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					  SAVINGS AND CREDIT COOPERATIVES AS MICROFINANCE
INSTITUTIONS. TWO CASE STUDIES: KOPERASI CITRA LESTARI &
            KOPERASI MAWAR PUTIH IN EAST JAVA




    A thesis submitted in partial fulfilment of the requirements for the
             Degree of Honours in Indonesian Studies at the
                     University of New South Wales




                                Nicola Hall
                             November 2005
CERTIFICATE OF ORIGINALITY




   I hereby declare that this submission is my own work and to the
   best of my knowledge it contains no materials previously
   published or written by another person, nor material which to a
   substantial extent has been accepted for award of any other
   degree or diploma at UNSW or any other educational institution,
   except where due knowledge is made in this thesis. Any
   contribution made to this research by others, with whom I have
   worked at UNSW or elsewhere, is explicitly acknowledged in
   this thesis.

   I also declare that the intellectual content of this thesis is the
   product of my own work, except to the extent that assistance
   from others in the project’s design and conception or in style,
   presentation and linguistic expression is acknowledged.

                                    Signed: ___________________
                         ACKNOWLEDGEMENTS

        First and foremost I would like to thank my supervisor David Reeve, for his time, assistance
and helpful advice. Thank you for providing me with a positive outlook and confidence throughout
my honours year.


        I would like to thank the managers and staff at Koperasi Citra Lestari and Koperasi Mawar
Putih in Malang. Thank you for warmly welcoming me, and willingly lending me your valuable time.
This thesis would not have been possible without your generosity.


        Many thanks to Novanto Agus and Harya Sumarta for all your knowledge, expertise and
assistance. Thank you for lending me your time and resources.


        Thank you also to my host family in Indonesia, H.M Anshor Alie, Dr. Hj. Nurhajati MS.,
Trya Febbianie, Nila Puspita, Ferrial Dianita and Annisa Nurina Putri. Thank you once again for
welcoming me into your home and for your never ending hospitality.


        Last but not least I owe many special thanks to all my family and friends. Special thanks to
Mum, Dad, Mike, Helen and Josh for your constant love, support and encouragement.
                                          ABSTRACT

           Indonesia began its journey in microfinance 110 years ago, in 1895 in Central Java. In 2005,
the International Year of Microcredit, Indonesia provides microfinance services through the banking,
cooperative, private, non-governmental organisation (NGO), and informal sectors. Savings and credit
cooperatives are just one of several microfinance institutions (MFIs) providing microfinance services
to the Indonesian population. There is a gap in the microfinance literature concerning savings and
credit cooperative as MFIs in Indonesia. This thesis attempts to begin to fill that gap with a case study
of two savings and credit cooperatives, Koperasi Citra Lestari and Koperasi Mawar Putih located in
Malang, East Java.


           Despite a long history in Indonesia, years of preferential treatment, cases of mismanagement
and inefficient supervision have significantly weakened the cooperative sector. These weaknesses
influence the ability of savings and credit cooperatives to effectively implement the principles of
successful microfinance. This thesis evaluates the effectiveness of Koperasi Citra Lestari and
Koperasi Mawar Putih in their implementation of theoretically defined principles of successful
microfinance.


           This thesis has used insights, opinions and conclusions from microfinance literature to create
an effectiveness checklist comprising seven areas and 40 principles of key importance to the
implementation of successful microfinance. The seven areas include loans, savings, documentation
and performance monitoring, management, financial management, risk management and tailoring the
program to clients’ needs. Ten interviews with management and staff, attendance at six group
meetings, and observation were carried out during a two month research period at Koperasi Citra
Lestari and Koperasi Mawar Putih in Malang, East Java. The information collected has been used to
define the effectiveness of these two savings and credit cooperatives according to the checklist
created.


           This research shows that Koperasi Citra Lestari is more effective than Koperasi Mawar
Putih at implementing theoretically defined principles of successful microfinance. In terms of the
effectiveness checklist, Koperasi Citra Lestari is 80% effective and Koperasi Mawar Putih is only
57.5% effective. At both cooperatives, inefficient implementation of the tanggung renteng, or mutual
guarantee system and infrequent training for management and members represent the main cause for
concern. The situation is however far more serious for Koperasi Mawar Putih.
                                    TABLE OF CONTENTS

ACKNOWLEDGEMENTS..............................................................................................i
ABSTRACT......................................................................................................................ii
LIST OF TABLES & FIGURES....................................................................................iv
INTRODUCTION............................................................................................................1
Chapter 1 ..........................................................................................................................9
 1.1 An Introduction to the Indonesian Microfinance Sector..........................................10
 1.2 The Indonesian Cooperative Sector.........................................................................11
 1.3 Weaknesses of the Cooperative Sector....................................................................15
 1.4 Conclusion...............................................................................................................19
 2.1 Koperasi Citra Lestari..............................................................................................22
 2.2 Koperasi Mawar Putih ............................................................................................23
 2.3 PUSKOWANJATI ..................................................................................................25
 2.4 The Tanggung Renteng System...............................................................................26
 2.5 Methodology............................................................................................................28
 2.6 Conclusion...............................................................................................................39
 3.1 Loans at Koperasi Citra Lestari ..............................................................................42
 3.2 Savings at Koperasi Citra Lestari ...........................................................................48
 3.3 Documentation and Performance Monitoring at Koperasi Citra Lestari ................51
 3.4 Management at Koperasi Citra Lestari ...................................................................53
 3.5 Financial Management at Koperasi Citra Lestari ...................................................55
 3.6 Risk Management at Koperasi Citra Lestari ...........................................................57
 3.7 Tailoring the Program to Clients’ Needs at Koperasi Citra Lestari ........................58
 3.8 Conclusion ..............................................................................................................61
 4.1 Loans at Koperasi Mawar Putih ..............................................................................66
 4.2 Savings at Koperasi Mawar Putih ...........................................................................71
 4.3 Documentation and Performance Monitoring at Koperasi Mawar Putih ...............73
 4.4 Management at Koperasi Mawar Putih ...................................................................75
 4.5 Financial Management at Koperasi Mawar Putih ...................................................77
 4.6 Risk Management at Koperasi Mawar Putih ..........................................................79
 4.8 Conclusion...............................................................................................................81
APPENDIX ONE............................................................................................................93
APPENDIX TWO.........................................................................................................102
APPENDIX THREE.....................................................................................................109
GLOSSARY..................................................................................................................112
                              LIST OF TABLES & FIGURES
TABLES

Table 1.1 Cooperative Outreach....................................................................................15
Table 2.2 Loan Methodology..........................................................................................31
Table 2.3 Savings Methodology......................................................................................32
Table 2.4 Documentation & Performance Monitoring Methodology.........................33
Table 2.5 Management Methodology.............................................................................34
Table 2.6 Financial Management Methodology............................................................35
Table 2.7 Risk Management Methodology....................................................................36
Table 2.8 Tailoring the Program to the Clients’ Needs Methodology........................36
Table 2.9 Effectiveness Checklist...................................................................................37
Table 3.10 Types of Loans at Koperasi Citra Lestari..................................................42
Table 3.11 Groups at Koperasi Citra Lestari...............................................................45
Table 3.12 Effectiveness Checklist for Loans at Koperasi Citra Lestari....................48
Table 3.13 Effectiveness Checklist for Savings at Koperasi Citra Lestari.................50
Table 3.14 Effectiveness Checklist for Documentation & Performance Monitoring at
Koperasi Citra Lestari....................................................................................................53
Table 3.15 Effectiveness Checklist for Management at Koperasi Citra Lestari........55
Table 3.16 Effectiveness Checklist for Financial Management at Koperasi Citra
Lestari...............................................................................................................................56
Table 3.17 Effectiveness Checklist for Risk Management at Koperasi Citra Lestari
...........................................................................................................................................58
Table 3.18 Effectiveness Checklist for Tailoring the Program to Clients’ Needs at
Koperasi Citra Lestari....................................................................................................61
Table 3.19 Ineffective Principles at Koperasi Citra Lestari........................................62
Table 4.20 Types of Loans at Koperasi Mawar Putih..................................................66
Table 4.21 Effectiveness Checklist for Loans at Koperasi Mawar Putih...................70
Table 4.22 Effectiveness Checklist for Savings at Koperasi Mawar Putih................73
Table 4.23 Effectiveness Checklist for Documentation & Performance Monitoring at
Koperasi Mawar Putih....................................................................................................75
Table 4.24 Effectiveness Checklist for Management at Koperasi Mawar Putih.......77
Table 4.25 Effectiveness Checklist for Financial Management at Koperasi Mawar
Putih..................................................................................................................................78
Table 4.26 Effectiveness Checklist for Risk Management at Koperasi Mawar Putih
...........................................................................................................................................79
Table 4.27 Effectiveness Checklist for Tailoring the Program to Clients’ Needs at
Koperasi Mawar Putih....................................................................................................81
Table 4.28 Ineffective Principles at Koperasi Mawar Putih........................................82



FIGURES
Figure 3.1 Koperasi Citra Lestari Loan Request Form...............................................44
Figure 4.2 Koperasi Mawar Putih Loan Request Form..............................................67
                                    INTRODUCTION

         Microfinance and Savings - & - Credit Cooperatives

         “Microfinance has proved its value, in many countries, as a weapon against
         poverty and hunger. It can change peoples lives for the better – especially the
         lives of those who need it most. A small loan, a savings account, an affordable
         way to send a cheque back home can make all the difference to a poor or low-
         income family. With access to microfinance, they can earn more, build up assets
         and better protect themselves against unexpected setbacks and losses. They can
         move beyond day to day survival towards planning for the future. They can invest
         in better nutrition, housing, health and education for their children. In short, they
         can break the vicious cycle of poverty. Microfinance is not charity. It is a way to
         extend the same rights and services to low-income households that are available
         to everyone else. It is recognition that poor people are the solution, not the
         problem. It is a way to build on their ideas, energy and vision. It is a way to grow
         productive enterprises, and so allow communities to prosper.”
                                                         Kofi Annan, UN Secretary General1


         Microfinance2 has the ability to empower the poor, to create jobs, to raise incomes
and to improve micro-enterprise performance. Throughout the second half of the 20th
century, countries throughout the developing world have been implementing
microfinance as an effective development tool. The Grameen Bank in Bangladesh, along
with Bancosol in Bolivia are two examples of successful microfinance institutions (MFIs)
reaching out to thousands of poor people. As a testimony to the power of microfinance,
the United Nations has declared the year 2005 as the International Year of Microcredit. 3
In light of this, on 28th February 2005,4 Indonesia’s President, Susilo Bambang
Yudhoyono announced 2005 as Indonesia’s Year of Microcredit, with the aim of
1
   Kofi Annan, “Microcredit Extends Same Rights to the Poor as are Available to Everyone Else, says
Secretary-General in message to Launch Ceremony for International Year”, Press Release
SG/SM/9601DEV/2494GA/EF/3099,                  http:/www.un.org/News/Press/docs/2004/sgsm9601.doc.htm,
07/08/05.
2
  Microfinance refers to loans, savings, insurance, transfer services and other financial services targeted at
low income clients. Microcredit refers to a small loan to a client.
3
  International Year of Microcredit, “Learn about the Year”, www.yearofmicrocredit.org/, 06/06/05.
4
   Republika, Tahun Keuangan Mikro Indonesia (The Indonesian Year of Microcredit), 22/02/05 and
Rudjito, Asosiasi Perbankan Indonesia, “Innovasi Metodologi dan Pengembangan Produk Keuangan Mikro
Untuk Mencapai Pelayanan Yang Berkelanjutan”, Temu Nasional dan Bazaar ke II Keuangan Mikro
Indonesia, (The Second National Meeting & Bazaar of Microfinance in Indonesia) Solo, 4 – 8 September
2005.


                                                                                                            1
decreasing unemployment, (10.9 million in February 2005)5, alleviating poverty, (16.7%
of 215 million population in 2004)6, and increasing economic growth through the power
of the micro, small and medium enterprise sector, (micro and small enterprises represent
99.9% of total micro, small and medium enterprises)7.


       Indonesia has been described as the ‘Mecca of Microfinance’.8 In 2005, Indonesia
accommodates at least fifteen different microfinance providers, with microfinance
services being implemented by the banking, cooperative, non-governmental organisation
(NGO), private, government and informal sectors. From microfinance according to
Islamic principles and credit unions, to commercial microfinance and pawning,
microfinance in Indonesia is by no means homogeneous, with each MFI operating
according to different regulations and procedures. Koperasi simpan pinjam (KSP), or
savings and credit cooperatives, represent just one of the many MFIs currently operating
in Indonesia. As part of the cooperative sector, savings and credit cooperatives provide
microfinance according to cooperative principles.


       My survey of the vast quantity of literature available on microfinance did not,
however, reveal substantial amounts of information regarding savings and credit
cooperatives. Literature concerning microfinance in Indonesia seems to gravitate towards
the experiences and success of Bank Rakyat Indonesia (BRI), The Indonesian People’s
Bank, leaving a gap regarding provision of microfinance through the Indonesian
cooperative sector. This gap, along with my previous research conducted in the
Indonesian savings and credit cooperative field, led me to the topic of this thesis.
Between February and June 2004 I undertook five months field work in Indonesia at two
savings and credit cooperatives in Malang, East Java in order to write a thesis for the



5
  Kompas, Penganggur Bertambah 600 000 Orang (Unemployed Increaseas by 600 000), 02/07/05.
6
  Dr Sumedi Andono Mulyo, Bappenas, “Peran Keuangan Mikro Dalam Strategi Nasional Penanggulangan
Kemiskinan Dan Pembangunan Indonesia”, Temu Nasional dan Bazaar ke II Keuangan Mikro Indonesia,
Solo, 4 – 8 September 2005.
7
  Bambang Ismawan & Setyo Budiantaro, Keuangan Mikro: Sebuah Revolusi Tersembunyi Dari Bawah,
Jakarta: Gema PKM, August 2005, p. 6.
8
  Riza Pimahendra, “Pelaporan Hasil Diskusi dan Penyusunan Komite Bersama”, Temu Nasional dan
Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.


                                                                                              2
University of Muhammadiyah Malang.9 This previous field work along with further
research and study upon returning to Australia in July 2004 has encouraged me to
continue researching this aspect of Indonesia’s economy. In earlier stages of this thesis I
had planned to include sections regarding the different types of MFIs operating in
Indonesia, along with the general weaknesses of the Indonesian microfinance sector. As
the thesis developed however, I found it necessary to focus solely on credit and savings
cooperatives and have included information regarding the types and weaknesses of MFIs
in Indonesia in the appendix.10


        This thesis then, seeks to explore and conclude the effectiveness of savings and
credit cooperatives in their implementation of theoretically defined principles of
successful microfinance. Therefore, this thesis answers the following question:
        How effective are savings and credit cooperatives in East Java in
        implementing theoretically defined principles of successful microfinance?
This thesis looks in depth at two savings and credit cooperatives, Koperasi Citra Lestari
and Koperasi Mawar Putih, both located in Malang, East Java. I will define their levels
of effectiveness in accordance with their implementation of theoretically defined
principles of successful microfinance. As one of the many MFIs currently operating in
Indonesia during the International Year of Microcredit 2005, it is important to understand
and define the role savings and credit cooperatives play in the empowerment of the poor
and low income earning Indonesian community.


        The theoretically defined principles of successful microfinance referred to in the
research question represent the methodology of this thesis. This methodology
incorporates single insights, ideas and conclusions regarding the successful operation of a
MFI from a range of sources of microfinance literature. This literature survey comprises
studies done by academics from several international organisations such as the World
Bank,11 programs and best practices of CGAP12 (Consultative Group to Assist the Poor)


9
      N.   Hall,    “Koperasi      Simpan      Pinjam      di     Kota    dan     Kabupaten      Malang”,
www.acicis.murdoch.edu.au/hi/field_topics/nhall.doc, 04/06/05.
10
   See Appendix One for discussion regarding the four different types of MFIs operating in Indonesia and
Appendix Two for discussion regarding the weaknesses of the Indonesian microfinance sector.


                                                                                                       3
and the United Nations,13 and case studies and conclusions from experts in the
microfinance field including B. Quinones14 and J. Remenyi. 15 A survey of these sources
and others within the categories listed above has enabled me to create 40 specific
principles relevant to the implementation of successful microfinance.


        These 40 principles can be divided into seven areas including loans, savings,
documentation and performance monitoring, management, financial management, risk
management and tailoring the program to the clients’ needs. I have combined these seven
areas and 40 principles to form an effectiveness checklist that is used to evaluate the
effectiveness of the two savings and credit cooperatives, Koperasi Citra Lestari and
Koperasi Mawar Putih. The 40 principles, seven areas, and effectiveness checklist
included in the methodology are discussed in greater detail in Chapter Two. This is
followed by an evaluation of Koperasi Citra Lestari and Koperasi Mawar Putih's success
according to these principles in Chapters Three and Four.


        The information in this thesis is derived from four different sources. Firstly, I
have conducted a survey of microfinance literature. I have used books, papers, case
studies and journal articles written by experts in the microfinance field. Secondly, I have
collected Indonesian newspaper articles concerning microfinance in Indonesia. These
newspapers include Kompas, Jawa Pos, Bisnis Indonesia, Republika, Surya, Suara
Pembaruan and Malang Post. These newspaper articles and the microfinance literature
referred to above can be seen in the footnotes throughout this thesis. Thirdly, in 2005 I
attended three conferences concerning microfinance in Indonesia and Southeast Asia. I
attended a “Skills for Microfinance Managers Course” in financial analysis run by
Prudentia, an Indonesian non-governmental organisation concerned with microfinance
capacity building. I also attended The Indonesian Movement for Microfinance
11
   M. Robinson, The Microfinance Revolution: Sustainable Finance for the Poor, The World Bank, June
2001.
12
   CGAP, “Key Principles of Microfinance”, http://www.cgap.org/keyprinciples.html, 07/06/05.
13
   UNCDF, “MICROSTART: A Guide for Planning, Starting and Managing a Microfinance Programme”,
http://www.uncdf.org/english/microfinance/microstart/guide/contents.php , 07/06/05.
14
   J.Remenyi & B. Quinones, jr., (eds), Microfinance and Poverty Alleviation: Case Studies from Asia and
the Pacific, Asia Pacific Development Council, 2000.
15
   J. Remenyi, Where Credit is Due: Income Generating Programs for the Poor in Developing Countries,
London: IT Publications, 1991.


                                                                                                      4
Development’s (Gema PKM) second national meeting in Solo.16 Finally, I attended a
conference run by the Asia Research Institute at the National University of Singapore
called “From Moneylenders to Microfinance”.17


        The fourth source of information includes field work conducted in Indonesia
during June and July 2005. This field work involves interviews with Harya Sumarta, the
secretary of Gema PKM, the Indonesian Movement for Microfinance Development,18
Novanto Agus,19 director of Prudentia, and others employed in the Indonesian
microfinance sector listed in the footnotes. The second component of this field work
includes research completed at Koperasi Citra Lestari and Koperasi Mawar Putih in
Malang, East Java. At Koperasi Citra Lestari I conducted three interviews with their
three head managers, one interview with two cooperative staff and attended four group
meetings. At Koperasi Mawar Putih I conducted five interviews with the three managers,
one interview with the six group leaders and attended two group meetings. At the group
meetings at both cooperatives I interviewed group members collectively and individually,
allowing me to gain both management and member perspectives. A list of these
interviews is included in Appendix Three.


        There are four original aspects in this thesis. Firstly, as discussed above, this
thesis addresses the gap identified in my survey of microfinance literature regarding
savings and credit cooperatives in Indonesia. Secondly, the primary focus of this thesis is
a case study of Koperasi Citra Lestari and Koperasi Mawar Putih, two savings and credit
cooperatives in East Java. To my knowledge, Koperasi Citra Lestari and Koperasi
Mawar Putih have not been the subject of this form of research in the past. Thirdly, I
have used the opinions, insights, ideas and conclusions of experts in the microfinance
field to create an original checklist that will be used to evaluate the effectiveness of
Koperasi Citra Lestari and Koperasi Mawar Putih. Fourthly, as outlined in the above
paragraph, I have used interviews conducted during the research period as the primary

16
   Gema PKM, Temu Nasional dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.
17
    Asia Research Institute, From Moneylenders to Microfinance, National University of Singapore, 7-8
October 2005.
18
   Interview with Harya Sumarta, Secretary, Gema PKM, Jakarta, 02/08/05.
19
   Interview with Novanto Agus, Prudentia, via email, 11/08/05.


                                                                                                   5
source of information for the case studies. It is hoped that these four aspects will allow
me to make an original contribution to the existing literature on microfinance in
Indonesia.


        All citations and footnotes are presented in accordance with procedures outlined
in the UNSW School of History Essay Guide.20 Unless otherwise indicated, all
translations are my own.


        This thesis is divided into four chapters. Chapter One introduces the Indonesian
cooperative sector and the three types of cooperatives involved in the provision of
microfinance: koperasi simpan pinjam (KSP), savings and credit cooperatives, unit
simpan pinjam (USP), savings and credit units and koperasi kredit, credit unions. This
chapter continues by outlining the seven weaknesses of the cooperative sector as a whole.
This introduction to the cooperative sector helps us to understand the background of the
two savings and credit cooperatives introduced in Chapter Two and discussed in detail in
Chapters Three and Four.


        Chapter Two introduces Koperasi Citra Lestari and Koperasi Mawar Putih. As
primary cooperatives of PUSKOWANJATI, (Pusat Koperasi Wanita Jawa Timur), The
East Javanese Women’s Cooperative Centre, the basis of Koperasi Citra Lestari and
Koperasi Mawar Putih's operation is the tanggung renteng, or mutual guarantee system.
Chapter Two continues by developing and defining the methodology of this thesis. The
40 principles of the effectiveness checklist are discussed in relation to the seven areas of
key importance to the implementation of successful microfinance. These areas include
loans, savings, documentation and performance monitoring, management, financial
management, risk management and tailoring the program to the clients’ needs.


        Chapters Three and Four are the primary focus of this thesis, derived from the
field work conducted in June and July 2005. These chapters discuss Koperasi Citra
Lestari and Koperasi Mawar Putih in terms of their effectiveness at implementing the
20
  This guide can be viewed at the following website:
http://www.history.arts.unsw.edu.au/currentstudents/essay_guide/4referencing.html.


                                                                                          6
theoretically defined principles of successful microfinance outlined in Chapter Two.
Koperasi Citra Lestari and Koperasi Mawar Putih are discussed with direct relation to
the 40 principles in the effectiveness checklist. Chapters Three and Four reveal that
Koperasi Citra Lestari is more effective than Koperasi Mawar Putih in implementing the
theoretically defined principles of microfinance.


       Koperasi Citra Lestari has proved to be effective in implementing 32 out of the
40 principles in the effectiveness checklist. Koperasi Citra Lestari has numerous
strengths, particularly with regard to their savings products and their ability to take into
account their clients’ needs. Primary weaknesses include some non attendance at group
meetings and some inconsistencies with late repayment procedures impacting on the
efficiency of the tanggung renteng system. Irregular training of management and
members is a further cause for concern.


       Koperasi Mawar Putih on the other hand, is inefficient with regard to 17 of the
principles outlined in the effectiveness checklist. At Koperasi Mawar Putih, five distinct
weaknesses in the tanggung renteng system are significantly influencing the overall
effectiveness of this savings and credit cooperative. Loan approval without the 50% + 1
group signatures requirement, along with staff regularly allowing members to pay double
their repayment the following week are threatening the tanggung renteng system and
have led to low levels of peer mobilisation. Weaknesses in the tanggung renteng system
combined with twelve other significant weaknesses combine to reduce the effectiveness
of Koperasi Mawar Putih in implementing the theoretically defined principles of
successful microfinance.


       This thesis therefore concludes the effectiveness of two savings and credit
cooperatives, Koperasi Citra Lestari and Koperasi Mawar Putih operating in East Java.
Koperasi Citra Lestari and Koperasi Mawar Putih are both effective in all principles of
the savings methodology. Common weaknesses include inefficiencies of the tanggung
renteng system and infrequent training of management and members. My research has
shown that in terms of the 40 principles in the effectiveness checklist, Koperasi Citra



                                                                                          7
Lestari is 80% effective and Koperasi Mawar Putih is 57.5% effective. Koperasi Mawar
Putih therefore has a bigger challenge in proving the value of microfinance outlined by
Kofi Annan as a weapon against poverty and hunger.




                                                                                     8
                                             CHAPTER 1

                    The Indonesian Cooperative Sector

       Chapter One discusses the Indonesian cooperative sector. Savings and credit
cooperatives (KSP), savings and credit units (USP), and credit unions will be discussed in
terms of their provision of microfinance services. This information is followed with
identification of seven weaknesses obstructing efficient cooperative development.
Chapter One explores one component of the vast Indonesian microfinance sector.
Focusing on the cooperative sector, Chapter One provides background information for
the case studies to be introduced in Chapter Two and discussed in detail in Chapters
Three and Four. In order to answer the research question and understand two specific
cooperatives’ effectiveness in implementing the theoretically defined principles of
microfinance, an understanding of the cooperative sector and its weaknesses is required.
Therefore, this chapter provides additional information to be considered as this thesis
evaluates the effectiveness of two savings and credit cooperatives in East Java.


       Chapter One begins with a brief introductory paragraph discussing the Indonesian
microfinance sector as a whole, followed by two main sections and a conclusion. The
first main section introduces the Indonesian cooperative sector. A brief history is
provided, followed by the definition of KSP, USP and credit unions as the types of
cooperatives engaging in microfinance services. Operational differences between the
three types of cooperative MFIs are considered, followed by information regarding their
levels of outreach to the Indonesian population. The second section of Chapter One
defines seven weaknesses and problems within the cooperative sector. These weaknesses
include the high degree of cooperative inactivity and closure rate, the inefficient role of
the Ministry of Cooperatives, high levels of government dependence, unreliable reporting
mechanisms, weak management skills, high levels of corruption and mismanagement,
and entry restrictions. These seven weaknesses and problems place restrictions on the




                                                                                         9
Indonesian cooperative sector, and need to be considered as we discuss the two KSP case
studies in later chapters.


        The conclusions made in Chapter One are derived from both primary and
secondary sources. Primary sources include interviews and field research21 conducted
during the research period of June and July 2005. Interviews have been conducted with
Harya Sumarta,22 the secretary of Gema PKM (The Indonesian Movement for
Microfinance Development), Novanto Agus,23 director of Prudentia,24 and Syachriel
Arifin25 from Mercy Corps.26 Secondary sources include newspaper articles collected
from Kompas, Bisnis Indonesia, Jawa Pos, Republika and Malang Post. Further
secondary sources include literature regarding the cooperative sector in Indonesia as seen
in the footnotes.


