Cultural Dimensions of LPD Micro-finance in Bali

Arsip Tulisan 2011 (Yudi Ahmad Faisal)

There have been many researches about the influence of culture on a business. A local culture often plays a significant role in developing a basic structure of a particular business. Thus, it can be argued that a business is not neutral from the cultural encouragement. Hofstede (2001) argued that a culture plays to conceptualize the practice of business in the world. One of the business players that is significantly affected by this cultural inspiration is microfinance institution. Its responsiveness and sensitivity to the local culture could be found in its operation.



Bali province in Indonesia, where the tradition is strongly embedded in daily life of its society, has a microfinance system which operates in accordance to its cultural dimensions. Lembaga Perkreditan Desa (LPD) or the village community bank is a microfinance institution owned and governed by the customary village (banjar) has inclusive in outreach, which covering almost all the Balinese villages and the vast majority of its population (Seibel, 2008:1). Those cultural dimensions which influence the basic structure of the institution are firmly centred on collectivism, and power distance with regards to Hofstede’s theory.



This paper is aimed to demonstrate the implementation of microfinance in Bali, especially how does the cultural dimensions influence the basic structure and the daily operation of LPD. Furthermore, the analytical approach of this paper will use the theory of individualism–collectivism and power distance of Geert Hofstede. The theories are helpful in describing the characteristics of Balinese culture in conceptualizing and constructing the business model of the microfinance institution.



The LPD and Customary Village (Banjar)

LPD is a microfinance institution, which is administrated by a specific law in Bali Province, owned, financed, and governed by the customary village. Its position serves as an economic engine to stimulate the business activity within a village. Thus, it has been an integral part of Balinese society in improving their economic life. The main purpose of establishing a network of LPDs is to preserve and strengthen the customary village as the communal space of Balinese economic life, culture, and religion (Seibel, 2008:3).This purpose preserves as a point of departure to considerably claim that LPD is not merely commercial business entity, but it is the main element of the society to actively engage in the modern life without separating its cultural dimensions.



It can be argued that in Balinese context, customary village is a community organization that considerably preserves the social cohesion of the community and culture altogether. As a fundamental civil unit in the region, customary village operates its administration system in decentralization, democratic, and cooperative manners. As similar to other villages in the modern Indonesia, customary village has a local leader who commonly possesses double functions, to implement the state administration system and to facilitate the society in applying local wisdoms and traditions. The nature of this village is different from one to another. In one case, its community includes both indigenous and migrant, and in other case its community strictly forms its membership from people who are born in that village (Vipriyanti, 2008:4).



Balinese customary village embeds local wisdoms as a social norm that must be considerably preserved by all members of its society. Local wisdoms are thus part of Balinese society in developing every aspect of social advancement including economy and business. According to Geertz (1980:8), local wisdom plays a significant role in developing human resources within a local context. Its deeply rooted cultural element enables a society to empower the community to gain a specific benefit. As a result, local wisdom can be classified as a social capital, which is very helpful in the process of development.



Individualism-Collectivism

According to Hofstede (2001:209), individualism emphasizes on the autonomy of a person. Individualists are motivated by their own preferences, needs, and rights, giving priority to a personal rather than to a group goal. And commonly, it often regarded as the characteristic of a modernizing society.



The notion of individualism is a contrast with collectivism that emphasizes the common goals and objectives of a group. In collectivist cultures the most important values place emphasis on the dependency of the individual with respect to in-groups (Trompenaars, 1994:52). Contrary to individualism, collectivism is often pointed on more traditional society, a society which is mainly motivated by the norms and duties imposed by the collective entity. Furthermore, the role relationships that include in-group members are perceived as more respectful, and intimate than they are in individualistic cultures.



The relationship between the individual and the collectivity in human society is not only a matter of ways of living together. It is closely linked with societal norms – in the sense of value systems of major groups of the population. It, therefore, influences both people’s mental programming and the structure and functioning of many institutions aside from the family; educational, religious, and even political (Hofsted 2001:210).



