MICRO-FINANCE INDONESIA
ACT OR ACCIDENT ?
The birth of the Village Units
(Electronic version)
a personal account by
Klaas Kuiper
2003
“Wachten is ook een werkwoord”
(‘waiting works too’)
(Kasmolo)
Copyright © Klaas Kuiper
kkuiper@ision.nl
2003
Permission is granted for reproduction in part or full of this material for educational, scientific
or development related purposes except those involving commercial sale, provided that full
citation of the source is given. For all other purposes prior written consent of the copyright
holder is required.
Keywords
Microfinance, green revolution, agricultural credit, trade loans, village banks, cooperative,
micro-enterprise, rural finance
2
CONTENTS
1. INTRODUCTION
2. ACKNOWLEDGEMENTS
3. THE FAO FFHC-FERTILIZER PROGRAMME (‘FFHC-FP’)
4. YOGYAKARTA PROVINCE, some background data
5. RICE PRODUCTION PROGRAMS 1957-1968
5.1
From JABATANI and Paddy Centers to BIMAS and INMAS
5.2
Farm input distribution
5.3
Credit
5.4
BIMAS planning system
5.5
Main problems
6. BIMAS GOTONG ROJONG (BIMAS-GR) (1968-1970)
7. BIMAS JANG DISEMPURNAKAN (‘improved BIMAS’)
8. THE DIPERTA-FAO FIELD DEMONSTRATION PROJECT
9. THE PN PERTANI-FAO FERTILIZER DISTRIBUTION PROJECT
9.1
Problems defined
9.2
Development proposal
9.3
Results
10. THE BRI-FAO CREDIT PROJECT (‘Village Units’)
10.1
Problems defined
10.2
Developing the project proposal
10.3
Use of pre-war information
10.4
Main aims and BRI policy
10.5
Designing the Village Units: making choices
10.5.1
Village Bank (BKD) or BRI sub-branch?
10.5.2
Mobile or fixed?
10.5.3
Involvement village head?
10.5.4
Involvement DIPERTA
10.5.5
Location choice criteria
10.5.6
Target clients
10.5.7
Group or individual lending?
10.5.8
Loan purposes
10.5.9
Loan terms
10.5.10 Loan package or free choice?
10.5.11 Credit in cash and/or kind?
10.5.12 Interest rate policy
10.5.13 Loan supervision system
10.5.14 Administrative systems
10.5.15 Staff: permanent or temporary?
10.6
Pre-start activities and starting date
10.7
Phase 2 activities and budget
10.8
Other activities/experiments
10.8.1
Storage loans
10.8.2
Savings
10.8.3
Trade loans
10.8.4
Grouping borrowers
10.8.5
Institutional development
3
5
8
9
10
11
11
13
13
14
15
16
18
20
22
22
22
23
25
25
26
28
29
31
32
35
36
37
38
39
41
43
44
45
46
47
49
50
53
53
54
55
55
56
58
59
60
10.9
Estimated system costs and benefits
10.9.1
Turnier’s estimates
10.9.2
Rice survey estimates
10.9.3
FAO-FFHC-FP estimates
11. RESULTS OF THE VILLAGE UNITS (1969-1971)
11.1 Village Units established and area covered
11.2 Loans
11.3 Workloads
11.4 Income and expenditure
11.5 Loan repayment
12. RESEARCH
12.1
Predicting default
12.2
Preference for large farmers?
13. DISCONTINUATION OF BIMAS GOTONG ROJONG
14. GOING NATIONAL
14.1 Expansion of the BRI Village Units
14.2 Expansion of the BUUDs
15. EXPANSION PROBLEMS
16. FAO WITHDRAWAL
17. SUMMARY AND CONCLUSIONS: ACT OR ACCIDENT?
18. EPILOGUE
APPENDICES
A. List of Tables
B. Abbreviations
C. Indonesian and Dutch (NL) words
D. Bibliography
E. List of persons
62
63
64
64
66
66
67
70
72
75
78
78
80
83
85
85
88
90
93
95
100
102
103
104
105
108
Exchange rate used: 1 US$ = Rp 375 (average in pilot project period, 1969-1971)
4
1.
INTRODUCTION
On 28 June 1971 I wrote to my mother-in-law in New York: “As such the credit project
begins to become rather unique now.” The credit project referred to was the pilot project of
the Village Units (VU) of Bank Rakyat Indonesia (BRI) in Yogyakarta province in Indonesia.
Why involve one's mother-in-law in an introductory sentence?
Over the years many people have written about the Village Units in Indonesia, most
publications referring to the period after their ‘rehabilitation’ after the 1983 change in
government policy and the start of the KUPEDES program. In many of these publications
reference is made to a pilot program in Yogyakarta province, sometimes with a wrong starting
date (including BRI publications!), some clearly not knowing why they started there, most not
knowing what the experiment was all about and nobody mentioning the three publications
about the experiments, two published by the Food and Agriculture Organization of the United
nations (FAO) and one by BRI. (34, 63, 64) One would expect that at least authors writing
from BRI offices should have been able to find these publications in the BRI library. As a
result, many later authors writing about the Village Units seem to copy from earlier
publications by others and also seem to have not made own efforts to trace publications about
that period. An internet search in e.g. the library of the Royal Tropical Institute in Amsterdam
produces all three publications! I have not found anywhere any reference to the involvement
of FAO in Bank Rakyat Indonesia (BRI) and the Village Unit experiment, except of course in
the above mentioned three publications.
This publication is not an attempt to claim the Village Units as an FAO invention. Many BRI
staff and others were involved in its development as this document will show. In fact, one
may ask oneself whether the Village Units were planned deliberately as an innovative and
new approach or whether the Village Units just developed as a result of actions or nonactions. Putting the name of one person to its origin, as with the Grameen Bank in
Bangladesh, does not seem justified.
“…textbooks hail Professor Mohammed Yunus in Bangladesh with his Grameen Bank and
BRI with its Unit Desa network as the pioneers of microfinance in Asia….. However, the
birth of microfinance in Indonesia dates back more than a hundred years.” (GTZ/Bank
Indonesia, 1)
“I initially thought that personalities were the explanation for the successful reforms; some
good people in BRI, talented technical assistance, and a supportive and strong Minister of
Finance……It may be hard to believe, but the Indonesians were doing microfinance before
Grameen Bank.” (Dale W. Adams to Devfinance, 22 August 1999)
It may therefore be useful to give some of the details of the experiments then carried out in
Yogyakarta province, not just for the record, but also to correct some incorrect statements as
to what they were aiming at.
One may ask: why tell the story now? The answer to that is simple. I am now retired and there
is time to write, rather re-write what was written about the Village Units in the period 1968 to
1972, and what the intentions and first results were and within what framework all this took
place. Fortunately, I found some old and dusty boxes in my attic in the Netherlands with
documents about the start and the first years of the Village Units including two draft final
FAO project reports (34, 63), correspondence with people closely involved in the Village
Units, many BRI provincial reports as well as some articles written by others referring to the
5
problems of those days, articles not always quoted in the better known Village Unit
publications.
My personal feelings about what was going on in Yogyakarta (I was stationed there from mid1968 till December 1971) and nationally and my work there found its reflection in letters
which my wife and I wrote to my mother-in-law in New York, a fortnightly correspondence,
mainly about the progress of our young kids (two were born during our stay there), but
regularly also about the FAO Freedom From Hunger Campaign Fertilizer Programme (FAOFFHC-FP) of which I was the project leader in Yogyakarta province and about the
experiments that were carried out with BRI, PN Pertani (state agricultural input supply
organization) and the Ministry of Agriculture Extension Service (DIPERTA).
When my mother-in-law passed away in 1991 it was a great surprise to find that she had kept
all our letters! As a result I can date many of the activities exactly, as well as my thoughts and
reactions to what was happening around us. My quotes from these letters may prevent me
from interpreting things now with the benefit of hindsight. I am aware of that risk when
writing about things that happened about 35 years ago. For the most I could rely on data,
letters, articles and texts earlier written and/or published by myself, colleagues and others.
My own rural credit experience at that time was very limited, in fact, non-existing. I knew a
bit of the theory and history about it from Wageningen University, The Netherlands, where I
had followed some of the lectures of professor Ballendux, the last president of the Algemeene
Volkscredietbank (AVB), established in 1934, the Dutch colonial predecessor bank to BRI.
When confronted with the agricultural credit problem in Yogyakarta, I started reading many
of the pre-war publications by Fruin (31, 32) and others as well as articles in the pre-war
monthly credit magazine ‘Volkscredietwezen’ (Popular Credit System) going back to the
beginning of the 20th century. Also, some of the older BRI staff in Yogyakarta and its Jakarta
Head Office knew about the pre-war AVB system and the independent village banking system
(BKDs, village banks and rice banks) in that period.
Three months prior to my posting in Yogyakarta, another FAO department had posted
Raymond J. Turnier to BRI Head Office in Jakarta. He was a senior credit and cooperative
expert, whereas my educational background was rural engineering and planning. My work
experience was limited to two and a half years in a FAO-FFHC-FP project in Eastern-Nigeria
(cut short by the Biafra civil war) and one year experience at FAO Headquarters in the same
FFHC program as assistant to its American program manager, Prof. Dr Robert A. Olson. I
was 29 years old when I started work in Indonesia.
A close cooperation was established with Turnier during the full contract period as far as the
BRI credit experiments and the BRI grain and cassava storage experiments were concerned.
He also assisted at times with the PN Pertani project developments. To complement this, a
Danish associate-expert, Palle C. Andersen, was posted in 1969 to the project in Yogyakarta.
He was mainly engaged in the project fertilizer and crop field demonstrations and trials with
the Ministry of Agriculture in the province and played a major role in processing the vast
amount of data locally.
Writing this article was not without problems. During my stay in Indonesia there was political
and positional fighting within and between government agencies, there were serious
disagreements about how to develop a national food policy and how to implement it; there
was disagreement about the use of foreign multinationals in the implementation of the
6
BIMAS (agricultural rice extension) program; there were great differences of opinion between
Jakarta and the ‘field’; there was disagreement about the place of foreign aid programs; there
were factions pro and anti the military leadership; and at one stage there were serious attempts
to have the two FAO-FFHC-FP programs (there was another one in East Java) stopped.
Most of these activities were Jakarta/Bogor based fortunately and in Yogyakarta we either
heard them late, second-hand and most times it couldn't bother us. Living in Yogyakarta, it
was difficult to verify stories and facts, even more so now. Above does not materially affect
the story I want to tell. This publication is not an attempt to put a belated blame on anyone.
In the following chapters I will quote from the earlier mentioned publications and those of
others so as to try to give as much as possible an unbiased and verifiable story. My quotes
from draft reports and letters can be verified in my personal library. The internal FAO project
correspondence about the project could not be traced anymore in Rome in spite of the
assistance of FAO’s Richard Roberts, which is not too surprising after more than 30 years.
BRI couldn’t help me either and informed me that they kept their documents only for a period
of 25 years, which had also expired.
Quotes from the (translated from Dutch) letters to my mother-in-law by me and my wife and
of my correspondence with others have been printed in italics. The same applies to nonpublished articles or reports or where I am not sure of publication. References to the 52
personal family letters with references to the project in Yogyakarta have been numbered as
L1, L2 etc. Reference numbers listed in the bibliography at the end of this document in
Appendix D refer to published or non-published articles or books or parts thereof. Quotes
either list the reference number in brackets only or the name of the author followed by the
reference number.
Some quotes refer to draft papers/reports or parts of them. These papers/reports are only
quoted from when the final version was not in my possession or, as with the FAO final project
reports by Turnier and Kuiper c.s., the final FAO report was much shorter than the draft report
submitted to FAO. The report editors at FAO Headquarters did not always do a good job in
selecting the right sections when shortening the report to some pre-set number of pages. For
example, the total seasonal loan volumes in Yogayakarta, not unimportant in a credit project,
were deleted in the editing process at FAO Headquarters!
At the end of some (sub) sections I have noted in boxes certain issues that are related to the
content of that (sub)section, either in history or after the FAO project ended in 1972. They
might provide some insight into certain historic connections or allowed for a comparison with
later developments. For those not fully acquainted with Indonesian history I have added a list
of persons mentioned in this document in Appendix E.
I have used the spelling checker of my computer, however, citations have the original spelling
of their authors, including errors. Some Indonesian words had spelling changes since I left
Indonesia, e.g. Jogjakarta is now Yogyakarta, ketjamatan is now kecamatan etc.
Readers interested in the BRI-FAO credit (‘Village Unit’) project only can start reading at
section 10.
7
2.
ACKNOWLEDGEMENTS
The staff members of the Ministry of Agriculture and Bank Rakyat Indonesia in Jakarta and
Yogyakarta province were already acknowledged in the final FAO reports by Kuiper,
Andersen and Turnier. Specific persons mentioned in this document but not mentioned in the
FAO reports I would like to thank here, although admittedly, a bit late, and for two of them,
Rik Molster and Bob Olson, even too late.
In writing this report particularly my wife and children have stimulated me to finalize it.
Writing it helped me in adjusting to my new life after retiring from my busy work from the
Dutch international technical assistance program (DGIS). They were supported in this by
various friends and in-laws.
I would especially like to thank Mr. H. Chandra, a rural finance consultant in Jakarta, who
was very helpful in providing me with translations of documents used in the Village Unit
project and of translating some Indonesian terminology. Thanks are also due to Dale Adams,
Johan Leestemaker and Dirk Steinwand for their suggestions and useful comments on the
draft report.
Thanks are also due to the International Visitor’s Program (IVP) of Bank Rakyat Indonesia in
going into their archives and supplying me with the correct spelling of the names of past BRI
presidents and directors and the periods they served in their positions.
Finally, I would like to invite those that have comments and/or suggestions or note clear
mistakes not to hesitate to contact me. I have done my best to be as accurate as possible but
cannot exclude the possibility that my memory or personal project records give a less than full
and correct picture. Those taking advantage of this offer I thank in advance.
Doorn, The Netherlands, 2003
Klaas Kuiper
e-mail address:
kkuiper@ision.nl
8
3.
THE FAO FFHC FERTILIZER PROGRAMME (FFHC-FP)
The ‘Fertilizer Programme’ (FP) was one of many activities under the FAO Freedom from
Hunger Campaign. The program was financed by contributions from large international
fertilizer and chemical industries and bilateral donor governments. (FAO, 28)
The program in Yogyakarta province in Indonesia was financed by the ‘Centre d' Etude de l'
Azote’ (C.E.A) (Nitrogen Study Center) in Switzerland and the Danish government, which
financed an associate-expert as from 1969. The official counterpart agency for the project was
the Indonesian Ministry of Agriculture, the official counterpart the Director-General of that
Ministry.
The FAO-FFHC-FP was being carried out in countries in Africa, Latin America, Middle East
and Far East and had the following standard components:
(i) a field program showing farmers the effects of new crop varieties, various
fertilizer applications and pesticides by way of demonstrations and trials on
farmers' fields. Such demonstrations included current farmers’ practice;
(ii) activities in respect of the storage, supply and marketing of agricultural inputs,
ranging from seeds, fertilizers, pesticides, equipment etc;
(iii) activities related to the supply of credit, either through financial intermediaries or as
supplier credit to support the use of the inputs promoted;
(iv) activities related to the storage, processing and marketing of farm produce.
Which activities were to be included in a particular country project depended on the local
conditions. In Yogyakarta province activities were to be planned in respect of all four
components.
This meant that, in addition to the Ministry of Agriculture (DIPERTA), a close working
relationship was also established with PN Pertani, the state agricultural input supply agency,
and Bank Rakyat Indonesia (BRI) for the credit component of the project.
“Time is short. Planting starts 1st October. Everyone is very enthusiastic and everyone
expects so much in a short time. I prefer to work with less attention but this is the situation. It
makes the challenge only bigger. I will not be seduced to an ’all or nothing’ approach and
surely some people will be disappointed in the beginning. Development is not being made by
developers but by the reactions of those to be developed. The Javanese farmer, and that's
what matters, will decide in how far we will have a successful project. His attention and
willingness will be the measure of progress, in spite of all our good wishes and intentions.”
(L1, 23 June 1968)
9
4.
YOGYAKARTA PROVINCE, some background data
Yogyakarta province was the smallest of the four provinces on the island of Java, in size,
population and rice area. It was the only province that had no military governor in 1968.
The province was divided into five districts (‘kapubaten’) one of which was the city of
Yogyakarta. The four rural districts were sub-divided into 60 sub-districts (‘ketjamatan’) and
these into 393 villages (‘kalurahan’). A village could consist of several ‘desa’ (hamlet, usually
also translated as ‘village’).
The total population of the province was about 2.675 million in 1969 (6), annual population
growth had been two percent in the previous years. Population densities in the rural areas of
the province varied from 500 to 2,000 per square kilometer.
According to the 1963 census there were about 325,000 farms covering about 190,000
hectares, giving an average farm size of 0.6 hectare. Irrigated farms numbered 185,000
covering a maximum of 93,000 hectares in the wet season (October-March), an average of
0.28 hectare irrigated land (‘sawah’) per farmer or an average of 0.5 hectare per irrigated
farm. During the dry season (April-September) the maximum irrigated area was 28,000
hectares. (2)
Most irrigation water came from rivers and streams running down Mount Merapi, an active
vulcano. No large reservoirs existed. This made irrigation mainly dependent on rainfall.
Ninety percent of the farms were fragmented with an average of 3.5 parcels per farm. Farms
were generally operated by their owners who might rent additional land. Tenants also existed
(some people protesting the Green Revolution called this group ‘landless farmers’).
The province had a strong presence of national party (PNI) supporters as well as communist
party (PKI) supporters prior to the abortive coup of 1965 and subsequent army take-over in
1966. In PKI controlled areas there had been programs for the redistribution of land. Some
villages in the Bantul district also had to rent their land for a one year period to the local sugar
factory at regular multi-year intervals, a colonial inheritance.
Average provincial annual per capita income was estimated at US$ 12 in 1969. Rice
consumption in 1969 was 60.7 kilogram/head in the rural areas and 80.7 in urban areas. The
province had had a rice deficit for many years. Provincial imports during the 1960s had
ranged from 20,000 to 50,000 tons of white milled rice annually.
In addition to BRI with its district branch offices and BRI supervised village banks (BKD),
there were a total of 18 state owned pawnshops with a total funding of Rp 50 million in
November 1969, using an interest rate of 7% per month. Illegal pawnshops also existed and
charged between 10 and 20% per month. (6)
10
5.
RICE PRODUCTION PROGRAMS 1957-1968
5.1
From JABATANI and Paddy Centers to BIMAS and INMAS
JABATANI (institute of agricultural materials)
Jabatani was according to John Kolff the first government attempt in 1957 to set up an
agricultural input distribution system, which had centers in Medan, Bandung, Semarang and
Surabaja. Jabatani's supplies were obtained through private imports and distribution from its
main centers was through private agents. As of 1959 Jabatani's functions were gradually taken
over by the Paddy Centers, which were part of a larger body, the BMPT, whose aims were to
raise the output of rice and to act as purchasing centers for government rice requirements.
(Kolff, 33)
Paddy Centers
In Yogyakarta province ‘Paddy Centers’ were started in 1960 as part of the national program.
Kolff's research included Yogyakarta province. He interviewed farmers about the Paddy
Centers and stated: “most farmers interviewed during fieldwork commented favorably on the
Paddy Centers which obviously stimulated the demand for fertiliser greatly. One reason for
their popularity was that, because of poor administration and widespread corruption, many
farmers were able to buy fertiliser extremely cheaply and credit was seldom repaid, which is
also the reason why the Paddy Centers were closed in 1963.” (Kolff, 33)
PN Pertani
BPU Pertani had taken over Jabatani's fertilizer procurement activities in 1961 and when the
Paddy Centers were abolished in 1963 this became PN Pertani.
“In fact PN Pertani was largely the Paddy Centers re-organized, with much of its large staff
also from the Paddy Centers.” “This state enterprise dominated fertilizer distribution for a
number of years.” “Its principal retail outlets were the rapidly-formed farmer co-operatives
(Koperta); where these did not exist, the village head or the Extension Service acted as
retailer. These distribution channels were also used for the BIMAS programs which began
operating in about 1964.” “A high proportion of the farmers interviewed complained about the
difficulties they had in obtaining fertiliser between about 1963 and 1968, especially when
there was no Bimas program in their area.” “The shortage of foreign exchange to pay for
fertiliser imports was often a major problem.” (Kolff, 33)
BIMAS
The BIMAS (‘mass guidance’) program was started by students in 1964 and abolished by
government in 1983. Some authors, e.g. Prabowo, use 1965 for its start. (54)
Information on the BRI website stated in 2001 that “At the beginning of the New Order, the
government of Indonesia wanted to achieve rice self-sufficiency by introducing a program
named Bimas….” (18). ‘New order’ means the Suharto government. This statement is
therefore incorrect since BIMAS existed prior to the start of the Suharto government in 1966
and it wasn’t the first government program to increase food production.
In Yogyakarta Province the Paddy Centers were abolished in 1965 and replaced by the
BIMAS program. Rice production in the province had then reached 234,800 tons of store dry
stalk paddy (conversion used: 100 kg store dry stalk paddy = 76.5 kg dry grain = 53 kg white
milled rice).
11
BIMAS BARU and BIMAS BIASA
In 1968 a new scheme was added, the BIMAS BARU (‘new BIMAS’), which involved the
introduction and farm management techniques for high-yielding rice varieties from the
International Rice Research Institute (IRRI, Philippines). The major varieties were IR5 and
IR8, in Indonesia called PB5 and PB8. Later IR20 and IR22 were also introduced in the
scheme. The BIMAS program for local rice varieties was henceforth called BIMAS BIASA
and the former BIMAS program was referred to as BIMAS NASIONAL.
Under these BIMAS programs the agricultural extension workers would make demonstration
plots, showing the new and old varieties with fertilizer and insecticide applications. These
demonstration plots could be rather large, up to several hectares. This may have been related
to the fact that extension workers were paid a BIMAS bonus of Rp 1 per square meter for
demonstrations laid out and completed.
In addition to the provision of funds for lending (through BRI) and the supply of the farm
input requirements (by PN Pertani), the BIMAS program also had an operational budget
handled by the Ministry of Agriculture, which benefited a wide range of officials as the
following example from one district in East Java shows:
Employee
“- Bupati (=district head) and deputy
- Deptan (Ministry of Agriculture, District head)
- Coop
- Public Works
- Ministry of Information
- Head of Kawedenan (district)
- Tjamats (sub-district heads)
- Mantri ketjamatan (sub-district officials)
- Agriculture officers, Kawedenan
- Police ketjamatan
- Army ketjamatan
number
monthly (Rp)
2
3000
3
3000
1
3000
8
3000
1
3000
4
1350
18
1500
36
1350
8
750
18
600
18
600
total per year Rp 1.84 million”
source: Worldbank agric. mission (1971)
Another system, dating back to pre-war times and still in use, was crop sampling by
agricultural extension workers. At harvest time a small area of a farmer’s field would be
harvested and all agronomic data would be recorded, including crop variety, plant spacing,
fertilizer applications etc. These samples were taken at random by throwing a large wooden
frame into a rice field to indicate which area was to be harvested. The data thus collected were
used to estimate district and provincial rice yields and to see what progress BIMAS was
making e.g. the adoption of the recommended farm inputs.
“The safest way to establish average crop yields will be to ask the Agricultural Extension
Service for figures in the various parts of the district.” (Fruin, 32)
INMAS
It was assumed that at a certain stage farmers would ‘graduate’ from the BIMAS and no
longer need advice and BIMAS credit. Such farmers were then grouped under the INMAS
program. In fact, most farmers not participating in the BIMAS program were put under
INMAS, an administrative exercise.
12
5.2
Farm input distribution
Farm inputs, especially fertilizers, supported with agricultural loans, were the major
component of the various BIMAS programs. The fertilizer and pesticides recommendations
were established centrally by the Agricultural Research Department in Bogor.
Fertilizer sales in Yogyakarta province for the period 1960 to 1969, the period prior to the
Village Units, had been as follows:
Table 1: Fertilizer sales by PN Pertani and private traders in Yogyakarta province in the
period 1960-1968 (tons nutrients)
PN Pertani PN Pertani
Private
Private
TOTAL
TOTAL
Year
N *)
P2O5 **)
N
P2O5
N
P2O5
1960
42
1
42
1
1961
525
17
525
17
1962
1980
38
1980
38
1963
4738
66
4738
66
1964
3755
181
3755
181
1965
1625
163
1625
163
1966
1716
6
1716
6
1967
892
30
892
30
1968
1861
63
615
21
2476
84
*) N = nitrogen, usually in the form of urea
**) P2O5 = phosphate, usually in the form of triple-super-phosphate (TSP)
source: FAO (34)
One should roughly double these tonnages to arrive at tons of fertilizers. Private traders were
allowed to operate since 1968, prior to that time PN Pertani held a monopoly position.
5.3
Credit
Farm credit supply under the Paddy Centers could be defined as supplier credit. The group
credit under the BIMAS scheme in Yogyakarta province was supplied by Bank Rakyat
Indonesia (BRI) starting from the 1965/66 wet season with the exception of the 1966/67 wet
season when PN Pertani was supplying inputs under supplier credit arrangements.
Table 2: Yogjakarta province: seasonal group loan volumes in BIMAS program prior to the
start of the Village Units (1965-1969)
Season
Loan volume (million Rp)
Credit supplier
1965/66 wet
2.2
BRI
1966 dry
Nil
1966/67 wet
6.0
PN Pertani, 100% credit in kind; repayment 10%
1967 dry
Nil
1967/68 wet
32.6
BRI, 81% credit in kind
1968 dry
24.3
BRI, 77% credit in kind
1968/69 wet
37.5 *)
BRI, 70% credit in kind; repayment 83%
1969 dry
2.5 **)
BRI, 80% credit in kind; repayment 74%
*) original record 35.5; in 1971 BRI Yogyakarta used a figure of 37.5 and BRI- Jakarta a figure of 42.5
**) BRI Yogyakarta figure; official BIMAS figure was 2.9
Loan repayment during above period varied between 70 and 85 percent per season with the
exception of the PN Pertani loans in 1966/67 where repayment was estimated to have been 10
percent. Repayments were normally not within the official loan period of seven months.
13
“The duty to repay what one has received is recognized….the requirements of the bank are
well known; anyone who takes out a loan knows that it must be repaid on time and normally
needs no additional incentive to do so.” “… if the traditional promptness with repayments has
given way to significant and widespread arrears…….it will cost a great deal of time and care
to restore the lost discipline.” (Fruin, 32)
Credit administration was through village agricultural committees or cooperatives
(COPERTA, KOPERTA), usually under the chairmanship of the village chief or village
agriculture officer (‘mantri’). BRI acted as an administrative agent for the Ministry of
Agriculture. The number of group loans was equal to the number of villages served by the
BIMAS program and BRI had no information on the number of borrowers, individual
amounts borrowed and for what purpose, nor had it information on individual loan repayment
performance.
5.4
BIMAS planning system
BIMAS planning techniques were simple: an area target was multiplied with the
recommended fertilizer and pesticides recommendations and that gave the required volumes
of fertilizer and pesticides, which PN Pertani then had to import and distribute to the villages.
“Indonesia has another weak point and that is the planning of fertilizer imports. You can't
believe it but nobody is concerned that the acreage targets were never achieved and that the
formula for imports is: BIMAS target area x fertilizer recommendation = import. Farmers
refused (luckily) to follow the crazy recommendations.” (L32, 22 December 1970)
In a similar way the credit target was established by multiplying the PN Pertani volumes with
the government fixed sales prices plus a fixed amount per hectare for cash expenses. Above
techniques were used irrespective of results obtained in the previous seasons. The results
could be guessed!
“PN Pertani had virtually no control either over the stocks of fertiliser it was obliged to
receive (and sell) or over the price at which they were to be sold. These decisions were taken
by the Minister of Agriculture, the Minister of Trade, or even the Cabinet.” “Among other
things, this led to large excess fertiliser stocks in many parts of Indonesia and further
aggravated Pertani's problem.” (Kolff, 33)
The use of targets for everything was very popular in those years. The planning process under
the first 5-year plan (1969-74) looked much like military operations planning. Yogyakarta
province also had an ‘operations room’ in the governor’s offices: a large room with a map of
the province covering a whole wall with all kinds of colored lamps fixed on it, indicating
various projects, which could be lit from a central panel. Visitors would be brought there but I
have never seen anyone there using the room at other times. The lamp bulbs slowly stopped
lighting up after some time.
“An all-pervasive by-product of cargo-fever in lower level offices is the continuing existence
of what one might call the ‘operations room complex’. The operations room is invariably as
empty of people as a museum.” (Franke, 30)
14
5.5
Main problems with BIMAS
The main problems experienced with the BIMAS programs were:
a. farmers did not accept the new rice varieties quickly;
b. farmers did not follow the official fertilizer recommendations;
c. planned BIMAS acreage targets were not achieved;
d. PN Pertani was left with surplus fertilizer stock;
c. BRI had no influence on borrower selection and loan repayment enforcement.
“It seems that little is left over from the original concept of BIMAS when it was started by
students putting themselves in a position of ‘farmers’ leaders’, even where the production
factors paid attention to remained the same. From the original educational effort it seems to
have developed into a money disbursing scheme with payments not only going to various
levels of Ministry officials but also to other government and local officials, whose relationship
with rice production are at least doubtful if not non-existent…. Enthusiasm for the BIMAS as
it has appeared in various forms during the past seven years therefore remained largely
limited to the officials engaged in it.” (FAO, 34a)
“The average farmer in Central Java and Jogjakarta is operating a business with little if any
financial working capital. Financing inputs necessary to increase productivity through modern
farm technology and to improve the farmer’s economic condition, calls for a massive injection
of outside credit. There is a clear cut case for the need and the justification for the
mobilization of available resources to finance production inputs and in initial stages, farm
living costs, and their channeling into those sectors in which they would be gainfully
employed.” (ADB, 10)
15
6.
BIMAS GOTONG ROJONG (BIMAS-GR) (1968-1970)
Because national rice imports continued at unacceptable levels Government accepted
proposals by (multinational) chemical companies to assist in solving its rice production
problems. This scheme, called ‘BIMAS Gotong Rojong’ (BIMAS-GR), basically implied that
a chemical company would be allocated up to several hundred thousand hectares of rice and
made responsible for supplying fertilizer and crop spraying. The latter was done in some areas
by plane or helicopter. The fertilizer was brought to the village doorstep. At the end of the
season the farmer was to repay by way of a payment of rice to the national rice agency
BULOG, this payment being “one-sixth of his rice yield with a minimum of 965 kilogram
paddy/ha.” (L19, 29 May 1969).
The fertilizer recommendation was a standard one and was modified in some cases so as suit
the formulas manufactured by the respective chemicals supplier. The credit in this scheme
was supplied as supplier credit by the multinational company which at least in the first year
would give an advantage to the government in that its foreign exchange requirements would
be less. In subsequent years this advantage would no longer exist because of payment to the
chemical companies for the past season.
“After the first season showed up difficulties in getting production inputs to farmers on time,
the companies came through with a plan to give vehicles to local agricultural extension
offices.” “This sudden ‘dropping’ as the Indonesians would call it, was often cited in
interviews as a sign of how things were improving. In interviews with government officials
that is. Farmers had a rather different response to the whole affair. Even with the vehicles,
harvests fell below calculated levels in most areas of Java….” “Unlike the government office
workers, farmers do not expect they will receive handouts from anyone, and anyone who
thinks he will is obviously being tricked.” (Franke, 30)
“In the meantime the second season started. Same production inputs are delivered but the
price is now $56 per ha in stead of $40 as in the past season. This all looks like an attempt at
self-destruction. There is a lot of criticism in the newspaper. There seem to be lots of farmers
protesting to the repayments. And rightfully so! For many farmers it means that they have to
pay more than what they got. Many farmers plant already more soybean and less rice, a clear
sign I think.” (L19, 29 May 1969)
Yogyakarta Province was not included in the BIMAS-GR scheme, although various
companies showed an interest in it.
“This week we had an attempt by three companies to have our area contracted from
government (for spraying and fertilization). Along the North coast there is already such a
project [name deleted] of 300,000 ha. The farmers are not being asked anything, the spray
plane sprays and the fertilizer is brought at the doorstep. At the end of the season the
(expensive) bill is presented to the farmer. In Holland such sales methods are not permitted as
far as I know. There is some farmer protest here. Fortunately it will not involve Jogjakarta,
my counterpart and head of service kept them at bay (in how far he has been influenced by me
is a guess? of course).” (L9, 21 December 1968)
“Some commercial eyes fell on Jogjakarta, which, if it continues, will make our second phase
impossible. John W. has helped a lot to make this clear to the folks in Jakarta, for the time
being with success, but you never know for how long. We don't believe much in commercial
‘gotong rojong’ projects and shall not cooperate with them. In the meantime the French in
West Java (similar project as ours) have lost their area and work now on other crops.
16
We are the only project now that works on the ‘institutional framework’, from which any
long-term development must come, but it doesn't make our position any easier. Although we
trust our approach, the question is whether we will be permitted to implement it. Let's wait.”