1.1 An Introduction to the Indonesian Microfinance Sector

        In December 1895, Indonesia began its journey in microfinance with the
establishment of the Bank of Purwokerto in Central Java.27 110 years later in 2005, the
Bank of Purwokerto’s successor, Bank Rakyat Indonesia (BRI), The Indonesian People’s
Bank, now provides microcredit loans to over 21 million Indonesians.28 Pegadaian on the
other hand, Indonesia’s state-owned pawning company, provides a further 9 million
microcredit loans to poor and low income earners throughout the archipelago. 29 At 110
years old, the microfinance sector in Indonesia has grown substantially, with numerous
different microfinance providers operating in 2005. Microfinance services are provided
by the banking, cooperative, NGO, private, government and informal sectors.


21
   Field visit to Koperasi Patitis Sae, Sitiarjo, 27/07/05.
22
   Interview with Harya Sumarta, Secretary Gema PKM, Jakarta, 02/08/05.
23
   Interview with Novanto Agus, Prudentia, via email, 11/08/05.
24
   Prudentia is an Indonesian micro, small and medium enterprise development centre providing various
training courses for providers of microfinance.
25
   Interview with Syachriel Arifin, Assistant Program Manager, Mercy Corps, Batu, 18/07/05.
26
    Mercy Corps is an international NGO currently working with the linkage program in the Indonesian
microfinance sector. See www.mercycorps.org.
27
   Titus K. Kurnadi, Gema PKM, “Upacara Pembukaan”, Temu Nasional dan Bazaar ke II Keuangan Mikro
Indonesia, Solo, 4 – 8 September 2005.
28
   Ismawan & Budiantaro, Keuangan Mikro, p. 32.
29
   ibid.


                                                                                                  10
        As outlined in the introduction, at an earlier stage while writing this thesis I had
planned to develop sections regarding the different types of MFIs in Indonesia and
weaknesses of the Indonesian microfinance sector in general. As the thesis developed, I
found it necessary to discuss the two savings and credit cooperative case studies at
length. Therefore, information regarding the four different types of MFI operating in
Indonesia and their weaknesses can be found in Appendix One and Two of this thesis. A
brief overview of the information in the appendix will be provided now and will be
expanded upon in the appendix.


        Firstly, my research30 has enabled me to gather information on 15 different MFIs
and categorise them into four different types including, bank MFI, cooperative MFI, non-
bank and non-cooperative MFI, along with central and regional government MFI and
microfinance projects. Secondly, despite the fact that Indonesia is blessed with many
different microfinance providers, twelve specific weaknesses threaten and obstruct their
development.31 These two factors must be considered when reading this thesis. It is
important to remember that savings and credit cooperatives represent one piece of the
Indonesian microfinance puzzle. Savings and credit cooperatives are part of a huge
microfinance sector with a variety of different players, regulations, outreach,
performance levels and weaknesses.


1.2 The Indonesian Cooperative Sector

        The cooperative sector has a long history in Indonesia. Cooperatives have been
part of the Indonesian economy since colonial times, the cooperative movement gaining
full momentum at the time of Indonesia’s independence in 1945. According to Article 33
of Indonesia’s 1945 Constitution, the national economy is to be organised according to


30
   This research includes the literature survey, attendance of two conferences: Gema PKM, Temu Nasional
dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005 and Asia Research Institute,
From Moneylenders to Microfinance, National University of Singapore, Singapore, 7-8 October 2005,
interviews, field visits and observation conducted during the research period in June and July 2005.
31
   These weaknesses include: lack of understanding of the definition and concept of microfinance, weak
government role, failure of government and banks to commit to increased credit promises, lack of
appropriate legal framework, failure to adequately implement the International Year of Microcredit 2005,
lack of access to capital, lack of micro-insurance, inadequate supervision, lack of benchmarks or
performance measuring tools, weak management and a persistent gap between demand and supply.


                                                                                                     11
cooperative and family principles.32 Muhammad Hatta, Indonesia’s father of cooperatives
and Indonesia’s vice president at that time, stated that cooperatives were to form the
foundation of the Indonesian economy on the basis that this would enable the creation of
a collective community based on tolerance, responsibility and democracy. 33 According to
Hatta,


         “…koperasi Indonesia menciptakan masyarakat kolektif yang berakar pada adat-
         istiadat asli masyarakat Indonesia. Ini berarti, semangat kolektivitas yang akan
         dikembangkan harus mengutamakan kerjasama asas kekeluargaan…”

         “…Indonesian cooperatives create a collective community rooted in the customs
         of the traditional Indonesian community. This means, the spirit of collectivity that
         will be developed must give priority to cooperation on the basis of the family
         principle…” 34

         Cooperatives, based on the principles of mutual cooperation, increasing
community welfare and voluntary membership,35 appeared to be the appropriate vehicle
to achieve Hatta’s goals. In an attempt to ensure cooperatives would help achieve these
goals, Article 60 of the Constitution requires the Indonesian government to create
favourable conditions for the growth of cooperatives, providing guidance, protection and
preferential treatment.36 Ironically, this article coexists with international cooperative
principles including independence and self-reliance. As a result, during the New Order,
koperasi unit desa (KUD), or village unit cooperatives, were used to channel cheap credit
to targeted groups, with unfavourable consequences for the majority of this economic
sector.37 These consequences will be discussed further on in this chapter.


         There are many different types of cooperatives operating in Indonesia. Koperasi
simpan pinjam (KSP), savings and credit cooperatives, unit simpan pinjam (USP),
savings and credit units, along with koperasi kredit or credit unions are the three types of

32
   Dr. Detlev Holloh, ProFi Microfinance Institutions Study, Denpasar, March 2001, p. 157.
33
   Republika, Revitalisasi Gerakan Koperasi di Indonesia (Revitalisation of the Cooperative Movement in
Indonesia), 11/07/05.
34
   ibid.
35
   Hudiyanto, Sistem Koperasi: Ideologi dan Pengelolaan, 2002, Yogyakarta: UII Press, p. 49.
36
   Holloh, ProFi Microfinance, pp. 157-178.
37
     BWTP, Asia Resource Centre for Microfinance (ARCM), “Country Profile: Indonesia,”
http://www.bwtp.org/arcm/indonesia/I_Country_Profile/Indonesia_country_profile.htm, 11/05/05.


                                                                                                    12
cooperatives involved with the provision of microfinance. KSP are specifically regulated
by government regulation no. 9 of 1995 and ministerial decree no. 351 of 1998. These
laws stipulate that savings and credit procedures may only be carried out by KSP and
USP. Secondly, establishments of KSP require at least 20 members for a primary
cooperative and three primary cooperatives for the establishment of a secondary
cooperative.


           KSP and USP are licensed, regulated and supervised by Menkop, the Ministry of
Cooperatives. Menkop was formed in 1958 and carries out its duties via direct ministry
offices located in all provinces of the archipelago. Their role, stipulated in ministerial
decree no. 9 of 1990, is to undertake inspections of cooperatives and provide both
financial and operational advice. Audits are required for KSP and USP with an annual
turnover greater than Rp. 1 billion and general assessments for cooperatives older than
two years are carried out at the end of each financial year. It is the Ministry of
Cooperative’s role to provide these services and assessments.38


           KSP and USP differ in terms of their operation. KSP are a form of cooperative
operating directly within the savings and credit field. USP on the other hand, refer to
multi-purpose cooperatives with some form of savings and credit unit in operation. This
is not their primary source of operation and is conducted as an additional activity. As
cooperatives, KSP and USP operate on the basis of membership. Members are required to
pay both an initial principal saving and continual compulsory monthly savings in order to
benefit from the cooperative’s services. KSP provide both savings and credit services to
members. According to Bu Wiwik, the treasurer of Koperasi Mawar Putih, a savings and
credit cooperative in East Java,39

           “…koperasi untuk anggota, dari anggota dan oleh anggota…”

           “…cooperatives are for members, from members and by members…”




38
     Holloh, ProFi Microfinance, pp. 157-178.
39
     Bu Wiwik, Treasurer, Koperasi Mawar Putih, 26/07/05.


                                                                                       13
Therefore KSP exist for the benefit and welfare of their members and are committed to
the provision of savings and credit services.


        Credit unions represent a third cooperative MFI operating in Indonesia.
Indonesian credit unions are part of a world wide and Asian region credit union
network,40 along with direct national and regional supervision under Induk Koperasi
Kredit (INKOPDIT), the National Secondary Unit of Credit Unions, and Pusat Koperasi
Kredit (PUSKOPDIT), the Regional Secondary Unit of Credit Unions. Since 2001, credit
unions have been implementing the CUMI (Credit Union Microfinance Innovation)
system. This program targets the economically active poor, with a three month
compulsory savings policy taking place before any credit is given. A field visit to a credit
union located in the village of Sitiarjo, East Java allowed me to personally see the
benefits of this program. Koperasi Kredit Patitis Sae currently has 375 members in their
CUMI program operating within 38 groups. Groups are formed with approximately eight
people, with the total savings of the group representing the total amount of loans able to
be disbursed among members.41 This develops savings as a valuable habit among
members of this program.


        In 2004, there were a total of 130 730 cooperatives operating in Indonesia on a
national level. Over 24 million of Indonesia’s population are members of these
cooperatives. KSP, USP and credit unions represent a small proportion of Indonesia’s
cooperative sector. In terms of outreach, KSP, USP and credit unions are less successful
in comparison with numbers reached by other microfinance providers currently operating
in Indonesia.42 The following table provides a summary of total units, borrowers, loan
value and savings.43



40
   Indonesian credit unions are part of the World Council of Credit Unions (WOCCU), and the Association
of Asian Confederation of Credit Unions (ACCU).
41
   Field Visit to Koperasi Kredit Patitis Sae, Sitiarjo, 27/07/05.
42
   Refer to the table in Appendix One.
43
   Information on KSP and USP from Ismawan & Budiantaro, Keuangan Mikro, p. 32., Gema PKM, Pokok
Pokok Pikiran Gema PKM Indonesian Tentang Kebijakan Nasional: Pengembangan Keuangan Mikro
Sebagai        Pembangunan        Indonesia,       2004      and   ProFI,   “The    Credit    Unions”,
http://www.profi.or.id/engl/mapping/scripte/inst.credit.PDF, 03/11/05.


                                                                                                    14
Table 1.1 Cooperative Outreach
                     Total Units          Total                Total Loan            Total Savings
                                          Borrowers            Value
KSP                  1 097                665 000              Rp. 531 trillion      Rp. 85 trillion
USP                  35 218               Not available        Rp. 3 629             Rp. 1 157
                                                               trillion              trillion
Credit Unions        1 022                497 531              Rp. 950 billion       Rp. 600 billion

From the table it can be seen that cooperatives providing microfinance services are
providing loans to approximately 1 million Indonesians, without taking into account
those reached by USP. In comparison with other MFIs, for example BRI and pegadaian,
cooperative MFIs have achieved less overall outreach.


1.3 Weaknesses of the Cooperative Sector

        Limited outreach of KSP, USP and credit unions can be partly contributed to the
many problems and weaknesses ingrained within the cooperative sector. The cooperative
sector is victim to seven specific areas of weakness. These seven areas have been
identified following several months of newspaper article collection,44 literature survey,
observation while in Indonesia, along with interviews with cooperative managers and
prominent members within the Indonesian microfinance community.45


        The first problem identified with regard to the cooperative sector relates to the
high degree of inactivity and closure rate. Throughout Indonesia, cooperatives are being
forced to close due to a variety of weaknesses that will be discussed below. In East Java
for example, 1 000 cooperatives were forced to close in July 2005 due to lack of
independence, reliance on the government and unprofessional management. 46 At the end
of June 2005, 306 cooperatives in Yogyakarta ceased operation due to management
inefficiency, bankruptcy and cases of corruption.47 Thirdly, in Malang, East Java, one
newspaper has stated that of 630 cooperatives located in the city of Malang, 50% are no

44
   Newspapers include Kompas, Jawa Pos, Bisnis Indonesia and Malang Post.
45
    Harya Sumarta, Secretary, Gema PKM, 02/08/05, Novanto Agus, Director, Prudentia, 11/08/05,
Syachriel Arifin, Assistant Program Director, Mercy Corps, 18/07/05.
46
   Kompas, 1 000 Koperasi Bakal Mati (1 000 Cooperatives Will Close), 09/07/05.
47
   Jawa Pos, 306 Koperasi DIJ Beku (306 Cooperatives in the Special Area of Jogjakarta Cease Operation),
10/07/05.


                                                                                                     15
longer in operation. Hundreds of cooperatives are reportedly closing down due to lack of
managerial ability. 30% of cooperatives in this city are claimed to be active, 20%
experiencing deflated development and 25% will fail to achieve five years operation.48
Located in Sukun and Lawang, Koperasi Mawar Putih and Koperasi Citra Lestari are
affected by this non-activity and closure rate. Press articles reporting on the above items,
along with unpleasant experiences of local community members with cooperatives taints
the image of savings and credit cooperatives such as Koperasi Citra Lestari and
Koperasi Mawar Putih and their membership of the cooperative sector as a whole.


        The second cause of weakness within the cooperative sector is the inefficient role
of the Ministry of Cooperatives in implementing their role as the regulator and supervisor
of this industry. Supervision problems are not unique to the cooperative sector however,
with other types of MFI also suffering from ineffective supervision.49 With regard to the
Ministry of Cooperatives specifically, existing regulations are not translated into practice
and not correctly enforced. Willingness to carry out effective supervision has not been
shown, the representatives from the Ministry of Cooperatives known for their desire to be
entertained not to effectively supervise.50 Audits for example are only required for KSP
and USP with an annual turnover greater than Rp. 1 billion and general assessments are
only carried out for cooperatives older than two years.51 These two conditions threaten
the health of the cooperative sector, the first two years being the most crucial in the life of
MFIs and external auditing important for the protection of members. However,
cooperative closure outlined in the above section does suggest that supervision is taking
place to some extent, which appears promising.


        The third weakness, government dependence, results from preferential treatment
given to cooperatives following Indonesia’s independence in 1945. During the New
Order, the Suharto government used cooperatives to channel cheap credit to targeted

48
   Bisnis Indonesia, 50% Koperasi Malang Tinggal Papan Nama (50% of Cooperatives in Malang Remain
in Name Form Only), 20/07/05.
49
   Riza Primahendra, HKTI, “Badan Pengawas & Otoritas Keuangan Mikro”, Gema PKM, Temu Nasional
dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.
50
   Interview with Syachriel Arifin, Assistant Program Director, Mercy Corps, Batu, 18/07/05.
51
   Holloh, ProFi Microfinance, pg. 157.


                                                                                              16
groups, and cooperatives today still suffer from this intervention.52 According to Dr
Detlev Holloh of ProFI,

        “30 years of government intervention, preferential treatment and subsidies have
        eroded voluntarism, transparency, democracy, self-reliance and independence as
        features of cooperative practice.” 53

The laws requiring preferential treatment of cooperatives have worked against the sector
and have created high levels of dependence, such that many cooperatives are far from
achieving financial self-sufficiency.


        Fourthly, the cooperative sector is known as the worst documented micro-finance
sub sector, ultimately due to lack of supervision, unreliable reporting and out of date
data. Cooperative reporting techniques are long and distorted, characterised by lack of
attention to detail and information. Cooperatives do not report according to schedule and
lack effective reporting instruments.54 These unreliable reporting mechanisms have led to
difficulties in finding up to date information. For example, all microfinance studies
consulted, even 2005 papers, use cooperative data collected in 2000. However, unreliable
reporting is not a weakness of the cooperative sector alone. The Indonesian microfinance
sector as a whole is weakened and limited by the absence of benchmarks and
performance measuring tools. Standard reporting mechanisms are yet to be developed,
leading to confusion and poor information available for the sector as a whole.55


        Like the Indonesian microfinance sector as a whole, the cooperative sector also
suffers from a variety of management weaknesses, the “bottom-up” principle commonly
turned upside down and replaced with a “top-down” structure.56 Management weaknesses
also include lack of know-how with regard to financial accounting and operational



52
     BWTP, Asia Resource Centre for Microfinance (ARCM), “Country Profile: Indonesia”,
http://www.bwtp.org/arcm/indonesia/I_Country_Profile/Indonesia_country_profile.htm, 11/05/05.
53
   Holloh, ProFi Microfinance, p. 165.
54
   ibid, pp. 175-178.
55
   Interview with Novanto Agus, Prudentia, via email, 11/08/05.
56
    Republika, Revitalisasi Gerakan Koperasi di Indonesia (Revitalisation of the Indonesian Cooperative
Movement), 11/07/05.


                                                                                                    17
existence,57 leading to debt problems and operational difficulties.58 This can be seen in
Koperasi Mawar Putih, the case study to be discussed in Chapter Four, with poor
management control and handling of late repayments.59


        Low management quality frequently leads to acts of deviance, the sixth weakness
identified within the cooperative sector. The cooperative sector is embedded with cases
of corruption and mismanagement, with almost daily reports of deviances committed by
cooperative staff or managers.

        “Selain tidak memiliki kemampuan manajerial yang memadai, matinya koperasi
        di kota ini juga akibat pengelolanya yang hanya ingin mencoba peruntungan di
        sektor itu.”

        “Apart from the absence of sufficient managerial ability, the closure of
        cooperatives in this city is also the result of managers only seeking profits.” 60

This can be displayed by two recent cases reported in Malang newspapers concerning
local cooperatives. In July 2005, a supervisor from Koperasi Sumber Makmur Ngantang,
was investigated for corruption.61 Similarly, at Koperasi Artasari in Singosari, an
employee has been accused of creating fictional members and using their “loans” as his
own money.62 These cases of corruption and mismanagement have tainted the
cooperative image within the nation and will continue to impact upon this sector of the
economy.


        A final weaknesses identified by Gema PKM is the problem of entry restrictions,
as in order to obtain a loan one must become a member of the cooperative. This can be
considered as a barrier to development and limits the extent to which cooperatives can
reach and empower the community. Clearly this depends on the amount required to

57
   Interview with Syachriel Arifin, Assistant Program Director, Mercy Corps, Batu, 18/07/05.
58
    Kompas, Bank Didorong Salurkan Kredit ke Usaha Mikro (Banks Encouraged to Channel Credit to
Micro-enterprises), 13/07/05.
59
   Refer to section 4.6 regarding Risk Management in Chapter Four.
60
   Bisnis Indonesia, 50% Koperasi Malang Tinggal Papan Nama (50% of Cooperatives in Malang Remain
in Name Form Only), 20/07/05.
61
    Malang Post, Pengawas KSM Ngantang Diperiksa (Supervisor at KSM Ngantang Investigated),
14/07/05.
62
   Malang Post, Pakai Data Palsu, Bobol Koperasi (False Data Used, Cooperative Destroyed), 21/07/05.


                                                                                                 18
become a member, but can have a huge effect on poor and low income earners. These
entry restrictions and the payment of principal saving will be discussed further in the case
study analysis.63


           The above discussion has shown that the cooperative sector is victim to many
weaknesses and problems. These problems and weaknesses combine to create an overall
negative image of the Indonesian cooperative sector. Furthermore, the seven identified
weaknesses and problems influence individual cooperative implementation of successful
microfinance principles. These weaknesses restrict cooperative MFIs ability to fulfill the
goals of microfinance.


1.4 Conclusion

           Chapter One has discussed the Indonesian cooperative sector. Cooperatives have
been in operation in Indonesia since colonial times and the 1945 constitution states that
the economy is to be organised according to cooperative principles. Chapter One
identified three types of microfinance cooperatives: savings and credit cooperatives
(KSP), savings and credit units (USP) and credit unions. KSP and USP are licensed,
regulated and supervised by the Ministry of Cooperatives. Credit Unions on the other
hand are regulated and supervised by INKOPDIT and PUSKOPDIT. This chapter
concluded that these three types of cooperative MFI are less successful in terms of
outreach than other MFI currently operating in Indonesia.


           Finally, Chapter One has made conclusions regarding the weaknesses and
problems embedded in the cooperative sector. Seven main weaknesses have been
identified, including the high degree of inactivity and closure rate, the inefficient role of
the Ministry of Cooperatives, high levels of government dependence, unreliable reporting
mechanisms, weak management skills, high levels of corruption and mismanagement and
entry restrictions. These seven weaknesses combine to create a negative image of the
Indonesian cooperative sector and influence the ability of individual cooperative MFIs to
effectively implement principles of successful microfinance.

63
     Refer to sections 3.2 and 4.2 in Chapters Three and Four.


                                                                                          19
                                              CHAPTER 2

                          Developing the Framework

       Chapter Two introduces the two koperasi simpan pinjam, or savings and credit
cooperatives to be discussed in Chapters Three and Four. Background information
regarding Koperasi Citra Lestari and Koperasi Mawar Putih is provided, along with a
discussion of their relationship with secondary cooperative PUSKOWANJATI, Pusat
Koperasi Wanita Jawa Timur, The East Javanese Women’s Cooperative Centre. As
primary cooperatives of PUSKOWANJATI, Koperasi Citra Lestari and Koperasi Mawar
Putih use the tanggung renteng, or mutual guarantee system. As the basis of the savings
and credit cooperative system, the tanggung renteng system is discussed and related to
the case studies.


       Secondly, Chapter Two develops and defines the methodology to be used and
discussed with relation to Koperasi Citra Lestari and Koperasi Mawar Putih in the
following two chapters. With specific discussion of two Indonesian savings and credit
cooperatives, Chapter Two continues the in depth information regarding the cooperative
sector in Indonesia. This information adds to the picture developed in Chapter One and
provides an introduction to the case studies to be discussed in Chapters Three and Four.
Chapter Two links directly with the research question as it introduces two savings and
credit cooperative case studies located in East Java, and secondly defines the theoretical
principles of successful microfinance in detail.


       Chapter Two can be divided into five sections followed by the conclusion. The
first two sections introduce Koperasi Citra Lestari and Koperasi Mawar Putih.
Discussion of their history and establishment takes place, followed by information
regarding the research areas of Lawang and Sukun. Location and demographics are
considered in order to gain a perspective on the members and potential members of
Koperasi Citra Lestari and Koperasi Mawar Putih. These sections conclude with



                                                                                       20
discussion regarding loan use of members at the two cooperatives. Section three of this
chapter discusses the secondary cooperative PUSKOWANJATI, and is followed by
information regarding the tanggung renteng system.


       The first four sections within this chapter are derived from interviews, observation
and pamphlet collection at Koperasi Citra Lestari and Koperasi Mawar Putih undertaken
in June and July 2005. The beginning four sections of Chapter Two conclude with the
similarities and differences between Koperasi Citra Lestari and Koperasi Mawar Putih.
It will be seen that the two cooperatives are similar in terms of their relationship with
PUSKOWANJATI, their incorporation of the tanggung renteng system, subsequent self-
selection of members and loan use. The two cooperatives differ in terms of their location
and levels of outreach, with Koperasi Citra Lestari reaching almost 3 500 more clients
than Koperasi Mawar Putih.


       In the fifth section, Chapter Two develops, defines and explains the methodology
to be used in this thesis. This section outlines the process undertaken to develop the
methodology, and defines the seven areas relating to the implementation of successful
microfinance. Loans, savings, documentation and performance monitoring, management,
financial management, risk management and tailoring the program to clients’ needs have
been identified as key areas of importance to microfinance operation. Each area is
discussed in detail, providing the basis for Chapters Three and Four. This section is
followed by the entire effectiveness checklist summarising the contents of the seven
areas. This effectiveness checklist includes 40 specific principles I have concluded to be
of key importance to the implementation of successful microfinance.


       The final two sections of Chapter Two are derived from the literature survey
conducted prior to the two month research period. This literature survey comprised
books, papers and articles regarding the implementation of microfinance. These sources
encompass experiences of what works best, and programs written on the specifics of
starting and operating a MFI. This methodology pieces together various opinions and
views from around world defining the best ways to implement microfinance.



                                                                                        21
2.1 Koperasi Citra Lestari

            Koperasi Citra Lestari was established in Lawang on 18th December 1989 as a
pilot project of PUSKOWANJATI and the University of Brawijaya, Malang. This pilot
project providing loans for local women market sellers became a registered savings and
credit cooperative under PUSKOWANJATI on 10th May 1992.64 Koperasi Citra Lestari
aims to empower members and their contribution to economic development and raise the
incomes of both members and the community at large. According to the head manager,
Bu Hidiyati, Koperasi Citra Lestari,

            “…tidak hanya menyediakan pinjaman, tetapi bertujuan menyediakan wawasan
            sosial, politik dan ekonomi juga…”

            “…does not only provide loans, but aims to provide social, political and
            economic understanding as well…” 65

            The geographical research area for Koperasi Citra Lestari is Bedali, Lawang,
Malang, East Java. Lawang is located just outside Malang’s city centre with an area of
60.08km2. Lawang has a population of 90 468 people with 1.506 people per square
kilometre, making Lawang the third most densely populated area within the Malang
region. The majority of the Lawang population are employed in services (8 917), food
crops (4 187) and manufacturing (4 797). The minimum wage for the Malang regency is
Rp. 540 000 per month. In Lawang there is one main market, 285 shops and 1 013
stalls.66


            The population of Lawang has three main credit options. According to an
interview with the three managers at Koperasi Citra Lestari,67 moneylender activity is
most prominent, with one local moneylender charging a 13% per month interest rate.
Moneylenders in the local area are very successful due to their uncomplicated and quick
credit channeling procedures. Aside from moneylenders there is one pawnshop in
Lawang, along with several savings and credit cooperatives. There is a BRI (Bank Rakyat
Indonesia) branch in the main street also.
64
   Interview with Koperasi Citra Lestari managers on 15/06/05.
65
   Taken from an interview with Bu Hidiyati, Head Manager at Koperasi Citra Lestari, on 22/06/05.
66
   BPS Malang Dengan Bapekab Malang, Kabupaten Malang dalam Angka 2002, pp. 44-269.
67
   Interview with Koperasi Citra Lestari managers on 29/06/05.


