11 evaluation of revolving fund for strenghening micro fin. · kja koperasi jasa audit kpkn kantor...

ADB SME DEVELOPMENT TA

BACKGROUND REPORT

EVALUATION OF REVOLVING FUND FOR STRENGTHENING MICRO FINANCE INSTITUTIONS

WOLFRAM HIEMANN, ANDI IKHWAN, TIKA NOORJAYA

JULI 2001

Published by: ADB Technical Assistance

SME Development

State Ministry for Cooperatives & SME

Jalan H.R. Rasuna Said Kav.3

Jakarta 12940

Tel: ++62 21 520 15 40

Fax: ++62 21 527 94 82

e-mail: [email protected]

ADB SME DEVELOPMENTTA

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I. TABLE OF CONTENTS

I. TABLE OF CONTENTS ........................................................................................... I

II. TABLE OF ABBREVIATIONS ...............................................................................IV

III. TABLE OF FIGURES ..............................................................................................V

IV. TABLE OF REFERENCES ....................................................................................VI

V. EXECUTIVE SUMMARY ENGLISH ......................................................................VII

VI. RINGKASAN EKSEKUTIF...................................................................................XIII

1 BACKGROUND .......................................................................................................2

1.1 Fuel Prices and Policies...........................................................................................2

1.1.1 Government Programs From Reduced Fuel Subsidy ...........................................3

1.1.2 Observations of Other Parties ...............................................................................4

1.2 Scope of Assessment ..............................................................................................5

2 THE PROGRAM ......................................................................................................7

2.1 The Environment and Problems Identified Before Program Implementation...........7

2.2 Description and Implementation of the Program......................................................8

2.3 Financial and Contractual Issues.............................................................................9

3 IMPLEMENTATION: FINDINGS AND ASSESSMENT..........................................11

3.1 The RF Concept.....................................................................................................11

3.2 Selecting Number and Type of MFI Participants ...................................................13

3.3 Selecting Handling Banks ......................................................................................13

3.4 Selecting Facilitators..............................................................................................14

3.5 Selecting MFIs .......................................................................................................14

3.6 Handling Banks as WG Member............................................................................17

3.7 Training ..................................................................................................................17


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4 SUCCESS YARDSTICKS......................................................................................18

4.1 Success 1: Disbursement of Funds .......................................................................19

4.2 Success 2: Utilization of RF by MFI members .......................................................20

4.3 Success 3: Repayment ..........................................................................................21

4.4 Impact Monitoring ..................................................................................................23

5 ASSESSMENT OF DUTIES AND PERFORMANCE OF STAKEHOLDERS ........24

5.1 Government Agencies ...........................................................................................24

5.1.1 National Level......................................................................................................24

5.1.2 Provincial Level ...................................................................................................25

5.1.3 District Level........................................................................................................25

5.2 Facilitators..............................................................................................................26

5.3 Handling Banks (Bank Pelaksana) ........................................................................28

5.3.1 Handling MFI accounts [1-3] ...............................................................................29

5.3.2 Other Financial Services [4, 5] ............................................................................30

5.3.3 Tasks concerning training and guidance [6, 7]....................................................30

5.3.4 Monitoring and supervision [8, 9] ........................................................................31

5.3.5 Reporting and evaluation [10 - 14] ......................................................................32

5.3.6 Reasons for Underperformance ..........................................................................34

5.3.7 Handling Fee .......................................................................................................34

5.4 The MFIs................................................................................................................36

5.4.1 Financial Activities...............................................................................................36

5.4.2 Monitoring Loan Repayment ...............................................................................38

5.4.3 Administration and Bookkeeping Issues .............................................................39

5.4.4 MFI Organizations ...............................................................................................39

5.5 Auditors..................................................................................................................40

6 PROGRAM MEASUREMENTS .............................................................................41

7 PNM, AN ALTERNATIVE INSTITUTIONAL SET-UP ............................................44

8 RECOMMENDATIONS..........................................................................................45

8.1 Recommendations for SMOCSME ........................................................................45

8.1.1 Guide Book..........................................................................................................45


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8.1.2 Improved Reporting.............................................................................................47

8.1.3 Improve Monitoring and Introduce Evaluation.....................................................48

8.1.4 Documentation "Lending to MFIs".......................................................................49

8.2 Recommendations Regarding Provincial WG........................................................49

8.3 Recommendations Regarding District WGs ..........................................................50

8.4 Recommendations Regarding Facilitators .............................................................50

8.5 Recommendations for MFIs...................................................................................52

8.5.1 Association ..........................................................................................................52

8.5.2 Prevention of Fraud, Handling of Arrears and Bad Debt.....................................53

8.6 Recommendations Regarding Handling Banks .....................................................55

8.7 Recommendations for Training..............................................................................56

8.8 Recommendations Regarding Institutional Set-up.................................................59

9 ANNEXES..............................................................................................................60

9.1 ANNEX 1: Impact Analysis ....................................................................................60

9.2 ANNEX 2 : Objectives and Indicators ....................................................................64

9.3 ANNEX 3: Success Supporting Factors.................................................................66

9.4 ANNEX 4: Performance Evaluation .......................................................................67

9.5 ANNEX 5: RF Performance Assessment (Calculation) ........................................68

9.5.1 Scoring ................................................................................................................68

9.5.2 Example for MFI RF Performance Assessment ..................................................68


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II. TABLE OF ABBREVIATIONS

BDS Business Development Services

BMT Baitul Maal Wa Tanwil, Islamic SHG

BPR Bank Perkreditan Rakyat, Rural Bank

DWG District Working Group

IFI Informal Financial Institutions, i.e. those set up by NGOs and independent savings and credit group members

KJA Koperasi Jasa Audit

KPKN Kantor Perbendaharaan dan Kas Negara, Government cashier office

KSP Koperasi Simpan Pinjam, single purpose savings and credit cooperative

KUD Koperasi Unit Desa, incorporated multipurpose village cooperative

LEPMM (Program) Lembaga Ekonomi Produktif Masyarakat Mandiri

MFI Micro Finance Institutions, i.e. cooperatives and SHGs (self-help groups, "informal financial institutions (IFI)")

OCSME Office of Cooperatives and Small Medium Enterprises

PHBK Proyek Hubungan Bank dengan Kelompok, Project Linking Banks and Self-Help Groups

RF Revolving fund

SHG Self-Help Group, here: savings and credit groups, a grassroots movement, identical with non-incorporated MFIs

SMERU Social Monitoring Early Respond Unit, an international sponsored research institute (1998 in the framework of monitoring social safety net), meanwhile independent

SMERU Social Monitoring Early Respond Unit, an international sponsored research institute (1998 in the framework of monitoring social safety net), meanwhile independent

SMOCSME State Ministry of Cooperatives and Small Medium Enterprises

USP-Kop Usaha Simpan Pinjam Koperasi, the autonomous (separate balance sheet) savings and credit unit of a multipurpose cooperative

WG Working Group on district level (Pokja, Kelompok Kerja)


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III. TABLE OF FIGURES

Figure 1: Price Developments for gasoline ,exchange rate, and price of crude oil ...........2 Figure 2: Fuel subsidy from FY 91/92 – FY 2001 .............................................................3 Figure 3: Three types of compensation regarding reduced fuel subsidies .......................4 Figure 4: Location of evaluation by SMERU.....................................................................5 Figure 5: Location of the survey........................................................................................6 Figure 6: Utilization of fee per annum.............................................................................10 Figure 7: Criteria of participants......................................................................................15 Figure 8: Distances (km) to MFIs....................................................................................16 Figure 9: RF: Disbursement through BNI per March 2001 .............................................19 Figure 10: Honorarium of Facilitators ................................................................................27 Figure 11: Bank Reports (based on contract SMOCSME - BNI Headquarters)................32 Figure 12: Bank Reporting Requirements: Contract WG Bantul - BPD Bantul branch .....33 Figure 13: Allocation of Costs for Auditors and Facilitators...............................................40 Figure 14: Reporting institution: Facilitator (sample).........................................................47 Figure 15: Scoring Realized Benefits versus Expectations before taking up the loan. .....49 Figure 16: Credit Sheet (sample) ......................................................................................54 Figure 17: Scheduling Training "Fitness Appraisal" ..........................................................58


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IV. TABLE OF REFERENCES

Author Title BRI Laporan Triwulanan I/2001 Perkembangan Dana Bergulir

Subsidi BBM oleh KSP/USP-Kop dan LKM

Deputi Menteri Negara Koperasi & UKM Bidang Pembiayaan

Konsep Kebijakan Pengembangan KSP/USP-KOP dan LKM, , Jakarta Maret 2001

LKM - Handling Bank Naskah Perjanjian antara LKM dengan Bank tentang Perkuatan Lembaga Keuangan Mikro…(BRI Purwakarta)

Menteri Negara Urusan Koperasi dan Usaha Kecil dan Menengah

Naskah Kesepakatan Bersama antara Menteri Negara Urusan Koperasi dan Usaha Kecil dan Menengah tentang Perkuatan Koperasi Simpan Pinjam/Unit Simpan Pinjam Koperasi (KSP/USP KOP) dan Lembaga Keuangan Mikro (LKM) dengan Bantuan Dana Bergulir dari Subsidi BBM Terarah 27 Oktober 2000

Menteri Negara Urusan Koperasi dan Usaha Kecil dan Menengah

Petunjuk Pelaksanaan Evaluasi Kinerja Dana Bergulir dari Hasil Pengurangan Subsidi BBM Terarah

Keputusan Menteri Negara Koperasi dan UKM Nomor 03/KEP/MENEG/I/2001, 16 Januari 2001

SMERU Research Institute

Has the Reallocation of Fuel Subsidies Addressed Community Concerns?, Newsletter Nr. 02 Mar-April 2001

WG/Pokja - Handling Bank/Bank Pelaksana

Naskah Kesepakatan antara Kelompok Kerja Dana Bergulir Kabupaten dengan Bank tentang Perkuatan KSP/USP-Kop dan LKM (BNI - Kab. Bojonegoro)


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V. EXECUTIVE SUMMARY ENGLISH

Background In October 2000, the Indonesian Government, pressured by an agreement with the IMF, increased fuel prices. Fuel price subsidies ballooned from Rp 1.4 trillion (about US$ 600 million) in fiscal year 1996/1997 to Rp 51.1 trillion (approximately $5.3 billion) in fiscal year 2000 (April - December = 9 months only). The fuel price increase resulted in reduction of subsidies but a burden for the low-income strata of the population. The Government allocated from these savings Rp 350 billion (about $40 million) to a Revolving Fund (RF).

In October 2000, the Government of Indonesia through the Office of the State Ministry of Cooperative Affairs and Small Medium Enterprises (SMOCSME) introduced a program called "Strengthening Savings and Credit Cooperatives, Savings and Credit Units of Cooperatives and Micro Finance Institutions Assisted with a Revolving Fund from Fuel Subsidies." A revolving fund (RF) shall strengthen selected non-bank micro financial institutions (MFIs) so that they achieve scale and professionalism enabling them to continuously borrow to low income people in their community and finally qualify as debtors for commercial banks.

A 3-year RF should be channeled to at least 350,000 micro entrepreneurs and farmers (maximum individual loan amount: Rp 1 million) through

2,925 MFIs being registered as a cooperative; they received Rp 100 million ($11,000) each to be channeled as micro loans to at least 90 members;

1,000 non-registered MFIs received Rp 50 million each for at least 45 borrowers.

The MFIs pay quarterly a 4% interest/fee. The "Handling Bank" keeps 1% for its services, 2.5% are added to the MFIs' blocked "liquidity reserve", and 0.5% are reserved to cover costs for auditing the MFIs, for the facilitator and for consultancy, advice and guidance ("pembinaan").

On Central level, SMOCSME concluded agreements with three national "Handling Banks" (BRI, BNI, Bukopin) and 23 Provincial Development Banks (BPD), the "crucial partner" (Deswandhy, Deputy Minister SMOCSME). They were given the important tasks to safeguard the RF: involvement in selecting MFIs, training MFI personnel, guidance, monitoring and supervision as well as monthly reporting on the development and performance of these MFIs over a 3-year period.

In nearly all (341) participating districts in Indonesia, the Offices for Cooperatives and SME (OCSME) organized Working Groups (WGs). The WGs concluded mirroring contracts with bank branch managers and with about 9 to 13 selected MFIs. In addition, a facilitator with community development experience was selected to support and bridge between MFIs, banks and government agencies. The banks concluded also contracts with the MFIs.

The 3-4-month preparation and socialization phase started in September 2000. The Revolving Fund (RF) was released in December.

Scope of Assessment During July 2001, the Financial Team of ADB Technical Assistance to SME Development and two resource persons assessed the implementation and performance of the program.


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More than six months after release of the funds to the MFIs, the Team interviewed representatives in 7 provinces (four islands) originating from:

2 Jakarta-located headquarters of banks with a nationwide branch network, namely BRI and BNI, both together accounting for nearly two thirds of the scheme's participants

3 headquarters of Provincial Development Banks

8 bank branches keeping accounts of the participants

6 district offices of the Ministry of Cooperatives and SME

8 single-purpose credit and savings cooperatives

6 multi-purpose cooperatives with an autonomous savings and credit unit

7 non-registered savings and credit cooperatives

Experience was shared with 7 facilitators.

The Team asked for and received copies of all relevant contracts, instructions and guidelines concerning the implementation of the program.

On July 20, the Team discussed preliminary findings with Mr. Agus Muharram , Assistant to Mr. Deswandhy, Deputy Minister SMOCSME, who is in charge of the program. On July 26, the Team had the opportunity to discuss the findings with the Finance Task Force and with representatives from banks involved in the RF.

The Team members extend their thanks to all institutions for their readiness to accept the Team on shortest notice, to make available the documents and to assist with logistic support. The Team members enjoyed a frank atmosphere. Most of all the Team has to extend its praise to the staff of the visited institutions who trustfully not only answered the seemingly endless questions but also shared their experience and aspirations.

Main Findings The RF concept is almost excellent. It involves the Government and private business oriented parties, the MFIs and the banks. The MFIs pay for business development services: the facilitators, training and guidance from banks (consultancy) and external auditors. Another quite unique feature is the effort to continuously measure impact. A concept for the utilization of data or monitoring results could, however, not be presented. Several questions, e.g. relating to the management of the 0.5% (2% p.a.) fee, namely costs for audit, facilitator and consultancy, are discussed controversially. The parties can not differ between rules that are allowed to be adjusted according to local conditions and other rules that are not negotiable on local level. The concept has still a "foggy" end. According to the Technical Guide, the RF will be donated to well-performing MFIs after three years. The contract between MFIs and the District Working Group offer only a prolongation.

The Team deemed it too early to judge if the MFIs have also already been strengthened considerably in non-financial fields. However, considering few efforts with regard to training and consultancy, it is quite doubtful.

The implementation of the program by SMOCSME was dictated by time pressure. This resulted in weaknesses in the preparation and socialization of the program. For example, training material was not developed and bank branches received instructions on reporting only in February 2001. Monitoring and reporting tools were developed (reportedly by one


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of the appointed banks) and their use instructed without having them tested in the field. Management of filing, documentation, reporting, supervision and monitoring on Central level is poor.

The Working Groups on District level executed the selection of participants, the MFIs, in a transparent and objectively verifiable way although some successful candidates did not fulfill all selection criteria. Only few large MFIs (assets more than Rp 500 million) received the loan. Most, but not all of the MFIs are located within 15 km from the district capital. The offices of the SMOCSME played an active role. They are now rather handicapped by the absence of operational funds, reallocation of staff and premises due to decentralization. They would be less involved would not the facilitator continuously keep contact with the staff in charge.

The facilitators were found to be sufficiently qualified. They are well received by the MFIs. They act not only as a consultants but also as discussion partners and catalysators. They are involved in the development of about ten similar units. They know the internal problems and are disseminating best practices and experiences. Continuous supervision by an outsider is certainly contributing to a higher standard of financial "hygiene." The job description could be more specific. A fixed honorarium is considered problematic if the facilitator has to pay transport from his own pocket. Transport is a particular problem if the facilitator owns no motorcycle. MFIs pay the honorarium for the facilitator therefore they should have a vote when (re-) negotiating the contract or employing the facilitator. Both, the WG and the MFIs should agree on the facilitator.

The MFIs (KSP/USK-Kop, LKM) have been found to be very enthusiastic. Finally, they did not receive a "dropping" but they were successfully competing with other MFIs. They are engaged and understand rather well the intentions of the RF. They are cautious in their credit operation but do not exclude really small entrepreneurs without collateral from taking a loan. Serious administrative deficiencies were identified. They refer to credit contracts and how loan repayments are recorded. Most MFIs do not know the amount of loans in arrears, thus effectively preventing easy portfolio quality calculation. They do not mind being supervised and controlled because they see the opportunity to learn and improve. It is noteworthy and encouraging that in several districts the participants formed associations.

The majority of borrowers, mostly micro entrepreneurs, could increase the welfare of the family. Many took up less than the maximum Rp 1 million. The MFIs offer a loan in the right size, more than they could get from traditional savings and credit groups but less than banks would like to extend to cover their transaction costs. The MFIs have their roots in the community, and they allow the required repayment flexibility at low cost, in particular if compared with the alternative moneylenders.

The "crucial partner", the banks, failed in a disastrous way to perform. They receive from the MFIs (finally from the work of thousands of small entrepreneurs) about Rp 14 billion annually for their task but they do not execute it. No bank has been met employing additional staff for the program on district level although the MFIs pay about Rp 40 million annually to the appointed district bank branch for services they do not receive. Banks shortened the training from one week to one day. They visit the MFIs about once in 6 months, some bank officers do even not know the location of the MFIs' premises. The banks have to prepare performance evaluation reports. Only very few reports arrived at


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the SMOCSME. Nearly all reports contained wrong figures, most of all because bank officers do not report problems related to the forms. The Team heard also that some banks are hesitant to advice MFIs, in particular bigger ones, because they are competing for the same clientele. Another bank did not see the threat but the opportunity: Based on a recommendation of the MFI, it took over several debtors who needed higher loan amounts than the MFI could make available. The MFI lost big risks and has now more funds available to finance additional small entrepreneurs!

The Team assessed whether the fee for the Handling Bank is sufficient. On average, banks earn about Rp 40 million per year. It is costly to conduct visits to MFIs at a distance of more than 1-hour travel. However, seen apart from thinly populated areas and small islands, the average distance is less than half-hour travel. Banks can easily earn a gross on-top profit of more than 100%.

It is also questioned whether the bank staff is qualified for the job. Normally bank people are not trained to advice other financial institutions. They may be not familiar anymore with the non-computerized bookkeeping procedures and simple credit contracts. Credit analysts learn to assess non-financial enterprises based on 5 C (character, condition, collateral, capital, capacity) but not financial institutions based on CAMEL (capital, assets, management, earnings, liquidity).

Main Recommendations Recommendations for SMOCSME It is recommended that SMOCSME develops a "Guide Book to the RF" in which problems and solutions for problems are presented. This book should also answer all questions regarding ownership and management of the RF after end of 2003. Every MFI should own two copies of this book. The MFIs can finance these books from interest earned on the various RF accounts (According to the Technical Guideline interest earned on the "liquidity reserve" account belongs to the MFIs. However, a respective clausula is not part of the contract between the District WG and MFIs.)

The entire reporting system needs to be reviewed including type, frequency and recipient of reports. In order to obtain meaningful data, a review of the evaluation scheme for MFIs and test trials are an absolute necessity before starting national implementation. Bank staff needs to be trained to cope with the monthly and quarterly performance and fitness evaluation formats. A manual with forms, samples how to use them, and explanations regarding the necessity of obtaining the data has to be sent to banks and MFIs. The portfolio quality calculation ("repayment") and data collection for the impact analysis needs to be made easier (principle: "simple and dirty"). Payments to banks for their services should also be linked to on-time reporting.

One reason for connecting banks with MFIs through training, consultancy and reporting is that after three years, banks should not anymore regard MFIs as a "strange animal" but as qualified potential debtors. It is proposed that together with banks schemes are developed that allow banks prudential lending to MFIs as companies without individuals rendering collateral thus risking their private property.

The Team learned that in due time a Consultant will be engaged to elaborate proposals for improving monitoring of the RF. The Team backs this efforts and urges immediate implementation and appropriate, thorough training of the staff who will handle this field in future. One of Indonesia's assets is its richness in micro finance schemes. The RF adds to this an exciting new product. Every district could allow at least one student to write a thesis on the RF in that district. It is proposed that universities be invited to take part in the evaluation of data.


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Recommendations for District WGs Independent from how the Government has booked the disbursement of the RF to the MFIs, legally, the Government is probably still owner of the RF. The MFIs use the RF based on a contract in which the word credit is not used to describe the character of the RF. Until end of 2003, the District WG will regularly be involved with the management of the RF and the relationship between bank, facilitator and MFIs. It is recommended that a budget should be made available for the activities of the WG. It is proposed to assess, if the 2.5% per quarter for the "liquidity fund" should be transferred to an account kept by the WG. The WG would, after receiving the bank's evaluation release the liquidity fund. The interest earned on this account, about Rp 3 million per year, would be available to finance WG activities. This procedure does not create new dependencies because the MFIs depend already now on the WG's recommendation to utilize the liquidity fund.

It is recommended that the District WG facilitates the founding of an association of the RF participants, to exchange experience and discuss joint financial problems, e.g. the use of the 2% p.a. fee allocated to audit, consultancy, and facilitator.

Recommendations for Facilitators Nobody controls the facilitators' day-to-day activities. The facilitators' job description needs to state clearly how often they should visit MFIs. The facilitators should be obliged to enter name and activity in the MFI's visitor book or a separate book. The facilitators should also keep records on their activities, which are to be countersigned by MFIs. It is proposed that the District Government offers them a desk and allows the use of a computer for his reports. The honorarium, or a lumpsum for fuel, should consider necessary costs for transport in order to make sure that also distant MFIs are visited only regularly.

Recommendations for MFIs The majority of MFIs fail because of non-performing loans (NPL). Following are proposals in order that NPLs do not remain undetected and become a problem in the future.

All MFIs should use credit contracts (one page) following minimum standards, among others clearly stating when installments are due, separately for principal and interest (except for loans with daily repayment), and the final date for repayment. A clausula in this contract shall reserve the Government's right to collect the loan.

Arrears should be calculated and presented at the end of each month.

Calculation of the portfolio quality has to be made much simpler.

A rule on maximum loan amount, in particular for the management and his family members, should be introduced.

It is recommended to introduce internal rules for "late payments" in order to segregate them from arrears on which the debtor should pay a penalty.

MFIs should have simple rules regarding supervisory visits, and their documentation, to members with arrears so that the reasons for non-payment are verifiable.

It is recommended that MFIs apply the same conditions to loans financed from the RF as those financed from members' savings.


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Training and consultancy for the years to come is without challenges and too expensive for just keeping the status quo. It needs a target. It is proposed that by end of year 2 at least 70% of the MFIs can perform self-assessment according to the rules laid down for performance evaluation and fitness. The training would be the bank's task because they will benefit if the MFI can prepare the required reports and the bank officers only need to confirm and forward the report. The training should be done in small steps on the spot during regular visits.

Two urgent training requirements refer to (a) differences between loan disbursement and outstanding loans in liquidity calculations and balance sheets and (b) interest calculation (flat, declining) and the effect of delayed loan repayment on effective interest and interest income.

Recommendations regarding Handling Banks The contract with Handling Banks needs to be assessed. The present system of paying banks, based on good trust without proper control of activities, should be abolished. It is recommended that banks do only receive the fee if they have performed their duty according to contract. It is acknowledged that in remote areas Rp 40 million might not be cost covering, if proper service is provided. This can be compensated with urban districts (municipalities) were distances average far below 10 km. The additional costs could be compensated with lower fees for small districts. Only MFIs and the District WG are in the position to judge, whether banks fulfilled the contractual obligations. Fees should only be released to banks, if the District WG and the MFIs consent.

