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Why the Bank Rakyat Indonesia has the World’s Largest Sustainable Microbanking System

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This paper, which was first presented at BRI’s International Seminar in December 2004, outlines the Bank Rakyat Indonesia’s journey from failed credit provider to successful microbanking institution, a passage of over three decades. It provides an overview that will be of interest to other finance institutions, and especially those which have their roots in government initiatives.

BRI began in 1970 as part of an Indonesian government plan to intensify rice cultivation. Composed of 3,600 units which acted as branches under a supervising branch, they provided subsidized credit to rice farmers and other agricultural enterprises. While the rice intensification program succeeded, the credit component failed: this was due to bad planning and poor thinking, mingling government-mandated loan terms and ceilings with inefficiency, a high loan default rate, a badly trained and uninterested staff, and a system prone to abuse and corruption. Calls to shut BRI down were not heeded by the government, which instead transformed BRI into a commercial microbanker. Various preconditions aided this transformation. First, Indonesia had enjoyed two decades of economic and political stability, second, oil wealth had been spread around in rural areas in the 1970s, leading to increasing demands for banking for the rural population, and third, the economics team of the Ministry of Finance began to acknowledge the importance of microfinance. Perhaps a more important precondition, however, was the government’s correct forecast of a decline in oil prices in the early 1980s, which set the stage for a greater private-sector role in savings and investment. In 1983, these factors came together to produce a new strategy for BRI which would transform it into a large-scale microbanking institution: recognising that its 3,600 units could form the nucleus of a banking system if properly managed and with skilled and committed management, with a commercial loan portfolio funded by public savings whose profits would built BRI’s longterm viability as a microbanker. By 1986 commercial microbanking (loans and savings services) were being offered at all units throughout Indonesia, with increased outreach and growing profits. The government spurred this change in part with a wide-ranging financial deregulation in 1983, which permitted state banks to set their own interest rates, and in part by guaranteeing unit funding for only two years, after which, if the unit had not become profitable, it would be closed. Units were given a fresh start, with some new cash equity and unburdened with liabilities, which were transferred to the supervising branches. A new corporate culture was introduced, emphasising cooperation among staff members, good staff training, and performance-based incentives. Strong leadership from the chief administrative figures was a key element in the successful transition.

The over twenty-year-long life of BRI as a microbanking institution receives the bulk of the author’s remaining attention. She stresses that the institution continued to grow, even during the difficult years following the start of the east Asian financial crisis in 1997. As many of BRI’s clients did no business abroad, they were only indirectly affected by the massive devaluation of the Indonesian rupiah. Moreover, the almost fifteen years of BRI’s successful functioning as a microbanker gave it such client confidence that new clients actually deserted their failing banks during the crisis, to transfer their money to BRI. Another reason for this institution’s success is its emphasis on savings rather than on loans, which ensures it has a strong basis upon which to mobilise funds. From here the author then speculates about the emerging global microfinance industry, and compares BRI favourably with Bangladesh’s famous Grameen Bank. This history of the BRI provides salutary lessons for successfully reforming a financial institution:

  • give strong leadership;
  • cultivate an awareness of the importance of microfinance;
  • train staff and encourage them to get involved in the spirit of the enterprise;
  • when appropriate, stress savings so as to provide stability for loans; and
  • strive to migrate from government financial support to viable economic independence as soon as possible.

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