Microfinance Services in Indonesia : A Survey of Institutions in 6 Provinces

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2 Microfinance Services in Indonesia : A Survey of Institutions in 6 Provinces 2

3 TABLE OF CONTENTS List of Tables 4 Abbreviations 9 Forward 11 I. INTRODUCTION 13 Background 15 Research Methodology 16 Research Sample 18 II. PROFILE OF THE RESEARCH AREAS 23 Variation between Regions 25 Available Figures 26 Conditions of Regencies/Cities 26 III. PROFILE OF MICROFINANCE INSTITUTIONS 33 Scope of the Financial Institution Sample 35 Deposits of Surplus Funds 38 Competition 40 Marketing 45 Profitability and Sustainability 49 IV. SERVICES PROVIDED 51 Types of Services 53 Savings and Loans 54 Geographical Coverage 66 Target Groups 69 V. OPERATIONS, SYSTEMS, AND PROCEDURES OF MFIs 79 Employees 81 Systems and Procedures 89 Internal Supervision 101 VI. RELATIONS WITH OTHER INSTITUTIONS 103 Types of Institutions 106 Forms of Cooperation 109 External Supervision 112 VII. SUMMARY OF FINDINGS 115 APPENDIX 125 THE DATA : WHAT THEY REPRESENT AND THEIR LIMITATIONS Research Design 127 Limitations to Reports from Government Officials 127 Limitations in the MFI Survey Data Microfinance Services in Indonesia INTRODUCTION

4 LIST OF TABLES TABLE NO TITLE 1-1 Research Locations 1-2a 1-2b 1-2c Numbers of Bank and Non-Bank Respondents by Regency / City in West Java and East Java Numbers of Bank and Non-Bank Respondents by Regency / City in West Kalimantan and East Kalimantan Numbers of Bank and Non-Bank Respondent by Regency / City in North Sulawesi and Papua 2-1 Background Data on Research Locations, 2001 / Values of Deposits and Loans of Bank and BPRs in Research Locations, 2002 (Billion Rupiah) 2-3 Economic and Social Indicators in Research Locations, 2001 / a 3-4b 3-5a 3-5b 3-6 Numbers of Financial Institutions (Bank and Non-Bank) in Sample by Regency/City, 2002 Value of Loans from Commercial Banks (Including BRI Village Unit) by Research Location, 2002 (Billion Rupiah) Places of Deposit for Surplus Funds Mentioned by Non-Bank MFIs by Type of Institution (%) Places of Deposit for Surplus Funds Mentioned by Non-Bank MFIs by Regency / City (%) Institutions Mentioned by Non-Bank MFIs as Competitors in Granting Loans, by Type of Institution and Location (%) Institutions Mentioned by Bank MFIs as Competitors in Granting Loans, by Type of Institution and Location (%) Institutions Mentioned by Non-Bank MFIs as Competitor in Mobilizing Deposits by Type of Institution and Location (%) Institutions Mentioned by Bank MFIs as Competitors in Mobilizing Deposits, by Type of Institution and Location (%) Marketing Methods Mentioned by Non-Bank MFIs for Saving and for Loans by Type of Institution (%) 3-7 Non-Bank MFIs Stating Potential Exists for Saving by Regency / City (%) Non-Bank MFIs Stating Potential Exists for Loans by Regency / City (%)

5 TABLE NO TITLE 3-9 Financial Performance Ratios of the Sample Banks, a 4-1b 4-2 Ratio of Profit / Loss to Credit Portfolio of Non-Bank MFIs by Type of Institution, (%) Number of Accounts and Value of Deposits and Loans at Bank MFIs by Type of Bank, May 2002 Number of Accounts and Value of Deposits and Loans at Non-Bank MFIs by Type of Institution, May 2002 Number of Accounts and Value of Deposits and Loans in Non-Bank MFIs by Regency/City, May a Banks MFI and Group Lending, by Type of Bank 4-3b Types of Customers of Non-Banks MFIs by Type of Institution (%) 4-4a 4-4b a 4-8b a 4-10b Minimum, Maximum, and Median Values of Annualized Bank Saving Interest Rates and Cost of Funds by Type of Bank (%) Minimum, Maximum, and Median Values of Annualized Non-Bank MFI Savings Interest Rates and Cost of Funds by Type of Institution (%) Minimum, Maximum, and Median Values of Annualized Interest Rates for Bank Micro Loans by Type of Loan and Type of Bank (%) Minimum, Maximum, and Median Values of Annualized Interest Rates for Non-Bank MFIs Micro Loans by Type of Loans and Type of Institution (%) Minimum, Maximum, Values of Annualized Interest Rates of Non-Bank MFIs by Type of Loan and Region (%) Non-Bank MFIs that Specify Requirements for Loans by Type of Institution (%) Bank MFIs that Specify Requirements for Loans by Type of Bank (%) Median Savings Interest Rates, Loan Interest Rates, and Net Interest Margins of Bank and Non-Bank MFIs by Type of Bank and Institution (%) Repayment Rate of Micro Loans at Bank MFIs by Type of Bank and Region (%) Repayment Rate of Micro Loans at Non-Bank MFIs by Type of Institution and Region (%) 4-11 Distribution of Non-Bank MFIs by Operational Area (%) 4-12 Non-Bank MFIs Target Group by Regency / City (%) 5 Microfinance Services in Indonesia INTRODUCTION

6 TABLE NO TITLE 4-13 Outstanding Loans and Accounts held by Women by Type of MFI (%) 4-14a Bank MFIs Mentioning Advantages of Female Customers over Males (%) 4-14b 4-15a Non-Bank MFIs Mentioning Advantages of Female Customers over Males (%) Non-Bank MFI Market Segments by Type of Institution and Location (%) 4-15b Bank MFIs Market Segments by Type of Bank and Location (%) 4-16a Micro Loans Accounts from Non-Bank MFIs by Economic Sector (%) 4-16b Micro Loans Accounts from Bank MFIs by Economic Sector (%) Average Number of Employees of Sample Banks by Type of Bank and Location Average Number of Bank Employees Involved with Micro Loans by Type of Bank and Location Time Allocated to Micro Loans by Bank AOs Who Perform Other Duties, by Type of Bank (%) Average Number of Non-Bank MFIs Employees by Type of Institution and Location Average Number of Non-Bank MFIs Employees Involved with Micro Loans by Type of Institutions and Location Time Allocated to Micro Loans by Non-Bank MFIs AOs Who Perform Other Duties by Type of Institution (%) Bank MFIs Stating Training is Adequate, by Type of Bank and Location (%) Bank MFIs that Provide Training Budget, by Type of Bank and Location (%) Non-Bank MFIs Whose Staff Receive Training, by Type of Institution and Location (%) Non-Bank MFIs Stating Training is Adequate, by Type of Institution and Location (%) Non-Bank MFIs that Pay for Staff Training Themselves, by Type of Institution and Location (%) MFIs Stating They Provide Incentives for Staff by Type of Bank and Type of Institution (%) 6

7 TABLE NO TITLE 5-13 Bank MFIs Using Computers by Level of Use and Type of Bank (%) a 5-19b 5-20 Non-Bank MFIs Using Computers by Level of Use and Type of Institution (%) Non-Bank MFIs Using Certain Financial Records by Type of Institution (%) Cooperatives whose Management and Supervision Are Separate, by Regency / City (%) Non-Bank MFIs that State They Have Certain Manuals by Type of Institution (%) MFIs Stating Certain Requirements for Loans by Type of Bank and Type of Institution (%) Bank MFIs that Require Certain Guarantees by Type of Bank (%) Non-Bank MFIs that Require Certain Guarantees by Type of Institution (%) Minimum Age of Business Requirements by Type of Bank and Type of Institutions (%) 5-21a Factors Given for Rejecting Loan Applications by Type of Bank (%) 5-21b Factors Given for Rejecting Loan Applications by Non-Bank MFIs by Regency / City (%) 5-22a Bank MFIs Methods of Handling Bad Loans by Type of Bank (%) 5-22b Non-Bank MFIs Methods of Handling Bad Loans by Regency / City (%) Non-Bank MFIs Regularly Performing Internal Supervision by Type of Institution (%) BPR (Rural Bank) that Cooperated with Certain Institution by Location (%) Non-Bank MFIs that Cooperated with Certain Institution by Type of Institution and Location (%) BPRs in Various Forms of Cooperation with Other Institutions by Location (%) Non-Banks MFIs in Various Forms of Cooperation with Other Institution by Type of Institutions and Location (%) Non-Bank MFIs Producing Various Types of Report, by Type of Institution (%) 7 Microfinance Services in Indonesia INTRODUCTION

8 TABLE NO TITLE Non-Bank MFIs that Mention Certain Parties as Providers of External Supervision, by Type of Institution (%) Non-Bank MFIs that are Supervised, by Frequency of External Supervision and Type of Institution 7-1 Bank Deposits and Credits by Regency/City, Values of Credit and Deposits of Non-Banks MFIs in the Survey, 2002 i ii iii iv Comparison of Numbers of MFIs According to Reports of District Officials and Number in the Sample, 2002 Numbers of Micro Finance Institutions That Served as the Sample by Type of Institution and Province, 2002 Overview of Proportion of Numbers of Research Regions Compared with Numbers of Regions in Indonesia and in the Unit Sample, January 2002 Comparison of Actual Amounts in the Sample and Hypothetical Amounts of Loans of Non-Bank MFIs, by Regency/City 8

