Developing financial services for microenterprises : an evaluation of USAID assistance to the BRI Unit Desa system in Indonesia

The evaluation covers the period through 8/90. This is an excellent project. The Unit Desa system has registered impressive growth and is fully self-sustaining. In 1989, it earned a $25 million profit, a remarkable turnaround from its loss of more than $24 million in 1984. Total assets increased 617% during this period, while returns on average assets have shown a steady upward trend, rising from 2.7% to 3.6% from 1986 to 1989. Progress towards EOPS indicators has been very good. (1) The amount of Kredit Pedesaan Umum (KUPEDES) loans outstanding for enterprise expansion has risen to more than Rp.1.1 trillion, against a target of Rp. 800 billion, although the long-term loss ratio of 3.28% is still above the target of 2.5% or less. (2) Unit Desa savings deposits have increased dramatically since the introduction of the Simpanan Pedesaan savings scheme in 1985 and account for over 50% of the KUPEDES loan volume, as planned. (3) The labor costs of intermediation have fallen from 14.4% to 10.2%. (4) Unit Desa has a formal reporting network and BRI has established a research department which performs borrower and product research for the Unit Desa system. The income distribution profile of Unit Desa customers is roughly that of the rural population: about 73% are landless or nearly landless and 15.1% fall below the poverty line. Just under 25% are women -- fairly high by Indonesian standards. Profits earned by borrowing enterprises have grown in real terms at an annual rate of 24.6% during an average of 3 years of participation. Borrowers' total household income grew over a similar period at an annual rate of 20.7%, with per capita incomes increasing by 3.8% per year. Total employment in borrower enterprises has increased at an annual rate of 18.2% in terms of persons and 22.5% in annual labor hours. The project has been extremely effective at the policy level. In particular, TA has played a major role in shaping BRI's interest rate policy, the structure of lending and savings instruments, and overall BRI policy toward the Unit Desa system. Significant contributions have also been made in facilitating the automation of BRI functions and in constructing BRI regional training centers. However, inadequate staff development and training are serious constraints on the Unit Desa system. There are about 900 staff vacancies and more than 4,000 persons need to be recruited for 1990. Numerous lessons were learned. (1) A combination of policy input and hands-on TA has been necessary to accomplish project objectives. (2) TA effectiveness has largely been due to long- term relationships between the TA team and senior Indonesian officials. (3) Project success has been heavily dependent on BRI commitment. (4) Government-owned institutions can be effective when they are responsive to market signals and use market-based performance incentives. (5) An intellligent interest rate policy has been essential to the success of the Unit Desa system. (6) Development impact is impossible without a viable institution. (7) Provision of financial services as opposed to targeted credit offers greater opportunities for developing a large customer base, a self-financed funding base, and institutional self- sustainability. (8) The demand for liquidity among the rural population is far greater than the demand for credit. (9) Financial services to low-income rural populations can be profitable.