Indonesia: A New Paradigm for Microcredit
Jakarta, Indonesia, December, 01 2009 -
In his speech at the opening of the recent National Summit, President Yudhoyono laid out a plan to expand the reach of micro-loans programs (KUR) by involving more banks and allocating more money from the state budget to guarantee the loans. He envisioned a Rp 100 trillion (US$10 billion) disbursement of micro-loans in the next five years.
The plan is part of an initiative to accelerate the development of Micro, Small and Medium Enterprises (MSMEs) in the country. Access to financing has been identified as one major obstacle for the industry to grow, so KUR is designed to improve it.
Under KUR's scheme, the government provides funds to guarantee the loans disbursed by a number of appointed banks. Should the loans turn bad, the government will share the loss with the channeling banks. To ensure the effectiveness of the program, KUR loans are restricted to new borrowers and for productive purposes only such as opening businesses or financing working capitals.
KUR program successfully encourages banks to extend loans to MSMEs. The existence of guarantee funds to share credit risks has improved banks' risk appetite. Around Rp 12.5 trillion of micro-loans have been disbursed in 2008 under the KUR scheme. In 2009, the amount of KUR loan is estimated to increase to Rp 15 trillion.
Despite its widely claimed success, KUR is not a perfect plan. Since KUR loans are essentially banks' money, they are subject to assessment by banks' credit officers. KUR applications are evaluated by full commercial terms just as they apply to regular loans. KUR borrowers are required to provide collateral and quoted with normal prevailing interest rates.
For majority of MSMEs, KUR is therefore not a solution to their problems. Millions of rural farmers do not have anything that qualifies as credible collateral. Their most valuable assets are limited farm land, on average 0.3 hectares per household farmer, which often lack proper legal documents. Fishermen barely have something more worthy than their wooden ships, which are not eligible either as collateral for banks loan. Similar stories can be heard from street vendors or other kinds of small businesses.
What these MSMEs really need is a dedicated microfinance institution that caters to specific characteristics of MSMEs i.e. small collateral-free loans, minimum paperwork, flexible installments, and affordable interest rates. Although not entirely impossible, it is difficult to expect commercial banks to entertain such needs from MSMEs.
Within the current operating framework of banking, MSMEs are left out. They are deemed not credit-worthy for lacking what the system acknowledges as "the right requirements". Whether intentionally or not, the designers of capitalist economic system have alienated MSMEs from getting credit.
Prof. Muhammad Yunus, Nobel Laurate and founder of the Grameen Bank, argued that the current practice of conventional banking is a "financial apartheid". Collateral is a bondage on credit. Paperwork and lawyers are chains we put around credit applications.
Grameen Bank is known for extending loans to the poor with no collateral and other administrative requirements. It even gives out loans to beggars, as small as $12 per customer. The loan is interest-free and can be paid with whatever amount they wish, whenever they wish. Ridiculous it may seem but Grameen Bank routinely makes profits. The repayment rate is 99 percent. More than 50 percent of its customers have crossed the poverty line, thanks to the loans.
To Yunus, credit is a human right just like food. Rich and poor, powerful and small enterprises should be given a fair chance. MSMEs do not necessarily perform worse than big, bonafide businesses when it comes to credit. They are just unlucky for not having the opportunities to show what they are capable of.
Grameen Bank has ample evidence for our government and politicians to believe that micro credit needs to go beyond conventional banking. It cannot be left to banks' business-as-usual. Successful micro credit program calls for a completely different paradigm, sometimes to the extent that it does exactly the opposite of the current practice of banking.