People continually face important financial decisions that require an understanding of the time value of money. Should we buy or lease car? How much and how soon do we need to save for our children's education? What size house can we afford? Should we refinance our home mortgage? How much must we save in order to retire comfortably? The answer to these question are often complicated, and they depend on a number of factors, such as housing and education costs, interest rates, inflation, expected family income, and stock market returns.
In case Mr. Jones, who earns $85,000, retires in 2000, expects to live for another 20 years after retirement, and needs 80 percent of her pre-retirement income, she would require $68,000 during 2000. However, if inflation amounts to 5 percent per year, her income requirement would increase to $110,765 in 10 years and to $180,424 in 20 years. If inflation were 7 percent, her year 20 requirement would jump to $263,139! How much wealth would Ms. Jones need at retirement to maintain her standard of living, and how much would she have had to save during each working year to accumulate that wealth?
The answer depends on a number of factors, including the rate she could earn on saving, the inflation rate, and when her saving program began. Also the answer would depend on how much she will get from her corporate retirement plan, if she has.
For this above sample cases, we have to understanding the concept of the time value of money. It will help us a lot too, to calculate another personal financial planning.
Future Value
A dollar in hand today is worth more than a dollar in the future because, if you had it now, you could invest it, earn interest, and end up with more than one dollar in the future. Future value (FVs) is the amount to which a cash flow or series of cash flow will grow over a given period of time when compounded at a given interest rate.
Suppose you deposit $100 in a bank that pays 5 percent interest each year. How much would you have at the end of five years?
Equation 1:
FVn = PV (1+i)n
Where
FVn = future value or ending amount, of your account at the end of n years.
PV = present value, or beginning amount, in your account.
i = interest rate the bank pays on the account per year
n = number of periods involved in the analysis.
Spreadsheet solution
You could find the FV by clicking the function wizard, then financial, then scrolling down to FV, and then clicking OK to bring up the FV dialog box. Then enter 0.05 for Rate, 5 for Nper, 0 or leave blank for Pmt because there are no periodic payment, -100 for PV, and 0 or leave blank for type to indicate that payment occur at the end of the period. Then, when you click OK, you get the future value, $127.63
Present Value
The present value of a cash flow due n years in the future is the amount which, if it were on hand today, would grow to equal the future amount. So the present value (PV) is the value today of a future cash flow or series of cash flows. Since $100 would grow to $127.63 in five years at a 5 percent interest rate, $100 is the percent value 0f $127.63 due in five years when the opportunity cost rate is 5 percent.
Equation 2:
PV = FVn / (1+i)n
Spreadsheet Solution
In Excel, click the function wizard, indicate that you want a Financial function, scroll down, and double click PV. Then, in the dialog box, enter 0.05 for Rate, 5 for Nper, 0 for Pmt (because there are annual payments), -127.63 for FV,and 0 (or leave blank) for type because the cash flow occurs at the end of the year. Then press OK to get the answer, PV=$100.00.
Source: Eugene F. Brigham, Joel F. Houston, Fundamentals of Financial Management, Harcourt, Inc, 2001.
Wednesday, January 23, 2008
Time Value of Money (Annuity)
Future Value of an Annuity
An annuity is a series of equal payments made at fixed intervals for a specified number of periods. If the payments occur at the end of each period, as they typically do, the annuity is called an ordinary or deferred annuity.
Equation 3
FVAn = PMT (FVIFAi,n)
Where
FVAn = The future value of an annuity over n periods
PMT = The payments at the end of each period
FVIFAi,n = Future value interest factor for a annuity
If you deposit $100 at the end of each year for three years in a savings account that pay 5 percent interest per year, how much will you have at the end of three years?
Spreadsheet Solution
In Excel, click the function wizard, Financial, FV, and OK to get the FV dialog box. Then, we would enter 0.05 for Rate, 3 for Nper, and -100 for Pmt (the payment is entered as a negative number to show that it is a cash outflow). We would leave PV blank because there is no initial payment, and we would leave Type blank to signify that payments come at the end of the periods. Then, we clicked OK, we would get the FV of the annuity, $315.25.
If payments are made at the beginning of each period, the annuity is an annuity due.
Equation 4
FVAn (Annuity due) = PMT (FVIFAi,n)(1+i)
For the annuity due, proceed just as for the ordinary annuity except enter 1 for Type to indicate that we now have an annuity due. Then, when you click OK, the answer $331.01 will appear.
Present Value of an Annuity
If the payments come at the end of each year, then the annuity is an ordinary annuity.
Equation 5
PVAn = PMT (PVIFAi,n)
Where
PVAn = The present value of an annuity of n periods
PMT = The payments at the end of each period
PVIFAi,n = Present value interest factor for a annuity
Suppose you were offered the following alternatives: (1) a three-year annuity with payments of $100 or (2) a lump sum payment today. You have no need for the money during the next three years, so if you accept the annuity, you would deposit the payments in a bank account that pays 5 percent interest per year. Similarly, the lump sum payment would be deposit into a bank account. How large must the lump sum payment today be to make it equivalent to the annuity?
Spreadsheet Solution
In Excel, click the function wizard, Financial, PV, and OK. Then enter 0.05 for Rate, 3 for Nper, -100 for Pmt, leave blank for FV, and 0 or leave blank for Type. Then, when you click OK, you get the answer, $272,32.
Had the three $100 payments in the preceding example been made at the beginning of each year, the annuity would have been an annuity due
Equation 6
PVAn (Annuity due) = PMT (PVIFAi,n)(1+i)
For an annuity due, proceed exactly as for regular annuity except enter 1 rather than 0 for Type to indicate that we now have an annuity due.
Source: Eugene F. Brigham, Joel F. Houston, Fundamentals of Financial Management, Harcourt, Inc, 2001.
An annuity is a series of equal payments made at fixed intervals for a specified number of periods. If the payments occur at the end of each period, as they typically do, the annuity is called an ordinary or deferred annuity.
Equation 3
FVAn = PMT (FVIFAi,n)
Where
FVAn = The future value of an annuity over n periods
PMT = The payments at the end of each period
FVIFAi,n = Future value interest factor for a annuity
If you deposit $100 at the end of each year for three years in a savings account that pay 5 percent interest per year, how much will you have at the end of three years?
Spreadsheet Solution
In Excel, click the function wizard, Financial, FV, and OK to get the FV dialog box. Then, we would enter 0.05 for Rate, 3 for Nper, and -100 for Pmt (the payment is entered as a negative number to show that it is a cash outflow). We would leave PV blank because there is no initial payment, and we would leave Type blank to signify that payments come at the end of the periods. Then, we clicked OK, we would get the FV of the annuity, $315.25.
If payments are made at the beginning of each period, the annuity is an annuity due.
Equation 4
FVAn (Annuity due) = PMT (FVIFAi,n)(1+i)
For the annuity due, proceed just as for the ordinary annuity except enter 1 for Type to indicate that we now have an annuity due. Then, when you click OK, the answer $331.01 will appear.
Present Value of an Annuity
If the payments come at the end of each year, then the annuity is an ordinary annuity.
Equation 5
PVAn = PMT (PVIFAi,n)
Where
PVAn = The present value of an annuity of n periods
PMT = The payments at the end of each period
PVIFAi,n = Present value interest factor for a annuity
Suppose you were offered the following alternatives: (1) a three-year annuity with payments of $100 or (2) a lump sum payment today. You have no need for the money during the next three years, so if you accept the annuity, you would deposit the payments in a bank account that pays 5 percent interest per year. Similarly, the lump sum payment would be deposit into a bank account. How large must the lump sum payment today be to make it equivalent to the annuity?
Spreadsheet Solution
In Excel, click the function wizard, Financial, PV, and OK. Then enter 0.05 for Rate, 3 for Nper, -100 for Pmt, leave blank for FV, and 0 or leave blank for Type. Then, when you click OK, you get the answer, $272,32.
Had the three $100 payments in the preceding example been made at the beginning of each year, the annuity would have been an annuity due
Equation 6
PVAn (Annuity due) = PMT (PVIFAi,n)(1+i)
For an annuity due, proceed exactly as for regular annuity except enter 1 rather than 0 for Type to indicate that we now have an annuity due.
Source: Eugene F. Brigham, Joel F. Houston, Fundamentals of Financial Management, Harcourt, Inc, 2001.
