Providing Financial Services to Poor Farmers through a Local Trader: An Indonesian Case Study
This case study presents an agricultural microcredit model developed by Koperasi Serba Usaha–Swadaya Dian Khatulistiwa (KSU-SDK) in Indonesia. The model relies on local traders to select borrowers, set loan terms and enforce loan repayments at the community level.
KSU-SDK provides ten-month loans to the local trader, who, in turn, provides farm inputs and cash loans to farmers. KSU-SDK also provides technical assistance and training to farmers and helps them in establishing market linkages. Reviewing the performance of the model, the paper finds that:
- Repayments are not linked to loan use;
- Character-based lending techniques are used in combination with technical criteria;
- Savings mechanisms are provided;
- Portfolio risk is highly diversified;
- Loan terms and conditions are adjusted to accommodate cyclical cash flows;
- Contractual arrangements reduce price risk, enhance production quality and help guarantee repayment.
The model has reduced the cooperative’s information and monitoring costs. However, it is not clear if the local trader’s dealings with farmers are fair or optimal. Finally, the paper questions the viability of the model if KSU-SDK scales up its microfinance activities in the area or broadens its range of financial services.
