#1371 1984 · Bank Rakyat Indonesia (Unit Desa system) · Rural banking / microfinance
Indonesia saved rural banking by charging market rates and courting savers, not borrowers
the problem
Subsidized farm credit left 3,300 village bank units with 40-50% repayment and open-ended losses
background
Bank Rakyat Indonesia, a century-old state agricultural bank, ran thousands of village units (unit desa) channelling subsidized BIMAS rice credit to farmers. By the early 1980s repayment ran at 40 to 50 percent and the losses were permanent — defended by the doctrine that the poor cannot pay commercial rates, so rural credit must be subsidized. The units were scheduled for the usual fate of failed development finance: closure or endless drip-feeding.
A 1983 deregulation freed interest rates, and in February 1984 BRI converted its units into microbanking profit centres with their own balance sheets, seeded with $20 million of equity. It launched two products: KUPEDES, a general working-capital loan priced at about 2 percent a month flat — an effective 33 to 44 percent a year, with a rebate for on-time repayment — and SIMPEDES, a passbook savings account paying 11.5 percent interest plus a lottery funded from a further 1.5 percent of the balance. Staff received profit-sharing tied to unit results.
what everyone would do
Keep subsidizing — cheap credit for the poor, arrears forgiven at every election, donors covering losses — which caps outreach at the size of the subsidy and teaches borrowers that repayment is optional.
what they saw
Cheap credit destroyed bank and borrower alike. Price at full cost so only productive users borrow — the real mass market is savings: the poor pay market rates for a safe place to keep money, plus a lottery ticket.
the move
The units priced loans to cover their full transaction cost and earn a profit, and targeting happened by price: only farmers with a genuinely productive use for money borrowed at those rates, so creditworthiness was revealed rather than assessed — no means tests, no group guarantees, ordinary collateral like land titles and motorcycles. On the liability side, the lottery savings account pulled in deposits from the same villages, and within five years deposits funded the entire loan book, ending dependence on subsidized government funds.
why it works
Full-cost pricing pays for the expensive per-account transactions that tiny balances create, so outreach scales without a subsidy cap. Self-selection replaces screening: a farmer borrows at 33 percent effective only when he expects to earn more than that, so the loan sorts itself. Market rates on savings plus the lottery mobilize funds — a chance at a big win recruits small savers that a fraction of a percent never would — and deposits, not donors, fund the loan book, making each village unit autonomous. Profit-centre accounting with staff profit-sharing makes survival local, and repayment is enforced by the credible threat of losing future access: when BRI froze small lending for fifteen months in 1991-92, arrears doubled; resumed, they fell again.
the payoff
Break-even in 18 months, profitable from 1986; by end-2003: 29.9M savers ($3.53bn) vs 3.1M borrowers ($1.68bn); loss ratio 1.62%
where it breaks
Where the state politicizes arrears, any rumour of forgiveness collapses repayment. It presumes institutional trust and presence — BRI had a century of both — which a new entrant cannot assume. It does not reach the destitute: the very poor need transfers, not loans, and unit staff served the bankable working poor. And success at unit level can be squandered upstream: BRI's later troubles came from parking excess microsavings in bad corporate lending, not from the villages.
what came after
BRI's unit system became the canonical proof, carried by CGAP and Marguerite Robinson's 'The Microfinance Revolution', that microfinance can be subsidy-free and savings-led; its design shaped ACLEDA in Cambodia, savings products at Thailand's BAAC and microfinance legislation in Tanzania, and the division's profits carried BRI to a 2003 IPO.
references
- [1]The Microbanking Division of Bank Rakyat Indonesia: A Flagship of Rural Microfinance in Asia (Working Paper 2005-2)University of Cologne / EconStor, 2005econstor.eu
- [2]Bank Rakyat Indonesia: Twenty Years of Large-Scale MicrofinanceWorld Bank / FinDev Gateway, 2004findevgateway.org