# **Competition**

On the credit side, program managers report that their units face limited competition. The BRI Unit Desa system has facilities throughout Indonesia. However, managers from the five programs reviewed claim that they did not face significant competition from BRI for lending. They feel that their customers are generally too poor or lacked required collateral to qualify for Unit Desa loans. Of the five programs reviewed, only BKK reports that it faces some competition from BRI for more affluent customers. BKK managers claim that they compete with BRI by providing loans faster, requiring less paperwork. and reducing transactions costs to clients through field staff visits to clients' businesses.

BKK, PHBK, and P4K report that they face some competition from programs that provide grants or very low interest loans to low-income families. The Family Planning Board (BKKBN) has recently launched a highly subsidized, group-based lending program for poor families (TAKESRA/KUKESRA). Private firms and individuals with profits or incomes in excess of Rp. 100 million (US$42,800) are required to channel 2 percent of profits/income to this program. The pressure to repay credits issued through this program is not high. Further, the program's effective interest rate is negative in nominal terms.<sup>13</sup> The program was launched in 1996 and in less than one year accumulated Rp. 500 billion (US$214 million) in fumding. Some state-owned enterprises use the 5 percent of profits they are required to devote to poverty reduction to support other highly-subsidized lending activities. BKK, PHBK, and P4K managers feel that these programs compete on unfair terms for some of their clients and erode good repayment habits.

Cooperative leaders functioning as private moneylenders also operate in the same regions as the programs studied. Their loans carry a 20 percent flat monthly interest rate (equivalent to about 1,600 percent per year on a declining balance basis). This rate is much higher than the highest rates charged by the programs studied. Programs' unit managers claim that in areas where their institutions operate, these cooperative leaders generally make loans only to individuals who do not qualify for credit from their units. **14** Most of the programs reviewed compete with BRI Unit Desas for voluntary savings. This can be difficult, as customers have tremendous confidence in the security of BRI deposits. Furthermore most of the programs require borrowers to deposit compensating balances that have restrictions on withdrawal. This practice can confuse customers and lead them to believe that they will also have difficulty withdrawing voluntary savings. LKP, which allows agents to accept deposits in the field, and BKD, which is located at the village level, can offer greater convenience than Unit Desas. Rural banks associated with PHBK frequently attempt to attract customers by offering interest rates on savings significantly in excess of those offered by BRI.

> **13** The program's nominal interest rate is 6 percent. However, upon full loan repayment. borrowers receive back 10 percent of their payments.

> **14** Generally people who have a poor repayment history on previous loans or do not have their own business or farm, and are not steadily employed.

23