FEBRUARY 2007 STTA JANET BURESH

THIS PUBLICATION WAS PRODUCED FOR REVIEW BY THE UNITED STATES AGENCY FOR
INTERNATIONAL DEVELOPMENT. IT WAS PREPARED BY DAI


RESEARCH AND ANALYSIS OF
FINANCIAL SERVICES SUPPLY
AND DEMAND




RESEARCH AND ANALYSIS
OF FINANCIAL SERVICES
SUPPLY AND DEMAND






























DISCLAIMER
THE AUTHORS VIEWS EXPRESSED IN THIS PUBLICATION DO NOT NECESSARILY
REFLECT THE VIEWS OF THE UNITED STATES AGENCY FOR INTERNATIONAL
DEVELOPMENT OR THE UNITED STATES GOVERNMENT.
4
ACKNOWLEDGMENTS

This publication was made possible through support provided by the United States Agency for
International Development (USAID). The authors wish to express their sincere gratitude to the
representatives of industry associations, small-to-medium enterprises, government agencies and
other donor organizations which have been so supportive in providing us their insight about the
selected industry value chains (IVCs).


Lead Consultant:
Jan Buresh (SENADA Consultant)

Consultants:
Maryam Idawati (SENADA Consultant)
Andi Ikhwan (SENADA Consultant)
Harris Berger (FSVC Volunteer)


5
TABLE OF CONTENTS

EXECUTIVE SUMMARY........................................................................................................... 6
I. INTRODUCTION.................................................................................................................. 8
A. Project Objectives .............................................................................................................. 8
B. Definitions of Small and Medium Enterprises................................................................... 8
C. Definitions of the footwear and auto parts industries................................................... 8
D. Project Activities................................................................................................................ 9
E. Focus on Two Industries .................................................................................................. 10
F. Project Team and Acknowledgements............................................................................. 10
II. FINDINGS ........................................................................................................................... 10
A. Value Chains................................................................................................................. 10
i. Footwear Industry Value Chains .................................................................................. 10
ii. Auto Parts Industry Value Chains ................................................................................ 12
B. Analysis of Constraints in the Current Environment Governing the Financial
Sector ....................................................................................................................................... 16
i. Legislation .................................................................................................................... 19
ii. Regulations ................................................................................................................... 20
iii. Norms ........................................................................................................................... 22
C. Analysis of SME Market Demand for Credit.............................................................. 25
i. Industry Data ................................................................................................................ 26
ii. Relevance of credit systems of upstream and downstream industries .......................... 27
iii. Analysis of sample SMEs financial statements.......................................................... 28
iv. Analysis of current requirements for credit .................................................................. 28
D. Analysis of the Supply of Credit to SMEs in the Two Industries............................. 31
1. The providers of financial services............................................................................... 31
i. Analysis of credit products ........................................................................................... 32
2. Credit portfolio data from lenders................................................................................. 34
3. Technologies used to assess and control credit risk...................................................... 34
4. Evaluation of effectiveness of technologies ................................................................. 35
iii. Lender and Borower Contraints Conclusions are from research studies and January
February 2007 meetings ....................................................................................................... 37
iv. Future plans for implementing current products and services ...................................... 41
v. Current Plans for new products and services................................................................ 42
vi. Willingness and nature of plans to expand services to SME........................................ 42
E. Recommendations: Some Specific to Auto Parts & Footwear Industries....................... 44
BIBLIOGRAPHY......................................................................................................................... 50
APPENDIX 1: LIST OF INSTITUTIONS AND PERSONS INTERVIEWED.................... 52
APPENDIX 2: EQUIPMENT LEASING COMMENTARY.................................................. 58
6



EXECUTIVE SUMMARY

SENADA is correct that activities to improve the supply side of SME access to credit can have
significant potential impact. There is progress on the supply side; attractive projects to pursue;
and good uses for SENADAs demand side expertise.

Norms in the financial system are the primary problem limiting SME access to finance.
Establishing confidence in new norms is the primary solution. Additionally, improvements in 1)
tax, legal and regulatory structures can speed development of true leases and venture capital, 2)
sources of term financing to fund longer term credit products, and 3) acceptance of various types
of collateral. Bank regulators do not require real estate collateral but they reinforce this norm.
The outlook for changing some of the norms is positive. Changes may be coming faster than
many financial professionals realize.

On the demand side, we observed SENADAs efforts to improve SME profitability strategies,
reduce financing needs and reduce financing costs. Client managers introduced us to SMEs and
discussed others with us one-by-one. SENADA has learned the value chains of the industries and
identified success factors for producers in each industry. The focus of our recommendations is
not the demand side because SENADA has new and on-going initiatives to address it. Our
recommended activities use SENADA expertise to support supply side actions.

Banks and other lenders are locked into traditional products and processes. No discussion of
lending in Indonesia can occur without perspective on the enormous losses suffered in the
financial crises beginning in 1997 and the impact of volatility in fuel markets last year. Lenders
are working hard to avoid risks for the purpose of surviving the next big challenge. The result is
very high costs of underwriting and restricted lending. Some SMEs who could repay debt do not
have access to credit from institutional lenders.

Changes are coming. Lenders are accumulating loan risk data that can be used to quantify and
predict risks. When combined with borrower information systems and credit bureau scores, loan
origination costs can be reduced by identifying the most relevant risk criteria. When duplication
is identified some processes can be discontinued. These changes can allow banks to lend with
confidence and with lower costs. They will also allow lenders to price loans based on risks and to
optimize loan portfolio profits. The result will be competition between lenders for SME business
and increased access to credit for SMEs.

A top tier of SMEs have access to credit on attractive terms. These are SMEs with generous
amounts of fixed asset collateral and strong relationships with buyers and suppliers. In auto parts
the top tier is correlated with high quality production as well as relationships with original and
certified equipment buyers. In footwear credit access is more limited even with collateral.
Manufacturers of niche products with unique distribution channels can be successful but many
struggle to be profitable. One of our recommendations seeks to assist SMEs to identify banks
who will lend to them.

Although the many well-served clients and financial entities with correspondent/shared lending
structures may retain their current practices indefinitely, other lenders are bringing profitability
goals, risk control tools, and marketing expertise. Changes in the financial sector may be rapid
over the next 5 years for the following reasons:
International banks and financial institutions have ownership interests in major banks
and are importing their risk management, automated credit scoring, and profitability
technologies and strategies.
7
Using Basel as the reason, lenders will modernize risk assessment. The impact will be
apparent first for consumer credits and then for smaller loans in SME portfolios.
Three existing borrower data bases and plans for a commercial credit bureau are building
lender confidence in borrower identification, borrower debt history, and collateral. This
data facilitates modern loan decision approvals.

Our recommendations seek to improve current practices in ways that further the transition we
envision. We seek to demonstrate how lenders can broaden access to credit by SMEs soon and
to encourage lenders to adopt approaches useful for future success.
Provide information to SMEs on how to match their profiles with lender SME profiles.
Design a loan or lease product to finance machinery for SMEs by standardizing and
quantifying risks and building confidence in this new product. Propose funding sources
and perhaps use a small risk guarantee.
Arrange a financing scheme for second and third tier SMEs with strong fundamentals
but inadequate fixed collateral using some current assets and possibly credit
guarantees/insurance. Create a buyer/supplier/commercial insurance/guarantor
partnership.
Inform lenders how to assess and identify strong SMEs further down the value chains
within the two focus industries using SENADAs industry value chain expertise. Provide
an example for assessing industry risk.
Reduce bank costs by streamlining processes and raising the visibility of loan
underwriting costs
Provide international practices on product design and pricing to encourage lenders to
create products for SME needs.

SENADA can use its expertise and resources to improve SME access to credit now and in ways
that support larger market improvements in the future.
8

I. INTRODUCTION

A. Project Objectives
SENADA identified the lack financial resources as among the highest priority
constraints within the footwear and auto parts industries. The three main
objectives were (a) determine the nature of financial services, in particular credit,
available to and utilized by core industry SME producers in these two industries.
Assuming constraints exist, (b) determine whether or not the conditions exist
near to medium change. We have recommended activities SENADA can
undertake to improve access to finance by the two industries.

B. Definitions of Small and Medium Enterprises
We use Bank of Indonesias definition based on loan size. We focus on loan
sizes from 200 million to 5 billion Rp. Alternative definitions are based on SME
assets (excluding land and buildings), annual turnover or sales and the number of
employees. We are most focused on Medium SMEs because of auto-part and
footwear industry characteristics.

Enterprise Loan Size in Indonesian Rupiah
In Millions
Loan Size US Dollar
(approx.)
Small 50,000,000-500,000,000 5,000 to 50,000
Medium 500,000,000-5,000,000,000 50,000-500,000

C. Definitions of the footwear and auto parts industries
i. Footwear
Footwear is one of the most traditional industries of Indonesia.
Particularly throughout the 1980s and 1990s it provided a significant
number of jobs. After the economic crisis in 1997-1998, the footwear
industry was facing a descent due to the pullout of some foreign
investors from Indonesia and an unfavorable investment climate.
The major products of footwear are: sports shoes, casual footwear, shoes
for industrial use and sandals. Footwear industries in Indonesia are
located across Java & North Sumatra and centralized in Surabaya &
Bandung. Supporting industries of footwear are: textile, plastic, leather
and rubber.
ii. Auto Parts
The growth of auto parts industry in Indonesia is a consequence of the
growing market of automotive or in particular: motorcycles. The rise in
fuel prices is a blessing in disguise for this industry, in the view of the
fact that car users and even public transportation users shift to
motorcycle to economize their transportation spending. Products of the
Indonesian auto parts are as follows:
Engine electrical systems (the battery, battery cable, wiring harness,
spark plug, starter, alternator, horn, halogen lamp)
Engine systems (the air filter, oil filter, fuel, valve, gasket, piston,
flywheel, pulley, exhaust system)
Brake system, brake shoe, brake pad, brake lining, disc brake, brake
drum, disc rotor)
Cooling system (air conditioning system, freon, radiator, water tank)
Body and frame (chassis, door frame, door lock, window regulator)
Plastic products (injection molding parts, plastic container box,
mirror, steering wheel)
9
Cast and smelt parts (aluminum cast parts, ferro or iron cast parts,
machining)
Power train (the clutch system, transmission, propeller shaft, main
shaft, differential [axle], bearing, motorcycle chain)
Suspension (the shock absorber, front fork, stay damper)
Forge parts (the mechanical jack, tool set, steering knuckle, under
bracket)
Other products (rubber products, colorant and compounds, cutting
products, tradings)
Supporting industries of auto parts are: steel factories, metal surface
finishing, such as electro and powder plating and nickel chrome work,
production of polypropylene, welding and production of plastics and
rubber.
The nature of auto parts industry is contract-manufacturing among
automotive parts companies. Each factory specializes in products and
steps of assembly process.

D. Project Activities
In thirty external and frequent meetings at SENADA we documented supply and
demand constraints for SME access to credit. Constraints are shown in two
formats: 1) legislative, regulatory, and norms and 2) from credit supply and
demand perspectives. The analysis of the constraints led to and justifies the
recommendations.

SME Market Demand For Credit.
We interviewed SMEs, SME associations, and SENADA client managers to
profile SMEs one-by-one. We learned where the SME fit in its industry value
chain, the length of their production cycle, how they finance that cycle, where
they obtain financing and on what terms. We used this information to calculate
effective annual percentage rates for credit. We found relatively generous
production profit margins at many SMEs but also found some margins
approaching zero after financing costs. With assistance from SENADAs client
managers we learned the value chains and credit systems of the upstream and
downstream suppliers in each industry. We met with SMEs to collect their financial
profiles and to learn the impact of credit on their cash flows and profitability. We
calculated transactions costs of credit from financial institutions such as forms and
licensing requirements, collateral and other guarantees, time required from
application to disbursement, and effective interest rates. We compared these costs to
those available through industry suppliers, pawn shops and money shops which
provide prompt but often expensive financing.

Supply of Credit to SMEs. We met with principal suppliers of financial services to
gain a thorough understanding of credit products provided to core producer SMEs
including:
o Description of credit products currently available.
o Credit portfolio data and lender profiles
o Technologies used to assess /control credit risk and their effectiveness.
We acquired information and on the institutions future plans for current and
potential new products and services and the willingness of these institutions to
expand services to the SME sector.

Recommended activities for SENADA to expand financial services to SMEs.
Based on our findings we offer recommendations for SENADA activities. They
address both supply and demand constraints, with priority given to supply side
activities because of their greater potential impact. Norms on the supply side are
10
primary constraints. Recommendations were prioritized and developed based on
SENADAs available resources, expertise and current activities.

E. Focus on Two Industries
Our analysis and recommendations focus on two industries because SENADA
has supply chain knowledge and direct SME relationships and experience. Our
analysis highlights the different competitive environments and success profiles
for SMEs in these industries.

F. Project Team and Acknowledgements
The project team is Steve Smith, Development Alternatives Inc (DAI); Caesar
Layton, DAI; Jan Buresh, DAI; Maryam Idawati, Independent Consultant; Andi
Ikhwan, Independent Consultant; Harris S. Berger, Financial Services Volunteer
Corp.; Sutrisna, DAI; received materials and assistance from Greg Allard and
Dian Adhitama of FSVC. Several SENADA staff and project people assisted us.

II. FINDINGS

A. Value Chains
Explanations of market segments, their financing source, and their costs of
financing:
i. Footwear Industry Value Chains

Footwear industry in Indonesia can be divided into 2 categories based on
the scale of the industry segment. The most interesting thing is Small
Enterprises are generally the suppliers to the Wholesalers, while
Medium Enterprises are the producers/manufacturer and marketers or
sellers as well. Further, the majority of Large Enterprises (which is
irrelevant here) are the sewer of the principal and multinational brand-
holders of sport shoes.