INDONESIA MICROFINANCE
INDONESIA CASE STUDIES ON MICROFINANCE
AND SMALL-SCALE FISHERIES
Prepared by:
Agus Rachmadi
Bank Rakyat Indonesia
I. Overview of the Country’s Fishery Sector
Importance of the Fishery Sector
Indonesia is the world biggest archipelago, one third of the Indonesia area consist mostly sea water covering about 5,8 million km2 with almost 81,000 km2 line beaches surrounding its 193 millions hectare. On the other hand there are about 24 million hectare are very potential for the fishery business with potential production about 47 million ton year. While location which are considered very potential for pond product is about 1 million hectare potential production is about 5 million ton /year.
The number of fishery household establishment averagely increased 3,53% per annum at period of 1999 - 2004, that was 2.033.175 units in 1999 to 2.405.688 units in 2004. These fishery household establishment was consist of captured and aquaculture fisheries household establishment. At period of 1999 - 2004, the number of captured fisheries household establishment averagely increased 4,20 % per annum, which came from marine and inland open water fisheries business unit.
At the same period, the number of aquaculture fisheries household establishment averagely increased 3,21 % per annum. This aquaculture fisheries household establishment came from fisheries household establishment of marine, brackish water pond, freshwater pond, and cage, floating net and paddy field culture.
Based on activity, fishermen divided into two categories, they are: marine fishermen and inland open water fishermen. These years, the number of marine fishermen from 2003 to 2004 had significantly decreased for over 29,14%, that was 3,31 million in 2003 to 2,35 million in 2004. Inland open water fishermen is fisherman which their major part of working day applied to-do fishing. In this decade, the number of inland open water fishermen from 2003 to 2004 increased 7,83%, that was 545.776 people in 2003 to 588.507 in 2004. The number of fish farmers in 2004 was 2.459.355 person. These fish farmers classified into group of marine fish farmers 81.377 person, brackish water pond farmers 440.545 person, freshwater pond farmers 1.131.078 person, cage farmers 58.565 person, floating net farmers 51.439 person, paddy field farmers 696.351 person. The number of fish
farmers generally increases annually with an average 3,15 %.
Based on result of agricultural census 2003, in 2004, BPS – Statistics Center Agent of Indonesia - has done agriculture household survey including fisheries survey. In general, besides doing business for fisheries, fisheries household also do other business either agricultural sector or non-agricultural sector. In doing their business, besides using manpower, they also do by themselves or involve member of household. In 2004, income of fisheries household from fisheries business (net income) which obtained by fisheries establishments in a row is as follows: income of fisheries establishments of fish culture in pond paddy field was Rp. 7,68 million, income of fisheries establishments of brackish water pond was Rp. 6,65 million, income fisheries establishments of marine culture was Rp. 3,44 million, income of fisheries establishments of inland open water culture was Rp.4,68 million. Income of marine fisheries establishment was Rp.11,05 million and income of inland open water fisheries establishment is Rp.6.42 million. The highest income for captured fisheries business was income from marine fisheries, while for aquaculture business was income from pond/paddy field fisheries business.
Performance of the Fishery Sector
The number of aquaculture area at period of 1999 - 2004 improved averagely 3,9%6 (gross wide) and 2,8% (net wide) per annum, it came from gross wide 594,7 thousands ha in 1999 to 716,3 thousands ha in 2004, while net wide 524,3 thousands ha in 1999 to 600,6 thousands ha in 2004. The last decade between 2003 and 2004, the number of aquaculture area decreased 2,1% for gross wide and 1, 6% for net wide, which gross wide in 2003 was 731,4 thousands ha and in 2004 become 600,6 thousands ha, while for net wide in 2003 was 610,5 thousands ha to 600,6 thousands ha in 2004. Trade balance of fisheries product from 1999 to 2004 generally increased 0,41%, from US$ 1,53 Billion in 1999 to US$ 1,63 Billion in 2004. In 2001 and 2002, trade balance decreased US$ 1,53 Billion than a year before and kept on decreasing to US$ 1,48 Billion in 2002. In 2003, it increased to US$ 1,55 Billion, and continues increasing to US $ 1,63 Billion in 2004. Fishery contribution to the regional income in Indonesia was increase about 21 % since 2003. Fishery export also contributed about USD 1.5 billion since 2003. It shows that fishery business development has significant potential and play important role in Indonesia economy
Gross Regional Domestic Product (GRDP) of Fisheries
GRDP of fisheries was increased 14,34% at period of 2000-2004. In 2000, GRDP of fisheries was Rp. 25 billion. In 2001, it had increased 17,13% compared to data in 2000 which was Rp. 29,2 billion. In 2002, GRDP of fisheries had increased 13,5% compared to a year before which was Rp. 33,2 billion. In 2003, it had increased 10, 9% compared to 2002 which was Rp. 36,8 billion. In 2004, GRDP of fisheries increased 15,8% compared to year before which was Rp. 42,6 billion.
Export volume of fisheries product generally increased 18,17 % at period of 1999-2004. Export volume had increased from 644,604 tones in 1999 to 902.358 tones in 2004. In 2000 and 2001, fisheries export volumes decreased than a year beforesuccessively ass follows: it is equal to 519,416 tones in 2000, and then it decreased to 487.116 tones in 2001. In 2002, it increased to 565,739 tones, hereafter, it kept on increasing to 857,783 tones in 2003 and 902.358 in 2004.
Export value of fisheries product
Export value of fisheries product increased 0, 50% at period of 199-2004, that was: it had increased from US$ 1, 61 billion in 1999 to US$ 1, 78% in 2004. I 2001, the values had decreased to US$1.63 billion and in 2002 it kept on decreasing to US$ 1, 57 billion. In 2003, it increased to US$ 1, 64 billion. It kept on increasing to 1, 78 billion in 2004. Export value increased significantlyin 204, while in 2002, it was experiencing the lowest export value.
Fish Supply for Domestic Consumption
Fish supply for domestic consumption in 2000 was 4,51 million tones and number of per capita was 22 kg/capita/annum. The number of fish consumption increased to 4,69 million tones in 2001 and the number of per capita was 22 kg/capita/annum. The number of fish consumption kept on rising in 2002 as National fish consumption need was 4,78 million tones and number of per capita was 23 kg/capital annum. In 2003, it decreased to 4,75 million tones and number of per capita was 22 kg/capita/annum. The year after (2004), the fish consumption need showed increasing become 4,84 million tones, per capita 22 kg/capita/annum. The number of fish supply for National fish consumption from 2000 to 2004 generally showed increasing 1,80% and per capita consumption was 1,07%.
II. Indonesia’s Rural /Micro Financial System
Rural /Micro Small Medium Finance Policy Environment.
Microfinance is an essential instrument for realizing the Government of Indonesia’s three-pronged approach for development to create jobs, increase incomes and alleviate poverty. Access to sustainable financial services is a prerequisite for micro entrepreneurs to improve their businesses and poor households to reduce their vulnerability and increase their incomes. Microfinance is an important tool in the countries’ development strategy directed at achieving the Millennium Development Goals. Even though Indonesia has a wide variety of microfinance services’ providers, a demand-supply gap of (micro-) financial services persists. A majority of Indonesian households do not have access to financial services, and most of these households are in rural areas and in provinces outside Java and Bali, where the incidence of poverty is highest. This problem is caused by a restrictive legal framework for microfinance, inadequate regulation and supervision, and the ongoing “old paradigm” of subsidized and targeted credit coexisting with the “new paradigm” built on commercial and market oriented microfinance institutions. A national policy on microfinance is needed to overcome the current limitations for microfinance by creating an enabling environment, which will allow existing microfinance institutions to expand their services and new microfinance institutions to fill the gap of demand and supply, especially in rural areas. This policy and the strategy for its implementation will be based on international good practice and lessons learnt from the Indonesian experience. The present absence of a concise microfinance policy, however, prevents stakeholders from aligning their efforts and creating a sustainable microfinance system. This vision has at its core the sustainable access to quality financial services, i.e., savings, deposits, loans, payments and insurance products by every household in every village on every island all over the wide Indonesian archipelago. This creates opportunities to increase wealth of the population by reducing vulnerability, enhancing business activities, generating employment and increasing income of poor and low-income households. To achieve this vision, the Government of Indonesia and all relevant stakeholders shall jointly work on removing the limitations for microfinance development. Microfinance in Indonesia has already recorded success story in providing financial services to MSMEs. Simple and well-adapted credit approval and administrative procedures, often coordinated with appropriate technical assistance combined with sociocultural approach, are all the aspects that support the successful of microfinance in Indonesia.
