THE IMPACT STUDY OF KREDIT USAHA RAKYAT (KUR) FOR POVERTY ALLEVIATION IN INDONESIA: CASE STUDY THREE PROVINCES (CENTRAL JAVA, EAST JAVA AND BENGKULU)

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1 Gunawan Kartapranata White House Wikipedia THE IMPACT STUDY OF KREDIT USAHA RAKYAT (KUR) FOR POVERTY ALLEVIATION IN INDONESIA: CASE STUDY THREE PROVINCES (CENTRAL JAVA, EAST JAVA AND BENGKULU) Bahtiar Rifai, SEADI Project & Nathan Associates June 12 th 13 th,

2 PRESENTATION OUTLINE Background Theory Concept and Research Framework Methodology Location Characteristic Findings Recommendation Acknowledge: The paper is based on research which was conducted by Economic Research Center-LIPI in 2012 (Agus Eko Nugroho, Latif Adam, Bahtiar Rifai, Rita Pawestri). Several improvement have been made.

3 BACKGROUND Main purpose of Micro Finance: Empowering SMEs capacity, particularly financial access to formal institution (e.g.: Bank) Business Credit for People or Kredit Usaha Rakyat (KUR) was launched in 2007 by Government and being part of National Poverty Alleviation Programs as 3 rd cluster. It is expected that KUR will be linked up with other cluster (2 nd for PNPM Mandiri). Impact study is a strategic part to measure and evaluates the program for the effectiveness of poverty alleviation in Indonesia.

4 PROBLEMS KUR is originally funded by Bank resource (not Government ) which market driven will be more dominated in the process (selection/ execution). This is done to meet profit and prudential aspect (minimize non performing loan) for Bank. Therefore, it is predicted that Bank will prefer to choose people/ SMEs that have ability to pay the loan to be their consumer target. There are several challenges: - Outreach Accessed by poor people? - Impact income improvement, SMEs Capacity? - Target VS Prudential Bank?

5 OBJECTIVES Institutional Framework of KUR Identification for KUR implementation barriers KUR s impact for economy aspect KUR s impact for social aspect

6 THEORITICAL CONCEPT Micro Finance (Mfi) goals: Improve economy capacity of poor people that have opportunity to grow larger (Eriki, 2012). It is bridging for SMEs to access a formal financing system (Bank) which is difficult to obtained. Micro Finance has several characteristic that makes it has differences with other formal bank s products. There are :1) small amount of loan refers to limited saving accumulation; 2) there s no collateral based on asset; 3) simple mechanism; 4) poor people being the target of borrowing; 5) group/ community distribution approach.

7 MICRO FINANCE DEVELOPMENT Group approach was built to develop self help group which consist people. Saving and loan are the main activities. After people can make saving, they will be linked with commercial Bank to obtain loan. GRAMEEN BANK Using group of borrower (4-5 people), this model has regular meeting (weekly) for loan payment. Model had structured for formal organization and became Bank for poor people. Individual banking-joint liability is the main basis. MICRO FINANCE (semi-organized) MICRO CREDIT CLUSTER/ BANKING FEDERATION FORMAL BANKING Bank create micro credit schemes to accommodate a prospective micro finance market which hasn t utilized optimally. Some incentives are delivered to attract SMEs. DEVELOPMENT program Women and Children in Rural Areas SMEs Empowerment program Bank and business cluster group are linked up which has purposed reducing cost transaction.

8 MICRO FINANCE and POVERTY Alleviation Financing Service Financing facility OUTPUT Saving accumulation Investment capacity improvement Investment capacity for technology Consumption improvement Possibility for buy productive asset Ability for managing resource Risk reduction for selling asset Improving the Ability to accommodate external stress Reducing for loan demand/ potency Support for Economy growth POVERTY IMPACT Reducing household vulnerability of external risk/ pressure Decreasing of consumption instability at household level Income improvement Poverty alleviation Reducing social exception and social separation Credit Facility Insurance Facility Investment opportunity Adoption better technology Possibility for Expansion Business Scale Diversification of economy activity Promoting risk taking Reducing dependency for Expensive financing resource (rentenir) Profit from investment Larger saving in financial asset Mitigation for risk and potency for business losses Risk reduction for selling asset Improving investment opportunity Higher income Income source Diversities Better quality for education and health Household capacity improvement Decreasing of consumption instability at household level Better income Improving household resilience Source: ADB, 2000

