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Players in Agricultural Financing (Cont’D) Table of Contents Abbreviation .............................................................................................................................................................................1 Abstract .............................................................................................................................................................................2 Summary .............................................................................................................................................................................7 1. Introduction ............................................................................................................................................................... 21 1.1 Background and Purposes of the Study .................................................................................................................. 21 1.2 Study Directions .......................................................................................................................................................... 21 1.3 Study Activities ............................................................................................................................................................ 22 2. Analyses of Financial Systems for Small and Medium Enterprises in Japan ................................................. 23 2.1 Finance Policy and Financial Systems for Small and Medium Enterprises in Japan ...................................... 23 2.2 Financial Systems for Micro, Small and Medium Enterprises ............................................................................ 43 2.3 Financial Systems for the Agriculture, Forestry and Fisheries Industries ......................................................... 70 2.4 Implications from the Experience of Japan ............................................................................................................ 86 3. Financial Systems for Small and Medium Enterprises in Indonesia and Various Issues .............................. 92 3.1 Roles of Micro, Small and Medium Enterprises in the Indonesian Economy .................................................. 92 3.2 Financial Policies on MSMEs in Indonesia ............................................................................................................. 94 3.3 Financial Systems for Micro, Small and Medium Enterprises .......................................................................... 100 3.4 Financial Systems for the Agriculture, Forestry and Fisheries Industries ....................................................... 133 3.5 Issues in MSME Financing in Indonesia ............................................................................................................... 138 4. Policy Recommendations ....................................................................................................................................... 142 4.1 Fundamental Viewpoints for Making Policy Recommendations ...................................................................... 142 4.2 Policies, including Regulations Pertaining to Finance ......................................................................................... 145 4.3 Financing Mechanisms and Financial Products .................................................................................................. 146 4.4 Credit Guarantee System ......................................................................................................................................... 152 4.5 Basic Financial Infrastructure ................................................................................................................................ 158 Appendix 1: Comparative Analysis Table on Japan and Indonesia ............................................................................ 164 Appendix 2: Seminar Presentation Material .................................................................................................................. 166 Abbreviation Japan ACRIS Agricultural Credit Risk Information Service CRD Credit Risk Database JA Japan Agricultural Cooperatives JFC Japan Financial Corporation Indonesia BII Bank Internasional Indonesia BNI Bank Negara Indonesia BPR Bank Perkreditan Rakyat (people's credit banks) BRI Bank Rakyat Indonesia BTN Bank Tabungan Negara DIS Debtor Information System KKPE Kredit Ketahanan Pangan dan Energi (Credit for Food Security and Energy) KPEN-R Kredit Pengembangan Energi Nabati dan Revitalisasi Perkebunan P (Credit for Bio-Energy Development and Estate Crop Revitalization) KUPS Kredit Usaha Pembibitan Sapi (Credit for Cattle Breeding Farm) KUR Kredit Usaha Rakyat (People's Business Credit) NES Nucleus Estate and Smallholder Others IDR Indonesia Rupiah USD U.S. dollar JPY Japanese Yen DI Diffusion Index GDP Gross Domestic Product NPL Non-performing loan MSME Micro, Small and Medium Enterprise SME Small and Medium Enterprise CGC Credit Guarantee Corporation 1 1 Abstract Micro, small and medium enterprises (MSMEs) have been playing an important role in the Indonesian economy, but the financing for MSMEs is considered to be quantitatively inadequate. In response to this situation, the Indonesian government has formulated a variety of laws and regulations in an effort to improve the access to funds of MSMEs, and started KUR (Kredit Usaha Rakyat) or the special credit guarantee system. Although the KUR has contributed to the access to finance of MSMEs, the loans to the productive sector, which is supposed to be the priority area of KUR, are still minimal. The purposes of this study are to compare the financial mechanisms for MSMEs and small-scale agriculture businesses in Japan and Indonesia, in order to make policy recommendations for the enhancement of the access to finance of MSMEs and expansion of KUR for the productive sector in Indonesia. This study firstly analyzes the fundamental causes of these issues, and then comprehensively considers risk factors such as moral hazard, bank incentives, policy costs, effects and benefits, in order to identify an appropriate financing mechanism. The appropriate financing mechanism should match the actual capacity of the productive sector in Indonesia and should not excessively increase the financing to MSMEs with lower capacity. Financial systems for SMEs in Japan have been centered on bank loans. This system has been formulated through its historical background. When the Japanese economy achieved rapid economic growth in 1960s, cooperative structured financial institutions such as credit unions and mutual loans and savings banks (currently second-tier regional banks) and governmental financial institutions (Japan Finance Corporation: JFC) played the important roles in SME financing. The unique sub-systems of the Japanese finance policy framework include policy-based finance, loan appraisal targeting on industrial development, “MARUKEI Loan” or managerial improvement loans, relationship lending, credit guarantee and re-guarantee system, and credit information agencies. All financial sub-systems are based on credit analysis capacity of financial institutions. Japan has been spending a large government budget for facilitate SME finance to achieve socioeconomic benefits, and also to overcome the “asymmetry information” problem, which increase the transaction costs of SME finance. In order to address this issue, the government or society needs to pay policy costs. On the other hand, the Japanese government and financial sector have treated finance for agriculture, forestry and fisheries separately from the finance for SMEs due to its special characteristics. Through long-term loans and interest subsidies, the government has spent large 2 2 budgets to this sector. Since the Asian currency crisis, Indonesia has successfully stabilized its banking sector and the financial policies through this period seem to have affected the characteristics of MSME financing in Indonesia. Following the Asian currency crisis, the revised banking act (1998) and the central bank act (1999) were enacted to strengthen banking supervision and regulation. Following the establishment of the Indonesia Bank Restructuring Agency (IBRA), alignment and integration of the banking sector has made progress. The number of banks had decreased from 240 before the Asian currency crisis to 136 in 2004. The total assets of in the banking sector became four times bigger for the last ten years, increasing from IDR 1.1 quadrillion in 2001 to IDR 4.2 quadrillion in 2013. During this period, credit to individual consumers and MSMEs has also increased. Because small-scale financial institutions that specialized in MSME and agriculture financing at rural area are still underdeveloped, major state-owned banks and commercial banks have been the main providers of MSME financing. Thus, the MSME financing in Indonesia is highly subject to the business strategies of such major banks. Consequently, the lending-ratio regulation for MSMEs, which had been abolished in 2001 (20% of total bank lending to be provided to MSMEs), was once again brought into effect by the Bank Indonesia in No. 14 of the 2012 Act. Banks are now legally obligated to make their lending ratios to MSMEs more than 20% by 2018. The level of financial inclusion in Indonesia is not necessarily sufficient, as the ratio of domestic credits to GDP is not very high. This is mainly because small manufacturers do not have bank transactions and most MSMEs are accessing to informal finance. KUR, which was started
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