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By: Djoko Retnadi

Since launched on the fifth of November 2007 by President of the Republic of Indonesia Susilo Bambang Yudhoyono, amount of KUR has come to Rp6.8 trillion, consisting of 672 thousand debtors. Compared to other types of loan, the growth of this kind of loan to almost Rp.1 trillion per month is really amazing. The aims of people based small-business loan or Kredit Usaha Rakyat (KUR) introduction are: (i) to accelerate the development of real sector and micro, small & medium enterprises (MSMEs); (ii) to increase access to financings for SMEs and cooperatives; (iii) to alleviate poverty and to expand work opportunities. This article will evaluate whether in reality the practices have been in line or not with the three objectives from various aspects such as debtor candidates, banking industry and the guarantor.

Background By end of 2006, the number of micro, small and medium enterprises (MSMEs) summed up to 48.8 million units. However, from this amount, only 39.06% or 19.1 million have been engaged with bank. 90 percent of the total number is those who do business in home industries, informal peddling, and other informal businesses, which absorb most jobs (pro-job) to support poor people life quality improvement (propoor). If there is no special effort from the government, the banking sector will still find it difficult to channel credit to MSMEs, as they really have been feasible but not yet bankable. The banking industry is obligated to implement international best practices of risk management (Basel II) which are not suitable for MSME condition and Indonesian macro economic situation. Although there were many government programs of loan directed to accelerate MSMEs in 2007 (as shown in Table 1), there have been no much attention from the banks so that the expected impact has yet to show a significant result on the grass root level of MSMEs.

Banker and banking observer

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Table 1: Various Schemes of Loans Directed to Enhance Real Sector Development NO. 1 2 3 4 5 6 7 8 9 CREDIT SCHEME KKP-E (food crop development) EXPLANATION Started 2000, initially KKP Started 2000, initially KKP Started 2000, initially KKP Started 2000, initially KKP Started 1995 Started 2005 Started December 2006 Started December 2006 Started 2004

KKP-E (food supply) KKP-E (livestock) KKP-E (sugar cane) KKPA (palm oil) PEMP Loan & Aquaculture of fish & seaweed KPEN-RP Mutually beneficial (palm oil) KPEN-RP Non mutually beneficial (rubber &


Considering this condition, the Indonesian government finally constituted President’s Instruction No.6 on 8 June 2007 concerning with policy to accelerate real sector development and revitalize MSMEs, followed with memorandum of understanding between Technical Ministries, Banks, and Insurance Companies signed on 9 October 2007, which was marked with launching of insured loan to MSMEs as now called People-based Small Business Loan (Kredit Usaha Rakyat –KUR). This kind of loan is expected to give much bigger access to capital for MSMEs and cooperatives which have been feasible but yet bankable.

Operational Foundation and Policy Objectives The operational fundamentals of KUR is President’s Instruction Number 6 signed on 8 June 2007 on Policy to Accelerate Real Sector Development and MSME Revitalization and Memorandum of Understandings between Technical Ministries, Banks and Insurance Companies signed on October 9, 2007, as follows:

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Participants Government of Indonesia (6 Ministries) Ministry of Finance Ministry of Agriculture Ministry of Forestry Ministry of Marine and Fisheries Ministry of Industry State Ministry of Cooperative, Small and Medium Businesses Banks (6 banks) Bank BRI, Bank Mandiri, BNI, Bank BTN, Bukopin, Bank Syariah Mandiri Credit Insurance Company PT Askrindo and Sarana Pengembangan Usaha Company Give approval for guaranteeing loan

Function a. Assist and support the execution of credit distribution and its insurance to MSMEs and cooperatives. b. Prepare MSMEs and cooperatives doing productive businesses individually, in group or mutual cooperation/cluster which are to be the target of financing c. Determine policy and priorities of business sectors receiving credits. d. Build character and give assistance along the period of financing. e. Facilitate relationship between MSMEs & cooperatives and other parties such as nucleus companies or off taker that gives contribution and business support. Assess business feasibility and decide financing disbursement according to the current regulation.

Other than these, in its implementation KUR, banks and the insurance companies base their activities on cooperation agreement they made together.

