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Regional Microfinance Development

Nusa Tenggara Barat (NTB)

Concept and Implementation Strategy

Dr. Wolfram Hiemann, Berlin Stefan Jansen, Denpasar I Ketut Budastra, Ph.D., Mataram November 2005

EXECUTIVE SUMMARY I

RINGKASAN EKSEKUTIF IX

1 INTRODUCTION 1

2 THE PROVINCE OF NUSA TENGGARA BARAT (NTB) 2

3 THE RURAL MICROFINANCE MARKET IN NTB 4

3.1 DEMAND FOR MICROFINANCE 4 3.2 SUPPLY OF MICROFINANCE 5 3.3 THE SUPPLY-DEMAND GAP 18 3.4 THE ROLE OF UPKD IN RURAL MF 19

4 UPKD: OUTREACH AND SUSTAINABILITY AT THE VILLAGE LEVEL 20

4.1 UPKD PROFILE 20 4.2 UPKD PERFORMANCE 22 4.3 CONCLUSION 28

5 THE PROJECT CONCEPT: STRENGTHENING UPKD 29

5.1 RATIONALE 30 5.2 ELEMENTS OF A FINANCIAL SYSTEMS APPROACH FOR NTB 31

6 IMPLEMENTATION STRATEGY: ACHIEVING RESULTS 36

6.1 IMPROVING SERVICE QUALITY 36 6.2 INCREASING THE NUMBER OF SOUND MFI 38 6.3 OPERATING ENVIRONMENT: REGULATION AND SUPERVISION 43 6.4 UPKD IN THE REGIONAL FINANCIAL SYSTEM 49 6.5 UPKD ACCESS TO FINANCE 50

7 IMPLEMENTATION 2006-2008 52

7.1 UPKD DEVELOPMENT AND ENABLING ENVIRONMENT 52 7.2 SEQUENCE OF ACTIVITIES 53 7.3 DRAFT CONCEPT: IMPLEMENTATION PHASE 53 7.4 UPKD PORTFOLIO VERIFICATION AND ASSESSMENT 55 7.5 UPKD MANAGEMENT SUPPORT 56 7.6 SUGGESTIONS FOR MID-TERM PLANNING 63

ANNEX 1: HOUSEHOLD SURVEY RESULTS 64

1. INTRODUCTION 64 2. THE SAMPLE HOUSEHOLDS 64 3. HOUSEHOLD DEMAND FOR FINANCIAL SERVICES 65

4. HOUSEHOLD PERCEPTIONS OF MICROFINANCE SUPPLY 68 5. SUMMARY AND CONCLUSIONS 69

ANNEX 2: MFI SURVEY RESULTS 70

1. THE MICROFINANCE SYSTEM IN NTB PROVINCE 70 2. THE MFI SAMPLE 71 3. SAMPLE MFI CHARACTERISTICS 71 4. SAMPLE MFI PERFORMANCE 75 5. SUMMARY & CONCLUDING REMARKS 79

ANNEX 3: UPKD – ORIGINS 81

ANNEX 4: UPKD – FINANCIAL PERFORMANCE 84

1. ASSETS 84 2. LOAN FUND OR INITIAL FUND 85 3. ADDITIONAL CAPITAL 86 4. LOAN DISBURSEMENT AND REPAYMENT 86 5. INTEREST INCOME 87 6. DEPOSIT MOBILIZATION 87

ANNEX 5: UPKD – SWOT ANALYSIS 88

ANNEX 6: UPKD – CAMEL RATING 90

ANNEX 7: UPKD – MANAGEMENT SURVEY 91

ANNEX 8: UPKD – COMMENTS ON REGULATIONS 101

1. SK BUPATI BIMA ON UPKD 102 2. STATUTES (ANGGARAN DASAR, AD) 104 3. BYLAWS (ANGGARAN RUMAH TANGGA, ART) 105 4. MANUAL AND GUIDELINES FOR UPKD OPERATION 108

ANNEX 9: UPKD – SUSTAINABILITY CRITERIA 110

ANNEX 10: TRANSFER OF ASSETS TO USPKD 111

ANNEX 11: MUSYAWARAH DESA (MUSDES) 113

ANNEX 12: BADAN KREDIT DESA (BKD) 114

ANNEX 13: “THE YOGYAKARTA COMMUNIQUÉ 2004” 115

REFERENCES 117

Currency Equivalents (as of September 2005) Rp Rupiah Rp m Rupiah million Rp b Rupiah billion USD1 = Rp10,300

Disclaimer

The authors attempted to provide useful and accurate information wherever possible. The authors had to rely on statistics, information gathered and processed by other institutions, and on the statements of respondents, most of which were not further verified. Some information was fragile and required skilled interpretation.

The authors judged the information based on their professional experience very carefully. They believe that the findings presented in this report reflect sufficiently accurate the conditions in the institutions and the environment in which they operate.

This report also contains personal opinion, both of the authors and opinions of various contributors, which are offered in good faith. They are not necessarily the opinions of Bank Indonesia, GTZ or the Government of Nusa Tenggara Barat.

Abbreviations 5C Character, capital, conditions, collateral, capacity (Loan assessment criteria) AD Anggaran Dasar (Statutes) ART Anggaran Rumah Tanggah (Bylaws) BI Bank Indonesia BKD Badan Kredit Desa BMT Baitul Mal Ta’mil (Non-bank financial institution based on syariah/Islamic principle) BP Badan Pengawas (Supervisory board of UPKD) BPD Bank Pembangunan Daerah (Regional Development Bank) BPR Bank Perkreditan Rakyat (People's Credit Bank or Rural Bank) BRI Bank Rakyat Indonesia (Commercial bank, 51% state-owned) BUMD Badan Usaha Milik Daerah (Province/district-owned enterprise) BUMN Badan Usaha Milik Negara (state-owned enterprise) CAMEL (bank rating or assessment by:) capital, assets, management, earnings, liquidity CDF Community development facilitator CGAP Consultative Group to Assist the Poorest FI Financial institution GDP Gross Domestic Product GoI Government of Indonesia GoNTB I / II Provincial / District Government(s) of Nusa Tenggara Barat (PemDa I / II) GTZ Gesellschaft für Technische Zusammenarbeit IMS-NTAADP Inisiatif masyarakat setempat (local people’s initiative) of NTAADP KSP Koperasi Simpan Pinjam (Savings and credit cooperative) KUD Koperasi Unit Desa (Village cooperative) KUT Kredit usaha tani (Farm enterprise loan) LKP Lembaga Kredit Pedesaan (Rural credit institution) MF Microfinance MFA Microfinance advisor, field worker, facilitator MFI Microfinance institution MoA Ministry of Agriculture MoF Ministry of Finance MoHA Ministry of Home Affairs MSE Micro small enterprise MSME Micro small medium enterprise Musdes Musyawarah desa (Village consultation) NPL Non-performing loan NTAADP Nusa Tenggara Agriculture Development Project NTB Nusa Tenggara Barat

PDM-DKE Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi (Local empowerment by overcoming the impact of the economic crises)

PHBK Proyek Hubungan Bank dengan Kelompok Swadaya Masyarakat (Project linking banks and SHG)

PKS-BBM Pengganti Kompensasi Subsidi Bahan Bakar Minyak (Compensation for fuel subsidy)

PNM PT Permodalan Nasional Madani (PNM) (State-owned financing agency in charge for BI liquidity financed program loans)

PPK Program Pengembangan Kecamatan (Sub-district development fund) ProFI Promotion of Small Financial Institutions SCC Savings and credit cooperative SCG Savings and credit group SHG Self-help group, savings and credit group SME Small medium enterprises SMoCSME State Ministry of Cooperatives and small medium enterprises SUTA Sistem Usaha Tani, Agriculture loan scheme of UPKD

UEP Usaha Ekonomi Produktif Ternak (Productive husbandry business, UPKD Loan scheme)

UEPT Usaha Ekonomi Produktif (Productive business, a UPKD Loan scheme) UPK Unit Pengelola Keuangan (Financial management Unit of PPK project) USP Usaha Simpan Pinjam (Savings and credit business of multi-purpose cooperatives

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

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Executive Summary In May 2005, the Government of the Province of Nusa Tenggara Barat (NTB) and ProFI – Promotion of Small Financial Institutions (a joint project of Bank Indonesia, Ministry of Finance, and GTZ) signed Agreed Minutes concerning the Microfinance Development Project in NTB. NTB belongs to the provinces with below average GDP, and has the second-lowest Human Development Index in Indonesia. Its 4.2 million inhabitants live on the islands Lombok (almost 3m) and on Sumbawa (about 1m). They earn income mainly from agriculture, fishery, and from working abroad. The rural microfinance market analysis compares current demand and supply to identify gaps. The demand side analysis draws on a survey of 90 households in all administrative units of NTB. The survey found that a substantial proportion of the households save their excess incomes. Large savings are generally placed with commercial banks, while small savings are generally placed with nearby non-bank financial institutions (particularly UPKDs). More than half of the households regularly borrow from financial institutions, particularly from UPKD and credit cooperatives. Most loans from these MFI are small, with sizes less than IDR 2 million. A few of the households also borrow from informal sources, in particular friends and family. Child education is the main purpose of saving, whereas the main purpose of borrowing is working capital. The households generally accept that financial services apply interest, and that borrowers should repay their loans. The households suggested that microfinance could be improved through demand-driven and convenient services, and better marketing of available services. The survey concludes that household demand for financial services indicates a large potential for savings mobilization and effective financial intermediation. The households are generally accustomed to saving and the application of interest rates on financial services. These provide the basis for the use of the financial system approach for further development of the rural-microfinance sector in the province. Based on the sample, the potential demand of rural households in NTB for institutional saving and loan services has been estimated very roughly. It amounts to between 275,000-288,000 saving deposit clients, and between 372,000-390,000 loan clients, including almost 40% of the households. Microfinance supply comes from a broad range of sources. Commercial Banks are centered in Mataram, the capital with about 700,000 inhabitants. Two banks are leading with regard to their presence in district capitals, i.e. Bank Rakyat Indonesia (BRI) and Bank NTB, the regional development bank owned jointly by the province and district governments. BRI’s branches do not offer micro loans and Bank NTB only to fixed income earners (government employees) and selected urban clients. BRI’s microfinance outlets are 51 BRI Units in about every second of the 100 urban and rural sub-district capitals. BRI Unit clientele are fixed-income earners and in particular traders with bankable collateral. Also on sub-district level, NTB’s government operates 46 Rural Banks, BPR-LKP. BPR-LKP provide complementary financial services by extending smaller loans with more lenient collateral requirements. These institutions reach village people through PHBK (loans to groups), but these loans contribute to only about 3% of the loan portfolio.


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The cooperative sector recorded substantial growth if measured by the number of institutions and their balance sheets. In particular savings and credit cooperatives (SCC) have an urban bias. Many government and private enterprise employees are members of a cooperative just for the purpose to obtain a loan. In rural areas, SCC are known as moneylenders for short-term loan with daily repayment. The multi-purpose village cooperatives (KUD), also in sub-district capitals, do not have sufficient funds just when farmers would need them most. Recently, “members” founded a number of SCC with a prohibitive high membership fee (and effective interest rates twice those BRI Units charge), so that these cooperatives appeared like a privately-owned BPR. They reported a demand, also from farmers, in excess of their capacity. In contrast to NTT, credit unions are not established in NTB. Also in contrast to NTT, only very few NGO support villagers with microfinance for self-help groups (SHG). SHG are popular in NTB though: the Kecamatan (Sub-district) Development Program (PPK) supports more than 500 SHG in 23 sub-districts. Many people enjoy the quick and uncomplicated services of moneylenders, who help with their loans settling installments with banks and MFI. All major national social programs with microfinance components were implemented in NTB: MoA experienced low repayment rates for its KUT and BPLM programs. The P4K facility was more successful until recently, but it is not anymore prolonged. Revolving funds (IDT, Inpres Desa Tertinggal; PDM-DKE, an economic crisis assistance program) turned out to be problematic as many groups were just arranged only to receive “capital assistance”. They easily dissolved. PKS-BBM, a working capital support project for cooperatives and Microfinance Institutions (MFI), implemented by the State Ministry for Cooperatives and SME (SMoCSME) between 2000 and 2003, incorporated training, monitoring and supervision by commercial banks for fund recipients. The banks, notably BRI and BPD, did not fulfill their contractual obligations, although MFI even paid a fair amount. The project was seemingly less successful and the funds, which were planned to remain with the MFI, have to be repaid in ten annual installments. The Kecamatan development project presents a unique feature, namely UPK (Unit Pengelola Keuangan, finance management unit) as a second-tier or apex organization providing loans to SHG and MFI. Preliminary figures indicate a high loan quality but also very high administrative cost. Projects and programs assist only temporarily and often only locally. Most MFI do not provide loans to villagers, because of the distance, or they provide a facility that villagers cannot use for their businesses. UPKD close both gaps, the distance gap and the financial gap: they are village institutions and they offer three loan products that are in demand: loans from Rp0.2m to Rp2m, no monthly installment, maturities of 4 to 12 months, and lenient collateral requirements. UPKD have a profound transaction cost advantage for both the lender and the borrower. However, UPKD do not close the gap for deposit services. The 245 UPKD in NTB are unrivalled in NTB in their number as a group of similar MFI. 214 UPKD were founded 1999 as non-bank, non-cooperative MFI to administer some Rp45b funds from IMS-NTAADP, the World Bank financed Nusa Tenggara Agriculture Area Development Project that started 1996. This poverty-oriented project assisted villages in backward districts. IMS stands for “inisiatif masyarakat setempat”, local people’s initiative. People empowerment, decision and implementation of investments, and control by villagers through joint liability groups and Musdes, a village forum, became prominent project features. District


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governments financed the establishment of at least 30 additional UPKD village financial institutes. Until its closure in September 2003, IMS-NTAADP trained UPKD management (three or four managers, and a supervisory team (Badan Pengawas, BP), in administration, bookkeeping and loan appraisal. Monthly reports were submitted to district Bappeda, the implementing agency. Already at that time, quite a number of UPKD reported increasing arrears, averaging at 17%. In 2005, all respondents reported further deteriorating conditions of most UPKD. It is difficult to describe this development with figures, as an increasing number of UPKD, in Sumbawa more than 50%, stops reporting. However, this does not always mean discontinuation of activities. There are significant differences among UPKD even in close vicinity, concerning performance, assets, and income, although they were guided by the same institutions and facilitators. Flourishing UPKD can be found even in dry areas, which are commonly considered very poor. In 2005, the average UPKD reports assets of Rp235m, almost the same as in 2003. The average loan portfolio of Rp180m is shared among about 50 groups with 500 members. Analyzing (fragile) interest income data yields an average of Rp110m non-performing loans, a 60% NPL-ratio. In the absence of reliable figures, it is assumed that at least Rp55m (>25% of all loans) are not at all recoverable. In total, some Rp12b of the original Rp40b loan fund have certainly to be written off. About 40% of all loans went repeatedly to (very) poor people. Many simply do have not the means to repay. These loans need to be finally written off. The remainder, Rp55m, can presumably be recovered through various measures, including loan reconditioning or seizing assets, political will and support provided. Only few UPKD practice appropriate bad-debt provisioning. The managers contribute decreasing loan income to seasonal influence, deferred payments which ”will be paid soon”, and to the social orientation, i.e. prolongation of loans without interest payment. UPKD contribution to the village coffers amounts to perhaps 1% of the loan fund, often it is a donation to the village head. A high NPL-ratio does not immediately endanger the viability and sustainability of a UPKD – although, of course – a lower NPL-ratio increases sustainability prospects. If stripped of its bad debt, UPKD are still about twice the size of Java’s quite sustainable BKD (Badan Kredit Desa, village credit board). The remaining performing portfolio of between some Rp60m to Rp100m generates sufficient income to cover expenses (not costs!), which are flexible to a very high degree. As long as they operate, UPKD have much better chance to recover bad debt and increase the performing loan portfolio. Calculations, based on NPL-assumptions and different sustainability ratios, predict that 91 to 117 UPKD have a realistic survival prospect, if political will and assistance are provided. Most reasons for increasing NPL and decreasing income are related to the nature of UPKD as a former project institution. When the project closed, UPKD management lost (also moral) support from facilitators, and debtors start questioning the origin and nature of the fund and the legality of the institution from which they received a loan. UPKD managers were burdened with too many and too conflicting aspirations and they were neither sufficiently prepared for this, nor had many actively applied for a management position in the UPKD.


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Another important reason for increasing NPL is weak credit risk management: non-prudential loans to people without diversified sources of income, who cannot offer “the second way out”, and to people who, as fixed income earners, are anyway indebted. The managers could not prevent this: they complied with the request of the project and with the request of their fellow villagers. Largely, supervision “by the people” failed. The conflict is perhaps best described by BP members who received loans and defaulted. UPKD managers and BP members cannot be dismissed because auf missing regulations. IMS-NTAADP financed and developed a microfinance infrastructure in rural areas of NTB: working capital, fixed assets, rented offices, human resources development, products and marketing channels. Without further attention, the number of NTB’s active UPKD-MFI will decrease by about 3 or 4 per month. Financial losses due to worsening loan portfolio quality alone are estimated to amount to Rp20m every day. The question is, whether and how these losses can be prevented or at least substantially reduced. Fortunately, most of the infrastructure is still in place: people in government agencies monitoring UPKD development, statutes and bylaws, UPKD offices, records, working capital and fixed assets, and the managers. The proposed new approach to UPKD development departs from the identified weaknesses, resulting from the UPKD nature as a project institution with exclusively social orientation. Its statutes and bylaws, the legal foundation, are entirely unsuitable for post-project times. Consequently, a follow-up project has to focus the attention to one single objective, the sustainability of UPKD. The vision for UPKD is proposed as: “increasing the welfare of village households through offering its services and products, and contributing to the community through its profits”. The corresponding UPKD mission shall be: “the sustainable provision of financial services and products, which are adapted to the demand of village-community members and based on prudent procedures”. It is suggested to change the name of the institution: “Unit” should be substituted by “Usaha” (Company, Business) to express the new orientation: generating profits for the village community. Simultaneously, social tasks should be transferred to the village government. This allows UsPKD (Usaha Pelayanan Keuangan Desa, Village Financial Services Company) to act market-oriented and increase interest rates to get closer to market rates. The village government decides, who will be eligible for interest subsidy and use UsPKD profits, i.e. only the surplus and not the substance, to finance (transfer to UsPKD) this subsidy. People, who can afford higher interest payments, contribute to more profits for more village development and assistance to the needy. Financial transparency and village solidarity can become reality. It is essential that UsPKD become profitable entities because only strong and profitable financial institutions can gain the community’s confidence and grow. People repay loans when the prospect of a larger follow-up loan looms. In particular it is proposed that: - The transfer of assets from Unit PKD to Usaha PKD includes verification and re-

assessment of all loans. They amount to about 80% of UPKD assets. The real value of many loans has to be established, which is often much lower than the nominal value or the book value. One cannot create sound financial institutions without transparent accounting. UPKD cannot carry past project burden. It is expected that loan verification will meet reluctance or even resistance from various persons. Government assistance on all levels is required for this task.


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- The village shall 100%-own the new UsPKD. The ownership of IMS-NTAADP funds needs to be clarified before deciding on a legal status of UsPKD. The role of district governments in a board of commissioners will also depend on IMS-NTAADP fund ownership. A law on MFI or implementing regulations on BUMDES (Badan Usaha Milik Desa, village-owned enterprise) could provide options for UsPKD legality. Cooperatives are less suitable: they member-oriented companies from which their members benefit, but not the community.

- The IMS-NTAADP loan fund shall become a long-term sub-ordinate loan to UsPKD, which strengthens equity, a key feature when UsPKD look for finance to expand their business.

The objectives of the “Regional MF Development in NTB” project, as laid out in the Agreed Minutes, are:

a) improve the quality of MFI services; b) increase the number of sound MFI; c) create a conducive environment by means of regulation and supervision; d) increase the cooperation between MFI and other financial institutions; e) increase the capacity of MFI to access capital from various sources.

Strengthening UPKD will contribute to achieving these objectives. a) Service quality: On average, UPKD mobilize Rp10m deposits, most of all

compulsory fees from borrowers. UPKD have not been active or inventive in attracting deposits, among others due to a Bank Indonesia regulation that restricts mobilizing deposits to banks. On the other hand, people are reluctant to deposit funds when they question the sustainability of the MFI. UsPKD might cooperate with a bank. Regarding lending, most people want access to individual loans with individual repayment schedules instead of the current group loans.

b) Increasing the number of sound MFI has two components: the number of

institutions and the quality, or soundness of MFI. Uplifting less sound MFI to become sound MFI counts also. Unfortunately, improvement from unsound to less sound does not. District governments intend financing the formation of new UPKD. It is believed that some 20 of these MFI will be added in three years. Whether the project will succeed increasing the number of sound MFI can only be answered once the initial number of sound MFI, here: UPKD, is known, which is certainly below 10 if measured by BPR standards. The standard for a “sound” non-bank non-cooperative MFI needs to be developed. However, an assessment based on the five CAMEL rating criteria appears to be suitable for UPKD, too. “C”apital rating, derived from the capital adequacy ratio (CAR), increases when

bad loans are removed from the balance sheet, when IMS-NTAADP funds becomes a sub-ordinate loan, and if part of this loan is converted to equity.

“A”ssets consist mainly of the loan portfolio. Renewal and rescheduling of overdue loans are methods to improve portfolio quality. A “sound” portfolio is also a result of suitable loan products and conditions, i.e., when loan contracts or products are adjusted to the borrower’s cash flow and risk structure, such as loans that allow flexible repayment.

“M”anagement rating improves through introduction of manuals and other written procedures, implementation of internal supervision and control mechanisms. Managers need training to comprehend and apply these tools.

“E”earnings can be doubled by enforcing interest payments for the time an installment or loan is overdue and by introducing penalties for late payments.


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The income will again double when UPKD management applies interest conditions similar to those of savings and credit cooperatives in rural areas. Earnings increase when costs decrease but only few high income UPKD can think about decreasing expenses. Costs for bad debt provisioning decrease because of prudent lending.

“L”iquidity is, in general, not a particular UPKD concern. Deposit withdrawals are predictable or negligible. Other expenses can be deferred and negotiated.

Summarized, there is an extensive field of activities to improve UPKD “soundness”. As a best guess, if one would qualify the ten best performing UPKD as “sound” today, some 20 would be sufficiently sound, 40 less sound and 160 unsound. It is expected that an intervention would see after 2 to 3 years about 40 (+30) sound UsPKD, 50 (+30) sufficiently sound, 65 (+25) less sound and 95 (-65) unsound. These 95 MFI are estimated to drop out or remain “dormant”, among others because already the portfolio verification fails.

c) Regarding regulations, three issues need attention: (i) for UsPKD incorporation

still missing procedures for BUMDES, and the Law on MFI, which will impact the formulation of new statutes and bylaws; (ii) regulations allowing village MFI to accept deposits (probably a chapter in a Law on MFI); and (iii) regulations and clarifications regarding ownership of the IMS-NTAADP fund, including write-off procedures. The project left UPKD with a set of “sunshine” rules and regulations, which might have been applicable for the project implementation, but become an obstacle for UsPKD development. It is proposed to prepare decrees for portfolio verification, and for temporary UsPKD statutes and bylaws. The case should be re-opened after a Law on MFI and regulations concerning BUMDES were issued. Without a regulation on write-offs it seems not possible to increase the number of sound MFI, unless only the sound loans are transferred to UsPKD and the unrecoverables remain “UPKD assets”. This report discusses supervision extensively because the success of UsPKD hinges on people having access to means that they do not own in a society that values family and neighbor bonds, and respect and obedience to superiors much higher than temporary (project!) employment regarding administrating anonymous funds. The presence of supervision, i.e. internal audit, strengthens the morale of managers. UPKD performance would be worse without supervision by BP-teams. However, their strength, i.e. being embedded in and knowing the village people, is also a major weakness. Supervisors are fellow villagers, therefore often not neutral, and shy conflicts. For many the task is too demanding, for others too irregular (once in three months). No one guides, supervises, controls, or monitors supervisors. Consequently, the formation of full-time semi-professional supervisor teams on district level, an externalization of internal audit, is recommended. About 15 to 25 specialized and – over time - experienced and full-time employed persons can perform this task better than the 735 persons can now. On provincial level, a professional coordinator shall guide, train, and supervise the performance of these teams. The expenses for financing supervision will increase substantially to about Rp500m annually. UsPKD can carry these expenses and they are very low compared with costs for proper bad debt provisioning amounting to probably more than Rp5b at present.

d) BPD Bank NTB, BPR-LKP and UPKD have a common bond in that they are

owned by the Government of NTB. Their products and the area they are covering complement each other. UsPKD could serve as a prolonged arm, e.g. as a


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savings collector for the banks. For UsPKD clients it would be attractive to know that their FI is not entirely standing alone but part of a province-wide financial system. In addition, cooperation among UsPKD (Forum) should be enforced, not only regarding supervision, but also in fields such as developing simple information and scoring systems.

e) UsPKD can provide services as cashier of the village government and its

deposits. They could offer their services to administer financial components of government programs. With an immediate unmet loan demand of about Rp350m per village UsPKD may attract the attention of lenders for whom it is impossible to tap this market segment directly. UsPKD cannot offer physical collateral. They have to offer a performance record and this is a main reason why UsPKD managers have to learn to monitor the CAMEL rating of their UsPKD.

Project implementation includes several UPKD support measures. The sustainability of UsPKD shall be achieved through a sequence of following measures: (i) asset verification to increase transparency (2 months), (ii) on-the-job training (business-orientation, 4-6 months), (iii) consultation (problem solving, 6-12 months), (iv) co-operation among MFI, especially regarding supervision, and with other FI. The sequence of institution building will be accompanied by provision of manuals, in-class training, and certification. The project will have a pilot phase, including preparation, pilot-testing of asset verification in selected villages and clarification of IMS-NTAADP fund ownership. The project will be continued if these activities have been implemented successfully. At the beginning of the pilot phase, consultations with GoNTB in the Forum of Regional Microfinance Policy (FoMFIDa) aim at an agreement about common objectives and the basic project design. A Project Director will use a preparation phase of two months to conclude cooperation agreements with selected village governments. This is one of the project’s most crucial points: An environment that does not support asset confirmation, i.e. transparency, is not conducive. Time should be allowed between announcing asset verification and the actual start to give some people the opportunity to settle their overdues. Latest in the third month, three Microfinance Advisors (MFA) shall begin portfolio verification in two villages each. Successful portfolio verification is one of the preconditions for asset transfer from UPKD to UsPKD and further assistance. Simultaneously, GoNTB will clarify the ownership of IMS-NTAADP funds and develop guidelines on handling bad debt and write-off procedures, which constitutes the other precondition for granting further assistance after the test phase. MFA will add a third and fourth support village the following months. The project should have gained sufficient experience after three months of pilot-testing asset verification and cooperation with 12 villages to decide on and design the multiplication in other districts. Provided the pilot phase was successful, i.e. asset verification has been conducted in at least 12 villages, and ownership of IMS-NTAADP funds has been clarified and allows for village-owned MFI development, the project will begin scaling-up. Based on the pilot experience, it will be decided how many new MFA and Deputy Project Directors would be recruited to continue the UsPKD institution building sequence of asset verification, followed by on-the-job training, consulting and parallel training. Up to 3 Deputy Directors and 21 MFA may be needed in total if UsPKD development realizes its full potential. Before new MFA would be hired, co-financing during project time and cost coverage after out-phasing need to be clarified to ensure sustainability.


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The proposed project implementation will see an overlapping of these sequences because it starts in a pilot area and will be multiplied in stages only after having gained experience and made necessary adjustments. It is estimated that asset verification of one UPKD employs a MFA for about 7-10 days per month, whereas on-the-job training requires only 2 to 5 days presence and consulting just 1 to 2 days a month. Therefore, one MFA will assist simultaneously, for example, one UPKD with asset confirmation, three UsPKD with on-the-job training, and another three with consulting. The project directors themselves have to visit UsPKD in order to confirm and learn first hand about the UsPKD performance and their problems, and in order to assure that the MFA fulfill their duties, among others regular internal audits until the supervision teams take over this task in the project’s second year. It is envisaged that during the second year scheduled in-class training takes place and scheduled visits by supervision teams start. The number of MFA can be reduced latest starting at the beginning of the third year. The project will concentrate on developing and strengthening the Forum or association towards supporting a certification system for managers as well as for institutions. It will also be concerned with attracting funds to performing UsPKD. Many of the proposed measures, such as manuals and training materials, shall be made available to all interested other MFI. The training capacity will allow inviting also non-UsPKD participants. Although the proposed project concentrates on UsPKD, it is beneficial for the rural people and for the financial system development when they operate in an environment with healthy, i.e. self-sustaining, competition.


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Ringkasan Eksekutif Pada bulan Mei tahun 2005, Pemerintah Propinsi Nusa Tenggara Barat (NTB) dan ProFi – Promotion of Small Financial Institutions (proyek bersama Bank Indonesia, Departemen Keuangan, dan GTZ) telah menandatangani sebuah Nota Kesepakatan tentang Pengembangan Keuangan Mikro di NTB. NTB termasuk golongan propinsi dengan GDP dibawah rata-rata, dengan Indeks Pengembangan Manusia terendah kedua di Indonesia. Jumlah penduduknya sebesar 4,1 juta orang tinggal di pulau Lombok (hampir 3 juta orang) dan di pulau Sumbawa (sekitar 1 juta orang). Mereka memperoleh penghasilan terutama dari pertanian, perikanan, dan dari bekerja di luar negeri. Analisis pasar keuangan mikro pedesaan membandingkan permintaan dengan penawaran pada saat ini untuk mengetahui berbagai kesenjangan yang ada. Analisis dari segi permintaan termasuk survai terhadap 90 rumah tangga di NTB. Survai tersebut menemukan bahwa sebagian besar rumah tangga menabung kelebihan penghasilan mereka. Tabungan besar pada umumnya ditempatkan pada bank umum, sedangkan tabungan kecil pada umumnya ditempatkan pada lembaga keuangan mikro bukan bank yang letaknya berdekatan (termasuk UPKD). Lebih setengah dari jumlah rumah tangga meminjam dari lembaga keuangan secara teratur, terutama dari UPKD dan koperasi kredit. Sebagian besar pinjaman dari berbagai LKM ini jumlahnya kecil, dengan ukuran kurang dari IDR 2 juta. Sebagian rumah tangga juga meminjam uang dari sumber tidak resmi, khususnya dari teman dan keluarga. Pendidikan anak adalah tujuan utama dari menabung, sedangkan tujuan utama meminjam adalah untuk mendapatkan modal kerja. Rumahtangga umumnya sadar bahwa jasa keuangan memperhitungkan pembayaran bunga, dan bahwa peminjam wajib membayar kembali pinjaman mereka. Berbagai rumahtangga menyarankan bahwa keuangan mikro ditingkatkan melalui pelayanan yang digerakkan oleh permintaan dan rasa nyaman, serta pemasaran yang lebih baik dari jasa pelayanan yang ada sekarang. Survai menyimpulkan bahwa permintaan jasa keuangan oleh rumahtangga menunjukkan adanya potensi besar bagi penggalangan tabungan serta intermediasi keuangan secara efektif. Berbagai rumahtangga pada umumnya sudah biasa menabung dan membayar bunga atas jasa keuangan. Hal ini menyediakan landasan bagi pendekatan sistem keuangan untuk pengembangan lebih lanjut dari sektor keuangan mikro didalam propinsi. Berdasarkan contoh tersebut diatas, maka potensi permintaan rumahtangga pedesaan di NTB bagi jasa tabungan dan pinjaman secara kasar dapat diperkirakan. Jumlahnya berkisar antara 275,000-288,000 pelanggan tabungan, dan antara 372,000-390,000 pelanggan pinjaman, termasuk hampir 40% dari jumlah rumahtangga. Penawaran keuangan mikro datang dari beraneka ragam sumber. Pemusatan Bank Umum terjadi di Mataram, ibukota NTB yang memiliki sekitar 700.000 orang penduduk. Dua bank mengemuka sehubungan dengan kehadiran mereka di ibukota kabupaten, yaitu Bank Rakyat Indonesia (BRI) dan Bank NTB, sebuah bank pembangunan daerah yang dimiliki bersama oleh pemerintah propinsi dan kabupaten. Kantor-kantor cabang BRI tidak menyediakan pinjaman mikro sedangkan Bank NTB hanya menyediakan pinjaman bagi peminjam yang berpenghasilan tetap


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(pegawai negeri sipil) dan pelanggan pilihan di pedesaan. BRI menyalurkan jasa keuangan mikro melalui 51 kantornya di setiap dua dari 100 ibukota kecamatan yang ada. Pelanggan BRI Unit umumnya berpenghasilan tetap dan khususnya terdiri dari pedagang dengan agunan yang memenuhi persyaratan bank. Ditingkat kecamatan, pemerintah NTB juga mengoperasikan 46 Bank Pedesaan, yaitu BPR-LKP. BPR-LKP menyediakan jasa keuangan pelengkap melalui pemberian pinjaman yang lebih kecil dengan persyaratan agunan yang lebih lunak. Lembaga-lembaga ini menjangkau penduduk desa melalui PHBK (pinjaman kepada kelompok), tetapi pinjaman jenis ini hanya sekitar 3% dari seluruh portofolio pinjaman. Sektor koperasi berhasil mencatat pertumbuhan yang pesat bila diukur dari jumlah lembaga dan laporan keuangan mereka. Khususnya pertumbuhan koperasi simpan pinjam (KSP) di perkotaan. Banyak pegawai negeri sipil dan karyawan perusahaan swasta menjadi anggota koperasi hanya untuk memperoleh pinjaman. Didaerah pedesaan, KSP dikenal sebagai pemberi pinjaman jangka pendek dengan angsuran harian. Koperasi usaha desa (KUD), juga di ibukota kecamatan, tidak mempunyai cukup dana bahkan di saat para petani paling membutuhkan bantuan mereka. Belum lama ini, sejumlah KSP didirikan oleh “para anggota” mereka dengan iuran keanggotaan yang sangat tinggi (dan suku bunga efektif dua kali dari BRI Unit), sehingga berbagai koperasi ini ibarat BPR yang dimiliki oleh pihak swasta. Mereka menunjukkan adanya permintaan, juga dari para petani, yang melebihi kemampuan mereka. Berlainan dengan NTT, koperasi kredit tidak terdapat di NTB. Juga berlainan dengan NTT, hanya sedikit sekali NGO yang membantu penduduk desa melalui kelompok arisan. Namun demikian arisan sangat populer di NTB: Program pengembangan kecamatan (PKK) memberikan bantuan kepada lebih dari 500 kelompok arisan di 23 kecamatan. Banyak orang menikmati pelayanan yang cepat dan tidak rumit dari para pelepas uang (moneylenders), yang dengan pinjaman mereka, membayar angsuran kepada bank dan LKM. Berbagai program pembangunan nasional yang berkomponen keuangan mikro dilaksanakan di NTB: Departemen Pertanian mencatat adanya tingkat pembayaran kembali yang rendah dari program-program KUT dan BPLM-nya. Fasilitas P4K lebih berhasil baik, namun demikian tidak lagi diperpanjang. Dana bergulir (IDT, Inpres Desa Tertinggal, PDM-DKE, sebuah program bantuan krisis ekonomi) ternyata bermasalah karena banyak kelompok hanya diatur untuk menerima “bantuan modal”. Mereka mudah bubar. PKS-BBM, sebuah proyek modal kerja pendukung bagi koperasi dan Lembaga Keuangan Mikro (LKM), dikelola oleh Departemen Koperasi dan UKM sejak tahun 2000 hingga 2003, mengikut sertakan pelatihan, pemantauan dan pengawasan dari bank umum bagi para penerima dana. Bank-bank bersangkutan, yaitu BRI dan BPD, masih kurang optimal dalam memenuhi kewajiban sebagaimana diperjanjikan, meskipun LKM sudah membayar secukupnya. Proyek tersebut nampaknya kurang berhasil dan dananya, yang menurut rencana tetap tinggal di LKM, wajib dibayar kembali dalam sepuluh kali angsuran tahunan. Proyek pengembangan kecamatan tersebut menghadirkan ciri-ciri yang khas, yakni UPK (Unit Pengelola Keuangan atau satuan pengelola keuangan) sebagai second-tier atau organisasi apex yang menyediakan pinjaman kepada kelompok arisan dan LKM. Angka-angka secara kasar menunjukkan mutu pinjaman yang tinggi tetapi juga biaya administrasi yang sangat tinggi. Proyek dan program hanya membantu untuk sementara waktu dan seringkali hanya bagi masyarakat setempat. Sebagian besar LKM sperti BRI Unit dan BPR-LKP tidak menyediakan pinjaman untuk penduduk desa, karena jarak yang jauh, atau mereka menyediakan fasilitas yang tidak bisa dimanfaatkan oleh para penduduk desa bagi usaha mereka. UPKD bisa menutup kedua kesenjangan tersebut, yaitu


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kesenjangan jarak dan kesenjangan keuangan: mereka merupakan lembaga pedesaan dan menyediakan tiga produk pinjaman yang dibutuhkan: pinjaman dari Rp0,2 juta sampai dengan Rp2juta, tanpa angsuran bulanan, jangka waktu dari 4 hingga 12 bulan, dan persyaratan agunan yang lunak. UPKD memiliki keunggulan tinggi dalam biaya transaksi bagi pemberi pinjaman dan peminjam dua-duanya. Namun demikian, UPKD tidak dapat menutup kesenjangan jasa pelayanan simpanan. Sebagai kelompok LKM serupa jika dilihat dari segi jumlah, maka seluruh 245 UPKD yang ada di NTB tidak punya bandingan. Pada tahun 1999 terdapat 214 UPKD yang didirikan sebagai LKM bukan bank bukan koperasi untuk mengelola sekitar Rp45 milyar dana yang dikucurkan oleh IMS-NTAADP, sebuah Proyek Pengembangan Daerah Pertanian Di Nusa Tenggara yang dibiayai oleh Bank Dunia sejak tahun 1996. Proyek yang berorientasi pada pengentasan kemiskinan ini menyediakan bantuan kepada desa tertinggal di berbagai kabupaten. IMS adalah singkatan dari Inisiatif Masyarakat Setempat. Pemberdayaan masyarakat, putusan dan pelaksanaan investasi, serta kendali oleh penduduk desa melalui kelompok kewajiban bersama dan Musdes, sebuah forum desa, adalah ciri-ciri terkemuka dari proyek. Pemerintah kabupaten membiayai pembentukan sekurang-kurangnya 30 UPKD tambahan. Hingga proyek ditutup pada bulan September tahun 2003, IMS-NTAADP telah menyelenggarakan pelatihan bagi para pengelola UPKD (tiga dari antara empat manajer, dan satu tim pengawasan (Badan Pengawas, BP), di bidang administrasi, pembukuan dan penilaian pinjaman. Laporan bulanan dikirimkan ke Bappeda tingkat kabupaten, selaku badan pelaksana. Banyak juga UPKD yang melaporkan tunggakan, yang rata-rata adalah 17%. Dalam tahun 2005, sebagaimana dilaporkan oleh semua responden, sebagian besar UPKD makin memburuk kondisinya. Sulit untuk memaparkan perkembangan ini dalam angka, karena makin banyak UPKD di Sumbawa, lebih dari 50%, yang berhenti mengirimkan laporan. Namun demikian, ini tidak selalu berarti berhentinya kegiatan. Ada perbedaan yang signifikan diantara UPKD bahkan yang saling berdekatan, perihal kinerja, aktiva, dan pendapatan, meskipun mereka menerima pembinaan dari lembaga dan fasilitator yang sama. UPKD yang tumbuh bagus dapat dijumpai bahkan di daerah yang tandus, yang lazimnya dianggap sangat miskin. Dalam tahun 2005, UPKD rata-rata melaporkan jumlah aktiva sebesar Rp235 juta, yang hampir sama dengan tahun 2003. Portofolio rata-rata sebesar Rp180 juta dimiliki oleh sekitar 50 kelompok dengan 500 orang anggota. Analisis (cermat) dari data pendapatan bunga menghasilkan adanya kredit bermasalah rata-rata sebesar Rp110 juta, dan rasio NPL sebesar 60%. Dengan tidak adanya angka-angka yang dapat dipercaya, menurut taksiran sekurang-kurangnya Rp55 juta (>25% dari seluruh pinjaman) macet. Secara keseluruhan, sekitar Rp12 milyar dari pinjaman awal sebesar Rp40 milyar secara pasti harus dihapuskan. Sekitar 40% dari seluruh pinjaman bergulir ditujukan kepada masyarakat (sangat) miskin. Banyak yang tidak sanggup membayar kembali. Berbagai pinjaman ini akhirnya harus dihapuskan. Sisanya, yang Rp55 juta, agaknya dapat ditagih kembali melalui berbagai cara, termasuk reconditioning pinjaman atau penyitaan harta, kemauan politis dan pemberian bantuan. Hanya sebagian kecil UPKD yang membentuk penyisihan penghapusan kredit macet secara benar. Para manajer menyalahkan berkurangnya pendapatan pinjaman pada pengaruh musim, tunggakan pembayaran yang “akan diselesaikan segera”, serta orientasi sosial, seperti perpanjangan jangka waktu pinjaman tanpa pembayaran bunga. Jumlah kontribusi UPKD untuk kas desa


