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microfinance
 
On Batang Kuis Road in Indonesia's North Sumatra, as cars and motorcycles whiz by, restaurant owner Siti is busy making one of her popular fried dishes that attract weary motorists and nearby residents alike.
“The restaurant was not like this before,” she says. “I began this place only as a small shack in which I sold cold ice tea to students.”
Realizing the opportunity, Siti sought ways to offer more food products and add space so that customers could sit and eat. One neighbor introduced the mother-of-two to the microfinance program run by government-owned Bank Sumut. She took out a small loan to buy cooking equipment that allowed her to expand her operation to include selling food.
Siti, who like many people in Indonesia uses only one name, is part of the microfinance program administered by Bank Sumut. The program started off as a livelihood restoration component of ADB’s Earthquake and Tsunami Emergency Support Project, initiated in response to the 2004 disaster.

Microfinance for women

Modeled after Grameen Bank’s pioneering microfinance program, Bank Sumut provides small loans to groups of fifteen to twenty women, most of them homemakers who operate small businesses. The loan is repaid through small weekly payments and larger loans after offered after each previous loan is repaid. The bank charges minimal interest from the loan but the large base of borrowers makes it profitable.
“Back in 2005, microfinance was a new endeavor to all of us,” recalls Abdul Hamid, a Bank Sumut executive who manages the microfinance business. “For the banks, we were used to waiting at the banks’ counters and waiting for potential borrowers to come. At the same time from the demand side, housewives were still not confident about borrowing money from banks.”
Wiwik is one of them. Back in 1994, the young lady from Batang Kuis village learned how to sew and two years later she bought her first sewing machine and started a home-based tailoring business. For the next 15 years, she worked by herself with one machine, sewing for neighbors who needed new dresses for special occasions.
“I just never had saved enough money to buy new machines and equipment,” she says. “I knew there were banks that provided loans, but I was scared. I had never been to a bank in my life. What if I could not repay the loan?”
It turned out that Wiwik, who uses one name, did not have to go to the bank to get her first loan. Together with the other housewives from her neighborhood she was invited to gather in a community area where a loan officer from Bank Sumut gave a presentation on the microfinance program.
“After hearing the clear explanation from that officer I became convinced that the program would not be a burden for me,” she says. “The weekly payment was very small. I was confident I could make it.”
Today, Wiwik has five sewing machines and other equipment. She employs some of her neighbors. “Thanks to the program, my tailor business is now growing, and it benefits not only me and my family, but also my neighbors.”
Wiwik also offers fabric for sale at her shop. “People can come, choose whatever fabric and styles they want, get measured, and go home. In two to three weeks, they return and the dress is ready."
Currently in the process of applying her fifth microfinance loan, Wiwik says that what makes her comfortable with the program is the fact that borrowing is done in groups. That way, each borrower has a sense of communal responsibility towards the group. “There are moments where business is slow, of course,” she said. “But the good thing about being in the group is that we can share and support each other.”

Finance that changes lives

After ADB’s Earthquake and Tsunami Emergency Support Project ended, the microfinance component took on a life of its own, with Bank Sumut taking the lead in expanding it. ADB continues to provide technical assistance to help local banks in the region develop microfinance products and assist people in financial literacy.
Mr. Hamid says that the microfinance program benefits not only people like Wiwik and Siti. It is also a morale booster for the bank. “The ground staff like me feel that we are not selling products. We are helping our people improve their lives.”
For Siti, she has gotten busier since she took her first loan years ago. She has expanded the premises to make customers more comfortable. She also offers more varieties of meals, including her popular crispy chicken and fried catfish.
“I heard from my customers that some of them drive from another city just to taste my fried catfish,” she says with a laugh.
On Batang Kuis Road in Indonesia's North Sumatra, as cars and motorcycles whiz by, restaurant owner Siti is busy making one of her popular fried dishes that attract weary motorists and nearby residents alike.
“The restaurant was not like this before,” she says. “I began this place only as a small shack in which I sold cold ice tea to students.”
Realizing the opportunity, Siti sought ways to offer more food products and add space so that customers could sit and eat. One neighbor introduced the mother-of-two to the microfinance program run by government-owned Bank Sumut. She took out a small loan to buy cooking equipment that allowed her to expand her operation to include selling food.
Siti, who like many people in Indonesia uses only one name, is part of the microfinance program administered by Bank Sumut. The program started off as a livelihood restoration component of ADB’s Earthquake and Tsunami Emergency Support Project, initiated in response to the 2004 disaster.

