Indonesia: A Regional Development Bank Linked with Village-Based Non-Bank Financial Institutions
This report presents findings of a study of financial linkages between the Regional Development Bank (BPD) and village credit institutions (LPD) in Indonesia. It demonstrates the impact of banking policies, regulation and supervision on the nature and level of success of formal and informal financial sector linkages. The linkage was initiated in 1985 by the provincial government of Bali to empower villages. BPD provides the technical and supervisory assistance to LPDs, who pay commercial rates for the services. The success of these linkages is a result of several factors such as institutional settings, strong government commitment and support, and village communities positive participation and loyalty. Despite its apparent success, the report raises five regulatory and governance issues for further improvement of these linkages:
- Growing opposition of individual LPDs to restrictions on interbank savings accounts;
- LPDs organization settings and governance structure which tend to restrict further expansion;
- Limited chances of LPDs receiving external funding due to lack of recognition in the national legal framework;
- Dominant role of village board in selecting LPDs manager;
- Conflict of interest between provincial and district governments concerning their regulatory power over LPDs.
