A SUSTAINABLE SYSTEM OF

LEMBAGA PERKREDITAN DESAIN BALI

A SUSTAINABLE SYSTEM OF VILLAGE CREDIT INSTITUTIONS

Ketut Nurcahya[nurcahya@blueline.net.id]

Bank Indonesia/GTZ/Bali

P d fPrepared forEuropean Microfinance Week 12th – 14th November 2008

Abbaye Neumunster, Luxembourg

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Outline of presentation:1. Introduction1. Introduction2. History and Establishment of LPD3. Goals, Products and Customers4. Ownership and Socio-Cultural Environment5. Regulation, Supervision and Guidance6. Profit allocation7. Competitive advantage of LPD8. LPD image9. LPD development and performance10 S h d W k f LPD10. Strengths and Weaknesses of LPD11. The problem face by LPD.

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Introduction

The Lembaga Perkreditan Desa (LPD) is a village financial institution that is owned by the Desa Adat (custom village),institution that is owned by the Desa Adat (custom village), which is formed by social bonds and governed by customary regulations. The custom village is both the area of operation and social place of the LPD The integration of the LPD inand social place of the LPD. The integration of the LPD in customary life and law has been a powerful framework for developing intimate customer relations and managing risks.

fAs non-bank financial institutions LPDs are regulated by the Government and supervised by the Regional Development Bank of Bali. Other pillars of the LPD system are the LPD Association, the LPD Development and Training Institute, and district-level LPD Boards that support the Regional Development Bank in its supervision and technical p passistance functions.

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LPDs have been established on initiative of the Government of Bali since 1985.At present (A g st 2008) there are 1 361 LPDs thatAt present (August 2008) there are 1,361 LPDs that operate in 95% of the Balinese custom villages. With 1.2 million savings deposit accounts and g p365,000 loan accounts they provide financial services to most of the 834,000 Balinese householdshouseholds.Savings and time deposits contribute 80% to the total assets of the LPD industry (USD 261.5 y (million).With this high outreach and effective financial i t di ti th LPD i d t h bintermediation the LPD industry has become an indispensable part of the financial system in Bali and plays an important role in local economic

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p y pdevelopment.

HISTORY AND ESTABLISHMENT OF LPDOne of the way to create a welfare society for all people of Indonesia is creating and giving financial services to society

In reality the banking facilities and services are concentrated only in towns and cities. The people in remote villages are not within bank reach. This create an unbalanced situation

Ministry of Home Affair conducted seminar; concluded that the way to solve the problem is to established and develop Lembaga Dana Kredit Pedesaan (Village Credit Funds Institution)Pedesaan (Village Credit Funds Institution)

assigned to facilitate financial services to people in villages.

B h f b i h G ’ f B li i dBase on the outcome of above seminar the Governor’s of Bali issuedthe decree; to establish LPD in Bali.

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The establishment of LPD become closely linked to the bj i f i h D Ad i d i f

ESTABLISHMENT OF LPD

objective of empowering the Desa Adat as recognized unit of village organization and customary law.

The Desa Adat regulation of 1986 gave the Desa Adat the right to generate and use assets through their own organization.

Desa Adat may establish a LPD as an operational unit with the major functions of mobilizing deposits and providing credit (loan).

The LPD capital may consist of retained profits and fund p y pcontributed by the Desa Adat, its members and the local government.

The LPD has to be managed by a committee consisting atThe LPD has to be managed by a committee consisting at least of chairman, accountant and treasurer.

The management is to be elected by and from Desa adat members

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members.

Goal, Products and Customers

LPD are established to achieve the following goals;To encourage the economic development of the village g p gcommunity by way of controlled savings and term deposit and effective allotment of capitalTo eliminate the practice of ‘ijon’ (buying and selling crops before harvest), black-market pawning and similar practices

tl ti t th illcurrently operation at the village.To create even distribution of prosperity and business opportunities for members and human resources of the villageopportunities for members and human resources of the village community.To increase the buying power and to level the flow ofTo increase the buying power and to level the flow of payment and circulation of money in the village

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The Product of LPD:

The products of LPDs are Savings Deposit, Term Deposit and p s s gs p s , p s

Credit (loan)

There are no other products as usually offered by commercial

banks.

The rate of interest is fairly competitive, compared to those of

commercial banks both for deposits and loanscommercial banks, both for deposits and loans.

In some LPDs they are even lower then the rate of People’s

Credit Bank (Bank Perkreditan Rakyat), the secondary bank.

Customers of LPD are the local people of the traditional

villages.

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Ownership and Socio-Cultural Environment

Th D Ad t i th f th LPDThe Desa Adat is the owner of the LPD.

The Desa Adat is a village unit in which customary symbols

and regulations play an important role in community life andand regulations play an important role in community life and

for social integration.