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mungkin sebesar 1% dari jumlah dana pinjaman, yang seringkali adalah sumbangan bagi kepala desa. Rasio NPL yang tinggi tidak serta merta membahayakan kelangsungan hidup dan berkelanjutannya sebuah UPKD – walaupun, tentu saja – rasio NPL yang lebih rendah meningkatkan prospek berkelanjutannya. JIka kredit macet dihilangkan, maka ukuran UPKD masih sekitar dua kali BKD (Badan Kredit Desa). Sisa portofolio sehat sekitar Rp60 juta hingga Rp100 juta menghasilkan pendapatan yang cukup untuk menutup pengeluaran (bukan biaya!), yang lentur (flexible) hingga ambang batas sangat tinggi. Sepanjang mereka beroperasi, UPKD punya peluang yang jauh lebih baik untuk memperoleh pembayaran kembali kredit macet dan meningkatkan portofolio pinjaman. Berbagai perhitungan, yang berlandaskan perkiraan NPL dan berbagai rasio berkelanjutan yang beragam, meramalkan bahwa 91 dari 117 UPKD punya prospek kelangsungan hidup yang realistis, jika saja ada kemauan politis dan bantuan tersedia. Alasan paling sering bagi meningkatnya NPL dan berkurangnya pendapatan terkait erat dengan sifat UPKD sebagai bekas lembaga proyek. Ketika proyek bersangkutan ditutup, pengelola UPKD kehilangan (juga dukungan moral) dukungan dari para fasilitatornya, dan para debitur mulai mempertanyakan asal dan sifat dari dana bersangkutan serta keabsahan lembaga dari mana mereka menerima pinjaman. Para manajer UPKD merasa terbebani oleh aspirasi yang terlampau banyak dan yang saling bertentangan, serta mereka tidak memiliki cukup persiapan untuk menghadapi hal ini, atau banyak dari mereka kurang mendambakan kedudukan sebagai manajer UPKD. Alasan penting lain bagi peningkatan NPL adalah lemahnya manajemen risiko kredit: pemberian pinjaman dilakukan tanpa mengacu pada prinsip kehati-hatian, tanpa adanya diversifikasi sumber pendapatan, yang tidak dapat menyediakan “cara pemecahan kedua”, dan kepada mereka yang, yang berpenghasilan tetap tetapi sudah memeroleh pinjaman dari pihak lain. Para manajer tidak bisa mencegah terjadinya hal demikian: mereka memenuhi permintaan dari proyek dan permintaan dari sesama penduduk desa. Sebagian besar pengawasan “oleh masyarakat umum” mengalami kegagalan. Konflik tersebut mungkin paling tepat digambarkan seperti para anggota BP yang menerima pinjaman dan lalu macet. Para manajer UPKD dan para anggota BP bersangkutan tidak mungkin dipecat karena telah mengabaikan peraturan yang berlaku. IMS-NTAADP membiayai dan mengembangkan infrastruktur keuangan mikro di daerah pedesaan NTB: modal kerja, aktiva/harta tetap, sewa ruangan, pengembangan sumber daya manusia, produk dan saluran pemasaran. Namun tanpa adanya perhatian lebih lanjut setelah proyek NTAADP berakhir, jumlah UPKD-LKM yang aktif di NTB akan berkurang dengan sekitar 3 atau 4 lembaga tiap bulannya. Kerugian uang karena memburuknya mutu portofolio pinjaman diperkirakan sebesar Rp20 juta tiap hari. Pertanyaannya adalah, apakah dan bagaimana kerugian ini dapat dicegah atau sekurang-kurangnya dikurangi secara signifikan. Untunglah, sebagian besar infrastruktur masih berjalan baik: para pejabat di lembaga-lembaga pemerintah yang memantau perkembangan UPKD, anggaran dasar dan anggaran rumahtangga mereka, kantor-kantor UPKD, catatan pembukuan, modal kerja dan harta/aktiva tetap, serta para manajer mereka. Pendekatan baru bagi pengembangan UPKD diusulkan untuk dilaksanakan setelah berbagai kelemahan mereka diketahui, sebagai akibat dari sifat UPKD selaku lembaga proyek yang semata-mata berorientasi sosial. Anggaran dasar dan anggaran rumahtangga, serta dasar hukum mereka sama sekali tidak sesuai


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manakala proyek tersebut sudah selesai. Maka dari itu, proyek susulan perlu memusatkan perhatian pada satu tujuan tunggal, yaitu berkelanjutannya UPKD. Visi UPKD yang diusulkan adalah: “meningkatkan kesejahteraan anggota masyarakat desa melalui penyediaan produk dan jasa keuangan, serta menyumbangkan labanya untuk pembangunan desa”. Bersamaan dengan itu maka misi UPKD yang diusulkan adalah: “menyediakan produk dan jasa keuangan secara berkelanjutan, yang sesuai dengan permintaan masyarakat setempat dan menerapkan prinsip kehati-hatian”. Disarankan untuk merubah nama dari lembaga: “Unit” diganti menjadi “Usaha” (Perusahaan, Bisnis) untuk menyatakan orientasi yang baru: menghasilkan laba bagi masyarakat desa. Bersamaan dengan itu, berbagai tugas sosial perlu dialihkan kepada pemerintah desa. Ini memperkenankan UsPKD (Usaha Pelayanan Keuangan Desa) untuk bertindak sesuai dengan orientasi pasar dan meningkatkan suku bunga mendekati suku bunga yang berlaku di pasar. Pemerintah desa akan memutuskan, siapa saja yang memenuhi syarat untuk menerima subsidi bunga dan menggunakan laba UsPKD, yaitu hanya kelebihannya (surplus) dan bukan isi pokoknya (substance), untuk membiayai (transfer ke UsPKD) subsidi ini. Mereka, yang sanggup membayar bunga lebih tinggi, menyumbang lebih banyak laba bagi pengembangan lebih besar dari desa dan memberikan bantuan kepada yang membutuhkan. Keterbukaan dibidang keuangan dan kesetiakawanan/solidaritas desa bisa diwujudkan. Adalah penting bahwa UsPKD menjadi badan usaha yang menguntungkan karena hanya lembaga keuangan yang tangguh dan menguntungkan yang dapat menarik kepercayaan masyarakat serta tumbuh. Orang membayar kembali pinjamannya dengan prospek untuk memperoleh pinjaman susulan yang lebih besar. Khususnya diusulkan: - Pengalihan harta/aktiva dari Unit PKD ke Usaha PKD termasuk verifikasi dan

penilaian kembali seluruh portofolio pinjaman. Jumlah mereka sekitar 80% dari jumlah harta/aktiva UPKD. Nilai sesungguhnya dari seluruh pinjaman harus ditentukan, yang mungkin sekali jauh lebih rendah dari nilai nominal atau nilai buku. Orang tidak bisa menciptakan lembaga keuangan yang sehat tanpa adanya akuntansi yang terbuka (transparent). UPKD tidak bisa menanggung beban dari proyek lama. Mungkin verifikasi pinjaman akan dihadapkan pada keengganan atau bahkan perlawanan dari banyak orang. Bantuan pemerintah di semua tingkatan dibutuhkan untuk pelaksanaan tugas ini.

- Desa akan menjadi pemilik 100% dari UsPKD yang baru. Kepemilikan dana IMS-NTAADP perlu di klarifikasi sebelum menetapkan status hukum UsPKD. Peran pemerintah kabupaten dalam dewan komisaris juga akan bergantung pada kepemilikan dana IMS-NTAADP. Undang-undang tentang LKM atau peraturan pelaksanaan BUMDES (Badan Usaha Milik Desa) dapat menyediakan pilihan bagi keabsahan UsPKD. Koperasi kurang cocok: mereka merupakan perusahaan yang berorientasi pada keanggotaan dari mana para anggota mereka menarik manfaat, jadi bukan masyarakat.

- Dana pinjaman dari IMS-NTAADP akan menjadi pinjaman subordinasi jangka panjang untuk UsPKD, yang memperkuat permodalan mereka, sebuah fitur kunci ketika UsPKD mencari pembiayaan untuk memperluas bisnis mereka.

Tujuan proyek “Pengembangan Keuangan Mikro Wilayah di NTB”, sebagaimana dipaparkan dalam Risalah Perjanjian, adalah:

a) meningkatkan mutu pelayanan LKM; b) meningkatkan jumlah LKM yang sehat;


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c) menciptakan lingkungan yang kondusif melalui peraturan/pengaturan dan pengawasan;

d) meningkatkan kerjasama diantara LKM dengan lembaga-lembaga keuangan lainnya;

e) meningkatkan kemampuan LKM dalam menjangkau modal dari berbagai sumber.

Memperkuat UPKD menyumbang pencapaian berbagai tujuan ini. a) Mutu pelayanan: Secara rata-rata, UPKD menghimpun Rp10jt simpanan, yang

sebagian besar merupakan pembayaran wajib (compulsory fee) dari para peminjam. UPKD kurang aktif atau kurang berdaya cipta dalam menarik simpanan, antara lain disebabkan oleh peraturan Bank Indonesia yang membatasi penggalangan simpanan oleh bank saja. Sebaliknya, orang segan menyimpan dana kalau mereka meragukan berkelanjutannya LKM. Dalam hal ini UsPKD bisa mengikat kerjasama dengan bank. Berkenaan dengan pemberian pinjaman, kebanyakan orang menginginkan akses atas pinjaman pribadi dengan jadwal pembayaran angsuran pribadi daripada pinjaman kepada kelompok yang ada sekarang.

b) Meningkatkan jumlah LKM sehat mengandung dua komponen: jumlah lembaga

dan mutu, atau kesehatan dari LKM. Memperbaiki tingkat kesehatan LKM dari kurang sehat menjadi sehat juga masuk dalam perhitungan. Sayang bahwa perbaikan dari tidak sehat menjadi kurang sehat tidak masuk dalam perhitungan. Pemerintah-pemerintah kabupaten telah menyatakan minat mereka untuk turut membiayai pembentukan UPKD baru. Diharapkan bahwa dalam jangka waktu tiga tahun ada sekitar 20 LKM tambahan seperti ini. Apakah proyek berhasil meningkatkan jumlah LKM sehat hanya dapat dijawab segera sesudah jumlah LKM yang sehat, disini: UPKD, diketahui, yang nampaknya dibawah 10 jika diukur dengan standar BPR. Sebuah standar bagi LKM “sehat” bukan bank bukan koperasi perlu dikembangkan. Namun demikian, penilaian yang berlandaskan kelima kriteria penilaian CAMEL kelihatannya sesuai juga bagi UPKD. “C”apital rating atau peringkat modal, yang berasal dari rasio kecukupan modal

atau capital adequacy ratio (CAR), meningkat kalau kredit macet dihilangkan dari neraca, ketika dana IMS-NTAADP menjadi pinjaman subordinasi, dan jika sebagian dari pinjaman ini diubah bentuknya menjadi modal.

“A”ssets atau harta/aktiva sebagian besar terdiri dari portofolio pinjaman. Perpanjangan dan penjadwalan kembali (rescheduling) pinjaman tertunggak dapat meningkatkan mutu portofolio, yaitu, ketika perjanjian pinjaman atau produk disesuaikan dengan arus kas peminjam beserta struktur risikonya, seperti pinjaman yang membolehkan pembayaran kembali secara lentur (flexible).

“M”anagement rating atau peringkat pengelolaan meningkat melalui pemberlakuan berbagai pedoman dan prosedur tertulis lainnya, pelaksanaan pengawasan intern dan mekanisme pengendalian. Para manajer membutuhkan pelatihan supaya dapat mengerti dan mengaplikasikan peralatan ini.

“E”earnings atau penghasilan dapat mencapai duakali melalui penagihan pembayaran secara intensif pada saat jatuh temponya angsuran pinjaman dan pembebanan denda bagi keterlambatan bayar. Pendapatan akan mencapai duakali lagi kalau pengelola UPKD menerapkan kondisi bunga yang serupa dengan yang diterapkan oleh koperasi simpan pinjam di


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pedesaan. Penghasilan meningkat kalau biaya berkurang namun hanya sedikit UPKD yang tinggi pendapatannya yang mampu memikirkan bagaimana mengurangi pengeluaran. Biaya penyisihan penghapusan kredit macet akan berkurang karena pinjaman diberikan berdasarkan prinsip kehati-hatian.

“L”iquidity atau likuiditas, pada umumnya, bukan merupakan keperihatinan khusus dari UPKD. Penarikan kembali simpanan bisa diramalkan atau bisa diabaikan. Pengeluaran lainnya dapat ditangguhkan dan dirundingkan.

Jika diringkas, ada banyak kegiatan untuk meningkatkan “kesehatan” UPKD. Sebagai terkaan yang paling tepat, jika hari ini ada sepuluh UPKD yang kinerjanya paling bagus, maka sekitar 20 cukup sehat, 40 kurang sehat dan 160 tidak sehat. Dengan adanya campur tangan diharapkan bahwa setelah 2 hingga 3 tahun ada 40 (+30) UsPKD sehat, 50 (+30) cukup sehat, 65 (+25) kurang sehat dan 95 (-65) tidak sehat. Menurut perkiraan 95 LKM ini tetap “dormant” atau tidur/tidak aktif, antara lain karena dari hasil verifikasi, portofolio mereka sudah terlanjur rusak.

c) Berkenaan dengan peraturan, ada tiga persoalan yang perlu disikapi: (i) untuk

menjadikan UsPKD sebagai badan hukum maka prosedur bagi BUMDES belum ada, dan juga belum ada Undang-undang tentang LKM, yang akan berdampak pada perumusan anggaran dasar dan anggaran rumahtangga yang baru; (ii) peraturan yang membolehkan LKM di pedesaan untuk menghimpun simpanan (mungkin bisa ditambahkan satu bab dalam Undang-undang tentang LKM); dan (iii) peraturan dan klarifikasi berkenaan dengan kepemilikan dana IMS-NTAADP, termasuk prosedur penghapusannya. Proyek meninggalkan sekumpulan ketentuan dan peraturan “sunshine” bagi UPKD, yang berguna bagi pelaksanaan proyek lama, namun menjadi hambatan bagi pengembangan UsPKD. Diusulkan untuk menyiapkan surat ketetapan (decree) bagi verifikasi portofolio, serta bagi anggaran dasar dan rumahtangga sementara UsPKD. Kasus tersebut perlu dibuka kembali sesudah Undang-undang tentang LKM terbentuk dan keluarnya peraturan tentang BUMDES. Tanpa adanya peraturan tentang penghapusan rasanya tidak mungkin meningkatkan jumlah LKM yang sehat, kecuali kalau hanya pinjaman sehat yang dipindahkan (transfer) ke UsPKD dan pinjaman yang tidak tertagih ditinggalkan sebagai “harta/aktiva UPKD”. Laporan ini membahas pengawasan secara luas karena keberhasilan UsPKD berpusat pada orang yang menangani uang yang bukan miliknya didalam sebuah masyarakat yang menghargai ikatan keluarga dan tetangga, serta rasa hormat dan kepatuhan kepada atasan yang jauh lebih tinggi daripada pekerjaan (proyek!) sementara berkenaan dengan pengaturan dana tanpa nama (anonymous funds). Kehadiran dari pengawasan, yaitu pemeriksaan intern (internal audit), memperkuat moral dari para manajer. Kinerja UPKD akan semakin memburuk tanpa adanya pengawasan dari tim-tim BP. Namun demikian, kekuatan mereka, yang terlekat dalam dan mengenal penduduk desa, juga merupakan kelemahan utama mereka. Para pengawas adalah sesama penduduk desa, dan oleh karena itu seringkali tidak netral, dan cenderung menghindari perselisihan. Bagi banyak orang tugas tersebut terlampau besar tuntutannya, sedangkan bagi orang lain terlalu tidak menentu (satu kali dalam tiga bulan). Tidak ada pihak yang membina, mengawasi, mengendalikan, atau memantau para pengawas. Maka dari itu, direkomendasikan pembentukan tim-tim pengawas yang bekerja penuh waktu dan semi-profesional di tingkat kabupaten, sebagai perwujudan dari pemeriksaan intern. Sekitar 15 hingga 25 orang spesialis yang dipekerjakan – dengan


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lewatnya waktu – akan sudah berpengalaman dan mampu melaksanakan tugas ini dengan lebih baik dibandingkan 735 orang yang ada sekarang. Di tingkat propinsi, seorang koordinator profesional akan membina, melatih, dan mengawasi kinerja tim-tim ini. Pengeluaran untuk membiayai pengawasan akan meningkat tinggi dan mencapai sekitar Rp500jt per tahun. UsPKD mampu menanggung pengeluaran ini yang relatif sangat kecil jika dibandingkan dengan besarnya biaya untuk membentuk penyisihan penghapusan kredit macet yang sekarang sudah mencapai lebih dari Rp5 milyar.

d) BPD Bank NTB, BPR-LKP dan UPKD mempunyai ikatan bersama dalam hal

kepemilikan oleh Pemerintah NTB. Berbagai produk serta cakupan daerah bersifat saling melengkapi. UsPKD dapat bertindak sebagai kepanjangan tangan, misalnya sebagai penghimpun tabungan bagi bank. Bagi para pelanggan UsPKD menarik untuk mengetahui bahwa lembaga keuangan tersebut tidak sepenuhnya berdiri sendiri tetapi merupakan bagian dari sebuah sistem keuangan propinsi yang menyeluruh. Tambahan pula, kerjasama diantara UsPKD perlu diterapkan, bukan saja berkenaan dengan pengawasan, melainkan juga di berbagai bidang seperti pengembangan sistem informasi dan pemberian nilai yang sederhana.

e) UsPKD dapat menyediakan pelayanan sebagai kasir dari pemerintah desa serta

simpanannya. Mereka dapat menawarkan pelayanan untuk mengurus komponen keuangan dari berbagai program pemerintah. Dengan adanya permintaan yang belum dapat dipenuhi yang jumlahnya sekitar Rp350jt per desa, maka UsPKD bisa menarik perhatian para pemberi pinjaman yang tidak mampu melayani segmen pasar ini secara langsung/sendiri. UsPKD tidak dapat menyerahkan agunan fisik. Mereka harus membuktikan prestasi kinerja dan ini adalah alasan utama mengapa para manajer UsPKD perlu mempelajari bagaimana memantau pemeringkatan CAMEL dari UsPKD mereka.

Pelaksanaan proyek mengikut sertakan beberapa langkah pendukung UPKD. Berkelanjutannya UsPKD bisa dicapai melalui urutan langkah sebagai berikut: (i) verifikasi harta/aktiva untuk meningkatkan keterbukaan (2 bulan), (ii) pelatihan on-the-job (orientasi bisnis, 4-6 bulan), (iii) konsultasi (pemecahan masalah, 6-12 bulan), (iv) kerjasama diantara LKM, terutama berkenaan dengan pengawasan, dan dengan lembaga keuangan lain. Urutan pengembangan kelembagaan akan dilengkapi dengan penyediaan berbagai pedoman, pelatihan kelas (in-class training), dan sertifikasi. Proyek melalui tahap percobaan (pilot phase), termasuk persiapan, uji coba verifikasi harta/aktiva di berbagai desa pilihan dan klarifikasi kepemilikan dana IMS-NTAADP. Proyek dapat dilanjutkan jika seluruh kegiatan ini telah berhasil dilaksanakan dengan baik. Pada awal tahap percobaan, dilakukan konsultasi dengan Pemerintah NTB dalam Forum Kebijakan Keuangan Mikro Wilayah (FoMFIDa) yang bertujuan memperoleh persetujuan atas berbagai tujuan bersama serta rancangan dasar dari proyek. Seorang Direktur Proyek membutuhkan waktu dua bulan untuk tahap persiapan menyelesaikan berbagai perjanjian kerjasama dengan pemerintah dari desa-desa yang terpilih. Ini merupakan salah satu bagian paling gawat (crucial) dari proyek: Lingkungan yang tidak mendukung konfirmasi harta/aktiva (asset confirmation), yakni keterbukaan, akan tidak kondusif. Waktu yang cukup perlu disediakan sebelum pengumuman verifikasi harta/aktiva untuk memberikan kesempatan kepada sementara orang untuk menyelesaikan tunggakan pinjaman (overdues) mereka. Paling lambat dalam bulan ketiga, tiga orang Penasehat Keuangan Mikro (Microfinance Advisors) atau MFA dapat masing-masing mulai


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melaksanakan verifikasi portofolio di dua desa. Verifikasi portofolio secara sukses adalah salah satu pra-kondisi bagi transfer harta/aktiva dari UPKD ke UsPKD serta pemberian bantuan selanjutnya. Bersamaan dengan itu, Pemerintah NTB akan mengklarifikasi kepemilikan dari dana IMS-NTAADP dan mengembangkan garis pedoman tentang penanganan pinjaman macet beserta prosedur penghapusannya, yang membentuk pra-kondisi lain bagi pemberian bantuan selanjutnya setelah tahap uji coba. MFA menambah dengan desa ketiga dan keempat dalam bulan-bulan berikutnya. Proyek seharusnya sudah menimba cukup pengalaman sesudah tiga bulan uji coba verifikasi harta/aktiva dan kerjasama dengan 12 desa untuk memutuskan dan merancang duplikasi (multiplication) di berbagai kabupaten lainnya. Sekiranya tahap percobaan (pilot phase) sukses, yakni verifikasi harta/aktiva telah selesai diselenggarakan di sekurang-kurangnya 12 desa, dan kepemilikan dana IMS-NTAADP sudah diklarifikasi dan memperkenankan pengembangan LKM yang dimiliki desa, maka proyek akan mulai beranjak ketingkatan yang lebih tinggi (scaling-up). Berdasarkan pengalaman uji coba, akan diputuskan berapa banyak MFA baru dan Deputi Direktur Proyek akan diterima bekerja untuk melanjutkan urutan pengembangan kelembagaan UPKD dari verifikasi harta/aktiva, yang diikuti dengan pelatihan on-the-job, konsultasi dan pelatihan yang sejajar (parallel). Maksimal 3 orang Deputi Direktur dan 21 orang MFA mungkin akan dibutuhkan jika pengembangan UsPKD mewujudkan potensi sepenuhnya. Sebelum MFA baru dipekerjakan, maka pembiayaan bersama selama jangka waktu proyek dan cakupan biaya setelah out-phasing perlu diklarifikasi untuk memastikan berkelanjutannya. Pelaksanaan proyek yang diusulkan akan menjumpai tumpang tindihnya barbagai urutan ini karena proyek tersebut akan dimulai di daerah percobaan (pilot area) dan akan digandakan secara bertahap hanya setelah berhasil memperoleh pengalaman dan membuat berbagai penyesuaian yang perlu. Diperkirakan bahwa verifikasi harta/aktiva dari satu UPKD akan mempekerjakan seorang MFA untuk 7-10 hari per bulan, sedangkan pelatihan on-the-job hanya membutuhkan kehadiran selama 2 hingga 5 hari dan konsultasi hanya 1 hingga 2 hari per bulan. Oleh karena itu, MFA akan membantu secara bersamaan, misalnya, satu UPKD dengan konfirmasi harta/aktiva, tiga UPKD dengan pelatihan on-the-job, dan tiga lain dengan konsultasi. Para direktur proyek sendiri perlu mengunjungi UsPKD untuk mengkonfirmasikan dan mempelajari dari tangan pertama perihal kinerja UsPKD dan permasalahan mereka, dan untuk memastikan bahwa MFA memenuhi tugas mereka, antara lain melalui pemeriksaan intern yang teratur hingga saatnya tim-tim pengawas mengambil alih tugas ini pada tahun kedua dari proyek. Diperkirakan bahwa selama tahun kedua dijadwalkan pelatihan kelas (in-class training) dan kunjungan dimulai oleh tim-tim pengawas. Jumlah MFA dapat dikurangi paling lambat diawal tahun ketiga. Proyek akan memusatkan pikiran pada pengembangan dan penguatan Forum atau asosiasi yang menuju pada pemberlakuan sistem sertifikasi bagi manajer dan lembaga. Proyek juga akan terlibat dalam penggalangan dana bagi UsPKD yang bagus kinerjanya. Banyak dari langkah-langkah yang diusulkan, seperti pedoman dan materi pelatihan, juga tersedia bagi semua LKM lain yang berminat. Pelatihan dapat mengundang partisipasi dari peserta yang bukan berasal dari UsPKD. Meskipun proyek yang diusulkan memusatkan pikiran pada UsPKD, proyek tersebut juga bermanfaat bagi masyarakat pedesaan dan bagi pengembangan sistem keuangan pada saat mereka beroperasi dalam sebuah lingkungan yang sehat, yakni persaingan tanpa memerlukan bantuan dari pihak lain.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

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1 Introduction Sustainable access to financial services has a powerful impact on economic growth and poverty reduction. Indonesia has a substantial and very diverse landscape of Microfinance Institutions (MFI), but access to finance is still very limited in rural areas, and most difficult at the village level. The Government of Indonesia (GoI) has made reducing poverty and achieving the Millenium Development Goals a top policy priority. To assist these efforts, German Technical Cooperation (GTZ) supports Bank Indonesia and Ministry of Finance in implementing the “Promotion of Small Financial Institutions” Program (ProFI). ProFI aims at increasing outreach and sustainability of MFI in Indonesia. Developing sustainable MFI with outreach to the poor has been most successful when following the “Financial Systems Development” paradigm. This implies that the Government provides an enabling environment to facilitate MFI growth, and assumes a promotional role in MFI capacity building. ProFI advocates these principles, including a commercial approach to microfnance, because it is most likely to reach more clients on a sustained basis. ProFI works with a diverse range of institutions, from Rural Banks and Cooperatives to village-based MFI, and supports MFI development through four components:

(1) National Microfinance Policy (2) Development Strategy and Enabling Environment for BPR and LPD (3) Capacity Building and Professional Certification (4) Regional Financial Systems Development

Decentralization opens new opportunities to improve access at the village level, because it enables locally adapted conditions for successful MFI development. ProFI is pilot-testing decentralized approaches under Component 4: “Regional Financial Systems Development” aims at creating an enabling environment and improving institutional capacities of MFI in Nusa Tenggara Barat (NTB) and Nusa Tenggara Timur (NTT). Agreed Minutes between the Provincial Government of NTB and GTZ, signed on May 17, 2005, create the framework for the “Regional Microfinance Development in NTB” project. The project objectives aim at adapting a financial systems development approach to the market for rural microfinance in NTB. This study has the purpose to develop a feasible concept and an implementation strategy from 2006-2008. To this end, demand and supply of financial services to village households have been investigated to identfy potential gaps. The MFI landscape in NTB has been screened for institutions which could contribute to narrowing these gaps. 245 Unit Pengelola Keuangan Desa (Village Financial Management Units, UPKD) are the most promising development option to increase sustainable outreach to the village level. They have been set-up as village-owned MFI by a World Bank poverty alleviation project from 1999-2003. UPKD are analyzed in detail, and the study proposes both a concept and an implementation strategy for achieving the project objectives. The concept builds on transforming UPKD into profitable business units. Implementation focuses on UPKD portfolio review and intensive capacity buidling through on-the-job training, feeding lessons learnt back into improved UPKD regulations.


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2 The Province of Nusa Tenggara Barat (NTB) NTB covers some 20,000 km2 and is composed of Lombok and Sumbawa, and more than a hundred minor islands. The distance from Western Lombok to Eastern Sumbawa is about 350km. NTB is inhabited by slightly more than 4 million people, living in about 1 million households. The population is unevenly distributed: Lombok covers slightly more than 20% of the area, but accounts for more than 70% of the population (population density 600/km2). In contrast, Sumbawa occupies 76% of the province, but accounts for less than 30% (population density 80/km2). Government Administration The province is divided into nine administrative units: seven districts and two municipalities, which are divided into 100 sub-districts / municipalities, and 792 villages. Four of them are in Lombok (Mataram, West, Central, and East Lombok) and five in Sumbawa (West Sumbawa, Sumbawa, Dompu, Bima, and Bima City). Mataram, Bima City and West Sumbawa came into existence after decentralization, separating from the districts West Lombok, Bima, and Sumbawa. Hence, official data are often not yet available for these new districts. Demography and employment The majority of the population lives in rural areas (65% according to the 2000 Population Census) and more than 50% of the labor force works in the agricultural sector. Other important employment sectors include industry (manufacturing), trade, and service, which account for 10% or more of the labor force. The majority of the industrial entities are labor intensive and family owned small and micro enterprises processing foods, wood (furniture), and tobacco. Socio-economic conditions The province is one of the least developed economies in Indonesia. It has the second-lowest Human Development Index. 20 per cent of the population were very poor (earning less the dollar value of 240 kg rice p.a.), and more than half of the villages were ‘backward’ villages in 1993. The poverty level should have even more risen following the 1997 economic crisis and several recent vast increases in fuel prices. After the 1998 financial crisis with a shrinking GDP, the economy began to grow around 3 per cent in 1999. The inflation rate was down from 90% in 1998 to 6% in 2004. The growth of the economy, however, is about half of the growth level prior to the crisis (1993-1997). In 2003, the Regional Gross Domestic Product (RGDP) was estimated about IDR 17 trillion or IDR 4 million per capita. After the Mining and quarrying sector which contributed 28 % to the RGDP (foreign investment), the agriculture sector contributed most (24% of RGDP) to the economy. Two other sectors with a relatively substantial contribution to the economy were trade, and hotel and restaurant (13% of RGDP) and the service sector (12% of RGDP). The manufacturing sector consists of micro- and small enterprises. Although it played a relatively important role in number of business entities and employment, it contributes little value to RGDP.


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The provincial RGDP is not evenly distributed. For instance, the mining activities are concentrated in Sumbawa and West Sumbawa districts. In 2003, both districts accounted for the largest share of the sector’s provincial RGDP (40%) while the other districts accounted for 14% or less. On the other hand, the Trade, Hotel and Restaurant activities are concentrated in West Lombok and Mataram City districts. The agriculture sector is equally important across the districts, except for the city districts where the service sector is dominant. Paddy, soybeans, peanuts, maize, shallots, garlic, chili and cassava are the major agricultural food products of the province. The major cash crops are coconut, coffee, cashew, and tobacco. The livestock sector is dominated by the production of cows and buffalos. The major manufacturing sectors include food, tobacco, wood and non-metal processing. The main export products are copper concentrate, pearls, cashew nuts, and various fishery products. In 2004, however, the copper concentrate made up almost 100% of the total export value (USD 975 million). Japan, The Philippines, India, Korea, and Germany were the major recipients of the exports.


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3 The Rural Microfinance Market in NTB The analysis of the market for rural microfinance investigates demand and supply to identify gaps. Potential demand has been estimated through surveys of 90 households and the management of 60 UPKD. Both surveys indicate substantial scope for more savings and loan services in rural areas of NTB. Analysis of rural microfinance supply aims at identifying MFI which could be developed further to narrow the identified gaps.

3.1 Demand for Microfinance To identify demand-supply gaps, 90 households from villages in the 9 districts / municipalities were surveyed during June/July 2005. The first objective was a better understanding of household demand for financial services. The second objective was to investigate household perceptions of microfinance supply. The survey is attached in Annex 1, the following summarizes the main results. The households in the sample have an average annual income of around to Rp15m, the estimated value of their physical assets is Rp18m. The household heads, mostly farmers and traders, have on average eight years formal education. They live at a six km distance from the nearest MFI offices. The households’ demand for institutional savings and loans are summarized in the table below: Table 1: Household Demand for Institutional Savings and Loans

Institution Saving: Share of

HH

Avg. Savings balance (Rp’000)

Borrowing: Share of

HH

Avg. Loan amount

(Rp million) BRI (Units) 14% 324 4% 7.7 BPD 6% 2,440 0% - BNI 1% 35,000 2% 25.0 BPR 1% 85 2% 1.5 KSP & USP 6% 720 19% 1.5 UPKD 10% 130 27% 0.7 Others 3% 117 1% 5.0 Total 41% 2,537 56% 2.7

Source: The Household Survey, 2005, see Annex 1 The survey found that a substantial proportion of the households normally save their excess incomes: 34% in cash (mostly with financial institutions), 6% in kind, and 2% in a combination of cash and kinds. Large savings are generally placed with commercial banks (particularly BRI Units) while small savings are generally placed with nearby non-bank financial institutions (particularly UPKD). More than half of the households regularly borrow from financial institutions, particularly from UPKD and credit cooperatives. Most loans from these MFI are small, with sizes less than IDR 2 million. Larger loans were borrowed from the commercial banks, mainly BRI Units. A few of the households also borrow from informal sources, in particular friends and family. Child education is the main purpose of saving, whereas the main purpose of borrowing is working capital. Based on the household sample, a very rough estimate of the potential demand of rural households in NTB for institutional saving and loan services can be made. The results are arrived at by simple projection of the samples behavior on the entire population or rural households in NTB, and are given in the table below. The


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potential demand of rural households for institutional savings and loans in NTB province amounts to between 275,000-288,000 saving deposit clients, and between 372,000-390,000 loan clients, i.e. almost 40% of the households. Excluding the households’ demand for the services of the commercial banks, others than BRI Units, roughly gives the potential for micro saving and loan services. Table 2: Potential Demand of Rural Households for Financial Services in NTB

Institution Type

Savers

(persons) Saving Deposit

(Rp million) Borrowers

(persons) Loan balance

(Rp million) BRI (Units) 96,626 312,176 29,731 230,118 BPD 37,164 90,680 - - BNI 7,433 260,146 14,866 371,638 BPR 7,433 632 14,866 21,704 KSP & USP 37,164 26,751 126,357 195,853 UPKD 66,895 8,696 178,386 132,006 Others 22,298 2,601 7,433 37,164 Total 275,012 697,647 371,638 988,557

Source: The Household Survey, 2005, see Annex 1 The households generally agree that financial services should apply interest to the clients, and that borrowers should repay their loans. Households perceived that microfinance development after financial liberalization has improved their access to financial services. The households viewed that the provision of microfinance services could be improved through demand-driven and convenient services, good and honest management, and better marketing of available services. The survey concludes that household demand for financial services indicates a large potential for saving mobilization and effective financial intermediation. The households are generally accustomed to saving and the application of interest rates on financial services. Awareness of the responsibility of loan borrowers prevailed among the households. These provide the basis for the use of the financial system approach for further development of the rural-microfinance sector in the province. The limited role of village-based microfinance institutions, such as UPKD, in the mobilization of household savings – despite substantial demand - points to gaps in the rural financial market. Further evidence for a demand-supply gap are several mismatches between the characteristics of the services demanded by the households and the services offered by the financial institutions. For instance, loans for purposes other than working capital are generally not supplied to the households. In addition, 60 UPKD managers were asked about prospects to extend lending in their villages. According to their estimates, on average around 250 potential borrowers would demand loans up to Rp500,000 is, about 100 would demand loans from Rp500,000 to Rp2m, and slightly more than 60 would demand loans of more than Rp2.5m. Based on these figures, the average village has an unmet micro loan demand of about Rp350m. Hence, the potential micro loan demand in NTB’s 800 villages would amount to Rp280b.

3.2 Supply of Microfinance Microfinance includes a range of financial services, from savings and loans to payment services and insurance, provided to poor and low-income households or small firms. The Consultative Group to Assist the Poorest suggests 150% of per


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capita GDP as upper limit to define microfinance. Bank Indonesia considers a loan to be micro up to Rp m 50, about five times Indonesian per capita GDP. A variety of sources supply Microfinance services in NTB: bank and non-bank financial institutions in the formal financial system, moneylenders on an informal basis, and social programs with Microfinance components.

Commercial and Rural Banks Most Commercial Banks in NTB are branches of larger private and public national banks. They are concentrated in the provincial capital of Mataram. In addition, Bank NTB, the Regional Development Bank (Bank Pembangunan Daerah, BPD), operates exclusively in NTB. Bank Rakyat Indonesia (BRI) remains the only commercial bank providing microfinance services in rural areas all over Indonesia. Some commercial banks offer services to micro entrepreneurs and villagers in places where large clients, e.g. plantation companies, need banking services. Bank Negara Indonesia (BNI) stopped its network expansion to rural areas just recently. Other commercial banks intend to extend micro loans to traders in rural market centers, but not loans below Rp10m, and not to farmers or cottage industries. The Rural Banks (Bank Perkreditan Rakyat, BPR) include private and government-owned entities. The private entities operate as limited liability companies (Perseroan Terbatas, P.T.), the public BPR are regional enterprises (Perusahaan Daerah, P.D.). Public BPR were initially established as LKP (Lumbung Kredit Pedesaan, Rural Credit Institutions). LKP are non-bank financial institutions and belong to the category of Lembaga Dana dan Kredit Pedesaan (LDKP), which operate in most Indonesian provinces, but under different names and regulations. The majority of LKP obtained BPR status in the late 1990s, becoming P.D. BPR-LKP. The least performing entities remained LKP. The recent development of banks is given in Table 3. Table 3: Development of Banks in NTB, 1997-2005 (IDR Million)

Type of banks and 1997 2001 2004 Av. Annual change Development Indicator 1997-2004 2001-04

Commercial Banks Number of banks 16 10 12 -4% 7% Number of branches 115 101 119 0% 6% Number of BRI Units 48 49 51 1% 1% Assets 1.207,592 2,800,958 4,433,000 38% 19% Savings and deposits 821,829 2,303,132 3,315,865 43% 15% Loan Outstanding 916,905 1241,957 2,760,310 29% 41%Private & Gov Rural Banks Number of banks 30 61 62 15% 1% Number of branches 30 61 63 16% 1% Assets 16,786 104,854 227,786 180% 39% Savings and deposits 12,231 49,640 121,666 128% 48% Loan outstanding 16,568 74,912 160,197 124% 38%Government Rural Banks Number of banks 46 46 0% Number of branches 46 46 0% Assets 52,743 116,967 41% Saving deposit 14,731 40,402 58% Loan outstanding 39,691 87,528 40%

Source: Bank Indonesia Mataram and The Economic Bureau of NTB Province.


