Chapter Three

Riau Province and UED-SP Microfinance Institution

3.1. Riau Province Overview

3.1.1. Geographic
Riau is one of 33 provinces in Indonesia. Riau Province is located in central of
Sumatra Island, in at 010.05'00" South Latitude to 02025'00" North Latitude, and
between 100000'00 " to 105005'00" East Longitude. It is bordering of Malacca Strait
and North Sumatra Province (Northern), Jambi Province and West Sumatra Province
(South), Riau Islands Province and Malacca Strait (East), and West Sumatra Province
and North Sumatra Province (West).
Riau Province has an area of 8,915,016 hectares, located at altitude between 2 - 91
meters above mean sea level. It has wet tropical climate that affected by dry season
and rainy season, with average rainfall ranging between 1,700-4,000 mm per year.
Air temperatures in Riau Province ranging by 21-35 0C.
Figure 3.1. Riau Province Map

3.1.2. Demographic
As a result of census of population in 2010, total population of Riau Province was
over 5.5 million, and 2.3 percent of Indonesia total population. The annual
population growth rate was 3.58 percent per year for 2000-2010, higher gowth rate
than national average. The population density of Riau Province in 2010 is lower than

national population density. It is 64 person per square kilometre, than 124 person per
square kilometre.
The distribution by sex was male, comprising 51.52 percent of the total population,
and 48.48 percent female. According the BPS (2014) the population of Riau in 2013
increased to 6.1 million, which total household almost 1.5 million, and average
household member 4 person. The distribution of population by sex in 2013 was 51.63
percent male, and 48.37 percent female.
Table 3.1. Population Indicators in Riau Province, 2010
Indicator
Total population (million)
Population density
Population growth rate
Percentage of male population
Percentage of female
population
Percentage of rural population
Percentage of urban population
Sex Ratio in rural area
Sex Ratio in urban area
Dependency Ratio
Dependency rural
Dependency urban

Unit
Person
Person per sq.
km
Percent per year
Percent
Percent
Percent
Percent
Percent
Percent
Percent
Percent
Percent

Indonesia

Riau
Province

237,64

5,54

124.00
1.49
50.34

64.00
3.58
51.52

49.66

48.48

50.21
49.79
101.00
101.00
51.31
56.30
46.59

60.83
39.17
107.00
105.00
55.46
58.41
51.10

Source: 2010 Population Census Data - Statistics Indonesia (http://sp2010.bps.go.id)

The population density of Riau Province in 2010 is lower than national population
density. It is 64 person per square kilometre, than 124 person per square kilometre.
Many Indonesian people live in rural areas, which showed by the proportion of
population in rural area more than in urban area. Indonesia Statistic showed that
about 60.83 percent of Riau population lives in rural areas, and higher than overall of
national average (50.21 percent). The rural peoples in Riau are more male than
female, which showed by sex ratio in rural areas 107 than urban areas 105.
Population indicators also showed that the productive peoples (peoples younger than
15 year and older than 64 year) are more than the non-productive peoples (peoples
age 15-64 year). It is shown by dependency ratio indicator in Riau by 55.64 percent
and average Indonesia 51.31 percent. The dependency ratio in Riau rural area is
higher than rural.
According Riau in Figures (2014) population level education in Riau obtained that
the population 10 years and over by education showed 27.39 percent hold primary
school certificate graduate, 20.38 percent graduated senior high school, 19.62 percent
graduated junior high school, 19.41 percent did not graduated primary school, and
4.09 percent university graduated. Additionally, the Riau population characteristics

was also point out the population 15 years and over dominant worked in agriculture
sector. More than 42 percent the Riau population work in the agricultural sector
compared to trade, restaurant, and hotels are 20.50 percent, 5.54 percent in building
and construction sectors, and the rest scattered in several sectors.
3.1.3. Administrative Division
Riau Province is subdivided into 10 regencies (kabupaten) and two autonomous
cities (kota). Both regency and city are the same level of government, and at lower
down of a provincial level. Substantially, the difference of a regency and a city is size
in population, area, and regional economic advancement. Each regency and city
subdivided some sub districts, and each sub district subdivided some villages.
Overall, there are 164 sub districts and 1,836 villages in Riau Province. Number of
regency, sub district, and village in Riau Province is shown in figure below.
Table 3.2. Number of Regency, Sub districts and Village in Riau Province, 2014
Name of Regency/City

Number of Sub districts Number of Villages

Kuantan Singingi
Indragiri Hulu
Indragiri Hilir
Pelalawan
Siak
Kampar
Rokan Hulu
Bengkalis
Rokan Hilir
Kepulauan Meranti
Pekanbaru
Dumai
Riau Province