9 ABBREVIATIONS BI Bank Indonesia (Central Bank of Indonesia) BKD Badan Kredit Desa (Village Credit Board) BKK Badan Kredit Kecamatan (Sub-district Credit Board) BPD Bank Pembangunan Daerah (Regional Development Bank) BPR Bank Perkreditan Rakyat (People s Credit Bank) BPR-LDKP LDKP converted to BPR status BRI Bank Rakyat Indonesia BRI Unit (Desa) BRI (Village) Unit BMT Baitul Maal Wat Tamwil (MFI Operate under Islamic principles) BKKBN Badan Koordinasi Keluarga Berencana Nasional (National Family Planning Coordination Agency) BPKP Bukti Pemilikan Kendaraan Bermotor (Vehicle owner-ship books) CU Credit Union Depdagri Departemen Dalam Negri (Ministry of Home Affairs) GRDP Gross Regional Domestic Product IDT Inpres Desa Tertinggal (Presidential Instruction on Backward Villages) KSP Koperasi Simpan Pinjam (Saving and Loan Cooperative) KUD Koperasi Village Unit (Village Unit Cooperative) KUT Kredit Usaha Tani (Farmer Credit Program) LDKP Lembaga Dana Kredit Pedesaan (Rural Fund and Credit Institution) LEPMM Lembaga Ekonomi Produktif Masyarakat Mandiri (Self-Reliant Community Productive Economic Industries) MFI Microfinance Institution NGO Non government organization OJK Otoritas Jasa Keuangan (Financial Services Authority) PHBK Proyek Hubungan Bank dengan Kelompok Swadaya Masyarakat (Project Linking Banks and Self-Help Groups) P2KP Proyek Penanggulangan Kemiskinan di Perkotaan (Poverty Alleviation Project in Urban Areas) PDMDKE Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi (Local Empowerment by Overcoming the Impact of the Economic Crisis) PPK Program Pengembangan Kecamatan (Sub-district Development Program) PKM Pengembangan Keuangan Mikro (Micro Finance Development) PUSKOPIT Pusat Koperasi Kredit (Center of Credit Cooperative) SKPG Surat Keterangan Pemotongan Gaji (Salary Deduction Authorization Letter) TPSP Tempat Pelayanan Simpan Pinjam (Savings and Credit Service Post) UED-SP Usaha Ekonomi Desa - Simpan Pinjam (Village Economic Unit-Saving and Credit) USP Unit Simpan Pinjam (Savings and Credit Unit of Cooperative) 9 Microfinance Services in Indonesia INTRODUCTION

10 FOREWORD In Indonesia, where more than 90% of all businesses are micro and small enterprises, the question of how to encourage growth and job creation is a vital one in reducing vulnerability to poverty. Micro and small business owners frequently comment that capital constraints limit their ability to grow. Indeed, very few small businesses obtain credit from formal sources. Extending credit to these enterprises is a challenging task. Small businesses suffer from high turnover, low levels of formalization, and borrow relatively small amounts that are expensive for financial institutions to service. This makes them unattractive to many private commercial lenders, few of whom target small borrowers. Instead, most small business borrowers in Indonesia obtain credit from a variety of microfinance institutions (MFIs). Indonesia has developed a vibrant microfinance market, with 30 trillion rupiah in outstanding loans in While microfinance is often considered a way of extending financial services to the very poor, MFIs in Indonesia tend to concentrate instead on consumer credits and working capital for small businesses, particularly in the trade and service sectors. Indonesian MFIs, such as Bank Rakyat Indonesia, are internationally recognized for their achievements in extending microcredit on a commercial basis. These financial markets are well developed on Java and Bali with a number of government and private lenders competing for the market. Less is known regarding the coverage and capacity of MFIs outside of Java and Bali and the research presented here attempts to fill this gap. The Asia Foundation surveyed nearly 400 MFIs in East and West Java, East and West Kalimantan, North Sulawesi, and Papua to examine the number, coverage, and capacity of MFIs in these provinces. While the sample is not representative, we hope that it will enrich the debate on credit services in Indonesia. It is important not to overstate access to finance as a barrier to SME growth. Numerous studies by the Foundation and others have found that risk-averse small business owners often prefer to ask family and business partners for loans rather than approaching formal lending institutions. Nonetheless, a properly functioning financial system, capable of extending loans to credit-worthy small business, is an important part of a conducive business environment. The Asia Foundation s work on microcredit is part of its broader effort to support the small business sector to contribute to job creation and growth. The Foundation expresses its gratitude to Edy Priyono and the team at Akademika for their work in analyzing the data presented here and to Dr. Thomas Timberg, Ms. Agustina Musa, Ms. Wida Johnston, and Mr. Sapprudin for assistance to this project. This work was made possible with the generous support of the United States Agency for International Development. Douglas E. Ramage PhD. Representative, The Asia Foundation, Indonesia. Erin Thébault Weiser Director, Economic Programs, The Asia Foundation, Indonesia. Siswa Rizali Program Officer, Economic Programs, The Asia Foundation, Indonesia 11 Microfinance Services in Indonesia INTRODUCTION

11 I. INTRODUCTION 13 Microfinance Services in Indonesia INTRODUCTION

12 BACKGROUND The Asia Foundation has cooperated with the Center for Business and Government of Harvard University (CBG-Harvard), which works for Bank Rakyat Indonesia, to conduct a survey on access to and services of micro finance institutions (MFIs) in six provinces: West Java, East Java, West Kalimantan, East Kalimantan, North Sulawesi and Papua. The Asia Foundation conducted the survey of institutions, consisting of banks and non-bank financial institutions, while the survey of households was done by CBG-Harvard. Data collection was performed in 2002 and included 374 MFIs and 1,438 households. This publication covers data related to the survey of institutions. Generally, the survey was aimed at looking at the availability of micro finance services. Specifically, the aims of the survey were: 1. To evaluate the capabilities of MFIs in several regions of Indonesia. For this purpose, an MFI was defined as an institution (bank or non-bank) that provides loans with a ceiling of Rp 50 million per customer. The meaning of capability here includes efficiency, sustainability, and ability to develop its service network. 2. To evaluate the market penetration of MFIs in terms of the gap between supply and demand, geographical coverage, societal levels, gender, and economic sectors. 3. To evaluate the possibility and capability of MFIs to develop linkages with larger financial institutions. 4. To identify the problems faced by MFIs, though not to make recommendations to remedy them. 15 Microfinance Services in Indonesia INTRODUCTION

13 RESEARCH METHODOLOGY Research Locations The research was done in six provinces, West Java, East Java, West Kalimantan, North Sulawesi, and Papua, which were chosen on the basis of a comparative analysis of several regions in Indonesia but were not intended to portray average conditions in Indonesia as a whole. 1. Selection of the Sample Locations On the basis of data 1 obtained from the Central Statistics Bureau (BPS), two regencies or cities were chosen in each province, based on criteria reflecting the characteristics of the province. These characteristics reflected the rural and urban nature and level of family welfare in the province being studied. From each of these regencies and cities, three districts were chosen at random, and the combined characteristics of these districts were then compared with the characteristics of the province. 2 Finally, from each of these districts, two villages or urban subdistricts were chosen at random, and again reexamined. 2. Research Locations Chosen Table 1-1 shows the locations of the regencies/cities, districts, and villages/ subdistricts chosen through the steps of sample selection described above. 1 These data were descriptive data from the BPS, focusing primarily on percentages of residents living in rural areas and in cities according to the 2000 national census, as well as on the percentages of poor residents per regency, city, district, and village/subdistrict as measured against a nationwide scale of public prosperity. Because accurate estimates of the level of poverty based on the BPS poverty line at administrative levels lower than provinces were not available, the BPS poverty line could not be used as a criterion for further examination of the selected sample locations In several cases, villages or districts with extreme characteristics were not selected and were randomly replaced so that the sample would better approach or represent the characteristics of the province being studied.

14 Table 1-1 Research Locations Province Regency (kab.)/ City (kota) District Village/Subdistrict West Java Kab. Bandung Cililin 1. Situwangi 2.Kidang Pananjung Cimaung 1. Pasirhuni 2. Sukamaju Cimahi Tengah 1. Baros 2. Karang Mekar Kab. Purwakarta Bojong 1. Cileunca 2. Pasanggrahan Purwakarta 1. Babakan Cikao 2. Nagri Kaler Darangdan 1. Sirnamanah 2. Linggamukti East Java Kota Madiun Manguharjo 1. Nambangan Lor 2. Sogaten Kartoharjo 1. Klegen 2. Kanigor Taman 1. Kejuron 2. Mojorejo Kab. Malang Pagak 1. Pandanrejo 2. Pagak Dampit 1. Bumirejo 2. Pojok Wajak 1. Dadapan 2. Kidangbang West Kalimantan Kota Pontianak Pontianak Barat 1. Pal Lima 2. Mariana Pontianak Utara 1. Siantan Hilir 2. Siantan Tengah Pontianak Timur 1. Tanjung Hilir 2. Saigon Kab. Sanggau Sekayam 1. Sotok 2. Kenaman Toba 1. Lumut 2. Belungai Dalam Kembayan 1. Sejuah 2. Tunggal Bhakti East Kalimantan Kota Samarinda Samarinda Ulu 1. Teluk Lirong Ilir 2. Gunung Kelua Samarinda Ilir 1. Pulau Atas 2. Sambutan Samarinda Utara 1. Lempake 2. Sungai Siring Kab. Kutai Kertanegara Tenggarong Seberang 1. Perjiwa 2. Embalut Kotabangun 1. Kedang Ipil 2. Kotabangun Ulu Muara Muntai 1. Muara M. Ulu 2. Muara Leka North Sulawesi Kota Manado Malalayang 1. Malalayang I 2. Kleak Wanea 1. Karombasam 2. Wanea Mapanget 1. Buha 2. Paniki Bawah Kab. Minahasa Pineleng 1. Kalasey I 2. Kalasey II Tompaso Baru 1. Lowian 2. Temboan Belang 1. Soyowan 2. Watuliney Papua Kota Jayapura Abepura 1. Nafri 2. Asano Jayapura Selatan 1. Entrop 2. Hamadi Jayapura Utara 1. Tanjung Ria 2. Angkasa Pura Kab. Manokwari Babo 1. Simuri 2. Rarutu III Ransiki 1. Iseren 2. Dembek Prafi 1. Waseki 2. Waseki Indah 17 Microfinance Services in Indonesia INTRODUCTION

15 RESEARCH SAMPLE 1. Survey Population The targets or respondents in this study can be grouped into three categories: a. Banking financial institutions identified as probably providing micro loans directly for business purposes (direct business microlending). The banks that served as respondents were government banks and private banks that might provide micro loans for working capital and that have a national network of branches. 3 For practical reasons and to ease comparison, the same banks were interviewed as respondents: Bank Mandiri, Bank BNI, Bank BRI (both branch offices and Village Units), Bank BCA, Bank Danamon, and Bank Bukopin. In addition to these, branch offices of Regional Development Banks (Bank Pembangunan Daerah, BPD) and several local Public Credit Banks (Bank Perkreditan Rakyat, BPR) also served as research samples. b. Non-bank financial institutions that provide micro loans for working capital. Included in this category are Islamic credit unions (Baitul Maal wa Tamwil BMT), Savings and Loan Cooperatives (Koperasi Simpan-Pinjam, KSP), Credit Unions, Savings and Loan Units/ Savings and Loan Facilities (Unit Simpan-Pinjam/ Tempat Pelayanan Simpan-Pinjam, USP/TPSP), Micro Finance Institutions/ MFI (Lembaga Keuangan Mikro, LKM), and others (such as Village Credit Agencies (Badan Kredit Desa, BKD), Common People s Business Credit Institutions (Lembaga Kredit Usaha Rakyat Kecil, LKURK) 4, etc.). The USP/TPSP mentioned above are the savings and loan units of Village Unit Cooperatives (Koperasi Village Unit, KUD), Employee Cooperatives (Koperasi Karyawan, Kopkar), Women s Cooperatives (Koperasi Wanita, Kopwan), Multi-Purpose Enterprise Cooperatives (Koperasi Serba Usaha, KSU), and Farmers Cooperatives (Koperasi Petani, Koptani). A separate category was created for the Kopkar (rather than including them in the USP category) because of their special characteristics that distinguish them from business cooperatives in general, in order to prevent a significant bias In practice, there were almost no local commercial general banks identified as possibly being involved in providing micro finance services, though there are some that do provide micro finance services in other regions, especially in Bali. 4 According to the Law on Banking, BKD and LKURK are in fact included in the bank category, but in practice it would be more appropriate to refer to them as prospective BPRs, and so in this study they were placed in the non-bank category (See: Detlev Holloh, Microfinance Institution Study. GTZ-Bank of Indonesia-Ministry of Finance).

