• Microfinance;
  • Commercialization;
  • People's credit bank (BPR);
  • Linkage program;
  • Economically active poor
  • G21;
  • O16


  1. Top of page
  2. Abstract

Financial sustainability is important for management of microfinance institutions, but funding is always a difficult problem for them. Commercialization is expected to be one of the solutions. This article focuses on the people's credit bank (BPR), which is a commercialized but small-scale unit bank in Indonesia, and examines the effects of a liquidity support scheme, a linkage program, on BPR. The results of regression analysis, using financial data from a total of 1,104 BPRs, reveal that bank loans contribute to the expansion of BPR credit. Moreover, the effect of bank loans through the linkage program has been larger than that of bank loans only. Funds from saving and deposits have had the largest effect on the expansion of BPR credit. Concerning profitability, bank loans affect the return on assets positively, but there is no obvious effect of participation in the linkage program.


  1. Top of page
  2. Abstract

As the microfinance industry has grown, its emphasis has shifted and financial sustainability has become a more important element. Reflecting a shift in the industry's focus from microfinance as a social movement to the integration of microfinance into the formal financial sector, “transformation” and “commercialization” are today part of the microfinance lexicon (Ledgerwood and White 2006). Commercialization of microfinance refers to the application of market-based principles and the term “transformation” refers to the institutional process whereby a microfinance provider or a microfinance project converts into a regulated financial institution.

Whereas the innovative experience of microfinance and its success in maintaining high repayment rates and keeping profitability for decades attracted the existing commercial finance sector to what appeared to be a promising new business model, new market players have entered into the microfinance market. Some major banks, including HSBC, Citigroup, Deutsche Bank, and ABN AMRO are viewing microfinance less as a source of aid and more as a formal financial activity, albeit still a small-scale one (Greenlees 2005).

Meanwhile, large domestic commercial banks in many countries are entering into the microfinance markets because of microfinance resilience. Director and chief executive officer of Consultative Group to Assist the Poor, Elizabeth Littlefield, has explained that throughout past financial crises, especially those of the 1990s (in Mexico, Asia, and Russia), financial services for poor people have shown remarkable resilience to shock. In fact, the loan portfolios of microfinance institutions (MFIs) in Asia during the Asian crisis and in Latin America during various banking crises in that region barely blinked, while corporate portfolios collapsed.1

On the one hand, the role of microfinance in poverty reduction has become increasingly important in development fields, whereas on the other hand, the promising prospects of microfinance for financial business are attracting new market players. Therefore, the competitiveness of microfinance is becoming ever more fierce. In the 1980s, the view emerged that the building of lasting financial institutions requires that they become financially sustainable: in other words, they must cover their costs (Zeller and Meyer 2002). However, given the severity of the competition, merely covering their costs is not enough. MFIs are required to strengthen their financial basis to a far greater degree than hitherto and to adopt a for-profit orientation in their administration and in their operations.

The Bank Rakyat Indonesia (BRI) is one of the world's most successful commercial MFIs. As the third largest stated-owned commercial bank in Indonesia, it has a good reputation for its nationwide network of microfinance local units called BRI unit desa and for its large quantity of outstanding loans. In addition to BRI, Indonesia has a wide variety of commercialized MFIs. The people's credit bank (bank perkreditan rakyat[BPR]) is a commercialized and secondary bank that is expected to play a central role in small-scale finance for the economically active poor and for micro, small, and medium-scale enterprises in Indonesia. The term BPR is in fact a generic term for various sorts of secondary banks (Holloh 2001). The generic term covers four different types of small financial institutions: BKDs (village credit boards), LDKPs (rural fund and credit institutions), old-style BPRs, which were established prior to the 1988 banking reform, and new-style BPRs, which were established on the basis of the 1988 banking reform.

The commercialization of MFIs is expected to result in their financial self-sufficiency as a result of them utilizing market-based funds and operating as for-profit financial institutions that form part of the formal financial system (Charitonenko and Afwan 2003). Furthermore, the commercialization of microfinance is expected to enhance credit expansion and strengthen its outreach. This article aims to examine the fundraising problems of the MFIs. One of the advantages of commercialization is the easy access to market-based funds and the capability of mobilizing funds; however, commercialization itself does not automatically resolve the fund-raising problem. The experience of the BPRs shows that commercialized MFIs still suffer from a shortage of funds, and it offers us an opportunity to examine the efficiency of obtaining loans from other commercial banks. The loan to deposit ratio (LDR) of BPR declined from 97% in December 2003 to 83% in December 2008. Like other MFIs, BPR is finding it difficult to raise funds, even though it is a licensed, deposit-taking bank. To alleviate this problem, Indonesia began a liquidity support program, a linkage program, whereby BPR can obtain loans from commercial banks. Using the financial data of 1,104 BPRs, this article explores the effects of market-based bank loans, particularly linkage program loans, on the expansion of credit and profitability of BPRs in comparison with the effects of other sources of funds; namely, savings, borrowing, and equity.