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PT. Bank Rakyat Indonesia (BRI) BRI offers MF services exclusively through its prominent Units with four to six staffs, which are located in sub-district capitals. BRI has not added immediately new Units after sub-districts split and new sub-districts emerged. BRI Units keep accounts for government institutions and the upper level of the rural population. BRI Unit is the “safe haven” for deposits. The successful credit operation is based on loans to fixed-income earners and traders with collateral. Common village people are not the target BPD Bank NTB The Regional Development Bank extends most of its micro loans to government employees who finance consumption goods (according to the loan’s classification), but, because of their low salary, quite often small income-generating activities. The bank’s branch network does not go beyond district capital level and serves few rural clients only near its branches. Farm households do not belong to the target group. Table 4: Microfinance Supply in NTB Institution BPR BPR LKP Bank NTB BRI Unit (May 2003) Offices Kota/Kabupaten Lombok Barat: 8 18 Kecamatan Level Mataram: 4 46 51 Village posts Others districts: 10 17 Credit - Value (Rp m) 134,280 69,043 399,054 196,951 - No. of loans 34,864 41,793 Savings - Value (Rp m) 49,321 21,091 527,078 209,718 - No. of accounts 139,280 88,322 391,858

Sources: Bank Indonesia, Bank NTB, Bank Rakyat Indonesia, Biro Pusat Statistik . P.T. Bank Perkreditan Rakyat (BPR) Four out of 22 private BPR are domiciled in Mataram, and eight in Lombok Barat, i.e. mostly bordering Mataram. Only 10 private BPR operate in NTB’s other seven districts. BPR receive assistance from ProFI through “Certif”, a system to qualify and certify BPR managers. BPR have access to funds either through mobilizing deposits or through loans from commercial banks and PT. PNM. Some BPR serve clients in villages using “motorcycle units”. BPR-LKP Provincial and district governments own 46 BPR-LKP. Alike BRI Units, they operate in sub-district capitals. They employ at least twice as many people who administer a loan portfolio a third, savings accounts a fourth, with a savings account balance only a tenth of BRI’s. The BPR are located in sub-district capitals where they complement (not compete with!) products and services of BRI Units. BI suggests these BPR to merge and become one BPR with branches and cash offices, among others because several of them are not profitable and do not comply with the regulation to employ two directors (they still have only one). District governments prefer merging BPR district-wise. The issue is under discussion and BPR-LKP directors in a seminar indicated already their support to merger(s) – as long as their income is not cut – because they gain a carrier prospect (promotion from small to larger BPR). Similar


8

set-ups were reportedly successful in Central and East Java. Recently, GTZ’s ProFI rendered assistance by providing a study on the envisaged BPR merger. BPR-LKP have founded an association. BPR-LKP serve rural clients. They lend to self-help groups, for which they received technical assistance from PHBK, a joint BI/GTZ project. Lembaga Kredit Pedesaan (LKP, Village Credit Institution) BI still registers seven LKP. They displayed the weakest asset quality and were the smallest among local government-owned FI and, therefore, not converted into BPR. According to Bank NTB, there were only six active LKP Units in 2000 with assets amounting to Rp767m or Rp128m per unit,1. Table 5: MFI in NTB by District (2003)

District BPR-LKP LDKP UPKD BMT P4K BPLM*) T.P. Bun Nak Hort

Mataram 1 2 0

Lobar 7 2 30 4 1 13 > 5 8

Loteng 9 53 1 4 18 > 4 14

Lotim 8 35 8 24 21 > 3 8 10

Sumbawa 11 2 30 1 2 9 > 2 7

Dompu 4 24 4 4 23 > 2 10 11

Bima 6 3 57 1 3 15 > 2 3 10

Total 46 7 229 21 38 99 > *) MoA, Program Bantuan Pinjaman Langsung Masyarakat (Direct loans to people), 2001-2003, see below under Pilot Project Proyek CF-SKR

Non-bank Financial Institutions – Cooperatives and Pawn Shops Non-bank financial institutions include several types of cooperatives and the large public network of pawnshops, as well as MFI originating from former social projects. Cooperatives are the only type of non-bank MFI with a legal status which allows for mobilizing deposits – however – limited to members of cooperatives, including members of other cooperatives. They provide small short-term loans in rural areas through motorcycle units of district capital-based cooperatives. Table 6 shows that cooperatives have grown significantly from 2002-2005. Number of KSP and USP establishments, and their assets and clients increased by more than 10 per cent per annum during the period. Thus, there are more KSP/USP than villages in the province. Table 6: Saving and Credit Cooperatives in NTB, 2002-2005

Indicator 2002 2004 2005 Annual Change (Dec) (Dec) (June) 2002-2005

Number of cooperatives 2,203 2,447 2,447 4% Number of KSP & USP 820 1,123 1,123 12% Assets (IDR Million) 156,974 293,303 296,236 30% Loan clients (person) 134,749 330,996 334,306 49%

1 Matrik Konsolidasi LKM Berdasarkan Hasil Penelitian Tahun 2004, Tim Pengkajian LKM Data from Holloh, D., Microfinance Institutions Study, 2000.


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Source: Dinas Koperasi dan Usaha Kecil dan Menengah Provinsi NTB However, their spatial distribution is uneven, concentrating in areas where their businesses are beneficial. In comparison to the growth of Rural Banks (see Table 3), Saving and Credit Cooperatives grow faster in number but slower in assets. This is because licensing requirements are easier for a cooperative than for a rural bank. Savings and Credit Cooperatives (SCC, Koperasi Simpan Pinjam KSP) A KSP is an independent business entity, generally privately owned. In 2000, only 13

SCC/KSP with assets amounting to Rp2.4b operated in NTB. 2 This number increased significantly. For example, in West Lombok the number more than doubled since 2003, assets almost tripled to Rp7.1b, three KSP alone account for Rp5.6b. Some resemble banks: 36 members but loans to 2,056 people!3 The services of KSPs, although smaller in size, resemble the services of the private rural banks

USP (Usaha Simpan Pinjam) USP are the savings and credit businesses of multi-purpose cooperatives. For 12 different types of multi-purpose cooperatives, the district West Lombok reported a loan balance of Rp18.8b, out of which loans to government employees accounted for Rp12.6b (67%).4 The “village unit cooperative” (KUD), a sub-district multipurpose-cooperative with a savings and credit unit (SC-Unit or USP), provides only few loans to the rural population although these cooperatives have commonly a membership of more than 1,000. Most loans in the portfolio are “forgotten” small balances (regularly below Rp100,000) of loans that were disbursed many years ago. 15 KUD in West Lombok report a loan balance of Rp0.9b for 3,896 borrowers (average less than Rp250,000). The majority of the USPs were developed from previous social development programs. For example, USPs of Koperasi Unit Desa (USP-KUD) were originated from the green revolution program, and USPs of Koperasi Karya Mandiri (a secondary cooperative) were originated from P4K groups. TPSP (Tempat Pelayanan Simpan Pinjam) Under the auspices of the sub-district based KUD (Koperasi Unit Desa, village cooperative), 975 TPSP were created in 24 provinces since 1994. They received a start-up capital of Rp8m (USD3,500). They are almost identical to BKD (see Annex 14) in their structure and function. One BRI supervisor oversees 18 TPSP (for which he receives 15% of interest collected) and one KUD technical administrator 6 TPSP. Credit Union (CU or Koperasi Kredit, Kopdit) More than 1,000 CUs have been established all over Indonesia under the umbrella of the World Council of Credit Unions (WOCCU). CU are prominent providers of MF in rural NTT, but, surprisingly, not a single unit was founded in NTB.

2 Holloh, D.(2001), p. 166 3 Laporan Perkembangan Koperasi Simpan Pinjam Kabupaten Lombok Barat Juni 2005, data/lapkspusp 4 Laporan Perkembangan USP Koperasi Kabupaten Lombok Barat 31 Januari 2005

KSP in West Lombok Year KSP 1996 1 1999 5 2000 6 2002 9 2004 17 2005 20


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BMT (Baitul Mal Ta’mil) Most reports on MFI development carry over year 2000 figures on BMT activities. In contrast, all respondents answered unanimously that, compared to three or four years ago the number of BMT declined sharply, at least by more than half. They suppose that many BMT were founded during the monetary crisis in order to obtain government program funds. BMT are said to play (or have played) a role in urban areas rather than in villages. As expected, most of the registered syariah-finance SHG or cooperatives operate in East Lombok. Pawn shops (Perum Pegadaian) The Indonesian law restricts pawning to state-owned pawn shops, which are a source of short-term loans from below Rp50,000 to above Rp10m. The service in a clean and comfortable (chairs, television) environment is quick (computerized). The loans, less expensive than loans from most MFI, have a tenor of four months but - pending re-evaluation of the pawn and payment of interest - they can be extended several times. Pawn houses are located in all district capitals and increasingly in sub-district capitals. The 24 pawn shops in NTB are not evenly distributed: seven operate in the districts Lombok Barat and Sumbawa (plus two more sub-branches), four in Bima, three in Lombok Timur, and only two in Lombok Tengah and in Dompu. The Bima branch records about 5,000 transactions p.m. (200/day). The average transaction is about Rp500,000, disbursements per month amount to Rp2.5b. The demand for micro loans grows, for example from Rp17.1b (2002) to Rp29.9b (2005 estimate) in Bima, where a new branch will open 2006. The 20% p.a. expansion underlines increasing demand for loans in the popular Rp200,000 to Rp2m range. However, pawnshops are not village-ased and do not offer deposit services, and are only useful for people with moveable assets, which are not needed for business. MFI originating from Social Programs

There are also unregistered microfinance institutions resulting from previous social development credit programs such as the Income Generation Program for Small Farmers (P4K Program, see below), and the Agribusiness Development Program. The agribusiness development program of the Ministry of Agriculture resulted in rural financial institutions, Koperasi Tani or KopTan (farming cooperatives). Data indicate that there are 210 Koptan in the NTB in June 2005 with, on average, assets of IDR 9 million, and 33 members. Koptan are much smaller financial institutions than resulting from the P4K program, and NTAADP programs. There is also a secondary cooperative. One is the centre for women cooperatives, Pusat Koperasi Serba Usaha Karya Terpadu Madani (PKSU-KTM), which were formed by associations of P4K groups. PKSU-KTM appears to have a potential to extend its member financial institutions in future, given it receives right supervision and management, and external supports. It is fully commercial, charging market interest rate and the managemetn is profit-oriented. To date, however, the PKSU-KTM’s role is limited. Its assets are slightly larger than IDR 200 million and its members are 14, including 6 multipurpose cooperatives and 8 LKMs.


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Informal Supply: Self-Help Groups, NGO and Moneylenders Self-Help Groups and Savings and Credit Groups (SHG/SCG) Dinas Koperasi regards savings and credit groups (SHG/SCG) as LKM (MFI) “embryos”. The agency records and monitors larger SCG in order to assist them with registering as a savings and credit cooperative (SCC) once membership exceeds 20 persons and capital Rp25m. Records on SCG are incomplete and therefore they are not part of official statistics. Bank Indonesia’s PHBK (Proyek Hubungan Bank dengan Kelompok Swadaya Masyarakat, Project linking banks and SHG) monitors banks financing SCG. Based on April to June 2005 figures for NTB, some banks, almost exclusively BPR-LKP, continue extending on average more than 40 loans to groups monthly (i.e. one per BPR-LKP). By end of June 2005, 48 banks record 568 group loans with balances amounting to Rp1,9b or about 3% of the BPR loan portfolio. Most end-users live in rural areas, which are difficult to access for formal financial institutions. SHG/SCG or LKM have not developed a system or apex organization in which they work together. Non-Government Organizations (NGO) NGO are active in community development rather than financial service provision. No agency in NTB collects data on NGO-MF activities. People who work with NGO or observed the MF market and can compare the situation with NTT confirmed that neither international, nor national, or local NGO are a significant MF provider anywhere in the province. Plan International is about to start a project in Dompu. ProMIS (GTZ) revived IDT-groups (see below) and support SHG in Lombok Timur, Dompu and Bima. However, activities do not center on financial institution building. Supposedly, the government does not repeat MF-programs with NGO channeling funds, such as KUT and PDM-DKE (social safety net programs) in 1999. In all probability, as long as no disaster hits NTB (as Flores 1991), NGO will remain engaged in facilitation only. Private MF Providers (Moneylenders) Credits from moneylenders remain popular. MFI can learn from moneylenders whose services are (i) most accessible, (ii) not bureaucratic and fast, (iii) simple terms, (iv) without collateral, (v) convenient (doorstep), (vi) without fines and penalties, if delays are not provoked deliberately. In the surroundings of active UPKD, the presence of moneylenders decreased significantly. People observed that moneylenders offer loans to those who face difficulties to repay their BRI or UPKD loan. People reported also that the services of moneylenders (including traders who offer loans before harvest or purchase the harvest in advance) were increasingly sought after in places where UPKD activities decreased.


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Social Projects with Microfinance Components Many popular MF programs are similar to IMS-NTAADP in addressing groups, who become recipients of a revolving fund. Most of these programs fail5, because they use a “participatory” approach, which only functions if the implementation capacity is sufficiently mature. This is quite difficult to expect in poor villages – not only in Indonesia. In addition, rules and regulations are unclear or incomplete, supervision is missing or does not function, sanctions are not in place or not enforced. The design of most social programs contradicts fundamental MF experience and best practice: no competition for limited funds, low interest rates indicating a grant, poor people using a loan for non-productive purposes first, and reluctance to repay a program loan or even grant from donor agencies, in particular without access to a follow-up loan.6 Other prominent shortcomings include no effective information campaign, incompetent facilitators7, inexperienced management, ineffective supervision, lack of transparency, no sense of responsibility (managers and project staff consider their part-time employment temporary), reluctance to collect repayments, and no (or not enforced) fines or penalties (avoiding conflicts). Table 8 lists efforts to provide people in rural areas with micro loans: Table 8: Micro Loan Programs

Type Project Comment

KUT, 1998/99 Banks, cooperatives and NGO as channeling organizations: high default rate

KUT, 2000 - Banks executing: insignificant volume MF for individuals

BPLM, 2001-2003 High default rate, stopped

Group formation IDT, 1994-1996 Village based poverty alleviation program, unclear ownership;

P4K, up to 2005 Default rate increases From group to cooperative Pilot project Proyek

CF-SKR, 2006 Depending on Bank Pembangunan Daerah (BPD) support

PKS-BBM, 2000/03 Probably best program, but failed because banks neglected their obligations

Support to existing MFI

PPK, ongoing High, unsustainable cost

UED-SP, 1996-1998 Too small New village microfinance institutions UPKD, 1999 - 2003 Missing support to develop from project

to sustainability

5 “Judged on performance, nearly all program credit schemes such as KUT, IDT, PMD-DKE (social safety net program), UED-SP and UP2K have been unsuccessful. This is especially the case with all those schemes which depend upon a revolving fund mechanism…” SMERU, Monitoring the Social Crisis in Indonesia, No. 11, November 2000 6 The perspective to obtain a higher follow-up loan made the P4K program more successful. 7 In the presence of a facilitator, 19 (33%) out of 57 UPKD managers stated that facilitation was not or less satisfying. Source: Questionnaires Lombok Tengah and Sumbawa, September 2005, for more see Annex 6.


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IDT Presidential Instruction on Backward Villages (Inpres Desa Tertinggal, IDT) Each district identified the 30% most backward villages and asked the village government to establish groups of 20 poor families. From 1994 until 1996, GoI transferred directly to these groups a “revolving fund” amounting to Rp20m to Rp60m8 per village. After one loan period (one year) the groups would revolve the fund to another group in the same village. In the absence of a follow-up loan revolving did not happen as expected. Meanwhile, monitoring IDT groups stopped. Most likely, less than 10% of the groups still operate the fund in a Savings and Credit Group. ProMIS, a poverty oriented project supported by GTZ, invested heavily in field motivators to revive IDT groups in the districts East Lombok, Dompu and Bima. IDT was not only a MF program; it was at that time a movement to reduce poverty. The financial impact in rural areas, with a current purchasing power of more than Rp200bi, was significant. However, IDT groups did not grow from below (poor people were grouped), their cohesiveness was weak and they collapsed easily. The financial crisis (1998) afterwards made it inopportune to demand repayment. Kredit Usaha Tani (KUT) KUT is a commercial low-interest seasonal loan scheme for farmers that once reached a volume of Rp8t nationwide (repayment below 50%). Formerly, banks acted as channeling agencies and did not spend noteworthy efforts in recovering arrears. Farmers have to contact the branch office of a participating bank, i.e. apply for this loan in a district capital, which makes transaction costs prohibitive. Since banks became executing agencies, the volume of this loan scheme dropped by more than 90%. P4K (Rural Income Generation Project) P4K was a nation-wide income-generation project for small farmers and fishers promoted by the Ministry of Agriculture, and jointly funded by donors and GoI since the 1970s. The project used a group approach to empower small farmers, which were organized into small groups of 8-16 households. Women accounted for about half of the participants. The government and the donor provided loanable funds (with 6% interest rate per annum) to BRI, which was responsible for the loan administration. The P4K loans were group liability loans with 12-18 month tenor, 12% annual flat interest rate, and compulsory group savings. Several groups mobilized members’ savings for on-lending to the members at 5% per month. A national evaluation by Ravicz (1998) for the period of 1990-1996 reported that less than 2% of the groups continued until the fifth loan, 21 % never received loans. Loan arrears ranged from 6% to 18.7%, and subsidy dependence index (SDI) was 262 %. . In May 2000, the outstanding loans to 4,076 groups in NTB amounted to Rp7,026b, or about Rp1.7m per group. The project was successful as long as new and increasing loans were a reward for loan repayment. After a peak in 2001, the number of the P4K groups sharply declined from 7,760 groups to just 174 groups in June 2005. At national level, the project terminated in 2005. 8 This is equivalent to a current purchasing power of about Rp80-240m.


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A similar outcome appears in NTB: the number of the P4K groups sharply declined in after the project, from 7,760 groups in September 2001 (end of the project) to just 174 groups in June 2005. Of those surviving, however, some have formed financial institutions, including a secondary cooperative, several multipurpose cooperatives, and several LKMs. 9 New Pilot Project in NTB: Counterpart Fund – Second Kennedy Round (CF-SKR) The Ministry of Agriculture intends to launch a new program in which financial institutions play a major role. West Java, Central Java and NTB were selected as pilot project areas. The 2006 budget for NTB amounts to about Rp250m out of Rp1b. Table 9: CF-SKR Project is based on MoA’s experience with loan facilities for farmers: 1998/1999: When farmers suffered from the monetary crisis aggravated by adverse

weather conditions (El Nino), Kredit Usaha Tani (KUT) was disbursed through different channels, also through NGOs and MFIs, some of which were allegedly set-up only for this purpose. The entire volume of KUT exceeded Rp8t. This was ten-fold compared to the years before. Until now, less than 50% could be recovered.

1999/2001: Banks became executing agents for KUT. Total loan volume dropped far below Rp1t. Farmers complained about difficulties to obtain loans.

2001-2003: MoA recognized that high transaction costs made KUT unattractive for banks and farmers. The new program BPLM (Bantuan Pinjaman Langsung Masyarakat, direct loans to people) made extension service staff (Petugas Penyuluhan Lapangan, PPL) taking over the function of bank officers: assessing the farmers’ credit capacity, extending loans and collecting repayments. The delinquency rate was far above projections and MoA may have lost Rp1t nation-wide.

The scheme’s main pillars are: - MoF deposits directly an “eternal fund” (“dana abadi”) with BPD. - BPD shall pay 5% p.a. interest for this deposit. - The deposit serves as a cash collateral or credit guarantee fund. - BPD will extend loans at 7% p.a. (proposed) to qualified or certified non-bank MFI. - The non-bank MFI disburse working capital loans to farmers at 12% – 18% p.a.

(proposed). The interest rate shall not result in a market distortion. However, the loan shall be priced well below “about 33% p.a. BPR are charging”.

MoA’s Finance Center (Pusat Pembiayaan) in cooperation with qualified and experienced NGO (LSM) will extend technical assistance to BPD with regard to assessing non-bank MFI. Provincial Bappeda will conclude a MoU with BPD according to which BPD will be responsible for guiding and monitoring the MFI. Provincial Bappeda and other agencies (Dinas Pertanian, Dinas Koperasi) will cooperate in upgrading MFI embryos to become certified MFI. The MFI shall obtain: - a 5-day training for the head (Ketua) and treasurer (Bendahara) - a set of stationary, forms, office equipment, including white board and typewriter. It is envisaged that MFI register as a Savings and Credit Cooperative. It is assumed that, without a clear legal status, BPD would probably hesitate to disburse loans. The scheme contributes to the quantitative and qualitative development of MFI in rural areas. However, it does not support building a MFI system. With regard to the

9 Based on experience, the ratio is 200 groups – 30 SCG – 1 SCC, based on: some 5,500 groups form 960 SCG and 30 SCC, see: Holloh, D., p.19


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sustainability objective the following problems arise - despite an “eternal cash collateral fund”: - A low 2% p.a. gross margin for BPD will definitely be an obstacle for prudential

lending to MFI that includes proper loan assessment and continuous loan supervision. Most probably, BPD will regard funding small MFI under these conditions not feasible, despite zero risk. For comparison, commercial banks obtain a 5% margin when lending much higher amounts to BPR.

- If BPD has easy access to the “eternal fund”, efforts for loan assessment and supervision will be limited and it is predicted that eternity does not last long. After a short time the scheme will cease to exist because of a decreasing loan guarantee fund.

- Few MFI that extend loans to farmers can cover the costs from an 11% p.a. margin, in particular cost for personnel and reserve for bad debt. Professional management is more expensive and if managed by laymen costs for write-off will increase. For comparison, UPK formed under the PPK run at a loss with a margin of more than 12% p.a. when extending loans to groups.

Fuel Subsidy Compensation - PKS-BBM (Pengganti Kompensasi Subsidi BBM10 In 2000, SMoCSME introduced the PKS-BBM program to strengthen existing, viable MFI in their efforts to make more small individual loans available to micro entrepreneurs without bankable collateral and addressing the reluctance of commercial banks and BPR to respond to loan requests in the Rp0.2m to Rp1m range. In almost all districts, about five to eight qualifying cooperatives received Rp100m each, and about three to five capable non-cooperative MFI Rp50m each for onlending to MSME. SMoCSME repeated the scheme 2002 and 2003. The total volume for NTB amounts to some Rp10b. This program tried to avoid common shortcomings of group-oriented lending by carefully selecting experienced and performing MFI, and charging commercial banks with training and supervision (monthly visits, advice, and monitoring). MFI selected the individual clients. Restrictions were few and simple: for business, maximum Rp1m, maximum interest 30% or 2.5% p.m. (sufficient margin to cover risks). The MFI pay for the contractual services to banks annually an amount equivalent to 4% of the fund (Rp2m – 4m). After about 4 years it has been observed in NTB: - Banks did not fulfill their contractual obligations to assist MFI from the very

beginning; after four years, most bank officers moved to other positions and locations and new personnel is not informed about the contracts; they do not know “their” MFI.

- Similarly, Dinas Koperasi officers have been moved, new officers are “not yet” informed.

- Dinas Koperasi officers indicated that less than half of the cooperatives and MFI could benefit and strengthen their institution. MFI will weaken, some perhaps even collapse, after SMoCSME’s decision that they have to repay annually 10% of the fund. (The initial concept remained unclear in the question of fund ownership; as the fund should remain with “performing” cooperatives/MFI.)

10 GoI fixes the nation-wide fuel prices, which are below international market prices. Indonesia has to import fuel at these prices, as refineries for local crude oil cannot cover the domestic demand. In particular kerosene for cooking and lighting in rural areas is subsidized. Fuel price rises reduce GoI’s subsidy but burdens especially low income households. Different measures served to soften this burden, including broadening access to micro loans.


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Based on this experience, which is not limited to NTB and not limited to one bank, one cannot rely on banks to fulfill non-financial contractual obligations regarding MFI, even if they are paid for their services. Neither SMoCSME, Dinas Koperasi nor the MFI signing the contract with the bank tried, or were successful in insisting that the banks fulfill their contractual duties. Sub-District Development Fund (PPK, Program Pengembangan Kecamatan) For participating sub-districts, PKK made available Rp1b for different purposes, predominantly investment in infrastructure. The sub-district could decide to invest up to 10% of the amount in the support or strengthening of MFI. In NTB, PPK financed seven MFI with Rp439m, including two UPKD, and three P4K groups. In three districts and 23 of NTB’s about 100 sub-districts, PKK finances Unit Pengelola Kegiatan (UPK). UPK are apex institutions: They provide exclusively loans (amount about Rp5-20m, interest rate 12-18% p.a.) to village based savings and credit groups (SHG). Table 10: UPK in NTB (August 2005)

District # of participating sub-districts

Allocation Rp m

Balance Rp m

Groups

Members

West Lombok 6 2,383 1,166 126 1,797 Central Lombok 9 2,574 1,131 219 2,866 Dompu 8 1,960 924 162 2,358 Total 23 6,917 3,221 507 7,021

Table 9: UPK Arrears in NTB (August 2005)

Loans at risk/arrears are, even for a second-tier organization, rather low, in particular when considering only arrears exceeding two installments (1.7% of the portfolio).

Until August 2005, the 23 UPK report cumulative income from interest on loans to groups (operational income) amounting to Rp536m. Despite obtaining the PPK-funds at zero percent interest, interest charged to groups were much too low to cover basic costs, such as Rp486m honorarium for UPK managers (on average almost Rp1m per group), and Rp218m for other operational cost (including reserves for bad debt). The operational deficit amounts to Rp168m.11 The sustainability of the attractive two-tier MF system is questioned, if income cannot be raised (50% higher effective interest rates) and/or costs lowered. It seems inefficient to operate a UPK for an average of about 22 clients (groups) only.12

11Also, from the viewpoint of sustainability, the income-cost calculations do not take account of (see also Annex 9 on sustainability): - interest or other charges for the initial fund, which UPK received for free; this is a value of at least 7% p.a. (opportunity cost) - reserves for balancing inflation (keeping real value of funds constant), about 9% p.a. - reserves for participating in real economic growth, about 6% p.a. 12507 groups served by 23 UPK

1 – 2 installments Rp 126.5m 3.9% 3 – 4 installments Rp 29.9m 0.9% 5 – 6 installments Rp 15.9m 0.5% > 6 installments Rp 9.0m 0.3% Total Rp 181.3m 5.6%


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UED-SP Usaha Ekonomi Desa Simpan Pinjam (Village Economic Enterprise) Since1995/96, Ministry of Home Affairs decreed villages to use Rp1.5m and twice Rp2.5m 13 of their annual budget for developing micro entrepreneurs, including offering MF. UED-SP was the embryo of a village-based micro bank. The fund for 20 or 30 very small loans was obviously too tiny to cover expenses, in particular the cost of recovering bad debt. The subsequent monetary crisis with much larger programs14 covered up the failure of most UED-SP. An unknown small number of villages applied for PDM-DKE or other funds, such as PKS-BBM, through their UED-SP. By bundling programs, UED-SP became a viable and growing village-based MFI, which serves repeatedly as an institution for receiving and administering various government and donor programs. The impact in NTB was rather insignificant because of the low amounts (estimated about Rp3.5b).

MFI Access to Finance Banks Banks provide loans to MFI: - Nationwide, about 30 commercial banks finance “sound” BPR. - Since 2002, a number of banks, even those without a local branch network,

finance increasingly SCC and other cooperatives, in particular those that extend loans to government employees. Teachers at village elementary schools are among those who benefit from these loans.

- BPR-LKP offer loans to SCG/SHG (PHBK). PT Permodalan Nasional Madani (PNM) PNM was one of the first financial institutions extending loans to MFI, namely BPR, using the CAMEL approach instead of the 5C assessment. This institution is interested in financing qualifying MFI. PNM has not yet opened an office in Lombok and still operates in NTB from its Denpasar branch. Klinik Usaha Bisnis (KUB), Selong, East Lombok In 2000, in the aftermath of the economic crisis, East Lombok’s government founded this alternative finance institution with Rp7.5b equity. At that time, for SME to obtain a loan was extremely difficult. This hampered the implementation of infrastructure projects, as contractors had no source of prefinancing. KUB resembles provincial venture capital companies in extending loans to companies that cannot provide bankable collateral. Meanwhile, it has become easier for enterprises to obtain bank loans and the government explores opportunities to finance MFI. KUB offers loans at interest rates similar to bank deposit rates and could become a local apex organization for MFI. As of June 2005, the KUB advanced loans to microfinance institutions (LKMs) with 10% flat interest rate for a 20 month fixed term (or .5% interest rate per month). This 13 Rp6.5m is equivalent to more than Rp30m today. 14 for example, in the framework of PDM-DKE (Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi, Local empowerment by overcoming the impact of the economic crises)


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rate was far below the interest rate of commercial loans (about 1% per month). Conceptually, therefore, the KUB may not have a bright future as KUB repeat the past mistake, the direct credit programs whose failure were widely reported in the literature.

3.3 The Supply-Demand Gap Loans BRI Unit, BPR(-LKP), Savings and Credit Cooperatives (SCC, KSP), and UPKD are the most popular MFI in NTB’s rural areas. When comparing their products it becomes evident that UPKD close gaps, namely loans in the range Rp0.2m to Rp2m with a tenor of more than four months. BRI and BPR are reluctant to offer these loans, especially if borrowers do not live in the close vicinity of the bank office. They regard these loans as too risky and less profitable. Therefore, UPKD can successfully exist side by side with other MFI almost without competition.15 UPKD loan products such as SUTA and UEPT are particularly suitable to finance farm activities, because borrowers repay the loan after harvest or after selling cattle. Table 11: Popular Loan Products of MFI16

MFI Loan Amount Collateral Tenor Repayment

BRI Unit > Rp5m

vehicle ownership book, land certificate and notary contract, SK on employment

12 – 36 months

no grace period, monthly installment loan

BPR > Rp2m vehicle ownership book, land certificate

12 – 18 months

monthly installment loan, no grace period

LKP Rp0.2 – 1m none 3 months weekly Single-purpose cooperatives (KSP)

<Rp0.5m – 2m membership and regular savings

40–100 days daily

Pawn shops Rp0.05m->5m gold, vehicles, electric appliances 4 months bullet repayment

UPKD Rp0.2m – 2m none 4-12 months monthly, seasonally, cash flow oriented

Deposit products It is undisputed that the demand for safe and any time unrestricted accessible deposit facilities for people in villages is not met. Villagers have a potential and a need (especially the poor) to save in order to be prepared for emergencies and to balance economic shocks. No commercial bank enters villages with deposit products through cash offices, mobile units or agents. Transaction costs are too high in view of the low amounts and low margins of deposit products for both FI and depositor.17 Only less healthy BPR that are not eligible for a commercial loan could be interested in mobilizing funds in remote areas.

15 Despite the different products, people in villages mentioned repeatedly that UPKD reduced the business of moneylenders considerably. 16 Other products are offered only reluctantly or to special target groups only, e.g. BRI loans “up to Rp3m without collateral”. 17 Transaction costs make small (up to Rp300,000) deposit less attractive for banks and villagers (travel cost). For example, some UPKD group leaders receive an incentive of about 15% of interest collected, i.e. equivalent to some 3% of the entire installment. Collecting deposits would not earn a third of that.


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3.4 The Role of UPKD in Rural MF Formal financial services in NTB’s rural areas are scarce. No commercial bank has a branch in a sub-district capital. Bank-MFI, i.e. BRI Units and BPR are present in just about half of 100 sub-district capitals and, through cash offices, in less than 10% of NTB’s villages. A number of cooperatives provide services in rural areas, but their distribution, range of products and capacity is limited. UPKD are the FI with the by far highest number of offices (245) at village level in all districts. Private investors are absent – seen apart from moneylenders. Minimum capital and staff requirements prevent establishing BPR and even SCC in villages. For most commercial banks, services in rural areas are too expensive. Interest income from small loans does not cover costs for bank personnel (five to ten times the cost of UPKD personnel), time and cost for travel, loan processing, loan supervision, and loan losses. UPKD have decisive transaction cost advantages, and have the most outreach with regard to the poor and underserved. They are convenient and close a finance gap. Table 12: MFI in NTB and their Services in Rural Areas

MSE = micro and small entrepreneurs

Institution Main operation area Target group Sustainability Technical

Assistance Needs

BRI Unit sub-district capitals

Fixed income earners, MSE with bankable collateral

Yes BRI Units and staff receive technical support from BRI

BPR Umum

Mataram, district capitals and growth centers

MSE who are not / do not want to be served by BRI Unit

Yes Technical assistance from BI/ProFI/Certif

BPR-LKP

sub-district capitals, larger villages with a high economic potential

MSE who are not / do not want to be served by BRI Unit, SHG (PHBK)

Only about 50%; it is discussed to reform the BPR-LKP organization

Technical assistance from BI/ProFI/Certif

LKP sub-district Households, emergencies, petty traders

No; conversion to become LKM/UPKD?

Yes, through BPR-LKP (7 units only)

KSP bias to urban areas

Households, emergencies, petty traders

Yes, if internal supervision functions

Not required

USP in urban and rural areas includes farmers

depends on other, non-financial businesses of the cooperative, often weak internal supervision

TA from/through SMoCSME, Dinas Koperasi

UPKD in villages rural households, farmers and micro entrepreneurs

Yes, in other parts of Indonesia Recommended


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4 UPKD: Outreach and Sustainability at the Village Level

4.1 UPKD Profile UPKD are non-bank, non-cooperative MFI, borne out of the necessity to administer IMS-NTAADP funds of a poverty alleviation project implemented from 1999 until 2003. UPKD are intentionally established in villages of backward sub-districts, where the population is poorer and the economic foundation weaker than in average villages. This poverty orientation is certainly one reason for the present sub-standard loan portfolio quality. For more UPKD background information see Annex 3 IMS-NTAADP financed through UPKD income generating activities proposed by the villagers. Since October 2003, UPKD were left with project-oriented regulations and without a clear role and business concept for post-project times. The number of active UPKD will decrease very fast without immediate assistance. At least about Rp12b or 25% of the loan fund, government funds, have to be written off, probably even more. This amount increases by about Rp20m every day. Almost all UPKD are similar in their history of establishment, their organization, their products and their sources of finance.18 They are also similar in their size, but differ strongly in their performance. A number of successful UPKD indicate that there is a considerable potential for weak UPKD to improve. Musyawarah Desa (Musdes), a village assembly, is UPKD’s highest authority (ee Annex 11). Musdes selected three to five managers and/or staffs from among the village community to administer the fund. Three persons were appointed as internal supervisors (BP, Badan Pengawas). Community development facilitators (CDF) trained and assisted the general manager, treasurer/teller, secretary/bookkeeper, and one or two field staff in applying for funds, disbursement, recovery and reporting. Table 13: UPKD Profile (2005)- Average Values Assets : Rp235m

Assets growth 2002-2004 : 7% p.a., recently declining Loans to groups : Rp180m Loans are bundled in a group loan

Borrowers : 50 groups = 500 individuals

Non-performing loans : Rp110m = 60%, Rp55m recoverable over 5 years

- out of which loan losses : Rp55m estimated to be unrecoverable

Potential loan expansion : Rp350m more than doubling assets

Potential additional borrowers : 300 individuals

(Very) poor borrowers : 40%

Interest income p.a. : Rp20m

Income potential p.a. : > Rp80m

Staff : 3 - 5 (3 - 4 “managers”, 1 - 2 field staff) Fixed assets :

furniture, computer, very seldom safe; some have motorcycle, very few own office building

Supervision internal : external :

Supervisory board: 3 appointed village people Bappeda, Dinas Koperasi (Loteng); no audit

18 14 UPKD in Lombok Tengah and 15 in Sumbawa were established with PPW funds.


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Loans to groups (80% of assets) dominate the balance sheet. Fixed assets account for about 10% on average. Many UPKD acquired a computer (80% in Lombok Barat), motorcycles, and, some few even acquired land and erected an office building. Cash, bank, and advance payments (office rent) sum up to the remaining 10%. UPKD offer three loan products to two different clients, i.e. to groups with a loan channeling function (most popular), and to joint liability groups. Table 14: UPKD Loan products

Product Purpose Maturity Repayment Max. Amount

SUTA seasonal agriculture up to 6 months according to

agreement /cash flow Rp2m

UEPT husbandry up to 12 months one or two repayments Rp3m

UEP non-agriculture 12 months monthly Rp2m IMS-NTAADP required UPKD to charge a minimum interest rate of 15% to 18% p.a.. Most UPKD ask 1.5% to 2% p.m. UEP loans became the most popular product. People requested the same conditions that apply to SUTA and UEPT loans, i.e. only one loan repayment at due date. Reportedly, there was a high pressure to disburse loans to poor people and quick at that, and also a high repayment pressure, which loan rescheduling could solve19. The management imposed fines only irregularly and did not document reasons for waiving. UPKD have more applicants (waiting up to one month) than funds available. The demand is high in the absence of other sources of credit, low interest rates and lenient, if any, collateral requirements. Many villagers do not apply for a loan because they are not member of a group, they do not want to become a group member, and it is not sure, when they would obtain a loan. NTB’s government agencies on provincial and district level, in particular Bappeda officers, are (still) familiar with UPKD. District governments support UPKD development and make available a budget to finance monitoring, consultancy, and even seed capital for additional UPKD. UPKD managers in Lombok Tengah and in Sumbawa were invited to a meeting in the district capital. During these meetings, questionnaires were distributed. Accompanied by explanations, the UPKD representatives answered 23 questions. For the result see Annex 7. UPKD Strengths, weaknesses, opportunities and threats are analyzed in Annex 5.

19 This statement sounds credible because the committed IBRD loan amount had to be reduced.


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4.2 UPKD Performance CAMEL measures performance of financial institutions. The data available on UPKD are not suitable for a meaningful CAMEL assessment. Alternative indicators for assessing UPKD performance were asset size, capital growth, repayment rates and arrears ratios.

Capital and Capital Growth According to a September 2003 report based on July 2003 data 20 , UPKD performance in NTB was superior if compared to other ADP regions: - Average assets are higher: 214 UPKD, average Rp239m, 96% > Rp100m. - Gross capital growth excelled with 14%. - The cumulative repayment rate was 85% and the average arrears ratio 17%. Based on the data made available in mid-2005, - average assets dropped slightly: 229 UPKD21, average Rp235m, 92% > Rp100m; - gross capital growth remains at 14% after two more years; - data on repayment performance was not requested, because UPKD apply

different standards and therefore the data would be misleading. All respondents admitted that, for more than 80% of the UPKD, the overall portfolio quality deteriorated continuously since the project’s closure.

Additional small PPW-financed UPKD (loan fund average below Rp100m) explain insufficiently why average UPKD assets did not increase until mid-2005. For this and other reasons, asset size itself is not a particular suitable performance indicator. For example, performing BKD in Java are just half or less the size of small UPKD. Capital growth22 is a more meaningful indicator. Bima, where the average UPKD are much smaller,23 recorded highest growth (21%). Though, the “gross capital growth” indicator is flawed because many UPKD do not account for a fair amount for bad debt reserves. Almost all UPKD have not sufficiently adjusted the value of the loan portfolio to loan repayment performance. UPKD developed different standards for calculating and reporting on arrears and on loan quality. The reports indicate loan repayment also for those loans that were prolonged, renewed, and revolved without actual cash flow. Therefore, no figures are available that reflect reliably – or at least comparably – repayment performance, assets value and subsequently capital growth. Also, monitoring staff in Bappeda (in Lombok Tengah: Dinas Koperasi) mentioned a deterioration of the quality and reliability of the financial figures. Therefore, a meaningful quantitative comparison of assets and asset growth between UPKD in July 2003 and in September 2005, two years later, is not possible. Two indirect indicators were tested in order to quickly assess UPKD performance: - reporting and

20 SMFP Preparation Mission September 2003, Holloh, D.: Report to GTZ, p.11 21 Local government financed from PPW 14 UPKD in Lombok Tengah; the data of local government (APBD) financed 15 UPKD in Sumbawa were not available and therefore not part of this analysis. 22 Capital growth: assets/loan capital; according to Holloh, this is the gross capital growth whereas the net capital growth is: (assets-overdues)/initial capital; initial capital = loan capital 23 For details see Annex 3 UPKD – financial figures.


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- loan interest income.

Reporting It is believed that non-performing UPKD stop reporting whereas the successful ones continue sending every month their balance sheets to a number of addressees. Presently, probably less than 50% of the UPKD send their monthly reports to various government agencies, some regularly, others on request. If reporting is a gauge for performance, then the situation worsens very fast as indicated in the development for Sumbawa district in 2005. Table 15: Monthly UPKD Reports, Sumbawa 2005 Month Jan Feb Mar Apr May June

Reporting UPKD 26 23 21 17 15 15

Monitoring n=36*) 72% 64% 58% 47% 42% 42% *) In Sumbawa, NTAADP financed 30 UPKD, local government (APBD) 15 units; 9 units, the difference, are located in the new district West Sumbawa. Similarly, the government in Lombok Barat received 16 reports from 29 UPKD (55%). In Lombok Tengah, the government receives monthly reports from probably less than 50% of the UPKD, some send reports to Bappeda, others to Dinas Koperasi.24 It was confirmed that some non-reporting UPKD stopped their activities. However, there are many other reasons for discontinuing reporting. For one UPKD non-reporting was a result of lack of printer ink. Another UPKD was used to be assisted by a CDF. A third one argued that the project has closed and so did the obligation to report, etc. In contrast, there are also UPKD with almost no transactions that continue sending monthly reports. Therefore, one can find very low performing UPKD among those reporting and average UPKD among those not reporting. Largely, the declining number of reports sent to district Bappeda reflects deteriorating UPKD development. For more details see Annex 6.