16 The MFIs mentioned above are informal community groups that conduct savings and loan activities, or only provide loans, for the needs of their own members. c. Government agencies related to or playing a role in development, whether of financial institutions or of micro, small, and medium-scale enterprises. These respondents included local Bank Indonesia Offices, Offices of the Cooperatives and SME Service, Industry and Trade Service Offices, the Economic Sections of regional governments at the provincial and regency/city levels, Provincial/ Regency/ City Development Planning Agencies (Badan Perencana Pembangunan Propinsi/ Kabupaten/ Kota, Bappeprop/ Bappekab/ Bappeko), District (Kecamatan) Offices, and Village/ Subdistrict Heads. 2. Stages of Sample Collection The collection of the sample of financial institutions for this survey was done in two stages, as follows: Stage I : Identifying the types of financial institutions present in the research location. This was done by seeking data on the types and numbers of financial institutions, both banks (especially BPRs) and non-banks. Data on types and numbers of banks were obtained from the local Bank Indonesia offices, or those whose operational areas covered the research regions/locations. Data on numbers and types of cooperatives (including some BMTs and MFIs), were obtained from the Cooperative and SME Service offices at the regency/city level. Aside from these official sources, the researchers also obtained data and carried out inspections in the field. Stage II : Determining the quotas for each type of financial institution to be studied. From the research population described above, we determined a quota for each type of financial institution that was to serve as a research respondent. The determination of these quotas was based on considerations including the following: 19 Microfinance Services in Indonesia INTRODUCTION

17 To try to obtain as many respondents as possible from all types of financial institutions found in the research locations, both bank and non-bank, so as to be able to represent the characteristics of each type of financial institution. The methodology had to be able to accommodate the limitations of time allowed for the research and of other resources. Based on these aspects, the quotas determined were as follows: For banking financial institutions: Because the number of banks was lower than that of non-bank financial institutions, the ones chosen as respondents were all branch offices of the government banks (including BRI Units) and private banks that were mentioned above, plus three to four BPR offices in each research location. If there were more than four BPRs in a given research location, the respondents were chosen at random. For non-bank financial institutions: The overall number of non-bank financial institutions was far greater than that of banks, and often the data on types and numbers of these institutions were not very accurate. The quotas were determined in the following way: three to four offices per type of non-bank financial institution present in the regency capital or city; two to three offices per type of such institution located in the districts; and two to three offices per type of such institution located in the research location villages/subdistricts. The selection of these samples was also done randomly. In several cases, when there were one or two types of non-bank financial institution that were not present in a given research location, the proportion of respondents of the other types in that research location was increased. 20

18 3. Sample Size Altogether, in this study 374 microfinance institutions were interviewed, consisting of 114 bank microfinance institutions and 260 non-bank microfinance institutions. Looking at the distribution of the financial institutions sampled in this research, the largest samples were found in West Java and East Java: 83 and 81 financial institutions, respectively. The smallest sample was found in West Kalimantan: only 34 microfinance institutions, comprised of 17 banks and 17 non-bank institutions. The entire research sample of financial institutions, both banks and non-banks, for the various provinces is shown in Tables 1-2a, 1-2b and 1-2c below. Table 1-2a. Numbers of Bank and Non-Bank Respondents by Regency/City in West Java and East Java Type of Institution W e s t J a v a E a s t J a v a BANDUNG PURWAKARTA Total MALANG MADIUN Total BANK Government banks BPD Private banks BPR BRI UNIT TOTAL BANK NON BANK BMT KOPKAR KSP Other MFIs PROGRAMs USP TOTAL NON-BANK TOTAL ALL Microfinance Services in Indonesia INTRODUCTION

19 Type of Institution Table 1-2b. Numbers of Bank and Non-Bank Respondents by Regency/City in West Kalimantan and East Kalimantan West Kalimantan East Kalimantan SANGGAU PONTIANAK Total KUTAI SAMARINDA Total BANK Government banks BPD Private banks BPR BRI UNIT TOTAL BANK NON BANK BMT KOPKAR KSP Other MFIs PROGRAMs USP TOTAL NON-BANK TOTAL ALL Type of Institution Table 1-2c. Numbers of Bank and Non-Bank Respondents by Regency/City in North Sulawesi and Papua North Sulawesi PAPUA MINAHASA MANADO Total MANOKWARI JAYAPURA Total BANK Government banks BPD Private banks BPR BRI UNIT TOTAL BANK NON BANK BMT KOPKAR KSP Other MFIs PROGRAM USP TOTAL NON-BANK TOTAL ALL

20 II. PROFILE OF THE RESEARCH AREAS 23 Microfinance Services in Indonesia PROFILE OF THE RESEARCH AREAS

21 In this section, brief profiles of the research areas are presented, particularly in terms of demography, social and economic aspects, and commercial activity. The data are presented in Tables 2-1 through 2-4. The profiles are presented at two levels: the provincial level and the regency/city level. This information is intended provide a context for the later discussion. VARIATION BETWEEN REGIONS It is evident from the available data that the regencies/cities that served as the research locations differ widely in terms of numbers of residents and levels of development. The regency with the largest population has more than two million people, while most of the other regions have fewer than 600,000 people. Physically, too, the research areas differ; very few urban regions were selected for this study, but the regencies, of a more rural nature, differed in terms of area and of population density. The factors of area and population density strongly affect the costs of financial institutions, as well as the transportation costs of businesses. It is therefore not surprising that very clear differences were found between research areas in terms of economic level, quality of infrastructure, educational levels, and levels of community incomes. All of these factors have a strong impact on the market for financial services, and especially on their ability to achieve a certain level of economic viability. Thus it is no coincidence that the regions in Java and the urban areas with higher population densities show a greater degree of development of microfinance institutions. Of course, the regencies have varying economic levels: several of them are agricultural areas (though in fact not very many), while other regions are dominated by natural resource extraction industries (oil, gas, and mining), and several of the urban regions serve as administrative and service centers for the surrounding areas and have little industry. As it happens, the sample of microfinance institutions in this study is evenly distributed, and so there is a tendency toward an excess of samples in smaller and less-developed regions. 25 Microfinance Services in Indonesia PROFILE OF THE RESEARCH AREAS

22 AVAILABE FIGURES The figures presented in this section come from official sources and have varying levels of reliability. The data on populations and areas are very sound. The data on educational levels are nearly as good as the data on populations and areas. The data on GRDP of regencies/cities are generally recognized as having some weaknesses, but are used nevertheless because no alternative data are available. The data on length of road networks are somewhat more complex in terms of data quality, because of differences in quality and differing definitions about roads. The use of water transport in island regions also affects the relevance of these data. The issue of data accuracy also applies for bank loans, which often include a large number of companies, such that they do not reflect accumulation among local residents. In reality, the issue of where GRDP and loans are recorded is essentially a matter of ease for a number of large companies. CONDITIONS OF REGENCIES/CITIES East Java is a very large province, covering most of the eastern part of the island of Java. Together, East Java and West Java contain nearly a third of Indonesia s entire population (Table 2.1). The two regencies/cities selected as research areas in this province have only a small population compared with East Java s total population. Malang and Madiun are both located near the center of the province of East Java. Both regions have a high level of financial development, which is on the whole a characteristic of regions in East Java. 26

23 Table 2-1 Background Data on Research Locations, 2001/2002 PROVINCE/ REGENCY/CITY AREA Population Population Density GRDP (KM2) (Million) (PER KM2) (Million Rupiah) GRDP/ CAPITA Regencies/ Cities Number of Jurisdictions Districts Villages/ Subdistricts West Java 30, , ,090, ,758 Bandung 2, ,768 17,314, Purwakarta ,002 5,226, East Java 37, ,443, ,465 Malang 2, ,987, Madiun , , West Kalimantan 120, ,737, ,439 Pontianak ,380 4,849, Sanggau 18, ,232, East Kalimantan 211, ,242, ,299 Samarinda 2, ,606, Kutai 10, ,182, North Sulawesi 15, ,720, ,196 Manado ,960 2,374, Minahasa 4, ,454, Papua 287, ,877, ,507 Jayapura ,096, Manokwari 23, , Indonesia 1,472, ,433,970, ,838 68,816 Source: BPS and Edi Sigar (2003), Buku Pintar Indonesia ( Indonesian Almanac) Note: Data on Gross Regional Domestic Product (GRDP) are for 2001, while data on Indonesia s population are for Figures for population have been rounded. 27 Microfinance Services in Indonesia PROFILE OF THE RESEARCH AREAS

24 Table 2-2 Values of Deposits and Loans of Banks and BPRs in Research Locations, 2002 (Billion Rupiah) Province/Regency/City Bank Deposits Bank Loans Small Loans BPR Deposits BPR Loans 2 West Java 80,182 71,645 11,988 1, Bandung 1,900 5, N/A N/A Purwakarta 614 5, N/A N/A East Java 78,827 34,022 10, Malang 7,296 3,025 1,555 N/A N/A Madiun 1, N/A N/A West Kalimantan 6,357 2, Pontianak 4,390 1, N/A N/A Sanggau N/A N/A East Kalimantan 11,825 5,094 1, Samarinda 4,870 1, N/A N/A Kutai Kutainagara N/A 627 N/A N/A N/A North Sulawesi 3,642 2,641 1, Manado 2,590 1,146 N/A N/A N/A Minahasa N/A 502 N/A N/A N/A Papua 4, N/A N/A Jayapura N/A N/A N/A Manokwari N/A N/A N/A Total Regencies 23,251 20,642 3,343 N/A N/A Source : Bank Indonesia Note: N/A: No data Available All data are for April 2002, except for West Kalimantan, January