The LPD as a financial institution is unique because the DesaThe LPD as a financial institution is unique, because the Desa Adat is not only its geographical but also its social place.

The LPD is owned, operated and use by the members of Desa Adat.

The highest authority of the Desa Adat is the assembly of its

b hmembers, the paruman.

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O hi d S i C l l E iOwnership and Socio-Cultural Environment(continued)

It elects its leadership board, the prajuru and agreed upon the customary law.

The Prajuru and its chairman, the Bendesa, take on goingThe Prajuru and its chairman, the Bendesa, take on going decisions on the basis of agreed upon customary law. They are, therefore, the main institutions dealing with LPD and play a crucial role in supervising LPD operationsplay a crucial role in supervising LPD operations.

Ideally, the LPD is embedded in community that is regulated and socially integrated by adat or customary law.

Adat describes local practice codified in customary law and embodied in local institutions. It can be a powerful frame work of social integration and control, and determines wo o soc a teg at o a d co t o , a d dete essanctions that may also be powerful tool for LPD management.

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Regulation, Supervision and Guidance

The government of Bali is responsible for regulating and supervising the LPD industry

P i i l R l ti LPD ti d th tProvincial Regulation on LPD mentioned, that Governor of Bali give a right to Regional Development Bank (PT. BPD Bali) to conduct LPD p ( )external supervision and technical assistance to LPD.

R i l D l t B k f B li iRegional Development Bank of Bali, is responsible for LPD external supervision, and

Supervisory Board of LPD is responsible forSupervisory Board of LPD is responsible for LPD internal supervision of the operations of LPD on behalf of Desa Adat members.

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SupervisionThe BPD’s primary function with respect to LPD is to be responsible for LPD supervision. This responsibility shall be carried out in accordance with sound international standards of supervision for micro finance institutionsof supervision for micro-finance institutions.

To carry out its primary function, BPD may conduct special investigations and shall conduct regular on and off-site supervision, as follows:(1). Off-site: receive from LPD specified monthly and quarterly information to assess the financial position of LPD

d t d t t bl ( l i t )and to detect any problems (early warning system).(2). On-site: visit LPD premises to verify the specified information supplied by LPD, and to assess whether all laws, regulation decrees and directives (of the BPD) have beenregulation, decrees and directives (of the BPD) have been compiled with. The frequency of on-site inspections shall be determined by the BPD, taking into account the principles of risk-based supervision.

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GuidanceGeneral guidance conducted by Provincial and District Guidance Board

Technical guidance conducted by PLPDK (The Counselor for LPDs at the district level) whoseCounselor for LPDs at the district level) whose duties are to provide technical guidance to the LPDs located within their working area.

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Profit Allocation

Annual allocation of net profit and the role of LPDs withinAnnual allocation of net profit and the role of LPDs within village development (in accordance with the Regulation of Bali Province No. 8/2002):

a Reserve fund/Capital : 60%a. Reserve fund/Capital : 60%

b. Village development fund : 20%

c. Production fee : 10%

d LPD Guidance Supervision and Support Scheme : 5%d. LPD Guidance, Supervision and Support Scheme : 5%

e. Social fund : 5%

As mentioned above 20% of the profit is allocated to theAs mentioned above, 20% of the profit is allocated to the traditional villages as the owner of LPDs.

The fund is use to finance the activities of the villages such as the restoration of the temple, carrying out ceremony / templethe restoration of the temple, carrying out ceremony / temple festival and other cultural or religious activities, infrastructure (road, sidewalks, bridge, market)

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Competitive advantage of LPD

(Compared to 536 bank offices in Bali):Direct and easy accessPersonal contactPersonal contactConvenient services, doorstep collectionSimple proceduresp pRapid serviceLow borrower and saver transaction costsProfit benefits the communityCustommary village, Sub village (Banjar) and SHGs (seka) accounts at LPD(seka) accounts at LPD

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LPD IMAGE

The ProFI baseline survey included a survey on image of 84 LPD, covering 396 savings customers

d b

Savings customers are attracted by easy and fast procedures

and borrowers;

procedures.

Interest rate are an importance criterion for a small minority of customers.minority of customers.

Borrowers are also attracted by easy and fast procedures as well as low collateral requirements. L i l f hi d f hLow interest rate play for one third of them.

Beside its fast and easy procedures the comparative advantages of the LPD are seen in thecomparative advantages of the LPD are seen in the short office distance and in the Desa Adatownership. There is a generally high satisfaction

i i

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with LPD services.

