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Asia-PacificAugust 1 2012

A micro climate: why microfinance is big news in Indonesia

With an emphasis on customer-centric services and products, Indonesia’s microfinance sector is proving to be extremely lucrative, not only for the banks involved, but also for the country’s large population and growing economy.
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A micro climate: why microfinance is big news in Indonesia

Given the country’s large population, it is natural that Indonesia’s banks should focus on retail banking, and now competition is heating up in one segment in particular – micro. Mention micro to anyone outside of Indonesia and they may think of microfinance, microcredit, non-governmental organisations or attempts to alleviate poverty. But in Indonesia it is a commercial operation that targets the mass market and the so-called ‘bottom of the pyramid’. It  is retail banking, just with small amounts on a very large scale.

By targeting this segment, Indonesia’s banks are making a bet on the future growth of the country’s economy and the source of its domestic consumption. Minhari Handikusuma, director of the self-employed mass market segment at one of these banks, Bank Danamon, points out that there are more than 50 million micro, small and medium sized-enterprises (MSMEs) in Indonesia, with each of the business owners typically supporting two or three people. This means that this market segment affects 150 million people – more than half of Indonesia’s population of 240 million. “It is the backbone of Indonesia,” says Mr Handikusuma. 

Realising opportunity

Many working in the micro industry comment on how competition is heating up in the sector. “If you have honey, you will also have ants. If there are business prospects then everyone will come,” says Mr Handikusuma. “The potential is there – the challenge is how we manage it.” When asked whether it is consumer demand or the banks’ supply of lending that is driving this competition, Mr Handikusuma replies: “Fortunately both. The market is also growing because the economy is growing. More and more banks are realising the opportunity of this sector.” 

One of the attractions of the segment is its resilience to downturns. Discussing the impact of the 1997 to 1998 financial crisis in Asia, Mr Handikusuma says: “During the crisis the MSME segment was strong. The perception was that in a crisis they would be the first to crash, but that wasn’t the case.”

This was also the experience of Bank Rakyat Indonesia (BRI), which attributes its relatively small bailout during the crisis to the strength of its micro business. Typically thought of as a key micro player, BRI has long been dominant in this space. But now, even BRI’s position is being challenged by a range of competitors. 

The [micro] market is also growing because the economy is growing. More and more banks are realising the opportunity of this sector

Minhari Handikusuma

Nova Hasdi, manager of BRI’s micro outlet in the district of Siteba in Padang, notes that in her area – which covers five square kilometres – there are now 10 banks. “The competition keeps increasing,” she says. Indeed there are three banks – Bank Danamon, Bank BTPN and Bank Nagari – all close to the micro unit in which she is sitting.

BRI’s Entrepreneurial spirit

In Padang, west Sumatra, the people are stereotypically entrepreneurial and the area is brimming with potential microbanking customers. In the Siteba district, the main street is lined with shops selling daily necessities, restaurants, motorcycle repair shops and traders of all kinds of household goods. The area is alive with the buzz of Indonesia’s dynamic economy in action. 

Ms Hasdi says that competition is the micro outlet’s biggest challenge, a sentiment that is shared at the branch level. Andjar Gladianho, a BRI branch manager who supervises 17 micro outlets in the area, says that his greatest challenge is how to gain market share. When it comes to the local economy, it is not the headline gross domestic product (GDP) figures that the bankers in the area speak of, but rather the impact of the earthquake that struck Padang in 2009. “After the earthquake the competition felt very intense,” says Mr Gladianho, adding that at that time many people were forced to start again from scratch and other banks saw that as an opportunity to start to offer loans. 

BRI services its customers through a network of micro outlets, which are like mini bank branches and sub-micro outlets, or ‘teras’, which are small informal units whose design replicates the terraces of the homes in the district. At the end of 2011, BRI had 4849 micro outlets. They supervise the smaller teras units, which are closer to the customers, and whose number has increased dramatically throughout Indonesia, from just 218 at the end of 2009 to 617 at the end of 2010 and 1304 at the end of 2011. 

