EMPOWERING RURAL MICRO FINANCIAL INSTITUTION FOR SUSTAINABLE FOOD PRODUCTION

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1 EMPOWERING RURAL MICRO FINANCIAL INSTITUTION FOR SUSTAINABLE FOOD PRODUCTION Sahat M. Pasaribu and Rusman Heriawan Senior Researchers Indonesian Center for Agriculture Socio Economic and Policy Studies INTRODUCTION As one of the main pillars in the national economy development, agricultural sector is oriented to achieve certain level of its capacity enabling food availability, distributed throughout the regions in the country, and accessible by the people at an affordable price. In the attempt to fulfill the national food demand, agricultural sector s goals and objectives are directed to maintain strong food security and achieve food sovereignty. Food security has long been a priority of national development of Indonesia. Various policiesand programs have been introducedtostrengthen food production and improve risk management. However, climate change, increasing population, and growing food demand have posed challenges for food security. McCulloch (2008) indicates that nearly a quarter (24.8%) of 53.5 million households in Indonesiais engaged in rice farming.on the other hand, Indonesian agriculture, in particular food production, is characterized by small-scale farming, with the average land ownership at around 0.3 ha. These farmers often lack access to working capital. Similar situation was reported by Filkenstein and Calfant (1991) that based on aversion to income risk, the farmers usually express their risk-averse behavior due to agricultural market price risk. In this context, the government policy should rely heavily and be adjusted to the consequences of price and production risks (Larson et al., 2004). Farm business is embedded with high risk characteristics, specifically toward natural dynamics and natural phenomena with its vulnerability on pests and diseases leading to a great loss. During the past few years, agricultural sector is also confronted severe challenges, in spite of good farm opportunity, in respect to global climate change with its climate anomaly. Extreme climate is difficult to predict and would be serious constraints on efforts in developing agricultural business. Rice farm would be specifically in concern because of its importance as one of the main food crops. Government play an important role to achieve higher production to meet self-sufficiency in rice and substatantial production of corn and soybean while improving the performance of other important commodities, such as sugarcane and cattle. With the application of adaptive technology on climate change, there are opportunities to improve productionof these commodities. In addition to the application of technology innovation, farmers are also deserved to be protected from risks due to harvest failures. The main problems associated with farm activities are the farmer s lack of working capital. With collateral as one of the requirements to access credit from formal financial institution such as bank, helping farmers in terms of financial support is almost unrealistic. Farmers have no chance to have bank loan to cover cost of production. Limited option for the farmers would be financial support from informal money lenders with high interest rate.this means that most of the farmers would never access the attractive financial facilities offered by the government. As a consequence, the farmers may not apply local recommendation of good farming systems which should affect the farm performance. 207

2 Aware on this situation, the government has launched another option, such as loan from state-owned corporations through the disbursement of fund under Corporate Social Responsibility (CSR) Program. To certain level, this program has been successfully worked to increase rice production in several rice producing centers. However, this program has recently faded following some misconduct and mismanagement at the top level. In addition, the Ministry of Agriculture alsointroduced social support in agribusiness activities (PUAP Program since 2008) with federation of farmer s groups (Gapoktan) as the beneficiaries. The amount of cash transferred to the farmer s bank account is amounted to Rp. 100 million. Up to 2015, some 5000 Gapoktan have received this support. It is interesting that this program encourage the establishment of micro financial institution for agribusiness with the Rp. 100 million as seed capital. In fact, not many Gapoktan could perform well and successfully use the money in their business activities (Pasaribu et al., 2011). Nonetheless, in the absence of agricultural bank, the small number of financial institutions would deserve advantage by empowering them with facilities and cash to develop their business and particularly to provide working capital for their respective members (farmers). Previous assessment indicates that the farmers could significantly increase rice productivity if they follow local farm recommendation (Biro Perencanaan, 2012). It was reported that with the availability of working capital, those who participated in CSR program could afford all costs of production and meet farm recommendation. As a result, farm performance was certainly improved and the production was also significantly increased. Farmers experience revealed that rice production could increase in the ranges of 500 to 2000 kg per ha. During the past few years, agricultural sector is confronted with increasingly intensity of challenges due to the extreme and difficult to predict of global climate change phenomenon. For agricultural sector, the global climate change should highly influence the performance of agricultural system or agribusiness activities, although the climate anomaly condition could also bring opportunities to provide certain benefits. Extreme climate would be one of the main constraints in agricultural development activities, specifically for rice crop farming system. Various crop could also be affected by such irregular and unpredictable climate change leading to crop damage and consequently the reduction of production. However, amid this challenge, there is also opportunity to optimize the available resources to increase crop production and improve farmer s income. Financial support, in this concern is very much important. On main food crops, technically, rice farm activity will always be accompanied by uncertainty and high risk of harvest failure due to flood, drought and pest and disease in addition to high price fluctuation. Farmers may shift to other high value crops with less risk and this is very dangerous in respect to national food security. If there is no action to encounter this situation, negative impact on national food instability, specifically rice, will certainly threaten national safety. Agricultural insurance is offered to share such risks which could be considered as one of the agricultural financial support schemes. Agricultural insurance will ensure production and productivity at certain level and contribute significantly to national stock.agricultural insuranceis closely relates to agricultural finance and the third party (private institution/commercial or government institution) to whom beneficiaries pay cash at certain amount of premium (World Bank, 2008). The farmers will be shielded from 208