(L20, 18 June 1969)
Precise reasons why Yogyakarta province was not included in the BIMAS-GR I can't trace
anymore, however, the Inspector of Agriculture in Yogyakarta was very much against
inclusion, and so was FAO. If the province had been included in the BIMAS-GR the FAO
program would have had to stop. The fertilizer demonstrations and trials were not in the
interest of the suppliers (trials would indicate lower fertilizer requirements) and the credit
project with the BRI Village Units would not have been possible because BIMAS-GR used a
system of supplier credit by the chemical suppliers.
Farmers in the BIMAS-GR areas were not enthusiastic. Many of them protested publicly and
some government officials too (some BIMAS ‘benefits’ no longer continued in the BIMASGR areas).
“When farmers were not convinced of the benefits of using fertiliser, especially when they
had been forced to join a BIMAS program, they sometimes sold all or part of their ‘package’
to private traders for immediate cash, usually at well below the official price. Other fertiliser
entered the private market through illegal sales by BIMAS officials. These practices were
most widespread during the BIMAS Gotong Rojong period, when the volume of fertiliser
forced down to the farmer was greater than ever before, but it had started well before then.”
(Kolff, 33)
Some BIMAS-GR fertilizer also found its way to Yogyakarta province but farmers did not
benefit from this ‘cheap’ fertilizer because the traders were taking the extra profit.
“The result is that Indonesia last year September was sitting on 500,000 tons of unsold
fertilizer, more than the annual demand (between 300,000 and 400,000 tons). Interest alone
costs the country US$ 400,000 per month! An unbearable situation. But there the helpers
appear! Foreign firms offer their help to improve the distribution! But the problem was not
distribution. It was the refused recommendations by farmers. No problem. Farmers are
pressed to use the recommendations.” (L32, 22 December 1970)
“This pressure existed in accusing the refusing farmers of communist sympathies which
showed itself in sabotage of the 5-year plan 1969-1974. This accusation or the threat of it was
usually sufficient to have farmers reluctantly participate.” (Lagendijk, 45)
For the discontinuation of the BIMAS Gotong Rojong program see section 13.
17
7.
BIMAS JANG DISEMPURNAKAN (‘improved BIMAS’)
Under the BIMAS-Gotong Rojong with its supplier credit system there was no agricultural
lending business for Bank Rakyat Indonesia. BRI didn't seem to worry too much about that
and also had its doubts about this new BIMAS type.
When a proposal came from Yogyakarta Province early 1969 to start a pilot scheme to
develop local alternatives to the BIMAS-Gotong Rojong (29), BRI Head Office, PN Pertani
Head Office and the Ministry of Agriculture (BIMAS section) were happy to cooperate.
Under the first five-year development plan 1969-1974 (‘Repelita-I’) the rural financial system
was to be improved and expanded and BRI’s new management was actively looking for ways
to achieve this, having started with a government financed rehabilitation program for the
5,000 village banks (BKD) already under BRI supervision (a system that existed also before
the Second World War). BRI Headquarters had not yet developed a clear view as to how to
develop BRI’s own agricultural lending system. Its rural system at that time existed of branch
offices at district level plus a growing number of Mobile Units (MU) attached to these branch
offices.
PN Pertani, which had no role in the Gotong Rojong areas either, was to be reorganized and to
be made ready for competition with private traders that had been allowed in since 1968.
The proposal developed in Yogyakarta for individual agriculture production loans became
known as the ‘Village Unit’ project, the approach to increase food production became known
as ‘BIMAS jang disempurnakan’ (improved BIMAS). Village Units individual lending and
group lending through the village (cooperative or not) committees for BIMAS existed sideby-side during 1969-70, as the provincial BRI reports showed. The new approach to BIMAS
was further supported by the establishment at the same time (late 1969) of the Bimas
Supervisory Board (Badan Pembina Bimas), with strong powers delegated from the President
(Presidential decree No. 95, 1969).
In 1970 rice and ‘gaplek’ (dried cassava chips) stores were added to the Village Unit project.
Later, rice hullers were added to these stores. These facilities being created under the
improved BIMAS became known as ‘BUUD’ (Badan Usaha Unit Desa, village unit
enterprise), some being managed by the village, others managed by BRI as part of an
experiment.
The term ‘BUUD’, as far as I recall, was first used by the Ministry of Agriculture in
Yogyakarta in 1970. BUUD was not an organization but an indication of the group of
facilities that were being created at village level under the ‘improved BIMAS’ within a
Village Unit area: farm input supply, produce storage, agricultural processing facilities and
supporting credit facilities for inputs and for the construction of stores, storage loans and
loans to the stores for the purchasing of farm produce at minimum guaranteed prices. The
‘improvement’ of the BIMAS program was that it differed from the previous BIMAS program
in that it did not limit itself to stimulating crop production but that it also paid major attention
to what happened after production: storage, processing and sales, all with supporting credit
facilities, the philosophy being that when farmers could receive a better price for their produce
they would produce more of it. Other major changes were the change-over to individual loans
and the fact that farmers were free to decide what quantities of inputs they wanted to use. This
was all in line with the objectives of the FAO-FFHC-FP.
18
The Village Unit design foresaw that after the initial agriculture related lending the Village
Units should become part of BRI’s normal rural financial services activities or could develop
into village owned banks (BKD), controlled by BRI (see further section 10.8.5).
BUUD
According to Bouman (22) these BUUDs further developed into registered KUDs (cooperative unit
desa) after 1973, and BRI withdrew from them as a manager but remained active in the financing of
the construction of stores and the facilities offered, such as storage loans and the provision of funding
of rice purchases at a minimum guaranteed price. A Loan Guarantee Fund for Cooperative
Development, earlier proposed by Turnier and his Harvard colleagues at BAPPENAS, guaranteed
these BRI investments (see further section 14.2).
19
8.
THE DIPERTA-FAO FIELD DEMONSTRATION PROJECT
The FAO-FFHC-FP worked with small fertilizer demonstration plots of a few hundred square
meters involving both local and high-yielding rice varieties and laid out and supervised by the
agriculture extension staff. Other crops, usually grown in rotation with rice, so-called
‘polowidjo’ (dry land) crops, were included in the project. This inclusion of dry land crops
was against the wish of the Ministry of Agriculture in Jakarta. In the district of Gunung Kidul,
a very poor limestone area with mainly dry crops, cassava was the main food crop and was
included under the DIPERTA-FAO program.
“In general it can be said that extension workers are reasonably trained and willing and able
to execute necessary duties. Due to the system followed motivation has become a financial
one mainly. This is a consequence of the system that payments are made for specific projects
or programs e.g. ‘management fee’, ‘compensation’ and others. Official salaries of extension
workers are low and they can increase their income by conducting certain paid activities,
either for government or for non-government bodies; for example payment for
demonstrations. This system of payments for certain duties automatically leads to a disinterest
in non-paying extension activities…. The major income increasing activities are those done
for the BIMAS program and those for commercial firms.” (FAO, 34a)
Extension workers were accustomed to receiving a bonus based on demonstration size. The
DIPERTA-FAO small demonstration plots of only a few hundred square meters would have
meant more work and less income to them if square meters were to be used to decide on their
bonus. To solve this problem, extension workers were paid a fixed amount for every
successfully completed DIPERTA-FAO demonstration plot. “Our trials cost about Rp 3,000
but Jakarta is crazy enough to budget Rp 50,000(!) for them. We call that ‘social security’.”
(letter to Molster, 9 June 1971)
Various authors have indicated that farmers did not use the proposed farm input quantities and
have given different reasons for that. Reasons mentioned were distribution problems, lack of
credit, lack of appropriate recommendations, unwillingness of farmers to follow
recommendations and an incorrect ratio between fertilizer prices and rice prices.
Government's main conclusion was that there was a distribution problem. Very few seemed to
have doubted the fertilizer recommendations made by the agricultural research institute in
Bogor, although some authors had indicated that recommendations covering a large area
should only be regarded as guidelines. Individual farmers could not be expected to use exactly
the recommendations coming from Bogor. In addition to the factors mentioned above, other
factors affecting fertilizer use were amongst others soil type, water fertility and the use of
compost or animal manure.
The DIPERTA-FAO demonstration program had the following aims:
- to demonstrate the new rice varieties from IRRI (Philippines);
- to establish best fertilizer practice on rice and other crops grown;
- to establish relationships between fertilizer recommendations and various other
factors (as mentioned above).
In addition, the crop cutting data of the agriculture extension service were processed,
believing that what farmers practiced might be useful indicators too.
20
The processing of all demonstration, trials and crop cutting data was done by H. C. (Rik)
Molster, a PhD student at the Food Research Institute of Stanford University (USA). His
thesis, made under the supervision of Professor Peter Timmer, a BAPPENAS (National Plan
Bureau) advisor at the time, was based on data collected in the DIPERTA-FAO project in
Yogyakarta province. (Molster, 51) The FAO program also used him to process data collected
in the pilot Village Unit credit scheme (see section 12).
“In respect of trial results from the period prior to our arrival here: I have looked everywhere
but cannot find more than about 20 trials by Bogor (with HYV). Not a single trial under farm
conditions.” (letter to Molster, 9 June 1971)
The results from the hundreds of fertilizer trials and demonstrations in farmers’ fields,
confirmed by the crop cutting data from farmers’ fields, showed that the Bogor BIMAS
recommendations used in Yogyakarta province were incorrect. This led to a serious conflict
between FAO and Bogor (see section 16). Once the problem was solved, the FAO-FFHC-FP
approach became accepted by the Ministry of Agriculture: “In the meantime Jakarta has
decided to have a national ‘field program’ with about 12,000 field trials (they got the money
for it). I am now trying to fit the FAO program into it.” “A lot of goodwill now comes more or
less automatically in Jogjakarta. The province is now a kind of ‘laboratory’ (Jakarta saying)
for the development of a new, national food production policy.” (L28, 1 November 1970)
Another preliminary and debated conclusion based on the field trials and demonstrations was
that high-yielding varieties of rice did not make much better use of nitrogen fertilizer than the
local varieties. (36) For the project staff this was not that much of an unexpected result
because the new rice varieties being introduced were cross-breds of high-yielding Indonesian
rice varieties with short-straw rice varieties from elsewhere. “It is a political dangerous
conclusion! Green revolutionists do not believe it. They prohibited me to have it published in
the FAO rice letter since ‘it was no news’!?” (letter to Molster, 20 April 1972)
As far as the Village Units of BRI were concerned, it was agreed between BRI and the local
DIPERTA inspector that DIPERTA-FAO could make recommendations to farmers but that
the amounts of fertilizers to be used would be decided by the individual farmer requesting a
loan.
21
9.
9.1
THE PN PERTANI-FAO FERTILIZER DISTRIBUTION
PROJECT
Problems defined
According to a joint survey carried out by the FAO-FFHC-FP and PN Pertani the main
problems with the distribution of fertilizer in Yogyakarta province could be summarized as
follows (38):
- surplus PN Pertani stock as a result of farmers not following the official BIMAS
recommendations, BIMAS acreage targets not being achieved and acceptance of
high yielding varieties being less than targeted;
- old stocks and poor storage (one year stock of between 6 months and 2 years old);
- lack of sales outlets close to farmers;
- provincial PN Pertani director having no influence on amount of stocks needed;
- lack of competition. PN Pertani was a monopoly supplier in the BIMAS program;
- adulteration of fertilizers (mainly urea) in the ‘free’ market;
- ratio bufferstock/retail stock of about 1:1 (compared to 1: 50 in the private sector), indicating
poor volume planning and poor transport planning;
- overstaffing; 30% of staff having a second job;
- staff knowledge about fertilizers, both in PN Pertani and private trade, fairly limited.
The PN Pertani left-over stocks were enough for another year. As a result the organization
was also facing a serious liquidity problem with the bank threatening to stop further credit. A
closure of PN Pertani would have threatened the pilot project proposed by FAO on fertilizer
distribution with PN Pertani in Yogyakarta province and Central Java.
“It was obvious that if PN Pertani wanted to stay in the market it should move closer to the
farmers, provide better services and change its planning procedures, in addition to looking in
the economics of the organization especially with regard to the needs of personnel.” (FAO,
34a)
9.2
Development proposal
A proposal for an improved fertilizer storage and distribution system was developed by the
FAO project together with Mr Soesmojo, the PN Pertani director in Yogyakarta, at the end of
1968. It was submitted to PN Pertani Head Office early February 1969, at the same time that a
credit program proposal was submitted to BRI Head Office.
“I have three proposals pending in Jakarta. They involve the inclusion of other crops,
reorganization of the distribution and sales systems for agriculture inputs (fertilizer,
pesticides, seeds etc.) and expansion of the agricultural credit system.”… “The proposals are
‘policy’ type proposals…. Next week, if all goes well, I will have a meeting with the governor
(nephew of the Sultan). The problem is that they always leave little room to the Provinces to
do things that are best under local circumstances. When a national project doesn’t go well in
a few provinces they can decide to stop it everywhere. This is a general feature of countries
with a strong central government. However, there must come a day that they change to
regional planning. An attempt in that direction I am taking in Jogjakarta if the governor
agrees. But even that requires Jakarta approval!” (L 12, 9 February 1969)
22
Main components of the PN Pertani project proposal were:
- a survey of existing facilities and systems of PN Pertani in Yogyakarta;
- based on survey results: prepare a provincial PN Pertani development plan;
- improve the fertilizer planning system;
- prepare for private sector competitors;
- upon request of PN Pertani Head Office: assistance with the implementation of the
provincial reorganization.
The preparation for facing competitors was needed because the government had already
accepted in 1968 recommendations from various sources to open the fertilizer market to the
private sector. The FAO-FFHC-FP proposal was accepted on 18 February 1969 by the PN
Pertani Head Office in Jakarta.
“Discussed today the proposed ‘pilot project’ for fertilizer distribution with the director of
that organization…... The reactions were overwhelming. In short it meant that the director
said that we “could do whatever we proposed”. This is not an empty promise. He was so
enthusiastic that we had to restrain him, just because I don't want to overwork myself by
starting too many things at the same time, although his suggestions were very valuable.”
(L13, 18 February 1969)
“My friend and colleague (Raymond Turnier) saved PN Pertani from bankruptcy. They will
now get their last loan from the Bank on the condition that Jogjakarta and Semarang become
successful projects.” (L22, 22 October 1969)
The proposed survey was carried out by Soesmojo and Kuiper, and its main findings were as
summarized in section 9.1 above. In addition to being a starting point for a reorganization of
PN Pertani, the study also aimed at having a “good description of the existing situation prior
to the start of the Village Units in order to enable a good evaluation of the impact of the
Village Units.” (FAO, 34)
“The survey I did last year of PN Pertani (the distribution agency) is still the only one of its
kind in Indonesia and ‘sells’ as sweet cake. It is being used amongst others by a German
survey team (national fertilizer study) financed by the Worldbank.” (L27, 6 September 1970)
9.3
Results
Prior to the start of the Village Units and the PN Pertani reorganization, urea credit sales in
the period 1967 to 1969 had decreased from 46% to 18% of total urea sales. For triple-superphosphate (TSP) the decrease was from 42% to 13%.
With the start of the Village Units the PN Pertani national fertilizer prices were decreased as
from the 1969/70 wet season (urea from Rp 31.5/kg to Rp 26.6/kg, triple-super-phosphate
from Rp 31/kg to Rp 26.6kg). The retail prices at village level were slightly higher but did not
exceed Rp 32/kg for urea and Rp 31/kg for TSP.
During the project period 1969 to 1971 cash and credit sales of urea by PN Pertani and the
private sector in Yogyakarta province were as follows:
23
Table 3: Urea sales 1969-1971 (tons) Yogyakarta province
Year * PN Pertani PN Pertani Private trade Private trade
Credit **
Cash
Credit
Cash
1969
828
1154
2693
1970
3292
2054
3708
1971
4120
1185
3461
3108
*) calendar year
**) mainly Village Units
Total
Credit
828
3292
7581
Total
Cash
3847
5762
4293
Total
4675
9054
11874
source: FAO, 34
The effect of the establishment of the Village Units on urea sales was substantial, as can be
seen when comparing the Table 1 figures and those for 1970 and thereafter. The effect on rice
production was also substantial and the province became self-sufficient in a few years. It was
also clear that PN Pertani lost market share to the private sector, however, its total urea sales
went up substantially and it remained the largest supplier of fertilizer sales on credit during
this period.
“Suppliers of farm inputs had contracts with the Provincial BIMAS council, in which BRI was
represented by its Provincial Inspector. The contracts specified that each VU should at least
have one retail point selling at agreed prices. Normally a ‘high sales’ area and a ‘low sales’
area were allocated to suppliers. Competition between suppliers (in services) was stimulated
by appointing more than one per area.” (37)
The late start (1970/71 season) of the private traders selling on credit had a number of reasons,
one being the lack of sufficient working capital at the retail level, another one being the
condition set by the project that private traders could only participate in the Village Unit credit
voucher scheme if they were willing to set up retail outlets in both high sales and low sales
areas. Initially they were reluctant to move into the low sales areas, preferring the high sales
areas, thereby creating the risk that PN Pertani would become a market developer and the
private traders moving in and taking over once that market had been developed by PN Pertani.
The condition of a presence in both high and low sale areas was imposed by the project so as
to avoid unfair competition to PN Pertani. As a result the total number of retail outlets
increased from 60 prior to the Village Unit project to 200 in 1971, equal to about one outlet
for every 2 villages.
24
10.
THE BRI-FAO CREDIT PROJECT (‘Village Units’)
10.1
Problems defined
There were various problems facing Bank Rakyat Indonesia (BRI) in 1968. The bank had just
changed its name to BRI after several changes in the institutional system of government
banks. The new BRI management clearly had the objective of becoming a commercially
operating bank offering a wide variety of banking services, not just in the agriculture sector,
but to anyone requiring banking services, including offering a savings facility and a giro type
system (current accounts) whereby people could pay e.g. their water and electricity bills at the
bank rather than at the suppliers’ offices.
There were some large problems facing BRI. Firstly, the BIMAS program in which BRI was
just an agent for government and in which it had no say in the selection of clients (they didn’t
even knew them by name), nor the best type and conditions of loans to suit these clients, and
secondly, the BIMAS Gotong Rojong program with commercial foreign companies providing
inputs with supplier credit, where BRI had no role to play either.
Internal BRI systems were also weak at the time, especially the auditing function, credit
control system and staff training. Administrative actions were all done by hand with no
computerization whatsoever. All major decisions were taken by Head Office in Jakarta where
also the compilation of all branch reports took place. BRI was a very centralized organization.
Government and BRI wanted major changes in all this, requiring a complete overhaul of
systems, a BRI expansion bringing services closer to the potential clients, staff training and
mentality changes, plus decentralization of the decision making process. In doing this BRI
didn’t want to be dependent on intermediaries such as agriculture extension workers, village
heads or BKDs deciding who should get a BRI loan.
The FAO-FFHC-FP also didn’t support the way BIMAS group loans were made and the
supply oriented way of establishing credit targets. It supported a demand based credit system
of individual loans with the farmer having a free choice of farm inputs and loan size. The
DIPERTA-FAO program would try to influence that free choice by way of demonstrations in
farmers’ fields.
BRI development objectives
This document restricts itself mainly to the agricultural credit activities of the Village Unit (Unit Desa)
project. It is interesting to note that it took several years before some of the abovementioned
planned/proposed activities in respect of non-agricultural services were started as the following three
quotes from the mid-1990s show:
“The BRI Units also perform financial services as transfers and serving as payment points for
telephone, electricity and property tax bills.” (BRI,12)
“The Units also offer checking accounts, called GIROBRI.” (BRI, 12)
“SIMPEDES interest rates were set in relation to the size of the deposit and a lottery system with
semiannual drawings was introduced.” (Steinwand, 62)
25
10.2
Developing the project proposal
“Furthermore busy with the preparations of a pilot project for input distribution and new
forms of credit. We want to use as a trial village banks to bring credit as close as possible to
the farmers. The big shots of the bank are willing to take that risk.” (L8, 25 November 1968)
The drafting of a proposal for the Village Unit credit program in Yogyakarta province (29)
involved a number of persons. The initiative for making a proposal came from the FAOFFHC-FP. The proposal, restricted to individual agricultural production loans initially, was
first developed with the local BRI director, Mr Supono, a BRI veteran with a good knowledge
of the pre-war AVB and village credit systems (BKD) and well versed in the Dutch language.
Later in the design phase Mr Supono was replaced by Mr Abdurachim Moesa, who also
implemented the first 35 Village Units and who remained in charge till the end of 1971, and
who was also fluent in Dutch (I stress their Dutch language capability because it made our
discussions on pre-war rural finance experiences so much easier. Hundreds of credit related
publications, going back to 1900, were still available, also in libraries in the Netherlands).
“The BIMAS library here goes back till about 1920, 90% is in Dutch.” (L5, 9 September
1968)
“Have now four new project proposals in preparation. I am going to have these ideas first
tested with some people. Tomorrow two meetings already at the University to discuss them.
Hope to bring the final proposals mid-February to Jakarta, which will be exciting.” (L10, 14
January 1969)
My records show that my meetings at Gadjah Mada University in Yogyakarta during the
whole project period were mainly with Professor Iso, Professor Sudarsono and Dr Mubyarto
and their students. The involvement of students in some of the discussions about the
development of our proposals may at first instance look strange, however, one should
remember that the BIMAS program was started by students in 1964 and that they were very
active at that time in criticizing (military) government actions.
In February 1969 a proposal to conduct Pilot Schemes on fertilizer distribution and credit was
submitted to the Head Offices of Bank Rakjat Indonesia and PN Pertani. (29) “These schemes
should feature an expansion of distribution and credit up to village level, improvement in the
storage and timely distribution of fertilizer, a more liberal treatment of credit, especially
interest rate, collateral and the inclusion of other crops than rice.” (FAO, 35)
Raymond Turnier, FAO’s senior credit advisor at BRI Headquarters, had assisted in preparing
the final proposal. This final Village Unit proposal was given to the BRI president-director,
Mr R. Soerjono Sastrohadikoesoemo, on 9 February 1969 (he was usually referred to as Mr
Soerjono in our correspondence and he was BRI president-director from 1968 to 1973).
“There are three proposals now in Jakarta…, and expansion of the agricultural credit system.
Have discussed them here with various people who were very enthusiastic. But Jakarta is the
‘central place’ where everything has to pass through.” (L12, 9 February 1969)
“Have later this week among others an important meeting with the credit bank (BRI). That
has also been well prepared by Raymond and my visit is almost unnecessary because I know
that they will accept it.” (L13, 18 February 1969)
26
On 20 February 1969 Raymond Turnier and I had a meeting with BRI’s president-director and
his directors in the BRI board room at Djalan Veteran in Jakarta, discussing the proposal and
answering questions of the directors. The equivalent of USD 600,000 for the pilot Village
Unit project in Yogyakarta province was approved the same day, more than we had hoped for!
“Credit project approved! $600,000 direct available. Not all needed. Fantastic!”
(L13, 20 February 1969)
An interesting ‘incident’ took place during that meeting. The meeting was conducted in
English. At a certain point, the president-director excused himself and said he wanted to have
a short discussion with his directors. Turnier and I then offered to leave the room. This was
not necessary he said. They then shifted their discussion to Dutch! During the official
launching ceremony of the Village Unit scheme in August 1969 in Yogyakarta, Soerjono
professed to me that he had never thought I was a Dutchman, although my name is very
Dutch. We had a big laugh.
Starting date of the Village Units
Historic overviews sometimes provide a problem when it comes to keeping exact data: various
authors, possibly copying each other, put the start of the Village Unit project in 1970 (e.g. Patton,
Robinson). They seem to take the instruction of President Suharto in May 1970 to BRI to expand the
Village Units from Yogyakarta province to the other provinces as the starting date. This expansion was
only possible then because the government had stopped the BIMAS-GR in the other parts of Java.
One author (BRI, 12) even puts the start of the first BIMAS program as coinciding with the start of the
Village Unit program. That may look nice but is far from the truth. The BIMAS program started in
1964 under the ‘old order’ government, not under the ‘new order’. BIMAS-Baru, BIMAS Gotong
Rojong and BIMAS jang disempurnakan were started under the ‘new order’. Furthermore, BIMAS
was not just a credit program as suggested by some authors but a combination of agriculture extension,
farm input supply and farm credit.
The following statement is therefore also very incorrect: “The Village Units had their start in the rainy
season of 1970-1971 when the government of Indonesia began the BIMAS (Mass Guidance) credit
program as part of broader efforts to gain national self-sufficiency in rice production.” (Charitonenko,
Patten, Yaron, 25) The starting dates for BIMAS and of the Village Units are wrong in this statement
and BIMAS is incorrectly described as a credit program only.
It was when BIMAS-Gotong Rojong failed (with possible negative effects on the forthcoming 1971
national elections) and BRI had shown that the Village Unit approach was promising that a (too) fast
expansion was undertaken on the instruction of President Suharto in May 1970.
Correct statements are:
“in 1969…BRI established its own village units, the BRI unit desa, instead of using the infrastructure
of the BKD, which were under the control of BRI as well.” (Steinwand, 62)
“On 20 May 1970 the Government of Indonesia announced its decision to discontinue, after the 1970
dry season crop, its reliance on Bimas Gotong Rojong…. By 1970 Bank Rakyat Indonesia .. had
successfully innovated and tested the use of ‘village unit’ banks to provide direct credit to individual
farmers…” (Mears, 47)
As exact starting date for the Village Units BRI could use either the approval date (20 February 1969),
the ceremonial launching date (most likely 8 August 1969) or the actual opening date of the first 18
Village Units in October 1969. The last date would be the most logic since BRI regards the opening of
the Purwokerto popular bank in 1895 as its own founding date.
27
10.3
Use of pre-war information
Marguerite S. Robinson, when writing about BRI’s Village Unit 25 year history, states in a
footnote: “The lessons of Fruin’s Manual were disregarded at the time of the BIMAS era. Had
the manual been in use at the time KUPEDES was in the planning stage, it could have
provided much-needed guidance. There are marked similarities between some of the precepts
of Fruin’s Manual and the principles underlying the KUPEDES credit program.” (56)
The manual she is referring to is the manual Fruin wrote in 1935 as first President of the
AVB, BRI’s predecessor. (32). Her statement may be correct for the (foreign?) designers of
the KUPEDES program but are not correct for the designers of the first Village Units in
Yogyakarta in 1968/69.
My own rural credit ‘experience’ was limited at the time to some credit lectures by Professor
Ballendux at Wageningen University, The Netherlands, while a student. He had been the last
Dutch president of the AVB.
In my baggage I carried Fruin’s article on the history of the Indonesian village credit system
(31) and an abstract I had made from an article written in 1933 by W. Middendorp called
“Critical review of the village credit system.” (48)
Some of the quotes still in my possession from the latter article read:
- “borrowing for someone else is widespread (called ‘tempelan’ in Central- Java);
- according to many people the purpose of a monetary loan seldom reflects the real
purpose;
- better not to have a village head as head of a bank (a good mayor is not necessarily a good
banker). When free elections were held villagers usually selected persons with proven
financial capabilities;
- a lot of decentralization is advisable and needed to maintain trust in a village bank.”
The most interesting and most challenging messages from Fruin’s article on the village credit
institutions (31) were that large numbers of small loans could be made at reasonable cost
(about 4% of amount disbursed) to large numbers of small farmers and micro-entrepreneurs
and that the village organizations doing so were profitable and financially self-supporting.
A question posed by the Village Unit project staff to various doubting persons (mainly foreign
visitors) at that time was therefore always: “why can’t we do what our fathers and/or
grandfathers could do profitably before the war?”
In the discussions with BRI staff during the preparation and design phase of the Village Unit
proposal (November 1968 to September 1969), as well as during the implementation phases,
choices had to be made and at many occasions we asked ourselves how things had worked
before the war, what had been tried, what had failed and why etc. (there is a considerable
published record of thousands of pages of pre-war village credit experiments in the monthly
credit magazine ‘Volkscredietwezen’ over the period 1913-1942).
Many of the forms, books etc. used in the Village Units were copied from BRI and its
predecessor banks, including the AVB and the village banks (BKD) (see further section
10.5.14 on the administrative system of the Village Units).
I think the above shows that Robinson’s claim as to the non-use of pre-war literature,
experiences, systems and results is incorrect, at least as far as it concerns the design of the first
two batches of Village Units in Yogyakarta province and the first 502 Village Unit expansion
in West, Central and East Java in 1970/71. It would be interesting to see how many of the
KUPEDES systems and forms have been ‘inherited’ from the Village Units since KUPEDES
could be regarded as a 1983/84 reform of the first Village Units according to Patten. (53)
28
“I have paid some more attention to Indonesian history. A lot has been published including
much of interest. It is nice to see that the things we are trying to do in Jogjakarta have already
been done previously (in 1907). Albeit, without success then. That makes us more careful and
modest in respect of our own attempts, more so because when you read those old publications
you don't get the idea that they are about something long past. Many descriptions seem to me
to be still relevant. One may ask whether the Indonesians we are working with today know
their own history well. I have some doubts because some ‘approaches’ that failed in the past
(e.g. Culture System) are still being tried, without results though. I also see some weak links
in our own approach, reason enough to pay attention to it.” (L23, 15 June 1970)
Village Unit a copy?
Steinwand seems to suggest that the Village Units were copied from the BKK (sub-district banks) in
Central Java: “The BKK in Central Java served as model of a rural based unit bank to design the BRI
unit desa.” This would mean that the Village Units in Yogyakarta were designed in 1970, or later,
because he and others (Patten/ Rosengard) give 1970 as the starting date of the BKK.
As shown above the design of the Village Units started in November 1968. The designers used the
existing BRI Mobile Unit (MU) system and the pre-war BKD (village bank) system as starting points
and modified these to suit their aims. The Village Unit systems were not a complete new design but
merely adjustments to existing systems operating within BRI and BKDs.
It may be better to assume that the BKK were copied from the Village Units in Yogyakarta since the
initiators of the BKK visited the first Village Units regularly. It might also be interesting to find out
whether the GTZ project in Klaten district played a role in the introduction of the BKK in Central
Java. The GTZ project staff had regular contact with the FAO staff in Yogyakarta (and used the same
swimming pool in the Ambarukmo hotel and the same beer!).
Some further copying seems to have occurred in respect of the establishment of LPDs (village banks)
after 1985: “The LPD system of Bali…..followed in most features the BKK system as well.” “The
LPD management has constituted of at least three persons, a manager, a cashier and a bookkeeper.”
(Steinwand, 62). These are the same number of staff and the same functions as in the original Village
Units, although the LPDs were village owned and should therefore better be compared with the BKDs.
10.4
Main aims and BRI policy
The aims of BRI and FAO-FFHC-FP were not exactly the same. For the FAO-FFHC-FP the
agricultural credit program was merely a support system to get more farm inputs quickly to
the farmers and to assist in obtaining better produce prices for the farmers so as to reach the
target of rice self-sufficiency in the province, which was its final program goal.
“The origins of the unit desa system can be understood only in the context of the country’s
long struggle for rice self-sufficiency.” “The unit desa system was originally created as a
channeling agent for BIMAS, the credit component of Indonesia’s massive and successful
effort to reach national rice self-sufficiency.” (Robinson, 56)
BRI had a much more ambitious objective, namely becoming a full-fledged rural bank in
close contact with the rural population. That expansion program was also supported by FAO
through the provision of Raymond Turnier to BRI Headquarters, and consisted of institutional
developments involving the whole BRI organization, especially getting closer to rural clients
29
in a decentralized way, as well as looking into the possibilities of mergers/take-overs of
existing village banking institutions (BKD) after their rehabilitation.
FAO’s wish and BRI’s goals could be seen as complementary. FAO-FFHC-FP’s wishes were
limited to facilitating farm input and farm produce storage/marketing loans. BRI Head Office
and FAO’s Turnier had a much broader objective of setting up a complete rural financial
system with individual BRI clients in various economic sectors. (Turnier, 64)
“In the last quarter of 1968 the Government welcomed the recommendations of the Expert
to initiate an experiment with the purpose of rehabilitation of the small village units – Bank
Desa and Lumbung Desa……An initial allocation of TWO BILLION Rupiahs (approx. US$
5,000,000) was made available for uplifting of working capital of the units.” (Turnier, 63)
The term ‘village units’ used here by Turnier are not the Village Units (VU) proposed in early
1969 but are the pre-war established and then still existing village owned credit institutions,
namely the village banks (‘bank desa’) and village rice banks (‘lumbung desa’), both being
involved in micro-lending activities, which started around the year 1900, and that were
together referred to as ‘BKD’ (Badan Kredit Desa).
For BRI the proposed Village Units (‘Unit Desa’ in the local language) were a chance to have
(or test) its own ‘independent’ agricultural credit program as an alternative to BIMAS Gotong
Rojong with its supplier credit. BRI would have its own decision making system as to who
would be its clients, what was to be financed and under what conditions. The Village Units
were an extension of the branch system at district level, similar to the BRI Mobile Units. They
were needed if BRI was to bring all its financial services closer to its (potential) clients.