Despite the micro-finance sector quite well developed with substantial outreach in number and volume, the challenges to reduce poverty through increased availability of micro-finance services remains. The fundamental problem is the persistence of a major gap between demand and supply of micro-finance services in the rural areas, especially amongst the poor. The problem is because the outreach of commercial banks into rural areas is very limited, and usually not accessible on a day-to-day basis by villagers. Among many types of formal microfinance in Indonesia, Bank Rakyat Indonesia Unit (BRI Unit) and Rural Banks (BPR) has recorded as the leader of microfinance that serve MSME in rural areas. Their successful achievement is represented in the number of office in all over Indonesia and the amount of loan disbursement to MSME. BRI Unit specifically is very phenomenal in Indonesia’s microfinance history because of their commitment in serving people in rural areas. For the BRI Unit Desas success story, I will specifically elaborate in separate part of this paper. Although the existence of BRI Unit in the early period is promoted by the government to be government agent of development in providing small scale credit to the farmers, but in their growth they have been successfully transformed to be a commercial based microfinance independent from the government policy. This transformation should be underlined as a monumental event not only for BRI but for the development of microfinance as well. It is satisfying to note that the major banks are now starting to replicate the success of BRI’s unit system for micro-finance. Micro-finance is now attracting more commercial banks to come. Bank Permata, Danamon, Bukopin and many others has started to open hundreds of sub-branches concentrating on micro-finance, although the concentration so far is mainly in the urban areas of Java. Further initiatives however are required to expand linkages between self-help groups and banks.
Bank Indonesia as the central bank has continuously put strategic policy to develop microfinance. The program is in line with Indonesia new government policy to develop rural areas especially in the sector of agriculture as this sector plays an important role in the Indonesia economic growth. The main objective is to generate prosperity for majority of Indonesia people that live in the rural areas and derive their living mainly from agriculture. This strategic policy includes regulation and promotion of microfinance with the final objective is how to serve more financial services to MSME. However, reaching poor households and micro-enterprises with sustainable financial services is a difficult and time-consuming task that requires a long-term, multipronged strategy. Such a strategy will need to cover a wide array of issues including enabling policy environments, supervisory and. The proposed legal framework is only one strategy to improve regulation and expand the outreach of sustainable micro-finance. Expansion can only be effective if all parties play a role - with the government initiating an improved legal framework following international best practices and an improved national micro-finance policy that phases out unsustainable micro-finance programs, with BPRs expanding outreach through opening large numbers of new branches, with commercial banks bringing microfinance into their mainstream operations, with provincial governments replicating the LDKP model, with the dormant BKD (village banking) sector reviving, with expanding bank linkages with groups, and finally, with sound donor initiatives that take a financialsystems approach to expand micro-finance, especially in our poorer provinces.
B. Banking Policy
In order to obtain banking system, that is sound and sustainable and also to support the development of MSME, Bank Indonesia is continuing the effort to recover banking intermediary function and enhancing credit to micro, small, medium and rural finance by following policies:
a. Regulation on small-scale credit
Bank Indonesia on January 2001 issued a new regulation concerning on Small Scale credit. The new regulation gives strong recommendation to commercial bank. The new regulation gives strong recommendation to commercial bank to distribute small-scale loan for micro small and medium enterprises (MSME’s) in order to diversify its credit portfolio
b. Improving the banking regulation.
While the putting high emphasis on prudential banking framework and the banking act that mentioning credit collectibles of loan amounted to Rp 500 million is onlybased on borrower payment capability. Bank Indonesia support MSME’s by providing technical assistance through training and information of MSME’s development
Institutional and capacity building
a. Increasing the role of credit insurance
Most MSME (including fishermen) do not have any collateral to get credit from bank because of their small scale of business and their limited capital capability. Therefore, to increase the feasibility of credit for MSME’s, the role of credit insurance should be optimized and extended to MSME’s. In Indonesia there are several credit insurances. They are PT ASKRINDO, PT ASEI, PT PKPI and Perum Sarana.
b. Supporting the establishment of MSME’s Service center
To provide good services to MSME’s, commercial bank are encouraged to establish MSME Service Center. MSME’s service center functions as interbrain data information center and also as a specialized unit that gives services mainly to MSME. Several big banks such as PT BCA, PT BNI, PT Danamon, PT BRI and PT Bank Niaga already established MSME’s service center in several big cities. Other banks are encouraged to found MSME’s service center so the services to MSME’s could be extended.
Technical assistance
a. Training
Bank Indonesia provides training targeted for banks and business Development services (BDSP). Training for bank, which focuses on all aspects of bank financial services to small and micro enterprises? Whereas, training fir BDSP focus on financial aspects
b. Research
Bank Indonesia has already conducted researches about how to develop MSME’s. The researches (base line economic survey) also include s technical assistance needed by MSME’s potential sectors in region.
c. Information System
Bank Indonesia built a Small Scale Business Development Information System (Sistem Informasi Pengembangan Usaha Kecil/SIPUK) to disseminate research result and other information regarding MSME. SIPUIK consist of:
Base line Economic Survey Information System (SIB)
Export Oriented Agricultural Industry Information System (SIABE)
Lending Model Information System (SILMUK)
Supporting Decision for Investment Information System (SPKUI)
Loan Procedures Information System (SIPMK)
C. Cooperation between bank Indonesia and the government
a. Coordination with government for poverty alleviation
Bank Indonesia has signed a memorandum of understanding with the government, coordinating Ministry of Social Welfare regarding effort to alleviate poverty. The MOU is targeted to develop MSME’s that generate the increase of low-income people welfare, including poor families and women
b. As a facilitator of banking sector and business sectors dialogue the dialogue is important to eliminate the communication gap between banking sectors as intermediary financial institution and entrepreneurs as the user of banking services.
The first dialogue has been conducted since 2003 from the east part of Indonesia to the west part Indonesia. The issues arising from business sectors are accommodated and discussed with the banking industry to obtain a win-win solution for both parties.
c. Financial Consultant for promoting bank Linkages to MSME’s
Most MSME’s are not bankable because of their lack of management capabilities, organizational structure, operational procedure or financial administration. For that reason, bank Indonesia support bank linkages to MSME’s by conducting training for financial consultant that will working with or acting as business development services (BDS), BDS function, as assistant to MSME’s to become bankable and help them to link with the bank.
III. Agriculture and Fisheries Credit Performance of the Country
Bank Lending on Agricultural and fishery
The aggregate amount of bank lending to the agriculture and fishery sector in 2006 is Rp 45,180 billion. Average growth rate for the past 3 years, 2004-2006 is 23 %. The government effort more seriously to explore more of the Indonesia fisherypotential through its Ministry of Marine and Fishery contributed to the development of aquaculture fisheries, facilities and infrastructureand fisheries product processing development should cover all of the sub system business. Central Government through the Department of Financial allocates Special Grant (DAK) in the amount of 17.094 trillion rupiah and Balance Grant for 2007 budgetary. The grant was allocated to region infrastructure development, and other sectors such as health, education, and agriculture, marine, and fisheries. To boost infrastructures development in region, in Special Grant is apportioned
money amounting to 5.033 trillion rupiah. From total of funding, 3.113 trillion rupiah for highway construction. Grant for irrigation development amounting to 858.91 million rupiah and funding for clean water infrastructure construction in the amount of 1.062 trillion rupiah. Whilst, the balance grant which is allocated for infrastructures to total 2.586 trillion. The grant covers funding for highway development and public utilities/ infrastructures to total 2.319 trillion, irrigation development funding in total of 179 billion rupiah, and grant for the installation of clean water construction and environment amount to 89.19 billion rupiah. For other sectors, data from Directorate General Financial Balance of Financial Department which was publicized on Monday (27/11) mentioned Balance Grant for education sector amount to 69 trillion rupiah, health sectoramount to 453.05 billion rupiah, agriculture sector, marine and fisheries amount to 98.7 billion rupiah.
The highest Special Grant is allocated to education sector that is total to 5.195 trillion rupiah. Special Grant for Health Sector is 3381 trillion rupiah. While marine and fisheries sectors in sum of 1.1 trillion rupiah, agriculture sector amount to 1.492 trillion rupiah; infrastructures development sectors (praspem) amount to 539. 06 billion rupiah; and environment sector amounting to 351.61 billion rupiah.
