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Modifications of Small-farmer Credit in the Rice Intensification Program of Indonesia
Dissertation Abstract:
High lending cost due to high administrative costs and high default rate constrained the development of the Kred it Usaha Tani (KUT) program in Indonesia. The program lender realized a net lending cost of -24 percent per year, implying a loss of 0.24 rupiah for every rupiah loan granted to the borrowers.
This study attempted to determine reforms in the KUT program than can reduce the net lending cost and improve the finan cial welfare of the fanner-borrowers.
The Liquidity-Specified Linear Programming (LS-LP) model was used to achieve the objectives of this study. Primary data collected from 100 KUT borrowers in Yogyakarta, Indonesia were used to specify parameters of the model. Variations in the interest rate (16%, 28%, and 40%), credit limit (Rp 125,000; Rp 160,000; and Rp 195,000), and mode of loan disbursement (cash-kind to cash-only) were simulated in the validated LS-LP model.
Results revealed that the welfare loss of the farmer-borrowers due to increase in interest rate can be offset by increasing the credit limit and changing the mode of loan disbursement from cash-kind to cash-only. Simultaneous increase in interest rate and credit limit coupled by cash disbursement yielded higher objective function level and net cash-flow. Moreover, liquidity position of the farmer-borrowers to meet unexpected events was also improved.
The study recommended that reforms, in terms of increasing interest rate and credit limit as well as changing loan disbursement from cash-kind to cash-only, were needed to improve the financial welfare not only of the farmer-borrowers but also of the lender.
