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It is believed that microfinance helps low-income people alleviate their life from poverty circumstances in many developing countries. As an economic instrument which has been raised in the middle of seventies, the thought of microfinance came up from the fact that low-income people difficult to access financial services from commercial or formal banking institution which may disadvantage them or even not including them as potential clients. The reason is that, which often we may hear for several times, low-income people lack of collateral for guarantee some amount of money they want, and in the commercial financial institutions point of view it is costly to serve them due to unequal cost-benefit and high transaction cost: low-income people tend to borrow in small amount but the commercial financial institution maintain high cost for processing and assuring their repayment. These costs are not proportional with the amount of loan given to them.
A formal microfinance institution existing in Indonesia is the Bank Perkreditan Rakyat/BPR (People’s Credit Bank or Rural Bank) which is established by the Banking Act. The main objective of the BPR is to serve small businesses. It means that BPRs can enhance their role and contribution in the development of micro and small business.
In Indonesia, like other developing countries, micro, small and medium enterprises (MSMEs) play significant role in economy. The role of MSMEs can be viewed as an important factor for Indonesia to recover from economic crisis and to lead economic growth and employment. Statistics Indonesia (Badan Pusat Statistik/BPS) and Ministry of Cooperatives and Small-Medium Enterprises reported that, the average contribution of SMEs’ share to total GDP Indonesia from the period of 2001 - 2007 was 60.77%, while at the same period large enterprises (LEs) contributed 39.23% which can be seen in Table 1.
Source: Statistics Indonesia (BPS) and Ministry of Cooperatives and Small-Medium Enterprises (various editions)
In terms of employment creation, MSM enterprises have passed over large enterprises. Table 3 provides worker absorption by types of enterprises. It shows that small enterprises have absorbed approximately 91% of employment during 1999-2006, while medium and large enterprises have provided by 5% and by 4% of employment in Indonesia.
Source : Cooperative Statistics cited in Nazara and Gitaharie (2008), edited by author
Based on the data which are discussed in the previous paragraphs, it can be concluded that micro, small and medium enterprises (MSMEs) have a big role and a potential as a driver of the domestic economy. Nevertheless, they still have several constraints, for instance, product market accessibility, lack of management skills, and limited access to financial sources, especially from commercial banks, to meet their demand for finance. A survey conducted by Statistics Indonesia (BPS) concluded that the biggest problem for micro and small enterprises is lack of capital for financing their business. The survey recognized that problem in finance for micro enterprises was accounted for 40.48%, while for small enterprises was 36.63% (Wardoyo and Prabowo 2003: 31).
In Indonesia, small and medium enterprises can acquire their finance from several sources. According to Nazara and Gitaharie (2008) which refer to statistical data from BPS 2000; 82,960 SMEs got their finance from non banking financial institution; 385,383 SMEs got their finance from banks; and 661,630 SMEs got their finance from other sources. It is clearly from the data that most of SMEs rely on sources other than formal institutions. These figures were not taking into account for SMEs which have no legal entities (Nazara and Gitaharie 2008: 8).
From SMEs point of view, they face kinky administrative procedure and also they have to provide collateral as guarantee to get loans from commercial banks. This condition leads SMEs favoring in Bank Perkreditan Rakyat/BPR (People’s Credit Bank or Rural Bank) and other financial institutions which provide simpler in administrative procedures, but higher in interest rates compared to commercial banks (Nazara and Gitaharie 2008: 8). Even though entrepreneurs are burdened with high interest rates, they do not much complain about it as long as they have access to formal credit (Berry et al. 2001 as cited in (Sunarto 2007: 2)).
In line with the condition in which SMEs favoring in BPRs, Sunarto (Sunarto 2007: 4) stated that BPRs have several advantages in serving to SMEs, those are: (1) its location which is close to SMEs, (2) simpler in credit procedures, (3) accentuate a personal approach in its services and (4) more flexible.
This paper is focused on the role and contribution of BPR, one of the formal types of microfinance institutions in Indonesia, as the suppliers of funds to different types of enterprises especially to micro and small. The discussion emphasizes on credit allocation delivered by BPRs to the micro, small and medium enterprises. Comparative analysis will be made between commercial banks and BPRs for analytical purposes in two things. Firstly, the comparison in terms of allocation of credit which does not consider other variables playing a role in borrowing, for instance interest rates and so on. The comparative result is not in the amount of the credit disbursed but in the percentage of allocation for each type of enterprise. Secondly, the comparison in terms of performance will be discussed through some indicators. Furthermore, the performance indicators of BPRs will be compared with their criteria which set by Bank Indonesia to see whether those indicators improving or deteriorating.
1.2 Research Objective and Research Questions
The objective of this paper is to study the role and performance of Bank Perkreditan Rakyat (BPR), as one of microfinance institutions in Indonesia, in financing micro, small and medium enterprises.
In order to achieve the research objective, this paper proposes research questions as follows:
1. What is the role of BPRs as supplier of funds to different types of small and medium enterprises, in particular micro enterprises?
2. What is the performance of BPRs in relation to credit provision to micro and small enterprises?
1.3 Research Hypothesis
Bank Perkreditan Rakyat (BPR) was established with the main objective is to serve small-scale business and people in rural areas. Therefore, the first hypothesis is that BPRs are reaching their main objective as supplier of funds to micro, small and medium enterprises as mandated by regulation (i.e., banking act). In order to meet the objectives, it is needed good performances which are reflected from their performance indicators. Therefore, the second hypothesis is that performance indicators of the BPRs have met with the standards which set by the Indonesia banking authority.
1.4 Organization of the Paper
This paper is divided into five chapters. Chapter 1 is introduction which contains background of the research, research objective and research questions, research hypothesis, and organization of the paper. Chapter 2 is review of the literatures and analytical framework for the research. Literature reviews discuss about definitions of microfinance and microfinance institution, the approaches can be taken by a microfinance institution in order to serve the clients, the models of microfinance institutions, the types of microfinance institutions in Indonesia and the pyramid of them in relation to potential customers and performance indicators.
Analytical framework discusses about the way in which the research will be achieved. Chapter 3 is the microfinance institutions in Indonesia which contains their brief history and recent condition. Chapter 4 is analysis of the role of BPRs in financing micro, small and medium enterprises which contains overview of the chapter, data source for the analysis, methodology of the analysis, some information about commercial banks and BPRs, and analyzing to answer the research questions. Chapter 5 is conclusion.
Literature Review and Analytical Framework
2.1 Literature Review
There are many definitions about microfinance proposed by several researchers and institutions. This paper uses some definitions given by Robinson, Ledgerwood, Consultative Group to Assist the Poor (CGAP), and Asia-Pacific Economic Cooperation (APEC) to describe microfinance.
Robinson (Robinson 2001: 9) defined microfinance as small size financial services (mainly saving and credit) given to people who having farm or fish or herd; people who running micro or small enterprises which producing, recycling, repairing or selling goods; people who offering services; people who working for commissions or wages; people who having earnings from renting the land, vehicles, draft animals, or machinery and equipment; and people or other individuals and groups from both rural and urban areas at the local level from the developing countries.
Consultative Group to Assist the Poor (CGAP) which uses terminology “poor people” and Ledgerwood which uses terminology “low-income clients” pointed out to person who receives basic financial services from microfinance including self-employed people.