Interest Income Analysis and Loan Portfolio Quality “Interest income from loans” is a position in the monthly UPKD reports. Figures on income from loans of a number of UPKD were gathered from reports and from questionnaires. The following analysis does not include 15 local government financed UPKD in Sumbawa for which comparable data were not made available. Unless the figures were picked directly from the monthly reports, it was not always obvious whether the number would refer to income in the reporting month or cumulative income for the year or even cumulative since the UPKD’s establishment. During visits to UPKD some common techniques were detected that cover up the real interest income. For example, the loan amount of a loan renewal or prolongation was higher than the previous loan’s combined arrears of principal and interest, a practice called “plafondering” that can disguise non-performing loans (NPL). There are also instances when UPKD deducted interest upfront and reported the full amount as interest income in that month. Consequently, this UPKD reported interest 24 In a meeting in September 2005, in which managers from 40 UPKD (out of 53) attended, 20 (50%) admitted not having send a report in 2005.


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income, which should have been allocated to several months. The position “interest income on loans” was overstated for that particular month – and understated in the following months. Despite severe shortcomings, for 216 UPKD, the reported interest income figures were set against the outstanding loans balance. The resulting percentage indicates that some UPKD earn much more interest on their loans than others do. This ratio will be lower for a large NPL portfolio and higher for a UPKD with a healthy portfolio. Table 16: Income Performance Interest Income on Outstanding Loans All UPKD Reporting UPKD in

Lombok Barat Bad Debt

(Best Guess)

up to 5% 78 36% 5 33% >80% > 5% up to 10% 38 18% 3 20% 60%-80% > 10% up to 15% 36 17% 2 13% 40%-60%

0% – 15% 152 70% 10 67% 40-100% > 15% up to 20% 26 12% 4 27% 20%-40% > 20% up to 30% 19 9% 1 7% <20% > 30% up to 40% 11 5% more than 40% 8 4% n = 216 15 average 13.3% 10.6%

The table above results from this comparison. For about one third (36%) of the UPKD gross interest income was reported to be extremely low.25 Additionally, the income statements and balance sheets of all 15 UPKD in Lombok Barat were analyzed for which monthly reports from June or July 2005 were available. The return on portfolio (in % p.a.) was calculated based on interest earned since January 2005 and the average outstanding loan amount: 33% (5) of these UPKD earn less than 5% p.a. on their portfolio and 34% more than 15%. The percentage of all 216 UPKD and the 15 selected Lobar UPKD in the different income brackets does not differ substantially: 70% and 67% report interest income of up to 15%. However, it can be assumed that the income situation of all 216 UPKD is worse because the 15 UPKD belong to the reporting UPKD with, most probably, over average performance. The extend to which UPKD loans perform can be estimated by the ratio: realized interest income on loans / target interest income on loans. Without bad debt UPKD would earn as follows: - The most common interest rate is 2% flat per month for the most popular

installment loans (UEP). The resulting effective interest rate is, in theory and depending on the formula, about 40% to 50% p.a.

- In reality it happens that after, for example, five months, when the outstanding loan amount dropped from Rp2m to Rp1m, group members ask for a new Rp2m

25 It cannot be concluded that 36% of “all UPKD” earn less than 5% interest on their portfolio. It is not known whether interest income refers to income in the reporting month (income in % would be much higher), income accumulated for all months in the reporting year (income in % p.a. would be higher), income received previous year (income in % would be right), or UPKD income accumulated since its inception (income in % would be much lower). Perhaps the inaccurateness balances.


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loan, from which Rp1m will be taken to repay the old loan. The effective interest rate drops to about 35% p.a. 26

- A 2% p.m. rate is often also applied on other loan types with repayment at the end of the loan period (SUTA, UEPT). The resulting effective interest rate is 24% p.a., and it is higher for upfront interest deduction.

If all loans perform, UPKD earn some 30% p.a. (target) on the average outstanding loan amount (depending on the portfolio mix). When UPKD earn less than 15% p.a., it can be assumed that less than 50% of the loan portfolio provides income, or more than 50% of the portfolio is bad debt or NPL. Thus, the percentage of NPL can be allocated to respective interest income brackets. More than one third (36%) of all UPKD have NPL amounting to more than 80% of the portfolio. Approximately 34% of UPKD have a portfolio with 40% to 80% NPL, and 30% less than 40% NPL.

Sustainability and NPL UPKD are sustainable if they can provide financial services without depending on support in kind or cash from non-clients and income from business with clients is projected to equal or exceed costs for these services.27 An increasing NPL-ratio results in decreasing income. A high NPL-ratio does not immediately endanger the viability and sustainability of UPKD, because expenditures, i.e. cash outflow, are low and can be reduced accordingly. Increasing NPL result in decreasing interest income that meets a flexible cost structure with few, if any, commitments: - no interest or principal payment for the IMS-NTAADP fund; - salaries and incentives are a percentage of UPKD income, they are not fixed; - the computer need not to be repaired: no income means no activity and no report; - office rent has been prepaid, sometimes for years; - addition to depreciation and to loan loss reserves are not cash transactions; Decreasing the arrears ratio through write-offs and flexible loan repayment conditions can improve some financial ratios, but not the real performance. A UPKD with a Rp200m loan portfolio and a 70% NPL-ratio has still an active loan portfolio of 30% x Rp200m = Rp60m. An MFI of this size is larger than most SCG/SHG; it is larger than P4K groups, manifold larger than UED-SP or TPSP funds for a village. It is as large as a BKD, or as large as many sustainable credit cooperatives (Kopdit or Credit Union, CU) in Sulawesi or NTT. A unit this size earns interest amounting to Rp60m x 2.5% p.m., or about Rp1.5m p.m. This sum can finance the operating cost of about 10 group accounts or 100 individual loan accounts, which one person can manage half-time, but two persons should manage (reason: four-eyes principle, and efforts to recover NPL):

26 In these cases many banks, in particular BRI Unit, ask for an interest compensation payment. 27 For a discussion on sustainability see Annex 9.


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Table 17: UPKD with 70% NPL - Possible Projected Monthly Income Statement

Income per month Rp Remarks

interest from loans 1,500,000 PL-portfolio Rp60m x 2.5% p.m. administration, fee 100,000 1%-2% fee for new disbursements Total income 1,600,000

Expenses and cost

two managers, part-time 700,000 2 persons (part-time) x Rp350,000 Stationary, transport, postage, electricity, etc. 200,000

rent of premises 100,000 depreciation (for equipment) 150,000 Rp9m x 20% (for 5 years)/12 months bad debt reserves (PPAP) 300,000 6% p.a., or 0.5% (p.m.) x Rp60m supervision 150,000 Total cost 1,600,000 Surplus/Profit 0 no incentives, no growth, no HRD

If interest could be raised to 3% p.m., this UPKD would earn a monthly Rp300,000 surplus and grow by about 5% annually. However, this UPKD cannot support three or even four managers: The concept to allocate 40% of gross income to four managers results in that they earn just Rp160,000 per month. A project should not exclude UPKD with a 70% NPL-ratio from a program that supports the development of village based MFI. An active portfolio of only Rp50m allows continuing MF operation in a village28 if one would adapt regulations regarding the management set-up. The BKD system in Java proves that even very small village based MFI are viable and sustainable (see Annex 14).

Sustainability Projection Based on the interest income analysis, only about 23 UPKD (10%) record less than 20% NPL. In total, about 103 UPKD show an NPL-ratio below 60%. Probably more than one third or about 80 UPKD record more than 80% NPL. A high arrears ratio does not mean un-sustainability, but it severely diminishes the survival prospect. In the absence of other meaningful indicators, the table below bases sustainability or survival prospect on the assumed NPL ratio. The percentage of sustainable UPKD is higher for UPKD with low NPL. The projected survival ratio decreases with increasing NPL. Not all 23 category-1 UPKD are projeted to survive. Perhaps two or three will drop out. It is assumed that of those UPKD with 80% and more NPL some 10-15% or 8 – 12 units can survive as very small MFI or as a service point of another UPKD. It is estimated that technical support to UPKD will enable at least about 100 (40%) of all 245 units to develop into sustainable MFI.

28One would need about Rp50m working capital to revive a dormant UPKD, which could then add to its capital by engaging in bad debt collection efforts.


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Table 18: Predicted Sustainability of UPKD

NPL Cate-gory

UPKD (%)

UPKD (#)

Sustainability % of UPKD

Sustainable # UPKD

Reserves (Bad Debt)

<20% 1 10% 23 85% - 90% 20 - 21 1.5%

20%-40% 2 20% 46 70% - 80% 32 - 37 6.0%

40%-60% 3 15% 34 50% - 70% 17 - 24 7.5%

60%-80% 4 20% 46 30% - 50% 14 - 23 14.0%

>80% 5 35% 80 10% - 15% 8 - 12 31.5%

Total 100% 229 91 - 117 60.5% The analysis is based on 229 UPKD for which data were available

Reserves for Bad Debt and Write-Off On average, category-1 UPKD have 15% NPL for which they have to allocate reserves for bad debt. Probably less than 10% of all UPKD belong to category 1. Therefore, NPL and related bad debt reserves of these UPKD account for 15% x 10% = 1.5% of the entire outstanding loans of all UPKD. It is assumed that, on average, 90% of the loans of category-5 UPKD are NPL and that 35% of all UPKD belong to category 5. Consequently, their NPL share in all loans is 90% x 35% = 30.5%. Based on above analysis and calculation, bad debt reserves should amount to: 60.5% x Rp40.3b (all outstanding loans of 229 UPKD) = Rp24.4b. Respective provisioning will reduce the average UPKD asset by Rp113m or 48%. It is estimated that, per September 2005, at least 50% of the amount required for bad debt reserves has to be written off, i.e. about Rp12.2b in total for all UPKD or Rp55m per average UPKD. This amount increases daily. Without a concerted action to revive and strengthen UPKD and to recover arrears, write-offs will perhaps triple in three years until 2008 from Rp12b to become Rp36b. With other word: Losses amount to Rp8b annually, or more than Rp20m every day, the equivalent of loans to 10-20 families in villages! The proposed project cannot completely prevent further loan losses but reduce them perhaps by 50% or more. This will limit losses to not more than Rp10m daily

Performance Indicators of Government Agencies Pembina apply different standards for assessing UPKD. Among these are a number of non-financial issues, e.g. concerning the office (own office, or even own office building), equipment (computerization, motor cycles), meetings with village elders and group leaders, reporting, savings mobilization, etc. A common standard for classifying UPKD does not exist. Government agencies estimate that about 30% of the UPKD “perform”, some 40% are weak, and the remainder (almost) not active. An evaluation of 45 UPKD in Sumbawa resulted in 14 (31%) sound, 12 (27%) sufficiently sound and 19 (42%) unsound units. This assessment is in line with above results.


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If measured by CAMEL standards for BPR, “performing” UPKD are unsound to a high degree, because the amount of NPL and loss-loans exceeds accumulated “profits” (see Annex 5 for a CAMEL assessment of a “good performing” UPKD). UPKD are only “profitable” because their loan loss provisions are minimal. It is justified to classify a number of UPKD as “performing” after stripping them of their bad debt, the project burden, and measure them by their most recent performance.

4.3 Conclusion The performance of most of NTB’s 245 UPKD deteriorates; they have to reduce new lending; they are not sustainable, because their income is insufficient to cover adequate loan loss provisioning. An increasing number of loans are not repaid and interest income decreases because: - loans were extended to poor and very poor people who, for a number of reasons,

have not the capacity to repay their loans from their income; - some people regard project loans as a grant and, although they have the

capacity, they do not want to repay the loan; - people do not repay the loan because they doubt receiving a follow-up loan, in

particular when installments are already overdue; - supervision, if carried out, remains without immediate (re-)action, and sanctions29,

both on part of lender and borrower. However, the post-project business of a number of UPKD is promising and they are profitable if measured by their active portfolio. Without a fundamental change in UPKD business approach, the number of active UPKD will decrease very rapidly, most of all because the management cannot cope with the increasing number of arrears. A substantial part of these delinquencies result from borrowers unsure about the prospect to obtain a follow-up loan.

29 For UPKD managers, a bad loan has the character of a sanction, because their income is a percentage (up to 40%) of the UPKD’s interest income. Surprisingly, this has not been a sufficiently strong incentive. Perhaps, this income has to be shared among too many persons. Similarly, managers revealed that in Sape/Bima one performing UPKD refunds 15% of interest income to group leaders, whereas in an almost neighboring village the UPKD refunded even 18%, but was found under-performing. It is suggested to explore reasons for this behavior.


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5 The Project Concept: Strengthening UPKD The Government of NTB and ProFI agreed to develop microfinance in NTB. 30 The parties have decided to use a financial systems approach, as outlined in the Yogyakarta Communique (see Annex 13). The financial systems approach builds on independent and commercially-oriented MFI to expand sustainable access to financial services for poor and low-income households. To this end, the approach addresses three areas of intervention:

Institution building: Business strategy, ownership, governance, Operating environment: Policy, regulation, external supervision Capacity building: Management and staff skills

Based on the analysis of the rural microfinance market in NTB, it appears feasible to significantly increase outreach (= access to financial services for poor and low-income households) to the village level on a sustainable basis. It is recommended to focus project activities on UPKD, which have the highest potential to improve both outreach and sustainability of access to financial services at the village level. However, other MFI which are willing and able to achieve sustainability should be included in the project. The following proposed project objective would contribute to expanding outreach and sustainability of microfinance in NTB: “Operating environment, institutional and human capacities of UPKD are improved” This objective can be achieved through strengthening village ownership, improving regulations, supervision and governance of UPKD, and providing access to capacity building and consulting services. Progress towards this objective will depend on the strategic decision to promote a commercial approach towards UPKD development, which shall be guided by the following vision and mission: - Vision: UPKD contribute to higher welfare of village households through sustain-

nable access to financial services, and to the village community through its profits. - Mission: UPKD aim at sustainability by increasing income and reducing costs.

They provide financial services adapted to the demand of village households and based on prudent procedures.

The following are the pillars of the proposal: 1. UPKD shall convert from project fund administering “Units” to become service

and profit-oriented village MFI. To this end, Unit PKD assets are transferred to a Village Financial Services Company (Usaha Pelayanan Keuangan Desa, UsPKD).

2. The village owns UsPKD. 3. A small board of commissioners is the highest authority, in which district

government is a member as long as UsPKD operate with district government funds.

30 Agreed Minutes between the Government of the Province of NTB cq. Bappeda and ProFI-Promotion of Small Financial Institutions concerning “Microfinance Development in the Province of Nusa Tenggara Barat”, May 17, 2005


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5.1 Rationale Empowerment and member participation were key project features under IMS-NTAADP. For the future, it is proposed to put greater emphasis on good banking practice, so that village households can benefit from ongoing access to finance. Frequently, sustainable (= cost-covering) provision of financial services and outreach of these services to poor households are perceived as conflicting objectives. However, there are many examples which illustrate that a conducive environment and efficient management can significantly reduce the trade-off between these objectives. In fact, decades of experience have proven that subsidized loans rarely reach target groups, repayment rates tend to be low and, thus, funds are quickly exhausted. On the other hand, it is possible to develop financial institutions which provide access on a sustainable basis and do not need ongoing subsidies: the poor are willing and able to pay market-based interest rates, if their demand for savings and loans is served. Willingness and potential to achieve sustainability should be the key criteria for MFI to receive support from the Rural Microfinance Development project. Sustainability of MFI means that these institutions get sufficient income from lending activities to cover their costs, including cost for loans which are not repaid, and that they generate a positive return for their owners, the village community. Actively increasing repayment rates and charging cost-covering interest rates are key steps towards sustainability. Supporting UPKD offers the unique opportunity to build on existing institutions and to achieve efficiency through replication: all UPKD are confronted with similar challenges. Additionally, these MFI enjoy attention of government agencies, which is required to solve legal, regulatory and organization-related questions. Sustainable MFI do not depend on financial support from third parties, or on the engagement or charismatic leadership of protagonists. A sustainable system of MFI will provide for mechanisms that support weak institutions, and allow substituting persons without endangering the continuation of services. The market analysis provides evidence that it will be feasible to develop a substantial part of the UPKD industry into a sustainable system of MFI, by providing a conducive operating environment, capacity and institution building as well as facilitating cooperation among MFI and between MFI and other financial institutions. The development of microfinance systems requires: - finance or working capital to run the institutions: UPKD have capital; - manpower: UPKD provide experienced manpower; - rules and regulations: UPKD work with statutes, bylaws and internal regulations. - common institutional bonds: UPKD share in the same history, source of finance,

regulations and ownership; the Kecamatan Forum is their common platform. UPKD need attention and assistance because - new UPKD are established, but the capital of many UPKD declines; - managers need training to manage a market-oriented MFI; - regulations need adjustment from project orientation towards business orientation; - common activities will make UPKD more efficient and enhance their presence.


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5.2 Elements of a Financial Systems Approach for NTB UPKD provide the unique opportunity to develop a large and coherent group of MFI into a sustainable system of MFI with significant outreach to poor households. Realizing this opportunity requires a comprehensive financial systems development approach. Consequently, decisions have to be taken on expected results of support in the proposed areas of intervention:

Institution Building: Business strategy, ownership, governance Operating Environment: Policy, regulation, external supervision Capacity Building: Management and staff skills

In addition, the roles of the stakeholders in developing UPKD into a sustainable microfinance system during project support and after phasing out need to be clarified. Key stakeholders are GoNTB I and II, Village Governments, and UPKD. The following outlines key issues to be addressed by the project. The following chapter lays out the implementation strategy to achieve the proposed results.

Institution Building Business Strategy: It is highly recommended that UPKD develop into commercially-oriented enterprises. The transformation from project fund administering Units to demand-oriented enterprises is symbolized by the transfer of UPKD assets to the new “Village Financial Services Company” (Usaha Pelayanan Keuangan Desa, UsPKD). This implies less emphasis on community participation. Instead, it implies more emphasis on prudent credit risk management, as opposed to endangering financial soundness for social purposes.

Higher Interest Rates on Loans to Poor People? Typically, poor people hesitate to sign a loan contract. They are not sure that they can fulfill the repayment obligations. A business loan means taking risks (speculation, no guarantee!) to increase the leverage of work and income. For working capital loan repayment, borrowers have to divest, e.g. selling goods, mostly those that were purchased from the loan. Interest is paid from the difference between purchase and sales price. If the loan-financed goods die (chicken), or are stolen (merchandise), or become victim of weather (harvest), the loan and interest have to be repaid from other income sources or by liquidating other assets (collateral). Often, poor and very poor people do not have additional income sources or assets from which they can repay the loan. Therefore, extending loans to poor people is speculative and risky!

If the speculation succeeds (successful harvest), poor people can repay the loan together with market-based interest. If the speculation fails, the lender is responsible for the non-prudent loan and, consequently, for their final write-off. This is not only a technical but also a moral obligation. The lender has to take these risks into account, if the borrower cannot. The lender does this when pricing such a loan: if experience shows that 10% of the loans to poor people are not repaid, the lender can charge an 11.1% extra premium on all loans to this target group. The additional incomes from nine debtors balance the loss. The lender manages joint liability. This is one reason why loans to poor people carry a higher interest rate.

Poor and very poor people especially need assistance to save so they can build reserves which protect them against economic shocks.


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UsPKD shall act as profit-oriented enterprises in order to grow and to enhance confidence in the institution. Confidence through better performance will be the key to attract funding, including commercial loans, with the objective to offer more and better services to its rural community members. UsPKD profits will be (i) re-invested (increase UsPKD capital) and (ii) transferred to the village coffers, the only social obligation of the UsPKD. The village government will decide on the allocation of these profits for general village community development and for assistance to individuals, for example through subsidizing interest for target groups, or in the framework of developing particular income-generating activities.31 Ownership: UsPKD should be 100% village-owned enterprises. The institutions have been conceived as such by IMS-NTAADP project design. Village ownership is today more important than ever to mobilize village efforts for better management and monitoring of UsPKD. To this end, it is very important and urgent to clarify the legal status of IMS-NTAADP funds. These are currently recorded as a liability of UPKD, whereas it is not yet clear who originated the loan. Once the legal basis of fund ownership is clarified, it is recommended to convert the IMS-NTAADP loan into a long-term sub-ordinate loan – unless the funds constitute a grant to UPKD and, consequently, equity. The objective is to improve UPKD performance indicators (Capital Adequacy Ratio, CAR) on which future loans to the MFI may depend - for BPR, 50% of sub-ordinate loans are considered equity for the CAR calculation. Governance: A small board of commissioners shall constitute the highest authority. The composition of this board depends on the ownership of the IMS-NTAADP funds. The role of the district government needs to be clarified. Product Development – Deposit Mobilization: UsPKD shall be allowed to demand cash collateral as a deposit, i.e. a percentage of the loan amount. UsPKD can use this deposit for lending. It is recommended to investigate legality, conditions, possibilities and advantages of UsPKD acting as agents of a bank. Conflict Management: It is recommended to systematically investigate conflicts that came up in more than 200 UPKD during six years of operation. The proposed review of statutes and bylaws (AD/ART) has to address these conflicts and offer solutions. Frequently, conflicts between commissioners and managers arise. Commissioners have a strong position, because they employ and dismiss managers, who are 31 Presently, UPKD disburse loans at far below market interest rates (1.5% p.m. or lower, indirect subsidies), although many, perhaps most, borrowers could afford paying higher interest rates. In future, UsPKD management decides on interest rates based on demand for its products. UsPKD shall not disburse “subsidized” loans anymore. If the village government wants lower interest rates for target groups, such as new cottage industries for cashew processing, the village has to transfer funds (subsidy) to the recipients (or to the UsPKD) so that the target group can afford UsPKD’s commercial interest rate. Hence, those who can afford a higher (subsidy-free) interest rate contribute via UsPKD profits to a higher income for the village coffers. This allows the village to assist more people in need. The economic strong support the economic weak! This procedure contributes to transparency, and reduces misallocation of subsidy. The influence of the village government is limited to decide on the profits only, not on the UsPKD’s portfolio or interest policy itself. This does not exclude that, for example, loan conditions may provide for one or two delayed installments without additional interest or fine (e.g. if the borrower needs urgently money for settling hospital bills). This is a feature of the product. This would be different to waivers of late payment fines that are part of the loan agreement.


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responsible for prudently running the MFI. Special thoughts should be spend on regulations concerning the process of dismissing managers, in particular the general manager. Handling political influence will be a particular challenge.32 It is proposed to agree on an organization for conflict facilitation.

Operating Environment Regulation: The future legal form of UsPKD could be MFI (Lembaga Keuangen Mikro, LKM) or Village-owned enterprise (Badan Usaha Milik Desa, BUMDES). A final decision on the legal form of UPKD depends on developments regarding a law on MFI and implementing regulations on BUMDES, which have not yet been issued.33 The project protagonists shall lobby for a regulation allowing BUMDES or LKM to mobilize funds. For the time being, the SK Bupati and corresponding statutes and bylaws (AD/ART) will be adapted to the new UsPKD. Cooperatives are less suitable, because they are private, member-oriented companies from which members benefit, not community-owned institutions from which the community benefits. Supervision: The commissioners will contribute to develop and introduce a system that guarantees regular and periodic off-site and on-site supervision of UsPKD by competent and qualified independent persons or institutions. In most instances, these supervisors are not community members.34 GoNTB/district governments and/or village government as commissioners will be responsible for monitoring UsPKD supervision. GoNTB should introduce sanctions such as dismissal of managers and closing or merging UsPKD for deliberate mismanagement. UsPKD have to contribute to the expenses for supervision.

Capacity Building The transformation of UPKD from fund administrating project institution into commercially-oriented MFI requires capacity building in several regards. The project shall apply a variety of tools to equip UPKD management with the required know-how.

32 For example when UPKD managers are advised to stop collecting overdue loans because of an imminent village head election, or when a village head candidate promises write-offs. 33 Since 2001, ProFI has been advocating the legal body of MFI to accommodate non-bank, non-cooperative financial institutions which mobilize deposits on a small scale. Currently, a feasibility study on a proposed “3rd (regulatory) window” for such institutions is being carried out. The proposal is based on a draft National Microfiance Strategy, which has been elaborated by key stakeholders at the national level and facilitated by ProFI. Law 32/2004 on Local Governance, Article 213, introduces BUMDES (Badan Usaha Milik Desa) as a legal form for an enterprise owned by the village. Implementing regulations are pending. 34 BP members, community members, have UPKD loans with substantial arrears. They are “involved”, have vested interest, and are not suitable supervisors.


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On-The-Job Training: At the beginning of cooperation with individual UPKD, and before asset transfer to UsPKD, a stock-taking of the institution’s portfolio needs to be undertaken. UPKD staff will trained by the project regarding the necessary procedures. The process will be followed by a 1-2 week on-the-job training to instill better credit and portfolio management. Classroom Training: On-the-job training will be complemented by several classroom training modules, which could form the basis for a management certification in the future. The above outlined concept implies roles for the stakeholders: GoNTB I and II - Will improve the operating environment for UPKD by

o Clarfying the legal status of IMS-NTAADP funds; o Harmonizing the regulatory framework and endorsing the new business

strategy of UsPKD; o Supporting asset transfer to UsPKD by appropriate regulations on asset

verification; o Strengthening external UsPKD supervision, preferably by assigning this task

to Bank NTB and providing adequate funding; - Will support capacity building of UsPKD by subsidizing training material

development and/or training of UsPKD management and staff The Village Government - will act as chairman of the board of commissioners, and shall - together with the

district government - support UsPKD, among others with: o urging all government agencies entering the village with programs with

microfinance components to coordinate with UsPKD, and to employ UsPKD services for administration;

o depositing village budgets with the UsPKD, for which the UsPKD will pay interest that do not exceed interest paid by banks;

o offering sufficiently representative office and electricity; if available; - decides on the allocation of UsPKD profits; Village Government will be

responsible for subsidizing from these profits non-commercial programs so that people with low income and insufficient collateral can obtain loans.

- can charge UsPKD with tasks in their competence as a financial institution, including implementation of loan schemes, also non-prudent loaning to non-bankable target groups, as long as the village government will settle all deficits and losses from these schemes (the village government may also act as loan insurer)35;

- gives recommendations for loan products, loan conditions, and loan policy, which are binding as long as they do not contradict income-orientation and prudent procedures;

35 The principle is: village government may risk its income (profits from UsPKD, budget, other sources) but never endanger the viability of the UsPKD.


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- supervises as first commissioner UsPKD activities and is allowed to gather any information on UsPKD activities and procedures for internal purposes;

- proposes as commissioner the employment and dismissal of managers to the regent (Bupati);

- decides on the fixed salary and a profit- or performance-oriented bonus for the UsPKD management.

- Internal control on whether the UsPKD follows its (the owner’s) policy guideline. UsPKD - UsPKD management will be responsible to earn profits for the village coffers. - UsPKD will prioritize service to clients in the community who have no access to

other sources of formal loans. If funds allow, UsPKD will extend loans to other applicants from the same village and from adjacent villages.

- UsPKD will extend loans to individuals and to joint liability groups36 following prudent procedures.

- UsPKD management decides on loan products and loan conditions. - UsPKD will channel loans the condition of which are determined by third parties

provided costs, in particular loan risks, are fully covered. Sequence of Priority Activities 1. GoNTB I and II decide that the post-project phase of IMS-NTAADP has ended. 2. GoI, GoNTB and Village Governments clarify legal status, ownership, and

conditions attached to PPW and IMS-NTAADP funds administered by UPKD. 3. Unit PKD assets will be transferred to a new Usaha Pelayanan Keuangan Desa

(UsPKD), a market-oriented sustainable village MFI. 4. GoNTB issues decrees on data collection for loan portfolio classification, and

write-off procedures for overdue loans, observing the law and best practices. 5. GoNTB, Village Govnernment and UPKD conclude a contract on IMS-NTAADP

funds. GoNTB provides and continues providing working capital for UsPKD, among others through not withdrawing PPW and IMS-NTAADP funds that shall remain, e.g. as a sub-ordinate loan, with the UsPKD as long as the UsPKD are active. GoNTB may charge interest on these funds the rate of which shall not exceed the interest rate state banks offer for savings accounts. The charge must not endanger the viability of the UsPKD.

6. Regulations will be developed for unprofitable and unsustainable UsPKD, such as transitional management assistance and merger with UsPKD in neighboring villages.

7. GoNTB will appoint the agency in charge for the new project and allocate annually funds (budget) to this project, e.g., to Bappeda or to Biro Ekonomi (preferably an agency also in charge of BPD Bank NTB and/or BPR-LKP).

36 In this respect, it is proposed that group loans are only recorded as such if the group practices group solidarity and when the group members reconfirm joint and severally liability for their group loan. Presently, most group loans are loans to individuals with a group leader as loan collector.


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6 Implementation Strategy: Achieving Results A number of indicators have been agreed between the Government of NTB and ProFI (BI/GTZ) to measure progress towards Regional Microfinance Development in NTB. The indicators describe expected results of the project’s activities:

1. Improving the quality of MFI services; 2. Increasing the number of sound MFI; 3. Creating a conducive environment through better regulation and supervision; 4. Increasing the cooperation between MFI and other financial institutions; 5. Increasing the capacity of MFI to access capital from various sources.

The following strategy addresses key issues for implementation of the proposed concept, which aims at strengthening UPKD through the financial systems approach.

6.1 Improving Service Quality Village people prefer convenient services, not products that cost least. The office in the village with daily office hours, hassle-free administrative procedures (an expired KTP identity card is accepted), without letters from RT/RW, village head and even sub-district head, and loan collection services illustrate this convenience. Product Development: Deposit Mobilization Villagers request a convenient place, a place close to their home where they can place their emergency savings and access them almost anytime. This is a key reason why ATM are popular also in rural areas (sub-district capitals). However, it has to be considered very carefully if it can be recommended that poor villagers deposit their savings with an institution that has no deposit insurance. In order to address the demand for savings products and to increase the UPKD’s services and assets, it is proposed to investigate the following: - implementing a kind of lottery for savings accounts together with other UPKD on

district or sub-district level, based on the experience that interest earnings are not a major motive for saving, whereas the chance to win a prize makes “saving” attractive37

- cooperation with a bank: UPKD act as savings mobilization agent for a bank - cooperation with neighboring UPKD to overcome liquidity problems - cooperation with other UPKD to realize deposit insurance, for example up to a

maximum of Rp1m38 - offering a loan contract instead of a time deposit certificate (circumventing BI

regulations); 37 Many people prefer a small chance (6% winners) of a high return (100%) instead of a high probability (100% = sure) of a small return (interest rate 6%). 38 It might be possible to insure savings up to a certain limit, if at least 50 participating institutions agree on a cooperation, in which they build up an emergency fund. All participating institutions may contribute 4% of their savings mobilization to this fund and allow the fund manager to perform regular audits (which are recommended anyway) in order to secure that no mismanagement endangers the UPKD. This 4% fee can cover claims if 4% (i.e. 2 out of 50 only) of the participating UPKD fail: Cost for savings mobilization would be high: 6% interest, + 4% administration costs, + 4% insurance, + 2% for audit: total 15%. This amount equals cost of a commercial loan, which however, the UPKD may not obtain! The insurance should cover a limited amount only in order to protect in particular poor people (moral hazard stipulation).


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Combined Deposit / Loan Products It is strongly recommended to ask a minimum 10% deposit as collateral for loans, which even could be deducted from the loan amount, or for which the loan amount could be raised. This deposit can bridge an installment period (preventing arrears), the debtor will own a savings account after loan repayment (richer than before), and the deposit increases the MFI’s effective interest earned for the loan. It is recommended to offer a savings-plus-loan product that allows savers after some time to obtain immediately without further investigation or collateral an emergency loan twice or three times the balance on the savings account. These loans can be offered at competitive nominal interest rates, i.e. below those of BRI Unit. This product is also attractive for MFI because many people open a savings account only in order to secure access to a loan in case of individual emergency. Most people do not need to use this loan facility. For people who are most of all attracted by a low (nominal) interest rate it is proposed to offer those loans that CU or KopDit promote. These installment loans with up to 50% cash deposit can be offered at 15% p.a. or 1.25% flat p.m. Loan Products Borrowers At present, UPKD extend loans to individuals in groups. All persons in this group have the same repayment schedule although their income source and cash flow differs. It is proposed that UPKD shall serve three types of borrowers: - joint liability groups; - individual households, i.e. loans to husband and wife; - individuals who can provide a guarantor or suitable collateral Regarding individual loans, UPKD may employ a “group leader” or any other trustworthy person as a loan collector. Purpose So far, UPKD offer loans only for income generating activities. It is best practice that MFI offer also loans for non-productive purposes. Especially poor people need access to funds for “consumptive” purposes, such as house repair, health and education, and repayment of expensive loans from money lenders. Entitlement All villagers without a loan record and those with clean loan records shall be entitled to a small consumptive loan. This reduces the burden of households that otherwise have to rely on moneylenders. Flexibility – (learning from the moneylender) People with regular income from employment, or traders and shop owners do normally not face problems to obtain a loan. In contrast, the turnover of many trade businesses in villages fluctuates seasonally, also with weather conditions, in particular in rural areas. In particular months, incomes can become too low to settle monthly installments. Quite a number of these debtors take an expensive short-term loan from moneylenders just in order to meet their obligation. In particular in rural areas loan repayment conditions have to be kept flexible. The obligation to repay an installment loan on time means stress for many rural


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households, in particular if a bank like BRI waves IPTW39-refund. This is one reason why people prefer the moneylender. His product allows deferring installments without extra interest or fine (it is already priced in the product). Recently, a commercial bank offered an installment loan product that also allowed this flexibility. Money Transfer and Payment Services Only commercial banks execute money transfer services themselves. UPKD might offer access to these services to the community through opening an account with a commercial bank, e.g. BRI Unit for incoming transfers, also from overseas workers. It is proposed to investigate whether UPKD can become a payment point for electricity and telephone bills.

6.2 Increasing the Number of Sound MFI The objective: “increasing the number of sound MFI” will be achieved - through increasing the number of MFI (limited potential) and - through improving the soundness of MFI (main training and consultancy activity).

6.2.1 Increasing the Number of MFI According to information from provincial and district Bappeda, the local government intends to create additional UPKD, and to support with funds private efforts to establish UPKD (as happened in Lombok Barat). Supposedly, GoNTB and district governments will provide Rp2b to Rp4b for the establishment of about 20 new UPKD until 2008, if these efforts are backed by technical assistance. In the table below, the new UPKD appear as five additional MFI in each 2006 and 2007, and ten additional MFI in 2008.

6.2.2 Improving UPKD Soundness (CAMEL) A common standard to determine the soundness of UPKD has yet to be developed. It is recommended that this standard should take into consideration the experience that, in contrast to loans to traders and fixed income earners, poor people in rural areas require more loan repayment flexibility. Bank Indonesia’s instructions on BPR rating follow a CAMEL approach. SMoCSME also bases the soundness of SCC on these rules. Four of the five criteria concern financial figures, with capital/equity (C) weighing 30% (most important), and assets (A = portfolio quality) weighing 25%. M = management (weight 20%) is a checklist regarding mainly internal organization and procedures of the MFI. UPKD can be assessed using the CAMEL approach. Although UPKD started without equity, after a number of years, accumulated profits substitute paid-in equity. However, the loan loss reserves of very few UPKD are sufficient, if one would apply BI or SMoCSME standards. Even with some adjustments (write-offs), a still optimistic guess would result in that, most probably, not more than 10 (4-5%) UPKD are sound or healthy (sehat), perhaps another up to 20 (less than 10%) UPKD are sufficiently sound (cukup sehat). Without efforts of GoNTB and ProFI to improve the quality of

39 Insentif Pembayaran Tepat Waktu, a refund for always paying on time, which amounts to 25% of total interest payments.


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UPKD, the number of sufficiently/sound UPKD will probably decrease to below 20 units by the end of 2006. The situation improves when the proposed transfer of assets from UPKD to UsPKD takes place and the IMS-NTAADP fund becomes a sub-ordinate loan, which, for 50%, substitutes equity. About 70 UPKD, those with NPL up to 40%40, will achieve a score that qualifies them as “sufficiently sound” or “sound”.41 Afterwards, the situation will worsen again. Several loans will turn bad among those up to 60% that perform at the time of asset transfer. The following measures would enhance the soundness or CAMEL rating of UPKD: C: Increasing Capital UPKD started business without equity. The following would increase UPKD capital: a) The IMS-NTAADP fund becomes a sub-ordinate loan. b) Conversion of loan and retained profits to become equity:

o About 20% of the IMS-NTAADP or PPW loan (after write-off) shall be donated to the village and become village-owned UsPKD equity.

o Retained profits until end of 2005 shall be converted to become UPKD equity. o At least 40% of profits shall remain in the UPKD to strengthen capital.

Measures to increase UsPKD profits (see below: “Earnings”) are simultaneously measures to increase UsPKD capital. It is recommended that UsPKD should aim at a minimum capital adequacy ratio (CAR) of 15%, or a capital/asset ratio of minimum 20%. A high CAR is an important argument when UsPKD explore sources of additional (credit) finance. A: Improving Assets / Portfolio Quality It is necessary to determine the actual portfolio quality by screening all borrowers and categorizing them according to repayment prospects. - A procedure has to be developed and implemented for loans that are regarded

unrecoverable (write-off). - It is proposed to introduce loan products that respond flexibly to the cash flow of

households with irregular income. - It is necessary to train UsPKD management in identifying and follow-up loans

with arrears (internal instruments and procedures). - Introduction of maximum loan amounts to one family, and to one commodity or

sector. - UsPKD management needs to be trained in rating and continuously monitoring

loan quality.

40 See estimate for sustainability in chapter 4.3.4 41 These are UPKD with: net equity = 50% x IMS-NTAADP fund – NPL > 15% ; IMS-NTAADP = 110% x loans (kredit yang diberikan) 50% x 110% loans – 40% NPL = 55% - 40% = 15%


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Improving the portfolio quality In most instances a low quality portfolio is the result of inappropriate loan conditions. UPK figures show that 1-2-month arrears account for 70% of all arrears. Provided, the borrower deposits two installments as cash collateral, the FI can transfer twice installments from the deposit account to balance arrears on the loan account and no arrears will appear. The same effect happens if loan conditions allow a debtor to defer twice loan repayment. As by far most arrears are balanced after two months, alternative loan products reduce arrears by 2/3 (example: from Rp180.3m to Rp54.8m) and cost, i.e. reserves for bad debt, by more than 60% (from Rp36.98m to Rp13.46m). Arrears and risk provisioning for same repayment under different loan conditions

Alternative loan condition Delay Amount

(Rp m) Risk provision

Risk provision (Rp m) Arrears Risk provision

(Rp m) 1-2 installments 125.5 70% 10% 12.55 29.9 2.99 3-4 installments 29.9 17% 25% 7.48 15.9 3.98

5-6 installments 15.9 9% 50% 7.95 (assumption) 5.0 2.50

> 6 installments 9.0 5% 100% 9.00 (assumption) 4.0 4.00

180.3 36.98 54.8 13.47 From NTB Collectibility Report August 2005, PPK Phase 2, UPK M: Management It is proposed to review procedures and forms (tools) and to develop a manual for UsPKD management. The manual shall also refer to those 25 questions supervisors check when visiting BPR and SCC. The project will offer in-class and on-the-job training for improving UsPKD management capacity. By 2008, managers shall have passed a compulsory test (certification). For suggested in-class training courses see below. E: Earnings or Profitability Asset profitability (Return on Assets, RoA) and operational profitability of many MFI is high because they work – as UPKD – with subsidized or even interest-free funds. Unfortunately, the earnings rating could decrease when UsPKD mobilize funds despite absolute income might increase. Effective income, not a percentage or ratio, is a more decisive key to achieving soundness, because high income can balance through generous bad debt provisioning and write-off an otherwise inferior loan portfolio. Measures to increase UsPKD earnings encompass - higher income from loans through

o enforcing penalty and interest payments for loan repayment delays; o market-oriented interest rate setting; effective UPKD interest rates are despite

low amounts and high risks not higher than those charged by BRI Units; they are far below interest rates of money lenders; effective interest rates of similar loans from non-KUD cooperatives in rural areas are about twice as high;

- additional income from payment services


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- reducing cost: o cost for bad debt reserves through enhanced portfolio quality (collection and

rescheduling efforts) o by adjusting other expenses to income.42

L: Liquidity Almost all UPKD have no liquidity problem because they can defer new loan disbursement. There are few short-term liabilities (savings accounts) and no repayment plan exists for the NTAADP loan fund. Conclusion In summary, for increasing the number of sound UPKD it is crucial: - to improve loan quality through

o bad debt write-off, o repayment-capacity-based loan assessment including the second way out

(collateral, insurance, joint liability, alternative income), o flexible, cash-flow-oriented loan conditions and cash (deposit) collateral, o loan repayment collection efforts and monitoring procedures,

- to increase income through

o enforced on-time repayment, else charging interest for flexible, and fines for delayed payments,

o market-oriented interest rates43, - to train managers.