Small Ent.
Supplier/Seller
Wholesaler
Buyer/Client
Raw Material
Supplier
shoes
PDC
Raw
material
funds
Small Enterprise Medium Enterprise
PDC
PDC
Medium Ent.
Supplier/Seller
End-User
Buyer/Client
Source of Funds
(Bank/Non Bank)
shoes
funds
Funds
repayment
Funds
loan
- Dept. Store
- Sales Outlet
Sales contract
Mechanism of SMEs Transaction in Footwear Industries
11
Small Footwear Enterprise:

Small Enterprises usually have sales contracts or Purchase Orders
with a wholesaler (Brand Holder, eg.Yongki Komaladi, Donatello,
etc) to supply footwear at a certain time, volume and price. As
payment instrument, the Wholesaler gives them a Post Dated
Cheque (PDC or Giro) with a certain maturity date (usually 30-60
days) after the purchase order. Sometimes purchase orders are given
to a co-op or group of small enterprises.
To buy raw material, the Small Enterprise goes go to a raw material
supplier appointed by wholesaler and pays with a PDC. The value is
discounted 5-6% in advance for 60 day PDCs or 2.5-3% per month.
In other words, the PDCs value is only 94-97.5% of the full
amount.
Raw material suppliers (eg. a leather supplier) will deposit the PDC
at their Bank to be cleared at the actual maturity date. At the
maturity date, the funds will be credited to their Bank Account (thus,
funds will flow from wholesalers account to the raw material
sellers account)
Small Enterprises have responsibility for only producing and
delivering shoes to the wholesaler. The wholesaler does all
marketing and sales. It may sell through a department store or other
sales outlet under its brand.
We spoke with a small, niche, buyer who uses individuals as
contract manufacturers and generally pays them in full upon
delivery or within 30 days after delivery. Occasionally, the
manufacturer is paid 50% upon order placement and the balance
upon delivery. Her contract manufacturers do not stock completed
shoes and are usually able to await payment on these terms. Since
this buyer is frequently paid 100% up front she has no working
capital needs and can finance others.

Medium Footwear Enterprises:

There are slight differences in the transaction mechanisms of a
medium enterprise compared with the smaller ones. Usually the
medium enterprise has better bargaining power than a small
enterprise. They will have a marketing strategy and target a segment
of the market.
A Medium sized footwear producer with strong capital usually has
sales outlets and sales forces as well. The buyer can be either the
end-user or an institution with sales contracts and/or purchase
orders. This companys source of funds can be its equity or from
accounts payable to a raw material supplier.
Because of the high demand for raw materials (high quality leather),
the Medium enterprises have to pay cash to buy leather supplies.
Hence, they will try to find another source of financing, either a
bank or a non bank.
According to our research of SENADA clients in Bandung, Jakarta
and Surabaya, there is a gap between payment from buyer (accounts
receivable payment terms are 2 months) and payment to the raw
material supplier (cash or account payable terms of 1 month).
Sources of funds to finance working capital needs come from either
banks or non banks. Only a few SMEs have access to loans for long
12
term investment needs so they usually reinvest their profits to
expand their workshops or to purchase equipment and machinery.

ii. Auto Parts Industry Value Chains

There are some differences between the Footwear and Auto Parts
Industries, particularly in Medium Size Industries.

The automotive parts industry is one of the largest and most significant
in Indonesia, since it supports other national transportation industries.
Huge investments have been made in manufacturing plants by
international automobile manufacturers like Honda, Yamaha, Suzuki,
and Peugeot.

Generally auto parts industries supply their products to:
1) Automotive Plants / OEM (Original Equipment Manufacturer)
2) After sales markets (spare parts): either auto parts wholesalers and
retailers or to
3) Export markets in the Middle East, Africa, and ASEAN countries.

Additionally, based on their types of parts, SMEs of auto parts can be
divided into:

A. Manufacturers of genuine parts supplying OEM for new cars
B. Manufacturers of certified parts supplying the after sales markets of
auto parts wholesaler-retailers and automotive service stations
C. Manufacturers of uncertified (branded and non-branded) parts
supplying the sales market. The certification process can involve the
national certification agency but may be lead by the larger
companies.

Astra International, as a leading automotive company in Indonesia, is a good
example of funding the top tier of the supply chain in auto parts, because through
YDBA (Yayasan Dharma Bhakti Astra, their Astra Foundation) they have
established a scheme of financing for SMEs, a source of funds from bank & non
banks institutions, with the larger Astra parent as the principal. According to
2003 data from the Astra Foundation and the Central Bureau of Statistic (BPS),
there are 45 companies or 12% of automotive parts manufacturers using the
Astra financing mechanism.


The supply chain of Auto parts for SMEs (particularly type A and B) is
described as follows:

Note: for Type C, sources of funds mostly are family, money lenders, pawnshop, etc
SMEs
Supplier/Seller
Big Company
Buyer/Client
Source of Funds
Banks
NBFIs
O h
goods
(Funds)
funds funds
Sales contract
13

Typically, in arrangements between suppliers (auto parts manufacturers)
and buyers there is a sales contract describing the terms and conditions
including product specifications, delivery, and payment terms. There are
three possibilities:
a. If suppliers have the ability to purchase raw materials and finance
the production costs, then after product delivery, buyers will pay
suppliers in a pre-determined time frame based on the sales contract.
But if the SME producer lacks money it will need a source of funds to
finance its next raw material purchases and production cycle.

b. If that source of funds is from the supplier (auto parts manufacturer),
then the flow of funds is only between them.
c. If the source of funds is a mediator (bank or non bank with
cooperation agreements) between the supplier and the buyerlike
under Astras schemethe flow of funds will be:
1. Suppliers get funds from banks/non banks prior to the actual
payment date by using accounts receivables or purchase orders
or sales contracts as the borrowing document. The lender often
lends at a discount to the stated value of the borrowing
document.
2. At the maturity date of the payment, the buyer will pay the
suppliers bank account. The bank deducts principal and
interest charges and then credits the remaining funds to the
suppliers account.
Contract or Purchase Order (PO) between a Buyer (Big Company) &
Suppliers:
Suppliers are required to deliver auto parts to buyers at certain times,
volumes and prices
A Buyer promises to pay at a certain time after delivery.
In the Astra Business Model, the Buyer will pay the PO 30-40 days after
delivery. Because of this term of payment, many suppliers need working
capital. Those receiving Astra financing pay a 15% interest rate
compounded daily or about 22% per annun. (Astra actually lends money
provided by 11 government entities which are required to use 2.5% of
their profits to help SMEs. The largest are Bank Niaga, Bank Permata
Shariah and Bank Bumiputera. Total Rp loaned in 2006 were Rp 21Tr
up from 18Tr in 2002. 2003 & 2005 amounts were lower.)
The amount financed is 70-80% of the SMEs account receivable
Uses include the purchase of raw material for production and
inventory stock and the next manufacturing production run including
wages
The Supplier also uses the funds to hold its output prior to delivery
to the buyer

In the auto parts Industry (particularly under Astras Scheme), financing
terms for the various Tiers 1-3 determine the relation between Principal
(lets say: Astra Daihatsu) and the suppliers.
Tier/Layer 1 is the main supplier (brand holder or SOWA)
Tier/Layer 2 is the main suppliers sub contractor (DWA)
Tier/Layer 3 is Tier 2s sub contractor (Meta Presindo.)
Tier 1 is a large company (corporate), while tier 2-3 is usually an SME.
14


The roles of Tier 2 and 3 SMEs can change. For example, if SOWA has
a PO which a DWA can not fill (eg. if DWA is at full capacity), Meta
Presindo can have the role of a Tier-2 company for a time.

Terms of payment in SME auto parts industry transactions (particularly
for Tier 2 and 3) follows:


Footwear Descriptions Auto Parts
SMEs Small Enterprises Medium Enterprises
Terms (of payment)
Raw materials 1-30 days 1-7 days +/- 14 days
Production 30-60 days Min.7days (depends on
production capacity)
Min.7days (depending on
production capacity)
Logistics &
Transportation
1-7 days - Inventory turn-over on
average: 1-6 months
Delivery & Payment 30-45 days 30-60 days Cash (end user)
Institution: 3-6
months
Dept. Store: 2-3
months
(consignment)
Sources of Financing
Equity & Debt *)
Note:
Assets and therefore Equity
exclude Land and Buildings
Debt to Equity ratios
vary
- Astra/YDBA said
20:80
- some up to 70%/30%
Debt includes short
term debt like accounts
payable, taxes payable
No debt, but Small
Enterprises are
financing the
Wholesaler
PDC from wholesaler
as payment
instrument
Debt from Short
Term & Long Term
Loans
Institutional debt is
due in less than 3
years and usually
much shorter
Conditions of debt
instruments
Long Term- investment
Short Term (Account
Receivable Financing)
Discount rate 3-5%
from PDC value


Collateral Land & Buildings
Purchase Order
PDC with term 1-2
months

Weaknesses SMEs have single
buyer risk
SMEs sales depend on
Astras performance
No bargaining power
No marketing
strategy (rely only on
whole-seller orders)
Need to look for their
own markets and
leather suppliers
Unsold product a risk
Strengths No need to search for
market and neither raw
material supplier
No need to search for
markets
No risk issue from
unsold stock
Create their own markets
Financial Constraints SMEs need a financing
scheme with Big Companies
if they want financial access
to bank financing
Lack of financial
statement reports
Lack of business
licenses, tax ID
numbers, etc
Footwear industries
are often on banks
negative lists
Collateral is
neededusually land
Astra Daihatsu SOWA DWA Meta Presindo
Tier 1 Tier 2 Tier 3
15


Typically, after an SME receives a Purchase Order from a higher
Tier company, it will buy raw materials to produce that order, but to
economize it may buy additional materials and keep the material in
inventory for 30 days or more
For example, an SME functioning as a Tier 2 company receiving a
purchase order from a Tier 1 company will produce the order at the
time required by the purchase order agreement. Usually a repeat
order takes less than 30 days of production time, depending on
product type and specifications. For a new model production time
may be 30-60 days or longer.
After the production phase products are usually delivered directly to
the buyer but other logistical arrangements may be required.
After delivery, the SME receives payment in approximately 30-45
days.














Raw
Materials
Production
Outbound
Logistic
OEM
(New Vehicle)
After
Sales
Market
TIER 2-3
1-30 days
Actual payment
Inventory turn over
Accounts
Receivable/turn-
over
Delivery
30-60 days
1 day (same day) 30-45 days
Working Capital
needs
Working Capital
needs
PO
16
A summary table from our interviews with SMEs Associations and SENADA
Sources follows:


Footwear Descriptions Auto Parts
SMEs Small Enterprise Medium Enterprise
Financing
Opportunities
Inventory Turn-Over
(Raw material & WIP)
Receivables Turn-Over
Overhead cost
financing
Investment (workshop,
warehouse, machinery
& equipment)
Receivables Turn-
Over
Overhead cost
financing
Investment in
machines &
equipment
Inventory Turn-Over
Receivables Turn-
Over
Investment in
machines
Key Issue Is there a non-Astra auto
parts supplier who could
replace Astra if necessary?
Small Enterprises
subsidize Medium/Large
Enterprises
Medium Enterprises
need to look for a
niche market
Finding a continuous
supply of raw
materials is a
challenge
Possibilities Apply the Astra financing
scheme as a business model
for other auto parts
enterprises
Bank/NBFI approach
Footwear Wholesaler to
touch SMEs (or
wholesaler as medium
enterprise client)
Comprehensive Industry
Analysis of Footwear for
Bank/NBFI

B. Analysis of Constraints in the Current Environment Governing the
Financial Sector
General observations on the environment and improvements in policies and
regulations are presented first. These are followed by a discussion of constraints
and existing conditions for three categories of potential constraints: legislation,
regulation, and norms.
The business environment is fundamentally positive and therefore not a severe
constraint to access to financing by SMEs. The broader economic environment
is stable with moderate growth and significant optimism. However there is an
aversion to risk in the financial sector.
Banks report their SME customers will have good but not great business in
2007. Some SMEs may not be requesting loans because their growth is
moderate.
Currency and interest rates are stable and declining respectively. Excesses of
growth and capital flows in other Asian economies such as China and
Thailand are absent.
Government plans to extend its debt maturities. This indicates some investor
confidence in effective management of the economy and inflation.
Nearly all money available for lending is very short term. Money for leasing
and venture capital is longer but is rarely over 3 years which constrains
longer term leases for equipment and true equity investments in venture
capital. Money is also concentrated in the banking system. This indicates a
general lack of investor confidence and general liquidity.
Banks do have liquidity but tend use it to buy government bonds

Pertamina and two state-owned plantation owners plan IPOs indicating a
positive tone in equity markets
Life insurance companies forecast 25% growth if economic growth is 6%.
17
Additional access to funding by non-bank financial institutions is vital for
additional products such as equipment leasing for SMEs. A more detailed
discussion of their activities and constraints is found in the January 2007
World Bank report referenced below. Funds exist in pension plans but 43%
of Jamsostek and 33% of private pension funds are invested in short term
bank deposits and 26% of insurance funds are invested in bank deposits.
Additionally several insurance companies are so weak that their licenses
have been rescinded.
Over-all multi-finance companies (MFIs) had average returns on equity of
23% in 2005.
Government policies, laws, and regulations are changing gradually. It is widely
thought that further implementation and enforcement is needed. There is
progress on bank regulations. More progress is needed regarding leasing and
venture capital companies. These companies are functioning as regular lenders
and not as the leasing and venture capital companies that thrive in other
economies. Specifically adding depreciation to the tax structure would
encourage investment in leasing companies. Venture capital companies are also
short of suitable funding. Government policies are important because financial
providers have historically relied on government for guidance, planning, and
controls. Because lending growth was 12.5% in 2006 and below a forecast of
18%, government is reviewing changes:
A House of Representative proposed amendment to tax, investment and
manpower legislation. It does not contain depreciation and an industry
source suggested such legislation is not likely any time soon.
Bank of Indonesia (BI) reduced the amount of capital a bank must maintain
for small business loans by 15%. The reduction recognizes lower losses on
small business loans than on larger corporate loans. This change in
regulatory capital does not impact profitability but it may cause some banks
to increase small business lending.
BI has expanded eligible collateral categories. Regulations will soon be
released for warehouse receipts and later for machinery. Regulators will
determine collateral valuation procedures. From our conversation at BI we
expect machinery valuations to be conservative.
Bank of Indonesias Banking Booklet 2006 specifically says alternative
financial products such as securitization and derivatives are permitted.
ADB reports a project is underway to strengthen regulation of pension and
insurance entities. World Bank recommends additional but light regulation
for leasing and venture capital companies.
The government in 2007 intends to make policies that increase SME access
to finance; reduce costs of finance; and increase the stability of the financial
system. This is an on-going initiative.
The current status of credit bureaus in Indonesia is relevant because access
to borrower information increases banks confidence in their ability to
predict repayment of loans. Three sources of borrower information exist
today: Bank Indonesias Debtor Information System, a fledging system
established by non-bank financial institutions, and a credit card data base.
The BI System gets information only from banks and only banks can use it.
Information provided is raw datano score is calculated.
Bank Indonesia has been providing credit reporting services via its Debtor
Information System (SID) since the late nineties, which serves the dual
purpose of banking supervision and credit reporting. This system receives
information only from banks and provides information only to banks. Data is
updated monthly. No credit scores for borrowers are calculated. A
18
comparison of the BI system and World Class Credit Reporting Systems
are
1
:


World Class Credit Reporting

New Debtor Information System

Unique borrower identification

Historical data
Automated matching process
Web & B2B access by lenders
Recording of credit enquiries
Privacy principle compliance

Consumer access for selves

Many entries require rechecking
with the providers of the data
Snap shot Dataall raw data
Pick-list sent to Users
Web & offline access
No record of credit inquiries
Data can be used for marketing
purposes
No access for Consumers


In line with those issues mentioned above, the SID still has problems, such as: (i)
validation of large input files can take 2-3 days to complete, (ii) the current
matching process used in SID does not uniquely identify a borrower, and (iii)
credit inquiry data is not displayed. By not displaying inquiries, SID reduces the
credit information available which may be particularly important for new
borrowers, (iv) Histories of debt arrears (past due) and credit charge-offs are not
stored on the SID database. (The key account performance variables used to
determine credit risk in the consumer and low-end commercial credit segments
are 'past due' status and charge off status. These two variables provide the most
fundamental measurement of a debtor's negative credit performance,) and (v)
historical data is stored on the SID database but not used for reporting purposes.
Only the latest debtor performance information is contained on the credit report.
This is a major deficiency as historical information is equally important to
understanding the true credit risk of an individual.
In response to demand from the financial sector Bank Indonesia will improve the
credit reporting infrastructure. On 29 June 2006, Bank Indonesia finally
launched its Credit Information Bureau (CIB), thereby realizing the fifth pillar in
the Indonesian Banking Architecture. The main task of the CIB will be to gather
and maintain credit data from all lending institutions in the country: commercial
banks, rural banks, finance institutions, and non-bank credit card providers. It
will cover all their operational offices head offices, branches, branches of
foreign banks, and sub-branch offices of foreign banks. For commercial banks,
rural banks, and non-bank credit card operators, membership and reporting is
compulsory, while for other non-bank financial institutions membership is
voluntary. The specific data collected by the CIB includes basic borrower data
(identity, e.g. name, address, identity card/ drivers license number, etc.), list of
owners/ managers (for business entities), loans/ credit facilities previously
received, amounts of collateral provided, guarantors, etc. There is no minimum
limit on the amount of loans reported unlike in the past.
At the moment, BI is seeking IT consultant assistance to enhance the current
performance of the SID as well as to consider separating the system into two
core distinct functions: 1) bank supervision and 2) credit reporting. BI has sought
proposals from a limited number of reputable and skilled international providers
of credit bureau (CB) solutions to provide consultancy, and to build &

1
Scoping Study Result prepared by Trans Union Advantage on 2004. The scoping study financed by Bank
Indonesia and IFC PENSA
19
implement the BI consumer and commercial CB. As of 27 November 2006, BI
had received responses to the Request for Information from Trans Union, D&B,
and Singapore Credit Bureau as potential technical partners.
Background information on small business risk score methodology is provided
here to put Indonesias efforts in a larger context: Fair Isaac offers an example of
a model for small business credit scoring in use today. Fair Isaac, headquartered
in Minneapolis, MN, US, with its closest offices to Jakarta in Singapore and
Kuala Lumpur, has developed predictive analytics for small business lending. Its
credit scores and related information are available on-line to credit grantors on a
subscription basis. Their models are largely driven by business and consumer
credit bureau reports and public records reports. The resulting scores essentially
predict repayment likelihood. Fair Isaac is also the U. S. leader in providing
consumer credit scores, known as FICO scores.
The business environment can benefit from continued improvements by regulatory,
the addition of depreciation and trust structures to the tax structure, and in
modernizing the normal practices of lenders.

Constraints: Legislation, Regulation and Norms. This information applies to banks
and multi-finance providers including leasing, factoring, consumer, and credit card
finance.
i. Legislation
The World Bank in January 2007
2
recommended a rationalization of
taxation across all Non-Bank Financial Institution (NBFI) sectors but
said passing of new laws is not the highest priority for improving non-
bank financial institutions. We agree but believe adding depreciation as
a deduction from tax liabilities and authorizing trust legal structures
would indirectly benefit SMEs by helping venture capital companies
and leasing companies get better access to funding. A trust structure
would allow separation of management from assets at venture capital
companies. For leasing it could increase financial sources by creating a
safe and tax neutral entity (does not incur VAT, sale, duty or transfer
taxes.) For venture capital it lessens governance issues.

a. Leasing:
i. Legal protections for secured lenders are frequently criticized
due to a weak legal framework and judiciary. However we are
told that for vehicle repossessions judges are remote and not
subject to influence. It just takes time and money to pursue
claims and even though lessors own the vehicle. Going to court
requires a 50% advance payment which is refunded if the
pursuer is successful.
ii. Repossessions are easier for lessors than for secured bank
lenders. They just take vehicles back after 3 months of non-
payment.
iii. On the other hand, lessors are more impacted than bank lenders
because the value of the leased asset is more likely to decrease
than the land collateral held by banks.
iv. Lessors also have no exemption from VAT on asset transfers.
Banks have it for repossession of assets.
v. Rights to machine collateral may be registered regionally. This
is slightly more costly and cumbersome than establishing rights
on titled vehicles.

2
World Bank, Unlocking Indonesias Domestic Financial Resources: The role of Non-Bank Financial
Institutions, January 11, 2007.
20
vi. There is a lack of tax incentives for leasing including no tax
deduction for depreciation of leased assets. This results in no
particular advantage of lease financing versus a loan.
vii. Leasing can only be offered to SMEs with tax identification
numbers. Consumer finance is not subject to this.
viii. Under Indonesias civil law tradition there is no recognition of
trusts as legal vehicles. The World Bank recommends legislation
for tax-neutral trust entities.
ix. Positively, leasing companies can deduct 2.5% of their doubtful
accounts for tax purposes. Other non-bank financial institutions
cannot.
x. Elsewhere leasing permits longer maturities, higher loan to
value ratios, faster access to collateral upon non-payment of the
lease, and tax incentives for the lessor who then offers attractive
rates to lessees.

b. Venture Capital:
i. Raising funds from the public and issuance of debt securities is
prohibited for venture capital firms.
ii. There is a general absence of investors in either venture capital
firms or directly to entrepreneurs. This concern is assumed to
relate to larger market confidence issues.

c. Banks:
i. Some say the bankruptcy law has limited value for creditors and
judicial processes are unpredictable in some regions. Delays in
repayment may also reduce collateral values.

ii. Regulations
The World Bank and others believe enforcement of regulations is more
of an issue than the content of regulations. Australian AID and ADB
have current projects to improve regulator supervision, enforcement, and
capacity. The World Bank found the regulatory framework broadly
reasonable and did not make passage of new regulations a priority. It did
recommend:
1. more implementation and enforcement of the existing framework
2. strengthening of regulatory and supervisory capacity
3. improvement in corporate governance and market discipline
4. improved coordination to harmonize regulations across sectors

a. Leasing:
i. Licenses are required to operate a leasing company. None have
been issued for three years following the collapse of several
leasing companies.

b. Consumer Finance: No constraints found

c. Credit Cards: No constraints found

d. Venture Capital:
i. This is a prohibited operation for banks.

e. Bank lending and operations:
i. Banks must underwrite loans based on three pillars of risk
management for loans over Rp 500 million but may use just one
21
pillar for loans under this amount. (BI Reg.7/2PBI2005), Article
35. The one pillar is repayment capacity. The three pillars are
customer prospects, repayment capacity, and financial status.
Using just one pillar benefits SMEs with less collateral. Raising
the threshold amount to Rp 5 billion is under discussion. Banks
must update appraisals frequently as provided in a BI schedule.

Bank Indonesia allows a wide variety of bank operations, and investments
in financial companies providing credit to SMEs.
3
Constraints do not
arise from the list of allowed activities but from incentives,
implementation of regulations, and norms. Norms includes a strong
preference for making short term loans. Commercial banks may: lend to
other banks, place funds in customers non-exchange securities, do
factoring, issue credit cards, invest in companies doing venture capital,
leasing, insurance, securities clearing, and management of pension funds.
Banks may also engage in securitizations, derivatives, and corporate
commercial paper. Banks are specifically requested to promote MSMEs
4

under six institutional support initiatives including linkage programs with
rural banks. BI requires banks to submit annual plans for SME lending.
These plans are public and a source of information on bank willingness to
lend to specific SME industries and regions and with specific products.
Bank Indonesia has made significant progress on regulations for credit risk
management including some relating to Basel standards:
5

BI Regulations Number 7/2/PBI/2005 on 20 January 2005 on Asset
Quality Ratings for Commercial Banks set four components for
assessment of debtor performance and six assessments for repayment
capabilities.
A plan to recognize machinery for manufacturing and warehouse
receipts as collateral was stated in BIs Regulation on Asset Quality
Rating and Provision for Asset Losses
6
of 12 January 2007. BI
announced 14 February that it will soon issue regulations effective 14
July for banks on warehouse receipts. Until BI issues detailed
regulations on collateral, banks do not know its value for calculation
of their initial loss provision. This calculation is important because
additions to the loan loss provision immediately reduce bank income.
Bank Indonesia requires banks to risk rate loans and take provisions
for losses when borrowers dont pay on time. Loans are almost
always rated current or pass initially. Related procedures:
- Banks decide loan risk ratings and adjust them over time.
- Banks record an accounting loss provision for new loans
because of expected losses.
- A risk rating changes when borrower circumstances become
more negative.
- A risk rating must change if loan payments are not made on
time. Regulators specify how many days without payment
require a risk rating change.

3
Pages 6-10, Bank of Indonesia, Indonesian Banking Booklet, Vol 3, No. 1, March 2006. BI prohits risk-
sharing equity participations under the Shariah principle, and operations in businesses doing rental, venture
capital securities, clearing institutions, and insurance activities.
4
Page 60, Bank of Indonesia, Indonesian Banking Booklet, Volume 3, No. 1, March 2006.
5
Pages 102 and 123; Bank of Indonesia, Indonesian Banking Booklet, Volume 3, No. 1, March 2006.
6
This change could make banks more willing to recognize machines as collateral and require fewer credit
insurance guarantees machinery collateral. The required Provision is 1% for current assets & ranges of 5,
15, 50, & 100% for the lower 4 rating categories. These percentages are applied after deduction of
collateral values. There is no economic value change here. This is regulatory compliance only.
22
- Indonesian banks make an initial loss provision of 1% of the
loan amount. This is an immediate expense item in the
banks income statement.
- In Indonesia the provision amount for a problem loan can be
adjusted if there is collateral. This is also true in the US.
- In Indonesia regulators recognize only some types of
collateral for adjustment of the provision. They also specify
collateral valuations.
- Later accounting entries recognize the actual loss and adjust
bank income
The chart below shows the provisions banks must take for loans which
become riskier


The enactment of the Warehouse Receipt System Law 14 July 2006
provides a regulatory framework for both the commercial transaction
and market trading purposes of the law. This, combined with the intent
to issue regulations stated 14 February may allow SMEs in
commodity businesses to borrow against by creating another
acceptable type of collateral. The structure of this regulation may
provide a basis later for other collateral arrangements.
BI lowered the amount of capital banks must maintain for Small
business loans by 15% to encourage SME lending. This reduction
recognizes the lower loss rates on SME loans during the financial
crises.
7


iii. Norms
We met with credit practitioners at banks, venture capital firms, finance
companies and their association and Bank Indonesia. The purpose of
these meetings was to learn normal loan approval practices and target
markets, progress on Basel and predicting loan risks, and plans for
meeting the needs of SMEs. We learned of complex linkage schemes,

7
This reduces the amount of regulatory capital banks must maintain and will have an impact only to the
extent some banks are short of capital or chose to make capital decisions based on regulatory capital
requirements. Because banks have relatively low loan-to-deposit ratios this change may not result in
additional loans. An earlier program to require banks to make more SME loans or face fines apparently
produced fines but no additional loans. BI Circular Letter on January 30, 2006 on Altered Calculation of
Risk-Weighted Assets for Small Business Loan, House Ownership Loan and Employee/Retirement Loan.

0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
%
Current Special Mention Sub Standard Doubtful Loss
23
thorough credit analysis, and challenges of assuring borrower integrity
and repayments. Shariah credit evaluation processes are similar.



a. Banks
i. Bank lenders are risk-averse.
8
Banks have restrictive target
market, lending processes and collateral requirements. They
normally require registered land and buildings as collateral, do
thorough analyses, rely only on trusted sources for borrower
character references, do intense and repetitive monitoring of
outstanding loans, and often require frequent loan repayments.
ii. Banks, their linkage banks, guarantors and credit insurers accept
similar risks and often have expensive and duplicative credit
processes. They seek additional information to add to their
credit processes and show no signs of eliminating processes or
recognizing processes that evaluate the same risk factor. Thus
their processes grow more cumbersome and expensive.
iii. Corporate governance is not strong at some entities and the level
of non-performing loans is a disincentive for change in lending
policies. For example, the World Bank says the 2 largest state
banks with 30% of banking assets have 2/3s of total non-
performing loans.
iv. Credit card issuance is relatively new and appears to be growing
quickly with interest rates of up to 4% per month before
compounding. Issuers have a shared information system and
contribute their customer information to the BI Debtor
Information system. Losses were reported at 9% for 2005.
Credit cards have limited use for SMEs now because their
suppliers are not credit card merchants.
v. Lenders generally mention identity fraud and limited credit
history information on many consumers and SMEs as
constraints. Bank Indonesia intends to improve its Debtor
Information system in 2007 and hopes to award a contract for a
for-profit credit bureau in 2007.

b. Non-Bank Financial Institutions
i. Banks dominate financing of non-bank financial institutions and
several have invested in them as well. Some banks are less than
eager to lend at competitive rates to non-bank financial
institutions they do not own because the banks view them as
competitors.
ii. Sources of funds for Multi-finance companies (MFCs;
consumer, credit card, leasing, factoring, and venture capital)
are equity, bonds, offshore loan and domestic loans (mainly
bank loans) are shown in figure below
9
.

