Danamon banks on Microcredit    
Industry News
By Aloysius Unditu and Anil Penna Bloomberg News

JAKARTA The president of Bank Danamon, Sebastian Paredes, is counting on Indonesia's 42 million self-employed workers, including the country's poorest people, to fuel loan growth.

Loans averaging $2,200 now account for 10 percent of Bank Danamon's $3 billion in advances. The nation's fifth- largest bank aims to double its percentage of lending to the poor, known as microcredit, in three years, Paredes said. "I have seen private banks being pressured by the World Bank and governments to give credit to the poor," said Paredes, 44, a former Citigroup head of South and sub-Saharan Africa. "We, on our own, are building a business out of it."

Bank Danamon is taking the lead from Bank Rakyat, the nation's oldest bank, which pioneered loans to Indonesia's poor in the 1960s. While administrative expenses may account for 19 percent of microcredit portfolios in Asia, lenders get an average return of 32 percent a year, according to the World Bank. "There's huge potential," said Hari Purnomo, a Jakarta-based financial services project officer at the Asian Development Bank. "The poor may be unbankable because they don't have collateral or a tax file number, but they have the capacity to repay because their business is run in a feasible way."

In India, Kenya and the Philippines, the average annual return on investments by microbusinesses ranges from 117 percent to 847 percent, the World Bank estimates.
In addition, the poor tend to borrow within their means and service loans promptly because they have few credit options, Purnomo said. "In the top league of microfinance institutions, the default rates are much, much better than commercial banks' default rates," Martin Holtmann, a microcredit specialist at the World Bank's Consultative Group to Assist the Poor, said in a telephone interview from Washington.

Jakarta-based Danamon began offering microcredit in March 2004. It now has about 250,000 customers, mostly small traders, corner-store owners, cab drivers, craftsmen, fishermen and farmers, Paredes said. Loans range from $222 to $56,000.
The bank, 70 percent-owned by Deutsche Bank and Temasek Holdings, charges as much as 31.3 percent annual interest on a three-year loan of about $11,000. That compares with the 8.5 percent Danamon pays on a one-year deposit. The loan margin of 22.8 percentage points is more than double the 8.9 points Danamon earns from its overall banking business.

By contrast, Bolivia's Banco Solidario charges 22 percent interest, down from 65 percent when it started operations in 1992, according to the World Bank. In Bangladesh, microcredit interest rates average 30 percent.

Commercial lenders charge high rates to offset the cost of loan processing, said Purnomo, of the Manila- based Asian Development Bank. Lending to thousands of poor customers may total less than one corporate loan.

Danamon runs 700 offices around Indonesia and employs 7,500 people at its microcredit unit. Loans typically are delivered to borrowers personally and fingerprint scans are used to establish identities. Bankers must track borrowers' incomes and expenses for the life of the loan. "It demands very strong commitment in terms of management, in terms of resources, in terms of allocation of capital," said Paredes. "It's labor-intensive."

Banks also must cover the risk of lending to customers who do not have collateral or credit histories. "Accessing the loan is more important to the customer than the cost of the interest rate," said Holtmann, of the World Bank.

Sarmada, who trades passion fruit in the markets of Jakarta and West Java province, said he had doubled his business since taking a three-year, $8,775 loan from Danamon in 2005. That has made it easy to pay 3.4 million rupiah, or $381, a month in principal and interest, he said. "I used the loan to increase my sales," said Sarmada, 42, who uses only one name. "I want to expand my business to trading other fruit as well."

Lending to the poor among Indonesia's 238 million people will increase by 20 percent a year for the foreseeable future, according to Bank Rakyat, Indonesia's fourth-largest lender.

Microcredit accounts for about 31 percent of $8.4 billion in loans at Jakarta-based Rakyat, said Wayan Alit Antara, the chief financial officer. Borrowers have defaulted on 1.7 percent of small loans, compared with 16 percent of loans to larger companies, he said. "Given Indonesia's population, it's a potentially huge market for any lender entering a specific niche like microfinance," said Eko Pratomo, president of Fortis Group's investment unit in Jakarta.

Danamon shares have risen 11.6 percent to 5,300 rupiah this year, lagging behind the 23.1 percent gain in Jakarta's benchmark index.
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