1. International Islamic University Malaysia
Does Microfinance Approaches Determine the Effectiveness of Its Intervention in Enhancing Microenterprise Performance? Evidence from Bank Rakyat Indonesia
Weni Hawariyuni
Salina Kassim
International Islamic University Malaysia

2. INTRODUCTION
Microfinance has shown to be effective in alleviating poverty and improving microenterprise performance across the globe
Better income and employment in Bolivia (Mosley, 1997; Mosley and Hulme, 1998)
Better income, saving & loan repayment among youth entrepreneurs in Kenya (Simeyo et al., 2011)
Higher assets owned and better performance of microenterprises in Malaysia (Al-Mamun et al., 2012; Saad and Duasa, 2011)
Others: women empowerment, better education, economic growth, multigenerational effects

3. INTRODUCTION Microenterprises (MEs)rely on MFI for financing due to:
1. Demand-side issues: MEs face obstacles borrowing from commercial banks
In Indonesia, only 12% of SMEs can get credit from CB
Collateral and other administrative requirements
Difficult for MEs to start or expand their businesses
2. Supply-side issues: CBs are reluctant to extend credit to MEs due to questionable capabilities of MEs
High risk-no proper accounting books, unable to present proper business forecasts
Loans required are too small, thus unprofitable for banks
Enforcement issues: no collateral and no insurance

4. OBJECTIVES OF STUDY
Investigate the effectiveness of MFI in enhancing performances of MEs in the case of Bank Rakyat Indonesia (BRI)
Compare two products of BRI in terms of their effectiveness in enhancing MEs performance
Highlight lessons learnt from the success story of BRI

5. BRI as MFI
Launched in 1984 with US$20 million government seed capital + start up capital + 2 years
First commercial bank to provide financial services to millions of economically poor (Robinson, 2005); largest and most successful commercial MFI in the world (Maurer, 2004)
Demonstrated success in transforming the microfinance section of a government-owned bank to become a highly profitable, self- reliant financial intermediary
A major microfinance provider offering micro-savings and micro-credit products to low-income people at market rates of interest (Seibel, 2005)

6. BRI as MFI
Currently, BRI uses savings mobilisation as its source of funds, and no longer depends on the Indonesian Government or World Bank
Has covered its costs from the interest margins and financed expansion from its profits
By end-December 2003, BRI had:
30 million accounts for savers; US$3.5 billion in savings balances
3.1 million accounts for borrowers; US$1.7 billion in loans outstanding
 excess liquidity around US$1.85 billion

7. BRI as MFI Lessons to be learned from BRI:
How to transform from a subsidised government-owned bank to a viable, competitive and self-sufficient financing intermediary?
How to remain profitable during economic crisis such as during Asian economic crisis (while many Indonesian banks collapsed, BRI Units managed to secure 1.3 million new savers during the crisis)?
How to be self-sustaining and sustainable?

8. BRI and its Microproducts
Rural General Credit/
Kredit Umum Pedesaan
Kredit Usaha Rakyat
Kupedes; launched in 1984
Comes with micro-saving product Simpedes in 1984 offering safe, convenient and liquid saving –concept of joint-saving
Flat interest rate depends on amount of loan, the bigger (loan) - the smaller (int. rate)
Distribution: Rp78.99 trillion in 2011
KUR; launched in 1994
A micro-product subsidized by the government
In general, has lower interest rate compared to Kupedes
Most clients are given loan tenure up to 2 years with a minimum of 6 months
Variable interest rate depends on tenure, the longer-the higher int. rate
Rp11.20 trillion in 2011

9. Comparison: Which is More Successful?
Specific analysis is provided in full paper
Survey on 400 BRI microfinance clients in Medan area
Adopt “before and after approach”:
To quantify the impact of intervention on income, assets and household expenditure
Results
Kupedes gives significant positive impact on all three performance indicators
KUR only gives impact on income

10. Lessons Learned from Good Practices of KUPEDES

11. Lessons Learned
Main reasons for success of Kupedes, BRI in creating a successful commercial micro-lending program that serves the poor which is profitable and self-sustaining:
Efficient income side: lend at market rates and use income to finance their operations
Stable source of funds: devise appropriate savings instruments to attract depositors. Savings instrument for the poor is as important as providing them with loans. Mobilizing rural savings also provided the banks with a stable source of funds 
Simplicity of loan design in order to keep costs down
Effective management at the unit level backed by close supervision and monitoring by the center; and appropriate staff training and performance incentives.
Presence of existing institutional network of village banks and a thriving economy that had spread to many rural areas were also critical. 

12. Lessons Learned (1)
1. A focus on objectives and guided by good policies:
Non-targeted credit, except for loan size
Non-subsidized lending
Ensuring profitable operations
2. Simplicity of design programs geared to self-sufficiency, backed by careful attention to organizational detail and staff incentives
The program's management instituted a system of quality control that emphasized monitoring, supervision, and accountability backed by significant attention to staff training
Management also devised performance incentives, rewarding employees and units for good performance. 

13. Lessons Learned (2) 3. Widest customer reach
Every sub-district town had at least one unit desa. In 1993, BRI ran a vast network of almost 3,300 unit desas (village banks) and 620 village service outposts
Together, the units employed 16,000 people, representing the biggest single rural banking network in the country.
4. Developing a savings instrument for the poor is at least as important as providing them with loans
Self-sustainability through savings mobilization
SIMPEDES, the village savings program, attracted thousands of depositors
By mobilizing rural savings, it not only provided the banks with a stable source of funds, it also kept financial savings in rural areas, thus helping continue development in the countryside. 

14. Lessons Learned (3) 5. Efficient operation practices
Staffing of units determined by a ratio (e.g. 1 credit officer per 400 borrowers, 1 teller per 200 daily transactions in automated units, and 1 teller for 150 daily transactions in non-automated units
Operational structure of each unit was kept simple. Units were staffed by at least four persons and at most 11. If the business of a unit expanded beyond the maximum staff limit, the unit was split, thus keeping the operation small and focused
Village service outposts were manned by 2 people.

15. Lessons Learned (4) 6. Motivation and competition
. Transition from nonmarket to commercial banking required a major change in company culture and work ethics - took place during the 4 years of KUPEDES, and produced clear operational procedures
Institutional incentives were used to motivate staff (e.g, performance bonuses allowed 10 percent of the unit desas' profits (up to one-and-a-half months of an employee's salary in a year) to be paid to staff.
Various ways to promote competition among the units
Recognize top 20 performers of each region, who then competed for becoming the top 20 performers at the national level. This competition was based on several criteria, including savings mobilized, outstanding portfolio, short- and long-term loss ratios, and management. 

16. Lessons Learned (5) 7. Sound macroeconomic and sector performance
KUPEDES was initiated at a time of rapid growth spurred by Indonesia's structural adjustment and sound sector development program
The economic expansion fed into the growth of incomes in rural areas, and the strong rural infrastructure and agricultural supporting services programs helped to increase demand for credit, and as important, create the basis for growth of domestic savings in rural and small households. 
7. Government commitment and ownership are at the heart of a sound market-based credit program
Designed and launched by the government.
The program was implemented with a high level of government commitment and guided by carefully chosen technical experts who not only understood the issues but appreciated the need to adapt solutions to Indonesia's unique setting 

17. THANK YOU