8
This is appropriate since industry-wide non-performing loans are currently near 10% and the financial
crises beginning in 1997 caused the government to spend 450 trillion RI (USD 49.4 billion.) to bail-out
lenders.
9
Indonesian Financial Services Association Annual Report 2005
24


Only a few debt issuances are well-known and include an over-
seas debt issue by Citibank, a lease securitization via a
consortium with a loan from the IFC and two debt placements in
2006.
iii. Business activities of multi-finance companies in 2005 are
shown in the figure below
10
Finance company assets were Rp 67
trillion at September 2005. Note that most credit card assets are
not included in these figures because they are bank assets.
Although many leased vehicles are used by SMEs, other
leasing products and venture capital are yet to play major roles
in funding SMEs and entrepreneurs.
11





10
Indonesian Financial Services Association Annual Report 2005
11
World Bank, Unlocking Indonesias Domestic Financial Resources: The role of Non-Bank Financial
Institutions, January 11, 2007, Executive summary page 43 of 49.
0
5
10
15
20
25
30
35
Trillion IDR
2001 2002 2003 2004 2005
Year
Domestic Loans Off-shore Loans Bonds Paid up capital
25


iv. Leasing company assets are almost entirely vehicles. Companies
are said to lack appraisal skills, value indices, or liquidation
markets for other assets such as manufacturing equipment.
However one leasing association official said they can always
sell repossessed assets and they know where to find buyers.
vi. Venture capital company investments are primarily structured as
debt and are therefore not a significant new type of financing for
SMEs. One venture company has 80% debt and 20% equity
investments on a shared profit basis because its funding is due in
a few years. This partially explains why return on investment
was under 3% between 2000-2005 as well as a lack of new
venture capital companies since 2001. The venture company,
Astra Ventura, lends primarily to the upper tier of preferred
suppliers to its parent company.
vii. Venture capital owners and managers are the same. This may
limit investment in venture capital by wealthy individuals,
pension funds, insurance companies and foreign investors. A
trust structure might help but the over-all investment climate
appears weak.
viii. Money Shops, Pawn Shops, and Supplier Finance: SMEs are
paying higher interest rates to non-institutional lenders who
provide value with prompt, accessible, and sometimes, flexible
credit. These include government-owned pawn shops charging
in the range of 26% and flexible money shops, street lenders,
and suppliers.

There are constraints in legislation, regulation, and norms. SENADA might want to support
changes such as adding depreciation, a legal structure for trusts, and some governance changes in
venture capital and in leasing companies.





C. Analysis of SME Market Demand for Credit
0
10
20
30
40
50
60
70
Trillion IDR
2001 2002 2003 2004 2005
Year
Leasing Factoring Credit Card Consumer Finance
26

i. Industry Data
1. Core Producers
a. Interest in obtaining credit varies. In a 2004 Central Bureau of
Statistic Survey,
12
between from 30 to 40% of small
manufacturers and a category of vehicle/repair/trade companies
were not interested in credit. While these companies are smaller
than SENADA clients their attitudes might be relevant.
b. The 2004 DAI study, pages 42 - 43 has data on borrowing
needs.
c. Bank Indonesia study report on MSME (2005) page 34 shows
how many MSME need credit, how many applied to the
commercial banks, and how many received loan.
c. From Bank Indonesia Report on MSME (2005); more
than half of survey respondents (52.9%) in the medium
business group believed banks have been allocating
enough credit to MSMEs.
13

d. From Bank Indonesias report on MSME (2005), of
total respondents who stated their interest in credit, most
of (54.1%) admitted they once asked for credit. The rest
said they had never applied for credit because it was
difficult for them to comply with collateral requirements
and high interest rates. The other study (RICS World
Bank, 2006)
14
, indicates that 58% of firms say they need
additional funds, but most do not plan to borrow from
Formal Financial Institutions (FFI). The reasons are: (i)
afraid of not being able to repay, (ii) interest rates too
high, (iii) insufficient collateral / don't meet req.'s, (iv)
complicated procedures.
e. The majority of Medium firms surveyed from 2003 to
2004 said their production trends were rising, 56.8%;
while 19 % said production was likely to be the same
and 25% said production was likely to fall. Firms who
are not growing may not need additional financial
resources and therefore may not view lack of access to
credit a primary constraint. However, overall production
capacity was 80% when measured in 2003 and 2004 by
Bank of Indonesia suggesting future borrowing needs to
expand production capacity.
f. In auto parts, successful SMEs usually have a high
quality product and choices for where they sell their
product. In footwear, successful SMEs produced niche
products or have a unique distribution and sales plan.

2. Business Associations with Core Producer Members

12
Gathering integrated sectoral data on small and household enterprises from all economic sectors other
than agriculture, the Central Bureau Statistic has been conducting the Integrated Business Survey (Survei
Usaha Terintegrasi, SUSI) since 1998. The companies/ businesses consist of those in the categories of
Non-Directory (unincorporated) Companies and Household Businesses; and manufacturing firms with
less than 20 employees regardless of whether they are registered/directory or not.
13
Section 3.3.6 of Results of MSME profile in Indonesia, Credit Bureau, Bank of Indonesia, 2005
14
Andi Ikhwan and Don E. Johnston, The Constraints Associated with Credit and Collateral Faced by
Non-Farm Enterprises at the Kabupaten Level, Background Report for RICA Project, World Bank Office,
Jakarta
27
In the auto parts industry, the role of the Business Association is
important, at least for suppliers under the same brand. Astra
International, for example, has a business model for auto parts
producer under Astra Foundation, not only for an association
mechanism, but for a flow of financing. Astra Foundation seeks
financing from banks and non-bank financial institutions, including
State-Owned Companies who provide 1- 5% of their profit for
revolving loan to SMEs. However, for manufacturers of uncertified
spare auto parts the role of business associations is still weak. This
type of SME faces constraints to access to finance/credit.
In the footwear industry small companies consider business
associations less valuable. Unlike auto parts (in particular Astra),
footwear business associations do not offer any financing schemes
or technical assistance

ii. Relevance of credit systems of upstream and downstream industries
Footwear Industry
Leather for footwear is in short supply. This issue has financial
impact either to Small and Medium Enterprises, since they have to
prepare cash fund to provide raw material. As a result, Small
Enterprises have to sell the PDC (Post Dated Cheque) -which they
receive from buyer- to raw material seller as a payment instrument
instead of cash money, and get a discount rate of 3-5% of PDCs
real amount. This will impact their profit margin as well.
Wholesalers who are brand holders have better bargaining power in
pricing and payment terms. They pay footwear producers using
PDCs which can be cashed in 30-60 days. Wholesalers say they pay
on these terms because:
o They take the risk of unsold goods and need to maintain
merchandise stocks of 30-90 days.
o If they supply goods to a Department Store, they are paid in 60
days or more
Medium Enterprises who both produce and sell footwear need
working capital to 1) buy raw material 2) keep inventory in stock
and 3) finance accounts receivables. The slower the medium
enterprise is paid the slower it pays.
There are opportunities for banks and non-banks to finance SMEs:
o Financing of small enterprises is currently based on discounting
PDC cheques. Wholesalers list their best suppliers for banks to
help banks select the most successful suppliers. These suppliers
have good quality and delivery records. This system may be
reliable for banks but excludes some SMEs who could repay
loans. This system may also support discrimination unrelated to
business reliability.
o Financing wholesalers for their inventory turn-over needs.
o Financing the working capital of Medium Enterprises who
produce and sell footwear. This includes inventory and accounts
receivable.

In the footwear industry, we are most interested in the demand for credit
by producers who can withstand or avoid the sometimes extreme
competition. These include manufacturers who do not produce sport shoes
for the major brands and who have niche products or direct distribution
channels.

28


Auto parts Industry
There are opportunities for banks to finance inventory, raw
materials, production costs and accounts receivable for auto part
SMEs. In the original equipment market (OEM) auto parts buyers
may list their best suppliers for banks. At least one bank does
reverse factoring to get money to SMEs before the large company
pays. This bank is taking risk only to the large company.
Other than working capital needs, banks and non-banks can finance
SME purchases of machinery and equipment with medium term
loans or leasing schemes but this financing has a term of under three
years and is not easily available.

In the auto parts industry we are focused on producers who can produce
the quality required for success in this industry. Access to credit for second
and third tier OEM and for producers of uncertified after-market product
may improve if lenders learn success factors for this industry.

iii. Analysis of sample SMEs financial statements
1. Sources of SME financing and the relative importance of equity and
debt
According to our research on SMEs in the footwear and auto parts
industries, their financing comes from:
a. Banks
b. Non Bank Financial Institutions: first tier SME auto parts
entities use Astra Foundation service include Astra Mitra
Ventura (source of finance and technical assistance)
c. Payment Instruments: Small footwear enterprises use Post dated
Cheques (PDCs) as payment for raw material. The discount
rate is 3-5% upfront for relatively short loan periods
d. Other Sources: Family, money shops and individuals, and
government pawnshops. While interest prices are high the
transactions are simple with few extra fees and costs.

2. Conditions of debt instruments and effective costs
a. SME Auto parts: Tier 1 SMEs receiving financing from
AMV/Astra Foundation pay an effective interest cost of around
22%. Costs are much higher from many other sources.
b. SME Footwear: Small enterprise financing costs range from a 3-
5% discount from a cheque (PDC) amount. Medium enterprises
use bank loans and accounts payable to fund their working
capital needs. Prices are upwards from 18%.

3. Collateral used to acquire loans
a. Land and buildings including workshops and homes
b. Vehicles, machinery, and equipment (Astra Ventura, a non-
bank, says it accepts this collateral.)
c. Purchase Orders or accounts receivable

iv. Analysis of current requirements for credit
1. Forms and licensing requirements
According to BI regulations on credit documentation, banks require
licensing requirements including:
29
Business licenses : NPWP (Tax ID), SIUP, TDP, AD/ART
(Complete Articles of Association -for Company)
Applicants data : ID Card of all shareholders and managements
Collateral Ownership Documents (certificate for Land &
Buildings, BPKB title for vehicles,
Financial information: at least three months of bank account
statements and financial statements including balance sheets and
income statements. When necessary, some banks use other
financial records to estimate this information.
Non bank financial institutions have similar requirements.

2. Collateral and other guarantees
Creditors require that primary collateral be fixed assets like land
and buildings and cash.
For additional collateral, banks take movable assets, such as
vehicles, machinery, and current asset such as inventory and
accounts receivable in the form of purchase orders, PDCs, and
invoices. Banks with linkage programs for SME can take
accounts receivable including purchase orders, PDCs, and lists
of receivables as collateral. Non-bank financial institutions
accept movable assets under certain conditions. For example
leasing companies take vehicles.
If needed, banks ask for personal guarantees (PG) or corporate
guarantees (CG) from debtors, guarantors or third parties related
to the loan.
Some banks and other creditors have agreements to receive
credit guarantees from state-owned credit guarantors such as
Sarana Pengembangan Usaha (SPU) and Askrindo. However,
private banks tend not to use these credit guarantors because of
1) bureaucratic processes for claims and 2) the premium rates
(paid by debtors.)
Buildings, vehicles, machinery and inventories can have
insurance from insurance companies.
Fiducia claims are legally-binding liens on movable assets.
These can be registered at fiducia offices but some Banks do not
register them due to debtor objections to the cost.
Current banking regulations governing bank, loan loss
provisions allow collateral offsets for cash, securities and real
estate assets only. These provisions only impact banks only if
the borrower does not make scheduled loan payments.
Current/regular loans are not affected by the regulations on
provisions for losses. Nevertheless, banks say loss provision
regulations are an impediment to lending for the purchase of
machinery because they are not yet allowed to adjust loss
provisions by the value of their collateral. In the future BI plans
to allow some percentage of machinery value as collateral.

3. Time required from application to disbursements
Most banks have separated the loan sales function from their
credit analysis and approval functions. This is a governance
policy and can result in faster loan decisions than their
competitors.
30
However, Banks with short or delegated credit authority at the
branch or regional level can process loans as rapidly as the
banks with separate credit analysis functions described above.
On average, for new loans between Rp.500 million and Rp.5
billion, the time from application to disbursement ranges from 2
weeks to a month.
The time required for renewing facilities is shorter. Banks
usually start the credit approval processes 1-2 months before
loan maturity dates so there is no gap in credit availability.

4. Other costs
In addition to interest expense SMEs pay other costs for bank loans:
Commission (named: provision fee) of 0.5 1 % of the loan
amount. This is paid annually for working capital loans and
upfront for investment loans.
Administration fee : Rp.250.000 Rp.1.000.000 depending on
bank policies and the size of the loan
Appraisal fee: the minimum charge is Rp.250.000 and depends
on the location of the collateral. Some banks waive this fee but
still obtain the appraisals.
Current Account Administration fee Rp.100.000,- per month
Notary fee: The amount depends on the type of collateral and
bindings/liens, the amount of hypothec/value of pledged
collateral (L&B) and location. The notary fee for a credit
agreement is Rp.500.000 or higher depending on the loan size.
On average, SMEs pay bank fees of 1.5% of the loan amount. For
example on a loan of Rp.500 million the borrower pays
Rp.7,500,000 in fees.

