The Microbanking Division of Bank Rakyat Indonesia: A Flagship of Rural Microfinance in Asia

The case of BRI is evidence that, in a deregulated policy environment, the microfinance section of a government-owned bank can (a) be transformed into a highly profitable, self-reliant financial intermediary; and (b) turn into a major microfinance provider, offering carefully crafted microsavings and microcredit products to low-income people at market rates of interest. Making good use of government seed money and the technical assistance portion of a World Bank loan during an initial phase, it has now fully substituted savings deposits for external loans as its source of funds. With a saver outreach to 30 million accounts and a borrower outreach to 3.1 million accounts (Dec. 2003) through a network of 4,185 outlets, BRI covers its costs from the interest rate margin and finances its expansion from its profits; arrears (1 day) stood at 2.2%, the long-term loss ratio (since 1984) at 1.62%, and return on assets at 5.7%. With non-targeted loans ranging from $35 up to $5800, the BRI Microbanking Division has a portfolio of $1.7 billion in loans outstanding and $3.5 billion in savings balances: evidence of a strong demand for deposit services (Dec. 2003). Excess liquidity amounted to $1.85bn. Several lessons can be drawn from BRI's experience: Within a six-year period, 1984-89, the BRI unit system became a model case in Asia of the transformation of an ailing government-owned development bank into a viable and self-sufficient financial intermediary with ever-increasing financial resources and numbers of customers, competing successfully with a wide array of other local financial institutions. Further strength was added to BRI?s microfinance operations during the Asian financial crisis: when the Indonesian banking system collapsed, BRI?s Microbanking Division remained profitable (and probably saved the bank with its loss-making corporate lending), while attracting 1.3 million new savers during the three-month peak period of the crisis. Due to the success of its Microbanking Division, there is no doubt in BRI, which went public around to the turn of 2003/04, what the answer should be to the question, Agricultural Development Banks: Close Them or Reform Them? Yet the immense success of the BRI units in terms of profitability and savings mobilization has generated a new challenge: How to reinvest their profits, on average substantially above $100m annually since the mid-1990s, in the unit system; and how to recycle the excess liquidity, consistently between $1bn and almost $2bn annually over the past ten years, in the village economies instead of siphoning it off into other areas of operation. In the long run, both better services (?taking the bank to the people?) and deeper outreach should pay off for the BRI units. Given their high profitability, there are few, if any, economic constraints to financial innovations geared to financial deepening and poverty outreach.