B. Loan scheme
Basically, the banking industry has supported the development of aquaculture fishery business using micro, small, medium and corporate loan as follow:
1. Loan less than 100 million usually served in more than 8,000 outlet trough Microfinance Institution (MFI), rural banking or BRI Unit which usually located in every sub district
2. Loan bigger than 100 Million up to Rp 5 billion classified as retail loan served in 9,110 bank branches which usually located in every district
3. Loan program associated with government program from ministry of Marine and Fishery, Ministry of Agriculture or Ministry of SME and Cooperative, usually can served also trough cooperatives or bank branches.
4. Big / Corporate loan serve in the branch regional office or head office of commercial bank.
C. Access of Fisher folk to Rural Credit/Microfinance in the Country
Since 2006, Marine and fishery Ministry of Indonesia has launched new program loan through banks in Indonesia, e.g. with Bank Rakyat Indonesia:
1. Coastal Community Economic Empowerment Loan (Kredit Pemberdayaan Ekonomi Masyarakat Pesisir/PEMP), is cash collateral loan using Productive Economy Fund of Marine and Fishery Ministry of Indonesia as guarantee
2. Loan for Marine culture and seaweed, a cash collateral loan using Capital Empowerment Fund of Directorate Marine Culture a guarantee.
3. Commercial Loan for Fishermen through boat certification program,
The objectives of the cash collateral loans are:
• Internal learning for the bank to explore the characteristic of Fishery/marine culture business
• External learning for the micro entrepreneur in fishery / marine culture on The bank mechanism It is hoped that after getting cash collateral loans from the bank above that guaranteed by ministry of Marine and fishery, micro entrepreneurs in marine culture/fishery business will later on are ready and able to deal with the bank directly and
commercially.
D. Obstacle on fishery financing
Some efforts have been conducted by the government, but still some obstacles faced by banking industry. Financing fisheries business is still considered as high risk business. Basically, the problems are: capacity building, environment and infrastructure availability. Commercial bank usually still experiencing lack of expertise in fishery business, besides, in someway market and mechanism or market structure is not yet efficient. In addition, so far there is no well proven loan guarantee program for fishery financing
IV. Conclusions and recommendations
Clearly, the government effort to explore the marine and fishery potential by establishing the Marine and Fishery Ministry of Indonesia shows the government more serious intention to develop marine and fishery business in Indonesia. This is one of good steps so far, since indeed as one of the biggest marine counties Indonesia has quit the potential to do so. However, this step has not been enough, the government should do more. In developing the marine and fishery business potential, there are at least three different approaches:
(1) Giving licenses to big corporation both national and international as
Investor in aquaculture,
(2) Gradually empower Indonesian fishermen (coastal community)
(3) Mix between above two approaches
The first approach has the benefit for a bigger tax income concession fees in a very short term and based on theory it is easier to manage. Using this approach the government should be more active to drive private investor as well as create a good climate for the business. The second approach which based on the coastal community / fishery will take much longer time to get the best result, tax income and fee will very much lower (even almost none) , and much more difficult to manage due to their weaknesses in market competition. However, if followed by good empowerment in a form capacity building and supervision, there is guarantee for a more sustainability in a longer period of time. The third approach, as a mix approach alternative could be in a form of:
(i) Plasma and cluster model, big company can foster the coastal community, tiny or
smaller entrepreneur
(ii) Sub contract model, where bigger company will sub contract its smaller business
to coastal community or they buy directly form the coastal community/ fishermen
(iii) Free market competitions, where all players can just invest in explore marine, fishery business and aqua culture freely. There is guarantee the small one and the traditional fishermen will lost the business due to their lack of capital and equipment. Off course, in this case, the government should be very wise in managing all of the economic potential for the sake of Indonesian.
____________________________________
References:
1. Indonesian Bank Statistic Vol.5, Bank Indonesia 1 December 2006
2. Indonesian Marine and Fishery Statistic, Indonesian Ministry of Marine and
Fishery, 2006
3. Ibrahim, Maulana, Strategic issues in developing microfinance to promote
micro, small and medium enterprises. Deputy Governor of Bank Indonesia at
BRI International Seminar Nusa Dua – Bali, 1st December 2004
4. Sarosa, Wicaksono Dr., Pemanfaatan laut melalui pemberdayaan nelayan, Info
AND SMALL-SCALE FISHERIES
Prepared by:
Agus Rachmadi
Bank Rakyat Indonesia
I. Overview of the Country’s Fishery Sector
Importance of the Fishery Sector
Indonesia is the world biggest archipelago, one third of the Indonesia area consist mostly sea water covering about 5,8 million km2 with almost 81,000 km2 line beaches surrounding its 193 millions hectare. On the other hand there are about 24 million hectare are very potential for the fishery business with potential production about 47 million ton year. While location which are considered very potential for pond product is about 1 million hectare potential production is about 5 million ton /year.
The number of fishery household establishment averagely increased 3,53% per annum at period of 1999 - 2004, that was 2.033.175 units in 1999 to 2.405.688 units in 2004. These fishery household establishment was consist of captured and aquaculture fisheries household establishment. At period of 1999 - 2004, the number of captured fisheries household establishment averagely increased 4,20 % per annum, which came from marine and inland open water fisheries business unit.
At the same period, the number of aquaculture fisheries household establishment averagely increased 3,21 % per annum. This aquaculture fisheries household establishment came from fisheries household establishment of marine, brackish water pond, freshwater pond, and cage, floating net and paddy field culture.
Based on activity, fishermen divided into two categories, they are: marine fishermen and inland open water fishermen. These years, the number of marine fishermen from 2003 to 2004 had significantly decreased for over 29,14%, that was 3,31 million in 2003 to 2,35 million in 2004. Inland open water fishermen is fisherman which their major part of working day applied to-do fishing. In this decade, the number of inland open water fishermen from 2003 to 2004 increased 7,83%, that was 545.776 people in 2003 to 588.507 in 2004. The number of fish farmers in 2004 was 2.459.355 person. These fish farmers classified into group of marine fish farmers 81.377 person, brackish water pond farmers 440.545 person, freshwater pond farmers 1.131.078 person, cage farmers 58.565 person, floating net farmers 51.439 person, paddy field farmers 696.351 person. The number of fish
farmers generally increases annually with an average 3,15 %.
Based on result of agricultural census 2003, in 2004, BPS – Statistics Center Agent of Indonesia - has done agriculture household survey including fisheries survey. In general, besides doing business for fisheries, fisheries household also do other business either agricultural sector or non-agricultural sector. In doing their business, besides using manpower, they also do by themselves or involve member of household. In 2004, income of fisheries household from fisheries business (net income) which obtained by fisheries establishments in a row is as follows: income of fisheries establishments of fish culture in pond paddy field was Rp. 7,68 million, income of fisheries establishments of brackish water pond was Rp. 6,65 million, income fisheries establishments of marine culture was Rp. 3,44 million, income of fisheries establishments of inland open water culture was Rp.4,68 million. Income of marine fisheries establishment was Rp.11,05 million and income of inland open water fisheries establishment is Rp.6.42 million. The highest income for captured fisheries business was income from marine fisheries, while for aquaculture business was income from pond/paddy field fisheries business.
Performance of the Fishery Sector
The number of aquaculture area at period of 1999 - 2004 improved averagely 3,9%6 (gross wide) and 2,8% (net wide) per annum, it came from gross wide 594,7 thousands ha in 1999 to 716,3 thousands ha in 2004, while net wide 524,3 thousands ha in 1999 to 600,6 thousands ha in 2004. The last decade between 2003 and 2004, the number of aquaculture area decreased 2,1% for gross wide and 1, 6% for net wide, which gross wide in 2003 was 731,4 thousands ha and in 2004 become 600,6 thousands ha, while for net wide in 2003 was 610,5 thousands ha to 600,6 thousands ha in 2004. Trade balance of fisheries product from 1999 to 2004 generally increased 0,41%, from US$ 1,53 Billion in 1999 to US$ 1,63 Billion in 2004. In 2001 and 2002, trade balance decreased US$ 1,53 Billion than a year before and kept on decreasing to US$ 1,48 Billion in 2002. In 2003, it increased to US$ 1,55 Billion, and continues increasing to US $ 1,63 Billion in 2004. Fishery contribution to the regional income in Indonesia was increase about 21 % since 2003. Fishery export also contributed about USD 1.5 billion since 2003. It shows that fishery business development has significant potential and play important role in Indonesia economy
Gross Regional Domestic Product (GRDP) of Fisheries
GRDP of fisheries was increased 14,34% at period of 2000-2004. In 2000, GRDP of fisheries was Rp. 25 billion. In 2001, it had increased 17,13% compared to data in 2000 which was Rp. 29,2 billion. In 2002, GRDP of fisheries had increased 13,5% compared to a year before which was Rp. 33,2 billion. In 2003, it had increased 10, 9% compared to 2002 which was Rp. 36,8 billion. In 2004, GRDP of fisheries increased 15,8% compared to year before which was Rp. 42,6 billion.
