Market Segmentation, Social Capital and Welfare-Outreach in Microfinance: A Case Study of Indonesia
Agus Eko Nugroho ([email protected]) Accepted 2010, Curtin University, Perth WA
This thesis investigates micro-finance in parts of Central Java from the perspectives of market segmentation, the role of social capital in micro-finance provision and the impact of micro-finance on the welfare of the rural poor. Data for the study were obtained through questionnaire-based interviews administered to micro-finance clients and institutions in rural areas of Boyolali district. The chi-square method and a logistic model were used in the analysis. There were four main findings.
First, the study confirms that heterogeneity among clients and among institutions leads to market segmentation in micro-finance. There is evidence that poor people are not a homogeneous group in terms of access to finance. While some can access the financial services of micro-banks, many cannot, owing to socio-economic constraints such as limited networks and low levels of income and education. Micro-finance markets thus tend to be segmented because some of the poor are capable of accessing only informal micro-finance institutions (MFIs). The findings show that MFIs face information and enforcement problems in lending to poor clients, who will often use loans given for productive purposes to finance consumption, leading to a greater probability of default. The differing capacities of MFIs to overcome such problems also contribute to segmentation in micro-finance markets. Although micro-banks have financial resources to lend, they are unable to gather information about the credit-worthiness of the poor because of their operational distance from the social networks of their poor customers. As a result, micro-banks prefer to set loan contract terms that favour non-poor clients, thus minimising risk in their loan portfolios. In contrast, because they are located in villages, informal MFIs, such as cooperatives and money-lenders, are more capable of overcoming the informational problems of lending to the poor.
Second, the study finds that social capital enhances the access of poor people to micro-finance. For instance, kinship relations can provide access to formal finance through the role of relatives in providing references in applications for micro-bank loans. Interviewees who maintained friendship and business networks faced lower informational constraints in accessing micro-bank finance, because they could gather knowledge of banking procedures from friends and business associates. From the lender's perspective, the findings indicate that MFIs that consider social capital as important in lending decisions tend to have higher rates of loan repayment than those that do not.
Third, the study examines the trade-off between profitability and outreach in the practices of formal and informal MFIs. Micro-banks prefer to make larger loans to non-poor clients, because managing small loans to a large number of poor clients increases the costs and risks of lending. Their focus on profitability potentially undermines their capacity for outreach (service to the poor). However, informal MFIs can maintain profitable operations in conjunction with serving the poor. The study finds that informal MFIs such as money-lenders and cooperatives can minimise the default rate on small loans through maintaining close contacts and friendships with their poor clients.
Fourth, and finally, this study finds that access to micro-finance services contributes to the welfare of the poor. A logistic regression reveals that access to micro-loans is positively associated with the level of child education and the degree of confidence in dealing with others, while it is negatively correlated with the frequency of financial problems in poor households.
© 2010 Agus Eko Nugroho
Essays on the Indonesian Banking Crisis and Restructuring
Cicilia Harun ([email protected]) Accepted 2007, Boston University, Cambridge MA
The East Asian financial crisis of 1997–98 forced the Indonesian banking authorities to take action to mitigate the banking crisis and execute a bank restructuring program. In this dissertation, I discuss issues surrounding the crisis and the restructuring events. Chapter 1 presents a history of the Indonesian banking industry from the financial liberalisation period (1983–89) to the restructuring period (1997–2002). It also refers to some of the literature on the East Asian financial crisis, and the banking crisis in particular. The banking crisis in Indonesia is a classic example of a bank panic response in the absence of a suspension of convertibility and a deposit insurance scheme.
Chapter 2 focuses on the problem faced by the banking authorities in deciding whether to liquidate or restructure troubled banks. The economic conditions and the bank restructuring program eliminated competition as a factor in banks’ decisions to stay in or exit the market. In order to improve banking system performance, the government and the central bank had to decide what to do with troubled banks. I show that most CAMEL indicators (performance indicators used in banking supervision) are useful in explaining the decision to liquidate a bank, restructure it or deem it healthy. This chapter also finds that the ‘too big to fail’ argument applies in the decisions about whether to save or freeze banks following the East Asian financial crisis. The study detects a change in the way the CAMEL variables were used to determine what to do with troubled banks between the first wave of bank liquidation in November 1997 and the beginning of the restructuring program in March 1999.
In chapter 3, I use portfolio management measures such as asset profitability, liquidity and security to detect bank behaviour during the financial crisis in response to micro and macro shocks. This chapter illustrates some of the patterns of behaviour of different groups of banks: government bank profitability and security are not significantly associated with most micro shocks; the profitability of foreign banks tends to increase with exchange rate depreciation; and changes in the profitability, liquidity and security of restructured banks are only associated with exchange rate movements. The analyses of asset liquidity and security reveal that at the beginning of the banking crisis most banks preferred to be liquid for precautionary reasons. Later, however, banks preferred not to place funds in riskier assets.
Chapter 4 discusses the effect on monetary transmission of heterogeneous risk aversion in banks. Using long-term panel data on Indonesian banks against the background of the banking crisis of 1997–2000, the analysis finds that the more risk-averse banks intensify the sensitivity of their lending to the strength of their balance sheets when monetary policy is tightened, in the same way as smaller banks have been found to do.