3 crop damage caused by flood, drought or pest and disease infestations through crop insurance. Therefore, from budget politic view, crop insurance is very important to avoid great losses and ensure that the farmers are protected as shown by the availability of cash obtained from insurance claim approval to be used as working capital for their respective farms. This is the immediate effect of such politic for farmers by having registered as the crop insurance participants/ beneficiaries. With the abovementioned financial policy description, the main objective of this article is to elaborate the importance of financial support for smallholding farmers to maintain their crop production. Specific objectives are to critically review the existing micro financial institution in rural areas and their role in financing crops production, examine the current budget politics on the ground of previous credit facilities and future trend of financial support. At the end of this article, a synthesis on empowering rural micro institutions is used to formulate budgeting policy recommendation for sustainable food production. LESSONS LEARNED FROM SEVERAL AGRICULTURAL FINANCIAL SUPPORTS The Ministry of Agriculture s targets during on the national agricultural development were the achievement of self-sufficiency and sustainable self-sufficiency of the five main commodities, namely paddy (rice), corn, soybean, sugar cane (sugar), and cattle (beef). During that period, the government had an endeavor to accelerate the production of these commodities (Kementerian Pertanian, 2010). However, the actual implementation of related projects should faced various challenges and the targets could not successfully achieved. Many programs were launched to increase agricultural production and productivity, such as PUAP (Rural Agribusiness Development), SL-PTT (Field School-Integrated Crops Management), SRI (System of Rice Intensification), and GP3K (Corporation-based Movement on Food Production Improvement). All of these programs are basically government-funded programs at which financial support is the key factor. With all of the difficulties faced by stakeholders at field level, the most influence challenge is not how to increase production, but to sustanably improve production quality (Direktorat Jenderal Tanaman Pangan, 2013). The newly introduced program, namely UPSUS Program (Special Endeavor) was introduced to specifically focusing on the performance improvement of the above mentioned five commodities. The integrated approach on this program is heavily guarded with technical and financial support to increase farm and livestock production. Almost at the same time, the extended pilot project of rice crop insurance program is also introduced as the other government response to protect farmers from farm risk. This pilot study is expected to cover 1 million ha of irrigated land areas at 16 rice producing provinces during the 2015/2016 (October-March) planting season. Agricultural insurance program is in favor of the farmers in the attempt to avoid large losses due to flood, drought, and pest and disease infestation. Lesson learned from these programs would enrich information at hand to critically review the need of financial support for agriculture, specifically the role of micro financial institutions in rural areas to boost both production and production quality of food and agricultural crops. 209

4 Government-funded Agricultural Development Programs As previously mentioned, the main problem faced by the farmers is lack of working capital, the required cash to be used to cover expenses at farm level to grow crops. Majority of the farmers would never obtain credit from formal financial institutions (banks) due to collateral. This means that farmers may not enjoy the government s credit facility. On the other hand, banks should see that cash disbursement is safe at reliable creditor. Farming is considered as economic activity with high risk and not bankable and for this reason, smallholding farmers would not be eligible to entertain by such facilities. Lack of collateral and shortage of working capital shoud lead farmers to see money lenders and leave them at gambling cards as the money lenders usually apply high interest rate. The availability of working capital is very important to maintain farm performance. UPSUS Food, horticulture, and estate crops are looking for specific program to open the commercialization of specific commodities. Certain approach to develop specific commodities is suggested to accelerate the higher achievement of commercial products, and hence the enjoyable advantage for the farmers. Given the effective supply chain within the cycle of certain crop, each pole of such chains would benefit specific stakeholders. Among several main programs currently implemented, Upaya Khusus (UPSUS) program or specific endeavor program in food and agricultural development was established and introduced to increase production of rice, corn, and soybean through improvement of irrigation networks and its supporting infrastructures. Agribusiness approach is used in farm activities with specifically provide agricultural inputs, better farm management, and availability of market. Good quality products are characterized by good quality of raw materials. The farmers are encouraged to increase their ability and skills to produce high quality products. The high quality products of rural areas are the economic opportunity for the farmers in their attempt to expand agrobased industries. The UPSUS program was specifically introduced to speed up agricultural activities, particularly certain farm activities, by providing farm inputs and supporting facilities. This program is managed by a working group, established at central and regional levels. The main tasks of this working group are (a) plan working activities to increase significant production of rice, corn, and soybean while improving irrigation networks and its supporting facilities, (b) identify and validate data on farmers and the locations irrigation network rehabilitation and improvement, dan (c) supervise and guard the local working groups in the implementation of the program. This program, like the others, also face implementation risks due to the large coverage of the program, variation in agro-ecology, different interpretation of program application by the assigned human resources, etc. Agricultural Insurance Agricultural development has played an instrumental and strategic role in the overall national economy of Indonesia. Food productivity and food security issues are increasing in importance, affected by world population growth, the influence of the global market economy, and dramatic effect of climate change. The Indonesian government policy is in line with the MDGs commitment in food availability, accessibility, and affordability. 210