The remainder of the article is organized as follows. Section II provides an overview of microfinance in Indonesia and Section III describes the characteristics of the BPR. Section IV provides an empirical analysis, and Section V concludes with a summary of the study's findings.


  1. Top of page
  2. Abstract

A. Commercialization of Microfinance

Financial sustainability is expected to enhance further the outreach of MFIs to poor people. In order to expand outreach to the poor, stable and low-cost funds are crucial; therefore, many MFIs have received subsidies from governments or donors to cover their operational expenses. However, subsidies are controversial, criticisms of them being that they foster lax management and reduce efficiency, and that they have not promoted the sustainable operations of MFIs.2Robinson (2002) points out that MFIs that operate with subsidized loan portfolios cannot achieve a wide outreach for either lending or savings operations because their lending interest rates are too low to cover the costs and risks of larger-scale financial intermediation.

With the commercialization of MFIs, it is assumed that managerial and efficiency problems will be overcome, thereby promoting the large-scale expansion and sustainability of microfinance (Charitonenko and Afwan 2003). The ultimate goal of applying commercial principles to MFIs is for them to become formal financial institutions or banks. Robinson (2002) introduces BRI as among the most advanced examples of the microfinance revolution. “Revolution” refers to the operation of an entire microfinance business without subsidy.

B. Microfinance in Indonesia

The microfinance sector in Indonesia is made up of a large variety of institutions, programs, services, clients, and target groups, which are also subject to various legal, regulatory, and supervisory frameworks (Holloh 2001). Numerous governmental programs provide microcredit to alleviate poverty and to develop small, medium, and micro enterprises. More than 70 programs and projects for poverty reduction with a microfinance component are conducted under various ministries and are being provided by foreign governments and international institutions (Charitonenko and Afwan 2003). Microfinance has become a standard element of Indonesian governmental poverty alleviation programs (ProFI 2003). Meanwhile, institutional microfinance, including bank and nonbank institutions, is also well developed. Table 1 provides a summary of MFIs in Indonesia.

Table 1.  Microfinance Institutions in Indonesia
Microfinance InstitutionsNumber of UnitsNumber of LoansLoans (Million Rp)Number of ClientsSavings (Million Rp)
  1. Source: ProFI (2005).

  2. Note: NA = not available.

BPR (people's credit bank)2,1582,160,00012,1505,760,00011,160
BKD (village credit board)5,345410,000200460,00029
BRI local unit3,9163,100,00014,18229,870,00027,429
KSP (savings and credit cooperative)1,097665,000531NA85
USP (savings and credit unit)35,218NA3,629NA1,157
LDKP (rural fund and credit institution)2,2721,300,000358NA334
Pawnshop421,64421No savingsNo savings
BMT (Islamic microfinance institution)3,0381,200,000157NA209
BK3D (credit union)1,022235,087396207,147272
LSM (nongovernmental organization, self-help group)124162,31411081,93112

Figure 1 shows a diagram of the Indonesian microfinance industry. The Indonesian microfinance sector is competitive and segmented according to source of funds and mission. Commercialized banks are also important players in the microfinance sector. Banks operate self-sufficiently and serve the economically active poor.


Figure 1. Diagram of Indonesian Microfinance Institutions Source: Author. Note: BPR =bank perkreditan rakyat; MFI = microfinance institutions; NGOs = nongovernmental organizations.

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Indonesia has over a century of experience in running microfinance institutions,3 and small-scale financial services have become very familiar to most Indonesian people, especially on the island of Java. We may say that microfinance has become embedded in Indonesian daily economic activities. This historical background and the competitive environment in which microfinance programs have to operate may drive many MFIs to become commercial-based microfinance institutions. Unlike those of other countries, nongovernmental organizations (NGOs) in Indonesia do not play a significant role as independent MFIs, although some NGOs have established small commercial banks or BPRs4 (Holloh 2001). This article focuses on institutional microfinance, not on microfinance programs.

In general, MFIs in Indonesia provide small-scale loans (consumption and investment loans) to low-income borrowers who are not the poorest of the poor. They require collateral, and lend to individuals based on commercial principles. On the whole, Indonesian MFIs place more emphasis on self-sufficiency and profitability than they do on poverty reduction (Hamada 2008).


  1. Top of page
  2. Abstract

A. Number and Size of Bank Perkreditan Rakyat

There are as many as 1,765 BPRs in Indonesia as of September 2009,5 but the percentage of their outstanding credits to commercial bank credits is less than 2%. This is almost equivalent to the percentage of the market-based rural small credit program Kredit Umum Pedesaan (Kupedes), which is a major micro credit product of the BRI local units.