Microfinance for women

Modeled after Grameen Bank’s pioneering microfinance program, Bank Sumut provides small loans to groups of fifteen to twenty women, most of them homemakers who operate small businesses. The loan is repaid through small weekly payments and larger loans after offered after each previous loan is repaid. The bank charges minimal interest from the loan but the large base of borrowers makes it profitable.
“Back in 2005, microfinance was a new endeavor to all of us,” recalls Abdul Hamid, a Bank Sumut executive who manages the microfinance business. “For the banks, we were used to waiting at the banks’ counters and waiting for potential borrowers to come. At the same time from the demand side, housewives were still not confident about borrowing money from banks.”
Wiwik is one of them. Back in 1994, the young lady from Batang Kuis village learned how to sew and two years later she bought her first sewing machine and started a home-based tailoring business. For the next 15 years, she worked by herself with one machine, sewing for neighbors who needed new dresses for special occasions.
“I just never had saved enough money to buy new machines and equipment,” she says. “I knew there were banks that provided loans, but I was scared. I had never been to a bank in my life. What if I could not repay the loan?”
It turned out that Wiwik, who uses one name, did not have to go to the bank to get her first loan. Together with the other housewives from her neighborhood she was invited to gather in a community area where a loan officer from Bank Sumut gave a presentation on the microfinance program.
“After hearing the clear explanation from that officer I became convinced that the program would not be a burden for me,” she says. “The weekly payment was very small. I was confident I could make it.”
Today, Wiwik has five sewing machines and other equipment. She employs some of her neighbors. “Thanks to the program, my tailor business is now growing, and it benefits not only me and my family, but also my neighbors.”
Wiwik also offers fabric for sale at her shop. “People can come, choose whatever fabric and styles they want, get measured, and go home. In two to three weeks, they return and the dress is ready."
Currently in the process of applying her fifth microfinance loan, Wiwik says that what makes her comfortable with the program is the fact that borrowing is done in groups. That way, each borrower has a sense of communal responsibility towards the group. “There are moments where business is slow, of course,” she said. “But the good thing about being in the group is that we can share and support each other.”

Finance that changes lives

After ADB’s Earthquake and Tsunami Emergency Support Project ended, the microfinance component took on a life of its own, with Bank Sumut taking the lead in expanding it. ADB continues to provide technical assistance to help local banks in the region develop microfinance products and assist people in financial literacy.
Mr. Hamid says that the microfinance program benefits not only people like Wiwik and Siti. It is also a morale booster for the bank. “The ground staff like me feel that we are not selling products. We are helping our people improve their lives.”
For Siti, she has gotten busier since she took her first loan years ago. She has expanded the premises to make customers more comfortable. She also offers more varieties of meals, including her popular crispy chicken and fried catfish.
“I heard from my customers that some of them drive from another city just to taste my fried catfish,” she says with a laugh.

 

Indonesia's microfinance sector performed healthily throughout 2015 with almost all financial institutions recording significant credit growth. The volume of microcredit disbursed by the country’s largest state-owned bank, Bank Mandiri, for example, rose to 42.48 trillion IDR as of the end of December 2015, up 22.9% over December 2014.Indonesia's microfinance sector performed healthily throughout 2015 with almost all financial institutions recording significant credit growth. The volume of microcredit disbursed by the country’s largest state-owned bank, Bank Mandiri, for example, rose to 42.48 trillion IDR as of the end of December 2015, up 22.9% over December 2014.


The Financial Services Authority (OJK) also noted that Indonesian banks in general have complied with the OJK rules that mandate them to allocate 10% of their loan portfolio to small and medium enterprises (SMEs) in 2016 which will be increased to 20% in 2018. The Indonesian government’s support for SMEs continues to improve too as evidenced by an increase in the allocation of the People's Business Credit (KUR) or small business loans from 30 trillion IDR in 2015 to 120 trillion IDR in 2016. In addition, OJK’s decision to allow multifinance companies to disburse KUR will enhance the people's access to small business loans. Such a strategy is in line with President Joko Widodo’s efforts to bolster the SME segment through simplifying processes in relation to starting a company and obtaining licenses (See Indonesia’s 12th Economic Policy Package is Unveiled to the Benefit of SMEs).

