SMALL-SCALE AND MICRO-FINANCE INDONESIA

PROVISIONAL MANUAL FOR THE CREDIT BUSINESS OF THE GENERAL POPULAR CREDIT BANK

by Th. A. Fruin

Original title (Dutch):"Voorlopige Handleiding voor het Credietbedrijf der Algemeene Volkscredietbank"

edited by Klaas Kuiper

Development Cooperation Information Department of the Ministry of Foreign Affairs, The Hague, Netherlands

1994, 2000

Copyright © Ministry of Foreign Affairs` Development Cooperation Information department (DVL/OS)

PO Box 20061, 2500 EB The Hague, Netherlands July 1994 ( printed version), August 2000 (electronic version)

Permission is granted for the reproduction in part of this material for educational, scientific or development related purposes except those involving commercial sale, provided that full citation of the source is given. For all other purposes prior written consent of the copyright holder is required.

The opinions expressed in this publication are the sole responsibility of the authors.

CONTENTS

PREFACE AND ACKNOWLEDGEMENTSKlaas Kuiper, editor

PROVISIONAL MANUAL FOR THE CREDIT BUSINESS OF THE GENERAL POPULAR CREDIT BANKTh. A. Fruin

GLOSSARY

REFERENCES

PREFACE AND ACKNOWLEDGEMENTS

The year 1995 marked the centenary of the founding of the first popular credit bank in Purwokerto, Indonesia. It was also sixty years since the publication of Th. A. Fruin's "Voorlopige Handleiding voor het credietbedrijf der Algemeene Volkscredietbank", in Jakarta, or Batavia as it was known at the time. Fruin's book reflects his fifteen years of experience with credit schemes, a period marked by a series of major reorganizations in the institutional structure of credit facilities, which culminated in the establishment of the "Algemeene Volkscredietbank" (AVB) in 1934, the predecessor of today's Bank Rakyat Indonesia (BRI).

The various types of credit facility granted at village level mainly served the needs of those with limited or no access to commercial banks, such as small farmers, merchants and small entrepreneurs or, in short, one-man businesses and households. The credit system consisted of popular banks and thousands of village banks, lumbungs (village rice banks) and pawnshops that provided small, usually short term loans to millions of households. And the interesting thing is that they managed to do so at a profit!

For a number of reasons this is an opportune moment to produce a translation of Fruin's manual:- Many countries are interested in small-scale credit facilities and are seeking ways

to tackle the problems such loans entail. They could benefit from examples from other countries and eras which demonstrate that it is possible to channel numerous small loans to relatively poor clients in a sustainable manner. Anyone in the field of credit today would do well to examine the factors which made those programs successful.

- The history of credit extension in Indonesia, which was still under Dutch colonial administration at the time, was chronicled in a monthly journal published since 1913. These documents contain detailed accounts of the many experiments carried out at village level and the debates and studies surrounding them. An English translation of these publications will make this wealth of information available to a far wider public and hopefully facilitate further research.

- Rural credit systems typically featured a bottom-up approach with a clear role set aside for government. They were generally based on wide-ranging social and economic surveys of village life concerning income flows and the role of informal loan providers, and consequently the most suitable form of credit. In addition, comparative studies were conducted of bank branches so that the less successful could learn from those that did well. These studies provide detailed information on the numbers, sizes, costs and performance of the loans, and show how problems were solved.

- Over the years a shift took place in the relationship between head offices and the local banks. For further information on this subject the reader is referred to Schmit's history of the popular credit system (1). Nevertheless, the popular credit banks always had a large measure of freedom in interpreting the general guidelines issued by headquarters.

- Another reason for translating the manual is that it is not merely a summary of precepts, but a detailed record of people's experience in the field, from which Fruin distilled strategic and operational principles applicable to a wide range of types of credit for entirely disparate groups. Today, the work would be called a "best practices manual", and much of the information is still valid.

In short, Fruin's manual is not simply of historical interest. In 1969, when I was involved in planning the "unit desa" (village units) project for Bank Rakyat Indonesia, extensive use was made of this and other publications by Fruin, particularly those describing approaches and costs in greater detail. (2)In the period between 1920 and 1930 it was possible to extend millions of small loans on a profitable basis to the same target groups (small farmers, traders and small and micro enterprises) as the BRI was trying to reach. The results of the pilot project in 1969/72 confirmed that these credit schemes could be repeated. Losses were incurred in the 1970's, when the unit desa scheme was too rapidly expanded and some of the guidelines developed during the pilot project were abandoned. Nevertheless, BRI's current KUPEDES program, which has replaced the units desa, has some of the features of both the earliest unit desa and of the pre-war AVB. In addition, the program has been yielding a profit.

The translation

Translating the manual has been an onerous task involving a number of choices. A lawyer by profession, Fruin sought accuracy of expression in complicated phraseology and convoluted sentences. His original text has been simplified where necessary to make the English version more readable. Moreover, his Dutch is now slightly archaic. Some of the terms he used have acquired a different meaning or simply have become obsolete. His vocabulary is larded with numerous Indonesian and Javanese words, and geographical names are spelt according to the orthographic rules of his day. Such usage has generally been preserved in the English. If possible, an English equivalent or explanation follows the first time a local word is quoted. Some terms, however, mostly referring to specific local contract forms, have not been translated. Many of them are strictly regional and are defined in purely local terms. Reference is made to the glossary containing the most frequently used foreign terms. We have opted for an unabridged translation of the manual and have therefore included a number of passages which may seem irrelevant today. The reader should be aware that the manual was written when Indonesia was still a Dutch colony. The term "government" thus refers to the colonial administration, while Fruin himself was a colonial civil servant, of the social-democratic school and with no ambition to be a commercial banker!

Acknowledgements

Many people have put time and effort into producing this version of the manual. In particular, I would like to thank the author's son, R. Fruin, for his permission to translate the work and to consult the family archives at the "Rijksarchief" (General State Archives) in The Hague. I am also deeply grateful for his advice and suggestions.

I am grateful too to Dr Leo Schmit for studying the archive and summarizing the history of the first 40 years of credit extension in Indonesia, published together with this manual in its printed version. (1) The historical framework he has thus provided makes the manual easier to understand. His earlier research for his own dissertation placed him in the best position to do this.Thanks are also due to the English Section of the Ministry of Foreign Affair's Translation Department for the translation of the manual. The project was funded by the research program of the Directorate-General for Development Cooperation (DGIS-DST/SO).Finally, I would like to thank my secretary, Desiree Sackman, for her assistance with the editing and lay-out, and the Development Cooperation Information Department for their help in liaising with the printers.

Klaas Kuiper, editorThe Hague, July 1994

The electronic version

Because the printed version of Fruin's manual has been sold out but requests for it still remain, it has been decided to make an electronic version available, especially for the various virtual libraries that are being set up.This electronic version differs in some aspects from the printed version:- The article by Schmit on the history of the popular credit system (1895-1935),

which was part of the book, is not part of this electronic version but has been given its own electronic copy. (1)

- Due to the different formats of the book and this version page numbers do not correspond.

- The text notes and footnotes in the printed version have been moved to a list of references at the end of this version.

- Text references to Dutch language publications have been translated into English in this electronic version; the original Dutch title appears in the references at the end. The name "AVB" has been used throughout for the "General Popular Credit Bank".

- Some errors in the printed version have been corrected and some Indonesian terms have been translated into English. They have been added to the glossary.

- The lay-out has been changed too, however, this is still an unabridged version of Fruin's original text. With the above we have attempted to make the reading more pleasant.

I would like to thank Maaike Manten and Johan Leestemaker for the assistance provided in making this electronic version possible.

Klaas Kuiper, editorAugust 2000

PROVISIONAL MANUAL FOR THE CREDIT BUSINESS OF THE POPULAR CREDIT BANK

by Th. A. Fruin

Published by the General Popular Credit Bank in Jakarta, March 1935

CONTENTS

CHAPTER I INTRODUCTION

CHAPTER II THE CAPITAL OF THE AVB1. Capital stock2. Net assets3. Total equity capital4. IGCI reserves5. Village assets6. Total IGCI and village investments7. The AVB as investment institution for the local councils and their institutions8. The AVB working primarily with capital from the indigenous community9. The AVB as a savings bank10. Indefinite-term deposits11. Current account funds12. Relationship with the general banks13. Conclusion

CHAPTER III NATURE, SIZE AND LIMITS OF THE AVB's CREDIT BUSINESS1. Three principal characteristics2. Subsidiary characteristics3. The bank's socio-economic responsibilities4. The AVB is not a philanthropic institution5. The commercial basis6. No direct influence on the part of Government7. The limits of the AVB's credit operations8. The AVB does not accept other banks' leavings9. The AVB as an agent for the major banks10. Credit for all, irrespective of racial origin or class11. The AVB as an intermediary for government credit12. Guarantees for the AVB13. AVB subsidiaries14. Geographical area covered by the AVB15. Advantages of the multi-faceted nature and geographical spread of the AVB 16. Long-term credit justified from the point of view of liquidity and socio-economic

considerations17. The risks associated with long-term credit18. Business credit on liquid assets19. Business credit secured by immovable property20. The extension of loans secured by pensions in combination with life insurance21. The danger of becoming a sleeping partner22. Personal credit23. Credit to one-man businesses

CHAPTER IV CREDIT TO SMALL-SCALE ENTERPRISES1. Limits2. Retailers and craftsmen3. Cooperation with the Industry Department and with craft schools in order to

promote crafts4. Small-scale enterprises proper5. The capital requirements of small-scale enterprises6. The credit requirements of small-scale enterprises7. Long-term supplier credit8. Short-term supplier credit9. Customer credit10. Supply on credit by small-scale enterprises11. The dilemma of credit to small-scale enterprises12. The AVB as administrator and accountant to small businesses13. Security: mortgages and credit surety14. Ceding claims15. Fiduciary transfer of ownership16. Guarantees17. Raising loans on pensions and salaries18. Liens on life insurance policies or mixed insurance policies19. The ceding of monies involved in contracts; order credit20. Raising loans on securities which can be traded on the stock exchange;

various forms of security21. Forms of credit to small-scale enterprises; discount and loan credit22. Short-term loans; seasonal credit23. Pseudo current account credit as continuous seasonal credit24. Long-term loans for fixed capital or as long-term operating credit25. Current account credit26. Long wave-length current accounts; continuous seasonal credit27. Short wave-length current accounts; permanent operating credit; regularly

reduced maximum borrowings28. Notice and cover in the case of current account credit29. Summary: general conditions for credit to small-scale enterprises30. Credit for new and recently established businesses

CHAPTER V CREDIT TO FARMERS1. Outline of the indigenous farming community2. The role of credit in village communities3. The lack of capital formation in the village community4. The gross monetary income of the farmer as the basis for the credit to be

extended5. Tenancies and share-cropping6. Bailment and leasing of land7. Profiteering8. Customer and supplier credit9. Other credit10. Debt problems11. Reasons of the relatively small debt burden of indigenous farmers12. Indigenous rural mortgages - an undesirable development13. Little need for long-term credit14. Credit to finance the purchase of additional land or a family farm15. Characteristics of short-term agricultural credit provided by the AVB16. Land as security and as a criterion for eligibility for credit17. The impossibility of a thorough individual approach18. Types of loans in indigenous farming19. Repayment dates and rapid succession of loans20. Determining the size of loans21. Credit for small farmers and indigenous commercial farming

CHAPTER VI CONSUMER AND SEMI-CONSUMER CREDIT1. Characteristics of consumer credit2. Short-term consumer credit3. Credit with which to pay off debts; cooperation with anti-usury associations4. Cooperation with trade associations and cooperative associations to keep their

members permanently free from usurious debts5. Credit for the redemption of pawned goods and the payment of taxes6. Credit for the purchase of durable goods (semi-consumer credit)7. Credit for the construction of housing on land borrowed by the borrower8. Housing credit where construction is to take place on land owned by a third

party9. Credit for various purposes at once10. Guarantees against the misuse of long-term credit

CHAPTER I INTRODUCTION

This manual is both a beginning and an end. It is the author's way of taking his leave of the popular Credit System, an attempt to record, before his departure, his fourteen years' experience of public administration in this field and the knowledge he has gained in that time. It is also a first attempt to provide an overview of the credit system as a whole and to discuss it systematically and with a critical eye.

With the setting up of the "Algemeene Volkscredietbank" (General Popular Credit bank, hereafter referred to as the AVB), the time had come for this to be done. The structure of the popular banking system was wrong, involving as it did a large number of local, insufficiently resourced, small banks, all of which were striving for independence from the beginning and proved to be incapable of effective cooperation. This fragmentation of resources, with the banks being linked only slightly by a management which was permitted as little involvement in the actual business of lending as possible, was badly suited for the development of a theory of the credit business.

After a few attempts in the first few years (cf. for example the interesting articles by Besseling in the "Journal of the Central Fund"(3)) the loans business for years received little attention. Since 1920 the efforts of the management have had to be concentrated primarily on the step by step introduction of better organization; since 1925 they have also been improving internal and external financial control, though by attaching academics to the service especially to conduct economic research (Dr C.L. van Doorn, Dr G.H. van der Kolff, Baron W.E.K. van Lynden in turn) an attempt has also been made to improve the economic side of the business.

The management itself had only occasional opportunity to involve itself intensively in this aspect of the business. The author's articles, "Long-term credit" (4) in the journal "Vollkscredietwezen" (Popular Credit System) in October 1927, "Forms of credit" (5) in January 1929, "The popular mortgage bank" (6) in January 1930 and "Current account credit to the indigenous population" (7) in December 1930 represent his various attempts, all interrupted again and again, to do so.The "Forms of credit" article did lead to a number of studies by accountants on seasonal loans, some of which were also worked on by management and staff (see also under this heading in the supplement to the file on the Popular Credit System); chapter IV of this manual makes grateful use of those studies.A full survey of the management's attempts to gain a greater understanding is provided in the author's article "The lending business of the Popular Credit Banks and the Central Fund" in the journal "Volkscredietwezen" of June 1933.

The establishment of the AVB makes a systematic, continuous study of the lending system possible for the first time because this is the first time that the management and the economic affairs department have been able to rely on full cooperation from the local branches or draw up detailed statistics. It is to be hoped that at least one member of staff, freed as far as possible from day-to-day concerns, will now be able to devote himself fully to further developing understanding of the credit system.

In this respect the present manual has been written too soon: the author has not been able to use any of the new statistical material and the year since the establishment of the AVB has not left him with sufficient time to give proper attention to or involve himself intensively in the credit business.Nevertheless, he felt himself obliged to smooth the way by making a start, providing a basis for further work in the future.

The manual is thus merely a provisional one, not the last word but the first. The aim of the author could not be better achieved than if the propositions developed in his work were not simply accepted without criticism but rather used as the basis for further study and discussion. It is to be hoped that in this way it will be possible for a much improved and expanded edition to be published a few years from now.

In the meantime it is essential that a start be made by studying the contents of the present provisional manual thoroughly. It is recommended that the volume be included in courses for the third part of the government service examinations for relevant staff. In addition, however, those in the field, the staff at local offices, must overcome the aversion to theory that many of them still harbor. They like to think that theory is simply putting facts and practical experience into order in a systematic manner, in accordance with certain viewpoints, which may or may not change.

No-one can manage without theory, even the most inveterate believer in practical experience. All administrators base their work on certain suppositions, applying theories (many not formulated) which experience has taught them or which they have learned from others (this too is common practice!). Feelings, which are essentially vague, more or less unconscious theories, take the place of consciously developed, accurately formulated theory. There are no more tenacious, rigid theorists than men of practical experience, because their theories are based more on feelings than on logical understanding. The rigid theories of the men of practical experience are among the major causes of the rigidity of the forms adopted by the popular credit system. Feelings and intuition are valuable in determining the direction research should take, the points of view according to which material can be classified, but they are dangerous if they are not accompanied by critical, logical research.

The best way of avoiding the dogma that is so feared by the men of practice is to involve them in the development of theory. A business can only be "kept alive" - one of the author's favorite images - if there is constant cooperation between local and central bodies. It does not help to sit about moaning in the interior of the country, to do so is simply destructive.

On the other hand, there is a great need for both properly motivated criticism and constructive contributions from all quarters. It is a matter of "noblesse oblige" that management should be able to accept and encourage criticism, to use the valuable elements it contains and to give properly motivated ideas from local staff a chance even if they are at variance with the management's view. Nothing could be more fatal to the popular credit system than a management which could only issue orders (even if this does have to be done as well!) and turned local staff into nothing more than the executors of policy.

Even with the best will in the world, however, management can do nothing in this regard if they receive no response from administrators and, because of their desire for an easy life, an aversion to theory or their fear of responsibility, these local representatives of the bank simply keep quiet and obey orders rather than showing themselves to be active members of staff with initiative of their own.

In this way it is to be hoped that the present provisional manual will serve as a stimulus to management and staff through cooperation to do away with the traditional dilettantism of the popular credit system and to adapt the methods of credit provision as effectively and as variably as possible to the needs of the society in which the AVB operates.

The local boards can play an important role in this too. An indication is given at various points in the chapters which follow as to how they can help to ensure that justice is done to special credit requirements by carrying out local research.

This volume is also intended to assist the members of the central and local boards and all those involved in the popular credit system in forming a picture of the purpose and modus operandi of the AVB and to make it easier for them to criticize and exercise supervision, The AVB, which is not a commercial, profit-making institution, need not be afraid of having its remotest corners examined and should, as an establishment with a social purpose, consider it its duty to demonstrate openly how and to what effect it defends the interests entrusted to it. Openness, which is a traditional feature of the bank, undoubtedly has its unpleasant aspects but it is possible once the new situation has been consolidated, the old battle forgotten and the initiator thereof has disappeared the rather personal aspects of the public criticism will come to an end and the endeavors and activities of the AVB will be more generally valued.

The chapter on credit to small-scale enterprise is based only in part on the author's own brief experience and primarily on that of others in the Netherlands and elsewhere. It should be pointed out here that the efforts of the AVB to develop into a bank for small-scale enterprises were primarily due to Pangeran R.A.A.A. Djajadiningrat, whose endeavors on the part of indigenous traders resulted in the government setting up the Indigenous Traders' Committee under his chairmanship. The criticisms made in the Committee of the fact that the credit requirements of small-scale enterprises were insufficiently being met by the local popular credit banks caused the author - who was a member of the Committee - to look more closely at the problems in this field than he had previously. His article on current account credit to the indigenous population was prompted by the impetus provided by the Indigenous Traders' Committee.

The realization that the time was ripe for the merger of the local popular credit banks to form a general bank also came about under the influence of the author's membership of the Committee. When in August 1931 the criticism expressed by certain members of the popular council concerning the situation in the popular credit system caused the government to discuss the reorganization of the system, the author's reorganization proposal (apart from the first, historical chapter) which was published in the journal "Volkscredietwezen" in October 1931, had already been completed.

The author would also like to thank the directors of the "Nederlandsche Middenstandsbank" in Amsterdam and the management of the bank's branch in The Hague, who, while the author was on leave in 1932, were so kind as to supply him with information and literature which were of considerable use in the writing of chapter IV.

The chapters which follow make no mention of arrears control. The following may serve to explain this. Arrears can to a large extent be made unnecessary by keeping loans and repayment installments within the financial capabilities of the borrower and in general by adjusting the provision of credit as accurately as possible to take account of changes in the economy in good time; it is to this that the following chapter are devoted.

However, it is equally essential to maintain proper discipline as regards repayment among the majority of borrowers. The studies conducted in 1933 by the temporarily appointed experts into the reasons why some of the popular credit banks suffered much less from arrears resulting from the changes in the economic situation than the large majority of the banks revealed primarily that strict discipline to guard against mistakes in the provision of loans, such as excessively large loans or incorrect calculation of repayment installments, pays off, even in periods of considerable difficulty for the people concerned. A lack of arrears thus does not necessarily mean that a credit business is healthy.

To be entirely honest, such discipline is based for a large part on fear. Anyone who succeeds in instilling a gear of getting into arrears into borrowers will be successful in keeping arrears under control. Such respect for the bank need not at all primarily depend on drastic measures; indeed they can do little on their own. As experience repeatedly shows, enforcement measures have little effect against mass unwilling-ness to pay or even against a certain reluctance to do so. There are people who by the very manner in which they address someone from a village in this country ensure that he would rather endure the greatest of sacrifices than fall into or remain in arrears.

The great docility and obedience of the village people undoubtedly plays a major role in this, as does their honesty. Most bank loan contracts, bearing only the fingerprints of the illiterate borrower, constitute only the slenderest of evidence and yet a man from the village will almost never deny his debt. The duty to repay what one has received is recognized. It may be that it is not customary in indigenous society to repay a loan within exact time limits which are agreed in advance, but the requirements of the bank are well known; anyone who takes out a loan knows that it must be repaid on time and normally needs no additional incentive to do so. In addition to respect for the bank, habits which have become traditional thus probably also play an important role in repayment discipline. Moreover, if repayments are not made on time, the borrower will either not be able to obtain further credit in the near future or only a smaller sum will be available.

What this all means is that provided the loan and repayment methods of the bank are up to scratch and no disasters occur, i.e. the borrower continues to be in a position to meet the repayment requirements agreed without too much trouble, no especially

strong words or deeds should be necessary on the part of the bank and the usual reminders will be sufficient to keep any arrears which do arise within manageable proportions.

On the other hand, this element of tradition also means that if the traditional promptness with repayments has given way to significant and widespread arrears, as happened during the economic crisis, new loans which are in themselves entirely in line with the financial circumstances of the borrower will no longer have the support of the habit and it will cost a great deal of time and care to restore the lost discipline.

This is why outstanding arrears on loans dating from before the crisis period have a demoralizing effect on borrowers taking out new loans and therefore constitute a major hindrance to the redevelopment of the credit business in the village. It will probably take several years for arrears on new loans to fall to the level common before the crisis.

In general one should perhaps add the warning that there is no need to be afraid of arrears. The soundness of a business is still too often judged on the basis of the incidence of arrears. Just as a low incidence of arrears does not prove that the manner in which loans are provided is correct, a higher incidence does not prove that credit provision is unsound. If a borrower fails to pay certain installments of a multi-installment loan and these are only paid off after repayment of the rest of the loan, the arrears concerned are innocent in nature, as are those arising from paying one or two seasonal installments late in cases where the deadline was a tight one to meet. Such arrears are essentially healthier than an extremely low incidence of arrears contrived by iron discipline, as a result of which a borrower who cannot pay on time borrows elsewhere in order to pay back the bank promptly.

This is not to advocate that repayment discipline should be neglected, simply that it should be used and judged critically. Maintenance of much stricter discipline will be both necessary and possible where very small sums are loaned to numerous members of a village than in the case of larger loans to officials, businessmen and large-scale farmers. which are more in line with individual requirements.

CHAPTER II THE CAPITAL OF THE AVB

Since the opportunities for the provision of credit by a bank are to a large extent determined by the nature of the capital available to it and the term within which it must be repaid, an examination of the capital held by the AVB cannot be omitted.

1. Capital stock

The equity capital of the AVB is unusual in that there is no share capital. The only form of participation in the bank capital is the capital stock of NLG 2.875 million provided by the government to the Central Fund and subsequently transferred to the AVB.This capital stock is similar to share capital in that should the AVB be wound up, no money would be repaid to the government until the bank had met all its financial obligations (article 19, paragraph 2 of the Provisions concerning the AVB. (9)

A fixed rate of interest of 3.17% is payable on NLG 2,125,250 of the capital stock, with 3.22% payable on the remaining NLG 750,000.Each year a proportion of the capital stock is repaid equivalent to half of the operating surplus from the previous financial year after covering for any outstanding losses from previous years (article 5, paragraph 2 of the Provisions concerning the AVB).

The repayment thus never reduces the equity capital of the bank but may delay its increase. This can be a problem during periods of rapid expansion of the bank's activities. However, the Governor-General may grant an exemption from the repayment obligation for any year in which the financial position of the bank makes such action desirable (article5, paragraph 3 of the Provisions concerning the AVB). Moreover, it must be remembered that in any event half of the profits always remain with the bank.

2. Net assets

The second component of the bank's equity capital is formed by the net assets accumulated from the operating surplus of the popular credit banks and the Central Fund which were merged to form the AVB, which the bank itself will soon start to increase. At the time of writing it is still impossible to say what the exact value of the net assets is. At the end of 1933 of the institutions which came to form the AVB in 1934 the popular credit banks had net assets plus reserves for bad debts of approximately NLG 17,930,000 and the Central Fund had reserves of NLG 509,000, not including its reserve for exchange rate risks in respect of securities of NLG 557,000. The large losses suffered by the popular credit banks as a result of the economic crisis must still be taken into account by the AVB. However, it may be assumed that once all necessary items have been written off and the balance between expenditure

and revenue has been restored the AVB will have net assets of at least NLG 9 million.

3. Total equity capital

The total equity capital of the AVB will thus be NLG 12 million or more, approximately NLG 4 million of which will be tied up in property and inventory, however. This amount must be increased to at least 25% of the money borrowed and may be increased to a maximum of 50% thereof (article 4 of the Provisions).

These provisions are intended to ensure that until the minimum is attained, reserves continue to be built up, that further increases in the reserves are dependent on the policy of the management and the Central Supervisory and Support Board, and that once the maximum has been reached the interest and charges payable by clients may not be higher than is necessary to meet interest payments and costs, to make allowance for the necessary depreciation and to keep net assets up.

Apart from the fixed interest on the capital stock, which in this respect is the equivalent of borrowed capital, and the payment of half the profits to the government in order to repay the capital stock, the AVB does not pay out profits. Bonuses are prohibited (article 6, last sentence of paragraph 5, article 7, paragraph 8, and article 5 of the Provisions).

4. IGCI reserves

The credit resources of the AVB comprise primarily assets invested with the bank by the Local Council Credit Institutions (IGCI's) and the local councils.

More than twelve thousand village banks and village lumbungs (rice banks), spread over the whole of Java and Madura and some of the outer islands, which together from the IGCI's, are now, after a relatively short period, working exclusively with net assets formed from operating surpluses. Their net assets have been increased to such a level that they have accumulated large reserves over and above what they need to make loans and, under the provisions of article 12 of the ordinance (10), and corresponding provisions in the relevant regional regulations in some of the outer islands, those reserves must be invested with the AVB in a form in which they may be withdrawn at any time without notice; they may not therefore be invested with another institution or in securities or other stocks. The IGCI's rarely suffer significant losses and certainly not in large numbers at the same time. Even the economic crisis which began in 1929 has left the assets of these institutions almost unscathed.

The lumbungs are sometimes affected by poor harvests, however, as a result of which arrears may arise. However, this never occurs in all districts at once and the arrears are usually paid off the following year. Lending is of course not affected by the economic situation because loans are made in kind, as are interest payments and repayments. The enormous drop in rice prices does, however, affect their profitability, since a large part of their costs must be covered by the sale of rice received as interest (other costs, such as wages of their staff, are covered in kind).

This has led to the temporary use of reserves and in the long term to interest rate rises.In the lumbung financial year ending on 30 September 1934 the lumbungs taken as a whole made a small profit. However, the monetary reserves, which among other things serve to replace the rice operating capital should it be lost, may be smaller than in the past because of the fall in the rice price. This would mean that when excess reserves are transferred to the village funds at the end of three years as is required, some would be lost to the lumbungs, though not to the AVB, since village funds are also invested with it.

Village bank loans usually have to be repaid in 10, sometimes up to 20, weekly installments and can thus be adjusted in line with the changing economic situation quickly and easily. The economic crisis naturally meant that the loans were smaller and that the invested reserves grew, as a result of which the village banks also lost out in the three-yearly transfer of the surplus. Again the AVB was not affected.

In periods of economic growth the village banks will again expand their business and to do this will need some of their invested reserves. Given that the AVB will also wish to increase operations at such time, this could lead to a shortage of resources at the bank if it were not for the fact that the depression has resulted in such a superfluity of surplus resources at the AVB that it has time enough to attract the other investment that it needs. Moreover, an expansion of operations will again lead to rapid formation of capital at the village banks, as a result of which their reserves invested with the AVB will again increase rapidly.

The value of the reserves of the IGCI's to the AVB is further increased by the fact that the IGCI's are legally subject to the supervision and management of the AVB. This means that they essentially form a single entity, i.e. the popular credit system in the Dutch East Indies.

Although each village bank has immediate access for business purposes to the reserves it has lodged with the AVB, it will be clear from the above that the IGCI capital held by the bank, taken as a whole, is essentially invested for an indefinite, lengthy period with the bank, which is then able to use a large part of it without any problems to provide long-term loans.

The AVB and the village credit institutions together form the popular credit system established by central government. The distribution of responsibility is such that the IGCI's provide small, short-term loans (up to a year) while the AVB provides larger loans over longer terms. The bank is, as it where, an extension of the village credit system. The large equity capital of the village institutions, which is largely unaffected by economic fluctuations, provides a firm foundation for the whole system. Although it is not of immediate practical importance, serious consideration should be given in the future to whether the commonality of the responsibilities of the IGCI's and the AVB, the fact that they are essentially a single entity, could not be expressed more purposefully, by linking them more closely in a financial stronger single organization.

This would benefit the provision of loans at lower levels. It could be done in the first instance by stopping the three-yearly transfers to the village funds, as a result of

which it would continue to be possible to use the capital saved by the popular credit system entirely for the purpose for which it was intended. The IGCI's could also be required to participate in the risks of the larger and more long-term loans extended by the AVB. The latter could be done simply by adding a clause to article 19, paragraph 2, of the Provisions concerning the AVB to the effect that upon winding up of the AVB first all other creditors would be paid off, then the IGCI's and finally the government (for the capital stock).

5. Village assets

The local councils, unlike their credit institutions, are not obliged to invest with the AVB, nor are they supervised or controlled in any way by the bank but by officials from the Department of Internal Affairs and from the Regency Councils. However, they more or less use the AVB because there is no other banking institution which has branches throughout almost all of the Dutch East Indies and regularly provides its account-holders with the opportunity to pay in and withdraw money in nearly all district and sub-district capitals.

Moreover, the assets of any individual village amount to little (between a few hundred and a few thousand guilders as a rule). It would be difficult for the Department of Internal Affairs to split the assets of each village into a component to be invested in securities or long-term at a major bank outside the administrative district, for example, and a second component to be invested with the AVB to which the village could have immediate access.

If the AVB is prepared to accept the depositing of all funds from each village in a single account to which the holders have direct access, and will pay a rate of interest intermediate between those for short and long-term investment elsewhere, it is in the interests of both the village and the Department to invest with the AVB. Under article 2, paragraph 1b, of the Provisions, the bank is partly intended to act as an investment institution for funds from local councils, regencies and autonomous regions, and their institutions. The AVB has taken account of the interests of the villages by opening current accounts with direct access under the name of "mixed account" for indigenous municipalities and their credit institutions. The intermediate rate of interest referred to above is payable on these accounts, while investments elsewhere or in stocks and shares yielding a similar rate of interest would require a year's notice of withdrawal.

On the other hand, no interest is paid on village funds held by the AVB if the village in question has also invested some of its funds elsewhere. As the village monies invested serve in part as a source of income with which to pay salaries of the village staff and also act as reserves for special needs (e.g. the construction of water supply, a market, a bridge or a road), these AVB resources, taken as a whole, to a large extent also essentially possess the character of permanent capital, part of which can be used for long-term loans.

6. Total IGCI and village investments

The figures below (in thousands of guilders) concerning Java and Madura show that the profile given above is in accordance with the facts.

Reserves invested with popular credit system banks ( '000 guilders)

End of IGCI Villages Total Amount loaned Number ofyear by village banks village banks

1917 6,046 3,206 9,252 1,250 2,107

1921 9,341 6,097 15,438 1,911 2,261

1925 12,432 10,072 22,504 5,461 4,307

1929 16,422 15,418 31,840 8,049 5,666

1931 20,691 16,897 37,588 5,382 6,144

1932 20,052 18,395 38,447 3,424 6,246

1933 20,292 16,834 37,126 3,122 6,264

7. The AVB as investment institution for the local councils and their institutions

The stability of the investments of the local councils and the IGCI's even in times of radical economic change which is revealed in the above table also poses a serious problem for the AVB, because of its obligations to accept these investments. The problem is that in periods of depression the bank is unable to use much of these resources for its own operations and instead has to reinvest them, and moreover that it must do so at a time when the general banks also have resources to spare and interest rates are falling.

As a result it is impossible to reinvest sufficiently in profitable fixed-term deposits, and securities have to be purchased on a large scale. Moreover, the choice of securities is extremely limited by the provision that the AVB may only invest in the currency of the Dutch East Indies and then only with banking institutions, in Dutch East Indies treasury bills and bonds, or in securities in Dutch East Indies currency in which the Java Bank may invest its reserve fund (article 3c of the Provisions). In mid-1934 the AVB held securities to the value of approximately NLG 24 million, almost all Dutch East Indies loan bonds, while only about NLG 13 million had been deposited with major banks.

No treasury bills or bonds were issued in the country. This is the weak spot, because of the danger of falls in the exchange rate, a danger which is particularly acute if the

general economic situation improves and interest rates rise as a result. In such circumstances the AVB not only suffers considerable exchange rate losses, to counteract which it is impossible to form sufficient reserves, at least in the short term, because of the small margin of only 1% between the interest paid to the villages and the IGCI's and the interest received on the bonds, but also sees both the amount of its capital reduced and its liquidity position considerably weakened, at a time when the improved economic situation will mean that its capital requirements will increase. The bank is then forced to raise loans with the major banks on its bonds, the rate for which has fallen and which are therefore in fact not realizable, and can extend long-term loans using the capital obtained in this way only with difficulty. The result is that precisely that aspect of the investment of the IGCI and village funds with the bank that makes them so valuable to the bank, namely their stability, may be lost at a time when it is most needed.