5. Constraints to use of credit by SMEs
SMEs give several reasons for avoiding bank and non-bank
financial institution loans:
Bureaucratic processes
Lack of the type of collateral required by lenders
Lack of financial statements and records
There are also reasons why SMEs cant get access to credit,
particularly for SMEs in the auto part and footwear industries:
a. Some banks have the footwear industry on their prohibited lists.
This is a portfolio risk decision based on some combination of
bank experience, bank information on the prospects of the over-
all industry, and positive decisions to focus portfolios on other
target markets.
b. Some banks are unwilling to finance SMEs producing
uncertified auto parts. As above some banks avoid this industry.
Un-certified parts means there is no brand on the product. This
may also mean the standards have not been reviewed by the
government standards agency.
c. Private Banks tend to finance loans to SMEs through linkage
programs to avoid incurring relatively high costs per loan.

31
D. Analysis of the Supply of Credit to SMEs in the Two Industries
1. The providers of financial services
The principal providers of financial services to SMEs and to the two industries
are banks, non-bank financial institutions, money shops, state-owned pawn
shops, and families as shown below. Sources of capital for informal enterprises
may be proxies for sources of capital for SMEs operating in industry segments
avoided by banks. The primary source of capital for all entities is owner equity
with equity ranging from 68% to 92% across the industry spectrum and at 72%
for small industry segment [SUSI 2004, CBS
(2005)]

Sources of Borrowing for Informal Enterprises show much variation with
banks, individuals and others the most prominent lenders. For small
industry banks provided approximately 45% of debt while individuals,
family and others provided approximately 21%, 10% and 10%
respectively [SUSI 2004, CBS (2005)].

0%
20%
40%
60%
80%
100%
Sma lholder
Mining and
Quarrying, Non
PLN Electric ty,
and
Construction
Sma l Industry Household Cra t
Industry
Wholesaler and
Retail Trade,
Car and
Motorcycle
Maintenance,
and Individual
and Household
Appliances
Accomodation
and Food
Beverages
Provider
Transportation,
Warehouse,
and
Communication
Financial
Intermediary,
Property, Rent
Business,
Business
Services
Education
Service, Health,
Social,
Community,
and Invidual
Activities
Indivdual
Services which
provide service
to household
Owned Capita Borrow from Other Sources
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Smallholder
Mining and
Quarrying, Non
PLN Electricity,
and
Construction
Small IndustryHousehold Cra t
Industry
Wholesaler and
Retail Trade,
Car and
Motorcycle
Maintenance,
and Individual
and Household
Appliances
Accomodation
and Food
Beverages
Provider
Transportation,
Warehouse,
and
Communication
Financial
Intermediary,
Property, Rent
Business,
Business
Services
Education
Service, Health,
Social,
Community,
and Invidual
Activities
Indivdual
Services which
provide service
to household
Don t know procedures Procedures complicated Don't have collatera Interesr rate to high Proposal rejected Don't interest
32
A broad study of Indonesian sources of finance identifies 40% of
investment/finance from banks and non-bank financial entities split
80%/20%. This suggests that over 50% of financing is personal equity or
informal money lenders.
15


i. Analysis of credit products
1. List & Description of products
The chart below displays credit and non-credit product usage by SME size
category.
16
Transaction, account, and credit products are included in the
chart below because of the interaction between products:

8
5
.
6
0
%
8
9
.
3
0
%
8
4
.
5
0
%
7
.
6
0
%
2
3
.
4
0
%
4
4
.
9
0
%
6
.
3
0
%
1
0
.
0
0
%
2
0
.
7
0
%
4
0
.
4
0
%
4
2
.
1
0
%
4
1
.
1
0
%
2
1
.
7
0
%
4
0
.
6
0
%
5
0
.
8
0
%
5
.
0
0
%
1
3
.
4
0
%
2
1
.
8
0
%
2
.
1
0
%
6
.
8
0
%
1
0
.
7
0
%
0
.
2
0
%
1
.
7
0
%
4
.
1
0
%
8
.
1
0
%
1
0
.
2
0
%
1
2
.
5
0
% 3
0
.
2
0
%
4
6
.
0
0
%
5
2
.
5
0
%
0
.
6
0
%
2
.
0
0
%
3
.
4
0
%
Savings
Account
Deposits Transfer Debit
Card
Mobile
Banking
L/C
Micro Biz Small Biz Medium Biz

a. Product definitions/descriptions
i. Transaction and Services (transfer and overbooking, clearing, cash
management, payroll)
ii. Transaction means the services banks provide for customer activities
& needs
iii. Transfer and RTGS (Real Time Gross Settlement) : fund transfer
from one Bank to another Bank
iv. Overbooking: fund transfers from one account to other accounts in
the same Bank
v. Clearing : mechanism of Banks cheque exchange (using Central
Bank facility)
vi. Cash Management: services for managing funds using manual
resources or system (computerized)
vii. Other services : payroll, auto-debit etc

b. Network/Channel (Branches, ATM, internet banking, mobile banking, phone
banking etc)
i. Branches are the oldest Banking Channel. They are the bank office
where the customer is physically using bank services

15
Financing Patterns Around the World: Are small firms different? Table II, Page 29, World Bank 2004
16
Bank of Indonesia, 2005, Results of MSME profile in Indonesia, Credit Bureau, Chart 3.3
33
ii. ATM : Automatic Teller Machine : the simplest electronic
bankingsome ATMs allow loan payment by transfer and one
bank takes cash and other deposits
iii. Internet banking : e-banking using internet as a telecommunication
provider
iv. Mobile Banking : e-banking using cellular phone as a
telecommunication media/provider
v. Phone Banking: e-banking using telephone for a service to customer

c. Accounts (Saving, Clearing/Current Account, Deposits)
In Indonesia, accounts equate to funding products. The regular
funding products of banks are:
i. Savings Account pays interest
ii. Current Account
iii. Time Deposits pays interest
Account can be in IDR or foreign currency (US$, SIN$, AUD$,
JPY) or dual-currency for some Time Deposits

d. Credit Products
Credit products can be categorized by:
i. Purpose of credit
1. Working Capital Loan: Credit to finance working capital needs
including inventory and accounts receivables. Generic working
capital loan products are:
a. Overdraft Facility (OD)
b. Revolving or Demand Loan (RL)
c. Fixed Loan (FL)
For b and c, there are other names of product derivatives related
to collateral, specific purpose (for example, a Back to Back
Loan, Export Credit, Post Import Loan or Trust Receipt,
Account Receivable Financing, Factoring, Post dated Cheque
Loan etc)
2. Investment Loan: Credit or Loan provide for financing
investment needs like machinery or plant purchases. This is rare
but known as term loan (TL)
3. Leases are usually a 3 year or shorter alternative to intermediate
term loans. Leasing is a bank product only at Sharia banks.

ii. Period
1. Short Term (up to 1 year)
Working Capital Loans are typically short term loans since the
cycle of working capital (receivables and inventories) is less
than a year.

2. Long Term (> 1 year)
Long term loans can be investments for commercial (term loans,
leasing) and consumer (mortgage, car lease or loan)

iii. Usage
1. Consumer Credit: Credit for purchasing a home (mortgage, <= 7
years), vehicle (car or motorcycle lease or loan), or consumer
merchandise (credit cards)
2. Commercial Credit: Credit financing commercial business


34
iv. Direct or indirect disbursement
1. Direct Loan: means funds provided to debtors directly (includes
all products mentioned before)
2. Indirect Loan: obligation appears merely if the obligor failed to
accomplish the term & condition applied (includes Bank
Guarantee)

v. Linkage Program or Product Programs: Executing, Channeling,
and Joint Financing are used for correspondent bank relationships
and marketing programs.
1. Executing is the most used: the larger bank lends money to a
smaller bank which takes the credit risk. The larger bank reviews
the credit before funding.
2. Channeling has big banks lending in rural areas and/or through
smaller banks. The smaller banks provide administrative services
but take no risk.
3. Joint financing is the least common arrangement and is a
negotiated risk sharing arrangement between two lenders.

e. Other products (Credit Card, Debit Card, Trade Finance Products)
i. Credit Cards: Cards issued by banks and other issuers as a payment
method for consumer/retail purposes. include There is a certain tenor
for paying the bill
ii. Debit Card : Card issued by Bank as a payment instrument for
consumer/retail purpose, at the real time account (saving/checking
account) will be reduced

2. Credit portfolio data from lenders
Credit portfolio data from lenders on risk, profitability, and relationship of
SME portfolio to bank strategies is mostly unavailable. Banks say they do
not know the information. What is known is that delinquent loans over all
are 10% but significantly higher at some state-owned banks. The absence
of this data is significant. Most banks cannot predict losses from
portfolios; do not know their costs of underwriting and monitoring loans;
and do not know their profitability. Only once in our numerous meetings
did we hear ROE. Positively, banks agree that SME lending has lower
risks than their corporate loan portfolios and are supportive of BIs new,
lower risk weight of 85% (versus 100%) for SME loan risks.

3. Technologies used to assess and control credit risk
Technologies used to assess and control credit risk are evolving in positive
ways but there are huge opportunities for improvement. Bank of Indonesia
is phasing in a requirement that banks risk rate loans above Rp 500 million
at the time they make the loan. This is part of the worldwide Basel
initiative seeking to match bank capital with precise loss predictions. Our
meetings indicate significant progress towards Basel compliance. However
Basel processes have not yet changed the credit decision process or
impacted management profit strategies. Bank underwriting continues to be
expensive, duplicative, and restrictive. Examples from our meetings
follow:
a. A public bank was risk rating their loans and knew the probability of
default and expected loss given default for each risk rating. They
were aware of the risk calculations when making pricing decisions.
35
b. A second bank was risk rating current loans but had only five risk
categories, did not yet know have its expected loss per risk rating
category, and was not doing risk-based pricing.
c. At another bank there is no risk rating or credit scoring of loans
when made although this work is done later. Credit decisions are
pass/fail based on whether the applicant fits the banks strategy,
target market, collateral minimums, is recommended as capable and
stable by the banks channeling, risk-sharing or partnership lenders.
Exceptions are sometimes made if the bank chooses to buy credit
insurance--purchased without the applicants knowledge. They dont
do credit scoring because they cant get accurate and reliable
financial statements or credit bureau information.
d. A fourth bank had several numerical risk measures: a customer risk,
10 levels; credit rating of 10 levels; industry rating scale with 5
levels; a management/business condition & financial performance
rating of 5 levels that includes collateral. Each indicator has risk
weights. They will calculate expected losses when they have built
sufficient data bases.
e. We learned that international banks including Standard Chartered,
Temasek Holdings, ABN AMRO, and Citicorp (credit card and
personal loans), are operating in Indonesia or have investments in
Indonesian banks are training Indonesian managements in use of
risk technologies. This suggests the use of technology to assess and
control credit risks will expand exponentially in the next 5 years.

4. Evaluation of effectiveness of technologies
Technologies used by the banks we visited are usually resulting in loans of
good quality but only to a select group of SMEs. The state banks are an
exception. One has non-performing loans in excess of 25%. There is a
huge opportunity to make more profitable loans. Administrative and
underwriting costs are high because numerous processes evaluate the same
risk factor. Technology can help banks chose the single best indicator for
each risk factor. Technologies used by banks to assess/control risk are not
effective in building lender confidence, efficiency, or willingness to lend
to a broader range of SMEs. The outlook for the future is positive.
Current practices and future possibilities are:
a. Technologies are beginning to be implemented that can be effective
when data-bases are built and lenders learn how to use and trust the
technologies.
b. The risk rating of loans at inception above 50 million Rp has started
and databases are beginning to fill with data. The risk rating of a
loan shows the relative risk of the loan. Using risk rating
information banks can learn their average or expected loss on each
aggregate risk rating category. This information allows the bank to
add an expected loss or average risk charge to the cost of making
each loan. This information is then used to calculate the price of the
loan that will produce profitability for the bank. To use their data
more quickly banks would benefit from sharing their aggregate data.
This would give them a larger amount of data that would give them
more reliable estimates. Regulators would use this information to
confirm consistency in risk rating criteria between banks. Data will
be useful when data bases have sufficient data and banks become
interested in using their data. Some banks have plans to obtain more
information from their data. Others do not and may not have data in
electronic form or in software that allows analysis.
36
c. Under the world-wide Basel pact for banks in all countries, the
purpose of risk ratings is to calculate adequate bank capital for
losses. Many international banks use the same information to
calculate their economic capital sufficient to support their business
lines and risks. They use this for profit strategies and to obtain
attractive, external credit ratings for their banks. With external credit
ratings of AA or better large banks can actively participate in the
trading and issuing of trading contracts like foreign exchange,
interest rate derivative, credit derivative transactions. The external
risk rating also allows banks to have their letters of credit (which are
forms of guarantees) accepted by other banks and businesses. Thus
economic capital is the most important capital measure for banks
because it allows them to maximize profits, manage risks, and
optimize their returns on equity.
d. When a bank learns how to use the above information it can be used
for to price loans and portfolios of SME loans for profitability and
for competitive strategies. For example, if a bank wants to earn 4%
on a loan portfolio they add: cost of funds + expected losses +
administrative costs + cost of capital (adjusted for earnings on
capital) plus 4% to arrive at a price to the customer.
e. Banks need to learn to use the above concepts to safely use scores
from credit bureaus. This is important in Indonesia because a credit
bureau with scores may be available within 2 years. Credit scores
need to be validated for correlation with current bank risk ratings.
Especially if a bank finds a lack of correlation they need to compare
their assessment criteria with the criteria used by the credit bureau.
They also need to know which set of criteria best correlates to actual
loan losses. Use of technology is expanding but is not sufficient for
accurately predicting loan losses.
f. Two errors can occur when using credit bureau scores: 1) believe
scores without validation 2) just add scores as one more piece of
costly and burdensome information. The latter is consistent with the
way banks are using the current borrower data bases. They can
benefit from streamlining their current processes and from analyzing
their new data.

