Microfinance Success Amidst Macroeconomic Failure: the Experience of Bank Rakyat Indonesia During the East Asian Crisis
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World Development Vol. 29, No. 6, pp. 1057±1069, 2001 Ó 2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain www.elsevier.com/locate/worlddev 0305-750X/01/$ - see front matter PII: S0305-750X01)00016-X Micro®nance Success Amidst Macroeconomic Failure: The Experience of Bank Rakyat Indonesia Duringthe East Asian Crisis RICHARD H. PATTEN, JAY K. ROSENGARD and DON E. JOHNSTON, JR. * Harvard University, Cambridge, MA, USA Summary. Ð The Bank Rakyat Indonesia -BRI) unit system is recognized as one of the largest and most successful micro®nance institutions in the world. Indonesia has been more drastically aected by the East Asian monetary crisis than other countries in the area. It is therefore worthwhile lookingat the BRI experience duringthe crisisÐnot only the experience in microenterprise credit, but also in small, medium and corporate credit and in savings mobilization. The comparative performance of dierent parts of BRI during the East Asian crisis suggests essential features in the future design of sustainable micro®nance institutions, products, and delivery systems. Ó 2001 Elsevier Science Ltd. All rights reserved. Key words Ð Asia, Indonesia, banking, ®nancial crisis, micro®nance, microenterprise 1. BACKGROUND ON BANK RAKYAT SBU Microbanking is in charge of BRI's INDONESIA -BRI) 1 3,694 units. A unit is a small bank oce with four to eleven sta. The units also maintain 319 BRI is one of three state-owned commercial cash posts which are open three to ®ve days a foreign exchange banks in Indonesia. BRI is week to receive and pay out savings, and to owned entirely by the Government, but oper- receive loan repayments. Each unit is a separate ates under all of the prudential norms and pro®t/loss center with its own balance sheet and regulations that every commercial bank must pro®t and loss statement. The units make loans adhere to in Indonesia. BRI's primary mission of Rp 25,000 to Rp 25 million. There were 2.6 is the provision of rural and urban community million microloans outstandingtotalingRp 6.9 bankingservices by mobilizingfamily savings trillion at the end of July 2000. The units also and deliveringcredit products to medium, small provide savings, giro, and time deposit ac- and microenterprises. counts; there were 25.1 million accounts in the Although BRI was established in 1968 under units at the end of July 2000 totalingRp 18.5 National Law Number 21/1968, it is actually the trillion. 3 successor to a series of banks in Indonesia going SBU Retail Banking is in charge of BRI's back more than 100 years, beginning with De branches, which provide full bankingservices. Poerwokertosche Hulp-en Spaarbank der In- They make small business loans up to Rp 3 landsche Hoofden, founded in 1895. BRI grew billion, loans against salaries and pensions, to become one of Indonesia's largest banks, as and ``program loans'' -channeling of loans for indicated by its position early in the East Asian government schemes, such as those to coop- Crisis: as of December 1997, BRI's total assets eratives or to the government agency that were $16.7 billion, includinga net loan portfolio provides agricultural price support). The of $12.6 billion, and 1997 pre-tax pro®ts totaled branches also provide savings, giro and time $56.7 million. 2 It had 324 branches covering deposit accounts. The branches have recently the entire country, overseas oces in Singapore, introduced an on-line facility for savings ac- HongKongand New York, and a workforce of count holders. over 44,000 employees. Duringthe same year the East Asian Crisis hit, BRI re-organized into four strategic busi- ness units -SBUs). * Final revision accepted: 15 November 2000. 1057 1058 WORLD DEVELOPMENT SBU Corporate makes large corporate loans This resulted in both risingprices and a -above Rp 3 billion), includingdollar-denomi- shortage of demand from farmers for the nated loans. products and services of micro and other lo- SBU Treasury and Investment handles trea- cal enterprises. sury functions, includingthe maintenance of -ii) For many years Indonesia has main- BRI primary reserves in Bank Indonesia and the tained an open capital account. The rupiah purchase of Bank Indonesia certi®cates -SBIs). has been allowed to depreciate about 5% a It also controls BRI ®nancial subsidiaries. year against a basket of currencies. High ru- piah interest rates compared to interest rates in neighboring countries, when coupled with the seemingcertainty of the rate of deprecia- 2. THE MONETARY CRISIS 4 tion, brought in large amounts of ``hot'' short-term money. Once there was a loss of -a) Onset con®dence, this short-term money could and did move out very quickly, triggering The monetary crisis in Indonesia began -or the decision