Locking out micro-finance

Huge growth potential in micro, small and medium businesses – over 60 percent of which have no access to banking services


Bank Rakyat Indonesia (BRI) has been the most profitable Indonesian bank for six years thanks to its aggressive focus on low-income businesses. The higher profit margins available in servicing micro and small commercial businesses have been a powerful engine for growth for the bank, which recorded IDR 11.47trn ($1.33bn) of net profit in 2010. A huge programme of expansion means the bank now has the widest banking business coverage in the nation, giving it the best access to Indonesia’s captive market of 240m people.

BRI is also the second largest bank in Indonesia in terms of assets: helping it to tap the potential of unbanked entrepreneurs, developing them into bankable businessmen and so empowering the economic community.

This focus comes with expensive operating costs and high capital needs for infrastructure – but this has not discouraged the bank from increasing its national penetration. Now with more than 7,000 outlets, the bank has created strong entry barriers to its competitors in serving Indonesia’s huge microfinance potential.

Working so closely with entrepreneurs means the bank has a real focus on providing excellent services that are relevant to local businesses’ actual needs. “We have gone all out in improving our performance,” says Sofyan Basir, CEO of BRI. “We optimise our intermediary function by disbursing healthy loans to prospective businessmen, particularly into micro, small and medium segments. We keep improving our services, and keep innovating new banking products and features to increase our fee-based income.”

“We have put much effort into raising low-cost funds and effectively manage our funding as well as improving our efficiency,” he says. “We aim to reach at least a 60 percent current and savings account deposit ratio through our outlet expansion strategy across this nation – the strategy also aims to create economies of scale.”

Indonesia’s growth potential
As the world secures its recovery from the financial crisis, emerging Asian countries such as China, India, South Korea and Indonesia have an optimistic future thanks to their abundant resources and greater potential for growth. Of course, the crisis caused a significant decline in global demand for Indonesia’s exports – but the huge potential of the country’s domestic market has not yet been fully realised.

For the banking sector this is a huge opportunity, and BRI’s expanding infrastructure, solid capital base and skilled staff give it a competitive edge to reach Indonesians at every economic level. “Our target is to serve at least 80 percent of our loan portfolio to micro, small and medium (MSM) businesses, but there is huge untapped potential everywhere in this country,” says Mr Basir. “As long as we can grow faster to provide services to those potential customers, we believe that we can create much higher ROE – and also relatively higher net interest margin, due to the fact that MSM businesses create higher margin.”

“We have already proven to the world that our company is one of the most attractive companies to invest in, as we are able to give return on equity around 30 percent,” he says. “However, we are also aware that market competition and regulators will bring our net interest margin down in the long run. Therefore, we continually try to boost our fee-based income as a second line income source.”

Knowing the market
According to Indonesia’s central bank, 99.9 percent of Indonesian entrepreneurs are categorised as micro, small and medium businesses – and approximately 60-70 percent of them have no access to banking services. Furthermore, a World Bank survey conducted in 2009 found that 32 percent of Indonesian citizens are financially excluded, and poverty is still high in the country. Other studies have confirmed this – the ratio of loan to GDP in Indonesia was 27.8 percent in 2010, indicating lower bank penetration.

Businesses are underserviced because of their size. There are more than 12,000 traditional markets in Indonesia, driving what the west would call the high street economy – but because they are small or sole traders, they are normally considered unbankable. Furthermore, traditional banking services are not available to these businesses because owners cannot leave the marketplace during business hours.

BRI’s strategy, however, is to bring banking services to the traders.

The bank has operated its ‘Teras’ – sub-micro outlets – since May 2009. These Teras embrace feasible but not-yet-bankable people and entrepreneurs, expanding BRI’s penetration into Indonesia’s traditional markets. Officers equipped with electronic data capture devices visit traders in their place of business to offer banking services such as microloans, deposits, utility payments and transfers. This pro-active approach is of significant benefit both to the traders and BRI, which would not otherwise have enjoyed their business.

BRI offers a wide range of market-driven products and continues to develop its offering, enhancing features of existing products or creating new and innovative ideas to fulfil customers’ needs in every segment. However it is the micro, small commercial and consumer segments in which BRI excels, with its unique ‘loan for unbanked’ business model. This helps feasible but not-yet-bankable people to expand their businesses so they can take advantage of BRI’s full services in the future. The bank provides mentoring for the borrower as part of its intensive relationship management programme, in effect grooming the business until it grows to small or medium-size. Unlike other microfinance institutions which offer microloans as a grant or government channelling programme, BRI’s microloans are entirely commercial.

Competitive advantages
BRI maintains its lead in the micro-finance segment thanks to its network of outlets – the largest in the country. Currently it operates more than 7,000 outlets across the Indonesian archipelago, and plans to add another 500 branches this year. With branches in every sub-district of the country, the bank is never far away from its existing and prospective customers. Furthermore, since the end of 2009, all of the bank’s branches have been able to provide real-time, online banking services – a key technological advance putting BRI steps ahead of its competitors.

The bank employs more than 75,000 staff, recruiting graduates from top universities and local staff in its branches. BRI has also committed to continuous professional development: employees are kept up to date with training seminars and higher education opportunities, helping the bank in its mission to become the biggest and best commercial bank in Indonesia.

However, because the microfinance sector is so lucrative and reliable, other banks are trying to threaten BRI’s dominance. “The biggest challenge in microfinance is maintaining our pace of growth while we are also urged to push down the operating cost,” says Mr Basir. The bank’s strategy is to continue development of outlets such as Teras, to create new products and features, and to improve levels of service and price competitiveness – thereby creating entry barriers to competitors and improve retention of existing customers. This expansion should also create economies of scale, while a separate investment in developing e-channels and new technology based-services such as phone, SMS and internet banking will lower transaction costs.

Corporate business
BRI is also expanding its reach in the corporate business sector, despite its typical low return and potential to reduce the bank’s overall net interest margin. However interest income is not the only reason to serve corporate customers, says Mr Basir. “We are also taking into consideration the multiple benefits of its trickle-down businesses, such as cash management, payroll, low cost deposits and administration fees.”

By targeting state-owned enterprise projects with government guarantees, BRI has penetrated the corporate sector while minimising its risk exposure: saving capital usage, and building synergies by cross-selling other products and services. However, says Mr Basir, this expansion is more to optimise the return on excess funds, rather than shift the focus of the bank. “Our core business will stay in the MSM segment, and maintain corporate loans not more than 20 percent of our total loan portfolio.”

A bank for the people
Mr Basir’s vision is for the bank to become the ‘national payment agent’ within three years. “We already have the enablers and infrastructures,” he says: “the largest customer base, largest networks all connected real-time online, qualified human resources, robust supervision and control system, as well as strong brand awareness.”
This awareness is helped by partnerships and cooperatives with villages: BRI offers soft loans and mentoring for sub-micro businesses (home industries, agriculture and animal farming), with the aim of empowering local communities and overcoming poverty.

The bank also funds programmes dedicated to local communities, including natural disaster recovery, building public utilities and infrastructures, scholarships for children from unfortunate families, and renovating public health facilities and places of worship.

“For us, availability and accessibility are the key points for expanding financial inclusion,” concludes Mr Basir. “More people utilising banking services will improve the economy.”