ROLE OF MICRO FINANCIAL INSTITUTIONS IN FINANCING BUSINESS BUSINESSES
ABSTRACT
In an effort to encourage community empowerment, especially middle to lower income people and micro, small and medium enterprises (MSMEs), comprehensive support from financial institutions is needed. So far, MSMEs have been constrained by access to funding to formal financial institutions. To overcome this obstacle, many communities in non-bank financial institutions have grown and developed that carry out business development services and community empowerment activities, whether established by the government or the community. These institutions are known as microfinance institutions (MFIs). Agriculture is the majority of business activities, which are carried out in rural areas. The biggest obstacle in doing farming is financing. Limited capital, has become one of the problems that has caused many farmers to pawn their fields. And ended up being “farm labor”
Keywords: MFI, costs, farming
PRELIMINARY
- BACKGROUND
Many believe that the Microfinance Institution (MFI) is an effective development tool to reduce poverty because financial services enable low income people and households to take advantage of economic opportunities, build assets and reduce vulnerability to external shocks. MFIs become quite important tools to realize development in three things at once, namely: creating jobs, increasing community income, and alleviating poverty (Anonymous, 2007). According to Martowijoyo (2002) the role of microcredit for the creation of independent employment to reduce poverty began to develop widely in the world since the Microcredit Summit pledge in
Washington DC, 1997. But many of these MFIs are not yet incorporated and have business licenses. In order to provide a strong legal basis for the operation of MFIs, on January 8, 2013 Law Number 1 of 2013 concerning Microfinance Institutions was enacted. Microfinance Institutions (MFIs) are financial institutions specifically established to provide business development services and community empowerment, whether through loans or financing in micro-scale businesses to members and the community, savings management, or providing business development consulting services that are not solely seeking the profit. The MFI’s business activities include:
- business development services and community empowerment, either through loans or financing in micro-scale businesses to members and the community, savings management, as well as providing business development consulting services.
- Business activities that can be carried out conventionally or based on Sharia Principles.
- MFIs can conduct fee-based activities as long as they do not conflict with statutory provisions in the financial services sector.
Financial service institutions in the form of Microfinance Institutions (MFIs) are basically very necessary to support rural economic development activities primarily as institutions to facilitate farm financing services. It is based on the fact that most of the farmers face the problem of technology adoption, because it is weak in capital. In accordance with the characteristics of the business scale, micro and small businesses do not require large capital. With small capital requirements but in large business units this causes less interest in large formal banking institutions to fund microbusinesses because the transaction costs are very high (Ashari, 2006). This condition is in accordance with the opinion of Krishnamurti, 2003; which suggests that without adequate access to microfinance institutions, almost all poor households will depend on their own limited financial capacity or on informal financial institutions such as moneylenders, money lenders or money lenders. This condition will limit the ability of the poor to participate and benefit from development opportunities. The poor who generally live in rural areas and work in the agricultural sector should be more empowered so that they can get out of the cycle of poverty.
- IDENTIFICATION OF THE PROBLEM
The formulation of the problem in this paper are:
- Analyze the role of microfinance institutions (MFIs) in rice farming
- PURPOSE AND OBJECTIVES
This research is a study of how big the role of microfinance institutions (MFIs) is in farming in Indonesia. The time span used is 2000 to 2016
The purpose of this research is to find out how big is the role of microfinance institutions (MFIs) on farming in Indonesia.
- RESEARCH METHODOLOGY
The object of research used in this study is the role of microfinance institutions in Indonesia. Descriptive-qualitative analysis was compiled based on the research method by testing secondary data that researchers obtained from various data sources, journals, articles, books, magazines, internet, and scientific literature studies relating to the problem of the influence of microfinance institutions on farming in Indonesia.
- RESULTS AND DISCUSSION
The presence of MFIs is needed at least for two reasons (Pantoro, 2008). First, as one of the instruments in the context of overcoming poverty. The poor in general have micro scale businesses. In World Bank terminology, they are referred to as economically active poor or micro entrepreneurs. In the configuration of the Indonesian economy, more than 90 percent of business units are micro scale businesses. Developing a micro scale business is a strategic step because it will realize broad base development or development through equity. They need capital to develop their business capacity. With increased business (becoming a micro-scale business), it will effectively overcome the poverty suffered by themselves and is expected to help the community in the poor category. On the other hand, the microfinance scheme is very compatible with the needs of low-income people.
Second, MFIs are needed because they are one of the instruments for developing the microfinance market. Pragmatically, the microfinance market is the financial aspect of all economic processes in the micro segment which includes everything that concerns savings and business credit. This understanding includes the words savings and credit in order to avoid narrow understanding as if in the micro segment the business actors only need credit, forgetting that they have the potential to save, and / or can be empowered to have the ability to save. In short, in the microfinance market there is great potential in terms of supply (savings) and demand (credit). The establishment of MFIs is an answer to the lack of formal financial institutions in embracing SMEs, so that its role can be said to be a savior valve in the process of rural economic development. The MFI that focuses its activities on financial services for agricultural businesses (agribusiness) is called LKM-A. According to Hendayana et al. (2008), LKM-A is a business institution that manages financial services to finance small-scale agribusiness in rural areas, both formal and informal.
agribusiness, the results of evaluations of the development of the Gapoktan implementing PUAP in 2008 and 2009, showed that PUAP funds managed by LKMA were allocated to finance agriculture (food crops, horticulture, animal husbandry, plantations and off-farm). The realization of the utilization of PUAP BLM funds in 2008 and 2009 by sub-sector is presented in Figure 3.