One of these teras, which is situated near the Siteba micro unit, is strategically positioned next to a market for the convenience of traders who cannot leave their stalls for long periods of time during the day. The account officers in the outlet display a broad understanding and knowledge of their customers, like the traditional banker – and pillar of the community – that many in the developed world yearn. One such customer is Hajimawardi, a shop owner who sells household goods.

Hajimawardi has been a customer of BRI since 1982 and started with a loan of Rp1m ($106) – which has now grown to Rp100m – that he uses for working capital. He has also noticed the increased competition from other banks and has been approached by Bank Mandiri, Bank Danamon and the local rural bank. Although they offer lower interest rates, he says that he would not change banks because BRI is able to process his loans faster as they know him so well. 

Danamon’s value proposition

Bank Danamon has been challenging this kind of customer service with a value proposition of speed, simplicity and convenience. It has invested in cultivating new relationships, with the idea that the longer it spends with a customer, the more likely the relationship is to last. 

Danamon has a very strong business… and clearly the business model has been carefully thought through

Bernard Tan

One such customer is Sugino, who sells coconut milk. In a market in Depok, a city in the west Java province to the south of the Indonesian capital of Jakarta, Sugino has four stalls. The market is outdoors, the ground is muddy with puddles, and a pungent smell lingers in this market that is set against a backdrop of a modern shopping mall with a KFC and Dunkin’ Donuts – a split level of development that is typical of emerging economies. 

Sugino’s credit limit is Rp700m, which some observers would argue is too large to be classed as a micro loan. He has been a customer at Danamon for six years and gradually increased his credit limit from a much smaller loan of Rp5m, which he initially used to buy coconuts and then later the machinery that boosted the scale of his business.

Bank Danamon’s micro segment typically only deals with loans of up to Rp500m, but because of Sugino’s good performance over the years, he has been given a top-up facility by the bank. He started his business 15 years ago and was at that time selling between one and 10 coconuts a day. Now he sells 6000 a day.

This growth story is not just a micro success story for the bank, but is also testament to Indonesia’s dynamic economy and the growth in domestic consumption. Not only does Sugino now have a successful business, but he and his wife do not have a mortgage on their spacious home – which is equipped with many of the latest mod-cons from air conditioning to a large stereo system – and are planning to purchase a plot of land next door to their home.

When asked to comment on the state of Indonesia’s macro economy, Sugino says that for him the most important thing is the dynamics and the footfall in the market itself. On the state of the local economy, he says: “Things are changing and getting busier, people have more money.”

International appeal

In the Tugu district of Depok is one of Bank Danamon’s micro units, which is situated near a traditional market. Servicing the loans to the market stall owners is a labour-intensive business and at this unit there are eight account officers, two credit analysts, one operations officer and three tellers, two of which travel to the market for mobile collections.

This branch also considers the competition in this sector to be heating up. Dang Kusmayadi, the Tugu unit manager, says that Bank Danamon does not offer introductory rates or gimmicks, and while other competitors may offer lower rates, Danamon has an advantage because of the speed with which it can process loan applications. 

Danamon has been building its micro business since 2004, and has now attracted international attention. In April 2012, Singapore-based DBS Bank made a $7.2bn offer for Danamon in a deal that would allow DBS to expand into the Indonesian retail banking market. At the time of writing, regulatory approval had not been given to the deal and Bank Indonesia was still deciding whether to limit majority foreign ownership in banks – a rule, which if introduced, would put paid to DBS’s takeover bid.  

Bernard Tan, president commissioner of DBS Indonesia, says the bank is interested in Danamon’s scale and network. He believes that the two banks could complement each other in various ways. “Danamon has a very strong business… and clearly the business model has been carefully thought through,” he says, adding that Danamon has scale and access to the mass market, while DBS brings funding capabilities and risk management, which would allow the combined entity to create a universal offering in Indonesia. 

Enter BTPN

Danamon has been an upstart in the microbanking sector, but now a more recent challenger has entered the market – Bank BTPN. Jerry Ng, the bank’s CEO and president, is convinced of the potential of the sector.