In contrast to the facilitator and the MFIs, banks on district level were not selected but appointed. As the bank staff is burdened without receiving a reward (and punishment may not loom), one should consider the introduction of a split fee, where a part of the money is directly earned by bank staff when visiting the MFIs. Another possibility to overcome the lack of engagement may be to invite (or even to tender) other banks in the district to participate.

The Team proposes training bank officers in charge for the RF.

Recommendation regarding institutional Set-up It is recommended that in future, all financial Government programs directed towards small financial institutions should involve PNM in order to centralize experience and expertise. The level of involvement may change from case to case


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VI. RINGKASAN EKSEKUTIF

Latar belakang Dalam bulan Oktober 2000, tekanan terhadap Pemerintah Indonesia oleh sebuah perjanjian dengan IMF mengakibatkan harga BBM naik. Subsidi BBM yang dalam tahun anggaran 1996/1997 hanya Rp 1,4 triliun (waktu itu sekitar US$ 600 million) kemudian naik dengan pesat mencapai Rp 51,1 triliun (sekitar US$ 5.3 miliar) dalam tahun anggaran 2000 (April - Desember = 9 bulan). Naiknya harga BBM akan mengurangi subsidi BBM, tetapi menimbulkan beban terhadap kelompok penduduk berpendapatan rendah. Pemerintah mengalokasikan penghematan tersebut sebesar Rp 350 miliar (sekitar US$ 40 juta) untuk dana bergulir.

Dalam bulan Oktober 2000, Pemerintah Indonesia melalui Kantor Menteri Negara Koperasi dan UKM meluncurkan sebuah program yang disebut sebagai “Penguatan Koperasi Simpan Pinjam/Unit Simpan Pinjam dan Lembaga Keuangan Mikro Melalui Dana Bergulir Kompensasi Subsidi BBM”. Dana bergulir akan memperkuat Lembaga Keuangan Mikro Bukan Bank (LKM Non Bank) sehingga lembaga tersebut dapat mencapai skala dan profesionalisme untuk mampu terus memberikan pinjaman kepada penduduk berpendapatan rendah di lingkungannya dan pada akhirnya memenuhi kualifikasi sebagai peminjam dari bank umum.

Selama 3 tahun dana bergulir akan disalurkan minimal kepada sekitar 350.000 pengusaha mikro dan petani (dengan maksimum pinjaman maksimum Rp 1 juta per orang) melalui:

2.925 KSP/USP yang akan memperoleh dana sebesar Rp 100 juta (US$ 9,000) per KSP/USP yang akan disalurkan sebagai kredit mikro minimal kepada 90 orang anggota;

1.000 LKM (pra koperasi atau lembaga semacam koperasi tetapi belum mempunyai badan hukum) yang memperoleh dana sebesar Rp 45 juta per LKM yang disalukan kepada minimal 45 peminjam

LKM membayar "fee/bunga" 4% per triwulan. Bank Pengelola akan memperoleh 1% atas jasanya, 2,5% sebagai “cadangan likuiditas terbeku” LKM, dan 0,5% dipergunakan untuk menutupi biaya audit, honorarium fasilitator, dan untuk konsultasi, saran dan petunjuk (pembinaan).

Pada tingkat pusat, Kantor Menteri Negara Koperasi dan UKM memutuskan untuk bekerjasama dengan 3 “bank nasional pengelola” (BRI, BNI, dan BUKOPIN) dan 23 Bank Pembangunan Daerah (BPD), “pemegang peranan krusial” (Deswandhy, Deputy Pembiayaan Kantor Menteri Negara Koperasi dan UKM). Bank mempunyai tugas yang penting dalam pelaksanaan program dana bergulir, yaitu: (i) ikut serta dalam seleksi LKM, (ii) melatih pengelola LKM, dan (iii) memberikan petunjuk, melakukan monitoring dan pembinaan sebagai bahan untuk laporan bulanan terhadap perkembangan dan kinerja KSP/USP dan LKM selama 3 tahun.

Hampir semua (341) kabupaten/kota di Indonesia ikut serta, dan Dinas Koperasi dan UKM di kabupaten/kota mengelola kelompok kerja (Pokja) yang membuat kontrak kerjasama dengan pengelola kantor cabang bank dan dengan sekitar 9 hingga 13 LKM terpilih. Kemudian, seorang fasilitator yang mempunyai pengalaman dalam pengembangan masyarakat dipilih untuk mendukung dan penghubung antara LKM,


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bank, dan lembaga pemerintah. Bank juga membuat kontrak kerjasama dengan LKM.

Tahapan persiapan dan sosialisasi dilaksanakan sekitar 3-4 bulan, sejak September 2000. Dana bergulir disalurkan pada bulan Desember 2000.

Ruang lingkup penilaian Selama bulan Juli 2001, Tim Kelompok Kerja Keuangan ADB SME Development TA dan 2 orang nara sumber melakukan penilaian mengenai pelaksanaan dan kinerja program ini. Setelah 6 bulan dana bergulir ini disalurkan kepada LKM, tim melakukan wawancara dengan beberapa pihak yang terkait dengan program ini di 7 propinsi yang berasal dari:

2 kantor pusat dari bank umum yang berlokasi di Jakarta dengan jaringan kantor cabang hampir di seluruh Indonesia, yaitu BRI dan BNI, dimana kedua bank ini memperoleh alokasi dana untuk sekitar 2/3 dari KSP/USP dan LKM yang ikut serta dalam program ini

3 kantor pusat BPD

8 kantor cabang bank dimana rekening KSP/USP dan LKM tersimpan

6 Kantor Dinas Koperasi dan UKM Kabupaten/Kota

8 KSP

6 USP

7 LKM

Tukar pengalaman dengan 7 orang fasilitator

Tim berdiskusi dan menerima salinan dari dokumen yang relevan dalam pelaksanaan program ini, seperti kontrak, instruksi, dan petunjuk teknis.

Pada tanggal 20 Juli 2001, temuan awal penilaian ini didiskusikan dengan Bapak Agus Muharram, Asisten Deputy Pembiayaan selaku Ketua Pelaksana Penyaluran Dana Subsidi BBM Pokja Pusat. Pada tanggal 26 Juli 2001, tim memperoleh kesempatan untuk mendiskusikan temuan–temuan dengan Anggota Satuan Tugas Keuangan dan wakil dari bank pelaksana.

Tim mengucapkan terima kasih kepada semua lembaga yang mau menerima tim meskipun dengan pemberitahuan yang sangat singkat, menyediakan seluruh dokumen yang diperlukan, dan memberikan bantuan logistik. Anggota tim merasa senang dengan suasana yang ada. Hampir semua anggota tim merasa staf dari lembaga yang dikunjungi telah memberikan jawaban yang terpercaya dan tidak hanya sekedar memberikan jawaban terhadap pertanyaan yang ada, tetapi juga melakukan tukar pengalaman dan pendapat.

Temuan utama Konsep dana bergulir sangat baik. Program ini melibatkan pemerintah dan swasta, kelompok yang berorientasi bisnis, LKM, dan bank. LKM membayar untuk jasa pengembangan usaha yang diterima: fasilitator, pelatihan dan petunjuk dari bank (konsultasi) dan audit eksternal. Pengukuran dampak secara terus menerus merupakan suatu kegiatan yang baik. Konsep untuk menggunakan data atau hasil monitoring sampai saat ini belum dapat dilakukan. Beberapa pertanyaan seperti


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pengelolaan fee 0,5% per triwulan (2% per tahun) yang diperuntukkan sebagai biaya audit, fasilitator dan konsultasi masih mengandung diskusi yang kontroversial. Pihak yang terlibat di daerah tidak dapat membedakan antara aturan yang dapat disesuaikan berdasarkan kondisi setempat dan aturan lain yang dapat dinegosiakan di tingkat daerah. Pada akhirnya konsep ini masih mengandung “kabut”. Berdasarkan pedoman teknis, dana bergulir akan dihibahkan kepada LKM yang mempunyai kinerja baik setelah 3 tahun. Perjanjian Kerjasama antara LKM dengan Pokja kabupaten/kota hanya menawarkan perpanjangan kerjasama tsb.

Tim ini merasa terlalu dini untuk menilai jika KSP/USP dan LKM sudah sangat diperkuat sekali dalam bidang non keuangan. Bagaimanapun, mengingat upaya yang sedikit sekali dalam konsultasi dan pelatihan, sungguh diragukan.

Pelaksanaan program ini oleh Kantor Menteri Negara Koperasi dan UKM menghadapi tekanan waktu. Akibatnya terdapat kelemahan dalam persiapan dan sosialisasi program. Sebagai contoh, materi pelatihan tidak dipersiapkan dan kantor cabang bank baru menerima surat keputusan mengenai evaluasi sebagai bahan laporan baru pada bulan Februari 2001. Alat untuk melakukan monitoring dan pelaporan telah dipersiapkan (hanya dilaporkan oleh satu bank) dan digunakan tanpa dicoba terlebih dahulu di lapangan. Pengelolaan file, dokumen, laporan, pembinaan dan monitoring di tingkat pusat lemah.

Pokja kabupaten/kota melakukan seleksi terhadap calon peserta (KSP/USP dan LKM) dengan transparan dan melakukan verifikasi secara objektif, meskipun ada beberapa kandidat yang terpilih tidak memenuhi seluruh kriteria seleksi. Hanya sedikit LKM besar (asset lebih besar dari Rp 500 juta) yang menerima dana bergulir ini. Sebagian besar, tetapi tidak semua lokasi LKM berjarak tidak lebih dari 15 km dari ibukota kabupaten/kota. Kantor Dinas Koperasi dan UKM kabupaten/kota melakukan peran aktif. Saat ini Pokja kabupaten/kota menghadapi kendala berupa: (i) tidak adanya dana operasional, dan (ii) realokasi staf dan dasar pemikiran yang disebabkan karena pelaksanaan otonomi daerah. Keterlibatan Pokja pasti akan berkurang jika fasilitator secara terus menerus menghubungi anggota Pokja.

Fasilitator yang ditemui cukup mempunyai kemampuan. Dapat diterima dengan baik oleh LKM. Fasilitator tidak hanya sebagai konsultan, tetapi juga berfungsi sebagai teman diskusi dan memberikan motivasi. Mereka terlibat aktif dalam pengembangan sekitar 10 lembaga penerima, persoalan internal yang dihadapi dan mendiseminasikan praktek dan pengalaman terbaik. Pembinaan yang berkelanjutan yang dilakukan orang luar tentu saja mempunyai kontribusi terhadap pencapaian standar kesehatan yang lebih tinggi. Honorarium yang tetap akan menimbulkan masalah jika fasilitator harus membayar biaya transport sendiri, utamanya bagi fasilitator yang tidak mempunyai sepeda motor. LKM membayar honor fasilitator sehingga LKM seharusnya mempunyai suara bila dilakukan negosiasi kontrak atau akan memilih fasilitator. Keduanya, Pokja kabupaten/kota dan LKM seharusnya memberikan persetujuan terhadap fasilitator.

KSP/USK-Kop dan LKM yang ditemui sangat antusias. Akhirnya, LKM tidak menerima “bantuan”, tetapi mereka telah memenangkan kompetisi dengan LKM yang lain. LKM menggunakan dan memberikan perhatian dengan baik terhadap dana bergulir. Mereka berhati-hati dalam penyaluran kredit dengan tetap meminta agunan, namun tidak menutup kesempatan kepada pengusaha sangat kecil yang


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tidak memiliki agunan. Kelemahan administrasi yang cukup serius diidentifikasi pada LKM sehubungan dengan perjanjian kredit dan caranya untuk mencatat pembayaran cicilan. Sebagian besar LKM tidak mengetahui jumlah tunggakan kredit, akibatnya menghalangi mereka membuat perhitungan kualitas portfolionya secara efektif. Mereka tidak merasa diberatkan dengan pembinaan dan pengawasan, karena mereka melihat ada peluang untuk belajar dan memperbaiki. Perlu disampaikan perkembangan yang membesarkan hati yaitu LKM di beberapa kabupaten/kota membentuk paguyuban atau asosiasi.

Sebagian besar peminjam, adalah pengusaha mikro, dan mungkin dapat meningkatkan kesejahteraan keluarganya. Pinjaman yang diterima sebagian kurang dari Rp 1 juta. LKM memberikan pinjaman dengan jumlah yang sesuai, lebih besar dari pinjaman tradisionil yang dapat diterima dari arisan atau kelompok simpan pinjam, tetapi lebih kecil dibandingkan yang suka diberikan oleh bank, antara lain karena pertimbangan biaya transaksi. LKM mempunyai basis di masyarakat dan menerapkan pembayaran pinjaman yang fleksibel dengan biaya yang rendah, utamanya jika dibandingkan dengan pelepas uang.

Bank Pelaksana. “Pihak yang krusial”, bank, gagal dalam menunjukkan kinerjanya. Bank menerima dari LKM sekitar Rp 14 milyar per tahun (yang bersumber dari kerja ribuan pengusaha kecil) untuk tugas yang ditentukan, tetapi mereka tidak melakukan. Tidak ada bank yang ditemui mempekerjakan staf tambahan untuk program ini di kabupaten/kota, meskipun LKM membayar sekitar Rp 40 juta per tahun kepada kantor cabang bank untuk jasa yang mereka, LKM, tidak terima. Bank mempersingkat waktu pelatihan dari satu minggu yang ditentukan menjadi satu hari. Mereka berkunjung kepada LKM hanya satu kali dalam 6 bulan, dan beberapa petugas bank tidak mengetahui lokasi KSP/USP yang ikut dalam program ini. Bank telah menyiapkan laporan evaluasi kinerja. Hanya sedikit laporan yang sesuai dengan pedoman evaluasi sampai kepada Kantor Menteri Negara Koperasi dan UKM. Hampir semua laporan mengandung informasi yang salah, dimana penyebab utamanya adalah petugas bank tidak memberikan informasi tentang masalah yang dialami dalam penggunaan formulir yang tersedia. Tim mendengar juga bahwa beberapa bank enggan untuk memberikan pembinaan kepada LKM, utamanya yang besar, karena mereka berkompetisi untuk nasabah yang sama. Bank yang lain tidak melihat pembinaan terhadap LKM sebagai ancaman, tetapi sebagai peluang. Misalnya, berdasarkan rekomendasi dari LKM, bank dapat membiayai beberapa peminjam yang membutuhkan pinjaman lebih besar dari yang mampu disediakan LKM. LKM kehilangan resiko besar dan sekarang lebih banyak dana tersedia untuk memberikan tambahan dana kepada pemohon pinjaman mikro.

Tim menilai fee untuk bank pelaksana cukup. Secara rata-rata, cabang bank memperoleh pendapatan Rp 40 juta per tahun. Biaya yang cukup besar diperlukan untuk melakukan kunjungan kepada LKM yang mempunyai waktu tempuh diatas satu jam perjalanan. Meskipun demikian, hampir sebagian besar KSP/USP dan LKM berlokasi dengan jarak tempuh rata-rata kurang dari setengah jam. Bank dengan mudah dapat memperoleh keuntungan kotor lebih dari 100%.

Juga menjadi pertanyaan, apakah petugas bank mampu untuk melaksanakan tugas ini. Pada umumnya petugas bank tidak dilatih untuk memberikan nasihat kepada lembaga keuangan non bank. Mereka mungkin tidak familiar dengan prosedur sistem pembukuan yang tidak menggunakan komputer dan kontrak kredit sederhana. Analis kredit belajar untuk melakukan penilaian kepada perusahaan non lembaga keuangan berdasarkan prinsip 5C (karakter, kondisi usaha, agunan, modal, kapasitas) tetapi


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tidak untuk lembaga non keuangan berdasarkan CAMEL (modal, asset, manajemen, pendapatan/hasil usaha, dan likuiditas).

Rekomendasi utama Rekomendasi untuk Kantor Menteri Negara Koperasi dan UKM Direkomendasikan agar Kantor Menteri Negara Koperasi dan UKM mencetak “Buku Petunjuk Dana Bergulir” yang menjelaskan masalah dan jalan keluar untuk masalah yang ada. Buku ini juga dapat menjawab semua pertanyaan yang berkaitan dengan kepemilikan dan pengelolaan dari dana bergulir setelah akhir tahun 2003. Setiap LKM sebaiknya memiliki 2 eksemplar. LKM dapat membiayai buku ini dari bunga yang diperoleh dari beberapa rekening LKM yang ada di bank (Berdasarkan petunjuk teknis, bunga yang diperoleh dari cadangan likuiditas yang ada direkening LKM menjadi milik LKM. Meskipun demikian, klausul ini tidak termasuk dalam naskah kerjasama antara Pokja kabupaten/kota dengan dan LKM).

Sistem pelaporan yang ada perlu dikaji kembali termasuk bentuk, frekuensi dan penerima laporan. Agar laporan dapat mengandung data yang berarti, perlu dikaji kembali skema evaluasi LKM dan diuji coba terlebih dahulu sebelum dilaksanakan secara nasional. Pegawai bank perlu untuk dilatih agar dapat membuat laporan kinerja bulanan dan triwulanan yang sesuai dengan format evaluasi. Sebuah manual dengan bentuk dan contoh bagaimana menggunakannya, dan menjelaskan bagaiman data diperoleh harus dikirim kepada bank dan LKM. Perhitungan kualitas portfolio (“pembayaran kembali") dan data yang diperlukan untuk melakukan analisa dampak perlu dibuat lebih sederhana (prinsip: “sederhana dan kasar”). Pembayaran kepada bank untuk jasa yang diberikan seharusnya terkait dengan penyampaian laporan yang tepat waktu.

Salah satu alasan untuk menghubungkan bank dengan LKM melalui pelatihan, konsultasi dan laporan agar setelah 3 tahun bank tidak lagi melihat LKM sebagai “binatang aneh”, tetapi sebagai calon peminjam yang memiliki kemampuan. Untuk itu disarankan bersama dengan bank, program ini dikembangkan mengikuti prinsip kehati-hatian bank dalam penyaluran kredit kepada dan LKM dengan prinsip hati-hati sebagai perusahaan tanpa harus pengurus atau anggota LKM menyediakan agunan.

Tim ini memperoleh informasi bahwa dalam waktu dekat sebuah konsultan akan dipekerjakan untuk mempersiapkan proposal guna memperbaiki monitoring dari dana bergulir. Tim menganggap ini penting dan dapat dilaksanakan dalam waktu singkat dan sesuai, melalui pelatihan kepada pegawai yang akan melaksanakan program ini di lapangan di masa yang akan datang. .Salah satu kekayaan Indonesia adalah kaya dengan skema dan program keuangan mikro. Dana bergulir menambah program ini dengan produk yang menarik. Setiap kabupaten/kota sebaiknya ada satu mahasiswa yang menulis tesis mengenai dana bergulir ini. Diusulkan agar perguruan tinggi diundang untuk ikut serta dalam evaluasi data.

Rekomendasi untuk Pokja kabupaten/kota Terlepas dari cara bagaiman pemerintah mencatatkan penyaluran dana bergulir kepada LKM, secara legal pemerintah masih tetap menjadi pemilik dari dana bergulir. LKM menggunakan dana ini berdasarkan kontrak kerjasama dimana kata kredit tidak digunakan untuk menggambarkan karakter dari dana bergulir. Hingga akhir tahun 2003, Pokja kabupaten/kota akan terus terlibat dalam pengelolaan dana bergulir dan berhubungan dengan bank, fasilitator, dan LKM. Direkomendasikan agar


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anggaran dapat disediakan untuk aktivitas dari Pokja kabupaten/kota. Sebuah usulan yang memerlukan penilaian, jika dana 2,5% sebagai cadangan likuiditas dapat ditransfer kepada sebuah rekening yang dikelola oleh Pokja kabupaten/kota. Pokja setelah memperoleh evaluasi dari bank baru dapat memutuskan untuk mencairkan dana ini. Bunga yang diperoleh dalam rekening ini yang diperkirakan sekitar Rp 3 juta per tahun dapat digunakan untuk membiayai operasional Pokja kabupaten/kota. Mekanisme ini tidak menciptakan ketergantungan baru sebab LKM saat ini juga tergantung kepada rekomendasi dari Pokja kabupaten/kota untuk menggunakan dana cadangan likuiditas.

Direkomedasikan agar Pokja kabupaten/kota dapat memfasilitasi pendirian asosiasi penerima dana bergulir, dalam rangka tukar pengalaman dan mendiskusikan persoalan keuangan bersama, seperti alokasi dari penggunaan dana 2% yang dialokasikan untuk audit, konsultasi, dan fasilitator.

Rekomendasi untuk fasilitator Tidak ada yang mengawasi fasilitator. Deskripsi uraian kerja dari fasilitator mengenai waktu/frekuensi kunjungan kepada LKM harus ditentukan dengan jelas. Fasilitator diminta untuk menuliskan nama dan aktivitasnya dalam buku tamu LKM atau pada buku yang terpisah. Fasilitator juga harus mencatat aktivitas yang dilakukan dan diketahui oleh LKM dengan membubuhkan tanda tangan. Diusulkan agar pemerintah daerah (kabupaten/kota) dapat menyediakan meja dan komputer bagi fasilitator untuk membuat laporan. Honor atau dana tetap untuk BBM harus cukup tersedia sebagai biaya transport dalam rangka menjamin agar LKM yang jauh dapat secara teratur dikunjungi.

Rekomendasi untuk LKM Pengalaman menunjukkan pada umumnya LKM gagal karena persoalan kredit macet. Agar kondisi ini tidak terjadi pada program ini dan dapat dideteksi dengan cepat sehingga tidak menimbulkan masalah di kemudian hari, maka direkomendasikan sejumlah usulan:

Semua LKM sebaiknya menggunakan perjanjian kredit (satu halaman) yang mengikuti standar minimum, antara lain jelas mengenai waktu pembayaran jatuh tempo, dipisahkan antara pokok dan bunga (kecuali untuk pinjaman dengan pembayaran harian), dan tanggal akhir untuk pembayaran. Penambahan klausul ini dalam kontrak merupakan jaminan bagi pemerintah yang benar untuk mengumpulkan pinjaman.

Tunggakan harus diperhitungkan dan dilaporkan pada setiap akhir bulan.

Perhitungan dari kualitas pinjaman harus dibuat lebih sederhana.

Aturan untuk jumlah pinjaman maksimum, utamanya untuk anggota secara berkelompok atau keluarga harus ditetapkan.

Direkomendasikan untuk membuat aturan internal mengenai “pembayaran yang terlambat” dalam rangka memisahkan antara debitur yang memiliki tunggakan dan akan diberikan sanksi.

LKM seharusnya mempunyai aturan yang sederhana mengenai kunjungan dan didokumentasikan, kepada anggota yang mempunyai tunggakan sehingga alasan untuk tidak membayar dapat diverifikasi.


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Direkomendasikan bahwa LKM menerapkan aturan yang sama untuk pinjaman kepada anggota yang dananya berasal dari dana bergulir subsidi BBM dan yang dikumpulkan dari simpanan anggota.

Pelatihan dan konsultasi untuk waktu yang akan datang tanpa perubahan dan tantangan dan tentunya mahal hanya dalam rangka mempertahankan kondisi yang ada. Diperlukan target. Diusulkan pada akhir tahun kedua minimal 70% dari LKM dapat melakukan penilaian sendiri tentang kinerjanya berdasarkan aturan yang terdapat dalam format evaluasi kinerja. Pelatihan ini akan menjadi tugas bank karena mereka akan memperoleh manfaat jika LKM dapat mempersiapkan laporan yang diperlukan dan pegawai bank hanya perlu untuk melakukan konfirmasi dan mengirimkan laporan ini. Pelatihan ini sebaiknya dilaksanakan dalam tahap kecil pada saat kunjungan dilakukan.

