In Indonesia, the regulated microfinance system and governmental-oriented financial institutions play dominant roles in the microfinance market. This section reviews the strategic roles and contributions of the state-owned financial institutions in
49 The regulatory and supervisory system of non-bank and non-coop microfinance is stipulated in Microfinance Law No. 1/2013.
microfinance – the state-owned pawnshop (Perum Pegadaian), PT. Permodalan Nasional Madani (PNM) and Lembaga Pengelola Dana Bergulir (LPDB).
5.5.1. State-owned Pawnshop
The state-owned pawnshop or Perum Pegadaian is a pawn broking company that was established during the period of Dutch colonialism. The initial operation was in Sukabumi, West Java and operated by disbursing credit in cash with collateral guarantees. The basic idea of Perum Pegadaian is to help indigenous people to access funds quickly for short-term needs, either for overcoming household budget stresses, or for emergency or business purpose. In a similar way to other microfinance institutions, pawnshops were established by the Dutch government to counter the dominance of the exploitative moneylenders and also to foster local economic development by providing direct access to credit in the communities (Perum Pegadaian 2009).
During the colonialism period, Perum Pegadaian developed by trial and error, and after independence it was transformed into a state-owned organisation (Perusahaan Umum or Perum). With this legal status, Perum Pegadaian carries on a mission as an agent of development, and is under the supervision of the Ministry of Finance (MENKEU) and the State Ministry of State-owned Enterprises (MENEG-BUMN). The formal status of Perum Pegadaian is unique in the financial system sector since it holds a monopoly right, however, recently the Islamic bank and BMT institutions have been allowed to provide an Islamic pawnshop service which is regulated under both the Islamic Banking Law and the Islamic Cooperative Regulation.
The core business of Perum Pegadaian is to provide short-term loans against specific collateral assets such as household goods, jewellery, vehicles and other forms of portable collateral. In general, the loan transaction process is very fast and the amount is reviewed based on the value of the collateral, on average, 60 to 80 per cent of the market value, ranging from IDR 5000 to IDR 100,000,000. The interest rate is charge based on the loan term and the amount outstanding. The interest rate is calculated every 15 days of the loan cycle: 1.25 per cent for loans less than IDR 150,000 and 1.75 per cent for larger amounts. The loan period is normally up to 15 days period but it can be extended a maximum of twice. If the loan is not paid back, the collateral will be auctioned to cover the principal and interest. It is clear that the business model of Perum
Pegadaian is based on a high turnover and relatively low risk when compared with the microcredit model (Perum Pegadaian 2009).
Lately, the company has introduced a microcredit schemes (Kreasi and Kritsa) for business and general purposes, for which the loan attributes and procedures are quite similar to the generic microfinance loan, and the Islamic pawnshop service. In addition, Perum Pegadaian provides non-financing products including remittance, auction, gold trading and storage but these businesses are less important.
In 2008 the Perum pegadaian operated a network of 2089 branches, supervised by 13 regional offices. The organisational structure follows that of the government administration, with the head office in Jakarta, regional offices in provincial capital cities, branch offices in districts and sub-districts. There is often an outlet close to the BRI branch. The role of Perum Pegadaian is critically important in providing financial services, since it provides an alternative source of credit to low-income clients when they need access to credit quickly without cumbersome administrative processes (Perum Pegadaian 2009).
Holloh (2001) points out an interesting phenomenon pawnshop business concerning during the economic crisis: the banking sector was reluctance to extend credit, therefore Perum Pegadaian became the major source of lending and liquidity supply in the communities. In 2008, Perum Pegadaian reached nearly 16.6 million clients, majority of whom were farmers, fishermen, traders, and micro-entrepreneurs (Chandra 2009). It can be seen that Perum Pegadaian has been well-positioned among the multiple segments of the microfinance market.
5.5.2. Permodalan Nasional Madani
Permodalan Nasional Madani (PNM) was established under government regulation No. 38/199950 with the primary mission to manage 12 program loan schemes of Bank Indonesia. Initially, the function of PNM was to disburse the agricultural plantation credit scheme (Kredit Koperasi Primer Aanggota or KKPA), which involves a partnership between farmers, cooperatives and corporate plantations. In a subsequent
50 Under the new central bank law (No. 23/1999), Bank Indonesia is prohibited from extending liquidity credit schemes and subsidised loans for financing government programs.
development, PNM was extended to channel the government funds for microfinance and the SME sectors (PNM 2004).
PNM manages several funds, which are principally from government sources, including government sub-debt (SUP-005), channelling funds of government institutions and projects, and concession loans from international donors. Although the operation is backed by the state, the nature of the PNM approach is commercially oriented and it is a fully autonomous institution, where the loan decision is solely based on the creditworthiness and sustainability of the targeted institutional clients. In contrast to commercial banks and other state-owned enterprises, the distinctive approach of PNM is to provide capacity-building programs to the microfinance sector. The provisions of training and technical assistance are built in with the loan programs, and the main objectives are to strengthen the institutional management capacity and to enhance the operational system and technology. Through the capacity building programs, PNM gains direct advantages that help this institution to monitor the soundness of loans on a regular basis, and it retains strong partnerships with the microfinance institutions.
PNM is designed as a wholesale financial institution to supply funds to commercial banks, BPR, cooperative microfinance, BMT and other regulated microfinance institutions. The lending model comprises direct financing, channelling and equity participation. PNM also performs as an umbrella or apex institution of BPR and cooperative microfinance organisations as well as BMT. In this regard, PNM and the microfinance associations form the apex organisations, which carry out particular functions such as pooling funds, providing an inter-lending mechanism, an information centre and IT services. At the beginning, PNM owned the majority share and provided most of the funding towards the apex institution, but these were gradually replaced by involvement of the members when the institution had become well established. In addition, PNM established two subsidiary companies focused on venture capitalism and investment funds (PNM 2004).