Export volume of fisheries product generally increased 18,17 % at period of 1999-2004. Export volume had increased from 644,604 tones in 1999 to 902.358 tones in 2004. In 2000 and 2001, fisheries export volumes decreased than a year beforesuccessively ass follows: it is equal to 519,416 tones in 2000, and then it decreased to 487.116 tones in 2001. In 2002, it increased to 565,739 tones, hereafter, it kept on increasing to 857,783 tones in 2003 and 902.358 in 2004.
Export value of fisheries product
Export value of fisheries product increased 0, 50% at period of 199-2004, that was: it had increased from US$ 1, 61 billion in 1999 to US$ 1, 78% in 2004. I 2001, the values had decreased to US$1.63 billion and in 2002 it kept on decreasing to US$ 1, 57 billion. In 2003, it increased to US$ 1, 64 billion. It kept on increasing to 1, 78 billion in 2004. Export value increased significantlyin 204, while in 2002, it was experiencing the lowest export value.
Fish Supply for Domestic Consumption
Fish supply for domestic consumption in 2000 was 4,51 million tones and number of per capita was 22 kg/capita/annum. The number of fish consumption increased to 4,69 million tones in 2001 and the number of per capita was 22 kg/capita/annum. The number of fish consumption kept on rising in 2002 as National fish consumption need was 4,78 million tones and number of per capita was 23 kg/capital annum. In 2003, it decreased to 4,75 million tones and number of per capita was 22 kg/capita/annum. The year after (2004), the fish consumption need showed increasing become 4,84 million tones, per capita 22 kg/capita/annum. The number of fish supply for National fish consumption from 2000 to 2004 generally showed increasing 1,80% and per capita consumption was 1,07%.
II. Indonesia’s Rural /Micro Financial System
Rural /Micro Small Medium Finance Policy Environment.
Microfinance is an essential instrument for realizing the Government of Indonesia’s three-pronged approach for development to create jobs, increase incomes and alleviate poverty. Access to sustainable financial services is a prerequisite for micro entrepreneurs to improve their businesses and poor households to reduce their vulnerability and increase their incomes. Microfinance is an important tool in the countries’ development strategy directed at achieving the Millennium Development Goals. Even though Indonesia has a wide variety of microfinance services’ providers, a demand-supply gap of (micro-) financial services persists. A majority of Indonesian households do not have access to financial services, and most of these households are in rural areas and in provinces outside Java and Bali, where the incidence of poverty is highest. This problem is caused by a restrictive legal framework for microfinance, inadequate regulation and supervision, and the ongoing “old paradigm” of subsidized and targeted credit coexisting with the “new paradigm” built on commercial and market oriented microfinance institutions. A national policy on microfinance is needed to overcome the current limitations for microfinance by creating an enabling environment, which will allow existing microfinance institutions to expand their services and new microfinance institutions to fill the gap of demand and supply, especially in rural areas. This policy and the strategy for its implementation will be based on international good practice and lessons learnt from the Indonesian experience. The present absence of a concise microfinance policy, however, prevents stakeholders from aligning their efforts and creating a sustainable microfinance system. This vision has at its core the sustainable access to quality financial services, i.e., savings, deposits, loans, payments and insurance products by every household in every village on every island all over the wide Indonesian archipelago. This creates opportunities to increase wealth of the population by reducing vulnerability, enhancing business activities, generating employment and increasing income of poor and low-income households. To achieve this vision, the Government of Indonesia and all relevant stakeholders shall jointly work on removing the limitations for microfinance development. Microfinance in Indonesia has already recorded success story in providing financial services to MSMEs. Simple and well-adapted credit approval and administrative procedures, often coordinated with appropriate technical assistance combined with sociocultural approach, are all the aspects that support the successful of microfinance in Indonesia.
Despite the micro-finance sector quite well developed with substantial outreach in number and volume, the challenges to reduce poverty through increased availability of micro-finance services remains. The fundamental problem is the persistence of a major gap between demand and supply of micro-finance services in the rural areas, especially amongst the poor. The problem is because the outreach of commercial banks into rural areas is very limited, and usually not accessible on a day-to-day basis by villagers. Among many types of formal microfinance in Indonesia, Bank Rakyat Indonesia Unit (BRI Unit) and Rural Banks (BPR) has recorded as the leader of microfinance that serve MSME in rural areas. Their successful achievement is represented in the number of office in all over Indonesia and the amount of loan disbursement to MSME. BRI Unit specifically is very phenomenal in Indonesia’s microfinance history because of their commitment in serving people in rural areas. For the BRI Unit Desas success story, I will specifically elaborate in separate part of this paper. Although the existence of BRI Unit in the early period is promoted by the government to be government agent of development in providing small scale credit to the farmers, but in their growth they have been successfully transformed to be a commercial based microfinance independent from the government policy. This transformation should be underlined as a monumental event not only for BRI but for the development of microfinance as well. It is satisfying to note that the major banks are now starting to replicate the success of BRI’s unit system for micro-finance. Micro-finance is now attracting more commercial banks to come. Bank Permata, Danamon, Bukopin and many others has started to open hundreds of sub-branches concentrating on micro-finance, although the concentration so far is mainly in the urban areas of Java. Further initiatives however are required to expand linkages between self-help groups and banks.
Bank Indonesia as the central bank has continuously put strategic policy to develop microfinance. The program is in line with Indonesia new government policy to develop rural areas especially in the sector of agriculture as this sector plays an important role in the Indonesia economic growth. The main objective is to generate prosperity for majority of Indonesia people that live in the rural areas and derive their living mainly from agriculture. This strategic policy includes regulation and promotion of microfinance with the final objective is how to serve more financial services to MSME. However, reaching poor households and micro-enterprises with sustainable financial services is a difficult and time-consuming task that requires a long-term, multipronged strategy. Such a strategy will need to cover a wide array of issues including enabling policy environments, supervisory and. The proposed legal framework is only one strategy to improve regulation and expand the outreach of sustainable micro-finance. Expansion can only be effective if all parties play a role - with the government initiating an improved legal framework following international best practices and an improved national micro-finance policy that phases out unsustainable micro-finance programs, with BPRs expanding outreach through opening large numbers of new branches, with commercial banks bringing microfinance into their mainstream operations, with provincial governments replicating the LDKP model, with the dormant BKD (village banking) sector reviving, with expanding bank linkages with groups, and finally, with sound donor initiatives that take a financialsystems approach to expand micro-finance, especially in our poorer provinces.
B. Banking Policy
In order to obtain banking system, that is sound and sustainable and also to support the development of MSME, Bank Indonesia is continuing the effort to recover banking intermediary function and enhancing credit to micro, small, medium and rural finance by following policies:
a. Regulation on small-scale credit
Bank Indonesia on January 2001 issued a new regulation concerning on Small Scale credit. The new regulation gives strong recommendation to commercial bank. The new regulation gives strong recommendation to commercial bank to distribute small-scale loan for micro small and medium enterprises (MSME’s) in order to diversify its credit portfolio
b. Improving the banking regulation.
