In cooperation with Bank Indonesia and the Indonesian Ministry of Finance

2005/2006 BPR & LPD Customer Satisfaction Survey

Conducted for ProFI - GTZ by Regional Economic Development Institute (REDI) and Don Johnston (Micro/SME Finance Advisor)

In cooperation with Bank Indonesia and the Ministry of Finance

Government of Indonesia

2005/2006 BPR & LPD CUSTOMER SATISFACTION

SURVEY

conducted for

The Promotion of Small Financial Institutions (ProFI) Project,

DEUTSCHE GESELLSCHAFT FÜR TECHNISCHE ZUSAMMENARBEIT (GTZ) GmbH

By

Regional Economic Development Institute

and

Don Johnston Micro/SME Finance Advisor

June 14, 2006

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Table of Contents

I. Introduction and Survey Background………………………………………. 1 A. Introduction.............................................................................................. 1 B. Customer Satisfaction Surveys................................................................. 2 C. Survey Specification................................................................................. 2 D. Survey Delivery Mechanisms.................................................................... 3

E. Survey Instruments................................................................................... 3 F. Testing Survey Instruments...................................................................... 4 G. Survey Sampling..................................................................................... 7 H. Sampling Issues in Implementation......................................................... 7 I. Sample Checking....................................................................................... 8 J. Distribution of Survey Packets to BPRs................................................... 8 K. Quality Control Survey............................................................................ 9 L. Recommendations for Future Surveys Implementation........................... 9 M. Selected Bibliography............................................................................. 11

II. Key Results, BPR Customer Satisfaction Survey…………………………. 14 A. BPR Size, Growth and Customer Characteristics.................................... 14 B. BPR Overall Customer Satisfaction......................................................... 18 C. BPR Service Satisfaction.......................................................................... 23 D. BPR Product Satisfaction....................................................................... 25 E. BPR Customer Loyalty Indicators........................................................... 29 F. BPR Customer Feedback......................................................................... 32 G. BPR Customer Values............................................................................. 34 H. Inactive/Former Customers..................................................................... 39 III. Conclusions and Recommendations, BPR Customer Satisfaction Survey.. 48

A. BPR Customer Satisfaction: Good, but Needs Improvement………….. 48 B. Areas for Improvement – and Some Problem BPRs................................. 48 C. The Payoff for Improved Satisfaction: Improved Growth and Profitability……………………………………………………….......... 49 D. Improving Customer Satisfaction – A Key Part of BPRs’ Profit and Growth Strategies…………………………………………………….… 49 E. Recommendations for Improving BPR Customer Satisfaction…………. 50 F. Implementing Service and Product Improvements: Look for Shared Solutions……………………………………………………………...… 52 G. Improving Customer Satisfaction: What BPRs Cannot Do On Their Own…………………………………………………………………….. 52

IV. Key Results, LPD Customer Satisfaction Survey A. LPD Size, Growth and Customer Characteristics.................................... 54 B. LPD Overall Customer Satisfaction......................................................... 59 C. LPD Service Quality Satisfaction............................................................. 64 D. LPD Product Satisfaction........................................................................ 65

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E. LPD Customer Loyalty Indicators........................................................... 69 F. LPD Customer Feedback......................................................................... 74 G. LPD Customer Values............................................................................. 75 H. Inactive/ Former Customers.................................................................... 79 V. Conclusions and Recommendations, LPD Customer Satisfaction Survey… 88

A. LPD Customer Satisfaction: Good, but Needs Improvement…………. 88 B. The Challenge: Repaying Outstanding Customer Loyalty with

Outstanding Service…………………………………………………… 89 C. Improving Customer Satisfaction – A Key Part of LPDs’ Growth and

Profit Strategies……………………………………………………….. 89 D. Recommendations for Improving LPD Customer Satisfaction………... 89 E. Look for Shared Solutions……………………………………………... 90

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List of Tables Table 1.1 : Terms Used for Individual Customer Satisfaction Responses………..… 5 Table 1.2 : Interpretation of Average Satisfaction Scores…………………….…….. 6 Table 1.3 : Valid BPR Customer Satisfaction Survey Responses…………….…..… 9 Table 1.4 : Valid LPD Customer Satisfaction Survey Responses.………………..… 9 Table 2.1 : BPR Size Distribution (in Million Rupiah)…………………………....… 14 Table 2.2 : BPR Account Growth (December 2004 – September 2005)………..…... 15 Table 2.3 : BPR Active Customers’ Overall Satisfaction……………………….…... 18 Table 2.4 : Distribution of Average Customer Satisfaction Scores per BPR……….. 19 Table 2.5 : Overall Satisfaction by Survey Location……………………………...…. 20 Table 2.6 : Overall Satisfaction by BPR Ownership Status………………………..... 20 Table 2.7 : Overall Satisfaction by Account Growth…………………………...…… 21 Table 2.8 : Overall satisfaction by BPR size……………………………………....… 21 Table 2.9 : Satisfaction of Passbook Savings (Tabungan) Customers by Size

Category…………………………………………………………..…….. 22 Table 2.10 : Satisfaction of Time Deposit Customers by Size Category……………... 22 Table 2.11 : Satisfaction of Borrower Customers by Size Category…………...…….. 23 Table 2.12 : Comparisons by Active BPR Customers of BPR Service Quality and Products with those of Other Financial Institutions.………………..…... 33 Table 2.12 : Comparisons by Previous BPR Customers of BPR Service Quality and

Products with those of Other Financial Institutions (FIs)………………. 44 Table 4.1 : LPD Size Distribution (in Million Rupiah)……………………………… 54 Table 4.2 : LPD Accounts Distribution……………………………………………… 55 Table 4.3 : LPD Account Growth………………………………………………….… 55 Table 4.4 : Comparison of Loans Size of LPD and BPR……………………………. 56 Table 4.5 : LPD Active Customers’ Overall Satisfaction…………………………… 60 Table 4.6 : Distribution of Average Customer Satisfaction Scores per LPD………. 60 Table 4.7 : Overall Satisfaction by Survey Method…………………………………. 61 Table 4.8 : Comparison Overall Satisfaction Distribution by Survey Method……… 61 Table 4.9 : Overall Satisfaction by LPD Size……………………………………….. 62 Table 4.10 : Satisfaction of Passbook Saving Customers by Size Category………….. 63 Table 4.11 : Satisfaction of Time Deposit Customers by Size Category……………... 63 Table 4.12 : Satisfaction of Borrower Customers by Size Category………………….. 63 Table 4.13 : Comparisons by Active LPD Customers of LPD Service Quality and

Products with those of Other Financial Institutions (FIs)………………. 73 Table 4.14 : Overall Satisfaction of Previous LPD Customers by Survey Method…... 80 Table 4.15 : Comparisons by Previous BPR Customers of BPR Service Quality and

Products with those of Other Financial Institutions (FIs)……………….. 84

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List of Figures

Figure 2.1 : Distribution of Average Monthly Household Income, BPR Customers……………………………………………………………... 16

Figure 2.2 : Distribution of BPR Customers by Gender...……………………......... 16 Figure 2.3 : Distribution of BPR Customers by Occupation...……...………..……. 17 Figure 2.4 : How Customers First Learned about their BPR…………………….… 18 Figure 2.5 : Distribution of BPR Service Quality Scores, by Service Aspect

Categories……………………………………………………………... 24 Figure 2.6 : Distribution of Loan Products Satisfaction Scores……………….…… 25 Figure 2.7 : Comparison of Satisfaction Scores on Business and Consumer Loan... 26 Figure 2.8 : Distribution of Passbook Saving Products Satisfaction Scores……...... 27 Figure 2.9 : Distribution of Time Deposit Products Satisfaction Scores…………... 28 Figure 2.10 : BPR Customers’ Plans on Using BPR Services in the Future...….…... 29 Figure 2.11 : Factors that Would Cause Customers to Leave………………….……. 30 Figure 2.12 : Customers Who Would Leave Their BPR for More Competitive Interest Rates Elsewhere, by Account Type...………………………… 31 Figure 2.13 : Comparison, Customers’ Relationships with Other Financial Institutions

by Survey Method…………………………………………………….. 32 Figure 2.14 : Areas for Improvement of BPR……………………………………..…. 33 Figure 2.15 : Financial Services/ Product Needed but Not Yet Provided by BPR…. 34 Figure 2.16 : The Importance of Service vs. Products………………………………. 35 Figure 2.17 : Aspects of Service Quality Considered Important to Customers…...… 36 Figure 2.18 : Loan Product Features Considered Important by BPR Borrowers…… 37 Figure 2.19 : Savings Product Features Considered Important by BPR Savers…….. 38 Figure 2.20 : Time Deposit Product Features Considered Important by BPR Time

Deposit Customers……………………………………………………. 38 Figure 2.21 : Comparison of Income Distribution for BPR Active & Inactive

Customers…………………………………………………………..…. 39 Figure 2.22 : Combined Classification of Inactive/Former Borrowers……………… 40 Figure 2.23 : Main Reason for Not Borrowing, Inactive v. Former Borrowers (Excludes Problem Borrowers)……………………………………….. 41 Figure 2.24 : Self-Classification of Inactive/Former Savers………………………... 42 Figure 2.25 : Self-Classification of Inactive/Former Time Deposit Customers…….. 42 Figure 2.26 : Main Reason for No Longer Saving, Inactive v. Former Savers……... 43 Figure 2.27 : Main Reason for No Longer Saving, Previous Time Deposit Customers……………………………………………………………... 43 Figure 2.28 : Previous Borrowers Who Feel that the BPR Loan Product Meets Their

Needs (By Combined Classification of Previous Borrowers)………… 45 Figure 2.29 : Suggestions for Loan Product Improvement, Previous Borrowers….... 45 Figure 2.30 : Suggestions for Savings Product Improvement, Previous Savers…...... 46 Figure 2.31 : Suggestions for Savings Product Improvement, Previous Time Deposit Customers…...…………………………………………..….... 47 Figure 4.1 : Comparison of LPD and BPR Customers by Level of Education…….. 56 Figure 4.2 : Comparison of LPD and BPR Customers by Occupation…………….. 57

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Figure 4.3 : Comparison of LPD and BPR Customers by Monthly Income...……... 57 Figure 4.4 : LPD Customers’ Most Frequent Means of Transport/Contact....……… 58 Figure 4.5 : Reasons for Becoming LPD Customers……………………………….. 59 Figure 4.6 : Distribution of LPD Service Quality Scores, by Service Aspect Categories……………………………………………………………… 64 Figure 4.7 : Distribution of Loan Products Satisfaction Scores……………………. 66 Figure 4.8 : Comparison of Satisfaction Scores on Business and Consumer Loan… 67 Figure 4.9 : Distribution of Passbook Saving Products Satisfaction Scores……….. 68 Figure 4.10 : Distribution of Time Deposit Products Satisfaction Scores…………… 69 Figure 4.11 : LPD Customers Plans on Using LPD Services in the Future…………. 70 Figure 4.12 : Possibility of Cross-Selling on LPD Customers………………………. 70 Figure 4.13 : Factors that Would Cause Customers to Leave……………………….. 71 Figure 4.14 : Customers Who Would Leave Their LPD for More Competitive Interest

Rates Elsewhere, by Account Type………………………………….. 72 Figure 4.15 : Comparison, Customers’ Relationships with Other Financial Institutions by Survey Method…………………………………………………….. 73 Figure 4.16 : Areas for Improvement of LPD……………………………………….. 74 Figure 4.17 : Financial Services/Product Needed but not yet Provided by LPDs….... 75 Figure 4.18 : The Importance of Service vs. Products for LPD and BPR Customers.. 75 Figure 4.19 : Aspects of Service Quality Considered Important to LPD Customers… 76 Figure 4.20 : Loan Product Features Considered Important by LPD Borrowers…….. 77 Figure 4.21 : Savings Product Features Considered Important by LPD Savers……… 78 Figure 4.22 : Time Deposit Features Cited as Important by LPD Time Deposit Customers……………………………………………………………… 78 Figure 4.23 : Comparison of Occupation of LPD Active & Inactive Customers……. 79 Figure 4.24 : Income Distribution, LPD Active & Inactive Customers…...…………. 80 Figure 4.25 : Combined Classification of Inactive/Former Borrowers…...………….. 81 Figure 4.26 : Main Reason for Not Borrowing, Inactive v. Former Borrowers (Excludes Problem Borrowers)………………………………………… 82 Figure 4.27 : Self-Classification of Inactive/Former Savers………………………… 82 Figure 4.28 : Self-Classification of Inactive/Former Time Deposit Customers…….. 83 Figure 4.29 : Main Reason for No Longer Saving, Inactive v. Former Savers……... 83 Figure 4.30 : Main Reason for No Longer Saving, Previous Time Deposit Customers……………………………………………………………... 84 Figure 4.31 : Previous Borrowers Who Feel that the BPR Loan Product Meets Their

Needs………………………………………………………………….. 85 Figure 4.32 : Suggestions for Loan Product Improvement, Previous Borrowers…… 85 Figure 4.33 : Suggestions for Savings Product Improvement, Previous Savers…….. 86 Figure 4.34 : Suggestions for Deposit Product Improvement, Previous Time Deposit

Customers……………………………………………………………... 87

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Appendices Appendix 1. Additional Description, Survey Methodology Appendix 2. Statistical Concepts Used in Survey Design and Analysis Appendix 3. Additional Description, Survey Implementation Appendix 4. Additional Results, BPR and BPR Customer Characteristics Appendix 5. Additional Results, Active BPR Customers Appendix 6. Additional Results, Inactive/Former BPR Customers Appendix 7. Additional Results, LPD Customer Characteristics Appendix 8. Additional Results, Active LPD Customers Appendix 9. Additional Results, Inactive/Former LPD Customers Appendix 10. Survey Instrument Package Appendix 11. Survey Sample

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List of Terms, Acronyms, and Abbreviations AO Account Officer (BPR staff) ATM Automatic Teller Machine BCA Bank Central Asia BI Bank Indonesia BMT Baitul Maal wa Tamwil (micro finance institution using syariah

system) BNI Bank Negara Indonesia BPD Bank Pembangunan Daerah BPR Bank Perkreditan Rakyat BPR-S Bank Perkreditan Rakyat Syariah BPRs Plural form of “BPR” BRI Bank Rakyat Indonesia BSF BPR Survey Finding DSP Danamon Simpan Pinjam FGD Focus Group Discussion GTZ Deutsche Gesellschaft Für Technische Zusammenarbeit HR Human Resource KTP Kartu Tanda Penduduk LPD Lembaga Perkreditan Desa LPDs Plural form of “LPD” LSF LPD Survey Finding Margin of Error Statistical term describing the accuracy of a statistical result,

presented as a number which, when subtracted and then added to the result, give the lower and upper bounds, respectively, of the confidence interval around the result

Mean Statistical term describing the average value of a result Missing Number of missing observations in a sample N Sample size Percentile Any of the 99 values that divide the sorted data into 100 equal

parts, so that each part represents 1/100th of the sample or population.

PD Perusahaan Daerah PDAM Perusahaan Daerah Air Minum PLN Perusahaan Listrik Negara PLPDK Pembina Lembaga Perkreditan Desa Kabupaten ProFI The Promotion of Small Financial Institutions PT Perseroan Terbatas QC Quality Control REDI Regional Economic Development Institute RIA Regulatory Impact Assessment SERVQUAL Service Quality standardized survey format SD Sekolah Dasar SMP Sekolah Menengah Pertama

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SMA Sekolah Menengah Atas SIUP Surat Ijin Usaha Perdagangan SME Small Medium Enterprise SMS Short Message Service Valid Observations which meet survey criteria and are used in

calculating a statistic

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I. Introduction and Survey Background A. Introduction

For a commercial institution, one of the most important factors in institutional growth and success is customer satisfaction and loyalty, which measures the ability of the institution to deliver products and services to the customer in such a way that the customer values his/her relationship with the institution and wants to continue using the institution over time, even in the presence of active competition. Increases in customer satisfaction and loyalty can serve both as a key indicator of successful institutional development and a predictor of future success, while customer feedback related to satisfaction and loyalty can help guide effective institutional development. In the world of Indonesian microfinance, where competition is strong and growing between institutional types, it is particularly important that institutions base their development on the preferences of present and potential customers.

This report presents the results of the 2005 BPR Customer Satisfaction Survey, the first national survey of customer satisfaction carried out for BPRs. Commissioned by GTZ’s ProFI project together with a parallel survey of the Lembaga Perkreditan Desa (LPDs) in Bali, the survey was conducted by a team from the Regional Economic Development Institute (REDI) working with Don Johnston, micro/sme finance advisor. This survey was carried out with support and assistance from Bank Indonesia, Perbarindo, and the LPD system; responsibility for all errors of course remains with the authors.

Because this survey is envisioned to be the first in a series of tracking surveys for

BPR (and LPD) customer satisfaction, special attention was paid to survey methodology and instrument design to ensure that the survey can be feasibly carried out again with as little modification as possible. Indeed, as will be seen below, this first round of the customer satisfaction survey included a special sub-survey, the “quality control” survey, intended to serve as a cross-check on the accuracy of the main survey.

In this report, Chapter I summarizes the methodology used in the survey design and implementation, including an explanation of why particular choices were made. The chapter presents recommendations for future survey implementation and concludes with a brief selected bibliography. Chapter II presents the key survey results of the BPR survey, beginning with an overview of BPR and BPR customer characteristics found in the survey sample. The chapter then presents the key results from the survey of active BPR customers followed by key results for inactive customers. Chapter III presents summary conclusions and recommendations based on the BPR survey. Chapters IV and V contain key survey results and conclusions, respectively, from the LPD survey.

Following the report are a number of attachments, including the full results of the

survey and the survey instruments used.

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B. Customer Satisfaction Surveys

Although not yet a routine part of doing business in Indonesia, customer satisfaction surveys are becoming fairly common in a number of fields, including banking and financial services. Such surveys are typically seen primarily as an important tool for obtaining marketing feedback to firms, though few firms appear to have developed a consistent approach to gauging and incorporating customer satisfaction and loyalty results into their corporate strategies. With SERVQUAL and similar conceptual frameworks1, survey approaches are both improving in their reliability and becoming more standardized across industries, making it easier to successfully implement such surveys.

