PEOPLE BASED SMALL-BUSINESS LOAN KUR:

PROSPECTS AND CHALLENGES

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By: Djoko Retnadi

Since launched on the fifth of November 2007 by President of the Republic of

Indonesia Susilo Bambang Yudhoyono, amount of KUR has come to Rp6.8 trillion,
consisting of 672 thousand debtors. Compared to other types of loan, the growth of
this kind of loan to almost Rp.1 trillion per month is really amazing.

The aims of people based small-business loan or Kredit Usaha Rakyat (KUR)
introduction are: (i) to accelerate the development of real sector and micro, small &
medium enterprises (MSMEs); (ii) to increase access to financings for SMEs and
cooperatives; (iii) to alleviate poverty and to expand work opportunities. This article
will evaluate whether in reality the practices have been in line or not with the three
objectives from various aspects such as debtor candidates, banking industry and the
guarantor.

Background

By end of 2006, the number of micro, small and medium enterprises (MSMEs)
summed up to 48.8 million units. However, from this amount, only 39.06% or 19.1
million have been engaged with bank. 90 percent of the total number is those who do
business in home industries, informal peddling, and other informal businesses, which
absorb most jobs (pro-job) to support poor people life quality improvement (pro-
poor).

If there is no special effort from the government, the banking sector will still
find it difficult to channel credit to MSMEs, as they really have been feasible but not
yet bankable. The banking industry is obligated to implement international best
practices of risk management (Basel II) which are not suitable for MSME condition and
Indonesian macro economic situation. Although there were many government
programs of loan directed to accelerate MSMEs in 2007 (as shown in Table 1), there
have been no much attention from the banks so that the expected impact has yet to
show a significant result on the grass root level of MSMEs.

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Banker and banking observer

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 Table 1: Various Schemes of Loans Directed to Enhance Real Sector
Development

NO. CREDIT SCHEME EXPLANATION

1 KKP-E (food crop development) Started 2000, initially KKP
2 KKP-E (food supply) Started 2000, initially KKP
3 KKP-E (livestock) Started 2000, initially KKP
4 KKP-E (sugar cane) Started 2000, initially KKP
5 KKPA (palm oil) Started 1995
6 PEMP Loan & Aquaculture of fish & seaweed Started 2005
7 KPEN-RP Mutually beneficial (palm oil) Started December 2006
KPEN-RP Non mutually beneficial (rubber &
8 Started December 2006
cocoa)
9 KUMK-SUP Started 2004

Considering this condition, the Indonesian government finally constituted

President’s Instruction No.6 on 8 June 2007 concerning with policy to accelerate real
sector development and revitalize MSMEs, followed with memorandum of
understanding between Technical Ministries, Banks, and Insurance Companies signed on
9 October 2007, which was marked with launching of insured loan to MSMEs as now
called People-based Small Business Loan (Kredit Usaha Rakyat –KUR). This kind of loan is
expected to give much bigger access to capital for MSMEs and cooperatives which
have been feasible but yet bankable.

Operational Foundation and Policy Objectives

The operational fundamentals of KUR is President’s Instruction Number 6 signed

on 8 June 2007 on Policy to Accelerate Real Sector Development and MSME
Revitalization and Memorandum of Understandings between Technical Ministries, Banks
and Insurance Companies signed on October 9, 2007, as follows:

Economic Review ● No. 212 ● June 2008 2

 Participants Function
Government of Indonesia (6 Ministries)
Ministry of Finance a. Assist and support the execution of credit distribution and its insurance to
Ministry of Agriculture MSMEs and cooperatives.
Ministry of Forestry b. Prepare MSMEs and cooperatives doing productive businesses individually, in
Ministry of Marine and Fisheries group or mutual cooperation/cluster which are to be the target of financing
Ministry of Industry c. Determine policy and priorities of business sectors receiving credits.
d. Build character and give assistance along the period of financing.
State Ministry of Cooperative, Small and e. Facilitate relationship between MSMEs & cooperatives and other parties such
Medium Businesses as nucleus companies or off taker that gives contribution and business
support.
Banks (6 banks)
Bank BRI, Bank Mandiri, BNI, Bank BTN, Assess business feasibility and decide financing disbursement according to the
Bukopin, Bank Syariah Mandiri current regulation.
Credit Insurance Company
PT Askrindo and Sarana Pengembangan
Give approval for guaranteeing loan
Usaha Company

Other than these, in its implementation KUR, banks and the insurance companies
base their activities on cooperation agreement they made together.