While the putting high emphasis on prudential banking framework and the banking act that mentioning credit collectibles of loan amounted to Rp 500 million is onlybased on borrower payment capability. Bank Indonesia support MSME’s by providing technical assistance through training and information of MSME’s development
Institutional and capacity building
a. Increasing the role of credit insurance
Most MSME (including fishermen) do not have any collateral to get credit from bank because of their small scale of business and their limited capital capability. Therefore, to increase the feasibility of credit for MSME’s, the role of credit insurance should be optimized and extended to MSME’s. In Indonesia there are several credit insurances. They are PT ASKRINDO, PT ASEI, PT PKPI and Perum Sarana.
b. Supporting the establishment of MSME’s Service center
To provide good services to MSME’s, commercial bank are encouraged to establish MSME Service Center. MSME’s service center functions as interbrain data information center and also as a specialized unit that gives services mainly to MSME. Several big banks such as PT BCA, PT BNI, PT Danamon, PT BRI and PT Bank Niaga already established MSME’s service center in several big cities. Other banks are encouraged to found MSME’s service center so the services to MSME’s could be extended.
Technical assistance
a. Training
Bank Indonesia provides training targeted for banks and business Development services (BDSP). Training for bank, which focuses on all aspects of bank financial services to small and micro enterprises? Whereas, training fir BDSP focus on financial aspects
b. Research
Bank Indonesia has already conducted researches about how to develop MSME’s. The researches (base line economic survey) also include s technical assistance needed by MSME’s potential sectors in region.
c. Information System
Bank Indonesia built a Small Scale Business Development Information System (Sistem Informasi Pengembangan Usaha Kecil/SIPUK) to disseminate research result and other information regarding MSME. SIPUIK consist of:
Base line Economic Survey Information System (SIB)
Export Oriented Agricultural Industry Information System (SIABE)
Lending Model Information System (SILMUK)
Supporting Decision for Investment Information System (SPKUI)
Loan Procedures Information System (SIPMK)
C. Cooperation between bank Indonesia and the government
a. Coordination with government for poverty alleviation
Bank Indonesia has signed a memorandum of understanding with the government, coordinating Ministry of Social Welfare regarding effort to alleviate poverty. The MOU is targeted to develop MSME’s that generate the increase of low-income people welfare, including poor families and women
b. As a facilitator of banking sector and business sectors dialogue the dialogue is important to eliminate the communication gap between banking sectors as intermediary financial institution and entrepreneurs as the user of banking services.
The first dialogue has been conducted since 2003 from the east part of Indonesia to the west part Indonesia. The issues arising from business sectors are accommodated and discussed with the banking industry to obtain a win-win solution for both parties.
c. Financial Consultant for promoting bank Linkages to MSME’s
Most MSME’s are not bankable because of their lack of management capabilities, organizational structure, operational procedure or financial administration. For that reason, bank Indonesia support bank linkages to MSME’s by conducting training for financial consultant that will working with or acting as business development services (BDS), BDS function, as assistant to MSME’s to become bankable and help them to link with the bank.
III. Agriculture and Fisheries Credit Performance of the Country
Bank Lending on Agricultural and fishery
The aggregate amount of bank lending to the agriculture and fishery sector in 2006 is Rp 45,180 billion. Average growth rate for the past 3 years, 2004-2006 is 23 %. The government effort more seriously to explore more of the Indonesia fisherypotential through its Ministry of Marine and Fishery contributed to the development of aquaculture fisheries, facilities and infrastructureand fisheries product processing development should cover all of the sub system business. Central Government through the Department of Financial allocates Special Grant (DAK) in the amount of 17.094 trillion rupiah and Balance Grant for 2007 budgetary. The grant was allocated to region infrastructure development, and other sectors such as health, education, and agriculture, marine, and fisheries. To boost infrastructures development in region, in Special Grant is apportioned
money amounting to 5.033 trillion rupiah. From total of funding, 3.113 trillion rupiah for highway construction. Grant for irrigation development amounting to 858.91 million rupiah and funding for clean water infrastructure construction in the amount of 1.062 trillion rupiah. Whilst, the balance grant which is allocated for infrastructures to total 2.586 trillion. The grant covers funding for highway development and public utilities/ infrastructures to total 2.319 trillion, irrigation development funding in total of 179 billion rupiah, and grant for the installation of clean water construction and environment amount to 89.19 billion rupiah. For other sectors, data from Directorate General Financial Balance of Financial Department which was publicized on Monday (27/11) mentioned Balance Grant for education sector amount to 69 trillion rupiah, health sectoramount to 453.05 billion rupiah, agriculture sector, marine and fisheries amount to 98.7 billion rupiah.
The highest Special Grant is allocated to education sector that is total to 5.195 trillion rupiah. Special Grant for Health Sector is 3381 trillion rupiah. While marine and fisheries sectors in sum of 1.1 trillion rupiah, agriculture sector amount to 1.492 trillion rupiah; infrastructures development sectors (praspem) amount to 539. 06 billion rupiah; and environment sector amounting to 351.61 billion rupiah.
B. Loan scheme
Basically, the banking industry has supported the development of aquaculture fishery business using micro, small, medium and corporate loan as follow:
1. Loan less than 100 million usually served in more than 8,000 outlet trough Microfinance Institution (MFI), rural banking or BRI Unit which usually located in every sub district
2. Loan bigger than 100 Million up to Rp 5 billion classified as retail loan served in 9,110 bank branches which usually located in every district
3. Loan program associated with government program from ministry of Marine and Fishery, Ministry of Agriculture or Ministry of SME and Cooperative, usually can served also trough cooperatives or bank branches.
4. Big / Corporate loan serve in the branch regional office or head office of commercial bank.
C. Access of Fisher folk to Rural Credit/Microfinance in the Country
Since 2006, Marine and fishery Ministry of Indonesia has launched new program loan through banks in Indonesia, e.g. with Bank Rakyat Indonesia:
1. Coastal Community Economic Empowerment Loan (Kredit Pemberdayaan Ekonomi Masyarakat Pesisir/PEMP), is cash collateral loan using Productive Economy Fund of Marine and Fishery Ministry of Indonesia as guarantee
2. Loan for Marine culture and seaweed, a cash collateral loan using Capital Empowerment Fund of Directorate Marine Culture a guarantee.
3. Commercial Loan for Fishermen through boat certification program,
The objectives of the cash collateral loans are:
• Internal learning for the bank to explore the characteristic of Fishery/marine culture business
• External learning for the micro entrepreneur in fishery / marine culture on The bank mechanism It is hoped that after getting cash collateral loans from the bank above that guaranteed by ministry of Marine and fishery, micro entrepreneurs in marine culture/fishery business will later on are ready and able to deal with the bank directly and
commercially.
D. Obstacle on fishery financing
Some efforts have been conducted by the government, but still some obstacles faced by banking industry. Financing fisheries business is still considered as high risk business. Basically, the problems are: capacity building, environment and infrastructure availability. Commercial bank usually still experiencing lack of expertise in fishery business, besides, in someway market and mechanism or market structure is not yet efficient. In addition, so far there is no well proven loan guarantee program for fishery financing
IV. Conclusions and recommendations
Clearly, the government effort to explore the marine and fishery potential by establishing the Marine and Fishery Ministry of Indonesia shows the government more serious intention to develop marine and fishery business in Indonesia. This is one of good steps so far, since indeed as one of the biggest marine counties Indonesia has quit the potential to do so. However, this step has not been enough, the government should do more. In developing the marine and fishery business potential, there are at least three different approaches:
(1) Giving licenses to big corporation both national and international as
Investor in aquaculture,
(2) Gradually empower Indonesian fishermen (coastal community)
(3) Mix between above two approaches
The first approach has the benefit for a bigger tax income concession fees in a very short term and based on theory it is easier to manage. Using this approach the government should be more active to drive private investor as well as create a good climate for the business. The second approach which based on the coastal community / fishery will take much longer time to get the best result, tax income and fee will very much lower (even almost none) , and much more difficult to manage due to their weaknesses in market competition. However, if followed by good empowerment in a form capacity building and supervision, there is guarantee for a more sustainability in a longer period of time. The third approach, as a mix approach alternative could be in a form of:
(i) Plasma and cluster model, big company can foster the coastal community, tiny or
smaller entrepreneur
(ii) Sub contract model, where bigger company will sub contract its smaller business
to coastal community or they buy directly form the coastal community/ fishermen
(iii) Free market competitions, where all players can just invest in explore marine, fishery business and aqua culture freely. There is guarantee the small one and the traditional fishermen will lost the business due to their lack of capital and equipment. Off course, in this case, the government should be very wise in managing all of the economic potential for the sake of Indonesian.
