Booming growth but rates 'a worry'
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Fried tofu seller Tri Rahmawati never thought she would or ever could "borrow money from a bank" until a branch of Bank Rakyat Indonesia opened near her area of work.
The mother of two took a 5 million rupiah (US$514) loan in April to fund her purchases of soya bean to make raw tofu, which she fries and sells to customers.
The loan boosted her operational efficiency, allowing her to buy raw material in bulk.
“Before the loan, I had to go back to my supplier every two days to buy the stock. Now, I can cut transport costs and get better pricing because I buy in bulk,” said Ms Tri, who repays the loan through monthly instalments.
Tri, 32, is among the millions of low-income earners in Indonesia who have benefited from a thriving micro-finance industry, providing them greater access to cash and opportunity to pull themselves out of poverty.
But the sector’s growth has raised concerns about excessive interest rates in some quarters.
Micro loans extended by state banks, which control more than three-fourths of the total market, almost tripled to a cumulative 32.4 trillion rupiah this year for some seven million borrowers – from 11.5 trillion rupiah four years ago. A micro loan is typically less than 20 million rupiah in value, and could be as low as 200,000 rupiah.
Bank Rakyat Indonesia, which pioneered micro-lending in Indonesia and is the country’s biggest micro-finance institution, had 17.8 trillion rupiah of micro-loan assets at the end of August.
This has attracted interest from private lenders in recent years. Bank Danamon, which Singapore’s DBS Bank is planning to acquire, Bank BTPN and Bank CIMB Niaga are among private lenders that have led the expansion into micro loans, boosting opportunities for households, of which only 20 per cent have access to conventional bank loans.
Despite positive stories like that of Tri, the micro-finance industry has often come under attack for being too commercial, charging what some say are high interest rates.
While major banks charge 13 per cent annual interest rates for micro loans, small banks charge 25 per cent as they do not have the economies of scale, said Zainal Abidin, director in charge of small loans and rural banking at Bank Indonesia, the central bank.
However, Indonesian bankers say the higher interest rates are justified as micro-lending often involves costly logistics, with lenders having to reach clients in remote places.
“Micro-finance is not charity. There could be an added social mission in it, but both parties, the lender and the borrower, must gain so it would sustain,” said Sigit Pramono, chairman of the National Banks Association.
“Let the free market – more players, more competition – work its way to lower interest rates over time.”
Forcing micro-loan institutions to cut interest rates would deter newcomers and inhibit competition, he added.
Halim Alamsyah, deputy governor at the central bank, takes a similar view. “The gauge should not be whether the households get low interest rates, but whether their quality of life improves – or their income improves – after they get the loan.”