“On the other hand, the Village Units could be in a position to undertake other banking
activities, e.g. trade loans, attraction of rural savings etc.” (FAO, 34)
“The advantages [of changing Village Units from a mobile to a fixed location in 1970] to BRI
were manifold: better use of time, no risk in transporting money and documents, and above
all: time for other activities e.g. crop storage loans, trade loans, savings etc.” (42)
“The overall aim of the Village Units was to bring all BRI facilities to the rural sector at a
level lower than the existing branches at District level.” (37)
“The Bank Rakyat Indonesia has traditionally held the special assignment from the
government to provide banking services to the rural areas, with particular emphasis on
agricultural credit.” (Robinson, 56)
Another agreed aim was that the pilot Village Unit project should try to be cost-covering. This
meant that the Village Units should break-even on the crop production (mainly rice) loans.
Any additional activities would then, it was assumed, make the units profitable (see further
sections 10.9 and 11.4).
“VU attached to each Branch operate at the financial break-even point until the expansion of
activities, i.e. other bank services, loans to other productive activities, results in the expected
profit.” (FAO, 34)
My personal ambition was to prove that we could ‘repeat’ some of the pre-war village bank
results as reported by Fruin (31), especially their low administration costs and their
profitability.
30
The FAO-FFHC-FP final report (FAO, 34) summarized the Village Unit aims as follows:
“The special pilot credit scheme aimed at, amongst other objectives:
(a)
Establishing direct and permanent relationships between BRI and the
agricultural producers;
(b)
Reaching a much larger number of farmers with the view of meeting effective
as well as potential demand for credit;
(c)
Establishing better assessment of the need for production credit for rice as well
as for other crops;
(d)
Making credit more flexible and better adjusted to the real needs, and
promoting more effective relationships between the extension of more
advanced practices of production and credit;
(e)
Reducing the cost of credit to the producers by the elimination of
intermediaries whenever feasible or called for, and establishing a simplified
and expeditious vetting process of loans, thus making credit more easily
accessible to farmers;
(f)
Verifying the extent to which farmers’ associations could channel credit
effectively and without additional costs to the borrowers;
(g)
Contributing to the improvement of the distribution of technical inputs
involving the private sector on a competitive basis;
(h)
Contributing to the improvement of storage, processing and marketing of farm
produce;
(i)
Determining the possible direction of institutional development of rural credit.”
Start of foreign Technical Assistance
Steinwand reports that: “Starting from 1979 the BKK system was rendered technical and financial
assistance through the USAID……. This was the first time of Indonesian BPR receiving external
donor support.” (62) What about the placement of an FAO senior credit expert at BRI Headquarters in
1968, who not only assisted in the design of the Village Units, but also made proposals, that were
accepted, to upgrade the 20,000 BKDs? The possibility of GTZ staff in Klaten having assisted with the
start of the BKK in Central Java cannot be excluded either (see box in section 10.3).
10.5
Designing the Village Units: making choices
The following sub-sections show what choices had to be made. This picture is not fully
accurate because these choice options were not discussed in the systematic way as presented
here. In fact, things were far more fluid, some choices were proposed prior to the actual
detailed designing of the program, others during the design phase and some after the first
Village Units had started operations. Adjustments thereafter also occurred. A very flexible
and open way of designing was used, coping with new problems and new opportunities all the
time as and when they arose. General policy was to test various ideas and only continue with
those experimental activities or systems that had worked and then copy these in other areas.
To be frank, there was no specific idea what was going to work and what not. There was no
fixed time table either. We only knew that BRI should listen to clients’ wishes if it was to
succeed and we also knew what had worked before 1940.
“The sequential phasing of activities did not take place according to a specific time-table. It
was thought that each step should be initiated only after the previous one had been completed
successfully.” (FAO, 34)
31
“The first activity would be the issue of BIMAS credits. Prior to the start of these loans, BRI’s
active president-director already initiated preparations for loans on stock of produce which
should be the second activity. Gradually trade loans and other activities should then be
introduced afterwards. Altogether a period of 3 to 5 years for experimenting was foreseen.
Once a phase was successfully implemented it could be copied elsewhere.” (37)
“Common features of evolutionary models are a focus on change processes rather than on
equilibrium as the natural starting point implies the inclusion of history in institutional
analysis.…….In contrast to a functionalistic approach, which assumes that a process can be
realized as planned, evolutionary models believe that institutions are too complex for being
set up or changed according to a previously set up plan.” (Steinwand, 62)
Suggesting that BRI was target (supply) oriented and not demand oriented is not correct for
the pilot Village Unit project as points c) and d) in the previous section already showed. It was
possibly correct for the periods that BRI acted as a government agent in BIMAS, not because
it was BRI policy but because that was the way the Ministry of Agriculture planned its
BIMAS targets (see section 5.4). This change to a demand orientation by BRI in the Village
Unit project was similarly applied by PN Pertani in its Yogyakarta rehabilitation project.
“The failure of the BIMAS (and that hasn’t changed) is that they try to have farmers
implement advise that is either uneconomic or less economic than what the farmers do
(hurray for the farmers!). The agriculture bank gave, on instruction of the Ministry of
Agriculture, credit for this advice. The result was of course poor repayment of the loans. No
bank can survive for long on such a thing.” (L32, 23 December 1970)
10.5.1
Village Bank (BKD) or BRI sub-branch?
Everyone involved in the Village Unit planning stage agreed that a rural financial services
program to be successful would require a close presence to the target groups in the villages.
BRI’s branch offices at district level were too far away to properly service the villages. BRI
was aware of this and had already started a system of Mobile Units (MU). This system was
part of a district branch and the Mobile Units issued mainly short-term agricultural, personal
and trade loans in the district villages visited by them.
A number of village banks (BKD) were still operating in Yogyakarta province. This system
was still as it had existed for about 70 years (for a description of the pre-war system see:
Fruin, 31). BRI in Yogyakarta had seven staff members working in its village banks section in
1970 (called ‘mantri BKD’).
The choice to be made was between an expansion/upgrading of the village bank system
(BKD), an expansion or upgrading of the Mobile Unit system, or the establishment of a BRI
sub-branch system. The BRI policy at the end of 1968 was to first rehabilitate/restart the
village banks (BKD) prior to starting any expansion or additional activities for them. That was
a very big job already involving 20,000 BKDs nationwide, 5,000 of which fell under direct
BRI supervision.
“The allocation of 2 billion (rupiah) by the Central Government, for the rehabilitation of
20,000 units…” (Turnier, 63)
32
FAO’s initial preference was for an independent, preferably cooperative, village bank system.
BRI staff tended more towards a Mobile Unit expansion or a BRI sub-branch system. The
pros and cons of these systems were compared.
The word ‘cooperative’ worked out to be a ‘dirty’ word, being associated with the old
government order and its attempts to bring villages under its control (village administrators
were the only elected officials and government control of villages was therefore limited).
“Professor Iso, already 70 years old, is still very interested in everything. He was in the past a
supporter of setting up cooperatives. In the PKI (communist party) period they were misused
for political purposes and therefore they are afraid of cooperatives now.” (L51, 5 July 1971)
“Past performance has tinted the cooperative image and its credibility to farmers. Cooperative
development has faced major problems of mismanagement and political interference:
cooperatives have been identified with the communist movement and the abortive coup of
1965.” (Bouman, 22)
Other assumed disadvantages of establishing new village banks or using existing village
banks (BKD) by the Village Unit designers were:
- who should start them and how was ownership to be?
- who were to run them?
- how to get starting capital (equity)?
- could government loan funds be used to support them?
- how to control them?
- in how far could you do controlled experiments with them?
- lack of BRI control of staff. Especially the use of village heads and other senior village
officials within a BRI system was regarded as risky by BRI (see further section 10.5.3).
An advantage of using BKDs would be that according to the existing BKD law they would be
obliged to set their tariffs at such levels so as to ensure profitability. Turnier (63) reports
interest rates higher than 10% per month for village banks. This would then mean, however,
that agricultural loans issued by the BKDs would have higher interest rates than government
policy dictated at that time with a BIMAS interest rate set at 12% per year. FAO didn’t bother
too much about interest rates. Higher rates could also be a disadvantage for the experiment
(see further the ‘interest rate policy’ section 10.5.12).
“The BKD system, which serves even lower-income clients, is also profitable and has been
consistently so for decades.” (Robinson, 56)
“Not only have the BKDs continued to provide small loans to millions of micro-enterprises
since 1898 (interrupted only by war and hyperinflation), but also they have provided a
working example for the development of subsequent institutions, particularly the BRI Village
Units and the BKKs of Central Java, which in turn, has provided the model for most other
village-level institutions and programs.” (Charitonenko c.s., 25)
The establishment of BRI sub-branches (‘Village Units’) was supposed to have the following
advantages:
- full BRI control of their activities;
- replication of experiments possible;
- expansion (more units) easily arranged;
- no need for an equity base;
- access to (cheap) government funds (subsidized BIMAS funds);
- if experiment failed, easy to abandon;
33
-
always possible to change a Village Unit in future into a village bank (BKD) or
BRI Mobile Unit (MU) (MU had less frequent visits to a village);
more in line with the long-term objectives and aims of BRI becoming a rural
financial institution, fully in control of its own affairs and without the use of
intermediaries.
FAO supported this second option but the idea of independent, cooperative-like groups,
remained: “At the same time we will try to organize the farmers that take [storage] loans in a
‘credit union’ that can develop later into a real cooperative, to whom you can then transfer
‘assets’. The present coops are political institutions. Each village has one. Members have
nothing to say….. We want a kind of farmers’ union. Question is in how far existing power
groups in the village will tolerate a new organized power group (our real cooperative). A
strong tie between farmers and enthusiasm will make it difficult to undo things. But this will
require careful work. The right step at the right time. Well, we are only advisors, the bank is
the responsible institution (though this does not exonerate us).” (L28, 1 November 1970)
Historic choice: BRI branch or village owned?
The choice whether to take the route of a BRI (sub)branch or a BKD approach had a long history in
Indonesia, as the following views from around the year 1900 may show.
“De Wolff van Westerrode had imagined that the village credit institutions would become the major
credit suppliers to the people, connected by the popular credit banks as apexes.” (Fruin,31)
“Right from the start, the main issue in the history of popular credit banks in Indonesia has centered on
the question whether loans to the Indonesian population should be extended through cooperative
organizations or popular banking institutions.” (Schmit, 59)
“As far as the village banks were concerned, the main question was whether they could be transformed
into cooperatives or whether they were to proceed as the lowest level in the new organization.” [new
organization was the AVB bank, BRI’s predecessor] (Schmit, 59)
And around 1930 “Middendorp defended the views of the cooperative movement while
Djojohadikoesoemo, who had little confidence in the village heads either in their capacity as bank
manager or in their role in the cooperatives, was in favour of amalgamation with the AVB-Bank.”
(Schmit, 59)
Deliberate exclusion of BKD route?
Steinwand (62) seems to suggest that the choice for Village Units in stead of BKDs was politically
motivated: “... their ownership and governance structure hindered government to directly control or
influence the BKD…..the obvious lack of political control over the system was one of the main
reasons that the New Order government preferred to establish new rural financial systems, rather than
building on the already existing BKD system” and: “...the question arises, why the New Order regime
obviously neglected the upgrading of the BKD and rather focused on the establishment of new
institutions like.... BRI unit desa.”
The answer to above statement is, firstly, that the Village Units were not new institutions, merely
another form of BRI Mobile Units, using to a large extent the same administrative system.
Secondly, BRI had proposed (Turnier, 63) the upgrading of the BKDs and had received a large amount
of government funds for that purpose and, thirdly, BRI was already in substantial control over the
activities of 5,000 BKDs. Government attention for more and better BKDs is also clear from earlier
(1952) and later programs (1991) to improve/rehabilitate the BKDs.
34
When the Village Units were started, the option that they might later be converted to BKDs or be
merged with existing BKDs was kept open in the Village Unit experiments (see section 10.8.5).
Steinwand himself also states that: “BRI indeed did re-capitalize a substantial number of BKD after
the end of hyperinflation.” Why should they have done that if there was a government policy to favor
BRI Village Units?
Finally, I never heard in 1968/69 that there was an official government policy preferring new financial
institutions over the existing BKDs. That came much later, in 1988, as far as I can see from the
information provided by Steinwand. The designers of the Village Units in Yogyakarta surely were
completely unaware of such a policy late 1968, if it existed at all! The considerations that influenced
their choices have been listed in the above and next sections.
10.5.2
Mobile or fixed?
In 1968 BRI had two mobile units (MU) traveling around in Yogyakarta province. They were
also used for the issue of BIMAS credits (one loan per village) in some outlying areas.
The major problem being faced by the planners of the Village Units was that there was little
information on expected credit demand. BIMAS credit data were not representative for
demand since they were based on the simple BIMAS formula: BIMAS target area times
volume of inputs times cost. At most, past credit disbursements and PN Pertani sales were an
indication of demand. Furthermore, demand was expected to change with the acceptance of
the new, high-yielding, rice varieties. The introduction of more commercial input suppliers
was expected to increase availability of inputs but how much was also unknown.
A fixed location in one village possibly meant that the number of potential borrowers in one
village (‘kalurahan’, consisting of a number of ‘desas’) would generate insufficient business
to cover the cost of a three-person office. Pre-war experience with part-time staff and parttime opening hours indicated this.
The minimum number of staff per unit required was quickly set at three: an experienced loan
officer who was also to be the Village Unit manager, a cashier and an administrator. This
would ensure the necessary internal controls. The personnel costs allowed for a rough
calculation of the loan volume required to break-even financially (see section 10.9.3). The
conclusion was that several villages had to be covered by one Village Unit.
The system of BRI Mobile Units (MU) was not designed to cope with the large numbers of
individual agricultural loans planned, a Mobile Unit covering too large an area. The designers
concluded that the Village Units should be mobile between a limited number of villages but
not be supplied with a car (too costly). The final choice made was that Village Unit staff
would use a (free or rented) room made available by each village and that there would be one
bank session per week per village. That meant that one Village Unit (VU) would consist of at
least 6 villages that would each be visited once a week.
“These farmers are visited by the ‘Mobile Units’ on days previously announced. This
concerns the whole area outside the Village Units. However, contacts with BRI are less good.
We call it a VU when there is an office (building). When BRI staff comes from the district
branch office with a car it is called a ‘mobile unit’. Administration etc. is the same.” (letter to
Molster, 14 August 1971)
35
The system of ‘mobile’ Village Units only lasted one year. During that period records were
taken of time spent, including idle time of staff. Also time lost in traveling (by motorcycle or
bicycle) and the risk of traveling with money played a role in changing the system the next
year to a fixed office for a Village Unit. This system remained in force since then. “The
advantages to BRI of the latter system were: better use of time; no risk in transporting money
and documents; more time to develop other facilities.” (37)
10.5.3
Involvement village head?
In the BIMAS program the village head (‘lurah’) and other village administrators had a role in
the village (agriculture) committee (or cooperative) that stood between the bank and the
farmers and to which the ‘village group’ loan was made and which disbursed and collected the
individual loans.
It was clear from the outset that the village head could not be by-passed if BRI was to set up
an office in a village. The question was what role to give to the village head in the Village
Units? Middendorp’s advice of 1933 “Better not to have a village head as head of a bank (a
mayor is not necessarily a good banker)” (48) and Fruin’s warning that the village heads
could not always be trusted (32) were known to the Village Unit designers.
The position of the village head was important, because “his participation in a particular
program is decisive for its success. He belongs in almost all villages to the economic
important stratum and because organized party politics has disappeared at village level it is
difficult to organize counter-forces….. Projects that could undermine the position of power of
him or his family he can sabotage; on the other hand he can fully profit from those projects
that aim at the economic more powerful farmers.” (Schulte Nordholt, 60).
The final solution chosen was simple: the village head became part of the loan application
process and, indirectly, could be used in case of poor repayment performance. His role in the
loan application process was the issue of a certificate giving details of the loan applicant. This
‘village (head) certificate’ was an A4-size heavy paper document, with on one side the
information from the village head and desa head and on the back being completed by the
Village Unit staff during the interview of the loan applicant.
“The village head and village elders together have a lot of influence on what will and what
will not happen. He further advises on the creditworthiness of the villagers in our work, an
important man. Sometimes they are old, sometimes very young, almost always very
progressive.” (L15, 9 March 1969)
Village head
Fruin (31) had noted in 1932 that “The good working of a village bank depends on the one hand on the
authority of the bank manager over the borrowers and on the other hand on the Local Government
inspectorate over the bank manager. This dual guarantee would be lost when a non-official person
would replace the village head as bank manager. In the official village credit system the village head
can therefore hardly be missed.” This advice from Fruin was considered by the designers but did not
result in a more prominent position of the village head in the Village Units. His position though
became more prominent in the BUUD.
The importance of the village head is also mentioned for institutions established later: “The LDKPand even many of the private BPR- require a recommendation of the local authorities (mainly the
village chief) for loan approval.” (Steinwand, 62)
36
10.5.4
Involvement DIPERTA (Ministry of Agriculture)
The ‘Dinas Pertanian’ (DIPERTA, Agricultural Service) had a prominent role in the BIMAS
program. The local extension workers had close contacts with farmers and the village
cooperatives/committees and their salary was partly based on bonuses received for achieving
certain BIMAS targets or implementing certain activities. Prior to the start of the DIPERTAFAO program fertilizer recommendations given to farmers came ‘from above’ and were
demonstrated in large demonstration plots of up to several hectares.
“This whole target-orientation is one of the dominant features of the civil service…..Another
feature of the mental inclination of the civil servant is that he is ‘looking upward’, he
estimates what he thinks is good and reports that… (may be the Javanese civil servant doesn’t
differ much in this from many of his foreign colleagues). A result of this attitude is many
times that his superiors don’t think it necessary to consult him; he receives his instructions,
and he himself passes his instructions on, also without looking at the possibilities of
implementation: the target must be achieved.” (Schulte Nordholt, 60)
FAO-FFHC-FP and BRI agreed that the agriculture extension workers should play no role in
the loan making and debt collection process. Their role should be limited to demonstrate best
farm practices to farmers and assist farmers when asked.
“The Ministry of Agriculture endeavored to provide one extension agent to each (village)
Unit.” (FAO, 34)
It was further made clear by BRI to DIPERTA that farmers would decide which farm inputs
and in what quantities to use, and not the extension worker.
“.. of the 15 fertilizer combinations that we tested one is clearly the best. That is the one
farmers use! The official Bogor recommendation is clearly bums!” (L19, 29 May 1969)
The DIPERTA inspector in Yogyakarta province had no problem with this new role for his
field staff but his superiors in Jakarta were not too enthusiastic. The agricultural research
people in Bogor were against a free choice of production inputs for farmers.
“In addition, a reversed balance of power between the agriculture bank and the Ministry of
Agriculture. In the past the latter had the final word. These days the bank decides for what
purpose they want to give loans.” (L30, 14 December 1970)
Loan decision by the bank
During the vast expansion to a national Village Unit program (after 1970) this requirement of
independent decision making by BRI seems to have gone lost for some years: “In the BIMAS credit
program, the BRI Unit Desas did not have full responsibility for the selection or approval of
borrowers.” (Patten, 53) After 1983 it was used again: “The main banking decision is whether a
particular individual and enterprise are creditworthy; this decision should be left to the bank.” (BRI,
12)
This latter is also more in line with Fruin’s advice from 1935 (32): “The bank’s primary concern is
whether the profits of the business applying for a loan or the income of an individual borrower are
sufficient and stable enough for the agreed repayments to be secure.” “…the size of an agricultural
loan to be made by the AVB Bank should normally be restricted to a proportion of the farmer’s gross
annual monetary income. Loans to farmers are limited primarily by that gross monetary income and
only secondarily by the value of collateral.” (Fruin, 32)
37
10.5.5
Location choice criteria
Because information on credit demand was scarce or non-existent the decision on how many
Village Units to plan and where to locate them was not easy.
“Experience and observations have amply demonstrated that the practice of seasonal area
target planning of production used by the Ministry of Agriculture for the BIMAS program,
based on the loose estimate of lands that may be planted, is not suitable for credit purposes.”
(FAO, 34)
Again, this problem was solved practically. The first batch of 18 Village Units was ‘evenly’
spread over the four districts (6 in Sleman, 3 in Bantul, 4 in Kulonprogo and 5 in Gunung
Kidul). Based on the expected results of these units, further units could be planned. It was not
excluded that some Village Units might have to be moved, expanded or closed if experience
should so dictate.
From the Asian Development Bank (ADB) rural credit study mission (10), then residing in
the province, the suggestion came to use between 600 to 1,000 hectares of irrigated rice land
as an indicator for deciding on a Village Unit location. This was just a rough proxy. We could
also have used a number of rice farmers. In various BRI and FAO publications it was stated
that this was a temporary planning tool, that the final boundaries should be based on demand
and/or results. Using 1,000 hectare meant about 4,000 farmers in the Yogyakarta context.
When half of them would apply for a loan that would give 2,000 clients per Village Unit in
the wet season, equal to about 250 to 330 borrowers per village, a number very similar to the
number of borrowers in the village banks (BKD) in the 1920s. I have noted that BRI, after
FAO-FFHC-FP had left the program, used this 1,000 hectare indicator also in the other
provinces, even when the average individual rice acreage differed from Yogyakarta province
and in spite of the following FAO recommendation: “The VU areas of operations were
initially set on the basis of rice acreage, periodic evaluation should take place with the view of
adjusting boundaries in order to ensure that at least the group of VU attached to each Branch
operate at the financial break-even point until the expansion of activities, i.e. other bank
services, loans to other productive activities, results in the expected profit.” (FAO, 34)
“The 1,000 hectare was just an indication for the operational area of a Village Unit. This
worked out to be too small. But it is such a nice round figure! A revision is based on loan
volume. We had no clue about the loan volume to be expected, therefore a hectare target. By
the way, this was against my will; I wanted free floating boundaries of the Village Units in the
first instance and when there was enough loan volume then you set the boundary. Indonesians
think too much in administrative terms.” (letter to Molster, 14 August 1971)
“It was mainly on the basis of a recommendation of a visiting ADB team that the initial size of
a VU was to be between 600 and 1,000 ha of irrigated rice fields. This criterion could be used
in the sawah districts, however, not in the Gunung Kidul district where upland rice is grown.
One could argue about such a basic criterion, however, the criterion of ‘existing credit
demand’ could not be used due to lack of data about it. The size worked out to be rather small
in some areas and later VUs had much larger rice areas within their boundaries. VU
boundaries should be kept flexible until all BRI facilities have been introduced e.g. crop input
loans (seasonal), loans on produce stock (seasonal), trade loans, development loans, savings
accounts etc. Final boundaries should then take into account work loads, loan volumes and
profitability of a VU.” (37)
38
The inclusion of so many Village Units in Gunung Kudul, a dry limestone area with very little
irrigated rice, may seem strange. However, as indicated before, BRI’s main aims included the
setting up of a sub-branch network, irrespective of type of crops grown in a particular area.
The Village Units in this district were also to replace the Mobile Unit that was operating
there. In addition, the DIPERTA-FAO project was also doing farm experiments with other
crops then rice, such as cassava, beans and groundnuts. The underlying philosophy was that
credit should not be given for a particular crop but to a farmer for his whole cropping system.
The Ministry of Agriculture (Jakarta/Bogor) was not in favor of extending credit for ‘dry’
crops at that time but BRI had a different view and used BIMAS funds to extend loans for
these dry land crops. Later, in 1972, the Ministry of Agriculture started a BIMAS-polowidjo
(dry crops) program.
“BIMAS has helped the rice farmers, which is fine, but the rest is still at the level (or lower)
of 15 years ago. And as if the devil played with us: last week I received an invitation for a
seminar about ‘dry crops’. The idea is to start a ‘BIMAS’ for dry crops.” (L50, 28 June 1971)
“We proposed 12 months loans, which implies that BRI will also finance legumes (is very
economic). By the way, this will become a new trend in national policy. .. We are going to talk
about a BIMAS-POLOWIDJO (=dry crops). I am the only non-native speaker on that
seminar. The invitation I got from the same man who tried to have me leave the country 9
months ago. Everything is possible here.” (letter to Molster, 8 July 1971)
Planning tool of 1,000 hectares
It is amazing how many authors writing about the Village Units have been commenting on the,
supposedly wrong, use of an acreage target in planning the first Village Unit locations without
indicating which other tools would have been better in the absence of past data on credit demand. As
we will see later in section 11.1, the 1,000 hectare target was well exceeded already in the first year.
It is also interesting to look into the Yogyakarta provincial situation in 1988 as reported by Patten (53).
He lists a total of 275 Village Units and 30 PPDs (VU sub-units) for Yogyakarta province in that year.
If we take this total of 305 units on a provincial total irrigated area of 90,000 hectares, then the average
irrigated area per unit amounts to only 300 hectares! In 1971 there were 35 Village Units in the
province, with an average of more than 2,000 hectares per VU.
Another calculation based on population densities would show that 1,000 hectare irrigated land
corresponded to 4,000 hectares total land, or 40 square kilometer. With the reported population
densities of 500 to 2,000 per square kilometer this would correspond with 20,000 to 80,000 people or
4,000 to 16,000 families per Village Unit.
Of course, the new BRI units were having more activities than only agricultural lending, but that was
the intention of the first Village Units too. That the first units were too small to ever reach financial
break-even because of the area covered seems therefore a wrong conclusion.
Another point of interest is that BRI reported (12) that after 1983: “Many Units which had been
originally sited for proximity to rice farmers were relocated to the economic centers of their areas in
order to be closer to a wider range of local enterprises.” This seems to contradict to some extent
Patten’s remark in 1988 that: “Only a few Unit Desas have so far been opened in non-rice growing
sub-districts which did not have Unit Desas previously.” (53),
The first 35 units in 1971 in Yogyakarta province were mainly located at sub-district level. There were
393 villages in the province. With 305 Village Units and VU-posts in 1988 one cannot but conclude
that there has been a move from sub-district level to village level, closer to farmers!
39
10.5.6
Target clients
From the foregoing it is clear that the initial clients were to be individual farmers and that the
project was to test a system of individual agricultural lending as an alternative to the BIMASGR program. The question was therefore who could be client and who not. Under BIMAS
normally those owning land could obtain a loan. Tenants could only obtain a loan with the
approval of their landlord. In how far this rule was really applied under BIMAS we didn’t
know.
In Yogyakarta province some villages had had a land re-distribution under the previous
government, especially those villages run by PKI (communist party) administrators. In other
villages there existed a complicated system of renting in and out of land under various types
of tenancy arrangements, including sharecropping. People with too much land might lease
part out to others, whereas those having little or no land would rent land. A substantial part of
village land (between a quarter and half in some areas) belonged to the village administration
and was allocated to the village officials as their ‘salary’; the other part was for ‘social’ cases
such as widows. Many of these officials would not farm themselves but lease out to others.
Molster (52) calculated that there seemed to be a tendency to farm about 0.4 hectare of
(irrigated) rice.
It was decided from the start that both owners and tenants could borrow from the Village
Units, so area owned was not more important than area farmed. Farmers not owning rice land
would usually still own their home plot with garden, enough collateral in case needed.
“as Boeke observes, “ there is no way in which land can be made more productive than by
having it worked by poor farmers and their families”, that is to say by leasing it to sharecroppers.” … “Sharecroppers are here the farming middle class.” (Fruin, 32)
Large farmers were known to be potentially higher credit risks, not because of inability to
repay but unwillingness. “…considerable caution is to be recommended with regard to the
desa chiefs and their henchmen, who also stand out from the mass. Such desa administrators
are often among the least reliable payers in rural areas.” (Fruin, 32)
Rather than define those that could obtain loans, it was decided to define those that could not
be handled by the Village Units: those requiring a loan of more than Rp 30,000,
corresponding to farming more than 2 hectares could not be served by a Village Unit but had
to go to a BRI branch office at district level. Only a maximum loan size could have been set
but that would have required regular updating (due to inflation) and might have stimulated the
splitting of a large loan request into smaller ones between family members or between a
landlord and his tenants. This land size selection criterion would also not interfere with the
possibility of providing loans for other purposes than the production of rice.
There was still a problem in that land owners might not farm themselves at all and rent out all
their land to tenants who could also get loans: “About 25% of villagers own sawah. Others
depend on renting. So there must be a substantial number of owners renting out. With current
practice it is possible that a farmer who owns and rents it all out can take a loan; at the same
time his tenants can get loans. Theoretically one can check this by comparing land title
numbers (from 5 to 15 per farmer, every small piece of land has a different number) but that
is an impossible job…. Land is also rented out to the sugar mill……What BRI should be after
is to give loans to farmers who farm and then for the actual area farmed. The ugly system of
renting on behalf of someone else should get the smallest possible chance to develop within
the VU, since it could destroy it.” (letter to Turnier, 17 July 1972)
40
Multiple income sources of clients
No suggestions were officially made that agriculture loans could well end up being used for other
purposes than crop production. The national fertilizer study report of 1971 (AHT, 2) had shown that
small farmers could not live from rice production alone. This was already known before 1940: “As
farmers may have a justifiable need for credit which does not relate directly to agricultural
expenditure, opportunities for them to borrow should not be restricted to the periods in which the land
is being worked; the tani should be free to determine for himself when he needs money.” (Fruin, 32)
The issuing of loans by the Village Units on terms longer than required for one rice crop production
was to allow a second crop to be produced but could also allow the use of the loan for other, non-farm,
activities of the farmer (‘second crop’ could well be ‘second job’!) The situation as to multiple income
sources of small farmers seems not to have changed: “BRI’s own research, as well as outside research,
shows that most rural households are engaged in many separate activities, both agricultural and nonagricultural. A BRI study in 1990 showed a range of family activities from 1 to 12, with an average of
3.6.” (BRI, 12) To suggest that BIMAS loans were only used for agricultural production may therefore
not give a correct picture.
10.5.7
Group or individual lending?
BIMAS used village group loans, which was not really successful. The main reason to go for
individual loans was that the BRI aim was to have a ‘normal’ banking system with clients
with different financial requirements, working in different businesses in different sectors and
with a need for different, individually tailored, financial services.
When considering group or individual loans the following advantages and disadvantages were
considered in the design phase (37):
“Advantages of group loans:
- little administration for BRI;
- use of local know-how of village chief; his request for distribution and collection
of loans;
- communal collection of inputs;
- use of social and other pressure upon loan defaulters especially if default leads to
whole village being excluded from future lending;
- exact knowledge about time of harvest and selling the crops; important because of
competition with private moneylenders to whom loanees may be indebted.”
It was noted that above advantages should not be overestimated because the limited
knowledge of a village chief in a society with different social and economic strata; the limited
administrative capacity of a village chief; and the fact that villagers might not trust the chief’s
financial administrative capabilities as already shown in the 1920s. The social pressure on
defaulters might also be limited in case of ‘high’ placed persons defaulting. Social pressure
would be unfair in case of unforeseen events (e.g. death) and excluding a whole village could
be grossly unfair. The main advantages were summarized as “the simple administration by the
Bank and the group purchase of inputs.” It was noted at the same time that “this does not
necessarily mean that the credit becomes cheaper to the farmer since the group representative
or agent will add additional charges.” (37)
41
For individual loans the advantages and disadvantages considered were the following (37):
“Advantages:
- direct contact bank-borrower;
- BRI employees gradually developing knowledge about local conditions and credit
demand (not only for rice but any type of credit demand);
- better planning of credit administration resulting in timely loans and timely inputs;
- systematic application of criteria and procedures (no favoritism; fair selection
procedures);
- better credit records;
- exact terms of loan (interest, time for repayment etc.) known to borrowers;
- possibility to treat ‘borrowers in difficulty’ in a fair way e.g. moratorium, new loan
etc.;
- increased possibility for legal actions in case of default.”
“Disadvantages:
- lack of intimate knowledge about villagers by Bank staff, at least in the initial
stages;
- the possibility of creating a ‘competitive’ lending body at village level disliked by
existing village money lenders;
- possibility that bank employees become involved in village ‘politics’. Regular
transfers partly overcome this but this would go at the cost of obtaining intimate
knowledge as mentioned before;
- the creation of a large number of staffed sub-branches, which may not pay for
itself in view of the seasonal nature of lending;
- substantial increase in work volume by the bank;
- use of group pressure in collection difficult;
- no advantage in group orders for inputs unless individual borrowers can be
grouped again.”
Some reports have mentioned ‘group securities’ being taken by the Village Units and have
interpreted the loans as group loans. The fact that several clients would sign the same standard
loan contract form in separate blocks was merely for administrative reasons: saving BRI
paper.
“The idea was group loans with individual liability, but in practice a farmer takes a loan
individually and pays back individually. There is no group guarantee. On the other hand,
loans are put on one form; this however is BRI administration and has nothing to do with the
loan as such. When a farmer does not repay he is not entitled to a new loan.” (letter to
Molster, 14 August 1971)
As Turnier reported it (63): ”Experimentation in the Special Pilot Project in Jogjakarta has
brought in and is inciting structural and functional changes in the rural credit policy, such as:
(vi) use of type of collective loans lending itself to the identification of each borrower and his
plantation, and involving individual responsibility for repayment to the bank units directly.”
