Working in Asia is different from working in the US. Ok, that's a huge understatement. But I didn't really feel it until I experienced living there. Here are a couple of quirks about life as an intern in Jakarta.
1. Irony. In this case, of living in one of the most advanced banking economies in the developing world and not having a bank account. The IFC pays me in cash. Specifically, IDR 18,426,000 of it every month. It comes in a Manila envelope, which I put in a plastic bag to bring home, much like how I carry broccoli back from Whole Foods. I keep my money under my mattress (literally) and use MS Money to manage my "account". It's not too bad; I bought everything from plane tickets to Nasi Goreng with it, and always make sure to carry an "inch" with me wherever I go. And the best part, it's tax free!
2. Karaoke. In America, we schmooze clients on the golf course. Out here, it's karaoke. And we're not talking about a bunch of drunkards spilling 40's of beer (or worse) over a mike in a noisy bar. The karaoke club my boss and a couple of colleagues went to was one of the classiest joints I've seen, with ferrari's lining the red-carpeted entrance and a dedicated karaoke room for us with two large screens, surround sound, 4 mikes, a full course menu with wine, and (get this) our very own live backup singers. Someone please tell me how one goes about talking business in a place like this.
3. Nasi Goreng. It's everywhere. Really. You can get it for 50 cents on the sidewalk, or you can pay over $8.00 for exactly the same thing at a nice hotel. Its noodle counterpart, Mie Goreng, has become my staple, as all you need is noodles, egg, and "ketchup manis", a sweet soy sauce. Isn't it great when even the simplest things taste so good?
Thursday, August 3, 2006
Tuesday, August 1, 2006
Indonesian Microfinance Sector
My thoughts on the intriguing Indonesian microfinance sector:
Indonesian Microfinance Sector
Microfinance Sector / Trends
1.1. Indonesia is one of the most celebrated cases in microfinance today, with 44 million depositors, 30 million borrowers (individuals and micro-enterprises), and a total asset size of $141 Billion.[1] Commercialization and privatization are growing trends; over the past two years several Indonesian banks have been sold to foreign investors and the government has sold significant stakes of its own banks through IPOs, namely Bank Mandiri (30%) and Bank Rakyat Indonesia (41%). Today over 80% of Indonesia’s microloans come from commercial sources. Table 1 shows the progress of commercialization, relative to other countries.
Table 1: Comparison of MFI commercialization in Asia (*** = large extent, * = lesser extent)[2]
1.2. A BRI survey with 1426 respondents showed that 62% of households without a viable enterprise did not have savings accounts and 68% did not have credit from any financial institution. In households with a viable enterprise, 52% did not have a savings account and 58% did not have a loan from a financial institution.[3] A similar study consisting of surveys, interviews, and focus groups conducted by the Asian Development Bank in 2003 echoed these results. Surveys also showed greater demand for microsavings than microcredit.[4]
1.3. The amount of micro-loans given out by commercial banks has increased steadily as well (graph 1). Furthermore, the share of the micro segment (defined as loans less than $5000 as defined by Bank Indonesia) of outstanding loans of commercial banks in the last three years is fairly impressive – 18.8% in 2001, 22.4% in 2002, and 23.3% in 2003.[5] The average loan size from a commercial bank is $983[6].
Graph 1: Outstanding micro credits (Rp.Billions) by commercial banks[7]
1.4. The quality of assets, as measured by non-performing loan (NPL) rate is promising for Indonesian microfinance institutions. Table 2 shows NPLs for the most prominent commercial MFIs:
Table 2: Non-Performing Loans (2004)[8]
Competitive Landscape
2.1. As shown in table 3, the Indonesian microfinance sector is currently comprised of a large variety of public and private institutions and government programs.
Table 3: Microfinance Institutions in Indonesia (as of 2005)[9]
The major microfinance institutions are described as follows:
Commercial banks. BRI’s microbanking outlets (called BRI Units) account for the majority of micro-loans in Indonesia. Though other commercial banks (such as Bank Mandiri) have followed BRI´s example, they have had limited success due to (1) expensive business model, (2) poorly defined strategy, and (3) lack of fit with industry in terms of organizational skill and human resources. The only other successful bank is Danamon which focuses on urban areas and provides higher-end micro-loans (average size $2000).
