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MICRO-FINANCE
INDONESIA
A HISTORY OF THE "VOLKSCREDIETWEZEN"
(POPULAR CREDIT SYSTEM)
(1895-1935)
by: Leo Schmit
edited
by: Klaas Kuiper
Development Cooperation Information Department of the
Ministry of Foreign Affairs, The Hague, Netherlands
1994, 1999
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CONTENTS
PREFACE AND ACKNOWLEDGEMENTS by Klaas Kuiper, editor
A HISTORY OF THE “VOLKSCREDIETWEZEN” (POPULAR CREDIT SYSTEM)
IN INDONESIA (1895-1935), by Leo Schmit
1Establishment of the first popular credit banks
2Different Approaches
3Formalising the popular credit banks
4Partnership between Boeke and Fruin
5The reorganisation of the Volkscredietwezen
6Debate in the Volkscredietwezen journal
7The Popular Credit System during the Depression
8Eliminating defaults and concentration of banks
9The founding of the “Algemeene Volkscredietbank” (AVB-Bank)
10References
GLOSSARY by the editor
Copyright © Ministry of Foreign Affairs
Development Cooperation Information Department (DVL/OS)
PO Box 20061, 2500 EB The Hague, Netherlands,
July 1994
Permission is granted for reproduction in part of this material for educational, scientific or development related purposes except those involving commercial sale, provided that full citation of the source is given. For all other purposes prior written consent of the copyrightholder is required.
The opinions expressed in this publication are the sole responsibility of the authors.
Photographs:
- Royal Institute for Linguistics and Anthropology, Leiden, Netherlands (first four)
- Fruin archive in Rijksarchief, The Hague, Netherlands ( last two)
PREFACE AND ACKNOWLEDGEMENTS
Klaas Kuiper, editor
This article was first published in 1994 . It was an introduction to the "Provisional manual for the credit business of the popular credit bank", a translation of the original policy and procedure manual written by Thomas Anthonij Fruin for the General Popular Credit Bank (AVB-bank) in 1935. (34) Fruin had been working since 1920 for the popular credit system and became the first president of the AVB-bank when it was established in 1934. The AVB-bank is the predecessor of today's Bank Rakyat Indonesia (BRI).
The popular credit system consisted of various institutions such as the popular credit banks, the village banks and the village rice banks, a popular credit system service and a central fund.
In addition there were pawnshops (a government monopoly), cooperatives, a credit rehabilitation bank and many anti-usury associations.
The whole system was based on a welfare policy of the Dutch colonial government in Indonesia. The target groups were small farmers, traders/hawkers or micro-businesmen and women who had difficulty in obtaining access to the formal commercial banking sector. Millions of very small loans were disbursed annually both for production and consumption purposes.
Schmit's article may not only be of interest to historians but also to those interested in the fields of micro-finance, social banking and welfare development.
The manual written by Fruin and translated in 1994 (34) will also be availbale on diskette as well as a translation of Fruin's "Historic overview of the village credit system", covering the period 1897 to 1932. (33) This will facilitate storage in virtual libraries.
These three publications together provide a good picture of the way micro-lending was practised in Indonesia during the firts part of this century. Many of the lessons learned in that period were taken into account when BRI and FAO designed the first village units for a pilot project in Yogyakarta province in 1969. (35), not in the least because it had been profitable.
Leo Schmit has done an excellent job in summarizing the way this popular credit system developed and which individuals played a major role in it. His earlier research for his own dissertation placed him in the best position to do this.
Thanks are also due to Mr R. Fruin for his permission to consult his father's archives at the General State Archive in The Hague and for his advice, suggestions and photographs.
The project of translating Fruin's manual and publishing it together with this article was funded by the research programme of the Directorate-General for Development Cooperation (DGIS).
This electronic copy was obtained by scanning the published article. It was felt that this historic overview could stand on its own. It required a few minor editorial changes: a glossary of terms had to be added and direct references to Fruin's manual were deleted. Some Indonesian terms were translated to facilitate reading.
Due to the difference in format of the original publication and this electronic version, the page numbers do not correspond. Due to the scanning the photographs in the printed version are of a better quality while the last picture has been reduced in size.