Furthermore, Ledgerwood (Ledgerwood 1999: 1) stated that definition of microfinance comprises not only in financial intermediation but also in social intermediation. Many of microfinance institutions (MFIs) provide this social intermediation function (i.e., group arrangement, self-confidence development, training to enhance capabilities and to increase capacities in terms of financial literacy and managements) go along with financial intermediation. Moreover, she argued that microfinance is a development instrument and it is not just banking.
Asia-Pacific Economic Cooperation (Santoso et al. 2005: 7) defined microfinance into two understandings. Firstly, it refers to an institution when it designates to an organization which offer financial services or banking products, especially loans to the poor people. Secondly, it uses for different methods or activities which assigned to the poor people in order to access financial services. The poor people usually ask for loans, meanwhile commercial banks do not qualify them for loans. These understandings are close to each other. An institution which provides products for poor people called as microfinance institution. The usage of products (i.e., credits) which is provided by MFIs will be beneficial for poor people in generating more earnings.
Ledgerwood (Ledgerwood 1999: 65-66) stated that the approaches that can be done by microfinance institutions can be divided into two main categories: the minimalist approach or integrated approach. When MFIs do minimalist approach, they only perform functions of financial intermediation, although sometimes they offer social intermediation in limited services. Premise that underlie this approach is a-single "missing piece" that can be offered by MFIs to the clients in the form of access to credit for them due to the clients are getting less coverage of services from financial institutions, for instance to grow enterprises. On the other hand, integrated approach is a combination of four aspects those are social and financial intermediation, enterprise development and social services. Thus, it is needed a holistic view of the client when a MFI taking this approach. If MFIs are not able to meet all four services, MFIs only offer services that are really needed by the client as long as this service in line with goal and objective of MFIs.
Since the large-scale demand for services microfinance activities is in existence, the activities are shown in many countries. The poor people are usually un-bankable, because of such conditions: low skills, poor capacity and severe inabilities. They might not be served in the commercial banking system. It is because the system needs for formal requirements, along with the proper economic scale and certain guarantee. In official terms, this kind of market is un-named and un-served. There are niche markets for the supply of services for MFIs (Santoso et al. 2005: 8).
Clients of microfinance institution can not be classified as the "poorest of the poor". Generally, they are self-employed and low-income entrepreneur, including; traders, food vendors at the street side, small farmers, small producers and artisan who produce souvenirs in at tourism area and so on. The nature of their business usually provides a stable source of income (Ledgerwood 1999: 2).
In various forms, income is provided by micro enterprises owned by the poor. This is done by providing employment. The recycling and repairing better than littering a good, making cheap food, clothing, and transportation to be available are some examples. It is also made to them who are from the low level of formal sector that are usually very difficult to live with their salaries. The people of this kind of life are often can cope with such a problem with the typical cases mentioned above, but can not handle the more serious problem. The other types of problem that are often found are deficiency of capital, skill, official status, and business security. In the meantime, naturally they already have the ability to face sharp business sense, strong life skills, long hard work practice, market knowledge, extensive communication and informal support networks. They also used to have the ability to live supported by their flexibility basic consideration (Robinson 2001: 12).
A recent study in Bosnia and Herzegovina carried out by Hartarska and Nadolnyak (Hartarska and Nadolnyak 2008) used the financing constraint approach. The approach states that microenterprises that have good access to credit will be less rely on internal funding in their investment. Using the Living Standards Measurement Survey and the existence of the MFIs in their area, they compare sensitivity of investment to internal funds in the microenterprises which there are MFIs in municipalities they located to microenterprises which there is no MFIs in municipalities they located. They concluded that the MFIs reduce the constraint of microenterprises funding when they are exist close to business.
There are some models of microfinance institutions. The first model is Grameen Bank. This model is founded in many countries, especially in Bangladesh, from which it established for the first time by Muhammad Junus. In determining target poor clients, Grameen Bank will do it carefully which is usually done through a series of tests. Loans are given to the group in which each group typically consists of five people and each member of the group guarantee the loan of the other members. This model intensively requires supervision and motivation from the staff to the group borrowers.
The second model is Village Bank. An implementing agency establish individual village bank together with 30-50 people and sets capital for on-lending to other members. Repayments of the loan are usually in a week until 16 weeks whereas the village bank pays the principal plus interest to implementing agency. The third model is Credit Unions (CUs). Credit Unions are non-profit financial cooperatives which owned and controlled by its members. Besides saving, CU also provides loans for both productive and non-productive purposes to the members. The membership of CUs compared to Grameen Bank is more heterogeneous and usually based on similar bond.
The fourth model is ‘self-help’ groups (SHGs). This model is close to the second model, village bank, although their structure is less well compared to the village bank. The membership of SHGs is based on the similarity in income and the number of membership approximately 20 people. In principle, they use internal funding, that is saving, to lend it to the members, even though they can also seek external funding as additional source of funds. Several NGOs are facilitating and promoting SHGs, but basically, SHGs are directed as an independent institution. The task of seeking additional financing from outside is usually helped by NGOs which link between SHGs and other external parties or other funding agencies. This NGO’s job close related to 'social' intermediary function they have, while other NGOs are functioned as financial intermediaries which funding SHGs (Conroy 2003: 4-5).
In terms of forms, microfinance institutions can be classified as bank (government and commercial), nonbank financial institution, saving and loan cooperative, credit union and nongovernmental organization. Pawnbrokers, rotating saving and credit association, and moneylender also part of MFIs and hold significant roles in functioning financial intermediation although they are more informal in legal status (Ledgerwood 1999: 1).
In Indonesia, several institutions have already served microfinance services for such a long period. Those institutions can be divided into four types. The first type is formal microfinance institutions (MFIs). This type of MFI is regulated and supervised as banking institution and therefore their activities as financial intermediaries subject to banking regulation and supervision. Such institutions included in this type are BRI Unit (state-owned microbank), commercial banks with microfinance services and Rural Bank (Bank Perkreditan Rakyat/BPR).
The second type is semi formal MFIs which registered and or licensed by state authorities or local governments, therefore they are not regulated by banking authority (Bank Indonesia). Including in this type are cooperatives, Islamic-based cooperatives (Baitul Maal wat Tamwil/BMT), rural credit institution (Badan Kredit Desa/BKD) and microfinance owned and managed by NGOs. The third type is informal MFIs that operate outside the framework of government regulation, among others, are credit union, rotating credit and saving association (ROSCA), moneylenders, landlords and so on. The fourth type is microcredit programs established by the government in channeling credit to subsidize the poor through a variety of institutions (Nugroho 2008: 181-182). Further explanation about these four microfinance services especially the first three types of MFIs will be presented in chapter 3.
In Figure 1 we can see the pyramid of microfinance institutions with their potential customers in Indonesia. The top layer shows formal MFIs (BRI Unit, Rural Banks/ BPRs and LDKPs). They provide financial services for the top level of microfinance market. This type of MFIs is intended to serve small business which has characterized with stable income flows; therefore these MFIs’ potential clients are non-poor and not so poor people. In the middle layer, semi- formal MFIs serve microfinance services for the poor households. This layer includes rural credit institutions (Bank Kredit Desa/BKD), cooperatives, BMT and NGOs. Clients in this layer are characterized by unstable flow of income. At the bottom layer of the pyramid the huge number of potential clients which need microfinance services. They are very poor people which are characterized by unpredictable income. They need the microfinance services in order to ensure their uncertain income, so they need a small loan to overcome the difficulties of life (Nugroho 2008: 184-185).