Dua jenis pelatihan diperlukan berdasarkan kepada (a) perbedaan antara penyaluran pinjaman dan baki debet pinjaman dalam perhitungan likuiditas dan neraca, dan (b) perhitungan tingkat bunga (tetap atau menurun) dan pengaruh dari pembayaran pinjaman yang terlambat terhadap tingkat bunga efektif dan pendapatan bunga.

Rekomendasi untuk bank pelaksana Kontrak untuk bank pelaksana perlu untuk dinilai. Saat ini pembayaran kepada bank berdasarkan kepada kepercayaan tanpa ada kontrol yang yang ketat terhadap kegiatan, sebaiknya dihapuskan. Direkomendasikan bank hanya dapat menerima pembayaran jasa jika tugasnya dilaksanakan sesuai dengan yang terdapat di kontrak. Dapat dipahami jika untuk wilayah yang sulit nilai Rp 40 juta mungkin tidak akan menutupi biaya, jika pelayanan yang baik disediakan. Kondisi ini dapat dikompensasi dari LKM yang jaraknya kurang dari 10 km dari kantor bank. Tambahan biaya dapat dikompensasi dengan fee yang rendah untuk kabupaten/kota kecil. Hanya LKM dan Pokja kabupaten/kota yang dapat memberikan penilaian, apakah bank memenuhi kawajiban seperti yang terdapat dalam kontrak. Pembayaran fee hanya dapat diberikan kepada bank, jika Pokja kabupaten/kota dan KSP/USP dan LKM memberikan persetujuan.

Berbeda dengan fasilitator dan KSP/USP dan LKM, bank di kabupaten/kota tidak dipilih tetapi ditunjuk. Petugas bank memperoleh beban tambahan tanpa menerima penghargaan (dan mungkin memperoleh sanksi), dimana mulai dapat diperkenalkan untuk memisahkan fee yang diterima bank dan langsung diberikan kepada pegawai bank yang melakukan kunjungan kepada LKM. Kemungkinan lain untuk mengatasi permasalahan yang ada adalah mengundang (atau melakukan tender) bank lain dalam wilayah kabupaten/kota untuk berpartisipasi.

Tim mengusulkan untuk memberikan pelatihan kepada petugas bank yang akan ikut serta dalam program dana bergulit

Rekomendasi untuk penentuan kelembagaan Direkomendasikan dalam masa yang akan datang, seluruh kredit program pemerintah yang akan disalurkan kepada lembaga keuangan kecil agar mengikutsertakan PT. Permodalan Nasional Madani (PNM) dalam rangka memberikan pengalaman dan keahlian. Tingkat keikutsertaannya dapat berubah untuk setiap kasus.


2

1 BACKGROUND

In October 2000, the Government of Indonesia introduced a program called "Strengthening Savings and Credit Cooperatives, Savings and Credit Units of Cooperatives and Micro Finance Institutions Assisted with a Revolving Fund from Fuel Subsidies." The program is not a genuine Government credit program.

Throughout the various documents, the term "credit" is deliberately avoided. The revolving fund (RF) is made available to strengthen selected non-bank microfinance institutions (MFIs1) all over Indonesia. The MFIs shall achieve a level of professionalism, and income, that enables them to continuously lend to low income people in their community. If these MFIs can perform satisfactory over a three-year period the Revolving Fund will remain to be revolved within the MFI. Otherwise, the fund shall be made available or "revolved" to other MFIs.

1.1 Fuel Prices and Policies

This program was meant as an anticipation of an October 2000 fuel price increase. The Government of Indonesia, an OPEC member, owns the oil company Pertamina and the wholesale distribution network. Traditionally, the nationwide fixed retail prices for several types of fuel, in particular kerosene, diesel, and, until the mid-90s, gasoline, were subsidized. Indonesia imported these products because demand exceeded the national refinery capacity. Local prices did not immediately follow movements on world markets for crude oil, fuel and currencies. From December 1998 until September 2000, crude oil prices increased about 220% (in $ terms). Since July 1997, the $-exchange rate for the Indonesian Rupiah slipped from 2,400 to 11,5002. Mathematically, this would have justified nearly a 6.7-fold fuel price increase for the period July 1997 - September 2000.3 The decent October 2000 increase of about 15% for oil products reduced subsidies. Indonesian consumers still pay a fraction of prices people pay in neighboring countries.

Figure 1: Price Developments for gasoline, exchange rate, and price of crude oil

Year Gasoline price/liter

$ exchange rate

$/barrel $c/ liter

Remarks

1980 Rp 100 Rp 625 30 16,0 1997, June Rp 700 Rp 2,400 18 29,2 Start of crisis 1998, May Rp 1,200 Rp 6,000 13 20,0 fuel price increase triggers riots 1998, June Rp 1,000 Rp 15,000 12 6,7 Habibie succeeds Pres. Suharto 1999, October Rp 1,000 Rp 7,000 13 14,3 President Abdurrahman Wahid 2000, October Rp 1,150 Rp 8,900 32 12,8 fuel price increase 2001, June Rp 1,450 Rp 11,500 Feb: 26 12,6 fuel price increase 2001, July Rp 1,450 Rp 9,800 14,8 President Megawati 2001, August Rp 1,450 Rp 8,450 17,2

1 In this report Cooperatives engaged in financial services are regarded as MFIs.

2 The exchange rate for the Indonesian Rupiah is quite volatile in both directions allowing daily moves of more than 5%. During the past 12 months, one US$ bought between Rp 8,500 and Rp 12,000.

3 In June 1997, the Indonesian crude oil price (ICP) was $ 17.9/barrel


3

1.1.1 Government Programs From Reduced Fuel Subsidy Fuel subsidy increased as a result of constant rupiah prices for fuel in the wake of higher prices for crude oil and the de-fakto devaluation. Based on an Letter of Intent with IMF, Indonesia agreed to reduce the ballooning burden and increase domestic fuel prices.

Figure 2: Fuel subsidy from FY 91/92 – FY 2001

Subsidy Rp billion

Subsidy $ billion

Fiscal Year

930 467 FY 91/92 March 692 336 FY 92/93 March 1,280 607 FY 93/94 March 687 312 FY 94/95 March 0 0 FY 95/96 March 1,416 594 FY 96/97 March 9,814 2,111 FY 97/98 March 28,607 3,565 FY 98/99 March 40,923 5,764 FY 99/00 March 51,135 5,329 2000 April-Dec (9 months) 41,304 4,303 2001 Budget (Rp/$: 9,600)

To soften the people's burden, the Government allocated "from reduced subsidies" Rp 800 billion (about $ 90 million)4 to three programs aimed at supporting the lower income strata:

individual Rp 30,000 (about $3.3) cash transfers to poor households to compensate for the fuel price increase for three months

community empowerment programs generating employment opportunities by supporting infrastructure projects (PPM Prasarana)

revolving funds to support the development of savings and credit activities of cooperatives and community groups in their effort to enhance the activities of small business people, farmers, fisherfolk, craftsmen and other low-income groups through micro loans

The figures in the table below show that cash transfers to compensate for increased fuel prices have reached many people (about 15% of the population) although the financial impact was probably very short lasting. It arrived however at an extremely strategic moment, namely before the Hari Raya Idul Fitri holidays (27/28 December). The community employment program could have engaged about 700,000 persons (or about 5% of the families living outside Java) for one month. Advantages from improved infrastructure may last for several years depending on availability of funds for maintenance. The impact of the revolving fund, being constantly monitored, may also last for years to come depending on the fund's management, its supervision and operation. Borrowers, through their interest payments, finance the MFIs' maintenance costs and even allow the institution, the fund, and its positive impact to grow.

4 This is less than 2% of fuel subsidies. The Rp 0.8 trillion program compares with Rp 648 trillion debt obligation to re-capitalize Bank Indonesia, state banks and commercial banks.


4

Figure 3: Three types of compensation regarding reduced fuel subsidies

Measure Amount Beneficiaries

Cash transfer (about $3.3 per beneficiary)

Rp 200 billion 6.7 million recipients

(47% of poor families)

Community employment and infrastructure program

Rp 250 billion 14.7 million working days (equivalent to 58,800 man-years at 250 days/year)

in 5,097 villages (out of more than 60,000 in all Indonesia) in 250 sub-districts, 55 districts, 15 provinces (outside Java only)

Revolving fund for MFIs

max. individual loan to member: Rp 1 million ($110)

Rp 350 billion more than 350,000 small entrepreneurs (out of about 40 million)

through strengthening microfinance institutions (MFI), the "participants":

- 2,925 savings and credit cooperatives

- 1,000 informal financial institutions

(savings and credit self-help groups, SHG)

341 districts, 26 provinces

Proposal for 2001

Revolving fund Rp 56.3 billion 50,000 small entrepreneurs

- 1,000 MFIs

1.1.2 Observations of Other Parties An early evaluation, executed in February 2001 by SMERU5, hinted to that the cash subsidy program might have given many poor people a relief, in particular as the money was disbursed before Hari Raya Idul Fitri. The timing for the infrastructure program was considered less appropriate as people are busy and can generate alternative income throughout the fasting month. The business loans for small entrepreneurs were mostly disbursed after Hari Raya in order to prevent diversion to consumptive use.

5 The SMERU Research Institute, No 02: Mar-Apr/2001, Spotlight On; www.smeru.or.id/newslt/ed14/spot14.htm


5

Figure 4: Location of evaluation by SMERU

Location Jember, Java Kapuas, West Kalimantan

Character well established, experienced and performing cooperatives

underdeveloped, ill-prepared, remote, geographically inaccessible

Information comprehensive:

radio stations, newspapers

900 cooperatives,

64 applications,

9 fulfilled criteria,

funds for 8

reached only participants deemed suitable:

264 registered cooperatives, 30 applied, 3 fulfilled criteria, but 8 received thanks to:

- increasing membership,

- reactivated cooperatives

Members are not familiar with the program, its name and source of finance

are not familiar with the program, its name and source of finance

Disbursement almost all large proportion not yet (due to defaults in loan repayments of previous programs),

offer to general public (non-members)

Problems mentioned by BRI branch managers in April after three months include:

Reports are incomplete and never appear within the time agreed upon.

Management still do not completely understand savings and credit business

Managers are not responsive regarding rules as explained by BRI staff and follow old regulations.

Many managers do not master administration or accounting of loans and savings.

One KSP is located remote so that consultancy and supervision is difficult.

Viability anaysis is based on confidence in repayment willingness only.

Some KSP are very cautious and demand collateral so that disbursement is delayed

The majority of loans are not backed by collateral so that in case of delays collection is difficult.

1.2 Scope of Assessment

During July 2001, the Financial Team of ADB Technical Assistance to SME Development, assisted by two resource persons6, assessed the implementation and performance of the program. No detailed Terms of Reference were submitted.

6 Mr. Rustam Effendi SE, MBA, Jakarta, and Mr. Indra, SE, Surabaya


6

More than six months after release of the RF to the MFIs, the Team interviewed stakeholders in 7 provinces on four islands:

2 Jakarta-located headquarters of banks with a nationwide branch network, namely BRI and BNI, both together overseeing nearly two thirds of the scheme's participants

3 headquarters of Provincial Development Banks

8 bank branches keeping accounts of the participating MFIs

6 district Offices of Cooperatives and SME (OCSME), as representatives of the District Working Groups (WG)

8 single-purpose credit and savings cooperatives, including two BMT

6 multi-purpose cooperatives with an autoomous savings and credit unit

7 non-registered savings and credit cooperatives

7 facilitators

Figure 5: Location of the survey

Location Jakarta Lampung West Java NTB Yogya-

karta South

Sulawesi East Java

Institution Kota Metro

Lampung Tengah

Purwakarta

Lombok Barat

Kota Mataram

Bantul Pangkep Sidoarjo

Dinas Koperasi 1 1 1 1 1 1

Facilitator 1 1 1 1 1 1 1

Bank HQ Jakarta

BRI

BNI

HQ BPD 1 1 1

Branch BNI BPD BRI BPD BPD BPD BRI Bukopin

KSP 3 1 1 1 1 1

USP-Kop 2 2 1 1

LKM 1 1 1 2 1 1

Those few districts the team visited are, if compared to the national average, areas with high population density. The development of the program might differ in districts that have difficult access and few suitable MFIs applying to take part in the scheme. The Team was committed to submit results within three weeks and could therefore not embark on exhilarating boat trips through the forests of Kalimantan. The Team met with few of the final RF recipients, the low-income population, as the attention focused on strengthening MFIs (see Annex Itinerary).


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2 THE PROGRAM

2.1 The Environment and Problems Identified Before Program Implementation

The Office of the State Ministry of Cooperatives and Small Medium Enterprises (SMOCSME) is the program's designer and promoter. The design is based on vast experience with other programs to support the low-income people, including other micro and small credit schemes:

Cash subsidies and time-limited employment opportunities help people only for a very short period to cover additional expenses for fuel and transport. The higher income is not sustainable.

Small entrepreneurs, including farmers, can sustainably increase their income. They need working capital that banks, for many acceptable reasons, do not or cannot make available.

Several thousand MFIs in Indonesia, rooted in the local community, try to complement where banks do not offer services. They lack working capital and qualified management.

Small entrepreneurs are reliable borrowers unless it concerns a Government "credit" program. Reward and punishment features, loan conditions set by the MFI and not the Government, steady supervision from a respected agency (commercial banks) and independent audits introduced from the very beginning shall underline the different approach compared to previous schemes.

The Government agencies have limited capacity to professionally assist MFI management and to monitor MFIs and their funds. Banks, whose professional task it is to handle loans, are the most suitable and experienced institution to do so.

Besides the professional aspects, namely the financial part, MFIs would need to have a person "translating" between the Government and the banks on the one hand, and the MFIs and their members on the other hand. Small MFIs are community based. Therefore, a community development advisor experienced with savings and credit activities should back the revolving fund scheme.

Small entrepreneurs or MFIs dislike paying for services the banks, facilitators and auditors have to render (BDS) although they could afford paying for them.


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2.2 Description and Implementation of the Program

For more information on objectives and indicators see Annex 2.

Having in mind this background, the Government allocated Rp 350 billion7 to be channeled as a 3-year revolving fund (RF) through

2,925 MFIs being incorporated as a cooperative; they received each Rp 100 million ($11,000) to be channeled as micro loans to at least 90 members

1,000 non-incorporated MFIs or SHGs; they received each Rp 50 million for at least 45 borrowers

in 341 districts in Indonesia.

The program has a distinct regional component. Independent from the number of people, the size of the district, or number of registered cooperatives and other MFIs, each district received about Rp 1 billion for a certain number of incorporated cooperatives and other MFIs. The diversity of the regions results in particular challenges:

uneven quality of participants between and within regions

remote location of MFIs making supervision by banks and control by other agencies difficult

limited experience of bank officers with cooperatives and microfinance institutions

A 3- to 4-month preparation and socialization phase started in September 2000. The Revolving Fund (RF) was released to the Handling Banks8 in December. In nearly all districts that the Team visited, it was common that the MFIs withdraw the RF in January 2001, after the Hari Raya Idul Fitri festivities.

On October 9, 2000, SMOCSME issued the Technical Guide for the implementation of the RF program. This paper explains

the composition, tasks and responsibilities of Working Groups on Central, Provincial and District level

criteria for the selection of a facilitator

criteria for the selection of participating MFIs

criteria for MFI members for receiving a loan from the RF

tasks of Handling Banks

operating the RF

The Technical Guide avoids the term "credit" and uses the term "Revolving Fund Assistance" ("bantuan dana bergulir").

End of October 2000, SMOCSME concluded contracts with Handling Banks, the "crucial partner" (Deswandhy, Deputy Minister SMOCSME), on channeling the RF and on other services for which they receive a 4% p.a. fee payable by the MFIs for 7 This compares with much more than Rp 400,000 billion the government had to spent to bail out the commercial banks (re-capitalization) or Rp 70,000 billion the government has budgeted for interest payment of bonds.

8 The Indonesian term "Bank Pelaksana", used in the Technical Guide, is normally used for Government credit programs in which the bank has full authority to select clients, and bank take over the repayment risk.


9

three years based on the amount the banks channeled to the MFIs. In order to achieve scale, one bank branch handles all MFIs in one district. This branch can earn about Rp 32 to Rp 40 million (about $3,500 - $4,500) annually from monitoring the RF and related tasks. BRI, due to its extensive network, received an allocation for about 50% of the 341 districts.

On October 18, SMOCSME issued a decree stipulating the number and type (cooperative or SHG) of MFIs in each district to be selected as RF recipients.

The SMOCSME concluded a contract with Bank Bukopin on training facilitators. This bank is affiliated to the cooperative movement and acknowledged for their capacity and qualification to train MFI people. Together with multi-purpose cooperatives, Bank Bukopin established and manages several hundred MFIs.

The Provincial Working Groups, having only coordinative tasks, organized efficiently the socialization of the program. People from Jakarta presented the RF to representatives of the District Governments.

The District Working Groups (WG) were the backbone of the program during its initial phase. The Bupati (District Head) has been appointed as its chairman, the Head of the Office of Cooperatives and Small Medium Enterprises (OCSME, Dinas Koperasi) is in charge of the routine work. About seven to ten9 WG members represent other Government agencies and the Handling Bank, they include non-formal community leaders, scholars, and NGO-activist. These WGs fulfilled the task to select the facilitator (October) and the MFIs (November).

The WGs announced the availability of the RF (radio, newspapers, direct visits to MFIs) and asked interested MFIs to apply and submit a proposal for the utilization of the RF. Teams were sent to the MFIs to verify the data they submitted in their applications. Based on a catalogue of criteria, the WGs finally awarded the RF to those MFIs that achieved the highest score in their category.

The WGs concluded "cooperation agreements" with the Handling Bank on reporting an on training MFI staff, and with the MFIs on the utilization of the fund. Thus, the assumed capacity of banks to train, advise and supervise the MFIs, and the Government's and other party's commitment to support the low-income strata of the population were combined. The WGs ordered the transfer of the money.

In December 2000 the MFIs opened savings accounts with the Hankdling Bank.

They signed a document (Berita Acara) taking over the responsibility to utilize the fund according to the program's specifications, the prerequisite for money transfer from the Government's account directly to the MFIs' bank accounts. This transparent procedure should make "side streaming" difficult.

2.3 Financial and Contractual Issues

The MFIs could withdraw their allocation of the RF from the bank account whenever they wanted to do so. The main obligation was disbursement of the RF to small entrepreneurs among their members. The maximum individual loan amount to their borrowers should not exceed Rp 1 million ($ 110). The program allows that up to 10% of the fund or Rp 10 million (respectively Rp 5 million) can be used by the MFIs for investment, e.g., premises and equipment. The MFIs have to pay quarterly (some few pay monthly) a 4% "interest/fee" to the Handling Banks. The banks keep 1% as

9 According to the Technical Guide: not more than eight members! Reason is that the budget from Central Government allowed financing only eight people.


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their handling fee, 2.5% are added to the MFI's blocked "liquidity reserve", and 0.5% are allocated to cover costs of audit, facilitator, advice and guidance

Figure 6: Utilization of fee per annum

Cooperative MFI Non-Cooperative MFI (SHG)Payments by % p.a.quarterly annually quarterly annually

Handling fee for bank 4% Rp 1.0 mio. Rp 4.0 mio. Rp 0.50 mio. Rp 2.0 mio. Liquidity reserve "blocked savings"

10% Rp 2.5 mio. Rp 10.0 mio. Rp 1.25 mio. Rp 5.0 mio.

Allocation for audit, facilitator, training

2% Rp 0.5 mio. Rp 2.0 mio. Rp 0.25 mio. Rp 1.0 mio.

Total 16% Rp 4.0 mio. Rp 16.0 mio. Rp 2.00 mio. Rp 8.0 mio.

The survey included two BMTs. One of these MFIs following strict syariah banking rules pays 60% of the profit10, another one does not regard the payment to be interest but "fee".

The MFIs are allowed to withdraw the "liquidity reserve" depending on a positive result of the annual performance evaluation. The release of the "liquidity reserve" is regarded as a short-term incentive for MFIs to perform.

Another obligation of the MFIs is separate accounting for the RF utilization in order to allow easy monitoring. Therefore, members know whether their loan origins from the MFI's "own" resources or from the RF. However, according to the Technical Guide, MFIs shall not apply different loan conditions.

The following contracts govern the rights and obligations of the parties involved in the channeling of the RF: 1. SMOCSME - Handling Banks, headquarters 2. WG - Handling Bank, branch office11 3. WG - MFI 4. WG - Facilitator (Appointment, a kind of contract) 5. MFI - Handling Bank, branch office 6. MFI - Member, individual debtor (credit contract) 7. Treasurer OCSME - MFI (conditions for release of RF from KPKN to the

participants' accounts) According to the Technical Guide, after three years, December 2003, depending on the evaluation of RF performance and institutional fitness appraisal, MFIs may continue to revolve the RF. However, contracts between WGs and MFIs differ. Some even stipulate the repayment of the RF first before any further decision is made.

10 This payment was Rp 3.7 million in the first quarter and Rp 4.2 million in the second quarter and will still increase in the third quarter.

11 It is regarded problematic that the Handling Bank as a member of the WG is in a way concluding a contract with itself.


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3 IMPLEMENTATION: FINDINGS AND ASSESSMENT

The institutional setup is ambitious, in particular during the program's 3-4 months inception phase. Overall, no really serious problems like delays that would have prevented disbursements, gross misallocation, unqualified MFIs or facilitators were met neither could the team identify any.

The implementation, the disbursement of funds, had to be finalized within a short period. The funds had to be channeled to the MFIs' accounts until end of December 2000, the end of the budget year. This target was achieved. The Technical Guide was released in the second week of October 2000 and in less than two months the selection processes took place and funds started to be transferred. Several of the shortcomings can be explained with this time pressure. Fortunately, these shortcomings are still relatively easy to reverse.

3.1 The RF Concept

The scheme or the concept of the RF is convincing and nearly excellent.

Many features that commonly apply to a successful small- or micro-scale credit program characterize it. For example:

The program is not too demanding and it is not loaded with incompatible objectives.

Many MFIs applied. But the WG, a committee selected only a limited number of participants (MFI) among competing candidates according to predetermined eligibility criteria; these MFIs qualified.

The selected MFIs are the most successful and engaged ones in the district already without receiving financial assistance. They can guarantee sustainability best.

Few, sensible criteria were also applied to select final borrowers.

A high degree of non-interference into the MFIs' lending operations and loan conditions leaves decision making, responsibility, and accountability solely with MFI management and MFI members.

The 16% p.a. interest/fee paid by the MFIs for the RF is higher than interest that could be earned on a deposit (incentive to revolve the fund).

The MFIs take over costs like fees for bank supervision, for an independent audit, for a facilitator and training measures. They pay for a range of business development services (BDS).

MFIs receive assistance from an institution-independent facilitator suggesting and advising as well as acting as a catalysator.

Strict, bank-related evaluation and reporting requirements enforce permanent financial discipline over a long period. Lack of financial discipline is one reason for poverty.

The quarterly evaluation of the MFIs' performance is also a highly laudable feature of the program.


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Rewards, short-term and long-term incentives for the MFIs, are in place.

The program hardly disturbs market mechanisms. Only a minority of MFIs have received a credit or a credit offer from a bank before. The MFIs are rather complementing missing financial services. They fill the gap between traditional savings and credit groups and small Rural Banks (BPRs).

The program has scale. Income for banks in one district allows appointing a junior staff member. A facilitator can be supported. The MFIs can form an association to center attention.

The program has a regional development component. It supports the same number of MFIs in less populated districts

. The evaluation of the MFIs' performance includes continuous and complete "quick and dirty" impact assessment on beneficiary (MFI member) level.