Despite this problem the AVB may not refuse the village funds or use the fact that IGCI reserves must be invested with it as an excuse for paying a lower rate of interest than is reasonable. The bank has a moral responsibility towards the villages and IGCI's. It would be improper to profit from the valuable capital of these institutions in times of prosperity and abandon them once the going got rough. However, it is as much on account of the interests of the AVB itself as for any other reason that the bank makes sure that it retains these investments by taking the interests of the villages into consideration as well.

8. The AVB working primarily with capital from the indigenous community

The investment of village assets with the AVB is economically and socially important in another way too. Thanks to these funds, the bank, which is primarily a credit institution for the indigenous population, also works primarily with capital originating in the indigenous community. The assets of the IGCI's are formed from the operating surpluses of those institutions and thus represent (like the net assets of the AVB itself) savings from the domestic economy.

The village assets have often arisen from land sales, sometimes from market profits or from other income. From a social point of view it cannot but be an advantage that the capital of the indigenous community, which has so little capital, is used again as far as possible for the benefit of that community through the offices of the AVB.

9. The AVB as a savings bank

For the same reason it would appear to be obvious that the AVB should do all it can to attract the savings of the indigenous population. The popular credit banks it replaced indeed had the statutory duty to "provide an opportunity to save". In the case of the AVB this duty has been reduced to "promoting savings in cooperation with the Post Office Savings Bank" ("Postspaarbank"), in part by accepting savings for investment in return for a rate of interest no higher than that of the Post Office Savings Bank" (article 2, paragraph 1e, of the Provisions).

The Post Office Savings Bank is thus taken to be the normal savings bank, with the AVB acting only as a secondary bank, without entering into competition with the Post Office Savings Bank. In addition, savings accounts may be opened only by individuals and associations; the maximum interest-bearing deposit is NLG 2,400 and the use of savings accounts as current accounts is prevented by various provisions (cf. Regulations on investment with the AVB, articles 11,14 and 17). The point is that unlike IGCI and village assets which are essentially available to the bank for an indefinite and lengthy period, savings are a less attractive source for the AVB, which, as will become apparent in a later chapter, does not have the liquid investments of the major banks but instead tends to extend loans mainly for a year or more. If conditions again become so favorable that the AVB needs more capital, it could be recommended that the Post Office savings Bank should make some of the savings it has accrued from the indigenous community available to the AVB in the form of long-term deposits or bearer bonds.

At the end of 1933 the popular credit banks held NLG 4.5 million in savings, NLG 1.5 million of which had come from the indigenous population. The limited amount of monetary savings accrued by the indigenous population and the reasons for this are discussed elsewhere.

10. Indefinite-term deposits

Indefinite-term deposits where a year's notice of withdrawal was required were the primary way in which the popular credit banks supplemented their capital, in so far as the village and village institution assets and their own capital were not sufficient. The massive shrinking of the operating capital which resulted from the economic crisis led to most of these funds being disposed of, only a few insignificant investments by local councils and certain other institutions being retained (see article 1, paragraph 1c, of the Regulations on investment with the AVB).

In the future it will probably be necessary for measures to be taken to attract such funds again. One to two year loans can easily be extended using the capital obtained in this way, particularly if repayment is required in a number of installments rather than a lump sum.

11. Current account funds

Investment in current accounts, on which the former popular credit banks placed no limits, is extremely restricted by the AVB because such funds are of even less use as a resource than savings (cf. paragraph 9). Only people borrowing through a current account may be in credit on a current account. Otherwise, current account investment is open only to the same privileged institutions which may have deposits with the AVB. Finally, the AVB may, in exceptional circumstances, permit others to open a current account in places where no major Dutch or Dutch east Indies bank is represented.

12. Relationship with the general banks

People writing about the banking system (Polak, Westerman) sometimes regret the division between the general banks and the specialized agricultural and small-scale enterprise credit banks, which can only be links in the general credit chain and must not be able to have an inflationary effect by having direct discount facilities with the bank of issue. Because of this, such writers believe that there should be links between the special banks and the general banks such that where necessary the general banks must also meet the credit requirements of the special banks.

With this in mind it should be pointed out that the surplus resources held by the popular credit system at any time were always invested with the major banks until the circumstances which resulted from the depression of the economy (cf. paragraph 7) made it largely impossible. The seasonal fluctuations in the popular credit system (high point around March, low point around September) were also financed by raising loans on the securities in which the reserves were invested with one of the major banks, usually the Java Bank. The AVB has no negotiable documents.

Because of the nature of the AVB's capital, there is no danger that it might have to seek assistance from the bank of issue in the event of a crisis. However, in favorable economic circumstances the bank would have to rely on the major banks in order to raise loans on its securities in the event of a fall in the rate for its Dutch East Indies loan bonds, in order to expand, or rather restore, its credit operations.

13. Conclusion

This chapter may be summarized as follows:

a. If the funds from savings accounts and current accounts, which provide for cash requirements but which are of little significance to the AVB, are ignored the bulk of the capital available to the bank for its lending operations comprises the assets of local councils and their institutions which are invested with it. They amount to approximately NLG 37 million. To this may be added equity capital of about NLG 8 million (after deduction of the book value of buildings and inventory). In times of expansion, these sums may be supplemented by indefinite-term deposits requiring one year's notice of withdrawal.

b. Because of this composition of resources the AVB is largely independent of the money and capital markets for its capital needs and thus free of the economic influences which affect those markets. It need not be afraid of runs.

c. Without disturbing the balance between the term of its liabilities and its assets the AVB can (in so far as it has again realized its securities, see paragraph 7 above), where necessary:1. extend a large proportion of its capital in long-term loans of say three to

ten years with regular repayments;

2. tie up part of the capital referred to at 1. even for extremely long periods;

3. for the rest extend loans for between one and two years, providing most of the loans are subject to regular repayments.

d. Because its equity capital comprises primarily net assets and indeed will in the long term comprise entirely net assets (reserves), the AVB may suffer losses without anyone being disadvantaged as a result; it can thus accept a higher than usual level of risk if necessary.

The comments made at c. and d. are not in the least intended to imply that it is desirable for the AVB to start extending long-term loans or providing more than usually high-risk loans of millions of guilders on a large scale. More attention is devoted to these subjects in the following chapters. The intention of this chapter is simply to demonstrate that more than enough permanent capital for long-term loans is indeed available and that the AVB can also accept risks. Article 10, paragraph 2, of the Provisions concerning the AVB requires the approval of the financial department of the Central Supervisory and Support Board for all parts of loans which fall due in more than three years and for amounts which may be extended in trial loans or other loans which the department considers to entail above-average risk.

Finally, it should be pointed out that article 3c in conjunction with article 10, paragraph 2, of the said Provisions permits the negotiation of loans, including the issuing of bonds by the AVB, subject to the approval of the financial department of the Central Supervisory and Support Board.

The AVB is not obliged to invest any of its equity capital outside its own business.

CHAPTER III NARTURE, SIZE AND LIMITS OF THE AVB's CREDIT BUSINESS

1. Three principal characteristics

The AVB has three principal characteristics which distinguish it from other credit institutions:

a. it has a socio-economic responsibility and although its operations are conducted on a commercial basis it is not a commercial organization geared to making a profit for its owners;

b. its credit operations are of a supplementary nature, that is to say that the bank does not enter into competition with other credit institutions but provides services where they do not; it is thus a special-purpose bank;

c. although it is a special-purpose bank, it has wide-ranging and multi-faceted responsibilities because in the Dutch East Indies it is primarily major banks, agricultural banks and savings banks, loan banks and to some extent mortgage banks which have developed, while there is as yet little involvement by the private sector in other parts of the organized credit system; the government has sought to fill this gap through the popular credit system.

2. Subsidiary characteristics

The following subsidiary characteristics follow from the principal characteristics listed in the previous section:

d. the AVB provides consumer, production and semi-consumer credit (for the purchase of durable assets);

e. production credit is provided both to indigenous farmers and to small commercial and industrial enterprises, craftsmen and retailers;

f. small public bodies which have no access to the money and capital markets, such as local councils and autonomous districts, may also be considered for AVB loans;

g. the AVB supports the development of popular credit institutions and cooperative associations, in part by providing loans;

h. it provides primarily small and medium-sized loans;

i. it provides both long and short-term loans, investment loans and operating/long-term operating loans;

j. its production credit primarily benefits one-man businesses;

k. it provides both personal and business loans;

l. the bank's claims are only to a limited extent covered by liquid assets held by its debtors.

3. The bank's socio-economic responsibilities

The social nature of the AVB follows directly from the structure of the popular credit system, is clearly apparent from the history of the development of the bank, is laid down in article 2, paragraph 1, of the Provisions concerning the AVB (9), which states that the objective of the bank defined in the article is "in the interests of popular prosperity", and is expressed more particularly in the division of the Central Supervisory and Support Board into a socio-economic department as well as a financial department, the establishment of local boards (also with a socio-economic function) (article 7, paragraph 1, of the Provisions), and the description of the duties of the various department and boards. Article 10, paragraph1, of the Provisions read as follows:

"The socio-economic department shall assess whether the AVB meets its socio-economic responsibilities as well as it can, taking into account the available staff and material resources, and shall encourage cooperation between bank and other welfare services and non-official institutions for the promotion of popular prosperity."

Article 11, paragraph 1, of the Provisions reads as follows:

"… a local board shall assess the socio-economic functioning of the local branch of the AVB and shall ensure that local credit requirements are sufficiently being met, that loans and other forms of credit do not in general exceed the financial capabilities of the borrowers, that repayment installments have in general been established appropriately and that measures taken to combat arrears are not undesirable from the point of view of popular prosperity."

The absence of a commercial orientation geared to maximizing profits for owners follows directly from the fact that there are no owners. The AVB is a legal person "sui generis" instituted by high authority (11) which may not pay out profits to anyone, not even bonuses to its management or staff (article 6, paragraph 5, and article 15, paragraph 5, of the Provisions). Should it be wound up and show a positive balance upon that occasion, the balance must be used in a way " which is in accordance with the objectives of the AVB as far as possible" (article 19, paragraph 3, of the Provisions).

4. The AVB is not a philanthropic institution

Article 4 of the Provisions reads as follows:

"The AVB shall provide the services referred to in article 2 (including the provision of credit) whilst taking into account the principle that the interest and costs charged should not be higher than is necessary to pay the interest it owes, to cover its costs, to write off items as necessary and gradually to form and maintain net assets which…" etc.

While this article shows that the AVB is not geared towards making a profit to be paid out to others, it also makes it clear that the bank does not perform its services for nothing but in return for charges to cover its own costs. These charges may include a premium for risk and capital formation to cover future risk. The bank is thus certainly required to make a profit, at least until its maximum net assets have been attained, but that profit serves only to strengthen its own financial position and enable it to meet its social obligations as effectively as possible.

Although the AVB was, on account of its social character, accredited in the decree of 23 March 1934, no. 13, as a philanthropic credit institution within the meaning of the Stamp Ordinance and rightly enjoys the associated stamp privileges, it is not philanthropic in the usual meaning of the word, that is to say it does not provide its services free and has no intention of doing so; it operates according to the principle of self-financing.

5. The commercial basis

It will be apparent from the above that the AVB is run on a commercial basis, it must look after its own interest. Article 18 of the Provisions accordingly declares that "the government shall not be liable for the consequences of actions carried out by public servants for or on behalf of the AVB nor for the performance of agreements entered into by that institution". The only exception to this is "that upon the winding up of the AVB the capital stock shall not be repaid to the government until the bank has met all its financial obligations" (article 19, paragraph 2, of the Provisions).

To ensure that the commercial basis is maintained the financial department of the General Supervisory and Support Board is charged with assessing "whether the AVB is run properly and efficiently in accordance with the principles of banking and whether solvency and liquidity, administration, organization and auditing meet the necessary requirements, to which end it may call upon the assistance of experts in the field of accountancy at the expense of the bank. The bank's management is accountable to the department" (see also article 10, paragraphs 2-4, of the Provisions).With the exception of the chairman and his deputy (one of whom is as a rule a financial expert), the members of the financial department comprise "financial experts

appointed by the Governor-General, preferably employed in private industry" (article 7, paragraph 4, of the Provisions).

6. No direct influence on the part of the government

For the record it should be pointed out that although the AVB was instituted by high authority and its articles of association, the Provisions concerning the AVB, were established and may be amended by decree, the government has not retained for itself any means of directly influencing the operation of the bank but rather has granted tit the independence desirable for proper management.

The AVB is not a state enterprise, its budget and accounts are not drawn up by and do not require the approval of the legislature; its management and the Central Supervisory and Support Board are appointed for five and three years respectively by the Governor-General (article 6, paragraph 4, and article 7, paragraph 6, of the Provisions), but they are not subordinate to any official body; even the commissioner of the Colonial Administration has only advisory and supervisory powers. The terms of reference of the latter and those of the central and local supervisory and support boards must be established by government ordinance, as must most cases not referred to in the Provision concerning the AVB in which the management requires approval of the Central Supervisory and Support Board (article 7, paragraph 8, and article 8, paragraph 5, of the Provisions and the government ordinance of 3 August 1934 (12)) but otherwise the AVB establishes its own regulations, conditions and rates. Despite its government origins the AVB is thus organized as similarly as possible to any other private banking institution.

7. The limits of the AVB's credit operations

Article 2, paragraph 1a, of the Provisions concerning the AVB defines the aim of the bank as regards credit operations thus: "to carry out credit operations in the Dutch East Indies in the interests of popular prosperity in order to meet the credit requirements of groups of residents of the Dutch East Indies and of organizations established in the Dutch East Indies, irrespective of their racial origin, which are not satisfactorily being met by other credit institutions".

The bank does not therefore compete with other credit institutions which meet reasonable requirements and is indeed required to withdraw from parts of the market it has already occupied if other credit institutions move in. The idea behind this is that the last thing the government wants to do is to stand in the way of private initiative in the area of organized credit; it is merely taking measures to cater for areas in which there is little or no private banking.

Another question is whether the AVB must also withdraw in the event of lower tiers of government establishing credit institutions, i.e. local government banks (these do not include the IGCI's discussed below). A literal interpretation of the wording of article 2, paragraph 1a, would suggest an affirmative answer to this question; such cases were simply not thought of when the Provisions were drawn up. However, lower tiers of government are not supposed to intervene in areas in which a higher tier has already

taken measures. This means that if, for example, a regency council should wish to set up its own popular credit bank there would be every reason for the relevant decision to be declared null and void.

Moreover, this would as a rule be in the general interest because there would be a risk of a return to the previous dilettantism - resulting from a fragmentation of resources over a number of different small banks - to do away with which the AVB was set up by the government.

If in addition, as in one case has occurred, the regency council did not simply intend to meet the credit requirements of individuals and small enterprises as well, as possible through its own bank but had the subsidiary aim of turning that bank into a profit-making enterprise intended to supplement regency funds, the setting up of such a bank would very clearly be contrary to the general interest.

If, on the other hand, no profit motive was present and the local government bank provided a limited range of services to which the AVB was unable to give equally intensive attention, it could be argued that the AVB should not simply withdraw from that market but also, if the local bank so wished, provide advice (auditing, reports) and assistance (credit). This is what happened in the case of the Manado Municipal Credit and Loan Bank. Even then, experience has shown that there is a danger of insufficient expertise.

The fields covered by the AVB are on the one side limited by those covered by the major banks and the agricultural banks, which to a certain extent also provide for the credit requirements of medium-sized enterprises. An AVB loan is thus for at most tens of thousands of guilders, but in the small-scale enterprise and mortgage sectors not usually more than a few thousand. At lower levels of the economy loans may indeed amount to no more than tens of guilders and loans of less than ten guilders are by no means unknown.

The sector covered by the bank is limited on the other side by that of the village banks which it controls and manages and with which it collaborates. They provide loans for a few guilders only, usually no more than ten to fifteen. The village banks should be left to operate in the sector which they are able to control. To prevent irregularities and excess lending, however, these small banks must limit themselves to short-term loans in accordance with a number of fixed models, preferably to be repaid in a number of weekly installments. Small seasonal loans, provided during and after tilling or in the periods of money and food shortages ("patjeklik") to be repaid after the harvest, can also be handled by the village banks in Java, providing there are a few clear months between repayment and the extension of a new loan.

If the loan work is properly distributed, the number of borrowers at local branches of the AVB may fall to one or two thousand (previously the various popular credit banks in Java usually had tens of thousands of borrowers), giving the bank's staff the opportunity to devote their attention to the more difficult cases and to deal with at least some of their clientele on an individual basis. The IGCI's are financed where necessary by the AVB.

The sectors covered by the AVB are also limited by that of the Government Pawnshop Service, which has a statutory monopoly on all loans of NLG 100 and under for which collateral is provided in the form of moveable property. The AVB may only accept moveable property (e.g. jewels, gold coins, jewelry) as collateral in the case of larger loans.In some parts of the country the mortgage bank system is extremely underdeveloped. After an earthquake in Bengkulu reconstruction was financed by loans from the government, administered by the popular credit bank. Only the popular credit bank was prepared to provide the necessary mortgage loans for the rebuilding work required after the destruction by fire of the neighborhood around the market in Pontianak.

The AVB is not, however, a mortgage bank in the limited sense of an investment institution. It is not the objective of the bank to seek long-term secure investment for capital made available to it. Mortgages are thus simply an accessory, even in economic terms, which is to say that they serve as additional security for semi-consumer credit and production credit, the provision of which is the bank's primary objective. The profit of loans and not investment is the main concern. This does not alter the fact that as the AVB has significantly more IGCI and village funds than it can use in its credit operations it invests part of those excess resources in mortgages.

"Credit surety" is to land owned in accordance with customary law ("adat") in this country what a mortgage is to immovable property covered by a title derived from the Civil Code (freehold, with building rights, leasehold etc.). The AVB, together with the Bank Nasional Indonesia and a number of local popular banks for the time being retains a monopoly on credit surety. However, the management of the popular credit system itself has taken steps to enable private lending institutions also to secure their claims in this way (within certain limits as a guarantee against abuse). This again demonstrates the principle that the popular credit system may not stand in the way of private initiative. Draft provisions on the subject have been submitted to the Government by the Indigenous Mortgage Commission. (13)

With regard to serious private, popular or cooperative banks which in part operate in the same loan sectors as the AVB, the latter is not only obliged to allow such banks to develop the sectors in question freely, but also, if they so wish, to assist them in doing so through the provision of auditing services and advice. Article 2, paragraph 1d of the Provisions concerning the AVB lists as one of the bank's objectives: "to provide advice and assistance to and to conduct the supervisions and auditing of popular credit institutions, cooperative associations and local council credit institutions in accordance with the relevant statutory provisions".

The said statutory provisions comprise Netherlands Bulletin of Acts, Orders and Decrees 1929, no. 357, and corresponding provisions in various outer islands in respect of IGCI's and Netherlands bulletin of Acts, Orders and Decrees 1927, no. 91, in respect of indigenous cooperative associations. That the AVB must also where necessary provide credit to the various institutions mentioned follows from the general definition provided in article 2, paragraph 1a of the Provisions, which was quoted at the beginning of this section.

The fact that the AVB has to allow popular and cooperative banks a free hand in developing a sector does not always mean that the bank refrains from the provision of any loans in the geographical areas covered by those banks, only that it should not compete with them but simply provide complementary services, i.e. provide loans which the private institutions cannot or do not wish to provide because they are insufficiently equipped or lack the necessary capital. Even if the private bank in question wanted to remain entirely independent of the AVB - something which can be respected as an expression of a desire for self-sufficiency - the AVB would still have to seek to cooperate with that bank, firstly to avoid competition and secondly to ensure that those seeking credit did not lose out on account of the private bank being unable to provide sufficient credit.

There is cooperation of this kind with the NV Batak Bank in Pematangsiantar, which has limited credit with the AVB and in addition passes on applications for larger loans to the local office of the AVB in Medan. The NV Bank Nasional Indonesia also regularly refers loan applicants to the branch of the AVB in Surabaya in the same way.

In order to promote good cooperation it is to be recommended that private banks of this kind, which in part cover the same sectors as the AVB, should be represented on local AVB committees. As here is no fear of competition and as openness is one of the fundamental principles of the AVB (see also article 17 of the Provisions) there should be no objection to this.

It should be emphasized that the words "not satisfactorily" in article 2, paragraph 1a, of the Provisions are not to be interpreted as meaning that the AVB may deny a loan or sector to private or cooperative banks of whose management it is critical or which charge more than it does. If this were the case the competition which the government does not wish to see would be bound to erupt between the AVB and private institutions. The criterion should be whether the institution concerned is a serious undertaking which is carrying out its duties in a reasonable manner under the prevailing circumstances. (14) Obviously, the AVB does not allow a free hand to cowboys or loan sharks in disguise.

Nor does the AVB give way to private moneylenders. Its job is simply to provide credit where other credit institutions do not do so satisfactorily, that is to say in cases for which no organized credit system as yet exists. It may attempt to take the place of the unorganized credit system, whether that involving moneylenders or that of customer and supplier credit, if it is desirable in the interests of popular prosperity. This subject is discussed further in the following chapters.

8. The AVB does not accept other banks' leavings

The AVB's objectives speak of groups of residents whose credit requirements it must where necessary meet. This precise terminology was chosen to indicate that the bank is not intended as a credit institution for borrowers who as individuals cannot obtain credit anywhere else, for example because they are not creditworthy.

The AVB must ask itself whether an applicant for a loan belongs to a group whose credit requirements, in so far as they are similar in nature to those of the applicant, are usually met by existing banking institutions. If that is indeed the case but the applicant can no longer obtain credit from the bank to which he would usually apply, the AVB too must refrain from providing a loan.

The same applies if an applicant for a loan already has credit from a major bank and cannot obtain any more. If the AVB did not refrain from providing credit in such cases it would be accepting the leavings of other banks.

9. The AVB as an agent for the major banks

Another question is how the AVB should act if no major bank is represented in a district covered by one of its local offices and this means that the legitimate credit requirements of certain groups, which would normally be met by a general or agricultural bank, are not being satisfactorily met. In accordance with its objectives, the AVB could decide to meet those requirements itself.

This is not desirable, however, because in doing so it would be entering a terrain with which it was not familiar. By "playing the part" of a major or agricultural bank in what are generally rather remote areas the AVB would run a serious risk of making mistakes and suffering losses. It is better off sticking to what it knows best.

In order nevertheless to do what it can to ensure that the credit requirements concerned are met, it can, where appropriate, act as an intermediary by passing on loan applications to the major banks and offering to conduct the necessary inquiries in accordance with the instructions of a bank which will accept the applications, in return for payment of its costs. It may also provide other services as an intermediary at the usual rates. This may lead to the AVB acting as a local agent for a major bank.

10. Credit for all, irrespective of racial origin or class

The popular credit system began life as the Indigenous Agricultural Credit System but soon dropped the double restrictions imposed by the title. Right up to the foundation of the AVB, however, directors of certain local popular credit banks were still unwilling to provide loans for small-scale entrepreneurs who did not belong to the indigenous population and even preferred to discourage better off members of the Indonesian population, even if it was only by charging the same high interest rates on large loans to traders or major landowners as on small consumer loans.

The objectives of the AVB state, in order to avoid any misunderstanding, that loans should be provided "irrespective of racial origin". Nor is the provision of credit restricted in any way to "small" borrowers. The only criterion is that the credit requirements of a particular group should no be being met satisfactorily by other credit institutions. Perhaps the name "Algemeene Volklscredietbank"(AVB), which was chosen as being reminiscent of and yet in contrast with that of the local popular credit banks, does not do sufficient justice to the objectives of the bank, which could better be

called the "Nederlandsch-Indische Volks- en Middenstandsbank" (Dutch East Indies Popular and Small Enterprise Bank).If the decree in the Netherlands Bulletin of Acts, Orders and Decrees 1934, no. 82, were to be amended, such a change of name might be considered.

11. The AVB as an intermediary for government credit

Certain loans which are desirable in the general interest are frequently deemed to involve too great a risk to be acceptable to an institution run according to commercial principles, even one as socially oriented as the AVB. In the initial stages of the popular credit system this was often ignored and the banks of the time were sometimes used by their directors to finance government and administrative measures. The AVB may not do this.

If the Department of Internal Affairs or other government agencies consider certain loans to be desirable from the point of view of the general interest but they are too risky for the AVB, the agencies concerned must convince the government of their case, which may then, if it is prepared to provide a loan, call in the assistance of the AVB. This is often to be recommended, in order to ensure that an expert investigation of the loan applications is made, to facilitate repayments by borrowers and to ensure that the funds in question are properly managed.

Moreover, if people borrow direct from the government, which in their eyes is extremely wealthy, they do not feel the same obligation to make repayments on time as they do in respect of the popular credit bank which they know to be a commercial institution and to require prompt repayment. Under article 2, paragraph 3, of the Provisions, the AVB is therefore obliged to take on, "in accordance with rules to be laid down by the Governor-General and in return for a payment to be determined by him, the administration of funds intended by the government to be loaned to the people in order to improve their physical welfare or to assist them on behalf of the authorities in the event of a disaster. The Governor-general may require the bank, over and above its normal responsibilities and in return for payment to be determined by him, to act in a supervisory and advisory capacity in the administration of the said funds".

12. Guarantees for the AVB

Loans which are in themselves too risky to be provided by the AVB may nevertheless also be provided by the bank in its own name if the government or another agency guarantees all or part of them. An example of this is the arrangement between the "Indische Maatschappij voor Individueele Werkverschaffing" (Dutch East Indies Company for Individual Employment Provisions) (IMIW) and the AVB, in accordance with which the bank provides loans of up to three times the amount of security the IMIW has lodged with the bank, without security where necessary and at low interest rates, to applicants for loans to whom the IMIW wishes to give a helping hand and whose businesses are viable. Another example is the financing of the agricultural colonization of Bengkulu from Java by the AVB, where the Resident of Bengkulu has lodged a guarantee fund with

the bank amounting to a proportion of the sums borrowed by the settlers and a government guarantee has been provided for the remainder.

13. AVB subsidiaries

Finally, the AVB can limit its risks by setting up a subsidiary to provide services in a particular credit sector and relinquishing some of its net assets to that subsidiary.Article 2, paragraph 2, of the Provisions states that the bank "may transfer part of its duties to popular credit institutions to be set up and managed or supervised by the bank and provide the said institutions with capital".

The original idea behind the drafting of this provision was the possible creation of a "Volkshypotheekbank" (Popular Mortgage Bank) (15) to provide long-term loans secured by mortgages, credit surety or a corresponding form of security in autonomous regions. Such a bank would then be required to supplement the equity capital it received from the AVB by issuing bond loans. The words "provide … with capital" in article 2, paragraph 2, of the Provisions do not therefore refer to the usual provision of credit, which is already possible under article 2, paragraph 1a, but specifically the provision of equity capital to subsidiaries.

14. Geographical area covered by the AVB

The AVB in principle covers the whole of the Dutch East Indies, though this principle is in practice restricted by the feasibility requirement. Article 4 of the Provisions states:

"1. The AVB shall maintain local offices throughout the Dutch East Indies wherever there is an appropriate need, providing a local operation is or can be made sufficiently feasible to cover the costs of a local office.

"2. Subject to the conditions laid down in the previous paragraph at least one local office shall be established in each regency in the regions of Java and Madura administered directly by the government and in each region of the outer islands and the principalities in Java.

"3. One or more branches may fall under the auspices of a local office."

The whole of Java and Madura is covered by a network of local AVB offices. Even if an office has to be closed in order to save money the area in question is not abandoned but added to that of another office.

The bank is not represented in the region of Manado because the Minahassa peninsula already has the Tonsea Popular Bank, the department of Gorontalo the Gorintalo Popular Bank and the city of Manado the Manado Municipal Credit and Loan Bank. Nor is the AVB represented in the regions of Riau, the Lampung Districts, the Moluccas, the Timor region or Belitung or in the western department of Aceh, the eastern part of the South and East department of Borneo region or various departments in the Sumatran East Coast region, because a viable business would not be possible in these regions and there is often little demand in any case.

There was a popular credit bank in the Lampung District but it could not survive on ordinary business, provided settlement loans on a large scale and went under as a result. It proved impossible to maintain the offices in Jambi and Lombok but otherwise it is unlikely that any offices in the outer islands will be closed. Instead there has been a move towards the splitting up of certain large regional offices and the transfer of their duties to existing branch offices or combinations thereof. This has enabled the post of "chief" administrator, who in fact played only a monitoring role, to be abolished, with the local branches acquiring a purely "local" character, thus enabling them better to carry out their responsibilities.

15. Advantages of the multi-faceted nature and geographical spread of the AVB

The multi-faceted nature of the work in which the AVB is involved (agriculture, commerce, industry, consumer and semi-consumer credit, business credit and long-term credit) and its geographical spread over a wide range of differing parts of the archipelago are an advantage because they spread the risk and enable loans to be extended in the interests of popular prosperity (particularly loans to small-scale enterprises and long-term loans) from the extension of which more specialized banks or institutions restricted to small geographical areas, such as separate banks for small-scale enterprises or the former popular credit banks, would have to refrain.

The sectors in which the AVB provides credit are on the other hand sufficiently uniform (they are primarily within the indigenous economy) for it to be possible for all sectors to be managed by experts, providing the principles set out in sections 8 and 9 of this chapter are adhered to strictly. The level of expertise required by major and agricultural banks is of a different order to that to which AVB staff have to be trained, though do have certain features in common.

16. Long-term credit justified from the point of view of liquidity and socio-economic considerations.

In the light of the usual theories promulgated by the general banks the fact that the AVB provides long-term credit to any significant extent might well be considered dubious and it is true that special attention should be given to this point.

Polak states in "Principles for the financing of businesses" (16) that from the point of view of social liquidity it is desirable that the banks should only invest for short periods, this to include the investment of their equity capital. He has already said that: "the bank's equity capital is permanent capital for distribution among the businesses, each of which is effecting part of a lengthy production process. Thus the provision of credit to such businesses does not endanger liquidity…… If the bank wishes to carry out its function as an instrument of distribution effectively, then in general its equity capital should not be tied up for long periods either and it must take care to ensure that the various businesses' requests for funds alternate. The bank

must therefore extend as little long-term operating credit as possible as, like investment credit, this stands in the way of the succession of repayments and new loans" (pp. 180/181). This was written with the operation of general banks in mind.Later Polak adds: "The regular alternation of the capital requirements of the various businesses is somewhat hindered by the fragmentation of the banking system. Because the general banks neglected farmers and small enterprises excessively for too long, special banks have come into being to serve these sectors and they have little if any direct contact with the general banks " (pp. 185/186).

In line with Westerman he therefore advocates links between the general banks and the special banks. In chapter II, paragraph 12, it has already been pointed out that such links do exists between the AVB and the major banks in the Dutch East Indies.

If the banks may not even use their equity capital for long-term credit, one might well wonder how business and industry are to obtain the long-term credit they need. In respect of large firms, this question can be answered relatively easy, as they can meet their needs for fixed capital by issuing shares and bonds. Should businesses which cannot make such issues not have access to the capital market, however? Do small and medium-sized businesses in particular only have a right to exist in society if the owner and his family and close friends are able to provide from their own pockets 100% of the necessary fixed capital, including that needed for further expansion, plus the usual operating capital?

In practice, society does not take this view, and solutions are sought for this difficulty. The question of how the need for small and medium-sized businesses for longer-term capital can be met has been a subject of debate for many years and in recent times has received particular attention.

In Europe and America consideration has been given to firms which cannot issue shares on the stock exchange but nevertheless need long-term credit amounting to several millions. Sensible systems such as industrial banks, and investment trusts have been set up to cater for such businesses, (17), but the scale of their transactions is still too ambitious for smaller businesses which operate on at most tens of thousands of guilders rather than hundreds of thousands. Shopkeepers and small factories also require long-term credit, after all.

The comments of Mr J. van Eck, Managing Director of the extremely cautiously managed "Nederlandsche Middenstandsbank", on this subject in a paper given at a small enterprise conference in 1932 typifies the situation well: "It has become clear to me during the time that I have been working in the small enterprise banking system, where I have had close contact with organizations representing small-scale enterprises, that in addition to the need for ordinary bank credit in the form of current accounts, there is a perhaps greater need for what the Germans call "Anlagekredit", that is to say credit for the financing of immovable property (plant etc.) in the form of a fixed loan with regular repayments. A shopkeeper who wants to refurbish or modernize his shop, the small factory owner who wants to rationalize his business, it is people like them who at a given point in time require a fairy large lump sum, without having been able to save it in advance, and who would therefore like to be able to take out a long-term loan."

The "Nederlandsche Middenstandsbank" has been able to do little in this area because as yet it is practically unable to place bonds with people involved in small-scale enterprises.Fixed advances with regular repayments, as referred to by Mr van Eck, are indeed provided in the Netherlands by certain small-scale lending banks, both to small-scale enterprises and to consumers, but it would appear that this is not sufficient; the loans are probably still too short-term.

In the Dutch East Indies there is certainly no less need for long-term credit than elsewhere and this need is scarcely being met. This is not only because the East Indies do not have a lot of capital but also because, apart from the upper strata of society, they are still economically underdeveloped. Few public companies and so on exist in the indigenous community and each entrepreneur is as a rule dependent on his own resources.

In the Chinese community family and clan loyalties are also very strong, which gives Chinese enterprises considerable advantage over indigenous entrepreneurs as regards both the financing of their businesses and the expansion of their commercial contacts. Indonesians in general are not yet able to save money (see also chapter VI) and any cash they have accumulated will only be made available to third parties under exceptional circumstances and for extremely short-term purposes.

Moreover, the little money which is saved by indigenous civil servants and employees finds its way to the Post Office Savings Bank or private savings banks, where it is lost as far as the economic development of the indigenous community is concerned (see also Chapter 11, paragraph 9), or is invested in securities, which benefit everyone but Indonesian tradesmen, farmers or craftsmen.

Nor do farmers, small traders, craftsmen or other small-scale entrepreneurs obtain long-term credit from other quarters. Institutions to meet their requirements simply do not exist, except for at most a few mortgage banks and the Government Pawnshop Service, which as a rule only provides small and short-term loans, however. Some Chinese and Indonesian traders have invested part of their wealth in jewels, gold coins and jewelry, which they deposit at the Pawnshop Service to provide for their seasonal credit requirements, but as an ordinary source of long-term credit the service is of little use.