                                                                                                    22
        In May of 2005, Koperasi Citra Lestari had a total of 3 828 members, the
majority women. Men are members also, mainly involved with agri-business loans.
Membership at Koperasi Citra Lestari has increased from 2 400 in 1999 with a slight
decline in membership in 2003. Since 2003 however, membership has soared, reaching
almost 4 000 in early 2005.68 The majority of members at Koperasi Citra Lestari use their
loans for their micro-enterprises. Women interviewed at June and July group meetings
were involved in selling goods including cakes, handicrafts, orchids, meatball soup
(bakso), fried goods and medicinal herbs. These women are either individual traders,
have a stall at the local market or own a small restaurant (warung) or shop where they
sell their goods. Men and women involved in agri-business use their loans to add capital
to their production of rice, flour, corn, maize, bananas, avocado, tea and roses. Some are
also involved in animal husbandry. Aside from using loans for their micro-enterprises,
members also fulfill their consumption needs. For example, family and household needs
and schooling fees. In each of the four groups visited, more than one member was
currently using their loan to meet school fee requirements.69


2.2 Koperasi Mawar Putih

        Koperasi Mawar Putih evolved from several arisan (rotating savings and credit
associations) operating in Sedudut village, Sukun, Malang. These arisan began in 1994
and took legal status as a savings and credit cooperative under PUSKOWANJATI in
1999. These arisan continue today, either in independent form or as part of borrower
groups at Koperasi Mawar Putih.70 Koperasi Mawar Putih operates from an office central
to Sedudut village, with the aim of empowering women and reducing moneylender
activity in the local area. According to Bu Juli, the head manager,

        “…sekarang perempuan jadi tertinggal, dan tidak mempunyai status yang sama
        dengan laki-laki…”

        “…these days women are left behind, and do not have the same status as men…”
68
   Information on membership taken from the Koperasi Citra Lestari pamphlet, 2004.
69
   Interviews with members of Groups #100, #132, #51 and Agri-business group Arjuno, on 16/06/05,
17/06/05, 02/07/05 and 08/07/05.
70
   Interview with the head manager, Bu Juli, and secretary, Bu Win of Koperasi Mawar Putih on 30/06/05.


                                                                                                     23
Koperasi Mawar Putih aims to nurture and educate these women through the provision of
savings and credit services.71


        Koperasi Mawar Putih is located in the city of Malang, in Sedudut village, Sukun.
Sukun has an area of 20.97km2 and is one of the five districts of the city of Malang.72
Sukun has a population of 165 517 (2003) and a population density of 7.893 people per
km2, making Sukun the most densely populated district within the city of Malang. Sukun
has eleven villages comprising over 34 000 families. Unfortunately, employment
information for the district of Sukun was unavailable. However, for the city of Malang as
a whole, the majority of the population are involved in trade, services and industry. 73 As
is the case in Lawang, pawnshops and banks are a source of finance in the Sukun area.
According to the managers at Koperasi Mawar Putih there are approximately eight
savings and credit cooperatives in the local area offering similar services to Koperasi
Mawar Putih. Moneylenders however are the main source of finance, mainly working
within factory worker circles, stated to be charging interest rates up to four times the
interest rate at Koperasi Mawar Putih.74


        Koperasi Mawar Putih is significantly smaller than Koperasi Citra Lestari, with a
total of 250 members in May 2005. At Koperasi Mawar Putih, membership is exclusive
to women, however men are able to use the cooperative’s savings services. Since January
2005 Koperasi Mawar Putih has introduced 25 new members, and has experienced
steady growth in membership since establishment in 1999. Members at Koperasi Mawar
Putih also use their loans for enterprise and consumption requirements. Members are
involved in various trading activities, the majority of women interviewed selling goods
from home. Use of loans for school fee requirements and household and family needs
was also common.75

71
   Interview with the head manager, Bu Juli, and secretary, Bu Win of Koperasi Mawar Putih on 30/06/05.
72
   The other four districts in Malang are: Kedungkandang, Klojen, Blimbing and Lowokwaru.
73
   Badan Pusat Statistik Kota Malang, Kota Malang dalam Angka Tahun 2003, pp. 1-48.
74
   Interviews with managers at Koperasi Mawar Putih on 14/06/05 and 30/06/05.
75
   Interviews and observation with field workers on 19/06/05, interviews with managers of Koperasi
Mawar Putih on 30/06/05 and attendance of group #7 and group #6 monthly meetings on 03/07/05 and
10/07/05.


                                                                                                     24
2.3 PUSKOWANJATI

       As mentioned in the above paragraphs, both Koperasi Citra Lestari and Koperasi
Mawar Putih are primary cooperatives of PUSKOWANJATI, The East Javanese
Women’s Cooperative Centre. PUSKOWANJATI was established as a secondary
cooperative on 1st March 1959 in Malang, East Java. Through 45 primary cooperatives
located within the province of East Java, PUSKOWANJATI provides loans to over 40
000   Indonesians.   Through    the   provision   of   savings   and    credit   services,
PUSKOWANJATI aims to,

       “…memperjuangkan harkat dan martabat perempuan melalui memberdayakan
       koperasi wanita, membentuk jaringan kerja sama antar koperasi wanita dan
       memperjuangkan hak-hak ekonomi perempuan.”

       “…struggle for women’s dignity and status through empowering women’s
       cooperatives, forming networks between women’s cooperatives and struggling for
       women’s economic rights.”

In achieving these aims PUSKOWANJATI works together with USAID (US Agency for
International Development), CCA (Canadian Cooperative Association), CRS (Catholic
Relief Services), FES (Friedrich Ebert Stiftung Foundation), the Ford Foundation and the
Asia Foundation.


       PUSKOWANJATI provides the following services to both Koperasi Citra
Lestari and Koperasi Mawar Putih:
   1. Monthly on-site consultation and observation by field worker.
   2. Training managers and members.
   3. Analysis of monthly financial reports.
It can be seen that a continuous relationship exists between PUSKOWANJATI and its
primary cooperatives on both a personal and financial level. The same field worker
attends their specific primary cooperatives each month, providing an opportunity to
discuss problems, successes and challenges currently facing the cooperative. Financially,




                                                                                       25
PUSKOWANJATI provide loans to primary cooperatives enabling them to extend and
improve their services.76


2.4 The Tanggung Renteng System

        PUSKOWANJATI seeks to fulfill its aims through the use of the tanggung
renteng system. The tanggung renteng system is based on togetherness, mutual support
and trust. At Koperasi Citra Lestari and Koperasi Mawar Putih this system is applied
through the formation of tanggung renteng groups. Each group is tied with elements of
trust and togetherness, replicating the family model.77 The tanggung renteng system
forms a social guarantee, replacing the conventional banking notion of collateral. The
main problem prohibiting poor and low income earners from the formal financial system,
collateral, is overcome through the tanggung renteng system. According to Danusaputro
and Colter,78


        “Melalui kelompok rakyat miskin menjadi ‘bankable’ karena tanggungan dapat
        ditanggung renteng.”

        “Through the group (system), the poor become ‘bankable’ because their
        obligations can be mutually guaranteed.”

According to this system, each member takes responsibility for the repayment of their
respective group member’s loans. If one member cannot pay an installment, remaining
group members use their group buffer fund (compulsory Rp. 500 per month per member
at Koperasi Citra Lestari and Rp. 500 per member per month at Koperasi Mawar Putih)
or personal money to fulfill the loan. Koperasi Citra Lestari has defined five aims and
benefits of the tanggung renteng system.79


     1. Provides security for the cooperative.
     2. Encourages the growth of family atmosphere and cooperation.

76
   PUSKOWANJATI pamphlet, 2000.
77
   ibid.
78
   Marjanto Danusaputro, Jusuf M. Colter, Pandu Suharto, Monetisasi Pedesaan: Bunga Rampai Keuangan
Pedesaan, 1991, Jakarta: Lembaga Pengembangan Perbankan Indonesia, LPPI, p. 147.
79
   Koperasi Citra Lestari Pamphlet, 2004.


                                                                                                26
     3. Creates an open environment where members have the courage to state their
        opinions.
     4. Encourages discipline, responsibility, self-esteem and self-worth among members.
     5. Indirectly creates a leadership framework among members.


        At both Koperasi Citra Lestari and Koperasi Mawar Putih, the tanggung renteng
system operates via a signature process. Upon loan request, more than half the group
members (50% + 1) must sign to signal their part of responsibility for the repayment of
other borrowers’ loan. At one of the meetings attended at Koperasi Citra Lestari, group
#51 had to use their group buffer fund to fulfill a member’s monthly repayment. A
statement was drafted and signed by all members of that group stating that Rp. 218 000
of the group buffer fund was to be used and repaid within a specified time limit. 80 The
tanggung renteng system represents the basis of the savings and cooperative model,
allowing Indonesia’s poor and low income earners access to much needed credit.


        As a consequence of tanggung renteng, membership at both Koperasi Citra
Lestari and Koperasi Mawar Putih is based on a self-selection process. The tanggung
renteng system is based on trust and mutual responsibility, such that each member within
a particular group must be comfortable and close with other members. According to one
of the managers at another one PUSKOWANJATI’s primary cooperatives,


        “…semua anggota harus setuju, anggota harus berani menahan risiko atau harus
        berani menolak…itulah tanggung renteng…”

        “…all members must agree, members must have the courage to bear the risk or
        reject it…that is the mutual guarantee…” 81

Each member has to be confident that a potential new member has the ability to repay
their loan without putting the group at risk. Consequently, all members of Koperasi Citra
Lestari and Koperasi Mawar Putih are arranged into geographically based groups. The


80
 Attendance of Group #51 July meeting, Candirenggo, 02/07/05.
81
 N. Hall, “Koperasi Simpan Pinjam di Kota dan Kabupaten Malang”,
www.acicis.murdoch.edu.au/hi/field_topics/nhall.doc, 04/06/05.


                                                                                      27
members therefore live near each other, know their families, their business and their
reputation, and can make informed decisions regarding new membership.


        At Koperasi Citra Lestari and Koperasi Mawar Putih the self-selection process of
new members is similar due to their incorporation of the tanggung renteng system.
Firstly, the potential member attends a monthly group meeting as a listener only. Once
introduced to the group, the group decides together whether they want to receive this
potential member. If the group agrees, the potential member can then become a member
at the following month’s meeting. In order to become a member, a principal saving of Rp.
100 000 at Koperasi Citra Lestari and Rp. 15 000 at Koperasi Mawar Putih must be paid,
along with photocopies of family and population cards. Provided the above conditions are
fulfilled, the new member proceeds to fill in a loan request form at the monthly meeting. 82
As a member of the group, the new member therefore plays their role in the tanggung
renteng system by taking responsibility for the repayment of other group members’ loans.


2.5 Methodology

        In Chapters Three and Four, Koperasi Citra Lestari and Koperasi Mawar Putih
will be discussed in terms of their effectiveness in implementing theoretically defined
principles of successful microfinance. These theoretically defined principles of
microfinance represent the methodology to be used in this thesis. This methodology is
derived from a literature survey of articles, books, papers, programs, experiences and
case studies from the microfinance field in Indonesia and the wider world.


        The methodology firstly incorporates studies done by academics from
international aid organisations including Marguerite Robinson from the World Bank,83
Joel Lebosse from OECD,84 A.P. Fernandez of MYRADA85 and Owail Adil Parray from
82
   Interviews with members of group #51, #132 and #51 on 16/06/05, 17/06/05 and 12/07/05 at Koperasi
Citra Lestari, and interviews with members of group #6 on 03/07/05 at Koperasi Mawar Putih.
83
   M. Robinson, The Microfinance Revolution: Sustainable Finance for the Poor, The World Bank, June
2001.
84
   J. Lebosse, Microfinancing and Local Development, Montreal: OECD, 1998.
85
   F. A Prakash, “The MYRADA Experience: Alternate Management Systems for Savings and Credit”,
Bangalore: MYRADA, 1994, http://www.gdrc.org/icm/ppp/ppp-4.html, 05/06/05. MYRADA is an NGO
operating in 3 states of south India and also helps promote self help affinity in Cambodia, Myanmar and
Bangladesh. See http://www.myrada.org/.


                                                                                                      28
Mercy Corps.86 Secondly, the methodology draws on programs and best practices
according to organisations including CGAP87 (Consultative Group for Assistance to the
Poor), Action Aid88 and the United Nations. The UNCDF89 has developed a program
called Microstart90 outlining their views on the best ways to develop and successfully run
a MFI. The methodology also uses case studies and conclusions from well respected
practitioners in the field of microfinance, such as J. Remenyi 91 and B. Quinones.92 Further
scholars and views have been used to develop the methodology and will be referred to in
the paragraphs and footnotes below.


        This literature survey provided information regarding techniques that work best
when implementing microfinance and various views on how to successfully operate a
MFI. From this literature survey and examining the conclusions and opinions of experts
in the microfinance field, I have concluded that there are seven areas relating to the
implementation of successful microfinance. In constructing these seven areas I have
taken both single insights and overall conclusions from the sources listed above. These
conclusions are based on using what has worked, and what is recommended to work best
when operating a MFI. I have combined these seven areas to form a checklist of 40
principles that will be used to determine the effectiveness of Koperasi Citra Lestari and
Koperasi Mawar Putih in implementing successful microfinance.


        For the purposes of this thesis, successful microfinance concerns the
implementation of techniques allowing the goals of microfinance to be achieved.
According to the United Nations, the ultimate goal of microfinance is,

86
   Mercy Corps is an international NGO currently working with the linkage program in the Indonesian
microfinance sector. See Owais Adil Parray, “Mercy Corps: Keuangan Mikro dan Pengurangan
Kemiskinan”, in M.J. Kasiyanto (ed.), Petabumi Keuangan Mikro di Indonesia, Panitia Temu Nasional dan
Bazaar Pengembangan Keuangan Mikro Indonesia, 2002, pp. 161-166.
87
   CGAP, “Key Principles of Microfinance”, http://www.cgap.org/keyprinciples.html, 07/06/05.
88
   Action Aid is an international development agency working in 42 countries. Established in 1972, Action
Aid aims to fight poverty worldwide. See http://www.actionaid.org/.
89
   United Nations Capital Development Fund.
90
   UNCDF, “MICROSTART: A Guide for Planning, Starting and Managing a Microfinance Programme”,
http://www.uncdf.org/english/microfinance/microstart/guide/contents.php, 07/06/05.
91
   J. Remenyi, Where Credit is Due: Income Generating Programs for the Poor in Developing Countries,
London: IT Publications, 1991.
92
   J.Remenyi & B. Quinones, jr., (eds), Microfinance and Poverty Alleviation: Case Studies from Asia and
the Pacific, Asia Pacific Development Council, 2000.


                                                                                                      29
        “…to create income and employment in poor communities through the
        development of micro-enterprises and, in the process, increase the financial well
        being of borrowers, their families and the community at large…” 93

The seven areas identified and included in this effectiveness checklist include loans,
savings,   documentation       and    performance     monitoring,     management,       financial
management, risk management and tailoring the program to clients’ needs. Chapters
Three and Four will discuss Koperasi Citra Lestari and Koperasi Mawar Putih with
regard to these seven areas and the effectiveness checklist. These seven areas include:


a. Loans
        With regard to loans, the practice regarded as most successful is group lending.
Under this system members form into groups of between 5 and 15 members (this can
vary depending on the MFI and clients) and guarantee each other’s loans via a signature
process. These groups represent a self-selecting system and an effective screening
process. Microstart recommends groups create their own by-laws to determine various
procedures including the removal and registration of members, loan payment collection,
procedures regarding late payments and duties of group leaders. Groups are encouraged
to have a group leader who organises and runs meetings and represents a contact point
between members and the field agent. A group treasurer is also required to collect and
record all transactions. These two afore-mentioned positions should be filled by members
themselves and are not be from official management levels.94


        With regard to the loans themselves, Remenyi recommends that MFIs should
charge a competitive interest rate,95 and Microstart suggests charging a rate that will
allow sustainability to be achieved in the 3rd year of operation. According to Marguerite
Robinson, the interest rate charged should be above the market rate to allow costs to be
covered.96 Initial loans need to be small, with a stepped loan process enabling clients to
borrow larger amounts of money upon the repayment of past loans. All financial

93
   UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
94
   ibid.
95
   Remenyi, Where Credit, pp. 122, 126.
96
   Robinson, Microfinance Revolution, p. 28.


                                                                                                 30
transactions should take place at group meetings, and credit should be extended quickly,
optimally within a week.


        A group buffer fund should also be created as a further substitute for collateral.
This fund is used when group members default on their repayments. Loan applications
should be simple and easy to follow, requiring personal information, description of their
economic activity and information regarding amount of credit and use of loan. 97 From the
above I have developed the checklist shown below in table 2.1.


Table 2.2 Loan Methodology
      LOANS                                                                                  Comment
1.    Use of the group system
2.    Guarantee via signature
3.    Self-selecting process
4.    Create own by-laws
5.    Group leader (member)
6.    Group treasurer (member)
7.    Competitive interest rate
8.    Stepped loan process
9.    Transactions only occur at meetings
10    Credit extended quickly
.
11    Group buffer fund
.
12    Simple loan application
.

b. Savings
        CGAP maintains that poor people are accustomed to saving and have been saving
for centuries using informal methods such as jewellery and animals. According to the
UN, the poor desire savings that are convenient, flexible, manage their risks, and
organised by helpful staff.98 Kelly Damore of Oxfam International99 has highlighted the
benefits of prioritising savings within the group system, encouraging members to save

97
   UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
98
   CGAP, Key Principles, http://www.cgap.org/keyprinciples.html.
99
   Oxfam International is a confederation of 12 organizations working together with over 3,000 partners in
more than 100 countries to find lasting solutions to poverty, suffering and injustice.


                                                                                                        31
and stay involved in the group.100 Furthermore, Robinson argues that the majority of the
economically active poor want to save more than borrow at any given time. She has also
suggested that savings need to be encouraged as a valuable habit.101 Remenyi and
Quinones have further noted that there is a need for voluntary savings as well as
compulsory savings, and that real returns should be offered along with this product. 102
Action Aid concludes that the poor are looking for savings that are secure, convenient,
and confidential, with both good service and returns.103 From the above I have developed
the checklist shown below in table 2.2.


Table 2.3 Savings Methodology
      SAVINGS                                                                         Comment
13    Prioritise savings
.
14    Savings should be encouraged as a valuable habit
.
15    Offer both voluntary and compulsory savings services
.
16    Offer real returns
.

c. Documentation & Performance Monitoring
        According to CGAP, microfinance works best when it measures and discloses
performance using standardised procedures.104 Owais Adil Parray of Mercy Corps states
that transparency should be highly prioritised,105 with Microstart maintaining that lack of
adequate and effective financial accounting is one of the main reasons for MFI failure. 106
Remenyi argues that monitoring needs to be central to all microfinance key objectives.
MFIs should engage in regular evaluation of critical performance indicators including the
100
    Kelley Damore, “Pulling Their Own Purse Strings”,
http://www.oxfamamerica.org/whatwedo/where_we_work/west_africa/news_publications/art7176.html,
06/09/05.
101
    ActionAid, “Savings and Credit: Management Control Systems” and “Savings and Credit – The NGO
Factor”, Bangalore, http://www.gdrc/icm/ppp/ppp-2.html, 07/06/05.
102
    Remenyi & Quinones, Microfinance and Poverty, pp. 262,264.
103
    Robinson, Microfinance Revolution, p. 29.
104
    CGAP, Key Principles, http://www.cgap.org/keyprinciples.html.
105
    Owais Adil Parray, “Mercy Corps: Keuangan Mikro dan Pengurangan Kemiskinan”, in M.J. Kasiyanto
(ed.), Petabumi Keuangan Mikro di Indonesia, Panitia Temu Nasional dan Bazaar Pengembangan
Keuangan Mikro Indonesia, 2002, pp. 161-166.
106
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.


                                                                                                 32
effect of credit on income, employment, and savings. Regular evaluation of costs,
repayment rates and loan information should also be undertaken.107 The Microstart
program encourages yearly auditing, along with regular feedback to both staff and clients
regarding performance figures. Goals need to be set and regularly evaluated against
performance.108 From the above I have developed the checklist shown below in table 2.3.


Table 2.4 Documentation & Performance Monitoring Methodology
      DOCUMENTATION & PERFORMANCE MONITORING                                          Comment
17    Measure & disclose performance
.
18    Transparency
.
19    Monitoring – effect of credit on employment, income, savings etc.
.
20    Auditing
.
21    Performance feedback to staff and clients
.
22    Goals set and evaluated
.

d. Management
        Remenyi maintains that managers of MFIs need to possess a variety of skills.
They need to be flexible, talented, sensitive, and above all know the clients they are
dealing with.109 A.P. Fernandez of MYRADA in Bangalore, suggests continual training
should be made a priority for all levels of management and staff. Furthermore, managers
and field agents need to be training members to maintain their own books and documents.
This is a valuable process that will assist the clients in the business world.110 Economist
Garber recommends that staff be employed specifically to oversee development and the
implementation of financial services.111 Finally, Microstart states that as a minimum,
MFIs require a project manager, loan manager, office assistant and field agents.
107
    Remenyi, Where Credit, pp. 122, 126.
108
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
109
    Remenyi, Where Credit, p. 126.
110
    F. A Prakash, “The MYRADA Experience: Alternate Management Systems for Savings and Credit”,
Bangalore: MYRADA, 1994, http://www.gdrc.org/icm/ppp/ppp-4.html, 05/06/05.
111
    C. Garber, “Private Investment as a Financing Source for Microcredit”, The Northeast Centre,
University of Miami, 1997, http://www.gdrc.org/icm/ppp/&-steps.html, 07/06/05.


                                                                                                   33
Incentives for staff are also encouraged to both enhance and develop management
performance.112 From the above I have developed the checklist shown below in table 2.4.

Table 2.5 Management Methodology
      MANAGEMENT                                                                        Comment
23    Management need to have a variety of skills – flexible, talented,
.     sensitive, know the clients they are dealing with
24    Continual management training
.
25    Training of members
.
26    Minimum positions: project manager, loan manager, office assistant
.     and field agent
27    Staff incentives
.

e. Financial Management
        CGAP maintains that microfinance can pay for itself and promotes sustainable
MFIs on the basis of full cost coverage. 113 Microstart states that interest rates must reflect
operating costs in order to achieve sustainability, and should generally be above market
rates but below those of moneylenders.114 Donor grants are often considered easy money
and need to be implemented appropriately by the receiving MFI. Robinson cites a case
study using data from Indonesian villages to test the hypothesis that cheap credit is
unlikely to be a useful growth stimulus. This hypothesis was proved right, concluding
that subsidies are ineffective and that these programs had high loan default rates. 115 Donor
guidelines for international best practice recommend that MFIs should have maintained
operational efficiency within three to five years and full self-sufficiency within five to ten
years. Steadily removing subsidies should therefore represent a constant goal. 116 From the
above I have developed the checklist shown below in table 2.5.




112
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
113
    CGAP, Key Principles, http://www.cgap.org/keyprinciples.html.
114
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
115
    Robinson, Microfinance Revolution, p. 142.
116
    Donor’s Working Group on Financial Sectoral Development and the Committee of Donor Agencies for
Small Enterprise Development, “Donor Guidelines for Microfinance International Best Practice”, 1994,
http://www.gdrc.org/icm/inspire/donor-guidelines.html, 04/06/06.


                                                                                                  34
Table 2.6 Financial Management Methodology
      FINANCIAL MANAGEMENT                                                           Comment
28    Interest rate must reflect operating costs
.
29    Interest rate must be above the market rate but below moneylender
.     rates
30    Donor grants to be taken with care
.
31    Achieve operational self sufficiency within the first three to five years
.     and self-sufficiency within ten years
32    Constant goal to remove subsidies
.



f. Risk Management
        As with any institution, risks need to be adequately covered, even more so in the
credit market. Donor guidelines for microfinance international best practice argue that
both costs and risks need to be assessed in order to protect management and client
interests.117 The major risk involved with MFIs regards late repayment of loans.
According to Microstart this needs to be avoided at all costs and MFIs need to have
specific procedures in place to attend to this issue. Discipline must be exercised, with
consistent standards and practices. All faults should be addressed, no matter how
minor.118 Robinson notes that there should be incentives provided for timely
repayments,119 along with Remenyi and Quinones recommending high mobilisation of
peer group discipline.120 Furthermore, in order to cover risk, CGAP suggest MFIs should
be charging interest rates that allow all operational costs to be covered.121 From the above
I have developed the checklist shown below in table 2.6.




117
    ibid.
118
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
119
    Robinson, Microfinance Revolution, p. 81.
120
     Remenyi & Quinones, Microfinance and Poverty, p. 265.
121
    CGAP, Key Principles, http://www.cgap.org/keyprinciples.html.


                                                                                                  35
Table 2.7 Risk Management Methodology
      RISK MANAGEMENT                                                                Comment
33    Cost & risk assessment
.
34    Discipline along with specific, consistent procedures set in place to
.     deal with late repayments
35    Incentives provided for timely repayments
.
36    High mobilisation of peer group discipline
.
37    Charge interest rates allowing operating costs to be covered
.

g. Tailoring the Program to the Client’s Needs
        The final area within the methodology ties all the other areas together and
involves making a program fit with its clientele. As Remenyi has stated, every socio-
economic environment is home to different characteristics and requires unique
microfinance practices.122 Microfinance programs need to be familiar with the
environment they are operating in, taking into account the various needs of the poor.
Parray from Mercy Corps notes that, “the poor are not a homogenous group”, meaning
that microfinance programs need to adapt to local markets.123 According to Microstart,
programs need to suit the circumstances of the poor, and management need to understand
the market, community and background of clients and potential clients.124 Remenyi
concludes that the poor require simple, uncomplicated processes that are easy to
understand and carry out.125 From the above I have developed the checklist shown below
in table 2.7.


Table 2.8 Tailoring the Program to the Clients’ Needs Methodology
      TAILORING THE PROGRAM TO THE CLIENTS’ NEEDS                                    Comment
38    Familiarity with local environment – understand market, community
.     & background of clients & potential clients
39    Take into account the needs of the poor
.
122
    Remenyi, Where Credit, p. 121.
123
    Parray, Mercy Corps, pp. 161-166.
124
    UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.
125
    Remenyi, Where Credit, p. 124.


                                                                                                  36
40   Use of simple, uncomplicated processes that are easy to carry out
.