Figure 1: The Pyramid of Microfinance Services in Indonesia
Source: BI and GTZ (2000) cited in Nugroho (2008)
As mentioned above, Rural Bank (Bank Perkreditan Rakyat/BPR) is one of the formal types of microfinance in Indonesia. Its existence is established by Banking Act number 7 of 1992 as amended by Banking Act number 10 of 1998. The main goal of the rural bank is to serve small business and rural communities.
In order to deliver their services to the customers, a microfinance institution requires a good performance. This performance can be seen from some indicators. Looking at these indicators, we can decide how well they not only can do financially but also it can also build the future performance goals. There are a large number of performance indicators that can be used by MFIs in measuring the financial performance.
One of the principles that can be used is the CAMEL system, ACCION. This system examines five traditional aspects which are regarded as the most important thing in the practices of the financial intermediaries. The five aspects (capital adequacy, asset quality, management, earnings, and liquidity) be the sign of the financial condition and operational strength of the MFI in common (Ledgerwood 1999: 205,227,229).
2.2 Analytical Framework
Based on the theoretical framework that has been presented in the previous section, the author uses Figure 2 below describing the analytical framework used in the research which answering the research questions asked.
There are two parties involved in the financial market. On one hand, there is a supply side which is financial institutions that act as financial intermediation agents or it might be function as other than financial intermediation like social intermediation or something else. These financial institutions include commercial banks, non-banks financial institutions (insurances company, ventura capital, etc), and microfinance institutions (in different types and forms). On the other hand, on the demand side, there are some parties that require financing for different purposes, among others for working capital and investment usage which is belongs to micro, small and medium enterprises (MSMEs).
The problem is that not all of these financial institutions allow MSMEs as their client due to several requirements which can not be fulfilled by MSMEs (collateral and bureaucratic procedures, for instances) or it might be comes from the MSMEs itself that no need too much funds (small financing). Here, microfinance institutions fit with the need of MSMEs. The mechanism then runs as common supply and demand in the market: MFIs, as financial intermediaries, offer credit or loan to MSMEs. Furthermore, MSMEs use the loan for running their operational activities (working capital usage) or for accumulating their physical capital (investment usage). At the end of the story, output of MSMEs will contribute to national income (GDP) and at the same time generates income for the owners and employees.
Figure 2: Analytical Framework of the Research: Supply and Demand in Financial Market
Source: author’s graph
This paper focuses on the supply side of particular financial intermediaries in the financial market those are microfinance institutions. In other words, using Ledgerwood’s terminology mentioned in literature review, the paper mainly looks at the role of MFIs in terms of “minimalist approach”; how they perform as financial intermediations in delivering credit or loan. Special attention given to Rural Banks, one of formal MFIs in Indonesia in allocating their credit to different types of enterprises such as micro, small, medium and large enterprises.
There are several reasons why this paper discusses on Rural Banks as unit of analysis. Firstly, it is states in the regulation (Banking Act) that the main objective of Rural Banks is to serve small scale business and looking into the pyramid of MFIs appeared in Figure 1. It means that Rural Banks have a specialization as small scale business’ banking, especially micro enterprises. This paper wants to see to which extent this mission is successfully executed. Secondly, Rural Banks are the second largest microfinance institutions in terms of asset, third party funds collected and number of debtors. According to Bank Indonesia (2008), they posses 35% of total MFIs’ assets; 30.43% of third party funds collected on total MFIs and 29.15% of total number debtors on total MFIs.
This study proposes two research questions. The first research question relates to the role of rural banks as financial intermediaries in delivering credit to different types of business especially micro and small enterprises. In addressing the first research question, the paper uses comparative analysis and simple calculations in terms of credit disbursement for both commercial banks and rural banks so that the share (percentage) of credit allocation to different types of enterprises to be known. In order to obtain the result, some criteria and assumption are applied in the study. This is done due to there is no data available about the definite amount of credit disbursed by either Rural Banks or commercial banks to different type of enterprises. The discussion focuses only on the amount of credit allocation, so that other variables that determine the credit such as interest rate, collateral, and so forth are not discussed in this study.
The second research question indicates the performance indicators of rural banks in relation to credit provision to micro enterprises. These indicators include; Loan to Deposit Ratio (LDR), Returns on Assets Ratio (ROA) and Non-Performing Loan Ratio (NPL) which refer to Director of Bank Indonesia Decree number 30/12/Kep/Dir and Bank Indonesia’s Letter No. 30/3/UPPB about Rural Banks Soundness Evaluation. Furthermore, comparison will be made between these indicators and criteria.
Microfinance Institutions in Indonesia
3.1 Microfinance Institutions in Indonesia
As developing country, Indonesia has long experience and history in developing microfinance institution which has made it possible for poor or low-income people to overcome financial constraints and to access financial institutions. For this condition, some researchers like Berenbach and Churchill called that Indonesia is “the most developed market for microfinance services in the world” (Barenbach and Churchill 1997 as cited in (Santoso et al. 2005: 43)). The development of microfinance institution began for the first time in Dutch colonial era when several well-educated local people saw deteriorating economy happened in their community and they looked for the need of this services and started organize it. The two famous institutions best known as pioneer in microfinance institutions and exist since colonial era are cooperative and Bank Rakyat Indonesia (BRI).
As mentioned in chapter 2, microfinance institutions in Indonesia can be classified into four types (Nugroho 2008), those are; formal microfinance institutions, semiformal MFIs, informal MFIs and microcredit program which is established by the government for delivering credit to poor people through several institutions. In this chapter the latter type of MFI will not be discussed. The discussion is emphasizes on three other institutions. Formal MFIs are financial intermediary institutions which refer and subject to banking regulation and therefore supervised by Bank Indonesia. Semiformal MFIs are not regulated by Bank Indonesia as a banking authority, but they are licensed and or registered by other state authorities or local government. Informal MFIs operate outside government regulations.
Nugroho (Nugroho 2008) described institutions which include in each type of MFI as follows: formal MFIs including BRI Unit, Rural Bank (BPR) and The Rural Credit Fund Institutions (Lembaga Dana Kredit Pedesaan/LDKP); semiformal MFIs covering rural credit institution (Badan Kredit Desa/ BKD), microfinance NGO, credit cooperatives including Islamic-based cooperatives (Baitul Maal wat Tamwil/BMT); informal MFIs including credit unions, rotating credit and saving association (ROSCA), moneylenders, traders and landlords. Table 3.1 provides map of microfinance institutions by types in Indonesia in terms of units and their financial services.
Bank Rakyat Indonesia Unit
Lembaga Dana Kredit Perdesaan (LDKP) – The Rural Credit Fund Institutions
The Rural Credit Fund Institutions (LDKP) is the term of credit fund institution that operates in rural area, including a variety of non bank microfinance institutions with different names, ownership, organization, services and outreach, that was established on initiatives of provincial government. LDKP belongs to provincial, district or village government which, in their operation, have to obtain license from and was regulated by provincial government within the national regulatory framework. they get technical support and supervision from regional development bank (BPD) which are owned by provincial government.. since it was established in 1970s, the number of LDKP getting less from 1978 to 630 in 2000, this decrease due to the conversion of LDKP to people's cerdit banks(BPR) and recently only about one quarter of LDKP have become banks.