Currently, Bank Indonesia, the central bank of Indonesia, is focusing on the development of the BPRs. Many of the BPRs are very small financial institutions operating only one office, but Bank Indonesia focuses on their large number and on the community-based nature of their operations. Table 2 shows the number of commercial banks and BPRs by total asset size, and it can be seen that the total assets of most BPRs are under Rp 100 billion (US$9.1 million),6 and that they are, therefore, much smaller than the commercial banks.

Table 2.  Number of Banks and Bank Perkreditan Rakyat (BPRs) by Total Asset Size in 2008
Total Assets (in Rp)State-Owned and Private, Foreign Exchange BankPrivate Non-foreign Exchange BankBPR
  • Sources: Bank Indonesia, Statistik bank perkreditan rakyat (various issues); PT Ekofin Konsulindo (EKOFIN), Indonesian Banking Indicator and Financial Performance Rating, CD-ROM (Jakarta: EKOFIN, 2008).


    Statistics for bank perkreditan rakyat (BPR) cover non-BKD BPR only.


    There are no details about BPR over Rp 10 billion.

<1 billion0056
1–5 billion00536
5–10 billion00511
>10 billion00669
50–100 billion01 
100–500 billion114
500–1,000 billion410
1–10 trillion138 
10–50 trillion (including BRI)131 
>50 trillion80 

To strengthen the BPRs, Bank Indonesia introduced a development program called the Promotion of Small Financial Institutions (ProFI).7 This program aims at improving the competitiveness of BPRs, to enable them to provide sustainable microfinance services to an increasing number of urban and rural low-income households. The average amount of credit per account of the BPRs is smaller than that of the BRI local units. In 2000, the loan size of the BPRs was Rp 1.2 million, while that of the BRI local units was Rp 2.6 million (Holloh 2001). In 2008 the average amount of a BPR loan per account increased to Rp 9.4 million (US$858), but BPR loans can be categorized as small-scale loans.8

B. Geographical Distribution

In Indonesia, credit and financial services are concentrated in the capital city of Jakarta. Of the 98 commercial banks (aside from joint banks and foreign banks), 55 are located in Jakarta, and Jakarta absorbs approximately 40% of total outstanding commercial bank credit. Figure 2 shows the outstanding amounts of small-scale credit (kredit usaha kecile[KUK]) of the commercial banks9 by province. KUK is defined as credit for investment and working capital up of to Rp 500 million (US$45,662). KUK is concentrated mainly in Jakarta. By contrast, Jakarta accounts for only 1.6% of the total value of BPR credit. The BPRs are concentrated mainly on Java Island, as is the case with the commercial banks; however, in low-GDP provinces outside of Java Island, the ratio of the number of BPRs to the number of commercial banks tends to be higher (Figure 3). The ratio of BPR credit to that of the commercial banks is negligible (less than 2%), but in rural areas, more importance is placed on the accessibility of financial services. Large commercial banks have participated in microfinance markets but their outreach to rural areas remains limited. The large number of the BPRs is meaningful to the development of microfinance, and is one of the advantages that BPRs have over commercial banks.


Figure 2. The Geographic Distribution of Small-Scale Credit by Province, 2007 Sources: Bank Indonesia, Statistik bank perkreditan rakyat (various issues); Bank Indonesia, Indonesian Financial Statistics (various issues). Note: BPR =bank perkreditan rakyat.

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Figure 3. Percentage of Number of Bank Perkreditan Rakyat (BPRs) to Number of Commercial Banks by Province, 2007 Sources: Bank Indonesia, Statistik bank perkreditan rakyat (various issues); Bank Indonesia, Indonesian Financial Statistics (various issues).

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C. Shortage of Funds and the Linkage Program

For many BPRs, it is not easy to collect funds from the savings markets even though the BPRs are commercialized banks. To alleviate this problem, Bank Indonesia has formulated a cooperative scheme. In 2002, Bank Indonesia introduced the linkage program as a preliminary measure in which commercial banks provided loans to BPRs for the development of micro, small, and medium-size enterprises, and in 2006, the initiative was formalized. The number of participants in the scheme has been increasing rapidly. Sunarto (2007) found that because of a lack of ability to mobilize funds from the savings markets, many BPRs depend on the linkage program and on subsidized credit from state-owned enterprises and state-owned financial institutions; namely, BRI, Bank Tabungan Negara (BTN), and PT Permodalan Nasional Madani (PT PNM). Of these, PT PNM is not a bank but a state-owned financial institution that provides small and medium-size financing for their funding.10 Some donors make large deposits in BPR accounts as well.