Within the field of microfinance, the past three years have seen substantial progress worldwide in effectively measuring customer satisfaction or loyalty and obtaining customer feedback, with a number of institutions eager to share (at little or no cost, often via the Internet) their knowledge and experience with the microfinance industry as a whole. So far, though, very little of this knowledge has been applied to microfinance in Indonesia, where most institutions appear to develop without a systematic attempt at learning from their customers. Fortunately, this may be beginning to change, as institutions such as Danamon Simpan Pinjam (DSP) demonstrate how market research can identify strong opportunities in microfinance segments previously thought to be relatively mature. C. Survey Specification The starting point for this survey is slightly different from the typical case of a microfinance institution wanting to get useful feedback from its customers. In this case, customer satisfaction and loyalty are being measured across whole classes of institutions, namely Bank Perkreditan Rakyat (BPRs) and Lembaga Perkreditan Desa (LPDs). Thus, the feedback gained can be used to gauge customer satisfaction and loyalty for BPRs as a whole but would not necessarily provide a blueprint for the development of any one individual BPR. In addition, one of the motivating factors leading GTZ to commission this study is the desire to use customer satisfaction as “a verifiable indicator for achievement of impact.” It is hoped that, over time, analysis of trends in customer satisfaction through the implementation of future survey rounds can provide a useful guide to the effectiveness of policy guidance and institutional support for BPRs as a whole. In the case of this survey, it was determined that the primary needs of the client and other key stakeholders call for results which are:

• broadly representative of the microfinance institutions overall, • consistently replicable over time, and • quantitative in nature, allowing reliable analysis of trends and development.

1 For further detail, please see the selected Bibliography in Chapter I, section M.

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The survey team has thus designed survey delivery mechanisms, survey

instruments, and the survey sampling approach with these needs in mind. D. Survey Delivery Mechanisms Because this is the first time a customer satisfaction/loyalty survey has been carried out on such a wide scale in Indonesia, the survey actually incorporated two delivery mechanisms. Based on the need for a broad sample at relatively low cost, the main survey was conducted by the institutions (LPDs or BPRs) themselves using a packet of materials and instructions sent to them. This packet was developed and field tested (in multiple rounds) by the survey team to ensure that the staff and management of a typical BPR or LPD would be able to understand clearly how to properly conduct the survey. Clarity was one concern, and here the team can justifiably claim some success in its combination of field-tested materials and easily accessible help by telephone and SMS. Another concern, and one less amenable to preventive measures, was the possibility of bias – that self-administered surveys might cause the responding institutions to look “too good.” Because the causes of this sort of bias can be quite subtle (from sample selection bias of various kinds to verbal prompts, facial expressions, or other “assistance” given customers in responding to the survey), it was felt necessary to cross-check the results from the institution-administered (“mail-out”) approach. 2 Thus, the “Quality Control” sample set out to administer the same survey following the same instructions – but in this case the actual interviews were conducted by the survey interview team. 25 BPRs from Java/Bali and 10 LPDs were selected for the “Quality Control Sample” representing a wide range of characteristics. Due to time limitations in the field, the actual number of BPRs included in the Quality Control sample was 23; the team was able to achieve its goal of 10 LPDs. E. Survey Instruments

For this survey, the team created a number of specialized instruments (attached as Appendices) for data collection, drawing from international best practice in customer satisfaction surveys for microfinance (see Selected Bibliography). The instruments created consist of the following:

• BPR Institutional Information Instrument – quantitative and descriptive information

about the BPR, primarily for use in gauging differences in average levels of satisfaction for BPRs with different characteristics, including growth.

• BPR Active Customer Instrument – the “flagship” instrument; basic information relating to satisfaction and loyalty among active customers, with an emphasis on

2 The finding related to bias for BPR survey is presented in Appendix IV, page 2. In short, there is no evidence that the mail out surveys resulted in higher recorded levels of customer satisfaction. Positive bias in the case of the LPDs is discussed in Chapter IV, LPD Survey Finding # 9.

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understanding the driving factors behind satisfaction as well as obtaining some simple feedback.

• BPR Inactive/Former Customer Instrument – a smaller sample than the active customer instrument, but still important. Here, the idea is to understand why people stop using BPR services. This instrument places a slightly heavier emphasis on feedback.

• Modified BPR Institutional Information, Active Customer, and Inactive/Former Customer Instruments for Syariah BPRs These instruments are nearly identical to the first three, with the exception of some small modifications to questions related to interest rates and financing costs. Results obtained are fully comparable to those in the survey for “conventional” BPRs.

• Modified Institutional Information, Active Customer, and Inactive/Former Customer Instruments for LPDs

• Customer Sampling Instructions for BPRs and LPDs – though not an instrument per se, the instructions required as much effort and field-testing as the questionnaires.

F. Scoring Approach: Quantifying the Level of Customer Satisfaction

Individual Responses

In the development of the survey instruments, one of the key decisions concerned how best to quantify the level of satisfaction of individual customers. Following field tests and focus group discussions with BPR customers as well as discussions with BPR staff who acted as enumerators in the field tests, the following three results emerged as crucial in obtaining clear, consistent results from customers:

• Customers should be presented with a limited number of choices3, • Each choice should have a defined meaning4, and • The set of choices should not include a neutral response5.

Accordingly, the team developed the following four point scale in measuring customer satisfaction:

3 In the course of the field tests, the team introduced several different scoring approaches to customers to gauge their response. Both continuous scale responses and a large number of choices (ie, on a scale of 1 – 10) were rejected as unworkable, leading to inconsistent responses and difficulty in explaining to customers. 4 The most important benefit of a specific defined meaning for each response was found in the relative consistency both in the ways the survey enumerators (for the mail-out sample, BPR/LPD staff) asked the questions and in the responses of the customers. 5 When tested, the presence of a neutral response appeared to encourage respondents to avoid giving a positive or negative reaction even when informal conversation indicated that the customer did indeed have a positive or negative opinion. There also appeared to be some confusion between the idea of a neutral response (neither positive nor negative – not good if one wants customers who are satisfied) response and a response of “biasa,” meaning usual or typical. Though somewhat ambiguous, responses of “biasa” during field testing were usually meant to be mildly positive.

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Table 1.1: Terms Used for Individual Customer Satisfaction Responses

Bahasa Indonesia Term Used in Survey

English Translation

Points on Response Scale

Tidak Puas Dissatisfied 1 Kurang Puas Unsatisfied 2

Puas Satisfied 3 Sangat Puas Very Satisfied 4

“Tidak Puas” (“Dissatisfied”) is a very negative and, as will be seen, unusual result. “Kurang Puas” (literally “less satisfied,” but translated here as “Unsatisfied”) is a less extreme but still clearly negative response in Indonesian common usage. “Puas” is positive but with little enthusiasm, while “Sangat Puas” implies a degree of enthusiasm, more or less offsetting “kurang puas.” Average Responses Although individual responses could (and did) range between 1 and 4, average responses – for the whole sample, subsamples, and individual BPRs or LPDs – fell in a much narrower range, and the interpretation of average responses needs a different scale. In this survey, average responses almost always fell in the range of 2.7 – 3.5, with most scores falling between 2.8 and 3.2. This should come as no surprise; in a competitive environment, one expects most active customers to be satisfied. The table below provides a guide to interpreting the average response scores found in this survey. As an aid to readers, the following table includes columns describing how the team would grade average scores according to the 10-point Indonesian school grade scale as well as a typical high school or university letter grade scale. Readers are of course invited to draw their own conclusions from the data.

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Table 1.2: Interpretation of Average Satisfaction Scores

Typical Distribution of Responses Leading to Score6 Average

Response Score Range

Indonesian School Grade

Equivalent

Letter Grade Equivalent %

Dissatisfied %

Unsatisfied %

Satisfied % Very

Satisfied

Description / Interpretation7

< 2.8 1 – 4 F 5% 20% 75% -- High % of dissatisfied/ unsatisfied customers, indicates very poor satisfaction performance

> 2.8 – 2.9 5 D -- 15% 85% --

Significant % of dissatisfied/ unsatisfied customers with few or no very satisfied cust’s, indicates poor satisfaction performance

> 2.9 – 3.0 6 C -- 7.5% 90% 2.5%

Dissatisfied/unsatisfied customers slightly outweigh or just balance very satisfied, performance not bad but needs improvement

> 3.0 – 3.1 7 B -- 2.5% 90% 7.5%

Very satisfied customers outweigh dissatisfied/ unsatisfied, indicates good performance with room for improvement

> 3.1 – 3.2 8 B+ -- -- 85% 15% Healthy % of very satisfied customers, few unsatisfied/dissatisfied, very good satisfaction performance

> 3.2 – 3.5 9 A -- -- 65% 35% High % of very satisfied customers, very few unsatisfied/ dissatisfied, excellent satisfaction performance

> 3.5 10 A+ -- -- 40% 60% Majority of customers very satisfied, indicates nearly perfect performance

6 The distribution of responses shown here corresponds to the mid-point of the indicated range except for the first and last categories, which are based on scores of 2.7 and 3.6, respectively. The distributions shown here are based on actual distributions of individual BPR overall satisfaction scores. 7 The remarks in this column represent the survey analysts’ application of typical customer satisfaction norms to the Indonesian microfinance context. Since there is necessarily a subjective element to interpreting the scores, readers are invited to draw their own conclusions based on the data.

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G. Testing survey instruments

Testing of the survey instruments was carried out via Focus Group Discussion (FGD) and discussion with the management/staff of 5 BPRs, 2 in Bali and 3 in East Java, in addition to 2 LPDs in Bali. FGDs yielded valuable input for improving the survey instruments, both from BPR and LPD customers as well as BPR and LPD management. FGDs in Bali were carried out during 24-26 Oktober 2005, while FGDs in East Java were carried out during 29 Oktober – 1 November 2005. Finalization of the survey instrument was carried out in the first and second weeks of November. H. Survey Sampling

BPR -Conducted (Mail-Out) Sample Because this was a new survey with considerable uncertainty regarding how many BPRs

would actually return the surveys, it was determined that a relatively large sample of 200 BPRs would be randomly selected from the full list of BPRs. Even with non-returns of up to 40%, it was projected that this would allow more than enough responses to draw statistically significant conclusions, assuming that non-returns were themselves randomly distributed.

For LPDs, it was determined that a province-wide sample of 80 LPDs would be randomly

selected from the full list of LPDs. It was felt that this sample number could safely be lowered because 1) LPDs would show less variation among themselves than do BPRs (this turned out not to be completely correct, with LPDs showing a great deal of variation in certain aspects), and 2) the percentage of returns would likely be higher (this turned out not to be true, and the lower number of returns increased the margin of error for LPD survey results beyond both the projected level and the corresponding level for the BPR survey).

Institutional Categories and "Oversampling"

For comparative purposes, it is relatively simple to divide a sample into two parts based

on a relative characteristic, such as large v. small BPRs or fast-growing v. slow-growing institutions. Absolute characteristics, on the other hand, can at times present more difficulties, particularly when the defined trait is relatively rare – there simply may not be enough responses with the given trait to allow statistical valid comparisons.8

It was projected that a minimum of 12 valid responses per category would be needed to

allow statistically valid comparison. Therefore, the goal in each case was to ensure that at least 20 institutions (again, to allow for up to 40% non-returns) be selected in each category of interest. When random sampling from the whole population produced less than 20 BPRs or LPDs in a category, "oversampling" (selection of additional BPRs or LPDs with the desired characteristic) was to be employed. For further details, please see Appendix 2.

8 More precisely, there may not be enough responses to tell whether apparent differences are statistically significant. In this study, a 95% level of statistical significance is used throughout.

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Survey Respondents

Each institution was asked to interview 40 active customers at random. Under typical conditions, this would be enough customers to determine a reliable average level of satisfaction for each LPD or BPR sampled. In addition, each BPR was asked to conduct interviews with 3 past/inactive borrowers and 3 past/inactive savers using the questionnaires provided. The sample of inactive/ former customers was set smaller because it was felt that there was little value added in obtaining reliable inactive/former results for each LPD or BPR sampled; an overall picture was considered sufficient.

Quality Control Survey Because it was felt that there was a possibility of bias or quality problems in the mail-out approach, the survey team also carried out a quality control survey, a smaller, parallel survey of BPRs and LPDs conducted directly by the survey team from REDI. Here, the quality control survey confirmed the overall validity of the mail-out survey results. BPR willingness to participate in the quality control survey, where survey teams arrived on site and did most of the survey work, exceeded 80%. For further details, please see Appendix 3. I. Survey Accuracy and the Margin of Error For the most important results presented in this survey, a margin of error is presented in order to help the reader gauge how accurate the result really is. Even when a survey is carried out correctly (i.e., random sampling, avoiding sources of response bias, etc.), we cannot expect the survey results to exactly match “the real world.” We do, though, expect the survey results to be close to the actual figures; the actual results should fall within the margin of error around our survey results. In this survey, we have followed the rule that the margin of error should reflect a 95% level of confidence; that is, we expect the “real world” figure to fall within the margin of error around our survey results 95% of the time, or 19 out of 20 tries. For more information about margins of error and how they were used and calculated in this survey, please see the Statistical Appendix. J. Sample Checking

As part of its effort in checking BPR names and contact information, REDI survey team members attempted to contact every conventional or syariah BPR on the sample list by telephone. A secondary reason for doing this was to establish “human contact” with the sample BPRs in order to encourage BPRs to respond in a timely manner and establish a contact in case the BPR staff encountered questions or problems with the survey. The survey team estimates that without this systematic telephone contact, the response rate would have been roughly half the 61% rate actually achieved. A letter from Bank Indonesia, while necessary, would not have been sufficient by itself to achieve a high response rate.

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For the LPD survey, the team relied heavily upon the PLPDK for ensuring responses from the sample LPDs. This was only partially successful, resulting in a 62.5% response rate. K. Valid Survey Responses

The following tables show the actual numbers of valid responses achieved in the survey.

Table 1.3: Valid BPR Customer Satisfaction Survey Responses

Survey Method BPRs Active Customers Inactive

Customers Total Customers

Mail out 126 84.6% 4,919 84.1% 716 83.7% 5,635 84.0%Quality Control 23 15.4% 931 15.9% 139 16.3% 1,070 16.0%Total 149 100.0% 5,850 100.0% 855 100.0% 6,705 100.0%

Table 1.4: Valid LPD Customer Satisfaction Survey Responses

Survey Method LPDs Active Customers Inactive Customers Total Customers

Mail out 50 83.3% 1,391 81.1% 313 83.7% 1,704 81.6%Quality Control 10 16.7% 324 18.9% 61 16.3% 385 18.4%Total 60 100.0% 1,715 100.0% 374 100.0% 2,089 100.0%

L. Recommendations for Future Survey Implementation Based on its experience in carrying out the customer satisfaction survey, the team presents the following recommendations for future survey rounds: BPR Customer Satisfaction • For internal, research and general public use, it is recommended that Bank Indonesia and/or

Perbarindo establish a publicly available and up-to-date directory of BPRs, both conventional and syariah (BPR-S). Such a directory would be enormously beneficial to stakeholders and the general public.

• It is recommended that in the future the customer satisfaction survey be carried out no later than mid-year, with the expectation that some responses will be quite late. In this round, late starters were discouraged from participating when they faced the double burden of conducting the survey among their customers while closing their books and preparing reports at the end of the year.

• Given the length and relative complexity of the survey questionnaire, it is recommended that an interview-based approach be continued in future iterations. Overall, BPR and LPD personnel performed well as survey enumerators, and none of the questions appeared to be consistently difficult for respondents to answer.

• While the survey results validated the mail-out approach, the response rate must always be an area of concern. Following substantial effort at individual follow-up by telephone and e-

10

mail/fax and the offer of lottery prizes for responding institutions, the response rate slightly exceeded 60% for both the BPRs and LPDs. Had the team not undertaken this level of follow-up, the response rate would have been far lower, perhaps half this figure. It is therefore recommended that future mail-out surveys continue to incorporate careful “socialization” and follow-up measures in cooperation with the key stakeholders, particularly Perbarindo and Bank Indonesia.

• A higher response rate, more than 80%, was achieved in the quality control survey, where survey teams from REDI relieved BPR and LPD staff of most of the field work. However, this higher response comes at a much higher cost per institution surveyed and is not recommended as the main approach for future survey rounds. In addition, any future customer satisfaction surveys by outside interviewers will need to take steps to minimize the possibility of “positive bias,” the effects of which are detailed in the following chapters. Future efforts at quality control will be better directed at monitoring the conduct of the mail-out survey rather than conducting a survey in parallel.

• For analysis purposes, the running of a comparable survey on the LPDs and BPRs was extremely useful. In the future, this benefit can be generalized by interviewing a sample of non-customers and users of other microfinance institutions.

• In the survey analysis, comparison of satisfaction and importance indicators turned out to be very important in developing recommendations; in the future, the survey instrument needs to be modified to take better advantage of this.

• For future rounds, the instrument should also be modified slightly to allow a more specialized analysis of new customers.

LPD Customer Satisfaction • The LPD system as it exists provides good basic information on the number, location, and

characteristics of LPDs for sampling purposes. It would still be helpful, though, if a complete, up-to-date directory of LPDs were produced and made available.

• It is recommended that sample size for future LPD survey rounds be increased; increasing the sample size to 160 (which would produce an estimated 100 valid responses) would improve the accuracy of the survey results by approximately 29% and allow more comparisons across different types of LPDs.

• Working through the local PLPDK (Kabupaten-level LPD supervisory committee) is instrumental but did not significantly reduce the level of follow-up required in order to obtain a response rate of more than 60%. It is therefore recommended that future survey rounds plan on the same level of follow-up for LPDs as for BPRs.

• The team’s experience with this survey round suggests that, on average, the need for pre-survey training, and quality-related supervision of participating LPD staff appears to be greater than that needed for the BPRs, and this should be reflected in future survey planning.

• As with the BPR survey, the validity of the mail-out survey approach was confirmed in the survey results, implying that this approach can be continued and that future quality control efforts can focus on monitoring how the mail-out survey is conducted rather than on running a parallel survey.