of Bank Indonesia to allow the was signaled) in mid-1997 when Bank Indone- market to set the exchange rate. sia, the central bank, decided that its foreign -iii) The large Indonesia conglomerates bor- reserves were insucient to support the ex- rowed dollars abroad, runningup a private change rate, at that time Rp 2,450 to the US sector short-term foreign exchange debt more dollar. By mid-1998, the exchange rate had than twice the total foreign debt of the Gov- plunged to Rp 14,900 to the US dollar. As of ernment, most of which consists of long- the end of March 2000, the crisis appears to term concessional loans. Bank Indonesia have ended, with Bank Indonesia predictinga was unable to keep track of this private for- stable exchange rate and growth at a rate of 4± eign debt, which was more than twice the 5% for the second quarter of 2000. country's foreign exchange reserves, and There were at least three causes of the mone- was therefore uninformed of possible short- tary crisis which were relevant to BRI's situation: term demands against the country's foreign -i) There was a severe drought in the 1997±98 exchange reserves if these loans were not season, and one entire crop of rice was lost. rolled over. Figure 1. In¯ation and one-month SBI rates. EXPERIENCE OF BANK RAKYAT 1059 A large amount of this debt was used for real Government of Indonesia -GOI) had not issued estate investment, most of which was not bonds that were traded in the market, Bank complete, much less sold or rented, at the Indonesia's main monetary policy instrument time the crisis began. Even had the funds was the Serti®kat Bank Indonesia -SBI). The been used for ®nancingrelatively quick re- rate for a one-month SBI was raised to over turn activities, these borrowers still could 70% in July and August 1998. Apparently, this not have repaid at the new exchange rate; policy was considered a success; the one-month most are now technically insolvent. SBI rate has been lowered rapidly commencing Unlike the Latin American debt crisis in the in October 1998, and was at 10.91% at the end 1980s and the Mexican peso crisis in 1991, of March 2000 -see Figure 1). government overspending was not one of the The exchange rate has moved from Rp 2,450 root causes of the Indonesian crisis. Including to the US dollar before the crisis to over Rp the proceeds of long-term foreign aid loans on 14,900 at the time of the worst panic, and has the income side and loan repayments on the moved between Rp 6,500 and Rp 8,500 to the expenditure side, the budget had been balanced US dollar most of the time since mid-June or in surplus since the late 1960s. 1999. It improved against the dollar following relatively peaceful elections in May 1999; it -b) Eects on interest rates deteriorates each time there is an outbreak of violence anywhere in the country, the appear- After Indonesia began to receive assistance ance of political uncertainty, or a delay in the from the International Monetary Fund -IMF), release of IMF funds. On April 12, 2000, the monetary policy for several months concen- exchange rate was Rp. 7,623 to the US dollar. trated on raisinginterest rates to support the BRI, alongwith other Indonesian-owned exchange rate and to control in¯ation. Since the banks, raised their time deposit rates in line Figure 2. SBI, time deposit, and SIMPEDES interest rates. 1060 WORLD DEVELOPMENT with the SBI rate until May 1998, when they loans apply almost immediately, because the peaked at 60% for one-month time deposits. loan agreements provide for adjustable rates. Because of the large in¯ow of deposits, result- The interest rate on KUPEDES -``General ingin part from the closingof several banks, Rural Credit,'' the units' sole microcredit in- BRI was able to keep deposit rates well below strument) was raised from 31.72% before the the SBI rate until October 1998. From October, crisis to 45% on September 1, 1998. Since then, BRI has kept rates just below the SBI rate as the rate has been lowered in steps all the way this has moved down. As of March 2000, BRI back to 31.72%, eective since September 1, is paying10.5% per annum on a one-month 1999 -see Figure 3). time deposit, while the one-month SBI rate is New interest rates on KUPEDES apply only 11.91%. Rates on SIMPEDES -``Rural Sav- to new loans, while new rates on savings apply ings,'' a passbook account available only at immediately to all existingsavingsaccounts or BRI units) and other passbook savings in BRI to time deposits taken out or renewed after the have been relatively stable compared to time rate change. Thus, there is a lag in the increase deposit rates: they moved from 13% before the in actual credit interest rates and a squeezingof crisis, to a peak of 20%, and have now declined the spread as interest rates move up and an to 9% as of the end of March 2000 -see Figure increase in spread as interest rates move down 2).