Friends-and-family loans jeopardize microcredit scheme

from The Jakarta Post

Adisti Sukma Sawitri,

After Governor Sutiyoso secured a second five-year term in 2002, he initiated structured bottom-up development in the form of the Subdistrict Residents Empowerment Program (PPMK).

The program ensures the availability of funds to meet the obligations of the revolving loan scheme, which gives each subdistrict the opportunity to improve public infrastructure and community welfare through access to microcredit.

The program, however, has had little success in the way of ending poverty in the city.

Between 2002 and 2006, the number of people said to be earning less than the minimum provincial wage -- of Rp 800,000 on average in that period -- doubled to 675,700, or 7 percent of the population, while nearly 31 percent of the Rp 470.5 billion (US$51 million) disbursed under the revolving loan scheme was unpaid by the borrowers and, therefore, could not be relent.

Consequently, the administration has decided to delay the disbursement of funds this year and to reduce the amount to Rp 200 million for each subdistrict, or one fifth of last year's fund.

"In the early years of its implementation, people only knew the PPMK as the Jakarta administration's 'money distribution' program in which they didn't need to repay the principal," Abdul Gozali, the newly elected head of the subdistrict council of Palmerah, West Jakarta, told The Jakarta Post recently.

Councillors are chosen through community elections. They are responsible for managing the fund and selecting recipients, though many of them are either unduly pressured or out of their depth in terms of making such decisions.

It is not unusual for the loans to go to the councillors' friends.

Solihin -- an ojek (motorcycle taxi) driver living in Kemanggisan subdistrict who is looking for financial backing to open his own store -- said he had never heard of the loan scheme, though he lives near the council office.

"They (councillors and the local authorities) never told us about the loan, though they've had every opportunity to do so," he said.

The often close ties between the councillors and the borrowers -- who may be friends or relatives -- has created some "awkward conversations" between the giver and the getter and a high default rate.

Instead of using the money to start their own business, the borrower might have gone ahead and bought a motorcycle or renovated their house instead, for example.

The administration found that more than half the cases of default were caused by low awareness of the need to pay interest and repay the principal on the part of the borrowers and lack of competence in the field on the part of the lenders. The loan's interest rate is 1 percent a month, lower than the rate charged by banks

A study carried out by a team from the University of Indonesia revealed that about 16 percent of the 96,000 loans granted under the scheme went to "family and friends" who had no intention of going into business.

Often the borrowers were not required to make a proposal or even enclose a copy of their identity card due to the informal handshake nature of the loans.

Weak financial accountability also contributed to the high default rate. It was three years before the Jakarta administration requested audit reports from all 272 subdistricts in the city.

Edi Supama, who manages the program in Palmerah subdistrict, said the long audit period had made the councillors less "eager" to remind the borrowers of their obligations since many of them had either moved out of the subdistrict or gone bankrupt.

Each subdistrict council has its own accounting team to ensure all loan transactions are fully documented. Team members' salaries come out of the interest payments made by borrowers.

"We were struggling to make the report last year. So many records were inaccurate or illegible," he said.

Edi, a retired soldier, said he had learned accounting principles through experience only.

The governor's assistant for public welfare, Rohana Manggala, conceded there was room for improvement in the program.

He said the disbursement process had been delayed this year to give the administration time to improve technical guidelines to avoid loans going unpaid in the future.

For instance, the accounting teams will be required to submit an annual report and external parties will be involved in managing the funds, he said.

Rohana said the administration was "still learning" when it initiated the program four years ago.

It took a long time for the administration to ask for the reports because it was told by the consultants it hired for the program it would take more than three years to see its affects on the community, he said.

"It's OK to make those mistakes since we learn a lot from them."