Indonesia' s rural credit systems before financial liberalisation experienced many changes starting from colonial period, the Sukarno government and part of the Soeharto regime.
The colonial period
Indonesia's rural credit system has been formed since the time when the Dutch still occupied Indonesia in the nineteenth century. The dawn of the rural credit system in Indonesia is believed to have started when Patih Wiryaatmadj a from Central Java officially established the first credit bank in Indonesia in 1 895, called the Hufp En Sparrbank Der Inlandsche Bestuurs Ambtenaren, or named as Bank Priayi. The main purpose of this credit bank was to prevent the upper class (Priayi or civil servants) from being serviced by the moneylenders who set up high interest rates (BRI, 1 995). Although this bank no longer operates, its role is very important in laying down the foundation of the rural financial system in Indonesia. Bank Priayi is believed to have been the starting point of the establishment of state banks later such as Bank Rakyat Indonesia (BRI) and Bank Perkreditan Rakyat (People's Credit Bank! BPR) (Soentoro
et aI., 1 992 : 6).
After the establishment of Bank Priayi, the Popular B ank, Village Bank and Lumbung Desa (or rice barns, banks that allowed villagers to secure a rice advance until the following harvest) were established. The main purpose of these banks was to help rural people to fulfil their credit needs, and to secure them from the practice of money lenders who set high interest rates and rigid regulations (Sukarno, 2000:9). The progress of these banks was remarkable. Within a six-year period (from 1 906 to 1 9 1 2) the number of popular banks increased from 33 to 75, the number village banks rose from 3 00 to 1 ,336, and the Lumbung Desa augmented from 7,424 to 1 2,424 (Chaves & Gonzalez Vega, 1 996). This success is related to the capability of colonial government in granting subsidies in a centralised system, and close supervision of these credit institutions. The
Badan Kredit Desa (BKD) in Central Java and the Lumbung Pitih Nagari (LPN) in West Sumatra were also established during the colonial period. These rural credit
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programmes are still operating and are considered as being among the successful rural financial intennediaries in Indonesia (Sukarno, 2000: 1 3).
The main characteristics of the rural finance system during the colonial period, therefore, are that it was highly centralised with supervisory and regulatory issues (Schmit 1 994 cited in Sukamo, 2000: 9). This has impacted on the performance of the rural financial system and the shaping of the establishment of new rural credit institutions even until now. For example, the designing of the current KUPEDES and S IMPEDES of BRI Unit Desa was done by consulting the A VB or the Priayi Bank
(Charitonenko & Afwan, 2003 : 37-3 8). On the other hand, these main characteristics also had negative impacts on the perfonnance of the current microfinance programmes. For example, the Bank Perkreditan Rakyat (BPR) is now suffering from a lack of legal and regulatory framework. Also, the challenge faced by the proponent of the current commercialisation of Indonesia' s microfinance system, among others, is the lack of legal and regulatory frameworks, and the tendency to form subsidised and directed micro credit programmes that inhibit the initiative of private sectors in micro finance (World-Bank, 200 1 : 3). The highly centralised nature of the rural finance system in Indonesia has also had an impact on the character of the current micro finance industry in Indonesia, which is mainly state-owned with a minor role being played by NGOs and the private sector (Paul Mosley, 1 996 :33; Soentoro et aI. , 1 992).
The Sukarno regime
During Sukamo' s regime ( 1 945-1 966) the banking system was almost completely nationalised and centralised, but it did not function smoothly. The rest of Sukarno 's regime was characterized by economic and social tunnoil coupled with political crisis. The inflation rate reached 600%, and in the political arena, the communist party attempted a coup against the government. Agricultural development was slowing down, and the peasant economy, especially in Java, reached a stagnant level of subsistence output. This period is believed to be the background of the later emergence of several rural finance institution, in which the agricultural credit programmes were implemented to support agricultural development (Soentoro et aI., 1 992: 1 8). Agricultural credit programmes were focused on increasing rice production to combat poverty in rural areas. The Padi Sentra credit programme was the first agricultural credit programme
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with clear, dynamic and simple procedures which gave help in the form of both 'in kind' (fertilisers, chemicals and seeds) and money. However this credit programme does
not exist any longer. The simple procedure and other facilities produced the problem of farmers becoming spoilt and their rate of repayment was sluggish (World-Bank, 200 1 : 5).