BPR. BPRs (Bank Perkreditan Rakyat) are rural banking units created by the Central Bank. Though they have been experiencing CAGR of 35%, they are highly regulated and are not allowed to accept any foreign investment. Of these, BKDs are village banks that are set up locally and funded by a combination of village landowners, village treasury, government organizations, and/or the Ministry of Finance. They also have a harder time competing with commercial banks for savings and tend to have lower-income clients.
Non-bank non-cooperative. Also called LDKPs, these are established by provincial governments as microfinance providers. They are government owned and receive seed capital from the local and central government.
Credit cooperatives. Most cooperatives are small, local institutions with up to 5 staff and mo more than 1,000 clients. They are often set up by a group of individuals who pool their funds and create a cooperative as an investment option. They provide individual loans, including some that do not require collateral.
S & L units. These are cooperatives that deal inclusively with saving and lending. A common form of S&L cooperative is the Islamic-lending cooperatives called Baitul Maal wat Tamwil (BMT) or Baitul Qirat that uses traditional profit-sharing schemes instead of charging an interest rate on their loans.
Pawnshops. All pawnshops in Indonesia are state-owned and run by Perum Pegadaian. There are 744 branches and 14 regional head offices. As of 2004, total loan asset of these pawnshops are $0.7 Billion. The lending is based on collateral which includes jewelry, precious metal, electrical devices and even clothing. To customers, pawnshops have advantages of simple and fast procedure.
2.2. Bank Rakyat Indonesia is the world’s first, largest, and most profitable commercial microfinance institution. Over the last four years the number of savings accounts at its BRI units increased by 1 million per year on average, the number of units increased from 325 to 4046, and the percentage of profitable units increased to 96%.[10]. BRI’s growth and success, combined with the as yet unmet demand for microbanking services, shows that there are still significant opportunities for growth in this sector.
Regulatory Environment
3.1. Indonesia’s approach to regulating microfinance has been one of trying to make optimal use of its diversity of small financial institutions – mainly sponsored by the state or locality – while commercializing microfinance in line with the liberalization of the Indonesian economy and banking system.
3.2. Regulations on BPRs have been revised several times; a 1999 regulation stipulated that BPRs may not have foreign shareholders and could only open one new branch per year, prior to which it must meet a minimum CAR requirement of 15% and be defined as a sound BPR for 2 years in a row by Bank Indonesia. A 2004 regulation changed the capital requirement to the following (table 4):
Table 4: Capital requirement for BPRs as of 2004[11]
3.3. A 2001 law stipulates that by 2008, foundations such as the one owned by Parasahabat Group can no longer engage in commercial and lending activities and must be purely dedicated to social activities.
3.4. Bank Indonesia uses the CAMEL system (a criteria to assess the performance of financial institutions through Capital, Assets, Management, Earnings, and Liquidity) to determine the soundness of BPRs and sets the following prudential requirements with which BPRs must comply.
Table 5: BI’s Prudential Requirements[12]
Table 6: CAMEL Supervision Tool[13]
3.5. Recent government focus on formulation of policies and strategies to develop microfinance is also creating more opportunity in this sector:
· Government has proposed the establishment of a supervisory body (Otoritas Jasa Keuangan – OJK) by 2010 that will supervise, under one roof, all financial institutions including banks and finance companies. If established, the quality of supervision is expected to improve.
· In 2005 the government created the National Committee for Microfinance Development, consisting of high officials and headed by a Deputy of the Coordinating Minister of Economic Affairs. The group’s mission is to (1) eliminate all restrictions to the development of microfinance, (2) recognize the existence of various non-bank non-coop MFIs, and (3) legalize these MFIs.
· Establishment of a microfinance Apex institution – essentially to link the BPRs to liquidity management and eventually to foreign funding and the payment system – with provincial apexes operating around the country.
Summary
With 30 million current borrowers and 58% of households not having any form of loan from a financial institution, an estimated 41 million households have yet to benefit from microcredit services. With approximately half of the 30 million receiving funds from commercial sources, if we assume (conservatively) that 20 million of the untapped households will receive loans from commercial sources and an average loan size of $983, the market opportunity for commercial microfinance can be estimated to be $20 billion. Combined with a diverse set of competitors and a regulatory environment that is removing restrictions on microfinance, commercial microfinance institutions can thrive in Indonesia’s microfinance market.
[1] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[2] Charitonenko, Campion, Fernando. Commercialization of Microfinance: Perspectives from South and Southeast Asia. Asian Development Bank, 2004
[3] BRI Microbanking Services: Development Impact and Future Growth Potential. Jakarta BRI, Harvard University, 2001
[4] Fernando. Commercialization of Microfinance – Indonesia. Asian Development Bank, 2003
[5] Bank Indonesia. Annual Report 2003.