Some criticism relates to the following:

The program does not benefit the very poor who have, due to lack of funds, no own business and are thus excluded from taking up a loan. However, this is part of the concept. Indeed, many MFI respondents fear that the very poor would not repay the loan.

The scheme lacks some flexibility. Several districts do not provide the requested number of qualifying MFIs. Some MFIs could channel more loans, for several small MFIs the amount made available is quite a challenge. Similarly, the maximum loan amount could be handled more flexible in both directions.

MFI income related indicators are not part of the monthly or quarterly evaluation. They are, however, part of the MFIs' fitness or health assessment.

Most of all, the Team has found different perceptions regarding to what will happen to the RF when the contracts expire after three years (end of 2003). Legally, the RF may remain Government property. The contracts between MFIs and WGs offer a prolongation. Some contracts even detail repayment schedules. According to the Technical Guide, however, the fund will be donated to those MFIs that fulfill the fitness and performance criteria.

Typical Range of Loans

1 10 100 1.000 10.000 100.000

ARISAN

KELOMPOK SIMPAN PINJAM

KSP/USP-Kop, LKM

BPR

BRI Unit

in Rp '000, logarithmic scale


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The program's name is hazardous. The term "aid" or "assistance" (bantuan) implies, this is the common notion that the money has not to be repaid. This perception may be wrong if measured by the program's achievement so far. In fact, "credits" are not repaid. One might assume that a new frankness returns a commitment on part of the beneficiaries.

Several borrowers (MFI members) received already a loan exceeding Rp 1 million before, some could even obtain a bank loan. The program could have been more focussed on applicants without access to bank loans. This argument has merits. However, it would interfere in the MFI's lending operation. Therefore, it should come as a suggestion.

Many other problems can be regarded as small but they may have an impact on the creditworthiness of the MFI management and hence the stability of the organisation. So far, opinions differ even among auditors on how to book the quarterly 4%-payment. A part of this amount is goes to the MFI's "liquidity reserve" bank account. It is an asset and should be included in the balance sheet. However, the access to this amount depends on the Handling Bank's performance report to the WG or District Government whose responsibility it is to decide on its release. Bookkeeping can become complicated.

The successe supporting factors as seen by the program's promoters are compiled in Annex 3.

3.2 Selecting Number and Type of MFI Participants

Depending on the location, in each district, about seven to ten cooperatives and two to five non-incorporated MFIs (SHGs) should benefit from the RF. The allocation for each district within a province is similar; differences between provinces exist but are not a specific feature of the scheme. They rather reflect a different situation among provinces. Under-populated areas in less developed provinces received a much higher RF share if compared to the number of inhabitants. For example, the urban Bekasi district (adjacent to Jakarta) received funds for seven cooperatives and three SHGs whereas the district North Maluku was awarded funds for twelve cooperatives and five SHGs. This distribution reflects also the ambition to strengthen MFIs in remote areas where access to the formal banking system is limited and where even tiny Rural Banks (BPR) can hardly work profitable. It is admitted that few of the MFIs in remote areas comply entirely with the catalogue of criteria as described in the Technical Guide.

In South Sulawesi, the Governor decided, against the rules and responsibilities, to re-allocate a part of the budget from one district to another district. BRI reported 28 deviations from the number and places of MFIs stipulated in their contract. In twelve districts, the number of MFIs receiving the RF differed by only one or two. These small differences were also explained with that not enough MFIs qualified. According to reports, the WGs decided in some few cases that the allocation of Rp 100 million is shared among 2 equally qualifying MFIs thus contributing to a higher number of participants in other districts. Compared to the total number of districts these "adjustments" are regarded as small and tolerable.

3.3 Selecting Handling Banks

In contrast to facilitators and MFIs, Handling Banks were not selected based on scoring as a result of a competition. The program did even not go so far as to include


14

districts to at least propose the Handling Bank. Talks were held with leading national banks. But no selection criteria were developed. The commitment of these institutions was assumed based on the 4% p.a. incentive, an income without a credit risk.

The Team was confronted with conflicting statements regarding the process of matching banks with districts. Reportedly, BRI, tha bank with the most extensive branch network on district level, took over all districts that were not allocated to or chosen by the other participating banks12, namely BNI, Bukopin, and 23 of the 26 Provincial Development Banks (BPD) that were appointed to take part. Some bank representatives were not satisfied with the "top-down approach without further consultation". However, in many remote regions there is no choice.

3.4 Selecting Facilitators

The WGs selected the person who qualified best as facilitator according to the criteria set in the Government's Technical Guide: no government employee, minimal D3 academy degree, experience with MFIs, living in the district, not older than 40 years. These terms are sensible, simple and clear. The Team found exactly these people in the field. In some cases, possession of a motorcycle was one of the additional, unofficial selection criteria.

Regularly, the WGs could choose between at least three, sometimes even more than ten, candidates. About 20% to 30% of the applicants were women, but the percentage of selected women is below 15% due to the "motorcycle factor". During the inception phase, based on a District Head (Bupati) decree, they received an honorarium of Rp 350,000 minus 10% tax deduction, the amount of which was decided in Jakarta. They reported that they received five to ten days training.

3.5 Selecting MFIs

The local WGs undertook efforts to identify potential MFIs and to promote the program so that the number of applying MFIs was higher than the number of recipients, thus allowing selection.

About 15% to 25% of the relevant MFIs in a district applied for the RF. In nearly all cases the WGs could select the participants among a number of qualified MFIs. The number of shortlisted MFIs was mostly at least 50% higher than the number of recipients. In a number of districts, due to the lack of candidates fulfilling all eligibility criteria, the WGs often compromised on the most suitable MFIs rather than excluding them. At least one district is known where part of the RF allocation was returned because no SHG qualified.

It is no wonder that the selection of MFIs under these time constraints did not always take place exactly according to the Technical Guide's criteria. BRI Branch Pangkep/South Sulawesi reported that MFIs were chosen without consulting the bank. In Sidoarjo, seven of the eleven participants did not fulfill the age criteria (two years for cooperatives, one year for other MFIs). It is estimated that in more than 10% of the cases, the number of members was still below the 90/45 threshold when the MFIs applied. These deviations were found quite often, but they were not the 12 Reportedly, BRI "returned" several districts later. Bank Negara Indonesia (BNI) is a state bank but listed on the New York Stock Exchange. Bank Bukopin, formerly a cooperative entity and still close to the cooperative movement, operates only few branches on district level but is, not only financially, engaged in several hundred partnerships with multi-purpose cooperatives (KUD) operating their Savings and Credit Unit under a management contract.


15

rule. Finally, the scheme allows explicitly MFI selection based on 2/3-WG members majority decision (voting). The Team obtained several documents that proved selecting MFIs based on objectively verifiable indicators in which age of the MFI and ownership were only two of 24. For example, a higher percentage of women members earned also higher scores. In fact, evaluation sheets for a previous program were used without having been adopted. But, by and large, they could suit the purpose. Despite some weaknesses of this form, e.g., ratio ("persen") of women was confused with number of women ("person"), mistakenly printing ">" for "smaller than", etc.), the evaluation system proved so far appropriate for the selection of MFIs. From one district it was reported about an MFI manager whose MFI did not receive the RF. He was suspicious and visited all RF recipients in his district. Afterwards he admitted that "his" MFI was less qualified.

Figure 7: Criteria of participants

Criteria of KSP/USP Kop (Cooperative) LKM (SHG, informal financial institution)

Sustainability legal status minimal 2 years rooted in the community, not yet legal status but performing savings and loans activities with members, statutes or similar since minimal 1 year

Members active in productive sectors active in productive sectors

Membership, minimal 90 persons 45 persons

Management and Supervisory Board

elected by members elected by members

Priority assessment as FI: "sound", "almost sound" already registered with the local Office of Cooperatives

members involved with prime products of the area

members involved with prime products of the area

Annual assembly annual assembly on previous year and books ratified

Program loans no arrears on program loans not yet received similar RF

already received consultancy from NGO or Government agency, bank, state enterprise or other institution

Submit proposal using the appropriate form

Responsibility management ready to take responsibility for the use of funds both by the cooperative as well as by the member

Selection already passed the selection by the DWG

"Side streaming" could not entirely be excluded. It is not known if unqualified or less qualified candidates received the RF for a return of about 3% to 5%, "for a favor". The team assumes that in most of these cases a traditional mechanism of achieving mutual "well-feeling" (live and let live) works and that no pressure was exerted. Both sides could have started offering "tit for tat". The Technical Guide demands "transparent announcement of the result of the selection of MFIs on a public billboard." However, the MFI could not control this. They did not possess the Technical Guide. Finally, these unwanted payments, if they are substantial, might be made known to the MFI members through the public audit. Respondents mentioned more serious trouble in Surabaya, namely inaudible records. One has to accept that fraud cannot be abolished but only limited.


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There are some concerns that in particular strong MFIs would obtain the RF, those with a loan portfolio exceeding Rp 500 million or even Rp 1 billion. They could probably also apply for a bank loan. This concern could not be shared. There are only few big cooperatives, they are a tiny minority (less than 3%). Most of them did not receive the RF. Generally, the RF was not awarded to the largest cooperatives only, although they tend to be the easiest to qualify. In most districts, assets of only very few savings and loan cooperatives exceeded Rp 200 million. In probably most cases the Rp 100 million from the RF exceeded the amount of outstanding loans to members prior to receiving the RF. It is for them a substantial challenge to administer the RF.

In contrast, one should be much more concerned with small MFIs. Many received funds amounting to more than double and, for non-incorporated MFIs (SHGs), even more than fivefold the amount they were used to manage. Many quite small (loan portfolio below Rp 10 million) MFIs received Rp 50 million. The danger looms that the management of the additional loans may overburden some of the less experienced participants. In contrast to many cooperatives, the small MFIs did not receive extensive training. They had to expand their membership - and, sometimes, number of staff - first.

The qualification criteria "minimum 90 (45) members" assumes that each member requires a loan of (at least) Rp 1 million. In reality, members received already a loan from "own funds". Often, only half of the members, or even less, are interested in a loan at any given point in time. There is the danger that, once the money is available, strict qualification and selection criteria will easily be abandoned. If every member gets the same amount, social control may easily collapse. Fortunately, the team has seen many MFIs disbursing loans prudently. But not few MFIs with a membership close to 100 disbursed the RF within two weeks on the basis of Rp 1 million per member indicating lack of proper assessment: "It is the members' right to obtain Rp 1 million from the RF." The Team met borrowers for whom the Rp 1 million was just a welcome addition to their normal working capital requirements of up to Rp 10 million (inland fishery).

The "gender of the MFIs" differs according to their members' profession. Some are rather male dominated and others are women only cooperatives. It seems that MFIs with a natural balanced gender ratio (40% - 60%) are relatively rare.

Figure 8: Distances (km) to MFIs District Average Maximum West Lombok 19 80 Matraman 1 6 Bantul 13 45 Purwakarta 15 35 Metro 2 6

Distance or accessibility was certainly sometimes another of the hidden qualification criteria for the selection of MFIs. They were just not invited to apply for the RF. In Pangkep, South Sulawesi, the District Head intervened preventing that two MFIs located on islands were not excluded as participants.


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3.6 Handling Banks as WG Member

The reports on the bank's cooperation and activity as member of the WGs, in particular regarding the MFI selection process, differed. Some bank officers complained that the other WG members did not respond to problems detected by the bank, e.g., an overdue loan to the Provincial Government. Some bank officers were just confused and resigned to actively participate because as an Executing Bank (Bank Pelaksana, in the context of the RF translated as Handling Bank) they are not used to share the decision on debtors.

3.7 Training

The development of suitable and appropriate training material for bank personnel, Government officials and MFI representatives was not part of the scheme. The program promoters did neither plan nor consider developing more detailed written explanations for the implementation of the scheme. Actually, the Technical Guide answers several questions that were posed by respondents. The problem is that the Technical Guide is not ready available and those who should know the contents do not remember every detail for which solutions are already given. Regularly, the MFIs do not possess a copy of the Technical Guide. In fact, on many questions no answer could be found in the Technical Guide. People were not aware about their extent of freedom to make own decisions and the limits.

In November and December, the one to two week training of facilitators took place in different areas in Indonesia. About 30 to 40 facilitators joined in one class. The training concerned bookkeeping, cooperative issues, rural banking and questions related to the Technical Guide. However, the facilitators did not receive specific training material regarding the implementation of the RF program. Reports on this training were conflicting: "4-5 days" and "10 days", "really in-depth with discussions until late at night" and "quite general without really discussing details of the RF implementation."

According to the Technical guide, training for MFI personnel by the WG (supposedly by the banks) should have taken place during the last week of November, at the beginning of the fasting month and before disbursement of the RF. The team found that this training was not implemented.

Nobody seemed to have considered training bank personnel being a valuable suggestion.


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4 SUCCESS YARDSTICKS

The program wants to achieve "five successes":

1. Disbursement of the RF to MFIs

2. Utilization as business loans

3. Repayment to MFIs without arrears)

4. Income increase (regarding the borrower)

5. Business expansion (regarding the borrower)

The Team believes that the program has achieved all five targets. This is a judgement based on a limited number of interviews and visits that, unfortunately, cannot be backed with sufficient evidence. The success should be reflected in a "performance evaluation" table with scores for each of the five factors. Instructions on measuring the performance arrived in the field in February or even later.

The Team has found banks that did not provide the figures. They claimed that the MFIs did not submit the data for "success" evaluation. In those cases where figures were made available, the Team never saw a correct calculation. They cannot be trusted. Regularly, most of the final scores submitted by the Handling Banks are wrong. They are not deliberately manipulated in order to present a good performance that does not exist. In some cases it is obvious that bank officers just have not read carefully clear instructions.13 Overall, the presented figures rather try to reflect a general impression or judgement. The Team has difficulties to interpret these figures because different bank managers in different environments will certainly come to different conclusions.

Reasons for not submitting the right figures are:

a complete set of forms is not available

some forms allow different interpretation, it is unclear which figure is meant

explanations on how to use the form are given but the borrower cannot understand them, e.g., uncommon words are used ("outstanding", "baki debet")

the data required are not available

information on how to process the data is incomplete

Even among Team members, opinions differ on how to correctly use the forms. Bank officers in branches, facilitators and MFI personnel were not trained to collect and to process the data for the score calculation. The forms were probably never tested in the field. They may be suitable for loans to traders but hardly for loans to farmers.

The Team has found at least one MFI combining their members' funds with the RF. In these instances it is not possible to assess the RF performance of the revolving fund.

13 Instruction: "maximum score is 100", but this instruction is ignored and subsequent calculations are based on scores higher than 100 (e.g., BPD NTB for disbursement).


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Despite these depressing findings, conditions encountered in the field are encouraging.

4.1 Success 1: Disbursement of Funds

In July, the team could find reports at SMOCSME showing that out of Rp 350 billion at least some Rp 106 billion were disbursed to MFIs until end of March. Data are still incomplete and inconsistent. Reporting is delayed despite the fact that banks agreed to report the disbursement within two weeks. For example, the list does not include disbursements made by BRI, because in several districts the number of MFIs reported to have received the RF was not in accordance with the allocation agreed with SMOCSME. It took BRI several months to recognize the differences and it was only end of June 2001 when BRI HQ requested clarification from its regional offices. BNI experienced a similar problem when Headquarters learned that changes have occurred and the number of districts allocated to BNI dropped. It is assumed that meanwhile indeed more than 90% of the amount has been transferred to the bank accounts of the participating MFIs as indicated by BNI's report.

Figure 9: RF: Disbursement through BNI per March 2001

Type of participants

(MFIs

No. (agreed/ realized))

Ceiling Disbursed % Final recipients (MFI members)

KSP/USP-Kop 382 / 346 Rp 34.6 b. Rp 31.9 b. 92% 31,613

LKM 137 / 126 Rp 6.3 b. Rp 5.9 b. 94% 7,239

The funds were transferred from the Government's district account directly to the participants' bank accounts in December 2000. Most MFIs, based on an agreement with the Working Groups, started disbursing the RF to final borrowers only in January 2001, after Hari Raya, in order to prevent consumptive misuse. Most of the MFIs withdraw the money in two or three tranches over a period of several weeks in order to minimize the risk of keeping too much cash. In some few instances bank representatives witnessed the disbursement of loans to MFI members. Although the participants had to submit a list of potential borrowers at the time of application, the fact that it took many MFIs three or even four months to disburse the fund hints to that the final borrowers, the MFI members, were carefully selected and their credit application re-assessed.

Normally, MFIs extend daily, weekly or monthly installment loans to their members. Repayments and interest income are used to extend new loans so that increasingly more members benefit from the revolving fund. Over time the total loan disbursement amount increasingly exceeds the initial amount of the revolving fund.

As cooperatives emphasize loan disbursement, this figure is, also with banks, repeatedly confused with the outstanding loan amount on which the performance evaluation is based. Many participants are not familiar with the English word "outstanding" or the technical term "baki debet", both used in the forms. The instruction for evaluating the performance of MFI adds to the confusion. The headline and the formula refer to disbursement ("penyaluran") whereas many readers do not pay attention to the contradicting remark in brackets when it reads "total disbursement of the RF (outstanding)" or "total penyaluran dana bergulir (baki debet)".


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From community development point of view, the success of a revolving fund is often measured by the number of people participating. The number is high if loan amounts are small, and repayment cycles short. Short repayment cycles result in high periodical disbursements. The MFIs record the number of loans and it happens often that after repayment of the first loan, the same person takes up another loan. Under these conditions, MFIs with small loan amounts, daily installments and loan repayment within less than two month are remarkably successful. However, for many people the benefit of a small, short-term loan is very small.

The number of loans is not identical with the number of borrowers. Instructions exist to report the number of old and new borrowers. However, this figure is not part of the evaluation.

It is common that cumulative RF disbursements until July 2001 are already 20%-50% higher than the benchmark, e.g.: Name of cooperative Loans (No.) Loan Disbursement

Benchmark14 102 Rp 90.0 million

KSP "Model" NTB, Mataram 147 Rp 145.5 million

KSP Kopontern Bany Yakub, NTB, Batu Kuta 211 Rp 188.0 million

This achievement exceeds projections (see Annex 6)

4.2 Success 2: Utilization of RF by MFI members

Without having collected detailed data the Team got, from the interviews with MFI staff and management and looking at records, the general impression that the loans were indeed used by micro entrepreneurs to finance additional working capital requirements of their businesses according to the RF's intention.

Cash can be used as a reverse indicator for RF utilization because several MFIs switched their portfolio of small loans to the RF and could claim high RF utilization but in turn their member fund showed a low utilization. The RF just replaced member funds. Normally, the MFIs keep cash and deposits (savings accounts) at banks amounting to less than 10%, often less than 5%, of the loan portfolio. This indicates high utilization.

Few MFIs made full use of the opportunity to spend up to 10% of the RF for fixed assets, because "many members wait for the loan and we need to earn interest." The money could finance an entire computer set, some office furniture and other equipment.

According to the scheme, at least 90% of the RF have to be re-lend to members to finance working capital for the development of their productive enterprises. Normally, the MFIs' loan ledgers or credit contracts inform about the borrower's business and loan utilization. Mostly, one can learn that the loan is used to "increase the working capital" (tambah modal kerja). Few applicants specify (e.g., "purchase of fertilizer") as an explanation for the use of a form requests. Reportedly, a notable number of small entrepreneurs used the money also to repay loans to become independent from moneylenders or unfavorable business connections. Few members used the loans for investment in fixed assets.

Loan amounts vary. Few MFIs disbursed Rp 1 million loans only. Often, loan amounts remained below Rp 1 million or even below Rp 0.5 million, because "the

14 Target: 350,000 loans / (2,925 coop. +1,000 SHG/ 2 (only Rp 50 mio.! ) = 102 loans/coop.


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business does not need more working capital" or "the borrower is afraid that he cannot pay the high installments." It is estimated that about 5% of the loans exceeded the limit of Rp 1 million, some recorded the amounts openly (up to Rp 5 million) as loans to "groups", e.g., for the purchase of cattle or a second hand photocopying machine, some disguised the high amounts as individual loans to several members. These groups could also be couples, family members, like brothers and sisters, or relatives.

The Team found one MFI that fulfilled the criteria but should better not have received the RF. Most of the members are involved in inland fishery. Their seasonal (9 to 15 months) working capital requirements amount to "at least nearly Rp 10 million" per member. The Rp 1 million from the RF made no remarkable difference.15

Due to the fungibility of money the entrepreneur may have bought a television set with revenues from his trade (divestment) and financed re-stocking with the loan. But people would interpret this differently and accuse the borrower of consumptive use of the loan. The MFI respondents admitted that they heard about some of these instances but they did not verify these reports because of smooth loan repayment.

The MFIs management or staff does normally not verify the utilization of the loan. They do not see the necessity. They observe that a neighborhood shop has more goods to offer after loan disbursement. In future, they will have to do it more systematically, at least orally, for the impact analysis.

4.3 Success 3: Repayment

The Team was impressed by the adherence to pay 4% quarterly for using the fund and by the repayment performance of the MFIs' members. Often payments were made two to three weeks in advance of the quarter's end. Facilitators remind the MFI managers well in advance about their obligation. In some instances payments were made up to two weeks late and therefore recorded as arrears in the quarterly reports. Several bank branches tolerated this delay. Many MFIs are also lenient regarding "late payments, not arrears," of their members. They could prove that during the following period two payments were made.

Checks of loan registers or loan recording cards showed that of those members, who received monthly installment loans, less than 20% missed one payment during the previous months (typically about 2%-5% every month) and that less than 10% of the members were actually in arrears, very few, most probably less than 3%, with two installments. This loan portfolio would qualify as "healthy" if measured by standards applied for Rural Banks. However, arrears increase considerably in case of force majeure and may "contaminate" other members who are still repaying the loan. The Team met one such case (1 of 21 = 5%).

The program's promoter wants to evaluate the repayment performance with objectively verifiable indicators. Reportedly, based on a system developed by one of the Handling Banks, the promoter submitted 17 criteria on two and a half pages as rules for the calculation of the program's "Repayment Aspect." The calculation system resembles the one used to establish a banks (BPR) loan portfolio quality. The rules are complicated. Even Bank Indonesia has allowed loopholes. Banks employ computers for this task. Some of the software programs are even not exactly correct. The wording adopted for the evaluation of the MFI's portfolio performance is quite user-unfriendly and, most of all, it is quite sure that many users will misinterpret the 15 In February, almost all fish died due to adverse water conditions in the lake. Only about 60% of the members paid their instalments, so that the MFI could still pay Rp 4 million to the bank.


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term "total funds channeled" as "total loans disbursed" instead of "outstanding loans" or "total portfolio". The wrong determinate they will probably use in the formula, results in too high scores and may cover unintentionally a bad portfolio quality.

bad loans bad loans Wrong formula:

total loans disbursed Right formula:

total portfolio

(total loans disbursed is > total portfolio)

The Team is convinced that the MFIs and their members take loan repayment serious:

the MFIs are experienced

too much is at stake

for the borrowers, the program is a "real" credit scheme in contrast to the cash program grant-subsidy for some 6.7 million really poor families at the same time

outsiders, bank and facilitator, control and observe activities continuously

social pressure is especially high in those districts where RF receiving MFIs founded already an association

to obtain a loan, often, collateral has to be provided and even life insurance cover to be bought

some MFIs copied BRI's successful ontime repayment incentive scheme

in contrast to other programs in the past, this scheme is not directed towards the very poor who often would have to establish a business first.

Provided banks and facilitators render continuous services there is no doubt that only few, less than 20%, of the MFIs will falter due to repayment problems. Some of the repayment problems will be caused by natural influences like flood, draught, landslide, etc. (force majeure).


