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STRENGTHENING THE BANKING SECTOR CAPACITY FOR MSMEs

FINANCING : THE ROLE OF BANK INDONESIA as THE

CENTRAL BANK

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About IndonesiaAbout Indonesia

Indonesia is one of the world's biggest archipelagic country. Situated between two continents.i.e. Asia and Australia/Oceania , it has a total of 17.508 islands. This strategic location has a significant influence towards its Culture, Social conditions, Politics and Economy.Area 

-  Total 1,919,440 (land) km²  735,355 sq mi  

-  Water (%) 48,5

Population 

-  July 2007 234,693,997  

-  2000 census 206,264,595  

-  Density 134/km²  347/sq mi

GDP (nominal)2007  

-  Total $438.1 billion  

-  Per capita $1,947.1 

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ROLES OF MSMEs IN THE ECONOMYROLES OF MSMEs IN THE ECONOMY

Number of EntityLarge Corp

1%

SME99%

Employment

SME96%

Large Corp4%

Non oil exportSME20%

Large Corp80%

GDP

SME53%

Large Corp

47%

Investment

Large Corp

54%

SME46%

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Definitions of MSMEsDefinitions of MSMEs

Micro enterprise :– Annual turn over of IDR 100 million (USD 10,000)– Net worth (excl. land n building) of max IDR 25

million (USD 2500)– Max. employees of 5 persons

Small enterprise :– Max. annual sales of IDR 1 billion (USD 100,000)– Max. net assets of IDR 200 million (USD 20,000)

Medium enterprise :– Annual sales range between IDR 1 billion

(USD100,000) up to IDR 50 billion (USD 5,000,000)– Net assets range between IDR 200 million (USD

20,000) up to IDR10 billion (USD 1,000,000).

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Number and Credit Outstanding of MSMEsNumber and Credit Outstanding of MSMEs

38.9 40.8 42.5 43.7 44.748.9

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006

million unit

Number of SME MSMEs Credit Outstanding

(2004-March 2008)

116

157.9181.9

202.5 203.3

72.4

165.9154.8

116.2101.8

171.6166.9

129.9110.2

82.7

0

50

100

150

200

250

2004 2005 2006 2007 Mar-08

Rp billion

Micro (IDR bilion/ 116/11.6 157.9/15.79 181.9/18.19 202.5/20.25 203.25/20.33

USD milion)

Small (IDR bilion/ 72.4/7.24 101.8/10.18 116.2/11.62 154.8/15.48 165.93/16.59

USD milion)

Medium (IDR bilion/ 82.7/8.27 110.2/11.02 129.9/12.99 166.9/16.69 171.6/17.16

USD milion)

Note: USD 1 = IDR 10.000

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Financial Accessibility Problem for MSMEsFinancial Accessibility Problem for MSMEs

MSMEs Feasible Not

Bankable*

Financial Institution Feasible Bankable

Only 33,8% MSMEs are Bank’s debtor

Regulator BI

• Insentive to Financial Institution

• Technical Assistance to MSMEs

*) Not bankable : MSMEs don’t have sufficient

collateral, limited access to market information,

bookkeeping and limited formal legal status

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BI’s Approach to MSMEsBI’s Approach to MSMEsBI’s Approach to MSMEsBI’s Approach to MSMEs

Based BI’s act No. 13 year 1968, The objective of Bank Indonesia is to achieve and maintain the stability of the Rupiah and to improve sustainable growth of production and economic development along with increasing of job opportunity that leads to raise the people’s welfare

Providing liquidity credits (financial assistance) and technical assistance to MSMEs through the banks

• Based BI’s act No. 23 year 1999, The Objective of bank Indonesia is to achieve and maintain the stability of the Rupiah

1999

Before 1999 : After 1999 : Central Bank Act 1968 : Direct & Indirect Policy in Financing MSMEs

Central Bank Act 1999 : Indirect Policy in Financing MSMEs

Only provides technical assistance

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BI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/Supervisor

Before 1999 :

1. Subsidized Credit Program Priority sectors (MSMEs, plantation, and housing for low

income people) Lower interest rate and long-term funding Funded by Govt. budget and BI About 20 schemes of credit programs had been

introduced

2. Banks Regulation Quota on lending to micro and small enterprise Lending to MSMEs was required to be min. 20% of net

credit expansion

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BI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/Supervisor (Cont.)

3. Technical Assistance Micro Credit Project The Self-Help Group Linkages to Banks

To link group of micro entrepreneurs to banks

4. Institutional Development Promoting the establishment of rural banks Promoting the syariah based banking

operation

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BI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/SupervisorBI’s Policy in Financing MSMEs as a regulator/Supervisor (Cont.)