SCHEME of KUR KUR may be in the form of working capital or investment loans with maximum amount of Rp500 million given to micro, small, medium and cooperative-formed unit businesses that have productive businesses that will be given guarantee from credit insurance company. These business institutions must be feasible 2 though yet bankable. KUR requires that main loan collateral is the project financed. However, as additional collaterals owned by these enterprises are usually insufficient in amount, the rest are covered with the guarantee program. The maximum coverage of the assurance is 70 percent from the total credit received. The source of KUR is totally from bank commercial fund. At the beginning of its launching on November 5, 2007, the scheme is only one type that is the one with maximum loan of Rp 500 million. Nevertheless, after being effective for some time President Yudoyono instructed that the limit should be lowered to a maximum of Rp 5 million so that micro enterprises are eligible to this scheme of credit. Finally on the 7th of May 2008, in a Limited Coordinative Meeting

Feasible means that revenues can pay off installments of original debt plus interest

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headed by Coordinating Minister of Economy, the government issued Addendum I of Memorandum of Understandings on Micro and Linkage Program of KUR. These three types of KUR are interpreted by the banks as shown in Table 2, Table 3, and Table 4.

Table 2: KUR Requirements for Maximum Amount Up to Rp.500 million
Potential Debtor Business experience Size of loan Type of loan Interest rate

Individuals (personal or legal business entity), group, cooperative doing feasible productive business Minimum 6 months Maximum Rp. 500 million Decreasing Working Capital - maximum 3 years Investment loan - maximum 5 years

Effective, maximum 16% p.a up to Rp 100 million: SIUP (letter of trading business permit), TDP (letter of


listed business entity) & SITU (letter of business location permit) or letter of recommendation from village head. > Rp. 100 million : minimum SIUP or following the current effective regulations

Individual : ID Card & family list card Legality Group : letter of recommendation from related institutions or from head of village Cooperative/ Others : subject to effective regulations Principal : for working capital and investment loans business or place

financed Collateral The cash flow of the projects financed must be able to cover all liabilities to the bank Additional : not obligated to fulfill

Table 3: Requirements of Micro KUR Micro Up to Rp.5 million
Potential Debtor Business experience Size of loan Type of loan

Individuals doing feasible productive business Minimum 6 months Maximum Rp. 5 million Working capital or decreasing investment loan for maximum of 3 years

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Interest rate Administration fee Legality

Effective, maximum of 1.125% flat rate per month None ID Card & family list card Principal : for working capital and investment loans business or place

financed Collateral The cash flow of the projects financed must be able to cover all liabilities to the bank Additional : not obligated to fulfill

Table 4: KUR Linkage Program
Potential Debtor Business experience Size of loan Type of loan Interest rate Administration fee

BKD, KSP/USP, BMT & LKM , others as long as there is no problem with the
installments of debt Minimum 6 months - maximum Rp 500 million - BKD, KSP/USP, BMT, LKM to end user maximum Rp 5 million Decreasing working capital , maximum 3 years Effective, maximum 16% p.a None Statement of institution Foundation Having legal business permit Active management : for working capital and investment loans business or place




financed Collateral The cash flow of the projects financed must be able to cover all liabilities to the bank Additional : not obligatedly fulfilled

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Success Story Since launched on the 5th of November 2007, the amount of KUR loan and KUR receivers have shown a significant development.

Table 5. Actual Distribution of KUR as of May 2008
Bank BNI BRI KUR BRI KUR Mikro Mandiri BTN Bukopin BSM Total Total Loan (Rp milllion) 911,871 1,744,547 2,431,078 1,021,640 81,051 430,740 258,485 6,879,412 Total Debtors 7,413 14,502 610,581 33,232 470 1,686 4,400 672,284 Average Loan per Debtor (Rp million) 123.01 120,30 3.98 30.74 172,45 255,48 58,75 10,23

Source: Coordinating Minister of Economy, processed

Even more, KUR debtors of size less than Rp 5 million contribute 90 percent of the total KUR so that commitment to absorb more jobs (pro job) and to cut down poverty (pro poor) is more to fulfill the government expectation. Based on economic sector, trade sector is the biggest absorber of KUR, followed by agriculture and social service sectors. Outside these three sectors KUR contribution is only less than 3 percent (Table 6).

