SWISSCONTACT Indonesia. Access to Finance through Linking Business Service Providers and Financial Institutions By: Peter Bissegger

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1 SWISSCONTACT Indonesia Access to Finance through Linking Business Service Providers and Financial Institutions By: Peter Bissegger Background Access to finance for s is definitely not a new topic and the problem is not limited to Indonesia. In most developing, and even industrialized, countries the issue is discussed more or less intensively. The fact that access to finance for s is discussed in many countries indicates that solutions are not easy to find. In Indonesia, the finance environment has changed dramatically over the last ten years. Before the 98 financial crises, finance was strongly based on special credit schemes for s, facilitated by Bank Indonesia. However, the experience with subsidized credit programs in Indonesia similar to other countries was mixed, as such programs have generally a limited outreach, tend to distort commercial markets, and often suffer from misallocation of funds. After the 1998 financial crisis, the general set-up for direct government and donor intervention in financing has changed fundamentally: The new 1999 Act on Bank Indonesia (BI) has prohibited the central bank from granting liquidity credit. Funds for domestic credit programs now have to be provided from the government budget. Bank Indonesia has also lost its management function for donor-supported credit programs. The former BI regulation that forced banks to lend 20% of the portfolio to s was withdrawn in January 2001 and replaced by the regulations, that commercial bank have to submit a yearly business plan, stating their objectives for lending to s. A comparison between banks objectives and real lending to s indicates a clear gap: Bank would like to lend more to the sector, but face difficulties in identifying allocating credits. On the other side, difficulty in accessing finance is identified as one of the key constraints for. This raises the questions on how interested parties such as the Banking Industry, Lending statistics 2003 (IDR Trillion) Total lending 2003 Planned M lending GAP Effective M lenidng Government, Bank Indonesia and donors facilitate and accelerate lending to s. What are the specific problems related to lending? From Bank Side:

2 o Commercial banks in the past have focused mainly on large customers; lending is new for many banks. Internal procedures need to be adjusted and human resources to be trained according to the specific requirements for lending. Credit scoring systems for lending are still underdeveloped; o Limited access to information on lenders: As Indonesia does not yet have a comprehensive credit reporting system access to information on potential customers is limited, which increases lending risks for banks. Lending for new customers is therefore mainly collateral-based. o Insufficient information on potential and risks of specific sectors and related to this, lack of appropriate lending products; o Identifying potential customers: Especially banks with a limited branch network face difficulties in identifying potential customers in other than urban areas; o Credit monitoring: Lending to new customers requires an early warning system in order to assure that funds are used according to agreement or in order to provide support if business does not develop according to expectations. The establishment of such monitoring systems brings along high transaction cost. From side: o Insufficient information on potential customers: s often only have limited business documentation: financial reports, business plans are in most cases not available or banks doubt the reliability of such documents. o Limited number of s with prospective business development plans: Lack of access to information on appropriate technology, lack of information on markets and generally, limited access to specific business services hampers many s in their business development. Identifying customers with a clear plan for their business development becomes a challenge; o Lack of collaterals: Lending to new customers is mainly collateral based, but s face problems in providing sufficient collaterals. Even if the majority of s own land, they often do not have land certificates due to the cumbersome certification process. o Lack of information on lending services and necessary requirements for getting access to such services Obviously, improved access to lending for requires efforts from both sides, bank and s: o Financial institutions have to adjust their internal procedures towards the specific requirements of lending, are challenged to develop specific lending products and the banking industry as a whole has to improve access to information establishing and participating in credit reporting systems; o New approaches for linking and financial institutions need to be developed. Business Service providers can play a crucial role in this process: Service providers have existing access to s and often know their customers quite well, they have sector specific know how and many of the service providers are interested to develop and offer pre- and post lending services

3 o Besides this, information on lending products needs to be improved, which can be facilitated through various means, among others through Business Service Providers. Develop lendingspecific Business Link Busin. Service Providers with financial institutions Access to Finance Financial Institutions Credit Reporting System Develop specific services Improve information on lending services Improve internal procedures Swisscontact s starting point o In Indonesia, Swisscontact has been promoting market development for Business for more than ten years, which has resulted in a broad network of service providers (more than 300 providers) all over the country. Over this period of time, Swisscontact has applied various approaches, starting from facilitating new service providers (Business Development Centers) to voucher programs for the promotion of commercial business services and during the last years mainly through improving business services through the Quality Improvement Program. This intensive work with business service providers has contributed to Swisscontact s high reputation in developing business services in Indonesia and opens the opportunity to promote this network to financial institutions. o Most of the surveys on needs and constraints conducted during the last years in various geographic areas in Indonesia indicate clearly that difficult access to finance is regarded as one of the key constraints of s: in average, more than 30% of all s have the impression, that they would need external financing for their future business development, but never have tried to get access from a financial institution. In other words there is high, untapped potential for financial institutions, which want to expand their portfolio. The key question is on how to address these potential customers. o In early 2003, Bank Indonesia, banks and Government institutions have launched the KKMB program (financial consultants as partners for banks) with the objective to link service providers with financial institutions. The concept for KKMB is still in the process of being developed and Swisscontact was invited to participate in the realization of the program. o Being aware that there is no single solution on how to link Service Providers with financial institutions, Swisscontact has developed two different approaches, which are presently being tested.

