INDONESIAN CREDIT GUARANTEE CORPORATION (CGCs): FUTURE AND CHALLENGES By: Choirul Djamhari Deputy Minister for Business Development and Restructuring Ministry of Cooperatives and SMEs Chairman of Board of Supervisors of Perum Jamkrino

Role of Indonesian SMEs The Indonesian economic growth is 6.1% in 2010 with GDP of USD 714 billion. Indonesian SMEs (Small & Medium Enterprises including cooperatives and micro enterprises): Contributing 53,3% of GDP; Providing 96,2 million job opportunities accounting for 97,3 of total labor force; Serving as sources of income among grass root, thus contributing to poverty alleviation; Driving innovation and developing new products in efficient ways Nurturing mentality and spirit of entrepreneurship; Fostering industries, as big companies need supports from SMEs;

Role of Indonesian SMEs (contd) Generating export opportunities Ensuring equitable and sustainable development as they are spread out all over the country. SMEs have proven their resilience to survive within the ailing national economy. As SMEs are the largest group in the economic structure and they represent the “people’s economy” of Indonesia, then SMEs should be given of the foremost priority in the national development.

SMEs’ Roles in Indonesia Economy SMEs in Indonesia SMEs’ Roles in Indonesia Economy Definition Net assets: more than IDR10 billion (USD1 million), or Annual sales: more than IDR50 billion (USD 5 million) Number of entity: ±4,372 unit or 0,01% Share to : - total employment : 2,96% - GDP: 44,44% - non oil export: 79.83% - total Investment : 47,11% Large Enterprise Net assets: more than IDR500 million (USD50.000) up to IDR10 billion (USD1 million), or Annual sales: more than IDR2,5 billion (USD250.000) up to IDR50 billion (USD5 million) Number of entity: ± 39,657 unit or 0,08% Share to : - total employment: 3,48% - GDP: 13,43% - non oil export : 13,10% - total Investment : 23,81% Medium Enterprise Net assets: more than IDR50 million (USD5.000) up to IDR500 million (USD50.000), or Annual sales: more than IDR300 million (USD30.000) up to IDR2,5 billion (USD250.000) Number of entity: ± 520.221 unit or 1,01% Share to : - total employment : 4,26% - GDP: 10,08% - non oil export : 4,85% - total Investment : 20,69% Small Enterprise Number of entity : ± 50,697,659 unit or 98,90% Share to : - total employment : 89,30% - GDP : 32,05% - non oil export : 2,22% - total Investment : 8,39% Max net worth (excl. land & building) : IDR 50 million (USD 5,000) Max. annual sales : IDR 300 million (USD 30,000) Micro Enterprise Data source: Statistics Indonesia, 2009 (data as of 2008) MSME definition refers to MSME Act No. 20/2008

SMEs ACCESS TO FINANCING Indonesian SMEs generally have some handicaps to access to financing for their business development. A lack of formal credit access due to lack of collateral. Currently, banking system is the most significant source of financing for SMEs, and other alternatives are saving & loan cooperatives, pawnshop, multi-finance companies, non-bank financial institutions. 5

SMEs FINANCIAL SERVICE PROVIDERS Non Bank Institution SMEs 51.25 million business unit Commercial Bank Rural Bank Saving and Loan Cooperative Pawnshop Multi finance/ Leasing Company Non Bank/Cooperatives/Microfinance Institution Money Lender CGC Non Bank Informal Institution Bank Source: Central Bank of Indonesia

Indonesian Banking Sector Overview Commercial Bank Commercial Bank (Conv) Sharia commercial Bank Rural Bank Rural Bank (conv) Sharia Rural Bank Number of Banks (as of Arpil 2011) Tot Banks Tot Offices Commercial Banks (conventional) 121 14.140 Rural Banks (conventional) 1.680 3.996 Sharia Commercial Banks: Sharia Commercial Banks Sharia Business Unit of Comm Banks 11 23 1.276 315 Sharia Rural Banks 153 293 Grand Total 1.988 20.020 Source: Banking Statistic, Central Bank of Indonesia, April 2011

Indonesian Credit Guarantee Practices Need of Credit Guarantee To bridge the need of SMEs financing and the banks’/creditors’ requirement of credit lending. Credit Guarantee for SMEs is a key to greater access to financing. Given to the feasible SMEs but not bankable in terms of collateral requirement. 8

FINANCING SCHEME & NEED of CG Feasibility Enterprise Financing Guaranteed by CGC Large Medium Small Micro Feasible for Go Public √ Capital Market No Feasible & Bankable Bank Lease financing Venture Capital Optional Feasible but not Bankable Rural Bank Pawn Shop Micro finance Inst Guarantee Not feasible & not bankable Micro Finance Inst Money Lender

CREDIT GUARANTEE SYSTEM IN INDONESIA Legal Background: Presidential Decree No. 2/2008 of Guarantee Institutions MOF Regulation No. 222/2008 of Credit Guarantee Company and Credit Re-guarantee Company As legal background, the grand design of credit guarantee system in Indonesia consists of: National and Regional Credit Guarantee Companies Credit Re-guarantee Company Government support as: Regulator: Capital Market Supervisory Body and Financial Institutions Shareholder for National Credit Guarantee Company Local government as the shareholder of Regional Credit Guarantee Companies

CREDIT GUARANTEE SYSTEM IN INDONESIA At the moment, there are 4 CGCs in Indonesia namely: Perum Jamkrindo PT Penjamin Kredit Pengusaha Indonesia/PKPI (private CGC) Jamkrida Jatim Jamkrida Bali Mandara. The government support is given to the establishment of regional credit guarantee as well as the supervision of the existing CGCs.

