Executive Column: Small firms need business competence, not subsidies

The Jakarta Post ,  Jakarta   |  Mon, 07/21/2008 10:34 AM  |  Business

Indonesia's micro, small and medium enterprises (MSMEs) have been the subject of a great deal of debate and skepticism. However, Tahir, chairman of the Mayapada Business Group, which operates in banking, retail trade and property development, has shown why lending to micro and small enterprises is not only profitable but also vital to strengthening the backbone of the economy.

TAHIR: (JP/P.J. Leo)

During his scientific oration he delivered upon receiving an honorary doctorate in economics from the Universitas 17 Agustus 1945 in Surabaya on July 5, Tahir spoke of how publicly-listed Bank Mayapada had expanded its lending to MSMEs while enjoying a negligible rate of bad credits.

In an interview with The Jakarta Post, Tahir spoke of his business lending philosophy, and his company's business model for the development of MSMEs, and explained how banks could make the businesses the heart of the country's economy.

Question: Most city-based banks consider lending to MSMEs costly and risky, so why has Bank Mayapada paid special attention to the sector?

Answer: Our attention to MSMEs is simply business common sense. First of all the numbers: According to the latest data at the Central Statistics Agency, MSMEs total more than 43 million in number and contribute around 50 percent to our gross domestic product. That means the sector is the highest employer as well as highly resilient and flexible in its operations.

During the 1998 economic crisis, for example, almost all the big business groups were in big trouble with mountains of bad debts. But MSMEs survived and became the main locomotive of the economy as they barely had foreign debts and their costs are based largely in rupiah.

Lending to MSMEs also diversifies our credit risks, especially as many big conglomerates with big debts are still consolidating. Data at Bank Indonesia shows that as of the end of last year MSMEs accounted for more than 50 percent of total bank credits outstanding. That is an impressive growth compared to the previous year.

Focusing on MSMEs is also part of our bank's effort to meet the tougher banking architecture requirements as designed by the central bank (BI) for 2014.

Six years from now, there will only be two to three international-class banks (with minimum capital of Rp 50 trillion (US$5.8 billion) and three to five national anchor banks (minimum capital Rp 10 trillion), supplemented by dozens of specialized banks and thousands of rural or secondary banks.

This means that many of the 130 city-based banks unable to meet the higher capital standards will have to turn into specialized banks, such as banks focusing on financing MSMEs.

Over the past four decades the government has designed and implemented various lending programs tailored specially to MSMEs, but most of them seemed to have failed miserably.

I think the approach used so far in nurturing MSMEs has been inappropriate because most of the programs emphasized subsidies and protection from market competition. This is the wrong way to nurture MSMEs.

In our experience at Bank Mayapada, MSMEs don't need charity, subsidies and excessive protection. What they mostly need is easy access to financing and technical extension services (consultancy) on various aspects of their business operations.

They don't have assets as securities for loans and they are not comfortable with, and sometimes even hate, arduous bureaucratic borrowing procedures.

So what is the business model Bank Mayapada has developed to nurture MSMEs?

We design our lending programs specifically to meet the special characteristics of MSMEs. Hence, we don't focus on collaterals but cash-flow or revenue-stream prospects based on their business feasibility.

We have developed a body of experienced experts to assess the MSMEs' commercial viability. We have opened what we call the Mayapada Business Partnership in various areas.

These business units are assigned to look out for viable MSMEs, nurture them with financial and technical assistance and constantly monitor their development and their needs as they continue to grow and expand. Each business unit also operates as a complete business advisory center. We decentralize credit assessment and decision making to these units.

We expect to operate almost 60 Mayapada Business Partnerships before the end of this year and expect to lend cumulatively Rp 600 billion to MSMEs by the end of this year.

Our rate of non-performing loans in this segment is only 0.58 percent. This means that with the right approach, MSMEs can be viable, creditworthy borrowers able to give banks fairly high net interest margins.

To put it briefly, our approach is market oriented and designed to transfer not only financing capability but, and most importantly, business competence and entrepreneurship to MSMEs.

In your scientific oration you also discussed the need for institutions that can serve as incubation centers for MSMEs.

Yes, we need more business incubators and the Universitas 17 Agustus 1945 campus is one of the right places to sell the idea. As you know, even in the U.S., small businesses still play a significant role in its economy. And many business schools in the U.S. also serve as the incubation centers for small businesses.

The European Union also has more than 900 small business incubation centers. But we in Indonesia need more such incubation centers where micro and small entrepreneurs can get training, financial assistance and consultancy services on all business issues.

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