The word ‘collective’ may seem contradicting ‘individual responsibility’ in his statement.
“The new scheme represents a shift from group credit to individual credit. The primary
channel, through which credit is disbursed, became the ‘village unit’ set up by Bank Rakyat
Indonesia and manned by locally recruited bank employees.” (AHT, 2)
42
The text of the Village Unit loan contract was also very clear: individual responsibility for the
loan with a pledge of all assets (‘floating charge’) to BRI as security for the loan. Nowhere in
the Village Unit loan contract is there any reference to any joint liability as the following two
quotes from the loan contract show: (a) “As a guarantee that the debtor will pay the loan to the
bank accordingly, including the fees attributable to the loan or other costs due to other matters
which may occur from time to time, the debtor hereby hands over his assets as mentioned in
the certificate of the village head at the time of applying for the loan” and (b): “The
undersigned [name borrower] hereby acknowledges to have received a loan from BANK
RAKYAT INDONESIA, Branch of …. Village, to the amount of Rp…. and duly accepts the
terms and conditions mentioned above.”
The AVB manual of 1935 (32) gave as reasons for taking such a floating charge that:
“Floating charges are desirable from the bank’s point of view because they mean that all
claims that it might have on the debtor at any time are also covered and because the debtor is
thus bound more permanently to the bank, will be more likely again to make use of its
services and will so help in establishing a permanent clientele.” (Fruin, 32) So, not just a
matter of taking collateral but also binding clients!
10.5.8
Loan purposes
It will be clear from the previous paragraphs that BRI’s aim was to finance clients in the
widest possible sense. The limited and aim of the pilot project was to finance individual rice
farmers in their adoption of new, high-yielding rice varieties and taking into account their
needs for finance for other crops in the crop rotation. For the first aim, rice finance, there were
plenty of (cheap) BIMAS funds to be obtained through the Ministry of Agriculture from Bank
Indonesia; for the latter there were officially no cheap funds neither for any other (non-farm)
activity.
Without formal approval of the Ministry of Agriculture BRI did provide in the Village Units
production loans for other crops than rice, first by simply extending the rice loan repayment
period, a dry crop normally following a rice crop, and later by officially giving one-year crop
loans. The Ministry of Agriculture became convinced of the financial importance of
‘polowidjo’ (dry land) crops in 1971 and initiated a ‘BIMAS-polowidjo’ scheme in 1972,
which solved this problem.
An experiment with storage loans was started in April 1971. Most of the 16 stores built in
Yogyakarta province could store rice but in Gunung Kidul district they also stored ‘gaplek’
(dried cassava chips). Again, BIMAS funds were used for their construction and operation.
Farmers could remain owner of the stored rice and obtain a storage loan equal to 70% of the
value of stored rice, or they could sell the rice to the store at a minimum guaranteed price.
Storage certificates were tradable. Later, rice hulling units were added to the stores. During
the experiment stores were either managed by a village committee or by BRI staff, the latter
so as to have a better control over the store experiments and to experiment with ‘collective’
ownership of the store by client groups (see further section 10.8.4).
“Bank efforts to assist farmers in making better prices for their produce (like the recently
announced storage loans for farmers) could have a stimulating effect.” (FAO, 35)
BRI also supported PN Pertani by financing its fertilizer and pesticide stocks, however, this
was arranged at BRI Headquarters in Jakarta.
43
The first experiment with small loans to traders in the Village Unit of Turi (Sleman district),
an entry point to the Province, was conducted in 1971. The introduction of the TABANAS
savings scheme in the Village Units also started in 1971. The FAO program was not involved
in these latter activities, being outside its scope of activities of agriculture production credit,
input distribution and produce marketing.
Multiple loan purpose
In my credit ‘innocence’ at that time I believed that loans requested for agriculture would really be
used for agriculture provided one took certain (control) measures. This was in spite of what literature
was saying in respect of small farmers in Indonesia. Turnier and BRI senior staff were less inclined to
believe so. Some statements in Fruin’s AVB-manual (32) were very clear in this respect:
a. “The distinction between production and consumer credit is meaningless in respect of the farmer; it
is artificial and does nothing to increase understanding of the provision of credit to the farming
community.”
b. “Domestic and business expenditure form a single, indivisible whole. The basis on which credit is
extended cannot therefore be the production costs and net business profits but the gross income of
the farmer, or rather that part of it which is received as money.”
c. “… has been shown that….. credit to indigenous farmers cannot really be called business credit but
that it should serve directly or indirectly to meet their needs.”
d. “It can be safely assumed that normally the entire family income is consumed, much of it directly in
kind. A bank loan would thus have to be entered on both sides of the accounts, as income and as
expenditure. Loans merely move income and expenditure so that they are distributed differently
over the year than would be the case without a loan.”
e. “One must consider farming as an organic whole, i.e. find out how crop rotation operates in
particular types of farming, how large a farm has to be to be able to support the farmer and his
family, which crops are intended for sale, which exclusively for food and which for both, and in the
latter case in what proportion they are divided, whether and to what extent such a business usually
derives cash income from horticultural and orchard produce, whether cottage industries or coolie
work normally provide additional income, and so on.”
Patten seemed to hold the same view: “Most rural families actually engage in a number of different
enterprises and shift their capital and family labor between these different enterprises according to
their opportunities during the year. This is an element of strength in stabilizing family income in the
rural areas.” (53)
BRI drew the correct conclusion for the KUPEDES scheme: “…the BRI does not attempt to tell the
borrowers the kind of enterprise for which they should borrow. The general rule is that borrowing may
be for any productive enterprise.” (Patten, 53)
10.5.9
Loan terms
For rice loans the loan term had been set at seven months in the past. This was based on the
growing period of the traditional local rice varieties. The new, high-yielding varieties had a
shorter growing period of between 100 and 130 days (after transplanting). It became quickly
clear that farmers being able to plant a second crop within the seven month period would reuse their loan funds. The same occurred with farmers planting a second, dry (‘polowidjo’),
crop for which officially there was no credit available. Because the DIPERTA-FAO field
program did include trials and demonstrations on dry crops there was sufficient positive
information to warrant the inclusion of these crops under the Village Unit credit program.
BRI took the correct view that they were not financing a crop but a farmer and agreed that the
loan term could be exceeded in such cases. In fact, it went on to develop an annual loan for
44
any cropping pattern that had proven to be profitable with repayments spread according to
income, including any off-farm income (the ‘village certificate’ indicated off-farm income).
Such repayments could be evenly spread over months or weeks. This was in line with pre-war
experiences: “It can be particularly difficult to determine when repayments of harvest loans
should be made if there is no clear distinction between the seasons and if crops at various
stages of maturity are in the fields at the same time…” “A good way of verifying when
farmers have a lot of money and when they have little is to examine the monthly disbursement
and repayment figures of the Pawnshop Service.” (Fruin, 32)
As collateral were taken all assets stated in the ‘village certificate’, a floating charge. Standing
crops and crops harvested were included in the collateral. There was no formal registration
made of the debt in the land register. Most farmers, including tenants, would own some land,
but even those that didn’t could obtain a first loan, provided they had a good credit rating
according to the village head or village officials or when they were known to the BRI Village
Unit staff.
“I am getting sick of all those people that suggest that BRI is selective in the making of loans.
Every farmer can get a loan……BRI in Jogjakarta has never refused a loan in the VU!”
(letter to Molster, 14 August 1971)
Collateral
The purpose of taking collateral in the Village Units was to have extra security and the calling up of
such collateral in case of default (‘auctioning’) was only planned for ‘exemplary’ cases, the size of an
individual loan not warranting the legal costs involved in a foreclosure. The main factor deciding on
who was to receive a loan was creditworthiness. This approach was not different from the pre-war
approach as worded by Fruin: “The bank’s primary concern is whether the profits of the business
applying for a loan or the income of an individual borrower are sufficient and stable enough for the
agreed repayments to be secure.” “..the value of the land as collateral is small, as is shown again and
again if such collateral has to be called in. In most desas there is still sufficient solidarity among
members to restrain them from bidding for the land or the home of one of their own if it is auctioned
off.” (32)
In KUPEDES this system seems to be continued: “The legal system for taking possession of the
collateral in the case of loan default is relatively complicated and expensive and is almost never used.
At the size of loan in KUPEDES, the documentation of collateral on each loan is more for the purpose
of establishing the borrowers’ ability and serious intent to repay than it is to provide the basis of legal
action.” (Patten, 53)
10.5.10
Loan package or free choice?
From the beginning it was made clear that BRI would not accept any pre-set farm input
package as a basis for lending. Farmers were to be free to make their own choice. The
experiences with the Bogor Agricultural Research recommended BIMAS input packages by
BRI, PN Pertani and in the BIMAS-GR had made it very clear that farmers’ practices and
wishes differed substantially from the official Bogor crop input recommendations.
“Whereas
in the old BIMAS prior to the VUs and later in the BIMAS Gotong Rojong in areas
not served by VUs farmers had to take the full package, the VUs had no such regulation. The
package was regarded as a recommendation indicating the maximum BRI was willing to
finance. Farmers were free to decide which items and in what quantity they would like to have
them. One restriction was made: the amount of cash could not exceed the value of the
45
production inputs which were given in kind. The reason for a ‘free’ package was simple:
farmers are supposed to know best what they need and/or can handle. Other, technical,
reasons were that a ‘standard treatment’ is unlikely to give the highest returns since farmers
operate at different levels of management and production, and their behavior towards
changes in e.g. prices differs (Bryant). A rigid package approach would only lead to ‘misuse’
of package items, mainly resale of inputs applied or transfer to other farm enterprises (which
could be less profitable). Even where the cash component was regarded to be a ‘cost of
living’ allowance it was accepted that certain farmers might prefer cash to buy inputs where
he was in position to buy them cheaper elsewhere. This applied to a considerable extent to
pesticides especially when PN Pertani had only diazinon for sale, whereas farmers preferred
the cheaper endrin.” (37)
One could not expect a good repayment performance on credit extended for crop input
packages that were forced upon farmers. They would accept the package but not use it for the
declared purpose and sold the inputs. Middendorp’s advice (48) was also taken into account:
“According to many people the purpose of a monetary loan seldom reflects its real purpose.”
The Village Unit credit scheme was therefore to be demand driven.
Turnier wrote: “It may be helpful to call attention to one essential feature of the credit policy
tested in the Special Pilot Project…. The new feature aiming at introducing more flexibility
consisted in proposing the standard loan package while at the same time letting the
producers/borrowers make their own decisions concerning the quantum and its components.
The rationale was that the producers, appropriately guided by the extension agents, would be
able to make the right economic decisions.” (64)
“The (loan) package has changed (on the basis of results of the trials and experience). We say
that the new recommendations are correct and better (higher net return, limited risk). The
package is furthermore not binding (that was something new that we introduced on the basis
of the theory that farmers know better than MINAG and Bank). The loan package therefore
gives a maximum (not a minimum), on condition that cash loans cannot be larger than
production loans.” (letter to Molster, 8 July 1971)
10.5.11
Credit in cash and/or kind?
The choice whether to make a cash loan or a loan in kind by the issue of coupons was more
difficult. In the BIMAS program farmers had received part of the (group) loan in cash and part
in kind. The BIMAS recommended credit package showed a percentage of the loan to be in
cash (with a maximum) while fertilizers and pesticides loans were supplied by way of
coupons that could be traded at PN Pertani stores.
By having already decided that farmers should have a free choice, a decision to restrict that
choice was difficult to make. On the other hand, the program was also to open the market to
commercial suppliers in addition to PN Pertani and farmers were still free to decide how
much fertilizer and/or pesticides they wished to have.
It was finally decided that farmers could have a loan consisting of no more than 50% in cash
and the remainder in kind. Whether the loan in kind was for fertilizer only or for fertilizer and
pesticides was left to the farmer. Of course, if farmers intended to maximize their loan they
could be expected to ask for the maximum amounts of fertilizer and pesticides in kind so as to
maximize their cash component. But past performance had shown that they were not using the
46
maximum recommended inputs, so if they suddenly would, then that would be suspect and a
reason for inspection of the borrower. Information on farmers’ actual practice was
furthermore available from the DIPERTA random harvest plots.
There was another reason for keeping a system of a combination cash/kind loan and that was
to measure in the farm input distribution experiment the change of market share between
various input suppliers. By using the coupon system it was easy to see how the market was
being divided, in which areas the commercial distributors were gaining market share and in
how far farmers would prefer to purchase pesticides on cash.
In addition, BRI would have some form of control on the farm input suppliers, because if they
tried to sell underweight or adulterate chemicals they would no longer qualify as a ‘registered
supplier’ allowed to cash in the BRI coupons.
It was even thought that BRI by limiting the number of suppliers (giving them a ‘preferred’
status) could possibly bargain a lower price for the inputs. This latter was not done in the pilot
scheme, however, because government had set fertilizer prices at a rather low level.
Finally, a sudden change from an existing system of cash/kind loans into a cash-only loan
system might be too much of a temptation for some farmers that could lead to unprofitable use
of a loan. This, of course, could also happen with the cash part in a combined cash/kind loan.
Farmers using different cash/kind ratios in their loan were subject to a study to see if this ratio
had any significant relationship with their loan repayment performance. It did! See further
section 12.01.
10.5.12
Interest rate policy
“Cheap money is no cure-all, on the contrary, it is a disaster when not accompanied by
ensuring that it is used sparingly and profitably in the knowledge that it must be repaid from
future earnings.” (Fruin, 31)
At the time of the Village Unit pilot project many prices were fixed by government, including
rice and fertilizer prices. Interest rates were also set by government, the one for BIMAS being
less than the prevailing commercial rates. In how far the BIMAS rate of 12% per year should
be regarded as ‘subsidized’ as indicated by some authors may be a bit open to discussion.
Compared to the inflation rate, the lending rate was positive in some years and not so in other
years. The BRI borrowing rate of 3% from Bank Indonesia was less than the inflation rate in
all years from 1968 till the end of the BIMAS program in 1983.
The conditions of the Bank Indonesia loan funds left no free choice to BRI regarding the
setting of its own interest rate for borrowers. In the areas not served by the Village Units the
normal BIMAS interest rate of 12% per year would apply. It might not work in favor of the
Village Units if their clients had to pay a higher rate than farmers still receiving BIMAS group
loans in neighboring villages not (yet) served by Village Units.
For the aim of the experiment the actual loan interest rate was not that important. For the
experiment the interest margin (‘spread’) of 9% was more important because the experiment
had to prove that that margin was sufficient to operate the Village Units profitably as in prewar days. If BRI could operate within that margin one could not say that BRI’s operations
were being subsidized.
47
It must be admitted that the Village Unit crop lending rate of 12% per year became a bit
strange when the TABANAS savings scheme was introduced by BRI, offering initially 18%
interest, later 15% per year. Trade loans, including those in the first Village Units, were made
at around 25% interest by BRI. In 1973 interest rates for these loans were lowered in the BRI
Kredit Mini scheme, which had similar borrowing and lending rates as the BIMAS program.
The interest rate used in the Village Units was also much lower than the interest rates charged
by the BRI supervised village banks (BKD), although it was argued that those loans were
much smaller, could be used for any purpose and were usually for very short periods of a few
weeks to a few months. In addition, the BKD law prohibited non-market interest rates.
Although a commercial rate should have been preferred in the Village Units, the government
policy simply didn’t allow it at that time.
Interest rate consequences
The low interest rates set by government had a number of consequences, especially for the possibility
of using the BRI attracted savings with a higher interest rate than the BIMAS and Kredit-Mini lending
rates. Patten summarized some of the problems that resulted in a change of policy in 1983:
“The BIMAS program was subsidized in a variety of ways:
- the interest rate on BIMAS credit was set at 12%, which was below the inflation rate and below the
interest rate paid on small savings;
- the Government and Bank Indonesia shared the risk with BRI, i.e. they covered 75% of loan losses;
- the Government paid a BIMAS administrative subsidy to BRI. This subsidy initially covered 40% of
total Unit Desa administrative costs. Later, after the administration of other kinds of credit was
added to Unit Desa responsibility, the administrative subsidy covered all operating losses.” (53)
The interest rate of 12% was, according to published data of Bank Indonesia, not lower, but higher
than the inflation rate in the period 1981-1988 and remained so till 2000, with the exception of the
year 1998. (Steinwand, 62)
“The basic problem was in the interest rates which had been set for Kredit Mini and Midi and for
TABANAS. There was a negative interest spread between savings and lending interest rates of the
Unit Desas. With no prospect for the continuation of large operating subsidies, the interest rate on
loans would have to provide sufficient positive spread over savings rates to cover the Unit Desa
operating costs.” (Patten, 53)
It seems from this that it was not so much the relation between interest rate and inflation rate but that
the negative spread between savings and lending rates was the major problem.
The new interest rate for KUPEDES became 1.5% per month flat in 1983 but: “Bank Indonesia
insisted that they would give 3% liquidity credits to support KUPEDES investment credit, so the
interest rate on investment credit was set at 1% per month on the original balance.” (Patten, 53) “It
should be understood that the KUPEDES interest rate [1.5% flat] is not strictly a market interest rate,
but rather a rate that would allow the Unit Desas to break even at a certain volume of credit if the
system had the capacity to lend up to that volume without adding staff. The market rate for credit in
the villages is much higher than the KUPEDES rate.” (Patten, 53)
Fruin had already assumed in 1935 government interventions in channeling certain activities through
his (government controlled) AVB Bank and he had made some provisions to protect the AVB: “Under
article 2, paragraph 3, of the Provisions, the AVB Bank is therefore obliged to take on the
administration of funds intended by the government to be loaned to the people in order to improve
their physical welfare …in return for payment to be determined….. to act in a supervisory and
advisory capacity in the administration of the said funds.” “Loans which are in themselves too risky to
be provided by the AVB Bank may nevertheless also be provided by the bank in its own name if the
government or another agency guarantees all or part of them.” (Fruin, 32)
Whether there was a need to subsidize operational losses of the Village Units as a result of operating
costs exceeding the interest spread, see section 11.4.
48
10.5.13
Loan supervision system
Under the BIMAS group loan program there was no BRI supervision of final beneficiaries.
The question of supervision by the Village Units focused on which borrowers to supervise/
check, how frequently, what to check and at what times within the loan cycle.
It was decided that the scheme should not be a fully supervised credit scheme as was
promulgated by various donors and the Worldbank at that time. That would involve too many
staff and costs in relation to the expected size of the individual loans.
“….there are a lot of farmers and their average creditworthiness is extremely poor and this
means that close and regular contact is unaffordable.” (Fruin, 32)
A good selection of borrowers at the start was regarded as important as well as setting up an
administrative system that would ensure that loan defaulters would be unable to get a new
loan. Maintaining good connections with the agriculture extension workers and village
officials was also part of the supervision system. The village head was stimulated by receiving
a small bonus for every Village Unit loan repaid.
Finally, a small group of roving inspectors, based at BRI district branches, initially checking
at random, became part of the project.
Information in the ‘village certificate’ in respect of outstanding debts with other organizations
such as the village banks (BKD) and the tax authorities was also used in deciding on whom to
check. A research component was added too to see if these inspections of borrowers could be
made more effective by limiting inspections to those borrowers that were potentially higher
non-performance risks (see section 12.01).
An issue not directly bothering the designers but nevertheless important was whether small
rice farmers had the ability to repay their loans. The National Rice Program Survey (4) had
gone into considerable detail in 1971 to calculate the paying ability of farmers. One of their
conclusions was that the minimum acreage needed to repay a loan was 0.9 hectare, which was
well above the average farm size found in Yogyakarta province.
“The report did not explain why farmers in Jogjakarta were still able/willing to repay their
loans: 99% of the loans issued in 1969/70 in the rice area were repaid. In Gunung Kidul,
where farms are bigger, repayment rates were much lower!” (41)
The view of the Rice Survey Team was that “a farmer will repay his credit if his revenues
cover his living requirements, the hired labour and eventually the costs for those inputs he
directly has to pay for. These items will range before taxes and debt repayments if cash money
is available.” (4)
The survey team had calculated the minimum required family expenses but didn’t seem to
have paid (much) attention to the non-farm income of small farmers.
The theory of the Village Unit designers was that “repayment capacity is not related to farm
size but to the profitability of the items financed. Whether repayment occurs depends on
farmers’ honesty, capacity to handle cash money and his future and/or other needs for
assistance.” (41) This latter view was supported by Fruin (31): “Still, there seem to be many
borrowers who have difficulty in collecting the weekly repayment amount, thereby decreasing
their working capital or going a day without food. It is also shown that as a result of the duty
to repay, several borrowers are forced to work more than they would otherwise do.” This
statement was also an indication of the multiple income sources of the small farmer and the
strong will to repay a loan.
49
The VU designers’ conclusion was based on the profitable package of inputs financed with a
cost/benefit ratio of 1:2 and the fact that BRI was the only source of cheap credit and that it
could also assist farmers with other types of financial and marketing assistance. Effective
interest rates in the private sector were about 8 to 10 times higher in that period. (41, 63)
Factors that could affect repayment performance were assumed to be:
“- farm size should not be a factor;
- the selection of package items, especially the profitability of the various items;
- the correct use of the financial inputs;
- land tenancy regulations (e.g. farmers growing on a share cropping basis would
loose part of their increased income to the owner);
- the agricultural conditions in the area (e.g. access to irrigation water);
- timely availability of seeds, inputs, labour, water etc.” (41)
In respect of the correct use of the loan, the following ‘deviations’ were thought to be
possible:
“- sale of the credit coupon for cash;
- sale of part of the inputs obtained;
- use of all or part of the inputs on other crops (e.g. dry crops);
- re-use of the loan for a following crop for which no credit was available (dry
crops).” (41)
Interestingly, no mention of other, non-farm, activities in the early design stage!
10.5.14
Administrative systems
The FAO-FFHC-FP staff in Yogyakarta and Turnier at BRI Head Office in Jakarta were
mainly involved in policy and product development, strategies, approaches and designing the
operational research. All administrative systems, procedures and forms for the Village Units
were designed by the BRI office in Yogyakarta. Turnier also assisted BRI Head Office in the
development of a national training program for all BRI staff (17, 65) and, together with the
Harvard team, the design of a national loan insurance scheme. (63)
In designing the administrative system, a Village Unit capacity target of 2,000 loans per
month was set as a maximum. This would correspond with about 80 applications per day in
one peak month. This translated into 10 applications per hour, which was equal to 6 minutes
per Village Unit staff member, or 18 minutes total loan request processing time per applicant.
This assumed that there would be two distinct periods of disbursements of loan funds,
corresponding with two rice planting periods. These periods might, however, differ per
Village Unit, whereas at the same time the introduction of the new high-yielding varieties was
expected to change this two season pattern.
“The demand for credit, especially in the irrigated areas, tends to shift away from the pattern
of two seasons.” (Turnier, 64)
“If the observation that the staff of the Village Units is able to process up to a daily maximum
of 80 applications were accepted, the urgency of supplementing the staff at certain peak
periods might arise.” (Turnier, 64)
The starting document, which a farmer should collect before visiting a Village Unit, was the
BRI form with the title ‘keterangan desa’ (village certificate), sometimes referred to as ‘SKD’
(surat keterangan desa) and by some authors referred to as ‘surat kepala desa’ (village head
50
certificate). The back of this form was completed by the Village Unit staff giving details of
the loan request and farm plan.
The information supplied by the village head consisted of: name and aliases of the loan
applicant; partner details; age; land size (owned, rented or sharecropped); type of house;
financial position in respect of the village cooperative, village rice bank and BRI; payment
capacity; production data various crops; other sources of income; etc. The certificate was
signed by the village head and another official (‘kepala dukuh’, desa head), and the applicant
would sign or fingerprint the form too. After the Village Unit staff had completed the other
side of the form with the loan request details, the form was signed again by the applicant. For
the issue of a certificate the village head received a few rupiahs from BRI. Upon full
repayment of the loan he would receive another small amount.
It is important to note that this SKD could not only be used for a crop loan application but
could also be used for a loan request ‘to increase business capital’ (item 5.1 of the SKD). This
again showed that BRI did not plan the Village Units to be crop lending windows only.
The design of some forms was coordinated with BRI Head Office. The ‘surat pengakuan
hutang’ (‘acknowledgement of debt’ declaration made by the borrower i.e. the loan contract
form), was copied from the loan contract text used by Bank Negara Indonesia Unit II (BRI’s
previous name) and the text of that latter form made reference to clauses of the ‘Algemeene
Volkscredietbank’ (General Popular Credit Bank, AVB) deposited with notary A. H. van
Ophuysen in Jakarta on 8 December 1934 and 3 September 1938. This is other proof that the
pre-war AVB systems had their influence on the BRI Village Unit system!
This contract form had sheets attached to it on which individual borrowers would sign for the
individual amount borrowed. These sheets could be signed by a maximum of 6 borrowers per
sheet. This signing, each borrower in his own ‘block’, was a time and paper saving measure,
not a form of joint liability.
Other forms and books were designed for use by the Village Unit administrator and cashier
for entering individual loans, summarizing data and balancing the books and cash etc. From
the BKD (village bank) system, another pre-war system, the ‘buku III B.K.D.’, a cashbook
leading to a trial balance sheet, was copied and used in the Village Units.
For the ‘in-kind’ part of the loan the borrower would receive a ‘surat-wesel’ (coupon), a piece
of typed paper listing quantities of fertilizers and/or pesticides, which coupon the borrower
could use to pay the farm input supplier.
Looking at all the forms now gives the impression that possibly the administration could have
been simplified. Some forms could have been combined. Where copies had to be made, this
was done by inserting carbon papers. The use of carbonized forms could have saved time but
that type of paper was not available in Indonesia then.
“With the large peaks of loan applications inherent in a scheme for seasonal lending like
BIMAS, simple loan processing procedures are a must. VUs were able to handle 40 to 60
loans a day with a one-time high of 80 involving overtime. Even where the system followed
was simple there still was a substantial amount of hand copying of data, fortunately not
resulting in many errors. But the system can be simplified even more.” (37)
All administration was done by hand in the Village Units. At district level some experiments
were done with mechanization, mainly the addition of paper rolls to the cash registers. In
Jakarta the first studies were done for a BRI computerization, which was to take many more
years before being implemented.
51
Village Units were part of a (district) branch and their financial records became part of the
branch records. However, separate Village Unit profit and loss accounts and other loan
summary records were kept. This allowed for comparisons to be made between Village Units
and to assess individual Village Unit profitability, which was to be the basis for either closing
a unit or extending its area of operations.
Occasionally a problem arose when Village Unit staff tried to make changes to the system.
Although usually well intended, this had the danger of making comparisons between Units
more difficult.
“The ‘slightly’ different administrative system in use in Wonokromo was initiated by the local
VU staff. The system made checking for them and us more difficult (double bookkeeping, not
yet ‘Italian’). Furthermore they rounded everything off e.g. no split–up in HYV and LV.
Rather than explaining all the administrative details, the only point I would like to make is
that no VU should start its own particular administrative system unless it is part of research
and approved by the Branch office. If we do not make the point the days are not far off before
every VU will have its own system!” (letter to Turnier, 17 July 1972)
Neither individual Village Unit financial records, nor complete financial reports of groups of
Village Units were published during the experiment as far as I recall. For some of the
financial results of the Village Units see section 11.4.
Other, less sensitive, data about the Village Unit project in Yogyakarta were published by
BRI, usually in combination with BIMAS records of other areas. These data included number
of loans made, loan volumes, repayments, acreages achieved, etc. but never the complete
profit and loss results, although the above data would allow an insider to make some estimates
of profitability in case of individual unit reports.
Using Fruin’s advice
Fruin’s AVB-manual of 1935 (32) was very specific as to the type of loan application and appraisal
system required: “Application and investigation forms which go into all kinds of detail and on the
basis of which the expenditure and income of the borrower and his family are estimated in order to
calculate a net family income from which it must be possible to repay a loan with interest are bound to
contain fictitious information and are therefore valueless and indeed dangerous, because they create
the illusion of net profits which do not exist. After all, a farmer’s family does not produce for the sake
of profits and surpluses but to meet its own needs.”
“Any effort to structure each individual loan to meet the specific needs and capacity of each farm is
doomed to failure in advance. As such efforts lead only to laborious and expensive investigations and
delays in the processing of loan applications they should not be made for most farmers.”
“Studies of the various types of borrowers in the district covered by each branch office should be
carried out rather than fruitlessly devoting detailed attention to each separate loan application.”
“Individual investigations can then be limited to establishing what that type is, and how much land he
and his family use. Attention might also be devoted to the size of the family, the number of family
members able to work, the amount of livestock owned, the care of livestock and the care of the home
and farmstead.”
The Village Unit designers followed this advice, but also recognized the need for BRI to become more
active in agro-economic research to make such a system work. BRI’s research department was very
small and understaffed in 1969 and not in a position to provide all relevant data. This was taken into
account when designing the various small research components of the project and by using outsiders,
e.g. local and foreign students, to collect and process the relevant data. In addition data collected by
other agencies were used, e.g. DIPERTA, Bureau of Statistics etc.
52
10.5.15
Staff: permanent or temporary?
BRI decided that three persons would be required to run a Village Unit: a loan officer who
was also the manger of the unit, an administrative officer and a cashier. Whether there would
be sufficient work for all three all the time was not known at the start. It was assumed that the
loan officer could also be made responsible for some random supervision/inspection of
individual borrowers, whereas some work of the administrative officer could also be shared
with the cashier, if required.
The loan officer was clearly the most important person, making the final financial decisions.
He had to be a BRI staff member with at least three years experience. The administrative
officer and cashier did not need to have previous bank experience. In fact, most were hired on
a temporary contract basis. Most of them were young high-school graduates. They could be
fired at short notice when not performing well or in case a Village Unit would have to close
down or the whole pilot scheme would have to be stopped.
On the other hand, if the pilot scheme was to become successful they could be considered for
permanent employment and promotion within BRI. They could be dismissed for very minor
errors such as books not balancing by only a few rupiahs. Staff was very motivated as a result.
A special training program was designed for them by the BRI provincial office in Yogyakarta,
taking into account BRI’s national training program requirements. This consisted of
classroom training as well as on-the-job training spread over a period of about 4 months.
Training officers were both from BRI as well outsiders from the Ministry of Agriculture,
cooperative movement, university etc. A typical short course would last two days, starting at
7.30 hours till 12.30, then a break, followed by a second session from 16.00 till 19.00 hours.
Such courses would also address BRI’s other activities such as e.g. savings and the village
bank (BKD) assistance/supervision. A total of 22 lecturers were used for example in the 1970
courses.
The fact that the subjects covered in these courses included all areas of BRI activities is
further proof that the Village Units were not just implementing a program of rice loans, as
suggested by some people, but were a fully integrated part of the expanding BRI rural
financial services system.
10.6
Pre-start activities and starting date
Between the date of approval of the Village Unit experiment on 20 February 1969 and the
official launching date on 8 or 9 August 1969 (I couldn’t trace the exact date) in Yogyakarta
town at the Governor’s office by BRI’s president-director Mr Soerjono, most of the work in
writing the procedures, designing all the required forms, selecting offices to operate from,
recruiting staff members and training them, purchasing office equipment and furniture etc.
was done under the guidance of the BRI director in Yogyakarta, Mr Supono.
It therefore came somewhat as a shock when the message arrived before the opening of the
first Village Units that Mr Supono was retiring and to be replaced by a manager coming from
Bandung. A transfer from Bandung to Yogyakarta was within BRI not regarded as a
promotion transfer, so speculation about a ‘penalty’ transfer was rife. Mr Abdurachim Moesa,
the new BRI manager, was different from his predecessor, but the way he delegated tasks was
liked and stimulated the staff working on the Village Unit project very much.
53
Under his guidance the finishing touches were made and the first 18 Village Units opened
their doors in October 1969. BRI was therefore one year too late in commemorating in 1995
the 25th anniversary of the Village Unit start, and Robinson’s article of 1995 on that
anniversary (56) has therefore the wrong title!
As mentioned earlier, a budget of the equivalent of USD 600,000 had been approved for the
first phase. In my memory these were BRI’s own funds and not BIMAS funds, however, BRI
financial and statistical reports included the pilot Village Units in their BIMAS reporting, so I
can’t be too sure about that now, more than 30 years later.
The equivalent of the amount allocated was Rp 225 million (at an exchange rate of Rp 375 to
the US dollar). These funds were to be used for crop (mainly rice) production loans,
construction of stores, staff training and the set-up of the first 18 Village Units. As section
11.2 will show, this level of funding was more than sufficient for the first year.
10.7
Phase 2 activities and budget
The second year (1970/71) proposal mainly extended coverage of the Village Units to about
75% of the Yogyakarta province irrigated rice area, adding an additional 17 village units (18
had been planned but one area withdrew). As a result of the workload measurement study
carried out during the first season the system of ‘mobile’ Village Units was first phased out in
the district of Sleman in the 1970/71 wet season and later also gradually phased out in the
other districts. The units then became permanently stationed in one of the villages of their
area, allowing also for more villages to be covered by one Village Unit.
