Based on literature reviews and interviews with a number of resources, the World Bank’s study team has come up with seven business models for saving and loan cooperatives in Indonesia. The business models consist of:
1. Credit Union 2. Quasi Credit Union 3. Quasi Bank
4. Joint Liability (Group Lending) 5. Sharia-based Cooperative 6. Saving and Loan Unit 7. Partnership
The differences can be made based on their business orientations, membership status, funding sources and allocation, funders and loan disbursements, types of financial service, risk management practices, benefits for members, and governance. Examples of each model are represented by the seven selected cooperatives (KSP/USP) with their business model illustrated in the table below:
Table 5.1: Examples of Saving and Loan Cooperatives Different Business Models No Business Model Name of
KSP/USP Description
1. Quasi Credit Union
Ba’lota, Toraja Saving and loan cooperative that sticks to the original concept of cooperative
Operates at national level and one the 10 best cooperatives in Indonesia
2. Quasi Bank Kospin Jasa, Pekalongan
Saving and loan cooperative that operates like a bank
Operates at national level and the largest cooperative in Indonesia
3. Credit Union CU Pancur Kasih, Pontianak
Saving and loan cooperative that adopts Credit Union principles, the oldest and the third largest Credit Union in West Kalimantan
Operates at provincial level 4. Sharia-based
Cooperative
BMT Tamziz, Wonosobo
Saving and loan cooperative that adopts Sharia principles
Operates at national level 5. Joint Liability
(Group Lending)
Komida, Jakarta
Saving and loan unit of a cooperative that adopts group lending to poor women
A unit of cooperative that operates at district/city level 6. Saving and
Loan Unit
Rukun Makmur, Madiun
A saving and loan unit of a surviving village unit cooperative (KUD)
A unit of cooperative that operates at district/city level 7. Partnership Swamitra
Cipulir, Jakarta
A saving and loan unit of a traditional market cooperative (Koppas) Cipulir, adopting a foster parent system of Bukopin.
Operates at district/city level
51
The different business models emerge from the possibility of serving member as well as non-member clients, thanks to the current regulations – Law no 25/1992 and Presidential Regulation no 9/1995 – that allow cooperatives to have such options. Most Saving and Loan Cooperatives evolve and find their own path through the dynamics created by their founders and management team in response to government regulations as well as business competition.
While some strive, some are near collapse, therefore, it will be inconclusive to say if one business model is better than the others.
Business orientation
There have been ongoing debates with regard to the purpose of cooperatives. The original concept of a cooperative5 is to serve as a media for people to work together for common economic purposes and for the benefits of the people. In the process, inclination for profit lets business motives rule the organization and put less priority on the benefits of the people. Indonesian Constitution of 1945 has put cooperatives as the backbone of the nation’s economy, which is based on the philosophy of “by the people and for the people”. The International Labor Organization (ILO) defines a cooperative6 as an "autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise”. The existing Law of Cooperative no. 25/1992 defines a cooperative as a business entity formed by individuals or a cooperative legal entity that operate under cooperative principles. Hence, a cooperative signifies a people movement, in which common goals and togetherness serves a base. Members become the owners and the clients at the same time, they are the actors as well as the target recipients, and their well-being becomes the main goal.
However, the shift of focus from the people to financial gain may occur when competition creates pressure to the cooperative. The need to raise more money to improve and expand their services leads to the cooperative expanding reach to non-member clients, in which it acts more like a bank. Furthermore, the limited supervision from the current authority of the Ministry of Cooperatives put cooperatives in the loose end that they can either put members’ interests or financial gain as their main goal. Cooperatives are regulated and supervised by the Ministry of Cooperatives, which are yet to find more effective control measures. From the regulation standpoint, cooperatives are more lenient compared with other financial institutions. Banks, for instance, are under close supervision and strict regulations by the Central Bank (Bank Indonesia), and now the Financial Services Authority (OJK). The relative laxity in regulations governing cooperatives creates loopholes that can easily be misinterpreted.
In relation to the seven business models represented by the sampled cooperatives, the survey shows that their business orientations vary accordingly with the classification can be seen in the table below. The classification is made based on, among others, the allocation of profit for the benefits of the members. KSP Balo’ta, for instance, in 2011 allocates 17.2% of its profit for education and Annual Member Meeting (RAT) related expenses, a higher percentage than average.