11

M. Selected Bibliography “Counting (on) Your Prospective Clients: Guiding Principles in Measuring Microfinance Client Satisfaction and Loyalty,” MFC Spotlight Note No. 8, Microfinance Centre for Eastern Europe and the Newly Independent States, www.mfc.org.pl, February 2004. Darmawati, Atik, “Trik Penerbit Kartu Kredit: dari Sensasi ke Inovasi,” InfoBank No. 309, Desember 2004, page 32-35. --------, “Raih Loyalitas: Dari Inovasi Hingga Adu Gengsi,” InfoBank No. 321, December 2005, page 34-38. --------, “Aksesibilitas Halangi Loyalitas,” InfoBank No. 321, December 2005, page 40-42. Djalil, Mucharor, “Customer Satisfaction Asuransi Jiwa,” InfoBank Special Issue No. 308, November 2004, page 63. --------, “Survei Kepuasan dan Loyalitas Nasabah Asuransi Jiwa Indonesia,” InfoBank Special Issue No. 308, November 2004, page 64-68. --------, “Nasabah Tabungan dan Kartu Kredit: Antara yang Loyal dan Kutu Loncat,” InfoBank No. 309, Desember 2004, page 12-16. --------, ”Nasabah Mulai Gelisah: Bank mana yang Nasabah Tabungan, Kartu Kredit, dan Syariahnya Paling Loyal,” InfoBank No. 321, December 2005, page 12-16. Ferdian, Rully, “Kearifan Komunikasi yang Menghindari Trauma,” InfoBank Special Issue No. 308, November 2004, page 69. ---------, “Pelayanan yang Melebihi Harapan Tertanggung,” InfoBank Special Issue No. 308, November 2004, page 78-79. ---------, “Ekspektasi Nasabah Sejalan dengan Teknologi,” InfoBank Special Issue No. 308, November 2004, page 80. ---------, “Satisfaction Sudah Usang,” InfoBank No. 309, Desember 2004, page 20-23. --------, “Loyalitas Nasabah dalam Taruhan,” InfoBank No. 321, December 2005, page 11. Hasanuddin and Subkhan, Farid, “Loyalitas Nasabah Bank: dari Rasional hingga Emosional dan Spiritual,” InfoBank No. 321, December 2005, page 18-23. Hudson, Rob, “An In-Depth Quantitative Assessment of the Ugandan Microfinance Environment,” research report produced for Microsave (www.microsave.org) by TMS Financial, April 2003.

12

Iskandar, Tofik, “Bagaimana Menarik dan Mempertahankan Nasabah?,” InfoBank No. 321, December 2005, page 44-47. Kurniasih, Apriyani, “Tidak Ada yang Bisa Sempurna,” InfoBank Special Issue No. 308, November 2004, page 70-71. --------, “Komplain: Kesempatan Memperbaiki Diri,” InfoBank Special Issue No. 308, November 2004, page 72-73. --------, “Sangat Pentingnya Tahu yang Dipikirkan Customer,” InfoBank Special Issue No. 308, November 2004, page 76-77. --------, “Menggiring Loyalitas dengan Fleksibilitas,” InfoBank No. 321, December 2005, page 32-33. Kristopo, “Meloyalkan Penabung dengan Hadiah dan Tanpa Hadiah,” InfoBank No. 309, Desember 2004, page 26-29. --------, “Kuncinya Pelayanan Maksimal dan Hadiah Menarik,” InfoBank No. 321, December 2005, page 26-30. “Market Intelligence: Making Market Research Work for Microfinance,” Accion InSight Note No. 7, October 2003, www.accion.org. MicroSave Market Research for [Micro] Finance Toolkit, www.microsave.org, 2004. This website also contains a number of useful links and briefing notes related to market research for microfinance. Mohammad, Karnoto, “Menimbang Loyalitas Nasabah,” InfoBank No. 309, Desember 2004, page 11. --------, “Bank Buana, Jawara Loyalitas Penabung,” InfoBank No. 309, Desember 2004, page 24-25. --------, “Menonton Perang Bunga dengan Penabung Setia,” InfoBank No. 321, December 2005, page 24-25. Mussry, Jacky, Hasanudin, and Farid Subkhan, “Era Baru Pengukuran Loyalitas dari Satisfaction hingga Enthusiasm,” InfoBank No. 309, Desember 2004, page 18-19. Ratnawati, Enny, “BCA di Puncak Tangga Nasabah Kartu Kredit,” InfoBank No. 309, Desember 2004, page 30-31. Saskiawardani, Ninuk, “Membanding-banding Tiga Survei Pelayanan,” InfoBank No. 309, Desember 2004, page 36-38.

13

“Service Quality,” (http://ils.unc.edu/daniel/131/servicequality.html) a brief note summarizing the SERVQUAL survey research framework described in Zeithaml, Parasuraman & Berry, Delivering Quality Service: Balancing Customer Perceptions and Expectations, Free Press, 1990.

14

II. Key Results, BPR Customer Satisfaction Survey A. BPR Size, Growth and Customer Characteristics BSF-1: BPRs are financial SMEs.

Although this is well known among many policymakers, the survey confirmed that most BPRs are quite small, with three-fourths of the BPRs sampled reporting total assets of less than Rp 7.3 billion (September 2005, see table below). All but five of the BPRs sample had equity of less than Rp 10 billion, one of the statutory criteria defining a medium-scale enterprise.9 Commercial services, unless they are pooled or shared among many BPRs, will therefore tend to be at ‘SME’ price and quality levels and may not match the services and terms available to larger financial institutions.

Table 2.1: BPR Size Distribution (in Million Rupiah)

BPR Size Characteristics

Total Assets Per September 2005

Profit Per September 2005

Equity per September 2005

Valid 141 141 131N Missing 8 8 18

Mean 8,122 252 1,382 Margin of Error ± 2,696 ± 98 ± 407

1 140 -641 0.2 25 2,067 32 265 50 3,397 94 635 75 7,267 256 1,447

Percentiles

99 120,136 4,270 15,237 BSF-2: While most BPRs are still growing in terms of total customers, 36% of BPRs show decreases in total savings and loan customers. This table presents growth figures for the number of customers in the sampled BPRs. Growth in the number of customers is an important indicator of the attractiveness of a financial institution and often reveals information that is obscured by rupiah growth figures. In microfinance institutions, there are a number of short-term factors which can cause rupiah figures to increase without an increase in the number of customers. For loans, these include increases in the average loan term, compensating for past shortages in funding, inflation and post-inflation “catching up” by customers. In the long run, though, growth per customer in most financial institutions is unlikely to far exceed the rate of nominal GDP growth, implying that faster growth requires increasing the number of customers.

9 Instruksi Presiden (Inpres) No. 10, 1998. This definition would also deduct the value of land and buildings (not undertaken here).

15

While average BPR growth appears fairly healthy, 36% of BPRs are losing customer accounts. The table below breaks down customer growth figures by account type and presents a summary distribution of account growth among BPRs:

Table 2.2: BPR Account Growth (December 2004 – September 2005)

BPR Account Growth

Characteristics

Passbook Saving Accounts

Time Deposit Accounts

Loan Accounts

Total Account Growth

Valid 139 137 138 135 N Missing 10 12 11 14

Mean 9.5 % 20.8 % 3.7 % 4.7 % 1 -71.2 % -85.5 % -87.8 % -54.0 %

25 -1.4 % -12.0 % -7.6 % -3.1 % 50 4.7 % 4.8 % 1.9 % 4.5 % 75 13.2 % 22.6 % 17.0 % 11.1 %

Percen-tiles

99 275.0 % 1,168.9 % 83.4 % 88.8 % BSF-3: BPRs serve mainly low-income individuals and households; 58% of BPR customer households have incomes less than or equal to three times the average household poverty line. Approximately 11% of BPR customer households are poor. The chart below presents the distribution of average monthly household income for BPR customers (borrowers and savers). To put the categories into perspective, Indonesia’s 2005 individual rural poverty level multiplied by respondents’ average family size would produce an “average family poverty line” of approximately Rp 490,000, almost identical with the Rp 500,000 category dividing line used in this survey. The approximately 11% of BPR customer households in poverty is less than the 16% of all Indonesians in poverty, indicating that BPR customers are somewhat better off than non-customers. However, 58% of BPR customer households have household incomes less than or equal to three times the poverty line.

16

Figure 2.1: Distribution of Average Monthly Household Income, BPR Customers

10.9%

47.0%

26.0%

10.0%

6.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

<= Rp 500.000 > Rp 500.000 - 1.5million

> Rp 1.5 million - 3 million

> Rp 3 million - 5million

> Rp 5 million

BSF-4: 42% of BPR customers are women.

Figure 2.2: Distribution of BPR Customers by Gender

58%

42% Male Female

17

BSF-5: 58.5% of BPR customers own a non-farm enterprise. Although most BPRs are located outside cities, only 6.5% of customers are farmers.

Figure 2.3: Distribution of BPR Customers by Occupation

1.7%

5.8%

6.5%

13.4%

14.1%

58.5%

0% 10% 20% 30% 40% 50% 60% 70%

Students

Other

Farmers

Private company employee

Public servant

Private sector

For additional details on BPR customer characteristics, please see Appendix 4.

BSF-6: BPR customers tend to be borrowers first, savers second.

Even though many borrowes have become savers, 60% of customers were first attracted to their BPR by the prospect of borrowing, while less than 40% were first attracted to their BPRs in order to save.

18

BSF-7: Direct contact and word-of-mouth promotion are still the dominant means of learning about BPRs. Formal advertising plays only a very small role.

Figure 2.4: How Customers First Learned about their BPR

1.3%

3.2%

5.8%

7.5%

12.4%

21.2%

48.5%

0% 10% 20% 30% 40% 50% 60%

Other

Leaflet, brochures, banner, advertisement in radio or newspaper

Business Partners

Saw the BPR when passing by

Family

Friend

BPR Staff

B. BPR Overall Customer Satisfaction BSF-8: On average, BPRs do fairly well in overall customer satisfaction. The average overall satisfaction score of 3.07 is enough to earn the BPR industry a solid B grade, qualifying as “good performance but with room for improvement.”10

Table 2.3: BPR Active Customers’ Overall Satisfaction

Mean Satisfaction Score 3.07Margin of Error ± .01Sample size 5,529School Letter Grade Equivalent B

Satisfaction Responses Distribution

Dissatisfied = 1 0.2%Unsatisfied = 2 3.1%Satisfied = 3 86.3%Very Satisfied = 4 10.4%Total 100.0%

10 For an explanation of the scoring system, see Chapter I, section F, “Scoring Approach: Quantifying the Level of Customer Satisfaction.”

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BSF-9: Almost 97% of BPR customers are either satisfied or very satisfied overall with their BPRs.

Overall, 86% of customers are satisfied with their BPR, with 10% very satisfied. Only 3% are unsatisfied, and 0.2% of customers are dissatisfied.

While this is a solid result, it also serves as a warning signal for an industry striving for excellence in customer service. One rule of thumb in marketing is that to be healthy, growing and assured of positive referrals, firms need 20% of their customers to be enthusiastic (ie, very satisfied) about their services. Overall, the BPR industry is still far from this benchmark, though many of the best BPRs are achieving it (see below). BSF-10: Customer satisfaction is very different between the best and the worst BPRs, BSF-10a: The bottom 25% of BPRs have more ‘unsatisfied’ than ‘very satisfied’ customers (most are still simply ‘satisfied’), an extremely unhealthy position for a service organization. BSF-10b: On the other hand, the top 25% of BPRs have very healthy levels of customer satisfaction, usually with 20% or more of their customers in the ‘very satisfied’ category.

Table 2.4: Distribution of Average Customer Satisfaction Scores per BPR

BPR Percentile

Ranking

N = 149 BPRs

Overall satisfaction score

School Grade Equivalent

Letter Grade Equivalent

1 (low) 2.68 1 – 4 F 10 2.93 6 C 20 2.97 6 C 25 3.00 6 C 30 3.00 6 C 40 3.02 7 B

50 (median) 3.05 7 B 60 3.07 7 B 70 3.13 8 B+ 75 3.15 8 B+ 80 3.18 8 B+ 90 3.24 9 A

99 (high) 3.54 10 A+

20

BSF-11: Customers of BPRs off Java/Bali are more satisfied than those on Java or Bali. BPRs off Java/Bali earned a satisfaction score of 3.11 (B+), compared to 3.06 (B) for BPRs on Java/Bali.

Table 2.5: Overall Satisfaction by Survey Location

Distribution of Results

Survey Location Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Java 3.06 ± 0.01 3932 .2% 3.5% 86.6% 9.7%Bali 3.07 ± 0.03 597 .2% 2.2% 88.1% 9.7%Off Java/Bali 3.11 ± 0.02 1000 .0% 2.4% 83.9% 13.7%Total 3.07 ± 0.01 5529 .2% 3.1% 86.3% 10.4%

Judging from the background data, at least part of the reason for this may be that there is

less competition. There was no difference in the average satisfaction of BPRs located in cities (kota) v. those in towns or rural areas (kabupaten). For full details, see Appendix 3. BSF-12: PT BPRs on average have higher customer satisfaction than either PD BPRs or Cooperative BPRs. PT BPRs earned 3.09 (B), compared to 3.03 (also B) for PD BPRs. Overall, customers of PT BPRs (almost all privately owned, though a very few local government-owned BPRs are also PTs) show a significantly higher level of overall satisfaction than do customers of PD (local government-owned) PD BPRs. On average, PT BPRs also have a higher proportion of enthusiastic customers than do either PD or cooperative-owned BPRs. The figures presented below can also be interpreted as indicating the difference in average satisfaction between publicly owned (PD) and privately owned (PT) BPRs. Since the BPRs sampled included only one publicly-owned PT BPR, it was not possible to measure whether satisfaction for publicly-owned PT BPRs was higher than for PD BPRs.

Table 2.6: Overall Satisfaction by BPR Ownership Status

Distribution of Results

BPR Status Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) PD 3.03 ± 0.02 1627 .2% 4.5% 87.0% 8.2%PT 3.09 ± 0.01 3752 .2% 2.4% 85.8% 11.6%Cooperative 2.99 ± 0.05 150 .0% 6.0% 89.3% 4.7%Total 3.07 ± 0.01 5529 .2% 3.1% 86.3% 10.4%

21

BSF-13: BPRs with faster account growth do not show higher overall satisfaction on average.

Breaking the sample down by account growth, there is no statistical difference between the average satisfaction of BPRs with declining numbers of total accounts and those which are growing. Other factors (e.g., market size, competition, attractiveness to new customers, etc.) appear to drive BPR account growth. For further details, see Appendix 4.

Table 2.7: Overall Satisfaction by Account Growth

Distribution of Results

Account Growth Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Slow 3.06 ± 0.02 1686 .1% 2.9% 88.2% 8.8%Medium 3.08 ± 0.02 1462 .3% 4.4% 82.6% 12.7%Fast 3.08 ± 0.02 1930 .2% 2.0% 87.8% 9.9%Total 3.07 ± 0.01 5078 .2% 3.0% 86.5% 10.4%

BSF-14: Small BPRs (here, BPRs with total assets of up to Rp 2.5 billion) have an average customer satisfaction score of 3.04 (B). This is significantly lower than the 3.08 average score for medium or large BPRs.

Table 2.8: Overall Satisfaction by BPR Size

Distribution of Results

Asset Size Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Large 3.08 ± 0.02 1756 .2% 2.7% 86.0% 11.1%Medium 3.08 ± 0.02 1819 .2% 2.1% 87.1% 10.7%Small 3.04 ± 0.02 1655 .2% 4.8% 85.9% 9.0%Total 3.07 ± 0.01 5230 .2% 3.2% 86.4% 10.3%

Breaking the sample down by size of BPR, the smallest category of BPRs (those with total assets <= Rp 2.5 billion) has significantly lower customer satisfaction than either the medium or large categories. There is no difference at all between average satisfaction at medium (> Rp 2.5 billion up to Rp 5.2 billion) BPRs and large BPRs (total assets > Rp 5.2 billion). In explaining this finding, two factors may have been involved: first, some of the smallest category of BPRs may experience difficulties with liquidity at times, reducing customer satisfaction. Second, the minimum capital requirement may be working against the smallest BPRs by requiring them to hold more capital than prudence alone (in the form of the CAR) would dictate. This in turn would tend to reduce the efficiency and raise the margins needed at the smallest BPRs, thus affecting customer satisfaction. Technology is unlikely to be involved, since larger BPRs do not at present have access to technology significantly different from that

22

used by smaller BPRs. While these possibilities may not be the only factors involved, regulatory measures raising the minimum efficient size of a BPR (e.g., an increase in the minimum capital requirement beyond that needed for medium-scale BPRs) appear likely to decrease customer satisfaction in the smallest BPRs. BSF-15: Large BPR savers are more satisfied than small savers, giving BPRs a 3.11 (B+) score on average compared to an average score of 3.06 (B) for small savers. Small savers (defined here as the bottom third of the distribution of accounts by size, namely those with balances of Rp 200,000 or less) are significantly less satisfied than large savers (defined here as the top third of accounts by size, with balances > Rp 1.28 million). Using a different different size definition to create smaller groups of the smallest and largest customers (not shown) did not affect the result.

Table 2.9: Satisfaction of Passbook Savings (Tabungan) Customers by Size Category

Distribution of Results Type of Passbook Saving

Customer Mean Margin

of Error N Dissatisfied (=1)

Unsatisfied (=2)

Satisfied (=3)

Very Satisfied

(=4) Small Saver 3.06 ± 0.02 996 0.4% 1.9% 88.9% 8.8%Medium Saver 3.09 ± 0.02 955 0.0% 2.4% 85.9% 11.7%Large Saver 3.11 ± 0.02 979 0.1% 2.2% 84.2% 13.5%Total 3.09 ± 0.01 2930 0.2% 2.2% 86.3% 11.3%

Note: For this analysis, the sample of BPR savers (passbook savings, or tabungan) was divided into three categories: the bottom third of (“small”) savers had accounts of Rp 200,000 or less, the middle third (“medium”) of savers had account balances greater than Rp 200,000 up to Rp 1.33 million, and “large” savers had account sizes greater than Rp 1.33 million.

There is no relationship between size and satisfaction for deposito customers. However, both average account size and average satisfaction are higher than for passbook savings.

Table 2.10: Satisfaction of Time Deposit Customers by Size Category

Distribution of Results

Type of Time Deposit Customer Mean Margin

of Error N Dissatisfied (=1)

Unsatisfied (=2)

Satisfied (=3)

Very Satisfied

(=4) Small Time Deposit 3.12 ± 0.05 229 0.0% 1.3% 85.6% 13.1%Med Time Deposit 3.08 ± 0.04 219 0.0% 1.4% 89.0% 9.6%Large Time Deposit 3.12 ± 0.05 225 0.0% 1.3% 84.9% 13.8%Total 3.11 ± 0.03 673 0.0% 1.3% 86.5% 12.2%

Note: For this analysis, the sample of BPR time deposit (deposito) account holders was divided into three categories: the bottom third of depositors had accounts of Rp 5 million or less, the middle third of depositors had account balances greater than Rp 5 million up to Rp 10 million, and the top third of depositors had account sizes greater than Rp 10 million.