5 Agricultural insurance in Indonesia includes four sub-sectors: crops, horticulture, livestock, and plantation. Rice crop and livestock insurances have been applied in pilot studies since 2012, and an expansion of the rice crop insurance program is scheduled for the October 2015 to March 2016 planting season (targeted to cover 1 million ha at 16 provinces of rice producing centers in the country). Application of indemnity-based rice crop insurance in Indonesia has included pilot studies, the first of which was completed in 2013 on a 623 ha area. A state-owned general insurance company was the sole underwriter in the pilot project implementation (Direktorat Jenderal Prasarana dan Sarana Pertanian, 2015). The criteria of participants are membership in a farmer s group that adheres to good agricultural practices, compliance with the terms and conditions of the insurance policy contract, and the rice cultivators, rather than necessarily the farm owners, as the insured. Furthermore, the farms had to be irrigated rice farms with clear boundaries with an area of not more than two hectares, irrespective of location split. The risks covered included the named perils of flood, drought, and five named pests and diseases. The premium tariff was offered to insurers at 3% of the total cost of production (IDR 6 million/ha or USD 500). Lessons learned from the pilot study included the following: Indemnity-based rice crop insurance is working with intensive communication, cooperation and coordination among the stakeholders PPP scheme is applicable Government intervention is necessary during the introduction of indemnity-based rice crop insurance scheme (premium support, inputs availability at local level, and farm management) Government role in such schemes would be gradually reduced to allow close cooperation between the private sectors (insurers) and the farmers (the insured) towards a commercial transaction. Lack of infrastructure limited availability of accurate and reliable data necessary to formulate appropriate insurance model and rating or pricing structure. Low risk awareness farmers are very aware of production risks but underestimate severity of catastrophic events, thus encouraging them to only buy agricultural insurance against extreme losses. Lack of insurance cultures insurance is regarded as a non-viable investment, as a privilege of the rich, especially for agricultural insurance. Low demand for agricultural insurance has therefore been due to limited understanding of its benefits. Low affordability (buying power) low buying power contributes to lack of demand for insurance. Low incomes hamper the development of the insurance market as income is absorbed by basic needs. The goal of agricultural insurance program apart from being a mean of risk transfer and protection is to promote better risk management in farming and to ensure increase in productivity. Having insurance securing their farming activities, farmers will hopefully obtain better access to financing from bank and financial institution. This is inevitably important where the partnership of farmers, insurance companies and banking institution would be expectedly boost the food production and productivity. 211

6 Indonesia will continue to develop agricultural insurance program to cover various high economic value commodities by applying different insurance models, such as indemnity based, weather-index based, and yield-index based models. Protection of farmer s interest is highly considered in the overall agricultural development plan. Food crops, in this concern would be prioritized. Integrated Farm Management (PTT) Integrated farm management (PTT) is an integrated approach in sustainable managed of land, water, pest and disease, and climate to increase farm productivity, farmer s income, and friendly environment. Rice or paddy in PTT is specifically designed based on experiences on various intensification system s programs and activities previously developed in the country. Main principles of PTT covering four elements, namely integration, interaction, dynamics, and participation (Scribd.com, 2013). These principles could be described as follows: a. Integration. In the field implementation stage, PTT integrate land and water resources, the commodity, pest and disease, and climate enabling the improvement of land productivity and the crops to provide as much advantage as possible for the farmers. b. Interaction. PTT is basically developed by taking the synergistic relationship or interaction between two or more components of production technology. c. Dynamics. PTT is dynamic since the system always follows the technology development and its application according to farmer s desire and options. PTT always characterized by local specific and uses the technology by thorough consideration on physical environment, bio-physical, climate, and local socio-economic condition. d. Participation. PTT is also characterized by participation. Farmer s participation open opportunity to choose, practice, and even to recommend the researchers and extension workers to improve PTT approach and disseminate the knowledge to cover larger farmer s participation. PTT Field School (SL-PTT) is rice intensification program that introduced to improve production and productivity to meet the ever increase demand within the national development framework. The technology introduced, include the use of improved-high yield variety of seed, special maintenance techniques, and application of intensive farm management to increase higher production. In this regard, it is well understood that there is no new high yield variety available and to be introduced to the farmers other than the existing high yield varieties. The seed is in the stagnant level for which the farmers need to intensify the farms they manage. Unfortunately, the land conversion to non-agricultural uses is also increasing significantly, specifically those located close to urban areas. Agricultural land conversion is difficult to control even with the issuance and formally apply of regional regulations about regional spatial planning and development (RTRW) at which the location and size of land for agriculture purpose has been set up. On the other hand, the extension of land for agriculture is not promising and is difficult to provide because of many reasons, such as setting up specific location, availability of all required infrastructures, and shortage of human and capital resources. 212