____________________________________
References:
1. Indonesian Bank Statistic Vol.5, Bank Indonesia 1 December 2006
2. Indonesian Marine and Fishery Statistic, Indonesian Ministry of Marine and
Fishery, 2006
3. Ibrahim, Maulana, Strategic issues in developing microfinance to promote
micro, small and medium enterprises. Deputy Governor of Bank Indonesia at
BRI International Seminar Nusa Dua – Bali, 1st December 2004
4. Sarosa, Wicaksono Dr., Pemanfaatan laut melalui pemberdayaan nelayan, Info
STANDARD Chartered Bank Tanzania
STANDARD Chartered Bank Tanzania Limited is one of the top five banks in Tanzania and recently its Chief Executive Officer, Mr Hemen Shah, granted an interview to Staff Writers ABDUEL KENGE and SHERMARX NGAHEMERA over small and medium enterprises (SMEs) funding, micro-finance institutions (MFIs), bank interests rates and rural financing. Excepts... QUESTION: Why is Standard Chartered involved with Micro-Finance Institutions (MFI)? Answer: Micro-finance is a growing sector that bodes well for the future of the banking industry in this country in terms of resource mobilisation and steady contribution to economic development. The government has also put in a lot of emphasis on this sector as mentioned in last week's workshop for members of the East Africa Sub-Region of the African Rural and Agricultural Credit Association (AFRACA). Standard Chartered Bank realises the importance and potential of micro-finance to economic growth in various countries and we are already involved in the sector in both Africa and Asia. The countries in which we have functional and active involvement include Kenya, Uganda, Ghana, India and Pakistan. It is in this context that Standard Chartered Bank Tanzania Limited has decided to package Microfinance products for the Tanzanian market. Q: How much have you set aside for micro-finance? A: According to the nature of our operations, SMEs are principally served and categorised as micro-finance. The strata of our customer profile is four -layered into large corporate deposits of more than 500m/-, below which are medium corporate deposits of between 250m/- and 500m/-, SMEs deposits reaching 250 million and micro-finance deposits of below one million shillings. We recently started to support this sector in Tanzania and have already established a strong relationship with strategic MFIs in the country. We believe our strategic alliance with the intermediaries will help our bank to reach beyond our current customer base. The initial provision for this sector is 5.5bn/- and we have an understanding with PRIDE to finance SMEs, the micro firms and companies. Q: What are the lending rates offered to the MFI? A: Our lending rates to MFIs are very competitive and we take into consideration a number of aspects, ranging from the amount of the facility to the credit risk associated with the transaction. Q: How will the bank cover itself against the credit risks associated with micro-finance? A: We are aware that quality risk management is a prerequisite of good corporate governance and in that respect we have studied the risks associated with the microfinance business in Tanzania and our entry in this sector signifies that we are comfortable and confident with the development of this sector in the country. We have also put in place the necessary framework to manage any risks. Q: What are the requirements for MFIs to qualify for such facilities? A: All applications for the credit facility will be appraised for risk in line with our internal procedures. The applications will be supported by the MFI's financial performance and internal controls, in addition to security. Q: Is your entry into micro-finance in Tanzania a short or long-term commitment? A: Standard Chartered Bank sees micro-finance as a way of supporting the government's effort in poverty alleviation by lending money to the common man through the MFIs as intermediaries. We believe that it is our social responsibility to continue supporting this growing sector and we will continue to work with various MFIs in order to outreach more Tanzanians. We are also exploring how we to support financial literacy in this area. Q: But why work through the intermediaries? A: Micro-finance is a specialised sector and is very much demanding in terms of loan administration and follow-ups. The work force of the bank is only 300 employees worldwide, so it is cost effective environmentally and administratively friendly to outsource the bulk of the credit services, that way we conveniently serve our customers. We have started with PRIDE others will follow. The SMEs as aforementioned borrow direct because they qualify under our customer portfolio. Q: Prime Minister Edward Lowassa has called on banks to go rural to meet the demands of the population who are currently not served by the banking industry, what is your reaction to that challenge? A: The call by the prime minister is a landmark note and we support the call because of the traditional and critical role played by the agricultural sector, which employs about 80 per cent of the population. In banking terms, rural banking is micro-finance and as we said earlier we have engaged in the sector through the MFIs and we think it is an expanding portfolio. The only comment is that formal banking is not geared to operate directly in rural settings, we use intermediaries to provide services because of their extensive operations, network, their cultural and field experience. The business volumes of rural operations are not compatible formal banking operations. We have MFIs who serve as outreach vehicles and that way every body is safely covered against manageable risks. We are well-equipped in finance and credit expertise and micro-finance is a powerful tool to improve living conditions which is investing in the country's future. This is because no one in the world is condemned to be poor there are always chances to advance if people are financially empowered to undertake economic ventures. Q: Again, the prime minister is of the opinion that Savings and Credit Cooperative Societies (SACCOS) and Savings Credit Associations Societies (SACAS) should be empowered to provide banking services at village level, especially with the promised 500m/- from the Treasury to each region, is this the right approach? A: I'm not the government but a banker with wide scope and focus on finances and as a general rule in the industry, bankers are cautious and conservative to maintain the trust bestowed on us by our customers and we do not engage in uncharted waters. The point is, SACCOS are institutions that we don't know much about, we better take the cost of learning them to understand their dynamism and mechanism. The government's move is the right one for empowerment purposes, but we are not sure of the cash deployment modalities. We fear it could end up as a financial drain to the government if it was industry. Q: The premier was vocal on the question of interest rates and saying he was uncomfortable with the widening spread, whereby interests on deposits are a pittance at 4.5 per cent against the lending rates of 19 to 25 per cent per annum. He called for its reversal by reducing the lending rates to sustainable levels and increase rates on deposits to attract savings to have a sustainable banking cycle. What is your reaction on this challenge? A: On the question of the interest rates spread Standard Chartered Bank Tanzania Limited offers most competitive rates on its product called Tajirika Account up to 10 per cent on savings with a minimum balance of 50,000/- and no fees on transaction. No bank provides such an empowerment product. Treasury bill rates command the extent of the lending rates by setting the benchmark and once the rates of the bills are higher, most banks opt to buy them because they are secure and carry the minimum liability and provide banks with a lot of leverages. The process creates the false impression that banks are only safe players and don't want to venture or support local enterprises. The Central bank is the one to fashion the trend because our main concern is to find profit-making sources to our depositors to generate more for their savings. Alternatively, by extending credit to the government through the Treasury bills the banks support the economy by making it possible to the government to deliver social and economic services without cash flow constraints; which is a positive development to the industry.
Contact information:
M. Nazirwan
Head of Desk International Visitor Program BRI (iwan@bri.co.id)
Adam Rogers
Head Communication UNCDF (adam.rogers@uncdf.org)
Hyewon Jung
Microfinance Program Manager UNCDF (hyewon.jung@uncdf.org)
Contact information:
M. Nazirwan
Head of Desk International Visitor Program BRI (iwan@bri.co.id)
Adam Rogers
Head Communication UNCDF (adam.rogers@uncdf.org)
Hyewon Jung
Microfinance Program Manager UNCDF (hyewon.jung@uncdf.org)
A Microfinance Path for Commercial Banks
A Microfinance Path for Commercial Banks
By Mohamad Nazirwan*)
In the recent years we have witnessed the flourishing of microfinance around the globe – particularly after the United Nation launched the International Year of Microcredit 2005. Perhaps, the greatest indication of this growing trend was when Professor Muhammad Yunus, the founder of Grameen Bank and the pioneer of microcredit for women was awarded a Nobel Prize. In many perspectives, microfinance has been proven an effective tool to support the Millennium Development Goals campaign in reducing the half number of poor people.
Microfinance has come a long way from its beginnings as a non-profit program to combat chronic poverty in developing countries. The best practice in the past was that the government created state owned banks to channel subsidized loans to farmers to produce food crops and many international NGOs gave charity to poor inhabitants in order to help them climb up from chronic poverty trap. Furthermore, microfinance gradually evolves from social intermediation to financial intermediation which adopts market mechanism and commercial practices. Surprisingly, this approach has worked well in the bottom of the pyramid (BOP) economy mainstream and it has generated good impact on the prosperity of low income households and the poor.
The presence of microfinance institutions in local community has successfully opened financial access to microentrepreneurs and under banked clients who need loans for working capital and investment. The spectrum of commercial microfinance also broadens through providing saving products, remittance and payment system to the entire society efficiently and profitably. A key feature of this approach is double bottom lines that are to seek profits and also to create social values. One of the best examples and also the pioneer of commercial microfinance is BRI-Unit microbanking system which developed over two decades ago, after BRI struggled with massive losses during the rice self sufficient program (Bimas).