After 1999 :1. Regulation on MSMEs credit :

Advised banks to allocate part of its lending to MSMEs

Advised banks to submit business plan to BI and publish the quarterly report on realization of the business plan.

2. Easing Banking regulation within the prudential banking framework Credit performance of loan up to IDR 500 million

(USD 50.000) is based only on prompt repayment of principal and/or interest.

Risk–weighted Assets for Small Business Loan is calculated of 85%

The Risk-weighted Assets is calculated of ≤ 50 % for credit which guaranteed by government’s guarantee firms.

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BI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a Mediator1. Technical Assistance

Training for bank officers and Business Development Services Provider (BDSP)

Researches to support policy formulation Building an SMEs Development Information System (SIPUK) Training with certification (CERTIF) for candidate of directors

and directors BPR/BPRS Training on productive sector financing for Rural Bank officer

2. Linkage Program To enhance bank loan to MSMEs via Rural Banks and

other MFIs As of June 2007, 28 financial institution (27 commercial

banks and PT PNM) has linkaged to 1,156 Rural Banks with total outstanding loan amounted Rp2,026 billions (USD 202,6 million)

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BI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a Mediator (Cont.)

3.Promoting the Role of Credit Guarantee BI acts as a facilitator :

• To encourage cooperation between credit guarantee agency and banks• To encourage cooperation between regional government and credit guarantee agency• Prerequisite : Approval from Regional Parliament to place fund in the regional credit

guarantee agency

BI as a counterpart of the Government in regulated the Credit Guarantee Policy :

BI also acts as a facilitator between the Banking Industry and Government in implementing Government Program so called Credit for People (Kredit Usaha Rakyat – KUR)

The purpose of this program is to enable MSMEs without sufficient collateral to get loan IDR 500 million (USD 50,000). The insufficiency of collateral was thus covered by credit guarantee, of which the guarantee premium is paid by the government

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BI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a Mediator(Cont.)

6. Extending the facilities of Credit Bureau Center of data base of all bank borrowers

5. Promoting the establishment of MSME center Special unit extending services to MSMEs in commercial

bank Information center for MSMEs clients

4. Facilitating dialogue between banking sector, MSMEs sector and government agencies

In form of bazaar of banking intermediary Held by BI branches

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BI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a MediatorBI’s Policy in Financing MSMEs as a Mediator(Cont.)

7. Supporting the Establishment of Promoting Enterprises Access to Credit (PEAC) units.

Special unit extending services to BDS Provider To improve the quality of BDS Provider services and

productivity in making MSMEs bankable

8. Facilitating the establishment of APEX Institutions for Rural Banks (BPR/BPRS)

- Functioning as a pooling of fund from the Rural Bank member - Providing both financial and technical assistance

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MSMEs Credit Outstanding by Type of Utilization (2004-March 2008)MSMEs Credit Outstanding by Type of Utilization (2004-March 2008)

41.2%

10.5%

48.3%

40.2%

9.3%

50.5%

42.3%

8.9%

48.8%

41.2%

8.8%

50.0%

39.9%

8.6%

51.4%

0%

25%

50%

75%

100%

2004 2005 2006 2007 Mar-08

Working Capital Credits Investment Credits Consumer Credits

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MSMEs Credit Outstanding by Economics Sectors (March 2008)MSMEs Credit Outstanding by Economics Sectors (March 2008)

1.3%

51.8% 26.0%

1.4%6.2%

3.3% 0.3% 7.2% 0.1% 2.4%

Agriculture, hunting and agricultural facilities Mining

Manufacturing Industry Electricity, gas & water

Contruction Trade, restaurants and hotelsTransportation, cargo storage and communication Business Services

Social Services Others

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Non Performing Loans of MSMEs CreditNon Performing Loans of MSMEs Credit

3.893.683.23

4.383.88

5.68

3.39

11.58

8.1

4.28 3.844.5

7.576.14

4.15

0

5

10

15

20

2004 2005 2006 2007 Mar-08

Percentage

MSME credit Non MSME credit Total Credit

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Disbursement Vs Business Plan of MSMEs CreditDisbursement Vs Business Plan of MSMEs Credit

14.1%

111.8%

85.2%

143.5%

174.6%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2004 2005 2006 2007 Mar-08

Rp billion

0.0%

40.0%

80.0%

120.0%

160.0%

200.0%Persentage

Business Plan (Rp billion/ 38.5/3.85 60.4/6.04 68.1/6.81 86/8.6 129.3/12.93

USD million)

Realization (Rp billion/ 67.2/6.72 86.7/8.67 58/5.80 96.19/9.62 16.60/1.66

USD million)

Persentage 174.6% 143.5% 85.2% 111.8% 12.8%

Note: USD 1 = IDR 10.000

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