Improving Access to Financial Services for Low-Income Rural Households and Microenterprises in Indonesia: The Potential for Further Development of Local Government-Owned Financial Institutions

This study draws lessons from the experiences of "local government-owned financial institutions (LDKPs)" and "village-owned financial institutions (BKDs)" in Indonesia, including those of LDKPs that have converted to "local government-owned rural banks (PD-BPRs)".

The paper states that:

• LDKPs and BKDs have proven to be sustainable and have made a strong contribution to microfinance access for rural low-income households and microenterprises;
• Understanding the potential for replication of these institutions is important for Indonesia because there remain substantial gaps in the access of Indonesian households and microenterprises to microfinance services;
• Traditional LDKPs and LDKPs converted to PD-BPRs provide credit and savings services to villages through "kecamatan"-level teams;
• BPRs still complement the services of village-level offices of a state-owned commercial bank (BRI) by serving smaller microenterprises than the BRI units would reach;
• PD-BPRs have focused on lending to salaried workers and collecting savings in urban centers, ignoring the needs of the rural population;
• Successful local government-owned microfinance institutions have been characterized by:
  • Placement of the LDKP at the lowest feasible level of local government;
  • Development of a strong relationship with a commercial bank;
  • Active avoidance of conversion to BPR status.

The study identifies two alternative courses of action that might have avoided the difficulties caused by the conversion of the LDKPs to BPRs and concludes with recommendations for provinces with and without LDKPs.