The Badan Kredit Desa (BKD)
BKD is a profitable and sustainable village level financial institution that provide financial services with a outreach to low income people. it was operated by a committee that controlled by head of village and have sustained the operation since colonial era. On behalf of Bank Indonesia, BRI branch offices supervise and provide technical assistance for BKD.
in 1970s indonesian government did not pay much attention to this system. instead, the government give more attention to the cooperative system. this make hard for BKD system to developed.
in 1990s BRI tried to revive BKD by providing basic capital, improving administrative system and introducing new saving instruments, however, 1992 banking act burden the expanding BKD system. BKD is recognized as people's credit bank (BPR) and has been operating as a licensed and regulated bank since 1992 banking act but the frame work setting, supervision and technical assistance has not changed since 2000.
Here, the brief history of cooperative in Indonesia refers to Santoso et al (2005) and Ministry of Cooperative, Small and Medium Enterprises’ website (www.depkop.go.id, 2009) as references. The thought of cooperative was delivered for the first time by Patih R. Aria Wiriatmaja at Purwokerto, a small town in Central Java, in 1896. Then, De Wolffvan Westerrode continued his efforts. In 1908, the year of national movement, Dr. Sutomo founded Budi Utomo which played a significant role for cooperatives improving the life of society.
Then, Verordening op de Cooperatieve Vereeniging was established. Twelve years after that, in 1927, another type of cooperative called Regelling Inlandsche Cooperatieve was launched. In the same year, to develop bargaining power among local entrepreneurs, Islamic Trader Union (Serikat Dagang Islam) was established. Indonesian National Party (Partai Nasional Indonesia) which had activities in promoting cooperative spirit was established in 1929.
3.2 Bank Perkreditan Rakyat (BPR)
Steinwand (Steinwand 2001) provided detail periodical history about Rural Bank. He divided the history into four parts of periods; the evolution of the colonial BPR (1895-1945), the period from independence to financial sector reform (1945-1983), the period from financial sector reform to financial crisis (1983-1999) and at the present condition.
Rural Bank Position in Financial System in Indonesia
Analysis of the Role of Bank Perkreditan Rakyat (BPR) in Financing Micro, Small and Medium Enterprises
Chapter 4 consists of 6 sections which each section aimed to answer the research questions. Section 1 is a general information about what will be discussed in this chapter; section 2 discusses about the source of the data used in the analysis; section 3 is the methodology; section 4 is about overview the condition of Bank Perkreditan Rakyat (BPRs) and commercial banks (CBs) in Indonesia using selected indicators, third party funds and credits; section 5 tries to reply the first research question by using comparative analysis between commercial banks and BPRs; and section 6 is the last section which answering the second research question about the performance indicators of BPRs.
4.2 Data Source
This paper uses secondary data for analytical purposes. The data are mainly taken from Bank Indonesia’s publishing document namely the Indonesian Banking Statistics (downloadable documents in the pdf format) which is issued monthly and also the data published in Bank Indonesia’s website (www.bi.go.id). For the BPR section, the data listed in the site are under the title "Statistics of Conventional BPR" and most of the data are in monthly series. Hence, author gives attention to conventional BPR as unit of analysis.
To answer the first research question “what is the role of BPRs as supplier of funds to different types of small and medium enterprises, in particular micro enterprises”, this paper simply uses the share (percentage) of outstanding credit of BPRs and commercial banks in terms of different types of credit. Therefore, comparative analysis will be discussed between commercial banks and BPRs in terms of delivering credits to micro, small, medium and large enterprises.
For the comparative analysis mentioned above, this paper uses the criteria for applying the definition of micro, small, and medium enterprise (MSME) credits provided by the Coordinating Minister for Social Welfare and Bank Indonesia (Nazara and Gitaharie 2008: 9). The criteria are as follows;
· Micro enterprise credit is credit with ceiling Rp 0 up to Rp 50 million
· Small enterprise credit is credit with ceiling Rp 50 million up to Rp 500 million
· Medium enterprise credit is credit with ceiling Rp 500 million up to Rp 5 billion.
Furthermore, this paper assumes that those of different types of credits are utilized for different types of enterprises. It means that micro enterprise credits are allocated to micro enterprises, small enterprise credits are delivered to small enterprises, and medium enterprise credits are distributed to medium enterprises. However, the criteria provided by the Ministry and Bank Indonesia are not mention about criteria for large enterprise credit. To overcome this problem, another assumption will be used, that is large enterprise credits are allocated to large enterprises. Therefore, the amount of large enterprise credit can be obtained by total MSM credit deducted from total outstanding credit.
The assumptions are applied for both commercial banks and BPRs and also they are being made due to inadequate of the data in this research.
Performance indicators appearing in the bulletin are useful to answer the second research question “what is the performance of BPRs in relation to credit provision to micro and small enterprises”.
Three indicators of BPRs will be discussed in order to answer this research question, including; loan to deposit ratio (LDR), non-performing loan ratio (NPL) and returns on assets ratio (ROA). Comparative analysis will also be done in this part. The BPRs’ indicators are compared to similar commercial bank indicators. Lastly, performance of BPRs will be evaluated in terms of those ratios using the criteria set by Bank Indonesia (i.e., Director of Bank Indonesia Decree number 30/12/Kep/Dir and Bank Indonesia’s Letter No. 30/3/UPPB about Soundness Evaluation of BPR).
4.4 Some Information about Bank Perkreditan Rakyat and Commercial Banks
For the period of 1998 to 2008, Bank Perkreditan Rakyat (BPR) has been experienced positive growths from year to year which can be seen in several important indicators as appear in Table 5 and Figure 3 – Figure 7. The average growth of total assets for the period of 2000-2008 was 25.02%. The highest growth in the year 2002 was 40.25%, while the lowest one was 13% in the year 2006 (Figure 3).
Figure 3: Growth of BPRs’ Asset, 2000-2008
Source: Author’s graph, calculated from Table 5
In terms of saving deposits, the average growth for the period of 2000-2008 was 28.07%. The highest growth was 40% for the year 2000 and the lowest growth was 13.81% for the year 2005(Figure 4).
Figure 4: Growth of BPRs’ Saving Deposits, 2000-2008
Source: Author’s graph, calculated from Table 5
The average time deposit growth rate for the period of 2000-2008 was 32.98%. The highest growth was 59.26% for the year 2000 and the lowest growth was 11.83% for the year 2008 (Figure 5).
Figure 5: Growth of BPRs’ Time Deposits, 2000-2008
Source: Author’s graph, calculated from Table 5
Figure 6 presents the growth rate of BPRs outstanding credit for the period of 2000-2008. The average growth rate during that period was 25.78%. The highest growth rate was 47.59% for the year 2000, while the lowest growth rate was 15.65% for the year 2006.
Figure 6: Growth of BPRs’ Outstanding Credit, 2000-2008
Source: Author’s graph, calculated from Table 5
Figure 7 presents the growth rate of BPRs’ equity for the period of 2000-2008. The average growth rate was 16.92%. The highest growth was 33.05% for the year 2001, while the lowest growth rate was 8.16% for the year 2005.