25 Table 2-3 Economic and Social Indicators in Research Locations 2001/2002 Regencies Contribution of Agric ultural Sector to GRDP (%) Contribution of Industrial Sector to GDRP (%) Contribution of Trade, Hotel and Restaurant Sector to GRDP(%) Population Elementary School Graduates or Lower (%) Population Junior/Senior High School Graduates (%) Population Diploma Holders or Higher (%) Population Aged 15/ Older Road Coverage (KM) West Java Bandung ,982, ,301 Purwakarta , ,712 East Java Malang ,793,441 64,025 Madiun ,308 82,250 West Kalimantan Pontianak , ,670 Sanggau ,112 13,373 East Kalimantan Samarinda ,877 78,265 Kutai K ,278 90,855 North Sulawesi Manado , ,345 Minahasa ,831 23,075 Papua Jayapura ,732 N/A Manokwari ,456 18,061 Source : BPS Note: Data on Gross Regional Domestic Product (GRDP) are for 2001, while data on Indonesia s population are Microfinance Services in Indonesia PROFILE OF THE RESEARCH AREAS

26 Table 2-4 Numbers of Financial Institutions (Bank and Non-Bank) in Sample by Regency/City, 2002 Province/ Regency/City West Java National Banks Non-BRI Unit Banks BRI Unit Sample Data Total Banks Non Banks Bandung Purwakarta East Java Malang Madiun West Kalimantan Pontianak Sanggau East Kalimantan Samarinda Kutai K North Sulawesi Manado Minahasa Papua Jayapura Manokwari Total BPR Source: fi eld survey (processed) 30 West Java s population is nearly as large as that of East Java, even though several of its second-level administrative regions (but not our two research locations) have recently become a separate province. West Java occupies the western part of the island of Java and has several second-level administrative districts bordering on Jakarta. In 2002, West Java was officially split into two provinces with the establishment of the new province of Banten, comprised of second-level administrative regions previously part of West Java. The two selected regencies represent only a small proportion of West Java s total population, and are located toward the center of the island. The city of Purwakarta (capital of the regency) is a small city, while Bandung regency is the territory that surrounds the city of Bandung and contains the population overflow from the city. These two regions show a very strong contrast in terms of their local economies. Development of the financial sector in West Java is somewhat behind that of East Java, but financial services in West Java are better than in the other four research location provinces.

27 In comparison, the remaining four provinces in this study represent smaller populations and many of them have very low population densities. However, low population density is not a characteristic of the urban regions in the research sample (the cities of Manado, Pontianak, Samarinda and Jayapura). West Kalimantan and East Kalimantan, located on the western and eastern sides of the island of Kalimantan, have very large areas but very sparse populations. The island of Kalimantan is in fact shared with two other countries: Malaysia and Brunei. Sanggau regency borders on Malaysia, and therefore much of its economic activity is related to this fact, including non-recording of economic flows and a certain amount of smuggling. Aside from having certain highly attractive industries, overall Kalimantan is somewhat behind Java in terms of economy, infrastructure, and education. Kutai Kertanegara has several large foreign companies, while Pontianak and Samarinda are important commercial centers and the centers of government of their respective provinces. In the rural regions of Kalimantan, the level of financial development is generally low, although West Kalimantan has a Credit Union movement that is quite influential among the Dayak community. Generally, the cities that served as samples in this study have high proportions of economic activity in the construction, services, and transportation sectors. North Sulawesi, bordering on the southern Philippines and located on the northernmost tip of the island of Sulawesi, is a relatively wealthy region with a well-educated population. However, North Sulawesi s infrastructure is rather poor, and its financial sector is underdeveloped. The city of Manado is the gateway to trade with the Philippines and a popular tourism center, as well as the center of government and regional trade. Papua has an enormous territory but a tiny population. The easternmost province of Indonesia, Papua shares the island with the nation of Papua New Guinea. Papua s economy is dominated by several natural-resource-based industries, which are the main attraction for investors and are foreign-owned. The central part of Papua has poor transportation facilities and its people are generally poorly educated. The second-level administrative regions serving as samples in Papua are both coastal regions. Development of financial institutions in this region is quite limited. Conditions in Papua are also widely affected by security disturbances. 31 Microfinance Services in Indonesia PROFILE OF THE RESEARCH AREAS

28 III. PROFILE OF MICRO FINANCE INSTITUTIONS 33 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

29 SCOPE OF THE FINANCIAL INSTITUTION SAMPLE 1. Overview of Micro Finance Institutions A wide variety of microfinance institutions (MFIs) provide financial intermediation for small-scale borrowers in Indonesia, and this is also so in the locations studied in this research. Some of these MFIs are banks, which are regulated through the Banking Law and supervised by Bank Indonesia (BI). These bank MFIs include branches of commercial banks, consisting of private banks and government banks. In rural regions the functions of these two types differ, in addition to performing commercial functions, government banks also serve as agents of development, particularly in channeling government program credits. Although some of these bank branches have substantial resources, they do not concentrate on small businesses, especially micro borrowers (which in this study are defined as loans of up to 50 million Rupiah). The commercial bank branches major role is in saving services, and micro finance is only a small part of their activities. The two types of banks that are the major exceptions are BRI Village Units (BRI Village Unit) and Regional Development Banks (Bank Pembangunan Daerah, BPD). These two types of banks provide many micro loans, especially the BRI Village Units. As of March 2003, BPDs had provided loans of Rp 18 trillion to some 1.8 million clients. The amounts of credit from commercial banks in the twelve research location regencies/ cities are shown in Table 3-1. There are, in addition, People s Credit Banks (Bank Perkreditan Rakyat, BPR). BPRs are small-scale banks that do not have access to a payment system, with credit outstanding of around Rp 7 trillion (all of which is in the micro loan category). An even smaller category of banks, found only in Java, consists of the Village Credit Agencies (Badan Kredit Desa, BKD), which BI has put under BRI s supervision, and the Village Credit Fund Institutions (Lembaga Dana Kredit Pedesaan, LDKP) owned by the regional governments. Consideration is currently being given to transferring these two types into the non-bank MFI category. 35 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

30 Table 3-1. Value of Loans from Commercial Banks (Including BRI Village Unit) by Research Location, 2002 (Billion Rupiah) Province Regency(Kab.)/City(Kota) Loans Small Loans West Java 71,645 11,988 Kab Bandung 5, Kab Purwakarta 5, East Java 34,022 10,398 Kab Malang 3,025 1,555 Kota Madiun West Kalimantan 2, Kota Pontianak 1, Kab Sanggau East Kalimantan 5,094 1,004 Kota Samarinda 1, Kab Kutai Kartenagara 627 N/A North Sulawesi 2,641 1,411 Kota Manado 1,146 N/A Kab Minahasa 502 N/A Papua Kota Jayapura Kab Manokwari Source: Monthly statistics of various branches of Bank Indonesia Note: All data are from April 2002, except that West Kalimantan is for January Non-bank financial institutions are often in the form of cooperatives, but sometimes also in the form of Programs, that is, government entities, which are usually sponsored by non-governmental organizations (NGOs) and the government. In the field, cooperatives and Programs often have the same function and role, though they differ in form and in their institutional rationale. In addition to the categories of MFIs mentioned above, there are many informal financial activities moneylenders (loan sharks), rotating savings clubs (arisan), and so on that are not within the scope of this study. Nearly all the microfinance institutions in this study provide consumption loans to their clients. 36 Most cooperatives are registered in various forms with the Cooperatives Department, and this is also evident for the institutions that served as the sample for this study. However, there are also many cooperatives and pre-cooperatives that are not registered. Institutions registered as cooperatives may take the form of Savings and Loan Units (Unit Simpan Pinjam, USP) that are parts of multi-purpose busi-

31 ness cooperatives. USPs are required to maintain separate financial records from those of the cooperatives as a whole, but this provision is often ignored. For the purposes of this study, the analysis of USPs separates multi-purpose business cooperatives (Koperasi Serba Usaha, KSU), from those serving employees of specific institutions (Koperasi Karyawan, Kopkar). This was done because of the significant differences between them in terms of behavior, although their legal status is the same. No precise figures are available about the activities of cooperative MFIs. Cooperatives lending activities are estimated to amount to over Rp 5 trillion throughout Indonesia, slightly lower than the value of their deposits. Among the forms of non-registered cooperatives are Credit Unions, pre-cooperatives such as Self-Reliant Community Productive Economic Institutions (Lembaga Ekonomi Produtif Masyarakat Mandiri, LEPMM), Savings and Loan Facilities (Tempat Pelayanan Simpan Pinjam, TPSP), and Islamic credit unions (Baitul Maal wa Tamwil, BMT). There are quite a few MFIs of these types in the research sample. There are also cooperatives related to NGOs, but this type appears only in the sample for the North Sulawesi research area, and not in the other five provinces. Village Savings and Loan Economic Units (Unit Ekonomi Desa Simpan Pinjam, UED-SP) established by the Ministry of Home Affairs also appear in this study s sample. In their operations, these UED SP resemble cooperatives. The study also includes District Development Programs (Program Pengembangan Kecamatan, PPK) and Regional Development to Overcome the Impact of the Economic Crisis (Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi, PDMDKE); these two are national programs related to poverty eradication programs. The District Development Programs (PPK) are highly underrepresented in the research sample. It is difficult to discuss other forms of MFIs with any certainty, because these types of MFIs tend to be concentrated in certain regions, and may not have been captured in the villages and districts that were the locations of this study. 37 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

32 2. MFIs in the Research Sample The data in the following discussion are based on a stratified sample in six provinces: West Java, East Java, West Kalimantan, East Kalimantan, North Sulawesi and Papua. In each province, two second-level administrative regions were selected, and from each of these, three districts were selected. In each of these districts, two villages/subdistricts were selected; however, in the field this was not carried out completely. A more detailed discussion of the sample selection process is presented in Chapter 1 and Appendix. 3. Legal Status of MFIs MFIs vary in their legal forms; this is related, among other matters, to the question of ownership. Some MFIs are owned by individuals, while most banks are in the form of limited-liability companies (Perseroan Terbatas, PT), which may, in fact, also be owned by individuals. For BPRs, the existing regulations require that the owner of a BPR be an Indonesian citizen or Indonesian legal entity (not foreign). Some MFIs take the form of foundations, and have therefore recently faced certain problems as a result of the enactment of the Foundations Law of DEPOSITS OF SURPLUS FUNDS MFIs must deposit their surplus funds; they generally do this by depositing in banks. Table 3-2 shows where they deposit their surplus funds, broken down by type of MFI. The table shows clearly that general banks are the most popular place for non-bank MFIs to deposit their surplus funds. This is one form of interdependence between non-bank MFIs and banks. Through this mechanism, the MFIs also benefit from the differential between the banks interest rates and the interest rates the MFIs pay their clients. 38