Expected Impacts: Development of Sound UsPKD By any standard, without technical assistance the average soundness and the number of sound UPKD will further decrease. Typically, for statistical purposes, MFI without financial transactions will not be closed and evicted from statistics. Most probably, they will be categorized as “dormant” and the last financial report will repeatedly be part of the aggregated figure of the annual UPKD report.

42 According to UPKD bylaws the managers’ honorarium is a percentage of gross interest income. They receive a very low income when many borrowers do not pay their installments, just when the engagement of UPKD managers is urgently required. It is suggested to review this provision. 43 It is recommended that not the government decides on the interest rate rural people can pay. The decision has to be made by the people themselves. They vote for it by accepting the products and prices.


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Table 18: Increasing the Number of Sound MFI Category Year 2005 2006 2007 2008 sehat Unit PKD 10 5 sound Usaha PKD 15 30 40sukup sehat, Unit PKD 20 10 sufficiently sound Usaha PKD 25 40 50kurang sehat Unit PKD 40 20 10 5 less sound Usaha PKD 30 45 60tidak sehat Unit PKD 175 140 115 90 unsound Usaha PKD 5 15 20 Unit PKD 245 175 125 95 Usaha PKD 0 75 130 170Total 245 250 255 265

In 2006, the proposed project plans to assess more than 100 Unit PKD. It is expected that 75 Unit PKD qualify to become Usaha PKD (including five new entrants), among others finished portfolio assessment) whereas some 25 remain Unit PKD (not viable, not transparent). Out of these 75 it is estimated that 15 are sound, 25 sufficiently sound, 30 less sound, and 5 unsound (dropouts, assistance was not successful). The number of unsound Unit PKD decreases from 160 to 125 Unit PKD. Towards the end of the project (2008) the number of “sound” and “sufficiently sound” UsPKD increases to 40 + 50 = 90, or 200% more than 2005. The number of “less sound” Units drops to 5, UsPKD increases to 60, because some of the “unsound” ones improve their performance.44 By the end of 2008, some 150 UsPKD (less sound, sufficiently sound, sound) will render services in rural areas of NTB.

Training requirements The transfer from UPKD to become sound and sustainable UsPKD requires training support. Project staff shall provide on-the-job training and coaching (six months x average 3 days), and once monthly one day for training (bookkeeping, reporting), information campaigns, and meetings for exchanging experience on sub-district level (Forum UPKD). With respect to a qualification and certification of UsPKD managers it is proposed to develop training material (modules) covering about eight topics with most of them centering on loans: Focus 1-3: features of loan products, analysis of rural households economy, business loans vs. loans to households, characteristics of main local commodities, collateral and collateral substitutes, pricing and other conditions, monitoring and supervision, contractual issues, bad debt management and loan recovery, risk management, etc. Focus 4: UsPKD CAMEL-rating and internal monitoring and evaluation. Focus 5: Target-oriented planning and incentive setting Focus 6: Internal supervision, audit and controlling Focus 7: Ethics and responsible loans to poor Focus 8: Communication and conflict management

44 It is a progress when the number of less sound MFI increases if this is a result from improving unsound UPKD.


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It is suggested to present the topics in 2-day packages. Over a period of two years UsPKD management shall participate in training measures as follows: Table 19: Suggested training measures Training days total - General manager, modules 5 2 10 - Finance manager, modules 3 2 6 - Secretary, modules 3 2 6 Total training sessions per UsPKD 11 2 22 200 UsPKD x 11 modules/topics 2,200 no. of participants Class-size per session (participants) 20 Training sessions /2 years 110 Training sessions / year 55 about 1/week Training days / year (2d/session) 110 = 2 persons half-time 1 session = 2 trainers

Each UsPKD sends three managers to participate in 11 training sessions. Assuming that 200 UsPKD join, 600 persons will be trained in 110 training sessions with 20 managers per session. Training takes place on 110 days per year and employs two half-time trainers for two years. The following years, demand from UsPKD for in-class training will drop by 60 – 70%. Further training and upgrading measures concern: - about 20 – 25 district based UsPKD supervisors, - about 20 – 30 district based government officers supervising, monitoring, and

evaluating UsPKD development, - some 200 village heads and sub/district as UsPKD commissioners. - government agencies with regard to monitoring and evaluation

6.3 Operating Environment: Regulation and Supervision A conducive operating environment is based on: - transparent decision-making and flow of funds - easy access to comprehensive written information - sensible regulations that are easy to comply with - supervision - enforcement of regulations UPKD are institutions created by a project for channeling funds to poor peasants. In most locations people view UPKD as an entity left over by a project, not as a sustainable village-based MFI. This impression is backed by the fact that there was no clear concept for the time after project closure, namely unwinding or development towards sustainability. Still, the government monitors UPKD development, in contrast to many other government programs that provided revolving funds to groups but were left unattended after some time. However, in the absence of “their” project, villagers, village governments, and UPKD management lack a sense of ownership. Problems and weaknesses of the organization and its set-up as a temporary institution for a particular project phase are reflected in the Bupati Bima Decree on


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UPKD45 issued three months after closure of the project. Nevertheless, this decree, which included statutes, bylaws and procedures for UPKD, contributed to a conducive operating environment.

6.3.1 Regulation Three sets of regulations require attention, (i) those regarding UsPKD incorporation and portfolio verification, (ii) clarification on the present and future ownership and legal status of the IMS-NTAADP fund, and (iii) issues concerning savings and deposits with non-bank organizations. UsPKD Incorporation - Should GoNTB support this proposal, it is proposed that the Governor issues an

instruction in support of UPKD loan portfolio verification. - The new UsPKD require a legal foundation, mission, vision, organization and

operation that should not differ from district to district. UsPKD will work in all districts, consequently, it is recommended to consider issuing a temporary provincial regulation for UsPKD and its statutes as well as a general guideline for bylaws, which may slightly differ among the villages.

- The new statutes should be a result from reviewing regulations (statutes and bylaws) that are valid now and the actual practice. Reasons for deviations should be discussed and understood.

- It is proposed to re-open the case when the Law on MFI and regulations concerning BUMDES are issued.

- Another instruction is required, which refers to the assets transfer from UPKD to UsPKD. In particular the question of how to handle bad debt and write-off needs an answer.

IMS-NTAADP Fund The foundations under which UPKD operate IMS-NTAADP funds are entirely unclear: Opinions and perceptions among government institutions, UPKD management, and beneficiaries (debtors) differ fundamentally. Few people are aware of the fact that the IMS-NTAADP fund origins from a loan, which GoI has to repay with interest. For example, many misunderstand the decree, according to which funds obtained from IMS-NTAADP and administered by UPKD become assets, not property (milik), of the people where the UPKD are located.46 Therefore, UPKD do not own the IMS-NTAADP funds, which consequently have to be booked as liability. The legal owner, namely the person(s) or institution that (has/ve to) record the fund as assets in its/their balance sheet, remains hidden. It seems that the district government is the fund’s owner because - should UPKD be “not sound” (no definition given) - the district government is entitled to withdraw the fund.47 The wording “bantuan modal” (capital assistance) for the IMS-NTAADP fund contributes to the interpretation that it is a grant, whereas it is a credit or loan - without interest and without repayment date.

45 See comments on SK Bupati in Annex 8 46 SK Bupati, Ps. 12 (3): Dana yang dikelola oleh UPKD yang bersumber dari Program IMS-NTAADP adalah menjadi asset masyarakat desa lokasi UPKD. 47 SK Bupati, Ps. 12 (5): Jika sewaktu-waktu dana abadi (modal abadi) seperti dimaksud ayat (3) pasal ini tidak mampu dikelola (UPKD dinilai tidak sehat), maka dana tersebut dapat ditarik oleh Pemerintah Daerah.


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People know that the local government is not the fund’s origin. They think that it is a World Bank = donor = grant for them, even not for the UPKD, and they do not feel obliged to repay a “bantuan modal” project loan. People need to be properly informed. The threat to withdraw the loan fund from “unsound” UPKD (SK Bupati) should be reviewed. Upon announcement, borrowers will immediately stop their loan service. UPKD management will not be available for assistance, and the money in the cash box and on the bank savings account will probably not suffice to settle claims from depositors. It is proposed to abstain from regulations that cannot fully be enforced. It is recommended to review all rules concerning the fund, its ownership, management, and operating directives. It is suggested to explore whether the fund, or part of it, could become village property. The village could conclude a loan contract with UPKD, tenor 10 years, option for another 10 years, interest 2% p.a., in order to secure income for the village. A provision should allow village government to withdraw the fund should the UPKD record losses exceeding x% of the fund. For the village government it is easier to collect overdues. Deposit Mobilization Bank law allows only banks to mobilize deposits from the public (masyarakat). Members of cooperatives, in accordance with regulations, keep deposits with their (and even other!) cooperatives. It is tolerated that a provincial decree enables Bali’s LPD to accept deposits from community members. A proposed Law on MFI that would allow non-bank FI to offer deposit products has not yet passed parliament. It is proposed that UsPKD accept deposits from community members in analogy to LPD that mobilize funds from people in the Adat village, and in analogy to cooperatives that are allowed to accept deposits from members.

6.3.2 Supervision Supervision is a general term for several on-site and off-site tasks to secure that no deviation from agreed objectives, rules, regulations and procedures occur. The different perceptions on the ownership of the IMS-NTAADP funds, which UPKD administer, are reflected in the way these MFI are supervised and controlled: - UPKD are not audited. - UPKD are FI but not supervised by MoF or BI, or by another bank on behalf of BI. - UPKD are not cooperatives and not supervised by the Agency for Cooperatives.

However, since 2005, the Agency of Cooperatives monitors UPKD in Lombok Tengah.

- District Bappeda, coordinating agency of the IMS-NTAADP, still monitors and supervises UPKD. Bappeda represents Tim Pembina. According to the organizational structure, the district government’s Tim Pembina is an UPKD’s highest authority, still above Musdes.

- Tim Pembina monitors UPKD development through reporting (off-site) and intervenes on-site if it is asked, or if it feels the necessity, for example, if financial irregularities are uncovered. Former project consultants assist in supervision. Budget allocations are limited (e.g., less than Rp100m for all UPKD related activities in one district) and not available in the first half of the year.

- In some districts, on Bappeda request (also on request of other parties), Bawasda was involved in inspections on embezzlements, because the IMS-


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NTAADP fund or loan fund was regarded as government property, at least until the end of the project.

- According to UPKD statutes, Musdes is the highest authority, in several respects comparable to a board of commissioners. According to UPKD bylaws, Musdes appoints a team of three persons (chairman and two members) as Badan Pengawas (Supervisory Board, BP-UPKD) to oversee and examine UPKD activities. BP-UPKD might be what banks call audit committee or internal audit. In some UPKD, the inspectors seem to be omnipresent, whereas in others they do not check the UPKD at least once in three months48, and submit a report to the UPKD village founders (Pembina Desa) as bylaws demand.

Supervision or internal audit of UPKD by BP-UPKD failed in most instances.49 The failure has several reasons: - BP personnel did not apply for this position but were appointed by Musdes –

even in absence, according to one report. - BP personnel was not appointed because of qualification. - Despite in-class training the task was too demanding for many BP members.

Some of them admitted that upon returning from in-class training they could not implement their newly acquired knowledge. Qualified and engaged BP could well have contributed to above average performance of successful UPKD.50

- BP itself was not supervised. In most instances, there was no feedback on the BP’s activities – or the lack thereof. Admittedly, the sheer presence of BP had certainly a preventive character.

- BP personnel are involved in multiple loan disbursement and they are debtors with noteworthy arrears.

- BP personnel prefer living in the village in harmony rather than provoking conflicts and making enemies.

Several days in-class training of three BP persons is certainly not efficient if their task – should they really perform it – will take not more than one day per supervisor per month on average. UPKD are too small to employ internal supervisors/auditors, and their revenues are too low to pay professional external auditors. Therefore, it is proposed that ten to twenty UPKD share external supervisors or auditors, and, at least partly, the expenses. Effective supervision is determined by the following elements: - Off-site supervision through reporting and analysis of these reports; - On-site supervision, i.e. supervisors visit the UPKD premises and borrowers; - Regular supervision, i.e. periodically: monthly reports, annual visits; - Irregular supervision, i.e. irregular reports on request, unannounced visits; - Definition of subject of supervision, e.g. performance indicators; - Sanctions and enforcement of sanctions; penalties should not be charged to

general costs, and the recipient should be made known (ART imposes a fine for sending report delayed).

- Monitoring supervision activities, and supervision of supervisors

48According to UPKD bylaws, BP-UPKD job description 49 See also Annex 7 on the UPKD Management Survey. 50 UPKD Periri, the BP chairman was manager of a savings and credit cooperative


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Investment in supervision, although costly, has a high return: - One non- or semi-professional (by formal education) but trained supervision team

will cost about Rp40-50m annually. - This translates to around Rp3m per year for each of about 15 UPKD. - For 230 UPKD supervision would cost Rp690m per year. - Total cost for supervision for six years (2000-2005) would amount to Rp4,140m. - During this time, UPKD had loan losses of about Rp12,000m to Rp24,000m (or

even much more if one takes into account lost interest revenues). - Supervision might have prevented perhaps 70% of this loss, i.e. Rp8,400m to

Rp16,800m, twice to four times the amount for qualified supervision. - Therefore, each Rp invested into effective supervision would have saved two to

four Rp or even more, probably six Rp, if lost interest earnings are added. Implementing Supervision Responsibilities Effective supervision and control requires tools, expertise and experience. The following are recommendations as a consequence of the unsatisfactory performance of internal supervision/audit (BP-UPKD): - The UPKD chairman controls (internal controlling) activities of the other

managers and staff. - One of the UPKD managers is responsible for controlling adherence to rules,

regulations and procedures based on the manual or UPKD handbook (“compliance director”).

- The commissioners are responsible for that they receive periodically, at least quarterly, reports from supervisors.

- A person appointed by the village government shall be responsible for investigating whether the UPKD follows the “political guideline”, such as priority loans to certain groups and sectors. This person is preferably UPKD commissioner (or appointed by a commissioner).

- Internal supervision is externalized, sub-contracted or outsourced. The supervisors review and audit compliance. For their work they will be equipped with a manual or handbook that still needs to be written. 51 The quality of UPKD supervision or internal audit can be professionalized through: o Supervisor candidates apply for this position. They are not appointed. They

are selected; because of their capacity. o Supervisors are qualified persons. They have proven experience in other

organizations, e.g. cooperatives, and they have a record of participating in training measures and related seminars.

o Supervisors will be offered a full-time job with full-time payment. o Supervisors must not supervise the UPKD where they obtained a loan.52

Organizing Supervision Teams A head supervision teams is responsible for training, information, coordination, monitoring and inspection of the supervision teams’ work. This is a crucial position, because this person will become responsible for the supervision system, i.e. that supervision takes place. This person should have the authority to dismiss a supervisor. 51 This handbook could perhaps be written based on experience of BPD Bank NTB’s internal supervisors or by BI’s BPR supervisors. 52 Alternatively, supervisors have to report on the status of their and their family member’s loans.


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Supervisors come in a team of two. It is estimated that, initially, external UPKD supervision requires 2 days per month (4 man days), and, latest after twelve months, about 1 day per month for the supervision of one UPKD (equivalent to six man days quarterly). Thus, one supervision team starts overseeing 10 UPKD and ends up with 20 UPKD. About nine teams, approximately one team in every district, are required for about 170 active Unshaped in 2008, when technical support from the project ends.53 The following alternatives secure the implementation of effective and efficient UPKD supervision (internal audit): Independent (fully UPKD financed)

1. Under the umbrella of Forum Kecamatan and Forum Kabupaten, UPKD establish, re-organize and finance their supervision. UPKD are already used to provide honorarium for their BP-teams. In a first step all interested BP-UPKD members in a sub-district are invited to apply for becoming full-time UPKD supervisor candidate. In a second step, the most suitable sub-district candidates would then compete with BP-UPKD candidates from other sub-districts in the final selection of two to four UPKD district supervisors. (Simultaneously, supervisors on district level could represent UPKD Forum and engage in and organize activities.) The final third step would then see the district supervisors appointing a superior or contracting a public accountant to become the professional supervisor, advisor, consultant, and coordinator. The bottom-up approach needs more technical assistance (training hitherto non-professional supervisors) and requires support, goodwill and coordination capacity on part of all UPKD. Probably, this is one of the less expensive alternatives.

2. UPKD identify managers or supervisors of Dinas Koperasi-rated cooperatives

with substantial savings and credit activities for conducting these internal audits.

3. UPKD representatives from all districts contract a public accountant who

offers supervisory services and organizes cooperation with accountants or special trained teams in all district capitals. (BDS 54 -concept) This system could become a more expensive one.

Government Assistance

4. The government is owner of the UPKD-administered IMS-NTAADP fund and has the right and obligation to supervise the institutions working with this fund. Consequently, UPKD supervisors could be attached to or even employed by district government supervision authorities such as Bawasda or Dinas Koperasi and enjoy logistic support (office). The coordinator would be attached to the respective provincial authority.

53 For comparison, in Bali, about 60 supervisors oversee about 1,200 LPD, a relationship of 1 supervisor for 10 MFI. 54 Business Development Services


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Bank Assistance

5. Similar to the LPD model in Bali, UPKD can be regarded as part of the government-owned financial system in NTB. The coordinator of supervisors would be attached to BPD Bank NTB’s head office, internal audit department. The supervisors would be attached to the branches. One branch would have to employ two staffs for supervising about 20 UPKD. These teams, if employed by BPD Bank NTB, are the most professional (probably over-qualified) and perhaps the most expensive choice. They cost distinctly more than Rp100m annually, a costly alternative even if BPD Bank NTB would benefit from synergies through extending loans to UPKD.

6. BPR-LKP could arrange and take over UPKD supervision. On average, one

BPR-LPK would supervise five UPKD. Unfortunately, this promising alternative can be discussed only after BPR-LKP reorganization, perhaps in 2007.

7. As a pilot project for future non-bank MFI supervision, BI engages in providing

assistance for the organization of UPKD supervision. In this scenario BI would take over the task of head supervision teams until a new superintendent agency supervises FI.

Financing Supervision It is projected that supervision (internal audit) for 170 performing UPKD may cost about Rp500m annually. Approximately 15 to 25 qualified supervisors (ratio < 10:1) will be employed (against more than 700 BP members at present). This compares to about 60 persons supervising Bali’s about 1,200 LPD (ratio about 20:1), which are also much larger. The costs may be shared as follows: - Total cost divided by the number of UPKD: Each MFI has to pay Rp3m per year

or Rp250,000 per month. This amount is quite high for UPKD with assets below Rp100m.

- UPKD pay 2% p.a. interest for the income earning part of the IMS-NTAADP loan fund, i.e. in total approximately Rp25b x 2% = Rp500m for the system. UPKD with higher share in the loan fund and higher interest income have probably also more transactions to be checked, and consequently pay more.

- UPKD pay a contribution amounting to 2% of the net loan portfolio (outstanding loans minus reserves for bad debt). This regulation takes into account loan fund repayment or additional funds mobilization or new loans for onlending.

6.4 UPKD in the Regional Financial System BPD Bank NTB, BPR-LKP, LKP, and UPKD have in common that they have no private owner. The province and the districts are owners of BPD Bank NTB, BPR-LKP, and LKP. The future UPKD ownership needs to be determined. BI’s connected party exposure limits are not applicable for transactions between UsPKD with BPD Bank NTB or BPR-LKP because of different ownership. The products of government-owned financial institutions complement each other. A micro entrepreneur might get the first loan from UsPKD. When the finance requirements exceed UsPKD’s competence, UsPKD might issue a recommendation letter and attach the investor’s credit history file in order to facilitate a loan at the


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nearest BPR-LKP. UsPKD could also take over for other financial institutions loan monitoring and loan collection talks. Similarly, BPR-LKP might refer to UsPKD should a loan applicant ask for a facility below Rp1m. The clients remain in an association of government-owned financial institutions. In this field, the government is not competing with other private financial institutions, because no other contender offers financial services from village to provincial capital. All parties might benefit from synergies. It is proposed that UsPKD participate in, or even spearhead, a mutual sub-district based loan information system to reduce instances of double financing. It could become a task of Forum Kecamatan to provide the turntable for information. Similarly, Forum Kecamatan or Forum Kabupaten can become a place to collect and evaluate data on loans and loan performance. These data can serve as a source to build a loan-scoring model. Scoring can contribute to easier, faster and a more reliable loan assessment, from which especially people without physical collateral can benefit. Cooperation among UsPKD needs to be made visible and expressed in a joint logo.

Level Local

Government-owned financial institutions

Loan range Rp m

Provincial capital BPD Bank NTB Headquarters > 200

District capital BPD branch BPD branch 20 - 200

Sub-district capital BPR-LKP BPR-LKP BPR-LKP 2.0 - 20

Village UsPKD UsPKD UsPKD UsPKD 0.2 - 2.0

6.5 UPKD Access to Finance Project / Program Funds UPKD is a government-financed FI with staff trained with government funds. This institution could offer its services to administer (revolving) funds of other government programs. As the FI, namely UPKD, already exists with experienced staff (no need to be trained anew in bookkeeping, loan disbursement procedures, etc.), sector programs can focus on sector specific issues. For example, for a program to provide assistance to fishermen, fishery extension service does not need to be concerned with managing finance of a SCG, and training fishermen (three managers, three internal supervisors per village) to become micro bankers.


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Bank Loans According to estimates of 60 UPKD managers, the average village has an unmet micro loan demand of about Rp350m. Thus the potential micro loan demand in NTB’s 800 villages amounts to Rp280b. Banks cannot fulfill this demand for small micro loans. UPKD, if provided with the means, can accelerate rural development through the provision of the financial services rural people request. Currently, UPKD cannot obtain a bank loan. First, no bank will consider a loan without a final solution to the UPKD ownership issue. Second, still many banks assess loan requests based on 5C, and therefore, FI will find it difficult to obtain a loan. Although meanwhile, some 30 banks learned to assess BPR (MFI) based on CAMEL, they prefer financing those BPR whose rating is “sound” since two or more years. Therefore, it is important that UPKD management understands CAMEL rating, manages and monitors the MFI respectively. BPD Bank NTB may also look for opportunities to extend financing SME, including financing creditworthy UPKD. Should BPD Bank NTB engage in UPKD supervision, this bank would have sufficient in-depth information upon which a loan decision can be based. Measured by the performance of even the best UPKD, it is unlikely and not realistic to expect that they will obtain commercial bank financing before end of 2007. Some argue that commercial bank loans that cost perhaps 15%-18% p.a. (including fees) are too expensive. Most UPKD managers believe that they cannot earn a profit from these funds. They had in mind that these loans need to be repaid in monthly installments. When offering the prospect of a flexible55 3-year loan at 18% p.a. (1.5% p.m.) some changed their mind. They could identify potential clients who would pay 3% or 4% per month for non-installment loans. If offered, they would immediately accept the price for this loan type. Other Sources Before applying for a bank loan, UPKD should also tap other sources of low-cost funds such as SME-loans from KUB (Lombok Timur) or from state-owned enterprises.56 PNM extends loans to MFI, however, at almost commercial interest rates. In this respect the UPKD Kecamatan or Kabupaten Forum could lobby for support and lead an information and promotion campaign. It would probably be too ambitious to develop Kabupaten Forum to become an UsPKD apex organization within three years.

55 A kind of current account loan with repayment anytime and interest charged based on actual outstanding amounts. 56 State-owned enterprises (BUMN) are obliged to set aside 1%-5% of their profits for SME support.


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7 Implementation 2006-2008 The project shall assist introducing the following key success elements in UsPKD: - transparent decision making; - transparent accounting; - performance monitoring; - performance-based incentives; - regular and irregular supervision/audit; - effective sanctions. The proposed project will have several overlapping sequences or phases, because it is recommended to start in a pilot area, and learn from experience before scaling-up. The project will carry out different activities at the same time, but in different locations. The sustainability of MFI, here: UsPKD, in NTB shall be achieved through (i) asset verification, (ii) on-the-job training (business-orientation), (iii) consultation (problem solving), (iv) co-operation among MFI (supervision) and with other FI. Provision of tools (manuals), in-class training, and certification are accompanying measures to achieve sustainability.

7.1 UPKD Development and Enabling Environment The project simultaneously aims at developing UPKD as village-based MFI and improving the environment in which UPKD operate. 1) UPKD Development: Institution and Capacity Building

- Inventory of assets of the “Units”, in particular the loan portfolio, by visiting all

debtors individually; assessment of the individual loan and its book value; - Transfer of assets from UnitPKD to UsahaPKD, new opening balance sheet; - Development of manual for UsahaPKD and on-the-job training; - Consultation (stabilizing through problem solving, performance improvement); - Strengthening cooperation among UPKD through association or Forum UPKD;

o externalization of internal supervision and audit; o human resources development towards certifying staff and UPKD (in-class

training); o lobbying for support and access to funds; o data base establishment for information exchange with other banks and

developing credit scoring; - Cooperation with banks in technical (data exchange, HRD) and financial (loan,

savings) matters. 2) Enabling Environment - Information campaign; - Decrees or orders/instructions regarding loan portfolio revision; - Regulations concerning IMS-NTAADP fund ownership and handling bad debt; - Decrees and recommendations regarding UsPKD mission, vision, statutes and

bylaws; - Regulations regarding UPKD ownership and incorporation (BUMDES, MFI/LKM) - Regulations regarding savings services; - Regulations regarding UPKD monitoring and supervision.


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7.2 Sequence of Activities The following is the proposed sequence of activities: 0 Pre-project phase Consultations with GoNTB in order to agree on common objectives and basic project design (see Chapter 5) 1 Preparation (Month 1-2) Decision on pilot project locations Informing about 15 village governments and UPKD managements Affirmation of cooperation Recruitment of three project staff, familiarization and training 2 Test Phase (Month 3-5) a) Transfer of assets from UPKD to UsPKD, portfolio assessment, in pilot villages b) Revision of UPKD manual and adoption to a profit-oriented MFI c) Development of action plans for debt bad collection d) On-the-job training The project approach will be tested with 12 UPKD in pilot areas. This experience is required to decide on further steps, in particular regarding project staff requirements before expanding the project to all districts. By then it will be possible to estimate the percentage of participating and promising UPKD. The project will also know whether time allocations were realistic or need to be adjusted. 3 Multiplication (Month 6 onwards) a) Transfer of assets from UPKD to UsPKD, portfolio assessment b) Revision of UPKD manual and adoption to a profit-oriented MFI c) On-the-job training d) Consulting e) Development of training material 4 Stabilizing towards Sustainability a) In-class training, qualification and certification b) Implementing internal audit/supervision, c) Empowerment of UPKD Forum or association (training, consultation, coordination, funding) Parallel to activities that involve UsPKD managers, the project in cooperation with relevant government authorities, shall develop suitable regulations governing UsPKD and establish a supervision, monitoring and evaluation system.

7.3 Draft Concept: Implementation Phase A project director (ProD) will be the responsible coordinator for the project’s activities. In cooperation with government agencies, the ProD will, among others: - coordinate with government agencies; socialization of the program in villages; - represent and present the project; - employ, guide, supervise, evaluate three MFA (Microfinance Advisors), starting

Month 2;


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- employ, guide, supervise and evaluate the performance of up to three project deputy directors (ProDD or MFA team leaders) and 18 MFA (starting Month 4 - 6);

- organize training, seminars, workshops, study tours (mainly within the district); - administer office affairs and project funds; - monitor and reporting project progress. Draft Schedule for Project Pilot and Implementation Phase (for discussion) Month 1 - Appointment of project director (ProD) - Project preparation (procurement, logistics etc.) - Selection/recruitment of three field workers / Microfinance Advisor (MFA) - With government agencies, visit preparations to present the project - Visits and negotiations with MusDes and UPKD Month 2 - Portfolio review agreements with MusDes in at least six villages in Lombok Barat - Preparation of forms for portfolio assessment, test runs together with UPKD (It is

important that ProD visits a number of debtors himself.) - Employment and training of three MFA Month 3 - Each MFA assists two UPKD (2 UPKD x about 7-10 days) - Securing agreements with at least three more MusDes - ProD six days in the field supervising each MFA for two days (supervising and advising

MFA is a major task of the superior, especially at the beginning of the assignment.) - ProD collects information for a review of the operation manual for UPKD based on inputs

from UPKD and MFA (month 3 – 5) - Decision on ending or prolonging the pilot test phase Month 4 - Each of the three MFA assists three UPKD (2 UPKD x about 4-5 days – reduced intensity

-+ 1 “new” UPKD x 7-10 days) - Selection / recruitment of at least six new MFA - Selection / recruitment of one to three Project Deputy Directors (ProDD) - Securing agreements with at least three more Musdes - Decision on the districts to which the project will expand in Month 6 - Decision on handling bad debt from IMS-NTAADP (write-off procedures) Month 5 - Each MFA assists four UPKD (3 UPKD x about 3-5 days + 1 UPKD 7-10 days) - Employment and training six new MFA, accompanying the experienced MFA - Employment and introducing one ProDD - Securing agreements with at least twelve more Musdes - Finalizing draft UPKD manual Month 6 - Assistance to 24 UPKD: - New MFA assist each two UPKD (6 new MFA x 2 UPKD = 12 UPKD) - Experienced MFA assist each four UPKD (3 MFA x 4 UPKD = 12 UPKD) - Securing agreements with at least six more Musdes - Experienced MFA provide on-the-job training using the draft UPKD manual for those

UPKD that finalized portfolio assessment. At the end of Month 6 - one ProD coordinates the project and supervises three ProDD and three MFA directly - three ProDD each coordinate and supervise six MFA - about 24 UPKD receive project support


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During a 3-month pilot phase, it is proposed to allocate two MFA to the district Lombok Barat and one MFA to Lombok Tengah57 because of: - proximity to provincial agencies; - superior infrastructure; - short distances (higher efficiency); - district government proved its strong commitment in UPKD development; - district government still employs UPKD facilitators; - establishment of new UPKD is supported with funds from district budget; - different government agencies responsible (Bappeda and Dinas Koperasi) - almost all UPKD own computers, many UPKD mangers have motorcycles; - experience on UPKD transformation can be gathered in different environments:

o UPKD work in regions in which many other MFI are active; o UPKD in adjacent villages show extremely different performance; o UPKD operate in dry areas (low income).

7.4 UPKD Portfolio Verification and Assessment Transparent accounting is a pillar for successful and sustainable MFI. Provincial and district governments will promote the proposed changes and invite MusDes for consultations. ProD will support this information campaign with the preparation of presentations for MusDes. One of the major project uncertainties is, whether it will be possible to arrange a MusDes meeting on short notice and to obtain Musdes support (see also Annex 11: MusDes meetings regulations). There are reports that MusDes members obtained loans, often not according to regulations, which are not repaid according to schedule. The extent of irregularities is unknown, but one has to expect reluctance and even resistance. UPKD improvement is unlikely without MusDes support. Because of these consultations, it is expected that MusDes will agree at least to the proposed portfolio “stocktaking”. More than 80% of UPKD assets are loan contracts with groups, i.e. documents signed by the group chairmen and group members. The identity of the individual debtors, their address or homes, the validity of their signatures, and the individual loan account balances need reconfirmation. The project will develop, test (and adjust, if necessary) inventory forms, which will contain all relevant details of the loan and borrower, such as income, collateral (land ownership, condition of home as poverty indicator, appliances, other assets) and repayment capacity. The debtors, ideally together with spouse, will be asked when and how (source) they intend to settle overdues. These data serve to decide on proposing a rescheduling agreement or write-offs. Therefore, it is indispensable to pay a visit to the homes of the debtors. The microfinance advisors (MFA, project field staff) together with UPKD managers, staff, BP, and group leaders will elaborate a schedule or action plan to visit all debtors. For at least one week, the MFA together with UPKD (manager, staff, BP, group leaders) will visit as many debtors as possible and train handling the “inventory forms” on the job. Afterwards, UPKD will continue this “stocktaking” on their own. Based on one week experience it will be possible to agree on a date (commitment of 57 Lombok Barat has 30 UPKD, out of which some 20 UPKD participate (assumption). One microfinance advisor (MFA) can handle about 10-15 UPKD. Consequently, one MFA will be allocated to the northern part of LoBar, another one to the southern part of the district. The third MFA will be employed in LoTeng.


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UPKD), when “stocktaking” will be finished. The MFA will return after one week for two or three days to review the progress and verify on the spot the data that were meanwhile collected without their presence, e.g. by checking 10% of the “inventory cards”. This check is indispensable. Irregularities have to be reported, sanctions to be applied (e.g., blacklisting for future loans and participation in support schemes of government agencies).58 ProD has to check the work of the UPKD and the MFA himself by reviewing 1-2% of the loans. It is estimated that it takes from less than one month to up to two months for a UPKD to complete “stocktaking”. It depends on the number of individual borrowers (estimated 500 per UPKD), commitment (number of persons that will be mobilized for the task, the time they can make available for the job), distances to borrowers, seasons (farmer work in the field), arrears (more time-consuming), etc. and results of re-checks by MFA and ProD. In particular the engagement of group leaders will be decisive. It is expected that during the project’s pilot phase the local government issues regulations regarding the handling of bad debt and transferring assets from Unit PKD to UsPKD. Simultaneously, ProD develops a draft UsPKD manual, which shall be used temporarily as a guideline and continuously improved.

7.5 UPKD Management Support After the initial phase of portfolio confirmation and assessment, and establishing a new balance sheet, the intensity to assist UPKD declines. Whereas each MFA assists two UPKD in the first month, they will probably share their time with four UPKD after three months and with seven or more UPKD after one year. Intense on –the-job training for up to six months allows MFA also to gather locally specific experience and collect information for further improvements and upgrades of the UsPKD manual. Afterwards, for a period of up to 12 months, MFA will spend one or two days a month accompanying, advising and supervising (initially also auditing) UsPKD with their routine work (consultation). Proposed sequence of assistance to one UPKD:

Assistance Time Allocation Duration IS: intensive support (portfolio assessment) about 6-10 days/month up to 2 months

T: on-the-job training about 2-5 days/month up to 6 months

C: consulting about 1-2 days/month up to 12 months

One MFA accompanies the UPKD continuously over a period of about 12 to 20 months. Intensive support, i.e. portfolio assessment, will be extremely time-consuming, because it has to be expected that it does not get always a broad-based support and manipulations occur. Therefore it takes more than a year until all qualifying UPKD receive support. Many more UPKD could receive support faster, if they will voluntarily register all outstanding debt in a way that MFA need only to

58 It is proposed to support this portfolio assessment with incentives. A modest compensation shall be paid for completed forms.


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confirm the correctness of the records. In this respect, one village might perhaps support the neighboring village. Following the sequence of assistance and following the principle that a MFA should continue advice to the same UPKD, the work plan of an MFA could look as follows: Table 20: Suggested MFA work plan

Month 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

UPKD 1 IS IS T T T T T T C C C C C C C C C C

UPKD 2 IS IS T T T T T T C C C C C C C C C C

UPKD 3 IS IS T T T T T T C C C C C C C C C

UPKD 4 IS IS T T T T T T C C C C C C C C

UPKD 5 IS IS T T T T T T C C C C C C

UPKD 6 IS IS T T T T T T C C C C

UPKD 7 IS IS T T T T T T C

UPKD 8 IS IS T T T

UPKD 9 IS IS T

UPKD 10 IS

In month 3, a MFA gives intensive support (IS) to two UPKD, in month 7 and 8 the MFA will train (T) four UPKD and render intensive support to one UPKD, and in month 11, two UPKD receive consultancy and four UPKD training.

At the beginning, the project renders intensive support to a limited number of UPKD only, but it will assist 117 UPKD after 12 months. Starting with all UPKD at the same time would require employing, training, and supervising more than 100 MFA. It is not advantageous when these trained, but still less experienced MFA would than meet experienced UPKD managers. After three months, i.e. after the end of intensive support, just when these MFA got some insight and could become valuable for the project, one would have to dismiss 50 personnel and, after another six months, again about 30 personnel.

Based on above MFA work plan, the cumulative number of UPKD that receive assistance is calculated as below: Table 21: No. Participating UPKD (cumulative) Month 3 4 5 6 7 8 9 10 11 12 MFA 1-3 6 9 12 12 15 15 18 18 21 21 MFA 4-6 6 9 12 12 15 15 18 MFA 7-9 6 9 12 12 15 15 18 MFA 10-12 6 9 12 12 15 15 MFA 13-15 6 9 12 12 15 15 MFA 16-18 6 9 12 12 15 MFA 19-21 6 9 12 12 15 Total 6 9 12 24 45 69 84 96 105 117

MFA = Microfinance Advisors


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Whereas after six month only 24 UPKD received support, this number has increased more than fourfold until end of Month 12 to become 117. It will further increase by about 10 UPKD every month. After the new portfolio balance was established, the main task of MFA will be guiding UPKD - to adhere to rules and regulations (strengthening discipline, supervision), - to respond to requests from the market (development of products for the village

community), - to earn profit, - to self-monitor and –evaluate, - to become a performing qualified MFI, eligible for a commercial loan for onlending

to villagers.

Sequence of assistance to UPKD

020406080

100120140160180200

3 9 15 21 27 33

Month

Num

ber o

f UPK

D a

ssis

ted

Portfolio verification On-the-job Training Consulting

Latest after 18 months, after assisting about 180 UPKD, activities regarding portfolio verification and assessment finished. By that time, most of the UPKD went already through on-the-job training. Afterwards, MFA will continue visiting UPKD as consultants. The frequency of these visits will decline from two days per month to less than one day per month. The project starts its “out phasing” stage when only few UPKD require on-the-job training, latest after 24 months.


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Rural Microfinance Development Project – Staff Requirements A From Pilot Phase to Implementation (Months 1-18)

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Phase Pilot Implementation Reducing Outphasing

Project Director R E Microfinance

Advisors (MFA 1-3) R E Project Deputy Director 1 R E

R E R E MFA 4-9 R E

Project Deputy Director 2 R E R E R E MFA 10-15 R E

Project Deputy Director 3 R E R E R E MFA 16-21 R E

R = Recruitment, E = Employment MFA Microfinance Advisors 3 3 3 9 15 21 21 21 21 21 21 21 21 21 21 21 21

UPKD Portfolio Assessment UPKD 6 9 6 15 33 45 39 27 21 21 21 21 21 21 18 15

On-the-job training UsPKD 0 0 6 9 12 24 45 69 78 87 93 93 81 69 63 63

Consulting UsPKD 0 0 0 0 0 0 0 0 6 9 12 24 45 69 84 96

Total USPKD 6 9 12 24 45 69 84 96 105 117 126 138 147 159 165 174 New UPKD joining with portfolio verification 6 3 3 12 21 24 15 12 9 12 9 12 9 12 6 15Accumulative 6 9 12 24 45 69 84 96 105 117 126 138 147 159 165 180


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Rural Microfinance Development Project – Staff Requirements B From Implementation to Outphasing (Month 19-36)

Month (Quarters) 19-21 22-24 25-27 28-30 31-33 34-36

Phase Pilot Implementation Reducing presence Outphasing Project Director #

2 Microfinance Advisors (MFA 1-3) 1 Project Deputy Director 1

2 2

MFA 4-9

2 Project Deputy Director 2

2 2 MFA 10-15 2

Project Deputy Director 3 2 2 MFA 16-21 2

MFA Microfinance Advisors # 21 19 13 13 6 6 UPKD Portfolio Assessment UPKD # ? finished On-the-job training UsPKD # 60 33 finished Consulting UsPKD # 120 147 180 180 180 180 Total UsPKD # 180 180 180 180 180 180


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Draft Implementation Schedule Regional MF Development Month 1 2 3 4 5 6 7 8 9 # # 12 18 24 30 36

Phase

Pilot

Implementation

Reducing

Outphasing

Regulations

Portfolio review instruction

Clarification regarding IMS-NTAADP fund

Decision on UPKD ownership

Asset transfer, bad debt write-off regulations Decree Governor on UsPKD, preliminary/final (AD/ART), lawyer

L

Law on MFI (GEMA, MoF, BI, SMoCSME) ?

BUMDES regulations (MoHA) ?

Advocating

Decision on incorporation

Supporting government with supervision, monitoring systems etc.