Figure 7: Growth of BPRs’ Equity, 2000-2008
Source: Author’s graph, calculated from Table 5
Looking at Table 5, in terms of profit and number of borrowers, BPRs were also experiencing positive growths significantly. Taking 2003 as a basis, the profits were as much as Rp 429 billion and the number of borrowers were 1,993 million. In 2008, it was recorded that BPRs realized profits as much as Rp 849 billion and maintained 2,681 million of borrowers. Thus, within five years, BPRs have been increasing the profit by 97.9% and the number of borrowers by 34.52%. With all of these positive figures and indicators, it is indicated that BPRs will reach better performances in coming years.
Certainly, when economic crises hit Indonesia in 1998, BPRs also experienced losses (i.e. Rp 42 billion) as can be seen in the table. However, economic crises did not make negative capitals for BPRs, as it happened with commercial banks which had negative capitals for two years (Sunarto 2007: 67). It also recorded that in the period of 1999-2002, Bank Indonesia as central bank closed down the operation of 117 BPRs due to bankruptcy which made the Ministry of Finance paid third party deposits for more than Rp 200 billion.
Table 6 presents some key indicators of commercial banks (CBs) for the period of 1998-2008. From the table, total assets of CBs have increased from year to year and have positive growths with average 10.09%. Total credits also have a positive growth with average 11.49%, although between year 1998 and 1999, when Indonesia was hit by the economic crisis, the outstanding credit had a very drastic reduction by -55.66%.
For capital, there was a declining for the period of 1998 - 1999 by -129.8%, and for the period of 1999 - 2000 by -41.2%. However, there was an improvement since year 2000 which can be seen in positive growth with average 19.75%. In terms of profit, in general, there was a positive growth with average 16.71%, although in 2005 a negative growth happened by -15.93% and in 2008 by -12.57%. When economic crisis hit Indonesia more than ten years ago, commercial banks also experienced severe losses.
Table 7 below provides number of BPRs broken down by volume of total assets; number of offices of BPR 2004 - 2008. This table shows that, for the period of 2004 - 2008, the number of the BPRs has decreased. Among those years, in 2004 – 2005, the number of BPR offices decreased drastically as 397 or -11.32%.
In terms of number of offices, BPRs’ offices were increasing for the period of 2005-2008 (in 2005-2006 as much as 63 offices or increase 2.03%, in 2006-2007 as much as 77 offices or increase 2.43%, in 2007-2008 as much as 117 or increase 3.60%).
Table 7: Number of BPRs, Broken Down by Volume of Total Assets; Number of Offices of BPRs, 2004-2008 (in unit)
We see interesting statistics when we look at the number of BPRs based on total assets. The number of BPRs which have total assets less than Rp 1 billion was declining from 2004 to 2008; however, at the same period, the different conditions occurred reversely for BPRs that have total assets more than Rp 10 billion which were increasing with average 24.03%.
In other words, within five years, the number of BPRs which have assets less than Rp 1 billion decreased as much as 229 units and the BPRs which have assets more than Rp 10 billion increased as much as 386 units. Therefore, there is an increase in size of units; smaller units disappeared, new larger units appeared. This condition leads a possibility for the people in accessing BPRs easily.
Comparison of BPRs and Commercial Banks’ Third Party Funds and Credits
Third Party Funds
As financial intermediary institutions, banks are function as distributors of funds from the parties who have excess of funds to the parties that need them. One source of bank funds, among others, is third party funds which can be in the form of demand, time and saving deposits. By banks, these funds are allocated, among other, in the form of credit/loan to customers.
Table 9 shows third party funds collected by commercial banks (CBs) and Bank Perkreditan Rakyat (BPRs) for the period of 2004-2008. In total, third party funds collected by both of the banks were increasing from the year 2004-2008 with average 16.18% per year.
In the same period, BPRs also recorded positive growths in third party funds’ collection with average of 17.61% while for CBs with average 16.16% per year. However, compared to the CBs, the amount of third party funds collected by BPRs were not commensurate. In the year 2008, for instance, 99% of third party funds were collected by CBs, and therefore, BPRs only got remaining portion of one percent (Figure 8).
The composition of third party funds among CBs for the period of 2004- 2008 was dominated by the Foreign Exchange Commercial Banks with a percentage in between 39.7% and 41.5%, followed by State Owned Banks with the percentage in range from 36.9% to 38.6%.
The percentage of third party funds collected by BPRs from the year 2004 up to 2008 of the total third party funds is not likely changing overtime, which is around 1%.
In conclusion, third party funds have been growing overtime, both of BPRs and CBs, at about the same rate. So, the shares have not changed much.
Figure 8: Proportion of Third Party Funds Collected by Commercial Banks and BPRs, 2008
Source : author’s graph, calculated from Table 9
In terms of distribution of funds, CBs place the funds which they obtain in the form of credit, inter-bank placement at the Bank Indonesia, securities (not including recapitalization bonds), equity participation and other claims, while BPRs distribute the funds in the form of credit and inter-bank assets. Table 10 shows one category of fund distributions, i.e. credit, disbursed by CBs and BPRs for the period of 2004-2008. From the table, it can be seen that the distribution of funds in the form of total credits increased from year to year with average growth 23.73%. The credits grew on average 23.80% per year for CBs, while BPRs recorded 20.37% of credit growth.
As well as in the collection of third party funds, the share of outstanding credit of BPRs to the total credit was very small portion compared to the CBs which can be seen in Figure 9. For the year 2008, on average, the share of outstanding credits of CBs was 98%, while the BPRs’ share was 2%.
Figure 9: Proportion of Outstanding Credit by Banks, 2008
Source : author’s graph, calculated from Table 10
In Figure 9 above, it shows that the biggest share of outstanding credit comes from Foreign Exchange Commercial Banks followed by State Owned Banks. It also can be seen that Regional Development Bank (BPD), one type of CBs which the majority of equity owned by local governments, close to BPRs in terms of the amount of credit disbursed. Regional Development Bank is the one of BPR competitors (Sunarto 2007: 130).
In conclusion, the outstanding credit of both CBs and RBs has been growing overtime, at about the same rate. Like third party funds, the shares of credit have not changed much.
Table 9: Third Party Funds of Commercial Bank and Bank Perkreditan Rakyat 2004 - 2008 (Rp billion)
4.5 What is the Role of Bank Perkreditan Rakyat as Supplier of Funds to Different Types of Enterprises?
Data of Credit Allocation for Enterprises
This section discusses about the allocation of credit by both of commercial banks (CBs) and Bank Perkreditan Rakyat (BPRs) to micro, small, medium and large (MSML) enterprises. The objective is that to see how certain types of banks focus on certain segments or types of enterprise and therefore the first research question can be answered. Because of there is no annual data for the information, this paper uses the data derived from the bulletin on the monthly basis published by Bank Indonesia. For CBs, the data are for the period of March 2008-March 2009.
The bulletin provides credit data to micro, small and medium (MSM) enterprises for five group, those are Stated Owned Banks, Foreign Exchange Commercial Banks, Regional Development Banks and Joint Venture Banks (in the bulletin, Joint Venture Bank data are combined with Foreign Owned Banks). Therefore, Non Foreign Exchange Commercial Banks are excluded for the analysis. For BPRs, the monthly data are for the period of February 2008 – March 2009.
Monthly data for CBs in the bulletin consists of MSM credit and total amount of credit disbursed. The difficulties come up when there is no data about the amount of credit allocated to large enterprises. Using this information, then, for CBs, large (enterprise) credit data are assumed as result of subtraction between total credit and MSM credit. Meanwhile, micro, small, medium, and large credit data for BPRs are available.