“If you look at the demographic structure of Indonesia, although our GDP per capita is about $3500, in reality it is unevenly distributed. For a big chunk of the population – approximately two-thirds – this figure may be less than $2000. I believe that this is the space that is going to grow to become a big market in the coming years.” 

If you look at the demographic structure of Indonesia, although our GDP per capita is about $3500 in reality it is unevenly distributed

Jerry Ng

Mr Ng, who was previously vice-president director at Bank Danamon, adds: “For BTPN it is not just about the micro banking, it is the entire mass market – or what some people call the bottom of the pyramid,” he says. Similar to Danamon, BTPN offers loans of about $4000 to $5000 to the segment of informal SMEs, but BTPN also targets the so-called productive poor segment with loans of a few hundred dollars.

“When dealing with these customers, it is not just the products, but helping them with the ways and means of improving their business,” says Mr Ng, adding that the bank has programmes to help its customers manage their money, as well as their inventory. 

Mandiri targets second spot

While BTPN has been making a play in this sector, another competitor – Bank Mandiri – has also been gaining ground. The managing director of micro and retail banking at Mandiri, Budi Gunadi Sadikin, who joined the bank from Danamon, says that Mandiri targets different market segments to his former employers. While Danamon is focused on the traditional outdoor markets, Mandiri targets similar customers to BRI, which means that it also goes to rural areas and targets the agricultural sector, not just market traders. “We are focused on the bottom of the pyramid,” he says.

Having focused in on the micro segment in recent years, Mandiri is now half way through its second strategic five-year plan. “Our target for 2014 is to be number two,” says Mr Sadikin. Mandiri is competing against both Danamon and BTPN for that spot, with the three banks aiming to fill the spot behind microbanking leader BRI. “We cannot be number one in five years,” he says.

So far Mandiri has been able to keep its ambitions under the radar, and has been gaining market share by stealth. “We are so low profile. BRI, Danamon, BTPN, they will not say we are their competitor,” says Mr Sadikin. However, people are beginning to take notice. In Padang, for example, it has been suggested that Mandiri is the biggest competitive threat to the incumbent number one, BRI. Similar to BRI, Mandiri is a large state-owned bank that has the resources to build the scale that is necessary for the microbanking business. 

BRI has long been the dominant player in the micro segment, and has had the advantage of an extensive network, originally used to distribute the government’s food programme, before it became a bank. Mandiri aims to challenge this coverage by partnering with the country’s postal network so that post offices share their branches with a Mandiri outlet. “This is the only way we can catch up with BRI,” says Mr Sadikin. Operating such a large branch network carries a cost burden, but maintaining close contact with the customers is necessary to keep a tight rein on collections and monitor the loan portfolio. 

Matter of time

Mr Ng at BTPN says of the early years of his banking career at Citibank in the mid-1980s: “We were taught we would only go and serve the customer at their place of business if they were in the top tier.” To have such close contact with the customers, especially when the loan ticket sizes are so small, is perhaps counter-intuitive. 

However, this close contact is not just necessary for collecting loans, which may require daily visits to the market by the tellers, but also for winning the business in the first place. Many potential customers already have their own businesses, but would not have borrowed before. They are unlikely to go to a bank to ask for a loan, and so the micro bankers have to go out to the market and scout for business. Because most of these business owners are first-time borrowers it requires patience on the part of the bank to build up the credit history and repayment behaviour of the customer before they can lend larger sums – all part of a time-consuming and laborious process.

Most of the credit decisions are made at the unit or area level... With that we can deliver our speed of service

Minhari Handikusuma

The banks make every effort to speed up the loan application process. At Danamon, the processing of loan applications is decentralised, but within the parameters that are set by the head office. “Most of the credit decisions are made at the unit or area level,” says Mr Handikusuma. “With that we can deliver our speed of service.”

Rajo Hamonang Lubis, a credit officer at Danamon’s Tugu unit, says that staff there refer to the bank’s internal policy to process credit applications. As a credit officer he has the authority to approve loan applications to a certain limit, but if staff wish to use their discretion and grant a larger loan it has to be approved at the next level by a unit manager.

Mr Handikusuma says credit risk assessment is a matter of policy and judgement. “It is always a balance of exposure to the risk and at the same time maximising the potential,” he adds. 