Today, for profit microfinance is becoming an emerging business. Banks of all sizes, from global institutions such as Citibank, HSBC, Standard Chartered Bank, Deutche Bank, ANZ Bank, Credit Suisse, ABN Amro and many more including leading investment companies are actively entering this sector and developing different business models of microfinance. Based on data published by Consultative Group To Assist the Poor (CGAP), a unit of World Bank that dedicated to microfinance, shows that the amount of global funds invested to microfinance in 2004 reached approximately US$ 1.1 billion and nearly half came from private sector.
Regionally, there is a long list of commercial banks in Latin America, Africa and Asia have microfinance portfolio. In Indonesia, such as BRI, Danamon and Mandiri are noted as banks that owned commercial microfinance business. Indeed, this mainstream has driven more commercial banks and venture capitalists to notice of the commercial viability of microfinance. This issue was discussed in the microfinance forum for commercial banks during the Asian Banker Summit 2007.
There are several incentives driving commercial banks to be quite aggressive in entering microfinance market. The findings of a study by Hatice Jenkins from HIID Harvard University suggest that a leading driver of commercial banks having microfinance business is profit motive. Most of commercial microcredit schemes can generate double digit profit margin which is substantially above the returns of SME loans and corporate lending. Another trigger is the changing market conditions and increasing competition in consumer finance, lending to medium and large enterprises. Other factors, such as regulations imposed by the government, innovations in banking technology, and awareness of poverty alleviation and social values have influenced the appetite of commercial banks to penetrate unbanked segment. In addition, commercial banks have a number of competitive advantages, for instance, management expertise, systems and physical infrastructure in place, ability to mobilize deposits and accessibility to other sources of funds.
However, microfinance does not mean a simple business. The business of microenterprise lending is complex and requires significant technical capabilities although its basic principle is derivedfrom conventional banking practices. Some experiences show that many commercial banks were unsuccessful in tapping the microfinance customers. The most common cause is lack of knowledge and information on informal sector which is the core of the target market of a microfinance institution. Generally, the costumers have lower educational background, enterprise ownership under family based, multiple sources of income and lack of marketable collateral. Moreover the typical of business is very dynamic, has fast turn over and high returns which are also important to take into consideration. Clearly, a good understanding on BOP segment will help banks to design products, term and conditions, operational framework etc. The second issue is high operational cost and initial investment. The big challenge in doing microfinance is how to control cost of each unit lending that is relatively high due to “a to z” processes that should be personally handled by credit officer. In other words, employment payroll is a critical issue in microfinance operations. Oftentimes, limited infrastructures particularly in remote areas also contribute to the overhead cost and network developments.
Drawn from the success and failure of commercial microfinance ventures, there are fundamental lessons that should be learned by commercial banks interested in entering the industry. The foremost consideration is to build a cost-effective business model through designing streamline organization and operations. In this regard, the essence of simplicity is very important, particularly related to products and services. Simple products and services will reduce operational costs and it can easily be understood by customers. Another critical element is pricing policy that is interest rate and transactions fees must be set based on commercial practices in order to achieve profits and sustainability. Finally, common requirements of a successful business also need to be in place. This includes clear vision, strong commitment and solid management; robust control and supervision frameworks, accounting and information systems, well-aligned promotion and compensation policies, great products and good customer service and so on.
*) Mohamad Nazirwan is observer and activist of global microfinance forums (iwan@bri.co.id)
By Mohamad Nazirwan*)
In the recent years we have witnessed the flourishing of microfinance around the globe – particularly after the United Nation launched the International Year of Microcredit 2005. Perhaps, the greatest indication of this growing trend was when Professor Muhammad Yunus, the founder of Grameen Bank and the pioneer of microcredit for women was awarded a Nobel Prize. In many perspectives, microfinance has been proven an effective tool to support the Millennium Development Goals campaign in reducing the half number of poor people.
Microfinance has come a long way from its beginnings as a non-profit program to combat chronic poverty in developing countries. The best practice in the past was that the government created state owned banks to channel subsidized loans to farmers to produce food crops and many international NGOs gave charity to poor inhabitants in order to help them climb up from chronic poverty trap. Furthermore, microfinance gradually evolves from social intermediation to financial intermediation which adopts market mechanism and commercial practices. Surprisingly, this approach has worked well in the bottom of the pyramid (BOP) economy mainstream and it has generated good impact on the prosperity of low income households and the poor.
The presence of microfinance institutions in local community has successfully opened financial access to microentrepreneurs and under banked clients who need loans for working capital and investment. The spectrum of commercial microfinance also broadens through providing saving products, remittance and payment system to the entire society efficiently and profitably. A key feature of this approach is double bottom lines that are to seek profits and also to create social values. One of the best examples and also the pioneer of commercial microfinance is BRI-Unit microbanking system which developed over two decades ago, after BRI struggled with massive losses during the rice self sufficient program (Bimas).
Today, for profit microfinance is becoming an emerging business. Banks of all sizes, from global institutions such as Citibank, HSBC, Standard Chartered Bank, Deutche Bank, ANZ Bank, Credit Suisse, ABN Amro and many more including leading investment companies are actively entering this sector and developing different business models of microfinance. Based on data published by Consultative Group To Assist the Poor (CGAP), a unit of World Bank that dedicated to microfinance, shows that the amount of global funds invested to microfinance in 2004 reached approximately US$ 1.1 billion and nearly half came from private sector.
Regionally, there is a long list of commercial banks in Latin America, Africa and Asia have microfinance portfolio. In Indonesia, such as BRI, Danamon and Mandiri are noted as banks that owned commercial microfinance business. Indeed, this mainstream has driven more commercial banks and venture capitalists to notice of the commercial viability of microfinance. This issue was discussed in the microfinance forum for commercial banks during the Asian Banker Summit 2007.
There are several incentives driving commercial banks to be quite aggressive in entering microfinance market. The findings of a study by Hatice Jenkins from HIID Harvard University suggest that a leading driver of commercial banks having microfinance business is profit motive. Most of commercial microcredit schemes can generate double digit profit margin which is substantially above the returns of SME loans and corporate lending. Another trigger is the changing market conditions and increasing competition in consumer finance, lending to medium and large enterprises. Other factors, such as regulations imposed by the government, innovations in banking technology, and awareness of poverty alleviation and social values have influenced the appetite of commercial banks to penetrate unbanked segment. In addition, commercial banks have a number of competitive advantages, for instance, management expertise, systems and physical infrastructure in place, ability to mobilize deposits and accessibility to other sources of funds.
However, microfinance does not mean a simple business. The business of microenterprise lending is complex and requires significant technical capabilities although its basic principle is derivedfrom conventional banking practices. Some experiences show that many commercial banks were unsuccessful in tapping the microfinance customers. The most common cause is lack of knowledge and information on informal sector which is the core of the target market of a microfinance institution. Generally, the costumers have lower educational background, enterprise ownership under family based, multiple sources of income and lack of marketable collateral. Moreover the typical of business is very dynamic, has fast turn over and high returns which are also important to take into consideration. Clearly, a good understanding on BOP segment will help banks to design products, term and conditions, operational framework etc. The second issue is high operational cost and initial investment. The big challenge in doing microfinance is how to control cost of each unit lending that is relatively high due to “a to z” processes that should be personally handled by credit officer. In other words, employment payroll is a critical issue in microfinance operations. Oftentimes, limited infrastructures particularly in remote areas also contribute to the overhead cost and network developments.
Drawn from the success and failure of commercial microfinance ventures, there are fundamental lessons that should be learned by commercial banks interested in entering the industry. The foremost consideration is to build a cost-effective business model through designing streamline organization and operations. In this regard, the essence of simplicity is very important, particularly related to products and services. Simple products and services will reduce operational costs and it can easily be understood by customers. Another critical element is pricing policy that is interest rate and transactions fees must be set based on commercial practices in order to achieve profits and sustainability. Finally, common requirements of a successful business also need to be in place. This includes clear vision, strong commitment and solid management; robust control and supervision frameworks, accounting and information systems, well-aligned promotion and compensation policies, great products and good customer service and so on.
*) Mohamad Nazirwan is observer and activist of global microfinance forums (iwan@bri.co.id)
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