       The above seven areas refer specifically to the internal operating environment of a
MFI. These are areas under direct control of the MFI itself and can be regulated
accordingly. It is these areas that will be discussed in Chapters Three and Four with
relation to Koperasi Citra Lestari and Koperasi Mawar Putih. External conditions, such
as an operating environment conducive to microfinance development, and appropriate
legal framework do assist in the implementation of successful microfinance. It has been
concluded in Chapter Two and Appendix Two that the external operating conditions
within Indonesian microfinance sector are considerably weak, particularly within the
cooperative sector. The weaknesses and problems identified need to be remembered
when discussing the effectiveness of Koperasi Citra Lestari and Koperasi Mawar Putih
in implementing the theoretically defined principles of successful microfinance.


       The effectiveness checklist below summarises the contents of the seven areas
outlined above. This checklist identifies 40 specific principles concluded to be relevant to
the implementation of successful microfinance. Chapters Three and Four will consider
each cooperative’s effectiveness with relation to these 40 principles.


Table 2.9 Effectiveness Checklist
     LOANS                                                                     Comment
1.   Use of the group system
2.   Guarantee via signature
3.   Self-selecting process
4.   Create own by-laws
5.   Group leader (member)
6.   Group treasurer (member)
7.   Competitive interest rate
8.   Stepped loan process
9.   Transactions only occur at meetings
10   Credit extended quickly
.
11   Group buffer fund
.
12   Simple loan application


                                                                                         37
.
     SAVINGS                                                               Comment
13   Prioritise savings
.
14   Savings should be encouraged as a valuable habit
.
15   Offer both voluntary and compulsory savings services
.
16   Offer real returns
.
     DOCUMENTATION & PERFORMANCE MONITORING                                Comment
17   Measure & disclose performance
.
18   Transparency
.
19   Monitoring – effect of credit on employment, income, savings etc.
.
20   Auditing
.
21   Performance feedback to staff and clients
.
22   Goals set and evaluated
.
     MANAGEMENT                                                            Comment
23   Management need to have a variety of skills – flexible, talented,
.    sensitive, know the clients they are dealing with
24   Continual management training
.
25   Training of members
.
26   Minimum positions: project manager, loan manager, office assistant
.    and field agent
27   Staff incentives
.
     FINANCIAL MANAGEMENT                                                  Comment
28   Interest rate must reflect operating costs
.
29   Interest rate must be above the market rate but below moneylender
.    rates
30   Donor grants to be taken with care
.
31   Achieve operational self sufficiency within the first 3-5 years and
.    self-sufficiency within 10 years
32   Constant goal to remove subsidies
.



                                                                                 38
     RISK MANAGEMENT                                                          Comment
33   Cost & risk assessment
.
34   Discipline along with specific, consistent procedures set in place to
.    deal with late repayments
35   Incentives provided for timely repayments
.
36   High mobilisation of peer group discipline
.
37   Charge interest rates allowing operating costs to be covered
.
     TAILORING THE PROGRAM TO THE CLIENTS’ NEEDS                              Comment
38   Familiarity with local environment – understand market, community
.    & background of clients & potential clients
39   Take into account the needs of the poor
.
40   Use of simple, uncomplicated processes that are easy to carry out
.

2.6 Conclusion

       Chapter Two has introduced and discussed the background of two savings and
credit cooperatives located in Malang, East Java. Koperasi Citra Lestari and Koperasi
Mawar Putih are similar in terms of their relationship to secondary cooperative
PUSKOWANJATI and their incorporation of the tanggung renteng system. The use of
the tanggung renteng system also denotes a self-selection process within both these
cooperatives. Similarities can also be seen with regard to loan use, the majority of loans
used for members’ micro-enterprises. Koperasi Citra Lestari and Koperasi Mawar Putih
differ in terms of their outreach, with Koperasi Citra Lestari reaching almost 4 000
members and Koperasi Mawar Putih providing loans to just 250.


       The final section of Chapter Two has concluded from the literature survey that
there are seven areas of key importance to the implementation of successful
microfinance. These areas include loans, savings, documentation and performance
monitoring, management, financial management, risk management and finally tailoring
the program to clients’ needs. These areas can be summarised into 40 specific principles
included in the effectiveness checklist. These seven specific areas and 40 principles will



                                                                                       39
now be discussed in Chapters Three and Four with direct relation to Koperasi Citra
Lestari and Koperasi Mawar Putih.




                                                                               40
                                            Chapter 3

                  Case Study #1: Koperasi Citra Lestari

       Chapter Three discusses Koperasi Citra Lestari in relation to the seven areas of
key importance to the implementation of successful microfinance created in Chapter
Two. This chapter will determine the effectiveness of Koperasi Citra Lestari in
implementing the theoretically defined principles of successful microfinance outlined in
the previous chapter. The introductory discussion regarding Koperasi Citra Lestari in
Chapter Two will be built upon in this chapter, providing an in depth view of operational
procedures. This chapter directly answers the research question, providing conclusions
relating to Koperasi Citra Lestari’s implementation of successful microfinance
principles.


       Chapter Three is divided into seven sections followed by a conclusion. Each
section deals with one area outlined in the methodology. Loans, savings, documentation
and performance monitoring, management, financial management, risk management and
tailoring the program to clients’ needs will be discussed with regard to Koperasi Citra
Lestari’s effectiveness. Each section is followed by an effectiveness checklist
summarising key factors concluded. All information in this chapter is derived from
research undertaken at Koperasi Citra Lestari during June and July 2005. This research
includes three interviews with Koperasi Citra Lestari’s managers, one interview with two
staff members and attendance of four monthly group meetings. At these meetings, group
interviews were conducted with members and field workers, along with constant
observation and analysis.


       These sources, particularly interviews with managers may have presented a biased
outlook. Secondly, no individual interviews with members were able to be conducted,
with all answers taking place with one of more of management levels in attendance. This
may have led to true feelings not being expressed and answers taking the form of what


                                                                                      41
the manager would want to hear. However, careful and detailed analysis and observation
of collected materials is hoped to convey a true evaluation of Koperasi Citra Lestari’s
implementation of the theoretically defined principles of successful microfinance.


           The conclusion highlights the areas in which Koperasi Citra Lestari is effective
and ineffective at implementing the theoretically defined principles of successful
microfinance. Research and discussion will show that that in terms of the effectiveness
checklist, Koperasi Citra Lestari meets 32 of the 40 principles discussed within the
checklist. Therefore, there are eight areas limiting the effectiveness of Koperasi Citra
Lestari’s implementation of successful microfinance principles. These eight areas are
discussed more fully in the conclusion.


3.1 Loans at Koperasi Citra Lestari

           Koperasi Citra Lestari has three different types of loans available: savings and
credit loans, agri-business loans, and loans for small and medium enterprises (SMEs). For
the purposes of this thesis I will focus mainly on the savings and credit loans as this type
of loan is directly related to the provision of microfinance. In May 2005, conditions for
each of the three loans were as follows:126


Table 3.10 Types of Loans at Koperasi Citra Lestari
                 Maximal         Interest      Collateral        Repayment         Group         Group
                    Loan                                                          Meetings      Numbers
Savings &       Rp. 8          2% per         No. 50% + 1       Per month at    Yes,            Min: 10
Credit          million        month          signatures of     monthly         monthly         Max: 30
loans                                         other group       meeting         (between 2nd
                                              members                           & 17th of
                                                                                each month)
Agri-           Rp. 20         2% per         Yes. Trading      Per month at    Yes,            Min: 10
business        million        month          certificates or   monthly         monthly         Max: 60
loans                                         transport         meeting         (between 2nd
                                              certificates                      & 17th of
                                                                                each month)
SME loans       Rp. 50         2.5% per       Yes               Per month at    No              Not
                million        month                            the office                      Applicable


126
  Information in this table is derived from an interview with the three managers of Koperasi Citra Lestari
on 15/06/05 and attendance of #100, #132 #51 and Agri-business group Arjuno group meetings on
16/06/05, 17/06/05, 02/07/05 and 08/07/05.


                                                                                                        42
            The above table outlines the maximal loan, interest rate, form of collateral,
repayment rate and group meeting and number information for the three loan types at
Koperasi Citra Lestari. For savings and credit loans, the maximal loan available is Rp. 8
million, with a flat interest rate of 2% per month. At 24% per year this interest rate is
higher than the local bank interest rate of 22% per year and below local moneylender
rates ranging between 30 and 100% and can therefore be considered competitive. As
noted in the table, no collateral is required, with savings and credit groups using the
tanggung renteng system. Members at Koperasi Citra Lestari are arranged into 174
groups, meeting monthly at members’ houses. Savings and credit loans are repaid on a
monthly basis, and all transactions occur at monthly group meetings.


            As outlined in Chapter Two, Koperasi Citra Lestari incorporates the tanggung
renteng system. As such, members at Koperasi Citra Lestari are formed into groups and
obtain their loans based on signatory guarantee. Each time a member applies for a loan
other members in that same group sign the loan request form, signaling their
responsibility for the other member’s loan.127 As seen below, the loan request form used
at Koperasi Citra Lestari is simple and uncomplicated, requiring basic member
information.128




127
      Interview with the three managers of Koperasi Citra Lestari on 22/06/05.
128
      ibid.


                                                                                      43
            Figure 3.1 Koperasi Citra Lestari Loan Request Form


                                                     Koperasi Citra Lestari
                                                     Loan Request Form129

       1.   Member’s name                 :_____________________
       2.   Address                       :_____________________
       3.   Date & place of birth         :_____________________
       4.   Business location             :_____________________
       5.   Type of business              :_____________________
       6.   Total income per month        :_____________________
       7.   Proposed loan value           :_____________________
       8.   Proposed loan use             :_____________________
       9.   To be repaid within           :_____________________
                                                                                            Date: ___/___/___
Field Worker:                   Group Chairperson:   Member’s Husband:        Member:
____________                    _______________      ______________           ___________

“Tanggung Renteng” Agreement:
         NAME                 SIGNATURE
1.
2.
3.



            Once more than half the group’s members (50% + 1) have signed the loan request
form, the loan details are processed for credit extension. It must be noted at this point that
a significant flaw within the Koperasi Citra Lestari tanggung renteng system is the high
numbers of absences at particular monthly group meetings. Attendance and observation
at four group meetings130 revealed that each group experienced numerous absences at the
June and July meetings, group #51 particularly recording low numbers, with less than
half in attendance.


            Following loan approval, members are then able to obtain their loan from the
Koperasi Citra Lestari office the morning after the loan request approval. Only the
member herself can obtain the loan from the office. If the member is sick or unable to
come to the office, field workers will personally deliver the loan to the member’s home.
Furthermore, under the tanggung renteng system, credit extension is only a possibility
when all members in one group are up to date with their loan repayments. As outlined in
an interview with Koperasi Citra Lestari’s managers, if one member is behind, or has not




129
      Collected during attendance of Group #51’s monthly meeting on 02/07/05.
130
      Refer to Table 3.2 on the following page.


                                                                                                                44
paid their last installment, new loans cannot be issued. Peer mobilisation therefore plays
an important role in each of the groups at Koperasi Citra Lestari.131


        At Koperasi Citra Lestari, loans increase via the stepped loan process system.
Members increase their loans on the basis of their savings. Loans up to the value of Rp.
500 000 are issued on the basis of members saving one quarter of the loan value. Loans
above Rp. 500 000 and below Rp. 3 million require one third of the loan’s value to be
saved.132 This stepped loan process encourages savings habits among members and
provides an efficient basis for increments in loan values. Information obtained has shown
that since 1999, savings and credit loans have increased from Rp. 678 million to Rp. 1.5
trillion in 2003.133


        As noted above, members at Koperasi Citra Lestari are arranged into 174 groups,
each group the responsibility of one field worker. Information regarding groups at
Koperasi Citra Lestari is derived from attendance at four monthly meetings taking place
in June and July of 2005.134 Statistics for the groups attended are as follows:


Table 3.11 Groups at Koperasi Citra Lestari
                       #100                  #132              #51                   Agri-business Arjuno
Year of                1997 (previously a    1999/2000         1995                  2003
establishment          local arisan group)
Location               Mulyorejo Village,    Purwosari,        Candirenggo,          Wonorjo Village,
                       Lawang                Lawang            Lawang                Lawang
No. Members            17                    30 (1 new)        21                    53
Meeting                12pm on 16th          12pm on 17th      11am on 2nd           2pm on 8th
Time/Date
Absences               13/17                 18/30             8/21                  35/53


        Members in each group live in the same area and meet monthly at members’
houses. Each group must have a chairperson, secretary and treasurer. These roles must be
undertaken by members themselves; the chairperson being the head of the group and the
secretary keeping the agenda and assisting the treasurer. The treasurer receives and
131
    Interview with the three managers of Koperasi Citra Lestari on 22/06/05.
132
    Interview with two office staff at Koperasi Citra Lestari on 08/07/05.
133
    Koperasi Citra Lestari Pamphlet, 2004.
134
    Attendance of group #100, group #132, group #51 and agri-business group Arjuno on 16/06/05,
17/06/05, 02/07/05 and 08/07/05.


                                                                                                      45
records all transactions taken at the group meeting. Upon establishment, groups decide
the date, time and location of the monthly meeting, the group by-laws, along with the
member who will fulfill the roles of chairperson, secretary and treasurer.


           Aside from individual group by-laws, all groups at Koperasi Citra Lestari are
obligated to follow certain rules. Firstly, if one member of a group does not attend the
monthly meeting for three consecutive months, their next loan value cannot be increased.
Secondly, each group must maintain records regarding meeting agendas, absences, loan
advancement, member’s personal information, and monthly group deposits. The field
worker for each group assists in the maintenance of the above requirements.


           The structure of the monthly meetings is similar between groups and follows the
same pattern each month. The monthly group meetings function as an open forum for all
members,

           “Semua persoalan hanya bisa dibahaskan pada waktu pertemuan kelompok…di
           luar kelompok tidak boleh…pertemuan kelompok memfungsikan forum untuk
           diskusi antara anggota.”

           “All problems can only be discussed at group meetings…outside the group
           (discussion) is not allowed…the group meetings function as a discussion forum
           between members.” 135

Before the group meeting is formally opened, monthly loan installments, compulsory
savings (Rp. 5 000 per month), social fund payments (Rp. 500 per month) and group-
buffer fund payments (Rp. 500 per month) are collected and recorded by the group
treasurer. The meeting is then formally opened by the group chairperson and absences are
noted. The group secretary then reads out the agenda and notes important issues raised
the previous month.


           The reading of the agenda is followed by the field worker’s address. This address
differs each month according to the information required to be relayed to members, and
individual group circumstances. The meetings attended during June and July 2005

135
      Comment made by Field worker for group #100 at the monthly meeting on 16/06/05.


                                                                                         46
included encouragement for groups to increase their membership and attendance, along
with reminders regarding loan procedures, particularly the need for more than half the
group to be present in order to sign loan requests. This was followed by information
regarding Koperasi Citra Lestari’s scholarships for primary school children136, recreation
to Bali,137 and National Cooperative Day. In conjunction with National Cooperative Day,
held on July 12th each year, the East Javanese Cooperative Department organised for each
cooperative within the province of East Java to contribute Rp. 1 000 per member to the
less fortunate community of Bondowoso.


         Following the field worker’s address, members requiring loans fill out loan
request forms and obtain group member’s signatures. In some groups an arisan138 is held
prior to the close of the meeting. Group #51 for example contribute Rp. 5 000 per month,
the winner the host of the following month’s meeting. Once the installment money has
been counted, the meeting is brought to a close by the group chairperson.


         As an incentive to improve group performance, Koperasi Citra Lestari gives ten
“Best Group” awards to the best performing groups within the cooperative. Each month,
management takes note of individual group performance with regard to use of the
tanggung renteng system, attendance levels, correct maintenance of administrative
procedures, prompt meeting starting time, attendance of the Annual Members’ Meeting
and correct filling out of loan request forms. These awards provide incentives for groups
at Koperasi Citra Lestari to improve their performance and ensure all essential duties are
carried out in the correct manner.




136
    Refer to section 3.7 regarding tailoring the program to clients needs.
137
    ibid.
138
    Arisan is the Indonesian name for a rotating savings and credit association.


                                                                                       47
Table 3.12 Effectiveness Checklist for Loans at Koperasi Citra Lestari
      LOANS                                                             Comment
1.    Use of the group system                          Yes. Tanggung renteng. Groups consist
                                                       of 10-30 members.
2.    Guarantee via signature                          Yes. Tanggung renteng. 50%+1
                                                       signatures from each group required. The
                                                       efficiency of this system is however
                                                       decreased by the attendance issues faced
                                                       by particular groups.
3.    Self-selecting process                           Yes. Members decide who can become
                                                       members of their respective groups.
4.    Create own by-laws                               Yes. For example some groups decide to
                                                       hold a monthly arisan.
5.    Group leader (member)                            Yes. Elected by group members upon
                                                       establishment.
6.    Group treasurer (member)                         Yes. Elected by group members upon
                                                       establishment.
7.    Competitive interest rate                        Yes. 2% per month.
8.    Stepped loan process                             Yes. In accordance with members
                                                       savings.
9.    Transactions only occur at meetings              Yes.
10    Credit extended quickly                          Yes. Credit extension occurs on the day
.                                                      following loan request approval.
11    Group buffer fund                                Yes. Rp. 500 per person per month.
.
12    Simple loan application                          Yes.
.

3.2 Savings at Koperasi Citra Lestari

        The information in this section is derived from two interviews with the three
managers at Koperasi Citra Lestari together with interviews with field worker Bu Neni
and group members of group #100.139 At Koperasi Citra Lestari, three savings services
are offered. Savings are available to both members and non-members within the local
community. In order to become a member of this cooperative, a principal saving of Rp.
100 000 must be paid. This initial saving must be paid before a member is entitled to a
loan. There are positives and negatives of this principal saving amount. Positively,
members are forced to save before receiving a loan, encouraging savings as a habit, and
deterring members from the prospect of “free” credit. On the negative side however, for
139
  Interviews with managers at Koperasi Citra Lestari on 15/06/05 and 22/06/05 and interviews with Bu
Neni (field worker) and members of group #100 on 16/06/05.


                                                                                                       48
poor and low income earners within Malang, this initial saving is a significant amount.
This principal saving may therefore represent a barrier to entry for some potential
members.


       The three savings services offered at Koperasi Citra Lestari are compulsory
savings, voluntary savings and long-term savings. Following the fulfillment of the
principal saving, all members are required to pay the compulsory savings amount of Rp.
5 000 per month minimum. These savings are paid at monthly group meetings along with
installments. Compulsory savings do not come with a rate of return and can only be
withdrawn when a member ceases to belong to Koperasi Citra Lestari. Despite not
receiving a rate of return on these savings, each year members are entitled to a share of
the cooperative’s profit. A section of Koperasi Citra Lestari’s profit is however divided
equally among members, therefore not reflecting individual savings habits.


       These three factors reveal certain ways in which compulsory savings can be
viewed as a disadvantage to members and a disincentive to save more than the required
minimum of Rp. 5 000 per month. However, compulsory savings are a required legal
component of savings and credit cooperatives and represent collateral in a different form.
This aspect, along with the voluntary and long-term savings available to members
outlined below, show that although members may be disadvantaged in one sense, the
voluntary and long-term savings do provide an opportunity for members to save with
returns.


       Voluntary and long-term savings are available to both members and non-members
of Koperasi Citra Lestari. Voluntary savings are offered at a rate of return of 6% per year
non-tax and begin with a minimum deposit of Rp. 10 000. These savings can be
withdrawn at any time. Long-term savings on the other hand are offered at a rate of 9%
per year non-tax and can be withdrawn following a minimum six month deposit period.


       It can be seen from the variety of savings services available, along with the rates
of return, that Koperasi Citra Lestari encourages savings as a valuable habit among



                                                                                        49
members. Savings are prioritised, with loan amounts increasing in line with members
savings. This stepped loan process, encourages saving among members, providing them
with incentives to save more in order to be able to obtain a larger loan. Members at
Koperasi Citra Lestari are also encouraged to save for the following reason outlined by
the head manager at group #132’s June meeting,

        “Tabungan Anda digunakan untuk melayani orang lain…berbuat baik untuk
        orang lain…”

        “Your savings are used to serve other people…to do good for other people…” 140

Koperasi Citra Lestari’s members are encouraged to save for the benefit of others. This
encourages members to save, with the result that principal, compulsory and voluntary
savings have all steadily increased since 1999.141


Table 3.13 Effectiveness Checklist for Savings at Koperasi Citra Lestari
      SAVINGS                                                          Comment
13    Prioritise savings                              Yes. Initial loan based on fulfillment of
.                                                     principal savings. Continuing loans
                                                      follow the stepped loan process based on
                                                      member’s savings.
14    Savings should be encouraged as a               Yes. Compulsory savings each month
.     valuable habit                                  along with the stepped loan process
                                                      system allow this to occur.
15    Offer both voluntary and compulsory             Yes. Voluntary and long-term savings,
.     savings services                                along with compulsory savings (Rp. 5
                                                      000 per minimum per month) are
                                                      available.
16    Offer real returns                              Yes. Voluntary savings = 6% per year
.                                                     non tax and long-term savings = 9% per
                                                      year non tax.




140
    Comment made by Bu Hidayati, head manager of Koperasi Citra Lestari at group #132’s monthly
meeting on 16/06/05.
141
    Koperasi Citra Lestari Pamphlet, 2004.


                                                                                                  50
3.3 Documentation and Performance Monitoring at Koperasi Citra Lestari

       With monthly repayments from 3 828 members, Koperasi Citra Lestari requires
complex documentation and performance monitoring procedures. This involves the
process from receiving installments from members to depositing the money at the
cooperative office, performance evaluation and disclosure to members and staff at the
Annual Members’ Meeting and the six-monthly Work Planning and Evaluation Meeting,
along with yearly auditing.


       The process between members bringing their installments to monthly group
meetings and those installments being deposited in the cooperative office is lengthy and
complex. While attending group meetings I was able to witness this process first hand.
Firstly, at the group meeting, members’ installments and savings are recorded in each
member’s book. Each member has an individual book, recording simple personal
information and all transaction activity at Koperasi Citra Lestari. All savings and
installments are recorded monthly in each individual member book and in the group
deposit book. Once recorded, the field worker and treasurer total the money and record it
again on a monthly installment sheet. The money is then taken and deposited in the
cooperative office. Compulsory and voluntary group savings are entered into the
computer by cooperative staff, with loan installments remaining on paper. This
documentation process allows both members and staff to be aware of their individual and
group performance on a monthly basis.


       Aside from recordings made at monthly group meetings, members and staff are
invited to attend the Annual Members’ Meetings and the six-monthly Work Planning and
Evaluation Meeting. These meetings disclose Koperasi Citra Lestari’s performance in a
transparent manner. At the work planning and evaluation meeting all work achieved in
the previous six month period is evaluated, along with planning and goal setting for the
next six months. The Annual Members’ Meeting on the other hand discloses Koperasi
Citra Lestari’s performance for the previous year. Koperasi Citra Lestari invites all
members to attend this meeting and requires at least one member from each of the 174




                                                                                      51
groups to attend. Both these meetings provide opportunities for members to contribute
their opinions and suggestions.142


            In terms of financial analysis, Koperasi Citra Lestari is audited on a yearly basis
and is required to submit monthly financial reports to PUSKOWANJATI. Koperasi Citra
Lestari is audited on a yearly basis by Koperasi Jasa Audit, (KJA), the Auditing Service
for       Cooperatives.       Secondly,      monthly      financial     reports   are   submitted   to
PUSKOWANJATI for analysis. Koperasi Citra Lestari’s financial performance is
available to the public through their pamphlet, last produced in 2004. This pamphlet
records their yearly performance since 1999 in terms of assets, savings, loans, profits,
annual turnover, member numbers and donor funds. It can be seen therefore that
Koperasi Citra Lestari engages in transparent reporting processes, with staff and
members regularly informed of cooperative performance.


            As noted in the methodology, Remenyi143 advocates monitoring the effect of
credit on employment, income and savings. At this stage Koperasi Citra Lestari has not
undertaken this form of monitoring. Understanding the effect of credit on these aspects
would assist with future product development and client satisfaction. This monitoring
would allow Koperasi Citra Lestari to identify and strengthen weak areas of
performance.




142
      Interview with three managers at Koperasi Citra Lestari on 29/06/05.
143
      Remenyi, Where Credit, p. 122


                                                                                                    52
Table 3.14 Effectiveness Checklist for Documentation & Performance Monitoring at
Koperasi Citra Lestari
         DOCUMENTATION &                                                      Comment
         PERFORMANCE MONITORING
17       Measure & disclose performance                     Yes. Performance measured and
.                                                           disclosed through a complex
                                                            documentation process.
18       Transparency                                       Yes. Performance disclosed to members
.                                                           and staff at the Annual Members’
                                                            Meeting and the Work Planning &
                                                            Evaluation Meeting. Pamphlets
                                                            disclosing performance are also available
                                                            to the public.
19       Monitoring – effect of credit on                   Not to researcher’s knowledge.
.        employment, income, savings etc.
20       Auditing                                           Yes. Each year by Koperasi Jasa Audit.
.
21       Performance feedback to staff and                  Yes. Each year at the Annual Members’
.        clients                                            Meeting and the Work Planning &
                                                            Evaluation Meeting.
22       Goals set and regulated                            Yes. At the Work Planning and
.                                                           Evaluation Meeting.

3.4 Management at Koperasi Citra Lestari

            The management structure at Koperasi Citra Lestari has three levels. At the top
level are the three managers, including the head manager, Bu Hidiyati, and two
supervising managers. The second level includes the eleven office staff, whereas the third
level incorporates Koperasi Citra Lestari’s nine field workers. The three management
levels work together to achieve Koperasi Citra Lestari’s goals of empowering members
and their contribution to economic development. The organisational structure at Koperasi
Citra Lestari places ultimate power in the Annual Members’ Meeting, where members
and management meet together. At this meeting, managers and field workers are chosen
collectively by members to fulfill five year positions.


            From interviews and observation during the research period,144 it can be
concluded that management at Koperasi Citra Lestari are confident, responsible and
committed to their members’ welfare. Management are in touch with the needs of their
144
      Interviews with the three managers at Koperasi Citra Lestari on 15/06/05, 22/06/05, and 29/06/05.


                                                                                                          53
members, all living in the local Lawang area, with one field worker a previous member of
Koperasi Citra Lestari for four years before becoming a field worker in 1997. In July
2005, each field worker was responsible for approximately 14 groups, allowing direct
monthly contact and ongoing relationship development with a variety of Koperasi Citra
Lestari’s members.