Klaas Kuiper, editor
Doorn, The Netherlands
July 1999
E-mail:
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A HISTORY OF THE “VOLKSCREDIETWEZEN"
(POPULAR CREDIT SYSTEM)
IN INDONESIA (1895-1935)
By: Leo Schmit
Edited by: Klaas Kuiper
July, 1994
CONTENTS
1Establishment of the first popular credit banks
2Different Approaches
3Formalising the popular credit banks
4Partnership between Boeke and Fruin
5The reorganisation of the Volkscredietwezen
6Debate in the Volkscredietwezen journal
7The Popular Credit System during the Depression
8Eliminating defaults and concentration of banks
9The founding of the “Algemeene Volkscredietbank” (AVB-Bank)
10References
11Glossary (by the editor)
A HISTORY OF THE “VOLKSCREDIETWEZEN" (POPULAR CREDIT SYSTEM)
IN INDONESIA (1895-1935)
By: Leo Schmit
1.Establishment of the first popular credit banks
The history of the “Algemeene Volkscredietbank” (AVB-Bank) started in 1895, when Raden Wiriamaadya founded the Priyayi Bank of Purwokerto. Wiriamaadya was a Javanese government official from an aristocratic (priyayi) family, who wanted to help his friends out of debt. He had noticed that during a slametan feast his host had taken a massive loan from a Chinese moneylender in order to meet his social obligations. He was so distressed by this incident that he decided to contribute to the festivities from his own pocket and proposed setting up a saving fund for prominent Indonesian citizens. (1)
In 1896 the idea was put further into practice by the administrator Sieburgh. A year later, his colleague, De Wolff van Westerrode, was appointed director of the bank, which was called the ‘Poerwokertosche Hulp- Spaar en Landbouwcredietbank”. De Wolff van Westerrode’s aim was to create a central institution for village credit cooperatives along the lines of the Raiffeisen in Purwokerto. This, he believed, would protect local administrative officials from Chinese and Arab usurers and help to preserve what he perceived as the “spirit of brotherhood and solidarity” among the rural population.(2)
A series of priyayi banks were subsequently established in other parts of Java, along the same lines as the bank in Purwokerto. These institutions provided a credit facility in a great many villages. Some, but not all of them, were cooperatives. Before this time, Christian missionaries had taken steps to establish local market banks. Their efforts, however, faded into insignificance in the light of the furore caused by Wiriamaadya’s loan scheme initiative and De Wolff van Westerrode’s expansion thereof.
All but a few of the cooperative experiments collapsed. Their failure is generally attributed to the fact that the colonial government had adopted an ill-considered bank policy in response to food shortages and famine in 1901 and 1902. In its efforts to deal with the crisis, the administration took account of the wishes of the Netherlands’ newly-crowned Queen Wilhelmina, who favoured an active welfare policy in Indonesia.(3)
Another factor, however, was the lack of enthusiasm for the cooperative movement both among some of the colonial administrators and among the management boards of the popular credit banks. Supporters of the government officials Fokkens and Van Deventer favoured a banking system with a prominent role for government and regarded the popular credit banks as the economic arm of local authorities. At village level, this role was assigned to the desa banks or, in Sumatra, to the nagari banks.(4)
De Wolff van Westerrode and his followers, on the other hand, saw government intervention as a threat to the success of local credit cooperatives, while the Indonesian founders were interested above all in developing an organisation of their own. They were motivated chiefly by a feeling of nationalistic pride and a latent commercial interest. The management boards of many of the banks chose to establish village banks rather than take the more laborious route of moving towards cooperatives.
After 1902, the village bank system set up by the administrator Mesman emerged as the best of the many variants. Indeed, the most successful of all were the lumbung padi banks, which allowed villagers to secure a rice advance until the following harvest. Nevertheless, there was still such a huge demand for monetary loans that an increasing number of popular credit banks opened branches in the villages.(5)
2. Different approaches
Right from the start, the main issue in the history of popular credit banks in Indonesia has centred on the question of whether loans to the Indonesian population should be extended through cooperative organisations or popular banking institutions.
Under what conditions should clients be granted loans? Was it advisable for loans to be tied to securities or guarantees? What was the most suitable form of organisation? How much intervention and control was desirable on the part of the colonial administration? These were the questions people were asking.
On the one hand, popular credit banks were seen as a way of strengthening the local economy along cooperative lines by extending loans to increase production in agriculture and industry. On the other hand, they were regarded as a means of protecting rural communities and local authorities against exploitation by Chinese moneylenders by granting loans for consumption purposes. At the same time, they formed a response to the emergent nationalist aspirations of local Indonesian dignitaries. Government officials such as Fokkens and Van Deventer were steadfastly in favour of involving representatives of the priyayi class in initiatives of this kind.
To further the emancipation of a moderate nationalistic Indonesian elite they were given access to the education system, while certain services and institutions, such as the popular credit banks, were established. Apart from the economic consequences, these administrators had high expectations of the “edifying” effect of these measures. An unexpected result, however, was that priyayi officials on the boards of these popular credit banks saw this as an opportunity to fulfil their own nationalistic and commercial aspirations.
The main objective at village level was to neutralise latent insurgency in Islamic circles by safeguarding the village economy against Chinese usurers, in Fokkens’s words, by “forcefully expelling them from the interior”. Towards the end of the 19th century, in rural parts of West Java in particular, the population gave indirect expression to nationalistic sentiments by using strategic opportunities to challenge the role of usurers and moneylenders of Chinese extraction. The colonial government, thus forced into the role of protector, in fact benefited from the situation, given its declining influence during the period of liberal rule from 1870 to 1890. (6)
3.Formalising the popular credit banks
From 1902 on, popular credit banks were assigned a central role in welfare policy for Indonesia, and at this point the process of formalising these institutions finally got under way. ln 1904 the Government started granting establishment subsidies, which enabled them to exercise control over the popular credit banks in receipt of such funds. The Government appointed an inspector of popular credit banks for this purpose, with a staff of 24 Indonesian supervisors.