23

BSF-16: Overall satisfaction of large BPR borrowers is higher than that of small BPR borrowers, though both groups give the BPRs satisfaction scores in the B range, 3.09 and 3.04 respectively.

Table 2.11: Satisfaction of Borrower Customers by Size Category

Distribution of Results (%) Type of Loan

Customer Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Small Borrower 3.04 ± 0.02 1031 .4% 4.8% 85.7% 9.1%Medium Borrower 3.05 ± 0.02 947 .2% 3.2% 87.9% 8.8%Large Borrower 3.09 ± 0.02 947 .1% 3.0% 84.9% 12.0%Total 3.06 ± 0.01 2925 .2% 3.7% 86.2% 9.9%

Note: For this analysis, the sample of BPR borrowers was divided into three categories: the bottom third of borrowers had loans of Rp 3 million or less, the middle third of borrowers had loans greater than Rp 3 million up to Rp 8 million, and the top third of borrowers had loan sizes greater than Rp 8 million.

This result was unchanged when a different definition of account sizes was used to create smaller groups of the largest and smallest borrowers (not shown). While it should come as no surprise that larger customers are more satisfied (and probably better served), this higher level of satisfaction is apparent at levels of saving and borrowing that are still small, well within the range that ‘normal’ savers and borrowers can expect to achieve over time. BPRs appear to be giving their best service to customers who are still well within typical “micro” size ranges for savers and borrowers. C. BPR Service Quality Satisfaction BSF-17: On average, customers give high scores (B+ and A) for most aspects of BPR service quality.

Since present customers tend to value service over product quality,11 service satisfaction is the key reason why customer satisfaction is as high as it is – product satisfaction is much lower. Nearly all of the indicators below the B+ level could reach this with only small increases in average satisfaction.

11 See BSF-30.

24

Figure 2.5: Distribution of BPR Service Quality Scores, by Service Aspect Categories BSF-17a: Customers are particularly satisfied with BPR staff, security and trustworthiness, and ease of transactions and other service. All of these aspects of service quality earned average satisfaction scores greater than 3.1, corresponding to a B+ (or 8 in Indonesian schools) grade equivalent. Factors involving staff ability are scored very slightly (but consistently) lower by customers than those focusing on honesty, friendliness, or hard work – though still scoring fairly well, this is an important area for further improvement. For further detail, see Appendix 4. BSF-17b: Service satisfaction is lowest with respect to office technology and office condition. These aspects of service quality earned average scores of 2.97 and 3.03, respectively, putting them in the C and low B ranges. These two factors, office condition and office technology, are the only two service-related factors pulling down overall satisfaction.

3.09

3.13

3.23

3.11

3.16

3.22

3.07

3.09

3.09

3.08

3.15

3.16

3.17

2.97

3.03

3.1

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Conformity of BPR working hours with customers' needs

Information service by phone or other means

Ease in saving and loan transactions

Security of BPR office

Security of money, documents, and information kept by BPR

Trust in BPR savings and time deposits

Knowledge and understanding of customer needs

Ability to explain things in a simple way

Willingness and ability to respond and solve complaints/ problems

Capable and competence

Quick service

Politeness and appearance

Honesty

Technology

Office Condition

Location

Ease

of S

ervi

ceSe

curit

y an

dTr

ust

Com

mun

icat

ion

Abilit

yBP

R S

taff

BPR

Offi

ce

A & A+F CD B B+

25

D. BPR Product Satisfaction BSF-18: Loan product satisfaction scores lag behind service satisfaction scores among BPR customers. Ease of procedures, account officer professionalism, loan decision processing time, and collateral requirements (rather surprisingly, since this is a standard complaint – BPRs apparently do relatively well here) all earn B scores, but every other aspect of the loan product earns a C grade or worse.

Figure 2.6 : Distribution of Loan Products Satisfaction Scores BSF-19: Twenty-five percent of borrowers are unsatisfied are unsatisfied or dissatisfied with their BPR’s interest rates and loan-related costs, earning BPRs a score of 2.76 (F) in this category. Consumer loan customers are slightly more satisfied than business borrowers, awarding BPRs a low D compared to an F from business borrowers.

2.76

2.79

2.83

2.9

2.93

2.96

2.97

2.99

3.01

3.08

3.08

3.09

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Interest rate

Loan administration dan provision fee

Penalty for late installments

Bonus and incentives

Flexibility in loan installments

Maximum loan size

The size of loan installments

Loan term and installment schedule

Collateral requirements

Loan decision processing time

Profesionalism of Account Officer

Ease of procedures and document requirements

A & A+ F CD B B+

26

Figure 2.7 : Comparison of Satisfaction Scores on Business and Consumer Loan

For loan customers (mainly business borrowers), the lowest levels of satisfaction are with

interest rates and loan-related costs (fees, late payment penalties, etc.). Although such a result is not unexpected – any borrower would like rates to be lower – when more than 20% of borrowers are unsatisfied in this area, it should be cause for some concern. Average satisfaction for loan rates and loan-related costs were 2.76 and 2.79, respectively – far below average overall satisfaction. For further detail, see Appendix 4.

On interest rates, there is a noticeable difference between consumer and business borrowers. Consumer borrowers are more satisfied with BPR loan rates, giving them a score of 2.81, a D grade, rather than the 2.74 F grade given by business borrowers.

2.81

2.82

2.84

2.88

2.89

2.95

2.96

2.97

2.99

3.06

3.11

3.12

2.74

2.78

2.82

2.91

2.94

2.97

2.98

2.99

3.01

3.09

3.07

3.08

2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3

Interest rate

Loan administration dan provision fee

Penalty for late installments

Bonus and incentives

Flexibility in loan installments

Maximum loan size

The size of loan installments

Loan term and installment schedule

Collateral requirements

Profesionalism of Account Officer

Loan decision processing time

Ease of procedures and document requirements

Business Loan

Consumer Loan

A & A+F CD B B+

27

BSF-20: Borrowers are relatively satisfied with the simplicity of loan procedures and requirements as well as processing speed, though satisfaction is somewhat lower than expected given the BPRs’ natural advantages in these areas.

Loan processing speed and simplicity scores of 3.08 and 3.09 represent the best aspects

of BPR loan products, but they are still just barely higher than overall satisfaction. Indeed, given that these are the most service-related aspects of the loan products, and that service is normally a strong point for the BPRs, one might have expected the scores to be a bit higher, in the B+ rather than B range.

With a score of 3.01, BPR collateral requirements earn a low B grade from customers.

This is perhaps better than one might expect, given that collateral is a common area of complaint. However, the score is still well below overall satisfaction, meaning that collateral is still a mildly negative factor for the BPRs.

BSF-21: Savings and Time Deposit product satisfaction scores also lag behind service satisfaction scores among BPR customers. For both savings and time deposits, very strong satisfaction scores in certain areas are offset by very low scores in others.

Figure 2.8 : Distribution of Passbook Saving Products Satisfaction Scores

2.56

2.92

3.03

3.17

3.18

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Prizes and promotion

Interest rate

Administration fee

Ease of opening a saving account

Ease of saving withdrawals

A & A+F CD B B+

28

Figure 2.9 : Distribution of Time Deposit Products Satisfaction Scores BSF-21a: Savers are very satisfied with the ease of opening accounts and making withdrawals.

For both savings accounts and time deposits, customers are very satisfied with the ease of opening accounts and making withdrawals, giving the BPRs scores higher than 3.1 (B+) in these areas for both savings and time deposits. However, BPRs score less well in matters related to interest rates, with scores of 2.92 and 2.97 (both in the C range) for interest rate satisfaction for savings and time deposits, respectively. BSF-21b: A high proportion of savers are unsatisfied with (the lack of) prizes and savings promotions.

Finally, BPRs earn failing grades in the area of prizes and promotions, with scores of 2.56 and 2.65 (F) from savings deposit and time deposit customers, respectively. In both the savings and time deposit cases, more than 30% of savings and deposit customers are unsatisfied with (the lack of) prizes and promotional giveaways. Interestingly, these low scores hold even for BPRs that report they are already carrying out promotions and giving away prizes. Clearly, customers feel that BPRs have much to do in this area.

2.65

2.85

2.97

2.98

3.14

3.16

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Prizes and promotion

Penalty for withdrawing beforematurity

Interest rate

Administration fee

Ease of withdrawals

Ease of opening a time depositaccount

A & A+F CD B B+

29

E. BPR Customer Loyalty Indicators BSF-22: 91% of BPR customers say they will recommend their BPR to friends, relatives, and business acquaintances as a good place to borrow, and 93% of customers say they will recommend their BPR as a good place to save. BSF-23: Fewer than 3% of savers report that they will not continue to save in the BPR, while only 5.1% of borrowers say they have no plan to borrow again.

Figure 2.10 : BPR Customers’ Plans on Using BPR Services in the Future

82.97%74.15%

14.32%20.75%

2.71% 5.11%

0%

20%

40%

60%

80%

100%

Savers’ plans to continuesaving

Borrowers’ plans to borrowagain

YesDo not knowNo

BSF-23a: 50.7% of savers indicate that they plan to borrow from the BPR in the future, while almost 70% of borrowers say they would like to save at the BPR in the future. BPR customer loyalty extends to other products offered by the BPR. This makes cross-selling a potentially productive strategy.

30

BSF-23b: Most respondents indicate that they would not easily stop using their BPR’s services: bad service, corruption, and loss of confidence in the management of the BPR are three of the top four reasons given.

Figure 2.11 : Factors that Would Cause Customers to Leave

2.5%

4.0%

6.2%

8.0%

8.6%

9.0%

10.6%

13.5%

19.9%

20.0%

24.9%

32.9%

0% 10% 20% 30% 40%

Need to save larger amount

Other

Other BPR or bank office closer by

Need larger loan

Need different loan types (KPR, KKB, line of credit, etc.)

Want better prizes

Do not know

Nothing

Do not trust the management of the BPR

Need better interest rate

Dishonesty or corruption by BPR staff

Bad service

31

BSF-24: However, 20% of respondents stated that a more competitive interest rate elsewhere would cause them to leave the BPR.

Figure 2.12 : Customers Who Would Leave Their BPR for More Competitive Interest

Rates Elsewhere, by Account Type

16.4%

22.2%

26.3%

0% 5% 10% 15% 20% 25% 30%

Savers

Borrowers

Time Depositors

BSF-25: Customer loyalty to their BPR is not exclusive.

14% of respondents report that they borrow from other financial institutions, and 34% of customers report saving with another financial institution. Indeed, these figures underestimate the true extent of customers’ use of other financial institutions, as some customers do not want to reveal this information to the BPR staff member interviewing them.

The figure below shows the difference in responses between the mail-out survey, where

customers were interviewed by BPR staff, and the Quality Control survey, where customers were interviewed by the survey team. For customers borrowing at other institutions, there appears to be only a small difference between what customers tell BPR staff and what they tell outside interviewers, but the difference is much greater for customers with savings accounts elsewhere – 46% of savers in the quality control survey reported having a savings account elsewhere, while only 31% of savers in the mail-out survey did so.

For most of the questions in this survey, particularly those dealing with customer

satisfaction and customer feedback, there was no significant difference between the mail-out and quality control samples, confirming the mail-out approach as a reliable (as well as far less expensive) survey method. However, it appears to be preferable to use outside interviewers for surveys that need more in-depth information regarding BPR savers’ banking relationships with other financial institutions.

32

Figure 2.13: Comparison, Customers’ Relationships with Other Financial Institutions by Survey Method

13.70%

31.40%

15.80%

46.40%

14.10%

34.08%

0% 10% 20% 30% 40% 50%

Borrowing from otherinstitutions

Saving at otherinstitutions

OverallQuality Control SurveyMail Out Survey

BSF-26: BPR customers are doubtful about their BPR’s competitiveness in savings (tabungan).

When asked to compare their BPRs’ savings products, loan products, and overall level of service with those of other local financial institutions, 30.4% of BPR customers could name a particular financial institution (usually a commercial bank) that they thought was a better place to save than their BPR, just matching the proportion who thought their BPR was the best place to save. BSF-27: BPR customers are confident of their BPR’s competitiveness with respect to credit, time deposits and overall service quality. By contrast to the result for savings, only 16.8% of customers could name an institution they thought was better than their BPR for time deposits. Similarly, only 21.2% of customers could name an institution they thought was a better place to borrow from. Finally, only 15.3% of BPR customers could name an institution they thought had better service. For time deposits, loans, and overall service quality, the proportion of BPR customers who feel that their BPR is the better in these categories is higher than the proportion who believe another financial institution is better.

33

Table 2.12: Comparisons by Active BPR Customers of BPR Service Quality and Products with those of Other Financial Institutions (FIs)

Service Quality and Products Comparison

Service Quality Savings Time

Deposits Loans

This BPR is better than other FIs 39.6% 30.4% 32.4% 35.7%This BPR is as good as other FIs 31.8% 25.3% 19.5% 21.7%Do not know 13.3% 13.9% 31.3% 21.4%Other FI is better 15.3% 30.4% 16.8% 21.2%TOTAL 100% 100% 100% 100%

N 5292 4645 3347 4199 F. BPR Customer Feedback BSF-28: BPR customers’ top recommendation for BPR is to further improve services.

When asked what areas of BPR operations required further improvement, respondents called for further improvements in overall service quality, even though this is a relative strong point for BPRs. Technology was the second most frequently cited area for improvement.

Figure 2.14 : Areas for Improvement of BPR

4.6%

9.2%

13.3%

19.8%

37.2%

43.5%

0% 10% 20% 30% 40% 50%

Time Deposit product

Other

Passbook Savingproduct

Loan product

Technology

Service quality

34

BSF-29: BPR customers would like their BPR to offer on-line products and savings prizes/promotions.

When asked which product or financial service they most needed but which was not yet available at the BPR, the most common responses were ATM service (39%), funds transfers (14%), savings prizes (13%), and bill payment (10%).

Figure 2.15 : Financial Services/ Product Needed but Not Yet Provided by BPR

0.5%

1.3%

1.6%

1.8%

9.5%

13.3%

14.3%

18.8%

39.0%

0% 10% 20% 30% 40% 50%

Other

Clearing facility

Credit card

Line of Credit

Bill payment (electricity, phone, water)

Saving account with prizes

Funds transfer

Nothing

ATM

G. BPR Customer Values Sections C. and D. above presented the survey’s findings related to BPR service quality satisfaction and product satisfaction, respectively. While these sections can give the reader a good sense of what customers like and dislike, it is also useful to know which of the many aspects of service quality customers consider important. Indeed, the key to successfully maintaining customer satisfaction is to understand what customers consider important – what customers value in the banking relationship – and strive to do the important well. This section presents results on customer values in order to help prioritize and put into perspective the previous findings.

35

BSF-30: When asked to choose between attractive products and good service in terms of importance, more than 65% of respondents felt that good service was more important to them.

For the 65% of customers who feel that service is more important than products, further

improvements in service quality will tend to have more of an impact on overall satisfaction than will equivalent improvements in product satisfaction. The charts below provide further detail on which aspects of service quality and products are most important to BPR customers.

By comparison, 79% of LPD customers (all in Bali) felt that good service was more

important than attractive products. The LPDs are village-based and serve much smaller loan and savings customers on average; for these customers, service quality is even more frequenstly important, and products are even less often considered the most important aspect of the BPR relationship. Though there is as yet no survey data on commercial bank customers, it is reasonable to assume that these bank customers would be more likely to consider products important.

Figure 2.16 : The Importance of Service vs. Products

35%

65%

Attractive products Good service

36

BSF-31: Among the aspects of service quality, BPR customers most often identified “Capable Staff” as important to them. Fast and convenient service, friendly staff, security, and integrity of BPR staff were also frequently considered important.

Figure 2.17 : Aspects of Service Quality Considered Important to Customers

9.0%

9.5%

27.8%

36.1%

36.5%

38.7%

39.0%

41.0%

0% 10% 20% 30% 40% 50%

Other

Working hours conform to customer need

Easily accessible location

Honesty and integrity of BPR staff

Security

Nice, polite, and friendly BPR staff

Convenient and quick service

BPR staff who are capable and understandcustomer needs

It is worth recalling that, on average, BPRs score well in most of these ‘priority’ aspects of service; however, “Capable Personnel,” the top item in the chart above, is the area of lowest satisfaction, with an average satisfaction score 3.08. Taking the margin of error into account, this makes “Capable Personnel” a neutral factor, neither increasing nor decreasing overall satisfaction. Given the importance of this area for customers, BPRs interested in improving service quality satisfaction should make this a top priority for further action. Also, the trend in this area will be worth watching to see whether, and by how much, the industry-wide initiatives for training and certification already under way affect customers’ perceptions in this area. BSF-32: BPR Customers most often identified the interest rate as a loan product characteristic important to them, with fast processing and simple procedures also frequently cited. Out of all loan product characteristics, the one most often rated important by customers was also the characteristic with the lowest level of satisfaction – the interest rate. The opinions of the 25% of customers who are unsatisfied with BPR loan rates is the most important factor dragging

37

down overall loan product satisfaction. BPRs score best on the second- and third-most important areas, fast processing times and simple procedures. However, the scores indicate that these are at best neutral, rather than positive, factors in overall satisfaction.

Figure 2.18: Loan Product Features Considered Important by BPR Borrowers

1.3%

10.5%

19.4%

25.7%

29.8%

33.7%

44.6%

47.8%

51.9%

0% 10% 20% 30% 40% 50% 60%

Other

Large loan size

Interest rate discount and bonus

Installment amount conforms to the capacity ofcustomer

Loan term and installment schedule conform to thecapacity of customer

Low administration fee, provision fee, and penalty

Simple procedures and requirements

Fast loan decisions

Interest rate

BSF-33: BPR Savings Customers most often identified security, the interest rate, and ease of withdrawals as important to them.

Of the three savings product characteristics most frequently mentioned as important to savings customers, BPRs score very well on two: security and ease of savings withdrawal, both earning scores high in the B+ range. The interest rate, the second-most frequently mentioned area, earns only a low C in satisfaction. Savings incentives and promotions (the area of lowest satisfaction with an F score), was considered important by only 23% of savers, less than half the number naming the interest rate, placing this in the middle rank of savings product features by importance.