Impressed by the strong resilience of MFIs to the macroeconomic shock delivered by the Asian financial crisis, many large commercial banks became interested in the microfinance business and entered the market. For example, the fifth largest private commercial bank, Bank Danamon, entered the microfinance market in 2004 and has since grown rapidly. The growing interest of commercial banks has made the microfinance market much more competitive, and one reason for introducing the linkage program was to reduce the intense competition between the commercial banks and the BPRs (Sunarto 2007). The interest rate on linkage program was around 12–13% as of 2008,11 whereas the BPR interest rate on loans to clients was around 20–24%. In general, the interest rate of MFIs tends to be higher than that of conventional commercial banks because of the high credit risk and high transaction costs that stem from the small amount of credit. For instance, Grameen Bank's interest rate for an income-generating loan is 20%, whereas that of Bolivia's BancoSol is between 12% and 22%. According to Microfinance Information Exchange (MIX), a nonprofit organization that provides information on microfinance, the median interest rate for the 700 MFIs in the MIX Market database for 2006 was 30% (22% net of inflation). Despite the high cost of funding, BPRs can still generate profits through the linkage program and, therefore, many BPRs are eager to obtain linkage program loans.

Meanwhile, commercial banks have been criticized for obtaining large margins through the linkage program without risk because all the credit risk is borne by the BPRs. Commercial banks make loans to BPRs after rigorous screening; sometimes the criteria of the linkage program can be more severe than Bank Indonesia's monitoring criteria.12 As a result, the level of nonperforming loans of the linkage program is very low, at 0.1%, as of 2007. It follows that commercial banks can gain from the linkage program.

The advantages of the linkage program are that BPRs can secure a source of funds, and that commercial banks can offer less risky loans to BPRs. Therefore, there is a strong demand from both lenders (commercial banks) and borrowers (BPRs) for the linkage program. The question is whether this program contributes to the expansion of BPR credit. The next section will examine the relationship between linkage program loans and the performance of BPRs.


  1. Top of page
  2. Abstract

A. Estimation Strategy

The growth of credit depends on the ability of the BPRs to mobilize funds. The major sources of BPRs funds are their own funding from the savings markets, bank loans from other commercial banks (including the linkage program), borrowing, and raising equity. In principle, a bank's essential role is to collect funds from savers and allocate them to borrowers. Funding from the savings market is less expensive than other financial sources, but mobilizing funds is not easy for many BPRs due to their limited operational area and their lack of ability. Therefore, the linkage program alleviates the shortage of funds and enhances the credit of BPRs.

By means of a regression analysis, this section examines whether or not the linkage program has had any effects on enhancing BPR credit expansion and profitability in comparison with other fund sources. Unfortunately, it is impossible to identify linkage program loans in BPR balance sheets, so the effect of the linkage program is examined using a dummy variable of participation in the linkage program. In addition to credit expansion, the effects of the linkage program on return on assets (ROA: profit after tax divided by total assets) is also examined. The following equation is considered:

  • image

where Yi is the dependent variable (growth of credit ratio and growth of ROA), Xi is a vector of source of funds for BPRi, Zi is a vector of cost of operation ratio for BPRi, Bi is a vector of characteristics for BPRi, and εi is the error term (see Tables 3 and 4).

Table 3.  Variable Definitions
Variables Definition
  1. Note: 1. “G-” indicates change in the ratios from 2006 to 2007.

Dependent variables:  
 G-CreditCredit ratioTotal credit to total asset ratio
 G-ROAReturn on assets (ROA)Income to total asset ratio
Explanatory variables:  
 G-BkloanBank loan ratioTotal amount of bank loans from other banks to total liabilities ratio
 G-Fund-relatedRelated funds ratioTotal amount of funding from related parties to total liabilities ratio
 G-Fund-3rdThird parity's funds ratioTotal amount of funding from third parties to total liabilities ratio
 G-BorrowBorrowing ratioTotal amount borrowings except bank loans to total liabilities ratio
 G-EquityRequity ratioEquity to total asset ratio
 G-DIFInterest margin ratioDifference between interest revenue and interest expense divided by total revenue
 G-operationalOperational expense ratioOperational expenses to total revenue ratio
 G-personnelPersonnel expense ratioPersonnel expenses to total revenue ratio
lnAssetLog of total assetsNatural logarithm of total assets in 2007
NPLNonperforming loan ratioBank nonperforming loans to total loans ratio in 2007
Linkage dummy Participation in linkage program = 1, not participation or non-linkage program = 0
Government dummy Government ownership = 1, others = 0
Bank loan dummy BPR which operates without bank loans in 2007 = 1, with bank loans in 2007 = 0
Table 4.  Descriptive Statistics
Variable in 2007MeanStandard DeviationMinimumMaximum
  1. Notes: 1. Total number of observations is 1,104 BPR.

  2. 2. NPL = non-performing loan, LDR = loan to deposit ratio, ROA = return of assets, ROE = return of equity.

