LKM (the Indonesian acronym of Micro Finance Institution) plays a very important role in giving contribution to economic development in ad-vanced as well as developing countries. In the 1990s, LKM undoubtedly assumed a more prominent role in giving contribution to economic de-velopment, particularly in the attempt to alleviate poverty.
Finance institutions in Indonesia were put to a severe test during the period of monetary economic crisis in 1997/1998. Dozens of general banks had to be closed down by Bank Indonesia because of bank-ruptcy and could no longer be saved. The general bank bankbank-ruptcy led to the bankruptcy of several bank customers, particularly me-dium and large business enterprises, which in turn made other banks also become less healthy. Bank Mandiri is a form of solution result-ing from the merger of four unhealthy government banks, namely Bank Dagang Negara, Bank Exim, Bank Bumi Daya, and Bapindo. Conversely, in 1997, BPR (banks apecializing in the provision of credit for people) began to flourish, because the target customers were the micro, small, and medium business sectors that were not much af-fected by the economic crisis.
four healthy. Based on preliminary estimate, unhealthy BPR BKK local enterprises could be saved after merging and prevented from bankruptcy that might eventually lead to liquidation.
BPR BKK local enterprise of Ungaran as a micro finance institution, local government-owned corporation belonging to the government of Central Java province and Semarang regency with its role as a local bank bears the mission of capital and funding intermediacy in the micro, small and medium business sectors. To gain excellent com-petitive ability, it had to be brave in consolidating funds and distrib-uting credit to people together with general banks and other BPRs. To be able to compete, BPRs and BKKs first had to be large, healthy and strong. To realize this, merger provided an immediate solution. The merger of BPR BKK Ungaran was expected to result in consoli-dated efforts between BPR BKK branches to extend their operations and strengthen bank funding structure. The flow of fund from banks to the community was one of the means to activate the economy and community empowerment. The BPR BKK merging process involved institutional dynamics, service dynamics, employees' psychological burden and competition between shareholders in turning in their capital.
This reality of merger is worth examining. Despite the large number of researches already conducted on this subject, this merger of BPR BKK local enterprises was a unique case, because it was a rare occa-sion as far as large-scale merger of finance institutions was concerned. For this reason, the research problems were formulated as follows: (1) What motivations did BPR BKK Ungaran stakeholders have and what role did they play in doing the merger?, (2) How was the merger dynamics of BPRs and BKKs as local banks striving to become healthy banks and play a role in the community economic empowerment scheme?, (3) How was the form and role of trust relations as financial and non-financial support of BPR BKK's performance?
popu-lar motives for merger (Moin: 2003, Weston and Mitchel et all: 2004). Consolidation could be translated into more real motives (Mahmud Z: 2009), among others to increase profit, economic scale, and to ex-tend market segments.
BPR merger had to be implemented based on the Official Decision of BI Board of Directors no 32/51/Kep/Dir 14 May 1999 on merger, con-solidation, and acquisition. BPRs were not obliged to observe sound competition laws, as there was no need for concern about the possi-bility of monopoly being created because the micro finance market was highly competitive, and even giant general banks could be in-cluded in this segment.
The present study was designed to analyse the motivations underly-ing merger, increase in significance of the stakeholders' role durunderly-ing and after the merging process in activating the economy and com-munity empowerment. The study also included analysis of the form and role of trust relations that could support BPR's performance fi-nancially as well as non-fifi-nancially.
earn-ing ability, sufficient liquidity, and sensitivity to market risk could be added to the list.
To find out the impact of merger, financial data analysis was con-ducted based on time chronology and comparison. Chronological financial data was compared between three years before and four years after the merger took place. In the comparative analysis, the data during the four-year period after the merger was compared to find out similarities and/or differences between BPRs and BKKs of Semarang regency and those of Central Java province.
Based on the formulation of the three research problems and the re-search objectives, after conducting theoretical study, field study, and analysis, the writer drew the following conclusions:
Stakeholders' Motivation and Role
Stakeholders' motivation and role in the merger of BPRs and BKKs from the whole Semarang regency into Ungaran BPR and BKK local enterprise were as follows:
The merging of BPR and BKK local enterprises in general and Ungaran BPR and BKK local enterprise in particular, were motivated by the need to save BPR and BKK local enterprises as a whole and particu-larly unsound BPR and BKK local enterprises. The unfavourable con-dition was caused by the low quality of human resources, inadequate capital, inefficiency, and ineffective control. Merger was a means to improve the condition of the banks and maintain their sustainability. This was evident from the fact that after the merger, BPR and BKK local enterprises depicted improved performance from various dimen-sions: business volume, capital adequacy, management and human resources quality, and service extension. Generally speaking, the merging of BPR and BKK local enterprises has created consolidation through overhead cost reduction (less supervisory or management personnel) by creating values for the stakeholders' interest.