38

Figure 2.19: Savings Product Features Considered Important by BPR Savers

1.1%

10.2%

14.9%

15.2%

23.0%

23.3%

46.4%

47.4%

48.8%

0% 10% 20% 30% 40% 50% 60%

Other

Easy access to funds

ATM and on-line services

Low administration fee and penalty

Ease of savings account opening

Attractive incentives and savings promotion

Ease of savings withdrawals

Interest rate

Security

Time deposit customers provided the same ranking of product features as savings customers but were even more focused on the importance of the interest rate and security.

Figure 2.20: Time Deposit Product Features Considered Important

by BPR Time Deposit Customers

0.6%

11.6%

16.0%

19.0%

23.9%

27.0%

44.6%

59.5%

62.1%

0% 10% 20% 30% 40% 50% 60% 70%

Other

Easy access to funds

ATM and on-line services

Low administration fee and penalty

Ease of savings account opening

Attractive incentives and saving promotion

Ease of savings withdrawals

Security

Interest rate

39

H. Inactive/Former Customers

A careful survey of customer satisfaction should always strive to include former customers. This is true both because it is important to find out why customers leave and because a study composed solely active customers (ie, the customers who have not left) may give too rosy a picture of the BPR’s customer satisfaction performance. That said, inactive/former customers are best kept in a separate sample, and the questions asked of active customers are not always appropriate. In this survey, each participating BPR interviewed a small sample of three former savers and three former borrowers using a shortened and slightly modified version of the survey instrument used for active customers. A small sample was selected from each BPR for two reasons: 1) most BPRs had relatively small numbers of customers meeting the sampling criteria for inactive/former customers, and 2) it was felt that there was no need to drawn conclusions at the BPR level – a national sample was sufficient. BSF-34: Inactive/former customers are typically poorer than active customers.

Inactive/former customers are also slightly more likely to be male than is the case with

active customers. Age, marital status, family characteristics, education levels, and customer occupation, distance from BPR, and length of time as a customer, however, were essentially identical. The income distribution of inactive/former customers was significantly lower, however.

Figure 2.21: Comparison of Income Distribution of BPR Active & Inactive Customers

10.93%

46.98%

26.03%

9.98%6.08%

15.61%

49.15%

23.05%

7.80%4.39%

0%

10%

20%

30%

40%

50%

60%

<= Rp 500.000 > Rp 500.000 - 1.5million

> Rp 1.5 million - 3million

> Rp 3 million - 5million

> Rp 5 million

Active Customers Inactive Customers

40

BSF-35: Relatively few customers who stop using the BPRs express dissatisfaction with products or services. Not surprisingly, inactive/former customers are less satisfied with their BPRs than are active customers. However, this difference is relatively small. Only 11.8% of inactive/former customers express a lack of satisfaction with their BPRs, compared with 3.3% of active customers. Dissatisfaction appears not to be the main factor driving customer exit from BPRs. More than 80% of inactive/former customers say they will still recommend the BPR to friends, family, and business associates. 49% of inactive/former customers report that they still plan to borrow from the BPR in the future, while 54% report that they plan to save at the BPR in the future. BSF-35a: 43% of Inactive/Former borrowers have paid off their loans and feel that their relationship with the BPR is ongoing, expecting to borrow again at the BPR in the future. 30% of previous borrowers have paid off their loans but consider themselves former customers, with no plan to borrow again at the BPR. 18% of Inactive/Former BPR borrowers have unresolved problem loans. When interviewing former customers, the single most important question is, “Why did you leave?” Among inactive/former borrowers, 8% actually still consider themselves to be active customers, while another 43% consider themselves to be inactive or “resting”. 30% of inactive/former borrowers consider themselves to be “former customers” of the BPR, while 18% of inactive/former borrowers have unresolved problem loans.

Figure 2.22: Combined Classification of Inactive/Former Borrowers

0.6%

0.8%

7.7%

17.8%

29.9%

43.2%

0% 10% 20% 30% 40% 50%

Other

Do not know

Active customer

Problem loan customer

Former customer

Inactive / resting customer

Within this classification, the two key groups for further exploration are the inactive borrowers and the self-identified former borrowers. For inactive borrowers, we would like to know why they are “resting;” for the former borrowers, we would like to know why they have stopped banking with the BPR.

41

For both groups, the main reason for not borrowing is lack of demand; 56% of former borrowers and 66% of inactive borrowers responded that they did not need loans because their businesses had slowed down. Former borrowers do not appear to have experienced worse service than inactive borrowers, nor do they appear to be much more likely to cite competitive reasons (lower interest rate, need a different product, closer bank) than inactive customers.

Figure 2.23: Main Reason for Not Borrowing, Inactive v. Former Borrowers (Excludes Problem Borrowers)

0.9%

1.8%

2.3%

4.1%

4.1%

7.8%

12.9%

65.9%

1.3%

2.0%

2.0%

5.4%

6.7%

6.7%

19.5%

56.4%

0% 10% 20% 30% 40% 50% 60% 70%

Poor service

Other BPR or bank office closer by

Need different loan product(KPR, KKB, line of credit, etc)

Collateral problem

Want a lower loan interest rate

Need larger loan size

Other

Do not need new loan because business is slowingdown

Former Borrowers

Inactive Borrowers

BSF-35b : Only 19% of former borrowers gave reasons for no longer borrowing which appear related to competition or service problems. These reasons consisted of needing a larger loan, wanting a lower interest rate, needing a different loan product, another bank or BPR closer by, and poor service at the BPR.

42

BSF-35c : 72% of inactive/former savings customers and 60% of inactive former time deposit customers feel that their relationship with the BPR is ongoing and expect to save (and possibly borrow) at the BPR in the future. The large majority of both inactive/former savings and time deposit customers consider themselves to be merely resting, not to have ended their relationship with the BPR. 8% of inactive/former savers and 15% of time deposit customers considered themselves to still be active BPR customers even though they had no account open at the time of the survey.

Figure 2.24: Self-Classification of Inactive/Former Savers

0.5%

0.9%

7.6%

19.2%

71.8%

0% 20% 40% 60% 80%

Other

Do not know

Active customer

Former customer

Inactive / restingcustomer

Figure 2.25: Self-Classification of Inactive/Former Time Deposit Customers

2.1%

2.1%

14.9%

21.3%

59.6%

0% 10% 20% 30% 40% 50% 60% 70%

Other

Do not know

Active customer

Former customer

Inactive / restingcustomer

43

67% of inactive savers and 51% of former savers say that their main reason for no longer saving at the BPR is that they have no money to save, the same answer given by 68% of inactive/former time deposit customers.

Figure 2.26: Main Reason for No Longer Saving, Inactive v. Former Savers

0.4%

1.1%

1.1%

1.5%

2.6%

3.3%

5.1%

5.8%

12.4%

66.8%

0.0%

5.4%

0.0%

4.1%

2.7%

1.4%

1.4%

12.2%

21.6%

51.4%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Want savings product with daily interest rate system

Poor service

Dishonesty, corruption, or illegal charges by BPR staff

Need to save larger amount

Other BPR or bank office closer by

Want a safer place to save

Want higher savings interest rate

Want savings product with prizes

Other

No money to save

Former Savers

Inactive Savers

Figure 2.27: Main Reason for No Longer Saving, Previous Time Deposit Customers

2.5%

2.5%

10.0%

17.5%

67.5%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Want deposit product with prizes

Other BPR or bank office closer by

Want higher interest rate

Other

No money to save

44

BSF-35d: 27% of former savers and 15% of inactive/former time deposit customers stopped saving at their BPR for reasons that appear to be related to competition or service problems. 12% of former savers said they had stopped saving at the BPR because they wanted a savings product with prizes, while only 5% said that they had left the BPR because of bad service. 5% of inactive savers reported that they had stopped saving because they wanted a higher interest rate. Only 10% of inactive/former time deposit customers reported that they had stopped using their BPR because they wanted a higher interest rate. BSF-36: Compared to active customers, lower proportions of inactive/former customers believe their BPRs compare well with other financial institutions, but they still believe BPR service beats the competition.

Once again, savings is by far the worst performer among product categories, with 33% of former savings customers naming other financial institutions they feel are better places to save compared to the 18% who felt that their BPR was still the best place to save.

Table 2.12 : Comparisons by Previous BPR Customers of BPR Service Quality

and Products with those of Other Financial Institutions (FIs)

Service Quality and Products

Comparison

Service Quality Savings Time

Deposits Loans

This BPR is better than other FIs 26.9% 18.4% 23.5% 27.2%This BPR is as good as other FIs 39.2% 28.8% 19.0% 26.1%Do not know 19.0% 20.1% 38.8% 25.7%Other FI is better 14.9% 32.7% 18.7% 21.0%TOTAL 100% 100% 100% 100%

N 795 697 554 654 BSF-37: Inactive/former borrowers would like to see BPRs lower interest rates and improve loan processing time. When asked whether their BPR’s existing loan product meets their needs, 92% of former customers and and 87% of inactive/resting customers answered “yes.” The overwhelming majority of previous borrowers do not find any fundamental problems in their BPRs’ loan products.

45

0.5%

2.1%

2.9%

3.5%

7.2%

7.7%

9.1%

20.5%

46.4%

0% 10% 20% 30% 40% 50%

Flexibility on late payments

Incentives (interest discount or prizes)

Other

Flexibility on collateral

Product promotion

Loan product conforms to customer needs

No suggestion

Fast service and using sophisticated means

Lower interest rate

Figure 2.28: Previous Borrowers Who Feel that the BPR Loan Product Meets Their Needs (By Combined Classification of Previous Borrowers)

83.5%

86.8%

91.9%

92.1%

100.0%

100.0%

80% 85% 90% 95% 100% 105%

Problem loan customer

Inactive / resting customer

Former customer

Active customer

Other

Do not know

When asked for suggestions about how BPRs could improve their loan products, the responses were unsurprising: the two main areas highlighted were “lower interest rates” (46.3% of respondents) and “better, faster service” (20.4%).

Figure 2.29: Suggestions for Loan Product Improvement, Previous Borrowers

46

BSF-38: Many Inactive/former savers would like to see BPRs add or improve savings incentives and prizes. Few former savers mention adding ATM or online service. For savings and time deposit products, the single most frequent suggestion for product improvement was “incentives and prizes” (26%), with another 10.4% mentioning the related answer of “wider promotion.” Relatively few inactive/former customers (4.8%) mentioned ATM and/or online service.

Figure 2.30: Suggestions for Savings Product Improvement, Previous Savers

1.3%

1.6%

3.9%

5.2%

10.4%

12.3%

14.9%

23.4%

26.9%

0% 5% 10% 15% 20% 25% 30%

Low administrative fee

Create new product

Other

On-line ATM facility

More promotions

Improving service (coming to customers’ place)

No suggestions

Higher interest rates

Incentives and prizes

47

For previous time deposit customers, 27% would also like to see higher interest rates, while 19% would like to see improved customer service, particularly in the form of bringing bank services to the customer. Incentives and prizes scored lower with previous time deposit customers at 14%.

Figure 2.31: Suggestions for Deposit Product Improvement,

Previous Time Deposit Customers

5.4%

5.4%

5.4%

10.8%

13.5%

13.5%

18.9%

27.0%

0% 5% 10% 15% 20% 25% 30%

Create new product

Other

No suggestions

On-line ATM facility

Incentives and prizes

More promotions

Improving service (coming to customers’ place)

Higher interest rates

48

III. Conclusions and Recommendations, BPR Customer Satisfaction Survey A. BPR Customer Satisfaction: Good, but Needs Improvement Overall, BPRs are doing a good job of keeping their present customers satisfied. Service quality is on average very good, and many BPRs have already achieved service excellence or are quite close to it. Since 65% of customers indicate that they care more about good service than attractive products, BPRs are delivering what the majority of their customers want.

Most BPRs have good reason to be proud of their customer satisfaction scores, particular in terms of service. Does this mean that the BPR industry should be satisfied with their customers’ current levels of satisfaction? Here, the answer is no – for three reasons.

First, 35% of active BPR customers care more about attractive products than good service, and BPRs’ product satisfaction scores are much lower than the scores for service satisfaction. If BPRs want to continue to grow and maintain profitability, they will need to raise their product satisfaction scores to retain and increase the number of “product first” customers as well as “service first” customers.

Second, BPRs are already competing with commercial banks for the business of active BPR customers. At least 34% of active BPR customers (and quality control survey results suggest the actual total could be much higher, up to 46%) have savings accounts at another financial institution, usually a commercial bank. In addition, at least 14% of BPR customers borrow from another financial institution. These customers not only form a large part of the BPRs’ existing customer base, they are in an excellent position to judge the relative merits of different microfinance institutions (the most frequent competitor by far is still the BRI Units, which predate most BPRs) – and tell their friends. Any sudden improvement in the attractiveness of BPRs’ main competitors – say, improved overall service through increased staffing and improved IT, or introduction of ATM and online facilities – would be conveyed informally but quickly to a large proportion of BPR customers.

Third, customers want more. BPR customers do not simply want the BPRs to improve their performance in the areas where they are lacking, they want the BPRs to improve in the areas where they already do a good job – including overall service quality. B. Some Problem BPRs – and a Key BPR Problem The survey identifies a number of areas for improvement among BPRs – and a substantial proportion of BPRs who are doing a relatively poor job of satisfying their customers. In this survey, thirty-eight percent of all BPRs earn a C score or worse in overall customer satisfaction, while 36% of participating BPRs are experiencing decreases in the number of customers (45% in the number of borrowers). Both inactive and active customers particularly point to savings products as an area where BPRs are uncompetitive with other local financial institutions. Even among active BPR customers,

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only 30% think their BPR is the best place, just matching the 30% who can name another local financial institution they believe is a better place to save.12 C. The Payoff for Improved Satisfaction: Improved Growth and Profitability

Customer loyalty, defined here as behavior resulting from a combination of satisfaction and the customer’s sense of belonging or ownership, is producing tangible benefits for the BPRs. Customers tend to stay with BPRs for a long time, increasing profitability and decreasing marketing costs. Customer loyalty is also expressed as an unwillingness to move even when interest rates might be better elsewhere. This appears to be one of the key reasons BPRs are able to maintain strong interest and profit margins, though 25% of borrowers and 13% of savers are unsatisfied with BPR rates. Customer satisfaction is one of the factors influencing customer loyalty – and the main loyalty factor that the BPRs can directly influence. A key companion to customer loyalty is attractiveness to new customers (indeed, referrals from loyal customers can be a key source of growth in the number of customers), and trends in the number of customers is one of the key operational areas for BPRs to monitor. While it is certainly possible to experience business growth without substantial increases in the number of customers in the short run13, in the long run acquisition of new customers will need to account for up to half of BPR business growth if strong growth rates are to be maintained.

Although this survey provides no direct information on the potential and preferences of non-customers, comparison of the BPR and LPD results suggests that currently unbanked customers will tend to show a strong preference for service (and its close companion, effective access), while customers already banking at other financial institutions will be much more product- and price-focused. D. Improving Customer Satisfaction – A Key Part of BPRs’ Profit and Growth Strategies To contribute to profits, improvements in customer satisfaction must be efficient, delivering the most “bang for the buck.” This survey has identified some important areas for improvement, but each BPR will need to decide which of the many possible ‘investments’ in improving customer satisfaction are feasible and carry a sufficiently low cost relative to the likely return in increased satisfaction and business. The following recommendations map out a general strategy for systematically and efficiently improving BPR customer satisfaction, including some priorities for the industry as a whole.

12 The remaining customers responded that their BPR was the same as other local financial institutions as a place to save or that they did not know. 13 There are many factors that can lead to big short-term Rp growth spurts without adding to the number of customers. On the loan side, increases in the average loan term and increased emphasis on consumer loans (which tend to be longer) are prime candidates, as is simple “catching up” with past inflation. On the savings side, owner’s funds would be a key place to look, along with other “hot” deposits. Under more normal circumstances, though, business from existing customers is unlikely to differ greatly from growth in nominal GDP. Studying trends in the number of active customers is thus an important companion to customer satisfaction work.

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E. Recommendations for Improving BPR Customer Satisfaction Non-Technological Recommendations The recommendations for improving customer satisfaction resulting from this survey can be broken down into two main categories, technology-intensive solutions and non-technological solutions. In most cases, the non-technological solutions are less expensive and faster to implement, suggesting that these may deserve first priority in implementation (“do the easy things first”). The non-technological recommendations include: 1) Improve the performance of BPR management and staff. Customers are already quite satisfied with the honesty and politeness/friendliness of BPR personnel, but they do see a need for improving the capability of BPR personnel, particularly in marketing and understanding/responding to customer needs. In general, there are two approaches to accomplishing this: training and performance incentives. For the specific areas identified, short courses that are heavily job- and task-oriented may provide the greatest immediate payoff. Performance incentives are part of the overall compensation package, and recommendations will vary among BPRs. In general, though, a balanced incentive package includes the following:

Job security and career path – After basic salary and allowances, this is the single most important means of ensuring that the long-term institutional and personnel interests are aligned; personnel who want to spend their careers at and fund their retirement from their BPR will naturally be more loyal to the best interests of the institution. Profit-focused team incentive – Most work within BPRs is not done by “single fighters” but by small teams, and it is not possible to directly calculate the profit impact of most individual tasks and decisions. In these situations, the best approach is to implement an incentive based on the team’s contribution to annual profits. A profit incentive generally ensures that personnel are allocating their time and making decisions in the best overall financial interest of the institution, not working to achieve an intermediate target that may not be directly related to profitability. Individual profit-focused incentive – In cases where it is possible to measure a direct profit impact of one individual’s work, individual (but, again, profit-based) incentives are appropriate. Special contests – These are useful for creating excitement and meeting specific targets, but there can be seriously negative side effects to such single-purpose targeting if it is not balanced by good long-term and profit incentives.

2) Improve interest rates. Although no one likes to contemplate reduced margins, BPRs need to be sensitive to the perception among the 25% of borrowers who feel that their rates are unfavorable – and be ready to meet growing competition. Perhaps the least painful approach is to make sure that, as BPRs succeed in improving their efficiency, some portion of this gain is given back to customers as lower loan rates.