37
iii. Lender and Borower Contraints
Conclusions are from research studies and January February 2007 meetings

Lender Constraint: Information
Impact of Constraint: High loan origination costs and long approval processes
Some banks believe more information and monitoring is important to for making more SME
loans while others emphasize regular and frequent loan repayments. All public banks want to
enhance supervision and monitoring of credits.
17

Banks find it useful and necessary to help SMEs make financial statements for SMEs who often
lack them.
18
Bankers say the quality financial statements makes it impossible to lend using cash
flows to determine ability to repay. In contrast, multi-finance companies often focus solely on
assetsvehicle leasing for example.
Credit information system data is being added to bank decision analyses. Identify verification is a
problem.
Bankers say the lack of titled, land and building collateral is a constraint. Most banks, except
BPRs, preferred land. Some new borrowers need to get titles for their land. Programs for area-
wide titling exist.
Most banks (except BPRs) require tax identification numbers for borrowers with loans of 50
million Rp or more.
19
BNI specifically asked if SENADA could lead an effort to raise the
threshold loan amount to 500 million Rp so this regulation would be a constraint for fewer
borrowers.
Some banks use credit insurance or guarantees for SMEs with insufficient collateral but the
number of those applicants meeting guarantee company standards is limited. Bank Niaga was
more positive about guarantees.
Non-Bank Lender Constraint: Information
Impact of Constraint: High credit losses and high financing costs to SMEs
Credit Card issuers beginning to build data bases now to share data on losses through the
Indonesia Credit Card Association (ICCA) data base. Credit card losses were 9% in 2005.
Interest rates range from 2.5% - 4% per month. Despite a relative lack of information, this is may
be a profitable product.
Non-bank lenders, except credit card companies, do not have access to the BI debtor information
system.
Venture companies say they provide loans to higher risk SMEs but struggle to get financial
information.
Leasing and consumer credit companies have their own borrower data-base but its contents may
not be timely or complete.
Identify theft is a problem.
Lender Constraint: Difficulties controlling and selling collateral
Impact of Constraint: Lenders prefer titled land and buildings as collateral.
Banks are hesitant to rely on warehouse receipts and machinery for collateral but this may
change with new regulations. They are even more hesitant about inventory and accounts
receivable. Lenders typically require 125% titled, land collateral. However, BNI says they

17
Credit Bureau, Bank of Indonesia, Results of Study of MSMEs Profile in Indonesia, Pages 73 and 69.
18
DAI Finance for SME in Indonesia, August 2004, Page 69.
19
DAI Finance for SME in Indonesia, August 2004, Page 68;.
20
World Bank SMEs: Overcoming Growth Constraints, February 2005, Page 16.
21
Ikhwan, Andi & Hiemann, Wolfram, November 2001, Enhancing the Role of Factoring as a tool for
Financing Small and Medium Enterprises in Indonesia. Background Report to ADB SME Development
TA 3417 INO Page 20.
22
AID PPC/CDIE/DI Report The Supply of Credit to SMEs, February 2000.
23
Ikhwan, Andi & Hiemann, Wolfram, July 2001, Strategi Meningkatkan Penyaluran Kredit Kepada
Usaha Kecil dan Menengah dengan Prinsip Pasar. [Strategies for Increasing Allocation of Credit to SMEs
through Market Principles], Background Report to ADB SME Development TA 3417 INO.
38
already take this collateral and BCA says they avoid the problem by using linkage programs.
Credit availability of SMEs depends on laws that effectively assign and protect property rights
and assignments for financial transactions.
20
Studies suggest revising regulations and legal
protections generally, and specifically for A/R financing.
21
Other studies recommend warehouse
and transit receipt financing until this is accomplished.
22

Some believe the judicial system provides a strong disincentive for banks to resolve credit
problems through the courts due to time, uncertainty, costs and lack of transparency.
23
Inventory
and A/R financing are easier to do in countries with stronger legal systems whereas leasing and
factoring require less legal support.
24

Vehicle leasing companies are less impacted. They successfully repossess vehicle if delinquent 3
months.


Lender Constraint: Institutional problems from internal policies
Impact of Constraint: Some SMEs do not receive loans even if they can repay
Bank preferences are inconsistent with SME preferences: Banks prefer larger loans than small
enterprises need, banks require more registrations by enterprises than exist, and SMEs dont
know bank preferences and procedures.
25

Banks do high-level industry analyses. They have target markets by region and stop lights on
some industries and portions of industries. Several banks do not believe the footwear industry
will survive over time and avoid the industry. Several banks are unwilling to lend to
manufacturers of uncertified auto parts. These portfolio decisions limit access to credit for some
SENADA clients.
Some bank officers prefer to make personal loans yielding higher returns than to analyze and
document SME credits.
Separately, Venture capital companies are primarily lenders as opposed to equity investors.
Non-bank Lender Constraint: Banks are the sole financing source for many Multi-Finance
Companies (MFCs)
Impact of Constraint: MFCs may be unable to access funds or funds at competitive costs
resulting in high credit prices for SMEs
Bank loans are often the only source of financing for multi-finance companies.
Some banks see multi-finance companies as competitors and unreliable borrowers who have had
poor credit quality.
26

A decree similar to that for venture capital access to financing would provide competitive
funding sources for more MFCs. However in 2000 20% of loans to domestic MFCs were from
non-bank sources including Astra.
Several government regulations are not supportive of recognizing the quality of accounts
receivables.
27

Insurance and pension companies are not major providers of funds to MFCs. Insurance
companies, unlike leasing companies have no tax deductions from portions of their reserves. This
increases their costs of funds.
Non-bank Lender Constraint: Leasing: New business licenses are unavailable; existing ones
are not for sale
Impact of Constraint: Barriers to entry and less competition may result in higher lessee
costs
Leasing licenses have been frozen for about 3 years. Most are held by banks.


24
World Bank SMEs: Overcoming Growth Constraints, February 2005, Page 18.
25
DAI Finance for SME in Indonesia, August 2004, Page 71.
26
ADB SME Development report Enhancing the Role of Factoring as a tool for Financing Small and
Medium Enterprises in Indonesia November 2001, Page 18.
27
ADB SME Development report Enhancing the Role of Factoring as a tool for Financing Small and
Medium Enterprises in Indonesia November 2001, Pages 24 and 18.
39

Bank Constraint: Lack of confidence in risk measurement resulting in a lack of profit focus
Impact of Constraint: Risk and profitability factors are unknown. They are not used to
make decisions. The result is fewer loans to SMEs.
Banks see profitability and potential in SME lending
28
but told us they do not know the net
profitability of their SME loans or of subcategories of these loans by size or quality.
29
For
example, banks prefer loans to medium-sized entities although they say small enterprise lending
is relatively safer.
30
If banks used their loan risk information for risk-based pricing they could
make additional loans to weaker SMEs
Bank Constraint: Banks have mostly short term floating rate funding and invest much of it
in government bonds
Impact of Constraint: Banks dont have fixed rate money to lend. A limited market for
interest rate swaps exists.
Banks lend at floating rates using under 30 day customer deposits which are 90% of bank
deposits. They have few reasons to seek other sources of funds. This can lead to interest rate risks
arising from making loans with maturities longer than deposit maturities.
Banks own 71% of government bonds; 389 trillion Rp
However, BNI gets funding both from deposits and a two-step-loan Credit Program from a
foreign development bank.


Borrower Constraints: from secondary research and from Meetings with SME Clients and
RMs at SENADA.
Borrower Constraint: SMEs dont know which lenders may give them loans
Impact of Constraint: SMEs believe they will be rejected by every bank and do not apply
to other lenders
Individual lenders have different target markets by region, industry and industry segment
restrictions, minimum loan sizes, and borrower character and certification requirements. These
differences are not known to SMEs but are believed available through the public reports banks
submit annually to BI on their plans for SME lending.
Some lenders avoid small loans to enterprises. Some private banks use linkage or correspondent
bank arrangements to make SME loans. This means the SMEs would need to apply at linkage
banks.


28
Credit Bureau, Bank of Indonesia, Results of Study of MSMEs Profile in Indonesia, Page 72.
29
DAI Finance for SME in Indonesia, August 2004, Page 73 and January 2007 meetings in Jakarta.
30
DAI Finance for SME in Indonesia, August 2004, Page 70.
40

Borrower Constraint: SMEs cant obtain financing to purchase manufacturing equipment
Impact of Constraint: SMEs do not expand their businesses as rapidly
Many SME clients of SENADA buy used equipment using savings or informal sources of
funding. Equipment manufacturer financing is not usually available for new equipment for
SMEs.
Leases and loans to SMEs for machinery are not common. Reasons include: loan size, lack of
information on values and resale values and opportunities, and new but not issued regulations
that encourage banks to consider this collateral. The ability to register fiduciary rights to the
collateral exists in each region. However, banks have insisted on land or buildings as collateral
for equipment financing and SMEs may not have enough collateral for all their financing needs.
Leasing companies say the own financing arrangements are only for vehicle leasing. Therefore
they have not pursued equipment financing.
Borrower Constraint: Lack of financial statement information
Impact of Constraint: Borrowers do not have good access to loans
SENADA has a project to address this constraint in the footwear and auto parts industries. Other
lenders say they provide assistance as well.
The ability the SME to provide basic financial information is an obstacle for just under half of
small enterprises. It is less significant for medium industries (but Bank of Indonesia did not
include that percentage in its 2003-2004 study.) When SMEs have financial statements banks
are more interested in processing their loan applications. Some creative banks use proxy
estimates of sales based on their experience with SME record-keeping and deposit account
records. However, many banks say they need to help SMEs make financial statements suitable
for analysis by bank credit approval staff.
DAIs 2004 study shows 55% of SMEs saying the borrowing procedures were was too difficult
and it is assumed lack of information contributed to this perception.
31

Borrower Constraint: Collateral certification; business and tax registrations
Impact of Constraint: Delays and complex procedures are constraints for SME loans
Projects are underway to register land in groups in some regions.
When first applying for credit some SMEs need to title their land and obtain business and tax
registrations. They incur expenses and delays in receiving financing. For manufacturing the
second most important reason for being refused credit was lack of a business license or tax payer
identification number.
32

BNI said it would be helpful if SENADA proposed increasing the credit limit for business owner
Tax IDs to Rp500 million from Rp.50 million. They believed it would help SME growth.

31
DAI Finance for SME in Indonesia, August 2004, Page 44.
32
Credit Bureau, Bank Indonesia, Results of Study of MSMEs Profile in Indonesia ,Page 35 and 33.
41

Borrower Constraint: Lack of sufficient collateral for the size of loan needed
Impact of Constraint: SMEs get smaller loans than they need or pay more for loans from
money or pawn shops
SMEs in manufacturing industries gave collateral as the primary reason for being refused credit.
This requirement is often 125% of the loan amount and is typically required in addition to
demonstrating profitability and purchase orders.
This is a norm. Bank Indonesia does not require collateral for all loans and they do not require
land and buildings as collateral. They do favor real estate collateral when banks take loan loss
provisions for loans that become problem loans.
Borrower Constraint: Lack of ability to pay due to low profit margins
Impact of Constraint: SMEs may not borrow enough to grow their businesses or purchase
efficient equipment
Lower margin companies can afford to borrow relatively less. On average, medium sized
businesses have margins under 10% whereas small businesses have margins of 10% or more thus
allowing them to afford relatively more credit. Medium businesses in manufacturing had profit
margins as follows: over 50%, 10.3%; 10-50%, 28.2%; and under 10%, 61.6%.
33

This indicates higher margin business strategies are available to SMEs. SENADA has identified
several. This contrasts with a footwear SME with an effective margin of 2% after financing 90
day receivables at high interest rates arising from discounted giros.
Borrower Constraint: Prospective borrowers may be unable to get references from
companies or people known to banks
Impact of Constraint: Some SMEs who can repay debt dont receive it
Some banks lend to the best SMEs in a market segment sometimes by asking buyers for a list of
their best suppliers. While this leads to high quality bank portfolios, it limits credit access for
some SMEs who have the ability to pay for debt. To the extent banks are expected to serve the
public purpose, the ability to pay criteria is more appropriate. However Bank Indonesia and
most other regulators allow banks to manage their risks.
Most banks say they ask existing bank customers and/or neighbors of SMEs for credit
references. Some SMEs may not be known by these references or may fail to be recommended
for reasons unrelated to character, business legitimacy, and intent to repay.
Separately, for borrowers with past credit payment problems BI found it necessary to affirm
problematic debtors can receive credit,
34

Borrower Constraint: Some SMEs do not ask for credit because they fear losing their
businesses and collateral
Impact of Constraint: Growth of some healthy SMEs is restricted.
In one study where the percentage of Medium/Large SMEs needing additional funding was 45%
and 27% of firms were afraid of not being able to pay and/or preferred to save instead of
borrow.
35
However, many successful medium-sized businesses have separated the assets of their
land and building for living from their business assets.
More risk/reward choices would benefit SMEs and the economy.


iv. Future plans for implementing current products and services
From our interviews with Banks, both SMEs and corporations are in their target
market definitions. Personnel in our meetings with BCA, BNI, and Bank Niaga
believe SME business is profitable but offered no comments or data. They think

33
Credit Bureau, bank of Indonesia 2005 Result of Study of MSME;s in Indonesia, Page 31, Chart 3.33
Profit Margin of Medium Businesses by Economic Sector.
34
Bank of Indonesia, 12 January 2007, Regulations on the Procedures of Evaluating Credit Collection
Ability.
35
The Constraints Associated with Credit and Collateral Faced by Non-farm Enterprises at the Kabupaten
Level, May 2006, by Andi Ikhwan and Don E. Johnston, Table 11, Page 16.
42
SMEs are profitable because of their survival rates in the economic crisis of 1998.
They also did not mention pricing.
Banks tend to keep and enhance linkage programs as a method for finding the best
clients in the SME market. A few are also developing their electronic banking
products to widen their SME market share.
IFSA, as the non-bank financial institutions association, is willing to consider a
leasing product for SME equipment.

v. Current Plans for new products and services
Banks tend to maintain their current product and services. Only Bank Danamon
will develop a pre-approved line for emergency needs of their existing
customers. This product/service addresses is customer-oriented. They think rapid
approval is everything to SME customers.

vi. Willingness and nature of plans to expand services to SME
All Banks and non-bank financial institutions say they are willing to expand
services to SMEs. They are optimistic that constraints related to lenders and
borrowers can be overcome and offered their recommendations. Below are some
highlights from our interviews:
The content and quality of industry analysis used by lenders is important
Information Centers would be useful for both lenders and borrowers
Credit Guarantee Insurance has an important role
There is enthusiasm for the credit bureau function and hopes for acceleration of
these functions
Projects to improve SME access to finance should be commercially viable
Keep and enhance technical assistance for SMEs as well as work on increasing
loan volumes