The second year included an experiment with loans of a longer duration than the standard rice
loan of 7 months so as to accommodate especially farmers in Gunung Kidul district with
upland rice and dry crops and also included a two-season loan experiment for farmers with a
good repayment record. The TABANAS savings scheme also started.
In addition, experiments were planned for produce storage loans, trade loans, the grouping of
borrowers and on future institutional development (see further section 10.8)
Finally, the second phase was to experiment with a more simplified and standardized
administration system in preparation for the change-over to mechanized systems for BRI. The
BRI directorate in Jakarta voted an additional USD 250,000 equivalent for the second year
experiments on 30 November 1970.
Not directly involving the BRI staff in Yogyakarta but very important nevertheless for BRI
and the future of the Village Unit approach and experiments, was the stoppage of the BIMAS
Gotong Rojong scheme after the 1970 dry season ordered by the country’s President and his
instruction in May 1970 to BRI to expand the Village Units in the 1970/71 wet season to
500,000 hectares of rice, equal to about 500 new Village Units. Similar expansions were
ordered for the following years. (Turnier, 63)
At the same time the new government food (rice) production strategy became based on the
‘Yogyakarta approach’. The expansion of the ‘improved BIMAS’ and Village Units to the rest
of Java did have a substantial effect on BRI as a whole and also on the FAO-FFHC-FP in East
Java, which had started after the FAO-FFHC-FP in Yogyakarta province.
54
The FAO staff and many of the BRI staff didn’t believe that this vast and fast expansion of the
Village Units was technically and organizationally possible. But then, who could refuse an
instruction coming from the country’s President? (see further sections 14 and 15).
10.8
Other activities/experiments
The credit activities proposed by the FAO-FFHC-FP were directly related to stimulating rice
(food) production. BRI’s aim, as stated earlier, was much more ambitious, namely developing
a better rural financial services system. One could consider that aim as an attempt to
rehabilitate of what had existed in the period prior to 1940. Much of that system had
disappeared during the Second World War, the period of fighting for independence that
followed, and the high inflation period under the Sukarno government. Only remnants of the
thousands of village banks (BKD) were still working in 1968 in the country. It was therefore
logic for BRI to experiment with some ideas and to use Yogyakarta province for such
experiments. The following sub-sections deal with five such experiments.
10.8.1
Storage loans
A trial with rice storage loans (and dried cassava loans in Gunung Kudul) was proposed for 16
stores that had already been built in 1970. The storage experiment included two different
types of management of the stores, one using existing village organizations of a pre-coop
nature, the other using BRI managers. The proposal for the storage loans had come from
BRI’s president-director Soerjono and was worked out by Turnier and published by BRI. (64)
These stores, the rice stores also being expanded with rice hullers, and to be expanded with
outlets for farms inputs at a later stage, were all part of the overall ‘improved BIMAS’
program, called ‘BUUD’ (‘Badan Usaha Unit Desa’, village unit enterprise). Another
experiment involved testing the possibility of setting up a credit union/cooperative by
grouping Village Unit borrowers around some of these stores/facilities (see 10.8.4).
The main aim of the storage loans was to give farmers time to sell their crop at a time when
prices were higher than at harvest time by offering a loan equal to 70% of the value of the
crop deposited in a store. Data on crop prices were collected by the Bureau of Statistics as
well as DIPERTA on a regular monthly basis. These agencies would also collect data on areas
planted and harvested for various crops. Occasionally surveys for the same data were
conducted by the ‘Inspeksi land use’ or project teams in the province (e.g. Progo River basin
study by MacDonald Partners and Hunting Technical Services). Within the DIPERTA-FAO
project price data were also collected. An occasional problem was that data collected by the
different agencies were not exactly the same. The Indonesian answer to the question which set
of statistics was correct and to be used was then: “which one you like most?”
Crop statistics showed that for rice the highest price was about 50% more than the lowest in
both 1968 and 1969. Such price differences could last for several months. The storage loans
were expected to last from 3 to 4 months. A problem was whether farmers should remain
owner of the rice stored. Another problem was that both different local as well as different,
new, high-yielding varieties of rice could be offered for storage, and that they shouldn’t be
mixed (local rice could also be used as seed for a next crop, high-yielding rice could not).
These problems would require extra storage space if accommodated. So, it was decided that
farmers could also sell to the store at a pre-determined and guaranteed price. Not much later,
rice hullers were added to the stores, allowing farmers to further benefit from added value. In
addition, Turnier had proposed that stock deposit certificates could be traded. (64)
55
“The second phase is assistance with the storage of rice. There are now 16 rice stores
constructed. Farmers can deposit their rice there after harvest (it remains their property)
when rice prices are at their lowest. They can then get credit up to 70% of the value of
deposited rice. Within a period of 3 to 4 months they can then wait for a better price. They
can also sell to the store at a guaranteed price.” (L28, 1 November 1971)
“This price is higher than farmers’ expectation. This storage project starts 1st April next.”
(letter to Molster, 15 March 1971)
BRI Head Office was not too happy with the idea of managing some of the stores, however,
this was a requirement of the controlled experiment to see if something like a farmers’ union
could be established out of Village Unit clients. It was thought that that would be easier to
achieve by offering the transfer of assets, i.e. a store plus huller, to a group formed out of BRI
Village Unit clients.
It was decided that two forms of management be experimented with: (a) BRI would manage
four stores completely and (b) the other stores would be managed by a committee selected by
local officials or a cooperative or a committee composed of representatives of local
cooperatives.
“In both cases a storehouse built by BRI would be leased on the basis of the sharing of gross
earnings (50%) with BRI to cover the initial investment plus, eventually, a percentage of the
net. The Management Committee would be responsible for the operating costs and would
decide on the use of the net earnings. A BRI employee (staff of the Village Unit) would assist
in the operations, attending to administrative chores, controlling, and would be in charge of
vetting and processing of loan applications on stocks of produce….. Decisions concerning
future ownership of the storehouse, especially after complete recovery of initial investment
has been postponed; it might be assumed that the financial results, the economic policy of the
moment, and the financial policy of BRI may be the determining factors.” “….it might appear
to be useful at the outset to look at production loans and loans on stock of produce as two
complementary aspects of credit, structurally and functionally.” (Turnier, 64)
Not everyone was in favor of this new BRI activity: “Otherwise, pilot projects are now being
attempted to link storage and marketing operations with the village unit. The fact that
marketing is a distinctly different undertaking from credit, would raise questions about the
logic of such an approach. However, experience has yet to be gained on this matter.” (AHT,
2)
The storage of ‘gaplek’ (dried cassava chips) in the district of Gunung Kidul required that the
produce was to be treated with chemicals. People were initially rather scared of eating the
treated ‘gaplek’ until the ‘bupati’ (district head) proposed to eat the treated product in a public
meeting. He didn’t die nor get sick but later admitted in confidence that he had been a little bit
scared!
10.8.2
Savings
“…the AVB-Bank should do all it can to attract the savings of the indigenous population.”
“…the village bank, which was also supposed to be savings bank.” (Fruin, 31)
Savings were not part of the FAO-FFHC-FP activities, and as shown earlier, the attracted
TABANAS savings (at an interest rate of 18%, later 15%) could not be used for agricultural
credit as long as it was government policy to restrict the lending rate for crop loans to 12% per
year.
56
Experiments with different forms of savings were, however, proposed by Turnier and BRI
Head Office as part of BRI’s new policy to become a full-fledged bank.
Turnier addressed the issue of savings too in his comments on the Yogyakarta pilot project.
(64) He listed there some hypotheses about the existence of private savings in rural areas and
how these might be expected to grow with income as a result of the introduction of new rice
varieties and increased credit availability, and how these savings could possibly be solicited
by the bank. He then proposed to ascertain his hypotheses by ‘systematic experimentation’.
Assuming that “small savers living in areas remote from the bank’s location may not be
incited to travel long distances for the purpose of small savings deposits inasmuch as eventual
withdrawal would entail another trip” he proposed to look at the use of the Village Units and
to let them provide ‘additional bank services’.
He then continued by offering two approaches: (a) one of forced savings associated with the
crop production loans, if necessary including a bonus or lottery incentive (attractive because
of the large volume of loans) and (b) a system of voluntary savings with “easy withdrawal
after the compulsory waiting time, interest earnings, lottery, bonus etc”, initially limiting the
experiment to collections of savings by the Village Units. Turnier favored the second option
of voluntary savings.
The TABANAS savings scheme was first introduced in the Village Units in 1971 and, as far
as I recall (because I deposited the ‘pension funds’ of my domestic staff into a TABANAS
account in 1971), did have a minimum waiting time before withdrawals were possible.
“The Government and Bank Indonesia instituted a national program for small savers
(TABANAS) in 1970. From 1971 on, individual Unit Desas were brought into this program as
their administrative capacity was judged to be sufficiently developed….The interest rate on
TABANAS was initially set at 18%; this was later changed to 15%. Administrative costs are
partly subsidized by Bank Indonesia.” (Patten, 53)
Development of a savings facility
It is interesting to note that BRI’s policy in 1996 still was that “savings are mobilized voluntarily from
people who want to save; the Units do not collect forced savings from borrowers.” (Moeljono, 49)
Turnier’s proposal of 1971 to include a lottery came with the introduction of the SIMPEDES savings
scheme: “SIMPEDES… from the beginning it has carried non-cash lottery prizes.” (BRI, 12)
It is somewhat unclear to me why BRI was ‘accused’ of not being close enough to the small
farmers/entrepreneurs as far as lending was concerned but apparently close enough to them to attract
their savings: “The strongest competitor for savings of the BPR unit banks are not the small, mainly
village based, LDKP but the BRI unit desa….” (Steinwand, 62)
This, of course, may have to do with the perception of where savings are safe, but also shows that
distance to a Village Unit is then not a major factor. I recall a meeting with a governor of Bank
Indonesia in the late 1980s when the private sector was allowed to set up rural banks. I asked him
whether he didn’t think that the setting up of a large number of such banks was not only stimulating
over-crediting of the rural population, a major problem in Fruin’s pre-war period, but was also creating
a potential risk of losing one’s savings in these low-capitalized rural banks. His answer was that the
people would soon discover the difference between a good bank and a bad bank! They have possibly
learned that difference by now?
57
10.8.3
Trade loans
The history of trade loans in Indonesia is older than the establishment of the first popular
credit bank in Purwokerto in 1895. ”Before this time, Christian missionaries had taken steps
to establish local market banks. Their efforts, however, faded into insignificance in the light of
the furore caused by Wiriamaadya’s loan scheme initiative and De Wolff van Westerrode’s
expansion thereof.” (Schmit, 59)
An experiment with trade loans for small entrepreneurs was started by BRI in the Village Unit
of Turi (Sleman District) in 1971. This was just an extension of the normal micro-enterprise
lending carried out by the Yogyakarta office and Mobile Units (MU) and was in line with the
policy of extending all banking services to the villages. It should be noted that Turi, an entry
point at a main road to the province, was not an average rural village but had a substantial
amount of small and micro trading and small and micro manufacturing activities.
After FAO left, trade loans and other non-farm loans were introduced on a much larger scale
in the Village Units in 1973 when the Government and BRI embarked on the ‘Kredit Mini’
program, followed in 1978 by the start of the “Kredit Midi” program, which programs later
formed the basis of the reorganized BRI Units (KUPEDES) system in 1983, as the following
quotes from Patten show: “In 1973/74, the Government made available a grant of Rp 5 billion
[USD 12 million] to BRI for a program of small loans outside the BIMAS credit program.
The individual loan ceiling was set at Rp 200,000 [USD 482] per person. All other details of
the credit operation were left to BRI. The BRI created the ‘Kredit Mini’ program to utilize the
government grant. The interest rate was set at 12%. Any type of rural enterprise, including
agricultural diversification, was declared eligible for loans. Regular banking procedures were
followed, with the BRI Unit Desa staff responsible for assessing the financial capability of the
borrower to repay the loan. Between 1973 and 1983, the Government made available about
Rp 7 billion per year in grant funds for the Kredit Mini, a total of Rp 66.7 billion by the end of
1983. The long term loss ratio in Kredit Mini was slightly over 2%. Beginning in 1978/79,
Bank Indonesia made available liquidity credit at 3% interest to finance a ‘Kredit Midi’
program. This program was administered in the same way as the ‘Kredit Mini’…The Kredit
Mini and Midi programs had shown that there was a large continuing demand for working
capital and a smaller demand for investment capital for all kinds of village enterprise. The
Unit Desa staff had learned how to administer such credit successfully….This program was,
in effect, the pilot project for KUPEDES…. The major problem was that its interest was set at
12%, which was less than the savings interest rate. This made them dependent on Government
grant or cheap B.I. liquidity credit to expand.” (53)
From agriculture loans to multi-purpose loans
Patten’s statement (53) that in the Village Units there was “a complete concentration on agricultural
lending” seems to contradict his earlier quoted statements that Village Units were engaged in
TABANAS savings since 1971, Kredit Mini since 1973 and Kredit Midi since 1978!
There also seems to have been a ‘reversal’ of reported loan clients since 1983: from selecting
(BIMAS) farmers that in many cases had off-farm income to KUPEDES trade clients that had also
farm income: “…the majority of KUPEDES loans are listed as being for trade, and most loans are for
twelve months with monthly installments. Most borrowers are also farmers and tap cash flow from the
trading enterprise for fertilizer and other inputs at the time they are needed. This has turned out to be a
most efficient way of providing agricultural inputs on time.” (Patten, 53)
58
10.8.4
Grouping borrowers
“So far the Village Units make only individual loans. This is an unbelievable administration
(loans vary between Rp 300 and Rp 10,000) [USD 1 to USD 26]. If BRI could make group
loans this would mean a lesser burden. The problem with the existing groups is that they are
not democratic. A few guys decide, there are hardly any meetings and there is usually no
accountability to the members. This has the potential danger as with the old KOPERTA (rich
borrows, poor pays). In spite of this we would like to do some trials with certain groups of
borrowers, that means, group applications but individual responsibility in respect of
repayment (not one or two farmers being guarantor for 50 others).” (letter to Molster, 8 July
1971)
Based on the observation that “in the social structure, collective action in one form or another
is traditional” it was suggested that “it might be more constructive, relatively more
expeditious, and less costly to deal with groupings of producers. If such groupings, with
clearly defined objectives, were properly organized so as to become functionally dynamic,
they might be able to fulfill some economic and social roles, especially as regards diffusion of
technical information on production and preservation of agricultural produce, distribution and
recovery of loans, some aspects of marketing produce etc. The rapid growth of the volume of
production loans and the number of borrowers suggest that it might be useful to investigate
further, in the field of collective action, with the view to making better use of the potentials.
Relationships of the Village Units and borrowers taken as groups might be an opportunity for
experimentation.” (Turnier, 64)
The status of being Village Unit borrowers was supposed to ‘link’ them, having similar
interests. The experiment proposed by Turnier and BRI Head Office in 1971 involved 4
Village Units, one in each district and each having a BRI managed produce store. The
grouping of Village Unit clients was to become part of the interest borrowers had in the use of
these storage facilities, the final aim being a transfer of these assets (stores) to a formalized
group, preferably a cooperative one.
Village cooperatives
The idea of establishing cooperatives at village level as a solution to their credit needs dates back to
the beginning of the 20th century:
“The village credit institutions were originally intended as popular credit institutions on a cooperative
basis, the cooperative character being further developed as development progressed.” (Fruin, 31)
“.. the General Popular Credit Bank must be the pioneer of agricultural credit, although cooperatives
must bring the final solution to the agricultural credit problem.” (Fruin, 31)
Groups and costs
Turnier’s argument for grouping borrowers was related to improving some of the cost aspects of the
Village Units. Again, that was not a new idea: “In order to cope with the typical micro-credit
problems, i.e. high risk (lack of collateral) and high cost (small loan size), De Wolff van Westerrode
and his successor, Carpentier Alting, propagated the idea of group-lending among the district banks
already in the early 1900s.” “In fact most of the cost- and risk-related arguments for group-lending
products discussed in the 1980s and 1990s have been under consideration in Indonesia already since
the end of the 19th century.” (Steinwand, 62)
59
10.8.5
Institutional development
In many publications the Village Units are portrayed as being only part of the BIMAS rice
loans scheme. We have shown in the previous sections that BRI had many other aims and was
requested under the first 5-year national development plan to develop a full rural banking
system.
In 1971 BRI was already considering some form of joining up with the traditional village
credit institutions (BKD), being the ‘bank desa’ (village bank) and ‘lumbung desa’ (village
rice bank): “The present direction of the Village Units appears to be a costly proposition
bringing tension on the structure of BRI and the means of action. It may take some time
before the system reaches a satisfactory level of performance. It is conceivable that it might
appear useful to re-cast attention to the rural institutions traditionally associated with credit
with the view of attempting to promote change which might enhance their usefulness. If
attention is focused in that direction, it would appear necessary to initiate systematic
experimentation in that direction, to the effect of finding out the extent to which these
institutions might benefit from government interest and investment and might fit into the
developing banking system.” (Turnier, 64)
The village credit institutions referred to were the about 5,000 BKDs already supervised and
controlled by BRI since pre-war days under a specific law and being rehabilitated since early
1969 with government funds. “They [BKD] still operate under colonial legislation (Staatsblad
from 1929).” (Steinwand, 62) Other BKDs (approx 15,000) were still controlled/supervised
by local administrators.
BRI had two types of what could be regarded as small-scale lending windows: the Village
Units, in the first year restricted to crop production loans, and ‘Mobile Units’ (MU), operating
from a district branch office and restricted to micro and small scale and short-term personal
lending, mainly to small traders and others in local markets, and some also active in the
BIMAS program in outlying areas.
Turnier in his final report (63) stated about the village credit institutions: “their function in the
rural sector has ensured and still ensures to a certain clientele an easy access to credit
sustained and secured by intimate knowledge of the household’s financial situation and the
ability of the borrowers to repay loans, and social pressure…. However they have no prospect
of development through the increase in the volume of business if they are not used as channels
for the flow of credit brought about by the Five Year Development Plan.”
He then proposed to experiment with a possible reorganization of the BKDs into ‘primary
credit or producer associations’ and to determine “the opportunity of linking the selected units
[BKDs] to the [BRI] Village Units and Mobile Units with the view of using them as channels
of credit to the extent possible.” (63)
The earlier mentioned experiment with establishing borrower groupings around the BRI
storehouses in the previous section should also be seen in the light of this above
recommendation.
60
History of merging the popular credit bank and village credit institutions
Above proposed ‘total approach’ of trying to ‘merge’ the village credit institutions (BKD) with BRI’s
Village Units and Mobile Units was a formidable task, due to the different legal ownership status and
different systems and performances of these organizations. However, such an approach was not new
and had already been advocated in 1903 and the 1930s. At the beginning of the 20th century “De Wolff
van Westerrode had imagined that the village credit institutions would become the major credit
suppliers to the people, connected by the popular credit banks as apexes.” (Fruin, 31) “Only from such
local banks, tied together by a central popular credit bank, which also acts as a fund for savings,
current accounts and deposits and for regulating of the village banks (that is transferring funds to
banks with shortages from banks with surplus funds), does the reporter see any benefit for agricultural
credit in the future.” (De Wolff van Westerrode in 31) “.. when the situation improves the relationship
[of the popular credit bank] with the village banks can become closer until in the end when they will
have merged together.” (De Wolff van Westerrode in 31)
Fruin (31) also saw some potential problems: “A central institution that brings substantial capital to the
people has the danger that the natural means which the people possess to buy the necessary, i.e. its
labor, leasing of land to farmers etc., will be neglected, and is dangerous because private capital is
displaced and made redundant.” “The future will tell whether the village credit institution or a more
centralized financial institution is best for the people.” (Fruin, 31)
BKD
Steinwand in his excellent book on Indonesia’s 100 year micro-finance history (62) also discusses
linkages between BRI’s Village Units and the BKDs: “A more dynamic development of the BKD
system would have been possible if the BKD were linked more closely to the BRI unit desa
system……Hence the question arises why BRI did not make use of the nearly 4,800 BKD as a kind of
village posts in order to increase the limited outreach of the BRI unit desa system.”
BRI did not want to be dependent on intermediaries for its Village Unit activities in 1969 as earlier
indicated in section 10.5.1. It also took into account the poor financial state of affairs in most BKDs at
that time. The ‘limited outreach’ of the Village Units mentioned by Steinwand surely did not apply to
Yogyakarta province in 1988 with more than 300 Village Units and VU-posts on a total of 393
villages according to Patten. (53)
Steinwand continues with: “However, keeping in mind that the system with the largest number of
units, the BKD, are under supervision of and closely linked with the BRI one can also say that two
thirds of Indonesia’s microfinance institutions are under control of one state owned bank.” (62)
A side effect of the BIMAS BARU program on the village rice stores, which had not been predicted,
was that the new high-yielding rice varieties required fresh seed every year so as to keep rice
production at high levels. This meant that storing seed for the next year in the village rice store
(‘lumbung’) and in the new stores constructed by BRI would no longer serve a purpose. The effect was
that: “During the second half of the 1980s all of the Lumbung Desa dropped paddy loans in favor of
cash based operations and became identical with the Bank Desa.” (Steinwand, 62)
61
Market segmentation
“….for the BKD system…...BRI uses its regulatory and supervisory authority to segment the market
by imposing a maximum loan size of Rp 400,000.” (Steinwand, 62)
In the 1930s a major problem, according to Fruin, was over-crediting of borrowers, leading to overindebtedness and poor loan repayment. His AVB credit manual of 1935 ends with the sentence: “It
may, then, be as fitting a conclusion as any to this provisional manual to impress upon the reader that
nothing is as undesirable for the AVB Bank and its clients than granting more credit than people can
afford.” (32)
One measure to avoid over-crediting was to segment the market between the various (government)
financial institutions. They saw no need to have different government owned or controlled financial
institutions such as pawnshop, popular bank and village bank etc. compete with each other for the
same clients. Differentiating for example on loan types and loan size and on type of collateral were
ways to create that segmentation.
That competition between banks may create over-crediting these days one might possibly conclude
from the statement by Steinwand that in areas where many banks are competing in the same market
loan performance is poorer: “Fierce competition [of BPR unit banks] in Java and Bali results in high
non-performing loan ratios.” (62)
10.9
Estimated system costs and benefits
Various authors have come up with estimated costs and benefits of the Village Units. There
were some rough BRI and FAO estimates prior to the start of the Village Units indicating the
required lending volume. Other estimates were made by visiting missions and donors, even
when the Village Units were already operational for some time and actual financial data could
have been collected and used.
The main reason for these exercises was that BRI didn’t publish any detailed data on income
and expenditure of the Village Units. Even for those working closely with the units, such as
the FAO staff in Yogyakarta province and in the Jakarta BRI Head Office, it was difficult to
get detailed profit and loss data. Whether the BRI directorate in Jakarta was fully aware of the
results in Yogyakarta province I could not establish, neither whether this policy of noninformation was deliberate. From some correspondence in my files it appears that BRI
thought the Village Units were profitable but that Bank Indonesia should not be made aware
of this since that bank might then raise its low interest rate of 3% per annum on borrowed
funds to BRI (see further section 11.4). A strategic decision in that case? When government
later started to subsidize the operational costs of the Village Units, a similar strategic attitude
might have been taken: “A Profit and Loss Statement and a Balance Sheet were prepared for
each Unit Desa, but these were partial statements whose main purpose was to indicate to the
Government the amount of operating losses in the BIMAS credit program, since these were to
be partially covered by the Government through the ‘BIMAS administrative subsidy’.”
(Patten, 53)
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10.9.1
Turnier’s estimates
Turnier did some model exercises with estimated costs and income, which were published in
1971 by BRI. (64) This publication was made by him and his BRI Head Office colleagues.
Their costs seemed clearly over-estimated and the final result was, at least initially, a lossmaking operation. Their calculations seemed to have a serious error when calculating the
break-even loan volume required. Turnier’s published calculations showed the following:
Table 4: Estimated annual costs per Village Unit (rupiah) by Turnier
description
with vehicle
a. personnel
288,471
b. maintenance
18,992
c. operations
35,179
d. depreciation
433,080
e. interest on investment
67,782
Total
843,504
(1 USD = Rp 375)
without vehicle
288,471
338
35,179
53,080
10,782
387,850
Source: Turnier/BRI (64)
They also calculated costs for periods of less than a year on the assumption that “staff might
be part-time employees, i.e. would be paid during a few months of activity.” Alternatively:
“consideration of the diversity and the unevenness of periods of activities related to rice
production might suggest the possibility or even the urgency of re-examining the size of the
area of operations of the Village Units.” (64)
Assuming that “for a relatively short period, a commercial enterprise can continue to function
while earning only enough to cover direct costs” the minimum required break-even volume
could be (temporarily) based on direct costs only, being the first three items listed, i.e. varying
from Rp 342,642 when a vehicle was included to Rp 323,988 without a vehicle.
On the basis of a cost of borrowing of 3% per year and lending at 12% per year, they then
calculated required break-even volumes of lending and corresponding rice acreages, assuming
a certain loan amount per borrower and number of borrowers per Village Unit. They then
arrived at lending volumes of between Rp 54.5 million (no vehicle, all costs) to Rp 112.7
million (with vehicle, all costs) per unit. These figures seemed to be wrongly calculated.
When taking above costs per Village Unit and assuming the net interest income (spread) to be
9%, then to cover the costs would require an annual loan volume outstanding per Village Unit
of 843504/9*100 = Rp 9.4 million (all costs, including a vehicle) to 387850/9*100 = Rp 4.3
million (all costs, excluding a vehicle). In case the interest earning period was half a year, then
net interest income would be 4.5% and the required break-even loan volumes twice as high.
Taking their estimated average loan of Rp 4,000 per farmer (“it is already Rp 8,000 in several
areas in Jogjakarta”, 64), above loan volumes would require 1,075 to 2,350 loans per year per
Village Unit. Assuming that part of the borrowers would borrow more than once a year, the
actual number of clients might be less, about 700 to 1,750. For actual number of loans per
Village Unit and amounts borrowed, see section 11.
63
10.9.2
Rice survey estimates
The national rice survey (4), carried out from late 1970 to early 1971, also provided some
estimates of Village Unit costs. FAO disagreed with many of the theories and conclusions of
the final report of this survey, especially its assumptions/conclusions that farmers with less
than 0.9 hectare would be unlikely to repay their loan; that loan repayment was secondary to
the cost of living, taxes and hired labor; and that the first Village Units were selecting the
larger farmers.
In the ‘unrevised draft’ report of the survey the following was stated:
- assumed between 1,800 and 3,000 borrowers per Village Unit;
- assuming all farmers would plant high-yielding varieties, they calculated that this would
require an average farm size of 0.6 hectare to be able to repay a loan and then this would
mean that a Village Unit should have 2,518 borrowers per season;
- personnel costs were assumed to be Rp 18,000 per month per employee or Rp 648,000 per
year or 48% of total Village Unit costs (actual costs were about half this amount);
- it was assumed that each Village Unit would have a 4-WD vehicle, the depreciation cost of
which would be Rp 354,996 per year and running costs Rp 250,000 per year, together 45%
of total Village Unit operational costs;
- office running costs were estimated at Rp 90,000 per year, or 7% of total Village Unit
operational costs;
- cost of funds was assumed to be 0.5% per month;
- total annual costs per Village Unit in its model amounted to Rp 1.34 million (costs reported
were for half a year; these were here doubled so as to be able to compare them with the
annual estimates of Turnier);
- based on above assumptions it calculated a necessary Village Unit loan break-even
volume of Rp 22.4 million per season.
In respect of the Village Units in Yogyakarta province the survey concluded that individual
Village Unit loan volume could possibly be doubled from Rp 7.5 million per year to Rp 15
million.
A comparison with Turnier’s estimates given in section 10.9.1 showed that the total cost
estimated by the rice survey team for a ‘VU with a vehicle’ was 50% higher than Turnier and
his colleagues had estimated. The rice survey assumption on cost of funds was also heavily
overstated (0.5% in stead of the actual 0.25% per month). Their conclusion that Village Units
could not be made to run profitably and therefore should not be expanded to other areas came
therefore as no surprise.
10.9.3
FAO-FFHC-FP estimates
As mentioned before, the FAO-FFHC-FP and the Yogyakarta BRI director assumed 2,000
clients initially per Village Unit. In the pre-war village banks the number of clients per village
bank had varied between 250 and 400. (Fruin, 31)
Assuming that a minimum of 6 villages would be covered by one Village Unit a number of
2,000 borrowers per Village Unit seemed to be a reasonable estimate when taking into
account the increase in population.
These 2,000 were also the maximum number of loans to be made in one peak month, giving
80 loan applications per day (BRI and the Village Units worked 6 days a week).
64
These figures were more a basis for the design of the administrative system and loan request
handling procedures than a basis for establishing minimum requirements to reach break-even
or financial sustainability. However, the financial consequences of above targets could be
calculated.
The recommended BIMAS farm input package for rice for the 1969/70 season was Rp 11,000
for high-yielding rice varieties and Rp 7,385 for local rice varieties. In addition, cash amounts
of respectively Rp 2,975 and Rp 2,100 were added, resulting in maximum recommended
loans in the range of Rp 9,485 to Rp 13,975.
It was assumed that farmers were likely to request a loan for a mix of local and high-yielding
rice varieties and less than the recommended maximum amounts. Assuming that they would
take half the recommended amount (a guess for the first season, but partly justified based on
PN Pertani sales figures of the previous seasons), a Village Unit would then have a maximum
of 2,000 loans of Rp 5,000 making a total of Rp 10 million loan volume outstanding for 6
months (maximum was 7 months). This would give a net interest income, at 9% per annum
and if all repaid, of Rp 450,000. Assuming half this number of loans (1,000) was made in the
dry season, the additional interest income would be Rp 225,000, and the total income
therefore Rp 675,000 per year per Village Unit. This figure was well above Turnier’s
conservative expenditure figure for the ‘non-vehicle’ operation. The Village Units in
Yogyakarta province were supplied with bikes and occasionally motorcycles and not with 4WD vehicles.
65
11.
RESULTS OF THE VILLAGE UNITS (1969-1971)
Many of the results presented here were earlier published by BRI and FAO. (34, 63, 64)
Other results were part of the two draft final FAO reports by Kuiper, Andersen and Turnier
but didn’t make it to the final publication due to FAO Headquarters editor selections and FAO
report size restrictions. The results given hereafter provide some more detail and also allow us
to see in how far planned targets were achieved. Some data collected did influence changes in
the operation of the Village Units after the first season(s). Some of the earlier assumptions
proved to be less than correct and were changed over time. All this is not abnormal for the
‘process approach’ that was followed in this experimental project.
11.1
Village Units established and area covered
The total number of Village Units established during the first year (1969-1970) in Yogyakarta
province and the total irrigated rice area covered by them were as follows:
Table 5: Village Units (VU) and irrigated area (ha) covered per district in 1969/70 (1st year)
District: Bantul Sleman Kulonprogo G.Kidul
Total
a. area Village Units (ha ) *)
3,550 11,008
4,239
7,191
25,988
b. number of Village Units
3
6
4
5
18
c. area per Village Unit (ha)
1,183
1,834
1,060
1,438
1,443
*) acreages are 1970 statistics for the sub-districts covered by the Village Units
Sources: BRI (15); FAO (34)
Above data show that in the first year of operations the recommended minimum acreage of
1,000 hectares per ‘mobile’ Village Unit was well exceeded. As the following Table 6 will
show, this acreage per Village Unit further increased when the units became fixed in one
village in the 1970/71 season, allowing for more than 6 villages to be served by one Village
Unit. During the first season about 30% of the provincial irrigated rice area was being served
by the Village Units, in the second year about 75%.
“Before a VU was created the approval of the local authorities was obtained. Only in one
area an initial attempt failed due to the interest of local officials in their own ‘bank’. The VU
results of neighboring areas however, resulted in acceptance the second year, possibly due to
‘social’ pressure from the villagers.” (37)
Table 6: Village Units (VU) and irrigated area (ha) covered per district in 1970/71 (2nd year)
District: Bantul Sleman
Kulonprogo G.Kidul
Total **)
a. area Village Units (ha) ***)
18,645
27,782
11,422
7,191 *)
65,040
b. number of Village Units
9
14
7
5
35
c. area per Village Unit (ha)
2,072
1,984
1,632
1,438
1,858
*) 2,875 ha according to Inspeksi Land Use
**) excl. Yogyakarta town with 643 ha
***) data for 1970
Sources: -Statistik pemerintah D.I.J. (1970)
-Progo River Basin Study
It is clear from the above that the 1,000 hectare target for planning a Village Unit location was
not really used, the actual area served by one Village Unit being closer to 2,000 hectares.