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4.4 Impact Monitoring

Success 4: "Enterprise Growth" (Peningkatan Usaha)

Success 5: "Enterprise Development" (Pengembangan Usaha)

Success 4 and success 5 may perhaps measure the program's impact on MFI members' welfare (expressed in net income increase) and commercial activity (gross revenues)16. This effort is highly laudable. Measuring impact of credit programs does normally not take place due to time constraints, efforts and costs involved when collecting and evaluating data. It is admireable that this program tries to gather at least some evidence of the benefits. Documentation would be of an exceptional value for potential donors.

During the survey nobody has been found who really understood and could fill in the form (Formulir Laporan Usaha) on which the calculation of scores for success 4 and success 5 are based. The unfortunate wording shall be demonstrated with the requested monthly data for

success 4: "enterprise income before being charged with cost" (pendapatan usaha sebelum dibebankan biaya) and for

success 5: "nominal turnover before being charged with costs" (nilai nominal omset usaha sebelum dibebankan biaya),

both together in two subsequent tables on one page.

Several people cannot see the difference, they give differing definitions or they do not at all understand which figures should be put in the upper and lower table. Even the Team members share not the same view concerning the way the form has to be used. To make bad things worse, the attached explanations for filling in this evaluation form start with a bold printed warning that "supplying wrong data will be punished." It is quite clear that under these circumstances most MFIs choose to not report.

Therefore, reports regarding the evaluation of the MFIs' performance arriving in Jakarta are with highest probability not correct. None of the Team members would trust and use them. The Team members however believe, based on discussions and observations, that the loans had a positive impact and contributed to increase welfare.

16 According to another interpretation, these indicators shall reflect the development of the MFI. However, data sheets do not support this statement.


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5 ASSESSMENT OF DUTIES AND PERFORMANCE OF STAKEHOLDERS

For the program's inception phase, Working Groups (WG) on central, provincial and district level were established which are headed by the Minister, Governor and District Head. Routine tasks have to be performed by representatives of agencies concerning cooperatives. Other government agencies, banks, informal local leaders, university representatives and community development organizations (NGO) played a role during the MFI selection process in the last quarter of 2000.

Nowadays, following parties are regularly involved in the execution of the program:

the Government, represented in particular by SMOCSME and Offices on district level being involved in affairs regarding cooperatives (still named WG in the following),

the Handling Banks: BRI, BNI, Bank Bukopin and the independent Provincial Development Banks (BPD) represented on central level through their association

the facilitators

the MFIs

the members of the MFIs

The following describes and assesses the main duties of the stakeholders based on the Technical Guide (Pedoman Teknis) and contracts concluded among them.

5.1 Government Agencies

5.1.1 National Level 1. The SMOCSME developed the concept and policies for the program. These

have been found to be in line with best practices, they even set new advanced standards through continuously measuring the program's quality and impact.

2. Coordination with other agencies was successful so that the funds could be disbursed before the end of the budget year 2000. However, coordination did not go to the extent that all regulations, reporting forms, training modules and necessary explanations were available at the time the funds were disbursed and facilitator and MFIs trained. It is also unclear whose responsibility it is that still different interpretations and views on the program are heard from participating stakeholders. For example, some consider this program still to be a credit program for which the MFIs have to pay "interest". This would not have been happened if the coordination would have been successful with regard to the technical implementation of the scheme and if all parties would own a comprehensive handbook.

3. The number of MFIs to be supported followed the principle of even distribution. Any decision on how to implement a policy of even distribution (based on area, based on population, based on districts or other criteria) has weaknesses and strengths. However, the promoters of the scheme have clearly spent some thoughts about it. It was found appropriate that every district should be allocated


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approximately the same amount for approximately the same number of formal (7-11) and informal (2-5) MFIs.

4. Handling Banks have been contracted and monitoring of disbursement of funds started. Due to interventions by provincial Governments several changes occurred that went without being reported immediately to SMOCSME.

5. The promoter's task and responsibility to supervise, socialize and advise the implementation of the program has been found not sufficiently effective. For example, banks claimed that no advice was given on the use of the performance evaluation sheets before they trained MFI personnel and before they collected data for their first quarterly report (March 2001).

6. Monitoring and evaluation regarding policies and its follow-up is not yet performed in an organized way. For example, no immediate information could be obtained on the number of banks that have not yet submitted their report for the first quarter 2001. The Team received the explanation that a monitoring consultant will be contracted in near future. Field visits have been undertaken by SMOCSME staff members but it remained unclear why these visits did not reveal at least some of the weaknesses this Team has found.

5.1.2 Provincial Level The Team has not contacted representatives from provincial level whose task is limited to coordination, supervision, socialization, monitoring the transfer of the RF to the MFIs (actually the same activity as on central level!) and from the MFIs to their members, an activity that has never been reported by one of the MFIs. In contrast to the Central and District WG, the Provincial WG does not conclude contracts in the framework of this program.

After the inception phase (September - December 2000) the Provincial WGs have been found being still active with organizing meetings for the socialization of the program. In some provinces they act as facilitators, e.g. concerning negotiations between MFIs and auditors. For the activities of the Provincial WGs no standard or reporting formats nor any schedule for supervision etc. has been introduced. This explains irregular, if any, reporting to the SMOCSME, one of their four tasks. Another reason is that the Provincial WGs does not receive reports from districts.

Against indisputable rules, Provincial Governments intervened in the allocation of funds to Districts (reallocation from one District to another District). They also appointed different Handling Banks to several districts thus disregarding Central WG's contracts with banks.

5.1.3 District Level The District WG is the most important partner in the scheme regarding the proper implementation of a quite excellent concept. Based on the Team's observations and interviews it can be concluded that the selection of MFIs and facilitators was performed in a serious and transparent way.

Contracts were concluded with banks, facilitators and MFIs. In some districts, some of these contracts wait to be signed by District Heads six months after implementation.17 Sometimes, only the original contract exists and no copy has been

17 The Team found one district were the bank could not provide the contract with the WG. In fact, the agreement was signed but for undisclosed reasons neither the WG forwarded the agreement to the bank nor did the bank claim it.


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given to the MFIs or even the bank. Thus, MFIs do not exactly know their rights and obligations. According to these contracts the WGs' responsibility is limited to guidance, monitoring, and facilitation in order to enable MFIs to continue utilizing the RF after 2003.

Many District WGs do not follow the instruction to report regularly to the Governor with a copy to the Provincial WG. Reporting format or reporting frequency are not known. Additionally, Handling Banks are charged with the task to report to the Governor according to their agreements with the WG. The banks, however, do only report to their superiors (Headquarters, Regional Offices) and, sometimes, to the District WG. Therefore, several Governors, who should receive reports from two sources, finally do not receive any report. Probably, it is not sensible at all to involve the Governor.

The Team gained the impression that during the inception phase the District WGs have done their duty and performed sufficiently well. Decentralization efforts regional autonomy and restructuring District Governments coincidented with the implementation of the RF. Several Government offices were moved, Central level staff handed over to local institutions and combined with other agencies, officials were replaced and their knowledge is not anymore available, documents are difficult to retrace. Since January 2001, WGs do not have anymore a budget for activities specifically related to the RF. They are not dissolved but the term "WG" is now quite identical with OCSME and at times, OCSME plus Handling Bank. Banks earn a fee, facilitators receive an honorarium, MFIs gain interest from their members but the Government agencies, including the WGs are without budget for the RF program. After RF disbursement the WGs still have to execute several tasks, e.g.,

facilitating RF repayment by bad performing MFIs and selecting the MFI that will benefit (revolving to other MFIs)

allowing successful MFIs to further on utilize the RF,

deciding on release of the MFIs' liquidity reserve at the end of each year

facilitating if problems arise, e.g., . the facilitators want their honorarium to be adjusted, they quit or move to another location; . one of the MFIs shows a deplorable performance due to force majeure, or . in the event that the entire management of an MFI resigns and nobody seems to be responsible for the RF anymore.

5.2 Facilitators

The facilitators are employed based on the Bupati's (District Head) decree. There is no date at which the appointment terminates and the Technical Guide mentions only that, after December 2000, the participating MFIs shall jointly pay the facilitators' honorarium. It may well be that several MFIs have difficulties to accept that a third party, the WG, has selected a person for which they have to pay the salary.

The Team supports the RF concept that includes the employment of a facilitator. However, the contract and the job description are very general in nature and touch a variety of issues, for which they have not received training and may not be prepared. For example, facilitators should give "market information on goods being produced by the MFI's members", and "informing on technological developments". In


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fact, neither any of the facilitators claimed having done this nor did any of the MFIs ask the facilitator to do this. They could perhaps perform these tasks in some remote areas where people very rarely visit the District Capital.

The job description does not contain specific targets or achievements against which the performance could be measured:

For example, achievements could refer to the number of visits to MFIs, the ontime availability of monthly reports, MFI portfolio quality or others.

The facilitator has to report to the WG monthly, but the program's promoter did not develop a form for this report. WGs and/or the facilitators have to develop their individual form.

Nowhere is an indication given whether being a facilitator should be a full-time or a part-time job.

The job descriptions does not state who is the facilitator's superior.

It does not state who is in charge of appraising the facilitator's performance.

The facilitator has no institutionalized working place. At least, many facilitators are allowed to share a desk at the OCSME.

Nobody controls the facilitator. The facilitator does not have to rely very much on the MFIs' support. Mechanisms to dismiss him are not in place. The system of reward and punishment does not really apply, and especially not, if the honorarium is low and costs are high.

The facilitators report monthly only to the District WGs. The Team received different reporting models. One model refers to figures concerning membership and financial development collected from the MFIs, another model describes the facilitator's activities and problems that were identified during the month. The facilitators are free to choose any format they deem suitable for their reports. Banks refer sometimes to their status as a member of the District WG. Therefore they ask the facilitators to assist collecting figures from the MFIs so that they can prepare their reports.

The issue of when, how and how much honorarium the facilitator will get has intentionally not been resolved in the Technical Guide, because conditions differ from place to place. During the inception phase facilitators received from the Government budget Rp 350,000 monthly, paid out Rp 315,000 after 10% tax deduction. For undisclosed reasons, deductions in Metro/Lampung were higher and the facilitator received only Rp 229,000 per month.

It was not uncommon that the facilitators received the first salary from the 2% p.a. allocation only after four or five months (April, May). In most cases they receive the salary only once in three months after the MFIs paid their 4% quarterly interest/fee. Several MFIs support the facilitator with money for fuel.

Figure 10: Honorarium of Facilitators

District Honorarium p. month Average distance Remarks Lombok Barat Rp 315,000 30 km Kota Metro Rp 350,000 6 km Purwakarta Rp 425,000 15 km no own motorcycle Kota Mataram Rp 500,000 5 km weekly visits to MFIs


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The income from between Rp 315,000 to Rp 500,000 per month, from which the facilitator has still to pay transport to MFIs, stationary, copies etc., indicates already that his activity might be regarded as a part-time job. The Team found that most facilitators visit "their" MFIs once or twice every month. A number of facilitators visit their MFIs even more often, some, indeed, once a week. If the facilitators would give sufficient attention and guidance to 12 MFIs they would spend at least about:

visits 12 MFIs x 0.5 days/MFI = 6 days + up to 2 days travel to remote MFIs

reporting: = 2 day

meetings: = 1 day

total = 9 - 11 days per month

If the facilitators were more thoroughly engaged, they would spend twice as much time with MFIs, e.g. visiting MFI members, so that they would work and travel the equivalent of 15 - 19 days per month.

Several of the selected MFIs are located at places for which one has to spend relatively much money to get there and to which frequency of public transport is low. Therefore, only few facilitators do not own a motorcycle. Motorcycle ownership became even a selection criterion with one of the WGs visited. Sometimes, facilitators join transport with OCSME personnel.

The Team found that expenses for the facilitators are shared based on the RF the participants received (principle of solidarity). Formal MFIs, the cooperatives, pay twice as much as the SHGs. E.g, if total costs amount to Rp 500,000 per month or Rp 6,000,000 per year, eight formal and four informal MFIs would share the costs as follows:

Rp 6,000,000 / (8 + 4 x 0,5) = Rp 6,000,000 / 10 = Rp 600,000 per formal MFI and Rp 300,000 per informal MFI per year.

Within the coming two years, due to rising prices for cost of living, and in particular transport, many facilitators will certainly ask for a review of their income, they will ask for an increase, or they will reduce their level of activity. Some may quit altogether.

So far, the mere presence of facilitators, persons who care, is more important than particular high qualifications and capabilities. The facilitators' attendance, the permanent insights of an outsiders, reduces instances of bad portfolio management and contributes to prudent lending. However, the facilitators need continuous training in order to stay ahead of developments so that they can earn respect.

5.3 Handling Banks (Bank Pelaksana)

Supposedly, the RF promoter overestimated the banks' capacity, qualification and commitment. Bank officers were not sufficiently prepared for their task.

The Deputy Minister of SMOCSME, Mr. Deswandhy, named Handling Banks as the "crucial" factor in the program. According to his opinion, there is no Government agency that would better qualify to train, supervise, consult, report and evaluate if it concerns MFIs. "Bank officers have to be active" was a statement by a Handling Bank Headquarters staff, "but they are passive because the character of disbursement resembles channeling."


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The Team found that the banks have not done their duty, for which they receive Rp 14 billion annually according to contract. And they did not appropriately inform the promoter about problems encountered. Their performance is poor, if not appalling. They failed to be the scheme's backbone.

The Technical Guideline lists 11 tasks for the bank. The contract between SMOCSME and BRI or BNI reveals [14] tasks, which are assessed in the following:

5 tasks concerning fund transfer (3) and RF accounting (2)

2 tasks concerning training and guidance

2 tasks concern monitoring and supervision

5 tasks concerning reporting and evaluation

5.3.1 Handling MFI accounts [1-3] The Team observed different handling MFI bank accounts. Some banks issued clear instructions only after some branches booked the funds on the wrong side of the balance sheet, others did not. Some regard the RF as a loan to the MFIs because the cooperation agreement between banks and MFIs mentions "interest" and "repayment". From a bank auditor's point of view, the handling of MFI accounts is questionable. For example, some MFI accounts were kept as private accounts of the manager instead on behalf of the MFI. At least, although the MFI's manager is the account holder, only two persons together could withdraw money. Banks withdraw money, the quarterly fee, from MFI accounts without having a properly signed order from the account holder etc. It seems not to make sense that banks discuss and handle this differently and that they can neither provide the WGs or the MFIs with related reliable information. In several places, this problem needs urgent attention in order to secure the appropriate handling of the "liquidity reserve" at the end of the year.

The models differ very much, e.g.:

in Purwakarta and Jakarta, the MFIs paid the facilitator not from the 2% interest/fee but they collect the money (e.g. through the bank);

in Lombok, the MFIs pay Rp 4 (2) million to the bank and receive a receipt. Only after all MFIs have paid the quarterly interest/fee, the bank allocates the 2.5% to the MFIs' liquidity reserve accounts and 0.5% to an account kept by the WG. From this account the WG pays the facilitator's honorarium, auditors, and consultancy and guidance ("pembinaan").

The problem of safe and secure as well as transparent accounting is not a crucial one for the scheme at present. However, it is concerning that many MFI managers could not explain to which accounts the quarterly Rp 4 (2) million is credited. Unnecessary frictions with auditors and MFI members could be a consequence.

Anyway, keeping accounts is a normal task of banks. The banks' reward is that they can earn money with re-lending the deposits. They could earn about Rp 4,000,00018 per district annually. It is not an activity for which the banks deserve a special handling fee.

18 Assuming a 4% margin on average Rp 50 million on "liquidity accounts" and on average bank account balance amounting to Rp 50 million (5% of RF) for all participating MFI in one district


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5.3.2 Other Financial Services [4, 5] The banks' other two tasks concerning financial service are:

assisting (the WG) to collect interest/fee, the 4% quarterly payment, from which the banks receive 1%; seen apart from that it is in the banks' own interest to collect the money, they promise to only "assist"; no instance has been found that required the bank to assist

assisting (the WG) to collect the RF from MFIs with bad performance; no such instance has been found.

5.3.3 Tasks concerning training and guidance [6, 7] Training for MFIs [6]: In their contracts, banks promised to provide education and training measures, including on-the-job training, for one representative of each MFI for one week, latest one month after RF disbursement (here assumed to be the disbursement from banks to MFIs). None of the banks kept the promise. For example:

Participants in one District presented invitation letters for three days training but they stated unanimously that, after signing the absentee list, they "agreed to compact the training to one day".

Another bank innovatively split the training for managers and bookkeepers of MFIs thus training two persons instead of only one in each MFI; however, both training measures lasted each only one day until noon.

One bank branch admitted that they did "not yet" train the MFI representatives.

Banks justified this with

having not received training material

the MFIs being selected among others because they received already training before through the department of cooperatives (OCSME) and that they were already well-trained in bookkeeping

being busy with recovery of bad loans due to the financial crisis. The banks could, for example, have trained the MFIs on how to prepare the monthly performance evaluation. However, at the time the "training" took place, mostly in January 2001, the instruction with its explanations, sent from SMOCSME to the Handling Banks on January 12, had not yet arrived at branch level. The Team considered the banks' reasons to be weak. SMOCSME expected that banks would, of course, have training modules and training programs available because, supposedly, they routinely train their own new staff members.

Guidance [7]: Contracts with banks differ in this point. The implementation in the field does not. Most bank branches do not fulfill their contracts. Following the Technical Guide, banks have to advice MFIs on technical issues regarding MFI management at least twice monthly for three consecutive months after RF disbursement. The SMOCSME - BNI contract promises in addition consultation once monthly afterwards. According to the contract with Pokja Bantul and the BPD Bantul branch, MFIs receive bank advice twice monthly - unlimited.

The banks do not perform. The Team found that very few bank officers visit MFIs for guidance and consultancy, let alone regularly, nor were MFIs periodically invited. "We go there, if there is a problem." Bank officers do not understand that they


31

should visit MFIs so that no problem arises. The MFI's visitor books and reports from MFI personnel and facilitators reveal that bank personnel went to MFIs on average twice during the past six months. Some entered the MFI office "for only 5 minutes". They just asked for figures and reports. Therefore, it was no wonder that the Team met bank officers handling RF affairs since the program's inception, who simply did not know the location of the MFIs with which they concluded a contract that earns them Rp 2 million or Rp 4 million a year without any risk.

It was especially disheartening to hear that bank representatives did never join meetings of an association of RF recipients to which they were invited. This demonstrates disrespect. The banks' reporting delivers sufficient evidence for the inattentive attitude. The Team learned that some few bank officers pay more attention to the MFIs. They visit the MFIs but their activity is limited to collecting data and to reminding paying the quarterly interest/fee. It is not clear if more frequent visits may be a result of an "envelop" which one of these MFIs offered also to one of the Team members.

5.3.4 Monitoring and supervision [8, 9] According to the Technical Guide, banks have to monitor and supervise the utilization of the RF at least once monthly. Again, the Technical Guide does not specify how this task has to be performed. The bank might discharge this duty with a look at the

MFI's report. It is not clear whether this deserves an extra visit or whether this can be combined with guidance. Anyway, field visits of bank staff are rare exceptions and not the rule. Banks perform in-house desk calculations with the data available. The facilitator is "employed" to collect data or to remind MFIs to deliver the required figures to the bank.

The banks have to appraise the MFIs' fitness or "health"19 based on a guideline almost identical with the one by which BI, the central bank, measures Rural Banks (BPR). The contract does not indicate when and how often banks have to appraise the institution's fitness. The MFI fitness evaluation together with the RF performance evaluation decide on whether the MFI has to return the RF. Therefore, the calculation is due latest after three years. The Team has not seen the banks calculating the fitness of one of the MFI's.

19 The fitness or health of the institution is established based on the Decree Kpts 194/KEP/M/XI/1998

The contracts with banks do not state whether the bank officer has to perform his task at the MFI's office or whether banks fulfill their obligation by just calling the MFIs and ask them to take their books along as has been reported in one of the Districts visited. The normal perception, however, would be that the bank officer visits the MFI. Books and vouchers should not unnecessarily be moved from their place.

In fact, for banks, these visits are expensive and they are probably the main justification for earning every month more than Rp 1 billion nationwide. It should be kept in mind that this money is part of the income of MFI members, people from the lower income level, whose right to receive something in return should not be dismissed just because they would not claim it. Visits, in particular supervision visits, are extremely important. They make it difficult for the MFI manager to disregard lending rules. He has a strong argument to resist, if others want a "favour" from him. The supervisor strengthens management and staff morally merely with his periodic appearance.


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After 3 years….. RF Performance - Kinerja RF

Kesehatan Fitness

baik sekali, baik, very good, good

cukup baik, kurang baik sufficient good, less good

tidak baik not good

kurang, tidak less, not fit

harus kembalikan RF RF has to be returned

harus kembalikan RF RF has to be returned20

sehat, cukup fit, sufficient fit

RF dihibahkan (?) RF donated to MFI (?)

harus kembalikan RF RF has to be returned

5.3.5 Reporting and evaluation [10 - 14] The contracts between SMOCSME and Handling Banks differ in several points from the contracts between WGs and local bank branch in charge.

Four of the following five tasks don't have any deadline. In some cases a reporting deadline is part of the contract between the WG and the bank branch, e.g., 10th each month.

The banks have to report to SMOCSME the disbursement of the RF to the MFIs latest after two weeks. More than six months after the transfer from state accounts to MFIs, the reports at SMOCSME are not yet complete.

The banks sent quarterly reports to SMOCSME but the reporting format was not according to the guidelines, they were incomplete. The banks were asked to submit the requested figures. Therefore, few complete reports are available covering the first quarter 2001.

Figure 11: Bank Reports (based on contract SMOCSME - BNI Headquarters)

No Type of report Recipient Frequency

[10] RF disbursement SMOCSME two weeks after disbursement

[11] MFI development based on RF management

SMOCSME,

Provincial Government,

District Government

quarterly and annually

[12] Monitoring and supervision Provincial Government/WG ? (no frequency, no deadline)

[13] Evaluation of selected (?) ("terpilih") MFI and suggestions/recommendations for continuation or return of RF

WG, copy to Provincial WG quarterly and annually

[14] (a copy of ) the agreement, the Technical Guide, and other documents

Bank branch in charge for further follow-up and implementation

? (no deadline)

20 It is to be questioned whether an MFI in really bad shape can still return the RF.


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The Team found several bank branches that could not provide a copy of the Technical Guide, the contract with the WG or forms for reporting. Some banks developed their own reporting format; some reported according to formats provided by the WG. Banks were common in their complaint that the MFIs did not forward their figures.

According to the Technical Guide, neither MFIs nor facilitators send reports to the bank. Bank officers have to pick up the data at the MFI offices. This has a good reason. Bank officers have the opportunity to train MFIs the preparation of proper reports. Once the MFIs have learned to do this, the bank has less work. Therefore, it should be in the bank's interest to train MFI people. Obviously, this social engineering to establish mutual beneficial cooperation between banks and MFIs is not yet understood.

Figure 12: Bank Reporting Requirements: Contract WG Bantul - BPD Bantul branch

No Type of report Recipient Frequency

1 RF disbursement SMOCSME one week after transfer from KPKN

2 Monitoring and supervision of the utilization of the RF

WG twice monthly

3 Evaluation/appraisal and scoring fitness/health of the MFI

? ?

4 Development of the MFI operation regarding the RF: - short evaluation - performance assessment - problems encountered - recommendation and action to solve the problems - MFI development based on RF

WG quarterly and annually

Learning about Savings and Loan Cooperatives may be the reason why Handling Banks should appraise these MFIs according to the Decree that apply for cooperatives (Menegkop dan PKM 194/KEP/M/XI/1998). The department of cooperatives has many staff members who qualified as appraisor after a two-week training. The first appraisal can be quite time consuming and last up to more than half a day. Approximately one third of the formal MFIs (KSP, USP Kop) underwent already this appraisal. Once the technique is understood, forms are prepared, and figures are available after closing the books end of the month, this exercise may take less than one hour in MFIs with few arrears. It is possible that even MFI staff can learn to appraise their institution21.