5 The cooperative movement began in Europe in the 19th century as part of labor and social movements during the Industrial Revolution. For saving and loan cooperatives, the credit union movement was initiated in Germany by Raiffeisen as part of social movement to promote unity among peasants. The concept of Credit Union is to empower the poor to help themselves by working together for the welfare of the community.
6 See www.ilo.org for their work with cooperatives.
52
Table 5.2: Business Orientation of selected Saving and Loan Cooperatives Names of Saving and Loan
Cooperatives (KSP-USP)
Business Orientation The benefits of the
Members (Empowerment)
Financial Gain (Profit)
CU Pancur Kasih √
KSP Balo’ta √
Kospin Jasa √
BMT Tamzis √
Koperasi Mitra Dhuafa √
USP KUD Rukun Makmur √
USP Swamitra Koppas Cipulir √
How each of the cooperatives set their priorities in terms of members (empowerment) or financial performance (profit) are explored in detail in the World Bank’s study on “The Different Business Models of Saving and Loan Cooperatives in Indonesia” mentioned earlier.
Meanwhile, study on “Saving and Loan Cooperatives’ Management Board”,7 also conducted by the World Bank to 133 saving and loan cooperatives early this year, found the estimated profit allocation for education at 7% in average.
Membership Schemes
Referring to the original concept of cooperative, in which a cooperative is formed by the people and for the people, the people are represented by the members. Members are the constituents. Therefore, the membership status should define the meaning of a cooperative.
However, the Law no. 25/1992 allows privilege membership, which can deviate from regular membership. With privilege membership the people are entitled with their own rights and obligations that can be stipulated in their article of association. The Government Regulation No. 9/1995 allows saving and loan cooperatives to serve non-member clients, defined as those who are yet to be members. Nevertheless, the regulation stipulates that the non-member clients should become members within three months, asserting that membership is compulsory.
In this World Bank study, membership is associated with four criteria:
Contribution through primary saving and compulsory saving
Entitlement for dividend (SHU)
Registration and attendance to the Annual Membership Meeting (RAT)
The right to vote and to be nominated
Semi membership system is applied by some cooperatives whose clients do not meet the four full membership criteria. Using the seven business models to illustrate the membership schemes, we can see how the seven cooperatives differ in terms of their membership schemes.
7 This survey was conducted to gain the picture of the supply side, which is from the cooperative management point of view. Additional survey is to be conducted to gain the clients’ point of view, to understand the demand side. Results of both surveys, plus results of Survey on Business Models, constitute the parts of this report.
53 Table 5.3: Membership Schemes
Name of saving and loan cooperative
Semi Membership Full Membership Privilege Membership
KSP Balo’ta (Quasi Credit Union)
Clients with semi membership make up a small percentage of total clients.
Requirements:
- Open to Indonesian citizen with legal capacity
Coverage:
- Those who haven’t paid the primary and compulsory saving in full and haven’t passed the selection process for membership.
Full memberships constitute the majority of clients.
Requirements:
- Pass the selection process conducted by the cooperative Management Board - Will comply with KSP Balo’ta’s Article of Association (AD/ART) - Pay for primary saving and compulsory saving in full
Membership entitlements:
- Voting rights during RAT
-The right to be nominated and to vote for cooperative’s Management Board and Supervisory Board - Entitled to receive dividend (SHU) - Full service from the cooperative, which include saving, loan, and security fund
- Participation in the activities and supervision of the cooperative
Privilege memberships constitute a small percentage of total clients.
Coverage:
- Students from preliminary to high school, who use saving products
- Members who live beyond the operational jurisdiction of the cooperative
- Foreign citizens who want to open saving accounts at the cooperative Entitlements:
- The use of saving products
- No voting rights and no nomination for Management Board or Supervisory Board
CU Pancur Kasih (Credit Union)
Semi membership makes up a small percentage of total clients.
Requirements:
- Open to Indonesian citizen with legal capacity
Coverage:
- Those who haven’t paid the primary and compulsory saving in full
- Those who haven’t
Full memberships constitute the majority of clients.
Requirements:
- Enrolled in the
initiation training level 1 - Pay for primary saving and compulsory saving in full
- Comply with AD/ART and CU principles Membership entitlements:
Privilege memberships constitute a small percentage of total clients.
Coverage:
- Students who use saving products - Members who live beyond the operational jurisdiction of the cooperative
54 Name of saving
and loan cooperative
Semi Membership Full Membership Privilege Membership
enrolled in the initiation training level 1
- Voting rights during RAT
- The right to be nominated and to vote for cooperative’s Management Board and Supervisory Board - Entitled to receive dividend (SHU) - Full service from the cooperative, which include saving, loan, and security fund
Komida (Joint Liability, Group Lending)
Semi membership makes up a small percentage of total clients.