It falls to the AVB to fill the gap. It is in an excellent position to do so because as stated in Chapter II, not only its equity capital but also a large part of its borrowed capital, in so far as it has been invested by local councils and local council credit institutions, originates from the indigenous community and, because of its special nature as the equity capital of these institutions, acting as a reserve and a source of income, taken as a whole constitutes a particularly durable form of capital for the AVB. This capital, which without the AVB would be lost to the development of the indigenous economy along with other indigenous savings, thus benefits that economy. The use of part of that capital for the extension of long-term loans is thus not only sensible from the point of view of bank liquidity, but is also justified on socio-economic grounds.

17. The risks associated with long-term credit.

There is, however, another objection to long-term credit, namely that in the form of investment and long-term operating credit it often results in the bank becoming a sleeping partner in the enterprise concerned, that is to say that the value of the bank's claim is to a large extent dependent on the viability of the business which has received the credit and that the bank thus shares the risk of the business (see paragraph 20 below). Long-term credit is frequently more risky than short-term (see also paragraph 19).

18. Business credit on liquid assets

The general banks prefer to provide short-term credit covered by a from of security which can easily be realized. These are primarily loans secured by unfinished bulk goods, which are always easy to sell, such as agricultural staples, i.e. all sorts of documentary credit from which wholesalers primarily benefit - especially those operating internationally. They are loans where there is in reality no element of trust, where the personal creditworthiness of an entrepreneur or enterprise is of relatively little importance in comparison with the security provided by rapidly realizable (i.e. liquid) assets.

Such business is so safe for the banks that they do not only provide temporary operating credit on this basis, that is to say credit to provide capital with a rapid turnover, to meet seasonal requirements or other temporary increases in capital requirements over and above the minimum necessary for ordinary operation, but also long-term operating credit, that is to say they also provide part of the rapid-turnover capital necessary for normal operation in the form of short-term loans which are extended over and over again.

Although it may at first sight seem strange, credit provided by the Government Pawnshop Service in the Dutch East Indies is similar in nature to this, although it deals not in staples but in consumables, which, however, are also relatively easy to realize at any time at the auctions held by the Service. The main concern in this somewhat mechanical manner of operating is that valuations must be conducted correctly and carefully in accordance with the changing circumstances. As this side of the operation is in fact conducted in an excellent manner, the Pawnshop Service has, relatively speaking, suffered only small losses, despite the enormous structural changes of the last few years.

The Pawnshop Service is so "business-like", so completely "impersonal", that it does not even know its own debtors. Money is recovered only on the goods lodged as collateral and debtors are never called upon to make up any shortfall.

Though they might be surprised to find themselves thrown together in this way, credit from the major banks and credit from the Pawnshop Service do have their commercial nature in common. Such credit secured by liquid assets (that is to say assets which can be realized in the short term) is not as a rule extended by the AVB.

This is not because it would not like to engage in such operations but because its debtors are not generally in a position to provide liquid assets as security.

Stocks which can be traded on the stock exchange may also be regarded as liquid assets from a banking point of view and business credit may be extended where they are lodged as collateral.

19. Business credit secured by immovable property

There is another form of business credit, namely that where the security takes the form of immovable property which has a sufficient surplus value for the bank to be able to realize it without loss, albeit in the long term; in other words, credit secured by a mortgage. Here too the provider of the credit is not dependent on savings or business profits (though they are relied upon for normal repayments) and is less concerned about the creditworthiness of individuals or concerns.

This demonstrates that not all long-term credit results in the bank becoming a sleeping partner. A large part of the long-term credit which the AVB provides is made up of such loans (land credit for farmers, credit for the semi-productive purpose of purchasing or constructing a house), even though these claims are frequently secured not by a mortgage but by credit surety. Much of the credit provided to Chinese and Indonesian merchants also comes into this category.

In most instances it is not possible to obtain sufficient information about the business or to establish a current account relationship involving acceptable movements and the AVB then regards a mortgage or credit surety as sufficient cover, though it must also be able to rely on that cover. The surplus value must be of such proportions that even if the debtor proves to be unable to make the agreed payments the bank can obtain payment from the proceeds of the property upon which the mortgage rests, even if this involves the bank first purchasing the property itself and later selling it privately. The claim is then not a liquid one but it is still not particularly risky.

Such loans are nevertheless less safe than those secured short term by bulk goods because even careful valuation and considerable surplus value offer no protection against such radical falls in prices as have resulted from the current international economic crisis. In addition, sequestered land upon which credit surety rested, which is owned in accordance with customary law, may be sold to indigenous people only. They have little money and may in any case be reluctant to buy out of regard for the original owner.

The business nature of credit surety is therefore extremely relative outside the towns. As observed in Chapter IV, paragraph 13, regular revaluation and constant monitoring for any deterioration in the wealth of the debtor is essential. Moreover, where possible the bank should have a lien on certain income, so that it can gradually collect its claim from that income (rents might be ceded to the bank, for example). If it is not reasonably certain that repayments will be met from profits or income, such long-term credit can never be extended because its business nature is only relative.

20. The extension of loans secured by pensions in combination with life insurance

There is a third way in which the AVB provides business credit and that is by extending loans on pensions and other payments in combination with life insurance to cover the risk of the death of the pensioner. Such credit is not liquid because it can initially only be repaid gradually, month by month, from the pension, but while the organization paying the pension remains solvent a safer from of cover is scarcely conceivable, because the pension is not subject to falls in prices. Even deductions from the pension can at most only extend the repayment period - they do not increase the risk.

Credit secured in this way can thus also be regarded as "business" credit. It protects the bank against the danger of becoming a sleeping partner (see also Chapter IV, paragraph 17 and the journal "Volkscredietwezen" of August and September 1934).

21. The danger of becoming a sleeping partner

As will be apparent from the above, the oft repeated claim that all long-term credit effectively involves the bank becoming a sleeping partner is not correct. Moreover, short-term credit, operating credit, can have the same result if it is not secured by liquid assets to which the bank has right of access, as is frequently the case with credit extended to small-scale enterprises.

However, especially where long-term credit is extended for fixed capital purposes (investment credit), the bank is dependent on the viability of the business. Factory buildings and specialized machinery have a significantly lower value as collateral than their purchase price. Loans extended for such purposes can only be repaid out of the sums reserved for the depreciation of the relevant items and out of business profits. If the business is not sufficiently viable, the capital advances will be repaid very slowly if at all. If the business has to go into liquidation, the bank will always suffer a loss.

The same can be said where credit is provided to meet a permanent need for capital in a business, albeit that that capital is constantly circulating, long-term operating credit in other words.

The danger of becoming a sleeping partner is discussed again in the chapter on credit to small-scale enterprises. It is mentioned in this chapter to make it clear that though from the point of view of balance between the period over which its resources are available to it and the periods for which it extends loans the AVB is in a position to provide long-term credit, this is not the end of the story - the bank must also take account of the special risks associated with long-term credit.

22. Personal credit

Sections 18-20 above were devoted to business credit. The opposite of this is personal credit, that is to say credit where the emphasis is not so much on the provision of collateral in the form of goods which can easily be realized, but on the business to be financed or the financial position of the debtor. This is not of course to say that such personal credit cannot be covered by business or personal security.

Credit of this kind is more difficult than business credit as it is not sufficient simply to look at the value of the security; all personal and business factors must be taken into account. The bank's primary concern is whether the profits of the business applying for a loan or the income of an individual borrower are sufficient and stable enough for the agreed repayments to be secure. Once credit has been extended the bank must also monitor whether the business or income concerned change in ways which would be disadvantageous to it and whether the borrower is tying up his profits or income in the business (expansion) or in other ways (houses, cars), rather than paying back the bank.

One of the primary problems of the local popular credit banks, which had no expertise in the field of credit to small-scale enterprises, was that they often paid insufficient attention to these two aspects. Personal credit requires regular and close contact between bank and borrower. Any security lodged serves in fact as additional security: real security lies in the creditworthiness of the borrower.

There is no need for such security to take the form of certain goods and indeed it cannot; instead it is based on the financial circumstances of the borrower as a whole. For example, the AVB provides most of its agricultural loans without any type of formal security, but this is not to say that they are not secure, since all of the land owned by the farmer serves as collateral. The bank would be let down if the borrower sold his land or other creditors were to recover their claims from it, but many years' experience has shown that under normal circumstances at least the risk of this happening is slight. Consequently, credit surety is as a rule only required for larger loans or loans with as term of several years.

Completely unsecured credit extended to people who own nothing, purely on the basis of their reliability and expertise and the expectation that the business for which they require credit will succeed, is of course extremely risky. Nevertheless, the AVB may, under certain circumstances, find it possible to provide even this kind of credit, for example ex-pupils of agricultural schools or craft schools who need a helping hand to get started.

The small sums that are involved are so tiny in comparison with the total operating capital of the bank that it can accept the risk if there is a good chance of the borrower succeeding. This does not simply mean that the latter must possess the right technical knowledge for their business; they must also have a good understanding of commercial principles. Close supervision by the relevant advisory or extension service and the bank is indispensable. In other cases the AVB can as a rule only extend unsecured loans if it receives some sort of guarantee for at least part of the amount concerned from a third party, as in the case of the IMIW loans and the Bengkulu colonization loans (see paragraph 12 above).

23. Credit to one-man businesses

It will be clear that personal credit as discussed in the previous section often involves loans being extended to one-man businesses, that is to say businesses which are owned and run by one or at most a few people (i.e. including firms, civil partnerships, and limited partnerships). Family businesses also fall into this category, even where, as is often the case (for tax reasons) with Chinese businesses, they are formally limited companies. Most of the shares in such companies are usually owned by only a few people, however.

The fate of one-man businesses is often largely dependent on that of one person. If he dies or falls ill, or if he proves to be less honest or skilled than expected, then the business will deteriorate or fold and the bank will suffer a loss on any personal credit provided to it. One of the difficulties with loans to such businesses is that often the household of the owner is inextricably mixed up with the business or, if that is not the case, more is taken out of the business for private purposes than the business results allow.

The bank must keep a sharp eye out for such things, so as to ensure not only that no more than the profits are taken out of the business but also that some of the profits are left in the business as reserves and in order to pay off the debt with the bank. Wherever possible, therefore, a loan should have to be repaid in frequent installments (monthly or quarterly).

Care must be taken to ensure that profits are not used to expand a business while there is still a loan outstanding or the business enjoys current account credit facilities with the bank where the maximum amount of credit which may be enjoyed decreases over time.

According to Polak one-man businesses cannot usually obtain long-term credit except where secured by business collateral, thus changing personal credit into business credit. A bank intended for small and medium-sized businesses, such as the AVB, must attempt, with the aid of as much security as possible and strict monitoring, also to provide personal credit. This is discussed in the following chapter.

CHAPTER IV CREDIT TO SMALL-SCALE ENTERPRISES

1. Limits

For the purpose of this manual small-scale enterprises are defined as small commercial and industrial enterprises. It is difficult to provide an exact definition and in any case such a definition is of little relevance to this manual.

The credit provided by the AVB to such enterprises is limited from above by the credit provided by the major banks. If the latter are prepared to meet certain credit requirements of certain kinds of business, then the AVB will not involve itself in that sector. Paragraph 8 of Chapter III should be borne in mind here, where it was stated that he AVB does not finance the leavings of the major banks.

There have been instances in which the AVB has taken over credit provision from the major banks, in consultation with the bank in question. This occurs primarily where credit is concerned which is small in major banks terms and on which the bank earns little if any additional income. The interest alone is often insufficient to make a relationship with a particular client attractive to a major bank. For the AVB on the other hand, which provides so many small loans, larger loans involving relatively low costs are a welcome source of income.

A second situation in which this has occurred since the start of the economic crisis concerns frozen current account credit enjoyed by borrowers who are still solvent which will take several years to pay off, while the liquidity requirements of the major bank make such slow repayment undesirable. In these circumstances the AVB which, as was explained in Chapter II, can tie up part of its capital for longer periods without any problem, can help both parties by taking over the credit.

Obviously, this is only possible if more than sufficient business collateral can be supplied which it will be easy to realize if necessary (this usually takes the form of mortgages on houses) and in the case of borrowers whose income is sufficient to redeem their debt gradually. The bank should preferably have a lien on certain elements of their income, e.g. rents from property on which it also has a lien and other property, this being the automatic consequence of borrowing from the bank and the loan being secured by mortgage or credit surety (in accordance with article 20 of the "Conditions under which the AVB may provide loans or credit").

However, in order to avoid competition with other banks as required by article 2, paragraph 1a, of the Provisions concerning the AVB, the AVB must always inform debtors of major banks who turn to it for assistance that it can only process their application if they agree to the AVB seeking further information from the major bank concerned. If the latter objects to the AVB taking over the loan, then the AVB will not provide the credit requested. If the major bank agrees to the transfer, the AVB will request the information it needs in order to assess whether the applicant is really creditworthy. Cooperation with the major banks rather than competition is thus the watchword.

2. Retailers and craftsmen

The lower limits of the AVB's operations in this field are difficult to define precisely. Small indigenous merchants (street traders, small-scale buyers of products, "warong" (stall holders)) and craftsmen within a village can for practical reasons best not be regarded as small-scale enterprises for the purposes of this manual, since they are not eligible for the most common forms of credit to such enterprises.

Very small-scale businesses, with an operating capital of NLG 10 or less, may turn to the village bank for assistance. Slightly less small-scale businesses must be treated by the AVB in the same way as applicants for consumer credit - if only it is often impossible to make a distinction between business and household - that is to say that they may obtain a loan which will usually have to be repaid in 10 to 20 monthly installments.

Bank staff, assisted by the local boards, should familiarize themselves with the most common forms of retailing and crafts in their district and establish for each form how much "capital" such businesses require and approximately what they earn. On the basis of this information they can then determine how large loans and the periods between repayment installments may normally be without running the risk of clients over-borrowing. Such investigations must be repeated regularly, especially if there are indications of changes in the economy generally or in the circumstances of a particular kind of business.

The results of such investigations should be made available to the management, who will have them collated by the economic affairs department and processed for publication in the journal "Volkscredietwezen". The economic affairs department should also be responsible for collecting material from periodicals and official reports and making it suitable for publication for the benefit of staff in general. Sector studies as described above are more valuable than apparently detailed individual loan applications, which as a rule are based partly on estimates and partly on actual facts, while it must be remembered that applicants do not after all always provide the most reliable of information. Applications completed in detail may thus provide information which only appears to be reliable. In the recent period of changes in the economy it has repeatedly been shown that no account was taken of the changing circum- stances when such applications were made.

3. Cooperation with the Industry Department and with craft schools in order to promote crafts

Crafts such as weaving, which are promoted by the industrial advisory services, deserve separate attention. Here the AVB is the appropriate institution to provide credit on request for the procurement of, say, a better loom, such credit to take the form of a loan to be repaid in installments within one or two years. Such advances are so small (tens of guilders at most) that they can be provided without any kind of cover at all if necessary to people designated by the advisory services.

Once it becomes clear that unsecured credit is to be extended for these or similar purposes on an extensive scale, the management must be consulted and a special arrangement arrived at with the industrial advisory services so as to limit the risk for the AVB. For example, the bank might supply looms bought from the Industry Department to those requiring them, on a hire-purchase basis, the Industry Department being obliged to take back any which have to be returned to the bank on account of default and which cannot be placed with other weavers and to pay the amount still outstanding to the bank.

Each local office which has craft schools within its area of operation whose former pupils' futures lie in the direction of crafts (before the economic crisis the training provided by these schools usually gave access to western industry) should also examine whether it is necessary and possible to support such pupils by providing modest loans. This must naturally be done in cooperation with the school authorities and the Industry Department. The bank management should be kept informed of any action of this kind and its results.

4. Small-scale enterprises proper

As a rule, small-scale enterprises in the true sense of the term in this country will require loans of at least a few hundred guilders, and loans in this sector amounting to tens of thousands of guilders are not unknown to the AVB.

Industrial businesses which may be eligible for loans from the AVB include batik producers, weaving mills, krètèk and cigarette factories, ice factories in the interior (in the centers such businesses can obtain credit from the major banks), smaller rice husking plants, brick and tile makers and printers.

As regards commercial businesses, the bank distinguishes between distributive traders (shopkeepers) and middlemen and storage businesses dealing in agricultural produce. The storage for between six months and one, two or even three years of pépéan tobacco for the krètèk industry, as described by Soenario in the journal "Volkscredietwezen" in January 1935 (p. 16), is an example of the storage business in question.

There are also a number of mixed businesses, which both process goods and have a distributive function, e.g. bakeries, butchers, cabinet makers and upholsterers and gold and silver smiths.Other small-scale enterprises which turn to the AVB include smaller hotels in the interior, auctioneers and dairies.

The above list is of course not intended to be exhaustive and the businesses concerned are of all nationalities. Almost all local AVB offices have Chinese clients, plus some indigenous tradesmen. The latter are found in larger numbers primarily in a few centers of population such as Kudus and Pekalongan, in the principal towns and in the areas covered by various local offices in the outer islands. Most of the European clients of the AVB are to be found in the bigger towns.

5. The capital requirements of small-scale enterprises

Capital requirements can be divided into those for fixed capital and those for operating capital. Fixed capital is required for a. land; b. premises; and c. capital goods (plant).

Commercial businesses established in rented premises will often need no fixed capital.

Operating capital is taken to mean capital which turns over quickly in the course of the commercial and production process, that is to say which returns to the business as money. Such capital is required to pay wages and rents, to keep stocks (raw materials, consumables and finished goods), for the sale of goods on credit and for the provision of monetary credit to customers (this is known as supplier's credit).

Operating capital can be divided into permanent operating capital and temporary operating capital. Although the exact proportions may vary (according to the goods being stored and the claims outstanding at any given time) a business will always need a certain minimum of operating capital, unless it is an entirely seasonal one which ceases to operate completely for part of the year and therefore has no stocks or outstanding claims.

The trade in agricultural produce does include some such businesses, those which deal in a single product; as a rule, however, traders begin buying up a second product before they have finished selling the first, for example rice or maize in the first half of the year, followed by tobacco, kapok, kedelee, groundnuts or other secondary crops in the second half. Nevertheless, the produce trade's operating capital requirement is often subject to some seasonal fluctuation. Over and above the minimum which is required at all times, many businesses thus regularly need to increase their operating capital on a temporary basis, either as a result of seasonal factors or because of the business' normal fluctuations.

The Bandung butchers described by Tänzer (18) provide an example of both these situations. The larger butchers in Bandung slaughter two cows per day, while the livestock is brought by train from Central Java once a fortnight; the operating capital invested in the livestock is thus at a peak immediately after and at its lowest point immediately before the fortnightly arrival of stock. In addition to this fluctuation arising from the business itself, however, these butchers are also subject to certain seasonal pressures (Radjab, Ruwah, Hapit and Raja-agung) when about twice as many cows are slaughtered per day but the livestock supplies arrive weekly, the result being that the difference between the livestock minimum and maximum at these times is not much bigger than at other times of the year, but the operating capital turns over at double the usual rate.

The Indigenous Printers and Book Shop in Bandung, which was also described by Tänzer (19) is also subject to seasonal pressures. "Most orders are placed in the last few months of the year, starting in October, while the busiest period for the smaller businesses is in the months of Raja-agung and Djumadilakir, the best times for holding traditional festivals"

In the journal "Volkscredietwezen" of January 1935 (p.14) Soenarjo reports that though the krètèk industry in Kudus is subject to certain seasonal fluctuations connected with the planting and harvesting times, it is not a markedly seasonal business.

According to the same author (20) September and October are very quiet months and April to July a very busy period for the Jakarta batik producers. Soerachman assumes two peak periods for the batik industry in the principalities (21), and De Kat Angelino two for the whole of Java (22) : the lebaran and, primarily, the rice harvest. In contrast, Soekarno claims in his article (23) that busy and quiet months in the Solo batik industry follow so quickly one upon the other that for financing purposes at least no clear distinction can be made between quiet and busy periods.

Shops with indigenous customers usually experience seasonal pressures towards the end of the puasa, while those with European customers are busiest towards the end of the year (the feast of St. Nicholas, Christmas and New Year) and around Easter (confectioners).

In addition to the usual kind of temporary increase in the operating capital requirements already mentioned, a business' long-term minimum requirement may also have to be increased if the business expands.

6. The credit requirements of small-scale enterprises

Credit requirements can be divided up in the same way as capital requirements. Fixed capital requires equity capital, supplemented where necessary by long-term credit (investment credit); temporary operating capital requirements resulting from seasonal factors or normal business conditions can be provided in the form of operating credit. The long-term minimum operating capital, if it is not provided for from the business' own resources, plus any expansion thereof, can be provided in the form of long-term operating credit.

7. Long-term supplier credit

In the case of certain traders these credit requirements are met to a significant extent through supplier and customer credit. Supplier credit is provided both for fixed capital and operating capital; though it is not extended for the procurement of land or premises, plant can be procured in this way. Financially strong manufacturers and their representatives in this country are often prepared to provide plant, entire factories indeed, to be paid for in installments, to such businesses as rice husking, ice factories and printers, in order to increase their market. In the article referred to above, Tänzer reports that the larger indigenous printers can obtain machines on hire-purchase if they pay one third of the purchase price in advance; they then have ten months to repay each NLG 1000 of the remainder. Since the suppliers in such cases are first-rate firms with realistic business prospects, there need be no fear of small-scale enterprises being exploited by this form of long-term supplier credit.

The fact that the repayment periods are still relatively short is a serious disadvantage, however. From the point of view of the industrialist using the machine, the capital borrowed for the machine's procurement should not have to be repaid any more rapidly than the same amount of capital generated by the production process, that is to say the rate at which the machine depreciates.

Repayments plus interest should thus amount to the same as correctly calculated depreciation. However, the period within which the supplier must be repaid is usually considerably shorter, with the result that repayments can only be made if the business generates sufficient surplus profits for money to be saved to pay the supplier. In practice this often proves difficult and the repayment period is seen to be too short. This is not always a bad thing. According to Tänzer, the Bandung printers were full of praise for the reasonableness and patience of the importers.

Nevertheless, there can be circumstances in which it is desirable for the AVB to take over supplier credit which has become too much of a problem and adjust the repayment installments in line with the profit generated by the business. Naturally, caution must be exercised in doing so; if the business has been over-capitalized by a supplier eager for bigger markets or is no longer viable, the last thing the bank should do is to take over the risk from the supplier.

Such credit should only be taken over in the case of healthy, viable businesses for which the supplier's repayment period is too short. However, the bank too will be wise to require the credit to be repaid before the plant comes to the end of its useful life, partly to limit the risks involved and partly because modernization of plant may be required long before the old plant is worn out.

It should also be borne in mind that this kind of credit involves a special risk, because specialized plant is difficult to sell and can usually only be sold at a considerable loss. Factory installations thus have but little value as collateral; other business security is desirable and where none can be provided only the soundness of the business can provide the bank with real security.

8. Short-term supplier credit

Usually, however, supplier credit is extended on a short-term basis (a few months) by the suppliers of raw materials and consumables or (in the case of shops) consumer goods. If the period within which the credit must be repaid is at least as long as it takes the tradesman to sell the goods he has bought (after processing them where necessary) and obtain payment from his customers, the supplier credit may enable him not only to finance stocks but also to finance his debtors.

It is well known how Chinese shopkeepers in this country enjoy (enjoyed?) such extensive supplier credit from importers that they are often able to use part of it to buy up products from local people as well as purchasing the goods to which it relates, and that where necessary they sell the goods bought on credit at a loss in order quickly to obtain cash with which to engage in other transactions, in the expectation of thus making a profit which exceeds the loss they have made in selling the imported goods.

Writers about small-scale enterprises regard excessive supplier credit as one of the most serious dangers facing such enterprises. In this country on the other hand it is probably true that importers, forced to provide extensive credit by competition, often suffer greater damage than the skilful Chinese, who are usually able to derive advantage from the situation. All the same, indigenous traders, who are as a rule less commercially skilled than their Chinese counterparts, are frequently disadvantaged by supplier credit.

In "Das kleingewerbliche Kredit in Deutschland" (Small business credit in Germany) Schönitz summarizes the dangers of supplier credit, all of which are well known from experience to those familiar with the lower levels of the economy in this country. First of all, the supplier attempts to cover himself against the risk involved by increasing his prices or reducing the quality of the goods supplied. More seriously, he uses the credit as a means of making his customers dependent on him and then exploits them to his heart's content. Is there anyone who does not know of a case in which the provider of the credit has deliberately driven his customers into debt and kept them there for precisely this purpose?

Tänzer records how Chinese livestock suppliers persuade their reliable, cash-paying, customers among the indigenous butchers to buy more on credit, initially without raising their prices; the biggest businesses are even able to obtain cash on credit from them. Such encouragement to incur debts continues until the customers are completely in the power of the suppliers and a claim on them secured by a mortgage has been obtained. It is only then that the customers are systematically exploited by artificially increasing the weight of the livestock, supplying less good meat etc., until foreclosure results. In these cases the supplier credit is directly intended to destroy the customers because the suppliers were also butchers and wanted to eliminate competition. Exploitation does not usually go this far.

According to Tänzer, Bandung butchers enjoyed healthy supplier credit from an Armenian livestock dealer in Surabaya, an Arab in Jakarta and two Javanese dealers in Madiun, who all supplied good customers on credit for up to 14 days, a period which was in accordance with the fortnightly livestock delivery times and the daily slaughter.

Batik producers often enjoy supplier credit in respect of cloth sand dyes. In some cases it has thus proved cheaper for them to do business with middlemen who provided credit than to buy direct from the importers for cash obtained with bank credit.

Other dangers of supplier credit noted by Schönitz include that already mentioned above, of goods to be sold at a loss simply to obtain cash, and that of customers buying goods they do not need. A well-known example of the latter phenomenon in this country is that of over-zealous salesmen employed by importers filling Chinese shops with excessive quantities of goods. Schönitz concludes by observing that prompt repayment, which is required through the custom of issuing acceptances for supplier credit, often does not suit small traders or small-scale industrial enterprises.

As far as agricultural produce is concerned, supplier credit is not extended by farmers, who are more likely themselves to enjoy customer credit (see Chapter V), but by middlemen who buy the produce from the farmers for cash or in advance and then sell it on credit to small-scale enterprises for further processing or retail sale. Temanggung pépéan tobacco distributors, for example, sell their merchandise almost exclusively on the basis of quarterly credit (sometimes up to six months' credit) to the manufacturers of krètèk cigarettes in Kudus or to retailers (24).

Where supplier credit harms small-scale enterprises the AVB can perform a useful role by enabling the businesses concerned to pay off their debts to suppliers and to make cash purchases in the future which cost them less. There must, however, be guarantees that the businesses concerned will not try to have their cake and eat it by continuing to obtain supplier credit while enjoying bank credit as well. This can best be achieved if the bank only provides resources by paying invoices or bills of exchange from suppliers direct, the amounts concerned having to be paid back wherever possible within a period agreed in advance.

However, there is no reason to replace ordinary, harmless supplier credit with bank credit. If it were to do so, the bank would in fact be accepting an unnecessary risk. Nevertheless, the AVB must be aware at all times of the extent to which its clients enjoy supplier credit if it too is to provide credit to them.

9. Customer credit

Customer credit is primarily extended by buyers to farmers and less to traders, though they too occasionally benefit, usually where goods are supplied on order and paid for in advance; small industrial enterprises are most frequently the beneficiaries.

According to Tänzer, the small indigenous printers in Bandung as a rule ask customers to pay between one third and a half of the price in advance. Larger businesses on the other hand have to supply on credit because of their different kinds of customers. For the butchers described by Tänzer the advances they received on hides from exporters and their middlemen were of considerable importance; it was said previously, when hide prices were high, advances of up to NLG 3000 had been provided for the supply of three hides per day. Where customer credit was extended in this way, prices were between five percent and ten percent lower; acceptances were issued for the credit received.

In general customer credit is extended in respect of products which are in demand and where the potential for additional production is declining, i.e. those of which there is a limited supply and for which there is a competitive demand. When the Dutch East Indies' agricultural export produce was still sought after on the world market, exporters extended customer credit to merchants, who in turn extended it to the farmers.

Customer credit enjoyed by agricultural produce merchants cannot be replaced by AVB credit if and in so far as it is passed on to farmers in a way which is damaging to the latter; credit can best be extended to the farmer by the AVB and village credit institutions themselves.

Those purchasing the produce can, however, obtain credit from these institutions once they actually start buying the produce, i.e. during or immediately before the harvest, but no earlier, and any such credit must be paid back once the goods are sold, so that the dealers retain no resources with which to extend advances on the next harvest.

With regard to other small enterprises, there may be reasons for providing them with enough credit for them no longer to have to seek credit from their customers, as a result of which they can either ask better prices or increase their turnover.

10. Supply on credit by small-scale enterprises

Besides supplier credit the primary evil of the way in which small enterprises may be financed is what Schmid (25) roundly denounces as "Borgungswesen", that is the custom on the part of shopkeepers in particular of supplying customers on credit, as a result of which they become dependent on that credit. Moreover, if the credit so extended is longer-term than that which the business itself enjoys from its suppliers the balance of the business will be disturbed and an attempt will be made to restore it by applying for bank credit.

The financing of some outstanding claims by providing loans on them is of course a normal part of the credit system for small enterprises. However, it should not result in the "coupon system" being expanded or assuming undesirable proportions. For this reason it is usual for credit only to be extended by the banks under such circumstances if the claims are ceded to and collected by the bank extending the credit (see also paragraph 14 below), which can thus be aware at all times of the extent to which the "coupon system" is being applied and of the soundness of the debtors.

In any event, in such circumstances the AVB must keep itself informed as fully and frequently as possible of changes in debt accounts, even if the credit it provides does not relate directly to the debtors of the business enjoying that credit.

12. The dilemma of credit to small-scale enterprises

Operating credit for small-scale enterprises often presents even the best-intentioned small business bank with an insoluble dilemma and this is the real reason why arrangements for such credit are never to the complete satisfaction of either bank or beneficiaries.

The dilemma is that on the one hand the operating credit often takes the form of personal credit, because the average beneficiary has too little if any liquid assets which can be used as collateral or even immovable property upon which a mortgage or credit surety could be secured, and this involves all the risks of the bank becoming a sleeping partner (see Chapter III, paragraphs 18-21); moreover, it is often extended to one-man businesses (III, 22).

On the other hand, it is often impossible for the enterprises concerned to meet the necessary requirement that the bank should have complete and constant details of the financial position of the business, because many (not only in this country, the complaint is a general one) do not keep proper accounts and it is often impossible for the bank even to exercise indirect control (invoices and bills of exchange being paid and made payable through the bank).

In order to assess an application for personal credit, the bank should inform itself of the capital invested in the business and its distribution among fixed assets, plant, inventory, stocks and debtors, of the proportions of the capital which comprise equity capital and borrowed capital and of the extent to which supplier or customer credit in particular is enjoyed, of the viability of the business and any increases or decreases therein, of expansions or rationalizations and of seasonal or normal business fluctuations. How can the bank obtain such information if there are no proper books and if no balance sheets or business accounts for several consecutive preceding years can be submitted?

Where personal credit is extended without sufficient collateral, the main form of security for the bank is the character and the business of the applicant. To extend credit without any information on a business is a leap in the dark and can amount to speculation, in which a bank may not engage. It is therefore a primary condition of the financing of new businesses (see paragraph 30) that clear accounts should be kept from the beginning and that the necessary information should be submitted to the bank regularly.

Another particular difficulty is that with the exception of European and a few indigenous and Chinese businesses, the traders among the clientele of the AVB still have the views and management techniques of a pre-capitalist or early capitalist era, in which rational considerations and thinking by no means play such a dominant role as is now customary in the West.

Moreover, traders do not like to provide information on their business which accords with reality and to ask about such matters is considered impolite. In these circles business credit secured by immovable property, where the credit does not change and no repayment is required, is the ideal. It does not concern the bank what the credit is to be used for; if the bank is not careful, a house will be built with it.

It is normal to mix up business and domestic expenditure. Documents with which it would be possible to determine the fluctuation of a current account either do not exist or those concerned do not wish to hand them over. Traders fear that if their customers have to make payments direct to the bank their creditworthiness will be reduced in the eyes of those they do business with. Under these circumstances it is often hopeless to require regular statements of a current account and a loan will often be a form of credit preferable to current account credit. Otherwise current account credit can be extended while at the same time reducing the maximum credit permissible at short intervals of 1 to 3 months to make this form of credit as much like a loan as possible

12. The AVB as administrator and accountant to small businesses

The inability and in some cases unwillingness of many businesses to provide the bank with adequate information about their business will frequently prevent the bank from extending credit. The bank must do all it can to help businesses to which it wants to extend credit to set up or improve their bookkeeping.

Article 3d of the Provisions concerning the AVB (9) therefore states that the bank may provide advice and assistance and conduct audits for other bodies in addition to popular credit institutions, cooperative associations and local council credit institutions. This may be done, "however, only in the interests of the proper provision of popular credit and in so far as there is a need to do so and that need is not met satisfactorily by other institutions".

If it is possible for the administrative and accounting assistance required by the bank's debtors to be provided by reliable private individuals in the locality at prices which do not pose a problem to those debtors, then it is desirable that the AVB should leave the job to them. However, it may often prove necessary for the bank to at least begin by acting as administrator and accountant for its debtors, primarily in order to overcome the initial resistance of clients to bookkeeping. This should be done for a modest charge and if necessary for free, the latter of course is preferable if the credit and the interest charged on it provide some compensation.

The assistance referred to here will only produce results in businesses with Western-trained staff among the management. For the vast majority of Chinese and old-fashioned indigenous businesses such assistance would be a fruitless undertaking.