Monitoring the loans at the head office level is critical to ensure that a bank detects the first signs of problems. At the grassroots level, it means that the collections officers can prepare themselves for any potential defaults. At Danamon, there is a system whereby staff visit the market seven days ahead of the payment due date to remind a customer, so that there is an early warning well in advance of the payment date. Sigit Hari Purnomo, the regional manager in Depok for Danamon, estimates that the non-performing loan (NPL) ratio for his region is less than 3%. At the bank level, the NPL ratio is below 5%.

Happy families?

If so much effort is put on building close relationships with the customers, which the Danamon bankers liken to a family relationship, does it make it awkward, or more difficult, to collect overdue payments? On the contrary, says Mr Purnomo, who says that treating the relationship like a family has a positive impact when it comes to collections. “[Customers] tend to be more co-operative and willing to pay back the loan. They feel ashamed if they cannot pay back the loan – like they would with a family member.” 

The whole micro model is hinged on the ability to collect the repayments. There have been cases where collections officers have felt threatened when going into a community – such as a market – to collect on loans that have turned bad. The flip side of this, however, is that there is peer pressure – from people who may have deposited money at the bank – to encourage the borrower to repay. Perhaps this could be described as real market forces in action: if the consensus is that the borrower should be shamed, the pressure will be on them to pay up. The converse is also true: if the lender is deemed to be extortionate, or treating its customers unfairly, the market may gang up on the bank and refuse to pay. 

As the competition increases in the micro sector, there is pressure to either increase the loan amounts, drop the rates or to lend to more people. Outside Danamon’s Tugu unit, the competition is evident with at least four other micro lenders on the same street. Anecdotally, the competition is having an effect and some smaller banks (none of those mentioned in this article) have run into problems with their collections as a result of offering aggressively priced loans to people who were perhaps not creditworthy in the first place. 

The greater good

With competition increasing in the sector, could there be the potential for a credit-fuelled boom that will one day burst? Could this be the beginning of an Indonesian version of the subprime crisis? Some argue that the signs are already there as the heightened competition is putting a downward pressure on pricing and the temptation is to extend more credit beyond borrowers’ ability to repay. Whether such a phenomenon could develop into a crisis could largely depend on how the loans are funded.

At BRI, for example, most of the loans are funded by deposits. Ms Hasdi at BRI’s Siteba unit estimates that the average loan size is Rp20m to Rp50m, and most of the funding for that comes from customers’ deposits. She looks into her books and points to the low loan-to-deposit ratio. She has Rp10.4bn of loans on her books, which are amply covered by deposits of Rp27bn. The unit also boasts an NPL level of just 0.65%. 

At the bank level, at the end of March 2012, BRI had Rp85,226bn of loans outstanding, with deposits of Rp104,778bn, and an overall NPL ratio of 1.46%. BRI’s strength is in its deposit base, something that Bank Mandiri aims to build up. Mr Sadikin says that Mandiri aims to have loans that are entirely funded by deposits in three years’ time. He points to the fact that during 2007, NPLs were as high as 8%, which have now come down to less than 4% and by the end of this year are expected to be 3.5%.

Mr Sadikin outlines the importance of deposits and explains how Mandiri encourages its customers to also save so that at the end of a loan term, they have more savings than the initial loan amount. “They have to save money at the end. That is how we enrich our customers – if that is not happening you are just squeezing the money and letting them bleed to death. There is no difference between you and a loan shark if you are working without values.”

Such a sentiment is common for those working in the micro segment, who also want to enrich the lives of those at the bottom of Indonesia’s demographic pyramid, while also building a retail banking operation that is commercially sustainable. On the question of whether such a commercial operation can have principles, Mr Sadikin says: “We want to make money to grow a sustainable business. Our objective is not to make money but to make sure that customers’ welfare will be improved.” 

This sentiment is echoed by BTPN’s Mr Ng. “We are a profit company. I genuinely believe that one can achieve both a healthy return on capital and at the same time do a lot of good for those who are deprived from accessing financial services,” he says.  

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