Indonesia is often cited as a model country in the fight against poverty. One of the reasons is the extensive network of microfinance institutions that are able to provide poor people with microloans, thanks to which they can invest more in their businesses and thus effectively kick-start them. Bank Rakyat Indonesia (BRI) and its unique Unit Desa system became the first commercially operating microfinance institution in the world.
Since 1984, Bank Rakyat Indonesia (BRI) has been entirely financially independent, operates sustainably, and at the same time succeeds in targeting even the poorest inhabitants of Indonesia. It became the first commercial microbanking system in the world and to this day remains the largest commercial institution of its kind. Thanks to its long-term profitability, BRI is a firm part of the Indonesian financial system.
The path to success of Bank Rakyat Indonesia Behind the success of BRI lie primarily financial and economic deregulation, long-term sustainable economic growth, and a change in the setup of government policies. These three factors led, in addition to the development of microfinance, to a significant reduction in poverty between 1970 and 1993. During this period, extreme poverty was reduced from 60% to "merely" 14%. The case of Indonesia shows that only financially viable institutions can provide services even to the poorest population. Indonesia is therefore in many respects considered by international institutions (e.g. the World Bank) to be a model country in the fight against poverty. In 1970, a programme for the intensification of rice cultivation was launched. Farmers were provided with loans for growing rice, which were subsidised by the government. Intensification in agriculture was achieved; however, the credit part of the programme failed completely. The combination of unsuitable government settings (price caps, interest regulation) and the position of BRI as a mere collector of money from debtors led to BRI's dependence on the government and to a situation in which BRI had to be subsidised for several years with funds from the government budget. Changes began in connection with the rise in oil prices in 1973 and 1979. The government invested intensively in the development of the country; one of the instruments was, once again, the provision of loans. The subsequent drop in oil prices in 1982 led to economic and financial liberalisation. In connection with the liberalisation of the country, demand for financial services increased, especially in rural areas. The new BRI system was named Unit Desa and responded to the changes in demand that were connected with the deregulation of policies. Microsavings SIMPEDES and microloans KUPEDES The goal of the new Unit Desa system was to reach the highest possible number of clients, to offer them suitable services, and at the same time to create independently functioning banking units that would be profitable. In cooperation with the Harvard Institute and USAID, the transaction costs were estimated and subsequently the first two microfinance products were created. The SIMPEDES product offers microsavings and the KUPEDES product is focused on microloans. Both products are characterised by a short duration, low repayments, the possibility of obtaining further loans for regular clients, and acceptable interest rates. BRI confirmed its firm position on the market during the Asian financial crisis, which struck Indonesia in 1997 and 1998. The economic recession, with relatively high inflation and unemployment, raised concerns. However, BRI Unit Desa had the opposite development to the national economy. Interest in microfinance services increased (especially demand for savings accounts). The development of demand for microfinance services during the Indonesian financial crisis confirms the fact that poor people are interested in financial services and want to secure themselves, especially in times of crisis. Poor people increase their financial security by starting to save more; it is for them a form of protection against a possible deepening of the crisis. Not resting on one's laurels, or the challenges for Indonesian microfinance Despite the successful development and growth of microfinance in Indonesia, there is still a great deal of room for further expansion of the Unit Desa system. The number of clients could, given the total population of Indonesia, increase a further two- to threefold if sufficient potential were reached. More than half of the inhabitants of rural Indonesia have no access to financial services, which is directly linked to poverty and unemployment. BRI constitutes almost a monopoly in the field of microfinance in Indonesia, which is not very favourable for competition and the necessary expansion. In Indonesia there is a large number of microfinance institutions, but the vast majority of them do not operate commercially, their products are poorly designed, they lack transparency, and they are not able to provide services to the poorest. These institutions are often dependent on various subsidies and copy the principles of foreign institutions. For a competitive microfinance market in Indonesia, the development of commercial institutions of the BRI type is needed. These institutions are the only ones able to reach the poorest part of the population. The government is nevertheless trying to respond to the shortcomings in microfinance. An example may be the introduction of the Laku Pandai programme or the Financial Digital Service (LKD). Both of these programmes were launched in 2015. Inclusive financial programme in rural areas Laku Pandai is an inclusive financial programme focused on the provision of services (microloans, microsavings, and insurance) in rural areas. The services are provided by so-called agents, so it is not necessary to go to bank offices. This increases the accessibility of banking services in remote localities. LKD makes it possible to handle various financial services and transactions through mobile phones. The main difference is that LKD need not be directly linked to a bank account, but transactions can be handled using Pulsa vouchers, which are freely for sale, and after activation in the phone can be operated according to the client's needs. These two above-mentioned programmes are so far used rather as supplementary to classic banking services. The programmes struggle in particular with shortcomings in infrastructure and with a lack of available technologies. Especially for digital services, it is essential to increase electricity coverage. Text and photo: Adéla Hemelíková The author is a student of the Department of Development and Environmental Studies, Faculty of Science, Palacký University Olomouc