In-field activities

Training field workers

Meetings in villages (Musdes) # 6 6 # # # # # # # # # # # 9

Action plans with MusDes/UPKD management

6 3 3 # # # # # 9 # 9 # 9 # 6

Information and socialization in … villages (assumption 1 out of 3 refuses cooperation)

Portfolio assessment 6 9 6 # # # # # # # # # # # # #

On-the-job training 6 9 # # # # # # # # # # # # # # # # # #

Consulting 6 9 # # # # # # # # # # # # # # # # # # # # # # #


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Draft Implementation Schedule Regional MF Development Month 1 6 12 18 24 30 36

UPKD Management Manual

Draft, preliminary basic version

Review, adjustments

Draft final version, printing distribution

Review, final version

UPKD Manager InClass Training

Certification team, constitution, meetings

Preparation training material, 1 module/month

In-class training sessions, certification

Supervision (Internal Audit)

BP and MFA supervision

Manual for supervision teams

Recruitment supervision team, training

Supervision team responsible

Coordinator for supervisors

Transfer of responsibility, supervision, monitoring

Supervision by project

Strengthening (Sub-)District Forum/association

Lobbying for funds

Progress Review / Planning P R P R P

Progress / final report(s)


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7.6 Suggestions for Mid-Term Planning After 12 months, project participants should convene for a review to discuss achievements and problems to be resolved. By this time in-class training material should be ready and scheduled training sessions shall start beginning the second year. At about the same time the project should initiate the formation of supervisor teams and develop internal audit guidelines. Criteria should be developed to indicate the degree of assistance UsPKD require, in particular the number of monthly visits and the time for one visit so that a MFA can visit two UsPKD on one day. After 18 months, supervision teams should begin with scheduled audits. A planning workshop should decide on outphasing procedures, in particular about the number of MFA required in 2008. Probably, latest beginning 2008 the number of MFA can be reduced by six and by mid 2008 again by six. The three ProDD will have to continue supervising activities of MFA on the spot and evaluate their performance. It is suggested that they spend at least six days per month in the field to assure that MFA give right information and qualified advice to UsPKD management. A system of rotating MFA should be considered. ProDD will be engaged in gathering and collecting information for writing the UsPKD manual and preparing training material. During the last year of their assignment they will be engaged in training and certification activities as well as strengthening UsPKDForum or association.

Rural Microfinance Development in NTB – Concept and Implementation Strategy Annex 1

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Annex 1: Household Survey Results

1. Introduction The household survey has two purposes. The first is to better understand household demand for financial services in NTB, in order to identify demand-supply gaps. The second is to investigate household perceptions of microfinance supply. Along with the MFI survey, the survey analyzed relevant secondary and primary data concerning the current market (supply and demand) of microfinance services in the province. Secondary data were provided by Bappeda I and II and related institutions, while the primary data were sampled through a survey. The sample includes households of nine selected sub-districts (Kecamatan), each representing one of the nine districts (Kabupaten) in NTB. Each sub-district sample contained several MFIs and, at least, one ‘good’ performer. Sub-district selection was based on secondary data and consultations with the respective Bappeda II. The household sample includes 90 households; 10 households randomly selected from each of the 9 selected sub-districts. The report is organized into five sections. Section 1 introduces the objectives and the methodology of the survey. Section 2 discusses the characteristics of the household sample. Section 3 discusses the demand of the households for financial services. Section 4 discusses the households’ perception concerning the existing supply of financial services. Lastly, Section 5 summarises the key findings and concludes the report.

2. The Sample Households This section discusses the key socio-economic characteristics of the household sample. The heads of the households were 43 year old of age with 8 year of formal educations, in average. The majority of them received major income from Trade sector (including small-micro industries) and Agriculture sector, 33% and 27%, consecutively. Other occupations such as laborer, and formal employee accounted for less than 10%, each. The average distances of thier houses from nearest offices of MFIs were about 6 km.59 The households’ average yearly incomes were IDR 15 million with a wide gap between the poorest (IDR 700 thousand) and the richest (IDR 190 million). Using the recent exchange rate (about IDR 10,000 per USD), the average yearly income of the households is lower than the poverty line incomes of a household with four members which is IDR 29.2 million (USD 2920 per 4 persons per year, or USD 2 per capita per day). The majority of them owned physical assets such as lands (including houses), and motorcycle with estimated values ranging from IDR 3.5 million to IDR 120 million. Among the obstacles of their economies considered important were: lack of capital, increasing input prices, decreasing output prices, sicknesses of the households’ members, and bad infrastructure. There were some variations in the socio economic characteristics of the households among regions. For instance, there were more agricultural households in the districts

59 An exception is for the five household respondents from sub-village (Kampung) Lanci II, village Sukadamai, sub-district Manggela, district Dompu whose home distances are between 139 km to 150 km from the sub-district town.


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of Sumbawa island than in the districts of Lombok. Similarly, there were more households lived in homes distant from offices of MFIs and sub-district towns in Sumbawa than in Lombok. There were more households with ownerships of physical assets (such as Land) in Sumbawa than in Lombok. The households’ demand for financial services are discussed in Section, below.

3. Household Demand for Financial Services 3.1. Savings A relatively substantial proportion of the 90 households reported that they saved their excess incomes, 34% in cash, 6% in kinds, and 2% in a combination of cash and kinds. Thus, more than 40% of the households were accustomed to savings. This may suggest that there is a potential for saving mobilization, when their economies are improved. Among the purposes of their savings included: child education, capital accumulation, and going hajj. Savings for child education was mentioned most often. Of those saving in cash, 54% with banks (such as BRI Units, BNI, BPD and Rural Banks), 41% with non bank financial institutions (such as UPKDs, KSPs, USP-KUDs, and USP-KSUs), and 5% with others (i.e., child’s’ schools) (Table 1). Table A1: Distribution of Household Savers by Financial Institution Types, and Saving Balances

Institution Type Frequency (person)

Percentage (%)

Balance*) (IDR)

BRI (Units) 13 35% 3230769 BPD 5 13% 2440000 BNI 1 3% 35000000 BPR 1 3% 85000 KSP & USP 5 14% 719802 UPKD 9 24% 130000 Others 3 8% 116667 Total 37 100% 2536789 BRI Units accounted for the largest shares of the households’ bank savings while UPKDs accounted for the largest share of the households’ non bank savings. Rural banks and other non bank financial institutions accounted for a marginal shares of the households’ savings. Looking at the balance amounts, larger savers tended to save with commercial banks (such as BRI, BPD and BNI) while smaller savers saved with the rural banks, cooperatives, and UPKDs. The households’ saving behaviors may relate to several factors such as fund safety, office networks, and service convenient. As Units of a national (state owned) commercial banks with a nation wide office network (up to sub-district level) and a good performance, BRI attracted more larger savers from rural households, this survey concerned with. The households generally concerned with the safety of their funds, and the convenient of deposits and withdrawals. Although, the withdrawal and deposit policies among commercial banks were not significantly different one and another, BRI’s wide office network offered a greater access convenient to rural households. The office networks of other commercial banks were generally up to district level. The provincial government bank (BPD) did have several rural branches, but none were in the sub-districts surveyed. In spite of giving more convenient access (with their mobile services), the private rural banks and the private cooperatives were generally regarded as less safe institutions to save with, relative to the commercial banks. This was because the offices of the rural banks and the cooperatives were far a way from the households’ home or work places. In other


66

words, saving withdrawals and deposits were dependent upon visits of the field officers, rather then on the wants of the savers. The UPKDs were different cases. If managed rightly, the institutional design of UPKDs allowed them to win trust of the village communities to place their excess funds with UPKDs. They were village level MFIs established for the provision of financial services of the rural households in less populated and underdeveloped (dry land) areas. Some associations between the socio-economic characteristics of the households and their institutional saving balances were found. Age, amounts of non agriculture income, and assets were positively correlated to the households’ saving balance amounts while education, agriculture income, and home distance from sub-district towns were negatively correlated with the households’ saving balance amounts. However, only the non agriculture income was significantly correlated to the households’ institutional saving balance amounts. This suggests that households with larger non agriculture incomes have larger saving balances than those with lower non agriculture incomes have, with existing financial institutions. This is because the earners of non agricultural incomes (such as traders and micro and small industries ) tend to have more frequent cash incomes besides (perhaps) being more bank minded, relative to farmers. 3.2. Borrowing More than a half of the households borrowed loans, on a regular basis. They borrowed loans for reasons, as follows: working capital, medical costs, education expenses, and housing expenses. The first was the most often mentioned reason (92%). The occasions during which they generally borrowed were: planting season, and new school year. A few of them also borrowed when the households’ members were sick, to pay for the medical expenses. Additionally, some (32%) of the households borrowed loans from informal sources for reasons, such as: loan repayment (45%), foods (28%), business capital (14%), and others such as: married and migrant workers (14%). These were generally emergency cases which were under serviced by existing financial institutions. They borrowed informal loans as their loans with other sources (financial institutions) were due while they did not have cash to for the due amounts. They borrowed informal loans as they lacked of cash for the day’s foods. They borrowed informal loans for working capitals because the households could get access to institutional loans (e.g. due to previous loan non repayments, or simply not bankable). In a few instances, the households might borrow informal loans as they were cheap (charging no interest), and more convenient (from the neighbor). In support to the informal borrowing behaviors, the majority of the households reported that they would borrow from friends and relatives (56%) when they were in urgent needs of cash. Only a few of them would borrow from financial institutions (2%), or would withdraw saving deposits (2%) when immediate needs of cash were necessary. Thus, the households relayed greatly on friends and relatives for immediate cash needs. Of those borrowing institutional loans, most of them borrowed from non bank institutions, particularly UPKDs and cooperatives (including KSP, USP, Bumdes and Koptan), which accounted for 48% and 34% of the borrowers, consecutively. Only 16% borrowed from banks (Table 2). This was contradictive to the financial institutions with which the households saved their excess incomes. As noted above,


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the households tended to save with (commercial) banks, rather than with non bank financial institutions. Table A2: Distribution of Households by Financial Institution and Loan Sizes

Institution Type Frequency (person)

Percentage (%)

Loan Size*) (IDR)

BRI (Units) 4 8% 7.74 (3.95-10.00) BPD 0 0% - BNI 2 4% 25.00 (10.00 – 35.00) BPR 2 4% 1.46 (0.10-2.84) KSP & USP 17 34% 1.55 (0.35-5.00) UPKD 24 48% 0.74 (0.30-2.00) Others 1 2% 5.00 Total 50 100% 2.66 (0.10-35) Notes: *) the minimum and maximum balances are in bracket The dominant role of non bank financial institutions in the households’ borrowed loans related to the characteristics of the loan services available (in one hand) and the characteristics of the households (on the other hand). The rural households were generally less educated, earned low and seasonal income, had limited assets acceptable as collateral for bank loans, and lived in sparsely populated areas with underdeveloped infrastructure. With these characters, the households generally demanded for quick and convenient access to small loan services. This kind of loan services was generally greater available from specialized non bank rural financial institutions, rather than banks. UPKDs, for instance, offered seasonal loan services specifically designed for the farmer members. Other than memberships, sound loan uses, and simple paper works, there were practically no requirements necessary for the households getting the loans. Such a loan was generally not available from banks. Besides requiring tougher requirements and procedures, banks generally offered larger loans. This was also the case for loans offered by other institutions (i.e., agribusiness firms) to selected Tobacco farmers in Lombok. See Table 2 for the sources and sizes of loans borrowed by the households. In support to this point, service inconvenient, no collateral, long loan processing, high interest rate, and unfair loan contract were the major factors preventing the households from borrowing institutional loans. Some associations between the socio-economic characteristics of the households and the amounts of institutional loans they borrowed were observed. Age, education, amounts of agriculture income, and asset values were positively correlated to the households’ institutional loan amounts while home distance from sub-district town was negatively correlated to the households’ institutional loan amounts. Of the socio economic characteristics of the households, agriculture income and asset value were statically significant (at 5 % level or lower). This means that the larger the households’ agriculture incomes and asset values the larger are the amounts of institutional loans they borrow. Households with larger agriculture incomes generally have larger (land) asset values. As so they are eligible for larger loans as they have the necessary collaterals.


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4. Household Perceptions of Microfinance Supply This section discusses the perceptions of the households concerning the supply of microfinance services existing in their sub-district. The discussions focus on several issues, including the interest rate, impacts of recent vast development in the supply of microfinance services on service access, who should borrow institutional loans, obstacles of sustainable provision of microfinance services, and ways to sustain the provision of microfinance services 4.1. Interest Rate on Microfinance Services The households appeared to support that interest rates should be applied to microfinance services. When asked whether interest rates should be applied to microfinance services, the majority of them (94%) replayed with ‘yes’ answer. This indicates that the view shared by many policy makers in Indonesia that microfinance should not charge interest rate is not right. Moreover, the acceptance of interest rate base financial services suggests that interest rate base ‘financial system’ approach to microfinance development remain relevant in rural NTB. 4.2. Access to Microfinance Services After Recent Microfinance Development The supply of financial services to rural households strongly developed since the liberalization of the financial sector in 1980s. Many new rural banks and rural credit cooperatives have been established. In addition, many development programs also included the establishment of microfinance institutions such as UPKDs, P4K groups and associations, UED-SP, and Koptan, among others. When asked if this vast development of the supply of microfinance services have eased access to saving and loan services, more than 70% replied that access to saving and loan services became easier. Only one third of them informed that access to consumptive loans became easier. This, however, doest not imply that the households’ demand for financial services has been fully serviced As noted above, there are evidences which indicate gaps between the services supplied by MFI and the services demanded by the households such as loan terms, and loan sizes. 4.3. The MFI best Servicing their Demand When asked to name the MFI best servicing their demand for financial services, however, most of them were unable to give accurate answers. Of those responding, they generally gave mixed responses. Each referred to the MFIs from which they obtained financial services but unable to explain the advantages of the referred MFIs over the other MFIs. This suggests that the households were generally not well informed about available financial services at local (sub-district) market. 4.4. Who Should Borrow Loans When asked about who should borrow institutional loans, their responses were: entrepreneurs (56%), the income earners (6%), honest people (10%), anybody in need (19%), and other (including not responding). This suggests that the majority of the households understood that borrowers (entrepreneurs, income earners and honest people) should be capable and have to repay their loans. 4.5. Ways to Sustain the Provision of Microfinance Services The households perceived that non repayment, economic failure of the clients, unhealthy market competition, lack of loanable capitals, and mismanagement were among the major obstacles preventing MFIs to sustain their operations. As so, the households suggested several ways to sustain the provision of microfinance services,


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as follows. First, MFIs should have good and honest management and achieved high rate of loan repayment. Second, MFIs should offer demand driven and convenient services. Third, MFIs should make their services widely known by the target clients.

5. Summary and Conclusions The household survey had two purposes. The first is to better understand household demand for financial services in NTB, in order to identify demand-supply gaps. The second is to investigate household perceptions of microfinance supply. To this end, 90 households from villages in the 9 districts were surveyed during June/July 2005. The survey found that a substantial proportion of the households normally save their excess incomes: 34% in cash (mostly with financial institutions), 6% in kind, and 2% in a combination of cash and kinds. Large savings are generally placed with commercial banks (particularly BRI Units) while small savings are generally placed with nearby non-bank financial institutions (particularly UPKDs). More than half of the households regularly borrow from financial institutions, particularly from UPKD and credit cooperatives. Most loans from these MFI are small, with sizes less than IDR 2 million. Larger loans were borrowed from the commercial banks, mainly BRI Units. A few of the households also borrow from informal sources, in particular friends and family. Child education is the main purpose of saving, whereas the main purpose of borrowing is working capital. The households generally agree that financial services should apply interest to the clients, and that borrowers should repay their loans. Households perceived that microfinance development after financial liberalization has improved their access to financial services. The households viewed that the provision of microfinance services could be improved through demand-driven and convenient services, good and honest management, and better marketing of available services. The survey concludes that household demand for financial services indicates a large potential for saving mobilization and effective financial intermediation. The households are generally accustomed to saving and the application of interest rates on financial services. Awareness of the responsibility of loan borrowers prevailed among the households. These provide the basis for the use of the financial system approach for further development of the rural-microfinance sector in the province. The limited role of village-based microfinance institutions, such as UPKD, in the mobilization of household savings – despite substantial demand - points to gaps in the rural financial market. Further evidence for a demand-supply gap are several mismatches between the characteristics of the services demanded by the households and the services offered by the financial institutions. For instance, loans for purposes other than working capital are generally not supplied to the households.


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Annex 2: MFI Survey Results The MFI survey has three purposes. The first is to provide a reliable picture about the origin, extent and quality of institutional microfinance services, including public and private entities, in NTB. The second is to learn the key characteristics of household and microenterprise demand for financial services. The characteristics include products and volume of services, in order to identify demand-supply gaps. Lastly, the third is to investigate perceptions of the microfinance supply by the demand side. The survey analyzes secondary and primary data concerning the current market (supply and demand) of microfinance services in the province. Secondary data were provided by Bappeda and related institutions while the primary data collected through a sample survey. The sample includes MFIs and households from nine selected sub-districts (Kecamatan), each represents one of the 9 districts (Kabupaten) in Nusa Tenggara Barat (NTB). The selected sub-districts have diverse types of village MFIs and, at least, one of them performing ‘well’. The selection was based on available secondary data and consultation from Bappeda. One MFI of each type existing in the selected sub-districts was chosen as sample. Additionally, ‘good’ performing MFIs of types not present in the sub-district sample were also included in the sample. Thus, the sampling should represent each type of ‘good’ performing village MFIs in the province. The sampling specified above selected 39 various types of village MFIs, 25 in Lombok island and 14 in Sumbawa island. This island differential in number of MFI sample reflected the differential in the density of MFIs in the two main islands of NTB province. For example, of the 63 rural banks and 2025 cooperatives in the province, 60% and 69% are in Lombok, consecutively (Bank Indonesia Mataram & DiskopUKM NTB province). This report presents the major results of the MFI survey. The detailed primary data compiled in the survey accompanies this report, in a soft (excell) file. The results the household survey are to given in a seprate report.

1. The Microfinance System in NTB Province A microfinance system can be defined as a system through which microfinance services to low-income households and microenterprises are provided. Microfinance services include small-scale (micro) saving, loan, insurance, payment and money transfer services which are generally underserved by the ‘macro’finance institutions such as commercial bank, finance, and insurance companies. The microfinance system in NTB is comprised of bank and non bank institutions in the formal sector, and various forms of informal sources such as money lenders in the informal sector. The banks include BRI (Units), and Rural Banks (Bank Perkreditan Rakyat, BPR). The non bank financial institutions include: the saving and credit cooperatives (Koperasi Simpan Pinjam or KSP, and Unit Simpan Pinjam or USP), and various entities resulting from institutional building activities of previous and current development (social) programs. The LDKPs (the general term of provincial government establised rural credit institutions) in the province are Lembaga Kredit Pedesaan (LKPs). The majority of them were converted to rural banks during the late 1990s. A few of the former program ‘induced’ MFIs have sutained their operations and obtained formal operational status as cooperative institutions.


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2. The MFI Sample The MFIs included as the sample in the survey can be differentiated into 12 types (Table 1). These include: rural bank (LKP), saving and credit cooperatives (KSP), saving and credit units of multipurpose cooperatives (USP-KSU), saving and credit units of the Bimas village cooperatives (USP-KUD), agricultural cooperatives (Koptan), village own enterprise (Bumdes), urban-village credit institution (LKK), islamic microfinance institution (BMT), rural-village credit institution (LPD), the financial management units (UPK) of an on-going program (Proyek Pengembangan Kecamatan, PPK), and the community direct aid fund (Bantuan Pembiayaan Langsung Masyarakat, BPLM) of an on-going agricultural development program. Table A3: Types and District Distribution of the Selected MFIs Instit. District Total Type Mtr Lobar Loteng Lotim Sbw

Barat Sbw Besar

Dompu Bima Bkota

UPKD 3 2 2 1 1 2 1 12 KSP 2 1 1 1 1 1 7

USP-KSU 1 1 2 1 2 7 USP-KUD 1 1 1 3

Koptan 1 1 2 Bumdes 1 1

LKK 2 2 BMT 1 1

BPLM 1 1 LKP 1 1 LPD 1 1 UPK 1 1

5 8 6 6 2 2 3 4 3 39 Of the 12 types, UPKDs and cooperatives (KSP, USP-KSU, and USP-KUD) are largerly represented in the sample while the others are only represented by one or two individual institutions. The district distribution of the MFIs does not reflect the population. An exception is for Bumdes, LKK, LPD, UPK and BPLM which are local/program specific, and hence represent the population. However, the majority of the MFI types existing in the province is represented in the sample.

3. Sample MFI Characteristics This section discusses the institutional origins and other major characteristics of the surveyed MFIs. 3.1 Institutional Origin This survey confirms the findings of a previous study (Holloh 2001) that the majority of the MFIs in NTB originated from social development programs. The financial statistics provided by 18 MFIs (included in this survey) shows that more than 70 per cent of the MFIs’ capital were originated from the previous development programs. Among the previous development programs are the green revolution program (Bimas), the small farmer income generation program (P4K), the backward village development program (IDT), the social sefety net program (PMDKE), and the agricultural development area program (NTAADP).


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Several examples are, as follows. USP-KUDs are the units of the village cooperatives (KUDs) which were established under the Bimas program. KOPTAN was established by groups of farmers (formed during the Bimas program) and received additional fundings from the Departmen of Agriculture (DEPTAN). Bumdes was established by the village government and the community to organize funds from various programs, targeting the community. Some USP-KSUs were developed by groups or institutions resulting from the P4K program while some by groups or associations of private individuals. UPKDs were established under the NTAADP program. LKK and LPD were established by the district government to manage the PMDKE funds. UPK was established under the sub-district development program (PPK). LKP was established by the provincial government under its rural credit institution development program. There are instances of multiple programs assisting individual MFIs. A few of the MFIs were purely established under private initiatives, by groups or associations of private individuals. The majority of KSPs are private which were established by a group of individual and family associations.. Several of them were developed from ROSCAs of family associations. The origins of individual MFIs are listed in the soft data file accompanying this report. 3.2. Ownership Various ownerships of the MFIs were found, some owned by the communities, some by the government (including the village government), and others by private entities. As perceived by the respondents, 74% of them are community and government owned institutions and 26% are private institutions. LKP is the provincial/district government rural bank. Bumdes, LKK and LPD are the business entities of village governments. UPK and BPLM is intented to be owned by community members. USP-KUDs are generally owned by the community members. KSPs are generally private. Some USP-KSUs are owned by the villages or the communities while the others are owned by private members. BMT is also owned by private members. Although, conceptually, the cooperatives (USPs and KSPs) are supposedly owned by the members, several deviations were found in this survey. Many USPs and KSPs are practically owned by private groups and village governments as they own or control the majority of the shares. In contrast, the clients (borrowers) which consitute for the majority of the members are generally lack of control since each of them only own a little share. Of those receiving grants from previous development programs, a conflict of interest between the village government and the management, regarding the ownership of the funds, may arise. On the other hand, the community members are generally not aware of their rights to the ownership of the cooperatives. The conflict of interest may creates a problem which harm the future of many USP-KUDs and village/community owned USP-KSUs. 3.3. Governance The governance of the MFIs relates to their operational status and ownerships. The operation of LKP and cooperatives (USP-KUDs, USP-KSU, and KSPs) are formally recognized by the banking laws, and the cooperative laws and cooperative regulations, consecutively. BMT is also recognized by a cooperative microfinance institution. Contrarily, the operations of the other MFIs are not recognized by the national laws and regulations. Thus, only licensed rural bank and cooperatives can be regarded as ‘formal’ MFIs. A rural bank is subject to the supervision of the central bank while a cooperative is subject to the supervision of the department of cooperative and small and medium enterprises (DepkopUKM). However, it is


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questionable whether the authories could effectively supervise such a large number of rural banks and cooperatives as in Indonesia. Additionally, the technical proficiencies of the Department of Cooverative and Small and Medium Enterprises (Depkop UKM) as the supervisor of cooperative financial institutions are also questionable. On the other hand, the operational status of other MFI falls somewhere between formal and informal. Thus, to simplify, they can be regarded as semi formal institutions. They are the concern of local governments at provincial and district level. LKK and LKP operate under decrees of the respective district heads. Koptan is not registered as a cooperative, inspite of its name referring to a cooperative. Bumdes operates under the village assembly’s decision. The operational status of UPKD becomes a hot issue since the NTAADP program ended. UPK and BPLM operate as the financial management units of present social development programs. As a consequence, their supervision and the technical assistance are generally at stake. No institutions are specifically assigned the supervision and technical assistance responsibilities. The operational budget for carrying out the responsibilities is another issue to the local government. Attempts to introduce regional regulations (as in Bali for its LPDs) have been made in several districts. However, the attempts have been strongly opposed by the parliaments as they consider the proposed regulations contradictive to the national regulations. During the early stage of its operation, the management of an individual MFI is generally run by three key personnel, namely: the manager, the bookeeper, and the service (credit) officer who is subject to the supervision and directions of the assembly of owners (i.e., provincial/district/village governments, community members, or private members). This structure resembles the standard organizational structure of a cooperative institution. Additional personnel are recruited during the later stages of its operations. The majority of the MFIs (85%) employed up to 10 officers (including the key personnel, noted above), (95%) had managers with senior high education backrounds or above, (82%) applied accounting systems, and 46% owned offices. In spite of these quit good characters, the governance of the MFIs generally lacks of a supporting system capable to provide effective supervision and technical assistance. 3.4. Services While most of the MFIs are fully financial institutions, a few of them also have other business activities. USP-KSU and USP KUD are as the examples. They are multipurpuse cooperatives, having multiple business activities. To illustrate, all KUDs have rice milling units and many have agricultural input shops. In spite of having multiple business activities, all of them consider the financial service units as core businesses and treat them as seperate and autonomous units. With some variations among individual MFIs, most of them offers saving and loan services. Their saving services include compulsory saving, voluntary savings and term deposits. The saving services offered by the MFIs are given in Table 2.


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Table A4: Financial Services Provided by Sample Village MFI Institution

type Product Initial Deposit Interest rate

(%/y) UPKD MD

MCS VS

0 IDR 1000 IDR 5000

0 0 6-12

KSP MD BCS VS TD

1% principal IDR 5t-25t

12 15

USP-KSU MD MCS BCS VS

IDR 10t-500t IDR 2500-5t 2-2.5% p. IDR 2t-2.5t

9.6-12

USP-KUD MD MCS VS

12

Koptan MD MCS

IDR 125t IDR 30t

Bumdes BCS VS

1% principal 12

LKK VS IDR 2500 12 BMT VS IDR 5000 p/l shar BPLM LKP BCS

VS 2% p IDR 2000

8

LPD VS 9.6 UPK Notes: Saving service products: MD= member deposit, MCS= member compulsory savings, BCS= borrower compulsory savings, VS= voluntary (passbook) savings, and TD- term deposits However, only a few of them offer term deposit. While there is only one form of voluntary saving (VS) offered (the passbook savings), the majority of the MFIs require three forms of the compulsory saving. These include: member deposit (MD), member compulsory saving MCS), and borrower compulsory saving (BCS). The first (MD) refers to the saving to be deposited with the institutions by new members. The second (MCS) refers to the regular saving to be made by existing members. The third (BCS) refers to the saving to be made by new borrowers, as a fraction of the loan principal. In spite of the saving services, it is necessary to note here that saving mibilization (particullary through passbook saving and term deposit services) is not the major concern of most of the MFIs. In contrast, lending (loan services) is generally the major concern of the MFIs. The loan service products offered by the MFIs are summarized in Table 3.


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Table A5: Loan Service Products of the Sample MFI Institution

Type Product Size

(IDR) Irate (%/y)

Term Adm fee

UPKD SUTA (s) UEP (d, m)

200t – 3 m 100t – 5 m

24-36 15-17

5-12 m 100d-18m

2.5% 2-3%

KSP KMK (d,w, m) 250t – 20 m 24-48 100 d – 1 y 1 - 1.5 USP-KSU KMK (i, g) 100t – 10 m 36-41 3 – 10 m 2.5-3 USP-KUD KMK (w, m,s) 200t – 5m 36 3 – 10 m 2.5 Koptan KMK (m) 500t – 1 m 32 10 m Bumdes KMK (w, m) 100t -5 m 24 11 m 2% LKK KMK (d,w,m) 100t – 4 m 21 – 24 100d - 10 m IDR 75h BMT Mm, Aq, AI 1m – 5 m Pls (8:2) 2 – 12 m BPLM LKP KMK (m) 250t – 25 m 32 3 - 36 m 1.5 % LPD KMK (d) 100t -2.5 m 48 3 m 3 % UPK SPP (m) 9.5 m 32 10 m Notes: Products: s= seasonal, d= daily, w= weekly, m= monthly, Mm= mudararabah murabahah, Aq= al-qard, Ai= al-Ijarah, KMK= working capital credit. Loan size: t= thousand, m= million. Interest rate: pls= profit/loss sharing. Loan term: d= day, m= month, y= year On the other hand, the loan services offered by the MFIs are mosltly working capital loans with 2 to 36 month terms and sizes from IDR 100 thousand to IDR 20 million. However, most of the loans advanced are less than IDR 1 million (discussed further latter). Large loans only advanced by larger MFIs to selected borrowers. There are variations in the terms, repayment system, size, interest rate, and requirements of the loan services among types and between individual MFIs with similar types. For example, some UPKDs and KSPs offer daily loan services while the others do not. This variation may relate to the market environment in which the MFIs operate. MFIs targeting clients with daily incomes such as traders offer daily loan services while those targeting farmers offer seasonal loan services. In regard to service mechanism, some variations are also observed, some MFIs use mobile services, regularly visiting the clients at their home or work places, while the other use in office services. The MFIs with mobile service generally have wider geographycal service coverage than the MFIs with in office service mechanism do. KSPs and some USP-KSUs are the MFIs which use the mobile service mechanism. The service performance of the MFIs is discussed in Section, below.

4. Sample MFI Performance This section discusses the service performance, the operational efficiency, and financial sustainability of the MFIs 4.1. Saving and Loan Service Performance The service performances of the MFIs are summarized in Table 4. It shows that the service performances of the MFIs also widely vary among groups (types) of the MFIs and among individual MFIs, as their service products do (noted above).


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Table A6: The Saving and Loan Service Performances of the Microfinance Institutions Inst Saving Deposit Services Loan Services

Client (person)

Balance (IDR 000)

Client (person)

Outstanding (IDR 000)

UPKD Mean Median Min-Max

389 392 67-126

19,600 10,600 00-131,000

558 500 104-1,185

310,000 290,000 154,000-572,000

KSP Mean Median Min-Max

958 603 110-3,224

400,000 1,6000 5361-2,290,000

570 600 101-900

470,000 250,000 47,532-1,900,000

USP-KSU Mean Median Min-Max

1554 402 143-8,771

890,000 57,000 7,630-5,800,000

500 335 100-1,754

620.000 420,000 3,100-2,340,000

USP-KUD Mean Median Min-Max

1,349 1,013 35-30,000

5,637 4,435 3,247-9,229

132 170 41-185

220,000 96,000 67,613-492,000

Koptan Mean Median Min-Max

97 97 67-126

2,537 2,537 670-4,403

88 88 50-126

64,000 64,000 59,868-67,697

Bumdes 285 68,000 603 403,025 LKK Mean Median Min-Max

100 100 0-200

2,500 2,500 00-5,000

379 379 200-557

150,000 150,000 80,000-223,000

BMT 810 9,844,000 480 166,000 BPLM 500 2,500 500 129,000 LKP 2,119 733,000 1,275 1,670,000 LPD 1,655 113,000 716 247,000 UPK 00 00 300 77,675 In terms of saving deposit and loan service performances, the rural bank (LKP) performs best among the MFIs. The rural bank ranks first in terms of number of saving deposit clients, number of borrowers, and ammounts of loan outstanding while the second in terms of saving deposit balance ammounts. In the regard to the ammounts of saving balance, the islamic institution (BMT) performs better than the rural bank.. USP-KUD, LKK, Koptan, BPLM, and UPK are among the institutions with low ranks while KSP, USP-KSU, Bumdes, LPD and UPKD are among the institutions with midle ranks. This is the average performance of each types of the MFIs. In regard to service areas, as noted above, the MFIs which employ mobile service generally have larger service areas. Their services areas may cover more than one district areas while the service areas of the other MFIs are, at most, within subdtrict areas. The service performances of individual MFIs can be inferred from the ‘min-max’ figures (Table 4) which read the smallest and the largest service performances of individual institutions in each of the MFI types. The figures indicate that there are individual KSPs and USP-KSUs which perform much better than the rural bank does, with respect to service performances. This is possible because of several reasons, including: larger asset, more convenient services, and wider service areas, among others.


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Looking at district differential, KSPs of Mataram district generally perform better than KSPs of other districts in in terms of number of savers and total amounts of saving deposits. In this same regard, USP-KSUs of Lombok Timur performs best, relative to USP-KSUs of other districts. The USP-KUD in Lombok Timur perform best in saving deposit balance while the USP-KUD in Lombok Barat better in number of saving deposit clients. Koptan in Bima perform slightly better than Koptan in Lombok Barat. A comparison of LKP, LPD, BMT, UPK and BPLM is not possible as the sample only include one of them, each. In terms of loan service, KSPs in Mataram generally perfom better than KSPs in other districts. Similarly, USP-KSUs in Lombok Timur perform much better than USP-KSUs in other districts. The USP-KUD in Lombok Timur is better in ammounts of loan outstanding but the second to the USP-KUD in Lombok Tengah with respect to number of borrowers. The UPKD in Bayan (Lombok Barat) outstands the other UPKDs in ammounts of loan outstanding and the second to the UPKD in Pemenang (Lombok Barat) in number of clients. On average, however, UPKDs in Sumbawa Island perform better than UPKDs in Lombok island. The performance differential relate to many factors, internal and external to the MFIs. Among these factors include management and service quality, effective governance, market competition, socio-economic, demographic, infrastructure conditions. For instance, UPKDs whose service mainly targeting agricultural communities and their business they generally perform better in remote areas such as Bayan (Lombok Barat), Beru (Sumbawa Barat) and Soriotu (Dompu). In contrast, KSPs whose services particullarly designed for quick and high return microenterprises generally perform better in surrounding urban areas such as in Mataram. The operational efficiency and sustainability of the MFIs are discussed in Section 5.2, below. 4.2. Operational Efficiency and Sustainability The survey attempts to calculate a number of indicators for the operational efficiency and sustainability of the MFIs. Three of them are presented in this Section due to low data quality consideration. The indicators are laon productivity ratio (number of loans per officer), deliquent rate (number of loans with non repayment of one or more installments per total number of loans), and financial self-sufficiency ratio (operational incomes per operational costs). The results are given in Table 5. Table A7: Selected Indicators of Operational Efficiency and Sustainability of the MFIs Institution type Loan productivity

(loans/officer) Deliquent rate

(%) Financial Self-

sufficiency ratio (%)

UPKD 131 15.15 227 KSP 95 9.02 210 USP-KSU 108 5.71 630 USP-KUD 36 30.73 1446 Koptan 25 8.00 330 Bumdes 19 9.87 338 LKK 67 25.00 763 BMT 96 2.92 na BPLM 7 Na na LKP 91 9.96 153 LPD 20 19.97 115 UPK 100 Na 1393


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Table A7 shows varrying operational efficiency and sustainability among the MFI types. UPKD, USP-KSU and UPK have higher loan productivities than the other MFI types. Several MFIs such as BMT, USP-KSU, Koptan, Bumdes, KSP, and LKP have loan portfolios at risk 10 per cent and lower while USP-KUD, LKK, LPD and UPKD whose loan portfolio at risk ranging from 15 per cent to 31 per cent. The rather high loan fortfolio risk ratio, however, should not imply that high loan non repayment will occur. This is because there is widely shared view among the MFIs that non repayment is just a delay of repayments. The borrower are generally not default, Instead, they will pay the loans in a latter time, given that the lender consistently visit (remain) and ask for them to repay. The credit officers of the MFIs generally know home, work place and relatives of the borrowers. As a result, the actual non repayment rate (by the end of the year) may be much lower than the deliquent rate. However, data avilable is insufficient to calculte the non repayment rate accurately as the MFIs never wiped out their bad loans, exception for the rural bank (LKP) which is required by the central bank to do so. Among the reasons of loan non repayments, as recalled by the MFI officers, are severe economic condition, marketing failure, and bad harvest. This confirms that non repayment is not as a result of bad personal of the borrowers but rather as a result of bad circumstances such as economic down turns, and insect attacks on the farms of the borrowers. On the contrary, the financial self-sufficiency ratios indicate that all the MFI groups are profitably run, capable of generating operational incomes larger than operational costs. However, a causion is considered necessary to made here since the costs of their funds may be underestimated, given that majority of them recieved some ammounts of grants and subsidies during their institutions’ lifes. Thus, a lower ratio may result when market rate is applied for all of their funds. This is not done in this survey as the data made available by the MFIs are not reliable. Exception is for the private MFIs whose funds are generally commercial. 4.3. Perceptions of the Officers Regarding Servicing the Poor Follows are selected perceptions of the majority of the MFI officers regarding several issues of servicing the poor” “The poor is not riskier than the rich as many of the poor repay their loans and hence trusable.” “Servicing the poor can be profitable when managed rightly: achieving cost effective operations, and high loan repayment.” “Provision of saving service is neccssary to the poor as saving may teach them to live triftly and accumulate capital.” The financial services supplied by existing financial institutions generally match the demand as there are various financial service products available in the market. In contrast, a few that see some gaps between the supply of and the demand for microfinancial services present in the market argued that the loan size offered to the poor are too small to be usefull. Servicing the poor faces some difficulties. Among of them are: − It needs frequent visits to ensure high loan repayment and high saving deposit

collection since the poor generally demand for convenient services


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− The poor generally dont have physical ollaterals, acceptable under the prudential banking principles. Their collaterals are often difficult to cash out.

− It needs a longer time and passions to servicing the poor as they are generally less educated

− The poor generally dont understand the MFIs’ service policies. As a consequence, they consider the officers as not nice persons when their demands are not met.

− The poor are generally unable to differentiate the good MFIs from the bad ones. As a cosequence, good MFIs may also receive the bad image when other MFIs create problems (such as charging very hign interest on loans and running a way with people’sr saving deposits).

5. Summary & Concluding Remarks The survey has compiled and analyzed data from secondary and primary sources, involving 39 selected MFIs from the 9 districts (Kabupaten) in the province. The MFIs were selected with consultation from Bappeda and associated institutions. The microfinance system is composed of bank and non-bank financial institutions in the formal sector, and various informal sources, such as money lenders. The banks include BRI Units, and Rural Banks. The non-bank financial institutions include saving and credit cooperatives, government rural financial institutions, and various entities resulting from previous and current development programs. The MFIs can be differentiated into 12 types, including: rural bank (LKP), saving and credit cooperatives (KSP), saving and credit units of multipurpose cooperatives (USP-KSU), saving and credit units of the Bimas village cooperatives (USP-KUD), agricultural cooperatives (Koptan), village-owned enterprise (Bumdes), urban-village credit institution (LKK), islamic microfinance institution (BMT), rural-village credit institution (LPD), and two MFIs of on-going programs (the UPK of the PPK program, and the BPLM of the Dinas Pertanian progam). Only the rural bank and the cooperative are formally recognized.by the national legal frameworks. The formal status is important in several respects, i..e. supervision, provision of technical assistance, and linking with commercial banks. These are essentially the governance problems faced by the majority of the MFIs. Attempts to introduce provincial or district-level regulations appeared to receive a strong opposition from the parliaments as they were contradictive to the national regulations (the banking laws and the cooperative laws and regulations). The finding of previous studies that the majority of the MFIs originated from social development programs is confiermed. The major development programs in the province include the green revolution program (Bimas), the small farmer income generation program (P4K), the backward village development program (IDT), the social sefety net program (PMDKE), and the agricultural development area program (NTAADP), among others. Only a few of the MFIs are private entities. These are KSPs and BMT. The ownership of the cooperative MFIs can be problematic.Although the owners of USPs and KSPs are the member, several deviations appear in practice. Many are dominated by private groups or village governments who own or control the majority of the shares. Of those receiving grants from previous development programs, a conflict of interest between related parties (particularly the management and the government) may arise and harm the future of the MFIs. Likewise, the ownerships of UPKDs is also not homogenous, some owned by the governement while the others


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are owned by the communities. As noted above, the imprecise ownership could result in governance problems. While most of the MFIs are fully financial institutions, a few of them also have other business activities. USP-KSU and USP KUD are the MFIs of the the type. They are multipurpuse cooperatives, having multiple business activities. Most of them offer saving and loan services. However, only a few offer term deposit services. Moreover, it is necessary to note that saving mibilization is not the major concern of most of the MFIs. Lending is generally their major concerns. The service performances of the MFIs vary widely among types and among individual MFIs.. The rural banks (LKP) appear performing best in saving and loan services. Individual MFIs from other types (such as KSPs and USP-KSUs), however, may perform much better in this respect because of larger assets, more convenient services, and wider service areas. KSPs and a few other MFIs which employ mobile services cover larger service areas. A variation in the performance of individual MFIs are also observed among regions resulting from differential in management and service quality, governance, market competition, and socio-economic, demographic, infrastructure conditions. In terms of operational efficiency and sustainability, as reflected by loan productivity ratio, deliquent rate, and financial self-sufficiency ratio, the performances of the MFI also vary accros institutional types. UPKD, USP-KSU and UPK have higher loan productivity, while BMT, USP-KSU, Koptan, KSP, Bumdes, and LKP have lower deliquency rates. The deliquency rate, however, tend to overestimate the portfolios at risk of the MFIs. A none repayment of several installments largerly turns out to be a repayment delay, rather than a default. This view is widely cofirmed by the MFI respondents. Data availability, however, prevent accurate estimates of the MFIs’ loan repaynent rates. Loan defauts generally result from other factors than bad borrowers, such as adverse economic condition, marketing failure, and bad harvest. All MFIs are capable of financially sustaining their operations, generating incomes larger than their operational costs. The perceptions of the MFI representatives compiled in this survey also confirmed that providing microfinance to the poor can be profitable. The representatives also view that saving services are necessary for the poor to improve their livelihoods. The representatives also point the problems and principles of effectively servicing microfinance. The poor generally lack of collaterals, are less educated, and need convenient services.