Table 6. KUR by Economic Sector
1 2 3 4 5 6 7 8 9 10 11 Agriculture Mining Manufacturing industry Electricity, gas & water supply Construction Trade, restaurant & hotel Housing Transportation, communication Business service Social/public services Others Total 200 468 40 6,879 2.900 6.809 0.574 100.000 3,441 40,625 229 672,316 0.51 6.04 0.03 100.00 warehouse,


Amount of Loan Rp billion Percentage
1,664 56 171 4 165 4,046 0 68 24.181 0.808 2.487 0.055 2.393 58.807 0.001 0.984

Number of Debtor Debtors Percentage
156,558 13,139 1,304 683 708 452,259 2 3,368 23.29 1.95 0.19 0.10 0.11 67.27 0.00 0.50

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Problem of Implementation Even though KUR has given better access to financings for MSMEs and cooperatives, an acceleration of its expansion is urgent. To reach this objective it is needed to evaluate problems in distributing this type of loan. From field investigation, some of the issues are as following. First, there has been no common understanding of KUR scheme, whether among bank officers or the public, so there maybe still some deviances and misperception on KUR, such as on collateral requirements, administration fee, source of fund, existence of illegal broker of Micro KUR, etc. Second, there is a gap in fulfilling officers having expertise in KUR. Banks must be prudent in distributing KUR so that they need employees with certain qualification to manage KUR. Finally, there is a decrease in loan demand because of higher inflation, interest rate, and so on as a result of macroeconomic condition change.

Public Polemic In consecutive edition of June 6 and 7 the daily Kompas exposed a polemic on KUR, stating that candidates of debtors were objection with the imposition of additional collateral of 30 percent of the total credit by the banks, for in the memorandum of understanding there is no such requirement. If we look into this problem, it seems that the government has conflicting interest. Even though the government has given guarantee as much as 70 percent through the guarantor company, when it wants to accelerate loan, the amount of guaranteed loan should be 100 percent. If the government takes this hundred percent security, this may create a moral hazard situation such like in 1990s, in which banks felt free to give extra ordinary amount of loans without considering prudential aspect and on the other side business entities did not have any worry on the performance of their payments of loan if someday their businesses collapsed. The guarantor will suffer the most as it bears a lot of claims, for non performing loans mount in the banking sector. The 70 percent collateral is the proper solution to unite all different interests. Other 30 percent will be on the banks’ burden which risk must be mitigated through, for example, asking additional collateral to cover the 30 percent of risk, especially for KUR size of almost Rp 500 million. This additional collateral does not mean to complicate credit approval process, but merely to find way-out for banks in order to always be able to finance MSMEs and cooperatives. If according to analysis a bank finds that debtor capability in paying off its debt rather questionable, than it may demand
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additional collateral; however, if the opposite result of analysis happens, there is no need for the bank to ask such increments. It is important to know that if non performing loans mount, the responsibility will mainly be on the bank officers’ shoulders, though in prior is verified under various considerations in procedures and effective regulations. From the above explanation, it seems logic if a bank inevitably asks more additional collateral as much as 30 percent of the total loan to the new debtors of KUR of size almost Rp 5000 million, as this is aimed to secure all interested parties. Under this policy the banking industry could finally convey KUR, rather than if the bank hesitates to deliver KUR as it lacks confidence on the debtors of KUR. By seeing the amount of KUR per end of May 2008 that came to Rp 6.8 trillion distributed to 673 thousand people, or average of loan per debtor of Rp 10.2 million, this shows that KUR achieving is really good even under the polemic existence on additional collateral. As end notes, I would like to stress that banks’ demand on additional collateral of 30 percent from outstanding loan is still tolerable as banks are exposed to credit risk. The incremental requirement is needed for banks to secure their loans. If not, the banks may hesitate to give more KUR so that the acceleration program might be hurdled.

Future Wish As we know the problems of KUR distribution, in the future we must prepare for future strategies so that KUR acceleration could be carried out properly. Some of these strategies are: • Continue joint socialization, under coordination of Vice President Secretary and Coordinating Minister of Economy, • Do joint evaluation and monitoring with Policy Committee and related Ministries every month, • Enhance linkage program in relation to KUR acceleration program, especially for KUR of size less than Rp 5 million, • • Develop KUR product featuring life and health insurance Making credit program distribution uniform whether through PKBL (program to assist bank environment, such as giving trading place for informal traders, etc) or other programs.
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Follow up programs from related ministries of Policy Committee members Focus more on agriculture sector in broad meaning.


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