Microfinance Initiative in Indonesia
November 2009
By Sahil Sondhi

Overview of Micro-Business in Indonesia

There are 51 million businesses in Indonesia, most of which do not have access to formal banking. A breakdown of the industry is shown below:

Our partner organization KOMPIP (discussed below) has and will continue to service the productive poor segment.

An overview of loans and savings in Indonesia’s financial system is provided in the table below. Legal structures for microfinance initiatives in Indonesia vary and include banks, non-bank financial institutions (NBFI), non-profit foundations, and cooperatives.

While the above data is outdated it is still useful to demonstrate the low level of microfinance representation in the aggregate financial activity of Indonesia. This implies a significant potential for growth. More current data will be acquired from Bank Indonesia if needed.

The KOMPIP Model

Branches of KOMPIP:
- Social Justice
- Good Governance
- Microfinance (DARMA & DAMAR-KOMPIP)

KOMPIP attempts to achieve a holistic approach to improving the lives of marginalized people in central Java by focusing on both social empowerment and economic advancement. This includes social service delivery, community organizing, disaster risk-reduction training, advocacy, livelihood and employment education, and microfinance. The organization’s long-term vision is to achieve the provision of healthcare, education, housing and employment to as many people as possible. The management structure of KOMPIP consists of a seven-member supervisory board, seventeen daily officers split across four branches and a four-person administrative structure for each neighborhood.

KOMPIP has a strong presence in central Java and has established a wide network and broad-based support.

The microfinance wing of KOMPIP is comprised of a three-year old neighborhood endownment fund and a newly created cooperative.

1. NEF
This is the fourth operating year of DARMA-KOMPIP’s revolving fund. Out of 198 original neighborhoods, 193 are still operating with a membership of 7000 people. 5 neighborhoods are in Jogjakarta and the remainder are in Klaten. DARMA-KOMIP’s neighborhood endowment fund provides its members with access to small loans for microbusiness purposes. Each neighborhood has an administrative structure composed of a leader, secretary, treasurer and debt collector.

DARMA-KOMPIP provides marketing and microbusiness management training to its borrowers. Loan repayment percentage rates have been in the high 90’s and the community has responded well to KOMPIP’s holistic approach. Additionally, in all 193 neighborhoods the revolving fund has grown substantially larger, allowing increased access and larger loans.

Due to the success of this program in increasing incomes and standards of living, DARMA-KOMPIP is in the process of replicating its NEF model in the Solo area, encompassing 2668 neighborhoods and 500,000 people. In order to facilitate this pilot project, a 2.3 billion rupiah (~US$240,000) seed grant has been pledged by the government of Solo from its poverty alleviation budget. It is hoped external grants will be obtained to cover adminstration and capacity building costs.

2. Cooperative

The cooperative will act as a legally independent microfinance institution that builds on the successful NEF model and supplements the services it currently provides. This is imperative because while the NEF has been remarkably successful in improving the lives of its members, it is limited in that it only provides access to relatively small loans. Vital services such as savings are not provided.

Named DAMAR-KOMPIP (“Power of the Marginalized People”), the cooperative will allow members to access larger loans, savings, and retirement services. The NEF will act as a screening process to identify the most economically productive poor who will thereafter be eligible for membership and access to these services. In addition, KOMPIP will use its network and ten years of experience in community empowerment to assist the cooperative’s members to gain access to social services that have been pledged by the government, especially in the areas of education and healthcare.

A separate office with new staff will be established for DAMAR-KOMPIP. For the first year, a small staff consisting of a treasurer, coordinators and secretaries will oversee the initial base of 2000 members. At this juncture, a conceptual model is being put together that will capture the strategy and specific mechinisms of DAMAR-KOMPIP. An ensuing financial projection will provide a timeline for reaching profitability.

A draft proposal has been submitted to HIVOS for consideration and we have received a response requesting clarification on certain issues, a strategy for measuring development outcomes and a financial projection for three years.

Requirements for the Cooperative’s Conceptual Model & Financial Projection
Scale to be sustainable and profitable

a. Financial model?
b. Branch model?
c. B.E.P (break-even point) --> 3 or 5 year model
d. Roll out


Questions for the model:

The Neighborhood Endowment Fund (NEF) as
Grassroot Income Generating Model in Java, Indonesia

May 2009
By Nicholas Taranto & Akbar Oedin Arif

The Neighborhood Endowment Fund is simply a community savings and loan model which is designed for a lifetime of membership. By being based in neighborhoods, NEFs can directly serve the poorest of the poor. Starting with a village named Mlese, KOMPIP is now replicating its model in seven other villages. More than 6,000 people have become members in NEFs spread across 190 neighborhoods.

The KOMPIP-RMF partnership supports these neighborhoods by distributing seed grants for about US$250 per neighborhood. Members in each neighborhood fund then add capital by contributing membership fees starting at US$.50. Members also contribute regular monthly savings as additional capital. Circulated as community follow-on loans, NEFs grow as borrowers pay interest of 1 to 2% per month until repayment of the principal. Since 2007 KOMPIP has distributed Rp329.000.000,- or US$32,900. After two years, the fund has grown to US$52,452.
 