Requirements:
- Poor women who plan to or already have micro businesses
- Willing to be part of a group for a joint liability Coverage:
- Those who haven’t paid the primary and compulsory saving in full
- Those who are still in the group training process
Full memberships constitute the majority of clients.
Requirement:
- Pay for primary saving and compulsory saving in full
Membership entitlement:
- Participation in RAT8
BMT Tamzis (Sharia based)
Semi membership makes up a small percentage of total clients.
Entitlements:
- Limited access to financing services - No involvement in RAT
Full membership makes up a small percentage of total clients.
Requirement:
- Pay for primary saving and compulsory saving in full
Membership entitlement:
- Participation and voting rights during RAT
- The right to be nominated and to vote for cooperative’s Management Board and Supervisory Board
Privilege memberships constitute the majority of clients.
Coverage:
- Those who pay for primary saving and compulsory saving in full.
Entitlements:
- Participation during RAT and voice in writing, but no voting rights
- No right to be nominated neither to vote for cooperative’s Management Board and
8 Full participation of members hasn’t been fully exercised. Participation is carried through representation system during RAT.
55 Name of saving
and loan cooperative
Semi Membership Full Membership Privilege Membership
- Entitled to receive dividend (SHU)
Supervisory Board - Entitled to receive dividend (SHU) - May upgrade to full membership by
depositing Rp100million for equity
Kospin Jasa (Quasi Bank)
Semi memberships constitute the majority of clients.
Entitlements:
- Access to saving and loan services
- No involvement in RAT
- No right to be nominated neither to vote for cooperative’s Management Board and Supervisory Board
Full membership makes up a small percentage of total clients:
Membership entitlement:
- Participation and voting rights during RAT
- The right to be nominated and to vote for cooperative’s Management Board and Supervisory Board - Entitled to receive dividend (SHU)
Privilege memberships constitute a small percentage of total clients.
Requirement:
- Contribute to equity Entitlements:
- Invited to RAT but with no voting rights - Entitled to receive dividend (SHU)
USPO Rukun Makmur
(Saving and Loan Unit)
Semi memberships constitute the majority of clients.
Entitlements:
- Access to saving and loan services
- No involvement in RAT
- No right to be nominated neither to vote for cooperative’s Management Board and Supervisory Board
Coverage:
- Member of Village Unit Cooperative (KUD), total number are 5200 people. So far only 60% of KUD members take advantage of the services provided by the saving and loan unit.
Membership entitlement:
- Participation in RAT USP Swamitra
Koppas Cipulir (Partnership)
Semi memberships constitute the majority of clients.
Coverage:
- Those who haven’t paid the primary and compulsory saving in full.
Entitlements:
- Access to saving and loan services
- No involvement in RAT
- No voting rights
Coverage:
- Member of Koppas Cipulir, total number are 51 people.
Membership entitlement:
- Participation in RAT
56
From the table, it can be seen that the main distinction between full membership and other types of membership revolves around their participation in RAT and voting rights.
Involvement in RAT indicates voting rights, unless stated otherwise. Semi and privilege membership options are reserved to expand outreach without giving the clients voting rights or involving them in RAT.
Funding sources and allocation
According to the Law No 25/1992, equity for a cooperative consists of internal capital and borrowed capital. Internal capital comes from Primary Savings and Compulsory Savings from the members, Reserve, and Grants. For borrowed capital, they come from members’
savings, placement from other cooperatives or their members, third party loans (banks or other financial institutions), the issuance of bonds, and other sources.
In general, there are 3 types of funding:
Full self-sufficiency: the cooperative obtain all funding from primary savings and compulsory savings collected from its members. Belongs to this category is CU Pancur Kasih.
Combination of internal and external sources: in addition to primary savings and compulsory savings collected from its members, the cooperative also obtains funding from third party loans. Belong to this category are Balo’ta, BMT Tamzis, Komida, USPO Rukun Makmur, and USP Swamitra Cipulir.
Internal sources include insertion capital and issuance of bonds, in addition to primary savings and compulsory savings. Insertion capital acts more like a share and members who contribute to the insertion capital are the shareholders. Belong to this category is Kospin Jasa, it has higher amount of insertion capital than its primary savings and compulsory savings. Furthermore, its bonds have been converted to insertion capital.
