With 13,466 islands and a vast ocean that makes up three fourths of its area, Indonesia is expected to be one of the world’s largest contributors of fishery products. The sector, however, only contributed 3.29 percent to its gross domestic product (GDP) in September 2014, according to official data.

The fisheries sector later grew rapidly throughout 2015 under President Joko “Jokowi” Widodo’s leadership, which renewed focus on Indonesia’s competitive advantages within maritime-related sectors. The country’s fishing industry grew 8.37 percent year-on-year (yoy) in the third quarter of 2015, far above the country’s overall economic growth of 4.7 percent.

However, the poverty rate in the sector remains high, with millions of low-income families coming from small-scale coastal fishing households that are heavily reliant on fish for daily food and income to fulfill basic needs such as education.

It is estimated that 7.9 million Indonesian fishermen are engaged in small-scale activities, altogether producing 92 percent of the national fisheries output. These communities, however, have been struggling to survive due to limited access to the market, capital and equipment as well as rising operational costs and high-risk activities.

According to the Financial Services Authority (OJK), the value chain of the fisheries sector in Indonesia includes main and supporting activities as shown in Figure 1. Infrastructure, human resources, technology development and procurement are important to supporting an efficient and sustainable fisheries sector. Meanwhile, the supporting activities start with operations, logistics, marketing and sales and end up in trading activities.

Three main actitivies in the fisheries sector are fishing, aquaculture and fish processing. Fishing can be done at sea or inland and can involve men, women and children.

To maintain sustainability, juvenile wild-catch is cultivated in aquaculture activities. The cultivation can be done in several places such as ponds, paddy fields, cages and floating cages. Fish processing activities, meanwhile, include producing boiled, smoked, fermentated, frozen or salted products, among others.

The distribution and trading of fish products is mostly done in convetional manners because of limited infrastructure and technology development. This situation affects the quality of fish, especially for fresh fish, since post-harvest losses in small-scale fisheries in developing countries can stand at between 20 percent and 25 percent.

However, access to capital for fishermen from formal financial institutions is limited, OJK data shows. As of December 2014, the bank disbursed only Rp 17.9 trillion in loans to the fisheries sector, around 0.4 percent of total national bank financing. Meanwhile, financing from non-bank financial institutions reached Rp 1.7 trillion, or 0.7 percent of total non-bank institution financing.

For most fishermen, financial needs are provided by informal financial institutions that have less administrative burdens but charge very high interest rates. These informal financial institutions not only provide loans, but also ships, nets, fuel, coverage of school fees and insurance.

Perceptions of high risks, high costs and low returns make formal financial institutions reluctant to provide loans to fisheries sectors. Additionally, asymetric information, a lack of collateralized assets and informality make it diffuclt for fishermen to access the formal financial sector.

The government has realized this situation and has initiated programs to assist not only fishermen but also workers in the agriculture sector by providing several types of microfinancing as shown in Figure 2. The programs are usually offered in the form of a subsidized credit program, credit quota and targeted loan policies at below-market interest rates.

Although these programs are attractive, it, however, does not immediately solve the underlying problems, such as those related to asymetric information and the obligation to provide collateral to receive bank loans. As a result, up until now, bank loans to the agriculture industry, especially to the fisheries sector, still constitute a small portion of total channeled loans.

Realizing that information is an important aspect in formal financing, the OJK has initiated the JARING program, which aims to provide sufficient fisheries information to financial industries seeking to assess risk profiles and identify business characteristics on the sectoral value chain, thereby allowing financial industries, such as banking and credit insurance, to measure a sectoral risk profile and design suitable products for each business.

Banks have shown enthusiasm for the program, with sixteen lenders having participated in it since December 2015.

In addition, the OJK has also lauched an insurance program for fishing boats. As of December 2015, 2,912 boats have been covered by the insurance scheme.

A number of developing countries in Africa and Asia have conducted several programs that aim to increase financial inclusion in the fisheries sector. Ghana, for example, implemented a linkage program between formal and informal financial institutions to expand credit provision to its fisheries sector.

Although small-scale credit providers have long been recognized as a source of alternative funding for rural people, their capacity is limited. Meanwhile, formal institutions, with a much greater financial capacity, rarely reach rural people because of risks and transaction costs. By linking these two sectors, formal institutions could greatly increase their volume of small loans available to rural people in ways that are accesible, profitable and provide high repayment rates.

This succesful linkage needs a widespread network of informal savings and credit agents to boost public recognition. The next step is to reform and extend regulatory framework to include informal financial agents. Formal financial insitutions need to have flexibility, innovative approaches and be open to change.

Indonesia could draw from the experiences of other countries to increase financial inclusion in the fisheries sector. Modifying the government-sanctioned people’s business loans (KUR) program to accommodate the unique characteristics of fishermen could be an option. Loan provisions to groups of fishermen instead of individual fisherman could also be applied.

Another option is to establish vertical linkage between informal financial institutions that already know about risks and characteristics of fishermen, as adopted in Ghana.

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The writer is head of Mandiri Institute.

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