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3) Introduce or improve incentives and promotional bonuses for customers. Based on the survey results, the natural place for most BPRs to start would be with introducing or improving a savings incentive scheme, which are typically based on a lottery approach to awarding prizes. A second area worth trying is customer loyalty or rewards programs, where customers receive prizes for long affiliation and referring new customers (nearly all customers already say they will do this). 4) Cross-sell. The survey results indicate that customers are open to using other products of their BPRs. BPRs can take the initiative in this area by proactively assessing reliable savers for loans and marketing savings accounts to borrowers, particularly by offering to build automatic deposits into loan payment schedules. 5) Improve office layout and appearance. Even if customers are not comfortable with the size and relative luxury of many commercial banks’ offices, BPR offices that are dark, dirty, hot, crowded and/or have difficult parking are considered unattractive. 6) Monitor customer growth, retention, and satisfaction. Monitoring begins with paying more attention to trends in total customers, new customers and account closings, not just rupiah statistics. Improved customer monitoring should also include systematic efforts at understanding what customers want, whether through focus group discussions (well-designed FGDs are almost always both cheaper and more informative than structured surveys at the level of the individual BPR) or less formal means. 7) Use customer feedback to guide investment and effort. Because there are no intermediate layers of bureaucracy between BPR managers and their customers, BPRs have a strong potential advantage in terms of understanding their customers and delivering the products and services they need. Once customer needs are specified and prioritized, these priorities need to be reflected in the BPR’s workplan and investment plan. Technological Recommendations 8) Extend office automation. Technology-intensive solutions may be aimed primarily at office/task automation – increasing the speed and reliability of routine tasks – or at product improvement – adding new features to products. While nearly all BPRs have computers at present, there continue to be wide differences in how effectively computers are used in carrying routine tasks. Several good office automation and simple core banking solutions are currently available for BPRs, allowing most BPRs some degree of choice in how they will automate. 9) Find a way to offer online and ATM services. At present, there are still no low-cost ATM/card product, phone banking and funds transfer solutions for BPRs available in the market – and no cost-effective way for BPRs to connect to ATM networks. This makes it extremely difficult for individual BPRs to upgrade their savings products to something comparable to that offered by commercial banks. This issue will become even more critical for the BPRs as BRI, still their main competitor, accelerates its rollout of online services to the BRI Units. Finding a solution to this problem must be a top priority for BPRs working together with vendors and regulators. International microfinance organizations such as CGAP and microfinance

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institutions in other countries, including the Philippines, may have valuable experience and possible solutions for the BPRs in this area. F. Implementing Service and Product Improvements: Look for Shared Solutions How the BPRs implement satisfaction-improving initiatives is just as important as what the BPRs do. Above all, improvements need to be sustained and cost-effective. A key part of developing cost-effective strategies is to look for shared solutions – and not just in areas related to technology. Some of the areas in which BPRs could work together to improve satisfaction in the areas identified in this survey include:

• Joint promotions and prizes, • Training programs, • Regulatory Impact Analysis – useful as a tool for lobbying for needed regulatory

change, whether for lowering compliance costs, reducing/eliminating regulations with no prudential value, or improving supervision/inspection norms,

• Joint search for cost-efficient online and ATM access – in addition to general support from Bank Indonesia, assistance from CGAP and other donors acquainted with the technical solutions implemented by small banks in other countries could be extremely useful in this area,

• Customer complaint handling, • Industry-wide customer satisfaction monitoring – to give BPRs a sense of where they

stand among their peers, • Joint Development of a low-cost BPR customer satisfaction monitoring approach,

and • Case Studies – short publications and articles showcasing success stories in promotions,

incentives, HR, pricing policy, and other areas. G. Improving Customer Satisfaction: What BPRs Cannot Do On Their Own In addition to the many areas listed above, there remain a few areas in which BPRs, acting either alone or jointly, cannot take the lead. These include: 1) Encouraging competition in microfinance among BPRs and commercial banks. Whether by expansion of existing BPRs, increasing the number of BPRs, or increasing the number of commercial banks offering microfinance services, increased competition is good for customers, both because it tends to narrow interest margins and because it gives customers more product and service options. Bank Indonesia is the natural leader in this area, and BI has done a good job of mediating the initial concerns and controversy among BPRs caused by Bank Danamon’s recent entry into the microfinance market via Danamon Simpan Pinjam (DSP), allowing DSP to begin competing effectively with a minimum of disruption.

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At the same time, there remain some areas where current policy could be made more pro-competition, including:

• Current licensing practice – Reduce the current emphasis on assessing the “saturation level” (“tingkat kejenuhan”) of local economies as part of licensing for new BPRs, and eliminate it altogether for opening new branches or sub-branches of BPRs and commercial banks;

• Minimum capital requirements – Current best practice in microfinance considers minimum capital requirements for banks or new branches (as opposed to CAR) as having no prudential value; in addition, setting minimum capital requirements too high can hurt smaller BPRs’ ability to operate efficiently, reducing competition and leaving smaller markets unserved;

• Subordinated debt – Eliminate the requirement that BPRs obtain prior approval from Bank Indonesia before borrowing subordinated loans to leverage their core capital for expansion;

• Foreign investment and ownership – Though outside of BI’s control, the central bank can act as a key advocate for financial service users by quantifying the benefits of reducing or ending protectionism in this area.

2) Harmonize the governance of PD BPRs with that of PT BPRs14, ensure that local government-owned banks and BPRs do not receive special or exclusive access in micro lending to civil servants, and modify current rules limiting the extent to which BPDs can perform apex functions for government-owned BPRs. 3) Improve the information on BPRs available to BPRs, commercial banks, analysts and policymakers about the microfinance market. BI could usefully undertake a number of fairly simple improvements in its BPR monitoring and information strategy, beginning with better information on number of customers, re-design and clarification of “sectors” used for credit reporting, and preparation of regular local information bulletins back to BPRs on microfinance lending by both commercial banks and BPRs in the area.

14 This is needed to increase professionalism (untying PD BPR staff from the civil servant payscale and career path) and distance operations from possible influence by local officials.

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IV. Key Results, LPD Customer Satisfaction Survey

A. LPD Size, Growth and Customer Characteristics LSF-1: Both in terms of assets and accounts, LPDs are much smaller than BPRs on average – but LPDs still show themselves to be highly sustainable.

The market/working area of one LPD corresponds to the traditional village level (desa adat) in Bali, much smaller than that of the typical BPR, and the average total assets per LPD totals only Rp. 1.9 billion compared to LPDs’ average assets of Rp. 8.1 billion. However, the large majority of LPDs appear to be quite sustainable financially. Most LPDs lend to market traders from outside the desa adat if they operate in the local market.

Table 4.1: LPD Size Distribution (in Million Rupiah)

Total Asset

per September 2005

Profit per September

2005

Equity per September

2005 Valid 54 54 29 N Missing 6 6 31

Mean 1,922 109 431 Margin of Error ± 883 ± 54 ± 310

1 7 0.4 1 25 157 8 31 50 486 26 77 75 2,110 138 247

Percentiles

99 13,645 966 3,270 LSF-2: For village-level financial institutions, LPDs are actually quite large.

Although most LPDs are considerably smaller than most BPRs, they are on average much larger than other village-level financial institutions. Despite operating at the desa adat level, 75% of LPDs have more than 90 loans, a scale of business that would be difficult to match in most villages outside Java/Bali.

Like the BPRs, most LPDs have a core of active savers only a little larger than the number of borrowers. Most LPD credit is for enterprise use, though the proportion of consumption use is 27%, higher than the 20% found in BPRs.

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Table 4.2: LPD Accounts Distribution

Number of Passbook

Saving Account per September 2005

Number of Time Deposit Account per

September 2005

Number of Loan Account

per September 2005 Valid 49 41 49N Missing 11 19 11

Mean 1,353 72 368Margin of Error ± 465 ± 30 ± 99

1 11 1 4325 215 9 9650 770 24 22975 1,534 97 538

Percentiles

99 6,585 494 1,486 LSF-3: The LPDs’ customer base is experiencing rapid growth.

Given that LPDs tend to be confined to one desa adat on Bali, one might suppose that many LPDs would have saturated their local market, but this seems not to be the case overall – growth is widespread, not concentrated in a few LPDs.

This is particularly true for savings deposits. Through a unique set of regulatory and supervisory arrangements, LPDs are non-bank deposit-taking institutions. 82% of LPDs showed growth in the number of active savings customers in the first nine months of 2005, while 68% of. LPDs also showed growth in the number of loan accounts.

Table 4.3: LPD Account Growth

Passbook Saving Account Growth

Dec '04 – Sep '05

Time Deposit Account Growth

Dec '04 – Sep '05

Loan Account Growth

Dec '04 – Sep '05

Total Account Growth

Dec '04 – Sep '05

Valid 49 40 47 50 N Missing 11 20 13 10

Mean 22% 12% 7% 7%Margin of Error ± 19% ± 10% ± 15% ± 9%

1 -17% -43% -84% -100%25 3% -9% -1% 0%50 9% 0% 5% 8%75 18% 27% 11% 14%

Percentiles

99 450% 100% 320% 124%

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LSF-4: LPDs profitably serve a smaller-scale, less educated and poorer clientele than do most BPRs.

LPD loan sizes are consistently about half the size of BPR loans across the size distribution; LPDs are profitably reaching a smaller-scale clientele than do most BPRs. Average LPD loan quality is somewhat worse than that of BPRs, though not enough so to question the sustainability of the system.

Table 4.4: Comparison of Loans Size of LPD and BPR (at disbursement in Rupiah)

LPD Loan Size BPR Loan Size

Valid 719 3129 N Missing 996 2721

Mean 6,650,000 12,100,000 Margin of Error ± 1,630,000 ± 1,040,000

1 160,000 300,000 25 900,000 2,500,000 50 2,000,000 5,000,000 75 5,000,000 10,000,000

Percentiles

99 66,080,000 101,750,000 Note: LPD loans are consistently smaller than BPR loans throughout the loan size distribution.

Gender, age, and family characteristics of active LPD customers are nearly identical to

those of BPR customers. However, LPD customers tend to be less well educated, and LPDs serve a much higher proportion of farmers (nearly 25% of active customers) and a much lower proportion of civil servants than do BPRs.

Figure 4.1: Comparison of LPD and BPR Customers by Level of Education

2.5%

17.4%

17.4%

46.4%

16.3%

4.2%

9.0%

13.5%

34.9%

38.5%

0% 10% 20% 30% 40% 50%

Other

University

SMP

SMA

SD

LPD CustomersBPR Customers

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Figure 4.2: Comparison of LPD and BPR Customers by Occupation

1.7%

5.8%

14.1%

13.4%

6.5%

58.5%

2.0%

3.6%

7.7%

13.0%

25.0%

48.7%

0% 10% 20% 30% 40% 50% 60% 70%

Students

Other

Public servant

Private company employee

Farmers

Private sector

LPD CustomersBPR Customers

Incomes of LPD customers are much lower on average than those of BPR customers, with a significant proportion (depending on family size) of customers at or near poverty levels. Together, LPD sustainability and customer characteristics create a compelling case for their ability to sustainably reach low-income households in Bali with basic financial services.

Figure 4.3: Comparison of LPD and BPR Customers by Monthly Income

10.9%

47.0%

26.0%

10.0%6.1%

42.3% 43.7%

10.6%

2.5% 0.9%0%

10%

20%

30%

40%

50%

<= Rp 500.000 > Rp 500.000 -1.5 million

> Rp 1.5 million -3 million

> Rp 3 million - 5 million

> Rp 5 million

BPR Customers

LPD Customers

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LSF-5: A high proportion of LPD customers visit the LPD office on foot and are routinely visited by LPD personnel at their home or workplace.

On average, LPDs are located very close to their customers, allowing a much higher proportion of customers to walk to the LPD office. Like the BPRs, more than 30% of customers have their most frequent contact with the LPDs via LPD staff visits to their home or workplace.

Figure 4.4: LPD Customers’ Most Frequent Means of Transport/Contact

0.7%

1.0%

25.7%

32.6%

39.9%

0% 10% 20% 30% 40% 50%

Using public transportation

Other

Using private vehicle

LPD staff coming to customer (home or workplace)

Walking

LSF-6: The desire to support the activities of the desa adat is a key motivator for many LPD customers.

When asked the main reason why they became an LPD customer, there is the normal range of answers (need a business loan, need a safe place to save, etc.), but also a unique response: 14% stated that their main reason for using the LPD was to support the desa adat.

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Figure 4.5: Reasons for Becoming LPD Customers

0.1%

2.7%

3.2%

4.4%

13.8%

17.2%

28.4%

30.2%

0% 10% 20% 30% 40%

Do not know or do not remember

Other

Need loan for religious worship

Need a place to save for future religious worship

As contribution for the village (cultural village)

Need loan for consumtion need, includingemergency

Need a place to save money

Need loan for business

B. LPD Overall Customer Satisfaction LSF-7: On average, LPDs do fairly well in overall customer satisfaction. The average overall satisfaction score of 3.08 is enough to earn the LPD system a solid B grade, qualifying as “good performance but with room for improvement.”15

Overall, 96% of customers report that they are satisfied or very satisfied with the level of service at their LPDs. The mean of 3.08 on the customer satisfaction scale indicates that on average most customers were satisfied (puas) with their LPD, with those who were very satisfied outnumbering those who were unsatisfied or dissatisfied (in this case, 13.4% of respondents indicated that they were very satisfied).

15 For an explanation of the scoring system, see Chapter 1, section F, “Scoring Approach: Quantifying the Level of Customer Satisfaction.”

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Table 4.5: LPD Active Customers’ Overall Satisfaction

Mean Satisfaction Score 3.08Margin of Error ± .02Sample size 1,608School Letter Grade Equivalent B

Satisfaction Responses Distribution

Dissatisfied = 1 1.0%Unsatisfied = 2 3.2%Satisfied = 3 82.3%Very Satisfied = 4 13.4%Total 100.0%

LSF-8: There is a high degree of variation in customer satisfaction among individual LPDs, ranging from truly awful to excellent.

As in the case of BPR satisfaction, the overall mean hides considerable diversity in the average scores per LPD. At the extremes (1% and 99% points in the distribution), there are scores of 2.21 (52% of customers are unsatisfied or dissatisfied at this LPD) and 3.61 (61% of customers are very satisfied at this LPD).

Table 4.6: Distribution of Average Customer Satisfaction Scores per LPD

LPD Percentile

Ranking

N = 60 LPDs

Overall satisfaction score

School Grade Equivalent

Letter Grade Equivalent

1 (low) 2.21 1 – 4 F 10 2.87 5 D 20 2.98 6 C 25 3.00 6 C 30 3.00 6 C 40 3.03 7 B

50 (median) 3.06 7 B 60 3.10 8 B 70 3.17 8 B+ 75 3.19 8 B+ 80 3.24 9 A 90 3.31 9 A

99 (high) 3.61 10 A+

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LSF-9: LPD customers show a strong “loyalty bias” toward the LPDs, even though their underlying satisfaction with the LPD service and products is less than that of BPR customers.

In designing the survey methodology, the survey team began with the fear that a pure “mail-out” survey (survey sent to the LPDs, then conducted by LPD staff) might create conditions, whether conscious or not, for possible upward bias in the satisfaction results. As a check against this, the team created a “Quality Control” sample in which the same survey was conducted directly by the survey team.

This approach to survey design turns out to have been very useful, but not for the reasons expected. Rather than seeing higher satisfaction scores among the LPDs in the mail-out sample, it turns out that average scores were much higher in the “Quality Control” sample.

Table 4.7: Overall Satisfaction by Survey Method

Distribution of Results

Survey Method Mean Margin

of Error N Dissatisfied (=1)

Unsatisfied (=2)

Satisfied (=3)

Very Satisfied

(=4) Mail Out 3.05 ± 0.02 1284 1.1% 3.6% 83.9% 11.4%QC 3.18 ± 0.05 324 .6% 1.9% 76.2% 21.3%Total 3.08 ± 0.02 1608 1.0% 3.2% 82.3% 13.4%

This difference is not simply the effect of one or two “outlier” LPDs; the distribution of mean satisfaction scores per LPD shows “Quality Control” satisfaction scores consistently higher than “Mail-Out” scores.

Table 4.8: Comparison Overall Satisfaction Distribution by Survey Method

Overall satisfaction

Mail-Out

Overall satisfaction QC

Valid 46 10 N Missing 14 50

Mean 3.05 (B) 3.18 (B+) 1 2.21 (F) 2.97 (C)

25 3.00 (C) 3.09 (B) 50 3.04 (B) 3.15 (B+) 75 3.17 (B+) 3.29 (A)

Percentiles

99 3.61 (A+) 3.42 (A) What is happening here? From qualitative reports of the interview teams and informal

discussions, the most likely answer appears to be that many LPD respondents care deeply about how their LPD is viewed by “outsiders”; respondents’ willingness to “accentuate the positive, eliminate the negative” flows directly from their sense of ownership and belonging. For most LPDs, it is thus far easier to gain accurate information about customers’ level of satisfaction

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through the “mail-out” approach because LPD customers are ‘biased’ towards showing loyalty when interviewed by outsiders. LSF-10: Customers of relatively large LPDs are significantly more satisfied on average than customers of smaller LPDs.

LPDs with total assets > Rp. 1 billion have significantly higher satisfaction ratings on average than do medium or small ones.

Although a small sample size (of “tourist area” LPDs) barely prevents the comparison

from being statistically significant at the 95% level, it appears that overall satisfaction is higher for LPDs located in the main tourist areas. The data also indicate that there are no systematic differences in average customer satisfaction by LPD soundness rating.

Somewhat surprisingly, the data indicate that there is no significant correlation between fast growth in the number of customer accounts and customer satisfaction.

Table 4.9: Overall Satisfaction by LPD Size

Distribution of Results

Asset Size Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Large 3.15 ± 0.04 573 .3% 1.6% 80.5% 17.6%Medium 3.07 ± 0.04 505 .2% 4.6% 83.6% 11.7%Small 3.00 ± 0.05 437 3.0% 4.6% 82.4% 10.1%Total 3.08 ± 0.02 1515 1.1% 3.4% 82.0% 13.5%

Note: For this analysis, the sample of LPDs was divided into three categories: “small” LPDs are defined as those with total assets of up to Rp. 200 million, “medium” BPRs are those with total assets greater than Rp. 200 million up to Rp. 1 billion, and “large” BPRs are those with total assets greater than Rp. 1 billion. LSF-11: Small borrowers (loan size of Rp. 1 million or less) are significantly less satisfied than larger LPD borrowers.