Saving mobilization and loan disbursements
According to the Government Regulation No 9/1995, saving and loan cooperatives are allowed to collect money from and disburse loans to its member as well as non-member clients. There are 3 categories with regard to saving and loan activities in relation to membership status:
Mobilizing savings from members and privilege members and disbursing loans to members (examples: CU Pancur Kasih, KSP Balo’ta, Komida)
Mobilizing savings from members and privilege members and disbursing loans to members and privilege members (example: BMT Tamzis)
Mobilizing savings from members, privilege members, and semi members, and disbursing loans to members and semi members (examples: Kospin Jasa, USP Swamitra Koppas Cipulir, USPO Rukun Makmur)
From the featured examples above, saving services are applicable to all types or members while the target recipients of loan services are more restricted in nature. The cooperatives exercise different strategies in their saving mobilization efforts. A cooperative manager, based on his observation to the members, says that most people go to cooperatives because they believe it is a place to get loans and associate it with an easier process. Study by the World Bank to the Saving and Loan Cooperatives’ Management Board mentioned earlier
57
shows that people prefer cooperatives than other financial institutions because of convenience and faster process. This preference is particularly related to loan applications. Therefore, when offering saving services, they need to be more creative. Some cooperatives offer a variety of saving products and are willing to go for the extra length to promote the habit for saving. One strategy is to tie the amount of saving to the maximum amount of loan a client may apply for. This policy is implemented by CU Pancur Kasih, KSP Balo’ta, BMT Tamzis, and Komida. It is a common practice for Saving and Loan Cooperatives to include saving in the calculation of loan collaterals. Some eliminate the requirement for collateral altogether and put saving as a substitute to secure the loan. Meanwhile, other cooperatives offer prizes as an incentive to save. Others also provide financial education, a special training session specially designed to educate the members on how to manage their finances and how to save.
For loan or financing products, the study to the Saving and Loan Cooperatives’
Management Board finds that interest rate has not become a factor for clients in their application. Instead, they put convenience and faster process as the main considerations. In general, cooperatives charge higher interest rates than banks, or even than rural banks, because cooperatives also borrow money from banks and as a consequence have to charge extra for their margin. Yet, cooperatives have the advantage of flexibility in terms of collateral and administrative requirements that seem to be more favorable for the clients.
Some examples of collaterals that differ from bank requirements:
Saving account in the same institution the person applying for loans
Motorcycle certificate of ownership
No requirement for business license of tax ID (NPWP)
Joint liability (in group lending)
The flexibility is made possible by the very low range of loan amount (below Rp10,000,000, or even below Rp500,000), which is not applicable for banks.
Types of Financial Services
Saving and Loan cooperatives, as the name suggests, offer saving and loan products.
However, there is a great variety in terms of the products they offer. For saving products, the variety comes from saving purpose and duration, in addition to the yield (interest rate)9. For loan products, the variety comes from the purpose – whether it is for personal or family oriented (consumptive) purposes or for business (productive purposes). In the expansion of their services, the cooperatives also offer additional products such as security funds, whose types also differ from one cooperative to another. The different variety can be seen in the following tables.
58 Table 5.4: Saving Services
Primary &
Compulsory Savings
General / Daily Savings
Time Deposits
Needs-based Savings
Educa tion
Retire -ment
Housi ng
Auto- mobile/
Motor vehicles
Religio us purpose
s
KSP Balo’ta
√ √ √ √ √
Komida √ √
USP KUD Rukun Makmur
√ √ √
BMT Tamzis
√ √ √
CU Pancur
Kasih
√ √ √ √ √ √ √ √
Kospin Jasa
√ √ √ √
USP Swamitra
Koppas Cipulir
√ √ √
Religious purposes for both saving and loan services refer to religious celebrations such as Christmas or Iedl Fitri festivals. It also refers to Hajj fund (pilgrimage activity for Moslems, in which they will need a certain amount of money and possibly have to save for years to afford the trip to Mecca in Saudi Arabia).
Table 5.5: Loan Services Productive
Purposes
Consumptive
Purposes Education Emergency Religious Purposes
KSP Balo’ta √ √ √ √
Komida √ √
USP KUD
Rukun Makmur
√ √
BMT Tamzis √
CU Pancur
Kasih
√ √ √ √
Kospin Jasa √ √
USP Swamitra Koppas Cipulir
√