Inclusive Growth and Financial Access for MSME in Indonesia

Arianto A. Patunru (LPEM FEUI) T.M Zakir Machmud (LPEM FEUI) Ari A. Perdana (TNP2K)

Successful Macro Condition
Relatively stable and prudent Macroeconomic condition  Moderately high growth trajectory in spite economic downturn, 5 – 6%  Continuously increase in capital inflow and foreign reserves (USD 120 bn);  Reasonably strong growth of domestic private consumption, 5.5%

But Some Issues Remains

Constantly declining trend number of the poor, however still rather high, 13%
- Majority of the poor are very sensitive to the poverty line - Non-income poverty is as serious as income poverty problem - Rural – Urban, KBI – KTI disparities in poverty is substantial. - Most poor people engage in agriculture

Slow decline in unemployment rate, 7% since 2006 Gini ratio tend to increase slightly, 0.376

Poverty and Inequality: Indonesia in Comparison
Country % Population below $2 (PPP)/day China India Indonesia Lao PDR Cambodia Malaysia Philippines Thailand 35.7 (2005) 75.6 (2005) 54.6 (2005) 76.9 (2002) 57.8 (2007) 7.8 (2004) 45.0 (2006) 11.5 (2004) 20% to Lowest 20% 8.3 (2005) 5.6 (2005) 6.2 (2007) 4.9 (2002) 8.1 (2007) 7.0 (2004) 9.0 (2006) 8.1 (2004) 6.4 (2006)

Income Ratio of Highest

Gini Coefficient

0.415 (2005) 0.368 (2005) 0.376 (2007) 0.326 (2002) 0.442 (2007) 0.379 (2004) 0.440 (2006) 0.425 (2004) 0.378 (2006)

Vietnam 48.4 (2006) Source ADB 2010

Poverty in Indonesia
Million People 60 HCR (%) 45 40 50 35 40 30 25 30 20 20 15 10 10 5 76 78 80 81 84 87 90 93 96 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 10

-

Number of Poor People

HCR

Source BPS

Regional Poverty Indonesia
Rural Urban Total Per Capita Income: Rural Sumatra Java-Bali Nusa Tenggara Kalimantan Sulawesi Maluku Papua Indonesia 15.0 17.7 22.4 9.1 18.3 25.9 46.3 18.9 12.2 10.6 24.6 5.1 6.7 7.5 5.9 10.7 13.9 13.7 23.0 7.5 14.8 20.9 37.1 14.1 357 294 253 376 275 313 315 311 Per Capita Income: Urban 558 543 405 697 570 591 707 550

Source: BPS, Resosudarmo and Yusuf 2009 Note: per capita income in Rp 000 (2008 price)

Unemployment Indonesia
Million People % 12 14 12 10 8 6 4 2 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 10

11 10 9 8 7 6 5 4 3 2 1 -

Number of unemployed people

Unemployment Rate

Source BPS

Inequality Indonesia
Income Distribution (%) 50 45 40 0.30 35 30 25 20 15 0.10 10 5 1980 1981 1984 1987 1990 1993 1999 2002 2003 2004 2005 2006 2007 2008 2009

Gini Ratio (%) 0.40 0.35

0.25 0.20 0.15

0.05 -

40 % population with lowest income 20 % population with highest income

40 % population with middle income Gini Ratio

Source BPS

Inclusive Growth: An Alternative

Simply put, growth for everybody. The benefit of economic growth should not be enjoyed only by the rich, but also by the poor Still driven by sustainable economic growth, but pay more attention on equality of opportunity in terms of access Focus more productive employment rather than direct income redistribution as means to assist the poor

MSME as Channel
    

Absorb over more than 95% of total work force Account for more than 97% of total firm establishment Contribute for about 55% of total national output (GDP) Cover about 53% of total Investment Supply approximately 16% of total Export

Sectoral engagement: agriculture sector (52%), followed by trade hotel and restaurant (28%) and manufacturing (7%)  Located widely scattered in rural areas  Typical MSME problems > lack of capital > lack of knowledge and skills > lack of productive assets > lack of market access

MSME Definition
Fixed assets Micro enterprises Small enterprises Medium enterprises Less than IDR 50 million IDR 50-500 million, excl land and building IDR 500 million to IDR 10 billion, excl land and building
Source UU no.20/2008

Annual sales Less than IDR 300 million IDR 300 million to IDR 2.5 billion IDR 2.5 billion to IDR 50 billion

Financial Inclusion: An option

Broadly refers to financing system that is accessible without exception, including the poor/less capitalized MSME The existing formal financial system is largely dominated by banks and cater only to less than 50% of the population Supply and Demand for credit is still mainly through banking and cater large corporate credit.

Financial Access in Comparison
Indonesia Bank branches per 100,000 adults ATM per 100,000 adults ATM per 1,000 squared kilometer
Source CGAP Financial Access 2010

Singapore 11

Malaysia 11

Philippines 12

India 10

8

14 13

50 2,901

54 31

14 28

7 19

GOI Vision on Financial Inclusion

“to develop a financial system accessible by all segment of the society so as to promote economic growth and to eradicate poverty” (Perdana 2011)

Previous Initiatives on Financial Inclusion

1970s – 1990 Small enterprises development credit (KIK/KMKP)
 Gives

interest subsidy to small enterprises, indigenous (pribumi) for investment and working capital purposes

Mid 1990s  Small enterprises credit KUK program
- Commercial banks were required to allocate 20% of their loan to small enterprises and cooperatives for either investment or working capital needs

Recent Initiatives

Micro Credit Loans (KUR) based on Inpres no.6/2007
- Government-collateral guaranteed loans for MSME and cooperatives that have productive and feasible businesses but still unbankable - Involving 6 banks (BRI, BNI, BTN, Bank Mandiri, Bank Syariah Mandiri, and Bank Bukopin) and 13 regional development banks (BPD)

Stratification of poverty alleviation program for better coordination, based on Inpres no.13/2009. Stratifies the program into 3 clusters.

CLUSTER STRATIFICATION
CLUSTER I. Household-targeted social assistance
Target: 19,1 million poor household Programs: Raskin, BLT, PKH, Jamkesmas, scholarships

CLUSTER II. Community-driven development
Target: 5.720 sub-district. Programs: PNPM and all its components

Idea: “to feed the poor”

CLUSTER III. Micro & SME development
Target: MSME entrepreneurs. Program: KUR And financing from various gov’t agencies

Idea: “to teach how to fish”

Source: Bappenas

Idea: “helping to have own net and fish pond”

To help implement all of the above, GOI establishes a special team called National Team for Acceleration of Poverty Reduction (TNP2K) that is under direct supervision of the Vice president (Inpres no.3/2010)

Implementation of KUR: some issues
Distrubtion of KUR by sectori


Heavily concentrated on trading sector Implementing banks deliver mostly in traditional market  high turn over Agriculture, fishery, forestry, cultivation is still perceived as high risk sectors

1%

1% 3%

16%

6%
0% 2% 2% 0%

Agricuture, fihsery, forestry, cultivation

Trading sector

69%

Source: UKP4 based on Realization of KUR Bappenas and CMEA,

Policy Implications

Better policy management, coordination and implementation across agencies at central government level, between central and local governments, as well as between government and other stakeholders Participation from stakeholders other than government must be encouraged through innovative policies that allow for multi-party partnership

Policy Implications
Policies on MSME development should carefully take into account variation in characteristics of the enterprises (e.g. size, sector, region specific)  Improvement in policy monitoring and evaluation is crucial

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