Micro Credit Financing and Poverty Alleviation in OIC Member States

Istanbul, July 9-11, 2007

ISMANTOBANK RAKYAT INDONESIA

BUSINESS LANDSCAPE (2006)BUSINESS LANDSCAPE (2006)

Source: Kompas, August 11, 2006

7.9 mio(15%)

MSEs85%

Medium + Big Corporates

15%

MSEs Medium + Big Corporates

(44.8 mio)

(7.9 mio)

Number of Business Units (57.7mio)

Microfinance in IndonesiaMicrofinance in Indonesia

Source : Central Bank Directorate of Rural BankingSupervision

Rural Banks (BPR/BPRS)

Act = The Banking Act No.10/1998License = Bank Indonesia, the Central BankSupervision = The Central Bank Act No.23/1999

MFIs

Bank

Non Bank

BRI Unit

Act = The Banking Act No.10/1998License = Bank Indonesia, the Central BankSupervision = * BRI Branches

* Bank Indonesia for BRI as a Whole (Commercial Bank)Village Credit Board (Badan Kredit Desa =BKD)

Act = Bank act No.10/1998License = Bank Indonesia, the Central BankSupervision = BRI on behalf of Bank Indonesia

Cooperatives (KOSIPA)

Act = Cooperative Act No.25/1992License = State Ministry of cooperative & Small

EnterpriseSupervision = State Ministry of cooperative & Small

Enterprise

Non Formal

LDKP (The Funds and Credit Institutions)

Act = ---------License = Governor of each ProvinceSupervision = Local Government Level I

• Non Government Organization (NGO) • Self Help Group • BMT• Rotating Saving & Credit Association (ROSCA)

Formal

ABOUT BANK BRI… Bank BRI was founded in 1895 by Raden Arya Wirya

Atmaja, in Purwokerto (Central Java) as a Support and savings bank for civil servants.

The growth of BRI is regarded as the beginning of Indonesian rural banking.

After 111 years of operation, Bank BRI still focuses its business on microbanking: making banking products and services accessible for the poor in Indonesia.

Becoming a leading commercial bank in Indonesia which puts customers’ satisfaction as the priority.VISION

MISSION1. Performing the best banking activities

focusing on providing services for Micro, Small, and Medium Enterprises to support Indonesia’s economy.

2. Providing excellent services for customers through widespread network, supported by professional HR by implementing GCG.

3. Providing optimum added values for all stakeholders.

STRATEGIESSTRATEGIES

1. Focus on the core business2. Expand operational coverage3. Strengthen Risk Management4. Use information technology

for operational efficiency

BIMAS Program

was successful.

BRI UnitUnsustainable

Initiated to support BIMAS Program (the Rice Self Sufficiency Program): BRI’s functioned as a government agent to channel subsidized loans for farmers

BRI-Unit 1970

Since 1984, BRI Units … Structurally an autonomous financial unit Staff accountability closely associated with

Unit’s performance Under branch’s supervision Strengthening the internal supervision,

audit capacities and staff capability Commercial approach Market based products

Fundamental Changes in Unit Banking Business Policies

Micro Banking staff become BRI Employees New accounting system focusing on

transparency Introduction of KUPEDES (General Rural Credit) Relocation of Poorly-sited BRI Units Development of SIMPEDES (Rural Savings) Introduction of performance incentives Organization of staff and supervision Personnel Training and Development

Simplicity

Transparency

Cost

RecoveryAccessibility

Sustainability BasicPrinciples

BRI MICRO BUSINESS DIVISION

VISIONVISION Promoting BRI as the Best Microfinance Promoting BRI as the Best Microfinance Provider in the WorldProvider in the World

1.1. Providing the BEST services in Providing the BEST services in microbanking to enhance the poor microbanking to enhance the poor economy; economy;

2. 2. Making contribution to BRI in the form Making contribution to BRI in the form of maximum profit and benefit;of maximum profit and benefit;

3. 3. Actively participating in the Actively participating in the international microfinance international microfinance development.development.