Merger involved several unavoidable processes that could not be de-tached from the dynamics in operation.
Prior to the merging process, in the constitution of BPR and BKKs from the whole Semarang regency, institutional dynamics had oc-curred, starting from a credit providing body pilot project called BKK becoming BUMD (Local Government Owned Enterprise) BKK, and in 1992 became BUMD BPR BKK.
The process of BPRs and BKKs from the whole Semarang regency merging into BPR BKK Ungaran went through several phases and dynamics, starting from merger initiative, continued with socializa-tion of the plan for merger, conducting cooperative study to banks set up through merger, announcement of merger, making the merger design, submission of related documents to get approval from Central Bank of Indonesia, realization of merger, making changes in the bank statute, appointment of new management team, making a new work plan, balance consolidation, and capital conversion. In the merging process, the shareholders also agreed to maintain the status of BPR and BKK Ungaran, the product of merger, as a local enterprise corpo-ration as stipulated in Local Regulations no. 11/2008 with its head office situated in the local regency/municipality.
In the merging process, there was a common agreement among all BPR BKK Ungaran shareholders as expressed in the general meeting to provide additional capital for banks whose capital was less than 8%, arrange the status of employees, and settle their rights and obli-gations.
Dynamics of Merger Process
the merger design, submission of related documents to get approval from Central Bank of Indonesia, realization of merger, making changes in the bank statute, appointment of a new management team, mak-ing a new work plan, balance consolidation, capital conversion, and in the merging process, the shareholders agreed to maintain the sta-tus of BPR BKK Ungaran, the product of merger, as a local enterprise corporation as stipulated in Local Regulations no. 11/2008 with its head office situated in the local regency/municipality.
A number of dynamics that occurred in the merger process included, among others, reluctance to do merger in the form of rejection of merger, postponement of merger, psychological impact on unaccomodated officials, dismissal of employees who committed fi-nancial deviations, improved performance, and bank development. A special dynamics that normally did not apply to other corporations was related to share percentage distribution already arranged in local regulations, so that the government of Central Java province as ma-jority shareholders always attempted to meet the portion assigned to them, i.e. 51% and regency government 49%. In the general meeting of shareholders, Central Java province government became the key decision maker on placement of management team members and other policies, because based on governmental hierarchy, provincial government's position was higher than regency/municipal govern-ment, while from shareholding position, provincial government held the majority of shares. Another important event was Bank Jateng share divestment.
In the process of BPR BKK from the whole regency into BPR BKK Ungaran, several phenomena were noted, such as the impact of merger and institutional dynamics, administrative and licensing dynamics, employee affair dynamics, psychological impact on unaccomodated officials, period of turmoil and employee dismissal, competition in depositing capital between provincial and regency/municipal govern-ment on the one land and BPR BKK Ungaran on the other.
better and healthier.
Impact of BPR BPKK Ungaran Merger
Post merger bank development was evident in improved performance based on such indicators as bank assets, the amount of credit given, third party's funds and profit. In other words, after the merger, the bank was making more progress. All bank CAMEL elements were improving, which depicted healthier development. Or it could be concluded that the combine of 9 BPR BKK local enterprises in Semarang regency which were not healthy enough before the merger became healthy after the merger was realized. The results of com-parison between the health level of all CAMEL elements depicted higher values, which meant healthier bank condition. This also ap-plied to the combine of those from the whole Central Java province. It could be concluded, therefore, that the merger of healthy BPRs with those that were healthy enough, and even less healthy or un-healthy produced a un-healthy bank. This indicated that there were consolidated operations and harmony between branches, so that merger created positive values that could benefit not only the share-holders but also all stakeshare-holders.
From non-financial point of view, merger created new trust relations on the part of the community to enhance the bank development. From financial point of view, the bank would be making progress, because the new trust relations would increase the amount of funds received from the community, which would automatically increase the amount of credit distributed to the community to enhance in-vestment and community economic empowerment. Credit reserve growth after merger proved to be higher compared with that before merger, or in other words, merger could promote the credit services rendered to the community. Making larger profit, the bank became more efficient and productive. Through merger, the increasing profit brought positive impact on the deposit of genuine local income. Merger of BPR BKK Ungaran could promote trust relations with stake-holders and motivate the community to take part in the attempt to promote the bank condition, so that it could become better and healthier.