            Koperasi Citra Lestari provides training for both staff and members. According to
Bu Hidayati, the head manager of Koperasi Citra Lestari, staff training is undertaken
twice a year. Where possible this is provided by managers, however Koperasi Citra
Lestari frequently uses external training and educational facilities. PUSKOWANJATI
also assists with staff and management training. The managers at Koperasi Citra Lestari
state that they focus more on member training and education. This training and education
is scheduled to occur three to four times per year and Koperasi Citra Lestari has
previously worked with Trisakti University to implement educational programs. Past
educational programs include understanding cooperatives, rights & responsibilities of
members, communication, leadership, household management, group dynamics, bag
making, and cake decoration.145


            This list indicates that Koperasi Citra Lestari aims to educate their members in a
variety of fields, equipping them for family and business life. Education and training of
members is a key factor in the achievement of Koperasi Citra Lestari’s goals to empower
their members. However, the extent to which the training follows the schedule is
unknown. At the time of the research, June and July 2005, no training sessions had yet
been implemented this year, which casts some doubt on the regularity of these training
sessions.




145
      Refer to Koperasi Citra Lestari pamphlet, 2004.


                                                                                           54
Table 3.15 Effectiveness Checklist for Management at Koperasi Citra Lestari
          MANAGEMENT                                                Comment
23        Management need to have a variety of      Yes. Management possess these skills,
.         skills – flexible, talented, sensitive,   with some managers being former
          know the clients they are dealing with    members themselves.
24        Continual management training             The extent to which the actual training
.                                                   follows schedule is unknown.
25        Training of members                       The extent to which the actual training
.                                                   follows schedule is unknown.
26        Minimum positions: project manager,       Yes. All these positions are fulfilled plus
.         loan manager, office assistant and        more.
          field agent
27        Staff incentives                          Not to the researcher’s knowledge.
.


3.5 Financial Management at Koperasi Citra Lestari

            With regard to financial management there are three areas of discussion including
external funds, interest rates and donor funds. Positively, charging a competitive interest
rate has allowed Koperasi Citra Lestari to achieve operational self-sufficiency. However,
an increasing reliance of borrowed funds has prevented achievement of full self-
sufficiency within the recommended ten year period. All information in this section is
derived from an interview with Koperasi Citra Lestari’s managers on 29th June 2005.


            Between establishment as a cooperative in December 1989 and 2000, Koperasi
Citra Lestari received both subsidies from PUSKOWANJATI and the Indonesian
government. In 2000, Koperasi Citra Lestari obtained a bank loan, increasing the amount
of borrowed funds. At the time of research, sources of total funds for Koperasi Citra
Lestari are as follows:
     i.        Compulsory, voluntary and long-term savings.
     ii.       Rp. 1 billion of government funds received through a specific cooperative
               focused program borrowed in 2003 and to be repaid over a ten year period.
     iii.      Funds from PUSKOWANJATI.
     iv.       Loan from Bank Mualamat.
     v.        Donor funds. (Rp. 16 million in 2003 – have remained at this level since
               2001)


                                                                                             55
       Specific figures for the above sources of funds were unable to be obtained,
however the 2004 pamphlet outlines total recorded funds for 2003. In 2003, total external
funds reached Rp. 1 004 billion in comparison with Rp. 869 million in equity capital.
Furthermore, borrowed capital has almost doubled between 1999 and 2003. This
increasing discrepancy between external and internal funds reveals a dependence on
outside financial resources, and a distinct lack of savings mobilisation. This trend reduces
the ability of Koperasi Citra Lestari to reach full self-sufficiency in the near future.


       With regard to interest rates, Koperasi Citra Lestari charges 2% per month or
24% per year for their savings and credit loans. This rate of interest is higher than the
local bank interest rate of 22% per year, and clearly below that of moneylenders,
charging interest rates ranging from 30 – 100%. Using this competitive interest rate has
enabled Koperasi Citra Lestari to cover their monthly operating costs including office
rent, electricity, water, wages, transport costs, computers, and interest owed to Bank
Mualamat and PUSKOWANJATI. This achievement of operational self-sufficiency is
possible as the interest rate charged reflects operating costs.


Table 3.16 Effectiveness Checklist for Financial Management at Koperasi Citra
Lestari
     FINANCIAL MANAGEMENT                                          Comment
28   Interest rate must reflect operating         Yes. Current interest rate of 2% per
.    costs                                        month covers monthly operating costs.
29   Interest rate must be above the              Yes. Interest rate of 24% per year is
.    market rate but below moneylender            above the local bank rate of 22% and
     rates                                        below moneylender interest rates.
30   Donor grants to be taken with care           Yes. Donor funds represent a small
.                                                 percentage of total external funds
                                                  received.
31   Achieve operational self sufficiency         Operating self-sufficiency has been
.    within the first three to five years and     achieved, however Koperasi Citra
     self-sufficiency within ten years            Lestari has now been in operation for 16
                                                  years and there are no signs of achieving
                                                  self-sufficiency in the near future due to
                                                  an increasing reliance of external funds.
32   Constant goal to remove subsidies            Yes. Subsidies remain relatively low and
.                                                 have not been increased since 2001.



                                                                                           56
3.6 Risk Management at Koperasi Citra Lestari

            As a loan provider, Koperasi Citra Lestari operates in a high risk field. Each loan
is accompanied by the risk of late or at worst non-repayment. Aside from charging an
interest rate that covers operating costs, Koperasi Citra Lestari incorporates two main
risk strategies; the self-selection system and procedures for dealing with late repayments.
Both these strategies are integral to the tanggung renteng system. These two strategies
work together to minimise the risk involved with credit extension at Koperasi Citra
Lestari.


            Use of the tanggung renteng system assists with Koperasi Citra Lestari’s risk
management. As discussed above, this system involves self-selection of members, as
each member takes responsibility for the repayment of another group member’s loan.
This mutual guarantee system means that members will only agree to take responsibility
for repayment of members’ loans they believe have the ability to repay. A high level
selection process is therefore incorporated into the group lending system. This self-
selection process plays a role in the risk management strategy of Koperasi Citra Lestari.


            Secondly, risk is managed through Koperasi Citra Lestari’s procedure for dealing
with late repayments. Timely repayment is advocated through the tanggung renteng
system and peer mobilisation. Members are aware that late repayment has individual and
collective consequences. Late or non-repayment means remaining group members have
to use personal funds or draw from the group buffer fund to cover the owed amount. If
this occurs, every member within the group is unable to obtain a larger loan at the time of
their next loan request. Peer mobilisation therefore plays a prominent role in timely
repayment and performs a risk management function.


            However, interviews with managers and field workers revealed that on some
occasions members are allowed to pay their installment on the day following the group
meeting at the cooperative office.146 This factor highlights an inconsistency in dealing
with late repayments, which increases the risk for Koperasi Citra Lestari. Lenient and

146
      Interview with the three managers at Koperasi Citra Lestari on 29/06/05.


                                                                                            57
negotiable procedures such as these encourage late repayments among members.
Consistent and specific disciplinary procedures are required to ensure timely repayment.
Aside from the “Best Group” award, members receive no incentives for timely
repayment, a further weakness within Koperasi Citra Lestari’s risk management
strategies.


Table 3.17 Effectiveness Checklist for Risk Management at Koperasi Citra Lestari
     RISK MANAGEMENT                                             Comment
33   Cost & risk assessment                     Yes. Development of two main risk
.                                               management strategies.
34   Discipline along with specific,            To some extent. Inherent part of the
.    consistent procedures set in place to      tanggung renteng system. Sanctions for
     deal with late repayments                  whole groups if one member cannot pay
                                                their monthly installment. However, the
                                                extent to which these sanctions are
                                                carried out is questionable. Some
                                                inconsistencies exist.
35   Incentives provided for timely             Yes to some extent. No direct incentives
.    repayments                                 aside from peer mobilisation and the
                                                “Best Group” award.
36   High mobilisation of peer group            Yes. Use of the tanggung renteng system
.    discipline                                 allows this to be executed efficiently.
37   Charge interest rates allowing             Yes. As outlined in the financial
.    operating costs to be covered              management section.

3.7 Tailoring the Program to Clients’ Needs at Koperasi Citra Lestari

        Tailoring the program to the clients’ needs is an aim of Koperasi Citra Lestari.
The six areas discussed above combine to make a program that suits the needs of
Koperasi Citra Lestari’s members. Three interviews with Koperasi Citra Lestari’s three
managers, along with attendance and observation at four monthly group meetings reveal
that there are a variety of ways that Koperasi Citra Lestari tailors their program to their
clients’ needs. Koperasi Citra Lestari tailors their program to the needs of the poor with
regard to management knowledge of the local area and clientele, and the use specific
techniques designed to empower members and meet their needs.




                                                                                        58
       Firstly, Koperasi Citra Lestari’s management and staff are familiar with the local
environment, understanding the market, community and background of members and
potential members. All Koperasi Citra Lestari employees are locals themselves and live
in the local Lawang area enabling them to understand Koperasi Citra Lestari’s potential
clients. Moreover, some employees were previous members themselves, adding to this
degree of understanding. Understanding the needs of the community can be seen in the
implementation of the agri-business loans, important for the agricultural community of
Lawang and its surrounding areas. Furthermore, field workers have close contact with
members each month at group meetings, where open discussion is encouraged and
members have the opportunity to voice their opinion and needs.


       Secondly, Koperasi Citra Lestari has implemented specific techniques designed
to empower members and take into account the needs of the poor. These techniques
include:
   •   Small time requirements: Members are only required to meet once a month for
       one hour in their local area. This does not take extended periods of time away
       from their business and family life.
   •   No collateral: Use of the tanggung renteng system replaces any needs for
       collateral, relying on mutual responsibility.
   •   No tax burden on savings: Koperasi Citra Lestari bears the tax burden for long
       term and voluntary savings, allowing members to get better returns on their
       savings.
   •   Provision of financial management skills: Koperasi Citra Lestari trains members
       in financial skills helping them to better manage their family and business
       budgets. This is a skill they might not learn elsewhere.
   •   Provision of training and education in a variety of areas: Koperasi Citra Lestari
       provides regular training and education seminars for members in both social and
       business fields.
   •   Provision of scholarships: Koperasi Citra Lestari provides scholarships for
       member’s children who have achieved one of the top three rankings in their
       primary school class. To obtain this subsidy, the child’s report and family card


                                                                                      59
       must be photocopied and given to respective field workers. This relieves the
       educational fee burden for some families.
   •   Provision of cheap recreation: From 22-25 September 2005 Koperasi Citra
       Lestari held a recreational trip for staff and members to Bali. The trip cost Rp.
       228 000 for an included seven meals, bus trip, and one nights stay in a hotel. The
       cost of the trip could be repaid over a period of ten months with a 2.5% interest
       rate. This provides an opportunity for members to have a holiday, at a cheaper
       rate than would otherwise be possible.
   •   Accommodating sickness: If members are sick or unable to come to the
       cooperative office to receive their loan, Koperasi Citra Lestari staff will bring the
       money to them at their house.
   •   Provision of social funds: Each month members contribute Rp. 500 to Koperasi
       Citra Lestari’s social fund. If a member or a relative of a member falls sick or
       gives birth, Koperasi Citra Lestari contributes Rp. 100 000 to assist with these
       unexpected costs. This social fund can be used once a year for all members.
   •   Simple and uncomplicated processes: Koperasi Citra Lestari aims to have simple
       and uncomplicated processes enabling members to gain credit hassle free. This is
       true after members have fulfilled the Rp. 100 000 principal savings requirement.
       Following this, members are only required to give up an hour of their time per
       month, and all installment procedures are explained upon credit extension.
       Members also have their own personal book, detailing loan installment and
       savings requirements, enabling them to be constantly aware of their
       responsibilities and obligations.
From the above discussion it can be concluded that Koperasi Citra Lestari implements
techniques that do accommodate the needs of their clientele. This is ultimately proven by
their outreach to almost 4 000 Indonesians living in the Lawang region.




                                                                                         60
Table 3.18 Effectiveness Checklist for Tailoring the Program to Clients’ Needs at
Koperasi Citra Lestari
     TAILORING THE PROGRAM TO                                   Comment
     CLIENTS’ NEEDS
38   Familiarity with local environment –       Yes. All employees are local residents;
.    understand market, community &             some have even been previous members
     background of clients & potential          of Koperasi Citra Lestari. Koperasi
     clients                                    Citra Lestari understands the local
                                                environment, offering agri-business
                                                loans. An open forum for discussion
                                                between members and field workers
                                                occurs each month at the monthly
                                                meeting.
39   Take into account the needs of the         Yes. See above. However these points
.    poor                                       need to be considered in light of the
                                                inefficiencies highlighted throughout the
                                                previous six sections of this chapter.
40   Use of simple, uncomplicated process       Yes. Small time requirements and easy
.    that are easy to carry out                 to follow repayment processes.

3.8 Conclusion

       Chapter Three has discussed Koperasi Citra Lestari in relation to its
implementation of the seven areas of key importance to running a successful
microfinance     program.   Discussion   of   components     regarding   loans,   savings,
documentation and performance monitoring, management, financial management, risk
management and tailoring the program to clients’ needs has revealed the strengths and
weaknesses of Koperasi Citra Lestari. The effectiveness checklists following each
section have highlighted and summarised areas of specific concern within the seven
points of discussion. These checklists have revealed that Koperasi Citra Lestari is
effective in the implementation of 32 out of the 40 principles recommended for
successful microfinance.


       This chapter has shown in the above seven sections that there are 32 different
ways in which Koperasi Citra Lestari complies with recommendations suggested by the
experts in the microfinance world. In answer to the research question, Koperasi Citra
Lestari is 80% effective at implementing theoretically defined principles of microfinance.



                                                                                       61
       However, according to the effectiveness checklist, Koperasi Citra Lestari is
ineffective in their implementation of eight specific principles. The weaknesses will be
defined and discussed in the following paragraphs. The table below highlights the areas
where Koperasi Citra Lestari is less effective.


Table 3.19 Ineffective Principles at Koperasi Citra Lestari
Principle # Problem
          2. Although Koperasi Citra Lestari’s incorporation of the tanggung renteng
             system means they approve loans via signature, notable absences at
             monthly group meetings decrease the efficiency of this system.
        19. Koperasi Citra Lestari is yet to monitor the effect of credit on employment,
             savings and income. Understanding the effect of credit on these aspects
             could assist with further satisfaction of clients’ needs.
        24. Regular implementation of management training is questionable.
        25. Training of members does not run according to the scheduled three to four
             times per year.
        27. Koperasi Citra Lestari does not provide staff incentives.
        31. Koperasi Citra Lestari has failed to achieve self-sufficiency within the
             recommended ten year period.
        34. Koperasi Citra Lestari deals inconsistently with late repayments, allowing
             some members to pay their installments on the day following their monthly
             group meeting. These lenient procedures send mixed messages to members
             and place the tanggung renteng system at risk.
        39. Although there are many ways in which Koperasi Citra Lestari takes into
             account the needs of the poor, the inefficiencies listed above limit this
             aspect of their operation.

       The eight identified weaknesses differ in terms of their centrality to the overall
operation of Koperasi Citra Lestari and the ease with which they can be overcome. My
interviews and observation at Koperasi Citra Lestari along with the literature survey have
led to me to the conclusion that principles #2, #24, #25 and #34 are crucial to the
operation and success of Koperasi Citra Lestari. Principle #31 is important, however
further analysis of Koperasi Citra Lestari’s financial situation are required to make more
specific conclusions. Thirdly, principles #19, #27 and #39 are relatively minor.


       Principles #2 and #34 are crucial to the operation of the tanggung renteng system.
Management at Koperasi Citra Lestari need to enforce the rules to ensure this system



                                                                                       62
operates effectively. Continual enforcement of tanggung renteng policy, that is no loan
approval without 50% + 1 signatures and no loan increases if a member fails to attend
three consecutive monthly meetings should ensure group absences are not a frequent
occurrence. The tanggung renteng system is further threatened with some inconsistencies
regarding late repayment procedures. Individual and collective sanctions need to be
continually enforced, along with strict discipline for all members failing to pay at the
required time. At Koperasi Citra Lestari, management are competent at enforcing
tanggung renteng policy, however it must be remembered that one inconsistency sets
precedent, and management should therefore be consistent in their dealings with late
payments to ensure the cooperative is not put at any unnecessary risk.


       Principles #24 and #25 are also crucial to the efficiency of Koperasi Citra Lestari.
From interviews it can be concluded that management and member training do not run
according to schedule. At the time of research, July 2005, no management or member
training had been implemented for that particular year. This questions the scheduled three
to four per year training sessions for members, and regular training for management.
Education and training are ways to empower and influence members and management to
work together to achieve Koperasi Citra Lestari’s aims. Education and training therefore
need to be prioritised, viewed as an intangible asset and included as a vital part of
Koperasi Citra Lestari’s development and performance.


       Principle #31 is important to the operation of Koperasi Citra Lestari, however
deeper financial analysis of Koperasi Citra Lestari is required to come to more specific
conclusions. Koperasi Citra Lestari has been in operation for 16 years. Research
conducted in 2005 has shown that Koperasi Citra Lestari is relying heavily on external
funds. The increasing discrepancy between savings mobilisation and external funds
means that Koperasi Citra Lestari has not been able to achieve financial self-sufficiency
in the recommended ten year period. Conceivably, this is a deliberate clever policy of
Koperasi Citra Lestari, in that they are aware of public funds and using these funds to
better position their savings and credit cooperative. However, this increasing use of
external funds has prevented Koperasi Citra Lestari from achieving self-sufficiency in



                                                                                        63
the recommended time period, revealing a serious departure from microfinance theory.
Further analysis of the financial situation at Koperasi Citra Lestari is required to come to
specific conclusions in this area.


           Principles #19, #27 and #39 are concluded to be of relatively minor importance to
the efficient operation of Koperasi Citra Lestari. Koperasi Citra Lestari is yet to
implement monitoring of credit on employment, savings and income. However, tools
such as these have hardly been developed for the Indonesian microfinance sector as a
whole.147 Therefore it is not of huge concern that Koperasi Citra Lestari is not
implementing this form of monitoring. Secondly, Koperasi Citra Lestari does not
implement staff incentives. This may be an area for Koperasi Citra Lestari to consider,
however is not crucial to this cooperative’s success. With regard to principle #39 finally,
it is hoped that with improvements and changes to the above inefficient principles,
Koperasi Citra Lestari will increase the ways in which it tailors its program to the needs
of its members.


           In 2005, Koperasi Citra Lestari had provided loans to almost 4 000 Indonesians
living in the Lawang district. Koperasi Citra Lestari has proven to be effective in
implementing 32 out of the 40 principles recommended for successful microfinance,
giving them an 80% level of effectiveness. This figure alone and the discussion outlined
above reveals Koperasi Citra Lestari’s competence and ability in implementing the 40
principles in the effectiveness checklist. I am confident from my research that Koperasi
Citra Lestari has the ability to rectify the eight inefficiencies discussed, and provide hope
to many more Indonesians in poor and low income situations.




147
      Interview with Novanto Agus, Prudentia, via email, 11/08/05.


                                                                                          64
                                            Chapter 4

                 Case Study #2: Koperasi Mawar Putih

       Chapter Four is based on Koperasi Mawar Putih, the second savings and credit
cooperative case study from East Java. This chapter discusses Koperasi Mawar Putih in
relation to the seven areas of key importance to the implementation of successful
microfinance. This chapter will determine Koperasi Mawar Putih’s effectiveness in terms
of the 40 specific principles outlined in Chapter Two. This chapter builds upon the
introduction to Koperasi Mawar Putih provided in Chapter Two and provides a contrast
to the discussion of Koperasi Citra Lestari in Chapter Three. Chapter Four directly
answers the research question, providing conclusions relating to Koperasi Mawar Putih’s
implementation of the theoretically defined principles of successful microfinance. This
chapter provides a second case study used to answer the research question.


       Chapter Four is divided into seven sections followed by a conclusion. Each
section discusses one area outlined in the methodology. Loans, savings, documentation
and performance monitoring, management, financial management, risk management and
tailoring the program to clients’ needs will be discussed with regard to Koperasi Mawar
Putih’s effectiveness. Each section is followed by an effectiveness checklist summarising
the 40 principles of successful microfinance. All information in this chapter is derived
from research undertaken at Koperasi Mawar Putih during June and July 2005. This
research includes five interviews with Koperasi Mawar Putih’s managers, one interview
with group leaders, and attendance of two monthly group meetings. As outlined in the
introductory paragraphs of Chapter Three, these interviews do have limitations, however
careful and detailed analysis and observation is hoped to convey a true evaluation of
Koperasi Mawar Putih’s implementation of the theoretically defined principles of
successful microfinance.




                                                                                      65
        This chapter concludes that Koperasi Mawar Putih is effective in implementing
23 of the 40 defined principles of successful microfinance. This suggests that there are 17
distinct areas limiting the effectiveness of Koperasi Mawar Putih. These 17 principles
will be discussed in terms of their effect on the overall operation of this savings and
credit cooperative.


4.1 Loans at Koperasi Mawar Putih

        At Koperasi Mawar Putih loan procedures follow the tanggung renteng system.
As outlined in Chapter Two, incorporation of this system means members take mutual
responsibility of each other’s loans. At the time of research, Koperasi Mawar Putih’s 250
members were arranged into ten tanggung renteng groups. As a consequence of the
tanggung renteng system, self-selection of members occurs, along with signatures
guaranteeing other members’ group loans.


Table 4.20 Types of Loans at Koperasi Mawar Putih
              Maximal       Interest     Collateral        Repayment            Group        Group
                Loan                                                           Meetings     Numbers
Savings &    Rp. 3         3% per       No. 50% +          1.   Weekly at     Yes,         Min: 10
Credit       million       month        1 signatures            office        monthly      Max: 30
                                        of other           2.   Fortnightly
                                        group                   at office
                                        members            3.   Monthly at
                                                                group
                                                                meeting


The above table outlines the loan conditions at Koperasi Mawar Putih.148 The maximal
loan charged is Rp. 3 million at a flat interest rate of 3% per month. As this interest rate
of 36% per year is above the local bank interest rate of 22% per year and below local
moneylender rates, it can be considered competitive.


        Under the tanggung renteng system members are freed from the burden of
collateral, with the need for collateral replaced by signatory guarantee. At the same time



148
  Information within the table derived from two interviews with Koperasi Mawar Putih’s three managers
on 19/06/05 and 30/06/05.


                                                                                                   66
as members fill out the loan request form seen below, 50% + 1 remaining members of the
group sign the form accepting responsibility for the repayment of this loan.


Figure 4.2 Koperasi Mawar Putih Loan Request Form

                                                     Koperasi Mawar Putih
                                                     Loan Request Form 149
                                                          Page One

           I.        1. Name                         :___________________________
                     2. Address                      :___________________________
                     3. Group/Member No.             :___________________________

           II.       1. Loan #                       :___________________________
                     2. Loan value                   :___________________________
                     3. Use of loan                  :___________________________
                     4. Repayment Period             :___________________________

           III.      1. Last loan value              :___________________________
                     2. Received on                  :___/___/____
                     3. Repaid on                    :___/___/____

           IV.       1. Principal savings            :___________________________
                     2. Compulsory savings           :___________________________

           V.        1. Notes                        :___________________________
                                                     ____________________________
                                                     ____________________________

                                                                                                Malang ___/___/___
           Husband’s Agreement                       Member
           __________________                        ________________

           Group Chairperson                         Treasurer
           ________________                          ________________

                                                           Page Two

           Loan Acknowledgement

                     1.    Name                      :___________________________
                     2.    Address                   :___________________________
                     3.    Group/Member No.          :___________________________

           The above has received a loan to the value of Rp.________ from Koperasi Mawar Putih. This loan will be repaid with the
           following monthly/weekly installments:

                     Time period                     :___________weeks/months
                     Loan installment                :___________ per week/month
                     Interest                        :___________% per week/month

                     To be repaid beginning in month_______ of year _______.
                     Ending in month ______ of year_______.
                                                                                                Malang ___/___/___
           Manager                         Member
           __________                      ____________




149
      Collected from the Koperasi Mawar Putih office on 19/06/05.


                                                                                                                             67
           Once this loan request form has been filled in and signed on the back by
remaining group members, the loan details are processed by cooperative staff. At
Koperasi Mawar Putih credit extension occurs within one week and one month of loan
approval and is to be collected at the cooperative office. This credit extension period is
far longer than the next day extension at Koperasi Citra Lestari and falls short of the
quick extension of credit recommended in the principles for successful microfinance.
This lag between approval and credit may impact upon members’ household financial
situation.


           Koperasi Mawar Putih, also follow the stepped loan process, with loan amounts
increasing in line with members’ savings. Each loan value is equivalent to one fifth of the
value in savings.


           At Koperasi Mawar Putih the majority of members follow a weekly repayment
schedule. As the majority of members work at the local factories, weekly repayment
coincides with their wage provision. Members have two repayment choices; repaying to
their group leader at their group leader’s home on Saturday, or repaying to their group
leader at the cooperative office on Sunday.150 This varied repayment procedure reduces
the control management have over repayment procedures and although does provide
flexibility for members, can be of inconvenience to group leaders. It also goes against
Microstart’s151 recommendation for all transactions to occur at monthly meetings.


           The ten groups at Koperasi Mawar Putih abide by both individual and
cooperative wide group laws. Cooperative wide laws firstly involve each group leader
taking on the function of chairperson, secretary and treasurer. Koperasi Mawar Putih is
yet to have members take on these roles themselves, losing a valuable opportunity to
have members learn and acquire new skills. Secondly, non-attendance at group meetings
for three consecutive months results in refusal to increase their next loan value. Each
group must also maintain monthly absence, agenda and deposit records. Finally, each
member in each group must contribute Rp. 500 per month for the group buffer fund. Each
150
      Observation of repayment process at Koperasi Mawar Putih office on 19/06/05.
151
      UNCDF, MICROSTART, http://www.uncdf.org/english/microfinance/microstart/guide/contents.php.


                                                                                                    68
group at Koperasi Mawar Putih also creates a set of individual group by-laws. These by-
laws stipulate repayment conditions, sanctions and loan conditions, and are read out by
the group leader at each monthly meeting.152


         Attendance and observation at group #6 and group #7’s July meetings concluded
that each group’s monthly meetings follow the same structure, including an address from
the group leader regarding cooperative information, along with a financial report for the
previous month’s performance. Loan requests are filled out and signed at group meetings
and the majority of groups also conduct a monthly arisan153. Group #6 for example
participates in a sugar arisan, with each member contributing one kilogram of sugar per
month.