MISSIONMISSION

STRATEGIES Reorganizing so as to be more focused in competition Taking steps for efficiency and effectiveness Product development Market expansion IT development HR quality and service enhancement BRI Units’ Office/outlet performance enhancement Optimizing networks Locking micro market using Strategic Alliance

BRI MICRO BUSINESS DIVISIONBRI MICRO BUSINESS DIVISION

1 Head Office

13 Regional Offices11 Regional Audit Offices

331 Branches

Phone Banking Facility

ATMs :977 ATM BRI 9.000 ATM Bersama 3.627 ATM Link

207 Sub Branches

4.229 BRI Units

133 Village Service Posts

45 Sharia Branches

ATM Cirrus & Alto around the world

BANK RAKYAT INDONESIA Networks

Target CustomersIncome Levels Commercial Financial Services Subsidized Poverty

Alleviation Programs

Lower MiddleIncome

Economically-Active Poor

Extremely Poor & Displaced households

Standard CommercialBank loans; full range of

savings services

CommercialMicro loans

Interest-bearing savings

accounts for smallsavers

Povertyprograms for

such purposes as food and water,Medicine and

nutrition,employment

generation, skillstraining, and

relocation

Poverty line

Target

Source: Robinson, M.. 2002. The Microfinance Revolution. Lessons from Indonesia,. The World Bank & Open Society Institute. Washington DC.

BRI APPROACHES Poverty Alleviation Program

Target : Below the Poverty Line

• Collaboration between BRI & Government agencies

• Interest subsidized by government • Funding from IFAD, ADB, BRI, etc.

1. Rural Income Generating Project (RIGP)

2. Program Loans• Focus on strengthening rice production

and food security program including cooperative sectors

• Target: farmers, agricultural sector, and cooperatives

• Interest rate set up by the government

3. Microbanking Target: micro entrepreneurs & the economically active

poor Loan size up to Rp 50 million (US$ 5,600) Commercial approach Simple procedures, quick disbursement Loan product: Kupedes (the General Rural Credit)

BRI’S APPROACHESBRI’S APPROACHESTarget : Above the Poverty Line

Target: Viable small enterprises Loan size up to Rp 5 billion (US$

55,000) Conventional banking approach

4. Small Loans

BANK RAKYAT INDONESIA - MICROBANKINGA Commercially Sustainable Microfinance System

• more than 4,200 outlet, covers the country up to the level of sub-district and village

• almost 30,000 employees

• 3.4 million borrowers, 32 million savers

• Provide wide range market-driven products (loan, saving and other services)

• Good financial performance (almost all outlets are profitable, NPL<2%, ROA>6%)

BRI is known as the largest and the best microbanking system in the world.

BRI GO PUBLIC• Bank BRI made its Initial Public Offering (IPO) in

November 2003, with 59.5% of the shares was owned by the government and 40.5% belonged to the public (55.3% went to foreign investors, and 44.7% to domestic investors).

• As of September 2006, 42.6% of the shares was owned by the public (88.5% went to foreign investors; 11.5% to the domestic)

Share Price at Jakarta Stock Exchange

IPO : Rp. 875

Recent : Rp. 6,400

Share Holders

Government : 57.4%

Public : 42.6%

Local ownership : 11.5%

Foreign ownership: 88.5.4%

BRI is Public listed company at Jakarta Stock Exchange.

(June 5, 2007)

BRI FINANCIAL PERFORMANCE

DATA31 Dec.

2005(billion)

In USD(mio)

31 Dec. 2006

(billion)

In USD(mio)

Growth

Total Asset 122,776 13,641 154,725 17,192 26.02%

Outstanding Loans 75,533 8,393 90,283 10,031 19.53%

Public Deposits 97,046 10,783 124,468 13,830 28.26%

Net Profit 3,809 423 4,258 473 11.79%

Net Interest Income 12,426 1,380 13,770 1,530 10.81%

CAR 15.29% 18.82% 23.08%

Latest update: April 2, 2007

BANK RAKYAT INDONESIA Financial Highlight

Loans: Maintained Key Success FactorProven Commitment and Focus to Micro, Small and Medium Enterprises

30.5% 30.5% 30.8% 30.2% 30.2%

24.2% 23.4% 23.1% 21.9% 21.2%

24.2% 26.9% 28.0% 28.5% 27.0%

3.7% 4.6% 4.6% 6.2% 8.2%17.4% 14.7% 13.6% 13.2% 13.3%

0%

50%

100%

2002 2003 2004 2005 2006

Micro Small Consumer Small Commercial Medium Corporate

86.7% Loans to MSME

Loan Definitions : By Loan SizeMicro Loans : Up to Rp 50 mio (US$ 5,000)Small Consumer : Up to Rp 200 mio (US$ 20,000)Small Commercial : > Rp 50 mio to Rp 5 bio (US$500,000)Medium Loans : > Rp 5 bio to Rp 50 bio (US$ 500,000 – US$ 5 mio)Corporate Loans : > Rp 50 bio ( > US$ 5 mio)