© 2010 Cicilia Harun
Complex Adaptive Processes of Supply Chain Formation and Collapse: Two Case Studies of Mango Supply Chains in West and East Java, Indonesia
Trina Fizzanty ([email protected]) Accepted 2009, University of Queensland, Brisbane
In 2005, the Indonesian government facilitated close cooperation between one fruit exporter and mango grower groups in initiatives to build supply chains in West and East Java. However, in the course of this study it became apparent that both the supply chains had largely failed. This thesis focuses on understanding the complex processes that led to the failure of the supply chains in these two cases, and the lessons that can be drawn from it. The objectives of the thesis are: (1) to document the environment in which the supply chain intervention took place; (2) to describe and understand the supply chain system behaviours associated with the intervention; (3) to establish how the system behaviours and the system environment related to the collapse of the supply chains; and (4) to analyse the consequences of the system behaviours for improved supply chain formation and management practices.
Through the lens of the ‘complexity paradigm’ (a technique for analysing complex reality) and informed by ‘complex adaptive systems’ characteristics and supply chain management principles, this thesis develops a framework and uses it to understand the formation and collapse of the two supply chains. This phenomenon was studied qualitatively, following a retrospective cross-case study approach. The case studies were located in Majalengka (West Java) and Situbondo (East Java). The data were collected during three fieldwork periods in 2005–07. They were restructured into critical event series and incorporated into matrices based on the research framework, and also into causal loop models. Data analysis was undertaken using within-case and cross-case study methods to understand why and how the supply chains collapsed shortly after they were formed. Learning from the supply chain failures, this research proposes some possibilities for improving the systems. A modified SAFE (sustainability, acceptability, feasibility and efficiency) method has been used to evaluate the proposed system improvements.
The study finds that the supply chain systems were set up with high expectations but with production levels that were well under target, with ineffective rewards and with a marginalisation of intermediaries, who had been critical to the operation of the traditional mango marketing system. Setting up the systems in this manner increased the resistance of players in the traditional supply chains. The process of establishing the new supply chains was concerned with market goals, technical issues and reward strategies. It therefore neglected to focus on building trust and effective relationships among the stakeholders, making it difficult to ensure commitment to these relationships. The interventions in the systems and the decision to manage the supply chains in a mechanistic way to meet pre-determined goals reduced the capacity of the supply chains to be adaptive. Players in the fruit supply chains displayed resistance as a result of the clumsy intervention (particularly the attempt to exclude intermediaries in setting up the supply chains, while copying their business strategies into the chains’ practices); the lack of grower participation in planning; customer dissatisfaction with the supplied produce; the supply chain actors’ inadequate learning capacity; and low trust relationships.
Given the implications of these findings for supply chain formation and management, it is necessary to consider three areas for reform: designing the system; measuring system performance; and improving supply chain formation processes. The thesis proposes various strategies for system improvement. In conditions of low trust between supply chain members, care must be taken in selecting partners and establishing an effective organisation among producers. Capacity building is likely to be the most acceptable strategy for improving supply chain performance. The case studies suggest that the most feasible and efficient strategies for supply chain formation in the Indonesian context involve eliminating government control within the supply chain systems.
© 2010 Trina Fizzanty
The New Institutional Arrangements and Economic Policy Reform in Post-Suharto Indonesia (1999–2007)
Gabriel Lele ([email protected]) Accepted 2008, Australian National University, Canberra
This thesis is about the influence of political institutions. It argues that new institutional arrangements in post-Soeharto Indonesia (1999–2007) had a significant effect on policy outcomes. To support this argument, the study qualitatively investigates how changes in Indonesia's key political institutions, especially the constitution and certain political laws, have affected achievements in economic policy reform.
The topic is important for two reasons. First, compared with agency-based analysis, research on the effect of political institutions is still under-played in the Indonesian policy literature, despite significant changes in this area since 1999.
The thesis develops an alternative way of looking at policy outcomes from an institutional angle. Second, assessing achievements in economic policy reform in the post-Soeharto era is a means to look at government capacity, an issue of great concern in contemporary Indonesia. Connecting these two approaches not only broadens contemporary research on government in Indonesia but also helps improve government's capacity by manipulating its institutional arrangements.
Given the complexity of institutional reform since 1999, several analytic approaches are possible. This study chooses as its optic executive strength, an aggregated measure of a president's constitutional powers and partisan support in parliament. It assesses the capacity of post-Soeharto administrations to push through difficult, even controversial, economic policy reform amid strong opposition, especially from the parliament. The results show that achievements in economic policy reform are significantly influenced by the degree of executive strength of each administration.
The study finds a stark variation among the post-Soeharto administrations in the achievement of fiscal, privatisation and investment policy reform. Former President Abdurrahman Wahid adopted very limited reforms in all three policy areas. His successor, Megawati Soekarnoputri, adopted many significant policy reforms in these fields, though with some elements of delay and partial reversal. President Susilo Bambang Yudhoyono purposefully adopted many policy reforms in these areas. A case study of fuel subsidy reform confirms this general pattern: it showed no progress under Wahid, advanced slightly under Megawati and moved forward significantly under Yudhoyono.
Without ignoring the effect of political actors and their vested interests, the thesis argues that this variation is best explained by differences in the degree of executive strength. Wahid achieved only limited reform primarily because he lacked sufficient political capital – particularly partisan support and constitutional protection over security of tenure – to adopt politically difficult economic policy reforms. These institutional underpinnings had improved under Megawati, with the tightening of the impeachment procedure. Her security of tenure was constitutionally protected, but she still lacked consolidated partisan support. Yudhoyono had sufficient political capital through his direct popular election, and had protection over his security of tenure and sufficient partisan support in the parliament.
These findings imply that institutional arrangements are consequential for policy reform. Political institutions must therefore receive at least the same attention as political actors and their vested interests in analysing particular policy outcomes. At a more practical level, if the government wishes to improve its capacity in any policy area, one important approach is through engineering its institutional arrangements.
© 2010 Gabriel Lele