Bill takes aim at microfinance in informal sector

Feb 2007
Jakarta, February, 19 2007 - Even though there is no exact figure on how much of a contribution informal microfinancing firms make to the economy, it is common knowledge that many -- if not most -- small and medium enterprises (SMEs) here rely on them.

A survey by the Regional Representatives Council found there were about 600,000 informal microfinancing firms in the country in 2006. Meanwhile, according to the Central Statistics Agency, SMEs contribute more than 50 percent of the country's gross domestic product every year.

This year the government has decided to stop overlooking the role of such financing firms and has asked the Finance Ministry to draft a bill on microfinancing firms.

"The bill on microfinancing firms will be handled by the Finance Ministry's secretary general," said Edy Putra Irawady, deputy for industry and trade to the coordinating minister for the economy, last week, as quoted by Antara.

Edy said that the bill was part of the government's regulation package on SMEs, which will be deliberated and implemented by the second semester.

"They have to be given the right to exist without violating any laws and regulations, especially those on banking and financing," he said.

Earlier, Coordinating Minister for the Economy Boediono said that many financing firms were operating without legal grounds, but had made a significant contribution to the growth of SMEs in the country.

"If they are beneficial for the public, then they should not be eliminated," Boediono said.

According to the Microcredit Summit, microfinancing is a program that provides loans in small quantities to the poorest people to finance projects that will produce earnings "allowing them to care for themselves and their families."

Bank Indonesia defines microfinancing as loans given to business players, be it an individual or a group, with yearly revenue of no more than Rp 100 million.

The microfinancing firms Boediono was mentioning carry out their activities exactly as defined by the summit and the bank. However, these firms do not have any legal basis for their activities and operate without a standard of best practices.

In the society, these firms continue to exist despite often providing much higher interest rates than banks. The main reason is because they provide a fast source of financing.

They do not implement restrictive lending procedures, such as requiring collateral or business licenses.

Most financing deals are conducted on the basis of a "gentleman's agreement".

They also imposes high costs on the SMEs due to the high interest rates, making them less competitive compared to bigger business players.

In 1992, the government issued a regulation that obliged the firms to convert their operations into a legal form known as rural banks.

However, the regulation has yet to solve the issue.

"Issues on SMEs have had the attention of many stakeholders for quite some time now, but there hasn't been an inclusive policy on it. We will dwell on the matter more intensively this first semester (under the planned bill)," Boediono said.

Source : The Jakarta Post

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