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n accordance with government'€™s first and third economic policy packages, several changes are being implemented to encourage the uptake of the government'€™s micro-credit guarantee program (KUR). These initiatives started with cutting interest rates for micro-financing from 22 percent to 12 percent, effective since July. The government also gave the banking industry a subsidy of 7 percent on its contributions to the KUR program and gave subsidies on interest by reallocating about Rp 600 billion (US$44 million) from the budget, bringing interest subsidies to the banking industry to a total of nearly Rp 1 trillion. These subsidies are expected to help the KUR contribute to Indonesia'€™s real, retail and labor sectors, which are estimated to reach a combined Rp 30 trillion by end of 2015. The KUR scheme is expected not only to provide convenience for entrepreneurs in need of financial aid, but also make the banking sector and insurance companies more efficient. The government also plans to cut its interest rate to 9 percent next year.

However, as of the end of November 2015, KUR funds disbursement remains below target, only having absorbed about 50 percent, or Rp 15 trillion. Regardless of the fact that the absorption target was quite high for a period of less than 6 months after implementation, there are some initiatives that could make the KUR'€™s absorption more effective and optimal.

As an initial explanation, the KUR is a credit program for working capital financing and/or investment allocated for micro, small and medium enterprises and cooperatives (MSMEs) that are considered productive but face limitations in accessing funds from the banking sector. The financing is capped at Rp 500 million with the government guaranteeing coverage at a maximum of 80-70 percent of the bank'€™s credit limit, depending on the industry.

The KUR has three schemes '€” KUR Micro, with a Rp 20 million ceiling; KUR Retail, offering credit from Rp 20 million to Rp 500 million; and KUR Linkage, which gives credit up to Rp 2 billion. KUR Linkage is usually the vehicle for institutions such as cooperatives, rural banks and non-bank financial institutions, acting as intermediaries for the banking industry, to channel the funding to target businesses.

In line with its objectives, the KUR is expected to accelerate access to capital and funding for MSMEs, enhance the development of economic activities in the real sector as part of poverty prevention and alleviation efforts and expand employment opportunities. As businesses being targeted are productive but without access to banking, the KUR program needs the support of a good ecosystem to make it work.

There are at least three important pillars for the success of the KUR program. First, the government through Bank Indonesia (BI) and the relevant technical ministries that provide support and a credit guarantee. Second is the institutions that act as guarantors for loans and financing provided by banks, namely PT. Askrindo, Perum Jamkrindo and Jamkrida. Lastly, the banking sector, which provides credit to the MSMEs and cooperatives. Participating banks for the KUR program include Bank BRI, BNI, Bank Mandiri and six regional development banks (BPD).

Based on the website of the Cooperatives and MSMEs (KUKM) Ministry, there are at least seven technical ministries related to the distribution of KUR scheme. The ministries are the KUKM Ministry, the Finance Ministry, the Agriculture Ministry, the Maritime Affairs and Fisheries Ministry, the Industry Ministry and the Forestry Ministry. Other supporting agencies include the Financial Services Authority (OJK), the National Team for the Acceleration of Poverty Reduction (TNP2K), the National Development Planning Agency (Bappenas), the Indonesian Institute of Sciences (LIPI) and the Creative Economy Agency.

From the ecosystem side, these institutions and ministries have implemented various revolving funding schemes for the training and development of small and medium micro enterprises. As of September 2015, the OJK has also monitored 220 financing institutions and 57 venture capital groups, all part of the non-bank financial industry (IKNB), while the KUKM Ministry has overseen 220,000 active cooperating units.

In addition to that, the office of the coordinating economic minister noted there were at least 22 ministries that have revolving funds and development programs with MSMEs. The KUKM Ministry has 3,487 partners for funding distribution through its revolving funds management body. As of 2014, the Agriculture Ministry had about 53,236 farmers'€™ unions. As of August 2014, the Maritime Affairs and Fisheries Ministry has 22,951 joint venture groups built by the rural enterprises program. There are also revolving fund initiatives by the Social Affairs Ministry in joint business groups and by the Forestry Ministry in the people'€™s forest group and in small and medium enterprises. The Research, Technology and Higher Education Ministry also manages a students'€™ creativity-entrepreneurship program.

These existing ministerial programs can act as databases for the KUR Linkage program that can be channeled into banking industry. With some kind of accreditation or recommendation letters from the KUKM Ministry and other relevant ministries, the disbursement of revolving funds will be more productive and efficient and banking industry will be more comfortable in channeling the financing, considering most of the risk has been mitigated through initial verification by both ministerial programs and accreditation by the KUKM Ministry. In this way, the provided assistance in the form of revolving funds and the KUR scheme can be harmonized so that they don'€™t overlap. However, it requires coordination between various stakeholders by forming a working group led by the office of the coordinating economic minister as the contracting authority, or the KUKM Ministry, which technically handles MSMEs.

Looking ahead, the KUR could be implemented more effectively so when the government increases funding to Rp 100 trillion in 2016, absorption can be done more effectively and efficiently.
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The writer is a researcher at the Mandiri Institute