33 In terms of type of institution, the use of banks as places to deposit surplus funds is most evident in the Kopkar category (84.2%). Even so, it should also be noted that Kopkar also use many other institutions (42.1%), as do BMTs, Programs, and Other MFIs 1. It is interesting to see that the same table also shows that the most popular place overall to deposit surplus funds is other. The meaning of depositing in other places most often is that the surplus funds are in fact kept at the MFI s own office. Type of Institution Table 3-2. Places of Deposit for Surplus Funds Mentioned by Non-Bank MFIs by Type of Institution (%) Place of Deposit Higher Office General Bank BPR Other BMT Kopkar KSP Other MFIs Programs USP All Non-Banks Source: Field survey (processed) The variation in place of deposit of surplus funds occurs not only by type of institution, but also between regencies/cities. Table 3-3 shows that in Sanggau regency, half of the non-bank MFIs deposit their surplus funds at a higher office. This means that most of the surplus funds of the MFIs in Sanggau regency circulate only within their own milieu, without involving other institutions such as banks. In Sanggau regency, only around 13 percent of the non-bank MFIs deposit their surplus funds in general banks. It is also interesting to examine the situation in the city of Madiun. In this city, the percentage of non-bank MFIs that deposit their surplus funds in banks is relatively low (40%). Unlike in Sanggau, where surplus funds are mostly deposited to higher offices, in Madiun only other is mentioned as a significant place for deposit of surplus funds. Quite possibly this is because the non-bank MFIs in Madiun do not in fact have surplus funds to deposit. 1 Many tables in the report feature multiple responses question. For this reason, total responses can be over 100 percent. 39 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

34 Table 3-3. Places of Deposit for Surplus Funds Mentioned by Non-Bank MFIs by Regency/City (%) Regency(Kab.)/ City(Kota) Place Deposit Higher Office General Bank BPR Bank Indonesia Other Kab Bandung Kab Purwakarta Kab Malang Kota Madiun Kab Sanggau Kota Pontianak Kab Kutai Kota Samarinda Kab Minahasa Kota Manado Kab Manokwari Kota Jayapura Source: Field survey (processed) COMPETITION It is not easy to assess the level of competition in the microfinance sector in Indonesia, either in terms of deposits or of loans. Generally, it can be said that the relatively high interest rates and net interest margins reflect a low level of competition. Nevertheless, this survey indicates that competition is reported by the respondent MFIs. 1. MFIs Perceptions of Their Competitors Generally, this survey shows that three types of institutions are competitors for non-bank institutions in granting micro loans: informal moneylenders (loan sharks), Savings and Loan Cooperatives (KSP), and BRI Village Units (BRI Village Unit). Surprisingly, BPRs are not considered a significant competitor to non-bank MFIs in micro loans. The survey results for BPRs show that 50 percent of BPR respondents state that their competitors in granting loans are KSPs, while around percent state that the BPRs competitors are Village Unit Cooperatives (KUD).

35 In other words, BPRs consider cooperatives to be their competitors in loaning, whereas Table 3-4 shows that only a minority of cooperatives mention BPRs as their competitors. Here we find a kind of asymmetry in perception regarding competition between non-bank MFIs, specifically cooperatives, and BPRs. Loan sharks are competitors because they usually provide loans using a very quick and easy procedure, but with extremely high interest rates. KSPs and BRI Village Units are also competitors, as they are relatively numerous and can reach clients down to (at least) the district level. As BRI is a state-owned bank, BRI Village Units usually also offer relatively lower interest rates than do non-bank MFIs. Table 3-4a. Institutions Mentioned by Non-Bank MFIs as Competitors in Granting Loans, by Type of Institution and Location (%) C o m p e t i t o r I n s t i t u t i o n s Type of Institution BKD USP/ TPSP/ KUD KSP Other MFIs Loan Sharks BRI Units Private BPRs Regional Govt BPRs BPR Syariah General Banks BMT: Kopkar: KSP: Other MFIs: Programs: USP: All Non-Bank: Source: Field survey (processed) 41 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

36 Table 3-4b. Institutions Mentioned by Bank MFIs as Competitors in Granting Loans, by Type of Institution and Location (%) Type of Institution BRI Branches BRI Units Bank Mandiri C o m p e t i t o r I n s t i t u t i o n s BPD BCA Private BPRs BPR Syariah BKD KUD KSP Government Bank: BPD: Private Banks: BPR: BRI Village units: All Bank: Source: Field survey (processed) Meanwhile, in mobilization of public savings, the significant competitors to nonbank institutions are BRI Village Units, general banks, and KSPs. It must be remembered that BRI Village Units and KSPs are also competitors in granting loans, and so it is suspected that the reason for this situation is the same: the relatively extensive reach of BRI Village Units and KSPs. Loan sharks do not provide saving services, and so it is logical that their existence is not considered competition for non-bank MFIs in the matter of savings. Competition between non-bank MFIs and BRI Village Units in granting loans is also seen from the survey results for bank respondents. Around 23 percent of BRI Village Unit respondents state that their competitors in granting loans are KSPs, and 20 percent state that their competitors are other types of cooperatives. 42

37 Table 3-5a. Institutions Mentioned by Non-Bank MFIs as Competitor in Mobilizing Deposits by Type of Institution and Location (%) C o m p e t i t o r I n s t i t u t i o n Type of Institution BKD USP/ TPSP/ KUD KSP Other MFIs Loan Sharks BRI Units Private BPRs Regional Govt. BPRs BPR Syariah General Banks BMT: Kopkar: KSP: Other MFIs: Programs: USP: All Non-Bank: Source: Field survey (processed) As with savings, there is an asymmetry in perceptions about competition between non-bank MFIs and BPRs. Relatively few non-bank MFIs consider BPRs as their competitors in loans, while around 37 percent of the BPR respondents stated that their competitors are KSPs, which are one form of non-bank MFIs. Because this asymmetry appears consistently, it needs to be examined more closely to see whether the BPRs are overestimating the level of competition, or the non-bank MFIs are insensitive to the existence of BPRs as competitors. 43 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

38 Table 3-5b. Institutions Mentioned by Bank MFIs as Competitors in Mobilizing Deposits, by Type of Institution and Location (%) C o m p e t i t o r I n s t i t u t i o n Type of Institution BRI Branches BRI Units Bank Mandiri BPD BCA Private BPRs BPR Syariah BKD KUD KSP Government banks: BPD: Private banks: BPR: BRI Village Unit: All Bank: Source: Field survey (processed) Another difference between competition in savings versus lending is the appearance of general banks (mentioned by around 14% of respondents). General banks usually succeed in attracting deposits through various types of prizes and relatively high interest rates. On the other hand, general banks do not provide much credit at the local level, and so they compete with non-bank microfinance institutions in terms of deposits, but not in terms of loans. 44

39 It should also be noted that if a certain type of institution is mentioned by nonbank institutions as a competitor but with only a very low percentage (for example, BPR Syariah), there are two possible explanations: first, this type of institution is present but is not in fact a competitor, or second, that this type of institution is in fact not present in the respondent s area, and thus it is logical that it would not be a competitor to the non-bank institutions. 2. Forms of Competition There are very few data in this study on forms of competition. However, some indications regarding forms of competition can be seen indirectly in the section on marketing. For those interested in competition as reflected in price, Chapter 4 presents data on the interest rates charged and received by MFIs. Of course, the interest rates for savings and for loans differ; the data on interest rates are therefore presented in the form of a range. MARKETING 1. Marketing Methods Incentives for staff to engage in marketing will be discussed in Chapter 5. Meanwhile, Table 3-6 below shows the various marketing methods employed by nonbank MFIs, both for savings and for loans. The table shows that there are two categories of marketing methods: through price mechanisms and through the media. Table 3-6 shows that in general, non-bank MFIs mostly market savings through their customers (word of mouth). This method is mentioned as being used by around 68 percent of all non-bank respondents. This implies that non-bank MFIs do not employ any specific methods to market their savings facilities. Most likely, this means is chosen because it is considered the most efficient, as the geographic area of operation of non-bank MFIs is usually not very large. 45 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

40 Marketing methods for loans do not differ greatly from those for savings. Non-bank MFIs continue to rely on marketing through their customers and direct marketing. In terms of type of institution, BMTs can be seen to be slightly different from other institutions in their use of media, even though the medium used is relatively simple (leaflets). For both savings and loans, BMTs are the non-bank MFIs that use leaflets the most in their marketing. Table 3-6. Marketing Methods Mentioned by Non-Bank MFIs for Savings and for Loans, by Type of Institution (%) Type of Institution For Savings: Leaflets Direct Radio Marketing Methods Print Media Customers Prizes Other BMT Kopkar KSP Other MFIs Programs USP All Non-Bank For Loans: BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) 46

41 2. Views Regarding Market Potential Overall, Table 3-7 shows that around 74 percent of non-bank MFI respondents state that there is still a potential market for savings in their region. However, significant variations can be seen between regions. This survey at the financial institution level found that the city of Jayapura was considered the survey location with the lowest potential for savings (only 25% of respondents though there was potential to expand deposits). Several other regions can be categorized as having low savings potential, though not as low as Jayapura: Bandung regency (53%), Manado (60%), and Kutai Kertanegara regency (65%). Institutions that stated that potential for savings still exists were asked in which market segment such potential remained. The same table shows that the lowermiddle to lowest income brackets were the market segments most often mentioned by respondents. This is because non-bank MFIs are generally aimed at this market segment. This pattern is seen in all regions, although in differing proportions. Table 3-7. Non-Bank MFIs Stating Potential Exists for Savings, by Regency/City (%) Regency(Kab.)/ City(Kota) Stating Potential Exists (%) Highest Upper Socio-economic Group (%) Upper Middle Lower Middle Lower Lowest Kab Bandung Kab Purwakarta Kab Malang Kota Madiun Kab Sanggau Kota Pontianak Kab Kutai Kota Samarinda Kab Minahasa Kota Manado Kab Manokwari Kota Jayapura All Locations Source: Field survey (processed) 47 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