Total assets (Rp 1,000)14,000,00022,500,000471,285163,000,000
 To total assets:    
  Equity ratio0.2370.179−0.6180.979
  Bank deposit ratio0.1760.1250.0000.950
  BPR deposit ratio0.0420.0750.0000.691
  Credit ratio0.7310.1470.1701.989
 To liability:    
  Bank loan ratio0.1290.1650.0000.884
  Borrowing ratio0.0270.0810.0000.891
  Fund ratio0.8010.1930.0631.000
   Related fund0.1310.2000.0000.961
   Third party fund0.6770.2410.0181.000
 To total revenue:    
  Operational expense0.9130.3970.4205.680
  Personnel expense0.3120.1330.0281.598
  Total credit/personnel expense11.5607.6571.43376.000
Growth (2006–7):    
 Credit ratio−0.0070.134−0.9881.095
1. Data set and variables

The Bank Perkreditan Rakyat's (BPR's) financial data are downloadable from Bank Indonesia's website. A total of 1,130 BPR balance sheets and income statements as of December 2006 and December 2007 were downloaded. Among available financial data, the 1st percentile and the 99th percentile of total assets in 2007 are excluded, and an additional 4 BPRs are excluded due to an abnormal value of lending. In total, the data of 1,104 BPRs have been used. The observation period of growth is from December 2006 to December 2007. A limitation of this data set is a lack of information on interest rates and the number of accounts, both of which would have been useful for evaluating efficiency and outreach to the poor. Table 4 shows descriptive statistics.

To evaluate the financial intermediary function, it is customary to use the LDR (total amount of credit divided by total funds of savings) as an indicator, but in this analysis, the credit ratio (total amount of credit divided by total assets) is used as an intermediary indicator because the growth of savings funds directly affects the denominator of LDR (i.e., the total amount of funds of savings) and the numerator indirectly, but growth of bank loans from other commercial banks does not affect the denominator of the LDR. Therefore, the use of LDR as the dependent variable would not accurately determine the effects of various sources of funds on credit growth, but using the credit ratio might not result in the same problem.

Explanatory variables are made up of three components: (1) the growth of sources of funds, (2) the income/cost of operation, and (3) the characteristics of BPRs. The variables regarding the source of funds include the bank loan ratio, the funds ratio, the borrowing ratio (borrowings except bank loans), and the equity ratio. The growth of bank loan ratio (G-Bkloan) is the change in ratio of the total amount of bank loans from other banks to total liabilities during 2006 and 2007. Funds from savings are divided into two kinds: one is from “related parties” and the other is from “third parties.” A “related party” is any person or company or entity exercising control over the bank, whether directly or indirectly, through ownership, management, and/or financial links.13 A “third party” is any person or company/entity other than a “related party.”14 As Sunarto (2007) has pointed out, donors sometimes make large deposits in BPR accounts; a related parties' fund might have features similar to that of a donor's fund, which is similar to a subsidy. Therefore, the effect of related party funds is examined separately.

There are six variables representing the characteristics of BPRs. One is lnAsset (natural logarithm of total assets in 2007). Lending behavior and profitability are largely determined by size. NPL (total amount of nonperforming loan divided by total amount of credit in 2007)15 is an important indicator of bank soundness. In addition, there is the linkage dummy (participation in linkage program = 1, not participation or non-linkage program = 0),16 the government dummy (government ownership = 1, others = 0), and the bank loan dummy (BPR that operates without bank loans in 2007 = 1, with bank loans in 2007 = 0). A total of 23% of the 1,790 BPRs (as of June 2008) are owned by regional governments. Governmental ownership is considered a proxy of a kind of subsidy. Charitonenko and Afwan (2003) argue that weak governance of BPRs stems from governmental ownership.

2. Comparison of the group of the linkage program, governmental ownership, and bank loans

What characteristics can be captured by these dummy variables? In Table 5, BPR indicators are compared with the Student's t-test. First, let us consider the characteristics of BPRs with linkage programs and BPRs without linkage programs. Table 5 shows the mean of major indicators of BPRs and explanatory variables by group. Generally, BPRs with linkage programs have larger total assets, they have far fewer nonperforming loans, and the credit ratio is higher than non-linkage program BPR. The smaller equity ratio implies that BPRs with linkage programs are more leveraged. Concerning profitability, ROA and ROE are not significantly different. Efficiencies measured using the total amount of credit divided by personnel expenses are higher for BPRs with linkage programs than non-linkage program BPRs.

Table 5.  Comparison of Some Indicators of BPR by Group
 No. of BPRTotal Asset in 2007NPLLDR in 2007CreditROAROEEquity RatioDeposit to Other BankBank Loan in LiabilityFundingRelated FundThird Party FundOperational ExpenseCredit Amount/Personnel Expense
  1. Notes: 1. This table provides the results of t-tests for the equality of means of variables.

