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A Slum Area in Jakarta (Photograph: Wikipedia.org).

Poverty Alleviation and Credit Assistance

Ari A. Perdana

“It is better to give away fishing rod than the fish itself” is a classical rhetorics. In the context of poverty alleviation, these words are often translated as it is important for the government to provide credit assistance (such as soft loan) to the people rather than give them cash directly. The argument is, credit assistance is considered as ‘educative’ and ‘productive’, while direct-cash assistance (Bantuan Langsung Tunai/BLT) may create ‘dependency’ for its recipients.

Credit assistance program (or any other similar program) is certainly a good initiative and important to have. However, this kind of program assumes that all of its recipients must have entrepreneurship skills and are able to manage their own businesses. The reality is, not everyone is an entrepreneur. Credit assistance is just one policy instrument for another purpose, but not for compensation program as it is not suitable. Moreover, if this program is not intended for the purpose of compensation, then there are several aspects that the government must take into account in giving subsidies to the business community.

Firstly, should the credit assistance be given as grant or as loan? If the credit is given as grant, then the program manager must not be burdened with target for return and non-performing loan ratio. However, if we choose this alternative, it may create moral hazard since the recipients know that they are not obliged to return the aforementioned credit. This will have the same consequences with BLT, if not even worse, where the micro financing companies will lose their customers, and eventually the impoverished people and small-micro-medium entrepreneurs will heavily depend on the government’s program.

As the alternative, the government may channel the funds of this program to Micro Credit Institution (Lembaga Kredit Mikro/LKM) such as cooperatives. Then, LKM will channel the funds to the recipients as soft loan. This might seem a better scheme notwithstanding, this scheme conditions the government to possess a comprehensive data regarding all LKMs that spread across the country, including in the remote areas. If the funds are given out as loans, then the program manager must ensure the recipients are able and willing to return the whole loans as well as their interest (if any). We must, however, remember that if the funds are channelled as loans, then there will be some other considerations as well.

Secondly, we must determine the criteria for selection. Are the recipients the ones who have their own business already, or the ones who are just about to start theirs? For the ones who have their own business, for how long they must have done so (the standard from commercial banks is normally for two years minimum)? Is it necessary to conduct additional appraisal against their performance? If their performance is the requisite to receive the loans, then the implication would be the ones who perform poorly are entitled to such scheme, whereas they might be the ones who need it to continue their business.

Providing loans to those who have started their business may reduce the risk of non-performing loan. The problem is, how about those who actually want to start their business, but cannot do so since they do not possess the starter capital? Could they be the target as program recipients? The answer is they could. Nevertheless, should their business fail, then the potential for non-performing loans would be huge. Giving credit assistance based on proposal may reduce such risk. However, we must take note that most of the impoverished people and micro-small-medium entrepreneurs might not be able to make decent business proposals just yet.

For business starters, perhaps the grant scheme is more appropriate compared to the soft loan one. It is noteworthy however, that it is important to search for a scheme that may reduce any moral hazard. The other option is by using joint-capital or joint venture scheme, which may also have further implication and larger complexity.

The third aspects relates to the mechanism of the credit assistance. The government might be able to manage and directly channel the credit to the impoverished people and/or micro-small-medium entrepreneurs as their intended targets. Nevertheless, their bureaucracy is not the best institution to select nor to identify the most suitable recipients from these people. Therefore, the government may consider to outsource the selection and the funds channelling processes to another party, which also means there will be some extra costs and further processes to run the program.

The banks could help channelling the credit assistance. Nevertheless, their coverage is mainly concentrated in the cities with large scale economic activities, and has not reached all remote areas across the country. It means, there will be plenty of would-be recipients who could not access the credit facilities. Furthermore, judging from the previous experience with a program called Loan-Credit for People (Kredit Untuk Rakyat/KUR), banks have a number of terms and conditions in giving out loans which could hinder the access of many impoverished people and/or micro-small-medium entrepreneurs to the banks’ service.

Another alternative is by channelling the credit via LKMs or cooperatives as mentioned above. The problem is how we can appropriately select the correct LKM as our partner, especially since many LKMs do not have clear organisational structures. It is possible for the government to establish an LKM as an ‘avenue’ to channel the credit, just like what National Program for Community Empowerment (Program Nasional Pemberdayaan Masyarakat) did. In many things, unfortunately, this step does not solve the problem of accountability, principal-agent, and target accuracy. Therefore, additional process in running the program would be required.

The fourth aspect refers to ensuring the funds is truly utilised as business capital. Either given out as grant or loan, either intended for those who have their business already or those who are about to start it, the government must ensure the credit assistance that they provide must be utilised as business capital by its recipients, and not for consumption purposes, nor debt settlements. This means the program manager must verify and regularly monitor the credit utilisation, as well as enforce the recipients to use it in accordance with its intended purpose. This also means that there will be some extra costs to do such verification, monitoring, and enforcement. Otherwise, this program might end up having no difference at all from direct-cash assistance. Even worse, should wrong design befall this program, it might kill off the existing LKMs and turn the credit assistance into a commercial activity.

The more fundamental question is, how about those who need a grant or fresh cash loan for other purposes, such as their children’s tuition fees, food, debt settlements, or any other purposes caused by economic fluctuation? Is it right to ignore them, only because direct cash assistance is judged as not educative?

Once again, I concur that providing credit assistance for business purpose is important. However, it must not be treated as a compensation program with short-term orientation. The credit assistance must have long-term goals, and therefore it is unsuitable for a ‘crash program’.

Therefore, we must position the saying that says “it is better to give away fishing rod than the fish itself” in a proportional manner. Not everyone is a ‘natural entrepreneur’ who could use the given ‘fishing rod’. It is also impossible to give ‘fishing rod’ to those who are in danger of famine. Some people have potential to become an entrepreneur, but some others need several steps before they are able to become a good recipient of credit assistance. Meanwhile, there are also others who simply do not have what it takes to be an entrepreneur, and therefore, we must have a more appropriate program for this group.

Ari A. Perdana is an economist and a lecturer at the Faculty of Economics, University of Indonesia. This article has been published in Suara Kebebasan (www.suarakebebasan.org).