Tabel 1.5. Capital growth in seven villages (in ’000s Indonesian Rupiah*)

Village	Seed grant	Membership savings fee	Monthly saving	Individual saving	Early capital	Collected interest	Others	Total May 2009
Brangkal	44.000	4.753	5.615	1.721	2.300	4.048		62.437
Mlese	47.500	37.049	13.358			21.520	28.829	148.256
Tirtomarto	38.000	9.595	6.773	2.318		5.164		61.850
Kalangan	84.000	5.531	5.373	2.520		1.940	765	100.129
Sumopur	48.000	3.391	4.726			5.897	1.010	63.025
Birit	42.500	4.577	3.983			4.151	660	55.871
Sawit	25.000	1.910	2.783			3.174	87	32.954
Total	329.000	66.806	42.611	6.559	2.300	45.896	31.352	524.525

* Exchange rate at time of report was 10,000 Rp to 1US$

Local Government of Surakarta/Solo is interested in replicating and scaling the Neighborhood Endowment Fund (NEF) model.

In late 2008, based on KOMPIP’s success, the Local Government of the city of Surakarta/Solo expressed interest in replicating the endowment fund model to all neighborhoods in Surakarta. However, due to its limited local funding capacity, the Government is seeking a continued partnership with RMF. Assuming that RMF can provide support for human resource mobilization, the Government has committed to provide seed grants to all 2,628 existing neighborhoods in Surakarta. The Mayor, Mr. Jokowi has passed his letter of partnership interest to RMF and has committed to provide US$262,800 in funding – a 5X expansion over KOMPIP’s current loan portfolio.

Despite its small initial size, we believe this partnership will make dramatic improvements in the lives of poor people. As the Mayor plans to continue allocating additional seed funds in the future each fiscal year, the opportunity to achieve large gains in the fight against Indonesian poverty is very exciting.



People’s First Endowment: Large-Scale Use of Community Savings to Reduce Poverty:
A Proposed Project Between Real Medicine Foundation & KOMPIP, March 2008

Nicholas Taranto & Akbar Oedin Arif

“The most important principle is that the fund is always working for and supporting the poor.”
-- Akbar Oedin Arif, CEO KOMPIP

KOMPIP has arrived at a juncture in its development of the Community Savings Model. Pilot programs run over the past five years through KOMPIP’s field laboratory have proven that Community Savings funds are not only feasible, but that they produce returns of over 100% per annum in the most successful cases. While Akbar and I were initially entertaining the idea of taking the model for-profit – as has been done successfully in Mexico with Compartamos – we ultimately have decided that maintaining not-for-profit status focused on plowing profits back into the respective funds is the most effective way to grow the community funds while providing maximal grants to prospective borrowers, namely the extremely poor.

Led by Akbar, KOMPIP is now ready to begin the executive modeling phase of the Third Fiscal Devolution (TFD). The idea behind TFD is to provide Java (and ultimately the rest of Indonesia) with a model that is capable of integrating funding mechanisms and micro-credit distribution channels to eliminate Indonesian poverty once and for all. To date, federal budgeting has distributed funding through regency and city channels. The TFD focuses on bringing the distribution of public funds down to the village and neighborhood level. The distribution of public finance lower down the proverbial social ladder has been empirically shown to reduce corruption and enhance the impact of each dollar spent.

In order to begin execution of the executive modeling phase, Akbar and I have made preliminary evaluations regarding the needed financing. Akbar has engaged the district regent (Bupati) who has agreed to provide the seed capital needed to launch a district-wide community savings fund. KOMPIP’s work to date in eight different villages has proven their model, and has prepared the regent to lend district government support to the process. The regent has agreed to provide the equivalent of US$50,000 in seed capital in the form of a grant to KOMPIP to establish Lumbung Rakyat Pertama (the People’s First Endowment).

Real Medicine’s Role

The $50,000 provided by the regent will serve as the Endowment’s seed, generating returns on the order of 18-30% per annum. In addition to the seed, yet-to-be determined initial and subsequent deposits (most likely $1 per month and $.50 per month, respectively, depending on the ultimate decision framework) made by villagers who belong to the Endowment will continue to bolster the fund.

In order to execute on this strategy, the Endowment will need initial capitalization from Real Medicine to cover the costs of administration, education, and documentation. These costs, as estimated on the next page, total US$31,050. These costs include overhead for district level administration; village level administration, education, and documentation for 15 villages; and neighborhood level education for 450 neighborhoods. These costs are estimated around comparable costs incurred while establishing previous programs.

The potential exists to partner with Hands On Disaster Relief (HODR) in order to split the costs of funding. While commitments from HODR have not yet been secured, the organization has supported community savings work through KOMPIP in the past, has worked on the ground in Klaten after the 2006 earthquake, and is likely to support future financial engagements.

I have agreed to take on this project, and will serve as a consultant and liaison between Western donors and project administrators on the ground in Indonesia.

Throughout the process of implementing the People’s First Endowment, KOMPIP will, per usual, collect poverty data that can be used by local, district, provincial, and ultimately the federal government in order to, as Akbar has put it, “Spoil the poor.” When expanded to its full potential, the Endowment will provide loans to over 25,000 poor individuals.

