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German Technical Cooperation (GTZ)

Reconstruction and Development of the Microfinance System

in Nanggroe Aceh Darussalam (NAD), Indonesia

Cooperative Outreach Component:

Report on Preparations

for the Establishment of Pilot Savings & Credit Cooperatives (BQs)

in the Districts of Aceh Utara and Bireun

by Hans Dieter Seibel

December 2005

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Economic Recovery and Microfinance in NAD, Indonesia

Project brief: The microfinance component

From relief to rehabilitation and reconstruction. The Tsunami flood disaster of December 2004 and the earthquake preceding it caused unseen devastation among people and infrastructure in Nanggroeh Aceh Darussalam (NAD). They also led to widespread destruction of financial and other institutions, already weakened by decades of conflict. As most relief actions are coming to an end, the emphasis is now shifting to sustainable rehabilitation and reconstruction. Financial institutions will have a crucial role to play, expanding services to those 80% of the population beyond the reach of banks. Bank Indonesia (BI) and GTZ as partners in microfinance. In June 2005 an appraisal mission prepared a technical assistance project with a focus on microfinance including microbanking. The project is geared to the rehabilitation of rural banks (BPR/S) and the reconstruction and development of non-bank microfinance institutions (MFIs), particularly Islamic savings and credit cooperatives (Baitul Quirad, BQ). BI is the legal partner of GTZ. Implementing partners include the rehabilitation and reconstruction agency BRR, the cooperative agency Dinas Koperasi and PNM, the former small credit division of BI.

Strengthening the microfinance sector in Aceh. GTZ supports BI in strategies of developing the microfinance sector and in donor coordination. Upon the request of BRR GTZ has organized the mapping of MFIs throughout the province as a basis for the activities of all stakeholders. In this context GTZ, in cooperation with PNM, has also carried out an assessment of those 73 financial cooperatives which were recently recapitalized by BRR. To alleviate the severe shortage of qualified personnel, GTZ is considering to support Syiah Kuala University in Banda Aceh in establishing a microfinance training program.

The rural banking component. The main emphasis is on the strengthening of five private rural banks (BPR/S) in Banda Aceh and Aceh Besar and the establishment of a new BPR/S in Aceh Utara. Among the project inputs are the rating of rural banks in cooperation with Mercy Corps; a business planning workshop; designing and introducing a new cash-flow lending product, using resources from the BPR and from Allianz AG; on-the-job training of loan officers in the new product; and the strengthening of Perbarindo, an association of BPR.

The cooperative component. Together with its partners GTZ has prepared a strategy for establishing sustainable savings and credit cooperatives (Baitul Quird, BQ) following Islamic financial principles and a support structure of secondary cooperatives (BQ Centers). GTZs support will focus on 15 new BQs and a BQ Center at the east coast and on strengthening the existing BQ Center in Banda Aceh. In cooperation with PNM GTZ has helped establishing two new BQs, one in Muaru Batu in Aceh Utara and one in Jeunib, Bireuen. In July 2006 PNM and GTZ took initiatives to establish BQs in Seneddon, Tanah Pasir and Lhoksukon. To increase its effectiveness, GTZ integrates the contributions of several German organizations into its approach: the German Development Service (DED) provides professional inputs into the day-to-day operations of the BQs and BQ Centers; the German Raiffeisen and Cooperative Federation (DGRV) will assist in the building of a sustainable cooperative sector, with an adequate apex structure and effective supervision; CIM, a subsidiary of GTZ, will place an expert in the cooperative agency of Aceh.

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Table of contents

1. From relief to reconstruction and development: the role of microfinance 1

2. The GTZ Microfinance Project in Aceh and its cooperative component

2.1 June 2005: preparing a technical assistance project

2.2 September 2005: Identifying locations for new savings and credit cooperatives (BQ)

2.3 December 2005: Initiating two pilot BQ

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3. Establishing pilot BQs

3.1 Cooperation partners

3.2 Service providers

3.3 Initiating the establishment of two pilot BQ

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4. Towards a sustainable system of savings and credit cooperatives (BQ) in Aceh

1. Background: The Aceh Microfinance Program (AMF)

2. Cooperation between ADB and GTZ in support of the AMF Program

3. Challenges and opportunities for enhancing the BQ sector in Aceh

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1.1. From relief to reconstruction and development: the role of microfinance

