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By: Choirul DjamhariDeputy Minister for Business Development and Restructuring

Ministry of Cooperatives and SMEsChairman of Board of Supervisors of Perum Jamkrino

The Indonesian economic growth is 6.1% in 2010 with GDP of USD 714 billion.

Indonesian SMEs (Small & Medium Enterprises including cooperatives and micro enterprises): Contributing 53,3% of GDP; Providing 96,2 million job opportunities accounting for 97,3

of total labor force; Serving as sources of income among grass root, thus

contributing to poverty alleviation; Driving innovation and developing new products in efficient

ways Nurturing mentality and spirit of entrepreneurship; Fostering industries, as big companies need supports from

SMEs;

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◦ Generating export opportunities◦ Ensuring equitable and sustainable development

as they are spread out all over the country. SMEs have proven their resilience to

survive within the ailing national economy. As SMEs are the largest group in the

economic structure and they represent the “people’s economy” of Indonesia, then SMEs should be given of the foremost priority in the national development.

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Data source: Statistics Indonesia, 2009 (data as of 2008)MSME definition refers to MSME Act No. 20/2008

SMEs in IndonesiaSMEs in Indonesia

• Net assets: more than IDR10 billion (USD1 million), or

• Annual sales: more than IDR50 billion (USD 5 million)

• Net assets: more than IDR500 million (USD50.000) up to IDR10 billion (USD1 million), or

• Annual sales: more than IDR2,5 billion (USD250.000) up to IDR50 billion (USD5 million)

• Net assets: more than IDR50 million (USD5.000) up to IDR500 million (USD50.000), or

• Annual sales: more than IDR300 million (USD30.000) up to IDR2,5 billion (USD250.000)

• Max net worth (excl. land & building) : IDR 50 million (USD 5,000)

• Max. annual sales : IDR 300 million (USD 30,000)

• Number of entity: ±4,372 unit or 0,01%• Share to :

- total employment : 2,96%- GDP: 44,44%- non oil export: 79.83%- total Investment : 47,11%

• Number of entity: ± 39,657 unit or 0,08%• Share to :

- total employment: 3,48%- GDP: 13,43%- non oil export : 13,10%- total Investment : 23,81%

• Number of entity: ± 520.221 unit or 1,01%• Share to :

- total employment : 4,26%- GDP: 10,08%- non oil export : 4,85%- total Investment : 20,69%

• Number of entity : ± 50,697,659 unit or 98,90%

• Share to : - total employment : 89,30%- GDP : 32,05%- non oil export : 2,22%- total Investment : 8,39%

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Indonesian SMEs generally have some handicaps to access to financing for their business development.

A lack of formal credit access due to lack of collateral.

Currently, banking system is the most significant source of financing for SMEs, and other alternatives are saving & loan cooperatives, pawnshop, multi-finance companies, non-bank financial institutions.

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Bank

Non Bank Informal Institution

SMEs SMEs FINANCIAL SERVICE PROVIDERS FINANCIAL SERVICE PROVIDERS

CGC

Non Bank Institution

Source: Central Bank of Indonesia

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Number of Banks (as of Arpil 2011) Tot Banks Tot Offices

Commercial Banks (conventional) 121 14.140

Rural Banks (conventional) 1.680 3.996

Sharia Commercial Banks:-Sharia Commercial Banks-Sharia Business Unit of Comm Banks

1123

1.276315

Sharia Rural Banks 153 293

Grand Total 1.988 20.020

Source: Banking Statistic, Central Bank of Indonesia, April 2011

Need of Credit Guarantee To bridge the need of SMEs financing and

the banks’/creditors’ requirement of credit lending.

Credit Guarantee for SMEs is a key to greater access to financing.

Given to the feasible SMEs but not bankable in terms of collateral requirement.