Micro, small and medium credits for both CBs and BPRs based on type of use are grouped into 3 types, namely, working capital, investment, and consumption. The utilization of consumption purpose, according to Bank Indonesia, among others, is for housing or apartment ownership or buying vehicle.
Table 11 provides MSM credits by CBs and BPRs based on type of use for the year 2008. It shows that the portion for consumption purpose for the year 2008 reached 52.41% of the total MSM credit for CBs, and 41.68% of the total MSM credit for BPRs, The reason using year 2008 data is that most of the data for analytical purpose (monthly outstanding credit) is in year 2008, while for the transaction after year 2008 the reason is that it is close to that year and therefore simplify the calculations.
In the beginning, this paper already assumes that the MSM credit allocated to the MSM enterprises (in this case for the use of working capital and investment), therefore the portion of consumption usage must be eliminated from total MSM credit. As a yardstick, this paper uses the share of consumption usage to total MSM credit as a point of reference for "adjustment process", that is 52.41% CBs and 41.68% for BPRs. The final result for this adjustment process is the average value (in percentage) of credit allocation to different types of enterprise.
Credit Allocation to Enterprises by Commercial Banks
Before the average value of credit allocation to different types of enterprise by commercial banks obtained, several adjustments are being made to the data. Table 12 shows the data set for CBs including each type of micro, small and medium (MSM), and the percentage of each type of MSM credit to the total MSM credit (column b, d, and f). For an example, in March 2008, the amount of micro credit was Rp 187,591 billion, so that the percentage of micro credit to total MSM credit was 36.19% (187,591 : 518.279 x 100%). Other data in Table 12 is the total amount of credit disbursed. This information is useful for determining the amount of large (enterprises) credit in the next adjustment process.
Table 13 presents the result of the adjustments has been made to the credit dataset in the previous table. There are several things be found in the adjustment table (Table 13), those are; the amount of each adjusted MSM credit, the total amount of adjusted MSM credit, the amount of consumption portion that have been excluded from the initial MSM credit, the shares of each credit and the share of consumption to the total amount of credit.
The adjustments can be explained as follows:
1. Determine credit allocation to large enterprise
Credit to large enterprise (LE) can be obtained from total credit minus total MSM credit. For instance, LE credit in March 2008 is Rp 492,760 (Table 13, column 10), calculated from Rp 1,011,039 billion (Table 12, column h) minus Rp 518,279 (Table 12, column g).
2. Estimate the amount of credit used for consumption purposes in MSM credit
It has been described previously that in MSM credit there is a portion of consumptive purposes that must be eliminated. According to Bank Indonesia, the share of credit allocation for consumptive purposes for CBs in the year of 2008 is 52.41% of total MSM credit (see Table 11). It means that data for March 2008, Rp 271,630 billion (see Table 13, column 8), must be deducted from the total MSM credit (52.41% x Rp 518,279 see Table 12, column g).
3. Adjust the total MSM credit
The MSM credit should be adjusted after it is allocated for consumption amount, as shown in the second step. To do this, the MSM credit (adjusted) equals MSM credit (old) minus the amount of consumption allocation. An example, in March 2008 the MSM credit (adjusted), Rp 246,648 (Table 13, column 7), equals to MSM credit (old), Rp 518,279 (Table 12, column g), minus the amount of consumption allocation, Rp 271,630 (Table 13, column 8).
4. Adjust the micro credit, small credit and medium credit
After the total amount of MSM credit have been adjusted, the next step is allocating them into micro, small and medium credit, so that they have new balances called adjusted micro, adjusted small and adjusted medium as appear in Table 13 (column 1, 3 and 5). These balances are obtained from the initial share each credit (in Table 12) times the adjusted MSM credit. The assumption which is used is that the original breakdown of MSM total can be applied to the adjusted MSM total.
Data of March 2008, for instance, the adjusted micro credit, Rp 89,274 (Table 13, column 1), is obtained from the initial share, 36.19% (Table 12, column b), times the adjusted total MSM credit, Rp 246,648 (Table 13, column 7). Similar ways should be done to obtain the amount of adjusted small credit and the adjusted medium credit.
Data of March 2008; the adjusted small credit, Rp 76,252 (Table 13, column 3), is derived from the initial portion of small credit, 30.92% (Table 12, column d), times the adjusted MSM credit, Rp 246,648 (Table 13, column 7). The adjusted medium credit, Rp 81,121 (Table 13, column 5), is obtained from the initial portion of medium credit, 32.89% (Table 12, column f), times the adjusted total MSM, Rp 246,648 (Table 13, column 7).
5. Determine the shares of micro, small, medium, large credits and the share of consumptive purpose
Table 13 (i.e. column 2, 4, 6, 9 and 11) presents the result of the calculations. Using data of March 2008, the share of adjusted micro credit, 8.83% (Table 13, column 2), comes from the adjusted micro credit, Rp 89,274 (Table 13, column 1), divided by the total credit, Rp 1,011,039 (Table 13, column 12). The similar ways should be done to obtain the share of adjusted small, medium and large credits. The results of these processes are presented in Table 13 column 4 (for small credit), column 6 (for medium credit), and column 11 (for large credit). To obtain the share of consumption, the consumption portion, Rp 271,630 (Table 13, column 8), is divided by the total credit, Rp 1,011,039 (Table 13, column 12).
6. Average the share of adjusted credits and the share of credit for consumptive purposes
This is the last step of adjustment processes. The lowermost figures in Table 13 column 2, 4, 6, 9 and 11 are the results.
Column 2 presents the share of total commercial banks’ credit to micro enterprises. As we can see, the highest share is 8.83% in March 2008, while the lowest share is 7.97% in November 2008. On average, it can be concluded that 8.33% of total credit disbursed by commercial banks are delivered to micro enterprises.
Column 4 shows the share of total commercial banks’ credit to small enterprises. The highest share is 8.25% in March 2009, while the lowest share is 7.54% in March 2008. On average, 7.92 percent of commercial bank’s credits are allocated to small enterprises.
Column 6 provides the share of total commercial banks’ credit to medium enterprises. The highest share is 8.11% in July 2008, while the lowest share is 7.30% in February 2009. On average, 7.75 percent of commercial bank’s credits are allocated to medium enterprises.
Column 9 presents the share of total commercial banks’ credit for consumptive purposes. The highest share is 27.03 % in April and July 2008, while the lowest share is 25.47% in November 2008. On average, 26.43 percent of commercial bank’s credits are allocated for consumptive purposes.
Column 11 provides the share of total commercial banks’ credit to large enterprises. The highest share is 51.40 % in November 2008, while while the lowest share is 48.42% in July 2008. On average, 49.58 percent of commercial bank’s credits are allocated to large enterprises.
Credit Allocation to Enterprises by BPRs
In this part, the similar adjustment processes will be done as commercial banks. As appears in Table 11, the share of consumption usage in the MSM credit for BPRs is 41.68%. Table 14 and Table 15 are the reference tables for the adjustment processes. Table 14 presents the original data which taken from Bank Indonesia’s website. For BPRs, the credit allocation dataset to each enterprise are completely available, therefore it is not necessary to do adjustment to obtain credit data for large enterprises.