7 With such condition, intensification program is the most appropriate option to implement. This is an option with main objective to increase and accelerate the local specific rice production that will contribute to the national stock. With this intensification program, the SL-PTT is relevant to be introduced, implemented, and developed. The implementation of this program is highly recognized by the farmers with enthusiasm and active participation. However, this is only during few years after the introduction. The farmers were supplied with farm packages, mostly free of charge. After about five years of implementation, the participation of the farmers was decline along with the change of package format of SL-PTT program to be adjusted to certain rules and regulations. The government program usually accompanied by giving and delivers something embedded in the program for free. This habit has always include in the government program that cause something wrong to the sustainability of certain programs. With this situation, the SL-PTT program is difficult condition in terms of sustainability and difficult to say that the program is successfully adopted by the farmers and that the farmers will continue with their respective efforts to use the technology that have been introduced during the field application. With this description, there is no guarantee that the SL-PTT program has been successfully work and will the program will sustain with farmer s self-support. This program was later evaluated and come up with several changes to adjust to the performance progress of the farmers after several years (since 2008) of implermentation and the availability of funding. Among the changes are (a) the focus of development approach into larger area scale, (b) implement an integrated farm activities from the upstream to downstream, (c) increase the support package as stimulan instrument, and (d) intensify field cooperation among the stakeholders. System of Rice Intensification (SRI) SRI is one of rice intensification approaches focusing on technical management of land and water and crops through active participation of farmer s groups combined with local wisdom on the basis of environment preservation (Direktorat Jenderal Prasarana dan Sarana Pertanian, 2013). Using this method farmers are expected to increase their rice productivity up to 1.5 ton/ha. The objectives of SRI method are: a. Improve quality of land (land fertility) with organic materials intake. b. Support national rice production improvement policy (P2BN). c. Efficiently used of farm inputs and water application. d. Improve farmer s knowledge and skills on SRI organic model s of rice farm. e. Develop environment friendly-based rice farm. f. Increase farmer s income and welfare. The development target of SRI rice farm model is irrigated land or sufficient water of rain-fed land. In 2013, SRI program was introduced in ha of irrigated land situated in 29 provinces and 277 regencies/cities across the country. SRI rice farm model has been adopted not only by the farmers but also private sectors, such as PT HM Sampurna Plc. With 3 (three) main activities in the application of SRI model (SRI development, research, and institution empowerment), this company was successfully achieved their target. It was reported that the productivity of rice increased by 60.5% (first 213