21 Based on experience with NGO-staff and BPR-staff, even High School graduates can learn to calculate the fitness of a financial institution within 3 to 4 days. However, it is hard to learn this in 3 to 4 consecutive days. Step-by-step training and application is recommended.


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Overall, rules on reporting are quite confusing if one follows the Technical Guide and the various contracts that differ slightly from district to district.

Monthly reports are

RF development (21 columns)

RF performance assessment or evaluation ("5 successes") with judgement (e.g. "very good, good" etc.) [Kepmeneg Kop dan UKM No.03/Kep/Meneg/I/2001 tgl. 16 Januari 2001]

The quarterly and annual reports reveal the same data:

RF performance assessment or evaluation ("5 successes") with recommendation replacing judgement (e.g. "to be continued" etc.)

5.3.6 Reasons for Underperformance Some questions have to be raised regarding the underperformance of banks.

The first question concerns the qualification of bank staff to do the job. Normally bank people are not trained to advice other financial institutions. They may not be familiar with the simple bookkeeping procedures and simple credit contracts. They are used to computerized recording and evaluation systems. They learned to assess non-financial enterprises based on 5 C (character, condition, collateral, capital, capacity) but not how to assess financial institutions based on CAMEL (capital, assets, management, earnings, liquidity).

The second question is, whether the bank staff is ready to leave air conditioned offices and visit MFIs. It is the question of willingness and commitment to assist low-income strata of the population.

The third question relates to the sharing of work load or bank internal organisation. Several bank officers could not fulfill all their other duties if they would allocate the necessary time for this program. They are just additionally burdened with this program. New employment did not take place although this program finances the equivalent of about 200 full-time working places in banks.

The fourth question concerns incentives. Bank staff will not earn more, if the MFIs are successful, or earn less, if MFIs fail. Good performance of MFIs is not a target of the bank staff. The employer will in no way held the bank officer responsible for any problems related to MFIs.

Finally, it is also a question of repeated experience in the past. Probably, nobody is really interested in what will happen to government funds and loans. One of the responding MFI received a Rp 50 million revolving fund loan (LEPMM) two years ago and complained that nobody is monitoring the development. Based on this experience nobody would be surprised that the banks do not really adhere to the provisions in the contracts.

5.3.7 Handling Fee The 4% p.a. handling fee was discussed with several bank representatives. One state bank mentioned that in most districts the fee covers costs and that the bank would "act as agent of development" in few other districts. Another state bank


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claimed that the orientation has shifted to profitability. A profit gained from handling the RF was admitted but regarded completely insufficient and one bank proposed to lift the fee by 50% to become 6%. "From business point of view we make a loss," said one bank director although he failed to explain. Especially the last statement is completely unbelievable. Most probably, a proper cost calculation has never been made.

No bank among those interviewed has employed additional personnel to handle the RF. The task was just added to the "normal" duties. Therefore, the Handling Banks did not occur substantial additional expenses.

To answer the question whether the 4% p.a fee is justified and sufficient one might compare it with margins earned on two popular credit schemes:

the 2%-3% p.a. fee earned as channeling bank on the KPKM scheme (credit for micro and small entrepreneurs), loan size up to Rp 30 million

the 5% p.a. margin banks earn from the KKPA scheme, a credit program in which banks take over the entire risk of credit repayment, loan size up to Rp 50 million.

The Team tried to find out how profitable the supervision, reporting etc. on about 12 MFIs for a bank could be, provided the institution fulfills its contract. Under normal conditions, those the team found in the field, banks will have an on-top profit margin exceeding 50%.

A calculation would start with the branch income from the RF. The annual fee from eight formal MFIs (cooperatives) and 4 informal MFIs amounts to Rp 40 million. This allows the bank to employ one full-time person (Rp 800,000 per month or about Rp 12 million a year concerning miscellaneous costs and benefits), finance a motorcycle and its operation (annually Rp 2 million depreciation, 20% p.a. or Rp 2 million interest "lost" on investment and Rp 2.4 million operation and maintenance), as well as finance the use of an old computer, electricity, desk, paper etc (Rp 3.6 million). Total expenditures amount to Rp 22 million per year. This person can spend nearly two full days every month in each MFI to supervise, advise and prepare the monthly reports. Still, the branch would earn a Rp 18 million surplus annually from its involvement in the RF.

Banks receive not only the quarterly fee. They also profit from the compulsory "liquidity reserve" ("blocked savings"), which the MFIs have to keep with the bank, and from funds temporarily not used for lending to members but deposited on savings accounts.

If bank officers do their job properly, one can expect that over time most MFIs will be able to carry out the reporting and evaluation of their

Income per year: 4% x Rp 1,000,000,000 Rp 40,000,000 Costs per year: Personnel - jumior staff: 12 x Rp 800,000 Rp 9,600,000 - THR, benefits, health etc. Rp 2,400,000 Motor cycle, (investment Rp 10,000,000) - depreciation: 20% p.a. Rp 2,000,000 - interest: 20% on investment Rp 2,000,000 - operation: 12 months x Rp 200,000 Rp 2,400,000 Stationary etc.: 12 x Rp 200,000 Rp 2,400,000 Additional office overheads use of desk, (old) computer, etc. Rp 1,200,000 Total costs Rp 22,000,000 Surplus Rp 18,000,000 in % of costs 82%


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performance themselves. The number and length of visits can be reduced, a "win (MFI: experience) - win more (banks: time = profit)" situation. At present, banks save efforts and the danger looms, that the MFIs' performance deteriorates with the result that, in future, the fee the banks earn is reduced (MFIs collapse). On the long term this is a "loose all (MFI: bankrupt) - loose (bank: no fee)" situation.

Only few banks see opportunities, the future clients: the MFIs themselves and individual borrowers who need more money than the MFIs can or are allowed to lend. The bank has direct access to previous loan records, the applicant's entire loan history. From macro-economic development point of view this has many positive implications. One effect is that the MFI is losing big clients (for MFIs, these are high risk clients!) and has now again funds available to finance more small entrepreneurs. However, the Team heard from banks also that "we don't like to support potential competitors."

Most concerning and worrying however is, that many of the presumably well educated bank officers dare to manipulate figures. They have not the courage to contact others to confirm problems with the form so that finally the promoter receives the message that something might be wrong with the forms or explanations. Probably, they simply do not dare to admit to their superiors that they cannot handle the form. Those, who actually do, create a difficult situation for their superiors.

5.4 The MFIs

All MFIs visited gave the impression that they are very enthusiastic and that they take RF lending very serious. This attitude is also underlined by the decision that the members should not receive loans before the Hari Raya Idul Fitri festivities in order to prevent consumptive spending.

Three types of MFIs received the RF:

Savings and Loan Cooperatives (KSP: Koperasi Simpan Pinjam) with financial activities as the only activity (meanwhile some of these KSP expanded their activities to other businesses), several hundred or even thousand members

Autonomous Savings and Loans Units of cooperatives (USP-Kop: Usaha Simpan Pinjam Koperasi), divisions of multi-purpose cooperatives with separate bookkeeping and profit and loss statement

already registered but not yet incorporated Savings and Credit Groups (LKM: Lembaga Keuangan Mikro), or SHGs, small community-rooted self-help organizations with typically far less than 100 members

The amount of money they handle and the degree of bureaucracy and professionalism are the main differences between these participants. Cooperatives are more professional and bookkeeping procedures are more advanced because they frequently received training. The different treatment, offering cooperatives a Rp 100 million share of the RF compared to Rp 50 million for small MFIs, does not reflect the difference in assets. In fact, many of the participating small MFIs had assets of less than Rp 10 million before receiving the RF.

5.4.1 Financial Activities MFIs are not a preferred place to save. Savings at cooperatives are rather an investment that will be liquidated once one decides to leave the cooperative. It is not


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uncommon that cooperatives want the loans to be backed up with 10% to 20% blocked savings. The team visited a cooperative demanding even a 50% deposit/loan (1 deposit : 2 loans) coverage but admitted that it is not so easy anymore to find new members as competitors offer a 1 (savings) : 3 (loan) ratio. Therefore, the main purpose to save with a cooperative is to obtain a loan. And the main reason people join a savings and loan cooperative is the intention to apply for a loan. They remain in the cooperative after loan repayment in order to preserve easy and fast access to loans, a kind of insurance against insurmountable sudden cash requirements.

By and large the Team got the impression that most MFIs tried to extend loans to micro entrepreneurs who would not qualify for a bank loan. The majority of MFI members would not have access to a bank loan because their credit repayment capacity would only allow them to take up a small loan of not more than Rp 1 million.

The Technical Guide for the RF states explicitly that loans from the RF should be offered at conditions that the MFIs normally apply to their members. About one third of the MFIs did not exactly follow this rule and introduced softer, albeit not very soft, conditions:

lower interest rates: e.g., 2.5% flat instead of 3% flat

but also higher interest rates: interest increase from 10% for 6 months (about 1.7% p.m.) to 3% per month "to increase the MFI's income"

higher loan amounts: before maximum loan amount Rp 500,000, now Rp 1 million, a development common in SHGs

longer repayment periods: before: 20 weeks, now 10 - 12 months

some cooperatives shifted all their small (up to Rp 1 million) loans to the RF account

less stringent conditions regarding collateral, some justified this with the lower loan amounts

no compulsory savings as collateral

The following were additional observations:

Some MFIs extend very small loans, Rp 100,000 to Rp 200,000, without collateral to people without a business. Sometimes the applicant applies for the loan with the intention to start business. The MFIs consider the risk acceptable and predictable.

Although it is not uncommon to find loan amounts below Rp 1 million, the maximum according to the scheme. The Team found also some few cases with loan amounts exceeding this limit.

Nearly all borrowers know whether their credit originates from the RF or from members' savings. Nevertheless, the MFIs reported unanimously that the repayment rate of the RF loans does not differ or is even better if compared with loans from members' funds. One MFI could even prove this statement with figures.

KUD Tri Upayo, in Bantul /Yogya-karta, has 7,473 members and received the RF. However, before receiving the RF, assets of its Savings and Credit Unit amoun-ted to just Rp 44 million. The high number of members results from the number of people settling their electricity bills with the cooperative as collector for the electricity company. They are, automatically, members.


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Not all MFIs have concluded formal loan contracts (and none was found using duty stamps) with their members. Some signed credit contracts but not all forms disclosed the most important details like repayment schedule or due date.

It is not uncommon that MFIs demand collateral for loans of Rp 1 million, e.g., a (substitute of a) land certificate22 or a motor vehicle ownership book and a life insurance coverage. Smaller loans are secured with a television set, other electrical appliances or furniture. Collateral itself does not guarantee loan repayment but it prevents that the collateral is used to access another credit with another credit provider.

5.4.2 Monitoring Loan Repayment Monitoring loan repayment is desk work. The selected MFIs achieve a quite satisfying bookkeeping standard.

The MFIs apply two methods for loan repayment:

The client pays installments at the MFI's office. Many offices open on 6 days a week. Field visits ("supervision") take only place when serious payment problems are obvious, e.g., installments were not paid for two consecutive months. Like most banks, the MFIs do not undertake actions to prevent problems; they are just reacting when it is often already too late for recovery measures.

The MFIs employ field officers or collectors who pick up the installment at the debtors' premises. This allows having a more or less thorough look at the enterprise, to "supervise."

Most MFIs don't have written rules or procedures to follow, if a loan is not repaid on time. The Team found that the entire repayment morale of many MFI members suffers if several of them have acceptable reasons (force majeure) to not repay. Other members regard this as an opportunity to join halting repayments. No transparent mechanism or procedure exists allowing loan repayment delay or even write-off.

Several MFIs claimed that they have not yet seen the form that has been developed for monitoring RF loan repayment. Other respondents mentioned that they do not really understand it. In fact, the form with its 21 columns was not part of any training so far. Several MFIs developed similar tables.

No MFI has been found that could readily provide the amount of principal arrears, a figure that is included in the aforementioned table. They do not know the percentage of their portfolio at risk. The individual repayment records informed about transactions but the difference of installments according to contract and the actual repayments is not calculated. Without this figure it is not possible to compute the RF performance.

Monitoring of RF borrowers does not include whether the debtor would have qualified for a bank loan. Loans from the RF program are not prohibited for people who obtained already a loan otherwise. Those MFI members who handed in their 22 Not the land itself is the collateral. For the borrower, it would just be more expensive to obtain a new land certificate than to repay the loan. Other loans are secured with the electricity bill payment. Any payment from the member is used as loan instalment first. The electricity bill cannot be settled unless sufficient money remains. If the electricity bill is not settled, the Electricity Company will cut electricity connection. Sanctions for not paying a loan come from the Electricity Company.


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motorcycle ownership certificate may have used their land certificate for another loan. It was frankly stated that government employees were among the borrowers and it is well known that they could easily obtain a bank loan - unless they just received one. But these instances don't seem to be the rule. There are several rational reasons why people prefer the convenience of a small and quick neighbourhood loan although interest rates are often higher than those for bank loans.

5.4.3 Administration and Bookkeeping Issues Proper administration was one of the criteria to select MFIs. Cash books, debtor registers and loan accounts as well as other records kept on MFI level differed in their appearance but could easily be understood and allowed cross checks.

The provision to keep the RF administration separate from other savings and credit activities received very mixed response. Small MFIs even stopped activities with own funds, others just recorded the fund in a different book using the same forms but with a different color, and in some cases, after consulting with an auditor an entire parallel bookkeeping system including monthly profit and loss statement was established. Only one MFI was identified that did not keep separate records for the RF and for own funds.

Some cooperatives use the RF exclusively to substitute small loans up to Rp 1 million that were financed from own funds before. Thus, more money remains to extend more and/or larger loans to members with demand for loans exceeding Rp 1 million. One cooperative had lower interest rates for the small loans up to Rp. 1 million, a social concern and in line with the interest policies of the official pawnshops. In several instances the RF loans were given in addition to loans that have already been extended from the cooperative's own funds.

Several cooperatives estimate requirements for "risk" reserves, including the risk of non-performing loans. Most of them allocate a percentage of the surplus to reserves; however, there is not always a relationship between the portfolio quality and the amount of reserves. Contrarily, those MFIs with a high profit (and presumably high loan portfolio quality) allocate more to reserves. Many non-incorporated MFIs, the SHGs, do not retain reserves for bad debt in whatsoever form.

Bank accounts complicate MFI bookkeeping. Less than half of the visited MFI kept already a savings account before. In nearly all instances the account happened to be with another bank. Lack of clear instructions resulted in that bank personnel had different opinions on how to book the fund and in particular how to handle the Rp 4 million quarterly payments. Some of the participating MFIs claimed that their savings books are kept with the Handling Bank and that bookings (transfers and deductions) by banks were still unclear to them. Many of those newly connected to banks did not go with the savings passbook to the bank to ask for updating account transactions. According to the Technical Guide, interest earned on the "liquidity reserve" account belongs to the MFIs. However, a respective clausula is not part of the contract between the District WG and MFIs.

5.4.4 MFI Organizations In many districts the RF receiving MFIs founded already associations, for example in Metro and Paguyuban in Bantul and Sidoarjo. Some associations were initiated by OCSME (Mataram, Lombok Barat). They constitute a forum to discuss and solve joint problems. One of the topics is the allocation and utilization of the 2% fee for facilitator, auditor and guidance/consultancy.


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5.5 Auditors

Already at present, independent auditors visit many incorporated cooperatives once a year, in particular multi-purpose village cooperatives (Koperasi Unit Desa, KUD). KJA, an auditor cooperative with offices all over the archipelago and specialized on auditing cooperatives, is not anymore a strange term.

However, expenses for auditors still hurt management and members. Many would prefer disbursing the amount as profit. Managers of the Autonomous Savings and Credit Divisions (USP) of KUDs questioned how they could avoid the extra costs of an audit because, up to now, there was no separate bill for the USP. The KUD management settled the cost of the audit. The question was posed if the audit had to cover the RF only or the entire operation of the MFIs.

Many MFIs have not yet concluded the discussion of this issue. In other districts the Provincial WG negotiated the payments together with the auditors for all MFIs in the Province. By concluding contracts for many units it is possible to negotiate lower fees. In several districts auditors, in particular KJA, approached already OCSME or MFIs.

Auditors quote charges from Rp 400.000 to Rp 1 million plus costs for travel and accommodation. In most instances this fee is in line with the budget available. There are probably some cases (SHGs in remote areas) where the budget available may not be sufficient.

Figure 13: Allocation of Costs for Auditors and Facilitators

KSP/USP-Kop

formal MFI

SHG

informal MFI

Budget (2% of RF) Rp 2,000,000 Rp 1,000,000

Expenses:

- Audit Rp 1,000,000 Rp 500,000

- Transport, accomodation Rp 50,000 Rp 150,000

- Facilitator, per year Rp 500,000 Rp 250,000

- Facilitator, transport Rp 60,000 Rp 120,000

Total Rp 1,610,000 Rp 1,020,000

Amount left for guidance Rp 390,000 minus


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6 PROGRAM MEASUREMENTS

The SMOCSME developed the following seven yardsticks to measure achievement and success of the RF. The measurements are realistic and well-founded. However, some actions should be undertaken to ensure that the success of the program could be presented in an unflawed and unbiased way.

1. 350,000 micro entrepreneurs participate in the RF It is assumed that more than 90% of the RF has been disbursed. About 5% of the amount have been invested (fixed assets of MFIs, e.g. rehabilitation of premises, purchase of equipment) and about 5% are kept as liquidity reserve. Therefore, about 80% of the amount available have been disbursed initially. The average loan amount is smaller than Rp 1 million, the maximum allowed. Assuming that the average loan amount is Rp 800,000 to Rp 900.000, the number of MFI members receiving a loan from the RF is about 310,000 to 320,000. Many MFIs report that loan repayments were used to extend loans to more people (revolving) so that by the end of June definitely already more than 350,000 micro entrepreneurs received an RF loan.

2. Coverage: 341 districts and 26 provinces It is known that the fund has not yet been disbursed in several remote districts. The number is small so that it is quite safe to say that at least 90%, most probably more than 95%, of the districts received the RF. All provinces participated.

3. Selection and disbursement within 3 months The program succeeded in selecting the participants (MFI) and transferring the amount to their accounts within about 2 months.

4. Non-performing loans < 20% It is not clear whether the percentage is measured against portfolio (outstanding) or against loan disbursement. At present, the number of non-performing loans, i.e., those with 3 monthly installments in arrears, is probably much smaller than 5% of the portfolio. The number of non-performing loans will inevitably increase (accumulate) unless they are written off23. The MFIs do not have a write-off procedure. If the calculation is not asset- or portfolio-based but disbursement-based (number or amount of npl-loans against number or amount of loans disbursed, including revolving loans) the target is not ambitious and could easily be achieved. The achievement is also a function of guidance, monitoring, and supervision efforts.

5. More than 60% are successful after three years Provided the level of guidance and facilitation will reach at least 50% of what it should be based on the contracts, the Team does not doubt that more than 70% of the MFIs are successful after three years and qualify to continue using the RF. If 23 Performing loans come (are disbursed and recorded as assets) and go (they are repaid and disappear as assets), bad loans, however, accumulate. If the portfolio expands fast, the bad loan ratio can decrease although the amount of bad loans increases. If the portfolio shrinks the ratio of bad loans will increase even if bad loans can be recovered.


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banks continue not being interested to assist and supervise the RF recipients, it will be a serious challenge to achieve the 60% target.

6. After the end of the program, Handling Banks consider more than 60% of the MFIs to be bankable

"We are not interested to lend to an institution that is re-lending. They are our competitors." This statement does not reflect the general picture. However, it shows that efforts are still required to convince banks that lending to MFIs is a profitable proposition. The MFIs nourish the small borrowers until they are big enough. By then, they have already a proven credit history, the most valuable collateral. The Handling Banks can pick the raisins.

Another statement was: "At least 10% of the selected MFIs have already received a loan." This can be confirmed. Banks offered loans to MFIs who did not yet respond to this offer, and several more are already now bankable. The Team found several MFIs that did not accept a bank loan because of a "too high (18%-20%) interest rate." After lengthy discussions it was discovered that the MFI management was not exactly aware of the difference between "flat" and "declining" interest and that a bank loan could increase the MFI's profit. The management did not accept the loan also for another reason. The bank wanted land certificates as collateral, either from the MFI's management, members or both.

It can hardly be understood that banks are paid for studying the management and operation of a potential client (MFI) for three years and they do not take up this opportunity. MFIs offer the banks a track record and proper, transparent bookkeeping. There is almost no other SME offering similar details on assets, debt and profits. A widely acknowledged scoring system that is also applied by BI for BPRs allows to objectively indicate the risk of a loan to MFIs.

However, the 60%-target cannot be achieved without discussions involving the banks, BI, and the cooperatives. Few bank officers are able to appraise loan applications of MFIs based on CAMEL, and not on 5C. Without Bank Indonesia reviewing rules on collateral requirements, e.g., allowing credit insurance cover to be deductible from loan reserve requirements, banks will extend loans to MFI managers, but not to MFIs.

The RF program will not be successful if banks employ staff from outside, their "own facilitators". It is the permanent bank staff, and not people temporarly employed, who shall learn and understand themselves how to appraise loan applications from MFIs.

7. Performance measured by the indicators: loan disbursement, utilization, repayment, increase of income and development of the business

Without doubt, the performance of the individual MFI can be measured already now. Several severe obstacles have, however, to be removed first: development of a proper guideline for performance assessment and socializing on all levels, including MFIs. The performance of many MFIs is already rather high and improvements may not sufficiently reflect the strengthening process.

The program's aim, "Strengthening MFIs", is not part of the measurement. Not all relevant figures are consequently collected. The Team confirms that a remarkable strengthening of nearly all RF participants took place, e.g., with regard to:

membership: revolving the RF still attracts new members

human resources development, most of all for MFI management


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assets, based on the availability of the RF and subsequent profits

income, from fee and interest gained

profit, from income exceeding additional costs and expenses

community development: . through a share of profits cooperatives allocate to village development and . through the formation of associations, part of the country's infrastructure

The RF program has not only a positive impact on the borrowers home economy and welfare. Other positive side effects are the generation or persistence of about 200 working places in banks. More than 300 facilitators found employment. It is estimated that about 2,000 new working places were created in MFIs.

The number of working places generated by the borrowers, micro entrepreneurs, increases from day to day. If only one out of five enterprises employs one person it won't be long that more than 100,000 working places have been created. The MFIs together with their members maintaining the RF continue contributing to the generation of new working places.


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7 PNM, AN ALTERNATIVE INSTITUTIONAL SET-UP

Since 1999, PT Permodalan Nasional Madani (PNM) is the Government agency for credit programs.

The RF program in its present form is regarded not suitable for execution through PNM. Reasons are:

The program is not a genuine credit program.

PNM has not the infrastructure on district level.

PNM could cooperate with district level agencies. However, it would not be a local program and miss "sense of ownership" and responsibility.

Banks are channeling funds and not executing, e.g., they are not responsible for repayments.

For several reasons, it was a committee and not the banks alone choosing the MFIs. They are not (yet) the banks' clients.

PNM has only the capacity to control banks in a very small number of districts

The program incorporates a very strong community development component for which PNM has neither the competence nor the expertise.

The program is implemented all over the country with contracts on district level. PNM has only 5 offices.

Some of the arguments are disputable. However, it is very much doubted, whether the performance of the program would be better, if it would have been PNM's task in October last year to launch this or a similar program. The weaknesses that have been identified are not those particularly typical for Government agencies.