43
Products and Plans: Conclusions from meeting with Banks

Descriptions BNI BRI BCA Danamon Niaga Bukopin
Future plans for
implementing
current products
and services
BNI will focus
on linkage
programs with
multi finance
companies,
cooperatives
etc
BRI will
enhance cash
management
and e-banking
to increase
Fee based
Income (FBI)
BCA will exploit
their e-banking
to get wider
customer (B2B,
linkage program)
Pre-authorized
lines of credit
(emergency
loan)
- Develop
linkage
program
- Account
Officers focus
on each
industries
Cooperation/
partnership with
NBFI (PNM,
leasing,
cooperatives)
Current plans for
new product &
service
No new
products
No new
products/
services
No new
products/services
No, but quick
approval
strategy
Product &
service
arranged for
linkage
programs (A/R
financing,
investment, re-
plantation
saving)
No, but keep
cooperation/linkage
program with credit
guarantor
Willingness and
nature of plans to
expand services to
SMEs
- BNI has
warehouse
receipt
financing
- BNI
suggested
SENADA
encourage BI
to increase the
threshhold for
borrower tax
ID from Rp.50
MM to Rp.500
MM
- SME is
target market
of BRI. BRI
has already
implemented
technical
assistance
(TA) for
customers.
- If SENADA
focuses on
TA, they are
willing to be
involved
USAID could
provide credit
guarantee
insurance for
SME customers
Programs
recommended:
1)
commercially
viable
2) not too
populist
3) credit
bureau
4) industry
analysis of
supply chain
Governments
policy to get
synchronized
with Banks
business
(program)
- accelerate credit
bureau function
- information for
both SME and
Bank/Non Bank

44
E. Recommendations: Some Specific to Auto Parts & Footwear Industries

These recommendations for SENADA activities will be most successful if focused on SMEs seeking loans of Rp 200 million to 5 billion. While
we found opportunities for SMEs to improve their profitability strategies, prepare financial statements, and reduce their needs for financing these
are not the primary focus of our recommendations because SENADA has initiatives which address these opportunities. We also found regulatory,
tax, and legal constraints and suggest SENADA look for opportunities to advocate for change. However, our over-all strategy for these
recommendations is to use SENADAs expertise, knowledge and SME contacts on projects that improve SME access to credit now while
preparing lenders to serve SMEs better in the future.

Constraint Recommendation How it Works Purposes Partners
1. Information for SMEs:
SMEs dont know which
banks might lend to them
SENADA explains lender
preferences for lending to
SMEs

Information is from bank
lending plans for SMEs
submitted each year to Bank
Indonesia.
To get regional and specific
industry information
SENADA will also need to
visit banks because bank
marketing plans can be
highly specific
SENADA works with
business associations to
distribute information
through flyers as well as via
CD Roms and web-sites

Posters are used to advertise
where to obtain the
information

SENADA distributes this
information at SME fairs
and education forums.
SENADA is a speaker if
possible
Guide SMEs to banks who
want their business.
Reduce SME credit
rejections

Give SMEs information on
lender perspectives on their
business prospects and their
industries

Strengthen business
associations by providing a
useful resource. Transfer this
project to business
associations willing to make
the project their own in
future years





Business associations known
to SENADA in Java and in
selected regions having
concentrations of footwear
and auto parts SMEs

SME business plan
information is public. BI
and lenders are therefore
expected to be willing to
give additional, specific
information
45

Constraints Recommendations How it Works Purposes Partners
2. Institutions eligible to
finance machinery for
SMEs are not doing it

Leasing companies and
Sharia banks are eligible to
do leasing. Reasons for not
doing it include:
--no one has experience with
this product
--funding at leasing
companies has not been
available/obtained for small
machinery leasing

(The alternative is to work
with banks on a debt product
since the lease product in
Indonesia is similar to bank
loans. However, banks may
encounter regulatory
impediments from costs of
provisions for losses because
machinery collateral is not
yet recognized by bank
regulators)
SENADA works with lessors
to make a machinery lease
product. This involves
standardizing lease quality at
a level where predicted
losses are acceptable to the
lessors. Product
specifications include:
--loan-to-value ratios,
--borrower quality
--machinery resale value
--repayment time

Next an expected loss rate is
estimated by the lessors and
pricing is determined that
will cover risks and costs
while still resulting in a
saleable product

A product viability decision
needs to be made at this
juncture or changes need to
be made


Assuming a viable product,
lessors make plans for
making a specific amount of
leases, a method for pooling
their risks and for obtaining
funding for this type of lease

SENADAs roles here are
advisory and possibly
coordinating


For example, SENADA
might coordinate
presentations to potential
investors, lenders and lessors


Pooling of risks is suggested
above to spread risks and
perhaps obtain some
marginal risk protection


Create the product by
standardizing it and
organizing providers

Leasing companies obtain a
new lease product.



Leasing companies via the
Asosiasi Persusahaan
Pembiayaan Indonesia,
And/or
a sharia bank(s)

Investors including lenders,
bond holders , and others
already providing funds for
leasing

Funds from a multi-lateral,
NGO, or AID entity could
give lessors a fixed and
modest amount of risk
protection
Or, US AID might wish to
use a Development Credit
Authority guarantee of a
small, fixed percentage. It
could make its guarantee
funds available only after
lenders incurred predicted
losses of double the amount
of a DCA guarantee
46

Constraints Recommendations How it Works Purposes Partners
3. Some SMEs have less
land and building
collateral than needed to
get loans large enough to
meet their working capital
needs. This impacts
primarily second and third
tier SME suppliers


Warehouse receipt financing
is now authorized and may
be a financing alternative for
some SMEs

SENADA creates a scheme
to lend to second and third
tier SMEs having half or
more of the real estate
collateral needed for most
bank loans. The other half of
total collateral (at 125%
coverage) is accounts
receivable and guarantee or
insurance
This will operate on a
commercial or small subsidy
basis


Identify the quality and
profit standards that
determine profitability and
stability in the auto parts and
footwear industries.
Demonstrate to lenders using
borrower financial
statements that borrowers in
the second and third tiers the
have predictable and reliable
accounts receivables
Document and show lenders
the payment chains between
tiers of suppliers














Give second and third tier
suppliers improved access to
financing.
Demonstrate a methodology
for lenders to evaluate and
confirm payment streams at
various industry tiers (Now
most lending based on
accounts receivable are
directly or indirectly linked
to the top industry buyers
with little recognition of
lower tier payment flows)

Commercial banks,
guarantors and insurance
companies
or possibly first tier suppliers
(state-owned enterprises or
private companies

US AIDs DCA program
could want to consider being
a guarantor






47

Constraint Recommendations How it Works Purposes Partners
4. SMEs further down
industry value chains are
not financed, financed
partially, or financed at
unattractive interest rates

Currently, several banks
avoid industries or industry
segments like footwear or
after market auto parts
because they believe the
SMEs will not survive and
lack the profit margins to
repay debt
SENADA publishes its auto
parts and footwear industry
value chain analyses for
lenders. It trains lenders how
to safely lend within its two
focus industries. The format
is workshops with case
studies

SENADA listens to credit
and lending officers about
what they want to know to
lend safely in these specific
industries. Then it designs
training relevant to these
responses.
SENADA trains-the- trainers
in bank loan underwriting
departments


SENADA uses its SME and
industry knowledge bases to
increase bank willingness to
lend

Present a methodology for
understanding industry
structures. Present specific
knowledge about the two
industries:
SENADA creates and
publishes in workshop
format 1) value chains 2)
successful SME strategies 3)
SME financial statements 4)
charts of SME interest rates
and Rp amounts SMEs have
paid recently for credit

Improve lender/guarantor
processes for evaluating
industries and identifying
SMEs with good prospects
for success

Increase loans to SMEs ;
decrease SME loan
rejections.
Primarily lenders including
non-banks and guarantee and
credit insurance companies

SENADA could share the
industry information as a
prototype model on
institutional websites:
BI
Minister of Industry World
Bank
Business associations

The training materials will
be made available to SMEs
and their business
associations so SMEs can
see how lenders think and
make judgments









48

Constraint Recommendations How it Works Purposes Partners
5. Banks do not know their
profitability from SME
lending
Banks dont calculate their
profits.
Underwriting, collection and
administrative costs are
extensive and expensive

This impacts access to credit
by SMEs because banks
arent motivated by profits.

The longer term solution is
to implement automated
credit scoring and
monitoring systems.


Near Term Impact:
1-Hold a workshop with
lenders/under-writers to
streamline procedures,
verifications, and assessment
categories

2--Raise the visibility of
costs. Collect lender cost
information from a survey
completed at meetings with
individual banks
Longer Term Impact:
Ask lenders for summary
loan risk data on loans in the
two focus industries:
1-Use this data to estimate
future losses

2- Hold workshops to make
internal credit scores using
bank decision criteria.
Quantify the evaluations and
weight the risk categories
1-Workshop participants
agree to agree priority risk
factors, priority assessment
factors, also to standardize
forms, verifications & ratios

2-Publish bank cost data on a
no name basis. Distribute it
to the participating banks


1- Collect, summarize and
chart this data on a no
name basis. Distribute it to
participating banks

2- Lenders develop more
detailed risk data
36
Later
they can validate their
internal bank scores against
credit bureau scores. (BI
intends to award a contract
for a credit bureau soon.)
1-Reduce costs of single
bank and of linkage or
correspondent lending
arrangements



2- Give banks a bench-mark
for costs. Motivate banks to
match peer costs



1- Focus lenders on SME
risks and profitability. Make
loan data and show how to
use it. Raise competitor
curiosity
2-Give lenders tools to safely
use credit bureau scores. The
scores can also be the basis
for customer prices based on
credit scores
1-Willing lenders especially
with lots of loan linkage
schemes with other lenders,
guarantors and insurers.
FSVC may be helpful

2-FSVC for knowledge of
bank processes and
streamlining options
Individual lenders
BI should be consulted

1-Banks and Non-bank
lenders
Consult with BI -- a next
step for Basel?

2- Banks and Non-bank
lenders
Consult with BI: internal
scores relate to Basel and
also may use BIs Debtor
Information system
37


36
IF IFC proceeds with technical assistance to create bank portfolio underwriting models for SME loans (to replace the large corporate model used by banks) then
SENADA could ask them to use the pilot banks auto parts and footwear portfolios. IFC plans pilots at two banks and each will select specific portfolios.
37
Some medium-sized SMEs have separated their personal and business assets and debt.
49

Constraint Recommendations How it Works Purposes Partners
6. SMEs cant get bank
financing quickly when
they need it so they pay
more at non-bank,
alternative lenders
SENADA encourages banks
to make new SME products
*publicize bank products and
prices from comparable
countries.
*publicize how much
SENADA clients are paying
other lenders for ready
products
Banks find ways to shorten
their credit decision
processes or do them in
advance of SME needs
Banks charge a fee for
products like revolving and
pre-approved loans and
quick access to funds using
drafts or ATMs.
SMEs may get lower loan
costs than with supplier
finance or loans from money
and pawn shops

SMEs get money when they
need it

Banks and Non-bank
financial institution lenders:
(Be alert to competitive
considerations especially for
banks who have products
under development) (Be alert
to integrity issues regarding
fees for loans)

50

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AID PPC/CDIE/DI. February 2000. Report The Supply of Credit to SMEs.
Badan Pusat Statistik. 2005. Profil Usaha Kecil dan Menengah Tidak Berbadan Hukum Indonesia
Tahun 2004. Survei Usaha Terintegrasi 2004, Jakarta, Indonesia.
Bank Indonesia. March 2006. Indonesian Banking Booklet 2006.
Bank Indonesia. January 2006. Bank Indonesia Regulation Number 8/2/PBI/2006 on Amendment to
Bank Indonesia Regulation Number 7/2/PBI/2005 on Evaluation of Quality of Assets of
Commercial Banks.
Bank Indonesia. January 2006. BI Circular Letter: Altered Calculation of Risk-Weighted Assets for
Small Business Loan, House Ownership Loan and Employee/Retirement Loan
Bank Indonesia. January 2005. Bank Indonesia Regulation Number 7/2/PBI/2005 on Evaluation of
Quality of Assets of Commercial Banks.
Bank Indonesia. January 2005. Bank Indonesia Regulation Number 7/8/PBI/2005 on Debtor
Information System.
Bank Indonesia. 2005. Result of Micro, Small and Medium Enterprises Profile in Indonesia.
Beck, Thorsten and Ash Demirg-Kunt. February, 2005. Small and Medium-Size Enterprises:
Overcoming Growth Constraints.
Beck, Thorsten, Ash Demirg-Kunt, and Vojislav Maksimovic. August, 2004. Financing Patterns
Around The World: Are Small Firms Different?.
Beck, Thorsten, Ash Demirg-Kunt, and Levine Ross. November, 2003. SMEs, Growth, and Poverty:
Cross-Country Evidence.
Ayyagari Meghana, Beck, Thorsten, and Ash Demirg-Kunt. August, 2003. Small and Medium
Enterprise across the Globe: A New Database
Beck, Thorsten, Ash Demirg-Kunt, and Vojislav Maksimovic. February, 2002. Financial and Legal
Constraints to Firm Growth. Do Size Matter?
Center For Economic and Social Studies (CESS) and IFC PENSA. July, 2005. Commercial Bank
Financing and Other Credit Issues for Rural Banks
Development Alternatives, Inc and Regional Economic Development Institute. August 2004. Finance
for Small and Medium Enterprise in Indonesia. Final Report prepared for Japan Bank for
International Cooperation (JBIC).
Hiemann, Wolfram. November 2001. Enhancing the Role of Factoring as a Tool for Financing Small
and Medium Enterprises in Indonesia, Background Report ADB SME Development TA 3417-
INO.
Ikhwan, Andi. November 2001. Strengthening Venture Capital Company as Source of Mid-Term
Finance for SME in Indonesia (In Indonesian), Background Report ADB SME Development TA
3417 INO.
Ikhwan, Andi. 2003. Penggunaan Movable Asset Sebagai Agunan dalam Penyaluran Kredit Bank
Umum Kepada UKM: Pengalaman International (International Best Practice on Utilization of
Movable Asset as Collateral for SME Lending), Background Report, ADB Strengthening BDS TA
3829-INO.
51
Ikhwan, Andi and Don E. Johnston. May 2006. The Constraints Associated with Credit and Collateral
Faced by Non-Farm Enterprises at the Kabupaten Level, Background Report for RICA Project,
World Bank Office, Jakarta
Ikhwan, Andi and Wolfram Hiemann. November 2001. Enhancing The Role of Leasing as a Tool for
Financing Small and Medium Enterprises in Indonesia (In Indonesian) Background Report ADB
SME Development TA 3417-INO.
Ikhwan, Andi and Wolfram Hiemann. July 2001. Strategi Meningkatkan Penyaluran Kredit Kepada
Usaha Kecil dan Menengah dengan Prinsip Pasar [Strategies for Increasing Allocation of Credit to
SMEs through Market Principles], Background Report to ADB SME Development TA 3417 INO.
Indonesia Financial Services Association. December 2005. Annual Report 2005.
Trans Union Advantage. 2004. The Scoping Study Report (Un publish), Financed by Bank Indonesia
and IFC PENSA.
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Bank Financial Institutions
World Bank. February 2005. SMEs: Overcoming Growth Constraints
52
APPENDIX 1: LIST OF INSTITUTIONS AND PERSONS INTERVIEWED