4 o Indirect facilitation by establishing a local facilitation unit, which provides linking service providers and banks; o Direct facilitation where the project acts as facilitation unit for linking service providers and banks. Indirect Facilitation a) Initial scheme Bank Indonesia Local Government Board Identification Training Certification Facilitation Unit Bank Indonesia Technical Assistance Swisscontact MoU with banks Bank Access finance The first scheme for indirect facilitation was developed in cooperation with Bank Indonesia and a group of interested banks in Bandung, West Java. The characteristics of the model are: The facilitation unit is located within Bank Indonesia; The unit provides the following services: o Identification and accreditation of service providers, based on individual assessment of service providers (experience as service provider, links to groups, staff and institutional capacity etc.) o Basic training in lending on various topics, such as precondition for lending, different lending schemes, lending procedures, specific services related to lending, risk assessment etc. o Training for specific services, such as credit proposal, business plans, credit monitoring, models for business linkages; o Facilitation of Memorandums of Understanding between Service Providers and banks (linking); o Certification of service providers for specific services, based on competence and track record; Characteristics: o All trainings are conducted in cooperation with banks; o Competence test are developed and conducted in cooperation with the association of accountants; o The unit reports to a board, which consists of representatives of Bank Indonesia, banks, service providers, universities and local Government; o provided by the unit are partly cost-recovering;

5 o Overhead cost for unit are financed by Bank Indonesia, local Government and banks; o Swisscontact finances and provides the Unit Director for a period of 18 month. Assessment: o Close relation with Bank Indonesia provides good access to banks; but slows down process due to bureaucratic procedures for operational budget; o Limited sustainability: facilitation unit is regarded as public service institution without to claim to financial sustainability; o Scheme is open for all interested banks; Achieved results as per end of June 2004: o Around 40 service providers identified and basic training provided o 19 service providers accredited, out of around 40 applicants; o Training for specific services developed and conducted (credit proposal, credit monitoring) o 12 service providers have signed MoU with banks b) Revised scheme Based on the experience with the facilitation unit Swisscontact in cooperation with IFC developed a similar scheme with following characteristics: Other contributers Foundation for investment in facilitation unit Funding Project (SC/IFC) to Investment Facilitation Unit (commercial service) to banks Technical Assistance Cooperation Bank Access finance Facilitation unit is set-up as independent, commercial unit which provides linking services for and banks; Swisscontact and IFC (and in future hopefully with participation of other donors for replication in other geographic areas) establish a foundation, which provides seed capital for the facilitation unit; Swisscontact and IFC provides Technical Assistance for the management of the unit;

6 to s and Banks are offered basically based on commercial criteria. Potential services might include: o To banks: identification of service providers, based on specific needs of individual banks; specific training for bank staff (e.g. on potential sectors, risk assessment); specific training to service providers according to bank requirements; quality assurance services; o To service providers: development of lending specific services; training on banking products, training on sectorspecific services, credit monitoring services; networking services among service providers; o For both customer groups: linkage services: business gatherings between banks, service provider, s and government; The unit is expected to generate positive cash flows after two years; The scheme is open to all interested banks and service providers; Achieve results as per June 2004: o The scheme is expected to become operational in September 2004 Direct Facilitation Under the direct facilitation scheme, Swisscontact has established cooperation with three financial institutions: Bank Niaga, Bank Syariah Mandiri and Oikokredit. Identification CB Project Individual cooperation MoU SC- Bank Cooperation CB by banks Bank Access finance The direct facilitation scheme is characterized by: o The project identifies interested banks and negotiates cooperation schemes, based on the specific needs of the banks; o The project identifies potential service providers, based on banks requirements; o Banks select suitable cooperation partners among pre-selected banks; o Banks provide specific training to service providers; o Banks define services to be offered by service providers; o The project provides quality assurance and monitoring services;

7 o Fee for services to s is shared between bank and, depending on the type of service. Achieved results as per June 2004: o MoU with 3 banks signed o 10 service providers linked to Bank Niaga o Bank Niaga has provided bank specific training to service providers o Pipeline of potential credit applicants prepared and presently being assessed (total credit volume app. US$ 1.5 Mio) o Similar process with two other banks in preparation Overall Assessment It is definitely too early for a comprehensive assessment, however, first conclusion can be drawn. The key points are: o Good timing for the initiative of linking service providers with banks, as the banking industry is characterized by over liquidity and increased competition. Banks are starting to address s as potential customers; o Improving access to finance for requires efforts from both sides, banks (procedures, products, human resources), s and service providers; o Banks have very limited knowledge about service providers: most of the banks are not aware of the variety of providers and services available, but are positively surprised once they get in touch with providers; o The relation between banks and service providers needs to be built on mutual trust and building such a relationship requires time. An institution with good reputation and links to service providers can accelerate this process considerably; o Banks are less interested in general management service providers, but mainly in providers with profound technical and sector expertise. Banks have financial expertise available in-house, but lack know-how on opportunities and risk of specific sectors. o Banks are more interested in post-credit services (monitoring, support to customers during credit period) rather than in pre-credit service (credit proposals, business plans). Again, the reason is that banks have internal know how for pre-credit services, but face difficulties in conducting efficient credit monitoring; o In terms of impact, the project is in the process of building a monitoring database, which allows impact assessment with regard to Number and amount of credits facilitated through Service Providers NPL rate of credits facilitated through service providers Customer satisfaction of services provided by providers from point of view and providers