9 Data & RESOURCES Aspect PRIMARY data SECONDARY data Approach Questionnaire, in-depth interview, Focus Group Discussion Object Questionnaire (360): -Treatment Group (180): SMEs already accessed KUR -Control Group (180): SMEs that haven t accessed KUR Sources: Banks, Central Banks, Central Government, Local Government, NGO Collecting Listed from Banking (target group) and simmillar Locations -Solo (Central Java) -Sidoarjo (East Java) -Bengkulu (Sumatra) Duration 1 st year (2012), continued for 2 nd (2013) and 3 rd (2014). Literature study Journal, Books, Article Browsing, Reading, Capturing Jakarta

10 Research APPROACH Combination between Desk Research and Field Research Approached by Economy Development and micro finance. Descriptive Qualitative and Quantitative Analysis Focused on Micro-KUR (IDR 20 million)

11 RESEARCH FRAMEWORK National Poverty Alleviation Program, Cluster 1-4 KUR group non- KUR group KUR Having Business Poor People/ Community Impact Study -Economy household -Business -Social POLICY RECOMMENDATION

12 KUR and Poverty Alleviation Central Government Fund for Guarantee fee & claim Empowerment Program for SMEs Province Government BPD Local Government Micro Credit Micro Credit Micro Credit Micro Credit Askrindo/ Jamkrindo (Guarantor Agency ) Guarantee Bank KUR linkage KUR micro Community, PNPM, Cooperation institution (Koperasi) SMEs/ Poor people KUR mikro

13 UNDERSTANDING about KUR-Micro among STAKEHOLDER SMEs/ KUR paradigm=grant transfer Without any collateral requirement (as seen on TV advertisement) Flexible requirement Affordable interest rate GUARANTOR AGENCY KUR Giring Ratio Limitation Limited for on-line system between bank KUR program has increased doubled for task and responsibility PNPM facilitator Needs for Bank efforts actively socializing KUR Demand for BKK/KSM should be designed to integrat with KUR Linkage BANK KUR is developed by BANK fund so prudential aspect will be implemented Bank still has 30% risk which influence Bank s performance Government supports Bank preparing SMEs to be Bankable LOCAL GOVERNMENT Limited cooperation with Bank Affordable interest rate Collateral requirement Flexible process More SMEs accessed KUR Linkages Partner (BMT/ Koperasi) KUR vs other micro credit product (segmentation) Benefited by affordable financing resources

14 KUR s profile in 3 LOCATIONS Aspect LOCATIONS Central Java East Java Bengkulu Source of KUR - (60%) Local Government and Bank Staff for KUR information - (20%) Advertisement on TV, Radio, Newspaper - (20%) other (socialization, discussion, etc) Loan Amount (77 %) 1-5 million (56%) 2-5 million (53%) 1-5 million Obstacles of KUR - Requirements access - Collateral - Distinct KUR information between Bank and on advertisement Third party assistance - Interest rate - (31%) Friends/ neighbor - (22)Relatives - (42%) Bank Staff - (5%) others KUR expenditures - 50% for Stock (raw material, intermediate products) and Equipments - 8% for Enlarging workshop/ development - 16% for Vehicle - 14% for Loan Payment - 12 % for Education and Health expenses

15 INCOME Comparision for KUR and Poor Household There is wide different between poor household-average income (IDR. 1,297,600 monthly) Income average on Household who is receive KUR program (IDR. 2-4 million per month) Respondent income at 3 Locations Penerima KUR <2 jt 2-<4 jt 4-<6 jt 6-<8 jt 8-<10jt 10> jt