13. Security: mortgages and credit surety

Following from what was stated in paragraph 11, it is true to say that the better the credit collateral, the less information about the business the bank necessarily requires. Conversely, the less able the bank is to assess the business of an applicant for credit, the bigger will be the requirement for collateral.

Only rarely is it possible in this country (in the case of a few European businesses with proper bookkeeping) to achieve the ideal of full information about a business; as a rule a compromise must be reached between more or less information and less or more collateral.

It should also be borne in mind that the bank can accept a greater risk where small loans which are in the interests of economic development are concerned than it can with applications for bigger loans.

Despite the personal nature of small business credit, security - the business element - can thus often be of considerable importance in this country. This is how the somewhat strange situation arises of much of the operating credit extended to small businesses being secured by mortgage or credit surety.

This is relatively easy to arrange, because the Chinese and Indonesian merchants and industrialists tend to invest money they have earned in times of prosperity in houses and shops. Since it is such people in particular who do not keep books in a manner which is comprehensible to the bank, as a result of which it is virtually impossible to assess the business properly, and because setting up a current account for such businesses rarely produces any information on the state of the business either (transactions using the account remain very rare), operating credit extended to such businesses is frequently predominantly business credit. From the point of view of the bank there is no objection to this, providing the premises which are to serve as collateral are situated in residential or trading centers and can therefore be realized for a reasonable price should this prove necessary.

If the property which is to serve as collateral is leasehold or subject to building rights, the bank must take the term of those rights into account. Undivided shares in estates are not accepted as collateral.

Where operating credit is concerned floating charges and credit surety are required, even if an advance is extended rather than a credit agreement being concluded. The advantage of this for the debtor is that if he needs further credit once the first loan expires or indeed additional credit before it expires, this can be arranged quickly and without further formalities and without further costs being incurred for the arrangement of a mortgage.

Floating charges are desirable from the bank's point of view because they mean that all claims that it might have on the debtor at any time are also covered and because the debtor is thus bound more permanently to the bank, will be more likely to make use of its services and will so help in establishing a permanent clientele (see also paragraph 21 of this chapter). An ordinary mortgage will therefore only be acceptable as cover for operating credit if the borrower steadfastly refuses to consider a floating charge.

In the case of long-term credit, i.e. for fixed capital (buildings, plant), the bank's claim will as a rule be secured by an ordinary mortgage or credit surety. In this context it is as well to remember that the business security offered by industrial businesses, such as factory buildings and plant, is usually of little value as collateral, because it is dependent on the operation of the business, which means that if the business fails and the bank wishes to fall back on the mortgage it will only be possible to sell the mortgaged property at a price far below what it was worth to the business and far below what was originally paid for it.

The bank musts therefore obtain mortgages or credit surety on property which is independent of the business (houses, offices, sawahs (land for wet cultivation, primarily of rice)) when extending long-term credit to industrial businesses. The same applies in respect of long-term credit to hotels for the procurement of buildings and inventory.

Apart from the valuation of the business which should be conducted whenever new credit is being extended, regular re-valuations (once a year) are also necessary in the case of current account credit or longer-term credit, while despite the largely business nature of the credit the bank must constantly be on the alert for any

deterioration in the financial circumstances or the business of the debtor. Whenever possible the annual balance sheets and profit and loss accounts should be examined to this end and income, corporation and wealth tax assessments should in any event be looked at.

If as a result of these controls the bank should be concerned that the credit or loan is no longer sufficiently secure, it will either have to obtain additional security or take measures to reduce the debt, by withdrawing the credit if necessary (see also paragraph 22). In relation to this, article 12b and 12d of the "Conditions under which the AVB may provide loans or credit" states that the bank is entitled to withdraw a loan or credit immediately or as of a date determined by the bank, irrespective of any agreement concluded on repayment or withdrawal. This then means that the debt outstanding may immediately be claimed by the bank. Such action may be taken, for example, if the security provided is no longer sufficient and is not increased or if the business is no longer viable.

Finally, attention should be paid to article 20 of the "Conditions", under which the rents of premises on which the bank has a lien are automatically ceded to it. As a rule, however, the bank need only make use of this facility if repayments are not made as promptly as is customary.

14. Ceding claims

The ceding to the bank by a borrower of claims he has on his debtors (including house and office rents) is only of value to the bank if it can be sure that most of the claims thus ceded will be paid. It is therefore necessary for the books to be examined in advance in order to ascertain from the balances and the debit and credit entries in the debtors records over a reasonable period of time and by examining a number of claims chosen at random more closely whether the claims are sufficiently liquid and not significantly in arrears or indeed dubious. Such security can therefore only be provided by businesses which keep proper debtors records (i.e. mostly shops).

Since the bank runs the risk, despite proper examination of the books, that payments by its borrowers' debtors will be disappointing, it will do well in the initial stages to lend only a fraction of the amount outstanding on claims ceded to it, e.g. a quarter to a half, depending on the confidence inspired by the trader concerned and his business. If the debts prove in practice to be paid as they should and if the borrower proves reasonably honest, a greater proportion may be advanced, up to a maximum of 70%.

As previously stated, the honesty and business caution of the borrower are important factors in this kind of security, which cannot therefore be regarded as fully-fledged business security. Double or fictitious receipts may be issued, the borrower may collect the claims concerned himself or, without any dishonesty being intended, sell on credit to traders in return for the ceding of claims if those traders meet the necessary requirements.

Another safeguard, in addition to that of not extending more credit than a certain percentage of the amount due from the claims, is to limit the total amount of credit. This is also important because from a general economic perspective and in the interests of both the bank and the borrower it is undesirable for the bank to collude in extending the use of the iniquitous "coupon system", which is not to be encouraged. Any such limit should be established with reference to the financial position of the business as a whole and to any other security which is provided (see paragraph 24).

This kind of security deserves particular attention in periods of economic depression. On the one hand, an otherwise healthy and viable small business may then have a greater credit requirement than previously because its debtors pay off their debts more slowly and a greater proportion of its operating capital is therefore tied up in those debts. As a result, the business will not have sufficient resources to continue operating. Credit assistance by the AVB would then appear to be justified.

On the other hand, this situation carries the risk for the bank - even though the nature of its capital permits it to accept less liquidity in its investments - that the claims in question will not only be settled slowly but may also for a large part prove to be dubious. Moreover, new transactions entered into with the assistance of the bank's credit may also give rise to problems, if they involve sales on credit.

The bank must therefore be extremely cautious: credit is permissible only for new turnover and then only if there is sufficient prospect that no freeze will follow. Bank credit may never act as a means of shifting responsibility for dubious debts onto the bank. Credit must therefore be limited, though not to such an extent that it fails to do what it is intended to do, i.e. is insufficient for the minimum turnover required to keep the business viable. If these requirements cannot be reconciled, the bank must refrain from extending credit. In such cases the "Crediethulpbank" (bank for credit assistance) may be able to provide the necessary credit.

With regard to how claims should be ceded to the bank, it is sufficient for a deed of cession to be drawn up, without this having also to be served on the borrower's debtors - this would in any case be impossible in practice. However, if the ceding of claims is the primary form of security it is essential that instead the bank itself collects the debts or that the parties appoint a collection agency to collect the amounts due and pay the bank. The bank should not bear any liability in this matter. It is not advisable to leave collection to the borrower as if this is done the cession will be of little value as a form of security.

If the bank itself collects the debts, it should charge for doing so in accordance with the customary rates. Its cashiers will no doubt be no less reliable than those employed by most collection agencies but for this kind of work the bank, like such agencies, must use only cashiers who can themselves provide security. In the case of older employees such surety will as a rule be available in the form of assets with the pension fund. It is also possible to exercise strict control through the recording of receipts and the daily accounts.

If care is taken that regular cession lists (indicating new claims which are subject to the deed of cession) are forwarded to the bank, the cession will also be recognized in the event of bankruptcy, though the deed of cession must then be subject to the civil

and commercial law which applies to Europeans, which means that it must be authenticated by a notary or another official designated to do so.

Arrangements for the ceding of claims should include a current account facility; the borrower is then debited for the amounts he withdraws and credited with the claims collected by the bank, minus costs and charges. The credit extended does not then have to take the form of current account credit, however, advances may also be secured by the ceding of claims (see paragraph 21).

As in the case of mortgages, the bank may not make do with a single evaluation of the business prior to extending credit; it must make sure that it is fully aware at all times of what exactly is happening as regards the claims. As it will either be collecting them itself or through an agency, this should be relatively easy. If claims begin to be paid less promptly, an immediate investigation of the causes is called for and where necessary the bank will have to reduce the credit facilities it has extended (reducing the percentage paid out and the maximum total amount of credit) or withdraw the facilities completely. The borrower's claims, including those which arise after credit facilities have been withdrawn, must continue to be ceded to the bank until the bank's entire debt is paid off.

A better form of security than the ceding of claims as discussed above would undoubtedly be the discounting of accepted bills of exchange made out by the customers of the borrower. Such bills of exchange are not in use among the small enterprises which use the AVB and are not discussed further here.

15. Fiduciary transfer of ownership

Small-scale entrepreneurs do not always have bulk goods which they can store in warehouses and pledge to a bank like wholesalers. They have to have their raw materials and shop stocks at hand, ready for processing or sale to consumers. It is therefore often impossible for goods to be pledged as security. The ownership of such goods may be transferred as security, however; this is called fiduciary transfer of ownership.

It is necessary for a deed on the fiduciary transfer of ownership to be made subject to the civil and commercial law which applies to Europeans and for the deed to be authenticated by a notary or another official designated to do so.

The fiduciary transfer of ownership is recognized by the Supreme Court and provides security in the event of bankruptcy, though not against the prior rights of a landlord to furniture or inventory. If these comprise the principal property, the bank must therefore ensure that the rent is paid regularly, preferably by paying it itself. Landlords have no rights to shop or warehouse stocks.

However, even though everything might be in order from the legal point of view, this does not alter the fact that the value to the bank of such transfer of ownership as security is nevertheless extremely limited, because as a rule it will be specialized and therefore less marketable goods which are concerned. The difficulties involved in selling them may well be the reason for the debtor being unable to meet his

obligations to the bank and in such cases the bank will also be unable to recover its claim from those goods. Bad faith on the part of the debtor is also quite possible, though this would make him guilty of embezzlement and this can act as a restraint.

The main value of this form of security for the bank lies in the fact that it gives the bank precedence over any other creditors; moreover, other creditors may not attach goods whose ownership has been transferred to the bank in this way and cannot therefore compel the bank to sell them.

Another advantage is that because the borrower is obliged to supply regular stock lists the bank has good information on the stocks and their turnover. This means that the requirements for personal credit are more properly met. If the stocks and turnover figures, which must be constantly monitored, indicate that the business is doing badly (particular attention should be paid to the relationship between stocks and turnover, which will become less favorable as stocks grow in relation to turnover) the bank should immediately take the necessary steps to reduce or withdraw credit facilities. In such cases the transfer of ownership should remain in force until the bank's entire debt had been paid off.

The provision of regular lists of new stocks may present problems but not for western-run shops, which can use their suppliers' invoices for this purpose. This is all the easier because payments by bank transfer will often also be dependent on the submission of such invoices.

As will be apparent from the above, this form of security is primarily of use in combination with current account credit, though it may also serve in respect of loans. (see paragraph 21).

As a rule a transfer of ownership is insufficient as a means of security and additional security, such as a personal guarantee, must be provided. It is therefore also not possible to give a percentage of the purchase value of the stocks, the ownership of which has been transferred, up to which credit may be granted. The amount of credit depends on the capital position of the business as a whole and on the additional security lodged (see also paragraph 24).

16. Guarantees

Guarantees (usually by two people for each debt) are the most common form of security in Europe for small amounts of credit. According to statistics for 1910, 77% of all credit up to an amount of 461 million Reichsmark provided by credit associations in Germany at that time was secured only by personal guarantees. It should be remembered that all credit secured by guarantees is essentially unsecured credit with subsidiary debtors in addition to the actual debtor.

Only people whose personal characters guarantee that they will do their best, should the need arise, to meet their obligations and whose financial position or income is such that they will be able to do so may act as guarantors. Guarantees to the bank from two financial non-entities on behalf of a third financial non-entity are of course useless, though this is sometimes forgotten.

If a guarantor is indeed wealthy and owns property on which the bank could obtain a lien, he should obviously provide business security. As far as credit surety is concerned, this is only possible if he formally acts not as a guarantor but as a co-debtor with joint and several liability. If a guarantor who is an a position to provide business security refuses to do so, there is reason to doubt the seriousness of his intentions.

In this country, where people take on debts lightly, a person will often offer to act as a guarantor equally lightly, without realizing the possible consequences. As a result, if the guarantee has to be called in, the guarantor may be extremely indignant and quibble about everything. It is therefore necessary that the seriousness of the obligation they are taking upon themselves is explained to prospective guarantors in advance.

Care must be taken to avoid the mutual provision of guarantees, i.e. the same people taking turns at acting as guarantors for one another.

Guarantees are usually included in the debt certificate or credit arrangement but may also be laid down in a separate deed.

A guarantee can also be provided in other ways, e.g. by guaranteeing bills of exchange or orders by counter-signing them. The AVB has been conducting a trial in Surabaya since mid-1934 involving the guaranteeing of debtors' promissory notes by two guarantors as the sole security in respect of unexpected, short-term credit requirements (see also paragraph 21 of this chapter).

The fact that guarantors relinquish the right of prior recovery is intended only as a security measure for the bank but must not mean that if the debtor fails to pay the bank takes the easy way out an calls in the guarantee immediately. In the first instance the property of the debtor himself must be sold off, unless this would result in his ruin. The bank should keep guarantors informed. As soon as a debtor gets into serious arrears or even if the bank merely fears that serious arrears are likely to arise, it should notify the guarantors. It should also notify them in advance of any other measures it is to take against the debtor.

It is also not a good thing to require guarantors to pay off the debt all at once if a debtor's entire debt has become payable as a result of arrears on a loan which was to be repaid in a number of installments. Guarantors too should be permitted to pay in reasonable installments. In general well-intentioned guarantors should be treated in an accommodating manner, providing they meet their obligations in a reasonable way.

17. Raising loans on pensions and salaries

Although loans to pensioners secured by their pension are often extended for purposes of consumer or semi-consumer expenditure, it is by no means exceptional for a retired person to set up a business and need capital for it.

Extending a loan on the basis of a pension or salary is therefore (aside from the possibility of the borrower dying) a particular secure form of lending for the bank because there need be no fear a arrears arising , since the bank itself collects the pension, deducts the payment due to it and pays the remainder to the debtor.

If the loan has to be provided for periods in excess of a year - and where the provision of capital for the establishment of a business is concerned two to five years may well be involved - additional security will be required. Guarantees (see previous section) and life insurance (see next section) are the primary forms in such cases. A combination of a loan secured by a pension plus a life insurance provides the greatest security because there need be no fear of a fall in value as in the case of mortgages or other collateral. The loan conditions remain in force even in the event of bankruptcy.

The bank should make sure that there is no likelihood of deductions being made from the pension on account of debts to the government. Reference may also be made to the article "Advice on the raising of loans on pensions, salaries and social assistance" (26) and with reference to continuous credit of this kind to "Volkscredietwezen", January 1935, p.64.

Private bodies as a rule include in their pension fund regulations provisions guaranteeing that their pensions cannot be alienated or encumbered in any way and to date have not proved willing when asked to permit the AVB to deviate from these rules, as the government does. The NIS (Dutch East Indies Railways) refused point blank to do so.

18. Liens on life insurance policies or mixed insurance policies

A life insurance policy is primarily of value to the bank as additional security. If the borrower already has such a policy, it is essential that the AVB should obtain a lien on it, unless the other collateral provided is so safe that the credit in question can already be regarded as entirely business credit (see chapter III paragraphs 18-20 and chapter IV paragraph 13).

Under certain circumstances it may be necessary to insist on the borrower taking out a life or risk insurance policy for the period of the credit or loan, as where longer-term loans are raised on pensions (see previous section).

Care must be taken to ensure that the policy is not already acting as security for other loans and that the premiums paid are paid regularly. To this end the bank should reserve the right to pay the latter itself and charge the borrower accordingly.Reference may also be made to Quant's articles. (27)

The above also applies to mixed insurance policies, which are of even greater value because the bank can recover its claim from them once they mature whatever happens - i.e. even if the policy-holder does not die - providing the premiums are paid. The value of this form of insurance as collateral thus increases as more of the premiums are paid. If the surrender value is adequate, a mixed insurance policy may even be sufficient to serve as the only security, at least where it does not mature too

long after the bank's credit expires. A borrower may never be obliged to take out a mixed insurance policy if he does not already have one.

19. The ceding of monies involved in contracts; order credit

In collaboration with a principal or party placing an order it is possible to provide bank credit to a business, which does not have sufficient capital to fulfil the contract or order concerned, to enable it to do so, by having all claims on the principal or party placing the order relating to the said work or order ceded to the bank. The contractor or party placing the order may appear in the deed as a third party but it is also sufficient for him to acknowledge that the claims have been ceded in a letter to the bank. It is less desirable that the deed should be served because this is both complicated and unsatisfactory.

The bank still runs the risk that the borrower will carry out the work or order unsatisfactorily and so forfeit his entitlement to a claim. As a rule some additional security is therefore required, at least where sums of any significance are concerned. Moreover, such credit can only be provided where the principal or party placing the order is himself creditworthy, which means primarily government authorities and large private companies.

The bank can also limit its risk by extending the credit in installments only, as the work or order progresses, and making it conditional upon the sums due also being paid to it in regular installments by the principal or party placing the order. Advance payments for orders should also go to the bank. The maximum amount of credit thus need scarcely exceed the amount of a single installment if at all.

However, it should be obvious that such credit should not serve to enable cowboy operations or optimists to compete at the risk of the bank. It should therefore be extended only if the borrower is not only technically but also commercially competent.

Before agreeing to extend credit in this way the bank must establish what resources the borrower already has which can be used to carry out the work or order and whether he can carry it out cost-effectively; the latter should be determined on the basis of cost-price calculations. The terms of delivery must be examined. Where necessary the advice of a reliable expert in the field should be obtained.

20. Raising loans on securities which can be traded on the stock exchange; various forms of security

Raising a loan on securities which can be traded on the stock exchange involves excellent security but it is primarily the major banks which supply such credit so such deals will only be offered to the AVB if the credit required exceeds the value of the securities. Additional security will then be required. If a borrower also owns other securities then they may serve as the additional security. Securities may not remain with the local office but must be handed over to the head office for safekeeping. Stock exchange movements must be monitored carefully.

A rare form of security is the ceding to the bank of a mortgage held by the borrower on a third party. It is sufficient for the claim to be ceded and for this to be accepted in writing by or the relevant deed served on the third party; the mortgage need not be transferred, which would be an expensive matter.

If the mortgage is properly covered or the third party is reliable, this can be a sound an satisfactory form of security. Naturally, the period which the claim ceded still has to run must not be too different from that over which the bank is extending credit. If the mortgage claim falls due considerably later than the end of the AVB credit, its value as security will be less. The terms of the mortgage must also be examined carefully to ensure that they provide the bank with sufficient security.

Loans raised on time deposits with solid banking institutions or the ceding of such deposits can also provide useful security. The usual arrangements are for the deposits to be ceded and notice given of withdrawal, withdrawal to be effected at the same time as the period of credit terminates. The amount due is then paid to the institution extending the credit so that it can recover its claim.

21. Forms of credit to small-scale enterprises; discount and loan credit

The forms in which credit is extended to small businesses are current account credit, loans and discount credit. The first of these is the most important, while the third is very rare in this country because traders seldom have customers on whom bills can be drawn which are eligible for discount and which are acceptable to those customers. As a rule debt claims are ceded for collection instead (see paragraph 14 above).

Credit provided by the popular credit banks usually took the form of a loan, described in old statistics as an "ordinary loan", meaning the disbursement of a fixed sum, usually in one and under exceptional circumstances in several tranches, which had to be repaid sometimes as a lump sum but as a rule in a number of installments.

Janzen (28) describes loans as "the most typical form in which small amounts of credit can be provided. The old small-scale lending banks and the small credit associations in the Netherlands almost always extended credit in this form. Today (in 1922) loans are extremely rare and usually limited to smaller sums". According to this author the clientele of the lending banks usually come from "the world of small entrepreneurs who need long-term credit for the purchase of an existing business, inventory and so on "(p.21). " The merit of the lending banks is that they have helped many small businesses to obtain credit which would otherwise have ended up in the hands of usurers" (p.22).

Small businesses in Germany and Switzerland also still make considerable use of loans, though in Switzerland too loans have now been somewhat eclipsed by current account credit. For example, according to Schmid, 18.6% of the credit extended in 1916 by the Schweizerische Volksbank, which is similar to the AVB in that it has a large number of relatively independent branches which look after local interests and extends a lot of small-scale credit, took the form of fixed-term loans, while 43.2 % took the form of current account credit and 15.4% that of discounted bills.

The fixed-term loans served especially as "investment credit for the creation or expansion of the permanent conditions required for the operation of a business or as operating credit for businesses which suddenly required a relatively large amount of money".

In this country too loans can be divided into two categories: those which meet relatively short-term temporary credit requirements (seasonal loans) and those which must be repaid gradually (i.e. in installments) from the savings of individuals or from business profits (term loans).

22. Short-term loans; seasonal credit

Seasonal loans are not only important in agriculture but for any business the operating capital requirements of which fluctuate according to seasonal or other factors (see paragraph 5) or which suddenly and unexpectedly needs money. The main feature of such loans is that they are extended when the business needs the extra capital and must be paid back at a time which is in accordance with the requirements of the business, i.e. not according to a fixed schedule of so many months but at a time when the business' capital requirements have again decreased, when some of the operating capital has again been freed from the business.

When promissory note credit as described in paragraph 16 of this chapter is extended to businessmen with only two countersigning guarantors as security, special attention must be paid to this aspect. Credit may only be extended on such notes if the person applying for the credit can demonstrate that he needs the extra capital at that moment and that he will be able to repay it from his business in a few months' time. The date on which the credit is to fall due should be set accordingly. Schmid reports that the larger "Lokal-und Mittelbanken" and the Schweizerische Volksbank also extend unsecured short-term seasonal loans, though of course under strict conditions such as recognized creditworthiness, the submission of balance sheets and in some cases examination of the books.

23. Pseudo current account credit as continuous seasonal credit

Seasonal loans for such activities as trade in agricultural produce can easily be extended and repaid in installments. If a series of such loans are provided one after another, with a loan following immediately upon the repayment of the previous one, and these loans are covered by security for all present and future claims which the bank may have on the borrower (such as a credit mortgage or credit surety), this will amount to almost the same thing as current account credit.

Such pseudo current account credit has much to recommend it over real current account credit in this country. This is because the fact that each loan has to have been repaid by a particular date and is otherwise regarded as arrears means that automatic and strict control is possible, which helps prevent freezing. To make sure this system works perfectly it is essential that a given period, say of one to two months, is allowed to elapse between the repayment of the old loan in a lump sum or

a rapid succession of installments and the provision of the new one in a lump sum or a number of disbursements payable in rapid succession.

This produces what is in fact an ideal form of current account credit with a "long wave-length" (see paragraph 26). A continuous series of seasonal loans as described here need not always be backed up by a credit mortgage or credit surety. The other forms of security described in the preceding sections can also be made to apply to all present and future claims of the bank on the borrower.

24. Long-term loans for fixed capital or as long-term operating credit

The kind of loan referred to in section 21, at b., is the usual way in which long-term credit is extended for fixed capital or long-term operating credit ("Anlage und Dauerbetriebskredit"), whether for a new business or for the expansion of an existing one, i.e. credit which if it is not sufficiently secured means that the bank becomes more or less involved in the business as a sleeping partner. It is therefore very important for the bank that such credit is not extended for longer than necessary and that repayments are made regularly, so that the risk to the bank is as limited as possible.

On the other hand, if such a loan is to meet the objectives for which it is intended, it cannot be repaid more quickly than the business profits produced (and depreciation on the fixed capital obtained with the aid of the credit) permit, unless the borrower has other income apart from that from the business from which he can make repayments. This is quite common among retired people, civil servants and employees for example. Borrowers may also receive a regular income from rents on houses, offices shops etc..

Loans of this kind should be repaid in accordance with the times when such additional income is received or the business profits realized. In the case of a business which is not affected by significant seasonal fluctuations in production or sales, profits will be realized throughout the year and interest payments and principal repayments should be made in monthly, two-monthly or quarterly installments.

If the business makes little if any profit at certain times of the year, the bank should agree to no repayments being made at those times but insist on regular payments in the months where profits are made. Where profits are only realized in one or two periods of the year may the bank be compelled to accept one or two repayments per year. Apart from this, monthly installments should be paid from regular additional income (salary, pension, rent).

The previous paragraph expressly refers to realized rather than calculated profits because the times at which profits are realized and calculated may differ. Profits are calculated when goods are sold but only realized when the sale price is actually received.

It is also important for the bank to make a clear distinction as possible between what can be repaid from additional income and realized profits and what must be repaid because this can help prevent further expansion.

There is a great danger that the borrower will constantly expand his business and tempt the bank to become increasingly involved, and where the bank is effectively a sleeping partner this must be strenuously resisted. A system such as this can appear to work splendidly for years, until recession sets in, the business is no longer viable, the collateral drops considerably in value and the bank ends up holding the baby.

The fundamental principle is therefore that the bank should only finance expansion gradually and provide credit to do so over periods no longer than necessary. Moreover, consideration should only be given to the extension of further credit once the preceding loan has been repaid. In this way it is possible for the bank to limit its participation in the business it is financing (see also paragraph 29 of this chapter). It should also be obvious that the longer-term the loan and the bigger the loan in relation to the equity capital of the business receiving it, the greater is the need for the credit to be of a business nature (see chapter III paragraphs 18-20 and paragraph 13 of this chapter). This reduces the bank's dependence on the business risk to a minimum.

Constant monitoring is also essential and this does not simply mean keeping an eye out for arrears but also for any falls in the value of the security or deterioration in the business. It is for this reason that in its "Conditions" the bank reserves the right to demand accelerated repayment and even total repayment at short notice, even where no arrears at all have arisen, if, in the bank's view, the credit extended is at risk on account of one of these factors. The value of this provision is in practice dependent on the extent to which the bank has a lien on realizable assets, in which context debts ceded to the bank for collection and inventory and stocks the ownership of which has been fiduciary transferred to the bank may also be of relevance.

This provision should not be invoked lightly, since its application will often mean at least partial liquidation of the borrower's business and so be very dangerous for him. However, the same applies if the bank makes use of the right to withdraw credit at short notice which is often included in the conditions for current account credit.

Nor should the provision be used if it proves that the calculations on which the repayment schedule was based were too optimistic, i.e. that the business to which the credit was extended is less viable than had been assumed. Unless bad faith is involved or the business in fact proves to be insufficiently viable, in such cases the total period of the loan will have to be extended and the regular repayments reduced.

The same may be done if during the period of the loan, because of economic recession or some other reason, the business becomes less viable and is therefore unable to make the agreed repayments without damage to itself. In such cases, however, the period of the loan should under no circumstances be changed, only smaller repayments agreed to, providing the credit is not thus put at risk. If the deterioration in the business is so serious that future losses are likely, the position of the bank should be liquidated as quickly as possible, as far as possible in consultation with the borrower. This is easy enough to say but in practice it is a difficult problem.

On account of its experience that most short-term loans are not redeemed on the date of maturity but have to be extended, the Schweizerische Volksbank has taken the logical step of introducing loans for indefinite periods which can be terminated at any time. Schmid, who reports this fact, unfortunately does not say what the experience with this kind of loan is. It will be clear from the above that the present author is not in favor of such loans. If repayment is not normally possible at the end of the short period agreed, this means that the loan has not in fact been a true seasonal loan but that capital requirements of a more permanent nature have been met, i.e. that long-term operating credit has been extended.

If regular repayments are not made from business profits or individual savings, the bank will become a permanent sleeping partner and run the risk that if it withdraws the credit facilities it will not be possible for the entire loan to be repaid. After all, credit facilities are most likely to be withdrawn if the bank is worried for one reason or another. Nor are long-term loans (for periods of a number of years) with single repayments desirable. This too amounts to the bank meeting normal, long-term operating capital requirements, i.e. it again becomes a sleeping partner with no control over the business.

It must nevertheless be recognized that long-term loans with regular repayments as discussed in this section are not an ideal way of providing permanent operating capital because many small businesses are not so viable as to be able to pay off that part of their normal, permanent operating capital requirements they obtain through such loans from their profits within a few years. The credit must therefore either be extended over a very long period, something of which the bank will not usually be in favor or not provided in this particular way. Janzen concludes from studying the balance sheets of a number of typical businesses in the Netherlands that "most credit is required on a permanent basis. Only once the business has little by little built up a turnover which it can maintain over a long period given the market it covers is it possible for credit to be repaid from profits"(p.17).

The best thing of course is for long-term capital requirements to be financed using the business's equity capital. In theory this is how it should be but businesses do not develop in accordance with the strict rules of theory and providing the permanent operating capital which is financed through borrowing does not form too great a proportion of the operating capital as a whole, there need be no serious objections to it.

However, a business will prefer to have the credit concerned for an indefinite period, or at least a long period. The AVB can meet this requirement, but in the form of current account credit with a "short wave-length", secured as well as possible by business security (see paragraph 27). Only in this way can such credit be properly monitored by the bank. Loans for an indefinite period or long-term loans with single repayments on the other hand offer insufficient safeguards for proper supervision.

25. Current account credit

According to the literature, current account credit is the most important form of credit not only for small businesses but also for small-scale merchants and craftsmen.

According to Schmid, in 1916 43% of the Schweizerische Volksbank's operating capital was invested in current accounts and in 1918 61% of the current account credit extended by the bank did not exceed 5000 Swiss francs.In Janzen's view, current account credit has to a large extent replaced other forms of credit in this sector.

The advantages of current account credit for the borrower are that:1. he saves interest payments by maintaining small cash balances;2. he can withdraw any amount he needs immediately without having to re-apply

to the bank or the bank having to conduct further examinations of the business and has a stable relationship with a single bank;

3. he may possibly have access to cheque and giro facilities.

The advantages for the bank are:1. that the account-holder is a permanent customer;2. that if most payments to and by the business pass through the account the

bank has access to information about the business of the borrower and any fluctuations in its capital requirements.

In practice the advantages in this country are usually less significant because indigenous and Chinese businessmen in particular are frequently reluctant to have all payments pass through the account, partly out of distrust and partly because they consider it to be far too much bother; moreover, they tend not to pay money which they do not need immediately into bank accounts but to invest in buildings and land or, if things go well, to buy a car with it.

In addition, in many of the transactions in which retailers and traders who buy up products from the local population are involved payment could not be effected at a bank.As a result there is as a rule little possibility of monitoring payments and gaining an understanding of the business of the current account-holder and the account displays a hopeless tendency to become a static rather than a current one; it then has the disadvantage of fixed long-term credit or credit for an indefinite period described in the previous section.

Current account credit should therefore preferably be permitted only where there are guarantees that a significant number of transactions will pass through the account, i.e. where it is agreed, in accordance with the nature of the business concerned, that access to the account is possible only in the form of withdrawals against claims ceded to the bank for collection and the making payable of bills of exchange and invoices, or that the receipts from claims ceded to the bank for collection, rents, sales and other designated claims may be collected by the bank or paid into the account with the bank. Linking withdrawals to bills or invoices is also especially desirable as it helps combat double credit from both the bank and suppliers (cf. paragraph 8).

As it will only rarely be possible for these various requirements to be met in this country preference will frequently have to be given to loans rather than current account credit when the AVB is extending credit to businessmen; either that or a middle way must be found by making the current account subject to exact conditions

concerning payments and regular reductions of the maximum amount of credit possible.

Current account credit may never be extended to meet a need for fixed capital (land, buildings, plant, etc.); for such purposes long-term loans with regular repayments are the appropriate instrument (cf. previous section).Credit should only be provided on a current account basis to meet requirements for capital with a rapid turnover, i.e. operating capital. There is a distinction here between long wave-length current account credit and short wave-length current account credit.

26. Long wave-length current accounts; continuous seasonal credit

This form of credit is most commonly provided to finance seasonal fluctuations. During a certain period of the year withdrawals are made until more or less the maximum amount of credit has been taken up, while other times payments are made into the account until the credit has been entirely or almost entirely repaid and the account is again more or less in credit.Long wave-length current account credit can be expected to be used by middlemen involved in certain products and businesses subject to pronounced seasonal fluctuations.

It is to be recommended that businesses requiring seasonal credit should not initially be provided with current account credit but with pseudo current account credit described above in paragraph 23. This allows the bank strict control over the credit so that freezing can be avoided. Only once the borrower has been "trained" to use seasonal credit correctly should real current account credit be extended if the borrower so requests in the interest of greater flexibility.

Real current account credit should be subject to the condition that the account will be more or less in credit for an agreed length of time during one or more periods of the year. It will often be necessary to stipulate that withdrawals may not be made before a particular date; this is in order to prevent the credit being used by the account-holder to provide undesirable loans to farmers.

Experience has shown that as a rule most small businessmen, including middlemen, do not wish to have anything to do with seasonal credit. This is partly because they do not wish to restrict their business to particular products but to make their capital work throughout the year, something they are quite capable of doing. Applications are therefore almost always for permanent operating credit.

27. Short wave-length current accounts; permanent operating credit; regular reduced maximum borrowings

Short wave-length current accounts are primarily to be found among businesses which are not subject to pronounced seasonal fluctuations. Here too there is a tendency among borrowers to use credit quickly and not make payments into the account thereafter.

As shops receive invoices and issue acceptances for their purchases, it is generally possible to stipulate that withdrawals may only be made in order to pay the claims of third parties on the account-holder via the bank.

The bank can ensure that payments are made into the account by having debts ceded to it for collection, providing the shop sells on credit to a significant extent and its clientele has a reputation such that the bank or collection agency can take on the collection of the accounts. Otherwise, fiduciary transfer of ownership may be of use; in such cases the bank does have control but must be constantly on its guard to ensure that receipts from sales are regularly paid in to the account.

