Abstracts of doctoral theses on the Indonesian economy

Abstract

This study analyses the impact of the 1990s banking deregulation on the per- formance of rural financial institutions (RFIs), and identifies key factors affect- ing their performance. The term ‘rural finance’ is used instead of ‘micro-finance’ to emphasise the sometimes neglected need to adapt to local conditions. The objects of study are: (1) kelompok swadaya masyarakat (KSM): self-help groups including rotating savings and credit associations; (2) Badan Kredit Desa (BKD): RFIs originating in Dutch colonial times, known formerly as lumbung desa (‘paddy banks’) and bank desa (village banks); and (3) Badan Kredit Kecamatan (BKK): subdistrict-level RFIs founded by the Central Java provincial government in the early 1960s. While the 1967 Banking Act acknowledged RFIs and allowed them to operate within the banking system, the 1992 Act perceived them as ‘weak’ and ‘small’, and required them to upgrade to Bank Perkreditan Rakyat (BPR) status. This change reflected a bias towards commercial banking practices and overlooked the role of RFIs as local economic institutions. In becoming BPRs, they had to comply with the CAMEL (capital adequacy, asset quality, management, earnings and liquidity) criteria used to assess commercial banks’ performance, and to adhere to standardised reporting requirements, obligations to operate daily, and other regulations applied to commercial banks. These requirements undermined the performance of RFIs, requiring drastic changes to accounting systems, organisation, cost structure and work culture, and threatening their sustainabil- ity. The 5,345 BKDs were temporarily exempted from these requirements, which, it was estimated, would bankrupt 90% of them. The policy discouraged the broadening and deepening of outreach for all 510 BKKs, which suffered a decline in existing and new borrowers, as well as a shift in market segment towards higher income groups. It also consigned the 2,272 unlicensed RFIs to ‘illegal’ status and a bleak future. As an alternative to the complicated BPR performance criteria, this thesis pro- poses a set of ‘simple-diagnostic-curative (S-D-C) criteria’ for RFIs. It argues that an RFI’s performance is determined by the extent of its social relationship with its customers (hubungan sosial), which influences its ‘effective outreach’ and therefore its self-sufficiency. Hubungan sosial is measured by scoring the personal relationships of a sample of customers to key personnel of RFIs—commonly four officials; a personal acquaintance with all of them for at least two years is scored as 1.00 (100%). ‘Effective outreach’ is represented by: (1) savers as a percentage of total households in the institution’s operating area; (2) borrowers as a percent- age of total households; and (3) defaulters as a percentage of total borrowers. ‘Self-sufficiency’ consists of: (4) efficiency: operational costs per rupiah lent; (5) funding self-sufficiency: the ratio of deposits to loans; (6) operational self-suffi- ciency: margin (the excess of interest income over operational costs) per rupiah lent; and (7) profitability: net profit-before-taxes per rupiah lent. Using a simple rank-tabular comparison of the performance factors of the observed RFIs and Spearman rank correlation analysis, the hypothesis that the S-D-C criteria will correctly identify viable RFIs is successfully tested. The study suggests that this set of criteria should replace the CAMEL criteria for RFIs, especially those founded before the 1988 deregulation package (the ‘old’ BPRs).