The one-size-fits-all regulatory policy does not seem to work for savings and loans (S&L) cooperatives in Indonesia, and the country could benefit from Nepal’s experience with small and medium enterprises.
In Indonesia, a small S&L cooperative which has less than Rp10 million (approximately $690) of assets has to complete on the same accounting report structure as larger institutions with more than $690 million of assets. To give context to the figure, an average labourer in 17 essential sectors in Indonesia makes about $290 a month.
If we are to enforce the same regulation and supervision for all the S&L cooperatives, the smaller businesses would not survive. On the other hand, if the rules are too lenient, they could undermine market discipline with middle and large savings and loans cooperatives taking advantage of it.
Indonesia needs to learn from the success stories of the cooperatives’ movement in other countries, notably Nepal, with its similar culture and socio-economic conditions to that of Indonesia.
According to a 2013 Kathmandu University study by Nav Raj Simkhada ‘Problems and Prospects of the Cooperative Sector in Nepal for Promoting Financial Inclusion’, more than three decades after the first cooperative was established in Nepal in 1956, the country saw minimal progress in the sector of small and medium-sized enterprises.
Nepal’s Cooperative Act 1992 however specified that the government would no longer directly promote cooperatives, shifting its strategy from a top-down to a bottom-up approach. Additionally, it also prevented cooperatives from any political interference, they are forbidden from making a donation or providing financial assistance to organisations working for a political party, religion or community.
This allowed for the independent growth of cooperatives in Nepal. There are now over 30,000 small, medium and large cooperatives in Nepal with over 45 million members.
The role of women was particularly crucial in developing credit cooperatives in Nepal. For example, Women Awareness Centre Nepal (WACN) has successfully established 41 microcredit organisations consisting of 30,000 women members.
Another study conducted by Nepal Agriculture Cooperative Central Federation Ltd (NACCFL) shows that empowerment of women through cooperatives had benefited not only the individuals but their families and communities, financially as well as socially.
Indonesian small S&L cooperatives should similarly focus on building community-based members only, instead of giving in to the temptation of rushing to expand the business.
A few reliable members who know each other well can better manage the cooperative than thousands of those who are virtually strangers. Moreover, a large number of members create a large span of control wherein self-control and self-regulation are difficult to achieve.
As a collectivist culture, Indonesians would choose to deal with their S&L co-operative where they are comfortable and are treated as a family rather than with commercial banks. Members could become loyalists if they have a voice and are heard. This is fundamental for an S&L cooperative to grow sustainability.
Grants and direct subsidisation by authorities often create a beggar mentality and increase financial dependency, which is at the heart of the problem.
Irsyad Muchtar in his recent book Indonesia’s 100 Largest Cooperatives revealed that some large cooperatives tend to avoid publishing results, and are closed to the press — worried that it will shine a light on their tax evasion.
Thus, the concept of a two-tiered rules and supervision institutional framework for S&L cooperatives is more suitable for the Indonesian context. In the first tier, the Financial Services Authority (OJK) should regulate and supervise medium and large S&L cooperatives at the national level to protect large members from any potential fraud by managements and create sound business competition among credit institutions to avoid regulatory arbitrage.
In the second tier, the small S&L cooperatives should not be supervised prudentially by OJK. They need more empowerment programs conducted by the Ministry of Cooperatives and SMEs and local governments. The policy aims to increase opportunities for those to graduate to a level where they can compete with other financial institutions. We understand that small S&L cooperatives exist because they serve mainly the poor who have little or no access to formal financial services, especially since they lack collateral and a stable income.
However, the empowerment programs from the government should not be financial aids or subsidies. Robby Tulus, the former regional director of Asia Pacific International Co-operative Alliance, says that when initiating a business, the source of seed money is often the starting point for people.
In the case of Indonesia, their first choice is to look for special subsidies from the government. This is in line with some Asian governments favouring direct control and subsidisation to the small S&L cooperatives.
Tulus suggested that cooperatives must learn to focus on their competencies and deliver the best services to their members, instead of setting up the business only to get financial aids from the government and make quick money from the members.
The Indonesian government can still play an important role, it can provide continuous and intensive support programs to cooperative members, such as training on management and entrepreneurial skills, risk management, bookkeeping standards and intellectual property rights. It can also promote micro-entrepreneur members of small S&L cooperatives to potential customers as well as Indonesian-made products to empower micro-enterprises.
While undertaking these strategies collectively, Indonesia can learn from Nepal to gradually cut down on financial schemes such as interest subsidies, credit guarantee funds, and grants to small cooperatives and their members.
This will in the longer term empower the cooperatives while also reducing their dependency on the second or third parties.
Bitra Suyatno is a senior policy analyst at Indonesia’s Ministry of Finance focused on financing service business issues. Currently, he is a team member on formulating Draft Law on Development and Strengthening of Financial Sector. The views expressed are personal.