Providing the bank uses these means to ensure that most of the business's turnover passes through the bank, short wave-length current account credit is the best form of credit for financing part of the normal permanent operating capital requirement. It is therefore a way of extending long-term operating credit without the amount of credit enjoyed by the business being reduced by regular repayments, as is the case with loans.It is still necessary, however, that the amount of credit extended should slowly be reduced - as business profits allow - by, for example, reducing the maximum by one tenth each year, as appears to be customary at the Nederlandsche Middenstands-bank.

According to Jantzen many banks for small-scale enterprises in the Netherlands required borrowers to reduce their debit balances each year by a few percent of the amount originally extended in credit.

To avoid any misunderstanding, it should be added that the former practice of many popular credit banks of accepting an annual reduction of the maximum amount of credit as sufficient in itself is not in fact satisfactory, even if the annual reduction is one of twenty percent rather than ten. It is still just as necessary for there to be movement in the account, this to be guaranteed as described above.

If this requirement cannot normally be met then either a loan with regular repayments (monthly or quarterly, cf. paragraph 24) should be extended or current account credit subject to the condition that the maximum is reduced once a month or once a quarter. Naturally, the latter is to be preferred to a loan with repayments only if the movements in the account agreed upon take place.

One disadvantage of both forms of credit referred to in the previous paragraph is that they mean that the operating capital made available by the bank to the borrower is constantly decreasing, without being supplemented proportionally from profits realized, in other words they do not constitute permanent operating credit. To compensate for this the bank can agree, at the request of the borrower, that each time a given minimum period (e.g. a year) has elapsed the amount of credit can again be increased to the original maximum, less say 10% for each year since the credit was originally extended, providing the conditions have been strictly adhered to. Further information on this subject may be found in the article "Small enterprise credit for the Chinese" (29).

As was stated in paragraph 24 with regard to permanent operating credit in loan form, here too the bank must be on its guard against constant business expansions. A current account with an annually decreasing maximum may not be used to obtain long-term credit for fixed capital; only loans should be extended for this purpose. If a client of the bank requires current account credit in addition to such long-term credit this is possible. A combination of the two would certainly be advantageous to the borrower, since he would save on interest payments and have an additional incentive to pay as much into his bank account as possible. However, such a combination will remain undesirable while bank staff and customers have insufficient experience of current account credit.

28. Notice and cover in the case of current account credit

As soon as a current account (long wave-length or short wave-length) no longer meets the requirement, set when the account was opened, that it should be reasonably fluid or display a tendency for the amount of credit enjoyed to decrease, notice should be given without delay and the account closed as quickly as possible.If the credit was intended to be seasonal, it should be repaid in full not later than the time at which extra seasonal income is received. If it was intended partially to meet a normal, regular need for operating credit, the credit should be repaid in a number of installments (once a month or once every so many months), the exact number to be tailored to the business in question, even if this means that the business has to contract. After all, the latter simply means that the expansion achieved with the aid of bank credit must be reversed.

For this reason any contract for a current account (including those where the maximum amount of credit must be regularly reduced) must include a provision stipulating that the bank may terminate the credit facilities at short notice, which means that the bank has the right to refuse further withdrawals from the moment notice is given (cf. "Conditions:, article 13). Such provisions should not of course be abused; in particular, where the account-holder has in good faith assumed financial obligations to third parties on the basis of the credit still available to him before receiving notice from he bank, the bank should give him, the opportunity of honoring those obligations.

Even if movement in the account is satisfactory it may still be necessary to give notice if the security lodged has fallen in value and so become insufficient and no further security can be provided or if the business deteriorates and is at risk of ceasing to be viable. This is a particular concern where permanent operating credit is involved because the bank more or less becomes a sleeping partner in such cases.

From the figures received automatically as a result of debts being ceded to the bank for collection and the ownership of assets being fiduciarily transferred, the bank will be able to see relatively easily whether turnover is falling or payments by customers are becoming less satisfactory. The bank should keep records indicating whether lists of debts ceded for collection, statements of assets whose ownership has been fiduciarily transferred and other information (turnover figures, trial balances etc.) are regularly submitted on time.

The fact that permanent operating credit (short wave-length) means that the bank is closely concerned with the business results of the borrower is also a reason why business security should be provided as far as possible for such credit (i.e. mortgage/credit surety, collateral in the form of negotiable securities or pensions in combination with life insurance, possibly in addition to the ceding of debts for collection of the fiduciary transfer of ownership).

As always, the need for business cover is more urgent the greater the amount of credit extended relative to the equity capital of the business and the more difficult it is to obtain information on the business, the bank thereby running a greater risk of not being able to extricate itself from its relationship with the business in good time where necessary. This is why regular revaluation of the security lodged is essential in such cases.

28. Summary: general conditions for credit to small-scale enterprises

Before providing credit in this sector, whether in the form of a loan or current account facilities, the bank should obtain as much information as it can about:

a. the reputation and personal qualities of the business and those running it, not only as regards the technical aspects of the business but also commercially; the bank should have nothing to do with cowboys, poor businessmen, unreliable characters and spendthrifts;

b. on the liability side the amount and composition of the borrower's capital and its distribution, among equity capital, supplier and/or customer credit enjoyed, bank credit and other debts (which should be specified) and on the assets side among land and buildings, plant, inventory, raw materials and consumable supplies, finished products or cash goods, customers and other debtors; i.e. detailed balance sheets should be obtained, preferably for several consecutive years;

c. operating accounts, turnover and stock figures, again preferably for a number of years;

d. the purpose for which the credit is required and the most appropriate form of credit and repayment schedule therefor;

e. the security available and proposed by the applicant.

The figures referred to at b. and c. should be checked where necessary with the books and by visiting the business. Income, corporation and wealth tax assessments should also be examined. Furthermore, information should also be obtained from such sources as small business or commercial associations or from banks of which the borrower is or has been a client, as it is quite possible that the applicant may not disclose certain debts, private ones for example, which the bank must nevertheless take into account just as much as business debts where one-man businesses and firms are concerned.

Details of supplier and customer credit enjoyed by the business and credit extended by the applicant and of other debts and claims must be requested. In times of depression special attention must be paid to whether part of the stocks have become unsaleable or whether some outstanding claims are dubious, with the result that the calculated profits only exist on paper and in reality the business is no longer viable or is at risk of ceasing to be so.

Credit may be extended to viable businesses only. In periods of economic depression one should be particularly cautious about the optimism of applicants for credit whose businesses are no longer viable but who think that they will be able to get them going again with the aid of bank credit. This can easily degenerate into speculation using bank money and the bank should have nothing to do with such activities. As to the financing of new businesses, the viability of which still has to be proven, reference should be made to the following section.

The amount of bank credit must be in proportion to the equity capital of the borrower and his other debts. Writing in 1920 Jantzen already considered it highly satisfactory "if, as is already the practice at some (sic!) small enterprise banks, the credit extended does not significantly (sic!) exceed the borrower's own resources" (p.110). From the balance sheets of a number of typical small businesses he concludes that " it is relatively common for the ratio of borrowed capital to equity capital to be two to one, while bank credit scarcely exceeds the borrower's own resources" (p.17). With an equity capital:borrowed capital ratio of 1:2 and an equity capital:bank credit ratio of more or less 1:1 it is hardly surprising that the small-scale enterprise banking system in the Netherlands largely collapsed shortly after Jantzen's book was written.

In 1932 Van Eck wrote as follows: "If bank credit equals or exceeds the amount that the borrower has himself put into the business the bank's interest in the business is as large or even greater than the owner's; this situation is not healthy because the bank is then to all intents and purposes acting as a sleeping partner and up to a point shares the business risk bit does not participate in the profits".

In practice the Nederlandsche Middenstandsbank would appear not to extend credit in access of 50% of the business's equity capital. This criterion should be taken as the norm by the AVB, to which might be added that bank credit plus other borrowed capital should not exceed equity capital (cf., however, paragraph 30, third from last paragraph). The equity capital of a business can also be taken to include the immovable property (houses etc.) of the members of a firm, as in this country such property fulfils the function of invested reserves. Naturally, the valuation of this non-liquid part of the capital will have to be conducted extremely carefully.

The real purpose for which the capital to be provided by the bank is to be used will not always be as claimed and careful investigation is essential to establish what it is as form of credit and repayment schedule must be appropriate to it. To this end it can be assumed that the equity capital is invested primarily in fixed capital (land, buildings, plant, inventory).If the equity capital amounts to less than the fixed capital and no long-term credit has as yet been obtained, it is likely that part of the bank credit which has been applied for will in reality be used to finance the purchase of fixed capital (cf. paragraphs 5

and 6); the relevant part of it should therefore be extended as a long-term loan with regular repayments (cf. paragraph 24)) and proper business security provided. If the equity capital exceeds the fixed capital, then it should also be regarded as contributing towards normal, permanent operating capital requirement. If it is not sufficient to do this, it means that the bank credit is to supplement the normal operating capital and should thus be regarded as long-term operating credit. The part of the credit to be used in this way should be extended either as "short wave-length" current account credit where the maximum amount of credit is regularly reduced (cf. paragraph 27) or as a loan with regular repayments (cf. paragraph 24). In both cases the credit should be extended over a period of several years and repayments or reductions in the maximum amount of credit timed to coincide with the times when profits are realized or additional income received.

The credit should also be covered by as much business security as possible because of the sleeping partner aspect. If the equity capital is equal to or exceeds the fixed capital and normal, long-term operating capital requirements together, the bank is providing only short-term operating credit and what is required is either a "long wave-length" current account (cf. paragraph 26), pseudo current account credit (cf. paragraph 23) to cover seasonal requirements or, occasionally, a "short wave-length" current account to take care of a variety of short-term capital requirements. In these cases it is less necessary to set strict conditions concerning security, but serious attention should be given to ensuring proper movement in the account.

The guidelines set out above will often be difficult to follow without exact information which can be checked. As has been stated repeatedly already, this makes it more important that the credit should take the form of business credit. It should depend as little as possible on the assumed results of a business about which little is known and should therefore wherever possible be covered not simply by business security with a large surplus value but also by the bank obtaining a lien on fixed incomes (rents, pensions etc.) and requiring regular (one, two or three-monthly) repayments or reductions in the maximum amount of credit.

It will also be clear that the more a bank knows about the circumstances in which a business of the kind it is dealing with generally functions, i.e. about that particular type of business, the easier it will be to understand a particular business and how it can be financed. This is why studies such as those conducted by Tänzer on indigenous printers and butchers and those by Soekarno and Soenario on the batik and small cigarette industries are of considerable value for the proper provision of credit to small businesses. This would be a splendid area for further study.

29. Credit for new and recently established businesses

It would appear from its publications that the Nederlandsche Middenstandsbank is generally reluctant to provide credit for new businesses, not only because of the risk involved but also because it believes that it is not its business to provide competition for existing small-scale enterprises, whose lives are difficult enough as it is. The latter consideration should not be forgotten in this country either, though the situation is different in that in the indigenous sector there has as yet been insufficient

development of small businesses, while the medium-scale enterprise sector is still unexplored. In general therefore it will be the responsibility of the AVB to help the development of small businesses by extending credit to new and recently established businesses as well. The threefold risk involved is a problem, however. Firstly, a new business and the person running it have yet to prove their ability in a new field. Secondly, the cover which can be provided will as a rule be insufficient. And finally, it will frequently be impossible to maintain the 2:1 ratio of equity capital to bank capital. The question then is how far the AVB can go.

The first thing to do is to make a distinction between small amounts of credit of a few dozen or perhaps a few hundred guilders and larger sums. Small amounts of credit, which will usually be what most craftsmen require, can be purely personal in nature; that is to say that they can be provided if the bank has reason to believe that the borrower has the technical and commercial skills and the character to succeed and it appears that conditions objectively favor a business such as that which the borrower wishes to establish. Further reference should be made to paragraph 22 of Chapter III and paragraphs 2 and 3 of this chapter.

Where larger amounts of credit are concerned the bank will have to be more cautious as regards limiting the risk to which it is exposed. Even if it would be socially and economically desirable for a business to be set up of the kind for which the bank is being asked to extend credit, it should not be the bank which bears the primary risk; the entrepreneur himself must in any event also put money into the business himself. The extent to which the bank can assist depends on the nature of the capital requirements and the security which can be provided. The bank cannot provide a loan for the procurement of premises and plant which derive much of their value from the business and so would result in a considerable loss if they had to be sold because the business had ceased to operate, unless better security can be provided (cf. paragraph 13, penultimate paragraph), In such a situation the new business must be satisfied with rented premises and purchase its plant from its own resources.

On the other hand, the bank can where necessary provide credit to cover the whole of any temporary operating capital requirement and often also some of the normal permanent operating capital requirement (long-term operating credit) if there is a fiduciary transfer of ownership and/or debts are ceded to the bank for collection.In this way the ratio of equity capital to bank capital may temporarily be 1:2 rather than 2:1, providing personal and objective conditions are favorable and the amount of credit involved is not too great (no more than a few thousand guilders). The bank will have to take care to turn the ratio around to its own advantage again as quickly as possible and to that end it must ensure that the business is set up and run in a sober fashion, that the trader does not pay himself too much and that the business profits are for the time being not used for expansion but to reduce the debt to the bank (cf. paragraph 24 and the penultimate paragraph of paragraph 27).

Where new businesses are financed without there being sufficient business security it is also essential that proper books are kept from the beginning and the necessary information supplied to the bank at regular intervals so that it can obtain a clear picture of how the business is going (cf. paragraphs 11 and 12).

It should be made clear to the borrower that the bank has a serious interest in the success of his business and is entitled to his trust.

Finally, it should be obvious that the bank should limit the total amount of credit it extends to new businesses in order that the risk does not become too great in relation to its own equity capital. It is the responsibility of the financial department of the Central Supervisory and Support Board to ensure that this is the case. The bank must therefore indicate in its books which credit concerns new businesses and supply regular figures on the subject to the Board.

The bank can only go further if others take over the risk in full or in part. The loans provided for rubber processing installations (presses and drying sheds) which were guaranteed from funds formed from export duties on rubber produced by small-scale growers are an example of the former, while those for which the IMIW paid a third of the sum involved to the AVB as a guarantee are an example of the latter.

CHAPTER V CREDIT TO FARMERS (30)

1. Outline of the indigenous farming community

Anyone wishing properly to understand the objectives, methods and results of the financing of indigenous farmers must begin by setting aside all economic and business management concepts derived from modern, individualistic capitalism. To assess such financing against criteria such as production credit, capital formation and economic progress is to apply the wrong standards. Anyone who does so can only be misled, probably into concluding that the Popular Credit System is failing in every respect and can best be wound up sooner rather than later. This mistake is made repeatedly, not only by outsiders but also by the staff of the Popular Credit System itself. People who have grown up accustomed to the modern way of thinking find it especially difficult to lay aside the standards they have learned from it.

The indigenous farming community can be described as a pre-capitalist society based on and made up of desas (villages). The village is not simply a conglomeration of individuals or families living in the same place, as is a town or village in the west, but as De Vries (31) has so aptly put it, a "community" bound together by the supernatural, "governing all aspects of the life of its inhabitants". The religious nature of this community is also apparent from the "village spirit", which in many villages lives in a large tree and is still venerated, and from many of the customs associated with the cultivation of rice, such as the holding of "slametans" (thanksgiving feats), which is a religious duty. The communal life of the village members is the primary concern, the interests of the individual being of secondary importance; there is no room here for the individualistic approach required for the exploitation of ways of making profits.

In his booklet "Village and desa" (32), Professor J.H. Boeke provides the following description of a pre-capitalist society, based on Sombart's "Der moderne Kapitalismus" ( Modern capitalism).

"The economy of both the family and the community is one based on expenditure. The needs of the producer are the driving force behind all economic activity. Those needs determine the producer's expenditure, and income is geared to that expenditure. Expenditure is traditional and does not vary in amount or composition; it is also limited because needs are limited. The principle of satisfying needs (the "Bedarfdeckungsprinzip") therefore does not only mean that production is geared to the meeting of needs of the producer but also that those needs are limited.

"So far as can be ascertained, pre-capitalist communities comprise two strictly separated classes, with totally different levels of need and philosophies: the ruling class and the masses. The ruling class leads a free, independent, lordly life, without performing any economic work; the masses have accepted their fate of having to work by the sweat of their brows. They alone are the economic subjects, the producers.

"The masses comprise people with few individual distinguishing features who live in highly organized groups, whose sensitivities and emotions are highly developed but whose intellectual abilities are poorly developed; they have little self-discipline and little sense of accuracy. They tend to regard work as a necessary evil, to be kept to the absolute minimum. They work irregularly and usually slowly. Methods of production are traditional: it is the past, not the objective, which determines the manner in which production is carried out. Customs govern all action by the individual and the community.

"Individuals consider themselves primarily to be part of a group and endeavor to demonstrate themselves to be worthy, respected - and perhaps admired - members of the group. Life is organically ordered: it is subject and adapted to the laws of all-powerful; nature. The principles of pre-capitalist existence are preservation, continuation and peace.

"One aspect of this picture can be described in more detail. The limitedness of the needs of the individual, combined with the fact that the individual is seen primarily as part of the group, means that economic activity is of less importance than social activity. It is not only that the interests of the group weigh more heavily than those of the individual; the needs of the individual are also for a large part determined by the community - they are social in nature. The temple is more important than the home, respect more important than wealth, power more important than financial advantage".

Boeke makes the following observations concerning farming communities in particular.

"Farming is concerned with food production, its aim being to meet the producers' limited needs; closely knit local groups of people related by blood dominate the scene; in addition to individual plots for cultivation there are also large communal areas of land for grazing and other purposes; communities demonstrate an internal spiritual cohesion and are closed to outsiders; there is a natural willingness to provide mutual assistance to other villagers, supplementary to the principle that each family should meet its own needs; there is a nucleus of farmers and a few skilled craftsmen with village officials subordinated to them and receiving a living from the community; the community has a powerful right of decision and is heavily involved in the manner in which individual plots are cultivated. And even though blood relationships are gradually giving way to relationships based simply on the fact that people live next to each other, even though differentiation is growing because of the increasing numbers of large landowners on the one hand and people with no land on the other, the spirit of traditionalism and immutability remains, individuals continue to be part of the community"

This picture of pre-capitalist village communities is no more than an outline and it cannot reflect living reality. Numerous outside factors have also affected village communities and the extent to which this has occurred can vary enormously from place to place. Such factors include the government-ordained produce cultivation system, western-style large-scale farming, the displacement of cottage industry by imported goods, contact with foreign traders and exposure to commodities previously

unknown, the cultivation of cash crops, people who are not part of the village community taking up residence within the village territory, the effect of monetary taxes, the influence of government agencies - in short, all factors which to a greater or lesser extent have breached the closed nature of the village community and have given rise to new needs and more monetary transactions.

Nor should one imagine that someone from a village is indifferent to prosperity; he too would rather be rich than poor, he attaches considerable importance to the respect of society and for this reason likes to have jewels and beautiful clothes, a nice house and a lot of land and livestock. This does not, however, make him an economically active person. He may be thankful to fate for bringing him greater prosperity but it is not part of his nature to take his fate into his own hands and work hard towards such prosperity himself through rational considerations and the appropriate continuous effort. Such people do exist but they are exceptions and as a rule they too soon reach the point at which they are content with what they have achieved and not prepared to make any further effort.

One can perhaps conclude that despite the material changes they have brought about, outside influences have in general wrought little real change in the mentality, the inclinations of the people of the village. The village is still largely a traditional community and the way in which its members act and think must be understood in this light.

2. The role of credit in village communities

It will be clear from the above that as a rule the static society of the village is not interested in the continuous pursuit of prosperity and that therefore credit can rarely promote prosperity or stimulate production. There is thus little to be gained from the consultation of books on agricultural credit and agricultural economics in search of an understanding of the provision of credit to indigenous farmers. Such books are based on premises which often do not exist in this country (they are incorrect even in large parts of Europe, moreover). These include individualistic farmers whose aim is to make a profit or at least increase their income, who think rationally and make rational calculations, who use capital in a consciously thought-out manner to increase their profits, who introduce labor-saving methods, who succeed in keeping their household and business to some extent separate, and who often already keep accounts. In this country the premises are different.

As the satisfaction of needs, consumption in other words, is generally the rationale for economic activity, credit will primarily also be seen as a way of achieving the same ends and only secondarily as a means of boosting production in order to satisfy the producer's needs. Credit thus serves as a leveling agent, firstly in that in periods of scarcity and lack of funds the most urgent needs (subsistence, cultivation) are met with the assistance of credit, which is paid back when the borrower has more money coming in, and secondly in that large expenditures can be spread over a longer period by borrowing. A seasonal loan, to be paid back after the harvest, is the appropriate form of credit to meet seasonal requirements, while a loan to be paid back in a number of installments is more appropriate for large purchases.

Credit may also be required for larger expenditures. In many cases, however, there is a greater need for credit for direct consumption than for production credit. The distinction between production and consumer credit is meaningless in respect of the small farmer; it is artificial and does nothing to increase understanding of the provision of credit to the farming community.

3. The lack of capital formation in the village community

Credit also plays a major role in the village community because there is no capital formation in such communities. This is not because it would be impossible but because pre-capitalist mentality does not favor it. The habit of restricting the satisfaction of one's needs in order to save, which until recently at least went without saying in Western Europe, does not fit in with village economics, which are geared precisely to the satisfaction of needs. Anyone who has an income greater than he needs to meet his daily living requirements uses the remainder to satisfy his need for social respect by buying beautiful clothes, jewelry or livestock, building a house, renovating his home or buying more land. In so far as they are not jewelry, even gold and silver coins are not regarded and kept as cash reserves (a typically capitalist concept) but as treasure, as is apparent from the fact that such hidden treasures are only brought out and disposed of in times of extreme necessity.

Another typical example of this mentality is the well-known phenomenon of village members with deposits with the Popular Credit Bank who would rather take out a loan at a higher rate of interest than withdraw their savings.

The lack of cash reserves means that credit must be acquired to provide the funds necessary for large and unexpected expenditures, such as in times of illness or other problems. This is why credit applications are frequently urgent, complaints being made that the popular credit banks do not react promptly enough, and the fact that the pawnshops are not open day and night being regarded as a serious problem.

4. The gross monetary income of the farmer as the basis for the credit to be extended

Paragraph 2 showed how it is illogical and indeed impossible to distinguish between production and consumer credit in dealings with indigenous farmers. Domestic and business expenditure form a single, indivisible whole. The basis on which credit is extended cannot therefore be the production costs and net business profits but the gross income of the farmer, or rather that part of it which is received as money. It is after all from such monetary income that the farmer must cover his monetary expenditure. He can only meet his requirements through credit in so far as his monetary income so permits.

In this regard indigenous farmers are capable of considerable adjustment, as was evident when the depression set in. Against this background it is incorrect to blame the former popular credit banks, as some have done, for being too generous with credit before the economic crisis.

In terms of the monetary incomes enjoyed by farmers at the time, loans were generally not too high (there were of course exceptions) and they left sufficient margin for normal setbacks. The relatively large monetary incomes of the farming population brought about an increase in monetary transactions and larger monetary expenditures. Credit had to adjust to this situation. A number of banks can, however, be blamed for continuing to extend too many loans in the same way after the middle of 1931, when the fall-off in monetary incomes had become extremely clear and the management had warned more emphatically even than at the end of 1930 that the amounts loaned should be reduced significantly. This meant that the farmers did not adjust to having less monetary income quickly enough, which in turn gave rise to considerable arrears.

5. Tenancies and share-cropping

Farmers can be divided into those with their own land and tenants. The actual form taken by tenancies in pre-capitalist village society is share-cropping of rice fields, payment being made in kind in the form of a proportion of the rice harvest, after deduction of the harvest payment.

It is also be possible for rents to be paid, in the form of a fixed amount of rice from the harvest. In addition, there is a system of labor tenancies, as referred to by Soekarno (33), where the tenant pays his rent by working some of the other rice fields of his landlord. No credit is therefore needed for these forms of tenancy.

Moreover, because of their small incomes, sharecroppers without their own land are as a rule not very creditworthy, especially in densely populated areas, where land is extremely scarce. Indigenous farmers want to remain farmers rather than become employees wherever this is at all possible, even though the wages of an employee may be higher than the income a farmer and his family can derive from their own business. Farmers are therefore prepared to become share-croppers under extremely unfavorable conditions where necessary. It is for this reason that, as Boeke observes (34), "there is no way in which land can be made more productive than by having it worked by poor farmers and their families", that is to say by leasing it to share-croppers.

Share-croppers are not always economically weak, however. In his "Comparison of the economic situation in the Tayu and Jakenan districts" (35) Burger observes that in Jakenan share-croppers are in a stronger economic position than the landowners. Young landowners, who have only been in possession of a communal rice field share for a short time and who have insufficient livestock to work the land, lease it for share-cropping by established farmers who themselves own land and a lot of livestock. In Tayu, especially in villages where the communal land is highly fragmented, there are many opportunities for making money outside farming and much land is rented out to sugar factories. The same author states that share-croppers (and in some cases those simply paying rent for land) are the real farmers. "In more than one village in this region almost nobody works his own land any more". As a result of share-cropping and tenancies a number of small communal shares held by a single person can be combined to form small farms of about 1 bouw (= 7096,5 m2). Share-croppers are here the farming middle class.

6. Bailment and leasing of land

From the legal point of view, bailment and leasing are land transactions but from an economic point of view they can often be regarded as credit transactions. The owner of a rice field who needs money bails or leases out part of his land. The former is only possible if the owner has the right to dispose of the land in question as he sees fit, that is to say that it is land which he has inherited individually or which is in communal ownership with fixed shares assigned to individuals, the disposal of which is permitted.

Both inherited land or land which is in communal ownership may be leased out, but in communal areas in particular, where it is leased out for several years at a time, such transactions play a role very similar to that involved when land is bailed.According to Soepomo in "Customary private law in West Java" (36), the leasing of land for a given sum of money handed over when the lease contract is concluded is always a contract intended to pay off a debt, that is to say that the debt already exists and that in order to pay off that debt the owner of the rice field relinquishes the use of his rice field to the creditor for one or more harvests.

The present author has not encountered the leasing of land for a given sum of money to be paid at the beginning of the lease. Soekasno (loc. cit.) mentions instances in which the rice fields leased out in order to obtain money to pay off bank debts, to work other land and to obtain operating capital for a business.

The credit element in the leasing out of rice fields is clearly demonstrated by the practice of the rent being paid some months before the land is actually taken over. According to Burger (loc. cit.) this is often done at the time of the previous rice harvest in Tayu and Jakenan, while in Juwana "toda", rent paid one or two years before the start of the period in which the land is to be worked, is said to be very common.

Examples of multi-year land leases include the "gangsoer" contracts in the Plumbon district (Cirebon), which are mentioned by Soepono (loc.cit., p.224) and Cramer (37), and the two-year "tandoe" leases in Besuki, which are mentioned by Niggebrugge (38). Both systems also reveal their credit-raising purposes clearly through the common trait that the rent payable per year or per harvest gets less the longer the period of the lease; the rent is paid as a lump sum in advance for the whole period.

The leasing of land to sugar factories is also clearly concerned with credit.

The leasing of land is not a credit transaction if the rent is paid out of the harvest. In the case of rice fields, however, this would appear seldom to be the case. Burger refers to such leasing of land in the sub-district of Karanganjar by the name of "balang woh" (39).

Even in the cases where the leasing of land is a credit transaction on account of the rent being paid in advance, it may, from the point of view of the person leasing it, also or primarily be seen as a straightforward tenancy, especially if he does in fact work the land with his family or has it worked by paid employees. Such tenants will

primarily be reasonably well-off, the less wealthy having to be content with share-cropping.For example, Tänzer (40) describes how the well-off farmers in Lembang, Cisarua and Pengalengan grow potatoes not only on their own dry lands but also on leased land. Dalman also states that the land is leased in this way for the cultivation of another cash crop which requires dry ground, sugar cane, in the sub-district of Redjotangan, Tulung Agung (41).Extremely high rents are also paid for good tobacco land in the Kedjadjar region of Wonosobo (42). Share-cropping is not common where it is primarily cash crops that are grown.

It may be concluded from the above that credit does not generally need to be extended for the leasing of land, certainly not in the long term.

7. Profiteering

The leasing and bailment of land can easily give rise to profiteering if the person providing the credit does not need the land for his own farming activities but regards it solely as capital for investment. Boeke (loc. cit., p.69) points out that in the village economy land serves only as a means of production for use in meeting the producer's own requirements and not as a source of income simply on account of ownership.

Consequently, large-scale investment in land is most commonly engaged in by indigenous people from the towns or other villages or (through front men or indigenous spouses) by foreigners (from the Orient and Europe). Such people, who are not bound by the traditional solidarity within the village community, frequently abuse their greater economic power by engaging in profiteering. In order to derive as much profit as possible from the land they have taken in bailment, leased or bought, they lease it to share-croppers, often to the very people they have leased it from etc. in the first place. The latter thus become poor tenants on their own land.

With regard to the Plumbonese "gangsoer" contracts referred to in the previous paragraph, Cramer states that in such cases it is common for the lessee to lease the land back to the lessor for a rent which is many times higher than that paid in advance by the lessee. Soekarno (loc. cit., p.286) describes the case of a village where lessors share-cropped the rice field they had leased in exchange for only a fifth of the harvest; there were also various large Arab and Chinese landowners in the same village.

8. Customer and supplier credit

Customer credit and the supplier credit which is frequently extended in combination therewith are of considerable importance in the financing of farming. Indeed, they are almost inseparable from farming, not only in this country but throughout the world. Only in times of depression, when there may be a surplus of agricultural produce in relation to demand backed by purchasing power, can these forms of credit temporarily become less important or disappear altogether. This is the current

situation in this country as far as most indigenous agricultural products are concerned. There is no reason to rejoice at this, no matter how many objections there may be to customer and supplier credit. It is a symptom of a decline in prosperity which is sure to disappear again once demand for agricultural produce picks up.

Polak describes customer credit to farmers as follows: "Farms produce goods in bulk which are subject to diminishing returns. It is thus others who compete to buy those goods rather than the farmers competing to find markets". Unfinished goods of this kind are generally easy to sell and are therefore much sought after as something on the strength of which credit may be extended; this is particularly true in the case of agricultural products.

"The buyers here come to the sellers because the diminishing returns make for scarcity. Moreover, those buyers are often companies whose businesses have a rising marginal return and for which it is desirable to acquire as large a share of production as possible, in order for the business to operate at optimum capacity. This is the case with the Dutch-owned sugar factories: the more sugar beet they can acquire, the closer they will be to operating their plant at optimum capacity. The same is true in the world of commerce, where the important thing is to maximize use of the organization; this means that every effort must be made to reach as high a turnover as possible. Where agricultural products are concerned which are always in demand but only obtainable for a limited period, that turnover can only be increased by being extremely competitive when purchasing.

"Competition among purchasers has gradually brought forward the time of purchasing, and contracts are now concluded long before the product is ready. This early conclusion of purchasing deals coincides with the period in which the producers are in greatest need of capital and therefore it should come as no surprise that for farmers customer credit has become a welcome means of obtaining capital, while for the purchasers it is a way of providing themselves with an advantage over competitors for the same goods……..Purchasers do not always have sufficient capital themselves to provide customer credit but often they can obtain credit from others. In the grain trade in Argentina, for example, a credit chain would appear to be the rule. This is described by Sonndorfer as follows: "One and a half to two months before the wheat is shipped the exporter draws a bill of exchange on his customer in Europe and sells it to a bank or on the stock exchange to businessmen with payments to make in Europe. He then provides advances to the intermediaries who in turn provide advances to the actual vendors so that they can pay the harvest workers". Bank capital is thus indirectly made available to farmers via wholesalers who enjoy the trust of the banks and the intermediaries responsible for collection, whose involvement ensures that "the organization for the protection of credit, the supervisory body, controls and the relevant experience of the buyers still come into play."

No matter how well the credit is secured by these intermediary links, a considerable risk remains. The chance of the harvest failing is in itself a big enough danger. Customer credit cannot therefore provide all the capital

requirements of farmers and will continue to be limited to that part of them which can be secured even by a poor harvest. Even if the immediate buyer was prepared to accept a greater risk, in most cases he would not be in a position to extend any more credit. Particularly where he must himself obtain credit from others, those others would surely be reluctant to provide capital to be used primarily to provide advances on a harvest.

"The primary sources of short-term credit for farmers are thus their customers and the private banks. Except in special cases (e.g. in the Dutch East Indies where secured by harvest surety) none of these will be prepared to provide all capital requirements, if only because of the risk of a failed harvest, a drop in prices, bad faith or incompetence".

The present author has quoted Polak so extensively in order to use the words of an authority on the subject to clear up a misunderstanding that is still far too common in this country, namely that the purchasers of agricultural products are harmful parasites living off farmers rather than a natural and indispensable link between farmer and consumer, and to make it clear to the staff of the AVB that the bank cannot eliminate customer credit.

Only if and in so far as farmers organize themselves to undertake the marketing of their products will it be possible to do without the purchasers and their credit. There is a long way to go in this country before such a situation will be reached. However, by providing operating credit under reasonable conditions, the AVB can help ensure that the farmers do not become too dependent on the purchasers and are not exploited by them. One restraint against this happening indeed already exists in the competition between purchasers. If the extension of credit is intensive, then perhaps the interest rates charged by the purchasers can also be reduced somewhat. The influence of the bank can go little further than this.

In addition, the bank cannot go so far in extending credit as the purchasers, as they know the market situation better and in particular because their links with the farmers are much closer and more personal. They know what each farmer is worth and can adjust the credit they provide accordingly. In the course of a study of the cultivation of tobacco in the hills of Central Java (43) the present author found that large, good-quality tobacco growers were able to obtain much more credit much more easily than others. Tänzer reports that the size of loans to potato growers in Bandung depends among other things on the reputation of the farmer as a grower. The Chinese tobacco purchaser in Central Java was regarded by many farmers as a friend of the family who provided evidence of his friendship by attending feasts and bringing gifts and to whom one could turn for money whenever it was needed, no matter what it was to be used for. Even if a farmer needed no money he would sometimes borrow it anyway, in order to bind the purchaser and be sure that he could get rid of his entire crop rather than being left with the poorer quality share of it.

