Picture: Employees of Mr.Sumardi (right), the end users of Eddy (left) who owns the Rakyat Mandiri cooperative in Pati, that counts three branches
After a few days in Yogyakarta at the head office of Nusa Makmur, the local partner of Lendahand, it was time to leave the “big city” to see with my own eyes where these loans really go to. In this blog, two examples of cooperatives in Indonesia that want to contribute positively towards their local communities through their financial services.
Lenders throughout the country
Since the founding of Nusa Makmur in 2013, it has been providing loans towards saving- and credit cooperatives initiated by local communities. These cooperatives are spead throughout the country and are often focused on certain types of professions known in the area. For this field visit we travelled to Jepara and Pati, both in Central Java. The drive to both towns passes Semarang, a bigger city, and with the large amount of traffic this takes you easily 8 hours. It is hard to imagine that the team of Nusa Makmur takes these types of trips multiple times a month.
Financial inclusion in Indonesia
After a five hour drive it was time for a break. While I sit down at a table where soup was already waiting, the CEO of Nusa Makmur, Mr. Fahmy Akbar Idries tells me the latest on financial services towards SME’s. The Indonesian government for quite some years has been investing in a micro lending scheme, but despite the government’s guarantee, banks are still reluctant about lending to these potential borrowers, and see SMEs as “unbankable”. There have been some branches that opened in the last years, but many of the banks stopped these activities. Often aspiring entrepreneurs and micro-scale enterprises have neither sufficient collateral to secure a bank loan nor the financial track records for lenders to evaluate. Geographical constraints also remain a challenge that has hindered people in rural parts of the country to get access to traditional bank services, something that I after a long trip can imagine more and more. However with SME’s in Indonesia being responsible for 60% of the workforce in the country, this creates a bottleneck for development in the country.
Visiting Lumbung Artho
Lumbung Artho is a cooperative in Jepara that was initiated in 2009. The cooperative exists of three branches that are each defined by the type of professions of their members. Lumbing Artho in total has around 4.300 people with a loan account and 3.000 people with a savings account. I visit the branch that is located in an area specifically known for its furniture carvers because of the strong teak wood in the area. Twelve staff members of the cooperative are constantly at work to visit all these members and has a monitoring system through special “cards” and an online program with SMS functions. In this way the cooperative keeps close contact with the members across big distances.
Picture: an account manager gets back on her motorbike to visit an entrepreneur
At Rakyat Mandiri in Pati they do things differently
Lumbung Artho incorporates a secular loan structure, but at Rakyat Mandiri in Pati they base their loans on Sharia-Law. Islamic banking is not based on interest rates (riba), but is based on profit/loss sharing. The financial institution has a share of the lender, at the value of the loan amount, and it is agreed beforehand how the profit will be shared. This possibly explains why Eddy, the owner of Rakyat Mandiri, is so closely involved with supporting the businesses of his lenders. When I arrive at the office of his cooperative he himself is working in the shop next door where lenders buy materials for fishing. He also frequently on the road to meet entrepreneurs. Eddy used to have a wholesale company with materials for fishing and therefore understands his lenders well. He does not run Rakyat Mandiri on his own however: he has 12 account managers that keep contact with 2700 lenders almost daily through SMS and WhatsApp and personal visits.
Picture: A loan is processed at the office of Rakyat Mandiri in Pati
Loans based on flexibility and trust
The account managers of both the cooperatives frequently visit the entrepreneurs at their business locations. During my stay in Pati and Jepara both the staff of the cooperatives as well as the entrepreneurs themselves mentioned the close relationship amongst each other. This is a big difference from the conventional banks, where entrepreneurs are often unable to access finance because of complex administrative processes. Because the cooperatives understand the way entrepreneurs run their businesses, on which seasons they rely and at what times they need new materials, they are more flexible in scheduling the payments of entrepreneurs. This trusted relationship seems to pay off: for both cooperatives there have not been any non-performing loans to date.
Cooperatives and fintech together create opportunities for the future
At Lumbung Artho and Rayat Mandiri they both recognize a setback on conventional loans for their portfolios. Previously, Rayat Mandiri received funding from Mandiri, a big national bank. However in the future Rakyat Mandiri thinks they will increasingly depend on Nusa Makmur for financing. At the same time for Nusa Makmur it is currently a costly activity to spread across the country, travelling long distances with staff. Hopefully new and innovative technologies can offer solutions in providing credit to SME’s in Indonesia. Through for example mobile banking and crowdfunding, loans can be provided without physically meetings and in this way scoring creditworthiness can be done across large distances. Still, when I ask the cooperatives, the personal contact is crucial for entrepreneurs, so complete digitalisation will not happen any time soon.