Review of Financial Linkages in Indonesia Preliminary Case Study Results

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Review of Financial Linkages in
IndonesiaPreliminary Case Study Results
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Background

• FAOs additional contribution to Ford Study
• September 15 October 15, 2004
• Why Indonesia? Complex and diverse financial
  landscape with ample linkages for review.
• Main objective of study to help push our
  reflection on the analytical and methodological
  frameworks for the global study.

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Points of Presentations

• Overview of Financial Sector Development
• Legal and Regulatory Framework
• Review of Various Linkages Models
• Preliminary Results from Linkage Case

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Financial Sector Development Strategies

• Central bank law enacted with strong
  development mandate in 1968.
• Financial sector deregulation began in 1983 with
  removal of interest rate restrictions
• Longer term consequence BRI village level
  operations turned around
• Further deregulation in 1988 expansion of local
  rural banks (BPRs)
• Liquidity credits through central bank to
  priority sectors (throughout Soeharto era)

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• Liquidity credits led to gross misallocation and
  misuse (efforts to curb from 1991)
• New 1999 banking law enacted
• Channeling credit to priority sectors modified
• Require approval of credit subsidies by govt
  budget process
• Supervisory role transfer to new entity planned
• Increasing trend to preserve central banks
  independence and improve accountability
• New banking architecture announced in 2003
• Encourages commercial banks to nurture linkages
  with rural banks

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Institutional Landscape of Rural and Microfinance
Policy, regulation and supervision. Support for
linkages
Overall low MF outreach but BI policy encourages
links with BPRs. Provincial development banks
(BPDs) have multiple linkage relationships with
local institutions.
Central Bank (BI)
Commercial Banks, including BPDS
BRI, a rural commercial bank. Retail division
links with local institutions. MB Division serves
better off micro borrowers via 4000 units. Tight
focus precludes unit from linkages
Banks
BRI Corporate Retail and MB Division
BPR/BPR (Shariyah)
BPRs total 2123 (incl 86 shariyah). Private (incl
cooperative NGO) ownership, also local govt.
Multiple linkages with commercial banks to
strengthen sector.
MF Service Providers
BKD
Small local organizations. Some 4500 BKDs linked
with BRI in supervisory and financial
relationships. These century old organizations
are liquid and profitable, but static
Formal
LDKP
More than 1600 entities, owned by local or
provincial govts. Linked with provincial
development banks (BPDs) for purposes of
supervision and liquidity management.
Non Banks
Co-ops
5200 USPs and 1200 KSPs active in rural areas. PN
Madani active in linkages. NGOs and MFIs (incl
shariyah) have taken advantage of co-op legal
status in recent years.
Pawnshops
Non Formal
Efficient and profitable state-owned
institutions. Not engaged in linkages
Apex Organizations PN Madani, Bank Mandiri,
DABANAS
Informal group organizations has traditional
roots. New Order government organized millions of
households in mass credit schemes. Widespread
informal S L activity continues.
MFIs, NGOs, Self Help Groups, ROSCAs
Madani is executing agency for former BI
liquidity credits. Mandiri is state commercial
bank. Both active in credit linkages. DABANAS
is a foundation created by private commercial
banks to channel working capital credits to BPRs
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Legal and Regulatory Framework
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Description of Linkage Models Observable in
Indonesia
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Nature of Linkage Models
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Five Kinds of Financial Linkages

• Savings linkage
• Credit linkage
• Facilitation linkage
• Capacity building and supervision linkage
• Equity linkage

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Simple Bilateral Linkages
O-------------------------------------------------
O------------gt Final borrowers Commercial bank
Rural bank
O-----------------------------------------------
--O-------------------gt Final borrowers
Commercial bank Non-bank
financial
institution (Credit Fund)

Village Credit Board
O----------------------------------------------O--
-------------------gt Final borrowers Apex
institution Rural Bank
Savings and Credit Co-op
KSP



O-------------------------------------------------
O------------gt Final borrowers Rural bank
Self-help group
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Agribusiness Financing via Non-financial Entities

• O----------------------------------O--------------
  -----------------gt Final borrowers
• Commercial Bank Agribusiness entity
  (Producers)

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A Case of BPD-LPD Linkage

• BPD Regional Development Bank
• LPD Community Rural Finance Organization at
  village level
• BPD main driver for linkage, provides supervisory
  services by provincial government statute
• LPD deposits excess liquidity with BPD
• BPD provides loans to LPD
• All products and services are based on market
  rates of interest

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Some Key Benefits

• Extended financial services at village levels,
  deposit facilities and loan products
• Convenient low-cost and market return liquidity
  management option for LPD
• Convenient access to loans and lines of credit on
  demand
• Technical assistance and supervision by BPD for a
  fee