         Interviews with members and staff, attendance of group meetings and observation
carried out during the research period have revealed five significant flaws within
Koperasi Mawar Putih’s implementation of the tanggung renteng system. As loans are
provided on the basis of this system, these five flaws have consequences for the overall
performance of Koperasi Mawar Putih.


         The first main obstacle is a lack of understanding on members’ behalf as to the
meaning of tanggung renteng. When the PUSKOWANJATI field worker asked members
of group #6 to define tanggung renteng they were unable to provide substantial answers,
indicating the need for greater understanding among members. The second obstacle
concerns persistent lack of attendance at monthly meetings. Non attendance means
members are unable to sign loan request forms, undermining the primary benefit of
tanggung renteng. This lack of attendance leads to the third obstacle to tanggung renteng
efficiency, Koperasi Mawar Putih’s loan extension without obtaining sufficient
signatures of remaining group members. Signatures were obtained from those in
attendance at group meetings, however if member attendance was less than half loan
requests were still approved.

152
    Information taken from an interview with Koperasi Mawar Putih’s managers on 30/06/05 and
attendance of group #7’s July meeting on 10/07/05.
153
    Arisan is the Indonesian name for a rotating savings and credit association.


                                                                                               69
           Late and non-repayment is the fourth obstacle to efficient running of the
tanggung renteng system. According to one of Koperasi Mawar Putih’s group leaders, if
she does not go to her members’ houses and demand payment, they won’t pay their
weekly installment.154 Late repayment is a huge problem at Koperasi Mawar Putih, with
members frequently paying double the following week. With inconsistent procedures,
along with deviance from the cooperative principle on this matter, members are
encouraged to continue avoiding timely repayment. The final obstacle to the efficient
running of the tanggung renteng system is non-active members. In group #6 for example
there are five non-active members. These non-active members still have un-repaid loans
and have ceased to repay or attend monthly group meetings. In some cases these
members have been non-active for as long as three years. These non-active members
represent a further burden on the tanggung renteng system.


           At all monthly meetings since the PUSKOWANJATI field worker visit to
Koperasi Mawar Putih in July 2005, group leaders announced to members that previous
policy of loan approval without 50% + 1 signatures, along with frequent double
repayment grants are unacceptable. Now, more than half the group’s signatures are
required for loan approval and timely repayment is compulsory. It will no doubt take time
to change the frame of mind of members who have been conducting these procedures for
a long time. With the enforcement of strict discipline however, this is a goal that
Koperasi Mawar Putih can achieve.




Table 4.21 Effectiveness Checklist for Loans at Koperasi Mawar Putih
         LOANS                                                           Comment
1.       Use of the group system                          Yes to some extent. The tanggung
                                                          renteng system is in place however the
154
      Interview with group leaders at Koperasi Mawar Putih on 19/06/05.


                                                                                                   70
                                                       five inefficiencies outlined above
                                                       significantly weaken the efficiency of
                                                       this system.
2.       Guarantee via signature                       No. 50%+1 signatures are required,
                                                       however Koperasi Mawar Putih has been
                                                       approving loans with below 50%
                                                       signatures.
3.       Self-selecting process                        Yes. Members decide on approval of
                                                       potential new members.
4.       Create own by-laws                            Yes. All groups are subject to
                                                       cooperative and individual group by-
                                                       laws.
5.       Group leader (member)                         No. Group leader is an employee of
                                                       Koperasi Mawar Putih.
6.       Group treasurer (member)                      No. Group treasurer is an employee of
                                                       Koperasi Mawar Putih.
7.       Competitive interest rate                     3% per month.
8.       Stepped loan process                          Yes. In accordance with members’
                                                       savings.
9.       Transactions only occur at meetings           No. Transactions occur at group leader’s
                                                       houses and the cooperative office.
                                                       Occasionally transactions occur at
                                                       monthly group meetings.
10       Credit extended quickly                       No. Credit extension usually occurs
.                                                      within two to three weeks following loan
                                                       approval.
11       Group buffer fund                             Yes. Rp. 500 per member per month.
.
12       Simple loan application                       Yes.
.

4.2 Savings at Koperasi Mawar Putih


           “Uang tabungan bukanlah uang sisa, tetapi uang yang sengaja disisihkan untuk
           digabungkan. Menabung untuk hari esok, dan berhematlah dalam
           membelanjakan harta, karena hari esok lebih baik daripada hari ini.”

           “Savings are not left over money, but money deliberately put aside to be saved.
           Save for tomorrow, be economical when purchasing, because tomorrow will be
           better than today.” 155




155
      Taken from Koperasi Mawar Putih’s members’ savings book.


                                                                                            71
           Two interviews156 with Koperasi Mawar Putih’s three managers have led to the
conclusion that Koperasi Mawar Putih encourages savings as a worthwhile habit among
members. This is done through the provision of three different savings services. In order
to become a member at Koperasi Mawar Putih, a principal saving of Rp. 15 000 plus an
initial compulsory saving of Rp. 15 000 must be paid. This appropriate entry level, along
with the incorporation of a stepped loan process based on one fifth of members’ savings
ensures that savings are prioritised and works together with the three savings services to
encourage savings among members.


           The three savings services offered at Koperasi Mawar Putih are compulsory,
voluntary and long-term savings. All members at Koperasi Mawar Putih are required to
pay a minimum of Rp. 2 000 each month in compulsory savings. These savings do not
come with a rate of return and can only be accessed once a member ceases to belong to
the cooperative. All members receive a share of the cooperative’s profits at the Annual
Members’ Meeting, however these profits are distributed evenly among members and do
not reflect individual savings habits. Similar to the situation at Koperasi Citra Lestari,
these elements appear to function as a disincentive to save. However, compulsory savings
are legal requirements for all savings and credit cooperatives and are balanced out with
opportunities for members to gain returns on voluntary and long-term savings.


           Voluntary and long-term savings on the other hand are available to both members
and non-members. The majority of non-members using these savings services are
husbands of current Koperasi Mawar Putih members. Voluntary savings are offered at a
rate of 12% per year and can be withdrawn at the clients will. Long-term savings yield a
return rate of 17.4% per year and can be withdrawn following a minimum three month
deposit period. At the time of research Koperasi Mawar Putih had Rp. 75 million worth
of long-term savings deposits.




156
      Interviews with Koperasi Mawar Putih’s three managers on 19/06/05 and 30/06/05.


                                                                                        72
Table 4.22 Effectiveness Checklist for Savings at Koperasi Mawar Putih
         SAVINGS                                                          Comment
13       Prioritise savings                              Yes. Initial loan based on fulfillment of
.                                                        principal savings. Continuing loans
                                                         follow the stepped loan process based on
                                                         member’s savings.
14       Savings should be encouraged as a               Yes. Compulsory monthly savings along
.        valuable habit                                  with the stepped loan process allow this
                                                         to happen.
15       Offer both voluntary and compulsory             Yes.
.        savings services
16       Offer real returns                              Yes. Voluntary savings = 12 % per year
.                                                        and long-term savings = 17.4% per year.

4.3 Documentation and Performance Monitoring at Koperasi Mawar Putih

           Observation and interviews157 conducted during the research period reveal that
Koperasi Mawar Putih undertakes various documentation and performance monitoring
procedures. These procedures, including installment and savings documentation, along
with monthly financial reporting are disclosed transparently to both Koperasi Mawar
Putih’s staff and members.


           The documentation process is helpful to members and staff, allowing both parties
to be aware of their financial situation. Installment and savings received from members
are recorded in each member’s individual member book along with the group deposit
book. This is recorded by the group leader at the time of payment. All cash received from
members either at the group leader’s house, the cooperative office or group meeting is
counted, recorded and stored at the cooperative office. Koperasi Mawar Putih is yet to
use computer technology, with all documentation kept on paper. Weekly reports of group
activity are then given to Koperasi Mawar Putih’s managers for analysis of financial
performance and record keeping. This information is complied monthly into a financial
report required by PUSKOWANJATI.


           At Koperasi Mawar Putih staff and members are given performance feedback at
regular intervals throughout the year. Firstly, at each monthly group meeting a financial
157
      Interview with Koperasi Mawar Putih’s head manager and secretary on 30/06/05.


                                                                                                73
report is given from the previous month. This enables both staff and members to be aware
of Koperasi Mawar Putih’s financial situation. Secondly, each year Koperasi Mawar
Putih holds their Yearly Members’ Meeting and their Work Planning and Evaluation
Meeting as one event. These two meetings are held together to reduce costs. At this
meeting, previous performance and goals are evaluated, and members and staff work
together to plan and set goals for the future.


            Koperasi Mawar Putih’s effectiveness in the implementation of the theoretically
defined principles of successful microfinance is weakened by two areas within the
documentation and performance monitoring section. Firstly, as outlined in Chapter
One158, as Koperasi Mawar Putih has an annual turnover below Rp. 1 billion it is exempt
from auditing. Although managers claim they take utmost care with financial
management, lack of outside supervision is this area is a cause for concern. Secondly,
like Koperasi Citra Lestari, Koperasi Mawar Putih is yet to undertake monitoring of the
effect of credit on income, savings and employment. Monitoring and understanding the
effect of credit on these aspects would allow Koperasi Mawar Putih to identify and
strengthen weak areas of performance and further tailor their products to members’
needs.




158
      Refer to section 1.2 regarding the Indonesian Cooperative Sector.


                                                                                        74
Table 4.23 Effectiveness Checklist for Documentation & Performance Monitoring at
Koperasi Mawar Putih
         DOCUMENTATION &                                                   Comment
         PERFORMANCE MONITORING
17       Measure & disclose performance                   Yes. Performance is measured and
.                                                         disclosed on a monthly basis.
18       Transparency                                     Yes. Performance disclosed to staff and
.                                                         members at the Annual Members’
                                                          Meeting.
19       Monitoring – effect of credit on                 Not to the researcher’s knowledge.
.        employment, income, savings etc.
20       Auditing                                         No.
.
21       Performance feedback to staff and                Yes. Each year at the Annual Members’
.        clients                                          Meeting.
22       Goals set and evaluated                          Yes.
.


4.4 Management at Koperasi Mawar Putih

           Koperasi Mawar Putih has four staff members and six group leaders or field
workers. Both staff and field workers are committed to the empowerment of local women
through the provision of savings and loans. The four staff members include one
supervisor and three managers. The managers take on individual roles of head manager,
Bu Juli, secretary, Bu Win and treasurer, Bu Wiwik. These three managers are chosen
collectively by members at the Annual Members’ Meeting and hold their positions for
three year periods. The six group leaders are chosen by management, and as mentioned in
the first section on loans, these leaders perform the functions of chairperson, secretary
and treasurer for each group at Koperasi Mawar Putih.159 Interviews with these six group
leaders160 revealed that all work at Koperasi Mawar Putih as additional employment. For
example one group leader is also a school teacher and another works at the local factory.
They collect repayments and fulfill their weekly reporting duties on Saturdays and
Sundays each week.




159
      Interview with Koperasi Mawar Putih’s head manager and secretary on 30/06/05.
160
      Interviews with Koperasi Mawar Putih’s group leaders at office on 19/06/05.


                                                                                                75
           Both the group leaders and managers live in the local Sedudut village, enabling
close relationships to be built with the local community. Observations and interviews
conducted during the research period showed the passion and commitment of these
managers and group leaders to Koperasi Mawar Putih’s members along with their
competence and proficiency. This commitment exists without any direct staff incentives.
Introduction of staff incentives may assist Koperasi Mawar Putih, especially with regard
to their efforts to ensure members repay in a timely manner.


           In terms of education and training of members and staff Koperasi Mawar Putih is
less effective in implementing the principles outlined in the methodology. According to
an interview with the Bu Juli and Bu Win,161 when required, management receive training
from PUSKOWANJATI and Dinas Koperasi, the Regional Cooperative Department. The
group leaders are trained by Koperasi Mawar Putih’s managers themselves, however the
extent to which this training is conducted is unknown.


           Education and training of Koperasi Mawar Putih’s members is very limited.
Since Koperasi Mawar Putih’s establishment in 1999, member training has been
conducted twice. Approximately 50 members were chosen to participate in these training
sessions focused on rights and obligations of cooperative members and self-esteem. In
almost eight years of operation, members at Koperasi Mawar Putih have only received
training on two occasions. Training of both management and members therefore needs to
be prioritised and conducted on a more regular basis. Increased training and education
has the potential to have a positive effect on Koperasi Mawar Putih’s performance.
Education regarding the tanggung renteng system for example would be of particular
benefit.




161
      Interview with Koperasi Mawar Putih’s head manager and secretary on 30/06/05.


                                                                                       76
Table 4.24 Effectiveness Checklist for Management at Koperasi Mawar Putih
         MANAGEMENT                                                          Comment
23       Management need to have a variety                   Yes.
.        of skills – flexible, talented, sensitive,
         know the clients they are dealing
         with
24       Continual management training                       Management training is received from
.                                                            PUSKOWANJATI and Dinas Koperasi.
                                                             The extent to which this training is
                                                             received on a regular basis is unknown.
25       Training of members                                 Not on a regular basis. In the 8 years of
.                                                            operation, member training has been
                                                             conducted twice. Regularity of training
                                                             needs to be increased.
26       Minimum positions: project                          Yes. All these positions are fulfilled plus
.        manager, loan manager, office                       more.
         assistant and field agent
27       Staff incentives                                    Not to the researcher’s knowledge.
.

4.5 Financial Management at Koperasi Mawar Putih

            In terms of financial management effectiveness, Koperasi Mawar Putih fulfills
the recommendations suggested in the methodology.162 Their interest rate covers
operating costs, limited external funds are in use and Koperasi Mawar Putih has yet to
receive any donor grants. However, this situation may be preventing Koperasi Mawar
Putih from expanding outreach and improving performance.


            Koperasi Mawar Putih charges a flat interest rate of 3% per month. At 36% per
year this interest rate is higher than local bank rates (22%) and well below interest rates
of moneylenders within the local area (30-100%). According to Koperasi Mawar Putih’s
managers, this interest rate covers monthly operating costs including staff wages and
office rent. As this interest rate reflects operating costs, Koperasi Mawar Putih can be
considered effective in this aspect.


            Secondly, since establishment in 1999 Koperasi Mawar Putih has yet to receive
external funds from banks, the government or donors. Koperasi Mawar Putih has relied
162
      Refer to section 2.5 regarding financial management.


                                                                                                       77
only on funds from PUSKOWANJATI and funds generated through savings
mobilisation. In Koperasi Mawar Putih’s May 2005 financial report, debt owed to
PUSKOWANJATI amounted to Rp. 15 400 000. This contrasts to Rp. 3 750 000
generated from principal savings and Rp. 17 million worth of reserves. 163 From these
figures it can be concluded that Koperasi Mawar Putih has more equity capital (Rp. 21
450 000) than external debt (Rp. 15 million).


            However, Koperasi Mawar Putih’s current rented office is scheduled to be sold
within the next year. If this occurs, Bu Juli, the head manager believes further external
funds, possibly a bank loan, will be sought in order to buy the office. Due to the office’s
prime location in the centre of the village, staff fear moving may affect member
convenience.164 This possibility of obtaining a bank loan casts doubt on Koperasi Mawar
Putih achieving full self-sufficiency within the recommended ten year period.


Table 4.25 Effectiveness Checklist for Financial Management at Koperasi Mawar
Putih
         FINANCIAL MANAGEMENT                                                Comment
28       Interest rate must reflect operating               Yes. Interest rate of 3% per month covers
.        costs                                              operating costs.
29       Interest rate must be above the                    Yes. Interest rate of 36% per year is
.        market rate but below moneylender                  above local bank rates and below local
         rates                                              moneylender interest rates.
30       Donor grants to be taken with care                 Not applicable. No donor grants received
.                                                           by Koperasi Mawar Putih.
31       Achieve operational self sufficiency               No. Koperasi Mawar Putih has now been
.        within the first three to five years and           in operation for eight years and has
         self-sufficiency within ten years                  achieved operational self sufficiency to
                                                            some extent. Full self-sufficiency within
                                                            the next few years does not appear
                                                            possible in light of taking out a possible
                                                            loan to fund the office purchase.
32       Constant goal to remove subsidies                  Not applicable. No donor grants received
.                                                           by Koperasi Mawar Putih.




163
      Financial figures obtained from the group leader’s address at group #6’s monthly meeting on 03/07/05.
164
      Interview with Koperasi Mawar Putih’s head manager and secretary on 30/06/05.


                                                                                                          78
4.6 Risk Management at Koperasi Mawar Putih

            Aside from charging a competitive interest rate,165 Koperasi Mawar Putih’s main
risk strategies are derived from the tanggung renteng system. This system allows self-
selection of members and the development of peer mobilisation. With efficient running of
the tanggung renteng system, these two strategies should work to minismise the risk
faced by Koperasi Mawar Putih. However, as noted in the first section of this chapter,
there are five obstacles to the efficient running of this system. These weaknesses limit the
extent to which Koperasi Mawar Putih manages its risks.


            The main cause of concern with regard to risk management is Koperasi Mawar
Putih’s inconsistent and discipline free system of dealing with late repayments. As
outlined in section one of this chapter, members at Koperasi Mawar Putih are frequently
allowed to pay double the following week, lacking any strict or consistent guidelines. In
order for Koperasi Mawar Putih to manage their risks effectively, stricter guidelines and
enforcement of agreed conditions are vital. The weaknesses outlined above suggest that
Koperasi Mawar Putih has not adequately assessed their costs and risks.


Table 4.26 Effectiveness Checklist for Risk Management at Koperasi Mawar Putih
         RISK MANAGEMENT                                                      Comment
33       Cost & risk assessment                               Failure of inherent tanggung renteng risk
.                                                             management strategies, suggest that
                                                              Koperasi Mawar Putih have failed to
                                                              adequately assess their costs and risks.
34       Discipline along with specific,                      No. Members regularly repay double the
.        consistent procedures set in place to                following week. There is no specific
         deal with late repayments                            disciplinary procedure in place for
                                                              dealing with late repayments.
35       Incentives provided for timely                       No.
.        repayments
36       High mobilisation of peer group                      No. Lack of group meeting attendance
.        discipline                                           along with continual late repayment
                                                              suggests peer mobilisation needs to be
                                                              increased.
37       Charge interest rates allowing                       Yes. Refer to section 4.1.
.        operating costs to be covered

165
      Refer to principle 17 of the effectiveness checklist.


                                                                                                       79
4.7 Tailoring the Program to Clients’ Needs at Koperasi Mawar Putih
       Koperasi Mawar Putih exists in order to empower local women and reduce
reliance on moneylenders through the extension of savings and credit services. In order to
do this they aim to tailor their services to the needs of the poor. Management live in the
local area, meet with members each week and encourage open discussion at monthly
group meetings. These three aspects show that management aim to understand the needs
of the poor and work together with members to fulfill their needs. This can be seen
through the following combination of aspects discussed in the previous six sections:
   •   Small time requirements: Aside from their weekly repayment schedule, members
       are only required to meet once a month for one hour in their local area – this does
       not interfere with their business and family life.
   •   No collateral: Use of the tanggung renteng system replaces any need for
       collateral.
   •   Reasonable     combined    principal   saving    and   initial   compulsory   saving
       requirements: In order to become a member at Koperasi Mawar Putih clients are
       required to pay Rp. 15 000 as principal saving together with Rp. 15 000 as a
       compulsory initial saving requirement. This amount does not represent a huge
       barrier to entry.
   •   Flexible repayment options: Members at Koperasi Mawar Putih repaying on a
       weekly basis can choose to repay on Saturdays at their group leaders house, or on
       Sundays at the cooperative office. These two options allow members to repay at
       their convenience. This system however does create inconveniences for Koperasi
       Mawar Putih’s group leaders however, having to give up two full days of their
       week to wait for members’ installments.
   •   Simple and uncomplicated processes: Following the fulfillment of the initial
       savings and loan request, members receive an outline of their weekly installment
       requirements in their personal members’ book. Members are therefore constantly
       aware of how much they owe and how much they have already repaid. The
       installment process is simple and uncomplicated, allowing members to carry on
       with their daily lives.




                                                                                        80
       The above list shows five specific ways Koperasi Mawar Putih are tailoring their
program to their clients needs. However, discussion in terms of the previous six sections
within this chapter has revealed numerous inefficiencies with regard to Koperasi Mawar
Putih’s implementation of the theoretically defined principles of microfinance success.
These inefficiencies reduce the ability of Koperasi Mawar Putih to wholly tailor their
program to their members’ needs.


Table 4.27 Effectiveness Checklist for Tailoring the Program to Clients’ Needs at
Koperasi Mawar Putih
     TAILORING THE PROGRAM TO                                   Comment
     CLIENTS’ NEEDS
38   Familiarity with local environment –       Yes. Management live in the local area
.    understand market, community &             and have weekly contact with members
     background of clients & potential          upon installment and at monthly group
     clients                                    meetings.
39   Take into account the needs of the         Yes. See above. However these points
.    poor                                       need to be considered in light of the
                                                numerous inefficiencies highlighted
                                                throughout the previous six sections of
                                                this chapter.
40   Use of simple, uncomplicated process       Yes. Small time requirements and easy
.    that are easy to carry out                 to follow repayments processes.


4.8 Conclusion

       The evidence presented in the seven sections of this chapter has highlighted areas
where Koperasi Mawar Putih is effective and ineffective at implementing the
theoretically defined principles of successful microfinance. In terms of the effectiveness
checklist, Koperasi Mawar Putih is effective in implementing 23 or 57.5% of the 40
defined principles. The seven sections in this chapter have shown 23 different ways in
which Koperasi Mawar Putih is effective in the implementation of successful
microfinance principles.


       However, this number alone suggests there are 17 distinct areas of weakness
within this savings and credit cooperative. Weaknesses were detected in six of the seven




                                                                                       81
areas discussed, with savings the only category implemented successfully. The table
below highlights the areas where Koperasi Mawar Putih is ineffective.


Table 4.28 Ineffective Principles at Koperasi Mawar Putih
Principle # Problem
          1. Although the group system is in place, the five discussed obstacles to
             tanggung renteng reduce its efficiency.
          2. 50% + 1 signature policy is required under the tanggung renteng system
             however Koperasi Mawar Putih has regularly been approving loans
             without obtaining the required number of signatures.
          5. The group leader is not a member.
          6. The group treasurer is not a member.
          9. Transactions occur outside of meetings at group leaders’ homes and the
             cooperative office at times convenient to members on Saturdays and
             Sundays.
        10. Credit extension is long, occurring between one week and one month of
             loan approval.
        19. Koperasi Mawar Putih is yet to undertake monitoring of the effect of
             credit on employment, income and savings.
        20. Koperasi Mawar Putih does not receive auditing services aside from
             financial analysis from PUSKOWANJATI.
        24. Regular implementation of management training is questionable.
        25. Training of members has been received on two occasions since
             establishment eight years ago.
        27. No staff incentives are implemented.
        31. Achieving self-sufficiency within the next two years is doubtful on the
             basis of the high possibility of acquiring a loan to purchase the
             cooperative office.
        33. Failure to adequately assess costs and risks.
        34. No discipline or consistent procedures to deal with late repayments are in
             place. Members regularly pay double the following week.
        35. No incentives are provided for timely repayments.
        36. The five obstacles to tanggung renteng suggest peer mobilisation needs to
             be increased.
        39. Although there are several ways in which Koperasi Mawar Putih takes
             into account the needs of the poor, the inefficiencies listed above limit this
             aspect of their operation.

       These weaknesses differ in terms of their centrality to the operation of Koperasi
Mawar Putih and the ease with which they can be overcome. My interviews and
observation carried out at Koperasi Mawar Putih, along with the literature survey have



                                                                                         82
led me to the conclusion that nine of these weaknesses are crucial to the efficiency of
Koperasi Mawar Putih, four are important and a further four are of relatively minor
importance.


       Principles #1, #2, #10, #20, #24, #25, #33, #34 and #36 are crucial to the
efficiency of Koperasi Mawar Putih. Principles #1, #2, #34 and #36 relate directly to the
tanggung renteng system. With regard to principle #1, the group system of tanggung
renteng is in place, however five specific weaknesses currently obstruct efficient running
of this system at Koperasi Mawar Putih. These include a lack of understanding among
members as to the definition and implications of tanggung renteng, lack of attendance at
monthly meetings and persistent late repayments and non-active members. The fourth
obstacle to the efficient running of the tanggung renteng system is encompassed in
principle #2, management approving loans without the 50% + 1 group signature
requirement. This defers from tanggung renteng policy and sets an unhealthy precedent.


       The tanggung renteng system is further put at risk with no discipline or consistent
procedure set in place for handling late repayments. Members regularly pay double the
following week without receiving punishment of any form. Failure to successfully
implement these principles means that principle #36, regarding peer mobilisation is
ineffective. Clearly, peer mobilisation is not of high level at Koperasi Mawar Putih,
primarily due to the lack of discipline of behalf of Koperasi Mawar Putih’s managers.
These weaknesses with regard to the tanggung renteng system are crucial to the operation
of Koperasi Mawar Putih.


       I believe these tanggung renteng weaknesses can be rectified with development
and enforcement of specific policies relating to the inefficient areas. Firstly, management
at Koperasi Mawar Putih needs to cease approving loans without the 50% + 1 group
signature requirement. Enforcement in this area should decrease absences and increase
peer mobilisation. Secondly, Koperasi Mawar Putih needs to develop specific policies,
with individual and collection sanctions, to be used for late repayments. Member training
in the tanggung renteng system and their rights and responsibilities as members of



                                                                                        83
cooperatives should also assist in rectifying these weaknesses. Principle #33 regarding
assessment of costs and risks is also related to the tanggung renteng system. An adequate
assessment of Koperasi Mawar Putih’s costs and risks will increase the importance of
efficient running of the tanggung renteng system. This is a further incentive to develop
and enforce the above policies.


       The second area crucial to the effectiveness of Koperasi Mawar Putih includes
principles #24 and #25 regarding training for management members. As noted in the
table, training for management and members does not occur on a regular basis. This
research has shown that members at Koperasi Mawar Putih would specifically benefit
from training concerning the tanggung renteng system and their rights and
responsibilities as members. Training members in the roles and responsibilities of the
group chairperson and group treasurer could also be conducted in order to smooth the
transition of these roles from the Koperasi Mawar Putih staff. From my research I have
seen the commitment of the managers and group leaders at Koperasi Mawar Putih. I
believe training in the importance of enforcing tanggung renteng policies would be of
specific benefit to all staff and would increase their commitment and competence.