  2. 2. NPL = non-performing loan, LDR = loan to deposit ratio, ROA = return of assets, ROE = return of equity.

t-statistics −2.5482.3271−0.474−4.639−0.158−0.7223.0283.094−6.1165.5391.8342.9690.246−3.823
p-value 0.0110.02010.6360.0000.8740.4710.0030.0020.0000.0000.0670.0030.8060.000
t-statistics −4.870−3.6140.005−0.859−0.374−0.179−3.015−3.5754.301−2.6486.205−7.1970.8421.007
p-value 0.0000.0000.9960.3900.7080.8580.0030.0000.0000.0080.0000.0000.4000.314
With loan78215,900,0007.4071.4900.7460.0120.0380.1950.1560.1820.7550.0840.6770.90812.403
Bank loan3229,355,2879.4961.8330.6960.012−0.2550.3370.2240.0000.9100.2450.6790.9289.515
t-statistics 4.459−3.258−2.5475.1980.0331.453−12.771−8.41919.283−13.006−13.007−0.160−0.7605.779
p-value 0.0000.0010.0110.0000.9740.1460.0000.0000.0000.0000.0000.8730.4480.000

Next, the characteristics of BPRs owned by the government are examined. Among 1,104 BPRs, 229 are mainly owned by regional governments. All BPRs are commercialized banks and do not receive any subsidies, but government ownership is regarded as an implicit guarantee similar to subsidies of BPR management. Table 5 reveals that BPRs owned by the government are larger in total asset size, but NPL is much higher than in nongovernment BPRs. The equity ratio of government-owned BPRs is higher and funding through savings is also higher. Concerning investment behavior, there is no significant difference in providing loans. In contrast, the number of investments to other banks as deposits is higher than that of nongovernment BPRs. Concerning profitability, ROA and ROE are not so different.

Finally, let us compare BPRs that do not obtain any bank loans and BPRs that take bank loans. BPRs with no loans are smaller in total assets and NPL is higher than in BPRs with bank loans. LDR and rate of investment in other banks as deposits are higher than those of nongovernment BPRs, the credit divided by personal expense is lower, but ROA and ROE are not significantly different.

From these comparisons, we can conclude that linkage programs tend to result in larger and better performances of BPRs, and vice versa, larger and better BPRs may easily attend linkage programs. Judging from the higher NPL ratio, government ownership implies lax management, as is the case with existing subsidies. A BPR that runs without bank loans tends to be smaller and its performance less efficient.

B. Estimation Results

1. Growth of credit ratio

Table 6 shows the results of regression of the growth of credit ratio of all samples of 1,104 BPRs. The results reveal that own funding by collecting savings contributes to the increase in credit ratio more than funding by bank loan. More precisely (Table 6, column 2), an increase in bank loans from other banks (G-Bkloan) is positive and statistically significant (with a coefficient of 0.180 and a p-value of 0.045), while funding from related parties (G-Fund-related) contributes to a much greater extent (0.363, p= 0.000), and funding from third parties (G-Fund-3rd) also increases the credit ratio (0.284, p= 0.001). The result that own funding has a much larger effect on the increase in credit expansion than do bank loans shows the importance of fund mobilizing, and a BPR functions as a financial intermediator through fund mobilizing. The importance of bank loans can be confirmed by different variables. The bank loan dummy, which presents a BPR operating without bank loans, is negative and significant (−0.016, p= 0.078). This indicates that a BPR that operates without bank loans tends to decrease its credit expansion, and funding that relies only on the savings and deposits markets is not sufficient to sustain credit growth. As for other fund resources, the effect of general borrowings (G-Borrow) is not clear (0.176, p= 0.104). Increase in equity (G-EquityR) is negative and significant (−0.464, p= 0.000), and the government dummy is negative and significant (−0.032, p= 0.009).

Table 6.  Regression Results: Growth of Credit
 (1) (2)
CoefficientStandard ErrorCoefficientStandard Error
  • Notes: 1. Breusch–Pagan/Cook–Weisberg test for heteroskedasticity rejects the null hypothesis in homogeneity at the 1% level; the estimation is based on White's heteroscedasticity-corrected standard errors.

  • 2. Dependent variable = growth of credit ratio.

  • 3. All variables are defined in Table 3.

  • ***

    , **, and * represent statistical significance at the 1%, 5%, and 10% level, respectively.

G-EquityR−0.4700.104*** −0.4640.102***
G-Bkloan0.1840.088** 0.1800.090**
G-Borrow0.1690.106 0.1760.108
G-Fund-related0.3590.102*** 0.3630.104***
G-Fund-3rd0.2800.087*** 0.2840.088***
G-personnel−0.0890.040** −0.0910.040**
lnAsset0.0060.004 0.0040.004
NPL−0.0010.001* −0.0010.001
Government−0.0330.009*** −0.0320.009***
Bank loan   −0.0160.009*
Linkage   0.0340.018*
Number of observations1,104  1,104 
F(9, 1094)6.96 F(11, 1092)6.75 
Probability > F0.00  0.00 
R20.1544  0.1604 

This reveals that bank loans from other commercial banks are important. Let us now consider the effect of a linkage program. Tables 7 and 8 show a matrix of participation of linkage programs and operation with and without bank loans. A total of 322 of the BPRs examined did not participate in linkage programs and operated without bank loans. Some 47 BPRs were participating in linkage programs and were operating with bank loans, and 735 BPRs were obtaining bank loans but did not participate in linkage programs.