[6] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[7] Bank Indonesia statistics. http://www.bi.go.id/
[8] Hammerich, Hamp. Joint GTZ-KfW Fact-Finding Mission Report. March 2005
[9] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[10] Robinson. Why the Bank Rakyat Indonesia has the World’s Largest Sustainable Microbanking System. BRI 2005
[11] Bank Indonesia. http://www.bi.go.id/
[12] Bank Indonesia. http://www.bi.go.id/
[13] CAMEL supervision tool. http://www.gdrc.org/icm/rating/rate-2.html; Bank Indonesia, http://www.bi.go.id/
Indonesian Microfinance Sector
Microfinance Sector / Trends
1.1. Indonesia is one of the most celebrated cases in microfinance today, with 44 million depositors, 30 million borrowers (individuals and micro-enterprises), and a total asset size of $141 Billion.[1] Commercialization and privatization are growing trends; over the past two years several Indonesian banks have been sold to foreign investors and the government has sold significant stakes of its own banks through IPOs, namely Bank Mandiri (30%) and Bank Rakyat Indonesia (41%). Today over 80% of Indonesia’s microloans come from commercial sources. Table 1 shows the progress of commercialization, relative to other countries.
Table 1: Comparison of MFI commercialization in Asia (*** = large extent, * = lesser extent)[2]
1.2. A BRI survey with 1426 respondents showed that 62% of households without a viable enterprise did not have savings accounts and 68% did not have credit from any financial institution. In households with a viable enterprise, 52% did not have a savings account and 58% did not have a loan from a financial institution.[3] A similar study consisting of surveys, interviews, and focus groups conducted by the Asian Development Bank in 2003 echoed these results. Surveys also showed greater demand for microsavings than microcredit.[4]1.3. The amount of micro-loans given out by commercial banks has increased steadily as well (graph 1). Furthermore, the share of the micro segment (defined as loans less than $5000 as defined by Bank Indonesia) of outstanding loans of commercial banks in the last three years is fairly impressive – 18.8% in 2001, 22.4% in 2002, and 23.3% in 2003.[5] The average loan size from a commercial bank is $983[6].
Graph 1: Outstanding micro credits (Rp.Billions) by commercial banks[7]
1.4. The quality of assets, as measured by non-performing loan (NPL) rate is promising for Indonesian microfinance institutions. Table 2 shows NPLs for the most prominent commercial MFIs:Table 2: Non-Performing Loans (2004)[8]
Competitive Landscape
2.1. As shown in table 3, the Indonesian microfinance sector is currently comprised of a large variety of public and private institutions and government programs.
Table 3: Microfinance Institutions in Indonesia (as of 2005)[9]
The major microfinance institutions are described as follows:Commercial banks. BRI’s microbanking outlets (called BRI Units) account for the majority of micro-loans in Indonesia. Though other commercial banks (such as Bank Mandiri) have followed BRI´s example, they have had limited success due to (1) expensive business model, (2) poorly defined strategy, and (3) lack of fit with industry in terms of organizational skill and human resources. The only other successful bank is Danamon which focuses on urban areas and provides higher-end micro-loans (average size $2000).
BPR. BPRs (Bank Perkreditan Rakyat) are rural banking units created by the Central Bank. Though they have been experiencing CAGR of 35%, they are highly regulated and are not allowed to accept any foreign investment. Of these, BKDs are village banks that are set up locally and funded by a combination of village landowners, village treasury, government organizations, and/or the Ministry of Finance. They also have a harder time competing with commercial banks for savings and tend to have lower-income clients.
Non-bank non-cooperative. Also called LDKPs, these are established by provincial governments as microfinance providers. They are government owned and receive seed capital from the local and central government.
Credit cooperatives. Most cooperatives are small, local institutions with up to 5 staff and mo more than 1,000 clients. They are often set up by a group of individuals who pool their funds and create a cooperative as an investment option. They provide individual loans, including some that do not require collateral.
S & L units. These are cooperatives that deal inclusively with saving and lending. A common form of S&L cooperative is the Islamic-lending cooperatives called Baitul Maal wat Tamwil (BMT) or Baitul Qirat that uses traditional profit-sharing schemes instead of charging an interest rate on their loans.