66
Table 7: Number of sub-districts and villages covered by the Village Units (1969-1971)
District:
Bantul
Sleman
Kulonprogo G.Kidul
a. number of sub-districts
18
17
12
13
b. total number of villages
1969/1970:
c. number of Village Units
3
6
4
5
d. number of VU-villages
18
30
27
56
e. villages/Village Unit
6
5
6.8
11.2
f. number of VU-sub-districts
8
10
9
5
g. sub-districts/Village Unit
2.7
1.7
2.3
1
1970/1971:
h. number of Village Units
9
14
7
5
i. number of VU-villages
54
74
57
56
j. villages/Village Unit
6
5.3
8.1
11.2
k. number of VU-sub-districts
18
17
12
5
k. sub-districts/Village Unit
2
1.2
1.7
1
*) remaining villages/sub-districts covered by Mobile Units (MU)
Total
60
393
18
130
7.2
32
1.8
35
241*)
6.9
52 *)
1.5
Sources: DIPERTA, D.I.J. 1970
BRI (15); FAO (34a)
Above data show that one Village Unit could cover more than one sub-district, in fact, the
number of sub-districts per Village Unit varied from one to three. (15) Villages from one subdistrict were not necessarily all part of one Village Unit but could belong to different Village
Units.
The reasons why in Bantul and Sleman the number of villages per Village Unit was less than
in the other districts was related to their larger irrigated acreages per village, and the length of
the rice planting season, which was one to two months in Gunung Kidul and Kulonprogo but
could be up to six months in Sleman and Bantul sub-districts. This latter had an effect on
lowering the peak workloads of the processing of rice loans and increasing the ability of the
Village Units to engage in other, non-agricultural, activities.
11.2
Loans
The lending system changed from a system of group loans in the BIMAS program prior to the
start of the Village Units in October 1969 to a system of individual loans, with both BIMAS
group loans and individual Village Unit loans existing side by side in 1969/70.
Table 8: Number of BRI crop production loans per season (1967-1971)
Village Unit loans BIMAS Loans *)
a. 1967/68 wet season
147
b. 1968 dry season
133
c. 1968/69 wet season
208
d. 1969 dry season
22
e. 1969/70 wet season
25,285
71
f. 1970 dry season
13,380
1
g. 1970/71 wet season
58,906
h. 1971 dry season
31,143
*) group loans; one per village
Loans per VU
1,405
743
1,683
890
Source: FAO (34a)
Above table clearly shows the phasing out of the BIMAS group loans during the 1969/70 and
1970 seasons and being replaced by the Village Unit loans. The increase in the number of
loans disbursed in 1970/71 over the previous year was a combination of an increase in the
67
number of loans made in the existing 18 Village Units plus the effect of opening up 17
additional Village Units.
Above table also seemed to indicate that the total number of loans per year per Village Unit
didn’t reach the 3,000 loans used in the planning phase (2,000 in the wet season and 1,000 in
the dry season), however, it took more than one year to reach that target as the following table
shows.
Table 9: Number of loans during two years in the first 18 Village Units (1969-1971)
District:
Bantul
Sleman Kulonprogo G. Kidul loans/VU
number of Village Units:
3
6
4
5
a. 1969/70 wet season
4,937
8,412
3,001
8,935
1,405
b. 1970 dry season
2,629
8,980
1,647
124
743
c. 1970/71 wet season
9,178
15,975
4,686
9,132
2,165
d. 1971 dry season
3,677
10,250
2,215
7
897
e. loans/Village Unit, year 1
2,522
2,899
1,162
1,812
2,148
f. loans/Village Unit, year 2
4,285
4,371
1,725
1,828
3,062
Source: FAO (34)
Above data showed the effect of the first 18 Village Units becoming ‘fixed’ in one location in
the second year, allowing a larger number of villages and farmers to be served by a single
unit. Gunung Kidul district was the exception, where 50% of the loans in the 1970/71 wet
season were still disbursed by Mobile Units. Above table also showed that in Sleman district
there was less difference between wet season and dry season loan numbers, indicating the
good year round irrigation system there with long periods of rice planting, resulting in less
and lower workload peaks.
The annual number of loans made in the first 18 Village Units in 1970 (1969/70 and 1970
seasons) was 2,148 and in 1971 (1970/71 and 1971 seasons) 3,062. This latter number was
very close to the 3,000 loans for wet plus dry season which was used by the BRI-FAO
planners.
Table 10: Crop production loan volumes 1966-1971 (million rupiah) by BRI-Yogyakarta
season
volume (mln Rp) % loan cash volume/VU (mln Rp)
a. 1965/66 and 1966 seasons *)
2.2
unknown
b. 1966/67 and 1967 seasons *)
PN Pertani **)
c. 1967/68 and 1968 seasons *)
56.7
24
d. 1968/69 and 1969 seasons *)
38.0
29
e. 1969/70 and 1970 seasons *)
18.2
unknown
f. 1969/70 and 1970 seasons VU
42.5
38
7.9
g. 1970/71 and 1971 seasons VU
381.6
45
10.9
*) BIMAS group loans; 1 per village;
**) supplier’s credit
So urce: FAO (34a)
The effect of the Village Units on the loan volumes was considerable as above table shows.
Part of the increase in borrowing could also be contributed to the about 50% higher input
requirements for the high-yielding rice varieties that were introduced. Other factors that
contributed to the vast increase in borrowers might have been the inclusion of tenants as BRI
clients and the greater availability and nearness to borrowers of both credit and farm supplies
as well as the very short procedures to obtain a loan (taking a few hours, including waiting
time).
68
Table 11: Number of loans, loan volume, average loan size and average acreage (ha) farmed
by borrowers; BIMAS recommended loan cash percentage and actual loan cash
percentage in the Village Units in Yogyakarta province (1969-1971)
season
number
volume
average average recommended
actual
of loans
(mln Rp)
loan (Rp)
ha
cash %
cash %
a. 1969/70 wet 25,285
81.4 **)
3,219
0.75
21-22 *)
33
b. 1970 dry
13,380
61.1
4,567
0.79
32-34 *)
45
c. 1970/71 wet 58,906
252.9
4,293
0.63
36-41 *)
46
d. 1971 dry
31,143
128.7
4,133
0.63
36-41 *)
42
*) HYV-LV (High-Yielding Variety and Local Variety of rice)
**) Mobile Units in addition: 14.9 mln (37)
Source: FAO (34a)
This table shows that the recommended BIMAS cash component followed more or less the
actual Village Unit cash component a year later. On average, the cash component did not
exceed the maximum of 50% of the loan as instructed. The cash component was mainly used
to purchase pesticides and for other non-specified activities such as labor, plowing, cost of
living etc. and other farm family activities.
“Cash loans are used to purchase pesticides. Officially this should be by way of chits, but
because pesticides are cheaper outside the official supply system farmers prefer cash (the use
of a cash loan cannot be checked). The main reasons for this is, as far as I know, a more
flexible policy by BRI in respect of the cash/production ratio of loans (officially cash loans
cannot exceed production loans, but it is allowed these days, that is, as long as the difference
is not too large. This is possible because BRI field staff get to know farmers better, especially
the good re-payers).” (letter to Molster, 8 July 1971)
Average acreage farmed by borrowers showed a slight downward trend over the years, which
might have indicated that the larger farmers were early adopters. Average farm-size owned in
the province according to the 1963 agricultural census was 0.58 hectares, varying from 0.43
ha in Sleman to 0.73 ha in Gunung Kidul. Acreages of Village Unit borrowers included any
additional land they might have leased, so a correct comparison of land farmed with the 1963
census data of land owned was not possible. See further the research results on preference for
large farmers in section 12.2.
Table 12: Average loan per hectare (Rp) in BRI Village Units, Yogyakarta (1969-1971)
District: Bantul
Sleman
Kulonprogo
G.Kidul
Total*)
a. 1969/70 wet season
4,556
4,573
3,885
4,067
4,309
b. 1970 dry season
5,542
5,920
5,058
5,700
5,738
c. 1970/71 wet season
5,652
7,023
5,535
6,135
6,252
d. 1971 dry season
5,712
7,526
6,310
7,313
6,713
*) weighted by number of loans per district
Source: FAO (34)
Above average loan per hectare per district was influenced by the speed of adoption of highyielding rice varieties, possibly inflation (16% over 2 years), and could be compared with the
BIMAS recommended loan per hectare (including cash component) for the same period.
69
Table 13: BIMAS recommended loans per hectare for High Yielding Varieties (HYV) and
Local Varieties (LV) of rice (Yogyakarta province)
Season
Loan component
HYV (Rp) HYV (%) LV (Rp)
LV (%)
1969/70 wet
Urea (Rp 31.5/kg)
6,300
45
3,150
33
TSP (Rp 31/kg) *)
1,550
11
1,085
12
Pesticides
3,150
23
3,150
33
Cash
2,975
21
2,100
22
TOTAL
13,975
100
9,485
100
1970 dry
Urea (Rp 26.6/kg)
5,320
36
2,660
24
TSP (Rp 26.6/kg) *)
1,197
8
931
9
Pesticides
3,545
24
3,545
33
Cash
4,700
32
3,700
34
TOTAL
14,762
100
10,836
100
1970/71 wet and
Urea (Rp 26.6/kg)
5,320
38
2,660
26
1971 dry
TSP (Rp 26.6/kg) *)
1,197
9
931
9
Pesticides
2,395
17
2,395
24
Cash
5,100
36
4,100
41
TOTAL
14,012
100
10,086
100
*) TSP-triple super phosphate
Source: FAO (34)
A comparison of Table 12 and 13 clearly showed that the recommended BIMAS packages
were almost twice what Village Unit borrowers used and this also explained farmers’
reluctance in accepting the BIMAS recommendations in other areas of Java, e.g. in the
BIMAS Gotong Rojong areas.
The actual cash component of the loans taken was higher than recommended. Turnier’s
conclusion was that “the borrowers, in addition to applying for a lower average amount of
loan per hectare did also modify the relative importance of the components. In absolute terms
they applied quantities of fertilizer lower than the proposed optimum; they also requested a
higher proportion of their loan in cash. It may be presumed that the portion of loans in cash …
may have been used for consumption purposes and repayment of expensive matured debts. It
would not be surprising to observe the same behavior over a few more seasons.” (64)
11.3
Workloads
Prior and even after the start of the Village Units there were suggestions, criticisms etc. that a
loan scheme for one crop only would lead to much idle time amongst the Village Unit staff:
“In addition, the complete concentration on agricultural lending meant that the staff of the
Unit Desas was extremely busy before and during planting seasons and at harvest, but
relatively idle at other times.” (Patten, 53)
It seems that such criticism was not based on an intimate knowledge of farm practices in the
province/island. Just as the pre-war AVB had intimate knowledge of farm practices in each of
its branch locations so had the Village Unit scheme management and the individual Village
Unit staff information on the expected planting times of rice in each sub-district and even in
each village. This information was available from DIPERTA and the Progo River Basin Study
team, not only for rice plantings but for all crops grown in a particular village. This
information showed that periods for rice plantings varied greatly per village/sub-district,
usually with two clear peaks in a year.
70
These peaks were not necessarily in the same month in different villages. On the basis of these
data it was assumed that loan requests could be expected all year round in the two main rice
growing districts of Sleman and Bantul, whereas there would be one or a few distinct crop
loan disbursement periods in the other two districts.
On the basis of the known planting periods the expected repayment periods could be
calculated too. It was further expected that the introduction of the new high-yielding rice
varieties with their shorter growing periods would increase the planting periods and even
make an additional rice crop per year possible in the better irrigated areas. Furthermore, many
farmers would not plant a whole crop in one month. They would spread planting as a way of
spreading their risk, for their own workload reasons and to avoid the hiring of extra labor. In
addition, for the period reported here, they would plant high-yielding rice as well as
traditional rice varieties, the high-yielding varieties being regarded more as a cash crop, and
the local varieties for home consumption. The new rice varieties IR5 and IR 8 had ‘poor’ taste
according to them, although in ‘blind’ tasting tests conducted in the DIPERTA/FAO project,
they were usually unable to distinguish between local and high-yielding varieties.
On the basis of above information graphs were made for each sub-district showing planting
periods, expected loan disbursement periods and expected loan repayment periods. These
graphs would show substantial overlaps between disbursement and repayment periods,
indicating at what times of the year both new loans were being made as well as old ones being
repaid. Such overlaps were further increased by farmers repaying their loan in advance of its
final maturity date.
The Village Unit plan assumed that one Village Unit could handle up to 80 loan applications
per day. Data collected from the first 18 Village Units over the period November 1969 to
October 1970 showed that the highest number of loans disbursed by one Village Unit in one
month was about 950, equal to about 40 per day. (Turnier, 64) More common maxima were
around 30 per day. When the number went over 50 applications per day, as occasionally
occurred, staff had to do overwork. This was exceptional though. It was sufficient reason,
however, to propose further simplifications in the administrative procedures and paperwork
for the following seasons.
Other statistics kept per Village Unit were total monthly loan volumes disbursed and
collected. When put in graphs, the cumulative totals for both would provide parallel curves
when repayments were on time and widening curves if they were not.
An interesting study done by Turnier (64) was a comparison of the monthly average loan per
borrower and of the monthly average loan per hectare for the first 18 Village Units in four
different districts. The data collected showed that the average loan per hectare varied per
month as well as per borrower. Although average loan per borrower and average loan per
hectare showed similar patterns, the pattern in the 3 Village Units in Bantul district was
different in 1970. The ratio between urea price and rice price was better in 1970 than the
period before and could explain this difference, however, this did not explain why the same
pattern was then not found in the other Village Units. There also could be such discrepancy
when loans were used for other purposes than agricultural production. These types of
observations would stimulate proposals for further study and experimentation in the project.
71
Staff productivity
Workload peaks are also related to the total amount of work that has to be performed. A low
workload evenly spread over the year may also result in a substantial amount of evenly spread idle
time when one has no means to decrease the number of staff. It is therefore interesting to compare
some of the workloads of the first Village Units with the workloads reported for KUPEDES and
other similar programs.
Type of program
1. 18 Village Units, Yogyakarta 1970-1971 (1 year); 3 staff/unit
2. 502 Village Unit expansion, 1970-1971 (1 year); 3 staff/unit
3. KUPEDES 1988, 3701 Units; 4 staff/unit (Patten, 53)
4. BPR unit banks (Steinwand, table VI-13), 1997
5. BKK (Steinwand, table VI-13)
6. all BPR systems (Steinwand, table VI-2), 1998
Accounts/unit
3,062
3,093
658
1,972
765
645
Accounts/staff
1,021
1,031
165
119 (30-430)
255
-
Steinwand’s conclusion for the BPR and BKK systems, which most likely also applied to the BRI
units of 1988, is: “..this indicates low staff productivity compared to international microfinance
standards.” (62)
Although loan purposes have changed over time and are not exactly the same for the different types
of units, the majority of the schemes provide loans not exceeding one year duration, which can be
used for any purpose of the farmer and/or micro-entrepreneur.
The much lower level of loans per unit as well as per staff member of the later BRI units compared to
the original Village Units of 1971 must have had its influence on the loan volumes and/or the interest
spread required to reach a financial break-even point in the reorganized BRI units!
See further box at end of section 14.1.
11.4
Income and expenditure
As stated before, BRI did not publish the complete details of income and expenditure of the
Village Units. This was partly ‘tactical’ it seems. Results could have influenced the cheap
borrowing rate BRI was getting from Bank Indonesia.
In fact, the FAO-FFHC-FP was requested not to publish any financial results of the Village
Unit experiment: “WARNING: no mention is to be made on profitability of the VU. (request
BRI) (reasons understandable).” (handing-over note final FAO draft report; 1971)
In the following I have tried to give some estimates based on the few financial documents I
was able to trace in my files. I have used the BRI-Yogyakarta monthly profit and loss
statement for 35 Village Units for the period January to September 1971 signed on 21 October
1971 by Mr Abdurachim Moesa, the BRI director in Yogyakarta (BRI, 19), plus financial data
from the BRI-Yogyakarta annual plan 1970/71 which gave e.g. the costs of furnishing Village
Unit offices and staff training costs. (BRI, 15)
This nine-month financial profit and loss statement showed a total income of Rp 22.6 million
(net interest plus other income), expenses totaling Rp 13.67 million and a profit of Rp 8.93
million. These figures applied to 35 Village Units. Per Village Unit the average net interest
income would then have been Rp 645,714 for nine months. If this would also have been the
income for 12 months then this figure was higher than the low-cost (‘without vehicle’) option
of the Turnier estimate of Rp 387,850 (see section 10.9.1) and would therefore indicate a
72
potentially profitable operation (depending on repayment rate and actual annual operation
costs), but lower than the costs of his ‘with vehicle’ option of Rp 843,504.
The above net interest income per Village Unit was only slightly less than the assumed net
interest income by the FAO-FFHC-FP in the planning stage, which estimate was Rp 675,000,
the difference being due to a slightly lower loan volume achieved per Village Unit than
estimated. It should be remembered, however, that 18 of the Village Units were in 1971 in
their second year of operation and 17 in their first year of operation and that loan numbers
could therefore be expected to further increase in future, as earlier shown in Table 9.
It is not clear whether office equipment/furniture depreciation and training costs were
included in the above BRI statement. From the annual budget for 1970/71 we knew that the
complete furnishing of a Village Unit office would cost Rp 365,275 (about one thousand US
dollar), the most expensive items being a safe, a calculator, a typewriter and a steel cabinet.
This would give an annual depreciation cost of Rp 72,857 per Village Unit when depreciated
over 5 years, which was more than Turnier had estimated (Rp 53,080). It must be remembered
that many of the Village Units were using village office space for which they paid no rent and
which was many times already (partly) furnished. Actual furniture and equipment purchase
costs were therefore less than the calculated depreciation costs for a fully furnished office. In
1970 e.g. the actual costs of furnishing the 17 new units amounted to Rp 44,379 per unit,
which was less than what Turnier had estimated.
The BRI budget statement of 4 June 1970 gave a total of Rp 1,687,500 for training costs. This
included all costs for 29 two-day courses plus one month on-the-job training for all Village
Unit staff, such as salaries, transport, materials etc.
Per Village Unit this would amount to Rp 48,214. These courses were not necessary each year
so it seems justified to charge only half this amount, Rp 24,214, as annual training costs of a
Village Unit.
A calculated annual profit and loss account, based on the BRI financial statement for 9
months for the first Village Units that had two years of operation could now be made.
We assumed the following for one Village Unit in its second year of operation:
- number of loans in the wet season: 2100
- number of loans in the dry season: 900
- total loan volume in two seasons: Rp 13 million disbursed
- average loan period: 7 months
- loan interest rate: 12% p.a.
- loan fund borrowing rate: 3% p.a.
- interest spread: 9%
- repayment rate: 100%
- charge 50% of training costs incurred in 1971 as annual costs
- charge actual furniture and equipment purchase costs or charge depreciation costs
On the basis of above assumptions the following financial picture emerged:
73
Table 14: Calculated income and expenditure statement for one Yogyakarta Village Unit,
based on 2,100 wet season loans and 900 dry season loans and a total annual loan
disbursement volume of Rp 13 million.
A. INCOME
- 12% interest on Rp 13 mln, 7 months
(910,000)
- less cost of funds (3%), 7 months
(227,500)
682,500
- other income
6,777
Total income
689,277
B. EXPENSES (one year)
- staff costs
- materials: furniture and equipment
: other materials
322,958
(44,379) *)
(100,252)
144,631
- operational costs
- other expenses
- training
Total expenses
- profit
TOTAL
82,706
74
24,214
(574,583)
114,694 *)
689,277
*) Actual purchase costs. Depreciation costs would have been 72,857 on a fully BRI furnished office.
Profit would then have been Rp 86, 216
Above mentioned loan volume and cost and income figures did neither include the effects of
the produce storage loans and trade loans, nor the TABANAS savings scheme.
A comparison of Village Unit costs with the pre-war cost of the village banks (BKD) as
reported by Fruin in 1932 (31) showed the following:
total loan volume disbursed by 1 Yogyakarta Village Unit in 1971: Rp 13 mln;
total annual costs (excl. interest) in one Village Unit: Rp 574,583 to Rp 603,061;
total costs as percentage of loan volume disbursed in a Village Unit: 4.4 to 4.6%;
village bank (BKD) annual costs as reported by Fruin: 3.8% of disbursements (period
1917-1932);
interest spread Village Units: 9%; interest spread pre-war: range 6.0 to 8.7%;
profit Village Unit: Rp 114,694 to Rp 86,216 equal to 0.9% to 0.7% of total amount
disbursed;
profit village banks (BKD) pre-war: 2.0 to 5.0% of total amount disbursed.
From the above we concluded that a low-cost/high-volume small agricultural loan scheme
could be implemented in 1970/71 at a cost level not much different from the (profitable) prewar operation of the village banks and within the available interest spread of 9%. We also
concluded that it was possible to obtain a break-even level with crop loans only.
See further: section 14.1 (Table 20) for the profitability of the expanded national Village Unit
program.
74
11.5
Loan repayment
The Village Unit profitability would also depend on high loan repayment rates being
achieved, although BRI was not held responsible for any BIMAS loan losses.
“For strange political reasons there is no chasing of borrowers when they do not pay back
in time. Also, no penalty interest. Interest just continues at 1% per month. Only disadvantage:
the farmer cannot get a new loan. BRI is not concerned about this. It is not their money
(BIMAS funds come from Bank Indonesia and non-repayment is paid from the Development
budget). We think this is wrong. Raymond (Turnier) proposed an insurance scheme for nonrepayment. Was not accepted. He then proposed a shared responsibility for non-repayment
between BRI, Bank Indonesia and Development Budget (the first two a quarter, the latter
half). Might be acceptable.” (letter to Molster, 14 August 1971)
Actual repayment rates reported varied per Village Unit and per season. These repayment
rates were achieved without any particular efforts by BRI. One should also take into account
that there was neither a penalty for late repayment (for political reasons) nor a premium on
early repayment, as introduced later in the KUPEDES scheme.
“A lot of premature repayments are thus not something for bank managers to be proud of…..,
but a sign that repayment dates have been structured too generously.” (Fruin, 32)
Furthermore, it was allowed to extend the loan period in order to allow the financing of other
crops (or jobs?), which were not officially part of the BIMAS program (so as to avoid
conflicts with the Ministry of Agriculture).
BRI staff also still had the (wrong) attitude that BIMAS funds were not their funds and were
therefore less inclined to take serious collection measures.
BRI did not use clear terminology for overdue loans, bad debts etc. Within the pilot project
the following definitions were used:
- “repayment within 5 months is very good
- repayment within 7 months is good (= official loan condition)
- repayment within 12 months is fair (usually understandable)
- repayment over 12 months is bad.” (letter to Molster, 9 May 1972)
“No proof could be found that farmers who used their loan for a different purpose than for
which it was given, and who were ‘caught’ by the Village Unit inspector, were excluded from
obtaining new loans when they repaid the previous one. The only measure seems to be some
more critical evaluation of the loan request. The random checking of borrowers by the VU
inspector seems to have some preventive effect. In subsequent seasons defaulters are excluded
from obtaining a new loan, and this, in fact becomes the main criterion for trustworthiness.”
(FAO, 34a)
“I am not against a penalty rate but feel that before that rate starts, the farmer should be
stimulated……The system of notices does not have to be time-taking. One can use pre-printed
cards where only name, amount and date have to be filled in. For example the VU extension
worker could deliver them, which would bring him into contact with those farmers that
possibly need his help most.” (letter to Turnier, 17 July 1972)
“Recommend punishment rate for overdue loans…discussed this with DG [agriculture] who is
in favor of it and feels, now that elections are over, this is possible. Reasoning: why should
farmers walk to the BRI unit to turn in their previous loan and obtain a new loan of possibly
the same size and at the same interest as what would be charged on his overdue loan? This is
a net loss to the farmer (sweat and waiting hours).” (FAO, 34a)
75
The project had not followed Fruin’s advice to have a short period between loan repayment
and the issue of a new loan: “small seasonal loans, …. to be repaid after the harvest, can also
be handled by the desa banks in Java, provided there are a few clear months between
repayment and the extension of a new loan.” (32)
No non-collectable loans were reported during the pilot project period. Actual loan repayment
rates reported on 31 December 1971 and 6 months after the end of a season were:
Table 15: loan repayment rates in % volume at 31 December
season (% in brackets) for the period 1969-1971
District
Season:
1969/70 wet
1970 dry
Sleman
98.77 (94)
94.90 (85)
Bantul
99.62 (92)
98.57 (91)
Kulonprogo
99.97 (99)
99.62 (99)
Gunung Kidul
94.39 (70)
97.45 (84)
*) not all loans were due on the reporting date
1971 and 6 month after end of
1970/71 wet
90.06 (86)
93.55 (91)
97.45 (95)
82.75 (73)
1971 dry *)
58.51
68.73
83.26
35.29
source : FAO (34)
In order to develop further policies and measures for a system of loan supervision and the
collection of loans in arrears, a study was done by Molster (50) to see whether non-payers or
late-payers could be predicted on the basis of loan, farm or borrower characteristics as
recorded during the loan appraisal phase. For the results of his study see section 12.01.
It was noted from the Village Unit records that in villages with substantial areas of dry land
the loan repayment lagged behind. Also, it seemed that loans issued early in the season and
loans issued at the end of a season had lower repayment rates than loans issued in-between. In
the project this led to the conclusion that “it might be necessary to try out loans for longer
periods, say twelve months, especially in areas with limited irrigation facilities, or
alternatively, provide loans for dry season crops” and “from results on repayment it appears
that more research is needed on repayment especially in relation to cropping patterns of
farmers.” (FAO, 34a).
Rather than giving all loans the same duration of 7 months, independent of the approval date
within a season, research time could possibly have been saved by having followed Fruin’s
advice: “Someone who borrows three months before the best time for repayment should be
given a three month loan, while someone who borrows six months before should be given a
six month loan.” (32)
Above considerations resulted in a proposal to experiment with two-season loans and annual
crop loans mentioned earlier. The FAO conclusion on loan repayment was that BRI could and
should do much more in chasing slow payers.
76
Facilitating and stimulating repayment
Collateral never was regarded as very important in Indonesia’s rural lending. In 1920 only 8% of the
total loan portfolio of the district popular banks was secured by collateral according to
Djojohadikoesoemo. Fruin had similar thoughts: “Any security lodged serves in fact as additional
security; real security lies in the creditworthiness of the borrower.” (32) BRI correctly still holds that
view.
The national rice survey of 1971 had stated that: “.. in Indonesia about one half of all farmers will not
be able to repay rice production credits out of income from rice.” (4)
It was therefore possibly a wrong assumption that a (BIMAS) crop loan would be fully used for crop
production, which then led to the condition that crops loans be repaid after harvest in a lump sum. We
have seen earlier that farmers had many other sources of income and that rice prices were low at
harvest time. For those reasons loan repayment conditions should have been more related to the actual
cash-flow of a farmer and there should have been more installments than the one lump sum installment
after harvest.
Neither Fruin’s advice: “Repayment as a lump sum already had proven to be less advisable” (31) was
followed in the first Village Units, nor the instructions issued in 1906 and 1926: “..the standard
regulation [of 1906] indicates that the repayment of loans should be in one or monthly or longer
periods, which shows that the village banks were intended for farmers in the first place, which is
obvious and in line with De Wolff’s thoughts……nevertheless it appears from the earliest data that the
328 village banks in Java in 1907 used 4 to 6 weekly or fortnightly repayment periods.” “In the
circular letter of 1926 it was advised to offer more opportunities for monthly or lapan [5 weeks]
repayments. This circular also remained very cautious in respect of repayment in one installment after
harvest. Village banks were only allowed this type of loans when they were intended to increase the
farmer’s productivity.” ( Fruin, 31)
After 1983 BRI started to really stimulate repayment: “There is a penalty of ½ % per month flat rate
for failure to pay on time. Since it is difficult to collect a penalty after a borrower is already in default,
the borrowers are charged 2% flat rate and the ½ % is returned to those who pay all installments on
time.” (Patten, 53) This, together with the fact that BRI is now operating at its own risk, shows that
not much action is required to achieve higher repayment rates.
77
12.
RESEARCH AND DATA PROCESSING
Within the project various studies were conducted and data collected with the aim of
supporting and/or developing new activities. Some were related to the agricultural production
of various crops and the farm input supply and marketing systems, others dealt with the
development of the rural financial system.
For the foreign experts this research seemed to have fulfilled a different function than for
many of their Indonesian colleagues. The foreign experts participated in many of the studies
with the aim of obtaining information and results which, if positive, could be introduced more
widely. Many Indonesians saw the research more as an instrument to prove that they had
already taken the right decision. When research results indicated that a different approach was
more successful they would, however, adjust their chosen system. For example, BRI initially
had decided to set up a rural service system in the form of mobile Village Units. The decision
to expand the number of Village Units was not made dependent on the results of the first 18
Units, the adjustment from mobile to static offices was, however, a result of workload data
collected and processed from the first batch of 18 Village Units during the first year.
The same was true for the construction of the rice and cassava stores at village level. Store
construction started in the other provinces of Java before the results of the first experiment in
Yogyakarta became known. The decision to expand was based on the feasibility study, which
had shown that such stores could be highly profitable to BRI. (Turnier, 64)
Many of the agricultural data collected by the FAO-FFHC-FP project were processed by Rik
Molster at Stanford University. Some of the data submitted to him formed the basis of his
PhD thesis. (51) These data included data collected by the Ministry of Agriculture (sample
harvest plot data), price data, and data collected by Nevin Bryant, a foreign researcher
working in the province for his thesis. (24) I am not sure whether all reports made by Molster
were also published by him. He was unable to visit the tropics and unfortunately died at an
early age. Our joint aim to publish some articles on the pilot project therefore never
materialized.
Two of his draft research reports are still in my possession, one dealing with the problem of
loan supervision (50) and one to assist the FAO-FFHC-FP and BRI in counteracting
accusations that the Village Units were giving preference to large farmers, an accusation more
generally heard worldwide at that time among those having doubts about the spread of the
benefits of the ‘green revolution’. (52) Both reports are dealt with in the next two subsections.
“It was rather surprising to me that FAO shows so little ‘sophistication’ in the use of valuable
data material. Professor [name deleted], a ‘senior’ professor with whom I discussed this, was
not surprised however: the -good- statisticians keep themselves mainly busy with the
compilation of data for all their data-books.” (letter from Molster, 22 February 1971)
12.1
Predicting default
From the very beginning it was clear that within the Village Units it would not be possible to
have a loan supervision system that would cover all farmers. The system designed was not a
‘supervised credit’ system.
Fruin stated in his AVB manual of 1935 that “there is no need to be afraid of arrears”, arrears
not having a direct relationship with the soundness of the loan making process.
78
In fact, certain “arrears are essentially healthier than an extremely low incidence of arrears
contrived by iron discipline, as a result of which a borrower who cannot pay on time borrows
elsewhere in order to pay the bank promptly.” However, he continued by stating that
“maintenance of much stricter discipline will be both necessary and possible where very small
sums are loaned to numerous members of a village than in the case of larger loans to officials,
businessmen and large-scale farmers.” (32)
Within the Village Unit project the impression existed that some farmers not repaying their
loan on time were actually using the proceeds for a second, dry crop such as soybeans etc. for
which no loans were available in the first year of Village Unit operations. BRI actually
allowed such re-use of proceeds without imposing a penalty. Another issue was whether the
Village Units should continue issuing vouchers (coupons) for farm inputs or paying out the
whole loan in cash, cash disbursement having a larger chance of being ‘diverted’.
From the BRI Village Unit records in four villages data were collected with the assistance of
mr Sudarmo of the BRI Yogyakarta office. From the village certificates (SKD) the following
data were copied: loan composition (loan size, cash/kind; fertilizers, pesticides), loan purpose,
land owned, land rented and land farmed (irrigated or dry land), adoption of high-yielding rice
varieties, repayment performance (on time, partly paid or not repaid) plus some borrower
characteristics. A total of 1,230 loanees were studied, of which 118 did not pay back on time
in the 1970/71 season, 11 made a partial payment and the remainder paid back on time.
Molster applied a stepwise discriminant analysis on the data collected and concluded that the
most important discriminating variables out of 41 variables studied were:
- area dry land and home garden (as predicted, this was the most important variable)
- cash loan/total owned land
- production loan/total loan
- cash part of the loan
A total of 8 variables with predicting value were defined by him. He then developed “5 values
of ‘basic’ variables that are needed to provide values for all 8 variables in the classification
function.” On the basis of a calculated ‘function value’ he could then allocate certain farmers
with certain characteristics to the ‘repay’ or ‘no-pay’ group. For example:
“Suppose a farmer:
-has 500 m2 dry-land & home-garden
-does not own any sawah
-rents 3,000 m2 sawah
-grows only HYV and uses the recommended amount of Urea: 200 kg/ha
-requires 500 Rp cash.”
This resulted in values for the discriminating variables for ‘repay’ and for ‘no-pay’. This
farmer would then be assigned to the ‘repay’ group. In case the farmer had 5,000 m2 of dryland and home-garden, while the other data remained the same, the final result would be that
he would be classified to the ‘no-pay’ group.
Molster concluded his study with: “the classification functions for NOPAY and REPAY give a
nice and easy way of predicting whether a farmer will default on his loan or not, with
reasonable accuracy.” (50)
This research showed that the ‘random’ system of loan supervision could be made more
specific and more effective by specifically focusing on clients with characteristics that
indicated a high no-pay chance. This chance could be calculated on the basis of the data
collected by the Village Units via the SKD certificate issued by the village chief and the
79
requested loan and its composition in cash and kind. In practice this meant that farmers with a
substantial area of dry land and home-garden and/or large cash components in their loan
should be first targeted for inspections. In addition, those not paying back in time would be
added.