Decent growth

The year 2015 was an exciting period for the Indonesian microfinance industry. Almost all banks, both state-owned and private, posted a significant growth in microcredit disbursement. According to Bank Indonesia (BI), SME loans grew 10.1% in 2015 to 739.8 trillion IDR as of December 2015 compared to 671.7 trillion IDR as of December 2014. On a monthly basis, SME loans recorded an increase of about 1% per month.
The SME loans consisted of 164.9 trillion IDR for micro enterprises, 215.9 trillion IDR for small enterprises and 359.0 trillion IDR for medium enterprises. About 537.2 trillion IDR of the loans are for working capital and 202.6 trillion IDR are for investment.
Indonesia’s largest state-owned bank, Bank Mandiri, for example, managed to disburse microcredit to the value of 42.4 trillion IDR in 2015, up 22.9% year on year from December 2014. This equates to 56% of the bank’s total SME lending which reached 75.78 trillion IDR and 1,112,385 borrowers.
Bank Rakyat Indonesia (BRI), which focuses on microcredit and allocates 35% of its total credit portfolio to the SME sector, also enjoyed a similar growth in 2015 of 17% over the previous year. The bank managed to post high profits thanks to its huge volumes of microcredit that offers net interest margin (NIM) of at least 8%.
According to data from the Indonesian central bank, the growth of microcredit continued into the first quarter of 2016. As of February 2016, SME loans accounted for 18% or equivalent to 728.97 trillion IDR of a total credit portfolio of 3,998.09 trillion IDR. State-owned banks remained the dominant force in SME financing by disbursing 82.61 trillion IDR in total. This is followed by the regional development banks (BPD) with total microcredit loans equating to 48 trillion IDR, private banks with 282.41 trillion IDR, and foreign banks as well as others accounting for 15.93 trillion IDR.
BRI was also a major contributor to the microcredit growth. In the first quarter of 2016, the bank’s microcredit grew 22.2% from 91.8 trillion IDR in 2015 to 111.2 trillion IDR and contributed 31% of its total loans of 361.2 trillion IDR. Other banks, including private banks, are also aiming to increase their microcredit portfolio in 2016. Bank Tabungan Pensiunan Nasional (BTPN), for example, has set a target to increase its SME loans by 50% in 2016. In 2015, the bank disbursed microcredit and SME loans amounting to 8.73 trillion IDR and 6.86 trillion IDR, respectively.
A similar strategy was undertaken by Bank Negara Indonesia (BNI). In 2015, the state-owned bank disbursed a significant amount of loans to the SME sector with a total value of 42.2 trillion IDR. These loans were either disbursed directly to the SMEs or through cooperation with other financial institutions. The bank’s linkage programme in 2015 has successfully disbursed loans of 3.2 trillion IDR whereby rural banks (BPR) accounted for the major share of 50%.
The OJK recorded that banks in general have complied with its rules that mandate them to allocate 10% of their loan portfolio to small and medium enterprises in 2016 which will be increased to 20% in 2018.
Small business loans in Indonesia have bright prospects due to the sheer size of the SME market. According to data from the Ministry of Cooperatives and Small and Medium Enterprises, the number of SMEs in the country reached 55.2 million consisting of 54,559,969 microenterprises, 602,195 small enterprises and 44,280 medium enterprises. In Indonesia, SMEs account for 99.99% of the total number of existing businesses and absorb 97.24% of the labour force as well as contributing 57.48% of the country’s GDP.

Shariah-based microfinance

Although the Islamic finance industry recorded growth of 6.1% in 2015, it still lags behind its conventional counterparts (See Indonesia's Islamic Banking Industry: Bright Prospects Ahead Despite Constraints). Its contribution to microcredit growth is even smaller because the share of SME financing among Islamic financial institutions is only between 5-10% despite its natural inclination towards this type of cooperative style lending. The majority or 90% of Islamic microfinancing has been channeled to motor vehicle loans as opposed to the SME segment.
To spur the growth of SME lending among Islamic banks, the OJK has offered incentives to relax the core capital requirements for Islamic banking if their SME financing accounts for 20% of the total loans. However, a constraint to shariah compliant microfinance growth is the relatively high level of non-performed financing (NPF) among Islamic banks which reached 4.73% whereby the SME sector accounted for 43%. This has made Islamic financial institutions more cautious in providing financing to small businesses that are considered to be at higher risk.
Indonesia’s largest Islamic bank, Bank Syariah Mandiri (BSM), for example, disbursed loans of 70.37 trillion IDR in 2015, an increase of 5.1% from 66.94 trillion IDR in 2014. Its microfinancing, however, only accounts for 3.5 trillion IDR or only 5% of its total loan portfolio.

Source :  gbgindonesia
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