SCHEME of KUR

KUR may be in the form of working capital or investment loans with maximum
amount of Rp500 million given to micro, small, medium and cooperative-formed unit
businesses that have productive businesses that will be given guarantee from credit
insurance company. These business institutions must be feasible 2 though yet bankable.
KUR requires that main loan collateral is the project financed. However, as additional
collaterals owned by these enterprises are usually insufficient in amount, the rest are
covered with the guarantee program. The maximum coverage of the assurance is 70
percent from the total credit received. The source of KUR is totally from bank
commercial fund.

At the beginning of its launching on November 5, 2007, the scheme is only one
type that is the one with maximum loan of Rp 500 million. Nevertheless, after being
effective for some time President Yudoyono instructed that the limit should be
lowered to a maximum of Rp 5 million so that micro enterprises are eligible to this
scheme of credit. Finally on the 7th of May 2008, in a Limited Coordinative Meeting

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Feasible means that revenues can pay off installments of original debt plus interest
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headed by Coordinating Minister of Economy, the government issued Addendum I of
Memorandum of Understandings on Micro and Linkage Program of KUR. These three
types of KUR are interpreted by the banks as shown in Table 2, Table 3, and Table 4.

Table 2: KUR Requirements for Maximum Amount Up to Rp.500 million

Subject Requirements

Individuals (personal or legal business entity), group, cooperative doing feasible

Potential Debtor
productive business
Business
Minimum 6 months
experience
Size of loan Maximum Rp. 500 million
Decreasing Working Capital - maximum 3 years
Type of loan
Investment loan - maximum 5 years
Interest rate Effective, maximum 16% p.a
up to Rp 100 million: SIUP (letter of trading business permit), TDP (letter of
listed business entity) & SITU (letter of business location permit) or letter of
Licensing
recommendation from village head.
> Rp. 100 million : minimum SIUP or following the current effective regulations
Individual : ID Card & family list card
Group : letter of recommendation from related institutions or from head of
Legality
village
Cooperative/ Others : subject to effective regulations
Principal : for working capital and investment loans business or place
financed
Collateral The cash flow of the projects financed must be able to cover all
liabilities to the bank
Additional : not obligated to fulfill

Table 3: Requirements of Micro KUR Micro Up to Rp.5 million

Subject Requirements

Potential Debtor Individuals doing feasible productive business

Business
Minimum 6 months
experience
Size of loan Maximum Rp. 5 million
Type of loan Working capital or decreasing investment loan for maximum of 3 years

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Interest rate Effective, maximum of 1.125% flat rate per month
Administration
None
fee
Legality ID Card & family list card
Principal : for working capital and investment loans business or place
financed
Collateral The cash flow of the projects financed must be able to cover all
liabilities to the bank
Additional : not obligated to fulfill

Table 4: KUR Linkage Program

Subject Requirements

BKD, KSP/USP, BMT & LKM , others as long as there is no problem with the
Potential Debtor
installments of debt
Business
Minimum 6 months
experience
- maximum Rp 500 million
Size of loan
- BKD, KSP/USP, BMT, LKM to end user maximum Rp 5 million
Type of loan Decreasing working capital , maximum 3 years
Interest rate Effective, maximum 16% p.a
Administration
None
fee
- Statement of institution Foundation
Legality - Having legal business permit
- Active management
Principal : for working capital and investment loans business or place
financed
Collateral The cash flow of the projects financed must be able to cover all
liabilities to the bank
Additional : not obligatedly fulfilled

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Success Story

Since launched on the 5th of November 2007, the amount of KUR loan and KUR
receivers have shown a significant development.

Table 5. Actual Distribution of KUR as of May 2008

Total Loan Average Loan per
Bank Total Debtors
(Rp milllion) Debtor (Rp million)
BNI 911,871 7,413 123.01
BRI KUR 1,744,547 14,502 120,30
BRI KUR Mikro 2,431,078 610,581 3.98
Mandiri 1,021,640 33,232 30.74
BTN 81,051 470 172,45
Bukopin 430,740 1,686 255,48
BSM 258,485 4,400 58,75
Total 6,879,412 672,284 10,23
Source: Coordinating Minister of Economy, processed

Even more, KUR debtors of size less than Rp 5 million contribute 90 percent of
the total KUR so that commitment to absorb more jobs (pro job) and to cut down
poverty (pro poor) is more to fulfill the government expectation.

Based on economic sector, trade sector is the biggest absorber of KUR,

followed by agriculture and social service sectors. Outside these three sectors KUR
contribution is only less than 3 percent (Table 6).