       There are two other principles crucial to the efficient operation of Koperasi
Mawar Putih. Firstly, with regard to principle #10, the credit extension period at
Koperasi Mawar Putih needs to be shortened. This uncertain long period of up to one
month is inefficient and inconvenient for members, with the high possibility of impacting
upon members’ financial situation. Optimally, credit extension should occur within one
week following loan approval. Secondly, regarding principle #20, it is crucial for
Koperasi Mawar Putih to be audited by an external source. Currently, PUSKOWANJATI
are involved in some financial analysis, however external auditing is encouraged to
ensure reporting is transparent and reduce the risk of corruption or mismanagement.


       The four principles considered important to the efficient running of Koperasi
Mawar Putih are principles #5, #6, #9 and #31. Currently each group leader at Koperasi
Mawar Putih takes on the roles of group chairperson and treasurer in their respective



                                                                                      84
groups (principles #5 and #6). This prevents members from having the opportunity to
learn and develop new and valuable skills for themselves and creates a large workload for
group leaders. As suggested above, this could be rectified with member training in these
roles.


           Secondly, with regard to principle #9, transactions occur in group leaders’ homes
and at the cooperative office on Saturdays and Sundays at members’ convenience. The
recommendation to only have transactions occurring at group meetings is a problem due
to the nature of weekly repayments at Koperasi Mawar Putih, however does place a huge
time burden on group leaders and can easily lead to cash handling issues. A possible
solution includes the development and enforcement of controlled weekly repayment
procedures, for example, allowing members to pay at any time during a one hour session
at the equivalent time and day of their monthly meeting. This will reduce group leader
hours and allow for a more efficient repayment process.


           Finally, according to the microfinance literature, MFIs should be self-sufficient
within ten years of operation. Koperasi Mawar Putih has been in operation for eight
years, and the possibility of achieving full self-sufficiency in the next two years is
doubtful with the high possibility of obtaining a loan to purchase the current rented
cooperative office.


           The four principles regarded to be of minor importance to the efficiency of
Koperasi Mawar Putih are principles #19, #27, #35 and #39. Principle #19 concerns
monitoring the effect of credit on employment, savings and income. As stated in the
conclusion of Chapter Three, tools such as these have hardly been developed for the
Indonesian microfinance sector as a whole,166 and inefficiency in this principle is
therefore not of huge concern. Similarly, with regard to principle #27, staff incentives
may be an area for Koperasi Mawar Putih to consider, but are not essential to the
efficiency of this savings and credit cooperative. Principle #39 concerns the
implementation of incentives to ensure timely repayment. Essentially, with enforced

166
      Interview with Novanto Agus, Prudentia, via email, 11/08/05.


                                                                                         85
procedures to deal with late repayments, timely incentives should not be required. The
awarding of “the best group” awards, or a similar incentive, could however be an option
for Koperasi Mawar Putih to consider. Finally, with regard to principle #39, it is hoped
that with improvements and changes to the above principles, Koperasi Mawar Putih will
be able to further accommodate the needs of their clients.


       This research has shown that Koperasi Mawar Putih is ineffective at
implementing 17 principles from the effectiveness checklist. Koperasi Mawar Putih only
has a 57.5% rate of effectiveness, revealing significant weaknesses in the operation of
this savings and credit cooperative. There are many challenges for Koperasi Mawar
Putih to overcome in order to increase their effectiveness in the implementation of the
theoretically defined principles of successful microfinance. The weaknesses and
problems outlined in this chapter cannot be rectified in the immediate future. In order to
increase their effectiveness Koperasi Mawar Putih need to focus on restoring the
tanggung renteng system. This will be the first step in their long road to recovery.




                                                                                       86
                               CONCLUSION


The International Year of Microcredit 2005: Time for Change

       Indonesia began its journey of microfinance 110 years ago in Central Java. In
2005, the International Year of Microcredit, the Indonesian microfinance sector reaches
millions of poor and low income earning families. Koperasi Citra Lestari and Koperasi
Mawar Putih are two savings and credit cooperatives providing microfinance services to
their respective local communities in East Java. Through the development and use of an
effectiveness checklist I have used research conducted at Koperasi Citra Lestari and
Koperasi Mawar Putih to determine the strengths and weaknesses of these two savings
and credit cooperatives. In accordance with the effectiveness checklist and the
theoretically defined principles of successful microfinance outlined in this thesis,
Koperasi Citra Lestari is 80% effective and Koperasi Mawar Putih is 57.5% effective.


       As mentioned in the introduction, there are four original aspects of this thesis.
These include addressing the gap in literature with regard to savings and credit
cooperatives as MFIs in Indonesia, and the use of two case studies that have not been
previously researched. Furthermore, this thesis has evaluated the effectiveness of
Koperasi Citra Lestari and Koperasi Mawar Putih through the creation and use of a
checklist determining 40 principles considered important in the implementation of
successful microfinance. The fourth aspect of originality includes the use of interviews
conducted during the research period.


       This thesis has assessed the effectiveness levels of Koperasi Citra Lestari and
Koperasi Mawar Putih through a discussion of the cooperative sector as a whole,
followed by specific discussion of these two individual savings and credit cooperatives.
Cooperative MFIs are one of the numerous MFIs currently providing microfinance in
Indonesia, and like the microfinance sector as a whole, the cooperative sector is
embedded with significant weaknesses. These include the high degree of inactivity and


                                                                                       87
closure rate, the inefficient role of the Ministry of Cooperatives, high levels of
government dependence, unreliable reporting mechanisms, weak management skills, high
levels of corruption and mismanagement along with entry restrictions.


       The seven weaknesses highlighted in Chapter One create a negative image of the
cooperative sector and influence the ability of individual cooperatives to implement the
theoretically defined principles of microfinance. These 40 principles relate to seven
specific areas of microfinance provision and have been summarised in an effectiveness
checklist. These areas include loans, savings, documentation and performance
monitoring, management, financial management, risk management and tailoring the
program to clients’ needs.


       Koperasi Citra Lestari and Koperasi Mawar Putih are two savings and credit
cooperatives operating in Malang, East Java. As primary cooperatives of the secondary
cooperative PUSKOWANJATI, Koperasi Citra Lestari and Koperasi Mawar Putih base
their operation on the tanggung renteng system. As outlined in Chapter Two, this mutual
guarantee system involves members taking full responsibility for other members’ loans,
replacing the need for collateral. Discussion of Koperasi Citra Lestari and Koperasi
Mawar Putih in terms of the effectiveness checklist in Chapters Three and Four revealed
respective areas of weaknesses, with Koperasi Citra Lestari 80% effective and Koperasi
Mawar Putih 57.5% effective. At Koperasi Citra Lestari there are only eight principles
from the effectiveness checklist concluded to be inefficient. Where as, at Koperasi
Mawar Putih 17 principles from the effectiveness checklist are unfulfilled. These figures
reveal that Koperasi Mawar Putih is therefore less effective at implementing the defined
principles of successful microfinance in comparison with Koperasi Citra Lestari.


       This thesis has concluded that Koperasi Citra Lestari and Koperasi Mawar Putih
have different weaknesses and problems influencing their effectiveness. Koperasi Citra
Lestari has proved to be effective in implementing 32 from the defined 40 principles of
successful microfinance. This thesis has shown that Koperasi Citra Lestari has reached
almost 4 000 poor and low income earners in the Lawang district. This is due to their



                                                                                      88
high standards and clear understanding of products required by their clients. Chapter
Three outlined ten specific ways in which Koperasi Citra Lestari does take into account
the needs of the poor and low income earners. It is this understanding that has enabled
Koperasi Citra Lestari to reach out and change lives to thousands of Indonesians in their
local area.


        The eight principles considered to be ineffective are of crucial, important and
relatively minor importance to the overall operation of this savings and credit
cooperative. Of crucial importance are the principles regarding the tanggung renteng
system along with education and training of members and management. Absences at
monthly group meetings along with some inconsistencies in dealing with late repayments
threaten the tanggung renteng system. However, continual enforcement of loan approval
via signatures and late repayment sanctions will prevent these inefficiencies from
increasing. With regard to member and management training, Koperasi Citra Lestari has
the ability, contacts and finances to prioritise this intangible asset and should implement
this training in the near future.


        Discussion of Koperasi Mawar Putih in Chapter Four on the other hand, has
revealed 17 areas of inefficiency. From these 17 areas, nine have been concluded to be
crucial to the overall efficiency and performance of this savings and credit cooperative.
Five of these areas relate to the tanggung renteng system. At Koperasi Mawar Putih, the
tanggung renteng system is primarily threatened by loan approval without 50% + 1 group
signatures and staff regularly allowing members to pay double their repayment the
following week. These regular inconsistencies with tanggung renteng policy have caused
low levels of peer mobilisation and have consequences for the operation and performance
of Koperasi Mawar Putih as a whole.


        The four other areas of crucial importance to the operation of Koperasi Mawar
Putih include the absences of regular member and management training, a long credit
extension period and lack of external auditing procedures. Member and management
training is of crucial importance in dealing with the ineffective areas at Koperasi Mawar



                                                                                        89
Putih. Training outlined in the conclusion of Chapter Four will allow management and
members to address respective areas of weakness and will set the foundations for
increasing Koperasi Mawar Putih’s effectiveness. Additionally, Koperasi Mawar Putih
need to shorten their credit extension period to reduce the inconvenience this causes to
members and be audited by an external source to prevent mismanagement.


       Koperasi Citra Lestari and Koperasi Mawar Putih have two distinct areas of
similarity in their implementation of the theoretically defined principles of successful
microfinance. Firstly, both Koperasi Citra Lestari and Koperasi Mawar Putih have
proven to be effective in all principles included in the savings methodology. Each
cooperative places high value on savings, encouraging savings as a valuable habit
through the availability of compulsory and voluntary savings with returns, along with use
of the stepped loan process. By providing secure access to savings products, Koperasi
Citra Lestari and Koperasi Mawar Putih are responding to the needs and helping secure
the future of their poor and low income clients.


       Secondly, the area common to both cooperatives includes weaknesses with regard
to the tanggung renteng system. The tanggung renteng system is put at risk at both
cooperatives with high levels of absence at monthly group meetings and inconsistencies
and lack of discipline in dealing with late repayments. As the basis of savings and credit
cooperatives, the tanggung renteng system is crucial to the overall effectiveness of this
type of MFI. Failure to adequately implement this system has consequences for other
areas of operation within the savings and credit cooperative. Members need to understand
their role, rights and responsibilities as individuals within the collective tanggung
renteng system. In order for this to occur, management and staff primarily need to ensure
members are educated and trained in these aspects and secondly enforce tanggung
renteng policy in a strict manner. This thesis has shown that Koperasi Citra Lestari and
Koperasi Mawar Putih have different levels of effectiveness and ability in this area, with
Koperasi Mawar Putih in a deeper level of weakness.




                                                                                       90
       I believe that Koperasi Citra Lestari and Koperasi Mawar Putih have the ability
to increase their effectiveness with regard to their implementation of the tanggung
renteng system. However, more work will be required at Koperasi Mawar Putih.
Continual development and enforcement of policies, along with regular training and
education of members will assist in this process. If the tanggung renteng system is
implemented adequately and other areas of inefficiency are addressed, both Koperasi
Citra Lestari and Koperasi Mawar Putih can continue to use microcredit loans to
increase the income, create employment and increase the well being of the local Lawang
and Sukun population.


       While writing this thesis I have identified two possible areas of further research.
These areas add to the research and conclusions made in this thesis. In this thesis and the
appendix, three levels of weaknesses have been identified with regard to different levels
of the microfinance sector in Indonesia. As noted in Appendix Two, there are twelve
weaknesses in the Indonesian microfinance sector. Secondly, Chapter One outlined seven
specific weaknesses of the Indonesian cooperative sector. Furthermore, individual
weaknesses of two savings and credit cooperatives have been concluded in Chapters
Three and Four, with regard to Koperasi Citra Lestari and Koperasi Mawar Putih.
Further research could be conducted in terms of the relationships between these
weaknesses at the general, sector and individual cooperative level. This research could
comprise the similarities and differences between these relationships, along with the
extent to which weaknesses at each level impact upon the operation and performance of
other levels.


       Further research could also be conducted in different areas of Indonesia. This
thesis has considered two savings and credit cooperatives in East Java out of a possible
thousand savings and credit cooperatives currently operating throughout Indonesia.
Further research could consider performance levels among savings and credit
cooperatives in different areas of Indonesia, and the relationship between area and
effectiveness.




                                                                                        91
       Indonesia’s vast microfinance sector has great potential to increase the quality and
quantity of its microfinance services. As shown in this thesis, Koperasi Citra Lestari and
Koperasi Mawar Putih are two savings and credit cooperatives currently involved in the
provision of microfinance. Koperasi Citra Lestari and Koperasi Mawar Putih have
different levels of effectiveness, but both have the ability to change and improve their
services to the local community. This task will be more difficult however, for Koperasi
Mawar Putih. Due to inefficient supervision provided by the Ministry of Cooperatives,
identified as one of the weaknesses in the cooperative sector, I see it necessary for
PUSKOWANJATI to play the primary role in increasing Koperasi Mawar Putih’s
effectiveness. The Ministry of Cooperatives and Gema PKM, The Indonesian Movement
for Microfinance Development, will also have an indirect role in this process.


       Overcoming these difficulties will be a challenge, but a challenge that is worth
pursuing. When implemented effectively, microfinance has the ability to change lives for
the better, providing a hand-up, not a hand out. With 2005 as the International Year of
Microcredit, there’s no better time than now for savings and credit cooperatives such as
Koperasi Citra Lestari and Koperasi Mawar Putih to take on this challenge.




                                                                                        92
                               APPENDIX ONE

                      The Indonesian Microfinance Sector

       In earlier stages of writing this thesis I had planned to develop sections regarding
the different types of MFIs operating in Indonesia and the general weaknesses of the
Indonesian microfinance sector. However, as the thesis came together I found it
necessary to discuss savings and credit cooperatives in more detail. The four different
types of microfinance providers in Indonesia: bank MFI, cooperative MFI, non-bank and
non-cooperative MFI and regional and central government MFI and microfinance
projects are discussed in Appendix One. Appendix Two discusses the ten weaknesses of
the Indonesian microfinance sector as a whole.


       I have included these two sections in order to illustrate the huge microfinance
sector that the two savings and credit cooperatives discussed in this thesis are included in.
Savings and credit cooperatives are just one of the many players in the Indonesian
microfinance sector, and their ability to implement the theoretically defined principles of
successful microfinance is influenced by these general weaknesses in the Indonesian
cooperative sector. As noted in the conclusion, further research is required to assess the
extent of this influence on individual savings and credit cooperatives.


The Four Types of Indonesian Microfinance Institutions (MFIs)
       The broad MFI landscape within Indonesia has resulted in the development of
several different classification systems regarding microfinance in Indonesia. Various
studies conducted by international organisations such as the Asian Development Bank
(ADB), Promotion of Small Financial Institutions (ProFI) along with The Indonesian
Movement for Microfinance Development (Gema PKM) have developed the
classification systems discussed below. This analysis will show that each system includes
a different selection of MFIs in its categorisation, each choosing a different combination
and classification.


                                                                                          93
      1. ADB. As can be seen in the following table, the ADB classification system
          categorises MFIs according to their level of formality.167


Table A.1 ADB Classification System
FORMAL                                                  SEMI-FORMAL
BRI (Bank Rakyat Indonesia)168                          BKD (Badan Kredit Desa)
BPR (Bank Perkreditan Rakyat)                           KSP (Koperasi Simpan Pinjam)
Pegadaian (State Pawning Company)                       USP (Unit Simpan Pinjam)
LDKP (Lembaga Dana Kredit Pedesaan)

      2. ProFI. ProFI differentiate between Indonesian MFI according to their provision
          of institutional or program microfinance. Institutional microfinance is defined as
          the, “provision of microfinance services by bank and non-bank institutions that
          fulfill financial intermediation functions with their own products and funds”.
          Where as, program microfinance consists of a wide range of measures that aim at
          providing financial services to low-income groups, usually taking the form of
          governmental credit programs.169 The division is as follows:


Table A.2 ProFI Classification System
     Institutional Microfinance            Program Microfinance               Individual Microcredit
Commercial Banks                  Microfinance System Building:        Moneylenders
                                        •    Linkage Project
                                        •    Microcredit Project
BPR170                            Poverty Alleviation Programs:        Traders
                                        •    P4K
                                        •    UPPKS
                                        •    PKK
                                        •    P2KP
LDKP                              Crisis Related Channeling of funds   Shopkeepers
BKD                               NGO Microcredit Programs             Neighbours
UED-SP                                                                 Family Members
State-owned Pawn Shops
Microfinance Cooperatives
      •   Cooperatives
      •   Credit Unions
      •   TPSP
Savings & Credit Associations


167
    ADB, “Commercialization of Microfinance”, http://www.adb.org/Documents?Reports?
Commercialisation_MicrofinanceIINO/chap2.pdf, 04/06/05.
168
    For translations refer to Table A.3.
169
    Holloh, ProFi Microfinance, pg. 31.
170
    For translations refer to Table A.3.


                                                                                                       94
       3. Gema PKM. Gema PKM classify MFIs in Indonesia within the following four
              approaches:
       i.        Savings Led Microfinance – including KSP, Credit Union, KSM (Kelompok
                 Swadaya Masyarakat).
       ii.       Credit Led Microfinance – including BKD, LDKP, BMT (Baitul Maal
                 Wattanwil), Grameen Bank Replicas.
       iii.      Microbanking – BRI Unit Desa, BPR.
       iv.       Linkage Model – Links between banks and MFIs.171


              Studies from the ADB, ProFI and Gema PKM have provided three varying
classification systems, incorporating different MFI into their respective frameworks.
These frameworks incorporate a selection of different MFIs. The literature survey along
with interviews and observation conducted in Indonesia during the research period have
allowed me to create a different framework again, combining and adding to information
noted in the above studies. This appendix will discuss the Indonesian microfinance sector
within the following four classifications: Bank MFI, Cooperative MFI, Non-bank and
non-cooperative MFI and central and regional government MFI and microfinance
projects. Below is a table summarising the 15 MFIs to be discussed in this appendix:




171
      Ismawan & Budiantaro, Keuangan Mikro, p. 23-29.


                                                                                       95
Table A.3 The Four Types of MFIs
                                ENGLISH              TOTAL UNITS             TOTAL              DATA 172
                              TRANSLATION                                  BORROWERS
A. BANK MFI
BRI Unit Desa             Microcredit units of the   4 046                3 210 678        December 2004
                          People’s Bank of
                          Indonesia.
BPR (Bank Perkreditan     People’s Credit Banks      2 164                2 161 000        September 2004
Rakyat)
Bank BMT Syariah          Banks operating in         3 038 (combined      1 200 000        December 2001
                          accordance with Islamic    with cooperatives)   (combined with
                          principles                                      cooperatives)
B. COOPERATIVE MFI
KSP                   Savings & Credit            1 097            665 000          April 2000
                      Cooperatives
USP                   Savings & Credit Units of   35 218               DATA NOT     April 2000
                      Multipurpose Cooperatives                        AVAILABLE
Koperasi Kredit       Credit Unions               1 022            235 087          December 2004
Koperasi BMT Syariah  Cooperatives operating in   3 038 (combined  1 200 000        December 2001
                      accordance with Islamic     with banks)      (combined with
                      principles                                   banks)
C. NON BANK & NON COOPERATIVE MFI
Pegadaian             Indonesia’s State Owned     827              7 768 278        December 2004
                      Pawning Company
LKM LSM               NGO MFIs                    1 047            285 935          December 2004
Informal:
     a. Arisan              a. Rotating Savings
                                  & Credit                         NO DATA AVAILABLE
                                  Associations
                            b. Moneylenders
     b. Rentenir
D. CENTRAL & REGIONAL GOVERNMENT MFI & MICROFINANCE PROJECTS
Central:
a. P4K (Proyek              a. Rural Income       a. Not available a. 37 744 active a. June 2000
Peningkatan                       Generation                       farmer groups
Pendapatan Petani                 Project
Nelayan Kecil)
b. TPSP (Tempat             b. Savings and        b. 1 582         b. 240 233 (loan b. April 2000
Pelayanan Simpan                  Credit Service                   accounts)
Pinjam)                           Posts
c. UED-SP (Unit             c. Village            c. Claimed to    c. Not available c. 1998
Ekonomi Desa – Simpan             Economic Unit – have established
Pinjam)                           Savings &       40 622
                                  Credit
d. UPPKS (Usaha             d. Family Welfare     d. Not available d. 600 843 UPPKS d. July 2000
Peningkatan                       Income                           groups
Pendapatan Keluarga               Generation
Sejahtera)                        Project
Regional:
     a. LDKP          a. Rural Fund and Credit          a. 239           a. 75 500        a. December
           (Lembaga   Institution                                                              2004
           Dana Kredit
           Pedesaan)
                          b. Village Credit Board         b.   5 345          b. 400 000       b.   2004
      b.   BKD (Badan
           Kredit Desa)




172
  Data in this table is derived from Gema PKM, Pokok Pokok Pikiran Gema PKM Indonesian Tentang
Kebijakan Nasional: Pengembangan Keuangan Mikro Sebagai Pembangunan Indonesia, 2004, Ismawan &
Budiantaro, Keuangan Mikro, p. 32, and Holloh, ProFi Microfinance, p. 159.


                                                                                                            96
Classifications A and B refer to MFIs currently operating under bank or cooperative legal
status, where as classification C refers to those MFIs currently operating under unclear
legal status and traditional forms of microfinance still alive in Indonesia today.
Classification D refers to both central and regional government microfinance projects
operating in Indonesia.


A. Bank MFI
          The two main bank MFI currently in operation in Indonesia are BRI Unit Desa
and BPR. Bank MFI operate under the 1988 banking laws,173 with BRI the successor to
Indonesia’s first microfinance bank established in 1895 in Purwokerto. BRI have been
involved in microfinance since the 1970s with the implementation of their subsidised
credit program. The failure of this supply driven program led to the establishment of
demand-driven products through BRI Units beginning in 1984.174 The provision of both
savings (SIMPEDES-simpanan pedesaan) and credit (KUPEDES-kredit umum pedesaan)
products has enabled BRI to maintain stable profit levels since 1986.175 In 2005 over 4
000 BRI Units are in operation throughout Indonesia. Yadi Supriyatno an employee of
BRI, maintains that the keys to success include simplicity, accessibility, transparency,
demand driven products, cost recovery and sustainability. 176 Secondly, BPR, The
People’s Credit Bank, have been in operation since the 1950s with a high concentration
within Java.177 2004 central bank statistics report that 2 164 BPR were in operation,
serving the Indonesian community with similar credit and savings services offered at
BRI.178




173
    Holloh, ProFi Microfinance, pp. 65-69.
174
    Rudjito, Asosiasi Perbankan Indonesian, “Inovasi Metodologi dan Pengembangan Produk Keuangan
Mikro Untuk Mencapai Pelayanan Yang Berkelanjutan”, Temu Nasional dan Bazaar ke II Keuangan
Mikro Indonesia, Solo, 4 – 8 September 2005.
175
    Robinson, The Microfinance Revolution.
176
    Yadi Supriyatno, BRI, “Membangung Kemitraan Perbankan, Swasta dan Lembaga Keuangan Mikro:
Tantangan dan Peluang”, Temu Nasional dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8
September 2005.
177
    Holloh, ProFi Microfinance, pp. 65-69.
178
    Ismawan & Budiantaro, Keuangan Mikro, p. 32.


                                                                                                   97
B. Cooperative MFI
        As discussed in Chapter One, cooperatives have been part of the Indonesian
economy since 1945, when Muhammad Hatta, Indonesia’s father of cooperatives, stated
that cooperatives were to form the foundation of the economy. Cooperatives are licensed,
regulated and supervised by the Ministry of Cooperatives, formed in Indonesia in 1958. 179
Cooperatives dealing in the provision of microfinance include KSP, koperasi simpan
pinjam, savings and credit cooperatives, USP, unit simpan pinjam, savings and credit
units and koperasi kredit, credit unions. Outreach for these three cooperative MFIs can be
seen in the following table:


Table A.4 Cooperative Outreach
Cooperative MFI                                       Total180
KSP                                                   1 097 (2000)
USP                                                   35 218 (2000)
Kopdit                                                1 022 (2004)

Further discussion of the Indonesian cooperative sector is included in Chapter One.


BMT Syariah
        MFIs operating in accordance with Islamic principles have also developed
throughout Indonesia in the form of BPR and cooperative legal status. In 2000 there were
3 037 BMT syariah institutions in operation.181 BMT syariah operate under the
supervision of Yayasan Inkubasi Bisnis Usaha Kecil (YINBUK), Foundation for the
Incubation of Small Businesses, and the region based Pusat Inkubasi Bisnis Usaha Kecil
(PINBUK), Center for the Incubation of Small Businesses. BMT syariah provide similar
services to other MFIs through the use of the profit sharing method. An interview with A.
Ihsan Arkam from Peramu, a syariah microfinance institution in Bogor, clarified that
BMT do not charge a rate of interest, but take a share of the profits made with the client’s
loan. The MFI/client profit division is based on the business in which the client is



179
    Holloh, ProFi Microfinance, pp. 159-160.
180
    Ismawan & Budiantaro, Keuangan Mikro, p. 32.
181
    Kasiyanto, Petabumi Keuangan Mikro, pp. 67-179.


                                                                                         98
operating, ensuring BMT staff have a deep understanding of the varying micro-
enterprises of their clients.182


C. Non-bank and Non-cooperative MFI
         The third classification of Indonesian MFI refers to non-bank and non-cooperative
microfinance providers. These MFI operate under varying legal status, pegadaian being
regulated by the Ministry of State Owned Enterprises and NGO MFI operations generally
taking yayasan, or foundational legal status. Arisan, Indonesia’s traditional form of
rotating savings and credit association, along with moneylenders do not have any form of
legal status.


         Firstly, pegadaian is Indonesia’s state owned pawn company that has been in
existence since the beginning of the 20th century. The 812 branches183 provide credit to
customers by converting personal items into cash. The main items converted include
motorbikes, electrical goods and jewellery. Clients are charged per 15 days of loaned
credit with an interest rate of 1.6%.184 Pegadaian guarantee conversion to cash within 15
minutes, providing Indonesians with quick and efficient access to funds.


