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