The Soeharto Government
The Soeharto era is a critical time both for economic development and rural financial development in Indonesia. In the economic sense, the Soeharto Government was crucial in restoring Indonesia to financial and monetary health focused primarily on combating inflation (Paul Mosley, 1 996: 33). The transition between Sukarno 's and Soeharto 's Government was also important for improving fiscal, financial systems, and agricultural development as well. In the agricultural sector, the Government kept the terms of trade favourable by setting the floor price of rice and controlling fertilizer's price in order to make growing rice profitable, and thus maintained the farmers' income (BRI, 1 995 : 2 1 ).
In the case of rural financial development, the early Soeharto regime is particularly important for the establishment of the agricultural credit system. The famous BIMAS programme was set up as a response to the need to increase agricultural outputs through Indonesia's Green Revolution of agricultural intensification programme. The primary purpose of this programme was to achieve rice self-sufficiency, which is the ambitious political objective of the Green Revolution. Thus, it is clear from this programme that the government's political objective was prioritised, and to achieve the goals, the government had heavily subsidised the rural credit programme with 3% interests rates from Bank Indonesia (Soentoro et al., 1 992 : 22).
In order to improve performance, the BIMAS programme had experienced many times of changing and deregulations. The BIMAS National credit programme was implemented in the 1 96511 966 planting season, with the objective of helping the farmers to increase agricultural outputs. Credit was channelled to the farmers through the Agricultural Production Cooperative (KOPERTA) from the state Bank (BRI) in the form of agricultural inputs such as seeds, fertilizers, and pesticides, as well as money for land tillage. The government designed this credit programme to be simple and
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convenient for the farmers, so that the farmers can adopt it easily, and the government goals to boost agricultural production, especially rice, would be realised. For example, credit can be repaid in the form of paddy after harvesting, with an agreement that this repayment should cover the debt with interest, savings, and administrative costs. Fanners also received concession credit with 3% interest rates per month, and credit to be repaid after seven months (Agricultural Department, 1 968 cited in Soentoro et aI., 1 992: 23). The government' s effort seemed successful, and the farmers' response was positive. This was evidenced by the increase of the are being farmed from 9,985 hectares in 1 9641 1 965 to 462,520 hectares in the 1 966/1 967 planting season (Hadisapoetro, 1 970, cited in Soentoro et aI. , 1 992: 23). However, the problems of low repayment and high arrears occurred, and arrears reached 94.6% during the 1 96811 969 planting season (Timmer, 1 98 1 : 37). This undermined the expansion of the planting area, and therefore the agricultural outputs. Another problem was the shortage of funds to provide inputs supplies and domestic credit for the farmers due to the government' s budget deficit (Timmer, 1 98 1 : 37).
The problems faced in implementing the credit programme through the BIMAS National programme had inspired the policy makers to design a new credit programme in order to increase agricultural production. Because of the lack of capital, the government needed to cooperate with the private sector such as fertiliser and pesticide companies to run the credit programme (Kasryno 1 969, cited in Soentoro et aI., 1 992: 26). This credit programme is named the BIMAS Gotong Royong, which was launched in the 1 96811 969 planting season, and the clients consist of groups of farmers who cultivate around 50 hectares of land per group. Thus the clients of the BIMAS Gotong Royong are specifically selected and are different from the clients of the B IMAS National credit programme. Learning from the failure of previous BIMAS National credit programmes, the government tried to be more liberal to the farmers in order to encourage them to increase production by making it easier for them to access credit. In this case no interest was charged, and the repayment was based on profit sharing. To avoid long and complicated procedures, the credit was not channelled through cooperatives and state banks, but it was delivered directly to the Kepala Desa or village head. Nevertheless, problems were still encountered, and these centred on the unmet demand between the farmers at the field level and the government's policy at the office level. For example, the delivery of agricultural inputs such as fertilisers and seeds, and
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money for land cultivation and spraying was late. Also, the types, dosage and quantity of inputs given by the government were not compatible with local conditions, or were not matched with the farmers' expectations (Soentoro et al ., 1 992: 30).