15
14
20
12
14
21
16
8
16
9
12
7

229
194
236
118
131
245
153
155
183
101
58
33

164

1,836

Source: Riau in Figure (http://riau.bps.go.id)

3.3. Land Used

Land used as natural resources were led economic characteristics of Riau Province.
Plantation and forestry as a cash crop cultivation are the largest proportion of land
used in Riau, comparing food crops cultivation. In addition, Riau region is also
blessed mining resources, especially fossil material that produce fuel fossil and other
mineral. According Riau Statistical (2014) the plantation area in Riau more than 3.5
million acres or about 39.75 percent of total area of Riau Province, compared to
fixed production forest was approximately 1.6 million acres or 27.77 percent.
Industrial forest plantation was producing timber to supply raw material for pulp and
paper industries that was operated in Riau. Palm oil plantation is the largest area for
using plantation cultivation, it is 67.70 percent of the plantation area, compared to
coconut was 14.68 percent, rubber was 14.26 percent, and sago cultivation was 2.35
percent, as Table 3.3 shows.

Table 3.3. Land Used Area for Agriculture in Riau Province, 2013
Land Used

Area (ha)

Plantation
Palm Oil
Rubber
Coconut
Sago
Others
Forestry
Protection Forest
Natural Concervation Forest
Fixed Production Forest

3,543,707
2,399,172
505,264
520,260
83,256
35,755
2,476,065
208,910
628,636
1,638,519

Area of Riau Province

8,915,016

Source: Riau in Figure, 2014

Palm oil plantations are generally operated by estate and smallholders. Estate palm
oil plantation divided two ownerships, which are state-owned plantation and private
plantation. While, the smallholder palm oil plantation divided two type, which are
partnership smallholder and independent smallholder. The partnership or affiliated
smallholder plantation was commonly tied to state-owned and private plantation
company, and supply their produce to Plantation Companys palm oil mill. While, the
independent smallholder palm oil free to sell their palm oil production to any local
trader or palm oil mill (Melonar, et al, 2013). Whereas, other plantation cash crops,
which are rubber, coconut, and sago plantation usually smallholder crops.
3.4. Economic Characteristic
According the Indonesia Statistics (2014) economic growth of Riau was less than
Indonesia average economic growth, which is 2.7 percent, compared with Indonesia,
5.0 percent in year of 2013. During the period of 2005-2013, Riau economic growth
tends to be below the national average economic growth, except in year of 2005,
which is above the average growth of the national economy, as figure 3.1 shows.

7.00
6.00
5.37
5.00
5.41

5.19

5.67

5.74
5.65

5.15

6.14

6.28

5.90

4.77
5.04

4.00
Growth (%)

6.35

4.21

3.00

3.54

3.41

2.97

2.00

2.61

1.00
0.00
2005

2006

2007

2008

Riau Province

2009

2010

2011

2012

2013

Indonesia

Figure 3.1. Indonesia and Riau Economic Growth 2005-2013

Sources: Riau in Figure and Indonesia Statistic (BPS, several edition)

Riau economy structure affected the natural resource abundance, it is mining sector
and agriculture sector, which supported by downstream industries and trade sector on
both these sectors. Riau economy can be described in two characteristic, these are
economic including of oil and gas, and economy excluding of oil and gas.
In terms an economy, including oil and gas, Regional Gross Domestic Product
(RGDP) of Riau was dominated by mining and quarrying sector, especially fossil oil
and gas production. Riau is the one of the main producer oil and gas in Indonesia,
which approximately 40 percent to Indonesias total oil production (Antarariau,
2014;
http://antarariau.com/berita/44959/-riau-sumbang-40-persen-produksiminyak-nasional). Contribution of mining sector to total Riau GDP more than 43.65
percent in year 2013, as Table 3.4 shows. The mining sector is the capital intensive
economic, and is not people based economic activities. According the Population
Census in 2010, there were 31,093 of people who working and participate in the
mining sector.
The other economic characteristic is the economy excluding oil and gas. It is
dominated of agriculture sector to total Riau GDP, and involve more people for these
economic activities. Contribution of agricultural sector to total Riau GDP is more
31.11 percent in year 2013, as Table 3.4. shows. Agricultural sector involves more
people in crop cultivation, and become the people economic activities, especially
plantation crop, food crop, fishery, but not for industrial plantation trees. According
the Population Census in 2010, there were 792,175 people involved to plantation
crops, 138,332 people for food crops, and 44,531 people for fishery.