Where good contacts are concerned, an obliging Chinaman does not restrict himself "to that part….. which can be secured even by a poor harvest". It regularly happens that the product delivered after a failed harvest is insufficient to pay the debt. The Chinese merchant then not only extends the period within which the debt must be paid but often also provides further credit.

Nor, where valued clients are concerned, is the interest rate raised because of the longer time taken to repay after a failed harvest. It is well known that such generous extensions of credit in a failing market sometimes result in the purchasers suffering serious losses.

Another advantage which the purchaser enjoys over the bank is the fact that he is often also the supplier of seedlings, fertilizer, food and almost everything else a farmer might require. The farmer can then buy from him on credit, the amount due to be deducted from the price paid for his harvest. Almost all Chinese warong (stall) holders in a village are also the purchasers of agricultural produce.Tänzer gives a nice description of how the Chinese purchasers/suppliers operate a kind of current account credit with the potato growers in Lembang and Cisarua. They are debited for seedlings, fertilizer and cash and credited as the harvest is delivered but at the same time debited again for expenditure during the harvest on such things as transport etc. (44)

Customer credit used to be common in the past, although it is less so now, not only in relation to pure cash crops but also in respect of rice in exporting regions. This credit took the form of "idjon", an advance on standing crops which were still green. This is different from "tebasan", where standing crops which are ripe for harvesting are sold (they may include the fish farmed in the rice field or the fruit of a particular tree or trees and may be sold by field, by tree or by weight). In the latter case the purchaser usually harvests the crop himself or pays for it to be harvested.

The fact that customer credit is common in respect of certain crops in certain areas should make the bank cautious in extending credit, so that the farmers do not become over-extended by obtaining credit both from the bank and their customers at the same time. In such circumstances the bank can easily be the one to suffer, despite credit surety, because the purchaser will be careful to ensure that he gets the produce and the bank will be reluctant to take over-hasty distress measures in respect of the land. The latter is in any case not an option where there is a large number of debtors in the same district. The caution required puts the bank at an even greater disadvantage vis-à-vis purchasers providing customer credit.

One should not, however, imagine that all farmers enjoy large amounts of customer credit or at least did enjoy it in better days. It is not only that people who are good contacts and people with whom the purchaser must remain friendly (village chiefs) obtain considerably more than others in the way of credit; small growers often get none at all or must go to a good deal of trouble to obtain even small advances.

While the author was conducting his study in 1923, in each village in Kedjadjar only a small number of tobacco growers borrowed from the Chinese, the criterion being not the amount of land owned but the amount put down to tobacco; tenant farmers also received considerable amounts of credit (sometimes thousands of guilders). At the time the popular credit bank reached two thirds of landowners in the same sub-district.

Customer credit can harm farmers but it is by no means always so. Of course, the income of the farmer is reduced by that of the middleman, but the latter is performing a socially useful function in return for that income (45) which in this country cannot

yet be taken over by farmers' organizations. Even if customer credit were to be eliminated altogether the purchaser would still continue to earn money from his trade. In assessing the harmfulness of this kind of credit the only factors which should be considered are whether the interest - direct and/or in the form of lower prices - is disproportionately high and whether the credit results in the dispossession of the farmer.

As a rule the interest rate also varies for the same product in the same region according to the importance of the farmer to the purchaser. Good contacts sometimes pay a rate close to the 1 to 1.5 percent per month charged by the popular credit bank. At the time of the author's study of the tobacco-growing regions of Central Java, 20% per season was perfectly normal for good customers. If the credit was extended because of a failed harvest, the interest rate was often not increased. Others, however, paid between 30 and 50 percent. Cramer informs us that the Chinese purchasers of groundnuts in the Plumbon district asked for 12.5 to 14 guilders in return for every 10 loaned and that old acquaintances received assistance more cheaply than the new borrowers (46).

Vintges reports that the tobacco advances to old acquaintances had no negative effect on the price obtained; indeed the price was sometimes better than that obtained in the open market (47). This may at first glance seem strange but in reality it is not: the purchaser's main concern is, after all, to obtain an advantage over his competitors by binding the farmer to him. Especially where he wants a particular farmer's crop because he knows from experience that it will be good, it is in his best interests to offer a good price and a reasonable rate of interest so that his client will not sell to a competitor. The purchaser does not, after all, have any right in rem to the harvest or land. Despite the advance he has received the farmer is free to sell to someone else and to repay the loan plus interest out of the proceeds. He is not very likely to do that because he will regard himself as under an obligation, but this will change if the purchaser who provides the loan treats him unfairly.

Tänzer reports interest rates of 2.5% per month in Lembang and Cisarua and 5% in Pengalengan where a combination of supplier and customer credit is extended to potato growers. He does not say why credit should be so much more expensive in Pengalengan.

Since it is very much in the interests of purchasers/credit providers to bind farmers to them, they employ various methods to discourage free trade. One of the most common is to set the price paid for products lower the further the farmer travels from home and the nearer the market center he comes. This has been observed in respect of tobacco sales in Wonosobo (48). Tänzer too (loc. cit., p 485) reports that all attempts by the Lembang potato growers to sell direct to wholesalers in Bandung without involving the local agents of those wholesalers failed because the prices obtainable in Bandung were lower than those offered by middlemen. According to De Vries et al. (49) the tobacco purchasers paid more in the village than they did at the market.Kessler (50) too points out in respect of rice sales that the prices offered by the Chinese middlemen along the road to the market got lower the nearer to the market one came. They could get away with this because the fact that the farmer was taking

his produce to market himself rather than waiting for the purchasers to come to him showed that he was in desperate need of money and because if he refused to accept the lower prices he would have made the journey in vain and be forced to take his produce home again.

Farmers are often fairly indifferent to the fact that the interest rates charged by purchasers/suppliers are higher than those of the bank. The greater flexibility of the customer, at least towards good clients, more than makes up for the interest rates in their eyes. Despite the high rates they will in many cases regard their ties with the purchaser as an advantage which saves them a lot of trouble, since they are sure of selling their crops quickly without any inconvenience and can obtain money for whatever they need from the same source, again without any inconvenience.

Under certain circumstances customer credit can assume forms which are extremely disadvantageous to the farming community. This is particularly true if it leads to profiteering from land, where the purchaser is no longer satisfied with the produce alone but by the use of front men seeks to control the land too or has the farmer work his own land as at best a share-cropper. In his novel "The grave on the Sumbing" (51) Wormser provides a good description of this situation. The bank can do little to prevent such abuses but an active Department of Internal Affairs can, if it is prepared to act against the illegal occupation of land.

9. Other credit

The other sources of non-official credit open to the farmer are less important than land credit and customer and supplier credit. It is often possible to obtain small, short-term loans interest-free from family or friends or to pay them back through labor; rice loans are often repaid after the harvest in the form of double what was borrowed.

Money-lending as a business flourishes primarily in the towns and in rural population centers among civil servants and employees. In the village "tjinamindering" (Chinese trade credit) is primarily used by female retailers. However, small-scale, short-term credit is primarily provided by official institutions, such as the Pawnshop Service, lumbungs (rice banks, ed.) and village banks which, where they exist, appear to keep unofficial small-scale credit within relatively strict limits.

With regard to the importance of fruit trees as a source of credit, reference should be made, inter alia, to Van Doorn's "The bailment and leasing of coconut palms and the premature sale of coconut products as a means of obtaining credit" (52).

10. Debt problems

In "Village and desa" (page 44) (32) Boeke describes "the increasing indebtedness of most villagers" as a consequence of over-population in rural India. He goes on as follows.

"Greater legal security as a result of the influence of western legislation and jurisprudence, the undermining of village solidarity and the subjection of

villages to central authority have strengthened the position of moneylenders and slowly but surely poor farmers are being robbed of the free use of their land. Protective legislation, which is being introduced in various forms and at different speeds in the various provinces, can do nothing to halt this process while those concerned lack the power to defend themselves against this disastrous state of affairs. As early as 1927 M. L. Darling, an expert on village life, stated to the Royal Commission on Agriculture that in the Punjab one in four income tax payers who were not civil servants was a moneylender, and in 1930, in an article in the Indian Journal of Economics (October), two Indian economists drew the following conclusion from local studies they had conducted: "In all parts of India there is a general impression that land is continually passing from agriculturist to non-agriculturist classes and the hereditary cultivating class is being expropriated by those who do not themselves cultivate the land". Capitalist-minded individuals are penetrating village communities everywhere and succeeding in making the masses economically dependent on them. Although certain castes play a prominent role in this - the Narwaris have acquired a certain reputation - it is primarily the fact that someone is a stranger in the village community that gives him the courage, the independence, the skills and the inclination to exploit the village for his own advantage. Circumstances do the rest.

"A major aspect of those circumstances is the rise in prices of agricultural produce. Mann was the first to establish in the course of his village studies that rising prices for agricultural products were disadvantageous to farmers. He was so astonished at this discovery that he published the relevant part of his study ahead of the rest. Nevertheless, the explanation is simple enough: the increase in indebtedness which is a result of the existing shortage, means that more is being bought than is being sold in rural areas, that the consumer is taking precedence over the producer. As a result of excessive sales of food crops (excessive in the sense that an increasing percentage of a constant harvest is being sold and leaving the village so that a decreasing amount of food remains available for an increasing rural population) food shortages are developing in the interior, which are exploited by product purchasing middlemen at those times when the farmers themselves again have to make purchases; this exploitation takes the form of increased prices. It is then precisely those who did not actually produce a surplus but who sold their produce nevertheless and were therefore unable to retain any stock, who have to pay the higher prices. Thus the poor get poorer and the rich richer as a result of price changes. It has since been established through research that this phenomenon exists in all parts of India."

The 1928 report of the Royal Commission on Agriculture in India also states that not only do farmers receive finance from local moneylenders for all their requirements - household and ceremonial expenses and farming requirements - but long-term mortgage credit is also extensive, having originated primarily as a result of accumulations of short-term credit being converted or in times of natural disasters. The mortgagee is often no more than an permanent tenant, who does not simply pay a reasonable rent but rather whatever the moneylender can get out of him. The report emphasizes that the investment requirements of moneylenders are in fact more to blame than the credit requirements of farmers for the heavy debt burden;

moneylenders tend to lend as much as they securely can and then to maintain the debt at that level. Much of the debt is passed on from father to son, farmland is subject to a heavy mortgage burden. It would appear that much of the support currently provided by governments in Western countries to farmers primarily benefit mortgagors.

If the debt burden of farmers in this country is compared with that of farmers in other countries, especially India, then the Dutch East Indies come out extremely favorably. (53) There are doubtless a number of regions where land is owned in larger quantities and share-cropped by tenants laboring under onerous conditions. Indeed a number of such areas have already been mentioned above. However, the very fact that it is possible to list them by name shows that this is an exceptional phenomenon rather than a general one. Larger landowners and land profiteers are to be found everywhere but to a serious extent only in certain regions.

Because there are no reliable records (the sale or bailment of land are not always and the leasing of land rarely reported to village heads) it is impossible to draw up a detailed picture even of the debt burden resulting from land transactions. From the experience of the staff of the popular credit system, however, it can be assumed that even if a lot of lending does go on in the villages (this is quite normal; cf. paragraphs 2 and 3), most farmers seeking credit are still not subject to a really heavy debt burden.

11. Reasons for the relatively small debt burden of indigenous farmers

The author believes that the relatively small debt burden of indigenous farmers is due to a combination of the following factors:a. the fact that there is no proper mortgage system;b. the prohibition on the alienation of property;c. the small amounts of capital owned by the indigenous population, even outside

village communities;d. the fact that domestic trade, which is stronger financially, is in the hands of the

Chinese

One of the main reasons for rural debt is the existence of customer and supplier credit, which merchants/moneylenders use to get farmers deeper and deeper into debt. The short-term credit thus accumulated is then converted into mortgages and the farmers have to work for the merchants/moneylenders. In this country, however, these kinds of credit are as a rule relatively innocent. A reading of the information published in "Volkscredietwezen" (54) on outstanding loans from product purchasers will lead to the conclusion that the farmers have come out of the economic crisis relatively unscathed. This differs from the situation elsewhere, where mortgage debt frequently exceeds the current value of a farmer's land. In this country it is the merchants who have suffered the losses and a large proportion of their old outstanding claims will have to be written off. This is because the Chinese merchants cannot obtain any rights to the land. They are dependent on the good faith of the farmers and generally this serves them well, providing their claims remain reasonable.

No matter how many disadvantages are associated with customer and supplier credit, they cannot result in farmers being dispossessed and having to work more or less as slaves to pay off debts, while trade remains outside the hands of members of the indigenous population with financial muscle, who could obtain control of the land, and while members of the non-indigenous population may not acquire rights to land owned by the indigenous population.

Investment by town-dwellers is the other important reason for farmland being mortgaged and farmers becoming dependent. This factor exists in this country too. Indigenous civil servants like to buy rice fields or receive them as security in order to have them worked by share-croppers, as do indigenous capitalists. However, they have little capital and as yet do not present any great danger to farmers.In addition, the exploitation of farmland through share-cropping requires some contact with and supervision of tenants. The collection of mortgage interest would probably be easier and being able to take out a mortgage on land would therefore probably make investment at the cost of the farmer more attractive and thus increase it.

Foreigners from the Orient and Europe who have sufficient capital can only invest in indigenous farmland by unlawful means. Unfortunately this does still occur, as a result of insufficiently forceful action on the part of the authorities against the illegal occupation of land, especially by foreigners from the Orient.

12. Indigenous rural mortgages - an undesirable development

It follows from the previous section that, in order to protect the pre-capitalist village society against exploitation by the merchant classes, towns and capital in general, it is both desirable and necessary not only to ensure both systematically and forcefully that the prohibition on the alienation of land is not breached but also that taking out mortgages on farmland is not encouraged, that is to say that every effort is made to prevent land being "mobilized" on the basis of wealth, as is advocated in certain quarters outside this country.

As will be described below, the large majority of farmers have no need of long-term credit and can only be harmed by it. The consolidation of the lodging of land as security which occurs on a limited scale here and there and the opening up of credit surety to all indigenous providers of credit are therefore dangerous steps in the wrong direction, even though these measures have had little effect so far.

The possibility of securing claims by credit surety should continue to be limited to those providers of credit whose credit can be expected to benefit the borrowers and over whom proper government control can be exercised. Fortunately, because it is impossible to draw up an indigenous land register, credit surety is but a poor substitute for mortgages and is therefore unlikely to expand to any significant extent.

13. Little need for long-term credit (55)

The principal factors which have led to long-term agricultural credit elsewhere are as follows:a. conversion of accumulated heavy debts into mortgage debts which either

cannot be paid off or can only be paid off slowly;b. social measures taken by the government in order to ensure that tenants and

agricultural workers are able to own their own land;c. clearance of land for cultivation and land improvement at times of population

growth;d. compensation to other heirs by the heir who inherits a farm;e. expansion of existing farms and purchase of new ones;f. procurement of buildings, equipment and livestock.

In many European countries there are special land credit banks, which are state-assisted and state-supervised and provide extremely long-term mortgages (up to 30, 50 or even 75 years) for the purposes listed in a. to d. in particular.

Most of the factors listed do not exist in this country or, where they do, they do not give rise to long-term credit requirements.

Land clearance and improvement (e.g. the construction of terraces) is usually carried out gradually by families or by the village community as a whole, without any significant outside capital being involved. Over the years, the whole of Java has been developed in this way, which is in accordance with the nature of pre-capitalist agricultural village society.

The situation is different as regards the colonization of the outer islands from Java by people who own little or nothing, this being a government measure. Here credit is initially indispensable, until sufficiently strong centers have become established which can then expand by themselves by attracting relatives and fellow villagers from Java. Experience has shown that the risks attached to this kind of credit are not insignificant: opening up forest land usually results in malaria and high mortality rates, some settlers lose heart and move away again, the potential for irrigation and cultivation may be disappointing, despite expert investigation in advance, disease, pests and wild animals may attack crops, markets and prices for crops may be less good than expected. Even if credit is provided in as cautious a manner as possible - and this is essential - the lender may be forced to extend the credit for longer than intended, with the result that the debts involved become too high. Even if the colonization is successful some loans will as a rule have to be written off. Moreover, collection of debts is largely dependent on the cooperation of the local authorities. The AVB can therefore only extend credit for colonization with a government guarantee.

The same applies in respect of social measures taken by the government to give farmers unencumbered possession of land or restore such possession. This might mean, for example, freeing farmers from feudal obligations to local rulers and magnates in certain parts of the outer islands, the financing of which has previously been considered by the popular credit system (Southern Sulawesi, Southern Bali), or, where land has been returned to the government by third parties, allocating it to

individuals in return for payment (Rawahlabok). Such measures are artificial, their success is anything but assured and it is questionable whether the beneficiaries will be willing and able to meet the obligations entered into; again, much depends on the cooperation of the authorities.

Another such artificial social measure is the systematic redemption of bailed land and fruit trees in areas where such bailment occurs on a wide scale. Formerly, particularly when the popular credit system was first getting under way, popular credit banks did undertake such things, at the instigation of well-meaning administrative officials, by encouraging the farmers concerned to redeem their land or trees with their assistance. Such measures did not have any lasting effect. The reason is obvious: if the bailment of land or trees is common there must be a reason for it and while that reason still exists, redemption will simply lead to further bailment.

The causes of land bailment have been shown to include the fact that those bailing the land were no longer proper farmers but rather craftsmen or traders, that the amount of land owned was insufficient for a profitable business, or that the owners had become too economically weak to continue to be independent farmers and had thus sunk to the level of share-croppers or workers of non-landowners, as a result of compelling economic and personal factors. Another cause, of particular relevance to fruit trees, centers on the easy availability of credit, the presence of moneylenders and merchants ready to buy up produce, for whom accepting a pledge is an advantageous form of investment or a way of securing the produce cheaply.

A credit institution can do nothing against the temptation of easy credit. The report of the Royal Commission on Agriculture in India referred to above states that experience shows that even where entire debts were paid off by cooperative associations it was to no avail, since the debtors made no effort to pay repayment installments regularly, even where they were able to do so, and soon fell back into their previous state of indebtedness. According to the report, it is generally accepted in India that cooperative associations should only attempt to free debtors from their debts once the debtors have learned to be thrifty and to comply fully with their obligations.

Under customary inheritance law no credit is needed in order to buy off other heirs. Land is often divided in such a way that each heir receives the minimum necessary for a viable concern, providing at least that there is enough. There are no valuable buildings. Moreover, communally owned land is a separate matter.

A farmer has no need for long-term credit to purchase capital goods such as buildings and agricultural machinery because his tools are limited and cheap and barns and sheds are equally inexpensive. The homes of most farmers are also of little value and are largely constructed by the family and its neighbors. More expensive homes made of wood and stone are a way of acquiring social prestige and it is true that well-off members of the village do sometimes borrow money for such purposes. Such loans are usually of a supplementary nature: the farmer has begun to build or collect the necessary materials using his own resources and seeks credit for the remainder only. As the people concerned are wealthy any loan can be repaid in a few years.

In addition, the purchase of livestock should only rarely be a reason to seek a long-term loan. In areas where a lot of livestock is bought, the animals are usually bought with the intention of selling them again quickly. Young animals are bought and are sold again when they are bigger, or sooner if the owner needs money. Credit for the purchase of livestock is therefore as a rule rightly extended by the popular credit system on a short-term basis.

14. Credit to finance the purchase of additional land for a family farm

The main objective for which the AVB can extend long-term credit to a farmer is to buy more land to farm. Land ownership can fulfil three different functions. Firstly, it can be a means of production for the owner. Secondly, it may serve as a means of increasing the social esteem in which the owner is held. Finally, it may be an investment from which the owner derives an income from rent or share-cropping. Only the first two are appropriate to a pre-capitalist village society; the latter is injurious to farming in this country. The AVB should only provide credit for the acquisition of land which is to fulfil the first of these three functions.

The suspicion expressed by Dr C. L. van Doorn following his studies on behalf of the popular credit system is of relevance here, namely that expansions and cut-backs in the amount of land owned by a farmer were connected with the composition of his family, that is to say that the more mouths the family has to feed, the more land the farmer takes into cultivation, buying it wherever possible in order to be able to sell it again or pass it on to his children later.

Boeke too, in "Village and desa"(p.24) refers to the "theory of the elasticity of the family farm" formulated by Tschajanow, according to which such farms "are able, on account of the size of their manpower reserves, and inclined on account of the limited, traditional extent of their needs, to adjust their production to changes in the size and composition of the family. The most usual method of adjustment is for the family to expand and reduce the amount of land worked as required by family consumption. This may involve purchasing or leasing land or share-cropping it, or the land may be a gift or obtained by developing previously unfarmed land".

The AVB can thus do some useful work here, by extending credit to farmers for the purchase of small plots of land. Under certain circumstances credit might instead be extended so that the farmer can take on land or so that he can redeem land which he himself has bailed. If the borrower is really to benefit from such credit, interest and principal repayments must remain within the limits of what he would have had to pay if he had obtained the land concerned by leasing it or share-cropping it under the locally prevailing conditions. Repayments should therefore fall due in whatever number of harvest-related installments (annuities where necessary) will ensure that the payments required remain within these limits. This may often mean that fairly long-term loans are required.

Since the land in question will not be sufficient collateral for a multi-year loan (unless the amount borrowed is only part of the total amount required), other land owned by the borrower will often have to be lodged as credit surety. If the borrower sells some land privately (it need not be the same land as that acquired with the help of the loan)

it is to be recommended that the money so obtained be used to pay off some of the loan if the borrower has sold the land because he can no longer use it economically as part of his farm, rather than because he needed the money. If all land owned by the borrower is lodged as credit surety, this will enable the bank to exercise the necessary supervision.

15. Characteristics of short-term agricultural credit provided by the AVB

It has been shown in sections 2 to 4 that credit to indigenous farmers cannot really be called business credit but that it could serve directly or indirectly to meet their needs. In principle there is no reason to make a distinction between those of a farmer's needs which can and those which cannot be considered for credit. However, this will often be unavoidable in practice, as it must always be the fundamental principle of the AVB that the amount of credit extended should be limited. After all, in pre-capitalist village society credit as a rule does not have the effect of stimulating activity, increasing productivity. Excessive credit and the interest which has to be paid on it is thus merely a burden on farmers which can best be kept as light as possible. The AVB should primarily provide credit to prevent farmers getting into greater difficulties, primarily by obtaining credit elsewhere under significantly more onerous conditions.

In contrast to private providers of credit, it is up to the AVB to do all it can to keep farmers out of debt. As a result, its methods are different from those of private moneylenders or merchants. The speed and flexibility with which the latter can provide credit should not be taken as an example by the bank. In the interests of borrowers themselves the AVB musts insist on regular repayments of debts in such a way that the borrower can meet the repayments from his monetary income without being forced to get into debt elsewhere or sell or mortgage those assets upon which his livelihood depends (i.e. primarily the land worked by him and his family). This can best be achieved if the borrower pays off the debt in a number of small installments at times when he receives monetary income.

This is why the popular credit banks preferred loans which were repaid in a considerable number of monthly installments. This was almost the only form in which many such banks extended credit to members of a village and indeed the same still applies to many local offices of the AVB. However, it is a form of credit which can only be used in areas where farmers regularly receive other monetary income in addition to their harvest, for example from fruit trees or other farm activities, rubber trees, cottage industry, retailing and coolie work.

The limitation to loans repayable monthly thus means that often a great many farmers are unable to obtain bank credit, that credit benefits retailers and craftsmen rather than those who derive their main livelihood from the land. This is unavoidable if farmers with no additional earnings are not creditworthy, which is the case where the land owned is highly fragmented and used for food cultivation. Harvests are then largely retained for the family's own food needs, and payments for any but the most essential items (tax, ritual feasts, clothing etc.) are impossible. Farmers of this kind will not use money on their farm and monetary credit would as a rule only be

damaging to them. Only larger landowners who have harvested surpluses over and above what they need for themselves are eligible for seasonal credit in such areas.Seasonal credit repayable from the harvest should only be extended to persons other than larger landowners in regions where a significant proportion of at least one of the annual harvests is usually sold for money, i.e. in regions where cash crops are grown or where the food crops also serve as cash crops, e.g. in areas with rice surpluses.

Normally, agricultural loans should be for no more than one harvest or one year, since loans are almost always sought for annual requirements such as subsistence, land cultivation, maintenance of the plantation, harvest, thanksgiving meals, (slametans) and, exceptionally, planting material or artificial fertilizer.

The practice which used to be common at some banks of normally extending two-year loans must be rejected as it only leads to borrowers borrowing too much. Repayments may only be spread over more than one year where it is certain that the advantages obtained with the borrowed money will last more than a year. This will thus primarily be the case where credit is extended so that the area of land owned by a farming family can be increased, as described in the previous section.

In accordance with the above, the size of an agricultural loan to be made by the AVB should normally be restricted to a proportion of the farmer's gross annual monetary income (cf. also paragraph 4). Loans to farmers are limited primarily by that gross monetary income and only secondarily by the value of collateral.

16. Land as security and a criterion for eligibility for credit

The security lodged is less important in respect of short-term agricultural credit extended by the AVB. Most such loans are unsecured, although the unfavorable economic conditions have led many bank administrators to be quicker to require credit surety. The average amount of a loan covered by credit surety (this figure applies to all kinds of loans, not only agricultural ones) in Java fell from NLG 162 to NLG 127 in 1933.

These unsecured loans are not totally uncovered, however. The rule is simply that loans are extended to landowners rather than just tenants who do not own any land. Generally speaking this is correct, in so far as tenants are generally economically weak and unable to cope with significant amounts of credit. They can obtain small loans from the Government Pawnshop Service, lumbungs (rice banks, ed.) and village banks. In cases such as those described by Burger and dealt with in paragraph 5, where as a result of communally owned land being highly fragmented a share-cropper can be the actual farmer, such "middle class" tenants must also be able to obtain credit from the AVB. This is why in Bandung credit is also extended to rice farm tenants who cultivate fish on their rice fields in the monsoon season, so that they can purchase young fish.

Even where a credit surety is not required, a thorough examination of the land owned by the borrower and its use should be conducted. There is no need to consult the land tax office, both because the information it can provide also appears on the land

tax returns of the borrower and because that information (and indeed that on the return) cannot be trusted. Land which is registered with the land tax office in the name of a particular person may very easily belong to someone else or to a group of people, of whom the official owner is only one. This can occur where an inheritance has not been divided or if a sale of land has not been declared, because of the land tax and village obligations associated with the ownership of land. Equally, a landowner may transfer some of his land to his heirs while he is still alive, though he himself remains the actual owner (see van Lynden's article (55)).

However, even if the land is actually owned by the person named in the land tax return and no-one else, there is still a possibility that part of it has been bailed, leased or divided among share-croppers, all of which mean that the owner derives less income from the land or none at all. This in turn means that his capacity to pay back a bank loan and his eligibility for credit are less than the land tax information would suggest. Even if the land is not serving as security, even indeed if it cannot serve as such (because it is in communal ownership and is inalienable), it is still the first requirement of a proper investigation that the bank should establish what land the borrower owns and how he uses it.Such an investigation can only be carried out in the village itself by asking questions. The bank administrator Keuchenius attributed the low level of arrears at the Bandung bank despite the economic crisis for a large part to the great care which was always taken with this aspect of investigating loan applications at this bank.

Whereas the ownership of land is thus of importance as an indication of eligibility for credit, the value of that land as collateral is small, as is shown again and again if such collateral has to be called in. In most villages there is still sufficient solidarity among members to restrain them from bidding fort the land or home of one of their own if it is auctioned off. This means that if there are no wealthy buyers from outside to bid the bank is forced to buy the property itself.Moreover, there is often the additional difficulty posed by the fact that the debtor whose property has been sold off remains on the sold land and continues to work it. Where it is at all possible such debtors are therefore given the opportunity of buying the land back with the assistance of their relatives, where necessary partly with the help of a new loan to a sufficiently affluent relative.Naturally, the selling off of collateral in this way is something which can only be done where absolutely necessary by a socially-oriented institution like the AVB. It may thus only be carried out where a prosperous debtor is unwilling to pay his debts. It then serves as a warning example to others.

Under these circumstances credit surety is primarily of importance as a means of protecting the bank and its borrowers against other creditors.

In view of the trouble and costs involved in obtaining credit surety, it is to be recommended that all regular clients of the bank should provide continuous credit surety covering all current and future claims of the bank.

Security is more important in respect of long-term credit because over a longer period significant changes may occur in the business and income of the borrower, which means that there is a greater chance that the bank may have to realize the

collateral. Credit surety with considerable excess value is thus desirable here. Such long-term credit is more along the liens of business credit. The fact that credit surety in the form of houses and land actually provide extremely little security in the village (as described above) is all the more reason to be extremely cautious in extending long-term credit to a farmer.

17. The impossibility of a thorough individual approach

As will be clear from the above, short-term agricultural credit is personal credit (cf. Chapter III, paragraph 22), in respect of which the important thing is not the goods provided as collateral, which are difficult to realize in any case, but the gross monetary income of the borrower. However, where personal credit is extended proper knowledge of the circumstances of the borrower and regular contact with him are necessary. Credit institutions in this country which operate using paid employees and which do not at the same time act as suppliers of consumer goods or middlemen buying up agricultural produce have considerable difficulty in meeting either of these requirements because there are a lot of farmers and their average creditworthiness is extremely poor and this means that close and regular contact is unaffordable.

Moreover, the pre-capitalist nature of village society and the concomitant mentality present insurmountable problems. The small farmer works in accordance with tradition but does not think ahead. If one asks a farmer for what and when he needs the credit he has applied for, what he is going to plant on his land in the year ahead, whether and at what time he will need money for this, how and when he will acquire the resources with which to repay a loan, nine times out of ten he will be unable to provide a sensible answer. He knows what to do when but cannot say in advance what he will be doing. In addition, the fact that household and business are inseparably entwined, the possibility of illness, death or absence from home and the normal risks associated with farming make it difficult to calculate what will happen in the future.

Application and investigation forms which go into all kinds of detail and on the basis of which the expenditure and income of the borrower and his family are estimated in order to calculate a net family income from which it must be possible to repay the loan with interest are bound to contain fictitious information and are therefore valueless and indeed dangerous, because they create the illusion of net profits which do not exist. After all, a farmer's family does not produce for the sake of profits and surpluses but to meet its own needs. It can safely be assumed that normally the entire family income is consumed, much of it directly in kind. A bank loan would thus have to be entered on both sides of the accounts, as income and as expenditure. Loans merely move income and expenditure so that they are distributed differently over the year than would be the case without a loan.

Any effort to structure each individual loan to meet the specific needs and capacity of each farm is doomed to failure in advance. As such efforts lead only to laborious and expensive investigations and delays in the processing of loan applications they should not be made for most farmers. Studies of the various types of borrowers in the district covered by each branch office and an assessment of the most appropriate form of credit for them should be carried out rather than fruitlessly devoting detailed

attention to each separate loan application. Each applicant can then usually receive financing in accordance with the type to which he belongs.Individual investigations can then be limited to establishing what that type is (and this should be obvious from his village and the land he owns) and how much land he and his family use. Attention might also be devoted to the size of the family, the number of family members able to work, the amount of livestock owned, the care of livestock and the care of the home and farmstead (56). It has already been stated in paragraph 16 of this chapter that it is extremely important to establish how much land is owned and how it is used and that this must be done in the village itself. No matter how far one believes it necessary to go with an individual investigation, such an investigation is only of value if it is based on a general understanding of the various types of borrower that exist.

Besides this non-individualized treatment according to type of borrower, it is desirable that applications be processed more individually if they come from farmers who stand out in some way from the mass. These are primarily those with whom the Agricultural Extension Service has had contact and whom it knows to be good farmers. They need not necessarily be large landowners, although special attention should be paid to them too. They too often combine farming with trading in certain products, as a result of which they may be eligible for small-scale enterprise credit (financing for purchasing purposes) rather than agricultural credit. In any event, having to repay a loan shortly after the harvest may suit them less well. The management of any local office should regard it as an honor to have a number of better and larger landowners among their clients and to maintain regular personal contact with them.

On the other hand, considerable caution is to be recommended with regard to village chiefs and their henchmen, who also stand out from the mass. Such village administrators are often among the least reliable payers in rural areas. Their way of life sometimes means that they are overburdened by debt. Although it would be untactful to exclude them from loans, they should certainly not be provided with extensive credit facilities if they do not have a particularly good reputation financially. Sound security and strict control of arrears are desirable where they are concerned.

Finally, an individual approach is also necessary in cases where credit is intended for a purpose which can be checked, e.g. if a loan is provided for the procurement of artificial fertilizer, agricultural implements, etc., in collaboration with the Agricultural Extension Service. In such cases the Service can assist the bank by checking that the credit is used for the intended purpose.

18. Types of loans in indigenous farming

If one examines the credit business of any former credit bank one is often struck by the large measure of uniformity revealed. This is due to the fact that no more than one or two different types of loans can be found. Further study then reveals that exactly the same types were used by many similar institutions. In other words, insufficient account was taken of the different kinds of agriculture within a region or of the differences between regions.

If this situation is to be improved, each local office will have to investigate, district by district, what the normal types of farming are. It is not therefore sufficient to know what the principal crops are in the region, to consult monthly figures on planting and harvesting of each crop, to have some idea about the kinds of fruit trees which are grown, about trade or about employment. One must consider farming as an organic whole, i.e. find out how crop rotation operates in particular types of farming, how large such a farm has to be to be able to support the farmer and his family, which crops are intended for sale, which exclusively for food and which for both, and in the latter case in what proportions they are divided, whether and to what extent such a business usually derives cash income from horticultural and orchard produce, whether cottage industries or coolie work normally provide additional income, and so on.This would be a thankful task for local staff and indeed it is what the local supervisory and support boards should do, as it is precisely local knowledge and research which is required. The sooner work is started in this field, which is as yet largely unexplored, the sooner agricultural credit extended by the AVB will be able to meet reasonable requirements. Where available, the analysis conducted by the Agricultural Extension Service can also provide the desired material.

