State-owned Development Banks in Microfinance

The paper describes the transformation process of Bank Rakyat Indonesia's (BRI) Unit Desa (village banking) system into a successful MFI.

State-owned development financial institutions are often subjected to political influences, Poor lending practices weaken these institutions and make them continually dependent on government or external donor funds. BRI is one of the few state-owned institutions that overcame these problems. The key factors for BRI's successful transformation include:

• Stable macro-economic environment;
• Strong leadership within BRI to steer the reform effort and unwavering political support from the government of Indonesia;
• Considerable and prolonged backing in financial and human resources from the government and external agencies;
• Liberal financial sector policy that allowed BRI to design its own products and price them according to cost-recovery principles;
• Complete operational autonomy for the Unit Desas without any government mandates on reaching lending targets or population groups;
• Large investment in creating a professional human resource base through staff training, merit-based recruitment, and performance incentives;
• Clear and transparent financial reporting and accountability.

The paper states that in the absence of these factors, the efficacy of reform for state-owned development finance institutions will be severely limited.

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