8 planting season of 2008) from 5.7 to 9.5 ton/ha, a significant increase managed by 15 farmers in 1.6 ha of irrigated land (Sampoerna, 2008). The optimistic report has been released by this company, although with such report, a question remain in the sustainability of the model. Financial Support and Credit Scheme Corporation-based Movement of Food Production Improvement (GP3K) The Ministry of State-owned Enterprises (SOE/BUMN) was assigned (Inpres No. 5/2011) to support the Ministry of Agriculture to increase the country s food production. The specific tasks of the SOE are (Biro Perencanaan, 2012): 1. To optimize SOEs in the attempt to provide land for food crops at forest areas, specifically for rice multi-cropping farm. 2. To optimize function of SOEs to provide and to distribute various inputs and production (rice). 3. To strengthen SOEs in purchasing and managing government s rice stock. In response to this assignment, the Ministry of State-owned Enterprises established a program called Corporation-based Movement for Food Production Improvement (Gerakan Peningkatan Produksi Pangan Berbasis Korporasi/GP3K) implemented by several agricultural related enterprises, such as seed and fertilizer companies. The main objectives of GP3K program are: (a) Support the achievement efforts of national food production target (national production surplus of 10 million ton of rice), (b) Optimize the role of SOEs according to their respective functions, and (c) Introduce the corporation system to the farmers. Specific objectives of this program is to increase rice, corn, and soybean productivity at frontier level through the application of good farm practices using specific location technology package (seed, capital, farm inputs, application according to plant calendar recommendation, and market and price guarantee). In 2011, GP3K program was implemented by 4 SOEs as operators working on 3 crops, namely rice, corn, and soybean and carried out in 27 provinces. The SOE operators include PT. Sang Hyang Seri (Persero), PT. Pertani (Persero), PT. Perum Perhutani (Persero), and PT Pusri (Persero) along with the its subsidiaries (PT Pusri Palembang, PT. Pupuk Kujang, PT. Pupuk Kaltim, and PT. Petrokimia Gresik). The total budget available for this program was taken from the companies CSR fund and amounted to Rp 1.1 trillion and Food and Energy Security Credit (KKP-E) Rp 0.7 trillion. The four SOEs established a partnership s networks and cover all required farm cost and purchase the production from the farmers. It was revealed that the farmers enjoyful their participation in the program at which the increase of crops productivity and the price contribute to their respective income. This policy was acknowledged as one of the agricultural programs that particularly designed in coordination with the Ministry of Agriculture to meet the farmer s interests. The program was actually conducted other farm-related activities, such as better access to capital, improvement of irrigation canal and networks, development of production road, better distribution of seed and fertilizers, availability of agricultural tools and machineries, and intensification of field extension activities. The main important in this program is that the farmers could apply local farm recommendation with sufficient budget for crop inputs and for 214

9 labor costs without any dependency on local money lenders. The farmers also showed their promising performance with incredible increase of productivity. This program, at this point has been well recognized by all concerned. However, would it be possible to provide similar support, specifically the availability of funding, to keep sustain the program? Associated problems experienced by the stakeholders during the implementation of the program (2011) could be listed as follows: No uniformity of support. Each operator (SOE) has its own agreement (written agreement with the farmers). This has allowed different package available and offered to the farmers and not necessarily reflect the farm recommendation at local level. No freedom for farmers to choose inputs they will apply as they are engaged in an agreement to only limit the application of certain brand of inputs (using certain seed produced by a designated company or fertlizers provided by certain factory). Late payment. This situation should not happened in the field, but it was reported that the farmers were disappointed by certain SOE action on this matter. Late payment from the SOE to the farmers should be frustrated as the farmers need immediate cash. It is obvious that farmers would not be interested to join such program in the next planting season. Late distribution of the support package. To certain level, some of the farmers experienced that the package was late, some surpassing the date of the planting season (seed). This situation should affect other farm activities, such as water distribution, labor force circulation, etc. Minimum extension activity. Not all operators provide extension services. Only agressive operators that concern on extension activities have supported the package with extension sessions. This condition lead to minimum achievement since the availability of extension services is required, specifically when farmers detect the pest and disease infestation and other constraints throughout the planting season. Lack of cooperation among the local institutions: Cooperation among the operators and between the operators and the local government (agricultural offices) is not always smoothly occured. To meet similar programs from two different sources need a good communication, from planning to implementation stages. The acceptable cooperation between the institutions involve in the program at local level is not reflect the expectation. The leaders of the institutions might not aware the actual condition for which their involvement is required. GP3K promotion is necessary for the benefit of the farmers and the leader s initiatrive is highly expected. Rural Agribusiness Program (PUAP) Introduced in 2008, the direct support program of rural agribusiness activities (Program Bantuan Langsung Masyarakat-Pengembangan Usaha Agribisnis Perdesaan/BLM-PUAP) was expected to establish the agribusiness micro financial institution (Lembaga Keuangan Mikro- Agribisnis/LKM-A) at farmer s federation level (Gapoktan). Several farmer s groups are grouped into a Gapoktan at village level. The PUAP was prepared to respond to the farmer s lack of financial capital, particularly in the attempt to develop their own agribusiness activities (on-farm, off-farm, or non-farm). Up to this moment (2015), the government fund has been disbursed to more than 55,000 Gapoktans across the country with each Gapoktan received 215

