FREEING UP THE LOAN MARKET © Duncan Graham 2007
Free market economists loathe monopolies – particularly when they're enforced by legislation.
Apart from stifling commerce monopolies create an arrogant and idle management smug with the knowledge that their indifference to customers will never boomerang.
That's the theory – and it seems logical. Though not in Indonesia where a government monopoly in the finance market is run like a private bank – as though the hounds of robust competition are baying at the doors.
And well they may be next year if anti-monopoly laws are enforced as expected, breaking the grip on the pawn business held by PU Pegadaian for more than a century.
(The anti-monopoly laws that have been in place for the past five years excluded Pegadaian).
If that happens the company owned by the Department of Finance should be in a key position to fight off opponents, according to Malang region head Budiyono. He's a veteran of the great shake up in the 1990s when new management dragged Pegadaian into the modern world.
"It was difficult and there was much resistance," he said. "But we were able to turn attitudes around. Cultural change is not easy, but here's proof that it can be done. We are planning ahead. We have a good brand and are trusted."
If your idea of the pawn business is circa Dickens, a grimy shop in a street of many odors run by voracious misers then prepare for a pleasant surprise.
There are more than 850 Pegadaian branches spread across the archipelago, their logo not three balls (the hallmark of the Italian Lombard bank that introduced pawnbroking into Britain) but the scales of justice. This symbol is used in the British legal system and its offshoots to represent law courts.
Pegadaian's motto is 'overcoming problems without problems' and the offices are usually bright and cheery, painted light green and white. All the ghastly trappings of government bureaucracy – bored and rude staff watching TV, filthy and crowded surroundings, unnecessary paperwork and 15 watt globes – are absent.
This outfit could teach the private sector a few things about promoting a positive corporate image. The staff seem genuinely friendly and all (even the backroom bosses) wear badges proclaiming 'NOW – Customers are always Number One' as though a rival office had just opened next door.
Yet the people who use this service (and at last count there were more than 12 million) have little choice.
If you need cash in a flash you can try your local loan shark (and most villages and kampong have someone who'll lend a few thousand), a gold shop that might buy your heirlooms for a pittance, the banks or Pegadaian.
"Our main competitor is Bank Danamon which is offering a product called Danamon Simpan Pinjam (DSP) for the bottom end of the market," said operations manager Swasono Widodo. "But the paperwork and procedures take time and many people feel uncomfortable in big buildings. Most Indonesians are not bank-minded.
"Our system is different – it's friendly and fast – we strive to ensure that you can be in and out with money in your purse within 15 minutes.
"We're also open on Saturdays and in some places like Manado we operate at night. You don't have to open an account. The banks can't possibly match us."
Clearly it's good business. Widodo said that last year the company earned Rp 500 billion (US $55 million) profit, and the growth rate is astonishing – nudging 40 per cent in the past two years. Non-performing loans are around 5 per cent.
In the branch visited by The Jakarta Post middle-aged and elderly women offering gold and jewelry as collateral half-filled the waiting room. Doubtless some feel shame at having to use the service, but there were no downcast eyes as in Western pawnshops.
Bunting and adverts for other products and services showing jolly folk with pure white dentures, the sort who normally feature in shampoo ads, gave the place a friendly feel. Unlike banks, where edgy guards think every customer plans a heist, security was unobtrusive.
Widodo said customers were asked for receipts to prove they owned the pledge. However few people kept such documents so staff had to make an assessment on honesty. He said using Pegadaian to launder stolen goods was rare and not a problem as it has been in the US and Australia.
Valuations are done on the spot and interest is charged at the rate of 1.6 per cent every 15 days. Business goes up by about 20 per cent during Idul Fitri and Christmas when cash is needed for gift-giving, and at the start of the school year.
Loans are for a maximum of four months with a ceiling of Rp 900,000 (US $ 100). The pledge can be sold if not redeemed five months after deposit.
Most people want to pawn gold – less than 20 per cent offer electronic goods, computers and cameras – only digital models accepted.
Widodo defended the high rate (38.4 per cent annually) by saying there were risks involved. Many people didn't return for their goods and sales might not meet valuation. On the counter a shabby five-year-old radio-recorder priced at Rp 550,000 (US$ 60) looked far from a best-buy compared with the dearer – but glitzy new models with the latest bells and whistles.
Many branches now offer an Islamic Syariah service where an administration fee is charged and a complex tariff formula used to avoid charges of usury. This service was introduced in 2004 and so far has attracted only 250,000 customers.
Another product is micro-credit where small entrepreneurs can borrow to start an enterprise or upgrade equipment. Security required is a certificate showing ownership of property, like a house or motor vehicle. The interest rate is between 1 and 1.6 per cent per month and the maximum is Rp 200 million (US $22,000).
BLAME THE BRITS
Indonesians feel at ease with the pawn system – as they should. It has been around a long time as it has in the West, operating back in the Greek and Roman empires.
When the British were running the Dutch East Indies in the early 19th century Governor Stamford Raffles liquidated the Bank van Leening and reversed a law banning pawnshops. (He also introduced the use-the-left-side road rule.)
The Dutch bank had a credit system that used short-term pawning of goods, mainly gold, silver and fabrics.
Raffles, the absolute free marketer and founder of Singapore, threw the pawn business open to everyone – though shops had to be licensed.
The Dutch returned to power in 1816 and didn't like Raffles' reforms one bit. But it took them till 1901 to cancel the private operators and create the government monopoly that remains today.
Though not for much longer. Next year it could be back to Raffles' rules. If you plan to use the law change to muscle in, then bankers beware: Pegadaian may be a government outfit but it will be no pushover.
(First published in The Jakarta Post 5 February 07)