The Tsunami flood disaster and the earthquake preceding it, with its epicentre off the coast of North Sumatra, caused not only unseen devastation among people and infrastructure, but also led to widespread destruction of financial and other institutions. Of all areas affected in various countries, the province of Nanggroeh Aceh Darussalam (NAD), commonly referred to as Aceh Province, suffered the most. 167,000 people died or are missing from tsunami, and 500,000 were internally displaced. Directly or indirectly, most financial institutions in the area were affected. Among them are the regional development bank (BPR) which suffered a loss of EUR 85.5m, Peoples Credit Banks (BPR), commercial banks and savings and credit cooperatives. Of about 20 savings and credit cooperatives reported as functioning before the tsunami, half were simply washed away; 6,000 borrowers stopped repaying because they had become victims of the deadly waves or lost their business. This is all the more serious as the financial sector of the province has been poorly developed, due to three decades of political conflict.

As most relief actions are coming to an end within this year (2005), the emphasis is now shifting to sustainable rehabilitation and reconstruction measures. Financial institutions with adequate services to all segments of the population will have a crucial role to play. In larger towns such services are provided by the units of government-owned Bank Rakyat Indonesia which runs one of the most successful microfinance schemes in the developing world, the ailing regional development bank (BPD), a few commercial bank branches with microfinance programs and some rural banks (BPR). The majority of the population, however, perhaps as many as 70-80%, are beyond the reach of banking institutions. Here is a big potential for small financial institutions organized on the basis of self-help and self-management, particularly savings and credit cooperatives under cooperative law. The crisis has thus opened a window of opportunity: seemingly the decades-old political conflict has been settled; and there is a strong urge for reconstruction and development.

The Rehabilitation and Reconstruction Agency for Aceh and Nias (BRR) estimates that there is a potential for up to 1000 savings and credit cooperatives in 335 subdistricts of the province, ie three per subdistrict on average. It is expected that the large majority of them, if

not all, will be Islamic cooperatives, referred to in Aceh as Baitul Qirad (BQ). It is conceivable that within a time period of around five years, up to 500 BQ may be established, provided the required resources can be mobilized and the recently concluded peace accord is sustained. The reconstruction agency BRR is in the process of initiating, with the assistance of consulting firms, the establishment of 73 new BQ during 2006, to be followed by about 100 in each of the two subsequent years. As a result of the political conflict in Aceh, of 43 BQ established since 1995 only 21 were functioning in 2004; of these only 10 are left after the Tsunami. PNM, an agency carved out of the central bank in 1999 with the mandate of financial and technical assistance to small financial institutions with services to small and microenterprises, has recapitalized three BQ in 2005 through its regional office in Medan and its provincial office in Banda Aceh. PNM has also helped to establish a secondary BQ for back-up services to the BQ sector in Aceh.

2. The GTZ Microfinance Project in Aceh and its cooperative component

2.1 June 2005: preparing a technical assistance project

In June 2005 a Bank Indonesia-GTZ Appraisal Mission visited Aceh province and prepared a technical assistance project to be implemented over a period of 36 months. The objective of the proposed project is the Rehabilitation of the BPR/BPRS (Bank Perkreditan Rakyat/Bank Perkreditan Rakyat Syariah) industry and the reconstruction and development of non-bank microfinance systems, including savings and credit cooperatives.

Formatted: Bullets and Numbering

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2.2 September 2005: Identifying locations for new savings and credit

cooperatives (BQ)

During September 8-20, 2005, a mission was fielded to Indonesia, with the main objective of identifying locations for the establishment of new savings and credit cooperatives and preparing a plan of action for the establishment of two pilot cooperatives. The mission in Aceh province during September 12-20, 2005, was jointly carried out with PNM, the agency mandated to support institution-building of Peoples Credit Banks and savings and credit cooperatives nationwide, with a provincial office in Banda Aceh. A detailed report was presented to the reconstruction agency BRR and discussed on 20 September (App. 1). A representative of UNDP was also present. Prior to the meeting the report was forwarded to PNM in Jakarta for comments. BRR and GTZ expressed their intent to coordinate procedures for the establishment of new cooperatives (BQ). For the identification of additional locations beyond the scope of the GTZ project it was suggested to follow the procedure tested in our mission and to use the rapid appraisal instrument attached in Annex 3 of the report. The desirability of coordinating the activities of GTZ with those of other donors was also discussed.