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Annex 3: UPKD – Origins In March 1996, IBRD approved a USD27m loan for the Nusa Tenggara Agricultural Area Development Project (NTAADP/IBRD Loan 3984-IND60). NTB became a project area because of its low GDP. The potential of agriculture is limited as some 80% of about 2m ha arable land is categorized as dry area. Ditjen Bina Pembangunan Daerah, MoHA, coordinated the project on central level, Bappeda Tk I on provincial level, and Bappeda Tk II implemented it on district level. A feasibility study identified 24 poor sub-districts whereas Bappeda Tk II selected the project villages, often IDT villages.61 Many of these villages are not served by financial institutions although few could be qualified as remote villages, i.e. at a distance of more than 10 km from a bank. The project aimed at - increasing smallholder income through enhancing and improving the efficiency of

agriculture production in the framework of poverty alleviation; - strengthening local level institutions. The sectoral government agencies, through their extension service, provided inputs in kind, disbursed seedlings and cattle (“dropping”), rehabilitated and invested in infrastructure, and offered micro loans. In the wake of the monetary crisis (1997/98) a review of the project’s achievements found out that the microfinance component was the one with highest acceptance. In 1999, Ditjen Bangda and World Bank agreed on a fundamental revision and to continue the project as IMS-NTAADP. Poverty alleviation should be based on the local people’s own initiative (IMS = Inisiatif Masyarakat Setempat). The IMS principle means: People plan and allocate funds, they monitor and supervise. Community development facilitators (CDF) were engaged to foster broad-based participation at grassroots level. Villagers were asked to form groups of about ten families to submit a plan to finance income-generating activities, in particular in agriculture. The villagers, not the government agencies anymore, became responsible for input procurement and were offered finance for their own investment plans, i.e. for - agriculture in general (sistem usaha tani, SUTA), - animal husbandry (usaha ekonomi produktif ternak, UEPT), - non-agriculture income-generating activities (usaha ekonomi produktif , UEP). The funds were channeled through and administered by UPKD (Unit Pengelolaan Keuangan Desa). Since 1999, UPKD were established as “community-owned” non-bank and non-cooperative MFI with independent administration and a working area limited to the village.62

60Net commitment: USD22.1m 61IDT villages are those regarded most backward in income and development with a high percentage of poor families; these villages received 1994-1996 in three subsequent years three times Rp20m as a revolving fund for “IDT groups” or “Pokmas” (kelompok masyarakat). 62 SK Bupati Bima:”UPKD adalah merupakan Lembaga Keuangan Mikro di Desa yang bukan Bank dan bukan Koperasi yang pengelolaanya bersifat Independen dengan wilayah kerja di desa setempat.”


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Despite the concept adjustments, the project objectives remained unchanged63: a) increasing the farmers’ income through agriculture, husbandry, fishery and others; b) reducing differences in income and welfare through assisting with funds for

economic activities64; c) increasing the capacity of the local government and people’s participation in the

development of economic activities among the poor villages; d) development of small and medium sized economic activities; e) providing employment for the rural people; f) increase the villagers’ purchase power. None of the official objectives were financial ones or related to a financial institution such as UPKD, although a financial monitoring system was introduced. The project engaged a number of NGO for providing field workers at a ratio of about one staff for about four UPKD. According to a related tender document the project looked for community development facilitators (CDF).65 No word mentioned that their task would include consulting an MFI and advising UPKD management.66 In fact, the project engaged also “Microfinance Consultants” on district level. Although the villagers could now submit their investment proposals for enhancing their income through micro loan financed investments, many people felt that IMS-NTAADP was still a top-down concept. They did not understand the mechanism (e.g. group loans only), or they did not really support it, such as the joint liability group approach. Many people questioned a number of seemingly contradicting regulations. For example, the project’s priority for agriculture loans to the poor, including landless workers without a business, and at the same time stressing the importance of timely loan repayment. According to IMS-NTAADP procedures, villagers discussed their financing proposals within the groups before the group leader submitted them to UPKD. CDF assisted with the loan application and related administration. The proposal was assessed based on: - poverty level of applicant - domicile (villager) - loans with other institutions - repayment capacity (whether the applicant has other side income sources)

63 UPKD dibentuk dengan tujuan:

a) meningkatkan pendapatan petani melalui usaha-usaha perbaikan dan pengembangan system usahatani tanaman pangan, perkebunan, peternakan, perikanan dan usaha ekonomi produktif lainnya

b) mengurangi kesenjangan pendapatan dan tingkat kesejahteraan melalui pemberian bantuan modal usaha

c) meningkatkan daya dukung Pemerintah Daerah dan partisipasi masyarakat dalam pengembangan usaha-usaha ekonomi diantara sesame penduduk miskin di desa

d) mengembangkan kegiatan ekonomi masyarakat berskala kecil dan menengah e) menciptakan lapangan kerja bagi masyarakat pedesaan f) meningkatkan daya beli masyarakat pedesaan

64 The list of project objectives might have contributed to confusion:”b)” mentions “bantuan modal”, assistance with funds or capital vis-à-vis “bantuan pinjaman”, the term normally used when programs or projects provide loans (whereas banks disburse “kredit”). It would have perhaps been more appropriate mentioning that UPKD receives “bantuan modal” whereas the end users, group members, receive “bantuan pinjaman”. It would perhaps have been better to use the term “kredit”. 65 Tender of Bappeda Propinsi NTB, Mataram 27 Juni 2000; 66 It is no wonder that several UPKD respondents expressed their disappointment with CDF.


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- type of enterprise (priority is given to present business, not new business) The proposals were screened on village level and, if approved, forwarded to the Camat (sub-district head) and Bupati (district head) who finally decided on releasing funds to UPKD. The IMS-NTAADP closed 20 September 2003. Until that time, the project UPKD received funds amounting to about Rp45b or about Rp200m per unit. The IMS-NTAADP invested a much higher working capital amount per unit compared to other institution development programs such as UED-SP (Rp6.5m per unit), TPSP (Rp10m per unit) or PKS-BBM (Rp50-100m per unit). Additional, IMS-NTAADP invested in facilitation, empowerment, and training. Two years after the project closed, NTB’s government agencies on provincial and district level, in particular Bappeda officers are (still) familiar with UPKD. District governments support UPKD development and make available a budget to finance monitoring, consultancy, and even seed capital (e.g. Rp15m in Lombok Barat) for additional “UPKD”. People questioned the legality of UPKD.67 A decree of the regent (SK Bupati) was the response in some (but not all) districts. This decree and the statutes and by-laws reflect UPKD management under the project. The decree was released to “guarantee the post-project continuation of the IMS-NTAADP program, and in order to take care of the assets.”68 In Annex 2 to the decree one can learn that after closing the project, UPKD will continue its activities to revolve the “NTAADP-loan”.69 Neither a mission nor a vision was formulated for UPKD.

67 The legality is questioned by people looking for reasons not to repay the loan. 68 Penjelasan atas Keputusan Bupati Bima, Penjelasan Umum: Untuk menjamin keberlanjutan program pasca proyek serta menjaga seluruh asset yang ada di setiap UPKD, perlu disusun legalitas UPKD…. 69 Annex 2 to the Decree No. 581/Thn 2003 tgl. 24 December 2003 of the Bupati about Pedoman dan Panduan Pengelolaan UPKD: “untuk kesinambungan kegiatan dimana dana kredit desa dapat bergulir dan berkelanjutan sebagai modal kerja…” (p.14), or: “5. Collateral/Agunan: UPKD ke depan…”(p. 35)


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Annex 4: UPKD – Financial Performance Financial data on 229 UPKD were made available. They do not allow a reliable analysis because the date is not known to which these figures refer. In addition, UPKD do not apply identical bookkeeping procedures. Despite these serious shortcomings they are helpful to describe the variety among these MFI. Table A8: UPKD per District, (Rp million)

Kabupaten UPKD Kec. Loan fund

Addit- ional f.

Out- standing Assets Interest

income Savings Inter.inc./Outstdg

L. Barat*) 30 7 7,378 1,097 8,230 9,323 284 565 3%

L. Tengah 53 6 9,515 10,922 10,939 1,107 317 10%

L. Timur 35 8 7,198 5,395 7,765 111 469 2%

Sumbawa 30 5 7,186 126 4,380 8,520 1,067 140 24%

Dompu 24 4 6,282 706 4,809 8,055 959 108 20%

Bima 57 5 7,672 6,627 9,282 996 614 15%

Total NTB 229 45,231 1,929 40,363 53,884 4,524 2,213 11%Italic figures for Sumbawa refer to 17 UPKD only Table A9: UPKD, per average unit, (Rp million)

Kabupaten UPKD Loan fund

Addit- ional f.

Out- standing Assets Interest

income Savings

L. Barat*) 30 246 37 274 311 9 19

L. Tengah 53 180 0 206 206 21 6

L. Timur 35 206 0 154 222 3 13

Sumbawa 30 240 4 258 284 63 5

Dompu 24 262 29 200 336 40 5

Bima 57 135 0 116 163 17 11

Total NTB 229 198 8 176 235 20 10

1. Assets Measured by their average assets of Rp235m, UPKD are placed just between two other well-known sustainable MFI types, namely BKD (assets about Rp50m) and BPR-LKP (assets about Rp3,000m). Approximately 20% of the UPKD record assets below Rp150m and 20% exceeding Rp300m. Compared to July 2003, average assets dropped Rp4m; among others a result of 15 additional locally financed UPKD (most of them in East Lombok) with PPW-funding below Rp100m. The growth measured as the difference between assets and IMS-NTAADP loan fund averages 14%. The growth is significantly lowest (11%) with UPKD in the average size range (assets Rp200-300m).


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Table A 9: UPKD Assets (2005) Range

(Rp million) No. of UPKD

Total Rp million

Growth *) Rp m Growth **)

0 - 100 19 1,477 202 16%

>100 - 200 68 10,898 1,450 15%

>200 - 300 97 24,805 2,476 11%

>300 - 400 33 11,195 1,721 18%

>400 - 500 9 3,848 631 20%

>500 - 603 (max) 3 1,672 255 18%

229 53,895 6735,0 14% *) Assets minus total loan-capital **) Growth / loan-capital The growth of most UPKD is very modest: Most of them grew less than 13%. Table A10: Asset Growth

Growth range UPKD Average UPKD Growth in Districts up to 10% 94 41% Lotim 8%, Lobar 10%

>10% - 20% 72 31% Loteng, Dompu 15%, Sumbawa 17%

>20% - 30% 45 20% Bima 21%

>30% - 69% (max.) 18 8% Based on these figures the smaller UPKD in Bima could grow much faster than the much larger ones in Lombok Barat.

2. Loan Fund or Initial Fund UPKD were established for channeling funds from IMS-NTAADP to be onlend to final borrowers through groups. UPKD received these funds without an obligation to pay interest or to repay the loan. This “loan fund” or “initial fund”70 has not become the property of the UPKD. It is recorded as a liability in UPKD balance sheets. It has also not become village property. In fact, there are differing perceptions about the present and future ownership of this fund. There is a latent conflict potential and it cannot be excluded that the government asks for repayment.71 For the time being it is important: - UPKD are allowed to manage this loan fund; - UPKD decides on proceeds such as interest from the management of this fund; - UPKD must not pay interest for this fund. A number of UPKD, in particular those with funds below Rp100m, received finance from local government funds (APBD). Probably, these funds were legally transferred as grants. Very few UPKD received funds from both sources. No UPKD received more than Rp350m.

70 This term might be misleading as the fund came in several annual tranches. 71 SMoCSME made available funds to MFI with the prospect that they would not have to repay it. SMoCSME changed its mind and the fund has to be repaid within 10 years.


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Table A 11: Loan Fund (n=228) The average UPKD loan fund varied according to district. Whereas the average UPKD in Dompu received Rp262m, those in Bima got only Rp135m.

3. Additional Capital Only three districts provide figures for “additional capital”: Lombok Barat, Sumbawa and Dompu. Besides funds for on-lending, UPKD received grants for premises and equipment. It is assumed that “additional capital” indicates also the accumulated surplus or retained profit. Also, some UPKD book reserves for bad debt as liability/(reserve) capital, whereas others record this position as negative asset (as banks do). Table A 12: Additional Capital

Almost 60% of the UPKD recorded “additional capital” amounting to not more than Rp25m, an amount equivalent to 10% of UPKD assets. Provided UPKD would have to pay 6% interest p.a. for the IMS-NTAADP fund, these UPKD would most probably have lost capital.

4. Loan Disbursement and Repayment Based on data from 229 UPKD, total loan disbursement (initial IMS-NTAADP loans plus revolving since 2000) amounts to Rp81.7b (average Rp357m/UPKD). The revolving factor is 1.8 and indicates a considerable ratio of non-repayment assuming that 1999 IMS-loans should have revolved up to five times (2000/01, 2001/02, 2002/03, 2003/04, and again in 2004/05), 2000-loans four times etc. Only 15 UPKD revolved the initial loan (loan fund) more than three times, 20 UPKD less than once. 225 UPKD report loan collection amounting to Rp35.2b (average Rp156m). Table A13: Loan Revolving

Item UPKD (n)

Total Rp million

average UPKD Rp million

Loan disbursement 229 81,664 357 Repayment 225 35,188 156 Outstanding amount 216 40,364 187

Range UPKD Average / district up to Rp100m 16 Rp100m – Rp150m 38 Bima: Rp135m Rp150m – Rp250m 118 others Rp180-246m Rp250m – Rp300m 44 Dompu: Rp262m Rp300m – Rp347m 12 average: Rp198m 228

Additional capital UPKD up toRp10m 22 39% Rp10m – Rp25 11 19% Rp25 – Rp50 12 21% Rp50 – Rp100m 9 16%

Rp100m – Rp265m 3 5%

Total 57 100%


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Data from several UPKD in Loteng (n=16) and Sumbawa (n=30) are incomplete or probably incorrect, because figures provided for loan disbursement are not equal to loan repayment plus loan balance. UPKD monthly monitoring reports provide figures for arrears. UPKD differ between arrears on the loan fund, arrears on first revolving, second revolving etc. These figures were not part of the data set.

5. Interest Income All 216 UPKD announced a combined interest income amounting to Rp4.52b (average Rp20.9m/unit). This is a low figure: - For comparison, assuming that UPKD received 15% interest on all already repaid

loans (1.5% x 10 months), they would have collected Rp35.2b x 15% = Rp5.3b or Rp23.2m per average UPKD.

- If UPKD revolve their average loan fund (Rp198m) only once and receive only 15% interest, their average income would already amount to Rp29.7m in one year.

- If UPKD lend their average funds of Rp198m at 2% for 3 years (2002 – 2005), total interest income would amount to 2% * 3 years * 12 months % x Rp198m = Rp142.6m.

Table A14: Interest Income

Two thirds have interest income lower than Rp20m. It is not recorded whether the amount stated as interest income refers to interest earned for the current year (and for how many months), the past year, or whether it is the sum of interest earned so far.

6. Deposit Mobilization For many UPKD it is common to ask a small amount for compulsory or membership savings.72 Some UPKD succeeded in convincing people to deposit funds voluntarily. In total, Rp2.2b could be mobilized, Rp10m per UPKD on average or Rp20,000 per borrower. Table A15: Deposit Mobilization Range in Rp million No. of UPKD 0 – 10 137 60% >10 – 20 78 34% >20 – 76 (max) 14 6%

72 There is a latent conflict or differing perceptions. Some argue that UPKD channels funds to members of groups and that these members are also members of the UPKD. According to the financial records, groups are account holders, and not the individual group member.

Range in Rp million No. of UPKD up to 10 87 40% >10 – 20 52 24% >20 – 30 28 13% >30 – 50 24 11% >50 – 100 21 10% > 100 – 160 (max) 4 2% Total 216 100%


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Annex 5: UPKD – SWOT analysis Major strengths, weaknesses, opportunities and threats describe in short UPKD features of these MFI and their environment. Strengths Village-based High number of similar financial institution Rather equally distributed over the province Outreach to target group (farmers and MSE in villages, un-banked poor) Decision makers are close to clients in several aspects (decentralized decision) Maximum convenience for borrowers in remote areas Flexible arrangements, BI regulations do not apply Products close financial gaps at prices for which the demand exceeds availability Low cost of working capital (loan fund) Low transaction costs, in particular: - cost of information (client, family, relationships, village economy), - cost and time for transport, for lender and borrower - cost of administration (low wages of local labor) - cost of institution (no or low costs for representative purposes) Substantial working capital available that allows financial sustainability Trained managers Incentives for managers Informed group leaders and borrowers Informed and supportive local government System through sub-district forum for coordination and lobbying Replication: similar or same problems, challenges and opportunities with all UPKD Weaknesses Unclear ownership: no sense of belonging Without vision and mission: no direction and no priorities No annual work or business plan: no targets Lack of discipline and adherence to regulations: no (immediate) sanctions Internal control fails (“Member empowerment” is not substitute for supervision.) “Participation” weakens organization (Social control does not substitute prudent lending.) Organizational flaws regarding composition and role of Musdes and Management73 Finance No access to bank loans, among others because unresolved ownership issue. Limited capacity to mobilize deposits (legal issue and matter of confidence) Management Lack of professionalism: temporary (?) part-time employment Income incentives not balanced Project-oriented management although project ended Insufficient internal control mechanisms Insufficient internal (and external) supervision No proficiency to increase income No revenue monitoring and control No proper arrears monitoring, and arrears control No action plan for arrears collection Relevant regulations not sensible Sanctions not effective No cooperation with other UPKD 73 Managers as Musdes members; for more see Annex SK Bupati


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Personal relationships (managers are community members) Avoiding conflict more important than problem solving Management often not appointed solely based on capacity Managers not assisted in personal relationship conflicts vs. professional decision Managers and staff not trained or supported to manage conflicts of interest Managers are part of the social fabric in the village and their decisions and activities are judged by non-professional standards such as respect to the village hierarchy and harmony, and avoiding conflicts. Performance Inefficient: three or more managers for 4 loans and less than 100 transactions/month Decreasing income from increasing NPL Deteriorating loan portfolio performance, increasing bad debt Costs exceed income, as income from loan interest decreases Insufficient enforcement of interest payments and fines No instruments for self-assessment Administration Manual incomplete and outdated (project-oriented, especially bookkeeping) Manual not applicable, e.g. gross income allocation to costs Insufficient depreciation on fixed assets: no written rule or regulation Insufficient provision for bad debt: no written rule or regulation No regulations for write-offs No regulations regarding profits or SHU (sisa hasil usaha) Insufficient documentation Weak internal control, supervision and audit Sub-district Forum not very actively supported Opportunities Government support on provincial and district level Local governments finance new UPKD Sustainable and profitable village-based enterprises Business expansion by more than 100% possible New products for village people (loans to individuals) Cooperation as deposit agent with banks Partner in a system of government-owned FI BPD Bank NTB or BPR-LKP as supervisor, auditor and HRD provider Bawasda as supervisor and auditor UPKD as banker for the village government and its increasing village budgets Channeling and administration of funding for village-based programs/projects Strengthening UPKD system through district or sub-district based Forum Threats Village government not supportive: no Musdes decision to renew UPKD Fast and almost irreversible deterioration of loan portfolio quality Government does not support information campaign Perception that UPKD loans are grants to poor people More government or donor programs or projects with low interest revolving fund BUMDES and/or LKM legislation adjourned Political influence and interference BRI, BPR, and cooperatives establish more service points and mobile services BRI, BPR, and cooperatives offer products similar to those of UPKD NGO entering the MF market External supervision of MFI too expensive Selection of UPKD managers not transparent UPKD managers’ authority questioned if not enforced by Bupati decree Government does not issue write-off procedures Government withdraws IMS-NTAADP fund


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Annex 6: UPKD – CAMEL Rating Setia Kawan Sekontong Tengah/West Lombok

Assets Rp m Comment Cash. bank 16.8 5% quite the right amount Loans sub-standard 60.0 doubtful 25.0 loss 15.0

289.2 loan quality is a very optimistic assumption! (According to General Manager, about Rp100m cannot be recovered!)

Loan risk reserves -1.8 0.6% should be 34.4! Inventory 73.6 19.8% should be 10% (incl. land and office building!) Depreciation -6.8 < 10% insufficient, should be > 10.0 despite inventory

including land and building (estimated Rp43.6m) Others 1.0 Total assets 372.0

Savings 4.8 NTAADP fund 280.7 Equity (profit until 2004) 77.1 20.7% of assets: sufficient (higher than average UPKD) Grant. inventory 7.1 Profit 1-6/2005 2.3 1.2% = RoA p.a.; should be more than 1.5% p.a. Equity and liabilities 372.0

Income and costs half year: 01-06/2005

Interest income 22.0 15.2% p.a. equivalent of all outstanding loans. (23,2% on Rp189m-Rp100m “no-loss” loans), higher than average UPKD, but indicates 40% NPL

Administration fee 1.9 8.5% of interest income: acceptable for 10 months loans Total income 23.9

Interest in savings < 0.1 0.8% on savings equiv. p.a.: should be 6% or higher Interest on NTAADP 0.0 0.0% should be 2% p.a. = 5.8m for village coffer Personnel cost Office

13.2 1.9

55.3% of total income: high: fringes: 13th salary, office clothes, consumption for 4 persons

Incentives 1.0 for group leaders, supervisory board, village Meetings 4.0 Annual meeting, including transport cost Risk reserve 0.1 0.1% should be at least 3% Depreciation Others

1.0 0.4

6.7% p.a. equivalent on Rp30m (computer. motorcycles). should be 20% x Rp30m /2 (half year) = 3.0

Total costs 21.5 Profit (6 months) 2.3 It takes 20 years to balance Rp100m loan loss! Penilaian Nilai Predikat Bobot Nilai Akhir Permodalan CAR 100,0 SEHAT 30% 30,0 Kualitas Aktiva KAP : APYD 3,0 TIDAK SEHAT 25% 0,8 Kualitas Aktiva PPAP : PPAPWD 5,2 TIDAK SEHAT 5% 0,3 Rentabilitas Return on Assets (RoA) 100,0 SEHAT 5% 5,0 Rentabilitas Biaya op. : Pendapatan op. 83,3 SEHAT 5% 4,2 Likuiditas Alat Likuid : Hutang Lancar 100,0 SEHAT 5% 5,0 Likuiditas Loan : Deposit Ratio (LDR) 100,0 SEHAT 5% 5,0

PENILAIAN TOTAL 491,6 (maks.: 700) 80% 50,2

Dikonversikan ke bobot 100%: KURANG SEHAT NILAI: 62,7 Measured by BPR standards, above “good performing” UPKD would be “less sound”. Alternative simulations show: 1) With Rp100m non-recoverable loans, equity would be negative, the score/nilai <50 = unsound. 2) A strong, >20% equity/asset ratio cannot balance 20% sub-standard, 10% doubtful and 5% loss loans when loan risk reserves are almost non-existent.


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Annex 7: UPKD – Management Survey The local government arranged meetings with UPKD representatives - on September 6, 2005, in Prada (Lombok Tengah) and - on September 13, 2005, in Sumbawa Besar (Sumbawa) These meetings offered the opportunity to gather more information. A questionnaire was prepared. The UPKD representatives jointly filled in these questionnaires during a 1.5-hour session accompanied by explanations and clarifications. Data and opinions on the following issues are presented in the following: 1 Attendance 2 UPKD and villages households 3 Funding 4 Asset 5 Loan portfolio 6 Interest earned 2005 7 Clients 8 Outreach to the poor 9 Loan policies 10 UPKD intervention 11 UPKD reporting 12 Facilitation 13 Training requests 14 UPKD managers 15 Supervision 16 Legalization 17 Potential 1 Attendance In Lombok Tengah, 40 (75%) managers of the 53 UPKD attended. In Sumbawa, 17 (47%) out of 36 UPKD (new Sumbawa district) were present, most with two managers. A low attendance may indicate that, on average, the performance of UPKD in Sumbawa is worse than those in Lombok Tengah. For many managers in Sumbawa, time for travel on a motorcycle to the district capital takes more than two hours one way. For some of them this might have been a reason to abstain. 2 UPKD and villages households The figures entered by the respondents point to a problem. Many do not really know the area of their operation or the potential, i.e. the number of inhabitants. In several cases figures given for number of villagers conflicted with the number of households, the more important figure, if it concerns financial services. Assuming that over- and underestimates balance (the median value is close to the average), it appears that Lombok Tengah villages have about twice as many families as Sumbawa villages (average 1,644 versus 785 households). The number of households, potential clients, is important for reaching scale and sustainability. As long as there is no competition, a UPKD in a high population density area has a better potential than a unit in a remote mountainous region serving shifting cultivators.


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Table A16: Households in UPKD villages (UPKD Managers Estimates) District Lombok Tengah Sumbawa

median 1,300 766 average 1,664 785 low - high 128 - 4,750 333 - 2,500 n 17 37

3 Funding Most UPKD, namely 42, received funds from NTAADP (World Bank). District government financed 13 (in Lombok Tengah 11) UPKD with PPW funds (APBD). Two UPKD in Lombok Tengah claimed to have received funds from both sources. The average NTAADP fund per UPKD is 19% higher in Sumbawa (Rp222m) than in Lombok Tengah (Rp186m), the average PPW funds only half that size of the UPKD funds: Rp116m in Sumbawa and Rp 84m in Lombok Tengah. Table A17: UPKD funding District Lombok Tengah Sumbawa

Source of fund NTAADP PPW NTAADP PPW

average Rp m 186 84 222 116 low – high Rp m 64 - 316 15 - 168 70 - 307 106 - 126

UPKD n 29 11 13 2 Don’t know n 2 2

Despite their lower funding, Lombok Tengah’s UPKD recorded a higher growth: Rp67m (+35%) versus Rp40m (+18%), although Lombok Tengah’s PPW funded 9 UPKD grew only 10% (data not in table). Total assets remained slightly higher in Sumbawa: Rp 261m versus Rp241m. 4 Assets Without exact data, the annual asset growth rate can only be estimated, because project funds were disbursed over three or four years. The project closed September 2003. In September 2005, one might base the growth rate on an average of three years. The resulting growth of 6% to 12% p.a. does not include UPKD with worst performance that were not present at the meetings. Table A18: UPKD assets development

District Lombok Tengah Sumbawa

Asset Asset growth Asset Asset growth

average Rp m 241 67 35% 261 40 18%

low – high Rp m 55 - 569 -23 - 253 -29%-102% 90 – 408 0 - 113 0% - 58% UPKD n 30 29 29 16 13 13


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5 Loan portfolio Various terms for “outstanding loans” are known. Several respondents certainly misunderstood the term and filled in figures that rather resemble cumulative loan disbursements, a figure which donors (not banks) are interested in. The average loan portfolio is slightly higher than initial funding and in Sumbawa about 20% higher than in Lombok Tengah (Rp236m versus Rp198m). Table A19: UPKD loan portfolio


Loans Rp m as of assets Rp m as of assets

average 198 85% 236 82%

low – high 39 - 442 20%-100% 114 - 406 39-100%

UPKD n 31 28 13 13

6 Interest earned 2005 The respondents were asked to state the amount of interest earned from January until any month of their choice this year (accumulated interest). Many of the answers were entirely questionable (too low – too high). Some figures reflect certainly income earned during (not until) the previous month, others rather refer to interest earned since UPKD establishment. In particular data from Lombok Tengah respondents were eliminated so that only records from 50% of these UPKD were processed. UPKD in Lombok Tengah and in Sumbawa earn more or less Rp2m interest per month or about 1% of the portfolio. The averages hide that the tremendous variances. Representatives from low-income UPKD demonstrated that they are interested in reviving their village “bank”. Table A20: UPKD interest earned on loans District Lombok Tengah Sumbawa

n avg low - high n avg high

- average p.m., Rp m 23 2 0 - 7 17 2 0.1 – 4.5

- Interest p.a. equivalent 20 8% 0% - 39% 14 11% 1% - 21% Loan conditions provide for income amounting to 2% on the outstanding loan amount, or even 2% on the initial loan amount (flat) for installment loans. When UPKD earn only 1% the conclusion is that 50% of the loan portfolio are NPL. The income is sufficient to cover expenses but not enough for additional bad debt provisioning. 7 Clientele For efficiency and other reasons, a loan applicant has to join a group. UPKD in Lombok Tengah have 73 groups-clients on average, with about 9 members (total 544). UPKD in Sumbawa provide loans to only 36 groups (clients), but with more members, 13 per group (total 474). The figures indicate that on average 52% on the households in Lombok Tengah’s and 74% of the households in Sumbawa’s UPKD villages received a loan. Even


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when eliminating some extreme high figures, one can state that perhaps 30% of UPKD village households in Lombok Tengah and 50% in Sumbawa are now acquainted with loan application, repayment and loan procedures. In some places the number of group members can exceed the number of village households: - Against regulations, one household gets two or even more loans (e.g., husband

and wife, child). - The same person appears several times, for example as a member of a core

group (kelompok inti) and again, after revolving, as a member of a development group (kelompok pengembangan).

- Clients from neighboring villages obtain loans. Table A21: UPKD clients: groups and their members


Groups Members M/G Groups Members M/G

average 73 544 9 36 474 13

low – high 15 - 90 300-930 6-20 4-383 53-2600 2-26

UPKD n= 39 38 38 13 13 11

The average loan balance per individual group member is Rp364,000 in Lombok Tengah and Rp498,000 in Sumbawa. It can be concluded that the average initial loan amount was about Rp750,000 to Rp1m (data not presented in the table). 8 Outreach to the poor Poor rural people living at a distance from modest infrastructure were the target of NTAADP. One should have this in mind before assessing UPKD performance. Without offering any criteria, the respondents were asked to estimate how many persons (or percent) of the group members belong to the poor, and to the very poor strata of the population in their village. (Poverty has not only a measurable component but one has also to consider the environment in which the people live.) Most respondents, for example 25 of 34 managers who answered this question, stated that all borrowers are poor or even very poor. With highest probability, those classified as very poor are certainly people living below daily 1USD per capita. From this perspective, Lombok Tengah UPKD dared to advance loans to a higher percentage of very poor people (48% versus 30%) - and still record faster assets growth than Sumbawa UPKD. The variance is extremely high: In Lombok Tengah, for instance, the percentage of very poor borrowers varies from 2% to 100%! Table A21: UPKD Service for the Poor District Lombok Tengah Sumbawa

n avg low - high n avg low -high

very poor borrowers, # 36 48% 2% - 100% 11 30% 5% - 80%

poor borrowers, # 35 42% 1% - 90% 12 55% 12% - 95%


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9 Loan policies Regarding the responsibility for loan policies, the two districts show a remarkable difference. Sumbawa follows project guidelines (82%) more than Lombok Tengah (58%). In Lombok Tengah, it is the village head (25%) and the UPKD director (43%) who have distinctly more influence on loan policies than the respective persons in Sumbawa. Table A22: UPKD loan policies

Only three respondents from Lombok Tengah claimed, never having seen the project’s written loan handling guidelines and instructions. For the others, who know about the existence of these guidelines and instructions, the better question might have been if they ever had read them.

Table A23: UKPD Intervention

10 UPKD intervention It is often argued that the weak performance of UPKD is a result of intervention from third parties. Intervention is perhaps less rampant than related rumors, but 18% (Lombok Tengah) and 29% (Sumbawa) of the UPKD directors report intervention, in particular from the village head. The respondents might not be really representative. Those not attending the meetings are said to have experienced quite often intervention.

11 UPKD reporting Reporting in a timely manner is indispensable. According to NTAADP regulations, the monthly report shall be sent before the 10th (or even 7th) each month, whereas, for comparison, BI allows BPR 15 days. BI imposes a financial penalty for submitting reports delayed. IMS-NTAADP proposed also a respective regulation but it was apparently not enforced. In Sumbawa, all of those UPKD that still send their monthly reports in a “timely” manner (within less than two months) were present at the meeting. The 14 UPKD represent 82% of the participating UPKD but only 39% of all 36 IMS-NTAADP-and APBD-financed UPKD in the district. Lombok Tengah’s “fast” reporting 15 UPKD constitute also a 28% minority of all 53 UPKD there.


- NTAADP 23 58% 14 82%

- Facilitator 2 5% 3 18%

- Village Head 10 25% 0 0%

- MusDes 19 48% 7 41%

- UPKD Director 17 43% 4 24%

- Others Verification Team

Intervention Lombok Tengah Sumbawa

- No answer 2 4% - No 31 78% 12 71% - Yes 7 18% 5 29% By

- Neighbor 1 1

- Family 0 2

- Village Head 4 3

- Facilitator 2 1 - Others 2 director,

people 0


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Not submitting a report for 6 months, 12 months, or even longer does not mean that the UPKD is “dormant”. Often, the UPKD just reduced the number of transactions. Even when activities came already to a halt, there are chances to revive the UPKD as, for example, ProMIS did this with IDT-groups. The attendance of representatives of non- or very late-reporting UPKD underlines this observation. Table A24: UPKD reporting Last time report sent Lombok Tengah Sumbawa n = 40 n = 17 - 07-08/2005 15 38% 14 82% - 01-06/2005 5 13% 3 18% - before 2005 17 43% 0 0% - no answer 3 8% 0 0% - not present 13 19

The district Lombok Tengah decided to move the guidance of the UPKD from Bappeda to Dinas Koperasi. Today UPKD report to: Table A25: UPKD Reporting (Lombok Tengah)

One UPKD sends the monthly report to four offices. Neither Dinas Koperasi nor Bappeda have complete sets. Many UPKD do not send a report, apparently in particular those that did not attend the meeting. The situation is different in Sumbawa. Most UPKD do not report monthly to Bappeda. However, all of the 17 UPKD present at the meeting claimed to send the report to the facilitator. One UPKD sends a copy to the sub-district office (Camat).

Reasons for not reporting: - no computer, file in computer lost, hard disk damaged, no ink for printer - no typewriter - not yet prepared photocopy, no refund from groups for purchasing stationary - few transactions, no transaction 2005, no changes of data - address for report after project closed is unclear - report is prepared but not sent because Dinas Koperasi is now Pembina - no legality yet - report is year-end report and comes in December, reporting only once annually or

once in six months - (general) manager is not active, not active since 6 month, not interested, one

manager went to work in Malaysia, new general manager in the process of reviewing assets

Dinas Koperasi 19 Bappeda 11 Diskop + Bappeda 5 Village Head 5 Sub-district 4 Dinas Perikanan 2 Bawasda 2 Dinas Pertanian 1 Dinas Peternakan 1 Facilitator 1 None 2 UPKD not present 13


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12 Facilitation Respondents from Lombok Tengah were especially critical about the facilitators. Almost half of them (8 of17) were disappointed. Also in Sumbawa: 11 managers out of 40 feel not or less satisfied. Although this is less than 30% one has to bear in mind

that government officers and the project’s former microfinance consultant watched the respondents when they ticked the respective boxes in the questionnaire. More than 50% of the managers do not only request facilitation, they regard it even necessary. Whereas 10 (59%) UPKD managers in Lombok Tengah want to see the facilitator once or twice a month, this frequency is only wanted by 18 (45%) of Sumbawa’s managers, who were more satisfied with past facilitation.

13 Training Needs UPKD managers have priority topics regarding training. Risk management comes first, second loan analysis and third bad debt management. Table A26: Training requests


Training requests Grand total*) Score no 1 2 Score no 1 2

- Bookkeeping 98 58 2 14 22 17 2 9 4

- Reporting 92 54 3 16 19 16 2 12 2

- Loan analysis 117 61 0 15 23 24 1 8 8

- Bad debt mgmt 115 59 1 11 24 24 1 6 9

- Organization 108 59 0 15 22 21 1 9 6

- Risk management 119 65 0 13 26 23 1 9 7

- Liquidity mgmt 108 63 0 13 25 19 3 9 5

- Personnel mgmt 110 61 0 15 23 21 1 11 5

- Product design 114 65 0 13 26 21 3 7 7

*) weighted scores from both districts Training not requested: # respondents x 0 point (no) Training requested: # respondents x 1 point Training very much required: # respondents x 2 points For example, bookkeeping, Loteng: 2 respondents need no training = 0 P; 14 resp. request training = 14 P, 22 resp. require training = 44 P; total = 58 P: Grand total = Score for Lombok Tengah + (Score for Sumbawa / 17) x 40 (adjustment to Lombok Tengah’s higher number of participants.)


Facilitation - not satisfying 0 1 - less satisfying 8 10 - satisfying 8 26 - very satisfying 1 3

not required 0 0 requested 6 16 necessary 11 22

once 3 months 7 19 monthly 9 11 twice monthly 1 7 on request 2 4


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Lombok Tengah managers are also interested to learn more about product design, even more than about bad debt management. 14 UPKD Manager Recruitment For many it was a conflict of interest when asked whether the UPKD general manager should first be professional and second coming from the village, or just the other way round: village first. This topic was discussed into more depth in Sumbawa, which could be an explanation for the much higher percentage opting for a professional. Only few insisted that a man has to head the UPKD. One argument was that distances and road conditions would harm women, another respondent pointed to that the villagers might not respect a woman in this position. The position of the general manger is still occupied by men. In Sumbawa, it is common that one or two women participate in UPKD management (and in the meeting). In fact, one might relate more accurate data presented by Sumbawa’s UPKD managers and the higher interest income of these UPKD to women who are more correct in recording and bookkeeping than men are. Many UPKD do not generate full-time employment and respective income. It was proposed to reduce the number of managers to one or two. The vast majority of the participants in the meetings rejected this idea. Table A27: UPKD Management

UPKD general manager: Lombok Tengah Sumbawa

a villager*) 31 (72%) 9 (53%) a professional*) 8 (25%) 8 (47%) no answer 1 a male 3 2 Number of managers 1 person 3 2 2 persons 2 3 persons 35 (88%) 15 (88%)

*) respondents had to choose one 15 Supervision Several institutions to a differing degree supervise UPKD. Surprisingly, five UPKD in Sumbawa do not feel to be supervised by any institution, in total 9 (53%), which are not supervised regularly. The situation is similar in Lombok Tengah: 20 or 50% of Lombok Tengah’s UPKD state that no institution supervises them regularly. Badan Pengawas (BP) is charged with internal supervision. However, BP teams work in only 12% resp. 20% of the reporting UPKD regularly. BP seem not to perform in the vast majority of UPKD. District offices are the institutions mentioned most often, in particular when it concerns regular supervision. They play the most important role as external supervisors. In several places village authorities and village people are also concerned with the UPKD business.