10 IDR 100 million. This amount was previously expected to provide seed capital to run any agribusiness activities at village level. The Gapoktan s LKM-A need to be empowered, financially strengthened and improve the capacity of human resources. The existence of LKM-A is highly considered and very important in the absence of agricultural bank which is vital to support the national agricultural development policies. LKM-A is expected to become a pioneer as local financial institution situated in rural areas and at which the farmers could easily access. LKM-A could provide financial support to cover farm costs and even purchase the output from the farmers. In a shadow of formal bank services, the LKM-A cold act as the micro financial institution to help the farmers in the preparation working capital. LKM-A could avoid farmer s dependency on local money lenders, could provide sufficient inputs, and even assist the farmers in marketing their production. LKM-A should become strategic with the government help. LKM-A need to be transformed from lack of roles to strong financial institution for farmers. Good LKM-A need to be identified. Good LKM-A deserves to be improved, empowered with substantial financial support after some legal preparations. The progressive LKM-A need to be strengthened with various supports to become a reliable micro financial institution. Noted that empowering LKM-A is one of the nine development agenda of the government policies: develop Indonesia from rural areas, strengthening the villages and the regions to achieve state unity framework. Moreover, the development of LKM-A should be in line with the ultimate development objective for food sovereignty as listed in the medium-term development planning of (Direktorat Pembiayaan Pertanian, 2015). MICRO FINANCIAL INSTITUTION IN RURAL AND AGRICULTURAL DEVELOPMENT Micro financial support for agricultural sector is very important at which the government role is vital. Almost all countries in Southeast Asia have established their respective banks to specifically deal with agricultural financial matters. Various credit schemes were set up and farmer s accesibility to agricultural financial institutions was gradually improved. The experience of Thailand to support agricultural sector is outstanding, although the Bank for Agriculture and Agricultural Cooperatives (BAAC) should face various problems, specifically its struggle for financial viability (Seibel, 2000). The bank was quickly recovered with successful reform that requires operational autonomy and freedom from political interference. BAAC in its current shape has shown its strong influence in providing financial assistance to farmers, farmer associations and agricultural cooperatives which conduct agriculture and other relatedagriculture business. Established in 1966, BAAC has successfully passed 5 decades of experiences with each decade has its own focus of development from which the bank was transformed to become not only funding farmer s agricultural businesses but also rural community s economic activities (BAAC, 2015). Challenges in Food Crops Production: Shortage of Financial Support Several problems associated with the importance of financial institution transformation include the incomplete structure of the institution, the legal status of the institution, the 216

11 unclear task distribution among the personnel, ineffective coordination with other related institutions, and type of businesses (main). Failure in institutional transformation to become rural and agricultural micro financial institutions should contribute to the community lose of advantage opportunities. In this respect, LKM-A need to be reformed and transformed from less business activities into a legal institution with stong objectives, particularly its role as farmer s reliable micro financial institution (Saptana et al., 2014). LKM-A need to be reformed to allow some changes in agribusiness networks, financial institution s role, productive activities, etc. This is the big challenges for LKM-A in the future and the government is the only party that could transform such institution into other productive role for the interest of the farmers in rural areas. Competitive challenges are envisioned by the farmers following the regional integrated market open policy in Southeast Asian region. Entering the ASEAN integrated markets in 2016, agricultural commodities would be very competitive. Similarly, the global market should affect the performance of agricultural local products. High competition among the commodities should not be avided and only high quality of products could compete in the market. Larger challenges would be faced by the farmers in the absence of working capital. Shortage in farm performance should even affected by negative impact of climate change leading to poor production and productivity. Crop s added value through the development of downstream industries for intermediate or final products is an economic opportunity for which smallholding farmers could take part. Domestic markets for local products are encouraged if export is not competitive. Two main problems faced by rural micro finance institutions, lack of cash capital/assets and low level of human resource capacity/management, are typically embedded and would be left behind when compete with the aggressive money lenders. In this concern, the government should take initiative to particularly strengthen the available micro finance institutions for which the farmers could access. Importance of Micro Financial Institution in Rural Areas Among the advantages to have strong micro financial institutions in rural areas are: (a) farmers have opportunity to have working capital to particularly cover farm costs, (b) have its own customers (the farmers in the village, the members of the farmer s groups) with large financial movement, (c) established and existed at rural areas and accessible (by the farmers), located at the village and cloise to the farmers, could be trusted and directly watched by the farmers and the environment, (d) could expand the businesses by opening special trade, open farm kiosk, do the distribution of seed and fertilizers, allow collective marketing of production, and others, and (e) could improve income and welafer of the farmers and the local community. With such advantages, progressive LKM-A could be awarded with legal certificate to meet government stipulation. This means that the government will pay for any cost in the issuance of the certificate. When it comes to commercial, the legal LKM-A could access formal bank to have interest subsidized loan to develop its own businesses. This is the steps for development of micro financial institution. The experience of other countries could be described below. Financial orientation of the existing micro financial institution could also be suggested to focusing on the development of rural agro-based industries. 217