Despite the problems found in the BIMAS National and B IMAS Gotong Royong credit programmes, the programmes have successfully expanded the planting area and production as a result of introducing new farming technology to the farmers. The numbers of BRI Unit Desa branch also increased sharply from 1 8 in 1 969 to 3,563 in
1 985 (Soentoro et al., 1 992: 28).
The shortcomings found in this farmers ' credit programme have become lessons learnt by the policy makers to design the most appropriate credit programme for the farmers. It was considered that there is an urgent need to provide support institutions at the village level, in order to assist the farmers in performing farming activities. The concept of " Unit Desa" was created, which is a composition of support institutions available at the village level such as extension services, credit or banking institutions, and farming supplies kiosks. This agro-economic unit, or Wilayah Unit Desa (WILUD), is expected to fulfil the farmer's needs on extension services, credit, and agricultural inputs (BRI
1 986 cited in Moll, 1 989: 37)
The B IMAS Gotong Royong was replaced by the BlMAS yang disempurnakan
(Completed BIMAS) programme, which incorporates the concept of WILUD and started to be implemented in 1 9701 1 97 1 planting season. This Completed BIMAS programme is expected to improve the services given to the farmers. The private sectors, such as state-owned companies and cooperatives, handled the credit component and inputs delivery of this programme. The credit component, in particular, was provided by the BRI Unit Desa with safe and simple procedure, while the inputs delivery and marketing of farmers' harvests was done by the Badan Usaha Unit Desa
(BUUD) and Koperasi Unit Desa (KUD). Thus, the BRI Unit Desa has begun to be involved in the rural credit programme in Indonesia, which was initiated by delivering direct credit to the farmers in 1 969. In this case, the credit was not only available for rice farmers, but also for the secondary crops (Palawija) farmers.
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During the period of 1 972- 1 976, the government enjoyed the smooth implementation of B IMAS credit programme through BRI Unit Desa, which channelled Rp 48.87 billion to the farmers, and about Rp 30.07 billion of the repayment (Moll, 1 989: 36). However, starting with the 1 9771 1 97 8 planting season, the annual flow of B IMAS credit declined with the increasing number of farmers who had defaulted on previous loans. The high loan defaults continued and the number of farmers who received the loans reduced sharply, reaching only less than half a million farmers in 1 984, which caused the termination of this programme in 1 985 (Gonzalez-Vega, 1 982; Moll, 1 989; Robinson, 2002; Soentoro et aI., 1 992).
The analysts have provided many reasons for the failure of the BIMAS credit programme (Gonzalez-Vega, 1 982). One reason is the periodic debt forgiveness given to the defaulting farmers, which developed the attitude among the farmers that sooner or later their debt will be pardoned (Soentoro et aI., 1 992: 3 5). This caused the farmers to view the credit programme as a grant from the government. Another reason is lack of coordination and conflicting roles among the stakeholders, wherein each of them wanted to achieve their goals as soon as possible. For example, the BRI Unit Desa had the goal to channel the credit and receive the repayment soon, which frequently conflicted with the Ministry of Agriculture, who aimed to reach the target of planting area, production and productivity as soon as possible also (Moll, 1 989: 3 6). In this case the centralised system of rural financial development required that the lower level (such as BRI Unit Desa) should follow the policy of higher institutions (such as the Ministry of Agriculture), and caused the paralysing of the function of the BRI Unit Desa as the credit provider. There was also the problem of misuse, in which the credit fund was used for other than farming purposes by bank employees and others who were involved in the provision of loans (Soentoro et aI., 1 992: 36). In addition, there was also the widespread practice ofjictitious loan, that is the loan was applied for by farmers but the money was used by the third party (Moll, 1 98 9 : 36). This reality suggests that although the BIMAS credit programme has successfully introduced new technology and increased rice production by achieving self-sufficiency in 1 984, the programme has not contributed to the establishment of a regular and sustainable financial system for the farmers (Moll, 1 989: 39).