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It is most concerning that the directors do not supervise the UPKD. Therefore, it is no wonder that one of the directors can misuse his authority without knowledge of the other directors. Probably, management instruments for supervision are missing. Table A28: UPKD supervision (at present)

District Lombok Tengah n = 40

Sumbawa n = 17

Supervision frequency sometimes regularly sometimes regularly none 5 Directors 2 4 5 2 BP (internal audit) 15 8 (20%) 11 2 (12%) Village institutions 9 4 8 2 Village people 8 6 4 2 District offices (Bappeda, etc.) 18 10 8 7

Others mentioned: Pokja (working group) (2), Bawasda (1), and the consultant (1) The respondents want the respective government agencies to continue supervision. On should point to a distinctive difference: UPKD in Lombok Tengah favor the District Forum to become active whereas Sumbawa wants to see a Special Agency to take over supervision. Surprisingly, in both districts, slightly more than 40% think that supervision by BP suffices. Table A29: UPKD supervision (proposed)

District Lombok Tengah Sumbawa Government agencies 29 73% 16 94% District Forum UPKD 22 55% 3 Special agency 2 11 65% BP only 17 43% 7 41% Other directors only 1 1 Bank 3 3

16 Legal Status - Options In Lombok Tengah, starting 2005, the guidance of UPKD was moved from Bappeda to Dinas Koperasi. The UPKD managers followed already a couple of discussions concerning the future UPKD incorporation. In contrast to Sumbawa, with no vote for incorporation as a cooperative, a 23%-minority of Lombok Tengah’s managers favors this model. Table A30: UPKD Legalization, Preferred Option

District Lombok Tengah n = 40

Sumbawa n = 17

Village enterprise 28 (70%) 11 (65%)

SC cooperative 9 (23%) *) 0

BPR-LKP service post 1 2

BPD Bank NTB service post 3 0

Other Penggaduhan ternak sapi UPKD 5

*) In 2005, Bappeda handed over UPKD supervision/monitoring to Dinas Koperasi.


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17 Potential The participating managers were asked to indicate the demand for loans in their village. They specified how many additional loans, split into three ranges, the village people would request. The estimated potential did not differ very much despite the larger villages with almost twice as many households in Lombok Tengah compared to Sumbawa. When multiplying the number of loans with an estimated average loan amount in each category (for loans below Rp500,000 this is Rp300,000, etc.), the sum of all three categories is the average additional UPKD loan potential. With about Rp353m, this potential means almost tripling UPKD’s portfolio. Table A31: UPKD Loan Potential

District Lombok Tengah Sumbawa Average

# of loansAverage

loan Rp m

Total

Rp m Additional loans, average/UPKD

1,300 households 766 households

up to Rp500,000 230 243 237 0,3 71 up to Rp2,000,000 118 75 97 1,3 125 above Rp2,000,000 62 63 62 2,5 156 Loan potential average village 353

Quite a number respondents pointed to a substantial prospect in neighboring villages without UPKD or “weak” UPKD, which they wanted to tap if allowed and provided funds were made available.


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Annex 8: UPKD – Comments on Regulations - Keputusan Bupati Bima (SK) No 581 Tahun 2003 tentang Unit Pengelola

Keuangan Desa (UPKD), Pemerintah Kabupaten Bima 2003 - Anggaran Dasar (AD) (statutes) and Anggaran Rumah Tangga (ART) (bylaws) - Pedoman dan Panduan Pengelolaan Unit Pengelola Keuangan Desa (UPKD)

Kabupaten Bima In December 2003, three months after closing IMS-NTAADP, Bima’s regent (Bupati) signed a decree (SK) which establishes the legality of UPKD. This decree and continuous financial support to local government agencies for monitoring UPKD has certainly contributed that most of these units are still active. Without local government support, the UPKD performance would certainly be worse. Flaws in these regulations are most probably a result of lack of expertise to implement a sustainable village-based banking concept. Regarding UPKD-ownership the reader of the SK and its annexes is confronted with “village people’s ownership”, “members of the UPKD” (“anggota”, without giving hints on how to become a member, duties and rights of membership, etc.) and even “share ownership”74. The decree and the two annexes reflect the transitional character of the project. Many regulations do not solve problems. They were only applicable as long as everything runs smooth, i.e. “sun-shine regulations”. Often, no thoughts were spent on the general question: “What if not?” For example, one finds no answer for the simple question: “What is the procedure, if a poor borrower cannot repay the loan?” No one in the “happy UPKD family” ponders about how to dismiss inactive managers. The following comments emerged when studying the decree. They do not cover all questionable regulations. Many UPKD managers do not adhere to fundamental AD/ART provisions. Often, deviations occur because of practicability, because of not knowing or remembering the regulations exactly, because of different interpretation and, perhaps most of all, just to avoid conflicts among fellow managers and villagers. It is suggested to review the regulations and procedures once a decision has been made on the basic concept for the future role and development of UPKD. It is recommended that a qualified lawyer should advise on draft SK, AD and ART before implementation. It is recommended for the development of AD/ART to compare the regulations with - experience in the application of the decree, - the actual UPKD practice, - those of cooperatives (decisions are made by many people, the members, similar

to the village community, who want affordable prices) and - those of rural banks (decisions are made by investors who care for their

investment, the sustainability of the institution). UPKD origin from the program IMS-NTAADP, “Inisiatif Masyarakat Setempat – Nusa Tenggara Agricultural Area Development Project”. “UPKD itself is an organization established by the people being conscious about the joint objective to increase the welfare of the members.” (Pedoman, p.2). If UPKD are a “people’s enterprise”

74 “Mekanisma kepemilikan saham diatur sedemikian rupa…”, Pedoman…, BAB I, hal. 3


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(masyarakat), ProFI should seriously consider not supporting these MFI, because most “people’s-owned enterprises” concepts failed. Very few still surviving ones convince only, if they are based on strong bottom-up developed social adhesion as in Bali. NTB’s communities do not practice such a strong social adat system. The deteriorating performance of the majority of UPKD is just another proof that “people’s enterprises” fail due to the natural behavior of most people to act in their own private interest. (In Bali, this interest is being embedded in the social fabric!) A better choice is running an UPKD as village enterprise (BUMDES)75 with recruiting managers and subcontracting internal supervision and audit. Alternatively, the village government may hand over the management to another party, e.g. a neighboring UPKD based on a profit-sharing contract (similar to Bank Bukopin’s Swamitra concept, where Bank Bukopin manages the savings and credit units of multi-purpose cooperatives).

1. SK Bupati Bima on UPKD P(asal)1 General definitions f) Missing definition of Tim Pembina members (“suatu tim” yang memfasilitasi) . i) “Pokmas (kelompok masyarakat, people’s group) is a community group that has a productive business”, however, in reality, individuals have a business. In most instances, Pokmas is a group of individual borrowers; the members appoint a group leader (Ketua Kelompok/Pokmas) who signs loan agreements and collects the group members’ loan installments. P2 Status “Working area of UPKD is the village.” This could be the way out to allow mobilizing savings, in analogy to the LPD practice in Bali. (See also P3.) P3 Function The UPKD mobilizes and disburses funds” from the village community”. This limitation might become a key vis-à-vis bank law. P4 Purpose of UPKD a) UPKD shall “increase the income of farmers.” Consequently, a borrower should at least have some farming activities to be entitled for a loan. Households with other source of income are not mentioned and do not seem to be the target group. (They are mentioned in other places.) P6 Legality (explanation for consideration, no comment) (1) “UPKD is legal body once its statutes and bylaws are registered at the court (Pengadilan Negeri). (2) As a legal body, UPKD have the right to - mobilize funds and disburse loans; - sign contracts, including loan agreements; - receive assistance and grants, financial as well as technical; - represent cases in court (penggugat, tergugat).” P7 Organization (explanation for consideration)

75 Similar to PD (Perusahaan Daerah) as BUMD on district or provincial level, or Persero as BUMN on national level. However, during the past decade, many of the national enterprises changed the status and became Perseroan Terbatas (PT).


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(3) UPKD have four managers (pengurus): (i) general manager (ketua), (ii) bookkeeper/secretary (sekretaris, bagian administrasi dan pembukuan), (iii) cashier/treasurer (kasir), (iv) “Pembina” for development and people’s empowerment (euphemism for credit/field officer, debt collector). UPKD in other districts have three managers. Some UPKD employ staff (thus implementing P4 e):”…developing employment opportunities for village people…”). P9 Tasks, responsibilities, rights (of Musdes and UPKD managers) (3) The management receives an incentive. An incentive for BP (badan pengawas, internal control/audit) is not mentioned here, but appears in ART-P6 (bylaws). (It is important that UPKD pay for reliable control. It is perhaps the best investment.) P10 Musdes (comment concerning editing) Compare: P10 (1) a) is a repetition of P9 (1) a) P11 Musdes (concerning Musdes membership) (2) - Conflicts might arise, if one person is simultaneously a representative of more

than one institution, e.g., if a BP-member is also Pokmas representative. - Problems might arise, when Musdes has to decide on a UPKD manager, also a

Musdes member. This person will decide on himself.76 - Three out of four managers have to attend Musdes, but no provisions are in place,

if two managers do not attend, e.g., one moved to another place, or passed away, and another one does un(intentionally) not show up; or if two UPKD managers cooperate in not showing up. In these instances, Musdes is not legitimate (syah), even when all other participants agree on an issue.

- Musdes is also not “syah”, if the village head boycotts Musdes. The provision does not take into consideration constellations, which can easily arise, in particular, if it concerns mismanagement. It is a sunshine regulation!

(3) Missing word “minimal”: “apabila disetujui m i n i m a l oleh 50 persen + 1” P12 Financing (1) Loan is not mentioned as a source of UPKD’s business capital here. It remains unclear what is meant by “non-binding” or “non-conditional” (“tidak mengikat”) contributions and grants, as these often come with conditions. (3) UPKD’s fund originating from IMS-NTAADP is/becomes the village community’s asset (“adalah menjadi asset masyarakat desa”). This may result in various contradicting assumptions and interpretations. It should be clear beyond any doubt that the fund is not property of the village and that the village is not fund owner. (4) The IMS-NTAAD fund is an eternal fund (“dana/modal abadi”). (5) The local government can withdraw the fund, if the UPKD fails (indicating that the government remains legal owner of the fund). Provisions regarding “unsound” UPKD need to be defined to prevent arbitrary withdrawal of the fund. P13 Business (3) UPKD extend loans to Pokmas/groups (not to individuals), for productive purposes, thus excluding, e.g., emergency loans for the objective “increasing the welfare”. This is against best practices77 and does not consider the phenomenon of money fungibility. This provision should not continue if UPKD become village banks. P14 Income 76 For example, a manager is not member of the board of commissioners! 77 Loans to the poor: first loan for food or repaying another loan, second loan for clothes, third loan for home, fourth loan for education, fifth loan for business or emergency.


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(2) This clause allocates arbitrarily (top-down!) UPKD gross income (not net income or profit!) to (i) equity growth (40%), (ii) management incentives and operational costs (40%), and (iii) other costs (20%). This provision is extremely unusual. It is a highly problematic sunshine regulation that does not allow losses! Under this regulation, when arrears increase, - incomes decrease, and less funds are allocated to bad debt reserves; - cost cutting happens just when money is required for various collection efforts; - management spends more time but gets a discouraging low income. A revision is urgently suggested. In this respect, village governments should ponder charging at least a small fee, e.g. 2% p.a. of the project fund, so that UPKD contribute to the village coffers. P16 Supervision (3) This clause appoints Badan Pengawas Daerah (Bawasda) as external supervisor. It is suggested that Bawasda should explicitly be mentioned in the Organizational Structure (see statutes, AD-P9). Explanations and clarifications on the Decree (Penjelasan atas keputusan) The decree comes with two pages explanations and clarifications. UPKD shall support farm-based businesses. UPKD are financial institutions for farmers (Lembaga Keuangan Petani?). It is suggested to review the necessity to link the activities of UPKD with farmer activities as many village people produce farm goods for own consumption only and have other sources of income. However, Musdes may charge the UPKD management with the task to disburse a minimum percentage of loans for financing seasonal farm activities (loan product “SUTA” Sistem Usaha Tani”, a loan that is repaid in full after harvest or from harvest sales proceeds). The “Explanations” mention “UPKD members” (“Untuk dapat menikmati asset yang dimiliki masyarakat ybs. terlebih dahulu harus menjadi anggota UPKD”). This sentence contributes to different interpretations. The SK Bupati itself does not refer to “UPKD membership”. Unfortunately, there is no mentioning that the district government will make a budget available for guidance (pembinaan), facilitation of technical and management matters, by the village, sub-district and district government.

2. Statutes (Anggaran Dasar, AD) AD-P6 Function “UPKD is a micro financial institution functioning as….” It is not mentioned that UPKD interacts with groups only as indicated by the organization chart (see P9). AD-P7 Objective UPKD shall increase the income of villagers, decrease social envy (!), improve welfare, increase purchase power, etc., a wide range of economic and even some non-economic and non-financial activities (7 a) – f)), wide and not focused. The term “bantuan modal usaha” (see sub-sentence b): often “misinterpreted” as a loan that must not be repaid) instead of “kredit” points to the social role. (There is a semantic flaw in P7 b): it is certainly not intended “Mengurangi ….tingkat kesejahteraan melalui bantuan modal usaha kerja” (Decreasing…. the welfare through financial assistance). AD-P9 Organizational chart or structure


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Concerning the chart, it is suggested - to present Bawasda explicitly as a body for supervision; - to consider having included and presented individuals of the same village as

savers and individual others, maybe limited to the same village and split villages or adjacent villages, as borrowers;

- to draw (a) box(es) for group leaders (Ketua Pokmas); - to draw (a) box(es) for members (“anggota”), if there are any. The organization chart presents Forum UPKD Kabupaten-Kecamatan. Regrettably, any other references (definition, participants, tasks, objectives, etc.) are missing. It is recommended that UPKD membership in an association becomes imperative. AD-P12 Funding The wording should be reviewed, as (3) and (4) are not sentences. It is suggested that (3) and (4) become (1) c) and (1) d); (3) loans (“dana pinjaman”), e.g. from banks, can become a source of funds (not mentioned in SK Bupati P12); (4) UDKP started as fund administrator. This is perhaps the reason that retained profits are not mentioned as a source of funding. The question of equity and profits (and its legal owner) is not resolved. It is suggested to review the UPKD in this respect in total as it also concerns and clarifies the ownership. AD-P13 Business (2) Regarding non-binding donations etc.: Normally, funds from programs and projects and even donations are binding. (3) Loans go to groups only: A revision is strongly suggested. AD-P14 Income This regulation concerns allocation of gross income (see comments on SK Bupati, P14). A revision is strongly recommended. AD-P15 Reporting (5) Suddenly the term “laba” (profit) appears. Before, gross income was allocated; profits (income minus costs) could not exist. Here, profit is defined as “dari dana pengembangan 40%” (40% from development fund), a term not mentioned or defined before. A review is urgently required. AD-P16 Changes Musdes is responsible for any changes to the AD. It is suggested to indicate which of the provisions Musdes can change, in contrast to those that are already fixed based on the SK Bupati. The nature of the individual UPKD should not differ too much from one another.

3. Bylaws (Anggaran Rumah Tangga, ART) ART-P1 Musdes (suggestions for editing only) See SK Bupati P11 to keep this list more simple, and for review. Unclear whether Kades (village head) plus three village representatives (= four persons), or three village representatives including Kades (three persons) have to participate. ART-P2 Musdes responsibility (1) Musdes does not formulate the AD/ART, it is only changing or adjusting the AD/ART and it should do so only with respect to the SK Bupati (dengan memperhatikan SK Bupati). Suggestion for addition: e) mensyahkan laporan/pertangungjawaban tahunan


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(2) It seems (not undisputable clear!) that UPKD management is responsible for inviting Musdes for the annual report. If the management fails to invite, a Musdes would not convene, - and no solution to problems. (4) A “Special Musdes” will convene only if UPKD managers divert funds, but not for other reasons, such as not reporting or complete inactivity. There should be a provision that a Musdes will be held on request of the government (Tim Pembina), for example, if the village cannot protect the funds. ART-P3 Management Kabupaten Bima promotes four instead of only three managers (pengurus) as common with cooperatives, or two directors as common with BPR, or even only one as in BPR-LKP. The more persons share in the same income, the lower will be their individual income, but probably also their engagement and sense of responsibility. ART-P4 Service period (2) “Managers are replaced with at least 60% of the managers remaining.” Following this regulation, after a three years service period, Musdes can only replace one out of three or four managers, even if the performance of two managers is unsatisfactory. Reason for this questionable rule is the intention that the skills remain in the UPKD. ART-P5 Recruitment and release of UPKD managers (1) In connection with (2) f,g; (3) f,g, (4) f,g: When comparing the terms for UPKD managers it was found that, in contrast to the other managers, the general manager (ketua pengurus) seems not be obliged to work full time and that he must not have a healthy body and spirit (“sehat jasmani dan rohani”). In contrast to the chapter’s title, nothing is mentioned about dismissing a manager. ART-P6 Tasks, responsibilities and rights of BP (internal supervision) (1) a) The first task of BP, as mentioned here, is socializing the presence of UPKD. It is proposed that the foremost task of BP should be checking whether the UPKD management follows regulations and procedures, and proposing changes to regulations and adoptions to procedures so that UPKD managers can always comply. (1) e) BP should be allowed to check the UPKD anytime, also without announcing an audit to the village head first, as stipulated here. ART-P7 Tasks, rights and authority of the UPKD managers The following observations on tasks relate to loan processing: - (1) According to the job description here, the general manager (ketua) seems to

be not involved in credit decisions, although the field manager reports his field observations and gives recommendations to him (see (4) d) below).

- However, according to ART-P14 (5), the ketua is the credit committee’s head. - (2) d) The manager for administration and bookkeeping (secretary) is a member

of the credit committee. - (3) k) The finance manager (cashier) is not mentioned as a member of the credit

committee but is responsible to withheld loan disbursement if its administration is not yet completed.

- (4) i) The field manager is the only (?) other “komite kredit” member among the managers.

Field managers communicate with (group leaders of) “Pokmas” (groups) not with the individual end-user. According to (4) b), field managers collect loan repayment; c) survey and assess group loan applicants (“Pokmas calon peminjam”), e) seize collateral from a group (groups do not have collateral, group members may have, it is not compulsory!); g) assist with writing loan proposals; i) approves or disapproves loan applications.


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ART-P8 Rights of the managers (1) The managers receive an “incentive” based on SK Bupati P14 (2) b), i.e. a percentage of the operational cost; according to SK Bupati P14 (2) b), total operational costs are 40% of the gross income. (3) The managers receive an annual THR78 bonus amounting to one (monthly) salary (“gaji”, the term is new here, it was not mentioned before). Probably, the “gaji” is the projected and budgeted “average insentif”. The THR bonus is part of a 20% allocation for “other costs” (see SK Bupati P14 (2) c)). (4) The managers receive severance payments amounting to three monthly incentive payments, without stating from which part of the UPKD’s income allocation. (6) The managers are insured in the social security system Jamsostek, charged to SK Bupati P14 (2) b) as part of the general operational cost. No manager has been met who confirmed being registered with Jamsostek. According to ART-P17 a) managers receive a bonus amounting to 5% of 40% = 2% of the gross income to be deducted from the 40% allocation to the UPKD capital development (SK Bupati P14 (2) a) ). This bonus reduces capital growth. ART-P9 Responsibility: Reporting (1) The UPKD management has to send the monthly report until the 7th each month to the Coordination Team at Bappeda in Bima. (2) A fine will be imposed for delays. However, no account of execution of this fine has been received. According to ART-P17 b), the fine is charged to the UPKD as operational cost. No regulations concerning fines were found or mentioned (amount, recipient). The fine does not reduce the income of managers. ART-P15 Loan repayment (6) For loans repaid before due date, this provision demands payment of a certain percentage of the interest that would have been earned.79 This regulation is sensible if it concerns installment loans with flat interest rates. In general, even local MF consultants do not comprehend this rule. Its application was not found. ART-P17 Allocation of (gross) income This provision details the allocation of gross income for cost items. It is recommended to not allocating gross income to cost items, if there is no direct relationship. With MFI, there are few costs directly related to income. Even worse: Lower interest income can provoke higher costs, e.g. for loan loss reserves, as in case of delinquent loans. It is also not sensible to allocate 10% of the gross income for asset maintenance and depreciation (see ART-P17a): 25% from 40% allocated to capital development = 10% of gross income). A review is urgently required.

78 Tunjangan Hari Raya 79 For example, loan interest payment according to loan agreement is 10 months x Rp20,000; the loan is repaid after the sixth month and UPKD has earned 6 x Rp20,000 = Rp120,000. It would have earned another 4 x Rp20,000 = Rp80,000 without early loan repayment. According to this provision, the debtor would have to pay an early repayment fee of, for example, 20% x Rp80,000 = Rp16,000.


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4. Manual and Guidelines for UPKD Operation Pedoman dan Panduan Pengelolaan Unit Pengelola Keuangan Desa (UPKD) Kabupaten Bima This instruction manual presents the UPKD administration on 70 pages. The introduction and program background covers two chapters on nine pages. One of the main problems is already presented on page 2: “…UPKD need statutes and bylaws, which are decided upon by all members in the members’ meeting or Musyawarah Desa.”80 Why: “or”? “The UPKD Program’s target are the “members and the village people.”81 Are these two different strata? Reasons are presented for establishing groups as borrowers, namely: coordination, supervision, guidance and joint liability as collateral substitute. Is this the “inisiatif masyarakat”? The answer from the field is: It is the initiative of the project! Even UPKD managers prefer loans to individuals. The following statements (p. 3) may explain the dilemma: - “The UPKD fund is property of the village people.” 82 - “The authority to make use of the fund lies with the village people.” 83 - “The mechanism of share ownership (“saham”) is arranged in a way to guarantee

the continued presence of the fund in the village.” 84 Chapter II (p.5/6) exposes underlying reasons, why a number of loans were not repaid. Target of IMS-NTAADP loans: - “Development of sources of income of poor people in the village by efforts to

develop productive working places.” This means: financing new activities with a much higher risk of loan failure.

- “Village groups or poor farmers are preferred target whose income is not sufficient to finance their food, schooling, health…” It has to be anticipated that a substantial part of the loan will be used for non-productive purposes.

- Loan processing principles: o demand driven, according to the people’s request; o quick disbursement; o all village people are active in planning, executing, UPKD supervision.85

Chapter III presents ten pages about the management of the IMS program, which are of minor relevance after the closing date 30 September 2003. Chapter IV explains on seven pages funds management and administration. Terms such as “tabungan anggota” (members savings) and “tabungan sukarela” (voluntary

80 “…maka UPKD harus memiliki AD dan ART yang ditetapkan oleh seluruh anggota melalui rapat anggota atau Musdes.” 81 …agar manfaatnya (UPKD) betul-betul dirasakan oleh anggota dan masyarakat desa.” 82 Status dana UPKD yang berasal dari proyek NTAADP adalah milik masyarakat desa.” 83 Otoritas pengelolaan dana tersebut ada pada masyarakat desa. 84 Mekanisme kepemilikan saham diatur sedemikian rupa …. 85 Comment: This is certainly demanding - and time spent on “empowering” can become a cost item! (In turn?, the IMS-NTAADP fund comes interest-free to the UPKD!) This is not so easy for average farmers and time-consuming work for which the UPKD management and BP is already paid. And what about common people who cannot express themselves and just want financial services?


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savings) are used but not explained (4.2 a). The example for the calculation of interest lacks necessary information.86. A reason why “the interest rate on voluntary savings has to be lower than the bank rate” is not given (footnote p.20). Chapter V, the mechanism to administer loans, covers 14 pages. It presents the 5C87 concept and includes a presentation of a simple loan analysis, a calculation of the loan applicants’ assets and loan repayment capacity. Using the forms and following the instructions (often they were not) would have prevented disbursing quite a number of loans that turned bad. The pages on interest calculation do not refer to effective interest rates, or to the effect of installments and savings, or to upfront interest deductions that are suggested for seasonal loans to agriculture (SUTA). Regular loan monitoring does not cover monitoring arrears and loans with arrears (see p. 38: Kartu Monitoring Kredit has no column for arrears.). Chapter VI, four pages about cash management specifies suggestions for the allocation of gross income. For example, the “incentive” for managers is maximum 25% of the 40%-allocation for operational expenses (BOP, biaya operasional, p.43)88, equivalent to 10% of total gross income. The result is not convincing: A profitable UPKD yields a monthly gross income of Rp5m to Rp8m.89 If 10% of this amount (Rp500,000 – 800,000) is allocated as incentive to four managers, the monthly income would be Rp125,000 to Rp200,000, - much too low even for a half-time job! Annual allocation to the risk fund (2% of 20% “retained profits”) would amount to about Rp1.5m to Rp2m, less than 1% of outstanding loans and insufficient (suggested minimum: 3%). The suggestions are not at all realistic. In most active UPKD, incomes are less than half and incentives (or salaries) at least twice as high. Chapter VII, ten pages about risk management, is suitable for advanced MFI managers. It describes several ways of risk measuring in theory, but unfortunately, no case study is presented. Very few, if any, UPKD will be able to handle risk measuring. As a risk mitigation measure, loan insurance, is suggested, but no loan insurance company takes over UPKD loan risks. Chapter VIII presents 14 pages about loan supervision and loan recovery. The bad debt classification matrix (p.57) is a helpful guideline, if the UPKD management has the capacity and experience to classify the business of individual (!) borrowers. A guide for loan quality differentiation is presented (p. 59/60), however, a link to bad debt provisioning is missing. The guide fails to discuss that, after rescheduling, interest on a “new loan” is lower (based on new, lower loan amount) (p64/65). A table is presented with figures that need additional explanations and may need to be revised. For example, Rp225,000 interest are stated to amount to Rp2,250,000 for “monthly repayment for one year”. However: 12 months x Rp225,000/month = Rp2,700,000.

86 This concerns interest calculation: The balance of an account and transfers from the 8th of the month onwards was given, but the balance from 1st until 7th not. 87 Loan assessment by 5C: character, capital, conditions, collateral, capacity 88 Maximum 75% of 40% is allocated for other operational costs. In most cases, maximum 25% plus maximum 75% is less than 100%! No hint is given how to handle a difference if less than 75% of the allocation to operational costs are spent! 89 Portfolio Rp250m x 2% - 3% p.m = Rp5-7.5m. Most probably, there are less than 15 UPKD in this income range in NTB.

Rural Microfinance Development in NTB – Concept and Imlementation Strategy Annex 9

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Annex 9: UPKD – Sustainability Criteria Some argue that a MFI is sustainable if it cannot only cover all costs and expenses but also generate income to cover the following: - interest or other charges for the initial fund, which UPK received for free (opportunity cost); this is a value of at least bank deposit rate or SBI rate

7% p.a.

- asset growth to compensate for inflation (keeping real value of funds constant), about

9% p.a.

- reserves for participating in general or sector economic real growth, about 6% p.a.Total 22% p.a.

Deposit-taking institutions can fulfill this requirement with regard to equity thanks to the leverage effect: Assets generate profits (return on assets, RoA) which are attributed to a much smaller equity (return on equity, RoE). Owners may earn 22% on their equity, which accounts for 10% of the balance sheet because depositors (90%) get only 7%. On average, this MFI earned 10% x 22% + 90% x 7% = 8.5%. It is not realistic to demand that grant-financed non-deposit-taking MFI have to earn 22% on the entire capital. It should be demanded to develop this MFI to become a deposit-taking institution! Others claim that a MFI is not sustainable when it can only cover costs thanks to subsidies, including the provision of a fund below market price or even free. UPKD obtained about Rp200m at zero % interest. A sustainable UPKD would earn at least a profit amounting to 7% x Rp200m = Rp14m (capital opportunity costs). This opinion is challenged.

MFI A earns 18% or Rp36m from an Rp200m donated fund. Operational expenses amount to Rp40m and do not include costs for an office and electricity (provided by village government). Despite subsidy, a fund at zero cost, MFI A’s net income is negative: -Rp4m! The sustainability of MFI A is questioned! It is called “inefficient”, because costs exceed income! MFI B earns 35% or Rp70m from an

Rp200m fund that it financed with a commercial loan (interest Rp24m). Operational expenses, Rp36m, are lower (no visits from donors, no meetings, no travel, no reporting). MFI B has to pay for an office and electricity (Rp5m). MFI B did not receive direct or hidden subsidies but booked an Rp5m net income. The difference between MFI A and MFI B is: MFI A passed on more than the subsidies to its clients: The “value” of the donated fund, the subsidy from donor to MFI, is 12% x Rp200m or Rp24m, the amount a bank would have charged. The donor required that the MFI charge its target group maximum 18%. This is 17% below market price. The subsidy from MFI A to its debtors amounts to (35% (market rate) - 18%) x Rp200 = or Rp34m. The donor forced MFI A to pass on more subsidy (Rp34m) than it has received from the donor (Rp29m). One cannot say that MFI A is not sustainable, the donor made it un-sustainable with limiting the loan interest rate! Therefore, a pragmatic definition is proposed: A UPKD is sustainable if it can provide financial services without depending on support in kind or cash from non-clients and income from business with clients is projected to equal or exceed costs for these services.

M F I A B Non-grant 200

Grant, donation 200

Income interest 18% 36 35% 70

Interest cost 0% 0 12% -24

Op. expenses -40 -36

Office, electricity = 5 0 -5

Net income -4 5


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Annex 10: Transfer of Assets to UsPKD It is recommended to provide a strong and undisputable foundation for strengthening UsPKD. This foundation is an agreement with the local government and village government concerning the (enabling) environment in which UsPKD work. The foundation for UsPKD as a profit-oriented enterprise is - a transparent book-keeping system and a new, reality-based balance sheet; - a set of rules and regulations that are common for MFI and are adhered to; - a qualified management and staff to run the UsPKD business. A well-documented transfer of assets, rules and regulations, and personnel from the Unit PKD to Usaha PKD has to take place. This transfer, although primarily an administrative one, has to be prepared. Presently, Musdes is the UPKD’s highest authority. Therefore, the proposal presented here can only be realized, if Musdes agrees to this concept. This may become a difficult procedure, if one follows UPKD statutes and bylaws. For example, in Bima, Musdes is an assembly of representatives of nine different village organizations that meets only once annually (see Annex 7) Despite these arrangements in statutes and bylaws (that may vary from district to district), it is proposed to socialize the proposed changes and to call in a Musdes. The local government shall request village and UPKD representatives to agree to the transfer of assets from Unit PKD to Usaha PKD. This process is preceded by assets verification. As loans account for about 80-90% of UPKD’s assets, it is imperative to confirm the existence and substance of these assets and assess their value based on the probability of repayment. 90 This assessment requires a full, renewed documentation of all loans, at least of all loans with arrears. Loans – intentionally, and on request of IMS-NTAADP – went to poor or even very poor people91 and it might not be possible to recover the full amount of overdue loans. Regulations have to be established for the assessment of the value and transfer of assets from Unit PKD to Usaha PKD. Especially, regulations are required for differentiating loans according to substance and quality: - reserves for bad debt: substandard loans remain in the portfolio; - write-off: loan collection continues, off-balance records; - final write-off: the case is closed.

90 For example, if the probability of loan repayment is only 30%, the value of this loan is loan balance x 30%. Loan loss reserves have to cover 70% of the loan balance. If the probability of loan recovery within two or three years is zero, the loan has to be written off. 91 According to UPKD managers, 30% (Sumbawa) or even 48% (Lombok Tengah) of the loans go to very poor people, 55% resp. 42% to poor people. (see Annex 6.8)


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The balance sheets below demonstrate in short a transfer from UPKD to UsPKD. Before transfer Table A32: Unit PKD “ABC”: closing balance

Aktiva / assets Passiva / liabilities and capital Cash 5,000,000 Deposits 5,000,000 Bank 5,000,000 IMS-NTAADP 160,000,000 Pinjaman (loans) 180,000,000 Reserves for bad debt 5,000,000 Fixed assets 10,000,000Depreciation (2,000,000)

Capital (accumulated surplus previous years) 25,000,000

Others (including office rent paid in advance) 2,000,000 Profit current year 5,000,000

Total assets 200,000,000 Total 200,000,000 After transfer Table A33: Usaha PKD “ABC”: opening balance

Aktiva/assets Passiva liabilities and capital Cash 5,000,000 Deposits 5,000,000 Bank 5,000,000Kredit yang diberikan92 130,000,000Reserves for bad debt (30,000,000)

IMS-NTAADP 85,000,000

Fixed assets 10,000,000 Equity 23,000,000 Depreciation (4,000,000)Others 2,000,000

Profit current year 5,000,000

Total assets 118,000,000 Total 118,000,000 The owner of the IMS-NTAADP fund has lost Rp160,000,000 – Rp85,000,000 = Rp75,000,000, which are allocated to Rp50,000,000 write-off and Rp25,000,000 as a contribution to increase bad debt provision from Rp5,000,000 to Rp30,000,000. Depreciation of fixed assets increased Rp2,000,000 to become Rp4,000,000 and was balanced with reduced capital/equity. Total assets decreased from Rp200,000,000 to Rp118,000,000 = Rp 82,000,000 IMS-NTAADP - Rp75,000,000 Capital - Rp2,000,000 Shifting bad debt reserves from Passiva to Aktiva - Rp5,000,000

92 It is recommended to apply the word that expresses best the obligation to repay a loan, namely “kredit” instead of “pinjaman” or “bantuan modal”.


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Annex 11: Musyawarah Desa (Musdes) Musdes, an assembly of village people, is the UPKD’s highest authority. Musdes has the authority to change the UPKD’s statutes and bylaws. Therefore, the proposal to alter the character of UPKD, can only be realized, if Musdes agrees. Representatives of nine different organizations form the Musdes: Table A33: Minimum Representatives of Musdes Organization Comment Members Group leaders, Pokmas 50% + 1, if UPKD serves 30 groups: 16 UPKD manager minimum three out of four (Bima) 3 UPKD supervisors minimum one out of three 1 Village head and administration perangkat desa, minimum 1

2 Badan Perwakilan Desa (BPD) minimum 1 Village elders minimum 1 Religious leader minimum 1 Karang Taruna, youth leader minimum 1 LKMD Lembaga Ketahanan Masyarakat Desa minimum 1

9 organizations Total, minimum: 12 + group leaders 28 Musdes cannot decide if one of the above organizations is not present with the minimum number of representatives. Decisions of Musdes are accepted if (at least) 50% + 1 of the people present agree.93 Musdes meets only once annually to approve the annual UPKD report. Extraordinary meetings are only held if requested by representatives of minimum five of the nine organizations, based on an indication that “deviations” (penyimpangan) occur(ed) in the management of the UPKD. Following UPKD’s AD/ART, Musdes can change statutes and bylaws only once a year, namely on the opportunity of the annual meeting. The composition of Musdes members with regard to UPKD is problematic: - Conflicts might arise, if one person is simultaneously a representative of more

than one institution, e.g., if a BP-member is also Pokmas representative. - Problems might arise, when Musdes has to decide on a UPKD manager, who is

also a Musdes member. This person will decide on himself.94 - In Bima, three out of four managers have to attend Musdes, but no provisions are

in place, if two managers do not attend, e.g., one moved to another place, or passed away, and another one does un-(or intentionally) not show up; or if two UPKD managers cooperate in not showing up. In these instances, Musdes is not legitimate (syah), even when all other participants agree on an issue.

- Musdes is also not “syah”, if the village head boycotts Musdes. The provision does not take into consideration constellations, which can easily arise, in particular, if it concerns mismanagement. It is a sunshine regulation!

The local government cannot exert pressure on Musdes by threatening to withdraw the IMS-NTAADP fund. Without village support, the local government would have to collect outstanding loans itself, for which it is not prepared, or to contract a third party, professional debt collectors, for which a budget has to be made available first. 93 Musdes dianggap syah apabila yang hadir….Keputusan Musdes dianggap syah apabila disetujui 50% + 1 dari jumlah peserta Musdes yang hadir. 94 For example, in PT enterprises, a manager is not member of the board of commissioners.


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Annex 12: Badan Kredit Desa (BKD) When advocating support to the development of UPKD, i.e. village based MFI in NTB, it may be useful to refer to the experience of Java’s village based MFI, Badan Kredit Desa (village credit board). BKD are regarded reasonably successful and sustainable at delivering MF services at the village level. Out of 5,345 BKD, 4,518 (85%) BKD are still active. BKD profile (rounded figures)

assets Rp58m loan portfolio Rp42m deposits Rp 8m equity and retained profits Rp50m, i.e. more than the loan portfolio 100 borrowers with loans from Rp100,000 to Rp1m, average balance is

Rp0.4m 120 savers, average savings account balance is Rp70,000; mostly forced

savings. Most popular are BKD’s 12-week installment loans with forced deposits. BKD make no efforts to mobilize voluntary savings although their status would allow doing so. At the end of May 2003, 9% of the loans (4% of the amount) were classified as “loss”, about 7% of the loans (5% of the amount) considered “doubtful”. BKD established a routine, formula-based system of reserving for bad debt. After a certain period, “loss” loans are automatically written off against reserves and moved from the balance sheet to an off-balance sheet “black list”. The high equity, despite routine write-offs, is a result of a loan interest rate almost double that of the BRI Units, but at a much lower transaction cost to the borrower. Operating costs are low because three staff open the office at the market day only. This is not attractive for savers who need access their emergency savings anytime. Bank Indonesia (BI) charged BRI with the supervision of these units. BRI is even allowed to dismiss BKD personnel. Although the equity of the average BKD exceeds the loan portfolio, the situation differs very much. Several BKD expand and look for more funds. BRI intends to lend to BKD and has requested permission from BI because of the still questionable legal position of BKD.


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Annex 13: “The Yogyakarta Communiqué 2004”

We, the Governors and Deputy Governors of Central Banks and high-level officials from Ministries of Finance and other authorities from 10 Asian countries present at the High-Level Policy Meeting on “Microfinance and Rural Finance in Asia” held in Yogyakarta from the 26th to 28th February 2004 identified appropriate strategies for Central Banks and Governments to promote Microfinance and Rural Finance. Recognizing

• the co-existence of the conventional and the new paradigm in Microfinance and Rural Finance in many countries and the need for a gradual shift along the continuum between these different approaches,

• the longstanding and successful experience with commercially-oriented

Micro-finance and Rural Finance in Asia, already providing millions of low-income households with financial services on a sustainable basis,

• the shortcomings of interventionist, directed and subsidized credit policies,

which are very costly, do generally not achieve significant outreach and compromise the sustainability of poverty alleviation efforts,

• the imperative to focus our attention on poverty alleviation in order to meet

the challenges arising from the Millennium Development Goals,

• the importance of market-based, effective Microfinance and Rural Finance Institutions for poverty alleviation,

• the need for a conducive regulatory framework for competitive Microfinance

and Rural Finance Institutions to realize their potential outreach and impact on low-income households to effectively reduce poverty,

• the desirability of financially self-sufficient provision of institutional capacity

building in the long run, while in the short and medium run smart subsidies may be necessary,


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We, the Governors and Deputy Governors of Central Banks and high-level officials from Ministries of Finance and other authorities, will integrate Microfinance and Rural Finance as a powerful tool for poverty alleviation in development strategies of our countries and commit ourselves to apply in present and future actions the following principles of good practice:

1) We will work towards a conducive environment for commercially-oriented Microfinance and Rural Finance. The key issues to be addressed comprise liberalizing interest rates and enabling deposit-taking as well as non-collateralized lending to facilitate institutional sustainability, deregulating market entry barriers to foster competition, and providing appropriate mechanisms for exit of unsuccessful institutions.

2) We will promote cost-effective and efficient ways to regulate and supervise

the Microfinance and Rural Finance sector to protect small savers and create a level playing field among bank, non-bank financial institutions, co-operatives and other member-based institutions.

3) We will strive for market orientation. We are aware that interest rate subsidies

endanger institutional sustainability and undermine deposit mobilization. Only if markets clearly fail, temporary subsidies may be justified. Subsidies must be implemented transparently and phased out gradually.

4) We will assume an active promotional role in Human Resource Development

and Institutional Capacity building.

5) We will extend the regional dialogue and co-operation among our countries to disseminate our rich and diverse experience with market-oriented and sustainable Microfinance and Rural Finance institutions, which are integrated in the formal financial sectors and serve large numbers of low-income households in Asia.

6) We will continue the dialogue commenced in Yogyakarta and discuss the

critical issues presented today and the principles of good practice agreed upon today with stakeholders in our countries.

All participants welcome the excellent co-operation achieved at the High-Level Policy Meeting in Yogyakarta, in particular the progress of practical work in the countries represented and the constructive discussions that have taken place and the Central Bank and people of Indonesia for their gracious hospitality as well as GTZ and the German Government for their professional support and generous co-funding of the event.

Declared in Yogyakarta, 27th February 2004


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