Agro Innovative Financing in

Indonesia
Desk Research Report
Tri Ismono
December 2022
Research Framework

Background Objective Methodology

• Land4Lives • To identify practices of • Online data sources that are

• One of the project's critical innovative financing in relevant to the topics
aspects is related to farmers' agriculture (include needs and • Research reports that are
financial access gaps) accessible to the public
• To identify existing and • Interview with key informants
potential strategies to finance who are experts in the financial
smallholder production. industry
• To provide analysis and
recommendation of best
mechanisms and practices
• To recommend generic
innovative finance models that
seem appropriate for the
conditions of Land4Lives
farmers
(Key) Fact Findings
Rural bank lending breakdown by sector, 2019 (%)
Account ownership by sector of livelihood
(% of adults) Other 8,624

Prosessing 2,057

89 93
Logistics 2,291
78
67 Real Estate 3,403
51
38 Construction 3,834

Agriculture 6,086

Agriculture Laborer Service and Manufacturing Propfessional Government Community & Entertainment 7,629
retail
wholesale and retail 23,544
Agriculture Laborer Service and retail
Manufacturing Propfessional Government Consumer loan 51,316

World Bank’s Global Findex Database, in 2017, Indonesia was home to 95 million unbanked people, which 33
million are farmers
 Current Issue on Financial Access for SHFs
• Lack of collateral
Limited • Small farm size
farmers’ • Unability to fulfill legal business standing
bankability

• Low financial literacy rates

Lack of Support
• Lack of strong off-taker/producer partnerships that could further enhance capital access for farmers
Business • Weak institutional capacity (farmers organization)
Ecosystem

Incompatibility • Agricultural cash flow did not match with monthly loan repayment terms that used to be applied by the regular banks
financial
products with
farmers capacity

• Although female farmers have the opportunity to be involved in the production process, both traditional and modern, their
Gender recognition on contribution and importance to agriculture production is still limited.
unfairness
Traditional Financing Scheme

• Tengkulaks will provide farmers with cash loans for them to

buy agricultural production product before the planting
Tengkulak season, later on, farmers who received the loans are
required to sell their crops back to the Tengkulaks at prices
that are far below the market prices.

• Almost the same as above where farmers take out loans

before the planting season, but the payments are not always
Rentenirs in the form of selling back their crops. The farmers are given
cash loans by the Tengkulak and the payment is subject to
an interest rate which is usually 5-10% / month
Formal Financing Scheme (Financial
Institution)
PNM
Rural Banks Non Banks Social Ventures
Pegadaian

Commercial
Branchless Banking
Banks PUAP

Coop/LKMA Fintech
Formal Financing Scheme (Agro Innovative
Financial Services)
•BRI, BNI, and Bank Mandiri are the largest distributors (with BRI
KUR KUR being the largest)
•Interest rate 7% per year

Closed Loop •integrating supply chain and value chain ecosystems from
upstream to downstream

Closed Partnership •Interest depend on the Banks/MFI

Blended
Financing Yarnen Loop
Partnership

Bundle •joining products or services into a single combined or linked unit

•Example : loan+insurance
Services
Bundle
Services
Blended •financing system that offers more favorable terms than
commercial capital, from grants (100% concessional) to debt at
Financing below-market rates or equity with asymmetrical returns,
Closed Loop Partnership
Product
3. Full package of ag-product based on RDKK/group plan
agent/
retailer

4a. Invoice for farmers payment 2. List of farmers / RDKK

1.b. Ag-loan in term of increase yield

Farmers
MFI/ Buyers/
1.a. List of recomendation group/ 6. Yield increase 7. Collective marketing
Cooperative Bulog
unions

5. Applying GAP
Farmers
Best Friend Farmers

4b. Ag-assistance :
Ag-input - yield improvement/GAP Ag-input
company - usage product properly Agronomist

8.
1. Buyers will pays the farmers crops through MFI
2. MFI could use some of this (money) as payment installment/loan by farmers
Integrate Innovative Financing to Sustainable
Agroforestry

Opportunity Challanges
• Gov (KUR) massive growth • Farmers bankability (small farm
• Agroforestry : farmers additional size)
income-multi crops • Remote area-lack of
• Proven-show cases of innovative infrastructure
financing- • Partners/MFIs/Banks incentive
Agroforestry(Commodity) that Potentially
Bankable
Category Livestock & Fisheries Horticulture Plantation Agri/Food
Primary Cattle, Goat, Chicken, Chili Coconut, Palm Rice, Maize
Seaweed, Pig oil, Cacao, Clove

Secondary Shrimp, Milkfish, Fish pond, Banana, Tomato, Porang (native Cassava
Duck Eggplant, Vegetables, root crop),
Nuts, Papaya, Orange Pinang
(catechu),
Hazelnut,
Sugarcane

Less priority Buffalo Tamarind Sengon timber,

TBD Pumpkin, Gmelina Elephant grass Cassava, Sweet

timber potato
Possibility of Financing Mechanism for Land 4
Lives Program
No. Type of Financial Service Challenges to be addressed Level of possibility
1. KUR - Not all Banks provided KUR with balloon payment (Yarnen), even for BRI High
- Some Banks (KUR provider) still require collateral

2 Post Harvest Payment-Rural Bank - Clarity regarding offtakers roles and responsibilities High
- Interest relatively higher compare KUR

3. Closed Loop Payment System - Engaging market actors within the value chain Moderate
- Incentives scheme must be clear for all actors (does the profit can
covered all the cost in the new business plan?)

4. Bundled Services - Banks need to develop products that are more appropriate for farmers Moderate
and cost effectiveness. Most banks prefer the status quo and are afraid
to take risks with unfamiliar mechanisms

5. Blended Financing - Access to non profit funds (grants) Low

6. Agricultural Insurance - Mitigation strategy Low
- Approach to insurance company
- Area (province) to be covered are still limited, mostly in Java
- Mostly, only available for food commodity (rice).
Recommendation
• Partnership and collaboration strengthening among Value Chain actors (government, non-
government, private sector, agricultural community, academia, and research institutions, etc.).
• Improving the capacity of farmer groups to understand what they "need" to access the financial
institution and its requirement, focus on productive expenses, and ready the terms needed to
gain access to finance. This effort also requires multiple actors to collaborate to be effective.
• Capacity building for the aggregators of farmer-produced commodities as potential institutions
that can help distribute financial services for farmers.
• Systems improvement of the MFI model, such as the development of a loan products that do not
require collateral or similar to the yarnen system that is less burdening for farmers in the payment
process.
• Integrating branchless banking into farmer groups to introduce the services and make easier
access to get basic services from banking, such as open savings account and online payments.
• Focus on primary commodities to build business cases or pilot stages related to agroforestry
financing for farmers or access to financial services.
• Seeing the enormous potential for involvement women farmers, program should incorporated a
gender lens to improve program strategy, process, and implementation.
Key Activities (to be considered)

• FInancial institution (KUR provider) assesment

Kredit Usaha Rakyat • Engage state owned Banks
• Product development and promotion

Value Chain • Value chain/sector mapping+potential incentives for all actors

Partnership/Close • Round table business meetings, develop MOUs with all stakeholders
• Pilot launch - uptake phase
loop payment

• Value chain/sector mapping

Bundled Services • Product and services development (develop MOU for the partnership)
• Promotion