Current Guarantee Issues: Government Policy to Enhance SMEs loan Banking/FIs Sector - Reducing Risk Weighted Assets on credit for SMEs for credit that guaranteed by the state owned/accredited CGCs. - Partnering with CGCs to increase SMEs loan lending. Government KUR Guarantee Program & other Govt Loan Program - Loan for Food Securty and Energy - Loan for Cattle Breeding. Improving Regulation for CGCs Playing such an important role to the economy, however, the Indonesian SMEs are facing some problems. In general, SMEs need capital/fund to expanding and renewing the business activities. SMEs often find it hard to get financing from banks/financial institutions. Some reasons that SMEs could not access in financing: refusal of credit proposal, high interest rate, reluctant, lack of collateral, they don’t know the bank procedure, and they perceived that bank has complicated procedure.

Support to CGCs through Additional Government Shares Target of Commercial Bank SMEs clasification Feasible & Bankable Target of SMEs Credit Guarantee Increasing the Guarantee Capacity Feasible but not Bankable Additional Government Shares Not Feasible, Not Bankable Target of Government Program Feasible and not Bankable > Guarantee Capacity

KUR GUARANTEE PROGRAM KUR Program supported by Indonesian CGCs (Jamkrindo and Askrindo), in which the government induced Additional Government Shares (AGS), totally IDR 3.75 Trillion since 2007. KUR Program targets 10x of Gearing Ratio, at least 10 times of the AGS (IDR 37.5 Trillion) to be lent as KUR Loan to the SMEs. The guarantee for KUR is provided in “Conditional Automatic Cover” mechanism, the evaluation of the credit fully conducted by the banks. KUR Program has been monitored by the Policy Board (interdepartmental committee).

Improving Regulation for CGCs To support the growth of CGC industry, the Government through Capital Market Supervisory Body and Financial Institutions is improving the regulation for CGC: No. 222/2008 of Credit Guarantee Company and Credit Re- guarantee Company. Points of Improvements: Initial capital for CGCs establishment; Reserved capital management of CGCs; Investment management of CGCs; Financial Ratios (liquidity, claim and gearing ratio, etc); Credit Guarantee Products & Services; Credit Guarantee Agency; Etc.

CHALLENGES OF THE INDONESIAN CGCs Challenges include : 1. CGCs financially sustainable Generally, credit guarantee perceived as an unprofitable business and take insurance business market. CGCs should find appropriate model of guarantee business to meet the expectation of the stakeholders (Govt, shareholders, SMEs, banks/FIs). 16

CHALLENGES OF THE INDONESIAN CGCs ii) Credit Guarantee Culture SMEs’ mindset of subsidized loan and rates if CGC plays the role and their moral hazard. Financial institutions’ moral hazard if loans are guaranteed. High interest rate and collateral requirement even though risk is mitigated by guarantee Guarantee fees will result in higher borrowing cost for SMEs. 17

CHALLENGES OF THE INDONESIAN CGCs iii) CGCs capacity and competency Increasing capacity and capability to provide the initial CGCs capital for establishment. Finding appropriate business model for CGCs. Increasing human resources competency to provide excellent services and products improvement. Increasing capacity in managing CGC’s financial and investments. 18

Proper CGCs Business Model SUSTAINABLE & GROWING INDONESIAN CGCs KEY SUCCESS FACTORS Improvement of CGCs’ Products & Services Government Support Proper CGCs Business Model Implicit support from shareholders & Government to facilitate growth and sustainability of Indonesian CGCs. Improvement of CGC Regulation. Appropriate guarantee business model that meets the needs of Shareholders, Government, Bank/FIs as well as SMEs. Adequate CGCs’ capital and sound financial management. Strategic business synergies with other corporations/ insurance. Balance between financial sustainability and SMEs empowerment outreach. TO SUSTAINABLE & GROWING INDONESIAN CGCs The key Success Factors, in our opinion, may be categorised into 3: The right suited guarantee model that meets the needs of the shareholders, the Government and SMEs. The ability to raise funds from the capital market is another area of importance if the organisation does not want to depend on Government’s funds. With regards the pricing of products and services, there should be a balance between FS and SO and the support from the Government to undertake developmental cost is essential. And finally, we acknowledge that achieving sustainable growth does have its share of challenges but it is NOT entirely impossible. 19

Thank You 20