Boosting Micro Enterprises
    Category: Column By : Eddy Leks Read : 1032 Date : Monday, July 08, 2013 - 00:51:20

    It is common knowledge that the banking system was designed for bankable people or business entities. But in fact, not all people or entities can obtain loans. This surely hinders the economic development of a country, particularly Indonesia, which is essentially supported by micro, small, and medium enterprises (SMEs). In principle, SMEs have to be empowered and given incentives to grow and become large enterprises that can significantly contribute to the state's economy.

    Grameen Bank gave loans to non-bankable people and named itself the bank for the poor. Interestingly, the unsecured loans to the poor were duly repaid. Grameen Bank, as of October 2011, has 8,349 borrowers, 97% of whom are women. At present, Grameen Bank has 2,565 branches, providing services to 81,379 villages or 97% of all villages in Bangladesh. This fact opens up a new perspective to the microfinancing world: a borrower who is not bankable does not automatically mean a defaulter.

    The Indonesian law on microfinancing institutions was promulgated on January 8 this year but will only become effective on January 8, 2015. In its elucidation, it is stated that a financing institution that provides fund or capital for micro and small enterprises is very important and that the poor or low income communities need better access to loans or microfinancing. The goals are noble to empower the economy, to raise the productivity of the poor, and to increase the income and welfare of the poor and this law should have existed a long time ago. However, it is better late than never.

    The law on microfinancing is intended to establish microfinancing institutions (LKM), which essentially is a special institution that enhances businesses and community development through nonprofit loans or financing to microbusinesses. LKM has to be a legal entity, whether it's a cooperative or a limited liability company. If it is a limited liability company, at least 60% of its shares have to be owned by the regency or local government or village/subdistrict-owned enterprises with the rest owned by an Indonesian and/or a cooperative.

    An Indonesian may only hold a maximum 20% shares in a limited liability LKM, which cannot be owned, directly or indirectly, by a foreigner and/or business entity that is partly or wholly owned by a foreigner or foreign entities. LKM must have a business license issued by the Financial Services Authority (OJK) and covers villages, subdistricts and municipalities.

    As the law on microfinancing institution says LKM has to be majority owned by a regency/local government or village/subdistrict-owned enterprises, the management of a LKM is held by regency/local government. As a regency/local government has to deal with many issues and many of them are not efficient and effective, the LKM risks having suboptimal performance. As a consequence, the noble goals of this law may not be achieved.