It remains an assumption that banks would have been more responsive to an agency like PNM. PNM has at least a bait, participation in future credit program, that SMOCSME does not have.


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8 RECOMMENDATIONS

After more than six months experience with the RF it is possible to identify weak spots and to submit proposals to remedy the situation. The fundamental rules on reward and punishment, and control and supervision, should not only apply for MFIs but also to other stakeholders, in particular banks. It is proposed that the basic concept of strengthening small financial institutions should be complemented with founding MFI associations on district level. In several districts RF recipients cooperate already.

In the following, several suggestions for intervention are presented. Most of these proposals could be implemented independent from one another. One of the most significant proposals, namely a Guide Book on the RF, is urgently required and would be rather incomplete if it would not incorporate the other proposals submitted here - provided the program promoters accept them.

8.1 Recommendations for SMOCSME

8.1.1 Guide Book Nearly 4,000 MFIs received the RF. Maybe around 20,000 persons are in the management and administration of the RF directly involved. If only half of them would have only one question that is not answered in the Technical Guide, the program would have created 10,000 times confusion and friction. It is recommended that SMOCSME should develop a "Guide Book to the RF" in which rules, problems and solutions, questions and answers around the RF are presented. The Guide Book should not only respond to recommendations in this chapter but also to those in the following chapters on facilitators, banks, and MFIs.

This book should make the implementers sensitive with regard to the background of the RF and its intentions.

The book should present the vision, the ideas and the reason for the program and its particular features. MFIs are not just extending loans, they share in a mission. They should be informed.

The Guide Book should identify those rules that are not allowed to be changed or locally adjusted (without consent from SMOCSME) in contrast to other rules that can or even should be adapted to local conditions.

One chapter should cover questions on how MFIs should select the most suitable borrowers. For example, the MFI management would like to know more about rewards for very good performance (score 86-100), SMOCSME's preferred qualification of borrowers. Many would like to extend loans for non-productive purposes (schooling, health), loans for employees planning a business, and loan amounts exceeding Rp 1 million, as it is best practice to reward a reliable debtor with a higher loan for the next credit cycle.

The Guide Book should be concerned with the following bank and bookkeeping related issues that are practiced quite differently:

It is proposed to describe character and handling of the different MFI-RF bank accounts for bank fee/interest, liquidity account, and the audit-


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facilitator-consultancy account more detailed. Questions relate in particular to the legal or ownership status and authority to access for executing transfers. Auditors should prepare a related paper. The proposal shall protect bank staff facing problems with differing opinions of superiors, head office staff, as well as any internal and external auditor. These guidelines should explicitly involve auditors' expertise, on order to prevent other auditors, including state auditors, to question the related MFI bookkeeping procedures. This special bookkeeping guideline should arrive at all Handling Banks branch offices and all MFIs until December 2001 for implementation until end of the year, i.e., before closing the books and before auditors start their work.

The procedure, the documents required, the responsibilities and the timing for the withdrawal or transfer of the "liquidity reserve" needs more detailed clarification. Otherwise banks might not release them. Delays "because the District Head is ill and cannot sign the decree" are not acceptable. There is the danger that MFIs feel forced to pay for the release of their money (similar to the Bank Bali scandal).

Several MFI members have seasonal loan demand and repay the loans after harvest. The MFI management asked about how banks calculate interest/fee and if periodic repayments of the RF would reduce the amount, not the interest rate, to be paid quarterly.

On-time payment of interest/fee is neither rewarded, nor is delayed payment punished. For interest/fee not paid until end of March/June/September/December, MFIs should be charged with an additional fee of 0.1% per day. The money could be added to the fund for consultancy and guidance.

The book should also present suggestions for executing "separate bookkeeping". According to the Technical Guide only the principal ("dana"), but neither income (interest) nor costs (e.g., for stationary, salary, etc.) have to be booked separately. It is recommended that the Guide Book clarifies this issue and recommends attributing income and cost to the separate RF-bookkeeping.

Advice should be given how to handle bookkeeping issues regarding problem loans. It is recommended that MFIs apply a write-off procedure after two years of unsuccessful, documented efforts to collect the outstanding amounts. Special attention should be given to instances of Force Majeure and its documentation.

The Guide Book should respond to all questions regarding ownership and management of the RF after end of 2003. It would not be wrong to disclose the

No rules exist regarding RF-related bookkeeping, in particular not for the "16% interest/fee":

the 4% share for the bank constitute costs: no problem

the 10% allocation for the liquidity fund might

a) either be booked as cost first and, if it is rewarded as an incentive, it will constitute income; problem: auditors question the actual ownership of this amount, because the account is owned by the MFI's and should therefore as asset be included in the balance sheet

b) or be booked as transfer from cash to bank and only if the WG refuses the utilization a cost booking will take place

whether the MFI owns the 2% share for facilitator, audit and consultancy is not clear, because the question cannot be answered what will happen to the remaining amount if expenses for audit, facilitator and consultancy are lower than the 2% in question. No problem exists, If the total is transferred to an association or to an account kept by the WG (as in Mataram) as "cost".


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intentions of SMOCSME and that the final decision will be made by the parliament, Ministry of Finance, or the President (or whatever is true). Following the wording of the contract between Handling Banks and MFIs ("prolongation"), the MFIs will even continue to pay 4% each quarter. Those who read already the Technical Guide and those having been otherwise informed of the RF becoming a grant might be disappointed and endanger the program's success.

The Guide Book shall very much increase the awareness and cooperation of the MFI operators. Every MFI should own two copies of this book. The MFIs shall sign a letter that they received the books. The WGs should send copies of these confirmations of handing over of the books directly to SMOCSME. If required, the MFIs can (co-) finance these books from the "2% consultancy" budget.

8.1.2 Improved Reporting The entire reporting system needs to be reviewed. A reporting schedule (who, what, to whom, when) for the different participants should be developed and represented in the Guide Book.

Figure 14: Reporting institution: Facilitator (sample)

Name of report

Contents No. of form

Recipient(s) Frequency Due date

Monthly report of facilitator

Financial development Member development Date of visits Observations

F-1 F-2 free free

WG Bank MFI Association

monthly 10th

etc.

etc.

Each form that has to be used for the RF development documentation should be presented as follows:

a) as a blank form in original size so that the MFIs can anytime photocopy and use them

b) accompanying explanations for the use of the forms including explanations on "why" and "what for" in order to increase data awareness and data sensibility resulting in higher data quality

c) as a sample, a form filled out with data.

It is recommended that parallel reporting, being actually part of the program, should be (re-) established:

facilitators District WG Province SMOCSME

banks bank headquarters SMOCSME

It is proposed that reporting to SMOCSME should take place quarterly unless banks observe special developments endangering repayment by one third or more members.


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8.1.3 Improve Monitoring and Introduce Evaluation Improved reporting should be the basis for improved monitoring and will result in higher quality of data evaluation.

The Team learned that in due time SMCOSEM will engage a consultant to elaborate proposals for improving monitoring of the RF. The Team backs these efforts and urges immediate implementation and appropriate, thorough training of the bank staff who will handle this task in future. The evaluation should include indicators measuring strengthening of MFIs like development of number of staff, MFI staff training measures, etc. through irregular reporting. Several problems have yet to be considered. For example, the fitness/health assessment needs to have a figure on how much profit the RF activity earned. This requires that the entire costs of the MFI have to be split and allocated to the RF activity and to other activities. The Team has not seen an MFI that did this so far.

In order to obtain meaningful data, a review of the impact evaluation scheme for MFIs and MFI members as well as test trials with forms is an absolute necessity before considering nationwide implementation.

One of Indonesia's assets is its richness in micro finance schemes. The RF adds to this an exciting new product. Every district could allow at least one student to write a thesis on the RF in that district. It is proposed that universities be invited to take part in the computerization and subsequent evaluation of data.

Two hazards are worth being watched:

The program's name "assistance" or "aid" (bantuan) is considered a hazard, because many people may think of a loan that has not really to be repaid.

The MFI members know whether their loan originates from the RF or from own savings. The separation of bookkeeping may make it morally even easier to default on RF financed loans. This is also considered to be a hazard.

So far, no evidence was found indicating a lower loan portfolio quality.

It has many advantages to monitor the impact of micro loans shortly after disbursement in order to avoid that other influences become paramount.24 Loans may have a positive impact far in the future, e.g., children can be sent to High School. However, it is hard to prove that this is the impact of the loan and not of improved infrastructure, for example. The program intends to study the impact through an income increase. These quantitative figures are seldom available, because few micro entrepeneurs keep books. If an entrepreneur repays a loan to the moneylender he will not only increase his net income from reduced interest payments. He will also feel independent, a qualitative benefit. It is ambitious to monitor the impact. It is regarded too ambitious to quantify the benefit.

Therefore, it is recommended to review impact monitoring and limit it to a qualitative self-assessment of the borrower. For example, about three to six months after loan disbursement, latest at final repayment, every borrower has once to answer, whether the loan was beneficial or a burden. This answer should be documented on the credit sheet. The borrower might give his assessment as a score.

24 For more information on impact analysis see Annex 1


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Figure 15: Scoring Realized Benefits versus Expectations before taking up the loan.

much higher than expected 10

higher than expected 9

as high as expected 8

lower than expected 7

Benefit of loan (loan decision was right)

much lower than expected 6

No benefit, no burden 5

some problems to repay 4

difficult to repay, lower standard of living 3

poorer than before, very difficult to repay 2

Burden

(loan was a wrong decision)

much poorer than before 1 The average score should be at least 6. In the framework of the existing system one might introduce the formula: Score x 10 + 20, maximum 100. For example, if the average score is 6.7 (this includes very successful loans but also problem loans) the final score would be 6.7 x 10 + 20 = 67 + 20 = 87.

8.1.4 Documentation "Lending to MFIs" One reason for connecting banks with MFIs through training, consultancy and reporting is that latest after three years banks do not anymore regard MFIs as "strange animals" but as qualified debtors. It is proposed that together with the Handling Banks and BI credit schemes should be developed and documented in a "Lending to MFIs"-manual that allow banks prudent lending to MFIs. MFIs should be regarded as extremely well documented transparent small enterprises. The Handling Bank's loan analysis should allow to consider MFI loans to its members, the most important asset of the MFIs, to be accepted as collateral (cession). The procedures should allow extending loans to MFIs without individual persons, e.g., owners, managers, or members, having to provide their private land as collateral. A credit insurance might be an additional way to overcome the problem of less collateral and collateral-less. This documentation should also build on experience of commercial banks with loans to cooperatives and SHGs (PHBK Linking Banks to SHGs).

8.2 Recommendations Regarding Provincial WG

It is recommended that the Provincial WG should be dissolved.

The Head of the OCSME or the Head of the office responsible for cooperatives should become, or appoint, the coordinator for RF issues in the province.

The tasks should encompass:

supervising the development of the RF program in the province

coordinating with SMOCSME, District WGs, or other agencies regarding socialization and consultation as well as training measures

reporting quarterly to SMOCSME based on reports received from the District OCSME using a reporting format provided by SMOCSME


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offering local academies and universities the opportunity to study the RF development in the particular districts.

8.3 Recommendations Regarding District WGs

District WG should not be abolished, because they have regularly to decide on the RF, either allowing MFIs to revolve the RF within their organisation or ask them to return it. Independent from how the Government has booked the RF disbursement to MFIs (expenses or accounts receivables), legally, the Government is probably still RF owner. The MFIs utilize the RF based on a contract in which the word credit is not used to describe the character of the RF. At least until end of 2003, the District WG will regularly be involved with the management of the RF and the relationship between bank, facilitator and MFIs.

It is recommended that a budget should be made available for specified activities of the WG. It is proposed to assess, whether the amounts for the "liquidity fund" should be transferred to an account kept by the WG requiring two signatures for access (suggested: the RF-responsible person in Government and Handling Bank). The WG would, after receiving the bank's evaluation release the liquidity fund to the MFIs. The interest earned on this account, about Rp 2 to 3 million per year, would be available to finance WG activities. This procedure does not create new dependencies because the MFI depends already now on the WG's recommendation to access the liquidity fund.

In many instances the authority of civil servants is required to recover bad debt. Rules should be put in place with regard to reimbursement of costs in connection with these collecting efforts, because the Government may not be in a position to finance these activities from routine budget.

The OCSME should establish a report monitoring system so that monthly or quarterly overdue reports are immediately detected.

Very often Handling Banks and MFIs could not provide their contracts with the WG and among one another. The WG should be made responsible that all parties who sign an agreement have at least a copy of their contracts. Reason is that without the contract, the parties involved do not know their responsibilities.

It is recommended that the District WG should facilitate founding of an association of the RF participants, to exchange experience and discuss matters of joint interest. including financial problems, e.g., the utilization of the 2% fee allocated to audit, consultancy, and facilitator.

8.4 Recommendations Regarding Facilitators

Most facilitators received a copy of the Bupati's (District Head) decree appointing them as facilitators in the framework of the RF program detailing activities that were mostly copied from the Technical Guide. This was a suitable solution for the implementation phase. However, this is not a proper employment contract. At present, nobody controls the facilitators' day-to-day activities.

It is recommended that the WG facilitate a contract between all participating MFIs and the facilitator. This contract should clearly state the institution responsible for supervising the facilitator. The contract should also give details of the facilitator's duties and compensation:


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Duties Compensation

number of regular visits per month to MFIs

regular activities during visits (one has to pay attention that tasks of facilitators and bank staff do not unnecessarily overlap)

emergency visits to assist with defaulting borrowers

documentation of activities

participation in meetings

coordinating training (contents, schedule, and venue)

participation in training

reporting

honorarium

date and mode of payment

travel expenses

allowance for medical costs

other benefits (THR)

leave

The facilitators should be obliged to enter name and activity in the MFI's visitor book or in a separate book to prove their activities. The facilitators should also keep own records on their activities, which are to be countersigned by MFIs. It is proposed that the District Government offers them a desk and allows the use of a computer for their reports.

The honorarium of the facilitator should reflect his educational background and experience. His income, based on actual days worked, should be at least twice the regional minimum salary. The honorarium, or an additional lumpsum for fuel, should consider necessary costs for transport in order to make sure that also distant MFIs are regularly visited. The facilitator's performance and honorarium should be reviewed once a year. Reason for this proposal is to avoid that the facilitator, if underpaid, will not fulfill his duty properly. There is even the danger that he will resign. Without annual review of the honorarium the facilitator has not very much incentives to do his job properly.

The relationship between facilitator and bank should not result in that the bank charges its task permanently to the facilitator. The tasks of banks and facilitator may overlap. A cooperation is very much recommended provided clear procedures and responsibilities are in place.

In no instance is the facilitator allowed to take a loan from the MFI, unless it can be assured that only one MFI is granting the loan. Otherwise, this is beyond control and results in uncontrollable dependencies. It shows a wrong understanding of the character of a loan. Loans are no favors. The facilitator may ask for a recommendation from the MFI association and apply for a bank loan. This should be easy because the bank keeps the MFI accounts.


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8.5 Recommendations for MFIs

8.5.1 Association It is proposed that the participating MFIs form an association. The following should be the tasks of the association:

The association manages the "2% for consultancy, facilitator, auditor." The amounts should be pooled. This could also avoid bookkeeping problems.

The association negotiates a contract with the facilitator and evaluates the person's performance annually. After consultation with the WG, the association may dismiss the facilitator. A new facilitator has to fulfill the requirements according to the Technical Guide. In case the MFIs need a new facilitator the association will select a candidate in cooperation with the WG. If the MFIs have not selected a new facilitator within two months, they have to accept and finance a facilitator selected by the WG.

The association, assisted by the WG, negotiates and pays for the audits for the MFIs.

The association may spend the remaining amount for monthly (or bi-monthly) meetings at the office of one of the members (venue is changing). This increases the social pressure to perform. The association invites at least one member of the WG for consultancy.

The association should assess the performance of the bank once every six months and if deemed necessary, report to the bank's headquarters and to SMOCSME. After consultation with the WG, the association may ask their members to withhold up to 50% of the bank's fee.

The association as witness should verify if there are acceptable reasons to withhold the disbursement of the liquidity reserve.

The association should assist with advice regarding administration, bookkeeping and budgeting. In particular, problems shall be solved originating from different opinions of facilitator, bank and auditor, if there are.

The principle of solidarity shall be applied. Although contributions from non-cooperative members are lower (2% from Rp 50 million instead from Rp 100 million), they should receive the same service. The same applies for different costs for audits

"2%"

for audit, facilitator, consultancy

District (sample)

8 cooperatives, 2% = 16.000.000

3 SHGs, 2% = 3.000.000

Total 19.000.000

Audit, incl. allowances

8 x Rp 1 million 8.000.000

3 x Rp 700.000 2.100.000

Facilitator, honorarium

Rp 500.000 x 13 6.500.000

Facilitator, transport

Rp 100.000 x 12 1.200.000

Total cost 17.700.000

Available for other activities: 1.300.000

plus interest earned, ca. 300.000

Conclusion:

In 2003, "2%" are not sufficient at an inflation rate of more than 10%. At present, the inflation rate is 13%.


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and transport arising from the distance of some of the MFIs. All MFIs shall share the transport cost for the facilitator.

These associations should be regarded as nuclei of a national MFI association that could be expected to develop after ratification of the Law on MFIs.

8.5.2 Prevention of Fraud, Handling of Arrears and Bad Debt MFI representatives, but also facilitators and bank staff, should exactly now how to identify and how to react on fraud and bad debt, the two most dangerous enemies of MFIs. Based on experience, MFIs fail because of arrears. The two major reasons for arrears are:

a) dishonest management: MFI members, MFI staff, facilitators and bank officers should be aware of this fact and react immediately if there are any suspicious transactions, e.g., "cash loans" (cashbook balance is higher than physical cash, the difference is presented as a "receipt"). Therefore, MFIs should have a rule on maximum cash amounts. It is suspicious if cash amounts are always very high. Facilitators and the bank officers should regularly check physical cash. They should be suspicious if only very few debtors live in a particular remote location, far from routine and surprise control.

In order to prevent borrowing to fictive persons, MFIs should consequently keep a copy of the borrower's identity card, if he is not a member since before 2001. It is recommended that the identity of borrowers living not in the MFI's village should be complemented with a sketch of the location of his house.

b) non-performing loans (NPL). Following are proposals in order that NPLs do not remain undetected and become a problem in the future.

All MFIs should have a proper documentation and use credit contracts (one page) following minimum standards, including clearly stating the date when installments are due (repayment schedule), separately for principal and interest (except for loans with daily repayment), and the final date for repayment. The contract should contain the following clausulae:

fines for late payments. The MFIs have to be made aware that they loose money if they allow delays of principle repayment without fine, in particular if they apply flat interest calculation. This would be an act against the principle of solidarity. The MFI has to decide case by case on fine cancellation based on transparent standards, e.g., the borrower had to be hospitalized.

reserving the Government's and the Handling Bank's right to collect the loan, e.g., in case the MFI collapses.

Arrears should be calculated and presented at the end of each month. Only few MFI use the official report form for the development of the RF (21 column) that requires to state the amount in arrears. The availability of this figure is a prerequisite for calculating the portfolio's quality. The MFIs should introduce individual credit sheets on which all relevant credit data are recorded.


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Figure 16: Credit Sheet (sample)

Date Payment due Paid Overdue (arrears) due Principal Interest Principal Interest Fine Principal Interest

11/06 100,000 30,000 100,000 30,000 0 0 11/07 100,000 30,000 50,000 30,000 50,000 0 11/08 150,000 30,000 0 0 150,000 30,000 11/09 250,000 60,000 250,000 60,000 10,000 0 0 etc. - - - - - - -

Calculation of the portfolio quality should be made much simpler:

arrears, principal or interest, on weekly or monthly installment loans:

- overdue 2 - 3 installments (weeks or months) x 50%

- overdue 4 - 5 installments x 75%

- overdue more than 5 installments x 100%

- loan overdue more than 3 months x 100%

The outstanding loan amount is multiplied with the percentage above and the total of these loans constitutes the amount of "non-performing loans" which is put into relation with the entire loan portfolio.

A rule on maximum loan amount, in particular for the management and his family members, should be introduced.

No loans should be given to facilitator, Government employees and Village Heads as a strict rule. Reasons are: - Government employees have and use regularly other sources of credit - The MFI may get into conflict: it cannot reject a loan and cannot enforce loan repayment due to social reasons. Loans have to be given from a stronger position!

It is recommended to introduce transparent internal rules for "late payments" in order to segregate them from arrears on which the debtor should pay a penalty.

MFIs should have simple rules regarding supervision visits to members with arrears and its documentation (recommended: a visit should be due latest 7 days after installment is due) so that the reasons for non-payment are verifiable and assistance can be offered. Very often, the debtors have really a serious problem and they are ashamed to discuss them with the MFI management; however, they will appreciate if somebody cares!

It is proposed to introduce that the MFIs allocate 50% of the amount regarded as bad debt to bad debt reserves. This will reduce the profit quite drastically and result in more attention to recovering loans with arrears.

For reasons of better transparency and control, all rules and regulations should be made in written and the MFI staff should possess a copy of these rules.


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8.6 Recommendations Regarding Handling Banks

The contract with Handling Banks needs to be re-assessed. The present system of paying banks, based on good trust without proper control of activities, should be abolished. It is recommended that banks should only receive the fee if they have performed their duty according to contract. There are two institutions most qualified to judge, whether the bank has fulfilled the contract:

the Government through receiving the reports in the agreed quality on-time

the MFIs who can confirm visits and training measures

A mechanism should be developed allowing the WG and the MFIs or the MFI association to warn the bank (cc to Bank Headquarters, CMOCSME) that the next quarterly payment will not, or only partly, be transferred.

The question is what kind of activities and services can be expected for about Rp 3 million per month. Calculations show that this income can cover much more than the costs of employing one person, transport and others. However, it is important that fixed employed (junior) bank officers are involved.25 They are, due to general overheads, more expensive. Therefore, allocating only three weeks per months is justified:

The average number of MFIs per district is 12. The bank can allocate on average monthly for: - consultation: 1/2 day x 12 MFIs 6 days - supervision: 1/2 day x 12 MFIs 6 days - report writing in the office 1 day - training, preparation and execution 1 day - bank staff receiving training, meetings 1 day Total 15 days or three weeks

Handling Bank's tasks should be specified and be made verifiable. Standard activities and procedures should be developed, e.g.:

Consultation visit, activities relate to the operation of the RF only (about 1 - 2 hours for travel and about 2 hours work on a portfolio of about 200 debtors), 1/2 day:

check whether measures were introduced that were suggested during the previous visits and discuss problems, if there are

check whether measures have been introduced that were presented during the previous training sessions or courses

assist if the MFI has problems in the implementation of training measures

visit minimum one client with repayment problems (at least 2 repayments missing)

visit minimum one client for whose business the MFI has assessment problems

document the visits to clients or the reasons if no visit took place 25 Staff hired for a limited time (honorarium) will probably leave the bank when payments from RF operations stop. The knowledge of how the MFIs work is lost. Nobody will be in place to continue supervision and financing the MFIs. Bank officers assisting MFIs in rural areas have to use motorcycles. Supposedly, very few senior bank officers will do this.


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write suggestions for the management (about half page)

sign the visitor book

Supervision visit: loan supervision, bookkeeping and recording: 1/2 day

check all new credit contracts (verification: paraph)

check all credit sheets with arrears (paraph)

check some calculations in the ledgers using the pocket calculator

check cash box

compiling data for reports that the MFIs have not yet readily available

advise on how to prepare the required data

joint preparation of the monthly or quarterly report

sign the visitor book

During the second and third year the bank will probably have to focus consultation increasingly to actively assist in bad debt recovery of.