Table. 3.4. Share of Sectors on Regional Gross Domestic Product of Riau in Constant
2000 Price by Including Oil and Gas and Exluding Oil and Gas
Sectors

Including Oil and Gas

2006

Agriculture, livestock, forestry

and fisheries
Mining and quarrying
Manufacturing industries
Electricity, gas and water supply
Construction
Trade, hotel and restaurant
Transportation and
communication
Finance, rent of buildings,
business services
Services
Total Reginal GDP

2010

Excluding Oil and

Gas

2013

2006

2010

2013

16.92 17.080 17.11

38.73

34.32

31.11

54.20 48.700 43.65

10.21 11.362 12.01
0.21 0.220
0.23
2.87 3.601
4.43
7.53 9.212 11.13

1.42
17.09
0.48
6.58
17.24

1.97
17.79
0.44
7.24
18.51

2.00
17.40
0.41
8.05
20.24

2.61

3.122

3.70

5.97

6.27

6.73

1.07

1.424

1.73

2.45

2.86

3.14

4.39

5.280

6.01

10.04

10.61

10.92

100.00 100.00 100.00 100.00 100.00 100.00

Sources: Riau in Figure (BPS, 2011, BPS, 2014)

There are three main commodities in agricultural sector in Riau, which have more
contribution to total agriculture GDP, these are plantation crop, forestry, and fishery.
Peoples involvement in agriculture activities was more in plantation and fishery
activities, while the forestry activities are largest scale that cultivated by private
company. The greatest contribution of agriculture GDP to total Riau GDP, has
shown the role of agriculture sector in Riau economy. Even though forestry has 25.85
percent contribution to agriculture GDP, it is not becoming peoples' economic
activities, because did not involve smallholders or farmer in this activity, comparable
to plantation crops, food and horticultural crops, and fishery. While, the contribution
of plantation to total Riau GDP was the greatest one, it was 46.22 percent, and
involving more people worked. Percentage of population 15 years of age and over
who worked in the plantation were 37.85 percent, is more than food and horticulture,
fishery, and livestock activities, as Table 3.5 shows.

Table. 3.5. Agricultural Sectors Contribution on Regional Gross Domestic Product of

Riau in Constant 2000 Price and Proportion of People in Sectors, 2013
Indicators
Agriculture to Total Riau GDP Including Oil and Gas
Agriculture to Total Riau GDP Exluding Oil and Gas
Food Crop to Agriculture Riau GDP
Plantation Crop to Agriculture Riau GDP
Livestock to Agriculture Riau GDP
Forestry to Agriculture Riau GDP
Fishery to Agriculture Riau GDP

GDP
Share
(%)
17.11
31.11
10.82
46.22
6.02
25.85
11.09

Population 15
Years of Age
& Over (%)

6.61
37.85
0.32
0.76
2.13

Sources: Regional Gross Domestic Product 2009-2013 (BPS Riau, 2014)

Economic characteristics of Riau that distinguished between the economy including

oil and gas and excluding, has led to differences of regional income per capita. Riau
per capita regional income in term of economy including oil and gas is higher than
excluding oil and gas, which is Rp. 16.53 billion in constant 2000 price, comparing
to Rp. 9.10 billion. It is higher than average national per capita income, which is Rp.
9.80 billion, but there is inequity, which about 0.374 Gini Ratio (BPS, 2014).
3.5. Poverty
3.5.1. Measurement Poverty
Generally, now there are two types of poverty data in Indonesia, including Riau,
which are macro-level poverty data and micro-level poverty data. Each of data
measured by different methods, and used for different purposes (Press Release BPS,
January 2011).
Macro poverty data present the number and proportion of poor to total population
based on estimates. It has been used for planning and evaluation of poverty
programmess with a geographic target. Poverty on a macro approach is calculated by
using the concept of a persons ability to meet basic needs, which conducted through
survey and not census, so the result is an estimate. The basic needs approach
illustrated the economic inability to meet basic needs of food and non-food, that
measured from expenditure side. Therefore, a person considered poor, if had an
average monthly per capita expenditure below the poverty line. According to World
Bank, the poverty line is a minimum level necessary to meet basic needs. It varies
across time and societies, that made poverty line is varying in time and place, and
each country uses lines which are appropriate to its level of development, societal
norms and values.