The smallest one-third of LPD borrowers (those borrowing Rp. 1 million or less) are significantly less satisfied than ‘medium’ (> Rp. 1 million up to 4 million) or ‘large’ (> Rp. 4 million) borrowers.

While it appears that savings (current account) customer satisfaction increases with account size, the difference is too small (or the sample size is insufficient) to allow significance at the 95% level. Size does not seem to matter for deposito customer satisfaction.

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Table 4.10: Satisfaction of Passbook Saving Customers by Size Category

Distribution of Results (%) Type of Passbook Saving

Customer Mean Margin

of Error N Dissatisfied (=1)

Unsatisfied (=2)

Satisfied (=3)

Very Satisfied

(=4) Small 3.04 ± 0.07 256 3.1% 3.9% 78.9% 14.1%Medium 3.10 ± 0.06 259 1.2% 3.5% 79.5% 15.8%Large 3.12 ± 0.05 237 0.4% 2.5% 81.4% 15.6%Total 3.09 ± 0.04 752 1.6% 3.3% 79.9% 15.2%

Note: For this analysis, the sample of LPD savers (passbook savings, or tabungan) was divided into three categories: “small” savers had accounts of Rp. 200,000 or less, “medium” savers had account balances greater than Rp. 200,000 up to Rp. 1 million, and “large” savers had account sizes greater than Rp. 1 million.

Table 4.11: Satisfaction of Time Deposit Customers by Size Category

Distribution of Results (%) Type of Time Deposit

Customer Mean Margin

of Error N Dissatisfied (=1)

Unsatisfied (=2)

Satisfied (=3)

Very Satisfied

(=4) Small 3.14 ± 0.1 49 .0% 2.0% 81.6% 16.3%Medium 3.04 ± 0.1 51 .0% 5.9% 84.3% 9.8%Large 3.17 ± 0.1 48 .0% .0% 83.3% 16.7%Total 3.11 ± 0.1 148 .0% 2.7% 83.1% 14.2%

Note: For this analysis, the sample of LPD time depositors (deposito) was divided into three categories: “small” depositors had accounts of Rp. 2.8 million or less, “medium” depositors had account balances greater than Rp. 2.8 million up to Rp. 9 million, and “large” depositors had account sizes greater than Rp. 9 million.

Table 4.12: Satisfaction of Borrower Customers by Size Category

Distribution of Results (%) Type of Loan

Customer Mean Margin of Error N Dissatisfied

(=1) Unsatisfied

(=2) Satisfied

(=3)

Very Satisfied

(=4) Small 3.08 ± 0.05 245 .0% 2.9% 86.1% 11.0%Medium 3.05 ± 0.05 220 .5% 3.2% 87.7% 8.6%Large 3.15 ± 0.07 221 .9% 4.1% 73.8% 21.3%Total 3.09 ± 0.03 686 .4% 3.4% 82.7% 13.6%

Note: For this analysis, the sample of BPR borrowers was divided into three categories: “small” borrowers had loans of Rp. 1 million or less, “medium” borrowers had loans greater than Rp. 1 million up to Rp. 4 million, and “large” borrowers had loan sizes greater than Rp. 4 million.

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C. LPD Service Quality Satisfaction LSF-12: While most LPD customers are fairly satisfied with service quality, average satisfaction is lower than that of BPRs – in nearly every category.

Overall, customers are fairly satisfied with the quality of service they receive from their LPDs, but there are few aspects of customer service about which they are very satisfied – and quite a few areas with substantial numbers of unsatisfied customers.

Compared to BPRs16, LPDs appear to deliver worse service on average. Indeed, there is

not a single aspect of service quality in the tables below in which LPDs score significantly higher than BPRs on average, and LPDs’ average satisfaction scores are often significantly worse than those of BPRs.

Figure 4.6: Distribution of LPD Service Quality Scores, by Service Aspect Categories

16 See Chapter II of this report.

2.83

3.05

3.18

3.05

3.06

3.18

3.05

3.07

3.07

3.04

3.12

3.12

3.13

2.85

2.9

3.12

2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Information service by phone or other means

Conformity of LPD working hours with customers' needs

Ease in saving and loan transactions

Security of LPD office

Security of money, documents, and information kept by LPD

Trust in LPD savings and time deposits

Knowledge and understanding of customer needs

Ability to explain things in a simple way

Willingness and ability to respond and solve complaints/ problems

Capable and competence

Quick service

Honesty

Politeness and appearance

Technology

Office Condition

Location

Eas

e of

Ser

vice

Sec

urity

and

Trus

tC

omm

unic

atio

nA

bilit

yLP

D S

taff

LPD

Offi

ce

A & A+F CD B B+

65

LPD customer service satisfaction is highest with respect to ease of transactions and trust in LPDs as a safe place to save; LPDs on average earned a score of 3.18, a strong B+, in these categories. Customer service satisfaction is lowest with respect to technology use, office condition, and difficulty in obtaining information by telephone or other media (e.g., SMS), earning D grades in these areas. Given that the LPDs are village-level institutions, it is somewhat surprising that customers give the LPD staff only a B grade in their ability to communicate, making what should be a natural advantage for the LPDs a neutral factor at best in determining overall satisfaction.

Indeed, while the LPDs’ service satisfaction scores are not bad, they are worse than one might expect. Service quality should be an area in which LPDs – as village-level institutions with lots of personal contact – are relatively strong. D. LPD Product Satisfaction LSF-13: Product satisfaction among LPD customers lags slightly behind service satisfaction.

27% of LPD borrowers are borrowing mainly for household needs, and LPD borrowers seem relatively more satisfied with their institution’s product offerings than do BPR borrowers, particularly with respect to the interest rate17. Since there is little difference in the interest rates at LPDs and BPRs, this is almost certainly driven by relative satisfaction; LPD customers (who tend to save and borrow smaller amounts) appear convinced they’re getting the best product deal available.

17 In the BPR survey, 25% of borrowers were unsatisfied or dissatisfied with their loan rate, a much higher percentage than the 8.5% for LPDs. Further information on BPR borrowers can be found in Chapter 2.

66

LSF-13a: Borrowers are least satisfied with high loan rates and the lack of discounts or bonuses for early or timely repayment, but the level of dissatisfaction is relatively mild. Borrower satisfaction with LPD loan rates earned a score of 2.93, putting it in the C grade range. This is lower than the overall satisfaction score but probably still adequate for this category – there will always be those who want lower rates. Satisfaction with bonuses and discounts for early or on-time repayment also falls in the low C range, scoring 2.91.

Figure 4.7 : Distribution of Loan Products Satisfaction Scores

2.91

2.93

2.95

2.97

3

3.02

3.04

3.05

3.05

3.06

3.09

3.09

2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Bonus and incentives

Interest rate

Loan administration dan provision fee

Penalty for late installments

Maximum loan size

The size of loan installments

Profesionalism of Account Officer

Loan term and installment schedule

Collateral requirements

Ease of procedures and document requirements

Flexibility in loan installments

Loan decision processing time

A & A+F CD B B+

67

For most categories, consumer borrowers tended to show slightly lower levels of average satisfaction than did enterprise borrowers.

Figure 4.8 : Comparison of Satisfaction Scores on Business and Consumer Loan

LSF-13b: LPD borrowers are most satisfied with fast loan processing time, payment flexibility, and the simple loan requirements and procedures.

Processing time, payment flexibility, and loan requirements all score in the B range for customer satisfaction. Unlike the scores for general service quality, though, there are no B+ scores among these service-oriented aspects of the LPDs’ loan products, underscoring the need for improvement in this area. LSF-13c: Savers are very satisfied with the ease of account withdrawals and opening a new account.

Savings product satisfaction appears to be roughly equivalent to loan product satisfaction, but for very different reasons. Whereas most loan product features elicited a fairly neutral response from borrowers, savers have some fairly strong “likes and dislikes” which more or less

2.84

2.90

2.91

2.93

2.94

2.99

3.00

3.03

3.04

3.05

3.07

3.07

2.92

2.96

3.00

2.93

2.99

3.02

3.03

3.05

3.06

3.04

3.09

3.09

2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3

Bonus and incentives

Loan administration dan provision fee

Maximum loan size

Interest rate

Penalty for late installments

The size of loan installments

Profesionalism of Account Officer

Collateral requirements

Ease of procedures and document requirements

Loan term and installment schedule

Flexibility in loan installments

Loan decision processing time

Business Loan

Consumer Loan

A & A+F CD B B

68

balance each other. The ease of making account withdrawals and opening a new account are definite “plus” factors for the LPDs, scoring 3.22, an A, and 3.17, a B+, respectively. Time deposit customers showed the same ranking of satisfaction with these two product features, but with B+ and B grades, respectively.

Figure 4.9 : Distribution of Passbook Saving Products Satisfaction Scores

LSF-13d: A high proportion of savers are unsatisfied with (the lack of) prizes and promotions for savings. LPD customer satisfaction with savings prizes and promotions was a very low 2.70, for an F (failing) grade. This is also one of the items which customers said they would like to see added to existing savings products. Time deposit customers rated prizes and promotion somewhat higher, giving LPDs a D in this category. Both savings customers and time deposit customers gave LPDs a C for interest rates.

2.7

2.93

3.04

3.17

3.22

2.6 2.7 2.8 2.9 3 3.1 3.2 3.3

Prizes and promotion

Interest rate

Administration fee

Ease of opening a savingaccount

Ease of savingwithdrawals

A & A+F CD B B+

69

Figure 4.10 : Distribution of Time Deposit Products Satisfaction Scores E. LPD Customer Loyalty Indicators LSF-14: Despite some dissatisfaction with LPD products and service, LPD customers show strong loyalty and commitment to continuing as LPD customers.

Whatever their feelings about LPD products and services, the overwhelming majority of LPD customers are comfortable recommending their LPD to friends, relatives and business acquaintances. 89% of LPD customers say they will recommend their LPD to friends, relatives, and business acquaintances as a good place to borrow, and 93% of customers say they will recommend their LPD as a good place to save.

Furthermore, 82% of borrowers say that they intend to borrow again from the LPD,

while 88% of savers say that they intend to continue saving.

2.83

2.92

2.99

3.03

3.10

3.12

2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3

Prizes and promotion

Penalty for withdrawingbefore maturity

Interest rate

Administration fee

Ease of opening a timedeposit account

Ease of withdrawals

A & A+F CD B B+

70

Figure 4.11 : LPD Customers Plans on Using LPD Services in the Future

2.2%

2.6%

10.1%

15.2%

87.7%

82.3%

0% 20% 40% 60% 80% 100%

Savers’ plans tocontinue saving

Borrowers’ plansto borrow again

YesDo not knowNo

LSF-14a: 67% of (non-borrowing) savers report that they plan to borrow from the LPD in the future, while nearly 80% of borrowers without savings accounts claim that they plan to save at the LPD in the future.

Figure 4.12 : Possibility of Cross-Selling on LPD Customers

6.8%

2.2%

26.2%

16.9%

67%

80.9%

0% 20% 40% 60% 80% 100%

Non-BorrowingSavers’ Intentionto Borrow at LPD

in the Future

Non-SavingBorrowers’

Intention to Saveat LPD in the

Future YesDo not knowNo

These findings indicate that LPD customers’ loyalty extends to other products offered by the LPD. This makes cross-selling a potentially productive strategy for the LPDs.

71

LSF-14b: Few LPD customers would switch institutions solely for a better interest rate.

Given the high level of loyalty shown by the statistics above, what would cause LPD customers to leave? More than 20% of customers say that nothing could cause them to stop using their LPD. For those who gave an answer (more than one was allowed), dishonesty/ corruption topped the list, followed by poor service and loss of faith in the LPD management. Only 9.7% of LPD customers indicated a willingness to move to another institution in order to obtain a more competitive interest rate.

Figure 4.13 : Factors that Would Cause Customers to Leave

1.4%

2.1%

2.2%

3.9%

5.7%

7.8%

9.0%

9.7%

20.7%

22.8%

29.1%

37.2%

0% 10% 20% 30% 40%

Need to save larger amount

Other

Other LPD or bank office closer by

Need different loan types (KPR, KKB, line of credit, etc.)

Want better prizes

Need larger loan

Do not know

Needing better interest rate

Nothing

Do not trust the management of the LPD

Bad service

Dishonesty or corruption by LPD staff

Broken down by account type, 12.4% of time deposit customers would leave their BPR for a more competitive interest rate elsewhere, while only 10.7% of savers and 7.4% of borrowers say they would do so.

72

Figure 4.14 : Customers Who Would Leave Their LPD for More Competitive Interest Rates Elsewhere, by Account Type

7.4%

10.7%

12.4%

0% 5% 10% 15%

Borrowers

Savers

Time Depositors

LSF-15: Loyalty to the LPDs does not stop some customers from using other financial institutions.

At the same time, customer loyalty to the LPD is not entirely exclusive: 14% of active customers report that they borrow from another institution, and 20.8% report that they save at another institution. The percentage of those borrowing elsewhere is virtually identical to the corresponding percentage for active BPR customers; however, the percentage saving elsewhere is much lower than the 34% of BPR customers who report having savings accounts at other institutions.

When these figures are broken down by survey method, some important additional

information emerges. For most of the questions in this survey, with the important exception of overall satisfaction18, there was very little difference in the responses given by LPD customers to LPD staff interviewers (the mail-out sample) v. the answers given to outside interviewers (the quality control sample), confirming that the lower-cost mail-out approach is a reliable survey method. Here, too, the difference between the percentage reporting loans from other institutions in the quality control is only slightly higher than that in the mail-out sample. However, the percentage of customers reporting savings accounts at other institutions is 36%, more than double the 17% who reported having additional savings accounts to the LPD staff interviewing them. When gathering information about LPD customers’ other savings relationships, it appears to be more effective to use outside interviewers. 18 See Section B. of this chapter.

73

Figure 4.15: Comparison, Customers’ Relationships with Other Financial Institutions by Survey Method

13.2%

16.7%

17.0%

36.2%

14%

21%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Borrowing from otherinstitutions

Saving at otherinstitutions

OverallQuality Control SurveyMail Out Survey

LSF-16: LPD customers believe that LPDs beat the competition.

The table below shows that LPD customers believe overwhelmingly that their institution is better than other institutions in both product delivery and overall service quality. Only 12% of LPD customers can name another financial institution they think is a better place to borrow, while 11% of savers can name a better place to save. This is a strikingly different response from that of BPR customers, particularly for savings19. LPD customers may not be entirely satisfied with the level of service they receive from their LPDs, but they appear not to believe there are better alternatives nearby.

Table 4.13: Comparisons by Active LPD Customers of LPD Service Quality and Products with those of Other Financial Institutions (FIs)

Service Quality and Products Comparison

Service Quality Savings Time

Deposits Loans

This LPD is better 48.4% 48.2% 43.3% 49.2%This LPD is as good as other 33.4% 28.9% 22.7% 24.6%Do not know 10% 11.8% 23% 14.5%Other FI is better 8.2% 11.1% 11% 11.7%TOTAL 100% 100% 100% 100%

N 1562 1469 1254 1421

19 In the BPR customer satisfaction survey, 30% of BPR customers thought that another local financial institution was a better place to save, just matching the 30% who thought their BPR was the best place for saving.

74

F. LPD Customer Feedback LSF-17: LPD customers most want to see improvement in service quality, and many would like to see improvement in LPD technology as well.

When asked what areas of LPD operations required further improvement, nearly half (49.9%) of respondents called for improvements in overall service quality. 32% of respondents thought that LPDs’ technology needs to be improved.

Figure 4.16 : Areas for Improvement of LPD

7.0%

12.4%

15.4%

19.3%

32.1%

49.9%

0% 10% 20% 30% 40% 50% 60%

Time Deposit product

Others

Passbook Saving product

Loan product

Technology

Service quality

LSF-18: Most LPD customers are satisfied with the products currently offered at LPDs, though some would like to see bill payment services, ATM access, and savings bonuses/prizes.

When asked which product or service they most needed but which was not yet available at the BPR, the most common response was “Nothing” (33%). For those giving an answer, bill payment services, ATM access, and savings bonuses/prizes were the items most frequently mentioned.

75

Figure 4.17 : Financial Services/Product Needed but not yet Provided by LPDs

0.9%

2.0%

2.1%

2.2%

3.8%

16.5%

17.0%

22.9%

32.6%

0% 5% 10% 15% 20% 25% 30% 35%

Other

Clearing facility

Line of Credit

Credit card

Funds transfer

Savings account with prizes

ATM

Bill payment (electricity, phone, water)

Nothing

G. LPD Customer Values LSF-19: When asked to choose between attractive products and good service, 79% of LPD customers chose good service over attractive products, an even higher priority on service than BPR customers placed.

In general, this indicates that improvements in service will have a greater impact on the overall satisfaction of LPD customers than will equivalent improvements in product satisfaction. Customers were also asked which aspects of service and products were important to them.

Figure 4.18 : The Importance of Service vs. Products for LPD and BPR Customers

35%

21%

65%

79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

BPR Customers LPD Customers

Attractive productsGood services

76

LSF-20: Among the aspects of service quality, LPD customers most often identified capability and integrity of LPD staff as important to them. Staff friendliness and quick, convenient service were also frequently mentioned.

Recalling the customer satisfaction results presented earlier, LPDs do well with respect to honest and integrity, earning a B+ with a 3.12 average score. However, customers rate the LPDs a little lower in terms of staff capability, giving them a 3.04 average score, a B. Staff earn B+ grades for friendliness and quick service.

Among the less frequently mentioned aspects of service, physical security (building and

documents) earned scores in the B range, while location rated a B+. Given their importance to customers, staff capability and physical security will need to become priorities for improvement at many BPRs.

Figure 4.19: Aspects of Service Quality Considered Important to LPD Customers

5.0%

12.9%

24.4%

26.7%

33.5%

34.0%

46.4%

50.5%

0% 10% 20% 30% 40% 50% 60%

Other

Working hours conform to customer need

Easily accessible location

Security

Convenient and quick service

Nice, polite, and friendly LPD staff

Honesty and integrity of LPD staff

LPD staff who are capable and understandcustomer needs

LSF-21: LPD borrowers most often identified the interest rate as an important aspect of the loan product. Simple procedures and requirements followed by loan terms and installment schedules that conform to customers’ needs were also frequently mentioned.