It is acknowledged that in some remote areas the allocation of 15 days might not be sufficient. Too much time is spent for travelling, e.g., if it takes more than 2 hours one way from bank office to MFI office, and a simultaneous visit to two MFIs can not be combined. It is recommended that in coordination with the WG, the bank may closely cooperate with the facilitator regarding consultation and data collection. The following solutions are offered:

After consultation with and consent by the WG, the Handling Bank may cooperate with the facilitator and visit remote MFIs only once in two months or MFIs with excellent performance (low arrears ratio) are visited less frequently.

The number of locations with over average many remote MFIs should be offset with the number of districts with easy and fast access to MFI locations, in particular city districts like Metro or Mataram with 5 km average distance only.

For bank officers, the RF adds to their work load without reward. Actually, this is a bank-internal problem and banks might consider overtime payments. Bank officers confirmed that no new employment took place and that their previous work load was not reduced. If the bank wants to avoid paying overtime boni, one should consider the introduction of a split fee, where bank staff earns directly a part of the money when visiting the MFIs. Another possibility to overcome the lack of engagement may be to invite (or even to tender) other banks in the district to compete for the "handling fee".

8.7 Recommendations for Training

The banks are responsible for training MFIs. In order that bank officers can train others they need to be trained themselves a) regarding the subject matter and b) regarding training and presentation skills. In addition they need to be equipped with training material. Some of the training material or similar modules were developed for IDT-groups, PHBK (Linking Banks and SHGs), Savings-and Credit Cooperatives, and for BPR-management and staff.


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A training and socialization schedule should be established:

on Central level: to train trainers (ToT)

on Provincial level: to train bank officers, WG members, and facilitators

on District level: to train MFI management and staff

When Where Who What by Whom Training

Date Venue Trainee Topic Trainer material 05/10/01 Kantor Diskop

Semarang Bank officers

Facilitators

Ka Diskop Kabupaten

Reporting MFI Performance

Bpk. XXXX,

Lembaga …

Petunjuk Pengisian Laporan Triwulan dan Perhitungan Kinerja

dsb.

There are two major matters that need to be trained or socialized:

1) reporting matters: Bank officers, facilitators and WGs need to be trained on how to use forms, how to choose and report the right figures, how to identify questionable figures and how to perform the various calculations. These training sessions shall also deal with the reporting schedules. Bank staff needs to be trained to cope with the monthly and quarterly performance and fitness evaluation formats.

2) MFI management matters that will be discussed more detailed in the following.

Training and consultancy for the years to come is without challenges and too expensive for just keeping the status-quo. It needs a target. It is proposed that by end of year 2 at least 70% of the MFIs can perform self-assessment according to the rules laid down for performance evaluation and fitness/health appraisal. The training would be the banks' task because they will benefit once the MFIs can prepare the required reports and the bank officers only need to confirm the figures and forward the report. The training should be done in small steps on the spot during regular visits instead of a three-day block training.

Step-by-step training and application is recommended. A training measure should be scheduled in a way that the majority of participants arrive and return the same day. For example, the banks should teach the calculation of the MFI's "health" or fitness. This exercise can be split into three or four lessons. The first part can be in-class training for about three hours. Afterwards the MFIs are asked to implement this first module or lesson. For three months the bank can control and, if required, correct the MFIs. After three months the banks invite the MFIs again for learning about the second module. Again, the MFIs have to implement the new knowledge while continuing to apply what they have learned before. After one year the MFI can take over the bank's task.


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Figure 17: Scheduling Training "Fitness Appraisal"

Month In-Class Training Theory (1/2 day)

Application - Practice

1 Module I (capital) Module I 2 Module I 3 Module I 4 Module II (assets) Module I + II 5 Module I + II 6 Module I + II 7 Module III (earnings) Module I + II + III 8 Module I + II + III 9 Module I + II + III

10 Module IV (liquidity) Module I + II + III + IV 11 Module I + II + III + IV 12 Module I + II + III + IV

This is participatory monitoring and evaluation. Most important is that MFIs learn what they have to do to achieve a good result. They should learn to detect their weaknesses and they should also learn about their strength. Therefore, it is strongly recommended that the MFIs learn fitness appraisal and apply it every month.

Other relevant training issues are:

How to split income and costs between the operation of the MFIs "normal" business and the operation of the RF (preparation of fitness calculation)

Measures to prevent misuse of the loan facility

How to assess the character of a loan applicant and why it is more important than the profitability of his business

How to calculate loan portfolio quality

How to calculate reserves for bad debt and how to book reserves for bad debt

How to collect bad debt

How to rescue bad debt (rescheduling, reconditioning, refinancing)

Rules on write-off, bookkeeping and documentation procedures

Differences between loan disbursement and outstanding loans in liquidity calculations and balance sheets

Interest calculation (flat, declining) and the effect of delayed loan repayment on effective interest and interest income

Calculating the profitability of financing loans to MFI members with a bank loan

Training might take place in coincidence with the meeting of the MFI association. However, MFI representatives at the meeting of the MFI association might not always be the same persons who are scheduled to be trained.


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8.8 Recommendations Regarding Institutional Set-up

It is recommended that PNM as the Government agency for credit programs should be involved in any Government or Government initiated credit program, including "Revolving Funds".

Indonesia is rich in experience with financial assistance to micro, small and medium entrepreneurs and enterprises, including those enterprises that act as financial intermediaries. This knowledge is scattered and buried in Central, Provincial and even District offices of various ministries. In addition to Government agencies, state enterprises extend also micro loans.

The involvement of PNM may differ according to the program. PNM must not at all always be the promoter or executing agent. It is recommended that at least all these small financial interventions outside the banking structure should be centrally registered in order to avoid overlapping. Centralized expertise may also avoid less efficient programs.

PNM could become a qualified partner for donor agencies with regard to non-bank financial institutions.


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9 ANNEXES

9.1 ANNEX 1: Impact Analysis

Mr. Dale. W. Adams, Ohio State Univeristy, is an acknowledged microfinance expert since more than 20 years who is regularly invited to present his findings at international congresses. His views on impact studies of microfinance programs are shared by a majority of microfinance practitioners. On May 1, 2001, he contributed the following to a microfinance listserver. Two reactions, from Mr. Imon and from Carlos Ani, also experienced micro finance pratitioners, are attached.

From: "Dale W. Adams" <[email protected]>

Subject: Debt impact manual

"At a recent microdebt conference I bumped into Monique Cohen from AID/Washington. Despite knowing I'm a confirmed agnostic on debt-impact studies, Monique graciously and fearlessly gave me a draft copy on CD of the new manual prepared by the SEEP Network on how to do debt-impact studies. You might contact her at [email protected] if this manual interests you.

Before proffering comments perhaps I should state my preconceived notions about debt impact studies: they are frought with insurmountable methodological problems and the costs of doing them usually exceed any benefits they might provide.

Backgound on the manual: it took 4-5 years to prepare a draft that is 416 pages long. Before reading the draft I did a word search to see how many times words appeared I thought might be included in such a manual. I was surprised to find that the words fungibility, additionality, counterfactural, diversion, and financial substitution did not appear in the manual. The word fungible was used once, the term control group was used twice, and the word attribution appeared five times in the text. One of my alltime favorite terms "empowerment," nonetheless, appeared 80 times.

I've alway thought of impact studies, if they could be done correctly, as providiing information that would help flesh out a benefit/cost analysis. That is, they would provide documentation on the volume of benefits that were caused by a debt treatment. Ideally, such studies would provide information that allowed donors and governments to compare benefit/cost ratios across activities so that resources could be allocated to those activities that yielded the most benefits per dollar spent. Since microdebt efforts currently comprise a large part of poverty alleviation programs, impact studies should also provide concrete insights on the extent to which debt lifts people out of poverty.

Unfortunately, the methods suggested by this manual will not provide information that can be used to address these issues. The authors of the manual only attempted to gather information that might be useful to managers of micro-finance institutions to improve their programs. For me, at least, it was misleading to put impact analysis in the title of the manual.

Some of the other problems I noted in the manual:


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1. The authors make no attempt to deal with the attribution problem. They claim all of the observed benefits associated with augmentation of debt for the debt treatment.

2. They suggest no technique for dealing with the couterfactual problem. Would some or all of the desirable changes observed have occurred without the debt treatment?

3. They assume that employees of an MFI can collect information from their clients without obtaining self serving answers.

4. The manual suggests 5 information collecting instruments. One of them is quite long and detailed: income, savings, family, education, health, etc. No mention of the opportunity cost of having MFI employees collect and analyzing reams of information, instead of making and

5. collecting loans. Sociologists might be interested in such information, but I have a hard time seeing how a Pedro Jimenez or a Nabil Shami would boost their bottom line by looking at all of this information.

6. Finally, there is no recognition in the manual that some of the "beneficiaries" of microdebt programs might develop activities that substitute for products or sales of people who are even poorer than the endebtor's clients.

Am I unfair in asking what the costs of this huge manual were? Could someone please outline the measurable impact (benefits) of the manual? If I were a donor or government official I wouldn't find the manual of use in making resource allocation decisions. If I were a manager of an MFI I'd surely find some cheaper ways to learn the territory than the instruments suggested in the manual. Who is going to use this thing? I hate to treat nice people this way! It's unpleasant work, but someone has to do it."

From Imon:

"I think the issues Dale Adams has raised in his mail below about the utility that impact studies of microfinance programs offer are interesting.

I recently went to great lengths to identify appropriate tools for program evaluation for inclusion in a study on the Government of India's largest rural self-employment program, the SGSY.

Nancy Barry at Women's World Banking aptly observes that, "While most of us are committed to poverty alleviation, we don't realy know that much about the impact of our work."

A great deal of exploratory thinking and work has gone into developing objectives, methodologies and standards for conducting microfinance impact assessments that are affordable, timely and generate credible findings (at CGAP, the SEEP Network etc.).

These 'mid-range impact evaluation tools' utilize a mix of small quantitative surveys, qualitative studies and participatory approaches to achieve their objectives, and the SEEP Network's Learning from Clients: Assessment Tools for Microfinance Practitioners is a recent example.

David Hulme (University of Manchester) differentiates between two goals of impact assessments: proving impacts and improving interventions. Elaborating on the


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'counterfactual' or what would have happened without the intervention, therefore, is only part of what impact assessment studies are called upon to achieve, according to this view.

Many programs currently contain few processes where client needs can inform policy planning / evolution on an ongoing basis, and this is where mid-range impact assessments tools can play a valuable role.

Among other things, they can help ensure that the voices of the poor are heard ...

Best regards,

Imon"

From: Carlos Ani <[email protected]>

To: Sharenet Information Service <[email protected]>; [email protected] <[email protected]>

Date: Thursday, May 03, 2001 1:50 PM

Subject: [sharenet] Impact studies of microfinance programs

All of the debt impact studies (dis) I've seen use procedures that inflate the benefits claimed from debt programs. It may be useful to discuss on the dfn why benefit-inflation occurs. In the following I briefly outline two of the most common difficulties, the attribution problem and the counterfactual issue.

Most dis attempt to measure the effects of additional debt -- the treatment -- on the activities or well being of supposed beneficiaries. To measure impact, numerous researchers use a before and after method. For example, attempts are made to measure things such as income of the borrower before they receive the loan and then come back sometime later, after the beneficiary has been endebted, and measure the supposed changes in income that occured over the period under study. In most cases all of the change in income, or whatever else is being measured, is attributed to the additional debt imposed on the beneficiary.

Why does this often result in claiming too many benefits for the endebting effort?

Often, debt programs are only one of various development efforts that are occuring concurrently. This might include decontrolling prices, adjustments in exchange rates, building roads, and development of new technology. All of these efforts may help to boost the income of the borrower over the period studied.

The counterfactual problem is closely related to the attribution problem. It is impossible to know what the beneficiary would have done absent the loan. For example, the borrower may simply substitute a loan of $500 from an ngo for a loan she would have otherwise taken from some informal source. Or, the borrower may take a loan from an ngo of $500 for the purpose of buying more goods for her market stall. At the same time she takes $500 in savings that she had earlier planned to spend on buying inventory and diverts this liquidity to buying new clothing.

Measuring what would have happened without a loan from an ngo is of course impossible. No one can measure events that did not happen. Because money is the most fungible good invented by humans, substantial amounts of substitution


63

and diversion occur with any lending. Borrowing does not change the borrowers expenditure priorities. The additional debt only allows a borrower to make more selections over her spending priorities.

By glossing over the attribution problem and ignoring the counterfactual issue, all dis claim more benefits than are actually caused by additional debt. Some of the supposed benefits are caused by other concurrent changes in the society and some of the benefits would have been realized by the borrower without a loan.


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9.2 ANNEX 2 : Objectives and Indicators

The program has multiple objectives:

Poverty alleviation

Strengthening financial institutions (MFIs)

Empowering micro and small enterprises through strengthening the financial structure of MFIs.

The following are the intended short-term and long-term impacts:

short term:

family income increase of micro entrepeneurs

enhancing the economy of low-income people

suppressing the potential of social unrest following the fuel price increase long term:

strengthen the capital structure of MFIs (LKM and KSP/USP-Kop)

increase the number of bankable MFIs

Indicators for the program's success (after three years):

Disbursement to 350,000 micro and small entrepreneurs empowered, members of KSP/USP-Kop and LKM join KBDB (Konsep Bantuan Dana Bergulir)

to 2,925 KSP/USP-Kop and 1,000 IFIs in 341 districts in 26 provinces

selection and disbursement within 3 months

repayment performance as non-performing loans (NPL) less than 20%

more than 60% of the participants (MFIs) receive the revolving fund as additional equity at the end of the program

the guiding banks will regard > 60% of the participants as bankable

the evaluation will refer to the performance of the following indicators: disbursement, utilization, return, increase and development of the enterprise (for details see: Kepmeneg Koperasi dan UKM No. 03/Kpe/Meneg/I/2001 dated 16 January 2001)

Indicators for success monitoring (see also ANNEX 4)

disbursement 20%

utilization 20%


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repayment 30%

increase in profits 10%

increase in sales 20%

Quarterly, the bank has to propose whether the performance of the MFI allows to proceed with the revolving of funds

whether measures to remedy a development should be introduced or

whether it should be stoped


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9.3 ANNEX 3: Success Supporting Factors

Inclusion of many parties, banks, participation of the local government, education program, associations and universities, shall result in unbiased decisions ("credit committee system") and

application of modern management tools that are hoped to protect the integrity, independence, transparency and accountability of the implementation of the program

1. Local Market Knowledge Approach: technical decisions are to be made by the District Working Group (DWG) on local level

2. Separation of Tasks: The central level (Jakarta) acts as policy maker and prepares guidelines, on provincial level the Provincial WGs act as coordinator, and on district level: selection, approval, program members, decision on rewards and punishment after receiving the bank's recommendation: the bank as channeling agent, advising participants on administration and management, and monitoring and evaluation

3. Credit Committee System: District WG includes various stakeholders, (majority of out of up to 10 or even 12 parties)

4. Social and Commercial Approach: a social program but implemented in a way that it is similar to a commercial banking program in order to avoid the impression of a charity program that invites moral hazard. Therefore, the fund is considered as a loan for the program period (initial 3 years) with 16% interest (4% for bank, 2% for fascilitator, 10% for liquidity reserve and a kind of collateral to allow a reward punishment mechanism).

5. Improving Creditworthiness of Local Micro Enterprises: bank 's duty includes to advise ("membina") participants for three years in order to establish a relationship between bank and participant and to allow members to become acquainted with bank procedures and to promote the sustainability of the participants.

6. Incentive based Program: Participants and the program will be evaluated every year and a recommendation will be forwarded to the DWG (District Working Group); reward: 10% annual liquidity reserve and granting the revolving fund assuming thet they are able to manage the fund, whereas others will have to return the fund and the WG has to decide on other participants

7. Direct Funds Disbursement to End Users: money transfer to participant's account, but end users are members (conflicting?)

8. Local Community Based Approach: participants have not to adjust to third party's regulations

9. Supervision and Monitoring: monthly reports from banks to DWG and once in three months report to CWG (but no deadline and no reporting format)

10. Institution Building: strengthening financial aspects of 2,925 coopertives + 1,000 SHG participants all over Indonesia with the hope that these institutions can give services to micro entrepreneurs being not yet bankable. MFI regulations do not yet exist. BI is preparing a concept for the legal status of MFI so that MFIs and their members are protected.

11. Clear Program Measurements (evaluation criteria)


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9.4 ANNEX 4: Performance Evaluation

The objective for evaluating the RF performance is to support the achievement of five criteria or success factors. The evaluation shall take place monthly (judgement: very good, good, sufficiently good, less good, not good) and quarterly complemented with a recommendation:

Criteria Weight Calculation method (cp = credit point)

disbursement 20% disbursement 50% = 0 credit points (cp), each additional % = 2 cp

Utilization 20% each % utilization according to loan application = 1 cp, max. 100 cp

repayment 30% a risk-rated ratio of loans with overdue payments versus total loans which is similar to the evaluation scheme BI introduced for BPRs and Menegkop & UKM for savings and credit cooperatives. Detailed explanations fill more than two pages. The wording is confusing: the lower the "repayment ratio" the higher the score. It should be the "risk ratio".

Criteria that have to be considered before classifying a loan 'delayed', 'doubtful' or 'loss':

a) loans with installment (differentiated according to frequency of loan repayment) and

b) loans without installments, maturity, delay of interest or principal repayment, etc.

The procedure is so complicated that it contains undefined "loopholes", for example, loans with single repayment and monthly interest payments remain "sound" even if interest is not paid.

increased income

20% On a separate sheet, the borrower has to supply income data before and after loan disbursement. Every percent income (net cash flow or profit?) increase earns 2 cp. (The word "pendapatan" can be misinterpreted as turnover or turnover minus cost of material.)

increased turnover

10% The member has to supply data on business volume (turnover) before and after loan disbursement. Every % income increase (net cash flow or profit?) earns 2 cp.


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9.5 ANNEX 5: RF Performance Assessment (Calculation)

9.5.1 Scoring

Report Monthly Quarterly

Score Judgement Recommendation

86 - 100 very good Loan to be continued with annual award

76 - 85 good Loan to be continued

61 - 75 sufficient Loan to be continued together with improving the quality of several aspects that were evaluated

46 - 60 less good Loan considered to be stopped

0 - 45 not good Loan to be stopped

The scores between the different judgements, e.g., 75.3 or 85.7, are not defined!

9.5.2 Example for MFI RF Performance Assessment MFI (name) Disburse

ment Utilization Repayment Profit

increase26 Turnover increase

Total

achievement member A

0% risk 75% (doubtful)

-20% -10%

achievement member B

100% risk 0% 20% 50%

achievement member C

MFI level

Rp 40 mio.

95% risk 0% 15% 5%

Total, average

80% 195% 75% 15% 45%

achievement of MFI

(sub-portfolio)

80% -50% = 30%

x 2 cp =

65%

(35% "con-sumptive")

risk 25% 5% 15%

credit point 60 65 50 10 30

weight 20% 20% 30% 20% 10%

score 12 13 15 2 3 45

Score 45 = recommendation: stop lending!

Above sample is based on the assumption that MFI members A, B, and C received the same loan amount. 26 The figure for profit and turnover increase is normally not available.


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Scenario 1: Scenario 2:

Development of Revolving Fund Development of Revolving Fund

Interest 2% flat, Default rate 4% Interest 2.5% flat, Default rate 2%

Rp million

RF dis-

burse-ment

Interest 2% p.m. default

4%

Repayment 10 months default

4%

Cost and

incen-tives

New

loan disburse-

ment

Out-standi

ng

RF dis-

burse-ment

Interest 2.5% p.m.

default 2%

Repayment 10 months default

2%

Cost

and incen-tives

New

loan disburse-

ment

Out-standi

ng

Jan 01 50,0 50,0 50,0 50,0 50,0 50,0Feb 01 30,0 1,0 4,8 35,8 81,0 30,0 1,2 4,9 36,1 81,2Mrz 01 10,0 1,6 8,2 (4,0) 15,9 88,6 10,0 2,1 8,4 (4,0) 16,6 89,3Apr 01 2,0 9,8 11,7 90,6 2,5 10,1 12,6 91,9Mai 01 2,2 10,9 13,1 92,7 2,8 11,3 14,1 94,7Jun 01 2,4 12,1 (4,0) 10,6 91,2 3,2 12,7 (4,0) 11,8 93,8Jul 01 2,6 13,1 15,8 93,8 3,5 13,8 17,3 97,3

Aug 01 2,9 14,7 17,6 96,7 3,9 15,5 19,4 101,2Sep 01 3,3 16,4 (4,0) 15,6 96,0 4,4 17,4 (4,0) 17,8 101,5Okt 01 3,6 17,9 21,4 99,6 4,8 19,2 24,0 106,3Nov 01 4,0 19,9 23,9 103,5 5,4 21,5 26,9 111,7Dez 01 3,9 19,7 (4,0) 19,6 103,5 5,5 21,9 (4,0) 23,4 113,2Jan 02 4,0 20,0 10,0 34,0 117,5 5,7 23,0 10,0 38,7 128,9Feb 02 4,4 21,8 26,1 121,8 6,3 25,1 31,4 135,2Mrz 02 4,6 23,2 (4,0) 23,8 122,5 6,7 27,0 (4,0) 29,7 138,0Apr 02 4,8 24,2 29,0 127,3 7,1 28,5 35,6 145,1Mai 02 5,2 26,0 31,2 132,5 7,7 30,8 38,5 152,8Jun 02 5,5 27,4 (4,0) 28,9 134,0 8,2 32,9 (4,0) 37,1 157,0Jul 02 5,7 28,5 34,2 139,7 8,7 34,6 43,3 165,7

Aug 02 6,1 30,3 36,4 145,8 9,3 37,1 46,4 175,0Sep 02 6,4 31,8 (4,0) 34,1 148,1 9,8 39,3 (4,0) 45,2 180,8Okt 02 6,7 33,7 40,5 154,9 10,7 42,9 53,6 191,5Nov 02 7,5 37,7 45,3 162,4 12,2 48,8 61,1 203,7Dez 02 7,8 38,8 (4,0) 42,5 166,2 12,8 51,0 (4,0) 59,8 212,5Jan 03 8,1 40,4 10,0 58,4 184,2 13,5 53,8 10,0 77,3 235,9Feb 03 8,7 43,7 52,4 193,0 14,6 58,5 73,1 250,6Mrz 03 9,2 45,9 (4,0) 51,1 198,2 15,5 62,2 (4,0) 73,7 262,1Apr 03 9,6 47,9 57,4 207,7 16,4 65,6 82,0 278,5Mai 03 10,1 50,6 60,7 217,8 17,5 70,0 87,5 296,0Jun 03 10,6 53,1 (4,0) 59,8 224,5 18,6 74,3 (4,0) 88,9 310,6Jul 03 11,1 55,4 66,4 235,5 19,6 78,5 98,1 330,2

Aug 03 12,3 61,6 73,9 247,9 22,2 88,9 111,1 352,4Sep 03 13,6 68,0 (4,0) 77,6 257,5 25,0 100,1 (4,0) 121,2 373,4Okt 03 14,2 71,1 85,3 271,7 26,5 106,0 132,5 400,0Nov 03 15,0 75,2 90,3 286,7 28,3 113,1 141,4 428,2Dez 03 15,7 78,3 (4,0) 89,9 298,4 29,9 119,4 (4,0) 145,3 454,1Jan 04 16,4 81,9 10,0 108,2 324,8 31,6 126,5 10,0 168,1 495,7

90,0 252,8 1.263,8 (18,0) 1.538,5 90,0 423,7 1.694,9 (18,0) 2.140,6Loan disbursement/administration fee 2% Rp 30,8 million Loan disbursement/administration fee

2% Rp 42,8 million

11 evaluation of revolving fund for strenghening micro fin. · kja koperasi jasa audit kpkn kantor...

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