Based on field visits in five districts, 41 locations in 26 subdistricts were proposed. An additional 6 subdistricts were proposed by the Dinas Koperasi in Aceh, but not visited due to

time constraints, bringing the total to 47 locations. Out of five potential pilot locations, three

start-up locations were proposed for immediate action: Keude Mane in Aceh Utara, Keude Jeunib in Bireuen and Krueng Raya in Aceh Besar. As a special location, Pasar Lamno at the west coast in Aceh Jaya, was also proposed: one of the most severely affected areas where the need for assistance is greatest. It is there where the mission met with great enthusiasm, but cautioned that during the rainy seasons road conditions are difficult.

There is consensus in Aceh that newly established cooperatives should follow the principles of Islamic finance. Aceh uses a unique terminology for its Islamic savings and credit

cooperatives: Baitul Qirad (BQ). A summary of Principles and Products of Islamic

Finance is given in App. 2.

Note should be taken that GTZ commissioned a study of Islamic Microfinance in

Indonesia in 2004; an abstract is attached in App. 3, the chapter on Islamic savings and credit cooperatives in App. 4

1. One of the conclusions of the study was that the poor

performance of many savings and credit cooperatives in Indonesia, including those following Islamic principles, is due to the historical absence of effective supervision. In the same vein, the September 2005 mission identified an urgent need for effective supervision of savings and credit cooperatives in Aceh, presumably through PNM as the mandated government agency in cooperation with the Cooperative Agency (Dinas Koperasi).

The possibility of assisting BRR and implementing agencies in the establishment of a sustainable system of financial cooperatives in Aceh with up to 500 BQ will have to be examined in further detail.

2.3. December 2005: Initiating two pilot BQ

Based on the results of the above mentioned Identification Mission in September 2005 steps for the establishment of savings and credit cooperatives in the more remote parts of the province were to be taken. The following activities were to be initiated during the available time frame, 28 November to 17 December 2005:

Facilitating the establishment of two pilot savings and credit cooperatives (Baitul Quirad, BQ) in two locations at the east coast of Aceh Province:

o Muara Batu Subdistrict in Aceh Utara District

1 The full version can be requested from seibel@uni-koeln.de.

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o Jeunib Substrict in Bireun District Coordinating (in Jakarta and Banda Aceh) the strategy and procedure of establishing

BQs with Bank Indonesia as the national project partner, BRR as the coordinating agency in Aceh Province, the Ministry of Cooperatives and its local cooperative office as the registration authority, and PNM as the presumed implementing agency for field initiatives including capacity-building and capitalization.

Initiating the establishment of financial cooperatives in two pilot locations in cooperation with a partner agency (PNM)

Making preparations for the capitalization of pilot cooperatives Discussing preparations to be made by PNM for effective supervision

3. Establishing pilot BQs

3.1 Cooperation partners

BRR and Dinas Koperasi: In December 2005 GTZ has signed a cooperation agreement (MOU) with the Reconstruction and Rehabilitation Agency (BRR) and the cooperative agency Dinas Koperasi (Annex 1).

BRR, originally in charge of planning and monitoring only, has now taken command of the

reconstruction and development of savings and credit cooperatives, in partnership with Dinas Koperasi. Total budget allocations in 2005 (to be carried over into 2006) and 2006 amount to Rp 165bn ($16.5m), with the objective of rehabilitating or establishing a first set of 73 BQ and a second set of approx. 100 BQ until the end of 2006, to be followed by perhaps another 100 BQ during 2007. BRR has defined for itself two functions in microfinance: (1) overseeing and directing the whole microfinance sector in Aceh, including smaller NGOs, through the Aceh Microfinance Forum (AMFF); (2) rehabilitating or establishing MFIs, especially BQ, referred to by BRR as its Aceh Microfinance (AMF) program. BRR considers as its main governmental partners Dinas Koperasi and PNM; main cooperating donor agencies are ADB and GTZ as well as ILO.

BRR has prepared plans and program guidelines2 for an initial set of 73 MFI and has

selected Jasa Konsultansi for...

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