Weathering the storm

Before the global crisis struck in 2008, microfinance had grown fast worldwide for three decades. Experts now fear that the international credit crunch may hurt microfinance institutions (MFIs). For instance, the Consultative Group to Assist the Poor (CGAP), a think tank, reported that “many MFIs are finding it harder to access funding, and their microcredit portfolios are stagnant or shrinking” (CGAP, 2009).

Many of the MFIs that CGAP is worried about have enjoyed disproportionate support from international donors and investors. Self-reliant MFIs, on the other hand, are less conspicuous, but also less prone to be affected by the ups and downs of international finance. Savings-based MFIs in Indonesia, for instance, are hardly exposed to global risks – and the financial crisis hardly seems to be affecting them at all. In Bali in particular, self-reliant local savings and credit institutions are thriving.

Culture and governance

The history of microfinance in Indonesia covers more than a century, but took a fresh turn in the early 1980s (Seibel, 2009). In view of a rapidly falling oil price, the Indonesian Government deregulated interest rates, eliminated credit ceilings and reduced the supply of liquidity to public-­sector banks. These changes resulted in the expansion of the banking sector and the rise of various types of savings-driven financial institutions, among them the ­microbanking units (MBUs) of Bank Rakyat Indonesia and rural banks. On Bali, a new system of local financial institutions emerged, quite different from those in other parts of Indonesia.

Bali is marked by two distinct systems. One is secular and part of the Indonesian state: a province organised in several layers of public administration. The other is cultural and religious: a Hindu island in a predominantly Muslim nation, organised in customary villages (“desa pakraman”) and smaller communities (“banjar”) that cut across the official lines of administrative villages (“desa dinas”).

Starting in 1985 Bali’s village financial institutions, which are called Lembaga Perkreditan Desa (LPDs), were set up at the level of the customary village. These villages own, finance and govern the LPDs as an integral part of Balinese culture. The ­final say in every matter lies with the assembly of indigenous residents (“krama ngarep”), the ultimate authority in every village.

The initial objective was two-fold: establishing viable MFIs and strengthening the customary village as a focus of Balinese culture. Unlike rural banks and Bank Rakyat Indonesia with its MBUs, the LDPs are not regulated by the central bank; instead, the Government of Bali is in charge.

In all but name, the LPDs serve as village banks. Bali’s Government resisted attempts to turn them into nationally regulated rural banks, so the central bank eventually accepted LPDs as non-bank ­financial institutions under Balinese provincial law.

Several factors thus shape the LPDs:
– The regulatory framework,
– the system of self-management and self-governance by customary villages,
– self-financing through deposit mobilisation and retained earnings, and
– contributions from LDP profits to the development of the customary villages.
Today, the LPD network covers 1356 of Bali’s 1433 customary villages. LPD outreach is inclusive and virtually universal. On average, every family has 1.5 deposit accounts. Almost every other family has a loan outstanding.

The LPDs are savings-driven, with a deposits-to-loans ratio of 118 %. In 2008, deposits and equity together exceeded outstanding loans by 45 %. Surplus funds are either deposited in Bank Pembangunan Daerah Bali (BPD), the provincial development bank, or, to a lesser extent, in other LPDs. LPDs with a temporary liqui­dity shortage borrow from the BPD or accept deposits from other LPDs.

Overall, the network is quite successful, though there are some challenges relating to supervision and the prevalence of many small villages with very small LPDs. A rough estimate is that one in six LPDs is not operating properly. In early 2009, 56 were classified as “non-performing”, 110 as “unsound” and 49 as “less sound”. These problem cases included a number of inactive, tiny LPDs which remain open because every customary village is entitled to an LPD of its own. Of the remaining 1141 LPDs, however, 1000 were considered “sound” and 141 “fairly sound”.

Problems should not be overesti­mated, however. Case studies have shown that dormant LDPs can be revived fast once the customary governance board decides to take action. Even loans overdue for years are repaid. Delinquents would be horrified to be called before the assembly of residents to which the board reports. According to Balinese beliefs, moreover, that would negatively affect a person’s karma.

Both the LPDs and BRI’s MBUs have proven resilient in times of crisis. The collapse of the country’s banking sector in 1997/98 did not have much impact on these MFIs. Both types of institutions actually grew stronger in that period, attracting additional savings, continuing to meet their clients’ credit demand and generating net earnings.

From 1996 to 1999, the number of LPD deposit accounts grew by 46 %, compared with 29 % during the preceding three years. Savers apparently trusted their LPD. In contrast, the number of borrowers fell by one percent from 1996 to 1999, after a rise of 43 % in the preceding period. During the Asian financial crisis, deposits thus exceeded outstanding loans by a widening margin. An explanation for this surplus was that borrowers were cautious and did not want to overextend themselves as they were not sure investments would be profitable (Holloh 2000: 7).

In 2002 and 2005, Bali was hit by terrorist attacks, which, on top of their political impact, also hurt the local economy, particularly in tourist areas. According to anecdotal evidence from 10 LPDs, the first bombing had deeper effects. Demand for credit slowed down, and a number of loans had to be rescheduled, but were eventually recovered. The second bombing had no detectable effect on LPDs.

In 2008, the first year of the global financial crisis, the number of loan accounts increased by 3.5 %, while the number of deposit accounts increased by 3.6 %. This time, there was no behavioural difference between borrowers and savers, which suggests that borrowers were positive about their investment and repayment capacity. Total assets increased by 30 %, outstanding loans by 30.5 %, deposits by 33 % and equity by 18 %.

Most strikingly, the overdue-loan ratio was lower in 2008 than in the years before. Monthly data for the period December 2007 to August 2009 show the ratio declining from around 12 % during the first six months to below 11 % from October 2008 on. The ratio stood at 10.5 % in August 2009. Indeed, the global crisis did not leave a mark in the LPD statistics.

A sustainable alternative

The global financial crisis has not affected Bali’s LPD system, nor is there evidence of an overall negative effect on their clients, the majority of Balinese households. Similar results have been obtained from a study of the microbanking units of BRI. As was the case during the Asian Crisis of 1997/98 these savings-driven MFIs have proven resilient.

Research results from Vietnam also suggest that savings-based MFIs operating on local markets possess great strength in times of regional or even global crises (Seibel and Tam, 2009). Local self-reliance is a valuable asset. For donors who wish to boost microfinance, it may, in terms of sustainability, therefore make more sense to support the capacity of MFIs to mobilise savings than to directly inject funds.