In terms of satisfaction with the most important product aspects, LPDs do best with simple procedures, earning a B with a 3.06 score. Loan repayment schedules also earned a B,

77

while interest rates were graded in the C range by customers, acting as a drag on product satisfaction (though, as mentioned earlier, the LPDs do considerably better in this category than the BPRs).

Figure 4.20: Loan Product Features Considered Important by LPD Borrowers

0.7%

6.0%

12.4%

27.3%

28.2%

31.0%

34.4%

36.7%

38.8%

0% 10% 20% 30% 40% 50%

Other

Large loan size

Interest rate discount and bonus

Low administration fee, provision fee, and penalty

Fast loan decisions

Installment amount conforms to the capacity ofcustomer

Loan term and installment schedule conform to thecapacity of customer

Simple procedures and requirements

Interest rate

LSF-22: For savings and time deposit products, ease of withdrawals and competitive interest rates were considered top priorities, with security as a second priority. LPDs score very well in ease of savings withdrawals, earning an A with an average score of 3.22. Security of savings (and time deposits) earns a 3.18 average score, placing it in the B+ category. Interest rates fare relatively poorly with a C grade and average score of 2.93 (though again, the LPDs perform better here than do the BPRs). For time deposits, the same top 3 priorities – ease of withdrawals, interest rate, and security – appeared, though interest rates were by far the most frequently cited product aspect, considered important by 59% of time deposit customers. Among time deposit customers, ease of withdrawals earned a B+ with an average score of 3.12, while security also earned a B+. Interest rates earned an average score of 2.99, a high C.

78

Figure 4.21 : Savings Product Features Considered Important by LPD Savers

0.6%

5.3%

11.1%

12.5%

19.3%

21.0%

37.6%

50.6%

51.2%

0% 10% 20% 30% 40% 50% 60%

Other

ATM and on-line services

Easy access to funds

Low administration fee and penalty

Ease of savings account opening

Attractive incentives and savings promotion

Security

Interest rate

Ease of savings withdrawals

Figure 4.22 : Time Deposit Features Cited as Important by LPD Time Deposit Customers

1.0%

5.2%

9.8%

13.9%

14.4%

22.2%

43.8%

51.5%

59.3%

0% 10% 20% 30% 40% 50% 60% 70%

Other

ATM and on-line services

Easy access to funds

Low administration fee and penalty

Ease of savings account opening

Attractive incentives and savings promotion

Security

Ease of savings withdrawals

Interest rate

79

H. Inactive/Former Customers LSF-23: Inactive/former customers are typically poorer and more likely to be farmers than are active customers.

In their product use, inactive/former customers tend to have had somewhat smaller

savings and loan amounts than current customers, and inactive/former customers are much more likely to be male relative to active customers. As one would expect, inactive/former customers are more likely to have experienced loan repayment problems. Age, family and education characteristics are much the same as for active customers, as are length of time as customers and distance to the LPD.

Inactive/former customers are likelier to be farmers and tend to have lower incomes than active customers.

Figure 4.23 : Comparison of Occupation of LPD Active & Inactive Customers

2.0%

3.6%

7.7%

13.0%

25.0%

48.7%

1.1%

3.3%

9.2%

16.6%

30.6%

39.1%

0% 10% 20% 30% 40% 50% 60%

Student

Others

Public servant

Private companyemployee

Farmer

Private business

Inactive CustomersActive Customers

80

Figure 4.24 : Income Distribution, LPD Active & Inactive Customers

42.3% 43.7%

10.6%

2.5% 0.9%

50.7%

37.8%

10.3%

0.6% 0.6%0%

10%

20%

30%

40%

50%

60%

<= Rp 500.000 > Rp 500.000 -1.5 million

> Rp 1.5 million - 3 million

> Rp 3 million - 5million

> Rp 5 million

Active CustomersInactive Customers

LSF-24: Former customers still show a strong degree of loyalty toward the LPDs.

As with active LPD customers, there is a big difference between the “mail-out” (administered by LPD personnel and “quality control” (administered by the REDI survey team) results, with the quality control sample producing much higher satisfaction scores. Overall satisfaction of previous customers in the mail-out sample falls in the C grade range with an average score of 2.97, while overall satisfaction in the quality control sample is a strong 3.15, good enough for a B+. Indeed, there is no statistically significant difference in the (high) average satisfaction reported in the quality control active and inactive/former customer samples. This provides strong support for the hypothesis that even inactive and former LPD customers want to present a good impression of their LPD to outsiders. Although this finding is somewhat accidental, it is an important indicator of the sense of ownership found among Balinese villagers for their LPDs.

Table 4.14 : Overall Satisfaction of Previous LPD Customers by Survey Method

Method Mean N Margin of Error

Mail Out 2.94 293 ± .05QC 3.15 61 ± .13Total 2.97 354 ± .05

89% of prior customers say they will still recommend the LPD to friends, family and

business associates for loans, and 93% say they will recommend the LPD for saving.

81

LSF-25: Very few former customers stop using the LPDs out of dissatisfaction.

Not surprisingly, inactive/former customers are less satisfied with their LPDs than are active customers. What is surprising, though, is that the percentage of unsatisfied or dissatisfied customers is still relatively small. Only 9.6% of inactive/former customers express a lack of satisfaction with their LPD, compared with 4.2% of active customers. Dissatisfaction is clearly not the sole factor driving customer exit from LPDs.

This also shows up in previous customers’ plans for the future: 76% of previous

customers indicate that they would like to borrow from the LPD in the future, while 83% report that they would like to save at the LPD in the future. LSF-25a: 37% of previous LPD borrowers have paid off their loans and feel that their relationship with the LPD is ongoing, while 24% of previous borrowers have unresolved problem loans. 22% of previous borrowers consider themselves to be active LPD customers, while 12% consider themselves former customers of the LPD.

Figure 4.25 : Combined Classification of Inactive/Former Borrowers

4.5%

12.4%

22.3%

23.8%

37.1%

0% 10% 20% 30% 40%

Other

Former customer

Active customer

Problem loan customer

Inactive / resting customer

The two key groups for further exploration are the inactive borrowers and the (self-identified) former borrowers. For inactive borrowers, we would like to know why they are “resting;” for former borrowers, we would like to know why they have stopped using the LPD.

For both groups, the main reason for not borrowing is lack of demand; 58% of former

borrowers and 56% of inactive borrowers said that they did not need a new loan because their enterprises had slowed down. Neither former nor inactive borrowers cited poor service as their main reason for not borrowing. Interest rates and need for a larger loan were each cited by 13% of former customers. 12% of inactive customers also cited interest rates as their main reason for not borrowing, while 8% cited the need for a larger loan.

82

Figure 4.26 : Main Reason for Not Borrowing, Inactive v. Former Borrowers (Excludes Problem Borrowers)

2.7%

8.2%

12.3%

20.5%

56.2%

4.2%

12.5%

12.5%

12.5%

58.3%

0% 10% 20% 30% 40% 50% 60% 70%

Collateral problem

Need larger loan size

Want a lower loan interest rate

Other

Do not need new loan because business isslowing down

Former borrowerInactive / resting borrower

LSF-25b: 70% of past savings customers and 69% of past time deposit customers feel that their LPD relationship is ongoing and expect to save (and possibly borrow) there in the future.

The large majority of previous savings and time deposit customers consider themselves to be merely “resting,” not to have ended their relationship with the LPD. In addition, 20% of previous savings customers and 19% of previous time deposit customers considered themselves active customers of the LPD even though they had no account open at the time of the survey.

Figure 4.27 : Self-Classification of Inactive/Former Savers

0.5%

1.6%

7.8%

20.2%

69.9%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Do not know

Other

Former customer

Active customer

Inactive / restingcustomer

83

Figure 4.28 : Self-Classification of Inactive/Former Time Deposit Customers

So why did these customers stop using the services of their LPDs? Lack of demand is the

main reason: 72% of ex-savers state that they have “no money to save” at present, while only 14.6% mention a reason that can be related to competition. Only 2.1% explicitly mention problems with LPD service (bad service or corruption). Lack of demand is also the main reason for time deposit customers no longer using the LPD: 73% say they have no money to save at present.

Figure 4.29 : Main Reason for No Longer Saving, Inactive v. Former Savers

12.5%

18.8%

68.8%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Former customer

Active customer

Inactive / restingcustomer

1.3%

1.3%

1.3%

1.9%

3.1%

3.8%

3.8%

10.7%

73.0%

4.2%

0.0%

0.0%

0.0%

0.0%

4.2%

0.0%

16.7%

75.0%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Need to save larger amount

Poor service

Dishonesty, corruption, or illegal charges by LPD staff

Other LPD or bank office closer by

Want savings product with prizes

Want higher savings interest rate

Want a safer place to save

Other

No money to save

Former saverInactive / resting saver

84

Figure 4.30 : Main Reason for No Longer Saving, Previous Time Deposit Customers

6.7%

6.7%

13.3%

73.3%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Want higher savings interest rate

Want a safer place to save

Want savings product with prizes

No money to save

LSF-26: Inactive/former customers overwhelmingly feel that the LPD is the best available source of financial services for them.

Inactive/former customers were asked to compare their LPDs’ savings products, loan products, and overall level of service with those of other financial institutions. In each category, inactive/former customers overwhelmingly (88% or more) believe that LPDs are better than other institutions nearby. Inactive/former LPD customers may not be completely satisfied with LPD service, but they do not appear to believe there are better alternatives nearby.

Table 4.15 : Comparisons by Previous BPR Customers of BPR Service Quality

and Products with those of Other Financial Institutions (FIs)

Service Quality and Products Comparison

Service Quality Savings Time

Deposits Loans

This LPD is better 45.6% 41.4% 36.7% 46.1%This LPD is as good as other 35.2% 32.3% 20.1% 24%Do not know 13.6% 16.9% 31.8% 18.1%Other FI is better 5.6% 9.4% 11.4% 11.8%TOTAL 100% 100% 100% 100%

N 338 319 289 304

LSF-28: Inactive/former borrowers have no new suggestions on how to improve loan products.

Except for problem loan customers, nearly 100% of inactive/former borrowers felt that the LPDs’ loan products met their needs. When asked for suggestions (no “multiple choice” options were provided) about how LPDs could improve their loan products, the responses were unsurprising: the two main areas highlighted were “lower interest rates” (31%) and “improved service and personnel” (30%).

85

Figure 4.31 : Previous Borrowers Who Feel that the BPR Loan Product Meets Their Needs

62%

95%

100%

100%

0% 20% 40% 60% 80% 100% 120%

Problem loan customer

Active customer

Inactive / resting customer

Former customer

Figure 4.32 : Suggestions for Loan Product Improvement, Previous Borrowers

1.9%

2.5%

3.7%

3.7%

4.3%

8.0%

9.9%

14.8%

19.1%

32.1%

0% 10% 20% 30% 40%

Incentives in the form of interest discount and prizes

Flexibility for late payment

Loan product conform to customer need (such as:seasonal loan, line of credit, etc)

Other

Easier collateral requirement

Product promotion

Do not know / no suggestion

Add LPD capital

Improvement on services and loan staff

Lower interest rate

86

LSF-29 : For savings product improvement, in addition to the usual “higher interest rates, better service” responses, inactive/former customers would like to see more savings promotions and prizes. Technology-based product features (ATM, transfers, etc.) were almost never mentioned.

For passbook savings, the most frequent suggestion for product improvement was “higher interest rates” (36%). Following this response were two more suggestions: improved service and personnel (20%) and incentives and prizes (12%). Almost no respondents made product suggestions related to technology (on-line service, ATMs, etc.).

Figure 4.33 : Suggestions for Savings Product Improvement, Previous Savers

2.7%

3.4%

4.7%

9.5%

11.5%

12.8%

19.6%

35.8%

0% 10% 20% 30% 40%

Others

New attractive product

Come to customer place

Broaden the promotion

Incentives and prizes

Do not know / no suggestions

Improving services and BPR staff

Higher interest rate

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Inactive/former time deposit customers suggested that LPDs “broaden promotions” and “increase interest rates” in order to improve the time deposit product.

Figure 4.34 : Suggestions for Deposit Product Improvement, Previous Time Deposit Customers

15%

23%

31%

31%

0% 10% 20% 30% 40%

Incentives and prizes

Come to customer place

Higher interest rate

Broaden the promotion

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V. Conclusions and Recommendations, LPD Customer Satisfaction Survey A. LPD Customer Satisfaction: Good, but Needs Improvement The LPDs are remarkable institutions. Not only is the system as a whole in good financial health, but, according to their customer profiles, LPDs reach much further down the economic scale than most BPRs or other commercial microfinance providers. This enables the LPDs to play a unique and important role in Balinese economic development.

While serving a lower-income clientele, most LPDs are also doing well at satisfying their customers. Service quality is considered good on average, and the top 40% of LPDs are considered very good to excellent by their customers. Most LPDs can be proud of their customer satisfaction scores, particularly those related to aspects of service. However, the LPD system is not yet in a position to be satisfied with their customers’ current level of satisfaction, for three reasons. First, 30% of LPDs earn a C grade or worse in customer satisfaction. For these LPDs, there is a need for a concerted effort to bring both customer service and product quality up to a higher level. The good news is that the main need for most of these LPDs is to provide better service to their customers – and the ways in which to achieve this are relatively straightforward and inexpensive. Second, LPDs compete with commercial banks for the business of many active LPD customers. At least 21% of active LPD customers (and the quality control survey results suggest the actual figure could be as high as 36%) have savings accounts at another financial institution. In addition, 14-17% of LPD customers borrow from another financial institution. These customers form an important part of the LPDs’ customer base, and the LPDs will need to work hard to maintain or increase their share of these customers’ banking business.

For LPDs, the main competitors appear to be BRI, the BPD Bali, other state banks, and BCA (this last for savings only, not credit). Only 1% of LPD customers feel that nearby BPRs offer better products or service than their LPD. Given that the LPDs simply cannot match many of the products offered by these banks (e.g., ATM and online service, exciting and heavily promoted lottery prizes for savers), this adds emphasis to the need for continued service improvement. Third, LPD customers want more – more service, better products – than they are receiving at present. Most LPDs appear to be in the enviable position of having an extremely loyal – and growing – customer base, even when customers are not completely satisfied with the service and products of the LPDs.

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B. The Challenge: Repaying Outstanding Customer Loyalty with Outstanding Service

The core challenge, then, is to ensure that all LPDs deliver service worthy of the loyalty they receive – before other instutions begin serious efforts at reaching down-market. The best LPDs clearly already achieve this, but there are also some LPDs in the sample with deeply dissatisfied customers.

Customer loyalty, defined here as behavior resulting from a combination of satisfaction and the customer’s sense of belonging or ownership, is producing tangible benefits for the LPDs. Customers tend to stay with LPDs a long time, increasing profitability and decreasing marketing costs. Customer loyalty is also expressed as an unwillingness to move even when interest rates might be better elsewhere. This appears to be one of the key reasons LPDs are able to maintain strong interest and profit margins.

Balinese villagers also clearly have a degree of built-in loyalty to the LPDs which contributes to continued customer growth. At some point, though, customer satisfaction will need to contribute more to building loyalty than it does now if the LPDs are to continue growing – and retain the business of successful customers.

In particular, people who value product quality more highly than most LPD customers at present may not find LPDs to be attractive. Even though present customers tend to value service over products, LPDs will also need to improve product quality in order to attract new customers and retain successful customers, who may become more product-sensitive as they grow familiar with commercial banks’ offerings.

C. Improving Customer Satisfaction – A Key Part of LPDs’ Growth and Profit Strategies

Improving customer satisfaction can play a key part in LPDs’ profit and growth

strategies. To contribute to profits, improvements in customer satisfaction must be efficient, delivering the most “bang for the buck.” This survey has identified some important areas for improvement, but each LPD will need to decide which of the many possible ‘investments’ in improving customer satisfaction are feasible and carry a sufficiently low cost to ensure a strong return. That said, it is still possible to map out a strategy for systematically and efficiently improving LPD customer satisfaction. Several key elements in such a strategy are included as recommendations below. D. Recommendations for Improving LPD Customer Satisfaction 1) Improve the performance of LPD management and staff. LPD customers are already satisfied with the honesty, politeness, and friendliness of LPD personnel, but they would like LPD personnel to improve their capabilities, particularly in their marketing and communication ability (related skills include understanding and responding to customer needs, explaining things clearly and simply, etc.). Improving staff performance normally requires a balance between training and incentives, with job security and a clearly marked career path serving as the best incentives.

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2) Expand or introduce incentives and promotional bonuses for customers. Based on the survey results, customers would like to see improvement in the incentives and prizes they are offered for their business, particularly for saving. 3) Build in cross-selling strategies. The survey results strongly suggest that LPD customers are open to using the other products offered by the LPDs. LPDs can take the initiative in this area by pre-qualifying (with assessment) reliable savers for loans and offering to build “automatic” savings deposits into loan repayment schedules. 4) Improve office layout and appearance. Though LPD customers certainly do not expect luxurious banking halls, they do prefer that the LPD offices be accessible, clean, well-lit, and spacious enough to comfortably accommodate staff and customers. 5) Extend office automation. Even among the LPDs which already have computers, there are large differences in how effectively these computers are used to improve service and increase staff productivity. For the LPDs, the main IT emphasis at present should continue to be effective use of computers in supporting operations and decision-making – bringing new online services to customers is probably not feasible at present, nor is there heavy demand for these services. 6) Use customer feedback to guide investment and effort. In addition to developing/improving management information reports which track trends in the number of customers/accounts as well as Rp. business, LPDs should strive to implement systematic efforts at understanding what customers want. One efficient, low-cost means of doing this is through periodically inviting a sample of customers to participate in focus group discussions. The key, though, is action: once customer needs are specified and prioritized, though, the LPDs need to include programs for implementation in their workplans. E. Look for Shared Solutions A key part of developing cost-effective strategies is to look for shared solutions. Some areas in which a joint approach might increase effectiveness include: • Joint promotions and prizes, • Training programs, • Regulatory Impact Analysis – useful as the basis for lobbying regulators and supervisors

for needed changes in rules or supervision, • Best-practice office automation – developing a clear “upgrade path” so that LPDs know

what hardware and software to add as they become able (and grow to need them), • System-wide customer satisfaction monitoring – to give LPDs a sense of where they stand

among their peers, • Development of a standardized, low-cost approach to customer satisfaction monitoring

at individual LPDs, and • Sharing of success stories – short, well-written case studies highlighting successful

approaches to promotion, incentives, human resource and customer service improvement, etc.

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