89 The failure of the B IMAS credit programme in delivering credit to fanners has been a valuable lesson for the government officials or policy makers in designing the future rural finance system. The government, in this case, has used the financial sector to channel funds to the priority sector to promote growth, with high subsidy and facilitating the disbursement so that it meets the target in terms of amount disbursed. However, it limits the effective use of resource, in that every place has different input requirements, while the capability of farmers in different places is also different. On one hand, the B IMAS programme has been successful in increasing national rice production. However, whether the B IMAS programme has raised fanners' income is questionable (Adams et aI., 1 984), while the repayment discipline of the farmers and the accountability of bank staff and officers are clearly negative. In fact, these circumstances are important for the efficiency and effectiveness of future rural credit systems. Many authors have acknowledged many criticisms about the limitations of cheap credit and special credit institutions in developing countries (Moll, 1 989: 37), and the BIMAS credit programme in Indonesia has confirmed these criticisms.
Considering the increase of commodity diversification in the agricultural sector, and also the limited economic capacity of small entrepreneurs in rural areas, the government expanded the credit programme into commodities other than rice and secondary crops, such as for livestock, fisheries, and cash-crops, and to other activities such as cooperatives, rice milling, petty-trading, and so on. These credit programmes started in 1 974, named as KlK (Small Investment Credit) and KMKP (Permanent Working Capital Loan), and were attractive and greatly demanded by the customers. By December 1 974 the requests for KIK and KMKP loans were 1 6,98 8 and 1 8,690 respectively. These credit systems follow the system of the B IMAS credit programme which was also channelled by the BRI Unit Desa. The maximum loan permitted per borrower is Rp 1 5 million for both programmes and the interest rate is 1 2% per year. To avoid the risks of loan default, the government established an insurance company named P.T. Askrindo, which guarantees the repayment of the loans. The successful implementation of the credit programmes caused the KIK and KMKP to become the largest small-scale cheap credit programmes in 1 982 with a total amount outstanding of Rp 1 , 1 96 billion (equal to US$ 1 . 8 billion) (BRI, 1 995; Soentoro et aI. , 1 992).
90 There are also other important rural credit programmes which were established before the financial sector liberalisation, namely, Mini Credit, Midi Credit, and BKK. Mini and Midi Credit programmes were created in 1 974 by the BRI Unit Desa, to respond to the demand of poor farmers in rural areas, who could not access the BIMAS credit programme because they were located outside the B IMAS credit' s zone (BRI, 1 99 5 : 43). Mini credit was given to the small entrepreneur i n rural areas with a loan between Rp 1 0,000 to Rp 1 00,000, and with very soft terms and simple procedures (Soentoro et aI., 1 992 : 42). The main purpose of this Mini credit, therefore, was to help the rural community to transform potential resources they have into real ones. Farmers were encouraged not only to focus on rice and secondary crops, but also to expand to non farm activities, so that they could rise above poverty and increase income (BRI, 1 995: 45). The Midi credit was also channelled to the rural community but the target population were the middle-income people, with the loan size between Rp 200,000 to Rp 500,000. This credit is usually given to the rural people who have already proved that they can run their business successfully, and the fund is used to improve their business activity (Chaves & Gonzalez-Vega, 1 996; Paul Mosley, 1 996; Patten & Rosengard, 1 99 1 ; Riedinger, 1 994).
The Badan Kredit Kecamatan (BKK) credit programme is one rural credit programme that was established in 1 972 during Soeharto ' s government, or before the liberalisation of the financial system, but it was initiated by the provincial government. This credit programme has been considered very successful by many authors in delivering credit for the rural community (Soentoro et aI., 1 992:48 ).
Besides the many rural credit programmes, which have been established out of the BIMAS credit programme, which focus on increasing income and combating poverty, the government also realised the need to direct a credit programme for the poor. The Presidential Instruction No. 41 1 973 gave tasks to the BRI Unit Desa to extend non BIMAS credit programmes and to mobilise savings. The government' s attempt to diversify the types of rural credit systems appropriate for the rural population has become a signpost for the future liberalisation of Indonesia ' s financial system.