BANK RAKYAT INDONESIA

Loans: Steady High GrowthLoan CAGR – by Business Segment

2002 - 2006 (Full Year)Mikro 22.8%Small Consumer 19.1%Small Commercial 26.5%Medium 50.3%Corporate 15.0%

12.01 14.54 19.19 22.78 27.289.52 11.2014.38 16.54

19.159.53

12.7017.47

21.5524.42

1.452.17

2.864.72

6.866.99

8.46

9.94

12.007.42

39.3747.60

90.2875.53

62.37

-

50.00

100.00

2002 2003 2004 2005 2006

IDR

Trillio

n

Micro Small Consumer Small Commerc ialMedium Corporate Total

BANK RAKYAT INDONESIA Loans: Steady High Growth

In the last five years, loan growth was driven by micro, small and medium loans

Medium loans showed the highest growth in

percentage, but in the amount of loan, micro loans and small commercial loans were still the segment where BRI expanded its loan book.

In 2005 -2006, loan increased by IDR 14.75 trillion. Micro and Small Commercial Loans contributed 50 % of it.

BANK RAKYAT INDONESIA

Loans: Steady High Growth2005-2006 Loan Expansions

by Business Segment (IDR Trillion)

2.05

2.71

2.88

2.61

4.50

- 2.50 5.00

Corporate

Medium

Small Commercial

Small Consumer

Micro

idr trillion

BANK RAKYAT INDONESIA Deposits: Trending Down of Cost of Funds and Improving Mix

13.4 17.4 16.6 21.0 20.7 27.9

51.8 58

.3

44.6 49.4 48.1 50

.2

30.3

24.5

33.0

38.439

.7

36.7

7.43

12.75 12.75 12.2511.25

9.75

4.60 4.73

6.206.24 6.21 6.07

0.0

4.0

8.0

12.0

Dec-04 Dec-05*) Mar-06 J un-06 Sep-06 Dec-06*)10

50

90

130

Demand Savings Time BI Rate (%) COF BRI (%)

BANK RAKYAT INDONESIA Deposits: Trending Down of Cost of Funds and Improving Mix

BRI’s cost of funds had been relatively resilient in the period of increasing interest rate, and decreasing steadily in the time of declining interest rate

Although there were some shifts toward high cost funds (time deposits) in late 2005 up to Q3 2006, low cost funds were still the majority in BRI deposits.

Despite the shift, BRI’s deposits mix was steadily better than the Industry’s

2007 : Outlook

Changes in Regulatory Environment

Easing criteria of one debtor one loan classification. Single loan classification will only be applied to loans with total exposure of equal or more than Rp. 5 billion

Opportunities for companies with bad loan history to get new loans as long as the cause of the bad loans are not related to any mismanagement practices or any bad intentions.

Quality of loans with total exposure below Rp 5 billion , or loans to projects guaranteed by the Government, will be determined solely on timeliness of payments.

Maximum loans of up to 30% bank’s legal lending limit will be permitted for loans to all State Owned Enterprises engaged in development projects (not only infrastructure projects).

Relaxation Policies from Bank IndonesiaIntended to spur loan disbursements, especially loans to MSMEs

Maintaining loan growth at around 20% Maintaining high loan quality, by keeping NPLs (gross) at

around + 5% Targeting deposits growth at around + 14% Maintaining the dominance of low cost funds in the

deposit mix, targeting more retail depositors Lower interest rate will give more advantage to BRI:

High net interest margin can be maintained:- Better mix of funds resulted in a lower cost of funds- High quality of loan growth

better valuation of government bonds

BI’s relaxation policy and lucrative business in serving MSMEs meanthat there will be more opportunities as well as more competitions among banks

BRI in 2007 : General Directions

BRI in 2007 : General DirectionsMicro Businesses - Emphasizing the Economic of Scale

Opening new outlets in the prospective areas, continue the on-line process of the existing outlets, on cost and benefit basis

Widening micro customer base by recruiting new customers long fostered through ‘subsidized loan schemes’

Setting more challenging targets for micro units accompanied by fairer incentive schemes

Improving and polishing products to cater more to customers’ needs and to compete better

THANK YOU