12 As mentioned above, other countries have successfully developed their agro-industry with their respective specific core business. The development is centered at rural area while the knowledge, technology, and management could come from many sources, both urban or peri urban areas. Japan is proud to have One Village One Product (OVOP) movement that develop specific location s products into high quality products and sell the products at high economic values, at local and international markets. The other successful country in developing small and medium enterprises is Thailand with One Tambon One Product (OTOP) movement. This OTOP movement was replicated from OVOP in Japan but strengthened by the local wisdom to develop any available but local specific commodities. OTOP has been expanded to reach international markets, including their Kitchen of the World brand that highly respected and become one of the national tourism icons. Similarly, Korea introduced the Saemaul Undong that encourage the rural people to move forward by improving any business potential they have to achieve certain level of performance and transform the potential into economic value to improve rural people s welfare. This program is also successfully worked and become the national and famous program. Many countries consider these programs as a way to empower rural area since such programs were started from rural/agricultural zone to reach domestic area and go international. The role of Thailand s BAAC in financial support for many of OTOP businesses and other related activities should be well recognized. One of the bank s objectives is to collaborate with other relevant agencies, both government and private sectors in order to support their business and agricultural related activities so that they can earn more income (BAAC, 2015). This objective reveals the important role of strong financial institution to reach certain level of rural business development. Similarly with financial support in Korea s Saemaul Undong, a movement to share knowledge among the people for community-driven development (ADB, 2015). Saemaul Undong was introduced in 1971 in Korea with strong support from the country s leader. It was clear that the political term used by the leaders is to transform rural areas with community active participation into higher achievement economic development, from rural and agricultural sector into various economic activities in a modern model development. Based on its development, Saemaul Undong could be divided into three development stages, namely basic movement ( ), achieveing self-help ( ), and become self-reliant ( ) (KDI, 2011). With well design of planning and implementation, effective used of government financial support, and active participation of stakeholders, this movement has been successfully enjoyed by the farmers and rural people. EMPOWERING RURAL MICRO FINANCIAL INSTITUTIONS Working Capital for Sustainable Food Production In every beginning of planting season, the need of cash is understandable. Lack of financial support is common for most of the smallholding farmers. These farmers are the target of many money lenders operated rural areas. Food production would be affected by the shortage of this cash because they cannot afford to buy necessary inputs or if they buy, the amount could not be sufficient to meet the local farm recommendation. Without changes in financial support, farmers would be trapped in looping cycles that would suffer the farmers. 218

13 By providing sufficient financial support, the farmers could improve their respective farm performance. They can practice according to the local recommendation farm management. Therefore, working capital is required for sustainable food production. With such weakness, the farmers need an access to financial institutions, preferably at rural areas, close to their business and settlements regions. Unfortunately, formal bank could not be available to perform agricultural bank, except that there is a unit to deal with agricultural matters. The farmers are not accessible to formal bank because of the unavailability of collateral. If there are reliable financial institutions in rural areas, it is almost certain that they would prefer to deal with such institutions. In this context, the micro financial institution at farmer s level (LKM-A) is strongly recommended to perform financial institution to cover the financial requirement of the farmers, specifically to finance the production cost. If LKM-A is to be enhanced, the farmers could access source of finance and help them to provide all required inputs and even pay the labor wages. Financing the farmers and strengthening the micro financial institutions would be best strategies to improve working capital at farmer s level to achieve food production sustainability. Participation of the local government, in this respect is highly required. Harmonious regulations should be sufficient to support the implementation. The role of local agricultural offices as the lead institution at regency level is significant and encourages taking initiative to build communication among the stakeholders. They are also encouraged to prepare financial planning support for smallholding farmers using the existing rural micro financial institutions. Development of Rural Micro Finance Institutions Among the important role carried out by the goverenment to facilitate LKM-A in transforming its capacity to meet a requirement of self-support rural micro financial institution are: 1. Assist the process of the issuance of legal document of institution, both administratively and financially according to the applied terms and regulations. 2. Provide certain percentage of interest rate subsidy for LKM-A to strengthen the capital of the isntituion. 3. Provide the institution with training and education to enhance the human resource capacity. Special training would be of interest of the institution, such as financial control and management adjusted to the role of micro finstitution at village level. 4. Support business network with oher organizations on partnerships business model (public-private partnerships). Government facility is required, both at central and local level to accelerate the business development. Reformulation of budget orientation to particularly prepare to cover production cost is essential as most of the farmers are not able to provide sufficient capital to cover various items cost of production. The LKM-A under the Gapoktan organization should be empowered. The government s budget politics should be well reformulated to fit into the farmer s budget requirements. LKM-A is in strategic position to become rural financial institution with some 219

