Minister of Villages, Development of Disadvantaged Regions and Transmigration Yandri Susanto has officially issued Ministerial Decree No. 10 of 2025 concerning the approval mechanism for village cooperative financing on August 12. It is stated that 30% of the village funds may be used as a last resort when and if Red-White Village Cooperative (KDMP) fails to pay its credit loan to the state-owned banks, Himbara. Interestingly, the cooperative is not required to repay loans from the village funds, which could potentially create a moral hazard.
KDMP, as we all know, is one of President Prabowo Subianto’s priority programs. The new Ministerial Decree is therefore a follow-up to the Presidential Instruction No.9 of 2025 concerning the acceleration of the Red-White Village Cooperatives establishment, and the Finance Minister Regulation (PMK) No. 49 of 2025 concerning loan procedures for the Red-White Village Cooperatives Financing issued earlier in July, which stated that KDMP is allowed to apply for the maximum of Rp 3 billion of loans to the Himbara with interest of 6% per year. In return, the cooperative is obliged to give at least 20% of its net profits to the village administration.
At the time, people had raised concerns about Article 11 of the PMK alluding that the government would cut and divert the village funds to help the cooperative which fails to pay loans to the bank. This mechanism makes it seem like the village funds are used as a safety net for KDMP, so the risk of failure is borne by the entire village instead of KDMP management who should be responsible for the cooperative. And now that there is no requirement for them to repay the village funds they borrow, it creates a potential moral hazard because KDMP management might increase exposure to risk, knowing that they will always have village funds to save the day should things go wrong.
In response to those concerns, Minister Yandri Susanto has emphasized that the village funds are not meant to be used as collateral. It is different from collateral mortgages in which guarantee money is provided ahead of time to ensure smooth payments from the debtor. Village fund, on the other hand, is a form of financial support from the village administration and may only be disbursed after following a few mandatory steps.
The KDMP management must first submit a loan proposal, including a business plan and a repayment plan, which should then be approved by the village head and the BPD, Village Consultative Body. Afterwards, the BPD is required to hold a village deliberation to discuss the proposal. Without these steps, the village funds cannot be disbursed. But even though the mechanism may indeed look different from collateral mortgages at first glance, people are afraid that it will become a mere formality in the end. Without strict supervision, moreover, the risk of misappropriation of funds will be too high.
The potential issues in this mega project have been continuously criticized by the public, as well as observers. An economist from the Center of Economics and Law Studies (Celios), Nailul Huda, argued that the Red-White Village Cooperative carries a high default risk, which could reach up to trillions of rupiah. So, if village funds are used as a safety net, the burden of default will be borne by the village community instead of the government.
Similarly, Suroto from the Association of Strategic Socio-Economic Cadres said the village funds are used because the Himbara doesn’t want to bear the losses, knowing that KDMP has a high default risk. There would be too many non-performing loans (NPLs).
For your information, the government is targeting the realization of village funds worth Rp 71 trillion in 2025. Currently, there are more than 80,000 KDMPs across Indonesia. Let’s say, half of them fail to pay loans to the bank and therefore use the maximum of Rp 3 billion of loans from the village funds, it amounts to around Rp 120 trillion in total, which exceeds the current budget. What will happen then if the village administration also fails to provide loans? Will the central government step in, and if so, where else will they divert the money from? Perhaps, we should all brace for impact.
By Valerie Ardi