“I think, that the current system of random checking of borrowers could be improved by doing
random checking more intensively within the groups of farmers having larger areas dry land
(and possibly also those in areas with low rice intensity; good chance part of the sawah land
will not be irrigated) and of those farmers that have larger cash components. The point not
proven or known is why farmers with large dry areas or large cash part are bad payers. I
mean, do they really misuse the loan? And how? Are the dry crops, if the loan is used for
them, so risky? Etc. Enough stuff and questions I feel for more field research.” (letter to
Turnier, 17 July 1972)
12.2
Preference for large farmers?
Some authors and researchers had suggested that the Village Units were giving preference to
larger farmers and that the ‘poor’ farmers were excluded from the benefits of the ‘green
revolution’, the latter not having access to credit to finance the required higher level of farm
inputs for the new high-yielding rice varieties.
The data on average farm size of the borrowers reported in Table 11 in section 11.2 showed
that the average farm size (farmed) of borrowers was 0.75 hectare in 1969/70 and 0.63 hectare
in 1970/71. Average farm size reported in the 1963 census had been 0.58 hectare owned land
for the province, varying from 0.43 ha in the district of Sleman to 0.73 ha in the district of
Gunung Kidul.
Four factors made that a direct comparison of acreages was not possible: the farm size
distribution had changed since 1963 due to land reforms having been carried out in some
villages (mainly those run by communist party administrations); the distribution of the Village
Unit loans was not spread randomly according to the number of farms in the districts; farmers
above a certain acreage were excluded from obtaining Village Unit loans; and the Village
Unit data published indicated ‘land farmed’ and not ‘land owned’.
Even when taking these factors into account, it still looked as if the early clients of the Village
Units had slightly larger farms than those in subsequent years. This is not abnormal when it
comes to the adoption of new technologies in agriculture (Rogers, 57). Also, at the early stage
of the Village Units, many tenant farmers were not yet aware that they could also obtain loans
directly and that they did not have to apply through their landlords as before.
Nevin Bryant (24) had been conducting research in villages in Bantul district, four of which
were also served by Village Units. Bryant had collected data on individual land ownership,
land rented, irrigated land and dry land, farm practices, fertilizer use, wealth indicators etc.
It was decided to compare Bryant’s ownership data with those from the Village Unit clients in
these four villages. A comparison of some other data was also possible: areas dry land and
home-garden (where the Village Unit clients had more than Bryant’s sample), total rented
irrigated land (where Village Unit clients showed larger areas than Bryant’s sample) and total
irrigated area farmed (where Bryant’s sample showed higher percentages in the group of less
than 2,500 m2 and smaller percentages in the group of 2,500 to 5,000 m2).
80
Of the four villages Palbapang, Murtigading, Srihardono and Wonokromo, the first three had
been served by Village Units since their start in October 1969, whereas Wonokromo became
part of the Village Unit program in October 1970. A comparison of land ownership
distribution as collected by Bryant and the land ownership distribution according to the
Village Unit records, collected by Kuiper and Sudarmo, is shown in the following tables.
Table 16: comparison of Bryant data (B) and Village Unit (VU) client data for four villages in
respect of sawah owned and sawah rented (1970/71)
Palbapang Murtigading Srihardono Wonokromo
1. 1970 population census (nr) (B)
8,848
7,260
11,640
7,361
2. % irrigated land (B)
64.6
44.7
60.5
67.7
3. % village owned land *) (B)
31
52
33
20
4. number of households (B)
2,097
1,714
2,743
1,952
5. number of sawah owners (B)
1,075
687
1,311
501
6. average sawah owned (m2) (B)
3,245
1,804
2,225
4,430
7. VU clients (number)
289
175
459
119
8. VU clients/sawah owners (%)
27
25
35
24
9. VU clients/households (%)
14
10
17
6
10. VU tenants (%) **)
26
24
4
4
11. VU average sawah owned (m2)
2,555
1,785
1,982
3,732
12. VU average sawah rented (m2)
1,695
3,402
1,983
621
13. VU average sawah farmed (m2)
4,250
5,187
3,965
4,353
*) village property used as ‘salary’ for elected village officials
Source: FAO (34)
**) tenants did not own any sawah land but could own dry land. Of a total of 188 tenants-borrowers, 43% did not
own any land; the others owned dry land.
Comparing row 13 (the BRI published record of sawah farmed) with row 6 (statistical record
of sawah owned) had resulted in the wrong conclusion and accusation that Village Unit
borrowers were on average larger sawah farmers, whereas a correct comparison of row 6 with
row 11 showed that Village Unit borrowers had smaller than average sawah areas owned.
A detailed comparison of various sawah ownership size categories showed the following:
Table 17: sawah ownership distribution (%) according to Bryant and of Village Unit
borrowers per ownership class (%) in four villages in 1970-1971
sawah size (m2):
0-1,000
1,001-3,000 3,001-5,000 5,001 +
village
Palbapang
Bryant
17
51
17
15
Village Unit
37
42
10
11
Murtigading Bryant
47
32
12
9
Village Unit
39
47
10
4
Srihardono Bryant
46
48
3
3
Village Unit
41
44
7
8
Wonokromo Bryant
24
24
19
33
Village Unit
16
40
25
19
Total
Bryant
33
39
13
15
Village Units
33
43
13
11
Source: FAO (34)
81
Although there were small differences between the villages, the total picture was very clear:
the Village Units did not give preference to the larger sawah owners in these villages.
In addition, in two villages a substantial percentage of the loans went to tenants as the
previous Table 16 showed.
“This will be my great ‘hit’ to all those know-alls in Jakarta. Their mistake is that they
compare sawah-owned with sawah-farmed. Because most farmers rent additional land you
get these crazy conclusions. In addition, the fact that consultants always know better after
three weeks than us after three years and the picture is complete.” (letter to Molster, 14
August 1971)
The fact that tenants were not immediately aware of qualifying for Village Unit loans was
shown by comparing the data for Palbapang and Murtigading in the next table. It took the
tenants in Palbapang a year to discover they could qualify.
Table 18: percentage of Village Unit loans to tenants in two villages during 3 seasons
season
Palbapang
Murtigading
1969/70 wet season
6%
26 %
1970
dry season
3%
27 %
1970/71 wet season
26 %
24 %
Source: FAO (34a)
82
13.
DISCONTINUATION OF BIMAS GOTONG ROJONG
"The good message arrived that the rice programs with foreign companies have been stopped
and the new national rice production policy will be based on the approach that we are testing
in our pilot project. The Indonesian way again, because our first pilot project can only be
evaluated coming August. But nice nevertheless. Never thought that we would have so much
influence so quickly." (L24, 24 June 1970)
The BIMAS-GR scheme had started in the 1968/69 wet season and continued through the
1969 dry season, the 1969/70 wet season and the 1970 dry season. The BIMAS-GR scheme
was stopped by the government in May 1970. On Java the scheme operated in the three large
provinces of West, Central and East Java. By 1970 the BIMAS-GR covered 1,167,000
hectares. (Prabowo c.s. 54)
“On 20 May 1970 the Government of Indonesia announced its decision to discontinue, after
the 1970 dry season crop, its reliance on Bimas Gotong Rojong, the rice intensification
strategy in which foreign private contractors were involved in the supply of current inputs,
such as fertilizers, pesticides and credit." (Mears, 47)
Professor Leon Mears (Harvard advisor at BAPPENAS) gave the following reasons for
stopping the Bimas Gotong Rojong program: “By 1970, the Bank Rakyat Indonesia, which
was responsible for providing direct input credits to the farmers, had successfully innovated
and tested the use of ‘village unit’ banks to provide direct credit to individual farmers over
limited areas. These had been sufficiently successful to encourage their expansion over
extended areas. Bank Rakyat Indonesia had demonstrated also the value of mobile credit units
for improving the provision and repayment of credit on a less intensified basis than with
village units but over much larger areas. This new organization available for distributing cash
credits gave grounds for confidence that serious collection losses would now be much less
than under the procedures involved in the Gotong Rojong program." "In any case, it had
become increasingly evident that the one year suppliers' credit provided by the foreign
contractors yielded its major advantage only in the first year of the program. Thereafter, as the
earlier credits had to be repaid annually, credit relief came only from any additional financing
associated with the program's expansion." "Required imports could be obtained on longer
term credits than usually available through Gotong Rojong contractors." "By 1970 the
Government also felt more easily able to assume responsibility for the foreign exchange costs
of the program." (47)
Above quoted reasons for the discontinuation of the BIMAS-GR by Mears are not to be
doubted in view of his position at BAPPENAS. His statement that BRI by 1970 “had
successfully innovated and tested the use of village units" does seem a bit strange. The first 18
Village Units in Yogyakarta Province had by May 1970 not yet completed their first full
season and the repayment of the loans, disbursed in the 1969/70 wet season, was not yet
completed in May 1970. When Mears wrote his article no evaluation of the financial
feasibility and of the sustainability of the Village Units was available. The decision to
discontinue BIMAS-Gotong Rojong must therefore have been based on other information
than the full results of the first Village Unit evaluation, which stood planned for August 1970.
The progress of the pilot project in Yogyakarta was from its start, however, known to Mears
and other senior BAPPENAS and Ministry of Agriculture staff through regular briefings by
the FAO project staff. “Had a perfect dinner with the boss of the National Plan Bureau and
83
professor Mears of Harvard University, who is advisor of the Bureau.” (L22, 22 October
1969)
The national fertilizer study team (AHT, 2) gave as reasons for the stoppage: “The BIMAS
Gotong Rojong program unnecessarily disturbed the existing organizational arrangements to
the extent that yields were seriously affected; and that the BIMAS Gotong Rojong program
did not produce any direct effect on production in comparison with the previous program.”
The FAO staff had no clear cut idea as to the exact reasons for stopping the BIMAS-GR but
assumed that the poor results of the scheme and widespread farmers’ opposition to the
BIMAS-Gotong Rojong were the major reasons.
This idea may be supported by what Elson reports in his Suharto biography: “Suharto himself,
in an attempt to gauge public reaction to his Bimas campaign, undertook a purportedly lowkey tour of villages in West and Central Java in April 1970. He was dressed in the same way
he appears in the palace, a green or grey suit, but had a hat on and held a walking stick, and
his discussions with farmers revealed the depths of their disillusionment with the scheme,
which he discontinued a month later as a prelude to a fundamental recasting of it to remove
foreign participation.” (27) During this tour (or a similar one) Palle Andersen, the FAO
associate-expert, had an unexpected lunch with the President and his party at a roadside
restaurant.
Other reasons might have been that the President, who had ordered the stoppage of the
BIMAS-Gotong Rojong program, was also personally well informed about what was being
tested in Yogyakarta province through direct (monthly) information from one of the
DIPERTA-FAO project staff. In addition, the President had also made a few incognito visits
to Yogyakarta province. Of course, data on the disbursement of loans during the first season
were available at that time, which showed that large numbers of small individual loans could
be made in a very short time and at low cost, that repayments were promising and that farmers
seemed happy with the choices given to them.
Finally, it may very well have been possible that the national elections planned for 1971 were
the main reason, rice availability historically always having been a political issue.
“We can do a lot at present. The government needs success projects in view of next year’s
elections. Whether you like it or not, politics always presents itself. Gives us again a mental
conflict.” (L28, 1 November 1970)
84
14.
GOING NATIONAL
The new national rice policy could be separated into two developments coming out of the
pilot project in Yogyakarta province:
a. the expansion of the BRI Village Units to the other provinces and
b. the expansion of the ‘Improved BIMAS’ and ‘BUUD’ concept to the other provinces.
“The execution of the new policy will no doubt, in practice, fall short of plans and hopes.
Such shortcomings must be expected, but the new approach developed in the light of several
years’ experience and the growing competence of the Indonesian administrators of the
program make it reasonable to count on a significant net gain. Some incidental losses, while
regrettable, will be a price worth paying for the experience Indonesians will gain in running
their own Bimas and Inmas, themselves fully responsible for solving the problems on the road
to greatly increased rice production.” (Mears, 47)
“.. the government focused on the development of the rural areas by channeling substantial
amounts of subsidized funds through BRI and its Unit Desa system and by providing technical
and financial assistance to the state controlled village cooperatives (KUD).” (Steinwand, 62)
14.1
Expansion of the BRI Village Units
For BRI Headquarters the experiments in Yogyakarta province were sufficiently promising to
continue their planned development of a rural branch office system based on the Village Unit
model. A start had already been made in the second season (1970 dry season) in Central Java
province. It was assumed that a gradual expansion of 150 to 200 new units per year could be
coped with. Expansion into the other three provinces was, however, difficult because of the
presence of the BIMAS Gotong Rojong program there. Although this could not stop BRI from
setting up Village Units there, BRI would not have the access to the free BIMAS support
funds and cheap Bank Indonesia funds to start its Village Units there. With the stoppage of
the BIMAS-GR this ‘problem’ disappeared.
With the start of the 1970/71 wet season Village Unit numbers were increased in Yogyakarta
province from 18 to 35 units. The other three provinces were also to be included on
instruction of the country’s President with much larger numbers than BRI had planned.
“The President has indeed ordered that he wants our pilot project expanded to about 500,000
hectares, an impossible task technically but it gives us a free hand for the time being. Our
counterpart budget has been quadrupled.” (L27, 6 September 1970)
“The expansion (of the 1st phase) of our pilot projects to West, Central and East Java is more
of a political nature (again). Most of it goes to East Java (old PKI area). They need (as said
before) success projects.” (L28, 1 November 1970)
The President’s order of May 1970 meant that about 500 additional Village Units had to be
set-up in a matter of months. And it didn’t remain at that. This number was to be added each
following year! Turnier wrote mid-1971 in his final report: “Village Units at village level, at
present 536; 400-500 new ones to be established in October-November 1971; 500 more in
October-November 1972.” (63)
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The first expansion in the 1970/71 wet season comprised 502 Village Units, of which 431 in
East Java, 39 in West Java and 32 in Central Java. The following results were achieved
according to BRI documents:
Table 19: Number of loans, acreage and loan volume of 537 *) Village Units (1970/71)
season
number
hectares
volume (Rp)
volume (USD)
1970/71 wet season
1,326,583
1,008,431
8,458,000,000
22,555,000
1971 dry season
315,983
261,843
2,226,000,000
5,937,000
Total 537 VU
1,642,566
1,270,274
10,684,000,000
28,492,000
Total 502 new VU
1,552,517
1,205,234
10,302,400,000
27,473,066
*) 537=35 Village Units (VU) in Yogyakarta plus 502 in the other 3 provinces
Source: BRI 1971 (11)
A comparison of some data from the 35 Village Units of the Yogyakarta pilot project and the
expansion of 502 Village Units showed the following:
Table 20: comparison of the 35 Yogyakarta pilot Village Units and the 502 new Village Units
(1970/71 wet and 1970 dry seasons)
Yogyakarta
expansion
a. number of loans per Village Unit
3,062
3,093
b. hectares per Village Unit
1,858
2,401
c. loan volume per Village Unit (mln Rp)
13.0
20.5
d. average loan per borrower (Rp)
4,246
6,634
e. average hectare per borrower
0.63
0.78
f. average loan per hectare (Rp)
6,727
7,763
g. VU expenses as % of loan disbursements *)
4.6
2.9
h. profit per Village Unit (Rp) **)
86,216
478,439
i. profit as % of disbursements
0.7
2.3
*) expenses taken from Yogyakarta as Rp 603,061 per Village Unit (fully furnished office) (see Table 14)
**) Yogyakarta figure is from Table 14; assumed net interest spread of 9% p.a. for 7 months is equal to 5.25%
An average annual loan volume of about Rp 20 million per Village Unit could generate net
interest income (at 5.25% over 7 months) of Rp 1,050.000, which is much higher than
Turnier’s high estimate for expenditure and compared also well with the annual expenditure
(high estimate) of Rp 603,061 in Yogyakarta in 1971. The loan volume of Rp 20 million per
Village Unit came also close to the calculated break-even volume of Rp 22.4 million by the
national rice survey team, which break-even volume was calculated on much higher costs than
the actual costs, especially interest paid on Bank Indonesia funds, staff costs and vehicle costs
(see section 10.9.2).
Assuming that the annual operational costs in the 502 new Village Units were the same as in
Yogyakarta, i.e. Rp 603,061, then the operational costs in the 502 new Village Units would
have amounted to 2.9% of the loan volume disbursed. This compared very well to the 3.8%
reported by Fruin (31) for the village banks (BKD) in the period 1917 to 1932 and was also
less than the figure calculated for the first 35 pilot Village Units in Yogyakarta of 4.4 to 4.6%
for a Rp 13 million loan disbursement volume.
In the 502 unit expansion the Village Units started with much higher loan numbers than the
first units in Yogyakarta, which could be explained by the fact that they were not mobile and
that less had to be learned. The same applied to the average acreage covered by the new
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Village Units. As a result, loan volumes per Village Unit in the new Village Units were about
50 percent higher than in Yogyakarta province.
Larger loans per borrower could be explained by the larger average rice area farmed in the
other provinces and by the larger average loan amount per hectare taken there. No immediate
explanation was available for the latter, however, this could have been related to less
information being available to BRI staff on what maximum input packages to finance. In
addition, the adoption of the high-yielding rice varieties with their higher financial
requirements continued and might have had an effect.
An average loan of Rp 7,763 per hectare in the expansion compared to the BIMAS
recommended loan packages of Rp 14,102 (high yielding rice) to Rp 10,086 (local rice
varieties) per hectare (these amounts applied to Yogyakarta; I am not sure whether the same
loan packages were used in the other provinces). These amounts included cash components of
Rp 5,100 to Rp 4,100 respectively, so the value for inputs varied between Rp 6,000 and Rp
9,000 per hectare. This compared to a BIMAS-GR package of inputs of USD 56 (Rp 21,000)
per hectare in 1969/70. No wonder farmers had rejected the BIMAS-GR inputs!
The operational expenses in the 502 new Village Units, assuming these to be similar to those
of the Village Units in Yogyakarta, were at 2.9% of loan disbursements giving sufficient
proof that Village Units could be established and operated in an efficient and cost effective
way with crop loans only, provided final loan repayment rates could be kept above 97.6%.
Profitability
Many authors have stated that the Village Units were unprofitable from the start contrary to what is
shown in above section. “The BRI unit desa have been net losers every year after their creation except
for 1977…” (Steinwand, 62). It would be interesting to know why 1977 was not an unprofitable year.
As shown earlier, staff productivity in the units reported on by Steinwand was much lower than in the
first batch of 502 new Village Units. Patten correctly stated in 1988 that the evaluation of the Village
Units should primarily be based on their profitability rather than on hectares covered or money lent,
which statement did not differ from that from Turnier in 1971. Patten also gave an indication of the
break-even volume required: “It was found that the Unit Desa system would begin to break even if the
total of loans outstanding reached Rp 200 billion in the first three years and an interest rate of 1.5 %
per month on the borrowers’ original balance was charged for working capital.” (53)
On the basis of this information we can calculate the following:
- Rp 200 billion in 1983/84, the start of the new BRI units, corresponds to USD 200 million
at the then prevailing exchange rate of Rp 994 to 1,074 to the US dollar;
- There were then 2,300 Village Units plus 1,600 VU-posts, together 3,900 (53);
- Per VU/VU-post the break-even volume then corresponds to USD 51,282 per unit;
- There were 4 staff members per BRI unit;
- Loan volume required per staff member at break-even was then USD 12,821;
- Break-even required a 1.5% per month flat interest rate.
The first large batch of 502 Village Units had a loan volume per unit in their first year of Rp 20.5
million. At the then prevailing exchange rate (Rp 400 = 1 USD) this is equal to USD 51,250 per
Village Unit, almost the same as Patten’s break-even figure!
Loan volume per staff member in the first 502 Village Units (3 staff per unit) was USD 17,083, which
is one-third higher than the required break-even volume per staff member given by Patten. This was
the loan volume for agricultural loans only, with still time left to engage in other types of lending.
There must have been developments after 1972 that have made the original units unprofitable such as
(unwarranted) staff increases and lower loan volumes per staff, increases in salaries, mechanized
transport, lack of credit control leading to higher loan arrears and write-offs etc. As a result operating
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costs of the new BRI units were at 11% (Maurer, 46) more than twice those of the first Village Units.
To reach break-even in such a situation of decreased staff efficiencies and higher costs would then of
course require a larger interest spread than in the original Village Units.
.
The above data make it still seem likely that the original Village Unit system could continue to be
(kept) profitable. A comparison with some newer units in the 1990s as reported by Steinwand, some
with identical staffing as the original Village Units, seems to support this conclusion.
Staff costs (expressed as percentage of average earning assets, mainly loans) of the various types of
units operating in the 1990’s, as reported in Steinwand’s table VI-8, show that these were about two to
three times higher than those of the first Village Units. This difference can be explained by the much
lower number of loans per staff member and lower average loan volume per staff member in these new
units. The LPDs with their non-financial operational costs of 6% came closest to the original Village
Units.
14.2
Expansion of the BUUDs
The concept of stores with processing facilities, the provision of storage credit, guaranteeing a
minimum price to farmers and organizing farmers with an interest in these BUUD facilities
into organized groups had originated at BRI’s president Soerjono and had been worked out by
Turnier and his BRI colleagues. (64)
As with the Village Units, a rather fast expansion of the stores and ancillary facilities was
undertaken as a result of the change in government policy in 1970. “In addition, a new
programme of loans to producers secured by stocks of produce is being organized within the
financial resources available to the BIMAS programme: 46 storehouses are ready for
operation with a projected expansion to 2,000.” (Turnier, 63)
“The AVB-Bank supports the development of popular credit institutions and cooperative
associations, in part by providing loans.” (Fruin, 32)
Because FAO was not involved in the national BUUD scheme some quotes from a report
made by Bouman and Butter (22) of their visit to Central Java province in 1976 may shed
some light on its development:
“The Government realizes that its administrative machinery cannot deal with the millions of
agricultural producers on an individual basis. The cooperative is there to act as an
intermediary between the planning machinery and the farmers and to provide an effective
framework for introduction and management of change….”
“To be attractive to farmers and to compete successfully with private enterprise, cooperatives
must offer facilities and services, equal or even superior to those provided by the private
sector and must cover the full range of credit, supply and marketing. The cooperative should
be multipurpose in character….”
88
“A major breakthrough in cooperative development came in 1971 with the successful
deployment of the BUUD/KUD formula in the Special Province of Yogyakarta. This formula
has since been applied to the whole Indonesian archipelago (Presidential decree no. 4, 1973).”
“Basically the BUUD -Badan Usaha Unit Desa or Village Unit of economic activities- is a
geographically limited business enterprise covering between 80 and 200 ha of irrigated rice
fields. BUUDS can be considered as a kind of unregistered pre-cooperatives at the smallest
primary level. Since the BUUD’s volume of business is too small to provide an economically
sound basis, several BUUDS are merged into a fully registered KUD -Kooperasi Unit Desacomprising an area between 600 and 1,000 ha of irrigated rice (During its trip the Mission
noted that some BUUDS covered far more than 1,000 ha)…”
“It is the intention of the Government to equip each KUD with rice storage facilities (200 ton
standard type gudang has been devised by the Bandung Institute of Technology), a rice
milling unit (for hulling and polishing) and a 100 ton fertilizer kiosk that will be
supplemented by additional 20 ton kiosks at BUUD level….”
“The necessary investment capital is provided by the BRI with loans for 3 years (rice milling
unit) to 5 years (storage and kiosk) against an interest of 1% per month. The Loan Guarantee
Fund for Cooperative Development, administered by DITJENKOP, guarantees payment to
BRI….”
“KUDS have been appointed local agents for the distribution of subsidized fertilizer available
through the BIMAS scheme…”
“KUDS are authorized to purchase rice for the national (BULOG) stock against at least a prefixed floor price. The KUD resells to BULOG/DOLOGS with a 1 Rp/kg margin. This clever
scheme is slowly restoring farmers’ faith in the cooperative….”
“…only a small number of KUDs handle other types of credit services (pasar or petty trade in
particular). Against an interest of 5 percent a month (1 percent BRI, 1 percent for
administration and 3 percent for the KUD) this credit pays handsome dividends, with no debts
outstanding.”
“KUDs are allowed to borrow short term marketing credit from the BRI against 1% per month
interests charge. Borrowing limits are set for each KUD, based on past repayment
performance….”
“By December 1975 there were 2,384 registered KUDs in Indonesia, formed in the past 3
years from previous village business units (BUUDS), numbering 3,628 at that time. Together
these 3,628 BUUDS/KUDS, with a full membership of over 2 million, are serving nearly 8
million farmers with agricultural supplies and marketing…(data copied from a report of the
Director General of Cooperatives, ICA conference, December 1975)….” (Bouman c.s., 22)
Above figures are of course quantitative figures and do not say much about the quality of the
cooperatives, their business success and their future prospects. Bouman already mentioned
some problems they were experiencing but expected that these could be overcome with
appropriate government decisions.
He also did some calculations on the profitability of the various activities within a BUUD and
concluded that a 1,000 ha area “should assure sufficient volume of business to make the KUD
a viable enterprise, provided the farmers use its facilities. The profitability of marketing and
processing of rice and of distribution of fertilizer is seriously jeopardized by the slim retailing
and processing margins set by BULOG and the Government.” (22)
And Bouman wouldn’t have been Bouman if he hadn’t found a ROSCA activity in the
scheme: “An interesting example of self help through traditional cooperation was observed by
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the mission in a district in Banyumas Residence. All 12 KUDs in the district are member of an
Arisan, a traditional rotating credit association. Part of each KUD’s profits are donated to the
Arisan-fund and its proceeds used to provide each KUD, in turn, with an office building.
Turns are decided through a lottery system. At the moment, already 7 out of the 12 KUDs
have been thus equipped.” (22)
The autonomy of the individual KUDs seems to have been lost over time: “In this top-down
social engineering process, the Ministry of Cooperatives gives direct guidance to KUD units,
bypassing the KUD district and provincial centres which were part of an earlier design for
more autonomy in cooperative management.” (Sajogyo, 64)
15.
EXPANSION PROBLEMS
The decision (order) to expand the Village Unit system, the BUUDs and the ‘Bimas jang
disempurnakan’ to the other provinces of Java, and later also to the provinces outside Java,
was regarded as a recognition that the national problems in the supply of farm credit, the
competitive supply of farm inputs, the storage and processing facilities and the supporting
agricultural extension services could be solved by national organizations and companies,
without financial or managerial assistance from foreign companies or donors, as had been
demonstrated in the Yogyakarta province pilot project.
The expansion of what looked like becoming a successful pilot project, however, had its own
problems in a country as large as Indonesia. To have national effects within a reasonable
period the multiplier of the pilot activities had to be very large. For many people, Indonesians
and foreigners alike, the decision to stop the BIMAS Gotong Rojong program and to expand
the Village Unit system, had come as a complete surprise, also to those directly involved in its
operations.
“From this successful experience 537 three-man village units were set up all over Java and
have been in operation for the wet season 1970/71. With this sudden expansion, two related
questions come to the fore: (1) whether the successful experience in Jogjakarta can be
repeated in all Java, (2) whether this development will have the same unfortunate
consequences of past program expansions.” (AHT, 2)
In order to have a successful expansion, all four components of the pilot project had to
expand: credit supply (BRI), farm inputs supply (PN Pertani and commercial companies),
storage and processing (BRI and/or village organizations) and agricultural extension activities
(DIPERTA). The farm input supply system was the least problem with the opening up of the
market to commercial suppliers (provided government price controls would be eliminated).
The storage and processing facilities suffered from a lack of vision as to their future
ownership and management. The farm input and storage loans could be made by BRI without
any outside assistance in the selection of clients, however, the BRI agricultural crop lending
decisions would depend on the various crop recommendations supplied by DIPERTA. The
recommendations given by DIPERTA had not been accepted by farmers in the BIMAS
Gotong Rojong areas and for good reasons as we showed earlier.
“There was an interview published in the newspaper with the agricultural inspector in
Surabaja. The ‘improved’ BIMAS did not go too well there. Raymond [Turnier] and I have
said many times that you can’t have a good credit project without healthy, economic
attractive recommendations. In the article the inspector says that this comes because they do
not know exactly what to recommend, and when they recommend something then farmers
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don’t want to accept it (the fools!). Interestingly, this same inspector did not want the FAO
[FFHC-FP] project because they knew everything already and the FAO project would only
result in a ‘lot of paper’. Sometimes you wonder how people connect such issues.” (L32, 22
December 1970)
In the other provinces DIPERTA therefore had to quickly engage in farm demonstrations and
trials and the processing of harvest data in order to come up with recommendations that could
help BRI in establishing appropriate loan packages.
“Localized research that could form the basis for specific fertilizer recommendations has been
a major gap in Indonesia’s rice intensification effort. Standardized fertilizer recommendations
do not take into account variations based on location and season…. Local trials carried out
over the next few years should be able to provide the needed information. One trial per 100
hectares of PB5 or equivalent is the suggested ration over a 5 year period.” (AHT, 2)
The Ministry of Agriculture also recognized this problem and started a national fertilizer field
trial project, copying the DIPERTA-FAO project, with 12,000 trials and demonstrations per
year (DIPERTA-FAO had 800 per year in the Yogyakarta pilot project, one per 120 hectare).
“There is a danger that the ‘groundwork’ is not there. The chance that there will be credit
given for uneconomic recommendations is large (there was no prior field testing project).
This increases the chance for poor credit repayments, which would mean failure.” “It takes 2
to 3 years before recommendations can be made.” “I will therefore keep advising the national
trial plots project on a ‘request’ basis. I do not want to be completely involved (too much
away from home).” (L27, 6 September 1970)
BRI’s problems to expand so fast and with such large numbers of Village Units were also
considerable. The lack of properly tested farm input packages in the other provinces could
partly be overcome by accepting farmers’ practice as a guideline. A more serious problem was
the availability of trained staff to head a Village Unit and the required training program
implementation. For the first expansion with 502 units there were just sufficient experienced
loan officers (credit examiners, manager of a Village Unit) with at least 3 years experience
available within BRI’s offices, at that time numbering 13 regional offices, 218 branch offices
and more than 450 Mobile Units. A rapid and continuous expansion with 500 Village Units
per year in the following years could not be supported from existing experienced staff
resources. Turnier, who had assisted in the preparation of the BRI training program (17), was
well aware of this, and warned BRI. The assistance of village heads, the availability of village
records and data could also not be guaranteed in all new Village Unit areas.
A major problem was also that the experiments in Yogyakarta province had hardly started
giving complete results, the first year had not been evaluated till August 1970. The decision to
change to fixed positions for the Village Units instead of mobile Village Units had been taken
but the effects of this change were not yet known. Village Unit location planning also required
refinements, doing away with the 1,000 hectare criterion.
The Village Unit administrative procedures needed further simplification, as well as the
reporting formats and data processing systems. In addition, a good borrower inspection
system, a follow-up system of poor loan re-payers and an internal audit system were not yet in
place. The expansion of the stores and rice hullers could at this early stage also not be
supported by BRI with any relevant experimental data or management staff to guide their
91
further development. The institutional challenge of merging Village Units, Mobile Units and
the village banks (BKD) was being talked about but no specific experimental work had yet
been undertaken or planned.
It should be concluded that the large expansion of the Village Unit scheme came far too early
for BRI and that the bank was badly prepared for it in 1970. It was the expectation of FAO
staff and some of the BRI senior staff that problems would not immediately show up in the
first expansion with 502 Village Units but surely soon thereafter. The major problem would
be the lack of experienced loan officers to manage the new Village Units.
“As major restraints of money lending to the agricultural sector could be identified a lack of
sufficient number of adequately trained banking personnel…” (national rice survey, 4)
The result of the fast and vast expansion also led to less attention to the necessary operational
research requirements, there simply was no time left anymore for that among the senior BRI
staff.
“The independent position which BRI had created for itself in Yogyakarta thereby got lost and
it became again a tool in the hands of centralized government and presidential directives.”
(letter to Robinson, 1998)
The FAO-FFHC-FP staff in Yogyakarta continued with the agreed further Village Unit
experiments in Yogyakarta province but was not directly involved in the expansion of the
Village Unit scheme in the other provinces.
“The future programs in Indonesia must learn from past experience. The lessons learned are as
follows:
a. attempts should not be made to abruptly and rapidly expand the program. This will only set
the program back. It is better to slowly expand the program as improvements on the system
are made.
b. it is better to retain an existing program and improve on it than replace it with another.
A new system will again set back the whole program.
c. The maximum program area which the system can carry seems to be in the vicinity of
2 million hectares.” (AHT, 2)
“The BIMAS program, in general, was extremely successful in accomplishing the goal of
achieving national self-sufficiency in rice production. The BIMAS credit program, however,
by 1983 had run its course and the government of Indonesia decided to discontinue it.”