LPD Development and PerformanceSaving/Deposit Mobilization by LPD in

BaliDec. 31 2005 – Dec. 2007

(In Million Rp)

1,077,7781,200,000

701,021790,914

737,682

968,760

800,000

1,000,000Saving

635,543

400000

600,000Term Deposit

Loan Receipt

Other Fund11,636

11,23515,023

13,752 15,47917,423

200,000

400,000 Other Fund

012/31/2005 12/31/2006 12/31/2007

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Loan Portfolio and Inter-bank Assets LPD in Bali

Dec 2004 Dec 31 2007Dec. 2004 – Dec. 31 2007( In Million Rp )

1,768,748

1,262,033

1,495,988

1,400,000

1,600,000

1,800,000

406,604 416 423

702,226

600 000

800,000

1,000,000

1,200,000

Loan portfolioInter-bank assets

06,60 416,423

0

200,000

400,000

600,000

0Dec.2005 Dec.2006 Dec.2007

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Total Assets of LPD in BaliDec. 2005 - Dec. 2007

( ll )( In Million Rp. )

1 743 0862,011,249

2,618,327

2,500,000

3,000,000

1,743,086

1,500,000

2,000,000

Assets

500,000

1,000,000

0Dec. 2005 Dec. 2006 Dec. 2007

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Revenue, Cost and Net Profit of LPD in BaliDec. 2005 – Dec. 2007

( In Million Rp )( In Million Rp )

419 633

313,608

361,717

419,633

288,635350 000400,000

450,000

207,407243,388

131 129200 000250,000

300,000350,000

REVENUECOSTNET PROFIT106,267 118,833 131,129

50 000

100,000150,000

200,000 NET PROFIT

050,000

2005 2006 2007

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LPD PerformanceTh f f LPD l ifi d i t d f i lThe performances of LPD are classified into sound, fairly sound, less sound, and unsound. The table below will show us a trend of LPDs performance. The rating is done by using the

LPD CAMEL Rating

CAMEL standard.

End of: Dec.2005 % Dec.2006 % Dec.2007 %

Sound 995 76.30 989 74.47 998 73.82

Fairly Sound 101 7.75 118 8.89 122 9.02

Less Sound 91 6.98 81 6.10 99 7.32

Unsound 117 8.97 140 10.54 133 9.84

Total 1,296 100 1,328 100 1,352 100

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Strengths and Weaknesses of LPDStrengths:

Self-financed, self-managed, self-controlledA i t l t f th t ill (d k )An integral part of the customary village (desa pakraman) as the center of lifeBanking on “karma phala” (an effective collateral substitute)g p ( )Crisis-proof (strengthened by Krismon, 1997/98)

Weaknesses:Weaknesses:No feasibility examination when establishing a new LPDRestriction to one village limits staff selection and growthRestriction to one village limits staff selection and growth Restrictions on investments of surplus liquidity (neg. returns)Weak external controls.

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Th P bl F b LPDThe Problem Face by LPDs One of the major problem faces by LPDs is the lack of professional human resource.

At the beginning LPDs were started most of the LPD d b t ff hi h tLPDs were managed by staff which were not professional enough. When LPDs were still small in size this condition did not create any problem. But when LPDs are growing up and become bigger and bigger these unprofessional staffs do create a problemproblem.

Some of these key human resource challenges related to the lack of the technical skills can be overcome by creating an LPD certification and training system with the goal of increasing skill level of LPD managers and staffs

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of LPD managers and staffs.

The Regional Government of Bali and the Regional Development Bank of Bali, supported by GTZ-ProFI, recognize the need for strengthening skills of LPD managers and are s g g s s g sactively encouraging the creation of the system that would increase capacity of LPDs to provide high quality services to the customers.Th i i d d d b iThe training needs assessment was conducted by using a combination of the qualitative and quantitative tolls including background research using available information from diverse sources such as GTZ-ProFI baseline study LPD sector statussources, such as GTZ ProFI baseline study, LPD sector status report, and review of current LPD-related legislation.Stakeholder interviews were conducted with the key industry players, such as BPD, PLPDP and PLPDK. The team organized p y , , gand conducted focus-groups discussions with the group of LPD managers to identify performance standard for successful LPD managers and structure the survey tool.Th CERTIF l d d i d h li iThe CERTIF team also conducted in-depth qualitative surveys with a variety of different representative LPDs in different districts to identify the level of skills and competencies of the LPD managers

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LPD managers.

The training needs assessment was structured to understand and to be able to formulate aunderstand and to be able to formulate a performance standard that would be applicable to the majority of the LPDs and that would serve asthe majority of the LPDs and that would serve as a ‘minimum benchmark’ for acceptable performance.

The second objective was to identify weak areas in the performance that can be strengthened by

i i d i i ifi itraining and requiring certification as means to ensure the standard.

The first certification training was conducted onThe first certification training was conducted on December 2007.

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Thank you

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