Observers skeptical over micro credit schemes

JAKARTA (JP): The government's effort to invigorate the lower end of the private sector by providing heavily subsidized loans to small scale business has been given a cool response by experts.

Observer and advocates of small and medium-scale enterprises (SMEs) and cooperatives questioned the sincerity of the programs and said the 16 micro credit schemes so far set up by the government had not made it any easier for small businesses to gain access to funds.

They said the schemes lacked controls to ensure that the funds available were delivered into the hands of those for whom they were intended.

Wawan Iriawan, who chairs the Institute of Small Business Advocacy, said on Saturday that the new credit schemes had not broken through the bureaucratic barrier which characterized similar schemes launched in the past.

In the past, the government made it obligatory for all commercial banks to allocate 20 percent of their lending portfolio to SMEs and cooperatives, but this failed to help the nation's small-scale entrepreneurs because they were unable to meet preconditions attached to the loans.

To obtain loans, businesses were required to have collateral, a license, tax registration number and business location permit, Wawan said, adding that none of this had changed.

"Preconditions, especially the clause regarding collateral, made it hard for small businesses to qualify," he told The Jakarta Post in an interview.

Furthermore, many small-scale entrepreneurs, including street vendors, were unable to obtain location permits because they do not operate on a fixed site, he pointed out.

The institution chaired by Wawan groups 750 small-scale entrepreneurs with capital ranging from Rp 75,000 to Rp 250,000.

Many members are street vendors selling anything from bakso (meatballs) to foreign food at new tent cafes.

In October, the government announced that it had allocated at least Rp 10 trillion (US$1.3 billion) to fund 16 micro credit schemes designed to help SMEs and cooperatives.

Loans issued under the schemes come at interest rates of between 6 and 16 percent, compared to about 50 percent for normal commercial loans. The loans are offered through commercial banks with the help of non-governmental organizations across the country.

The schemes cover almost all sectors of the economy, including farming, fisheries, housing, trade and commerce, and poultry farming.

Loans available range from Rp 5 million to Rp 3 billion, with repayment periods varying from between one to 15 years.

Working capital loans are limited to Rp 5 million, with repayment due within one year. For investment loans, the limit has been set at Rp 25 million, with repayment due within five years.

Disbursement

Isono Sadoko from the Bandung-based Akatiga research center said on Saturday that money made available through most of the credit schemes had not been disbursed, with the sole exception of farming loans.

"When confronted, most banks said the funds had not been disbursed, or that they were awaiting implementation guidelines to be issued," Isono told the Post.

Isono said that most small-scale businesses would not qualify for the loans if banks participating in the scheme continued to impose their own strict preconditions.

"The banks might even be stricter than normal when selecting loan recipients because the loans are issued at such low interest rates," he said.

However, Isono said that if the government took responsibility for the scheme he feared that the funds would disappear into collusive schemes cooked up between the authorities and well- connected businessmen.

Wawan, who is a lawyer, said that collusion was rampant in the issue of subsidized loans in the past.

Cooperatives which were unable to meet preconditions were still able to obtain loans because of their connections to the government, Wawan added.

In the light of this, some opportunists have recently reinvented their businesses as cooperatives in order to gain access to the subsidized credit.

"Institutions which were not cooperatives have reestablished themselves as cooperatives and many companies have become non- governmental organizations," Isono said.

Isono said the government should have limited the targets of the subsidized loans to ensure that the programs were effective.

It must prioritize loans to businesses in Java and large cities outside Java because these are the areas worst affected by the economic crisis, he added.

At the same time, it should help SMEs which are not yet on the point of collapse by working with them to improve their access to information and business networks, he said.

"It is an investment, so it must take place gradually," he said, warning that the government should take the initiative seriously.

"If it is done hastily and merely for political gain, it will be counterproductive," he said.

-- Devi M. Asmarani