A Lembaga Perkreditan Desa Is a Bank the Village Owns

There is a bank in Bali that no investor can buy. A lembaga perkreditan desa is owned by the customary village itself, which means its shareholders are the farmers, fishers, drivers and temple priests who live around it, and its annual meeting is the same assembly where the village argues about ceremonies and roads. The customers and the owners are the same people, because they literally are the same people.

A lembaga perkreditan desa, mercifully shortened to LPD almost everywhere, takes savings from the members of the desa adat, the customary village, who are called krama, and lends the money back to them. The loans fund small shops, fishing boats, school fees, weddings and cremations. Almost every customary village in Bali has one. By 2020 there were about 1,433 of them spread across 1,485 customary villages, so the lembaga perkreditan desa is not a charming experiment anymore. It is simply where much of rural Bali keeps its money.

What makes the institution worth a second look is not only its size, though the combined assets of every lembaga perkreditan desa in Bali had passed 14 trillion rupiah by the end of 2015. It is the direction the money flows. An ordinary bank draws profit out of a place and sends it to shareholders somewhere else. This one is designed, by regulation and by custom, to push its profit back into the village that created it.

What a lembaga perkreditan desa does all day

The daily work is ordinary banking at village scale. A lembaga perkreditan desa accepts savings and time deposits, including savings earmarked for a purpose, a child's schooling, a coming ceremony, a family's old age. It then lends, mostly in small sums, to its own members and, interestingly, to the village itself, which borrows from its own bank for communal projects. Under the provincial regulation now in force, a lembaga perkreditan desa may even lend to members of another customary village, but only where the two villages have a formal cooperation agreement. The default boundary of the institution is the boundary of belonging.

Researchers who followed one coastal institution, the lembaga perkreditan desa of Kedonganan in Badung, over more than a decade recorded credit reaching some 1,580 people by 2016, most of it productive lending to traders, transport operators and small tourism businesses, with problem loans kept low across more than three decades. Savings there could also serve as security for a loan, which tells you something about the logic of the place. Your own money, held by your own village, vouches for you.

Eight pilot villages in 1984

The lembaga perkreditan desa was not a folk invention that grew wild. It was designed. In the early 1980s, Bali's governor, Ida Bagus Mantra, had seen the Lumbung Pitih Nagari, the savings and loan body of the customary villages of West Sumatra, and judged that Bali's customary villages could carry something similar. On 1 November 1984 he signed the decree establishing the lembaga perkreditan desa, and the following year eight pilot institutions opened their doors.

The crucial decision was where to hang the new institution. Bali runs two village systems layered over the same ground, and the governor attached the lembaga perkreditan desa to the desa adat, the customary village of temples and obligations, rather than to the administrative village that issues identity cards. It helps to understand how a desa adat governs itself to see why that choice mattered. The customary village was the body people actually obeyed, the one that could summon labour, settle disputes and enforce its written rules, the awig-awig. A bank planted there inherited all of that authority.

Growth was slow, then very fast. Only 913 existed by 1999. By the end of 2011 there were 1,418, and the combined balance sheet had grown from 1.4 trillion rupiah in 2004 to about 14.69 trillion rupiah by December 2015. Without ever making much noise outside the island, the lembaga perkreditan desa had become one of the largest microfinance networks in Indonesia, built one village at a time.

Where the profit of a lembaga perkreditan desa goes

A commercial bank answers to its shareholders. A lembaga perkreditan desa answers to a village assembly, and its profit sharing is written into provincial regulation. Twenty percent of net profit is set aside as a village development fund, and five percent goes to a social fund, while the largest share stays inside the institution as capital. The full formula in the provincial regulation runs to five slices: sixty percent stays as capital reserve, twenty percent becomes the village development fund, ten percent rewards the people who produced the result, five percent funds guidance, supervision and protection of the system itself, and five percent is the social fund. Read as a whole, the formula is a small constitution. Most of the money stays in the bank, a fifth of it is spent on the village in plain sight, and even the cost of being watched over is paid out of the lembaga perkreditan desa's own earnings. The development money pays for the unglamorous substance of village life: meeting halls, roads, drainage, temple repairs, the physical upkeep of the community that owns the bank.