of human resources, efficiency, effectiveness of control and also en-hance the people's economic empowerment, because the bank could become healthier and strategic. In addition, local bank merger en-hanced the role of stakeholders and increased the community's trust. Apart from the positive aspects of BPR BKK bank merger, several negative aspects or weaknesses were worth noting, namely (1) the lengthy process of decision making on capital deposit. As a local en-terprise, the decision on capital deposit had to await approval from DPRD (Local Legislative Assembly) Level 1 as well as Level 2, (2) the possibility of the Board of Directors' policy being dominant involv-ing personal interest, which would influence decision makinvolv-ing, (3) the health level of the bank was measured based on consolidated data, so that good branches could be affected by poor branches, (4) accu-mulation of outstanding loans, since the combination of credit in ar-rears increased non-performing loans, (5) corporate tax obligation that would be higher when progressive tariff was applied, (6) the old im-age already attached to the institutions being merged could not be instantly removed. The old impression of being manned by weak human resources still remained with the new institution.
Less satisfactory services, unstrategic location of the office, and un-comfortable office atmosphere were still attached to the new bank. In consideration of the negative aspects above, it could be concluded that the merging of BPR BKK local enterprises, BPR BKK Ungaran in particular, did not instantly bring improvements to all aspects and remove the former inherent weaknesses. It took time for the new management to do reorganization and take concrete steps to resolve the problems. A number of merger-related weaknesses according to Mahmud Z included, among others, with the organization becoming larger, managerial decision making took longer time, and the com-munication channel became longer.
Theoretical Implications
the growth of BPR BKK Ungaran local enterprise. This was in line with Healy (1992), who in his research found out that banks with larger assets depicted a significant increase in the profits gained. The outcome of Sarwono's research (2007) on Bank Mandiri merger also revealed that merger proved to have increased profits and taxes ob-tained from the bank. A compilation of research by Weston, Mitchell et al (2004) indicated the impact of merger of the first category re-lated to the increased values of the merging business companies. Merger was an investment decision having long-term impact that served as development strategy. This was in line with Mahmud Z (2010), who found out that long-term objectives were attained by means of transforming banking enterprise limits.
Hence this research affirmed the theory that consolidation created values in inter local bank merger. Increased values were observable in several performance indicators, such as the bank becoming healthier and more transparent. The bank established through merger that became healthier with stakeholders' support, particularly evident in improved community-bank trust relationship, could eventually served to prove that BPR BKK local enterprise as a local bank was becoming more competitive.
Policy Implications
The lengthy merger process duly completed, the attempt was worth the while. BPR BKK local enterprise depicted better performance. Regency and provincial government as shareholders became more rational and would be interested in BPR BKK local enterprises with better prospects. It was just natural if shareholders would be more encouraged to increase their capital deposit in the hope to get divi-dends and larger amount of taxes. Moreover, they could be proud of their BPR BKK local enterprise, as it was able to empower the com-munity. In other words, the local government as shareholders would be reluctant to increase their capital if the enterprise belonging to them did not perform well. The best policy, therefore, was to im-prove the BPR BKK local enterprise by encouraging the management team (board of directors) to work more elegantly based on a better incentive system.
profits retained and more extensive services to reach the customer. The community, therefore, did not have to go far to find a larger bank, as in the vicinity, a quite large bank established through merger (BPR BKK local enterprise) was already available. A local bank grow-ing larger indicated the greater trust the community had in the bank concerned. Hence, the policy implication was to strengthen the strat-egy of local bank growth as an attempt to empower the people's com-munity as envisaged in the original ideal of BPR BKK establishment in 1970.
The merging of BPR BKK local enterprises, particularly that of Ungaran, though bringing about improvement in several aspects, could not instantly remove the previous negative aspects still attached to the post merger BPR BKK local enterprises. It took time on the part of the management team to straighten out the organization and take concrete steps to resolve the problems leading to more professional BPR BKK local enterprises with competitive ability at the regional level.
Further Research
In the process of BPR BKK local enterprise development through vari-ous kinds of turmoil and economic, social as well as political dynam-ics for more than 30 years since its establishment in the 1970s as an ordinary finance constitution with no corporate body in the form of BKK, BPR BKK local enterprises have now managed to prove their identity, committed to serve the lower layer of the community as well as the micro, small and medium business enterprises, and able to compete with other micro finance institutions as well as general banks that thronged to get entrance to the micro finance market segment. The formulation of a corporate body and merging of local banking enterprises suggested that BPR BKK local enterprises have adjusted themselves to the existing regulations. Hence, regency and provin-cial government as shareholders could now have a better look at BPR BKK local enterprises as finance institutions growing in maturity and able to practice good corporate (banking) governance.