Power Distance

Power distance is defined as the degree to which power differentials within society and organizations are accepted (Hofstede 2001:79). In cultures with small power distance, people expect and accept power relations that are more consultative or democratic. People relate to one another more as equals regardless of formal positions. Subordinates are more comfortable with and demand the right to contribute to and critique the decisions of those in power. In cultures with large power distance, the less powerful accepts power relations that are autocratic or paternalistic. Subordinates acknowledge the power of others based on their formal, hierarchical positions (Hofstede, 2001:83).



Local Culture and LPD’s Model

It can be argued that Balinese people preserve local wisdom to strengthen their social cohesion. One of their social cohesions relies on the notion of togetherness. In the context of Hofstede’s theory, this value system can be categorized as a collectivist system which forms a collectivist society. The harmony among society’s members are thus as a result of their willingness to live within local wisdoms. Some scholars such as Geertz (1980:46) argued that local value system often creates beneficial values to actively engage in the modern life. The notion of mutual help (gotong-royong), for instance, creates a strong solidarity that substantially differsthe traditional society from its modern counterpart. This togetherness spirit is firmly based on collective interests.



This notion of mutual help has been successfully used by the LPD in developing its local banking concept, especially how this microfinance institution replaces the physical collateral in allocating funding. Unlike the concept of collateral of commercial banking that relies on the physical collateral of its borrowers, the collateral that is developed by the LPD relies on social protection. In the business model of LPD, the concept of collateral has been changed from tangible to intangible collateral. This idea is a result of utilizing social solidarity namely gotong-royong (mutual help) and trustworthiness in the new collateral model[1].



Social protection, which is rooted from the local wisdom, is often argued as a mechanism to limit social cost as a result of illegal individualistic behaviour. Furthermore, social surveillance enables the effectiveness of controlling system in the daily life of a society (Vipriyanti, 2008:6). It function is to limit the magnitude of social corruption that undermines the existence of the microfinance institution.



Bali society still adopts social stratification. Each member of society possesses particular position that enables he or she to utilize this particular title to gain a position within society. Essentially, this social hierarchy represents power distribution among society. Those who possess high rank titles are often elected as a leader. This mechanism makes sense when it deals with the obligation of a leader to govern their people. In traditional society, a leader needs a strong position that enables him to take considerable decisions in every aspect of social activities. Thus, a leader from high rank status is often elected in order to secure such function. This structure can be categorized as large power distance based on Hofstede’s theory. In relation to microfinance operation within a village, a leader of customary village acts as a supervisor to encourage the borrowers to settle their debt. In case of a particular borrower refuses to settle his or her debt, a sanction will be enforced to them by a society’s leader. The sanction is not only related to social, but also to the spiritual one namely karma (Hobart et al. 2001: 68). The social control of LPD can be so successful in inducing defaulters to repay their loans (Seibel, 2008:16).



Though the above explanation has shown the impact of cultural dimensions in the operation of microfinance, some studies reveal a sceptical view. According to Ledgerwood (2006:271), a culture by itself has no significant contribution to the performance of the institution. The studies on the influence of culture to microfinance excessively emphasize the cultural context of the microfinance operation. According to him, the most influential factor that creates the sustainable existence of microfinance is a modern management application. Even though some cultural dimensions are appropriate to utilize certain kind of banking mechanisms, the microfinance is hard to be successful without engaging its operation into management modern. As a result, the modern management considerably participates in maintaining the sustainability of microfinance’s performance in the customary village.



The proponent of this view always relates to a business process as a result of management application in reducing the technical error in managing the microfinance institution. Thus, management is often seen as an important tool in organizing various elements and resources to accomplish desired goals and objectives effectively. Furthermore, they often emphasize the argumentation on certain microfinance failures that have raised the issues of poor management and inadequate corporate governance among microfinance institutions (Lascelles, 2008:5). The ability of microfinance to adapt rapid change is argued as the greatest risk which is facing by this financial institution. The survey unveils a strong scepticism about the ability of many microfinance institutions to adapt to new demands while still retaining their social and cultural objectives. By retaining the culture dimension excessively, the industry is often seen to be lacking in professionalism and management skills. As a result, this could be a source of deficiencies of the development of microfinance institutions in many parts of the world (Lascelles, 2008:5).