Quite recently, PNM introduced a microfinance unit (Unit Layanan Mikro or ULAMM) to reach out the micro and small enterprises. In essence, the business model of ULAMM is quite similar to that of the BRI Unit and other microfinance institutions, whereby it extends microcredit for business and productive ventures. The advantage of ULAMM, besides disbursing loans, is that it is designed to provide technical assistance to the
clients, especially in areas of marketing, financial management and information technology. PNM developed from a wholesale financial institution into a retail micro- financing provider. As such, this institution, as a state-owned enterprise, is likely to play a significant role in the microfinance sector. The annual report for 2008 shows that PNM serves over a million beneficiaries (low-income households, micro and small businesses) through different partnership models, with 1500 microfinance institutions and 4000 cooperatives (PNM 2009).
5.5.3. Revolving Fund Institution
The Revolving Fund Institution or Lembaga Pengelola Dana Bergulir (LPDB) is a government public service institution established under government decrees: The Ministry of Finance No.KEP.292/MK.5/2006 and MENEGKOP-UKM No. 19.4/Per/M.KUKM/VIII/2006. The legal status of LPDB is a subsidiary of the MENEGKOP-UKM. The underlying objective of the establishment of the LPDB institution is to maintain the dualism policy of government in the financial system. The LPDB mission is to manage government revolving funds for microenterprise, SME, and cooperative sector. Broadly speaking, it is a means for the government to direct subsidised funds to particular sectors and target low-income population groups (LPDB 2009). From the lessons learned and past experiences, it was realised that direct financial intervention of government organisations, i.e. the MENEGKOP-UKM,51 would cause corruption and misuse of funds and the bureaucratic system. Instead, a board of management independently runs the LPDB and, unlike in Perum Pegadaian and PNM, because LPDB is a public service institution, it has a not-for-profit motive, but its operation should generate sufficient income to cover costs.
The main source of LPDB’s funds come from the SUP-005 repayments,52 and additional money from the government budget (APBN). Every year, LPDB is required
51 For many years, MENEGKOP-UKM was involved in subsidised financing programs. In 2000, it introduced a revolving fund model in order to support the funding of the cooperative sector. Among the programs were programs to capitalise loan and saving cooperative (KSP/USP), to finance prospective agribusiness, the P3KUM financing scheme, and women and household empowerment (Perkasa).
52 In 2004, the government issued the first phase of the government sub-debt (SUP-005) with a total outstanding of approximately IDR 3.1 trillion. The fund is channelled through the state-owned banks (BRI, BNI, Bank Mandiri, BTN, BUKOPIN), the regional government-owned banks (BPD), Pegadaian and PNM. The SUP-005 fund is aimed at financing the agricultural sector, small trades and retailers, small industries, handicrafts, and other high- valued commodities and products of micro, small and medium enterprises, informal sectors and cooperatives.
to submit a business plan to the Ministry of Finance, including the amount of funds allocated from the APBN to support the financing plan.
The LPDB’s financing scheme is targeted to the un-bankable segments of the population, particularly households and individuals who are involved in productive economic activities and own micro and small enterprises. The initial LPDB financing model was developed in partnership with several commercial banks that have core businesses in the SME sector. Accordingly, LPDB embraces cooperative sectors such as KSP, BMT and apex cooperative institutions, to channel the loans to the borrowers.
This strategy is more effective in extending the outreach of LPDB into the communities rather than through banking networks, which are focussed on serving bankable customers. In addition, LPDB has developed a direct financing model for strategic microenterprises and the SME sector, for instance in agribusiness and export-oriented products.
The LPDB financing methodology comprises conventional (interest-based) and Islamic (profit and loss sharing) systems. The interest rate for loans or financing is established based on the co-existence of subsidised and commercial approaches. LPDB disburses the loan to a commercial bank and cooperative microfinance institutions at the central bank rate (the BI rate) plus (e.g. 4 per cent); this rate or price is substantially under the market rate. Subsequently, the banks and coop microfinance organisations charge the client at commercial loan interest rates. This mechanism, at one end, allows the LPDB partners to make sufficient profit to cover operational costs and risk, and, at the other end, to generate enough income for LPDB to maintain the operation.
In general, the LPDB approach is quite promising as an alternative financing mode to remove financial barriers for the un-bankable population with a less-destructive impact on the financial market and banking sector. This institution would be a source of liquidity for non-bank microfinance institutions that are not allowed to mobilise public funds. However, there are several challenges that the LPDB development has encountered.
1. The inherent structure of LPDB allows the government to interfere in the independence of management and the institutional policy, especially in loan assessment and disbursement.
2. Second, as a public service institution, LPDB is part of the government budget system, thus this unique position tends to drive the management to take a risk-averse policy in order to protect themselves against legal action in the case of loan default.
in effect, LPDB employs selective loan procedures similar to the banking system, therefore the main objective of the institution to extend their services to the un- bankable clients would not be achieved.
3. Third, there is still a strong perception in the communities that most the government program is charity; in this instance, LPDB should be appropriately positioned as an independent financial institution and adopt good governance practices as well.
4. Finally, lack of human resources and limited networks would be a major limiting factor for LPDB to embrace a significant number of the un-bankable inhabitants.
It is evident that the state-owned microfinance institutions make a direct contribution to the development of the microfinance sector. The predominant role of the institutions is in making basic financial services accessible to the under-served population. It has been demonstrated that Perum Pegadaian and PNM can provide this function. Secondly, the quasi-public agency, LPDB, is also critically important as a means for maintaining the dual microfinance system (subsidised and commercial loans), especially to strengthen the capacity of the cooperative community-based microfinance sector as important frontier microfinance service providers.