By 1906 the system extended to a network of 33 popular credit banks operating, 7,424 lumbung padi banks and some 300 village banks. In the same year, a decree was issued which required local officials to give a high priority to supporting these credit institutions. At the same time, the Government tightened its grip on the popular credit banks by making local government officials responsible for supervising their management boards. Moreover, an increasing number of professional administrators were appointed, at the expense of the lending agency.
The Internal Municipal Ordinance of 1906 gave village banks the status of decentralised credit institutions. This placed them under the authority of the village heads, who were thereafter chosen within the framework of this ordinance. These measures meant that, officially, the popular credit banks could not influence the village banks operating under their auspices. They did not, however, prevent the management boards from gradually expanding some of the village banks. Moreover, it was soon evident that there was not yet a democratic basis for village elections, and that many of the village heads were embezzling funds.
In 1907, after being informed of the situation, the Inspector of Local Government, Carpenter Althing, compiled the first "manual for the organisation and administration of popular credit banks, lumbung padi and village banks".(7)
In 1908 a decree was issued allowing popular credit banks to demand security or guarantees on loans. These two measures were instrumental in delaying the introduction of a cooperative structure. But the latent commercial aspirations of many management boards and village heads remained a source of consternation. For this reason, the government issued a decree in 1910 giving popular credit banks the status of "philanthropic associations" and confirming that of the village banks as decentralised village credit institutions.
This distinction in status had two significant effects. Firstly, it caused confusion about the role of government officials in relation to that of the boards of popular credit banks and professional bank administrators. The government had to bear the ever increasing burden of monitoring this system, while the question of competence gave rise to problems between the authorities and the professional administrators appointed by the popular credit banks. The local administrative apparatus was itself faced with newly-defined regional and district boundaries, which, given the status of the popular credit banks as "philanthropic associations", threatened to end the correspondence between administrative departments and the geographic reach of the banks, and consequently their control over these institutions.
Secondly, it led to problems regarding the flow of money which was rapidly growing in volume between village banks and the popular credit banks. Under the provision of the Municipal Ordinance, village banks were responsible not only for providing loans but also for managing the local council's financial reserves. In practice, however, many village banks defied the rules by depositing their reserves in savings accounts at popular credit banks.
Private clients, too, made increasing use of this facility, thus helping to bolster the popular credit banks’ financial basis. As a result, these institutions were eventually able to expand their activities and secure a greater degree of independence than the Government Inspector had wanted.
This situation led to the creation in 1912 of an autonomous welfare service known as the "Volkscredietwezen", (Popular Credit System). A Central Fund (“Centrale Kas")was also established, with a working capital of 5 million guilders. By this time, the system had expanded to comprise 75 popular credit banks, 12,424 lumbung padi banks and 1,336 village banks. The object of these measures was to enable local councillors to devote themselves to the routine tasks that had been assigned to them with a view to achieving administrative reform. It was also hoped that by centralising the system and granting subsidised funds the government would gain more control over the popular credit banks. With this in mind, the Fund’s first annual reports noted under the heading “Advice and assistance in the management of small-loans institutions” how many of the banks which had entered into credit agreements with the Central Fund were in fact willing to submit to auditing.(8)
Within the framework of the Popular Credit System, the village banks, as decentralised institutions, were responsible for providing short-term and sometimes seasonal loans to meet the “chronic” needs of the local population. The service was designed not so much to galvanise the economy as to tide people over through periods of scarcity. The popular credit banks, by contrast, on the grounds of their status as “philanthropic associations”,were intended to nurture the cooperative movement.
auditing a village bank (above) and signing
a loan agreement at a popular credit bank (below) in the district of Bogor
.Government intervention was defined mainly in terms of encouragement, support, supervision and auditing. The official standpoint was that this type of intervention was merely a stopgap and that it was to be withdrawn once the seed of cooperation had germinated. With this in mind, a financial director was appointed as the head of the Fund.
He was assisted by an adviser for the Volkscredietwezen, whose job was to mould the system along cooperative lines. This brief included the preparation of an amended Cooperatives Act (1915) and an Anti-Usury Act (1916) to suit conditions in the country, and the submission of proposals for the reorganisation of the institutional structure of the Volkscredietwezen.
4.Partnership between Boeke and Fruin
From 1920, the reorganisation of the Volkscredietwezen was dominated by the partnership between two young “institutional developers”, both graduates of Leiden University. Boeke had specialised in colonial economics and Fruin in jurisprudence. As far as theoretical knowledge was concerned, the two men made a good team. Both were committed to the economic development of the country and to ensuring that the process took place within a proper institutional framework and with a sound basis in law. Over and above this, they were both of a highly practical disposition and had an unflinching devotion to duty.
Boeke was inspired by the theories of the German economist Sombart, and applied his concept of “pre-capitalist” society to this colonial community in the tropics. He reformulated the notion into what was later to become known as his “dualistic economic theory”. The gist of his argument was that the aggressive market-oriented mentality which he attributed to the Chinese posed a threat to the indigenous peoples, whose disposition inclined more towards “satisfying social needs”. This is what motivated Boeke’s resolve to form a separate system based on cooperative principles for the native population.(10)