State pawnshop expands to east Indonesia

State pawnshop expands to east Indonesia

Sandy Darmosumarto, The Jakarta Post, Jakarta

The lack of financial institutions in the eastern part of
Indonesia is the main reason for the state-owned pawnshop company
Perum Pegadaian to further expand operations in the region, where
Islamic-based pawnshop activities have been on the rise.

According to Deddy Kusdedi, director of Pegadaian, it has been
the company's policy to expand operations into regions outside
Java, especially to eastern islands where there is scarce
availability of modern financial institutions that cater to
micro-financing.

"We will commit Rp 500 billion (US$35.27 million) for the
expansion of our operations in 2004. Out of the fund, Rp 300
billion will be used for expansion outside Java, and the
remaining Rp 200 billion for expansion within Java," Deddy told
The Jakarta Post in a recent interview.

"Potential markets in Kalimantan are located in Balikpapan,
Samarinda, Banjarmasin and Pontianak. Within Sulawesi, Manado and
its surroundings are highly regarded," said Deddy.

In Java, potential markets are located in big cities where
Pegadaian is already widely presented. "The market in Java is
already saturated due to the presence of many banks," he
commented.

The company has previously closed down its Ambon, Poso and
Aceh branches due to rioting and wars in those areas. But it
aims to resume full operations in the lucrative markets of Ambon
and Aceh.

In addition, Deddy said the company was targeting East and
West Nusa Tenggara, as well as Timika in Papua.

Another lucrative location is Bitung in North Sulawesi, where
the presence of a seaport involving export activities helps push
up Pegadaian's credit extension to some Rp 55 billion each year.

Pegadaian has secured government loans to help finance its
expansion program.

In terms of market competition, the state-owned pawnshop has
been facing challenges from Islamic-based pawnshops that only
accept gold as loan collateral. "This runs counter to Government
Regulation No.103/2002, which allows only Pegadaian to engage in
the pawnshop business," said Deddy.

The contradiction is possible because there are now two
authorities regulating the pawnshop business, the Ministry of
Finance and the central bank through the banking law. Sharia
(Islamic) pawnshops are regulated by the banking law, while
conventional pawnshops are regulated by the ministry.

In light of this market threat, Pegadaian has joined forces
with Bank Muamalat to engage in sharia pawnshop activities. "This
year, we will convert 16 branches of Pegadaian across the nation
to sharia pawnshops. They include branches in Jakarta, Makassar,
Madura, Batam, Semarang, Banda Aceh, Surakarta, Yogyakarta, Kuala
Simpang, Langsa and Lhokseumawe," said president of the bank A.
Riawan Amin.

"So far, we have invested Rp 30 billion in this joint project,
and will not hesitate to continue investing. There will be 100
more sharia pawnshops opening in the next three years," Riawan
told the Post. "Profit sharing is expected to be equally
distributed."

Pegadaian employs 6,845 workers nationwide. The firm aims to
channel Rp 11 trillion to its customers next year.

Despite plans to expand operations, the company claims that it
will not hire additional workers because it practices a zero-
growth policy in labor and chooses to outsource many of its
units.