An attempt has been made below to classify types of farming from the point of view of the extension of credit. It is more than an outline and is by no means complete. The last thing it is intended to do is to make the much-needed local research superfluous. On the contrary, it is hoped that it will provide a number of points which may be of relevance in the conduct of such research.

1. Farms with one harvest per year, which serves for purposes of subsistence but part of which may also serve as a cash crop

A. These will primarily be in regions where a relatively large amount of land is owned and there is a rice surplus and where a significant part of the annual rice harvest is sold, e.g. the rice areas of Indramayu (57), Krawang, Demak, South Jember and Kroja (58).

If other income is of little importance, as in Indramayu and Krawang, loans to be repaid as a lump sum after the rice harvest will be the appropriate form of credit for farmers. As the rice surplus is often removed by the middlemen buying it up immediately it is harvested, the repayment date set by the bank for most farmers must be set precisely with the harvest in mind. Individual farmers who are known to retain their rice with an eye to price increases may either be given more time to pay from the beginning or granted an extension of the credit. Loans should only be extended towards the time the land is to be tilled. An investigation might be conducted to establish whether it would be possible and desirable to extend loans in two installments (at the time the ground is tilled and during patjeklik (times of shortage)).

B. The situation is different in the purely rice-farming areas, where the harvested rice serves primarily for subsistence and local sale and where rice may even be imported from outside. Except by a few large-scale

farmers, the rice in these areas is not sold immediately after harvest as a cash crop but kept and at most disposed of in part very gradually.In such areas it would be difficult to repay a loan immediately after the harvest from rice revenue. This is why in the Bandung high plains (which are such an area) seasonal loans only have to be repaid in 12 months after they are taken out, or several months later if the repayment date should fall during patjeklik. Research has revealed that a great many borrowers indeed still have large rice stocks long after the harvest. In such circumstances the Bandung system has much to recommend it. In order to prevent one debt replacing another too quickly, it should be a requirement that sixty days elapse between repayment and a new seasonal loan. In areas where less land is owned, where the retention of large rice stocks over and above what the producer needs for himself is not usual, the Bandung system should not be used. In such circumstances it will not be possible to extend seasonal loans, only monthly loans and even then only to people who receive a sufficient regular income from compound produce etc.

2. Farmers with two harvests per year, one of subsistence crops and the other of cash crops

Tobacco and maize are grown alternately, for instance, on dry land in the hills of Central Java, likewise tobacco and irrigated rice in Bondowoso. In such cases repayments must be required immediately after the harvest of the cash crops. Attempts to have repayments made in two installments, from both the rice and the tobacco harvest, were not successful in Bondowoso and Lumajang. This is not surprising since the rice is not a cash crop but intended overwhelmingly for consumption by the producers or payments in kind.The times at which loans are extended do not matter, providing one loan does not follow quickly on the heels of a previous one. This should not indeed be necessary if care is taken to keep the sums loaned small so that after repayments have been made, taxes and other monetary expenditure completed, sufficient funds remain from the harvest of the cash crop to cover the next planting of rice, which moreover as a rule requires little money. Bank credit can be employed more usefully to cover the monetary expenses involved in working the ground for the cash crops or, if they do not amount to much, for the purchase of food in the lean period before the harvest of the subsistence crops.

That the monetary expenditure on small plots of rice-field tobacco is indeed small is demonstrated in "Analysis of tobacco and rice cultivation in Ngawi" (59). In 1928 twenty-eight farmers spent NLG 204 in cash on 10.4 hectares for the cultivation of tobacco in water meadows: NLG 3 to NLG 25 per person and an average of NLG 7.50 per person and NLG 30 per hectare, while the average gross monetary revenue per hectare was NLG 515. Where money was necessary at all, it was only for seedlings and hiring livestock for ploughing (although the farmers' own seedlings and livestock were usually used) and for the purchase of additional food in the event of "sambatan" assistance (mutual aid).

This type of farming also includes the rotation of rice with groundnuts, as described in the district of Plumbon (). In other areas, where groundnuts are cultivated primarily for consumption by the producer or locally, it should not be included under this type.

Other examples include the cultivation of soybean after rice or farms where the cultivation of sugar cane by the indigenous population is alternated with that of food crops.

3. Farms with two rice harvests per year

Attention should be paid to whether one of the harvests is especially intended to yield a cash crop, and if so, which one, or whether both or neither is so intended.

A. The latter is the case, for example, in the sub-district of Delanggu, Klaten, Surakarta (60), where farmers normally only have one third of a bouw (approx 0.7 hectare, ed.) of communally owned rice land, albeit good land. Almost no rice is sold. In such areas only larger landowners with rice surpluses intended for sale are eligible for harvest loans. Others must make do with monthly loans, providing they at least have sufficient additional income, as would appear to be the case in Delanggu. If they do not have such additional income, they are not creditworthy (cf. conclusion to part 7 of this section).

B. If one of the rice harvests is especially intended for sale as well as subsistence, loans and repayments can be structured as for type 2.

4. Two rice harvests a year yielding sufficient monetary income

Two types of loan are possible:a. repayment in two installments, one after each harvest (the installments

do not need to be equal) orb. repayment in one installment after the first harvest.

Type a. loans may be larger than type b. loans. Type b. loans will in practice easily result in two loans being extended per year, with one debt following quickly upon the previous one. It is possible to allow borrowers to choose which type they prefer but the amount loaned should be kept very small in the case of type b. loans.

5. Farms with one rice harvest and various second crops

An example of this is given by De Vries (61) where he describes a rice area with two consecutive polowidjos (second, dry crop, ed.) and all kinds of mixed cultivation. The popular credit bank there therefore prefers to extend only monthly loans in the rice area (seasonal loans being extended in the main only for vegetables, coffee and tobacco cultivation in the hills), with the result that there are few farmers with loans in the region. This does not seem to do any

harm, however. Little is heard of profiteering and "indebtedness" among farmers (De Vries, loc.cit., p.296) in this region, where the population has been stable for twenty years, there are no large absentee landowners or fragmentation of farmland among impoverished farmers and food shortages have been rare for more than a century. 31% of the villages have village banks, all of which work exclusively with weekly installments and have no arrears to speak of. At the end of 1933 only NLG 10,000 of village arrears at the popular credit bank related to monthly loans and NLG 32,000 to seasonal loans. De Vries established that farmers in the region could usually get by for the whole year because the working of the rice land is paid for from the revenue from the polowidjo, while the polowidjo cultivation is financed from the revenue from the rice which is sold. Private moneylenders did little business there either. De Vries therefore assumed that there was little need for credit. The popular credit bank would thus appear not to have been wrong not to extend agricultural loans in such an area.

Should a need for seasonal loans arise, it would be obvious to require repayments to be made in the monsoon season, where possible in two or more installments, or otherwise in a single installment at the time the most profitable polowidjo crop is sold. Repayments should in any event not be required from the subsistence crops and only one seasonal loan per year should be extended.

6. It can be particularly difficult to determine when repayments of harvest loans should be required if there is no clear distinction between the seasons and if crops at various stages of maturity are in the fields at the same time or there are three rice harvests in two years, as in the hilly regions of West Java and southern Central Java (Bogor, Priangan, Banjumas, Kedu). The same difficulties can arise if a mixed farm is operating on both irrigated rice fields and tegalans (higher-situated, non-terraced, non-irrigated farmland).

7. In the past some popular credit banks therefore decided not to take harvest times into account but to require repayments to be made after a year, in the expectation that borrowers would repay sooner of their own accord if that suited them better. The Bandung bank, which was discussed above at 1B, was one such. Reference should be made to "Vollkscredietwezen" (62) for information on the seasonal loans in the Subah (Batang) district, which were also made for a year. Given that rice and maize are almost exclusively grown as subsistence crops in the relevant areas, one might wonder whether seasonal loans are in fact appropriate, except where they are extended to the few tobacco growers and owners of enough kapok trees; in both cases, however, it is quite possible to arrive at precise times for repayment.

Cassava, which is sometimes a subsistence crop and sometimes a cash crop, presents some difficulty. Where it is processed to make gaplek (dried chips, ed.) as in parts of Central and East Java, the period from July to September can be deemed to be a period of cash crop harvesting. Where it is processed to produce flour (as is usually done in West Java) there are no pronounced fluctuations between seasons.

In general it is to be recommended that the bank should not be too quick to permit a loan to be repaid only after a year and that repayments should never be required during the lean season ("patjeklik") but at times when farmers have the most money to spare.

8. Finally, there are areas where land ownership is highly fragmented, where farming if at all produces enough for the farmer's own needs and where it is better not to require loan repayments to be made from the harvest. If farmers have sufficient additional income, as used to be the case in the coconut-growing areas when prices were better, no harvest loans should be extended but they can derive some benefit from monthly loans.Even then, considerable caution should be exercised. In most cases income from compound and garden produce is no longer sufficient to allow any significant amount to be repaid to the bank each month. For example, Van Lynden calculated (63) that even in a relatively important fruit-growing center such as Kebajoran (Meester Cornelis) , the income from compound produce in 1932 was as a rule only sufficient to allow a loan of no more than NLG 15 to be repaid in ten monthly installments. Additional income from weaving, batik production or retailing by the farmer's wife often amounts to only a few cents per day and that money is needed for the family's daily requirements. Village studies have demonstrated that the additional income calculated by various banks which extended monthly loans was largely fictitious.

In addition, it is extremely difficult for the bank to know what income is actually derived from coconut trees in areas where the trees are often bailed. The low coconut prices also mean that any such income is too little for most farmers to be able to obtain a loan on the strength of it.

In general it can therefore be said that since the major economic recession in Java real farmers have only rarely been able to obtain loans to be repaid monthly and then only for extremely small amounts. This too will have to be examined more closely region by region by the staff of each office, with the assistance of the local board.

Attention should also be devoted to the relatively regular revenue obtained from the cultivation of rubber in areas subject to individual restrictions and to small-scale tea production in Preanger.

19. Repayment dates and rapid succession of loans

The fundamental principle outlined in the previous section is that in its own interests and those of farmers, the AVB should structure repayments of seasonal loans so that they fall during a period when the small farmer is receiving more monetary income than at other times and can meet repayments from that income without too much trouble, i.e. usually after the harvest of his most lucrative (in terms of gross monetary revenue) cash crops. A cash crop harvest is preferable even when part of the principal rice harvest also serves for trading purposes, because expenses for ritual feasts are associated with

the traditional, sacred rice harvest which do not arise in respect of harvests of cash crops, which were introduced at a later date. Moreover, it is usually after the summer monsoons that land taxes are mainly collected.

However, the best time for repayments need not necessarily be after the harvest of field crops; it may be after a fruit harvest, as in the kapok growing areas. Formerly, it was also possible to repay loans from land rents in sugar growing regions.

A very good way of verifying when farmers have a lot of money and when they have little is to examine the monthly disbursement and repayment figures of the Pawnshop Service after deductions for renewed loans. The result of the two factors can most clearly be seen in the figures for the total amount owed to the pawnshops, which often tell one a great deal.

As a rule the bank should require repayments to be made immediately after a harvest and not a few months thereafter. Bank credit is thus not "market credit". It is not intended to enable the farmer to retain his produce in order to obtain a better price. As has been shown elsewhere, such credit can only fruitfully be extended by organizations which also control the sale of the harvest. If no such organizations exist, competition between middlemen wishing to buy up the harvest, whether or not they provide customer credit, and the farmers' need for money will as a rule inevitably result in immediate sales where farmers are not very well-off.

Allowing a generous period for repayment of several months after the harvest will still not prevent sales and will only mean that when the repayment falls due, the farmer will probably no longer have sufficient means to pay. Fortunately, in such cases the farmer is usually sensible enough to put right the bank's mistake by paying in advance. A lot of premature repayments are thus not something for bank managers to be proud of, as they sometimes used to be, but as a sign that repayment dates have been structured too generously. If repayment dates are tight and arrears prove to have arisen because the farmer has retained his stocks, he may be given more time to pay. Such a borrower could then be given more generous repayment dates than others in the future. Special facilities can also be extended to large landowners who are known also to trade in produce.

Although it is a general consequence of the recommended way of setting repayment dates, it should be emphasized that the practice of all seasonal loans extended by a particular local office being extended for the same period (e.g. eight or ten months or two times six months), which is still common, is not to be encouraged. Someone who borrows three months before the best time for repayment should be given a three month loan, while someone who borrows six months before should be given a six month loan. If repayments are to be made after each of two harvests, the period between the two installments should be the same as the normal period between two harvests. In addition, the irrigation arrangements of the golongan must be taken into account, as they mean that though the type of loan may be the same, the harvest in one golongan may come at a different time to that in another.

Though repayment dates must thus be set as accurately as possible by the bank, the situation is rather different as regards the times at which loans may be extended. As farmers have a justifiable need for credit which does not relate directly to agricultural

expenditure, as described in sections 2 and 3, opportunities for them to borrow should not be restricted to the periods in which the land is being worked. The farmer should be free to determine for himself when he needs money. There is perhaps one exception to this rule, and that is that one seasonal loan should not follow too quickly on the heels of a previous one where repayment is due in a single installment.

The question of whether or not a new loan should be extended soon after repayment of a previous one is one of the most contentious issues relating to agricultural credit in the popular credit system. In order to assess the question properly, it should be emphasized that regular borrowing by farmers is normal and is not a sign of unhealthy farms. However, if repayment dates have been set correctly, it is obviously not very likely that the farmer will require credit immediately after repaying a previous loan, since the date for repayment will have been set precisely at a time when he has most money to spare.

If loans are therefore required in quick succession it will thus often mean that repayment does not really suit the borrower or that he is not willing to repay the former loan. Nor is this so strange. It is common among cooperative agricultural credit associations, both in Europe and India, for borrowers to be permitted not to repay short-term harvest loans when they fall due but to extend them until the next harvest. The regulations often stipulate how often extensions may be granted and five to ten extensions are quite normal.In comparison, a rapid succession of loans as occurs in this country is of little consequence and at least the loans are repaid, albeit that new ones are taken out within a few weeks. Elsewhere there may be no repayment at all. Moreover, the number of times one loan rapidly succeeds another is usually limited: in 1928 at the Batang bank, which has no restrictions on one loan being followed quickly by another, only 2% of the Subah farmers who had borrowed again within two months of repaying a previous loan had done so five or more times in succession and only 10% had done so twice in succession. (64)

Taking out loans in rapid succession five or more times in succession was much more common in 1929 in the Delanggu sub-district (Surakarta), where 40% of those renewing their loans did so within two months and 20% within a month of repaying the previous loan. (65) This was because in Delanggu there are two good rice harvests per year and therefore the farmer often borrows twice a year as well. As the land has to be worked soon after the harvest, farmers who have to spend money to work their land (and in Delanggu seasonal loans are as a rule extended to members of the village administration who have land on account of their office) will borrow again for that purpose very soon after repaying their previous debt. In such cases (i.e. type 4b in paragraph 18) a rapid succession of loans is perfectly rational and should be permitted. To minimize the dangers associated therewith, the sums loaned should, however, be kept relatively small.

The situation is different with regard to the type of loan referred to at 1. in paragraph 18, where planting takes place only once a year. There is no reason here for a rapid succession of loans. Permitting it can easily result in the borrower living well in the period immediately after the harvest and being unable to obtain assistance from the bank when his land needs working or during the lean season because he took out a

loan soon after his harvest. This is why it is recommended that the time of borrowing should not be left entirely to the farmer in such regions but rather that loans should not be extended before the land needs working and that even then possibly only part of the permissible amount should be provided at that time, the rest being extended during the lean season.

The situation is somewhat different again with respect to types 2, 3 (last paragraph) and 5, as described in paragraph 18, i.e. generally in those areas where the farmer has more than one harvest per year, of which only one (or a number of polowidjos) comprise cash crops, however, and the bank therefore requires repayments only from the cash crop harvest or the polowidjo harvests in general. Here there could be a reason for a rapid succession of loans on account of the fact that the land often has to be worked immediately after a loan has been repaid for the purposes of summer monsoon planting of rice or maize. However, as there will normally be enough money left from the cash crop which has just been harvested (providing the previous loan was not too large) for working the ground in preparation for the subsistence crop, which moreover does not usually require much money, it is to be recommended that an interval of sixty days be required between repayment and a new seasonal loan. This is not necessary, however, if in practice it proves that loans are not very often required in rapid succession despite it being possible to obtain them, and in particular if applications for a series of loans in rapid succession from the same borrowers remain the exception. In such cases, where a rapid succession of loans does not present any danger, there is much to be said for allowing them and thus maintaining the flexibility of the bank's lending system.

Besides the objections to loans being taken out in rapid succession in an unjustified manner which have already been discussed, namely that this means that essentially no repayment is being made and the debt merely extended, and that it prevents borrowers from obtaining credit from the bank at times when they really need the money, where such practices occur on a wide scale, there is also a danger of borrowers borrowing too much because, knowing that they can immediately obtain a new loan, they can pay off even large loans, providing they do not exceed their gross monetary income; serous arrears are therefore unlikely to arise.

In addition, where numerous borrowers are permitted to take out a rapid succession of loans, the new loans and the repayments in a particular area may overlap, thus giving rise to the danger that someone who cannot meet his repayment obligations will have someone else borrow for him. Where debts are renewed in this way in another name there is considerable danger for the bank, since the entire lending business comes to be based on false premises and will ultimately come to a standstill. In the past, rapid successions of loans have therefore primarily proved to be dangerous where they went hand in hand with debt renewal and where the bank was persuaded by the fact that arrears initially remained low gradually to extend larger loans. This is why the sums loaned must be kept small where a lot of loans are taken out in rapid succession. In addition, sample investigations should be conducted in the villages to establish whether any pernicious debt renewal is taking place. In respect of the latter, reference may also be made to "Volkscredietwezen". (66)

In order to keep a check on loans taken out in rapid succession it is to be recommended that where this is permitted records should be kept, as indicated in "Vollkscredietwezen". (67) In order to keep the work involved to a minimum such records may be kept for only one or two districts with a lot of seasonal loans at a time, different districts being selected each year, so that each one is monitored only once every few years.

20. Determining the size of loans

As already indicated in sections 4 and 15, the amount of credit extended to a farmer is based on his gross monetary income, or rather that part of it from which the loan must be repaid. In the case of seasonal loans which have to be repaid from a particular harvest, the first thing is to estimate how much produce will normally (that is to say where the harvest does not fail to any significant extent) be obtained from the land the farmer is cultivating, taking into account the crop concerned.

To look first at cases where repayments must be met from the rice harvest, studies by the economic affairs department have shown that land tax classifications do not provide a useable basis for estimating the rice yield of different pieces of land. This is because factors other than agricultural production play an important role in such classifications. It can be said that they provide a fairly good measure of the value of various pieces of land to the population and are thus of relevance to the value of the land as collateral, but irrigated rice fields which enjoy a low classification often yield more rice than those higher up the scale. Irrespective of land tax classifications, the bank must thus work with averages.

The safest way of establishing average crop yields will be to ask the Agricultural Extension Service for figures on the various parts of the district. In some areas the Service has relatively detailed information, in others it too must rely primarily on informal data and estimates. It should be borne in mind that within the district covered by a single local office the normal average rice yield may vary enormously. Whether and to what extent use might also be made of the annual figures on total production, production per bouw planted and production per successful bouw, produced by the Central Office of Statistics for each district (68), should be left to the decision of the Agricultural Extension Service and the local boards.

Land tax classifications can be used to assess whether gadoe or polowidjo is regularly planted on a particular piece of land. If a second crop is planted with any degree of regularity, district studies usually indicate which irrigated fields in which district groups are concerned. In this connection it should be remembered that gadoe or polowidjo is sometimes also planted on land belonging to other groups against official rules. As is also known, land tax returns indicate the village class of land. One can work backwards from this to the district group, using the key obtainable from district studies held at the land tax office.

The extent to which harvests fail is also of importance to the bank. In an area where serious failures occur regularly, it is better to provide seasonal loans only as an exception to alleviate need after a failed harvest. Less serious but frequent failures

should be a reason to keep sums loaned low and not to expand seasonal credit too much.Figures on the number of bouws in each district which fail completely can best be obtained from the Central Office of Statistics (68) and translated into a failure percentage for the total irrigated area. These figures can also be used to calculate the annual yield per successful bouw.

For a proper understanding of the situation the exemption percentage is also important. That is the percentage of the total gross land tax assessment of the district concerned which is waived on account of harvest failure (total or partial). Gross assessment and exemption figures can be obtained from the local offices of the Department of Internal Affairs. The relevant percentages for a number of years should be taken into account. With regard to the usefulness of such information for assessments conducted by the bank, reference should be made to the study by the economic affairs department of the lending business of the Indramayu Popular Bank in "Volkscredietwezen". (69)

Whereas relatively good yield and failure figures can be obtained for rice cultivation one must rely largely on local studies for information on second crops and fruit. The relevant figures must be obtained from the Agricultural and Horticultural Extension Service or through one's own local studies. Land tax classifications of dry lands are of even less use than those for irrigated fields as regards yields, and the number of samples taken from second crops with the aim of estimating yields is insufficient. It is possible, as described above, to extrapolate from the way in which the irrigated districts are grouped for land tax purposes whether second crops are commonly planted on certain pieces of land.

Though it is possible to base calculations on average production as far as most second crops grown on irrigated fields in a particular region are concerned, there are extremely large variations in quantity and quality where the cultivation of cash crops on dry land is concerned (e.g. tobacco in the hilly tegalans of Central Java) and it is important that the bank takes these into account. Only local studies can be of assistance here.

To summarize, what the above means is that one or more average production figures are calculated in the manner indicated for each farming area within the district covered by the local office and in respect of each crop from which seasonal loans in that district are repaid. These are then used in estimating the yields to be obtained by individual borrowers, without it being possible as a rule to devote attention to individual differences.

Bawon (70) and other loans in kind are usually paid back out of the harvest (e.g. hiring animals for ploughing, irrigated land leases paid for in rice, share-crop payments) must then be deducted from the gross yield thus calculated. In the case of rice harvests account must also be taken that part of the remainder which is usually retained for consumption by the farmer's own family. The proportion varies depending on the area and the amount of land owned. Finally, local purchasing prices are used to estimate the gross monetary revenue likely from that part of the harvest which will be sold.

The price obtained by the farmer for his crops is not the same as the market price. Local AVB offices must therefore obtain information about the local bulk purchasing and lending methods and bulk purchasing prices, in accordance with the instructions and under the supervision of the economics department. This is already happening with regard to the prices of rice, kapok, coconuts and copra. Reference should be made to the relevant articles by Van Lynden, Krapels Soekasno and Soenario in "Volkscredietwezen". (71)The same should be done in respect of other important cash crops such as tobacco, groundnuts and soybean. In addition, all offices for which the crops in question are of relevance for the repayment of agricultural loans extended by them should cooperate in drawing up price lists as this is in the interests of their lending business. Where it can be obtained, local offices can also use the information collected by the Ministry of Economic Affairs for the statistics of the Department of Agriculture and Fisheries.

As to the size of the loan finally to be provided by the bank, it may only amount to part, usually not more than half, of the gross monetary yield of that part of the harvest intended for sale and from which repayments must be made, less the land tax which also has to be paid from this sum. After all, as a rule the farmer will have certain other expenditures besides land tax which he has to make immediately from the gross monetary yield (e.g. for clothing, ritual feasts, repayment of other debts) and he will also wish to keep something (back) for his immediate needs .(72) The possibility of a less than perfect harvest or of falls in prices provides additional reasons for limiting the amount borrowed to part of the gross monetary yield.

If the purpose for which the loan is intended (as indicated by the applicant) means that a larger loan is in fact necessary, this should not generally result in any deviation from the principle outlined in the previous paragraph because information on intended purposes is usually not very reliable, a particular purpose often only being stated in order to obtain a bigger or long-term loan. Only if there is reasonable certainty that the loan will indeed be used for the stated purpose and that purpose is considered to be of such great benefit that a larger loan is justified (e.g. where credit is extended in cooperation with the Agricultural Extension Service for artificial fertilizer etc.) may the loan amount to more than half the estimated gross monetary yield (after deduction of land taxes). If the benefit to be obtained with the assistance of the loan will last more than a year, repayments may also be spread over more than a year.

Finally, collateral or if, as is usually the case with smaller loans, no security is lodged, the visible assets - i.e. livestock as well as land and home - of the applicant should be taken into account in determining the amount of credit. The loan may only be a fraction of the assets, no more than a quarter or a third, and no more than 50-60% of the value which the business security would have if it were sold privately.Using assets as a criteria is intended primarily to maintain a reasonable relationship between debt and property. It is not a question of them being of much value to the bank upon enforced sale. In the case of larger, longer-term loans, however, where account must be taken of the possibility that repayments may not continue to be made properly from income received and that the bank may have to resort to sale under distress, the liquidation value must also be taken into consideration and the loan not exceed it.

In the case of loans to farmers which are to be repaid in a large number of monthly installments, repayment capacity should be calculated not on the basis of harvests but rather orchard, coconut, tea and rubber revenue, retail activities, coolie wages, cottage industries, carting and so on. Here too as a rule only a third to a half of the gross monetary income can be expected to be used to repay a loan and the interest on it. Assets and security should also be taken into account, as described above.

Loans may not normally amount to any more than can easily be repaid in twelve monthly installments unless the purpose for which the loan is intended and for which it is reasonably certain to be used will mean that the borrowed money is used in such a way that the benefits are felt for a period exceeding a year.

21. Credit for small farmers and indigenous commercial farming

The previous sections all dealt with indigenous farming as carried out by tradition-bound village members, i.e. family businesses. The AVB may also act as a credit institution for small-scale farms operating on a more commercial basis, which in practice means farms run by "small" European farmers and a number of farms run on behalf of wealthy indigenous town-dwellers (not by share-croppers) and covering an area of several dozen and sometimes several hundreds bouws. The AVB is happy to leave the financing of large-scale farming to the agricultural banks. Both the above types of farming are primarily concerned with the cultivation of perennial crops.

The basic principle in extending credit to such farmers is that only farms which have been proved to be viable should receive financing. There should be no speculation on possible future viability. This means that these farmers cannot obtain the necessary start-up credit (for the purchase of land, the procurement of basic buildings and sowing or planting the first crops) from the AVB unless they have sufficient other income and collateral not dependent on the yet to be developed business. The risk for the bank would otherwise be too great. After all, land and farm buildings derive their value largely from the success of crops and the possibility of running a viable business on the basis thereof. That such stage will be reached is by no means certain in advance.

Experience has shown that the chances of small-scale European farms failing are high and it is still an open question whether the social experiment they embody can succeed under the conditions laid down by the government. It is only less well-off Europeans who are eligible to receive land, whereas to get a farm of 25 bouws up and running requires a not insubstantial amount of capital. "Small" farmers can therefore obtain state credit comprising three quarters of the value of the land (in so far as the plot does not comprise only wasteland) as land credit and one quarter of the land value as operating credit, plus building credit amounting to the full amount necessary to erect living accommodation, sheds, barns and any other buildings which may be needed.

The land credit does not have to be repaid, only the interest on it. Until the building credit has been repaid the buildings erected with it remain the property of the Government. The resident's (district commissioner) permission is required before

ownership of such land may be transferred to someone else (even after a public auction under distress or due to foreclosure on a mortgage) and such permission will as a rule only be granted on condition that the purchaser takes on the debts and pays installments of interest and principal to the Government. In addition, ownership may only be transferred to someone eligible to become a small-scale farmer, i.e. able to obtain a statement to the effect that he is not wealthy.

These requirements mean that it is an extremely perilous undertaking for the bank to enforce sale of the farm. As a rule it will have to buy the property itself and as quickly as possible find a buyer who meets the requirements, who is not well-off but can nevertheless pay a sufficient amount. If the bank fails to do this, the authorities must be asked to assist in selling the land, possibly divided into plots, to the people, while at the same time revoking the right to charge leasehold rent.

Indigenous commercial farmers have a better chance since their ownership of their land is not subject to conditions and they are not bound by limits on expansion or the amount of capital they may possess. Here too, however, the liquidation value of the farm is extremely limited, since only other indigenous people may purchase such a farm and there are very few of them who have the financial resources, the desire and the capability to run a commercial farming business of any size properly. In the event of distress measures having to be taken, the land will thus often have to be sold in small plots to people living in the surrounding area or the bank will have to continue running the business on its own account, with all the risk that entails, until it can sell it privately.

There should thus be no doubt that the credit involved in such situations is not business credit (cf. Chapter III, paragraph 22). This is why the foremost condition must be that the business has proved itself to be viable.

Another difficulty is that often no proper accounts have been kept. An indication of the viability of the business can then be obtained by looking at whether land rents and taxes are not in arrears, whether interest payments and principal repayments on government loans are made properly and whether there are any other large debts. Agents' reports concerning the sale of produce and the prices obtained also provide valuable information, as does whether crops and buildings are well-maintained. Indirect information of this kind will often give rise to serious doubts about the viability of the farm, in which case the bank should refrain from extending credit. Experience has shown that in many cases credit is requested in order to cover deficits (to pay arrears in land rent and taxes etc.), for which purposes the AVB may not of course provide loans.

Operating credit may be extended to successful businesses in the form of short-term loans (up to a year) or long-wave current account credit, the latter to be monitored closely. Expansions may be financed, providing repayments can be made regularly (preferably several times a year) from operating surpluses which already exist, so that repayments do not have to wait until the expansion concerned results in additional production.

In order to limit the risk, the total repayment periods for such credit should preferably be no longer than five years. Credit for the procurement of agricultural machinery may also be extended under the same conditions.A mortgage or credit surety may serve as security where possible, or otherwise the fiduciary transfer of ownership of buildings, machinery, inventory etc., supplemented by risk insurance where possible. Loans may also sometimes be provided on the strength of a pension. It is very important that arrangements are made for customers buying the farm's produce to pay the money involved direct to the bank.

CHAPTER VI CONSUMER AND SEMI-CONSUMER CREDIT

1. Characteristics of consumer credit

There is little point in going into detailed theoretical consideration of the differences between consumer and production credit in this manual. When a producer and the members of his family are the principal, if not the only, workers in their business and family and business expenditure are inseparably intermingled, as is the case on indigenous farms but equally among craftsmen and in the retail trade, consumer and production credit can no longer be distinguished from the other. It is ultimately a question of definition as to whether one wishes to consider credit to pay the wages of outside workers as a business production credit while that for food for farmers working in their own business is deemed not to be production credit. Even if the latter might also be called "improper" consumer credit, the fact remains that such credit is useful and necessary and has no damaging effects, providing it remains within the limits of the income obtainable by the borrower and is repaid therefrom.

The fact that a large majority of the indigenous population in this country who are not in paid employment work in their own family or one-man business means that such consumer credit is extremely important to the AVB. From a general, social point of view it could of course be more desirable if the farmers, craftsmen and retailers concerned saved and worked with their own capital and had their own cash reserves to which they could turn in those seasons in which they receive little income, while replenishing them in financially better periods. It is true, moreover, that a considerable proportion of indigenous farmers take out no credit of any significance and that indigenous people involved in trade and industry also work to a large extent with their own or family capital.

However, setbacks can easily occur in small, one-man businesses, which then give rise to deficits which a loan can alleviate. Once one has started to borrow it is not so easy to stop, particularly where seasonal loans are concerned, unless a good year provides additional income or there is a fall-off in economic activity. The latter means that stopping borrowing is by no means a good sign. Reference may be made, for example, to what is said concerning the results of the field study conducted among farmers in the Subah district. (73)

In addition, as was stated in paragraph 3 of Chapter V, pre-capitalist societies do not favor the formation of monetary reserves. Someone with more money than he needs for his immediate requirements will satisfy his need for social prestige by buying beautiful clothes, jewelry, livestock or land, have a new house built or renovate his existing one. If he needs money later, he will borrow it using his possessions as collateral. This is why pawnshops in this country are so much more important as institutions than in Western Europe and also function just like normal banks in respect of operating credit.

Loans made to civil servants and persons in paid employment are purely for purposes of consumption. Here too, the pre-capitalist disposition has its effect. A lack of caution in money matters and a need for physical show as a source of social prestige have everywhere been characteristic of aristocracies and civil servants living

off agrarian societies. The tradition of these circles perpetuates the priyayi class, which results in them easily falling prey to profiteers.

The tendency to live well without paying too much attention to one's financial position is, however, by no means limited to the indigenous population but also affects large parts of the European population. The minta perskot is not only expressed by coolies and servants but just as much by senior functionaries, whatever their origins. Usurers' clients come from all ranks and all classes.

Credit to people in receipt of a pension, servicemen and social assistance recipients is a special intermediate form. Like credit to civil servants and employed people, it is part purely used for consumer expenditure. However, the fact that many people are retired on a pension in this country while still in the prime of life means that some of them attempt to increase their incomes by carrying on a business, for which they then need credit. This is why the raising of loans on pensions and salaries is also dealt with in paragraph 17 of Chapter IV (Credit to small-scale enterprises).

In order to protect recipients from usurers there are provisions in all regulations governing government pensions, salaries and social assistance making them inalienable and therefore unable to be bailed or used in raising a loan. Moreover, orders for them to be paid to third parties may be revoked by the official beneficiaries at any time. The prohibition on the use of pensions to raise loans does not, however, cover the raising of loans (interest-free or at a moderate rate of interest) from local and municipal authorities and charitable institutions, which are also deemed to include credit institutions to be designated by the procurator-general, which are of a charitable nature and run by an association, public company or foundation recognized as a legal person, providing the provisions under which loans are extended have been approved by the competent authority (Head of Regional Administration or Head of the Resident's Department).