No Institution Name Title Address Phone Fax Date Time Note
Ratna E.
Amiaty

Head of Credit
Bureau
Yunita Resmi
Sari
Analyst of Credit
Bureau
Gedung Tipikal Lt. 5
Jl. MH. Thamrin No.2,
Jakarta
+62 21 3817525 ;
2311832
+62 21
23111237
14.00
Imansyah Senior Bank
Researcher
Banking Research
and Regulation
Bureau Directorate
of Banking
Research and
Regulation
Gedung A Lt. 9, Jl. MH.
Thamrin No.2, Jakarta
+62 21 3817336 +62 21
3518946
1. Bank Indonesia
Pungky P.
Wibowo, Ph.D
Senior Researcher
Financial System
Stability Bureau
Directorate of
Banking Research
and Regulation
Gedung A Lt. 9, Jl. MH.
Thamrin No.2, Jakarta
+62 21 2310108
9 February

15.00
Central Bank
Susilo Sudjono Chairman


Dennis D.
Firmansyah
Secretary general
2. Indonesian Financial
Services Association
Oddie W.
Siewira
Secretary for
Education





Wisma Indomobil, 10
th

Floor, Jl. MT. Haryono,
Kav. 8, Jakarta
+62 21 8564753 +62 21
8564752
30 January 14.00 Business
Association
53

No Institution Name Title Address Phone Fax Date Time Note
Arif Tri
Tjahoyono
KBP - USK + 62 21 2511946,
Ext. 2013
Yudi K Credit Risk
Division
+62 21 5728184
Rahmanto
Made Nariswari
Small Scale
Marketing
+ 62 21 2511946,
Ext. 2010
Driarlena Risk Management
and Policy
Division
+62 21 5728019
Ani H
Rianto Siregar
Medium Scale + 62 21 5729438
3. PT. Bank BNI, Tbk
Yolanda T.M TSL Program
Credit Small Scale
Division
Kantor Besar Gedung
BNI, Lantai 28, Jl. Jend.
Sudirman, Kav.1, Jakarta
+ 62 21 5728536
+62 21
2511148;
+ 62 21
2511162
25 January 14.00 State Bank
Dewi Corry Head of
Department
Risk Management
Division
Gedung BRI II Lt.5, Jl.
Jend. Sudirman Kav. 44
46, Jakarta
+ 62 21 5713114 ;
5752450
+ 62 21
5713121
Sonny Harsono
WS
Senior Manager
Credit
Administration
Division
BRI I Building 12
th
Floor,
Jl. Jend. Sudirman Kav.
44 46, Jakarta
+ 62 21 5751243 + 62 21
2500127 ;
2510327
4. PT. Bank Rakyat
Indonesia, Tbk
Dwi Agus
Pramudya
Vice President
Retail Business
Division
BRI I Building 8
th
Floor,
Jl. Jend. Sudirman Kav.
44 46, Jakarta
+ 62 21 2500083 + 62 21
2510308
26 January

09.00 State Bank
54

No Institution Name Title Address Phone Fax Date Time Note
Ruddy
Branianda
Head of Bureau
Small Business
Development
Wisma BCA I, Lt. 12A,
Jl. Jend. Sudirman Kav.
22 23, Jakarta
+ 62 21 5208650
; 5208759 ;
5711250 Ext
23050
+ 62 21
5712450
09.00
Subianto
Rustandi
Chief Manager
Risk
Management
Unit
Wisma BCA I, Lt. 10,
Jl. Jend. Sudirman Kav.
22 23, Jakarta
+ 62 21 5208733 + 62 21
5711400
5. PT. Bank Central
Asia, Tbk
Lianny
Somyadewi
Head of Bureau
Retail Credit
Risk Analysis
Bureau
Wisma BCA II, lt.4 +62 21 5028750,
Ext. 34002
+62 21
5224860
25 January
10.00
Private Bank
and owned by
Jarum
(cigarette
company) as
major
shareholder
Sakri
Widhianto
Directorate
General
+62 21 5251761 + 62 21
5251449
Eddy Siswanto Head of Sub
Directorate
Program
Development
Directorate of
Metal and
Electronic
Industry
+62 21 5253782 +62 21
5253782
6. Directorate General
of Small and
Medium Industry,
Ministry of
Industry
Zainal Arifn Head of Sub
Directorate
Program
Development
Directorate of
Clothing
Industry
Jl. Gatot Subroto Kav.
52 53, Lantai 13 - 16,
Jakarta
+62 21 5254042 +62 21
5254042
29 January 16.30 Government
Institution
7. PT. Bahana Artha
Ventura
Diwangkara Assistant Vice
President
Graha Niaga M Floor,
Jl. Jend. Sudirman Kav.
58, Jakarta
+62 21 2505270
ext. 5012
+ 62 21
2505271 ;
2505275
01 February 09.00 Private
Company as
subsidiary
company of
PT. BPUI
(owned by BI
and MoF)

55

No Institution Name Title Address Phone Fax Date Time Note
8. PT. Bank Niaga,
Tbk
Wiyosobroto Senior Manager
Business
Development
Group
Bank Niaga SME
Center
ITC Permata Hijau
24 January 09.00
Private Bank
and owned by
Malaysian
Company as
major
shareholder
Roy Irvhan Corporate
Secretary and
Legal Head
9. PT. Astra Mitra
Ventura
Reyuko
Syahruddin

Jl. Majapahit No. 16,
Lt. 2, Jakarta
+ 62 21 3450653 + 62 21
3450652
30 January 10.00 Established
by Astra
Group
Alex Widjaja Manager 10. Yayasan Dharma
Bhakti ASTRA Tonny
Sumartono
Advisor
Jl. Majapahit No. 16,
Jakarta
+ 62 21 3865831
; 3865834
+ 62 21
3865833
29 January 14.00 Established
by Astra
Group
Philip Beavers Program
Manager
SME Banking
Nyoman Gde
Wibawa
BDA Access to
Finance
A. Bido
Budiman
Operations
Officer SME
Banking Access
to Finance
11. IFC PENSA
Eky Amrullah BDA Access to
FInance
JSX Building Tower 2,
9th Floor, Jl. Jend,
Sudirman Kav. 52 53,
Jakarta
+ 62 21
52993001
+ 62 21
52993141
01 February 10.00 International
Agency (The
World Bank
Group)
12. PT. Bank
Danamon, Tbk
Arief Harris


Vice President
SME Banking

Graha Surya Internusa,
Lt. 16, Jl. HR. Rasuna
Said Kav. X O,
Jakarta
+ 62 21
25517139

+ 62 21
5273045
31 January 09.00 Private Bank
and owned by
Tamasek
International
as majority
shareholder
56

No Institution Name Title Address Phone Fax Date Time Note
Ramesh
Subramaniam
Principal
Economist
13. ADB IRM
Hari Purnomo Program Officer
BRI II Building 7
th

Floor, Jl. Jend.
Sudirman Kav 44 46,
Jakarta
+62 21 2512721 +62 21
2512749
26 January 08.00 International
Agency
Afrizal Naim Manager
SME &
Cooperative
Product
Management
Division
Iman Officer
SME &
Cooperative
Product
Management
Division
14. PT. Bank Bukopin,
Tbk
Irvan Institutional
Cooperation
Bukopin Building, Jl.
Haryono MT, Kav. 50
51, Jakarta
+62 21 7988266
; 7989837
+62 21
7983824
31 January 14.00 Private Bank
and owned by
several
cooperatives
as major
shareholder
15 PT. International
Factors Indonesia
Dennis D.
Firmansyah
President
Director
Wisma Standard
Chartered Bank, 23B
Floor, Jl. Jend.
Sudirman, Kav. 33A,
JAKARTA
+62 21
57901090
+62 21
57901080
14 February 10.00 Private
company as
member of
IFS Group
and member
of IFSA
16 FSVC Dian
Adhitama
Program
Manager
Wisma GKBI 39
th

Floor, Suite 3901, Jl.
Jend. Sudirman No. 28,
JAKARTA
+62 21
57998119
+62 21
57998080
23 January 14.00
17 PT.Galih Ayom
Paramesti
Ignatius
Sumardi
Director Jl.Inspeksi Tarum
Barat, Pekopen,
Lambang Jaya,
Tambun, Bekasi 17510
(021)9169016
(021)70604371
+62 21
839662
29 January 11.30 Private
company
(Auto part
industry)
57

No Institution Name Title Address Phone Fax Date Time Note
18 CV Teguh
Danajaya Pratama
Mr.Teguh Owner Tambun Bekasi Timur 29 January 14.00 Private
company
(Auto part
industry)
19 Elzasapalar Lisa
Elzsapalar
Owner Jl. Kemang 1B/11,
Jakarta 12730
12 February 09.00 Private
company
(Footwear
industry)


58
APPENDIX 2: EQUIPMENT LEASING COMMENTARY




Recommendations for the Indonesian Equipment Leasing Industry

In developed countries and in many developing countries, leasing of equipment is a win-win proposition for
leasing companies and equipment users alike, especially for small and medium enterprises (SMEs). Leasing
can be particularly attractive when tax deductions are provided for depreciation expenses. Leasing also frees
up the scarce capital of SMEs for investments that drive growth.

Recent inquiries and discussions have shown that the Indonesian leasing industry can be significantly
enhanced and made more responsive to borrowers/lessees by careful consideration and implementation of the
following suggestions:

Currently, lessors and lessees are not permitted to take fixed asset depreciation charges as expenses
for tax purposes. In other places depreciation for tax and accounting purposes is a mechanism
allowing equipment purchasers and owners to spread the cost of fixed asset acquisitions over their
useful lives. Along these same lines, depreciation charges reflect the use of fixed assets, and their
corresponding decrease in value, over their useful lives. Importantly, for the equipment leasing
industry, the ability of financial institutions to take depreciation deductions against other sources of
income provides upside lessors, in turn allowing them to offer lower borrowing/leasing rates, thus
making leasing a cost effective alternative to conventional term financing. This is one of the key
drivers in active leasing markets, especially in the area of tax advantaged leasing.

Current legislation requires tax ID numbers for leasing transactions, at all exposure amounts. This
has the potential effect of providing a disincentive or even excluding the lower or bottom tier of the
borrower market. For loans, tax ID numbers are required for loans exceeding Rp 50 million.

Leasing terms available now in the market are generally up to 3 years, with some containing
accelerated repayment schedules, while useful lives of the underlying equipment can be
significantly in excess of that. Elsewhere, leasing, and equipment term loans as well, typically allow
for much longer tenors, with lease tenors generally exceeding available term loan tenors. For
example, in the U.S., typical tenors for equipment term loans in the market are 5 to 7 years, while
leases can frequently be done with terms of 8 to 10 years. In addition, loan amounts, on a loan to
value or loan to cost basis, are typically higher for lease financing versus conventional term loan
financing.

Elsewhere, programs known as vendor leasing are very effective marketing tools for equipment
manufacturers in providing financing (either loan or lease financing) for their customers/buyers.
Under these programs, the manufacturers would originate the loan and lease transactions in
conjunction with their ongoing selling processes, and then sell qualifying loan/lease paper (on a pre-
arranged basis) to financial institutions. This can be done on a recourse or nonrecourse basis, as
negotiated, depending on equipment buyer profiles and the nature of the underlying equipment,
along with its remarketing characteristics. An active vendor leasing market would be a benefit to
both equipment manufacturers and purchasers in terms of enhanced equipment sales and financing
availability, respectively.

59
Banking regulations require that banks take loan loss provisions against their credit exposures, net
of qualifying collateral, while today qualifying collateral includes only securities and real estate, but
does not include machinery and equipment. This is a further disincentive to lenders. The inclusion
of equipment as qualifying collateral is under discussion, and hopefully will be implemented, as it
will help encourage the development of the equipment leasing industry.

The legal system related to insolvencies and equipment repossessions is at present not particularly
lender/lessor friendly in terms of allowing cost effective and timely control of collateral assets and
the enforcement of loan and lease contracts, and could be significantly enhanced to provide better
collateral protections to financial institutions. This would, in turn, result in greater liquidity flowing
into the financing markets as institutions perceive much stronger protection for deteriorating credit
exposures.

Leasing transactions here are rarely structured with residual risk, as most leases, as mentioned, are
full payout leases. Without the tax advantages related to depreciation, these full payout lease
structures essentially represent term loans in disguise. As an enhancement to the product array,
leasing companies, acting prudently, could be encouraged to offer alternative structures, which
could very well include their accepting residual exposures as circumstances warrant. For lessors to
be comfortable creating residual exposure, the equipment market generally, and the resale market
specifically, need to further develop so that equipment prices and value can be more predictable.


Without the right incentives in place, Indonesias vast potential for SME development will remain hampered
by an undeveloped equipment leasing industry. To facilitate capital formation and enhance competitiveness,
and at the same time expand the lending product array offered by financial institutions, regulatory bodies
should give serious consideration to the above.


Commentary By FSVC: Harris Berger, Volunteer, and Dian Adhitama and Greg Alling
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