14 advantages, such as location in rural areas, close to the farmers as the customer target, and familiarity with rural environment. The government is suggested to pick this rural micro financial institution to expand farm credit package to help the farmers to cover their production cost. This financial institution is also strategic in the attempt to diversify agro-based industry products. Incentives on this orientation are required to allow financial support sustainability. Role of Local Government The Ministry of Agriculture s Strategic Plan had listed the working steps to improve farmer s welfare. Among the steps, namely to help the farmers by providing and improving the system of input subsidy, apply price protection of agricultural production at farm level, and introduce agricultural insurance to reduce farm risks, strengthen farmer s institution, improve farmer s skills through training and education, and open accesibility to financial sources (Kementerian Pertanian, 2015). These steps are in line with the message in Law No. 19/2013 on farmer s protection and empowerment. However, more details of implementation breakthrough should also be required since many obstacles along with political orientation always in front of many improvement efforts. Through public-private partnerships approach, many business activities in rural areas could have opportunities for development. Partnerships need commitment from all stakeholders because partnership is a mechanism at which the government and private sectors share all resources, knowledge, and risks in order to increase production efficiency, and product and service distribution in achieveing certain level of benefit (Frank et al., 2007). Institutions at rural level that involve in the development process need to take clear position to help improve the performance of agricultural sector development, to produce product with high quality and have commercial value. Note that the partner determination is crucial taking into account that the network attempt to create cooperation among the institutions should allow each institution to take part according to their interest (Ferroni and Castle, 2011). Partner could become enemy to certain extent at the point that the partnerships is absolutely relate to business and financial profit. It should be understandable that only a few of the cooperation between research institutions and the private sectors that could in strategic position to produce innovations. This indicates that there is the need to further explore and more studies required to understand the partners, including the culture, the incentive, and overall system embedded in the institutions (Spielman, et al., 2010 and Umali-Deininger, 1997). Every effort to deal with partnership is a trial because cooperate with other parties means to combine two or more desires that need adjustments in technology, objectives, and others. In this concern, local government or related institutions need are requested to provide applied business plan and facilities, such as regulations, promotions, and special guard to support the existence of certain institutions, such as rural financial institution. The latter is about to cooperate with other private sectors to accelerate its service development and establish micro financial support at rural level. The current development of credit scheme in Indonesia should be well adopted by local institutions and immediately take advantage by perform appropriate responses to such 220

15 changes. The new format of people s business credit (KUR) should also be important for agricultural sector. There is opportunity for LKM-A to access such newly changed credit services. Since LKM-A or similar institutions need the government role to guide them to access to such formal credit, the local government should takje initiative and allow the process for the benefit of the farmers and institutions at village level. The other source of fund is CSR that available at big state-owned enterprises or private sectors. LKM-A should take initiative to approach such companies and try very hard to convine them and later develop business plan that could increase the rural community s welfare. CSR is not only produce certain products but also open opportunity for investment and contribution to develop rural micro financial institutions. Agricultural development budget politics on especially food production improvement program should be well incorporated in the annual budget of national agricultural development. In this respect, the steps in budgeting reorientation to empower rural micro financial institution are required to enhance the performance of the institution. The institution need to be equipped with legal documents, such as necessary papers to meet requirement of both national and local regulations. Prepare the institution with legal support to access to formal bank for interest subsidized credit. The cash obtained from the bank will be used to finance the farmer s cost of production. The other business activities will also be the advantage of this financial institution. The next step would be oriented to provide all necessary inputs under the institution s management, such as the availability of seed, fertilizers, pesticides, etc at their own kiosk. This means that the farmers as customers will not be given a credit package in cash, but in kind. This strategy is taken to avoid cash misuse by the farmers and the institution will also have some gain through internal farm inputs trade activities. Capacity building through training and regular education for skill improvement in many fields is suggested in strengthening the institution. Budget politics should also reorient to cover this human resource development along with intensive extension and other integrated activities focusing on food production improvement. CONCLUSIONS AND CLOSING REMARKS Shortage of capital is the most and chronic problem face by the smallholding farmers. As majority of food crops producers, these farmers need financial support to particularly cover cost of production. From the formal bank institution view, agricultural sector is considered as high risk economic activity with non-bankable category. Formal bank, therefore would not be interested to deal with credit requested by smallholding farmers. Micro financial institutions could be alternatives to provide financial support for farmers in the absence of formal bank in rural areas. Empowering rural financial institutions should be considered as the advantage of rural community and agricultural sector. The government need to formally establish the institutions at village level. As a source of capital, rural micro financial institution is needed by the farmers to help them in requirement of farm working capital. The institution is located in rural areas, close to the farmers and easier for the farmers to access, perhaps with no collateral requirement to obtain the credit. The institution should be closely and directly watched by the 221