16 Impact to HOUSEHOLD economy No INDICATOR KUR* (Rp) NON KUR* (Rp) IMPACT (%) (1) (2) (3)=(1-2)/2x100 1 Group of INCOME: 25% (lowest) (G 1 ) 2,065,079 1,883, % (Middle) (G 2 ) 5,032,143 9,750, % (Highest) (G 3 ) 11,500,000 19,500, Group of EXPENSES: 25% (lowest) (G 1 ) 1,504,070 1,359, % (Middle) (G 2 ) 2,991,000 3,232, % (Highest) (G 3 ) 6,575,000 10,110, Group of SAVINGS: 25% (lowest) (G 1 ) 2,031,600 2,448, % (Middle) (G 2 ) 22,500,000 19,750, % (Highest) (G 3 ) 45,000,000 32,000, Group of ASSET: 25% (lowest) (G 1 ) 10,183,821 7,776, % (Middle) (G 2 ) 28,100,000 56,250, % (Highest) (G 3 ) 15,000,000 76,000,

17 SOCIAL IMPACTS Confidence has been increased for most members in treatment group, both in social and individual interaction. They have been acknowledged each other. This opens further opportunity, particularly enlarging their market. Most members of treatment group having limited time for social activities. They are busier with their emerging business. SMEs have been more educated and familiar with financing formal institutions, banking regulations and bureaucracy.

18 KUR s ADVANTAGES SMEs who is already accessed KUR Elevates SMEs capacity Enlarge SMEs market Overcome household-financial problems (consumption, education and health expenses). Relatively affordable interest rate compare to non-formal financing resource Government Help SMEs to access an affordable financial service Empowering SMEs capacity by financial approach Implement national program BANK Support for aggregate profit creation (20-30 %) Support for Bank s performance Guarantor Agency (Askrindo/ Jamkrindo) Support for aggregate profit development (20-30 %) Support for Organization s performance

19 KUR s STRENGTH Reducing poor group preference to use expansive financing resources (rentenir). Market operation of expansive financing resources will be limited. In some areas, education about Bankable and Prudential banking have been socialized by Bank s staff. It helps and trains SMEs having ability to meet Bank requirements.

20 Several HOMEWORK High competition for micro credit when Banks may provides micro loan (IDR 1-5 million) which is market for non Bank financing institution (Koperasi, BMT, KSM/ SPP). Without selective regulation, non-bank Financing institution will be collapsed. There are several different paradigm about KUR which need to be solved by mainstreaming of KUR understanding. It is important that KUR should be assisting with other empowerment program such as training and mentoring particularly for: Business Development, Financial Management, Entrepreneurship, Marketing and Skill Development. PNPM Program had not been linked up yet with KUR formally.

21 CONCLUSION Generally, KUR have been accessed by SMEs that have monthly income above than poverty line. It means that poor people are still limited touched by KUR. For selected group, KUR brings several impacts particularly for income, expenditure, saving and asset. Confidence and interactions have been well developed. Meanwhile, some social activities (weekly meeting) are avoided by some SMEs because they are busy with their business. Constraints are appeared during program implementation such as: KUR paradigm, collateral, technical problems, trade off between prudential aspect, target achievement and outreach program. KUR and PNPM are less linked up. Some obstacles are: 1) BKK/KSP does not have a legal formal as financial institutions; 2) there is no formally mechanism for PNPM and KUR to be linking; 3) KUR has not well socialized among both facilitator and member PNPM;

22 RECOMMENDATION There is a demand to linked up KUR formally and structurally with PNPM program. It should accommodate for mechanism, equal responsibility and Synergy may be developed between BANK, PNPM, technical agency for PNPM and local government. Synergy which is involving Local Government, Bank, Guarantor, NGOs, Central Bank can be as exit strategy. Local Government may take a part in empowering SMEs to be a bankable. Technical supporting are required to optimizing KUR implementation such as: on-line system between bank and guarantor, universal form to socializing KUR, education program for SMEs about business development.

23 THANK YOU BAHTIAR RIFAI Economics Researcher The Indonesian Institute of Sciences (LIPI) Widya Graha, 4 th 5 th floor, Jl. Gatot Subroto No. 10 South Jakarta, INDONESIA bahtiar.rifai@lipi.go.id or bahtiar2000@gmail.com