42 However, it should also be noted that around 17 percent of respondents considered that there is still savings potential in the highest segment. This indicates that MFIs are also targeting this segment as potential savers. Table 3-8 contains similar information, but for loans. This table shows that around 91 percent of non-bank respondents in this study stated that there is still potential for lending in their regions. There is still variation between regions, but not as great as the variations in savings potential. In several regions (Malang regency, city of Pontianak, Kutai Kertanegara regency, Minahasa regency, and Manokwari regency), all respondents stated that such potential exists. This reflects the high level of demand for micro loans in several regions. The lowest figure was found in Bandung regency, where only 79 percent of respondents stated that there is still a potential market for loans. It must be remembered that Bandung regency is also the lowest in market potential for savings. According to these perceptions, Bandung has the lowest potential for expansion of MFI services. Table 3-8. Non-Bank MFIs Stating Potential Exists for Loans, by Regency/City (%) Regency(Kab.)/ City(Kota) Stating Potential Exists % Agriculture Trade Socio-economic Group (%) Small Industries Services Civil Servants Other Kab Bandung Kab Purwakarta Kab Malang Kota Madiun Kab Sanggau Kota Pontianak Kab Kutai Kota Samarinda Kab Minahasa Kota Manado Kab Manokwari Kota Jayapura All Locations Source: Field survey (processed) 48

43 PROFITABILITY AND SUSTAINABILITY 1. Indicators of Banks Financial Performance Return on Equity (ROE), the ratio between profit and capital, which is the measure generally used to measure a bank s financial performance, may be inappropriate for many cases in this study. This is because nearly all the bank respondents in this survey were single branches from among the numerous branches of the banks concerned. Further, it is difficult to distinguish between the capital of the bank s owners and the capital derived from the bank s depositors, especially for BPRS. The Loan to Deposit Ratio (LDR) is one indicator of the performance of microfinance institutions that can be used specifically to see whether certain institutions tend to mobilize their funds or not. Table 3-9 shows that in December 2000 and in May 2003, the value of LDR was less than one. This indicates that in these two periods, banks were granting loans with a lower value than the amount of deposits in the banks. The developments in banks LDR in this survey show that the figure tended to remain stable between 2000 and 2002, in the 0.4 to 0.5 range. Table 3-9. Financial Performance Ratios of the Sample Banks, Ratio December 2000 December 2001 May 2002 Loan Deposit Ratio (LDR) Expenditure to Income Source: Field survey (processed) 2. Performance Indicators for Non-Banks Because of various limitations to the data as explained in the Appendix, the performance ratios used for banks cannot be applied to non-bank financial institutions. The indicator that is appropriate, and comparable to ROA, is the ratio of profit to credits granted. The results of the calculation of this ratio can be seen in Table Table 3-10 provides a picture of the profitability of non-bank financial institutions during the period The table shows that the institutions with relatively high and stable levels of profitability were Other MFIs and USPs. The profitability 49 Microfinance Services in Indonesia PROFILE OF MICRO FINANCE INSTITUTIONS

44 of Other MFIs was 22 percent, 24 percent, and 19 percent respectively for 2000, 2001, and 2002, while for USPs it was 23 percent, 26 percent, and 30 percent. In 2001, BMTs achieved profitability of 35 percent but in the other years observed (2000 and 2002) never reached 10 percent. Quite interesting is the change in profitability of Programs (which usually manage government sponsored revolving funds), which was very high in 2000 but fell sharply in the following years. Most likely, this is related to the performance pattern of Programs, which are typically excellent during the start of their operation, but then deteriorate. In a number of cases, the rate of repayment of revolving funds declined when the borrowers learned that the funds were derived from grants. In other words, the factor of moral hazard strongly influences the financial performance of Programs. Table Ratio of Profit/Loss to Credit Portfolio of Non-Bank MFIs, by Type of Institution, (%) Type of Institution December 2000 December 2001 December 2002 BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) 50

45 IV. SERVICES PROVIDED 51 Microfinance Services in Indonesia SERVICES PROVIDED

46 This section is a discussion of exactly what services are provided by microfinance institutions, both banks and non-banks, the distribution of services by several criteria, and the requirements related to these microfinance services. TYPES OF SERVICES The banking sector provides many types of financial services to small and micro customers, which fall generally into the categories of loans/credits of various types and savings facilities. The banking sector also provides services for payments and fund transfers. Although they are included in the banking category, BPRs are not allowed to provide payment and fund transfer services; however, some of them do provide these services, typically in cooperation with general banks or other financial institutions. In Indonesia, banks often provide these services, even though they have issued credit cards and debit cards, which are also in fact a facility for payments and fund transfers. Banks also provide services of a non-routine nature, such as replacing damaged banknotes. This study focuses on lending and saving services. The discussion on savings will be much briefer than that on loans, as in this study microfinance institutions are considered in the context of development of micro enterprises. In this context, attention will be focused mainly on the micro loans granted by the various financial institutions that served as the sample of the study. For the sake of simplicity, the discussion in this study will refer only to savings and loans, but in reality there is a tremendous variety of products in each of these categories. Many microfinance institutions offer various loan programs, primarily programs whose funds come from external investors as opposed to deposits. In this situation, the requirements and procedures for such loans are usually determined by the owner (source) of the funds. As with loans, savings also consist of many product schemes, often accompanied by prizes or the like. No less important is the difference in requirements for differ- 53 Microfinance Services in Indonesia SERVICES PROVIDED

47 ent types of savings, especially between time deposits and regular saving accounts, which can be withdrawn at any time. Aside from these, there are also giros, and the situation becomes even more complex with the existence of Islamic financial institutions, which offer specific types of products. Non-bank MFIs typically provide a limited range of services, particularly with regard to payments and fund transfers, but even in the matter of loans and savings, which are the focus of this study, differences are seen. This is especially true for cooperatives, which are quite numerous in the study sample. Cooperatives usually have various types of compulsory contribution requirements related to membership, as well as voluntary deposits, for which various incentives are provided. As with banks, in practice it is not easy to differentiate between mandatory savings and voluntary savings, because the counter-deposit requirements (savings required at the time of borrowing) are often implicit. Many micro loan schemes, whether operated by cooperatives, banks, or other institutions, also require savings in connection with loans. SAVINGS AND LOANS There is a great variation in the savings products provided by the MFIs in the study sample. Banks mostly provide time deposits and savings accounts, although in practice time deposits seldom apply for small/ micro depositors. Other financial institutions often provide services that are essentially adaptations of the services provided by banks. For example, cooperatives, in addition to deposits that are in principle a form of capital participation, also have regular savings accounts (like those at banks). Loans also vary, though the variation is not as great. Generally, loans can be classified into two categories: standard loans (like those normally granted by banks) and loans of the government program type. 54

48 1. Numbers and Values of Savings Accounts and Loans Table 4-1 shows the numbers of accounts and values of savings and loans in various institutions. Of course, a depositor may have more than one account. This is particularly true with Programs, in which participants are required to maintain a balance between their deposits and their loans. The table shows that the balance between value of loans and that of savings varies by type of institution, indirectly reflecting their differing orientations. Some institutions have a lower tendency to grant loans than to accept deposits, such as BMTs and Kopkar. Even so, the fund gap (or surplus) is not very great. What MFIs do with their surplus funds has been discussed previously in Chapter 3. In contrast, certain other institutions (KSPs, Programs, and USPs) grant loans in amounts greater than their deposits. For Programs, this is very easy to understand, as they are usually focused on providing loans to the public. Table 4-1a. Number of Accounts and Value of Deposits and Loans at Bank MFIs by Type of Bank, May 2002 Savings Loans Type of Bank Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) Government banks ,220, , , ,555.4 BPD ,492, , , ,765.3 Private banks 2 270, , , ,413.4 BPR , , ,326.9 BRI Units , , ,136.8 Source: Field survey (processed) 55 Microfinance Services in Indonesia SERVICES PROVIDED

49 Table 4-1b. Number of Accounts and Value of Deposits and Loans 1 at Non-Bank MFIs by Type of Institution, May 2002 Savings Loans Type of Bank Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) BMT 7.5 1, , Kopkar 9.3 1, , KSP , , ,031.6 Other MFIs 3.1 1, , Program , ,446.9 USP , , Source: Field survey (processed) Table 4-2 shows the values of deposits and loans in various institutions in various regions. There are two sources of data in the questionnaires, which are occasionally not consistent with one another: data from responses to direct questions on deposits and loans, and data from balance sheets. Table 4-2. Number of Accounts and Value of Deposits and Loans in Non-Bank MFIs by Regency / City, May 2002 (%) Savings Loans Regency(Kab.)/ City(Kota.) Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) Accounts (000) Value (Rp.0000) Value/ Account (Rp.000) Kab Bandung 6.6 1, , Kab Purwakarta , , Kab Malang , Kota Madiun , , Kab Sanggau 2.0 1, ,101.6 Kota Pontianak , , , ,455.1 Kab Kutai 4.0 1, , Kota Samarinda 6.6 3, , Kab Minahasa , Kota Manado , ,065.1 Kab Manokwari 0.4 1, , , ,841.6 Kota Jayapura Source: Field survey (processed) 1 In reality, not all non-bank MFIs provide full services (savings and loans); some provide only savings, while others provide only loans. 2 Note that the value for KSP has been skewed by an outlier KSP in Pontianak with around 15,000 members, Rp 24 billion in savings, and Rp 22 billion in outstanding loans

50 Analogous to the discussion by type of institution, the research regions can also be divided into two groups. The first group is regions where the value of loans is slightly lower than or equal with the value of deposits: Sanggau, Pontianak, Kutai, and Samarinda. The high ratio is caused by a larger number of credit unions in the sample which characterize these areas. Credit union apply strict savings requirement on their members before they are allowed to borrow. The other group is those where the value of loans is greater than that of deposits: Bandung, Purwakarta, Malang, Madiun, Minahasa, Manado, Manokwari, and Jayapura. Generally, the results of field observations indicate that one characteristic of non-bank MFIs, especially cooperatives, in North Sulawesi is a tendency to be oriented toward granting loans. They channel funds derived from the cooperatives owners to the public, rather than funds from third parties. 2. Acceptance of Group Customers Some MFIs accept group customers, that is, deposits from institutions, while others do not. Table 4-3a shows that many government banks and BPDs offer group lending. On the other hand, only a few private banks and BPRs have group lending, and no BRI Units have group lending. When a bank has group lending activities, it is mostly implementing government credit programs such as PKM, PUKK and KUT. In fact, all BPR group lending activities are government credit programs. Table 4-3a. Banks MFI and Group Lending, by Type of Bank Type of Bank Banks With Group Lending % Government Number of Banks Proportion (%) Group Lending Program Government banks (n=30) BPD (n=13) Private banks (n=12) BPR (n=24) BRI Units (n=35) All Bank (n=114) Source: Field survey (processed) 57 Microfinance Services in Indonesia SERVICES PROVIDED