Pawnshops. All pawnshops in Indonesia are state-owned and run by Perum Pegadaian. There are 744 branches and 14 regional head offices. As of 2004, total loan asset of these pawnshops are $0.7 Billion. The lending is based on collateral which includes jewelry, precious metal, electrical devices and even clothing. To customers, pawnshops have advantages of simple and fast procedure.
2.2. Bank Rakyat Indonesia is the world’s first, largest, and most profitable commercial microfinance institution. Over the last four years the number of savings accounts at its BRI units increased by 1 million per year on average, the number of units increased from 325 to 4046, and the percentage of profitable units increased to 96%.[10]. BRI’s growth and success, combined with the as yet unmet demand for microbanking services, shows that there are still significant opportunities for growth in this sector.
Regulatory Environment
3.1. Indonesia’s approach to regulating microfinance has been one of trying to make optimal use of its diversity of small financial institutions – mainly sponsored by the state or locality – while commercializing microfinance in line with the liberalization of the Indonesian economy and banking system.
3.2. Regulations on BPRs have been revised several times; a 1999 regulation stipulated that BPRs may not have foreign shareholders and could only open one new branch per year, prior to which it must meet a minimum CAR requirement of 15% and be defined as a sound BPR for 2 years in a row by Bank Indonesia. A 2004 regulation changed the capital requirement to the following (table 4):
Table 4: Capital requirement for BPRs as of 2004[11]
3.3. A 2001 law stipulates that by 2008, foundations such as the one owned by Parasahabat Group can no longer engage in commercial and lending activities and must be purely dedicated to social activities.3.4. Bank Indonesia uses the CAMEL system (a criteria to assess the performance of financial institutions through Capital, Assets, Management, Earnings, and Liquidity) to determine the soundness of BPRs and sets the following prudential requirements with which BPRs must comply.
Table 5: BI’s Prudential Requirements[12]
Table 6: CAMEL Supervision Tool[13]3.5. Recent government focus on formulation of policies and strategies to develop microfinance is also creating more opportunity in this sector:
· Government has proposed the establishment of a supervisory body (Otoritas Jasa Keuangan – OJK) by 2010 that will supervise, under one roof, all financial institutions including banks and finance companies. If established, the quality of supervision is expected to improve.
· In 2005 the government created the National Committee for Microfinance Development, consisting of high officials and headed by a Deputy of the Coordinating Minister of Economic Affairs. The group’s mission is to (1) eliminate all restrictions to the development of microfinance, (2) recognize the existence of various non-bank non-coop MFIs, and (3) legalize these MFIs.
· Establishment of a microfinance Apex institution – essentially to link the BPRs to liquidity management and eventually to foreign funding and the payment system – with provincial apexes operating around the country.
Summary
With 30 million current borrowers and 58% of households not having any form of loan from a financial institution, an estimated 41 million households have yet to benefit from microcredit services. With approximately half of the 30 million receiving funds from commercial sources, if we assume (conservatively) that 20 million of the untapped households will receive loans from commercial sources and an average loan size of $983, the market opportunity for commercial microfinance can be estimated to be $20 billion. Combined with a diverse set of competitors and a regulatory environment that is removing restrictions on microfinance, commercial microfinance institutions can thrive in Indonesia’s microfinance market.
[1] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[2] Charitonenko, Campion, Fernando. Commercialization of Microfinance: Perspectives from South and Southeast Asia. Asian Development Bank, 2004
[3] BRI Microbanking Services: Development Impact and Future Growth Potential. Jakarta BRI, Harvard University, 2001
[4] Fernando. Commercialization of Microfinance – Indonesia. Asian Development Bank, 2003
[5] Bank Indonesia. Annual Report 2003.
[6] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[7] Bank Indonesia statistics. http://www.bi.go.id/
[8] Hammerich, Hamp. Joint GTZ-KfW Fact-Finding Mission Report. March 2005
[9] Meagher, Campos, Christen. Microfinance Regulation in Seven Countries: A Comparative Study. Iris Center, 2006
[10] Robinson. Why the Bank Rakyat Indonesia has the World’s Largest Sustainable Microbanking System. BRI 2005
[11] Bank Indonesia. http://www.bi.go.id/
[12] Bank Indonesia. http://www.bi.go.id/
[13] CAMEL supervision tool. http://www.gdrc.org/icm/rating/rate-2.html; Bank Indonesia, http://www.bi.go.id/
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