Neighborhood Endowment Fund (NEF) in Central Java; community-owned and operated microcredit units
What is the Neighborhood Endowment Fund (NEF) initiative and what are our plans moving forward?
This is the fourth operating year of RMF and KOMPIP’s joint NEF program. Out of 198 original neighborhoods in Yogyajakarta and Klaten, Central Java, 193 continue to operate with a membership of 7,000 people. This community-owned revolving fund initiative provides its members with access to small loans for micro-enterprise purposes. Each neighborhood has its own fund and democratically elects three to four people to administer the fund voluntarily, acting in the capacities of leader, treasurer and secretary. The amount received by each neighborhood is generally sufficient for two simultaneous borrowers of up to US$100 each and at a monthly interest rate of 1% to 1.5%.The neighborhood structure that is already in existence is the pillar of the program. In Indonesia this structure is known as the “RT-RW” system of socio-geographic organization. Each defined geographic area is divided up into neighborhoods that are identifiable by this RT-RW marker and these cohesive neighborhood groups are instilled with a communal sense of ownership and responsibility of their NEF. Each group collectively decides which members of their community will be granted loans for micro-enterprise purposes, thereby removing the need for any outside entity to carry out credit risk assessments.
KOMPIP staff and/or its large and growing base of volunteers make field visits during a training and mentoring period of four to six months. During this time, bookkeeping and administration training for NEF-level elected representatives is provided. Additionally, bookkeeping, micro-enterprise management and marketing training is given to borrowers.Loan repayment rates have been close to 100% and NEF communities have responded well to KOMPIP’s holistic approach. Additionally, in all 193 neighborhoods the revolving funds have grown substantially larger, allowing for increased access and larger loans. Due to the extraordinary success achieved, measured by increasing incomes and standards of living, KOMPIP is in the process of replicating its NEF model to the entire Surakarta area, encompassing 2668 neighborhoods and 500,000 people. In order to facilitate this expansion, a seed grant of $240,000 has been pledged and disbursed by the local government of Surakarta and a partnership between the mayor’s office, RMF and KOMPIP was established in late 2009.
One significant advantage of community-owned microfinance units such as KOMPIP-RMF’s NEF is the solid financial performance that is observed. This is attributable to the communal sense of ownership of respective neighborhood-level funds as well as the peer pressure that results from such a collectivist system in which neighborhood members are mutually dependent upon each other. Additionally, overhead costs continue to be low and the cohesive and communal nature of the neighborhood groups greatly reduces risk since prospective borrowers are screened by those that know their strengths and weaknesses best.
However, while the NEF model has proven itself through fantastic achievements and development outcomes, it does have some disadvantages that are common among community-owned and managed microfinance units. The neighborhood-level administrators have limited skills and can only be trained to a certain extent and for certain tasks, such as basic bookkeeping and fund management. Further objectives such as interest rate calculation, quantitative measurement of development outcomes and provision of additional microfinance services cannot be accomplished at the neighborhood and informal level and instead require a higher institutional level. Furthermore, like most community-owned and managed microfinance operations, the NEF initiative is limited in its size and scope: the only services provided are micro-loans, the loan sizes are relatively small, and the number of simultaneous borrowers is low because of reliance upon external grants rather than members’ savings. Therefore, this initiative must be formalized and institutionalized for two reasons: i) to scale up from 7,000 members to 500,000 members and ii) to improve service delivery and add more financial services such as savings, insurance and retirement.
In November 2009, Koperasi DAMAR Jateng (Cooperative for the Power of Marginalized People of Central Java, hereafter referred to as KDJ) was founded. Through the building of institutional capacity, this legally independent microfinance institution will transition the existing portfolio of community owned and driven revolving fund microcredit activities to a sustainable market-based financial system. Savings will become a major component of the financial services offered and will act as a key source of funding. Meanwhile, market-based and cost-covering interest rates will be calculated, regulation and oversight will be strengthened, and financial and institutional sustainability will be achieved.