51 Table 4-3b. Type of Customers of Non-Bank MFIs by Type of Institution (%) Type of Bank Type of Customer Individual Group Total BMT Kopkar N.A N.A N.A KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) Table 4-3 shows that in all around 30 percent of the clients of non-bank institutions are group customers. The most interesting case is that of Programs, where 85 percent of customers are group customers. This is easy to understand, as (at least when they are first established) government programs usually require borrowers to form groups. Through this group approach, the administrative costs to serve customers (relative to the value of the loans) can be reduced. Furthermore, the group approach allows for internal supervision within the groups, thus reducing the moral hazard that could lead to non-repayment of loans. 3. Savings Interest Rates and Cost of Funds Savings interest rates are a central issue for intermediation institutions, because they strongly influence loan interest rates and, in turn, the demand for credit. Calculation using currently effective interest rates is difficult, but an attempt was made in this study by converting interest rates into annual interest rates. 58 Table 4-4b shows savings interest rates in non-bank financial institutions. Overall, savings interest rates display a very wide range, from 0 percent to 60 percent per year. The difference in interest rates between institutions is not easy to interpret, because savings interest rates depend greatly on the product, or type of savings. If we compare them with the bank interest rates in Table 4-4a, it can be seen that with the exception of BPRs, the interest rates of non-bank institutions are higher than

52 bank interest rates. However, it should also be noted that certain non-bank institutions (mainly USPs) may grant loans with extremely low interest. This indicates that the phenomenon of high loan interest rates in non-bank institutions is not one that applies generally to all such institutions. Table 4-4a. Minimum, Maximum, and Median Values of Annualized Bank Savings Interest Rates and Cost of Funds by Type of Bank (%) Type of Institution Savings Interest Rates Min Max Median Average Cost of Fund* Government banks BPD Private banks BPR BRI Units All Bank * Data on cost of funds is average figure from respondents estimates Source: Field survey (processed) Table 4-4b. Minimum, Maximum, and Median Values of Annualized Non-Bank MFIs Savings Interest Rates and Cost of Funds by Type of Institution (%) Type of Institution Savings Interest Rates Min Max Median Average Cost of Fund* BMT Kopkar KSP Other MFIs Programs USP All Non-Bank * Data on cost of fund is average figure from respondents estimates Source: Field survey (processed) 59 Microfinance Services in Indonesia SERVICES PROVIDED

53 4. Loan Interest Rates As explained above, interest rates are a central issue in discussions on microfinance services. Table 4-5 consistently indicates that BPRs are the type of bank that charges the highest interest rates. For working capital credits, BPRs charge interest rates between 24 percent and 60 percent, while for investment credits and other credits, their interest rates are between 24 percent and 42 percent. By way of comparison, aside from BPRs, the highest interest rates are charged by government banks, at 26 percent (for working capital credits and investment credits). Table 4-5. Minimum, Maximum, and Median Values of Annualized Interest Rates for Bank Micro Loans by Type of Loan and Type of Bank (%) Type of Bank Working Capital Investment Other Min Max Med Min Max Med Min Max Med Government banks BPD Private banks BPR BRI Unit All Bank Source: Field survey (processed) For non-banks, the interest rates charged to micro loan customers vary tremendously; they may be extremely high, or extremely low, as shown in Table This table shows that overall, the interest rates of non-bank institutions range from zero percent to 96 percent. Zero percent interest rates (no interest) are usually provided by non-bank institutions with a social mission, but they do not usually involve significant amounts of funds Interest rates for investment credit were not provided by most of the non-bank MFIs. Therefore, the available data on interest rates for investment credit was merged in the group interest rate on working capital credit.

54 Table 4-6. Minimum, Maximum, and Median Values of Annualized Interest Rates for Non-Bank MFI Micro Loans by Type of Loan and Type of Institution (%) Type of Bank Working Capital Other Min Max Med Min Max Med BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) It is also interesting to compare the loan interest rates of non-bank micro finance institutions by regions. The hypothesis proposed is that loan interest rates in regions outside Java are higher than in Java because of the relatively higher cost of funds and operating costs. Table 4-7 shows that in this survey, this hypothesis is not supported by strong evidence in the field. Interest rates in Malang regency (East Java), for example, are relatively low, but so are those in Pontianak (West Kalimantan). Table 4-7. Minimum, Maximum, Values of Annualized Interest Rates of Non-Bank MFI Loans by Type of Loan and Region (%) Regency Working Capital Other Min Max Med Min Max Med Kab Bandung Kab Purwakarta Kab Malang Kota Madiun Kab Sanggau Kota Pontianak Kab Kutai Kota Samarinda Kab Minahasa Kota Manado Kab Manokwari Kota Jayapura n.a n.a n.a Source: Field survey (processed) 61 Microfinance Services in Indonesia SERVICES PROVIDED

55 5. Loan Administration Fees Table 4-8 gives a picture of the costs that must be borne by customers when they borrow money from financial institutions, whether banks or non-banks. In all, around 58 percent of non-bank institutions charge their customers administration fees. If we compare by type of institution, the ones that most often charge administration fees are BMTs (74%), while those that least often do so are Other MFIs (25%). This is because Other MFIs (PDMDKE and the like) are usually instruments for government loan programs (such as the PPK program). On the other hand, only two types of non-bank institutions charge notary fees and insurance fees: KSPs and USPs. Most likely, these charges for notary fees and insurance fees apply only to loans of high value. For the institutions that charge them, some of these various loan fees are fixed rates, while for others, these fees are a percentage of the value of the loan. For fixed rates, the average administration fee is Rp 8,600, the average insurance fee is Rp 13,000, and the average notary fee is Rp 225,000. When they are a percentage of the loan, administration fees average 2.2 percent, insurance fees 1.6 percent, and notary fees 2.0 percent. Type of Institution Table 4-8a. Non-Bank MFIs that Specify Requirements for Loans by Type of Institution (%) Administrative Fees Insurance Fees Notary Fees Mandatory Savings BMT Kopkar KSP Other MFIs Programs USP All Non-Bank

56 Meanwhile, for banks, Table 4-8b shows that around 72 percent of the bank respondents state that they charge their customers loan administration fees. This percentage is around the same as the percentage of bank respondents that require notary fees. Without discussing the amounts of these charges, Table 4-8a and Table 4-8b show that compared with non-bank MFIs, banks tend more often to charge customers fees in addition to the loan interest. As well as the difference in standards of administration, this may also be due to the difference in the value of the loans. Among the various types of banks, BRI Village Units are the ones that least often charge administration fees. Only around 34 percent of BRI Village Units state that they charge their borrowers administration fees. In comparison, around 96 percent of BPRs state that they charge administration fees. In contrast, with regard to notary fees, the largest percentage of respondents stating that they charge such fees is BRI Village Units (86%). By way of comparison, only 45 percent of BPRs state that they charge their borrowers notary fees. Table 4-8b Bank MFIs that Specify Requirements for Loans by Type of Bank (%) Type of Bank Administration Fees Insurance Fees Notary Fees Mandatory Savings Government banks BPD Private banks BPR BRI Village Units All Bank Savings Requirements for Loans In addition to financial requirements, around 38% of non-bank institutions require borrowers to have a savings account as a condition for extending credit (Table 4-8). In terms of type of institution, the percentages of institutions that impose this requirement range from 32% (USPs) to around 43% (KSPs and BMTs). The amount or value of such mandatory deposits was not included in this study. 63 Microfinance Services in Indonesia SERVICES PROVIDED

57 A slightly higher percentage of banks require borrowers to open savings accounts. This once again confirms that banks impose relatively greater burdens on borrowers than do non-bank institutions. In this context, positioning non-bank MFIs as alternative institutions for micro enterprises to access micro loan facilities is a very logical step. 7. Net Interest Margin Net interest margin is the differential between loan interest rates and savings interest rates. For the sake of simplicity, administrative and other fees are not taken into consideration. Table 4-9 shows that in general, the net interest margin of nonbank institutions is higher than that of banks. It should be noted that the net interest margin cannot automatically be interpreted as a profit earned by the institution, because it could well be that a high margin is caused by high operating costs. Table 4-9. Median Savings Interest Rates, Loan Interest Rates, and Net Interest Margins of Bank and Non-Bank MFIs by Type of Bank and Institution (%) Bank: Type of Bank/ Institution Median Savings Interest Median Loan Interest Rates Net Interest Margin Government banks BPD Private banks BPR BRI Units All Bank Non Bank: BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) 64

58 8. Total Cost of Loans It is evident that even ignoring the transaction costs incurred from the complex procedure of releasing loans and of collateral requirements, both administration fees and deposit requirements produce an increase in the actual cost of loans. Even so, most institutions have costs of loans that do not differ greatly from the nominal interest rates. There are some extreme values, mostly from those that report extremely low interest rates. All of this comes from the transaction costs incurred in the process, and from illegal commissions, which are often reported but are not directly covered in this study. 9. Loan Repayment Rate The repayment rate of loans is a problem for all financial institutions, though the degree of problems with micro loans is usually smaller than with larger loans. The loan repayment rate for banks is presented in Table 4-10a. The table shows that overall the loan repayment rate to banking institutions is 94.5 percent. The loan repayment rate at government banks, BPDs and BRI Village Units are higher than at private banks and BPRs. Table 4-10a. Repayment Rate of Micro Loans at Bank MFIs by Type of Bank and Region (%) Type of Bank Cities Regencies All Locations Government banks BPD Private banks BPR BRI Units All Bank Source: Field survey (processed) Table 10b presents information on the loan repayment rate in non-bank financial institutions. Compared with banks, the level of loan repayment at non-bank institutions is lower, only around 93 percent. Among the non-bank financial institutions, the lowest loan repayment rate is seen in USPs. 65 Microfinance Services in Indonesia SERVICES PROVIDED

