Credit guarantee fund

The credit guarantee fund company established by Indonesian businessmen early this week after one year of preparations, is expected to facilitate the disbursement of unsecured bank loans to small and medium-scale enterprises. The new company will not only help banks assess the credit risks of small-scale borrowers, it also will secure credit repayment in case of bankruptcy or default.

Although the initial paid up capital of the company, locally known as PT Penjamin Kredit Pengusaha Indonesia, is only Rp 6.16 billion (US$2.7 million), far below the original target of Rp 50 billion, its presence alone is nonetheless a significant start.

We share the confidence of Aburizal Bakrie, chairman of the Indonesian Chamber of Commerce and Industry, that more large- scale businessmen can be expected to join the new company as shareholders.

Supporting the guarantee fund is one of the most effective means for large-scale businessmen to realize the commitment to helping foster small firms stated in their Bali Declaration in late August.

It is an encouraging and interesting development that while in most other countries the establishment of guarantee funds for small-scale firms has been sponsored mostly by state agencies, Indonesia's version has been initiated and financed by the private sector. Even more encouraging is the pledge of the shareholders to fully apply business principles to the operation of the guarantee fund. That means the fund will most likely be managed professionally and thus can be expected to be sustainable.

There are many things, besides guaranteeing credit, which could be done by the guarantee fund company to help the development of small-scale businesses. The fund company could provide guarantees for leases and bills and for performance in relation to bids for the supply of goods and services or construction jobs. This diversity of services would also broaden its sources of income.

To accomplish such a multitude of functions, the guarantee fund company, besides building up capability in assessing the credit-worthiness and commercial viability of small-scale businesses, will need to develop competence in financial, technical and marketing management, as well as an integrated system of credit information.

In view of the diverse range of skilled professionals, who do not come cheap, and the large sum of working capital required to run the guarantee fund, it is imperative for the company to start up with a larger sum of paid up capital. Aburizal expects to raise its total paid up capital to Rp 30 billion by early next year. But the original capital target of Rp 50 billion seems much more feasible to start with.

There is another alternative that could increase the company's capital more rapidly. The government could, for example, allocate a portion of the funds, which are currently set aside by state companies to foster small firms and cooperatives, for state equity shares in the guarantee fund.

The present arrangement whereby state companies are obliged to allocate at least five percent of their net profits annually for the development of small-scale businesses is neither effective nor efficient because their businesses are not related to those of the small-scale enterprises they assist. In some instances a fertilizer plant assists small-scale firms that produce charcoal, or a cement company fosters small-scale producers of bamboo baskets or hats.

It is really difficult to manage such programs because of the absence of business inter-linkage. Since the programs smack of charity operations, business accountability is often ignored. In fact, state companies could easily hide any inefficiency or incompetence by blaming failure of the program on the small-scale businessmen. And the small-scale businessmen too often treat the funds they receive simply as donations from the state.

Channeling the funds through the credit guarantee fund company would make their use more accountable. After all, the target beneficiaries of the guarantee fund and the state companies are the same.