Table 7.  Matrix of Linkage Program and Bank Loan in 2007
 With LoansWithout LoansTotal
Table 8.  Comparison of Major Indicators in 2007
 Number of Bank Perkreditan Rakyat (BPR)Average of Total Assets (Million Rp)Return on AssetsCredit Ratio
Without loans3229,3550.0120.696
Non-linkage with loans73515,5000.0120.740
Total (average)1,10414,0000.0120.731

The coefficient of the linkage dummy is positive and significant (0.034, p= 0.064) and shows that participation of a linkage program helps to increase credit. This implies that bank loans from other banks are an effective source of funds, but participation in linkage programs increases credit more effectively.

2. Effects on profitability

As a financial intermediary barometer, a lower credit ratio means that the bank (BPR) does not function as well as an intermediary, whereas too high a credit ratio, such as one in excess of 1.0, is not necessarily a good indicator for the soundness of a bank. A higher credit ratio is preferable from the profit point of view, but an excessively high credit ratio will endanger the soundness of the bank's (BPR's) management. Therefore, the level of preferable credit ratio depends on the management strategy of each bank (BPR).

Figure 4 shows the relationship between the level of credit ratio and profitability (ROA). The horizontal axis corresponds to credit ratio in 2006. The left side of the vertical axis is the frequency of BPRs and BPRs with linkage programs, whereas the right side of the vertical axis represents the average of ROA. A credit ratio that is too low implies poor management, whereas an excessively high credit ratio implies the riskiness of the management's approach. In accordance with the indicator, Figure 4 reveals that a profitable level of credit ratio is somewhere between 0.5 and 0.8. Concerning the linkage program, there is no participant BPR with a credit ratio of under 0.5.


Figure 4. Relationship between Level of Credit Ratio and Profitability (ROA) Notes: 1. Horizontal axis: credit ratio 0 is less than 0.1, 0.1 is less than 0.2. 2. BPR =bank perkreditan rakyat; ROA = return on assets.

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To examine the effect of linkage programs and source of funds on growth of profitability, a sample of credit ratio ranging from 0.5 to 0.85 of 822 BPRs in 2006 were taken from 1,104 BPRs. Regression results (Table 9) show that an increase in equity ratio (G-EquityR) contributes to increased ROA (0.248, p= 0.000). This is consistent with the view that the capital ratio is positively related to profitability (Demirgüç-Kunt and Huizinga 1999; Molyneux and Thornton 1992). Funding from related parties and from third parties (G-Fund-related, G-Fund-3rd) is positive, but insignificant (0.094, p= 0.146; 0.095, p= 0.139). The contribution of bank loans from other banks (G-Bkloan) is positive and significant (0.136, p= 0.052) and borrowing (G-Borrow) is also positive and significant (0.143, p= 0.070). Participation in linkage programs is negative and insignificant, and government ownership is positive but insignificant.

Table 9.  Regression Results: Growth of Return on Assets
 Coefficient Standard Error
  • Notes: 1. Breusch–Pagan/Cook–Weisberg test for heteroskedasticity rejects the null hypothesis in homogeneity at the 1% level; the estimation is based on White's heteroscedasticity-corrected standard errors.

  • 2. Dependent variable = Growth of return on assets.

  • 3. All variables are defined in Table 3.

  • ***

    , **, and * represent statistical significance at the 1%, 5%, and 10% level, respectively.

G-BkLoan0.136 0.070*
G-EquityR0.248 0.062***
G-Borrow0.143 0.070*
G-Fund-related0.094 0.064
G-Fund-3rd0.095 0.064
G-operational−0.118 0.023***
NPL−0.001 0.000**
G-DIF0.027 0.089
Government0.006 0.006
Linkage−0.001 0.003
Bank loan0.001 0.004
Number of observations 822 
F(12, 809) 4.71 
Probability > F 0.00 
R2 0.6197 

In principle, because funding costs from savings are lower than bank loans, an increase in funds from savings markets seems to contribute towards profits. However, the results do not support this position. This might be because of the higher deposit interest rates of BPRs. The averages of time deposits and savings interest rates of non-foreign exchange commercial banks, which are relatively small-size commercial banks, are 11.58% and 5.17% per annum, respectively. Time deposits and the savings interest rate of BPRs are 12.43% and 7.16% per annum as of December 2008. BPRs have to offer 1% or a much higher interest rate than commercial banks. Therefore, we can suppose that the cost of funds from savings is not necessarily low for BPRs, especially for a BPR that is small and cannot obtain bank loans because of its poor performance. This problem is associated with the size of the BPR, the limited scope of its operation, and the absence of a local network.