(Charitonenko c.s., 25)
Not everyone converted
An interesting development took place in West Java province after the change of rice production
policy in 1970. Contrary to the official policy of the Ministry of Agriculture in Jakarta, which had
adopted the FAO-FFHC-FP approach of large numbers of small demonstration plots in farmers’ fields,
a Japanese aid program, together with some Bogor research officials, continued with few but large
demonstration plots as in the old BIMAS system, even claiming these to be more effective than large
numbers of small demonstration plots.
“FAO also has conducted fertilizer demonstrations and tests around the Jogjakarta district under the
FFHC Fertilizer Program. However, such numerous, small-scale (usually 0.1 ha) demonstration plots
could only benefit a small number of selected farmers who were conducting these demo-plots. Usually
such selected farmers were rich and educated for improved practice.” “Thus, new ‘Demonstration
Farm Project’ was launched in the dry season of 1970 under the guidance of the Government Central
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Research Institute for Agriculture, Japanese agricultural experts staying in West Java.” “JUASIA
willingly contributed 20 tons of urea and 10 tons of double superphosphate as well as necessary
running expenses for this new project. Each demo-farm covers 3 hectares and 5-30 participating
farmers including poor peasants.” “The project continued into the rainy season 1970/71, and enlarged
to 15 sites in the dry season 1971.” (Japan Chemical Week, 9 September 1971).
It is very unlikely that these fifteen sites (villages) with 5 to 30 farmers each would have had more
effect on farmers than the 800 trials and demonstrations (two per village) per season (and at a lower
cost) in the DIPERTA/FAO project covering almost all villages in Yogyakarta province!
16.
FAO WITHDRAWAL
The FAO-FFHC-FP in Yogyakarta province had a contract period of three years, officially
ending in July 1971. Shortly after the Yogyakarta approach in experimenting with agriculture
extension, credit and farm input supply had been declared the new national rice policy by the
country’s President in May 1970, FAO Headquarters received a request, emanating from the
Ministry of Agriculture, to withdraw its staff from Yogyakarta and East Java provinces.
The fact that the government (e.g. Dr Hatta was on our side) has now chosen for our system is
not only an honor but also shows its ‘independence’ of foreign capital. Our project is being
financed by Indonesian banks. According to me that is the way it should be but others think
differently.” (L25, 12 July 1970)
“They talk about possible withdrawal after a few months….. We are curious about what
Suharto thinks of this. So far he is in full support of the project… The East Java project has
been stopped. The manager just asked for a transfer in time.” (L32, 23 December 1970)
Normally such withdrawal requests are automatically adhered to (FAO personnel being a
‘guest’), however, the timing of the request so short after the pilot approach having been
declared national policy was very strange, and resulted in an investigation by a FAO
Headquarters Department Director.
It was known that there was some opposition to the FAO-FFHC-FP activities, both within the
Ministry of Agriculture, especially its Agricultural Research Department, as well as among
some chemical companies, that hoped for a re-start of something like the BIMAS Gotong
Rojong program. Other possible factors could have been the Bogor fertilizer
recommendations that the FAO program (and the farmers!) had proven to be too high and the
(negative) effects of that on possible future income of certain companies and/or persons.
“I have received confidential information from a staff member of a foreign company that
[name government official deleted] had asked them to assist in stopping our project.
Unfortunately for him this was one of our project donors and so they refused. …. His actions
were as far as I am concerned purely directed at personal gain.”…”Our departure would
possibly mean a stop to our project.”…“We want to be sure that this is really a ‘government
request’ and not a request of a few civil servants.”…”In any case we will have a few
interesting months ahead.”…“To be fully complete, foreign companies have also tried to
become friendly with me. I could have had two arms with golden watches plus free lodging
(imagine that those watches would not all give the same time).” (L32, 23 December 1970)
“Met by accident one of the bosses of [name chemical company deleted] here. Was quite
arrogant and very sure that the commercial projects would come back…….”
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“Also met some generals who think that what we do here with the agricultural bank they can
do with the army under the slogan ‘there is a soldier in every village anyway’. Well everyone
his own plans for the future.” (L37, 2 February 1971)
Exact details of the various reasons are unknown to this author but the final result was not that
the FAO-FFHC-FP had to withdraw its staff but that two senior officials in the Ministry of
Agriculture were removed and that the FAO staff in Yogyakarta and at BRI Headquarters
fully served their contracts. Raymond Turnier left BRI at the end of his contract end June
1971 and this author left Indonesia only in December 1971.
The BRI director in Yogyakarta province, Mr Abdurachin Moesa, was promoted in December
1971 and became a director at BRI Headquarters, a position he held till December 1976.
“Mr Moesa has been appointed as one of the five directors in Jakarta…..He very much
wanted you to know about the promotion and sends his regards……He also said he thought (I
don’t know if he meant it) FAO had a great share in the reason for his appointment.”
(letter from Andersen, 23 December 1971)
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17.
SUMMARY AND CONCLUSIONS: ACT OR ACCIDENT?
It is not easy to clearly pinpoint who or which organization was responsible for each stage of
the development of the Village Units and whether an independent initiative was planned or
whether actions were reactions to something else. All seem to have occurred. Below we first
give some of the major Village Unit developments followed by some indications as to
whether these were caused by ‘accident’ or whether they were normal acts.
a. Bank Rakyat Indonesia (BRI) was established under this name in 1968 and Mr R. Soerjono
Hadikoesoemo was appointed as its new president-director.
b. The first national five year plan (Repelita-1, 1969-1974) required that the rural financial
delivery systems had to be expanded and improved. This meant a major challenge to BRI. In
fact, one could consider this as an attempt to rehabilitate much of what was lost during the
Second World War, the independence struggle that followed and the Sukarno government
period with its very high inflation rates.
c. BRI started with two major activities: an expansion of its existing services by setting up
more Mobile Units (MU) and the rehabilitation of the about 5,000 village banks (BKD) under
its supervision. The Mobile Units were extensions to the BRI district branch offices, visiting
villages from once a week to once a month and mainly providing short term personal loans for
small and micro businesses and occasionally a BIMAS (group) loan. The village banks (BKD,
their history going back to 1900) had also been under the supervision of BRI’s pre-war
predecessor, the AVB, since 1934.
d. BRI had been involved on an agency basis for the Ministry of Agriculture in the BIMAS
rice production program from its start (with the exception of the year 1966/67). BRI supplied
group loans to the villages participating in the BIMAS scheme through village committees or
cooperatives. In 1968 the government had started the BIMAS Gotong Rojong (BIMAS-GR)
program with local and foreign chemical companies in West, Central and East Java supplying
farm inputs as supplier credit and with repayment in kind to the government rice purchasing
agency BULOG. The scheme was disliked by farmers. BRI had no role in this scheme.
e. The province of Yogyakarta was not included in the BIMAS Gotong Rojong program,
although various chemical companies did try to have a contract there.
f. A proposal was developed late 1968, on the initiative of the FAO-FFHC-FP and Mr
Supono, BRI director in Yogyakarta, to start an experiment with individual agricultural loans
through mobile Village Units attached to the four BRI district branch offices in Yogyakarta
95
province as an alternative to the BIMAS Gotong Rojong scheme. This was a (possibly
cheaper) modification of the existing Mobile Unit system of BRI, and was creating a system
of decentralized individual loan decision making.
g. The proposal was finalized with the assistance of the FAO credit expert working at BRI
Headquarters, Mr Raymond Turnier. The final proposal was submitted to BRI’s presidentdirector on 9 February 1969. The 1,000 hectare preliminary Village Unit area design criterion
advice had come from an ADB mission in Yogyakarta. The view that loan repayment capacity
was related to farm size was not followed because that would have made the Village Unit
scheme a non-starter in Yogyakarta province with its very small farm sizes.
h. In a meeting on 19 February 1969 at BRI Headquarters, with Turnier and Kuiper
present, BRI’s president-director and his directors approved the proposal for a pilot project of
Village Units and made a budget equivalent to USD 600,000 available for its first year of
operation.
The Village Units were operationally not very much different from the BRI Mobile Units. The
difference was that the Village Units would start to experiment with individual lending to
farmers instead of the group lending practiced under the BIMAS program. In a second phase
the Village Units would start lending to Mobile Unit client categories (small and microbusiness etc.). Village Unit managers could approve loans up to a limit. It was thought that a
comparison of operational efficiency results between Village Unit and Mobile Unit could help
BRI in deciding on BRI’s course of action in respect of which system to favor for the future.
i. The documents and systems used in the Village Units were all designed by BRI in
Yogyakarta and to a large extent copied from existing BRI and BKD documents, some
containing text from pre-war AVB documents. The Village Unit loan application form and
loan contract form allowed not only for loans for agricultural activities but also for loans for
trade, business, handicrafts, cottage industry and other small and micro enterprises.
j. The Village Units scheme was officially launched by the president-director of BRI in the
office of the Governor of Yogyakarta province in August 1969 (most likely the 8th). The first
18 Village Units opened their doors in the month of October 1969; another 17 were added a
year later.
k. The initiative to experiment with produce storage loans and the construction of produce
stores came from BRI’s president-director, Mr Soerjono. Construction of stores started in
1970 and the issue of storage loans began in April 1971. The stores and storage loans
feasibility study was made by Raymond Turnier and his colleagues at BRI Headquarters. The
decisions for the introduction of the TABANAS (savings) scheme in the Village Units and an
experiment with trade loans in the Village Units in 1971 were taken by the BRI director in
Yogyakjarta in consultation with BRI Headquarters.
l. As from 1970/71 the Village Units were no longer mobile but became fixed in one location.
Reasons were security, saving costs, getting a better use of staff time for the expanding types
of activities and allowing for more than six villages to be served by one Village Unit. This
decision was made by BRI Headquarters on the basis of workload research results in the first
18 Village Units during the first year. The change-over implementation from mobile to fixed
locations was gradual and took a year.
96
m. The large scale expansion with 500 Village Units per year for a number of years was
ordered by the country’s President in May 1970 after the BIMAS Gotong Rojong scheme had
been stopped by him. This expansion started in the 1970/71 wet season in the other three
provinces of Java. A much smaller expansion of 150 to 200 Village Units per year had been
proposed by BRI on the basis of available trained staff resources.
It is interesting to speculate what could have happened if certain persons or organizations had
not done what they did or if certain actions had succeeded or failed.
1. First of all, it is good to remember that the Village Units were not an attempt to introduce
micro-finance in Indonesia. There was already more than 75 years experience with microfinance, dating back to the start of the 20th century. (31, 59) BRI was in 1968 already fully
engaged in micro-finance activities through its district offices, Mobile Units and its
involvement in 5,000 BKDs (village owned banks).
2. The choice of location of the province of Yogyakarta for the FAO-FFHC-FP was
influenced by FAO Headquarters (especially the CEA, the project donor) but was also
influenced by the fact that other donors were also planning to start rice extension activities in
West and Central Java. Reason for choosing the smallest province was that that would make
experimenting easier and faster. The fact that the province had no military governor and that
the Sultan of Yogyakarta was vice-president of the country at the time were regarded as
additional advantages.
3. The appointment of Klaas Kuiper as the FAO-FFHC-FP project leader can be regarded as
accidental since he had become available due to his early withdrawal from Eastern Nigeria as
a result of the outbreak of the Biafra war. If someone with another nationality and/or not
acquainted with Indonesia’s pre-war rural credit history had been appointed as FAO project
leader, a different or no credit experiment might have been proposed early 1969. It was also a
coincidence that BRI’s director in Yogyakarta at the time, Mr Supono, was someone who had
a good knowledge of the pre-war rural financial systems. It was a further coincidence that
another FAO department at the same time had appointed, independently, a senior credit and
cooperative expert to BRI headquarters in the person of Raymond J. Turnier. On top of that, a
very dedicated provincial Inspector of Agriculture, Ir Soetrisno Wirosomarto, ensured that
Yogyakarta province did not become part of the BIMAS Gotong Rojong scheme. This made
the development of an alternative (‘improved BIMAS’) rice production scheme possible,
including the Village Unit and produce storage experiments (BUUD).
4. For Bank Rakyat Indonesia (BRI) the main reason for supporting the Village Unit
experiment was that they were supposed under the 5-Year Development Plan (Repelita-1,
1969-1974) to rehabilitate and expand the rural financial services system.
The proposal for the Village Unit experiment, an experiment for seasonal agricultural credit
for individual farmers, fitted within this BRI rural financial services strategy because the
proposed Village Unit systems did not differ much from the systems used in the Mobile Units
of BRI or the BRI supervised BKDs.
97
5. In case there had been no FAO-FFHC-FP program in Yogyakarta province, the individual
agricultural loans experiment most likely would not have occurred there at that time. BRI
would have continued with BIMAS group loans as in other areas with no BIMAS-GR
program, more likely through an expansion of its existing system of Mobile Units, which over
time, could have become fixed and, with delegated decision powers, would have become very
similar to the Village Units. The setting up of rice stores would have taken place since this
was an initiative of BRI’s president-director. It is anyone’s guess whether these
abovementioned developments would then also have resulted in a Presidential decree to stop
the BIMAS Gotong Rojong scheme in May 1970 and continue through BRI’s Mobile Units.
That could have been the case, depending on what the real reasons were for stopping that
scheme.
6. The BIMAS Gotong Rojong approach with supplier credit failed to get access to
Yogyakarta province. If BIMAS Gotong Rojong would have entered the province, then the
FAO-FFHC-FP would have come to a stop and BRI could not have started/continued with the
Village Units to test new ways of supplying individual agricultural credit. The development
of the ‘improved BIMAS’ would not have been possible under BIMAS-GR but the BUUD
experiment with stores, storage loans and rice hullers could have continued in an adapted way.
BRI’s Mobile Units would possibly have continued with their activities of small personal
loans in non-agricultural sectors and be expanded slowly.
7. Indonesian initiatives, supported by some foreign institutions, to have the FAO-FFHC-FP
stopped in late 1970 would not have had an impact on the Village Unit experiment, unless
accompanied by a re-introduction of something like BIMAS Gotong Rojong (which was tried
by the private sector), because the Village Unit approach had already been declared national
policy by the country’s President in May 1970. Whether this change to a new policy would
also have occurred if there had been no national elections planned for 1971 is not known,
neither to what extent farmers’ dissatisfaction with the BIMAS Gotong Rojong played a role
in that decision.
8. The vast and fast expansion of the Village Units to other provinces could not be coped with
by BRI due to trained staff shortages and internal system weaknesses. This was known
beforehand within BRI. The new and growing role of the Ministry of Agriculture after 1972 in
establishing farm input recommendations and credit packages, from which BRI had itself
freed in Yogyakarta province, meant less BRI control on agriculture loan sizes in other
provinces. Both above factors, combined with the ‘agency’ character of the BIMAS credits
and the involvement of agriculture extension workers in the loan application process, were an
invitation to lower loan repayment rates in later years.
If BRI had been allowed more time for a more gradual expansion, without interference from
the Ministry of Agriculture or the President, the poor results later in the 1970s might have
been avoided. The government subsidies for Village Unit operational costs and bad debts in
later years most likely have also created a negative effect on the operational efficiencies of the
units.
9. The experiment with farm produce stores was not well implemented from a research point
of view. This was partly due to the many other activities BRI senior staff was engaged in as a
result of the order in 1970 to expand fast, leaving little to no time for BRI controlled
experimentation. The too vast and too fast expansion of the Village Units put tremendous
strain on the bank after 1971. BRI did not want to remain involved in the management of the
stores. The BUUDs developed after 1973 into KUDs and began their own development path
with BRI support being limited to that of a lender.
98
10. The Village Unit experiment and the first expansion with 502 Units showed that with high
repayment rates the issue of individual agricultural loans could make a Village Unit reach a
break-even point financially as planned (some were already profitable) and that the addition of
other types of loans and services could therefore make them (more) profitable.
Administrative overhead costs reached a level similar to those prevailing in the Village Banks
(BKD) in the 1920s. The decision by the BRI directors to expand the Village Units to other
provinces at a rate of 150 to 200 Village Units per year, less than the 500 units ordered by the
country’s President, was therefore a calculated decision and was rightly taken.
11. The design of the Village Units assumed a wide package of financial services, ranging
from savings to various types and purposes of loans in various sectors. The loan
request/appraisal form, legal contract form and bookkeeping systems were (partly) copied
from BRI Mobile Units, BRI predecessor banks (BNI-II, AVB) and village banks (BKD).
These were deliberate acts by BRI personnel and showed that the Village Units were part and
parcel of the BRI systems and history.
12. It will possibly always remain a secret in how far the presence of a family member of the
country’s President as a FAO-FFHC-FP counterpart and his regular visits to Jakarta had,
combined with a few unofficial visits by the President himself to Yogyakarta and other
provinces, influenced the President’s decision to stop the BIMAS Gotong Rojong scheme and
to adopt the Village Units and the accompanying ‘BIMAS Jang Disempurnakan’ approach as
the new national food production policy in May 1970. This could at least explain the
President’s early decision in May 1970, a time when no results of the pilot Village Unit
project had been officially submitted to Jakarta. On the other hand, the factors given by
Professor Mears and the upcoming national elections could be regarded as sufficient reasons
for initiating the change in national rice production policy.
Conclusion
We conclude that the Village Units that started in 1969 in Yogyakarta province with technical
assistance from FAO and its expansion to other provinces as part of a new national food
policy in 1970 were only partly planned deliberately. It was a combination of acts and
accidents. Village Unit development was first and foremost an expansion of already existing
BRI systems within existing BRI policy to reach out to rural areas. Large numbers of
individual agricultural loans could not be coped with under the BRI Mobile Unit system,
leading to a modification of that system, called Village Units. The development of the Village
Units was influenced by some unforeseen ‘accidents’, especially by certain people with
certain know-how, experiences and political visions being in the same area/institution
working together at the same time. The expansion of the Village Units from Yogyakarta
province to other provinces in 1970 was a logic result of the experiment in Yogyakarta
province which had shown that the system could become profitable. The speed and scope of
the expansion ordered by the country’s President was more than BRI had decided it could
cope with. The sudden expansion may also have been influenced by political motives such as
the national elections planned for 1971 and the poor results and farmers’ negative reactions of
the BIMAS Gotong Rojong scheme, or by a project counterpart’s family tie to the country’s
President.
The Village Unit scheme was not an invention of one person or a few persons but was
developed gradually by a number of BRI staff, high and low, that designed and applied
99
systems and procedures that had proven their effectiveness in reaching large numbers of small
entrepreneurs in the 75 years period prior to the start of the Village Units. This process started
late 1968 as a result of a request by the FAO-FFHC-FP for an experiment with individual crop
production loans. The presence of advisors, local as well as foreign, had a stimulating and
supporting effect on the start of the Village Units, the types of experiments, the system
designs and related developments. The designers of the Village Units had no blueprint but
they followed a ‘process approach’, using a systematic trial and error approach, reacting to
developments around them, testing new ideas and retesting old practices, and introducing on a
wider scale those practices and procedures that worked in the experiment.
18.
EPILOGUE
When writing this ‘story’ I came across many publications describing what happened to the
Village Units after I left Indonesia. I also had to read books and articles about the pre-war
AVB Bank, the village credit institutions (BKD) and the various discussions about interesting
subjects held in the Popular Credit System newsletters before the Second World War. It struck
me several times that what Turnier and I proposed to BRI in the period 1968-1972 and what
others proposed to BRI after we left, showed similarities to proposals made 40 to 75 years
ago!
May be the issue of how to reach (poor) peasants with micro-credit is a ‘revolving’ issue. Is it
the wish to get the poor a fairer share in national welfare? That was the main and overriding
argument in 1902 when the Dutch government started its colonial ‘welfare policy’ from which
the Indonesian popular and village credit systems had originated. This same welfare idea was
also promoted by Fruin, the first president-director of the AVB Bank, who after his retirement
from the AVB in 1935, returned to Indonesia after WW-II in the hope that he could assist in
setting up a national welfare and development system with as a central organizing body the
AVB Bank, BRI’s predecessor, a faint hope.
It also struck me that many of the recommendations made prior to WW-II, especially those
by Fruin, were still very valid and promoted as ‘new’ in 1968/69, again in 1983 and
thereafter. At least I am sure that I did not try to re-invent the wheel in 1968/69. My credit
know-how at that time was too limited anyway! We therefore included Fruin’s views and
experiences when assisting BRI in designing the Village Unit policies and systems.
Occasionally, we forgot Fruin’s advice or acted differently for specific reasons. Others
assisting BRI did not do so, in fact could not do so, because all pre-war literature was in
Dutch. That makes their advice even more interesting, for example that of Patten and his
colleagues in 1983. Was their advice based on personal know-how obtained outside
Indonesia, on Indonesian history or was it advice based on the ‘system logic’ of the then
existing BRI systems and the problems it experienced, which I hope I have shown to have
been amazingly similar to the pre-war systems and problems? Have all the foreign experts and
their Indonesian colleagues advising BRI since 1968 been innovators or were they merely
assisting in putting back in shape and/or modifying a system that had already proven that it
could run profitably?
After I left Indonesia I have asked myself sometimes what could have happened in BRI when
some American boss in Rome had not decided to send me to Yogyakarta in 1968, against my
wish! When I look at my activities in the project, the developments that occurred before my
arrival in 1968 and those that have occurred after I left in 1971, the best answer to that
100
question is possibly given by Schotter (in 62): “The point is that the set of institutions at any
point in time is really an accident of history and that what exists today could have evolved in a
very different manner. All we know about institutional history of a society is what happened,
not what could have happened.”
++++++
101
A. List of Tables
Table 1: Fertilizer sales by PN Pertani and private traders in Yogyakarta province in the period
1960-1968 (tons nutrients)
Table 2: Yogyakarta province: seasonal group loan volumes in BIMAS program prior to the start of
the Village Units (1965-1969)
Table 3: Urea sales 1969-1971 (tons) Yogyakarta province
Table 4: Estimated annual costs per Village Unit (rupiah) by Turnier
Table 5: Village Units (VU) and irrigated area (ha) covered per district in 1969/70 (1st year)
Table 6: Village Units (VU) and irrigated area (ha) covered per district in 1970/71 (2nd year)
Table 7: Number of sub-districts and villages covered by the Village Units (1969-1971)
Table 8: Number of BRI crop production loans per season (1967-1971)
Table 9: Number of loans during two years in the first 18 Village Units (1969-1971)
Table 10: Crop production loan volumes 1966-1971 (million rupiah) by BRI-Yogyakarta
Table 11: Number of loans, loan volume, average loan size and average acreage (ha) farmed by
borrowers, BIMAS recommended loan cash percentage and actual loan cash
percentage in Village Units in Yogyakarta province (1969-1971)
Table 12: Average loan per hectare (Rp) in BRI Village Units, Yogyakarta (1969-1971)
Table 13: BIMAS recommended loans per hectare for High Yielding Varieties (HYV) and
Local Varieties (LV) of rice
Table 14: Calculated income and expenditure statement for one Yogyakarta Village Unit,
based on 2100 wet season loans and 900 dry season loans and a total loan
disbursement volume of Rp 13 million.
Table 15: loan repayment rates in % volume at 31 December 1971 and 6 month after end of
season (% in brackets) for the period 1969-1971
Table 16: comparison of Bryant data and Village Unit client data for four villages in respect
of sawah owned and sawah rented (1970/71)
Table 17: sawah ownership distribution (%) according to Bryant and of VU borrowers per
ownership class (%) in four villages in 1970-1971, Yogyakarta province
Table 18: percentage of Village Unit loans to tenants in two villages during 3 seasons
Table 19: Number of loans, acreage and volume for 537 VU on Java island (1970/1971)
Table 20: comparison of the 35 Yogyakarta pilot VU and the 502 new VU (1970/71 wet and
1970 dry seasons)
102
B. Abbreviations
ADB
AHT
AVB (Dutch)
BAPPENAS
BI
BIMAS
BIMAS-GR
BKD
BKK
BMPT
BPR
BPU
BRI
BULOG
BUUD
COPERTA
CEA
DG
DGIS
D.I.J.
DIPERTA
FAO
FFHC-FP
GTZ
HYV
INMAS
IRRI
KOPERTA
KUD
KUPEDES
LDKP
LPD
LV
MINAG
MU
N
P2O5
PKI
PN
Asian Development Bank
Agrar-und Hydrotechnik, a German consultancy firm
Algemeene Volkscredietbank (General Popular Credit Bank), Founded 1934.
Badan Perencanaan dan Pembangunan Nasional (National Planning Authority)
Bank Indonesia (Central Bank)
Bimbingan Massal (mass education program)
see: BIMAS. GR = Gotong Rojong (doing things together)
Badan Kredit Desa (village credit bank and village rice bank)
Badan Kredit Kecamatan (credit bank at sub-district level)
Badan Perusahaan Makanan dan Pembukaan Tanah (agency for food
and the opening-up of land)
Bank Prekreditan Rakyat (people’s credit bank)
Badan Pimpinan Umum (general management board)
Bank Rakyat Indonesia (people’s bank of Indonesia);
National Logistics Board, the state rice purchasing agency
Badan Usaha Unit Desa (village owned enterprise in Village Unit)
(village) agricultural committee (in Yogyakarta)
Centre d’Etude de l’Azote (Nitrogen Study Centre), Zűrich, Switzerland
Director-General
Directorate Internal Development Cooperation, The Netherlands
Daerah Istimewa Jogjakarta (Jogjakarta Special Province)
Dinas Pertanian (Agriculture Service, Ministry of Agriculture)
Food and Agriculture Organization of the United Nations
Freedom from Hunger Campaign- Fertilizer Programme (of FAO)
Deutsche Gesellschaft fűr Technische Zusammenarbeit (German aid agency)
High-Yielding (rice) Variety
Intensifikasi Massal (mass intensification; rice farmers outside BIMAS)
International Rice Research Institute (Philippines)
Kooperasi Pertanian (agricultural cooperative)
Kooperasi Unit Desa (Village Unit cooperative)
Kredit Umum Pedesaan (general rural credit, BRI program)
Lembaga Dana Kredit Pedesaan (village owned village bank)
Lembaga Perkreditan Pedesaan (rural credit institution)
Local (rice) Variety
Ministry of Agriculture
Mobile Unit (BRI)
nitrogen
phosphate
Partai Komunis Indonesia (Indonesian Communist Party)
Perusahaan Negara (state enterprise)
103
PNI
PN Pertani
PPD
ROSCA
SIMPEDES
SKD
TABANAS
TSP
UD
USAID
VU
Partai National Indonesia (Indonesian Nationalist Party)
state enterprise for farm inputs distribution
Post Pelayanan Desa , Village Unit branch, open 1 to 6 days a week
rotating savings and credit association
Simpanan Pedesaan (rural savings, BRI program)
Surat Keterangan Desa, village certification letter
Tabungan Nasional (national savings, BRI program)
triple-super-phosphate
Unit Desa (BRI) (Village Unit)
United States Agency for International Development
Village Unit
C. Indonesian and Dutch (NL) words
baru
biasa
buku
bupati
desa
gaplek
gotong rojong
gudang
jang disempurnakan
kapubaten
kalurahan
kepala dukuh
keterangan desa
ketjamatan (kecamatan)
lapan
lumbung
lurah
mantri
nasional
pasar
polowidjo
rupiah (Rp)
sawah
Staatsblad (NL)
surat
surat pengakuan hutang
surat-wesel
tani
tjamat
Volkscredietwezen (NL)
new
basic
book
district head
small village, hamlet
dried cassava chips
mutual aid, help one another
store
improved, perfected
district
village (consisting of several desa)
desa (village, hamlet) head
village certification
sub-district
period of 7 Javanese 5-day weeks (35 days)
village rice bank
village head
(village) official, officer
national
market
dry land crop
Indonesian national currency
irrigated (rice) field
Government gazette
letter
acknowledgement of debt letter (loan contract)
letter (bill) of exchange (wesel = wissel (NL) = change)
farmer
sub-district head
Popular Credit System (before WW-II); also name of a
monthly magazine in the same period
104
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1. …… (2000): Legislation, Regulation and Supervision of Microfinance Institutions in
Indonesia. Joint paper by Bank Indonesia and GTZ, Project ProFI
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3. …… (1971): Monthly honoraria BIMAS in Sidoardjo (East Java). Worldbank mission
member, (mimeo)
4. …… (1971): Study and evaluation of rice production programs in Indonesia, 19611970. (unrevised draft)
5. …… 1971: Preliminary: Some comparative data for ‘Old BIMAS’ and ‘Village Units’
for three wet seasons. (internal use only)
6. …… (1970): Economic Survey, Special Area of Jogjakarta, 1969-1970 (data extract).
Gadjah Mada University, Faculty of Economics
7. …… 1971) Wide-spread Use of Urea in Indonesia. (BIMAS project)
Japan Chemical Week, 9 September, 1971
8. Arndt, H.W. (1971): Survey of Recent Developments. Bulletin of Indonesian Economic
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(all BIMAS programs, loan statistics period 1965-1971)
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18. BRI (2002): Financing for small scale entrepreneurs through the BRI Unit system.
BRI website
105
19. BRI-Jogjakarta (1971), Neratja Perhitungan Rugi/La?a. BIMAS. 21 Oktober 1971.
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and Credit in the D.I.J. (restricted). February 1969
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Government of Indonesia on the Fertilizer Programme in Jogjakarta Province in
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(34a is draft report of 1971; 34 is the published version by FAO)
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Province, Special report No. 2. FAO, 38p.
37. Kuiper, K. & Andersen, P.C. & Molster, H.C. in cooperation with Bank Rakyat
Indonesia (1972): Seasonal agricultural credit to smallholders in Jogjakarta
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in the districts of Bantul, Sleman and Kulonprogo. (‘PN Pertani survey’)
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of the faculty of Economics, Gadjah Mada University, Jogjakarta. (restricted)
40. Kuiper, K. & Andersen, P.C. & Molster, H.C. (1971): Seasonal agricultural credit to
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smallholders in Jogjakarta Province (Indonesia) 1965-1970. (unpublished draft)
41. Kuiper, K. (1971): Repayment capacity. (unpublished draft)
42. Kuiper, K. (1971): A Village Unit. (unpublished draft)
43. Kuiper, K. (1971): Preference for large farmers? (unpublished draft)
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44. Kuiper, K. (1971): The use of BIMAS credits (1967-1971). (unpublished draft)
45. Lagendijk, J.M.D.: Gegesik Wetan, een rijstdorp in de noordjavaanse kustvlakte
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47. Mears, L.A. (1970): A New Approach to Rice Intensification.
Bulletin of Indonesian Economic Studies, Vol. VI, No. 2, July,
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50. Molster, H.C. (1971): Which farmers default on their loans?
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E. List of persons
Adams, Dale W.: professor (ret.), Ohio State University, USA
Andersen, Palle C.: Danish associate-expert, FAO-FFHC-FP Yogyakarta province, 1969-1972
Boeke, J. H.: cooperative advisor to the Volkscredietwezen;
member board and director of Volkscredietwezen;
author various manuals for the popular credit banks, 1915-1928
Bouman, F. J. A.: lecturer, Wageningen Agriculture University, The Netherlands
Carpentier Altingh, H.: Inspector of Local Government;
author first manual for popular banks and village banks in 1907
Chandra, H.: rural finance consultant, Jakarta, Indonesia
Couston, John W.: economist, FAO-FFHC-FP, Rome
Djojohadikoesoemo, S.: deputy-advisor Volkscredietwezen, early 1930s
Fruin, Th. A.: first president-director AVB (1934);
(deputy) director Volkscredietwezen 1920-1934
Hatta, M.: former Indonesian prime-minister and vice president under Sukarno
Iso: professor, Gadjah Mada University, Yogyakarta
Kasmolo: medical specialist, Bethesda hospital, Yogyakarta
Leestemaker, J.: development consultant, Amsterdam, The Netherlands
Mears, L. A.: professor, Harvard University; advisor BAPPENAS
Moesa, Abdurachim: BRI director Yogyakarta province, 1969-1972
Molster, H. C.: PhD student at Stanford University
Mubyarto: lecturer, Gadjah Mada University, Yogyakarta
Olson, Robert A.: programme manager, FAO-FFHC-FP, Rome
Ophuysen, A. H. van: public notary, Jakarta, 1930s
Patten, R. H.: advisor KUPEDES, BRI Head Office, Jakarta
Roberts, R. A.: Chief, Marketing and Rural Finance Services Division, FAO, Rome, Italy
Soerjono Sastrohadikoesoemo: BRI president director, 1968-1973
Soesmojo: PN Pertani director, Yogyakarta
Soetrisno Wirosomarto: Inspector of Agriculture (DIPERTA), Yogyakarta province
Steinwand, D.: Head, Financial Systems Development Section, GTZ, Germany
Sudarmo: BRI Yogyakarta province, office assistant
Sudarsono: professor, Gadjah Mada University, Yogyakarta
Suharto: 2nd President of Indonesia
Supono: BRI director Yogyakarta province, till September 1969
Timmer, Peter: professor, Stanford University; advisor BAPPENAS
Turnier, Raymond J.: FAO credit and cooperative expert, BRI Head office, 1968-1971
Wiriamaadya, R.: founder first popular credit bank in Purwokerto in 1895
Wolff van Westerrode, W. P. D. de: first director, popular credit bank Purwokerto (ca.1900)
Yunus, Muhammad: manager, Grameen Bank, Bangladesh
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