While, micro poverty data is non-monetary poverty measurement, and illustrating the
poor household characteristics. Census was conducted to provide these data, so that
can ensure who and where the poor people address. The micro poverty data had used
for targeting of aid programmes and social security programmes, to poverty
reduction purposes. The micro poverty data, presenting data of very poor household,
poor household, and near-poor households that lives slightly above the poverty line.
There are 14 non-monetary variables as household characteristics were calculate to
considered the poor household, which are per capita house floor area, type of house
floor, type of house wall, facility defecation of household, household source of
drinking water, house source of illumination, cooking for fuel, ability to buy
meat/poultry/dairy, daily eating frequency, ability to buying new clothes, access to
health facilities, main economic activities of head household, education level of head
household, and household assets owned.
3.5.2. Poverty Incident
In recent year, poverty level in Indonesia has shown decreased during 2008-2014.
Some of the poverty reduction programmes that have been implemented by central
government and local governments, indicated positive impact on poverty alleviation
in Indonesia. In year 2008, poverty incidence in Indonesia reached 15.42 percent and
was decreased to 11.25 percent in 2014. Whereas, poverty incidence in Riau
Province more slowly declined in the same period, which is 10.63 percent to 8.12
percent, as Figure 3.2 as shows. Poor people in Indonesia were most concentrated in
rural areas compared to urban areas, which was 14.17 percent compared to 8.34
percent in year 2014. In the same phenomenon, it is also in Riau Province, which
was 8.92 percent, compared to 6.90 percent, as Table 3.6. as shows. The rural higher
poverty incidence was depicted on more difficult to obtain expendable earnings to
meet basic needs of rural peoples, than the urban peoples.
18.00
15.42
16.00
14.15
14.00

13.33

12.49

12.00

11.66

11.37

11.25

8.05

7.72

8.12

2012

2013

2014

10.00
10.63
8.00

9.48

8.65

8.47

6.00
4.00
2.00
0.00
2008

2009

2010
Indonesia

2011

Riau Province

Figure 3.2. Poverty Incident in Indonesia and Riau Provinsi 2008-2014

Source: SIMPADU Penanggulangan Kemiskinan (http://simpadu-pk.bappenas.go.id)

People can be said to be poor when they has annual income falls below poverty line
or poverty thresholds. Poverty line updated each year by Statistical Board, for
purpose estimates poverty incidence in national level and regional level in Indonesia.
Poverty line define as monetary cost to a given person, at a given place and time
(Ravallion, 1998). In Indonesia, poverty line calculated by summing food poverty
line with non-food poverty line. Food poverty line is the minimum food expenditure,
which is equivalent to 2,100 kilocalories per capita per day, and non-food poverty
line is the minimum requirement for housing, clothing, education and health (BPS,
2014). Therefore, poverty line will differ in term of region and time, that cause of
difference in total cost required to obtain basic need, due to variation in price,
composition of consumption and consumption patterns (Simler and Channing, 2011).
Table 3.6. Poverty Fact in Indonesia and Riau, 2014
Poverty Fact
Poverty Line (Rp)
Rural Poverty Line (Rp)
Urban Poverty Line (Rp)
Number of Poor
Number Rural Poor
Number Urban Poor
Proportion Poor to Total Population (%)
Proportion Rural Poor to Total Population (%)
Proportion Urban Poor to Total Population (%)

Indonesia
302,735
286,097
318.514
28,280,060
17,772,830
10,507,200
11.25
14.17
8.34

Riau
364,176
357,009
375,286
499,890
333,520
166,360
8.12
8.92
6.90

Source: SIMPADU Penanggulangan Kemiskinan (http://simpadu-pk.bappenas.go.id)

In year of 2014, poverty line in Riau higher than average in Indonesia, which is Rp.
364,176.00, compared to Rp. 302,735.00. In year of 2014, poverty line in Riau
higher than average in Indonesia, which is Rp. 364,176.00, compared to Rp.
302,735.00. The other fact in poverty is also depicted that the urban poverty line is
higher than rural poverty line, in Indonesia and Riau, as Table 3.6 shows. Interpreted
of this, that's the point on rural people's expenditure or a minimum cost at prevailing
prices and household characteristics, is lower than the urban people. In the other
word, urban peoples need to spend more money to meet their basic needs than rural
peoples, or the urban peoples are more prosperous than the rural peoples. According
to Ravallion (1998) poverty line defined as the monetary cost to a given person, at a
given place and time, of a reference level of welfare.
3.6. UED-SP Microfinance Institution
3.6.1. History
Usaha Ekonomi Desa-Simpan Pinjam (UED-SP) is kind of state-owned rural
microfinance institution that provided by Riau Province Government. UED-SP is
part of Programmes Pemberdayaan Desa (PPD) or Rural Empowerment Programmes
to support the acceleration of poverty alleviation programmes in Riau Province.
Rural Empowerment Programmes was motivated by political will of local