Table 14 also contains information about the share of each micro, small and medium credit to total MSM credit. In February 2008, for instance, the share of micro credit to total MSM is 69.5% (Table 14, column b) which is obtained from the amount of micro credit (i.e, Rp 14,771,115 in column a) divided by total MSM credit (Rp 21,247,923 in column g). The same procedure has been calculated for small credit’s share (24.9%, in column d) and medium credit’s share (5.6%, in column f).These information are useful for determining the amount of adjusted MSM credit allocated in Table 15.
Table 15 shows the adjustment results of BPRs credit dataset. This table contains several columns those are the adjusted amount of micro, small and medium credit (column 1, 3, and 5), total the adjusted MSM credit (column 7), the amount of large credit (column 8), the amount of consumptive purposes credit (column 10) and the total amount of credits (column 12). It also contains the share of each type of credit (micro, small, medium and large) and the share of consumptive purpose credit to the total credits (column 2, 4, 6, 9 and 11).
The adjustment process can be explained as follows:
1. Estimate the amount of credit used for consumption purpose in MSM credit
The total amount of MSM credit has to adjust due to it contains the amount of consumption purpose credit. According to Bank Indonesia, the share of credit allocation for consumptive purposes for the year of 2008 was 41.68% of total MSM credit (see Table 11). Therefore, the amount of total MSM credit has to be recalculated to get proper balance. The result appears in Table 15 column 8. For instance, the result for February 2008, Rp 8,856,134, is obtained from the share of consumptive purpose, 41.68% , times the total MSM credit, Rp 21,247,923 (Table 14, column g).
2. Adjust the total MSM credit
The MSM credit should be adjusted after it is allocated for consumption purposes. The result appears in column 7. The result for February 2008, as an example, is obtained as follows: the total MSM credit, Rp 21,247,923 (Table 14, column g), minus the consumption portion, Rp 8,856,134 (Table 15, column 10), equals to the total adjusted MSM credit, Rp 12,391,789 (Table 4.10, column 7).
3. Adjust the micro credit, small credit and medium credit
After the total MSM credit have been adjusted, the next step is allocating them into micro, small and medium credit. The assumption which is used is that the original breakdown of MSM total can be applied to the adjusted MSM total. We get the adjusted micro, small and medium credit. The results are presented in Table 15 column 1, 3 and 5.
The calculations for February 2008 are as follows: the adjusted micro credit, Rp 8,614,514 (Table 15, column 1), can be obtained from the initial share, 69.5% (Table 14, column b), times the adjusted total MSM credit, Rp 12,391,789 (Table 15, column 7). The adjusted small credit, Rp 3,086,925 (Table 15, column 3), is obtained from the initial portion of small credit, 24.9% (Table 14, column d), times the adjusted MSM credit, Rp 12,391,789 (Table 15, column 7). The adjusted medium credit, Rp 690,349 (Table 15, column 5), is obtained from the initial portion of medium credit, 5.6% (Table 14, column f), times the adjusted total MSM, Rp 12,391,789 (Table 15, column 7).
4. Determine the shares of micro, small, medium and large credit and the share of consumptive purpose
Table 15 (i.e. column 2, 4, 6, 9 and 11) presents the result of the calculations. Using data of February 2008 as an example, the share of adjusted micro credit, 40.4% (Table 15, column 2), comes from the adjusted micro credit, Rp 8,614,514 (Table 15, column 1), divided by the total credit, Rp 21,312,543 (Table 15, column 12). The similar ways should be done to obtain the share of adjusted small, medium and large credits. The results of these processes are presented in Table 15 column 4 (for small credit), column 6 (for medium credit), and column 9 (for large credit). To obtain the share of consumptive purpose, the consumption portion, Rp 8,856,134 (Table 15, column 10), is divided by the total credit, Rp 21,312,543 (Table 15, column 12).
5. Average the share of adjusted credits and the share of credit for consumptive
This is the last step of adjustment processes. The lowermost figures in Table 15 column 2, 4, 6, 9 and 11 are the results.
Column 2 presents the share of total BPRs’ credit to micro enterprises. As we can see, the highest share is 40.5% in March 2008, while the lowest share is 39.0% in November and December 2008. On average, it can be concluded that 39.5% of total credit disbursed by BPRs is delivered to micro enterprises.
Column 4 shows the share of total BPRs’ credit to small enterprises. The highest share is 15.9% in March 2009, while the lowest share is 14.5% in February 2008. On average, 15.3 percent of BPR credits are allocated to small enterprises.
Column 6 provides the share of BPRs’ credit to medium enterprises. The highest share is 3.6% in June 2008, while the lowest share is 2.0% in March 2009. On average, 3.2 percent of BPRs credits are allocated to medium enterprises.
Column 9 provides the share of total BPRs’ credit to large enterprises. The highest share is 0.8%, while the lowest share is 0.1%. On average, 0.5 percent of BPRs’ credits are allocated to large enterprises.
Column 11 presents the share of total BPRs’ credit for consumptive purposes. The highest share is 41.7%, while the lowest share is 41.3%. On average, 41.5 percent of BPR’s credits are allocated for consumptive purposes.
Comparative Analysis: Commercial Banks – BPRs
After the adjustment is being done for both commercial banks and BPRs, furthermore the result is presented in the following summary table:
From the table it can be seen that there are striking differences between commercial banks and BPRs in terms of credit allocation to enterprises.
For productive purpose, the domain of commercial banks looks like in financing large enterprises whereas the largest percentage of outstanding credit is allocated to that group with the share value close to 50% of the total credit. Meanwhile, the allocation to micro, small and medium (MSM) enterprises is not more than one-fourth of the total commercial banks’ credit. Among the MSM enterprises, allotment of the credit is almost equal that is approximately 8%.
Conversely, BPRs allocate most of their credits to MSM enterprises for productive purposes. In general, BPRs allocate their credit to MSM enterprises 58% of total credit. Among MSM enterprises, the highest share is allocated to micro enterprises, almost 40% of total credit, followed by small enterprises, 15%, and then medium enterprises, 3.2%. Credit allocation to large enterprises remains very small portion.
Besides for productive purposes, both of CBs and BPRs also distribute their credit for consumptive purpose. The share of credit allocation for it, as we can see in the table, is 26% of CBs’ total credit and 41% of BPRs’ total credit.
In conclusion, the table also presents the answer for the first research question that is BPRs play a positive role as providers of funds for micro, small and medium enterprises in Indonesia. The share of credit given to micro enterprises is 39.5% of the total credit, to small enterprises 15.3% of total credit, and to medium enterprises 3.2% of total credit.
4.6 Performance of Rural Banks
In order to serve better to the customers and to perform well, a bank must be in good financial condition. Financial condition can be reflected in several performance indicators which can be obtained through data in their financial statements.
Bank Indonesia as the central bank supervises operational banking and their activities, include rural banks, setting performance standards that must be fulfilled by banks in Indonesia, Standard for conventional banking refers to the CAMEL system. In discussion of performance indicators in this section which is the main criticism only four performance indicators, namely, loan to deposit ratio (LDR), non-performing loan (NPL) and return on assets (ROA). The performance indicators of rural banks appear in Table 4.11 below.
