Smallholder farmers are the pioneers and backbone of an industry that contributes 15 percent of Indonesia’s GDP. Even so, only a small percentage of bank lending went to this group in the past, with most of it being allocated to the larger commercial plantations. This limited access to proper financial support hampered farmers’ productivity and income. Indonesia’s farmers were in need of a solution that would help them to overcome these barriers and give them access to affordable financing and support.
How do we look after Indonesia’s farmers?
Such a solution recently took shape in the form of the Innovative Value Chain Scheme – a programme developed by The Indonesian Chamber of Commerce (KADIN), together with the Partnership for Indonesia’s Sustainable Agriculture (PISAgro), and the Indonesian Economists Association (ISEI). The programme aims to improve farmers’ productivity and welfare, supporting sustainable agriculture production in the country.
The Innovative Value Chain Scheme is ‘Kredit Usaha Rakyat (KUR) Plus’ – a credit scheme for farmers with additional support benefits such as compensation during replanting, infrastructure support, and the provision of seeds and fertiliser.
With the Innovative Value Chain programme in place, we now have a system and benchmark for how to provide affordable finance and support for Indonesia’s farming community. A good start, but what next?
Financial inclusion for farmers needs better synergies
Like any large-scale national initiative, the ultimate success lies in how it is adopted. For the Innovative Value Chain Schemes to be most effective and to ensure widespread and successful adoption, there needs to be strong synergies between government, local government and the financial institutions.
Both the central and local governments need to take the lead to help institutionalise the value chain schemes across the country. Starting at a national level, then being implemented and executed in every region. To start, financial literacy programmes need to be made available for the farmers, educating them about financial planning, understanding the banks’ expectations, and managing loan repayments. The government can also help streamline the legal documentation process and assist farmers with land ownership certification. Programmes should also be set up to reward farmers who use sustainable farming techniques.
On the financial service providers’ side, they also need to make a commitment to gain a proper understanding of Indonesia’s smallholder farmers and their businesses. Once that happens, they can then develop suitable financial solutions for the farmers. Finance companies need to ensure affordable credit for the farmers by further reducing interest rates, extending loan tenures, and to also allow a certain grace period during replanting periods.
Learning from Innovative Value Chain Schemes that are already running
The good news is that there are a number of Innovative Value Chain Scheme pilot projects already underway with the programme and already benefitting more than 440,000 farmers in 2016. This is where we have seen the important role that the private sector can play as well.
For example, we have seen good momentum in the palm oil sector with companies such as PT SMART Tbk initiating Innovative Financing and support schemes for smallholder and independent palm oil farmers. Looking at one of their programmes in Riau, palm oil farmers were facing challenges such as low yields due to unclear source of seed inputs, lack of good agriculture practices (GAP) to cultivate their farmland, and a lack of funds to replant palm oil trees. The farmers had also experienced low productivity with many owning inherited debts.
But after following PT SMART’s Innovative Financing programme, palm oil farmers in the village have largely been alleviated from their burdens. They now have access to certified quality seeds and are receiving training on GAP as well as sustainable farm practices. They now also have market price certainty on harvest with FFB (Fresh Fruit Bunch) pricing from the provincial office of agriculture.
In regards to financial support, what is important is how to support the palm oil farmers to gain wider access to Innovative Financing, giving them a sufficient grace period and longer tenure to support their palm oil replanting activities.
Good progress, but let’s not stop here
We can be proud of the progress we have made thus far, with the Value Chain Innovation Scheme being implemented successfully within various agricultural sectors with many farmers already benefitting from the programme. The next step is to initiate successful schemes in all our other agricultural commodities and to reach the target of helping 1 million farmers by 2020. For this to happen, we will require the ongoing support of the financial community, national and local governments, as well as the private sector. The farming community are the unsung heroes who play a vital role in the Indonesian economy, it’s the least we can do work together to support them the best that we can.
Ms Aviliani is the General Secretary of Indonesian Economists Association and a respected Indonesian economist. Since 2012, she has also held the position of Secretary for The National Committee for Economic and Industry (KEIN). This op-ed first appeared in Media Indonesia.