government of Riau Province, because there are still many poor people in Riau,
especially in rural areas. As Microfinance Institutions, UED-SP provides credit
services to rural communities, to support rural economic development trough out
productive activities enhancement. Supporting rural empowerment programmes, the
local government of Riau together with each other regencies government in Riau
Province granted an initial capital to start up developing of rural microfinance
institutions.
Acoording Ledgerwood (2000) microfinance institutions (MFIs) is generally focuses
on providing credit to the poor who have no access to commercial banks. In addition
to financial intermediation, many MFIs provide social intermediation services such
as group formation, development of self-confidence, and training in financial literacy
and management capabilities among members of a group. Thus, the definition of
microfinance often includes both financial intermediation and social intermediation.
Microfinance is not simply banking, it is a development tool.
At least, there are two reason that motivates developing UED-SP, in Riau, which are
poverty issues that is still on high rate in Riau rural area, and decentralization issu
that deliver opportunities for local government (province and regency rovernment) to
fiscal allocation for poverty reduction through regional development. As we know,
the poverty incidence in Riau was 14.67 percent in year 2004, and decentralization
are was begun since 2001 in Indonesia. Decentalization implications are the transfer
of financial authority and development to local government. Hence, the
responsibility of development, including poverty reduction is not just by the central
government but also the local government (Hidayat 2006).
According to that, Riau province government and regencys government in overall
Riau signed a Memorandum of Understanding No. 4/LCS/IV/2005, to support
together the Rural Empowerment Programmes, and also pointing Bank Rakyat
Indonesia (BRI) to distribution of funds to rural areas. The important points in this
agreement is each government, should be provide Rp. 500 million to become initial
capital of Microfinance Institutions UED-SP.
3.6.2. Vision and Goals
UED-SP vision is the Rural Empowerment Programmes vision, which is built of
prosperous society and self-reliance. Development of microfinance institutions UEDSP is a one of activities in this programmes, and has mission to accelerate poverty
reduction through rural economic and rural communities development by providing
funds to village government, as an initial-capital to operate UED-SP. The objective
of microfinance institutions UED-SP is encouraging economic activities of rural
communities, through provided micro-loan to increasing rural communities
enterprises, especially low-income rural communities, to increase employment of
rural informal sector, and to avoiding the rural communities from debt bondage loan.

3.6.3. Outreach
Microfinance institution UED-SP was developed in 2005 in 12 regencies in Riau
province. Number of village for the first year programme reach out 48 villages. The
program was planned gradually to reach out all villages. Until year 2014, UED-SP
was reaching out 989 villages, or 53.87 percent to total number of villages in Riau.
Additionally, UED-SP was reaching out in all villages in two regencies, which is
Rokan Hulu and Dumai, while other regencies still have not reached all the villages.
Table 3.7. Number of UED-SP and Poverty Incidence
Regency

Number of
Village

Number of
UED-SP

Percentage Poverty Incidence (%)

(%)
2005
2012

Kuantan Singingi

229

130

56,77

23,04

10,29

Indragiri Hulu

194

98

50,52

17,28

7,17

Indragiri Hilir

236

71

30,08

16,01

7,81

Pelalawan

118

89

75,42

22,36

11,11

Siak

131

117

89,31

7,62

5,17

Kampar

245

108

44,08

12,93

8,36

Rokan Hulu

153

153

100,00

26,48

10,13

Bengkalis

155

50

32,26

8,59

6,76

Rokan Hilir

183

34

18,58

9,51

7,37

Kepulauan
Meranti

101

54

53,47

0*

35,88

Pekanbaru

58

52

89,66

2,44

3,38

Dumai

33

33

100,00

8,44

5,23

Riau Province
1.836
989
53,87
Source: BPS Riau (2014), PPD Report, 2014, and SIMPADU Penanggulangan Kemiskinan
(http://simpadu-pk.bappenas.go.id)
*

including Bengkalis Regency

Outreach of UED-SP according entreprises of borrowers mostly plantation sector,

comparing to small business and trade services in rural areas. Until year 2014,
number of borrowers in plantation sector was 52.95 percent, as Figure 3.6 shows.

Samll and Home Industries 1.09

Live Stock

1.80

Fishery

1.98

Food and Horticulture Crop

2.24

Small Trade
Services
Plantation

6.40
33.53
52.95

Fi
gure 3.3. Outreach of UED-SP According Enterprises Riau Provinsi, 2014
Source: PPD Report (2014)