The AVB (a foundation governed by public law) is by far the most prominent of these institutions. Thanks to cooperation from the Department of Finance, loans can be raised very quickly. Quite a lot of work is involved (each month the bank receives the relevant pensions from the General Collectors and pays them to its customers after deducting what is owed) but the risks are more or less limited to that of the customer dying, at least where pensions and salaries are involved. This form of credit has therefore developed into a very important part of the AVB's business, which comprises purely consumer credit, semi-consumer credit and credit to small-scale enterprises. Reference may also be made to "Instructions for the extending of loans on pensions, salaries and social assistance" (74) and the revised rules issued by the Director of Finance. (75)Improper consumer credit to farmers and small enterprises as discussed in Chapter V and IV and nothing further will be said about it here. The rest of this chapter is devoted exclusively to pure consumer credit.

2. Short-term consumer credit

Pure consumer credit as extended by the AVB is intended to prevent and eliminate usury. Though it might be regrettable, if one is to be realistic account simply has to be taken of the fact that, as described in the previous section, many officials, pensioners and wage-earners have little inclination to save or be economical. If the AVB does not help them, usurers will have the field to themselves.

However, this must never mean that the bank aids and abets people in being profligate and living beyond their means. The only way of preventing this from resulting from a loan is to keep the amount involved small and insist on prompt, regular repayments in installments on dates which are directly related to those on which salaries or pensions are received. With this in mind the AVB management has stipulated that loans raised on pensions, salaries or social assistance may not normally exceed three times the net monthly pension etc. and that they should be repaid in no more than twelve monthly installments. The same principles should apply in respect of officials, wage-earners and others, though the fact that they will frequently be unable to provide such good security as a pension should normally mean that a loan may not exceed one or two months' income. Such loans will usually still be repayable over twelve months, however.

Used in this way, consumer credit is not destructive in its effect. Limiting the amount loaned and therefore the time over which it must be repaid so that they are within the financial means of the borrower and maintaining reasonably strict discipline as regards repayments means that the borrower is forced gradually to save the income he has consumed from his other income. Instead of voluntarily saving money well in advance of it being needed, those who are not so inclined are forced to save afterwards, without being obliged to turn to a usurer for larger expenditures which exceed their monthly budget.

The nature of these credit requirements means that it is desirable for loans to be provided as quickly as possible without extensive prior investigation. Account must also be taken of the possibility that a new, perfectly justified need for credit will arise before the loan has been repaid completely. It must therefore be made possible for the remainder of an existing debt to be deducted from any new loan to be provided.

In establishing rules for the raising of loans on pensions this was provided for. Regular customers - most of them - may grant the bank a lien on their pension, salary or social assistance to enable it to recover any money they may at any time and for any reason owe to it. If they do so they can obtain a loan immediately upon submission of a completed application form. Where necessary any part of a previous loan which has not yet been repaid will be deducted from the new loan. The latter should of course not become the rule. If it does it is better to reduce the size of loans and the amount of time allowed for repayment where people who regularly renew their loans are concerned.

As loans may not be raised on the salaries of civil servants and the bank therefore runs a grater risk (leaving aside the possibility that a civil servant may be dismissed, possibly without a pension), such persons cannot enjoy such flexible arrangements

as pensioners, unless they can provide other security for all present and future claims by the bank (e.g. credit surety). Moreover, civil servants include many bad debtors. They do not have the same respect for the bank as the working man and automatic deductions cannot be made from their income by the bank as where loans are raised on pensions. Greater flexibility is possible here too if satisfactory arrangements can be made for the amount owed to the bank to be deducted from the civil servant's salary and paid to the bank from the start (i.e. without waiting for arrears to build up) by the civil service pay officer concerned.In this case the civil servant concerned must provide authorization when he takes out the bank loan. Such authorization can always be withdrawn, of course, but the chance thereof is small because to do so would provide evidence of bad faith to civil service superiors as well and the bank would of course then immediately and forcefully require repayment of the debt, which would have become payable in its entirety on account of arrears having arisen. This could involve the sale of goods whose ownership had been fiduciary transferred to the bank.

Though consumer credit provide by the AVB as described above may help those who have not properly learned to save money nevertheless to stay out of the hands of usurers, the fact remains that once a person is involved with them the small, short-term loans referred to above will often not be enough to help them. In addition to preventing usury, it is therefore also necessary in some cases to lend larger amounts for a longer term to free people from usurious debts.

3. Credit with which to pay off debts; cooperation with anti-usury associations

Experience has shown that considerable caution must be exercised in extending credit for the repayment of debts. A person who has got into difficulties, whether or not it is his own fault, naturally finds it easy and advantageous to convert his many, sometimes heavy, debts into a single loan from a socially responsible credit institution. In many cases, such debtors are unable to provide sufficient business security or proper creditworthy guarantors, so that the risk would be far too great for a soundly run bank, partly because of the fact that most such loans have to be long-term ones. Aside from the risk, taking over of such debts by the AVB would not help prevent usury but rather encourage it. The knowledge that the bank was ready to convert debts which had become a nuisance into a loan would make it easier for both debtors and usurers to loan money imprudently.

The Bandung Anti-Usury Association has therefore since its inception applied the same rule that the AVB should apply, namely that victims of usury should be helped by means of credit only in so far as it is unavoidable. If usury is to be combated efficiently, the first thing that is required is for the debtor to be helped to put his finances in order, for him to provide a full overview of his financial obligations and income and for the usurers to be compelled, where necessary by a court judgement, to reduce their demands to a reasonable level. The debtor must continue to live in fear of the usurer, however, his debts should not be expunged by a bank loan but rather he should gradually, under supervision, repay his debts from his income, with the prospect before him that if he does not meet his commitments those helping him

will cease to do so and the moneylenders will then still be able to seize his goods and have him imprisoned. Only in extreme cases, where it is impossible to reach any agreement with one or more creditors and the debtor is at immediate risk of ruin through being imprisoned and so losing his job, may credit be extended as a supplementary measure. In such cases the debtor must pay part of his income to the bank each month, while another part is paid by the bank or another supervisory body to his private creditors.

Another option is for the bank to provide assistance in the from of two or more successive loans. The first is intended only to pay off the most pressing debts. Only when it has been largely or entirely paid off and no difficulties have arisen in the process is a second loan provided, and where necessary thereafter a third, to redeem the remaining debts. The bank is thus able to limit the risk and exercise greater control over the debtor. The understanding that he will be refused any further loans if he does not meet his obligations in full will be a considerable incentive for him to do so.

However, these methods cannot always be used, for example where the private moneylenders are not prepared to accept gradual repayment or are only prepared to reduce their demands to any significant extent if the remainder is paid off in a lump sum. Where debts place the debtor in a position unbefitting to his station, for example where an administrative official is in debt to moneylenders in his district and is therefore at risk of becoming dependent on them in a manner which is not desirable, it may also be necessary to redeem the debts as quickly as possible. In such cases all private debts may have to be assumed by the bank, at least in so far as the risk does not become too great. In some places the risk can be limited by a guarantee from an anti-usury association (Jakarta, Bandung). Such a guarantee need not cover 100% of the loans. Loans may be extended up to a multiple of the amount contained in the guarantee fund. Most anti-usury associations do not have such guarantee funds, however. It is to be hoped that at some time the federation of Anti-Usury Associations will acquire the resources to form a guarantee fund for all loans extended by the AVB for the purposes of repaying debts to usurers on the advice of affiliated local associations, whether or not the loans in question are sufficiently secured.

The AVB can still provide longer-term loans to help the victims of usurers to over-come their problems even if there is no way of obtaining satisfactory business or personal security, providing the personal qualities of the debtor guarantee that he will meet the obligations to be entered into properly, his age and health give no cause for concern that he may die before the loan has been repaid and there is no reason to expect that he will lose his income as a result of dismissal without a pension before it has been repaid. Personal qualities are thus of decisive importance, that is to say that the debtor and his family (the latter is crucial; an extravagant wife can make the best intentions of her husband worthless) must be known as plain living people, not addicted to gambling, jewelry or intoxicants, who have got into financial difficulties as a result of circumstances beyond their control (illness or other setbacks) or no more than a moment of weakness. In such cases it is also most likely that it will be possible to obtain proper guarantees.

Without sufficient security or guarantees from elsewhere the bank should under no circumstances provide a large, long-term loan for the repayment of debts to people who have proved themselves to be financially unreliable and whose difficulties can largely be attributed to carelessness and living beyond their means. This is unfortunately usually the case. Even two personal guarantors are only acceptable in such cases if the debtor is properly supervised and interest and principal repayments are deducted from his income at source.

If insufficient security can be provided or the security comprises no more than a pension, a life insurance policy as referred to in "Volkscredietwezen" (76) should be required, at least as far as Europeans or indigenous people of a certain standing are concerned (for others such insurance would often be too expensive or impossible to obtain).

The above demonstrates that a lot of time and attention is required to help the victims of usurers and that in many cases it will in any case be to no avail. AVB staff are usually too busy to involve themselves intensively in such matters. For such purposes cooperation with an anti-usury association is therefore desirable. The latter can then investigate the debts of the victims, attempt to reach agreements with the creditors and ensure that the debtor makes regular debt repayments. The bank can then limit its involvement to providing credit where required and rely on the information supplied by the anti-usury association for its own investigations . It will be obvious that a meaningful cooperation is largely dependent on the manner in which the anti-usury association concerned interprets its role. An association which is insufficiently critical and sober in its judgements will not enjoy the trust of the AVB and will therefore be able to do little to help its clients.

4. Cooperation with trade associations and cooperative associations to keep their members permanently free from usurious debts

Besides cooperation with anti-usury associations, cooperation with trade associations or other organizations representing particular interests, such as cooperative associations, is also desirable. Indeed, this is probably the only way of achieving lasting results. Such cooperation could take the following form. The association operates a compulsory savings scheme for its members, under which they have to invest a minimum percentage of their income each month with the AVB. Members may not have access to the funds so invested except with the permission of the executive of the association or its local branch, even if they then resign their membership of the association. Members who are not immediately able to save in this way because they still have debts may be gradually helped out, in accordance with the principles set out in the previous section, by the association in cooperation with the AVB, the association taking on the role otherwise played by an anti-usury-association. Only once the debts have been repaid are members who receive help in this way obliged to save. A person who already has a savings account with the AVB and needs money may not normally have access to his money but may, if the executive of his association approves, obtain a loan at a special, low rate of interest from the AVB of an amount up to, for example, twice the amount in his account, the latter acting as collateral.

The loan may of course be larger if additional security so warrants. Once savings accounts of this kind amounted to more than a given minimum, the AVB could pay the same interest on them as on indefinite-term deposit accounts requiring a year's notice for withdrawals. Such cooperation can achieve more than just occasional action to combat usury, since it can keep the large majority of the members of the associations concerned permanently out of the hands of usurers. Nevertheless, this can only be done if the members provide one another with moral support and are given a lead in doing so by their executives.

5. Credit for the redemption of pawned goods and the payment of taxes

The consumption purposes for which credit is required often include the redemption of goods pawned with the Pawnshop Service and payment of current tax and tax arrears. In neither case is a loan from the AVB generally justified. In the case of pawned goods, this is because they can be re-pawned for as long as is needed, providing only that the interest on the loan so raised is paid.The interest rate charged by the Government Pawnshop Service (1% per month on loans exceeding NLG 100 ) is not high.(77) The Service is also in a better position to store pawned goods. Contrary to what is often believed, there is no need for loans from the Service to be repaid in a lump sum. Repayment in installments is also possible, albeit that use is seldom made of this facility.

Usually, applications for debts to the Pawnshop Service to be taken over by the bank are made because the applicant wishes to have immediate access to the pawned goods and does not therefore wish to raise a loan from the AVB using them as collateral. The bank should only cooperate in such schemes if sufficient other business security can be provided and it can be sure that the money will be repaid regularly in monthly installments. It should in any event take no risks for such purposes. It is particular important that goods should not be redeemed in this way simply in order to obtain a larger loan on them from the bank than the pawnshop was prepared to provide. The staff of the Service have greater expertise in the valuation of goods to be pawned than those of the AVB and it is therefore not a sensible idea to exceed their valuation. If the person pawning the goods has not initially taken up a loan to the full value of the goods he can then obtain an additional loan from the Service.

Farmers quite often borrow in order to pay current land tax. If they do this in the first half of the calendar year and the loan is repaid in ten monthly installments, so that by the beginning of the following year the debt has been repaid in full, no objection need be raised.The situation is different where loans repayable in monthly installments are taken out late in the year and in the case of seasonal loans which are to be repaid from the harvest the following year, as in these cases one would thus in effect be paying two years' worth of land tax in one year. As this is difficult, another loan is then needed to pay the new tax. What transactions of this kind boil down to is that the payment of land tax is constantly put off for a year, arrears in tax being avoided but at the risk to the bank that the borrower will get into arrears with it. After all, such borrowing in order to pay land tax is often done at the insistence of the village chief.

No doubt land tax will sometimes be paid from ordinary loans obtained by the farmer, but care should be taken to ensure that padjeg loans (loans to pay tax or rent, ed.) do not become the norm.

Civil servants and pensioners who apply for loans also sometimes need the money to pay arrears of income or personal tax, though they may also need the loan to pay off other debts as well. Like debts to the Pawnshop Service, such tax debts are among the very last things for which it should be necessary to borrow money. In general, the tax authorities are prepared to help people who have got into difficulties by allowing the payment of tax arrears in installments. Many people in this country cannot be bothered to contact the official concerned. It is then the role of the bank or an anti-usury association to tell them what to do or to act as an intermediary. Where loans are provided to repay debts therefore, the bank or anti-usury association will have to deduct from the income of the debtor a proportion to pay tax arrears and current taxes, in addition to that part deducted to cover interest on and repayment of the loan. Account must after all be taken of the fact that assistance in paying tax arrears will achieve little if care is not at the same time taken to ensure that no new arrears arise.

6. Credit for the purchase of durable goods (semi-consumer credit)

Polak calls credit intended for use in the acquisition of durable consumer goods semi-production credit, e.g. credit for the purchase of a house for owner-occupation and for the purchase of goods to be paid for in installments. In this country, such credit can also be taken to include that for the purchase of jewels and gold and silver jewelry. The characteristic feature of this semi-consumer credit is that because of their durability the consumer goods purchased with the aid of the credit are not consumed immediately but gradually and that the credit is repaid as the goods are consumed. Such credit gives rise to apparent saving which is very similar to the regular release of capital from capital goods. This apparent saving becomes real, new saving, in so far as the credit is repaid more quickly than the goods are consumed. Long-term credit to be repaid gradually and at least as quickly as the goods will be consumed is appropriate here.

This kind of consumer credit, where it is extended for the purchase, construction or renovation of homes, has always formed an important part of the lending business of the popular credit banks and is also of considerable importance to the AVB. It accords excellently with the frequently mentioned inclination of the indigenous population to invest surplus resources in goods which increase the regard in which they are held. Moreover, in the towns there is often a shortage of decent housing for ordinary people, as a result of which rents are high in relation to the value of properties. Public housing construction is of considerable importance there and by extending credit to people wishing to build their own houses the AVB can make a useful social contribution.

7. Credit for the construction of housing on land owned by the borrower

Housing credit is an easy matter where the borrower intends to build on his own land, as is usually the case in the village. The land which serves as security together with the house which is to be built, in itself ensures that the value of the security somewhat exceeds that of the loan. Furthermore, it is common in the village for the house builder to begin getting together the most basic materials from his own resources, so that only supplementary credit is required. Often other security (farmland) is also available. If the borrower is a farmer who does not have a regular additional monthly income, repayments will have to be made in accordance with the same principles as apply to agricultural credit, i.e. often in a number of annual installments, timed to fall after the harvest of the cash crops which yield the most monetary income or of rice which serves as a cash crop. In all other cases monthly repayments should be required as far as possible. If there is insufficient cover there is no reason why the total period of the loan should not be five to ten years. Longer loans will seldom be necessary, even for brick townhouses secured by a mortgage, given that the monthly rentable value of such houses is as a rule no less than 1% of their value.

For the AVB there is little point in distinguishing between short-term "construction" credit (for the construction of the house) and long-term credit (secured by mortgage) once the house has been completed as the bank's capital after all permits it to lend on a long-term basis. If it is secured by a first credit mortgage or by credit surety up to a maximum of approximately thirty percent more than the amount of credit to be extended, credit may be provided to cover construction costs on condition that as soon as construction has been completed, and in any event from a given date, a given amount will be repaid regularly, preferably in the form of annuities, to cover principal repayments and interest.

8. Housing credit where construction is to take place on land owned by a third party

Credit for the construction of houses is more difficult where the construction is to take place on land belonging to a third party, to which no proper rights can be obtained, e.g. rented land or land leased from an urban municipality, subject to land rent, which may not be alienated or encumbered in any way. Not only can the land on which the house is to be built not serve as security in such cases, only the demolition value of the house itself can do so. As there is as a rule unlikely to be sufficient other security, this means that housing credit cannot be granted, unless the municipality or other parties entitled to the land make special arrangements for the bank, pursuant to which, under certain circumstances (e.g. that rents or land rents are paid properly), the bank is given the power to sell the house to someone else if the borrower fails to pay, that person then being entitled in the same way as the original borrower to have the house on the land in question. General arrangements may be made with the municipality or other authority to cover such cases. Private landowners or land-holders must act as third parties in agreements between the bank and borrowers.

The legal arrangements in such cases might be as follows. Formally, the bank initially builds the house on its own account and therefore pays the builder directly and in

return is itself the owner of the house (which will be registered in its name).The bank then provides the house to the borrower on a hire-purchase basis, in return for a monthly payment calculated in accordance with the annuity system, which together with the land rent which must be also charged and paid by the bank to the party entitled to the land, should be roughly the same as or little more than the local rentable value of the house. If the person acquiring the house through this hire-purchase arrangement fails to meet his obligations, the bank need not fear that it will lose out as a result: It may then take the house from him and sell it to someone else, again on a hire-purchase basis.Building on the bank's own account in this way should of course only occur where someone has applied for housing credit and has signed a hire-purchase agreement which takes effect once the house has been completed and supplied by the builder. It is also possible, and safer for the bank, for an agreement to be entered into with the builder, in accordance with which the latter only receives his money on supply of the house after conclusion of the hire-purchase contract.

Housing credit of this kind need not be provided for more than five to ten years either.

Where inexpensive, ordinary houses worth a few hundred guilders each are provided on a hire-purchase basis, the bank may, where necessary, do without other security, if the houses are of reasonable quality and would be easy to rent out and the information available on the character and income of the persons entering into the hire-purchase agreements is favorable. However, the bank should preferably require 10% of the construction costs to be paid by the person entering into the initial hire-purchase contract, in order to limit the risk and to ensure that money is lent only to borrowers who are serious about the project. The investment of such a sum as a few dozen guilders will as a rule not present any insurmountable problem.

Where the loan to be provided by the bank is less than 90% of the construction costs or the monthly payments of interest and principal to be made to the bank are considerably more than the rentable value, hire-purchase is less to be recommended. Instead, an ordinary loan should be extended, secured by credit surety, or as this will often not be possible, by the fiduciary transfer of the ownership of the house or the sale of the house to the bank with the seller retaining the right to re-buy it. In the latter cases the bank should be acknowledged by the parties entitled to the land as the owner of the house, which means that it should be transferred to the bank's name in any relevant records.

If the bank wishes to provide credit for ordinary housing to any significant extent in a given municipality or other local administrative area, without the collateral provided being worth significantly more than the property concerned, good cooperation with the local authorities will be necessary. If the construction of such housing is of interest to those authorities, they will be prepared to offer assistance, e.g. by surveying houses once built and ensuring that the people who acquire them through hire-purchase schemes maintain them properly.If the local authorities consider that greater flexibility on the part of the AVB (e.g. in respect of interest rates or the waiving of direct contributions towards construction costs from the person entering into hire-purchase agreements) is desirable to stimulate housing construction, they will also have to take over some of the risk

involved by providing guarantees, though these may be limited to a given percentage under certain circumstances.

A local office should only begin to provide housing credit as discussed in this section on any scale after consultation with the management.

9. Credit for various purposes at once

It is common for loan applicants to ask for credit for a number of purposes at once. In such cases the first thing that must be done is to separate the various purposes clearly and in so far as is possible check how much is required for each purpose. It will then often prove necessary temporarily to refuse credit for some of the purposes and limit the credit to one or more, primarily of course where the accumulation of purposes for which the loan is intended means that the amount required is large in relation to income and the security which could be provided. A combination of debt redemption and some other non-urgent purposes, such as home improvement, the purchase of furniture or help to relatives is extremely common. It goes without saying that a person who has not proved able to cut his coat according to his cloth should not be provided with money for non-urgent purposes until he has repaid all or most of a loan taken out to pay off his debts to third parties. The bank should nevertheless do what it can in other respects to prevent customers borrowing too much for a dubious combination of purposes. In many cases some of those purposes may turn out on closer examination to be fictitious. It is therefore extremely useful if the bank itself makes as many as possible of the payments to be made with the help of the loan. Many of the alleged purposes will then fade away because the applicant was in reality only seeking to obtain some money to waste.

It will sometimes also be necessary to divide the money requested for various purposes over two loans, e.g. one long-term loan for the purchase of a house, plus current account credit or a seasonal loan for operating credit.

9. Guarantees against the misuse of long-term credit

Although, as has been demonstrated in the previous sections, long-term consumer and semi-consumer credit is in many cases useful and necessary and can be provided by the AVB, this is not to say that account need not always be taken of the inclination of many people in this country to borrow more than is good for them and not to look far enough ahead. Even where it is 100% covered itself (e.g. because loans are raised on pensions in combination with life insurance), the AVB must therefore protect prospective borrowers against themselves.

Some ways of doing this have already been described above. In the first place, where long-term credit is required, the bank should not only ascertain whether the purposes for which the loan application has been made are correct but also whether their usefulness is in proportion to the lasting burdens which long-term repayment will impose on the borrower. This is why, as stated above, care must be taken to avoid extending loans for a combination of purposes, why credit should not be extended for the purchase of luxury goods and preferably not for the purchase of furniture either,

and why an amount which is considerably more than his previous operating capital should not suddenly be provided to a merchant or small industrialist.

In addition, loans should preferably not be paid to the borrower but direct to those whom he has to pay, i.e. the anti-usury association or creditors in the case of loans to repay debts, suppliers in the case of credit for the purchase of goods and the builders in case of construction loans, while if a person is building something himself the loan should be provided in installments, each one to be paid after it has been demonstrated to the bank's satisfaction that the previous installment was used for construction purposes.

The bank should also ensure that the repayments to be made plus additional costs, such as insurance premiums and fire cover, do not constitute too large a fraction (no more than about a quarter is standard) of the regular income upon which the borrower can rely, i.e. not including uncertain and varying income from additional jobs, after taking into account deductions from his wages, salary, pension or social assistance. If this procedure is not strictly adhered to, there is a risk that in the long term the borrower will get into rapidly increasing debt because his remaining income is insufficient. The credit which initially appeared to be so useful will then do him more harm than good.

It may, then, be as fitting a conclusion as any to this provisional manual to impress upon the reader that nothing is as undesirable for the AVB and its clients than granting more credit than people can afford.

GLOSSARY (by the editor)(nl = Dutch)

Algemeene Volkscredietbank (AVB) (nl) General Popular Credit Bank (AVB)Bawon harvest share paid to harvestersBatavia (nl) JakartaBouw (nl) 7096,5 m2 ( app. 0.7 hectare)Buitenzorg (nl) BogorCentrale Kas (nl) Central Fund; provided guarantees

and deposit facilities to popular credit banks prior to its merger into the AVB

Credietverband (nl) credit surety; mortgage on communal land allowed to few institutions, to prevent land getting into the hands of foreigners

Desa villageGadoe dry season crop/plantingGaplek dried cassava piecesGiro current accountGolongan irrigation blockIGCI (nl) Local Council Credit Institutions (Inlandse Gemeentelijke Crediet (popular credit banks, rice banks, Instellingen) village banks)IMIW Dutch East Indies Company for

Individual Employment ProvisionsKedelee soybeanKrètèk clove (to indicate clove cigarettes)Lebaran Islamic feastLumbung rice/paddy bank (lit: warehouse)Minta perskot request advance paymentNederlandsche Middenstandsbank (nl) Netherlands bank for small enterprisesNV (nl) limited liability company (Ltd)NLG (nl) Netherlands(Dutch) GuilderPadjeg loan loan to pay taxes or (land) rentPasar marketPatjeklik period of money and food shortagePépéan drying floor/shedPikul 62.5 kgPolowidjo secondary crop/dry field cropPuasa Islamic fasting periodPriyayi elite; office holderSawah irrigated fieldSlametan (ceremonial) partyTani farmerTegalan upland, non-irrigated landVolkscredietwezen (nl) Popular Credit System (name of the

organization as well as the name of a monthly magazine)

Warong foodstall; small shop

REFERENCES

1. L.T.Schmit: "A history of the "Volkscredietwezen" (Popular Credit System) in Indonesia (1895-1935)", in: "Provisional manual for the credit business of the general popular credit bank", Ministry of Foreign Affairs, The Hague, 1994

2. Th.A.Fruin: "History of the village credit system"; Original title: "Geschiedenis van het dorpscredietwezen"(1933), translated and edited by K.Kuiper, Ministry of Foreign Affairs, The Hague, Netherlands, 1999

3. "Blaadje der Centrale Kas" (Journal of the Central Fund), No. 6, 1919, pp. 83 ff4. Th. A. Fruin: "Credieten op langen termijn" (Long-term credit),

"Volkscredietwezen", October 19275. Th.A. Fruin: "Credietvormen" ( Forms of credit), "Volkscredietwezen", January

19296. Th. A. Fruin: "De Volkshypotheekbank" (The popular mortgage bank),

"Volkscredietwezen", January 19307. Th.A. Fruin: "Rekening-courant crediet aan inheemschen" (Current account

credit to the indigenous population), "Volkscredietwezen", December 19308. Th. A. Fruin: "Het uitleenbedrijf der Volkscredietbanken en de Centrale Kas"

(The lending business of the Popular Credit Banks and the Central Fund), "Vollkscredietwezen", June 1933, pp 642 ff

9. Provisions concerning the AVB, Netherlands Bulletin of Acts, Orders and Decrees, 1934, no. 82

10. Netherlands Bulletin of Acts, Orders and Decrees, 1929, no. 35711. Netherlands Bulletin of Acts, Orders and Decrees 1934, no. 82, in conjunction

with no. 19712. Netherlands Bulletin of Acts, Orders and Decrees 1934, no. 49013. Cf. "Vollkscredietwezen" January 1933, pp. 20 ff. and "Koloniale Studiën"

(Colonial Studies), April/June 1934, pp. 136 ff.14. Cf. also the proceedings of the "Volksraad" (People's Council), 1933-34,

p. 183115. Cf. "Vollscredietwezen", January 1930, pp 1 ff.16. Polak: "Eenige grondslagen voor de financiering der onderneming" (Principles

for the financing of businesses), 192317. Cf. Dr H.M.H.A. van der Valk: "De betrekkingen tusschen banken en industrie

in België" (Relations between banks and industry in Belgium), Haarlem 1932, chapter X in particular; and the articles by Dr Mautzer in the journal "Economisch Weekblad" (Economic Weekly), 30 March and 11 May 1934, nos. 13 and 19.

18. "Volkscredietwezen", June 1932 pp. 281 ff.19. "Volkscredietwezen", January 1932, pp. 6 ff.20. "Volkscredietwezen", October/November 1934, p. 57121. Soerachman: "Het batikbedrijf in de Vorstenlanden" (The batik industry in the

principalities)22. De Kat Angelino: "Batik-rapport" ( Batik report)23. "Volkscredietwezen", February/March 193524. "Volkscredietwezen", October 1930, p.44125. Schmid: "Kleingewerbliche Kreditinstitute in der Schweiz" (Small business

credit institutions in Switzerland)

26. "Aanwijzingen voor de beleening van pensioenen, gagementen en onderstanden"(Advice on the raising of loans on pensions, salaries and social assistance), "Volkscredietwezen", October/November 1934, pp. 603 ff.

27. "Volkscredietwezen", August 1934, p 474, and September 193428. Janzen: "Het middenstandsbankwezen in Nederland" (The small-scale

enterprise banking system in the Netherlands), 1922, p.8429. "Middenstandscrediet aan Chineezen" (Small enterprise credit for the

Chinese), "Volkscredietwezen", February/March 1935.30. Before finalization this chapter was submitted to and discussed with Dr G.

H.van der Kolff, X. F. Crine Le Roy, Baron W. E. K. van Lynden and Dr E. de Vries; the author is grateful for their valuable comments, which have been incorporated in the text.

31. Dr E. de Vries: "Landbouw en Welvaart in het regentschap Pasoeroean" (Agriculture and prosperity in Pasuruan), 1931, p.28

32. Prof. J.H.Boeke: "Dorp en Desa" (Village and desa), 193433. Soekarno: "Onderzoek naar het leenbedrijf van de Volksbank Indramajoe"

(Study of the lending policy of the Indramaju Popular Bank), "Volkscredietwezen", May 1934, p.285

34. Boeke: "Dorp en Desa" (Village and desa), p.2835. Burger: "Vergelijking van den economischen toestand der districten Tajoe en

Djakenan" (Comparison of the economic situation in the Tayu and Jakenan districts), p.13

36. Soepomo: "Het adatprivaatrecht van West-Java" (Customary private law in West Java), pp.223 ff.

37. "Volkscredietwezen", April 1930, p.12238. "Volkscredietwezen", June 1934, p.41239. Burger: "Het niet-officieele crediet in het Regentschap Pati in 1927" (Non-

official credit in the Pati Regency in 1927), "Koloniale Studiën" (Colonial Studies), volume…, p.403

40. "Volkscredietwezen", August 1931, p.47341. "Volkscredietwezen", July 1931, p.41642. "Volkscredietwezen", September 1923, p.21743. "Volkscredietwezen", September 1923, pp.267 ff.44. "Volkscredietwezen", August 1931, p.48245. See also in particular the section on the importance of the Chinese in the

indigenous cultivation of tobacco (pp. 321 ff.) in the article in "Volks-credietwezen", September 1923

46. "Volkscredietwezen", April 1930, p.12747. "Volkscredietwezen", January 1931, p.1548. "Volkscredietwezen", September 1923, p.28049. De Vries: "Ontleding van de tabaks-en rijstcultuur in het regentschap Ngawi"

(Analysis of tobacco and rice cultivation in Ngawi regency), "Landbouw" (Agriculture) V, p.663

50. "Volkscredietwezen", 1931, p.78751. Wormser: "Het graf op den Soembing" (The grave on the Sumbing)52. Van Doorn: "Het verpanden en verhuren van klapperbomen en het voortijdig

verkoopen van klapperproducten als middel tot credietverkrijging"(The bailment and leasing of coconut palms and the premature sale of coconut products as a means of obtaining credit), "Volkscredietwezen", August 1927, pp.248 ff.).

53. An exception must be made for the Minahasa (coconut groves), where the debt burden was already considerable before the economic crisis (see Van Doorn in "Volkscredietwezen", July 1926, pp.165 ff.) and is now extremely serious.

54. "Volkscredietwezen", August and November 1933, pp.753 and 1083 ff. 55. "Volkscredietwezen", January 1934, p.2456. Dr C. L. van Doorn: "Onderzoek van de credietwaardigheid van leeners van

Volkscredietbanken" (Study of the creditworthiness of popular credit bank borrowers), in : "Volkscredietwezen", December 1926, pp.317 ff.

57. "Volkscredietwezen", May 1934, pp.27 ff.58. For the distribution of rice importing and rice exporting areas and the seasonal

fluctuations in various kinds of rice-growing areas reference should be made to the articles "Het Javasche rijst jaar" (The Javan rice year) and "Het rijstvervoer op Java in 1930 en 1931" (The transport of rice in Java in 1930 and 1931) by Dr De Vries in "Volkscredietwezen", June 1933, pp.672 ff.

59. De Vries et al.: "Ontleding van de tabaks-en rijstcultuur in het regentschap Ngawi" (Analysis of tobacco and rice cultivation in Ngawi regency), "Landbouw V" (Agriculture V), 1929/30, pp.577 ff.

60. "Volkscredietwezen", February 1931, pp. 77 ff.61. De Vries : "Landbouw en Welvaart in het regentschap Pasoeroean"

(Agriculture and prosperity in Pasuruan regency)62. "Volkscredietwezen", November 1929, pp. 439 ff.63. "Volkscredietwezen", January 1931, pp. 16/1764. "Volkscredietwezen", November 1929, p.45965. "Volkscredietwezen", February, 1931, p.8666. "Volkscredietwezen", December 1932, pp. 777 ff. 67. "Vollkscredietwezen". January 1929, pp.7/8.68. In the case of districts where a lot of seasonal loans are provided which have

to be repaid from the rice harvest, these figures can best, if so desired, be obtained annually from the Central Office of Statistics for the relevant local offices by head office; they can then be processed by the local offices and incorporated intro district charts.

69. "Volkscredietwezen", May 1934, especially pp. 278 ff. and 328 ff.70. On the other hand, bawon is frequently received if the farmer helps others with

their harvests.71. "Volkscredietwezen", January 1934, p.46 (kapok), August 1934, p.467 (rice),

September 1934, p.540 (coconuts and copra), and January 1935 (all said products)

72. Bawon received from others and other payments for services rendered by him for others will help him here, as will the retail trade which picks up after the harvest.

73. "Volkscredietwezen", November 1928, p.47274. "Volkscredietwezen", October/November 1934, pp.603 ff.75. "Volkscredietwezen", September 1934, pp.550 ff.,

amended in "Volkscredietwezen", January 1935, p.6476. "Volkscredietwezen", September 193477. The Colonial Administration's Pawnshop Service has a monopoly on loans of

less than NLG 100, which means that even the AVB may not provide smaller loans on the strength of collateral in the form of moveable property on which loans can be raised from the Service