59 Table 4-10b. Repayment Rate of Micro Loans at Non-Bank MFIs by Type of Institution and Region (%) Type of Institution City Regency All areas BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) GEOGRAPHICAL COVERAGE 1. Geographical Coverage of Services With regard to the geographical extent of MFIs service networks, there is a tremendous variation between regencies in terms of numbers of institutions and of customers. Services are generally more intensive in urban regions than in regencies. Furthermore, services are also more limited in many regions outside Java. Manokwari (Papua) and Sanggau (West Kalimantan) are the regions whose microfinance institutions have the fewest services. In fact, variation is even found within districts; more micro financial services are found in district capitals than in villages far from the district capitals. This is indicated by the fact that in around half of the villages surveyed, there were no microfinance institutions. 66

60 2. Areas of Operations It can also be seen that the geographical targets of the MFIs in this study may be characteristic of MFIs as a whole. Table 4-11 shows the operational areas as defined by the MFIs themselves. Around 32 percent of the non-bank institutions in the study have very limited areas of operations, only one village. These institutions fill a market not yet reached by traditional banking services. Table Distribution of Non-Bank MFIs by Operational Area (%) Type of Institution > 1 Regency/ City District up to Regency Village up to District 1 Village TOTAL BMT: Kopkar: KSP: Other MFIs: Programs: USP: All Non-Bank: Source: Field survey (processed) 67 Microfinance Services in Indonesia SERVICES PROVIDED

61 Table 4-11 shows a significant difference between institutions located in regency (rural) areas and those located in cities (urban areas). For all types of institution, around 31 percent of institutions located in urban regions have a presence in areas larger than one regency, while for institutions located in regencies, the percentage is only around six percent. In fact, among the BMTs and Other MFIs in regency areas, there is not one that has a presence larger than one regency. Thus, it is clear that non-bank microfinance institutions located in cities have more extensive operational areas than those located in regencies. Among the various types of institution, the ones that most often have a presence in only one village are Other MFIs (around 63%). This is understandable, because several institutions, such as UED, PDMDKE, P2K, and BKD (all of which fall into the Other MFIs category) are in fact designed to work in village regions. But as things develop, institutions that were originally designed to serve one village may serve residents of other villages. In all, for non-bank institutions, Table 4-11 shows that 32 percent have a presence in only one village. This means that around a third of non-bank MFIs in the research sample are believed to operate on a very small scale. On the other hand, it is interesting to note that 16 percent of non-bank MFIs have coverage in more than one regency. This is an indication that although many are small-scale, non-bank MFIs have started to develop into larger-scale business units. Therefore, the paradigm that non-bank MFIs are highly local by nature may, in the years to come, have to be revised. 68

62 TARGET GROUPS 1. Gender Two aspects are considered: female target groups or customers, and the views of MFIs about the behavior of female customers. Table 4-12 provides a picture of the target customers by gender, as reported by respondents. As might be expected, most (88%) MFIs stated that they have both male and female target groups, or in other words, they do not place a priority on any particular gender as their target. It is not easy to observe the proportion of loans to women, whether in terms of amounts outstanding or of number of accounts, which would be one key measure to examine the aspects of gender in the banking sector. Unfortunately, most financial institutions do not specifically record or categorize their customers by gender. This study therefore only asked for respondents estimates, and as a consequence the answers may well be subjective. Data on percentages of amounts outstanding and accounts for women based on these estimates are presented in Table Table Non-Bank MFIs Target Group by Regency/City (%) Regency(kab.)/ City(kota) Women Men Target Groups Both women and men Total Kab Bandung Kab Purwakarta Kab Malang Kota Madiun Kab Sanggau Kota Pontianak Kab Kutai Kota Samarinda Kab Minahasa Kota Manado Kab Manokwari Kota Jayapura All Locations Source: Field survey (processed) 69 Microfinance Services in Indonesia SERVICES PROVIDED

63 Table Outstanding Loans and Savings Accounts held by Women by Type of MFI (%) Type of MFIs Women (%) Loans Savings Bank: Government banks BPD Private banks BPR BRI Units All Bank Non-Bank BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed) Figure 4-1 shows that quite a few bank respondents stated that there is a difference in character between male and female customers, particularly with regard to their position as loan customers. When types of banks are compared, it is seen that BPDs are the type of bank that most often states that there is a difference between male and female customers, while the lowest figure is for private banks. 70

64 Figure 4-1. Bank Respondents Stating There Are Differences in Character between Male and Female Customers (%) Government Banks BPD Private Banks BPR BRI Units All Banks Source: Field survey (processed) Table 4-14a shows that in general, in cases when a difference in character is considered to exist between male and female customers, female customers are considered superior to male customers. They are said to be better in promptness of repayment of loan installments, easier to collect from, and more honest. Type of Bank Table 4-14a. Bank MFIs Mentioning Advantages of Female Customers over Males (%) Prompter Payers Usually have fixed business Easier to collect from More honest Government banks BPD Private banks BPR BRI Units All Bank Source: Field survey (processed) 71 Microfinance Services in Indonesia SERVICES PROVIDED

65 Non-bank MFIs perceptions of differences between male and female customers do not differ greatly from banks perceptions. When we make a comparison among non-bank institutions, BMTs are the type that most often considers differences to exist between the two groups of customers, while the lowest figure is for Other MFIs (Figure 4-2). Figure 4-2 Non-Bank MFI Respondents Stating There Are Differences in Character between Male and Female Customers (%) BMT Kopkar KSP Other MFIs Program USP All Non-Bank Source: Field survey (processed) The opinions about advantages of female customers over male customers also do not differ greatly from those expressed by banks. A majority of non-bank respondents felt that women are better in terms of prompt payment of loan installments, ease of collection, and honesty (Table 4-14b). Table 4-14b. Non-Bank MFIs Mentioning Advantages of Female Customers over Males (%) Type of Bank Prompter payers Usually have fixed business Easier to collect from More honest BMT Kopkar KSP Other MFIs Programs USP All Non-Bank Source: Field survey (processed)

66 2. By Socioeconomic Strata It has been mentioned in other sections of this report that non-bank MFIs are an alternative for the poor and/or micro enterprises to obtain financial services. Banks are considered too bureaucratic by a majority of the poor and/or micro enterprises. Banks are also unable to provide services to the poorer strata, because the cost of servicing small loans is prohibitive. This consideration of profitability is believed to influence banks unwillingness to channel micro credits. Table 4-15a shows that this indication is not far off the reality in the field. Around 86 percent of non-bank MFIs state that their target group is middle-lower. The lower group is also an important target group for non-bank MFIs (76%), though there are also non-bank MFIs that aim at the upper and middle upper classes as their target groups. This is because Employee Cooperatives (Koperasi Karyawan, Kopkar) in institutions such as universities, government offices, and private companies provide services to non-poor customers. It is interesting to see that around 62 percent of banks state that their target group is the lower category. In terms of type of bank, BRI Units are the type that most often states that the lower stratum is their target group (80%), while the lowest figure is for private banks (33%). In fact, among the private banks located in regencies, not one stated that the lower stratum is their target group. It should be noted that these data are respondents subjective evaluations, and rather difficult to relate to actual socio-economic data. However, a loan of Rp 50 million (defined in this study as micro loans) is in Indonesia considered quite large, relative to average income. In this situation, loans of Rp 500,000 or less are most likely to be loans to extremely poor people. 73 Microfinance Services in Indonesia SERVICES PROVIDED

67 Table 4-15a. Non-Bank MFI Market Segments by Type of Institution and Location (%) Type of Institution Upper Middle- Upper Social Stratum Middle Middle- Lower Lower BMT: Kopkar: KSP: Other MFIs: Program: USP: All Non-Bank: Source: Field survey (processed) 74

68 Table 4-15b. Bank MFI Market Segments by Type of Bank and Location (%) Type of Institution Upper Middle- Upper Social Stratum Middle Middle- Lower Lower Government banks: BPD: Private banks: BPR: BRI Units: All Bank: Source: Field survey (processed) 75 Microfinance Services in Indonesia SERVICES PROVIDED

69 3. By Economic Sector Table 4-16a clearly shows that the trade sector is the primary target of non-bank MFIs (and also of banks in micro lending). Around 50 percent of all accounts in non-bank MFIs are accounts from customers in the trade sector. The reasons why this occurs may be quite complex, but the main reason is that the trade sector is the largest non-agricultural sector. Among the 16 million micro enterprises (with fewer than five employees) in the non-agricultural sector, around 60 percent are micro enterprises in the trading sector. Compared with agriculture, which is the largest sector, the trading sector is relatively easy to serve, because cash flow is rapid, and profit margins may be greater. In second place after the trade sector are the other sector (including services) and industry (15%). Meanwhile, the agriculture sector is the least attractive sector for non-bank MFIs. In all, only around 10% of micro loan accounts come from the agriculture sector. In terms of supply, MFIs are not very interested in serving the agriculture sector because of its seasonal character and relatively long production cycle (especially when compared with the trade sector). Furthermore, on the demand side, not many farmers are interested in borrowing money from MFIs, probably because the government widely and intensively channels subsidized credits to the agriculture sector. If a comparison is made by type of institution, it is seen that BMTs and Kopkar differ somewhat from the other types of institution. Unlike other institutions, BMTs have a very low percentage of accounts in the other sector (1%). This shows that BMTs are highly concentrated on financing the productive sector, because the largest part of the other sector is consumption. In contrast, Kopkar differ from other institutions as they are highly concentrated on the other sector (53%). As these are employee cooperatives, this is easy to understand, because cooperatives must be oriented toward the needs of their members (who want to obtain consumer loans). 76

70 Table 4-16a. Micro Loan Accounts from Non-Bank MFIs by Economic Sector (%) Type of Institution Economic Sector Trade Agriculture Industry Services Other TOTAL BMT: Kopkar: KSP: Other MFIs: Programs: USP: All Non-Bank: Source: Field survey (processed) The situation for banks turns out to be consistent with what happens with nonbanks, as can be seen in Table 4-16b. The table shows that the trade sector is the most attractive sector, along with the other sector, which is the consumption sector. Again, the agriculture sector is less attractive than the trade sector. Among the types of banks, the ones with the greatest attention to the agriculture sector (although the figures are small) are BPRs and BRI Units. 77 Microfinance Services in Indonesia SERVICES PROVIDED

71 Table 4-16b. Micro Loan Accounts from Bank MFIs by Economic Sector (%) Type of Institution Economic Sector Trade Agriculture Industry Services Other TOTAL Government banks: BPD: Private banks: BPR : BRI Units: All Bank: Source: Field survey (processed) 78