In summary, the growth of bank loans from other banks' contributions to increased credit and linkage programs also have the effect of enhancing the credit expansion of BPRs. However, funds from related parties contribute the most to credit expansion. Most BPRs manage to raise funds through a combination of several fund sources, but BPRs that do not rely on bank loans cannot expand their credit. These results indicate the importance of bank loans in the funding strategy of BPRs, but the impact of linkage programs on profitability is less clear. Bank loans from other banks and increases in equity contribute to the increased ROA. Government ownership has negative effects on credit expansion, but its effects on profitability are not obvious.


  1. Top of page
  2. Abstract

The commercialization of microfinance is assumed to be a way of overcoming managerial and efficiency problems, and is thought to promote the large-scale expansion and sustainability of microfinance institutions. Once they become commercial banks, are the problems of MFIs such as their shortage of funds resolved? The results of this article reveal that commercialization in itself does not automatically solve the problem of funding. Commercialized banks face another problem, and that is the difficulty of fund mobilizing.

The analysis on which this article is based focused on the effects of loan support programs to MFIs in Indonesia. The empirical results show that bank loans from other commercial banks contribute positively to the expansion of credit and to an increase in ROA. Bank loans through linkage programs contribute more than bank loans alone, but there are two findings that need to be emphasized. One is that savings, which is a fundamental source of funds for banks, has a larger effect on credit expansion. The other is that, despite the above, savings as a single fund source are not effective enough to increase credit. Furthermore, savings, the lowest source in terms of cost, do not contribute to profit. This might account for the small size of BPRs and the limitations of their operation.

Although a BPR is a commercialized bank and does not receive subsidies, a large amount of deposits from related parties is an important fund resource. Here, funding from related parties and governmental ownership are considered to be subsidies by proxy. The results of the analysis indicate that related funds positively affect the increase in credit, while government ownership does not contribute to credit. From the results, we can say that government support or involvement is not utilized effectively by MFI management, and nongovernmental subsidies such as donors' deposits are likely to be more effective in the expansion of credit.

Linkage programs contribute to an increase in credit, but impose a high interest rate on BPRs. BPRs can transfer the higher cost of funds to their clients because they are commercialized banks and seeking profits is one of the objects of commercialization. However, the conditions of BPRs might pose a question as to whether commercialization is a suitable strategy for the MFI, which places its primary emphasis on poverty reduction and outreach to the poorest of the poor.


  1. Top of page
  2. Abstract
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  • 1
  • 2

    The success of the BRI has arisen from the failure of government-subsidized credit to agriculture, which was one of the programs for introducing high-yielding varieties under a mass guidance scheme (BIMAS). The repayment rate of subsidized BIMAS credit ended up being very low.

  • 3

    See for example, a BKD that was set up in 1896 during the Dutch colonial period in Java.

  • 4

    For example, BPR, which collaborated in our survey, was established by the largest NGO in Indonesia, Yayasan Bina Swadaya. The survey results are utilized in Takahashi, Higashikata, and Tsukada (2010) and Tsukada, Higashikata, and Takahashi (2010) in this issue.

  • 5

    Until the middle of the 2000s, there were over 2,000 BPRs in Indonesia. At present, the number of BPRs is decreasing in conformity with the guidelines of Bank Indonesia.

  • 6

    US$1 is equivalent to 10,950 rupiah as of the end of December 2008.

  • 7

    This is a comprehensive microfinance program set up in 1999 through the joint efforts of Bank Indonesia, the Indonesian Ministry of Finance and the German Agency for Technical Cooperation (GTZ), which is an international cooperation enterprise for sustainable development with worldwide operations, owned by the German Federal Government.

  • 8

    Kredit Umum Pedesaan (Kupedes), which are major loan products of the BRI local units, ranges in value from a minimum of Rp 25,000 to a maximum of Rp 25,000,000.

  • 9

    On January 4, 2001 Bank Indonesia completed the formation of KUK through the Bank Indonesia Regulation No. 3/2/PBI/2001 concerning “Provision of Credit to Small-Scale Enterprises.” This means that Bank Indonesia will not oblige, but rather suggests to the banks that they distribute KUK in accordance with their business plans.

  • 10

    Since 1999, the task of managing the small-scale credit program has been redirected to three state financial enterprises; namely, BRI, BTN, and PT PNM. In this case, BRI serves as the coordinator of the credit scheme distribution for KUT (credit for farmers), and credit for cooperatives; BTN for housing loans for low-income people; and PT PNM for other credit needs.

  • 11

    Bank Indonesia's benchmark interest rate was 8% as of March 2008.

  • 12

    This is based on the author's interview with BPRs, East Java, November 2008.

  • 13

    See Bank Indonesia Regulation No. 7/3/PBI/2005 concerning “The Legal Lending Limit for Commercial Banks.”

  • 14

    Before the financial crisis in 1997, most commercial banks provided loans to clients close to the owners and management, and it has been said that this practice resulted in high nonperforming rates of approximately 78%. After reflecting on this, Bank Indonesia introduced a regulation to report information on clients separately.

  • 15

    Nonperforming loan in 2006 is not available.

  • 16

    Biro Riset Infobank.