PUAP funds until the end of 2010 have experienced growth, namely in 10,542 Gapoktan in 2008 only reached an average of 5.42 percent, while in 9,8484 Gapoktan in 2009 reached an average of 3.63 percent (Figure 4). The existence of LKM-A in the community of rural farmers has been proven to be able to play its role in facilitating agricultural financing (farming), this is presented in Table 1.
Farming is needed technological innovation to encourage increased productivity and production. Farmers’ weaknesses are precisely in the adoption of relatively low technological innovations as a result of the weak mastery of farm capital. To overcome the shortage of farm capital, farmers usually seek additional capital from various sources of funds both from formal financial institutions (banking) and non-formal financial service institutions. But generally because farmers often do not have access to conventional banking institutions, they will
to deal with informal financial service institutions such as financiers (money lenders), or enter into contracts with traders of production facilities and other sources that generally these capital sources charge a rate irrational interest because it is too high and binding. Such conditions have a negative impact not only for farmers but also damage the economic order in rural areas.
In this regard, the existence of an agricultural microfinance institution (LKM) will be one solution. Agricultural MFIs have a strategic role as intermediaries in economic activities for farming communities that have so far been unreachable by the services of general banking institutions / conventional banks (Wijono, 2005). Microfinance Institutions (MFIs) are increasingly developing in rural and urban areas, ranging from formal (government support), semi-formal to non-formal or informal. MFI orientation is more aimed at non-agricultural economic businesses, while MFIs that serve capital in the agricultural sector are still limited in number. Meanwhile, according to Hendayana, et al. (2007) the initiative to establish an MFI in line with the launch of a financing program for agricultural businesses by the Directorate of Financing of the Directorate General of Agricultural Facilities (2003). .
The MFI was again used as a means of empowerment for Farmers Groups receiving Group Business Capital Strengthening (PUMK) by the Agricultural Finance Center. Agribusiness label is also pinned to become MFI-Agribusiness.
The existence of LKM-Agribusiness in PUAP is a must for managing Gapoktan finances. According to the Agricultural Financing Center (2007) LKM-Agribusiness is one of the Gapoktan capital units that is developed at the initiative of farmers in the farmer group members in the Gapoktan (BPTP, 2010).
Agribusiness Microfinance Institutions (LKM-A) is one of the many financial institutions that are formed from community empowerment programs in the context of poverty alleviation. This institution was formed from the Rural Agribusiness Development Development Program (PUAP) which is under the coordination of the Ministry of Agriculture. The manifestation of the PUAP program is a Community Direct Assistance (BLM) fund of Rp. 100 million that is channeled directly to the account of the target farmer group association (GAPOKTAN). This fund is then managed by the business unit in GAPOKTAN and in the 3rd year since the distribution of these funds is expected to stand an Agribusiness Microfinance Institution which is an independent business unit owned by GAPOKTAN whose management is separate from GAPOKTAN itself.
Specifically the establishment of LKM-A aims to: 1) Increase farmers’ easy access to financing schemes provided by the government or other parties 2.) Increase the productivity and production of farming / livestock business in order to encourage the achievement of farm value added 3.) Encourage rural economic development and rural economic institutions, especially Gapoktan. Specifically, the role of LKMA is to provide farming capital for farmers who need farming activities to avoid borrowing from money lenders whose existence is very detrimental to farmers.
Basically the existence of LKM-A in rural farming communities is needed and has proven that LKM-A is growing and developing in the community and serving micro and small businesses (UKM). This also proves that LKM-A is accepted as a source of financing for its members (UKM). In other words, LKM-A is independent and is rooted in the community. The existence of LKM-A is close to the community with quite a large number and its spread is widespread so that it is able to reach out and serve the community. In addition, LKM-A has procedures and requirements for borrowing funds that can be fulfilled by its members (without collateral). Furthermore, LKM-A helps solve the problem of funding needs which have so far been unreachable by the poor. The existence of LKM-A is able to reduce the development of money lenders so that it helps move the community’s productive business. LKM-A is owned by the community so that any surplus generated by LKM-A can be enjoyed again by the customers as owners. LKM-A as an economic institution in rural areas is really needed because it has several advantages. The advantages of LKM-A include: first, participatory. Farmers play an active role in managing finances, managing and developing productive businesses, building networking with other parties (government, private, and between farmers) as well as independent decision makers. Second, LKM-A is professionally able to overcome the difficulties of farmers in accessing capital in rural areas. The third advantage is that LKM-A is dynamic where there is always room to accommodate aspirations, meet the wants and needs of farmers. The next advantage is LKM-A as a means of business education for rural farmers, especially for beneficiaries.
- CONCLUSION
- SUGGESTIONS