Table 6. KUR by Economic Sector

Amount of Loan Number of Debtor
No Sector
Rp billion Percentage Debtors Percentage
1 Agriculture 1,664 24.181 156,558 23.29
2 Mining 56 0.808 13,139 1.95
3 Manufacturing industry 171 2.487 1,304 0.19
4 Electricity, gas & water supply 4 0.055 683 0.10
5 Construction 165 2.393 708 0.11
6 Trade, restaurant & hotel 4,046 58.807 452,259 67.27
7 Housing 0 0.001 2 0.00
Transportation, warehouse, 68 0.984 3,368 0.50
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communication
9 Business service 200 2.900 3,441 0.51
10 Social/public services 468 6.809 40,625 6.04
11 Others 40 0.574 229 0.03
Total 6,879 100.000 672,316 100.00
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Problem of Implementation

Even though KUR has given better access to financings for MSMEs and
cooperatives, an acceleration of its expansion is urgent. To reach this objective it is
needed to evaluate problems in distributing this type of loan. From field investigation,
some of the issues are as following. First, there has been no common understanding of
KUR scheme, whether among bank officers or the public, so there maybe still some
deviances and misperception on KUR, such as on collateral requirements, administration
fee, source of fund, existence of illegal broker of Micro KUR, etc.

Second, there is a gap in fulfilling officers having expertise in KUR. Banks must
be prudent in distributing KUR so that they need employees with certain qualification
to manage KUR. Finally, there is a decrease in loan demand because of higher inflation,
interest rate, and so on as a result of macroeconomic condition change.

Public Polemic

In consecutive edition of June 6 and 7 the daily Kompas exposed a polemic on

KUR, stating that candidates of debtors were objection with the imposition of
additional collateral of 30 percent of the total credit by the banks, for in the
memorandum of understanding there is no such requirement.

If we look into this problem, it seems that the government has conflicting
interest. Even though the government has given guarantee as much as 70 percent
through the guarantor company, when it wants to accelerate loan, the amount of
guaranteed loan should be 100 percent. If the government takes this hundred percent
security, this may create a moral hazard situation such like in 1990s, in which banks felt
free to give extra ordinary amount of loans without considering prudential aspect and
on the other side business entities did not have any worry on the performance of their
payments of loan if someday their businesses collapsed. The guarantor will suffer the
most as it bears a lot of claims, for non performing loans mount in the banking sector.

The 70 percent collateral is the proper solution to unite all different interests.
Other 30 percent will be on the banks’ burden which risk must be mitigated through,
for example, asking additional collateral to cover the 30 percent of risk, especially for
KUR size of almost Rp 500 million. This additional collateral does not mean to
complicate credit approval process, but merely to find way-out for banks in order to
always be able to finance MSMEs and cooperatives. If according to analysis a bank finds
that debtor capability in paying off its debt rather questionable, than it may demand

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additional collateral; however, if the opposite result of analysis happens, there is no
need for the bank to ask such increments. It is important to know that if non
performing loans mount, the responsibility will mainly be on the bank officers’
shoulders, though in prior is verified under various considerations in procedures and
effective regulations.

From the above explanation, it seems logic if a bank inevitably asks more
additional collateral as much as 30 percent of the total loan to the new debtors of KUR
of size almost Rp 5000 million, as this is aimed to secure all interested parties. Under
this policy the banking industry could finally convey KUR, rather than if the bank
hesitates to deliver KUR as it lacks confidence on the debtors of KUR. By seeing the
amount of KUR per end of May 2008 that came to Rp 6.8 trillion distributed to 673
thousand people, or average of loan per debtor of Rp 10.2 million, this shows that KUR
achieving is really good even under the polemic existence on additional collateral.

As end notes, I would like to stress that banks’ demand on additional collateral
of 30 percent from outstanding loan is still tolerable as banks are exposed to credit
risk. The incremental requirement is needed for banks to secure their loans. If not, the
banks may hesitate to give more KUR so that the acceleration program might be
hurdled.

Future Wish

As we know the problems of KUR distribution, in the future we must prepare for
future strategies so that KUR acceleration could be carried out properly. Some of these
strategies are:

• Continue joint socialization, under coordination of Vice President Secretary and

Coordinating Minister of Economy,

• Do joint evaluation and monitoring with Policy Committee and related Ministries
every month,

• Enhance linkage program in relation to KUR acceleration program, especially for

KUR of size less than Rp 5 million,

• Develop KUR product featuring life and health insurance

• Making credit program distribution uniform whether through PKBL (program to

assist bank environment, such as giving trading place for informal traders, etc) or
other programs.

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• Follow up programs from related ministries of Policy Committee members

• Focus more on agriculture sector in broad meaning.

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