Local culture and modern management inevitably contribute to the development of the basic structure of microfinance. Local wisdom is a fact which is utilized by the institution to create a unique form of collateral and social surveillance. Such norms create a new banking model that differs with its mainstream counterpart. Commonly, the collateral requested by a commercial bank is always related to physical collateral. This system in practice has created many obstacles, especially for those who have any ability to run a business with no appropriate collateral. In a modern banking terminology, such party is called as an un-bankable person. Culturally speaking, the physical collateral is appropriate to be applied in commercial banking in the urban community since the social cohesion is often absent in the modern society. It can be argued that individualist culture is responsible in creating such a system. In that system, a bank has no choice to protect its fund in term of default unless it asks and holds procedurally an evidence of property ownership from a borrower.



Contrary to the modern system, the conventional collateral is not compulsory to be imposed to a borrower in the mechanism of microfinance institution, because it has been changed by the group protection system. The protection value of such collateral is replaced by a social protection that based on mutual help and trustworthiness. By using this system, the obstacles of an un-bankable borrower can be resolved.


Conclusion

Cultural analysis can provide valuable knowledge about local mechanisms that can be useful to a business institution. Culture attributes – social cohesion and trustworthiness – are often valuable to become strategic tools to manage commercial entities. Such knowledge demonstrates that cultures have built a social capital which microfinance institutions can easily use and avoid significant mistakes.



In collectivist society, social dependency can be used as a social capital that is very constructive in developing a business model of microfinance institution. The collectivist society in Bali often uses social norms as alternative to reduce social cost that generated by individualistic behaviors.



The implementation of this model is easy to be achieved in the collectivist society that is grounded on group’s interests. The notion of unity creates a new concept of collateral and governance. As a result, the collectivism notion of Bali society strongly influences the operation of its microfinance institution namely LPD. As a result, it is obvious that the influence of cultures produces significant differences in the conceptualization, understanding and practice of a business institution.












References

Books

Geertz, C., (1980), Negara: the Theater State in Nineteenth Century Bali, Princeton: Princeton University Press



Hobart, A., Urs Ramseyer, Leemann A., (2001), the People of Bali, Oxford: Willey-Blackwell



Hofstede, Geert, (2001), Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, Thousand Oaks, CA: Sage Publications, Inc.



Ledgerwood, Joanna, (2006), Transforming Microfinance Institutions: Providing Full Financial Services to the Poor, Washington: IBRD and the World Bank



Trompenaars, E. (1994) Riding the Waves of Culture, London: Nicholas Brealey



Journals and Papers

Lascelles, D., (2008), Microfinance Banana Skins 2008: Risk in a Booming Industry, Center for the Study of Financial Innovation (CSFI), New York. http://www.microfinancegateway.org/files/47464_file_CSFI_Microfinance_FINAL.pdf (accessed December 05, 2010)



Seibel, Hans Dieter, (2008),DesaPakraman and LembagaPerkreditanDesa in Bali: A study of the relationship between customary governance, customary village development, economic development

and LPD development, ProFI Working Paper Series WP 03/2008.



Vipriyanti, NyomanUtari, (2008), BanjarAdat and Local Wisdom: Community Management for Public Space Sustainability in Bali Province, presented in IASC 2008 12th Bienniel Conference, July 14 – 18, 2008




[1] Technically speaking, LPD will allocate a loan to a group in which all group members are responsible to make sure that the loan will be settled in an agreed date. It is no need for the group members to provide tangible collateral because the group is acted as social collateral. This mechanism is hard to be applied, unless there is a notion of trustworthiness in society that preserves such cohesion.