ESTIMATE OF COSTS FOR INITIAL CAPITALIZATION

BY REAL MEDICINE FOUNDATION

Third Fiscal Devolution For Neighborhood Endowment Fund (NEF)

Résumé From 7 Years of Field Laboratory KOMPIP-Indonesia

March 2008, Akbar Oedin Arif

KOMPIP is developing a new model of Community Savings called the Neighborhood Endowment Fund (NEF). The development of this new fund goes along with the effort to realize the third fiscal devolution.

The first fiscal devolution happens when the central government delivers publicly budgeted finance and a certain degree of authority to the regency level. The second fiscal devolution happens when regency governments deliver comparable budgeting from the regency to the city. The third fiscal devolution is KOMPIP’s proposed next evolution in public finance. The third fiscal devolution happens when cities and villages deliver budgetary discretion to the village and neighborhood level.

KOMPIP has worked on materializing the third fiscal devolution for over seven years. After a long struggle together with other NGOs in Indonesia to manifest the second fiscal devolution, Indonesia has now implemented this second fiscal devolution.

Since 2003 KOMPIP has succeeded to persuade one village to implement the third fiscal devolution as an example. However, it is important for KOMPIP to continue this process and to keep piloting this vision to determine how the funds should be used in the most effective way and for the highest benefit to the poor.

As the CEO of KOMPIP, I have piloted participatory poverty assessment since the year 2003. The piloting has been followed by giving seed grants to three neighborhoods in Boyolali City in Central Java, Indonesia. These three neighborhoods used the seed grants for poverty alleviation applying different strategies. The first neighborhood, Tegal Harjo, used the seed grant implementing revolving ducks. The second neighborhood, Deresan, used the fund for revolving goats. Different from the other two neighborhoods, the third neighborhood used the seed grant for the implementation of community saving. We received our inspiration from this third neighborhood.

After one year, the first and the second neighborhoods stopped their process of poverty alleviation. Meanwhile, the third neighborhood has been sustaining the implementation of community savings up to today.

A pilot program of the Neighborhood Endowment Fund has run for the past five years. Through field laboratory work, we could prove that Community Endowment funds, which work like community savings, are not only feasible, but they produce returns of over 100% per annum in the most successful cases.

However, the NEF is different from community saving. The difference is in its management which is organized by volunteers and it does not attract individual saving. Can it survive being managed voluntarily? The answer is yes. NEF’s members meet once a month to collect savings and distribute loans. By meeting only once a month, the burden on the volunteer workers will not be too much. Volunteers rotate every year so all members take responsibility in how to sustain the NEF.

Why does it not need to attract individual saving? So it won’t have to risk sustainability. Why does individual saving risk sustainability? Because the individual saver tends to ‘invest’, not to donate. When a member starts to save individually, he will make it a priority to receive benefits of his investment. The more benefit he wants, the more will he try to control and direct the rules in the save and loan processes. Rules should always go in direction of the poor while the rich merely support and strengthen them.

Individual saving would also direct the saving and loan process to a need of professionals who need salary. Imagine as an example that if there are 40 members in one neighborhood of NEF, there will be potentially about 80 to 120 transactions a month. Officers will very soon complain: I work everyday now! I cannot go to do other work now! Finally, they will say: You have to pay me! When NEF has to pay professionals, the professionals will start to swallow the benefit of interest or even all the endowment in the neighborhood.

Rules that people can learn from NEF is that “You as people in your neighborhood can donate without you losing your money!” But if you are very much eager to donate your money without having to get it back, that would be great! People from anywhere else may donate to NEF, but the rules of the NEF will be the only ones applied:

So, possible sources of NEF could be:

1.Membership savings

2.Monthly savings

3.Interest

4.Donations

5.Third Fiscal devolution

So, if community savings and coop are mostly entertaining the idea of taking the model for-profit, NEF should ultimately be maintained as having not-for-profit status. To focus on plowing profits back into the respective funds is the most effective way to grow the funds while providing maximal grants to prospective borrowers, namely the extremely poor.

KOMPIP is currently replicating the experiment in Sorowaden to seven villages in earthquake areas in Central Java and Yogyakarta. The NEF in the seven villages is very promising in its sustainability, as the total seed endowment has increased 37% after a mentoring period of four to six months. This again verifies that after every year the fund can increase 50 to 100%.

Judging from our experiences in the field, one neighborhood can potentially collect NEF US$3,000 to US$5,000 after seven years. Imagine you have US$5,000 and you will need to alleviate half of the families in your neighborhood out of poverty.

The biggest challenge of NEF in neighborhoods in Indonesia within the next two to five years is to establish a good example and model that one city in Java adopted for its third fiscal devolution for NEF. It is also important to have a good example in each of the big islands in Indonesia. Why? Because NEF should be able to be successful, sustainable and scaleable in different social and cultural contexts. It is our goal to pioneer and practice, and to find challenges in different neighborhoods, in different social and cultural situations, to resolve those challenges before NEF is truly replicated in a wide range of neighborhoods in Indonesia.