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Feasibility Enterprise Financing Guaranteed by CGC

Large

Medium Small Micro

Feasible for Go Public

√ √ Capital Market No

Feasible & Bankable

√ √ √ √ BankLease financingVenture Capital

OptionalOptionalOptional

Feasible but not Bankable

√ √ √ BankLease financingVenture CapitalRural BankPawn ShopMicro finance Inst

GuaranteeOptionalOptionalOptionalOptionalOptional

Not feasible & not bankable

√ √ Pawn ShopMicro Finance InstMoney Lender

NoNoNo

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Legal Background:◦ Presidential Decree No. 2/2008 of Guarantee Institutions◦ MOF Regulation No. 222/2008 of Credit Guarantee Company and

Credit Re-guarantee Company As legal background, the grand design of credit guarantee system in

Indonesia consists of:◦ National and Regional Credit Guarantee Companies◦ Credit Re-guarantee Company◦ Government support as:

Regulator: Capital Market Supervisory Body and Financial Institutions

Shareholder for National Credit Guarantee Company Local government as the shareholder of Regional Credit Guarantee

Companies

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At the moment, there are 4 CGCs in Indonesia namely:◦ Perum Jamkrindo◦ PT Penjamin Kredit Pengusaha Indonesia/PKPI

(private CGC)◦ Jamkrida Jatim ◦ Jamkrida Bali Mandara.

The government support is given to the establishment of regional credit guarantee as well as the supervision of the existing CGCs.

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Current Guarantee Issues:Government Policy to Enhance SMEs

loan

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Not Feasible, Not Bankable

Feasible & Bankable

Feasible but not Bankable

Increasing the Guarantee Capacity

Additional Government Shares

Target of SMEs Credit Guarantee

Feasible and not Bankable

Guarantee Capacity

>

SMEs clasification

Target of Commercial Bank

Target of Government

Program

KUR Program supported by Indonesian CGCs (Jamkrindo and Askrindo), in which the government induced Additional Government Shares (AGS), totally IDR 3.75 Trillion since 2007.

KUR Program targets 10x of Gearing Ratio, at least 10 times of the AGS (IDR 37.5 Trillion) to be lent as KUR Loan to the SMEs.

The guarantee for KUR is provided in “Conditional Automatic Cover” mechanism, the evaluation of the credit fully conducted by the banks.

KUR Program has been monitored by the Policy Board (interdepartmental committee).

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◦ To support the growth of CGC industry, the Government through Capital Market Supervisory Body and Financial Institutions is improving the regulation for CGC: No. 222/2008 of Credit Guarantee Company and Credit Re-guarantee Company.

◦ Points of Improvements: Initial capital for CGCs establishment; Reserved capital management of CGCs; Investment management of CGCs; Financial Ratios (liquidity, claim and gearing ratio, etc); Credit Guarantee Products & Services; Credit Guarantee Agency; Etc.

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CHALLENGES OF THE INDONESIAN CGCs

Challenges include :

1. CGCs financially sustainable

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Generally, credit guarantee perceived as an unprofitable business and take insurance business market.

CGCs should find appropriate model of guarantee business to meet the expectation of the stakeholders (Govt, shareholders, SMEs, banks/FIs).

CHALLENGES OF THE INDONESIAN CGCs

ii) Credit Guarantee Culture

• SMEs’ mindset of subsidized loan and rates if CGC plays the role and their moral hazard.

• Financial institutions’ moral hazard if loans are guaranteed.

• High interest rate and collateral requirement even though risk is mitigated by guarantee

• Guarantee fees will result in higher borrowing cost for SMEs.

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- Increasing capacity and capability to provide the initial CGCs capital for establishment.- Finding appropriate business model for CGCs.- Increasing human resources competency to provide excellent services and products improvement.- Increasing capacity in managing CGC’s financial and investments.

CHALLENGES OF THE INDONESIAN CGCs

iii) CGCs capacity and competency

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Improvementof CGCs’

Products & Services

Government Support

TO TO

SUSTAINABLE & GROWING SUSTAINABLE & GROWING INDONESIAN CGCsINDONESIAN CGCs

• Appropriate guarantee business model that meets the needs of Shareholders, Government, Bank/FIs as well as SMEs.

• Adequate CGCs’ capital and sound financial management.

• Implicit support from shareholders & Government to facilitate growth and sustainability of Indonesian CGCs.•Improvement of CGC Regulation.

• Strategic business synergies with other corporations/ insurance.

• Balance between financial sustainability and SMEs empowerment outreach.

Proper CGCs

Business Model

KEY SUCCESS FACTORS

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