The social side can be startlingly concrete. In Kedonganan, the lembaga perkreditan desa pooled tiny administration fees of one or two thousand rupiah per customer until the fund was large enough to pay for the village's mass cremation, the ngaben, in 2006 and again in 2009. A cremation arranged privately can cost a Balinese family between 20 and 50 million rupiah, a sum that shapes a household's finances for years. Here the village bank simply absorbed it, twice, out of small change. That is perhaps the purest expression of what a lembaga perkreditan desa is for.

Collateral you cannot put in a drawer

Ask a banker what secures a loan and you will hear about land certificates. Ask a lembaga perkreditan desa and the answer is closer to a biography. The managers are villagers, chosen through the paruman, the village assembly, and the supervisory board is made up of the heads of the village's banjar, its neighbourhood wards. The rules of each lembaga perkreditan desa must be written into the village awig-awig, so a loan agreement sits inside the same rule book that governs ceremonies and burials.

This is why repayment discipline has historically been strong. Legal scholars describe honesty as the stated foundation of the system, and note that many Balinese fear a customary sanction more than a national court. Defaulting on your neighbours' money is not an anonymous event. It happens in front of the people you will meet at the temple next week, and the week after, for the rest of your life. I find it hard to think of a credit bureau anywhere that knows as much about its borrowers as a lembaga perkreditan desa does, because a conventional bureau only has your data. This one has your whole life in the village.

Formally, the lembaga perkreditan desa occupies an unusual legal space. It is not a bank under the national banking law, and Indonesia's 2013 microfinance law recognises institutions of its kind as grounded in customary law rather than subjects of that law. Oversight runs through Bali's provincial regulations, with technical supervision and guidance involving the regional development bank, an arrangement outside researchers were already describing in the 1990s as part of what let village institutions professionalise without leaving the village. It is a deliberate halfway house, formal enough to be supervised, customary enough to be trusted.

When the village bank goes wrong

None of this makes the lembaga perkreditan desa immune to the ordinary diseases of small institutions holding other people's money. Governance is the weak point. Studies of disputes around the lembaga perkreditan desa describe managers who began treating the institution as a personal fiefdom, terms of office that stretched well past the rules, fictitious loans, and in the worst cases outright corruption. At one institution in Kapal, five collectors were eventually sentenced to prison. Figures drawn from a provincial legislative inquiry put the number of defunct or bankrupt institutions at around 158 by 2017, and each one was a village whose savings had been entrusted to neighbours.

There are quieter criticisms too. Elders in Kedonganan told researchers that credit had become so easy it fed consumption, with teenagers pressing their parents for new motorbikes because everyone knew the money was there. And the same machinery of belonging that makes repayment likely can turn severe when a debt goes bad. In Paselatan, Karangasem, an unpaid debt to the village's own lembaga perkreditan desa became the ground for kasepekang, the customary sanction that cuts a family off from village life altogether. The trust that powers the system and the pressure that enforces it are, in the end, the same force.

It is telling that when these disputes harden, they are often settled under national law rather than customary law, as legal researchers at Universitas Tarumanagara have documented. The halfway house contains two legal systems, and when the customary one fails to discipline its own bank, villagers reach for the other one.

Still, the basic idea of the lembaga perkreditan desa has now survived for more than four decades, through financial crises and the complete transformation of Bali's economy from farming to tourism. A bank whose biggest asset is the fact that borrower and owner live in the same village and meet at the same temple sounds, on paper, like a fragile arrangement. In Bali it has turned out to be one of the most durable financial ideas in the country, largely because the lembaga perkreditan desa never pretended that money was only about money.