Loan to deposit ratio measures intermediary function of a bank (Sunarto 2007: 68) and reflects sustainability of a microfinance institutions (Santoso et al. 2005: 65). The ideal LDR set by Bank Indonesia, as best practice, with the value of 80%-110%. A bank is said having good intermediary function if LDR ratio in between that value. If LDR of a bank less than 80%, it means that over liquid, too many idle funds which could be invested in productive assets, in this case is credit.
It can be seen from the table that mean value of rural LDR over five years is 82%. Compared to Bank Indonesia regulation which requires the value of LDR less than 95%, it means that rural banks have a good performance in delivering credits.
The low value of non-performing loan (NPL) reflects high ability of a microfinance managing its financial assets and credit. There are several causes why NPL is high, among others; first, external factor especially related to the economic condition. When economic condition become worsening because of high inflation for example, it forces MSM entrepreneurs reducing volume of production due to higher cost of production and raw material price resulting in a lower sales.
In addition, purchasing power of society becomes weak, so that entrepreneurs can not afford to pay their debt to the bank. Political and security conditions also can make economic worsening, for example, because of terrorist attacks in the center of tourism and handicrafts souvenirs area lead decreasing in sales of enterprises. Second, character, which means character of the debtor who does not want to pay obligation. This cause is the most difficult solved in the management of credit. Third, inability to manage in the business. This is usually associated with inability to apply sounds principles of management in the business. Fourth, a misuse in funds outside productive activities (Santoso et al. 2005: 69-71).
Looking at the average value of NPL for five years in the table above (8.63%) which is lower than the maximum limits required by Bank Indonesia (10.5%), it can be concluded that rural banks have been adequate managing the credit.
Return on assets (ROA) is microfinance profitability indicators. ROA measures the net income on assets (Ledgerwood 1999: 221-223).
Looking at ROA indicator in Table 4.11, it is concluded that rural banks have reached good performance which can be seen from the ROA value (2.68%) exceeds Bank Indonesia requirement (> 1.2%).
This paper concludes that there is a positive role of Rural Banks in financing small and medium enterprises in Indonesia. It can be seen from the portion of their outstanding credits which almost a hundred percent for SME sectors. Even though, this portion cannot be compared with the commercial banks’ share.
However, there is an advantage which owned by the Rural Banks but not owned by commercial banks, namely the coverage of the market. As we know, Rural Banks exist in almost of district of Indonesia. This advantage should be used well by authorized parties, in this case are the government and Bank Indonesia, to promote them.
For that purpose, they need to increase their equity. This can be done with improving cooperation program between commercial banks and the rural banks (linkage program) or and involve them in government programs in terms of subsidized credit, for instance. Local governments can also play an important role in promoting these rural banks, among other, with capital or injection to them. This is not only beneficial for rural bank itself but also for the local governments as a source of revenues. On the other side, the management of rural banks has to improve banks’ performance in order to keep well financing to their customers, for instances, balancing the liquidity and profitability.
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 The term “Rural Bank” is given by Banking Act Number 7 of 1992 as amended by Banking Act Number 10 of 1998 in article 5. Bank Indonesia called it as “Rural Bank” in their official (English) document and website, but BI sometimes also uses original term as Bank Perkreditan Rakyat. The term “BPR” (stands for Bank Perkreditan Rakyat) is used in many sources/references when they mention about the history of BPR rather than the term Rural Bank (see Steinwand 2001, Holloh 2001 and other researchers). At the beginning, I use the term “Rural Bank” instead of “BPR” but when I write chapter 3, there is no references which called it “Rural Bank”. To avoid the confusion, following discussions in this paper I use terminology of “Bank Perkreditan Rakyat (BPR)”, the original terminology, which means that it also refers to “Rural Bank”.
 Elucidations to the Act of the Republic of Indonesia number 7 of 1992 concerning Banking as amended by Act of The Republic of Indonesia number 10 of 1998 article 14 stated that “…., the primary objective of which is to serve small-scale business and the people in rural areas. …” ( available in http://www.profi.or.id/banking_act_no7-1992_am_no10-1998.pdf
 Cetak Biru Bank Perkreditan Rakyat (Blue Print of BPR) (available in http://www.profi.or.id/)
 Some institutions have own definition using different criteria about micro, small, and medium enterprise. We look into two definitions: based on number of workers and based on total assets and amount of sales. A micro enterprise is an enterprise which owned by a family or an individual which employs 10 workers at most (Nazara and Gitaharie 2008). According to Statistics Indonesia, small enterprise employs 1-19 workers; medium enterprise employs 20-99 workers; and large enterprise employs more than 100 workers (Tambunan 2008). It can be seen that the definition of MSMEs in terms of number of workers is not clear. The Law No. 20/2008 on Micro, Small, and Medium Enterprises uses total assets and sales as criteria. The latest law about MSMEs defines micro enterprises are the productive enterprises that meet the criteria of maximum assets of Rp 50 million exclude land and building or maximum yearly sales of Rp 300 million; small enterprises have Rp 50 million – Rp 500 million of assets exclude land and building or have yearly sales between Rp 300 million and Rp 2.5 billion; medium enterprises have Rp 500 million – Rp 10 billion of assets or have yearly Rp 2.5 billion – Rp 50 billion of sales. (available at http://www.hukum.jogja.go.id/upload/UU%20No.20-2008.pdf)
 It is taken from “Statistic of Small and Medium Enterprises in various editions”. In these statistics, there is no differentiation between micro and small enterprises so that in this study small enterprises include micro enterprises. Furthermore in the discussion, what I mean as small enterprises also refer to micro enterprises and combined with medium enterprises become small and medium enterprises (SMEs or MSMEs).
 Banking Act Number 7 of 1992 as amended by Act Number 10 of 1998 article 5 classifies banks in Indonesia into two categories: Commercial Bank and Bank Perkreditan Rakyat (BPR). According to Bank Indonesia classification (based on latest data in Banking Supervision Report/Laporan Pengawasan Perbankan 2008), Commercial Banks consist of six types of banks, which are State-Owned Bank/Bank Persero (5 banks), Foreign Exchange Commercial Bank/Bank Umum Swasta Nasional Devisa (32 banks), Non Foreign Exchange Commercial Bank/Bank Umum Swasta Nasional Non Devisa (35 banks), Regional Development Bank/Bank Pembangunan Daerah (26 banks), Joint Venture Bank/Bank Campuran (16 banks), and Foreign Owned Bank/Bank Asing (10 banks).
 She distinguished the terminologies between “microfinance activity” and “microfinance institution” (MFI). Microfinance activity refers to operation of a microfinance institution, a microfinance project, or a microfinance component of a project. Microfinance institution, whether regulated or not, refers to an organization which provides microfinance activities.
 Data are taken from Directorate of Credit, Rural Bank and MSME, Bank Indonesia. A power point presentation titled “Indonesia Rural Bank: Policy, Regulation and Supervisory System”, October 2008
 The term “conventional” refers to interest bearing banking system. According Banking Act Number 7 year 1992 as amended by Act Number 10 year 1998, a dual banking system was introduced in Indonesia, those are conventional banking and sharia ( syariah) banking. The sharia bank operates based on Islamic principles.
 It is noted that in this paper when author mention about the term “credit” especially in the analysis part, it means author refers to term “outstanding credit”.
 According to Act Number 10 of 1998 concerning Banking, a Rural Bank is prohibited from accepting deposits in the form of demand deposits.
 SE Bank Indonesia No. 30/3/UPPB/1997