         The NGO microfinance sector is slowly developing within Indonesia, limited to a
considerable degree by the lack of appropriate microfinance legal framework and
protection. Data collected by NGOs in December 2004 reported that there were 1 047
NGO MFIs operating in Indonesia.185 Many NGOs are affiliated with international
organisations, for example Yayasan Dian Mandiri (DIMAN) in Tangerang, Jakarta.
DIMAN was established in 1998 through Opportunity International (OI)186. DIMAN
currently have 11 branches in West Java, Sumatera and Aceh, serving over 13 000
clients. DIMAN channel loans via the group lending system, with women representing
182
    Interview with A. Ihsan Arkam from Peramu, Temu Nasional dan Bazaar ke II Keuangan Mikro
Indonesia, Solo, 4 – 8 September 2005.
183
    BWTP, Asia Resource Centre for Microfinance (ARCM), Country Profile: Indonesia,
http://www.bwtp.org/arcm/indonesia/I_Country_Profile/Indonesia_country_profile.htm.
184
    Pegadaian pamphlet.
185
    Ismawan & Budiantaro, Keuangan Mikro, p. 32.
186
    Opportunity International is an International NGO working to support partners in 27 countries to solve
poverty and empower lives through micro-enterprise development and training. See
http://www.opportunityinternational.org.au/.


                                                                                                         99
the majority of clientele. Monthly performance monitoring at an international standards
has enabled DIMAN’s assets to exceed Rp. 10 billion, with branches usually achieving
sustainability within one and a half years of operation.187


        Although arisan and moneylenders do not retain any form of legal status, they
remain an important and substantial part of the Indonesian microfinance sector. As
informal providers of microfinance, arisan and moneylenders maintain high levels of
service operate in all areas of the archipelago. Firstly, arisan represent a form of savings
and credit association, whereby members meet informally and contribute an agreed
amount of money each month. The money is collected and followed by a lottery which is
won by one of the group members. According to the IFLS, the Indonesian Family Life
Survey188 of 1997, 52% of Indonesian households participate in arisan, 71% of
participants women. Furthermore, the study noted that the average Indonesian contributes
11% of their monthly wage to arisan funds.189


        Moneylenders on the other hand are renowned for their exceptionally high rates of
interest. Interest rates have been stated to be as high as 100% in some cases, 190 stunting
the development process with any profits made being used as interest repayment. Despite
high interest rates, the moneylender market is booming in Indonesia due to the simple,
quick and convenient procedures. Moneylenders go to the poor, they don’t require any
information, and they deliver credit on the spot – a much easier and less complicated
process for the poor.




187
    Information taken from an interview with Metti, Finance & Accounting Manager, and Dino V.
Hadjarati, Operational Director, of DIMAN on 18/07/05 in Batu and from DIMAN’s website, see
http://www.dianmandiri.com/index.php.
188
    The Indonesian Family Life Survey is an ongoing longitudinal survey in Indonesia conducted by
RAND, UCLA and The University of Indonesia. Stated to be representative of 83% of the population.
189
    Sowmya Varadharajan, Explaining Participation in RoSCAs: Evidence from Indonesia, Dept.
Economics, Cornell University, Ithaca, New York.
190
    Robinson, The Microfinance Revolution.


                                                                                                    100
D. Central and Regional Government MFIs and Microfinance Projects
           The central Indonesian government has been involved in the implementation of
microfinance projects since the beginning of the 1970s. Four examples of these projects
include Program Peningkatan Pendapatan Petani Nelayan Kecil (P4K), Tempat
Pelayanan Simpan Pinjam (TPSP), Unit Ekonomi Desa – Simpan Pinjam (UED-SP) and
Usaha Peningkatan Pendapatan Keluarga Sejahtera (UPPKS). These projects have been
implemented by various government departments, including the Ministry of Home
Affairs, Badan Koordinasi Keluarga Berencana Nasional (BKKBN), and the National
Family Planning Board (Bappenas). The majority of these projects channel credit through
groups and have had varied success levels. Criticisms include consistent use of the “top-
down” approach and subsidised credit of channeled funds not meeting the needs of the
clients.191


           Regional governments however, have experienced more successful MFI
implementation.          Two      well    known          regional   government   MFIs   are
Lembaga Dana Kredit Pedesaan (LDKP) and Badan Kredit Desa (BKD). These MFIs
have a long history in Indonesia, BKD being of colonial origin and LDKP beginning in
the 1970s. Both these MFI provide credit and savings services to clients in the form of
individual loans. In 2004 there were 2 272 LDKP and 5 345 BKD in operation.192




191
      Ismawan & Budiantaro, Keuangan Mikro, pp. 35-36.
192
      ibid. p. 32.


                                                                                          101
                                 APPENDIX TWO

         Weaknesses of the Indonesian Microfinance Sector

        Appendix Two discusses the twelve weaknesses identified in the Indonesian
microfinance sector. This appendix is divided into five sections. The first section shows
that there is a lack of understanding of the definition and concept of microfinance. This is
coupled with a weak government role in promoting and developing microfinance and a
lack of necessary supporting institutions, in terms of access to capital, micro-insurance,
supervisory bodies along with benchmarks and performance monitoring tools. Finally,
these weaknesses give rise to resulting problems including weak management strategies
and a persistent gap between demand and supply for microfinance services. The fifth
section outlines the role Gema PKM, the Indonesian Movement for Microfinance
Development, is playing in improving the Indonesian microfinance sector.


Weaknesses in the Indonesian Microfinance Sector
        Indonesia is blessed with a variety of microfinance providers. Microfinance has
the ability to empower the poor, to create jobs, to raise incomes and to improve micro-
enterprise performance. However, the vast microfinance landscape of Indonesia is yet to
provide the funds needed by Indonesia’s poor. The legal framework is inadequate,
supervisory bodies need to be improved and management quality needs attention. Despite
the vast array of different microfinance providers, the Indonesian microfinance sector is
ridden with problems and weaknesses. I have concluded that there are twelve distinct
weaknesses with regard to the Indonesian microfinance sector as a whole. This
conclusion is based on collection of newspaper articles from Indonesian newspapers,193
interviews with Indonesian experts in the microfinance field,194 attendance of the 2nd
National Meeting of Gema PKM, the Indonesian Movement for Microfinance
Development,195 and reading microfinance literature.
193
    The newspapers consulted include Kompas, Jawa Pos, Bisnis Indonesia, Malang Post, Suara
Pembaruan and Surya.
194
    Harya Sumarta, Secretary, Gema PKM and Novanto Agus, Prudentia.
195
    Gema PKM, Temu Nasional dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.


                                                                                               102
           These twelve problems and weaknesses can be broken down into four categories:
lack of understanding of the definition and concept of microfinance, weak government
role, lack of necessary supporting institutions and resulting problems. These twelve
identified problems and weaknesses impact upon the degree to which the theoretically
defined principles of successful microfinance can be implemented effectively in
individual MFIs.


a. Lack of Understanding of the Definition and Concept of Microfinance
           The first problem identified within the Indonesian microfinance sector is a distinct
lack of understanding of the definition and concept of microfinance itself. Microfinance
is a new idea with complex concepts, and this high level of misunderstanding (believing
microfinance can be equated with other forms of existing financial services for example)
and lack of understanding, particularly among those elements with the power to make
changes, is limiting the growth and development of the microfinance sector.196 This lack
of understanding can be seen with one specific example, with BRI, The Indonesian
People’s Bank, defining microcredit as loans up to a maximum of Rp. 50 million, well
above the Gema PKM recommended Rp. 5 million ceiling. Harya Sumarta, the secretary
of Gema PKM has remarked that there is little expertise available in the Indonesian
microfinance field.197 This factor has consequences for the performance and success of
the microfinance sector as a whole.


b. Weak Government Role
           The second area of microfinance weaknesses refers to the weak role played by the
Indonesian government. This ineffective government role can be seen clearly with
reference to three areas: failure to deliver promised credit, failure to create an appropriate
legal framework and failure to adequately implement the International Year of
Microcredit 2005. The Indonesian government is yet to provide a stable and conducive
environment for sustained development of the microfinance sector. Instead of both
monitoring and assisting MFIs, the government persists in interfering, stunting and
196
      Harya Sumarta, Secretary, Gema PKM, Interview, Jakarta, 02/08/05.
197
      ibid.


                                                                                           103
limiting MFI operation.198 The government is also still involved in the provision of
subsidised credit, creating an imbalance due to its coexistence with commercial and
market orientated microfinance.199


        Firstly, the ineffective role of the government can be seen with regard to their
supposed commitment of increased credit to the micro, small and medium enterprise
sector not being translated into reality. Total micro, small and medium enterprise credit is
reported to have increased from Rp. 15 billion in 2003 to Rp. 60 billion in 2004.200 But
the credit is not reaching micro-enterprises. According to Bambang Ismawan, Gema
PKM’s secretary general, the saying, “water, water, everywhere, but not a drop to drink”
encompasses the depth of this situation. This lip service needs to be translated into
reality, with micro-enterprises receiving the loans promised by the government and
banking sector.


        The Indonesian government has secondly failed to provide an appropriate legal
framework for the microfinance sector. Indonesian MFIs are restricted by the current lack
of appropriate legal framework regarding the microfinance sector. Microfinance
operation is divided into MFIs with either bank or cooperative legal status. Other MFIs
operate with unclear legal standing. MFIs can also adopt foundational legal status;
however this is unfavourable due to a distinct focus on social or religious operation.201
Separate legal framework is required for MFIs; MFIs cannot be boxed in with banking
and cooperative law due to their different nature of development and operation.


        The third illustration of the weak role of the Indonesian government with relation
to microfinance development can be seen with regard to their failure to adequately
implement the International Year of Microcredit 2005. In November 2004, the UN
declared the year 2005 as the International Year of Microcredit. Indonesia’s President,

198
    Holloh, ProFi Microfinance, pg. 183.
199
    Gema PKM, Draft Microfinance Policy & Strategy – Version 2.1, 8 July 2005.
200
    Surya, Pelamar Kredit UKM Diverifikasi (SME Credit Applications Verified), 09/07/05 and Republika,
Komitmen Pemerintah Terhadap UKM Masih Rendah (Government Commitment Towards SMEs Still
Low), 11/07/05.
201
    Setyo Budiantoro, “Difficulties of Building Microfinance”, Jurnal Ekonomi Rakyat, Januari 2005.


                                                                                                   104
Susilo Bambang Yudhoyono continued with this concept announcing 2005 as Indonesia’s
Year of Microcredit in February 2005, with the aim of decreasing unemployment,
alleviating poverty and increasing economic growth through the empowerment of the
micro, small and medium enterprise sector.202


        A national committee for the Year of Microcredit has been formed, but those
involved are not familiar with microfinance implementation and no clear program has
been established.203 As a result, awareness of the International Year of Microcredit 2005
is extremely limited. Interviews conducted revealed that managers of nine savings and
credit cooperatives and one pegadaian in Malang, East Java had never heard of this
concept.204 The International Year of Microcredit is a great prospect for the Indonesian
government to promote microfinance. Failure to do this so far represents a lost
opportunity for Indonesia’s growing microfinance sector.


c. Lack of Supporting Institutions
        The third category of problems and weaknesses in the Indonesian microfinance
sector relates to the lack of supporting institutions needed for microfinance development.
These include, access to capital, micro-insurance, effective supervisory bodies along with
bench marks and performance monitoring tools.


        A significant problem for the majority of Indonesian MFIs is lack of access to
capital. Capital access issues have limited MFI development and have resulted in high
rates of donor dependency and government subsidies.205 Capital needs of the
microfinance sector will continue to grow, with a need for formal relationships to be
established between individual MFI and financial intermediaries. This has been achieved

202
    Republika, Tahun Keuangan Mikro Indonesia (The Indonesian Year of Microcredit), 22/02/05 and
Rudjito, Asosiasi Perbankan Indonesia, “Inovasi Metodologi dan Pengembangan Produk Keuangan Mikro
Untuk Mencapai Pelayanan yang Berkelanjutan”, Temu Nasional dan Bazaar ke II Keuangan Mikro
Indonesia, Solo, 4 – 8 September 2005.
203
    Harya Sumarta, Secretary, Gema PKM, Interview, Jakarta, 02/08/05.
204
    Interviews were conducted with managers and staff at the following MFIs in Malang on 05/07/05:
Koperasi Simpan Pinjam Mitra Usaha, Koperasi Simpan Pinjam Rasa Mandiri, Pegadaian, Dieng Branch,
Koperasi Serba Usaha Karya Bhakti, Koperasi Simpan Pinjam Kharisma, Koperasi Simpan Pinjam
Kusama Artha Lestari, and Koperasi Serba Usaha Makmur Sejati.
205
    Holloh, ProFi Microfinance, pg. 197.


                                                                                              105
to some extent by the linkage program, seeking autonomous linkages between financial
intermediaries and individual MFI. Bank Mandiri for example currently have 1 082
BPRs in their 2000–2005 linkage program.206 This linkage program however experiences
two main problems limiting its effectiveness. Firstly, financial intermediaries are showing
a reluctance to commit to ongoing linkages when projects finish. Secondly, the linkage
program is limited by microfinance policy issues and the lack of clear MFI legal status.207


        A second supporting institution absent from the Indonesian microfinance sector is
micro-insurance. Lack of micro-insurance presents a multitude of risks for Indonesia’s
MFIs and places them in an extremely vulnerable state.208 MFIs along with their clients
need to be protected against potential losses, and slow development in this regard
weakens the Indonesian microfinance sector as a whole.209


        Inadequate supervision is a third supporting institution lacking in the Indonesian
microfinance sector. Supervision of the microfinance sector is unquestionable, primarily
for those MFIs providing savings services for the community. Lack of supervision of
these funds can lead to cases of mismanagement and corruption, supervision eminent for
the protection and maintained trust of the community.210 In the cooperative sector for
example, ineffective supervision is a huge problem, in part caused by the Ministry of
Cooperatives responsible for both regulation and supervision of the cooperative sector.
This dual role has led to poor supervision and resulted in much ill activity within this
sector.211




206
    Moch Tri Bekti Mawardi, Bank Mandiri, “Inovasi Metodologi dan Pengembangan Produk Keuangan
Mikro Untuk Mencapai Pelayanan yang Berkelanjutan”, Temu Nasional dan Bazaar ke II Keuangan Mikro
Indonesia, Solo, 4 – 8 September 2005.
207
    Riza Primahendra, HKTI, “Pelaporan Diskusi dan Penyusunan Komitmen Bersama”, Temu Nasional
dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.
208
    Interview with Novanto Agus, Prudentia Microfin, via email, 11/08/05.
209
    Riza Primahendra, HKTI, “Pelaporan Diskusi dan Penyusunan Komitmen Bersama”, Temu Nasional
dan Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.
210
    ibid.
211
    Soni Harsono, PERBARINDO, “Badan Pengawas dan Otoritas Keuangan Mikro”, Temu Nasional dan
Bazaar ke II Keuangan Mikro Indonesia, Solo, 4 – 8 September 2005.


                                                                                             106
         The microfinance sector in Indonesia is further weakened and limited by the
absence of benchmarks, performance measuring tools and databases 212. With the vast
array of different MFIs, donors, stakeholders, investors, and ultimately clients are in the
dark about the comparison of one MFI to another. There are no agreed quality standards
or a “code of conduct” resulting in limited development of this sector. Performance
measuring tools allow MFIs to better understand their clients and the effect of their
products on client’s welfare, an enhanced understanding of this allowing effective
assistance to be provided.


d. Resulting Problems
         The problems and weaknesses discussed above have resulted in two further
problems within the Indonesian microfinance sector: weak management and a persistent
gap between demand and supply. Firstly, one of the keys to successful microfinance
implementation lies within MFI management. Kompas, one of Indonesia’s leading
newspapers has reported that MFI management quality is weak,213 with persisting cases
of corruption, mismanagement and deviance.214 There is a general lack of expertise with
regard to microfinance, and these factors combine to impact upon the effective operation
and successful performance of microfinance providers.215 Weak management is in part
due to a lack of reasonably priced training facilities, with MFIs frequently only
participating in training if donors will cover the cost. Training and education of managers
are yet to be viewed as the intangible asset that they are.216


         Secondly, despite the wide variety of MFIs throughout Indonesia, a huge demand-
supply gap persists. A mere 20% of all micro-enterprises currently receive microfinance
services revealing the extent of this demand-supply gap.217 The majority of these unmet
households and poor entrepreneurs are in rural areas in Indonesia’s outer provinces. Here
the incidence of poverty is at its highest and the demand for financial services greatest. 218
212
    Interview with Novanto Agus, Prudentia, via email, 11/08/05.
213
    Kompas, LKM Pesaing Baru BPR (MFIs New Competitor for BPR) , 17/06/05.
214
    Holloh, ProFi Microfinance, pg. 196.
215
    Interview with Bu Metti & Pak Dino, Dian Mandiri, Batu, 19/07/05.
216
    Prudentia Microfin, Skills for Microfinance Managers Course, Batu, 17th – 20th July 2005.
217
    Harya Sumarta, Secretary, Gema PKM, Interview, Jakarta, 02/08/05.
218
    Holloh, ProFi Microfinance, pg. 193.


                                                                                                107
Each of the weaknesses outlined above contributes to this demand-supply gap. The lack
of legal framework, the lack of access to capital, weak government role, lack of effective
supervision all combine to create this demand-supply gap.


         The twelve weaknesses and problems identified above reveal a vulnerable and
endangered microfinance sector. Each MFI is impacted in different ways by these twelve
weaknesses. Furthermore, these weaknesses influence the ability of all microfinance
providers to effectively implement the theoretically defined principles of microfinance
outlined in Chapter Two. The two savings and credit cooperative case studies introduced
in Chapter Two and discussed in detail in Chapters Three and Four are influenced by the
weaknesses and problems outlined in this chapter. Their implementation of the principles
of successful microfinance is influenced by these external conditions.


Gema PKM: The Indonesian Movement for Microfinance Development
         Gema PKM, The Indonesian Movement for Microfinance Development, is
dedicated to eliminating the weaknesses outlined above. Gema PKM was formed on 1st
March 2000 by eight stakeholders219 in the area of microfinance.220 Their national strategy
for microfinance development, launched at their second National Meeting in September
2005 is working towards improving the Indonesian microfinance sector. This National
Strategy aims for,

         “…sustainable access to quality financial services by every household, in every
         village on every island all over the wide Indonesian archipelago…” 221

In order to achieve these aims, Gema PKM’s national strategy focuses of four main
areas:222
             1. Reorientation of the role of the government.
             2. The creation of an environment conducive to microfinance development.
             3. Improved prudential regulation and more effective supervision.
219
    Gema PKM’s eight stakeholders include government institutions, financial institutions, non-government
organizations, mass organizations, researchers and intellectuals, the private sector, donors and the general
secretariat of Gema PKM.
220
    Interview with Harya Sumarta, Secretary, Gema PKM, Jakarta, 02/08/05.
221
    Gema PKM, National Policy and Strategy for Microfinance Development, 8 July 2005.
222
    ibid.


                                                                                                        108
           4. Institutional development and capacity building.
At their second national meeting, Gema PKM’s Secretary General Bambang Ismawan
expressed hope that this national strategy for microfinance development will be both
presented and accepted by Indonesia’s President, Susilo Bambang Yudoyono by the
conclusion of the International Year of Microcredit 2005.223 If the national strategy for
microfinance development is accepted, many positive changes should occur within the
Indonesian microfinance sector.




                             APPENDIX THREE

             List of Interviews, Conferences & Field Visits

Koperasi Citra Lestari
           1. Interview with three managers at 10am on 15/06/05.

223
  Bambang Ismawan, Gema PKM, “Upacara Pembukaan”, Temu Nasional dan Bazaar ke II Keuangan
Mikro Indonesia, Solo, 4 – 8 September 2005.


                                                                                        109
         2. Attendance of Group #100 June Meeting at 1pm on 16/06/05.
         3. Attendance of Group #132 June Meeting at 1pm on 17/06/05.
         4. Interview with three managers at 9:30am on 22/06/05.
         5. Interview with three managers at 10am on 29/06/05.
         6. Attendance of Group #51 July Meeting at 11am on 02/07/05.
         7. Interview with two office staff at 2pm on 08/07/05.
         8. Attendance of Agri-business Group Arjuno at 3pm on 08/07/05.


Koperasi Mawar Putih
         1. Interview with three managers at 11am on 14/06/05.
         2. Interview with three managers at 11am on 19/06/05.
         3. Interview with group leaders at 2pm on 19/06/05.
         4. Interview with three managers at 12pm on 30/06/05.
         5. Attendance of Group #6 July Meeting at 4pm on 03/07/05.
         6. Attendance of Group #7 July Meeting at 10am on 10/07/05.
         7. Interview with three managers at 3pm on 24/07/05.
         8. Interview with three managers at 12pm on 26/07/05.


Gema PKM, The Indonesian Movement for Microfinance Development
         1. Interview with Harya Sumarta, Secretary at 12pm on 02/08/05.


Prudentia Microfin & MSME Dev. Centre
         1. Interview with Novanto Agus, director in Malang on 27/07/05.
         2. Interview with Novanto Agus, director, via email, 11/08/05.
         3. Interview with Novanto Agus, director, via email, 22/09/05.
         4. Interview with Novanto Agus, director, via email, 19/10/05.


Mercy Corps
      1. Interview with Syachriel Arifin, assistant program manager, in Batu on
         19/07/05.




                                                                                  110
       2. Interview with Surya Agung Meranga, microfinance program officer, in Batu
          on 19/07/05.


DIMAN: Yayasan Dian Mandiri
       1. Interview with Metti, finance and accounts manager, in Batu on 18/07/05.
       2. Interview with Dino V. Hadjarati, operational director, in Batu on 18/07/05.


Conferences
       1. Prudentia, “Skills for Microfinance Managers Course: Financial Analysis”,
          Batu, 18-20 July 2005.
       2. The Indonesian Movement for Microfinance Development, (Gema PKM),
          “Temu Nasional dan Bazaar ke II Keuangan Mikro Indonesia”, The Second
          National Meeting and Bazaar of Microfinance in Indonesia in Solo, 4-8
          September 2005.
       3. Asia Research Institute, “From Moneylenders to Microfinance”, The National
          University of Singapore, 7-8 October 2005.


Other Field Visits & Interviews
       1. Koperasi Simpan Pinjam Mitra Usaha, interview with staff member in
          Malang on 05/07/05.
       2. Koperasi Simpan Pinjam Rasa Mandiri, interview with staff member in
          Malang on 05/07/05.
       3. Pegadaian, Dieng Branch, interview with head manager in Malang on
          05/07/05.
       4. Koperasi Serba Usaha Karya Bhakti, interview with staff member in Malang
          on 05/07/05.
       5. Koperasi Simpan Pinjam Kharisma, interview with staff member in Malang
          on 05/07/05.
       6. Koperasi Simpan Pinjam Kusama Artha Lestari, interview with head manager
          in Malang on 05/07/05.




                                                                                     111
       7. Koperasi Serba Usaha Makmur Sejati, interview with two staff members in
           Malang on 06/07/05.
       8. Pusat Koperasi Kredit (PUSKOPDIT), the Regional Secondary Unit of Credit
           Union, interview with head manager in Malang on 27/07/05.
       9. Koperasi Patitis Sae, Sitiarjo, interview with head manager in Malang on
           27/07/05.




                                  GLOSSARY
Action Aid - Action Aid is an international development agency working in 42 countries.
Established in 1972, Action Aid aims to fight poverty worldwide.

Arisan – Rotating savings and credit cooperative.




                                                                                     112
Bakso – Meatball soup.

BMT (Baitul Maal Wattanwil) Syariah – Microfinance according to Islamic principles.

BRI (Bank Rakyat Indonesia) – The Indonesian People’s Bank.

CCA – Canadian Cooperative Association.

CGAP – Consultative Group to Assist the Poor.

CRS – Catholic Relief Services.

CUMI – Credit Union Microfinance Innovation.

DIMAN (Yayasan Dian Mandiri) – An NGO MFI operating in Tangerang, West Java.

Dinas Koperasi – Regional Cooperative Department

Gema PKM (Gerakan Bersama Pengembangan Keuangan Mikro Indonesia) – The
Indonesian Movement for Microfinance Development.

FES – Friedrich Ebert Stiftung Foundation.

IFLS – The Indonesian Family Life Survey. Ongoing longitudinal survey in Indonesia
conducted by RAND, UCLA and The University of Indonesia. Stated to be representative
of 83% of the population.

INKOPDIT (Induk Koperasi Kredit) - The National Secondary Unit of Credit Unions.

International Year of Microcredit 2005 – Designed by the United National in order to
unite member states, UN agencies and microfinance partners in their shared interest to
build sustainable and inclusive financial sectors and achieve the Millennium
Development Goals (MDGs).

KJA (Koperasi Jasa Audit) – Auditing Service for Cooperatives.

Koperasi kredit – Credit union.



                                                                                   113
KSM (Kelompok Swadaya Masyarakat) – Community Self-Help Groups

KSP (Koperasi simpan pinjam) – Savings and credit cooperative.


KUD (Koperasi unit desa) – Village unit cooperatives.


Menkop (Menteri Koperasi) – Ministry of Cooperatives.


Mercy Corps - Mercy Corps is an international NGO currently working with the linkage
program in the Indonesian microfinance sector.


MFI – Microfinance Institution.


Microcredit - Refers to a small loan to a client.


Micro-enterprise – A micro business with up to five employees.


Microfinance – Refers to loans, savings, insurance, transfer services and other financial
services targeted at low income clients.


Microstart – The UNCDF’s guide for planning, starting and managing a microfinance
programme.


MYRADA – MYRADA is an NGO operating in 3 states of south India and also helps
promote self help affinity in Cambodia, Myanmar and Bangladesh.


New Order – The 32 year political regime led by former president Sukarno.


NGO – Non-Governmental Organisation.


OECD – Organisation for Economic Co-operation and Development.



                                                                                     114
OI (Opportunity International) - Opportunity International is an International NGO
working to support partners in 27 countries to solve poverty and empower lives through
micro-enterprise development and training.


Oxfam International – Oxfam International is a confederation of 12 organizations
working together with over 3,000 partners in more than 100 countries to find lasting
solutions to poverty, suffering and injustice.


Pegadaian – Indonesia’s state-owned pawning company.


Prudentia – Prudentia is an Indonesian Micro, small and medium enterprise development
centre providing various training courses for providers of microfinance.


PUSKOPDIT (Pusat Koperasi Kredit) – The Regional Secondary Unit of Credit Unions.


PUSKOWANJATI (Pusat Koperasi Wanita Jawa Timur) - The East Javanese Women’s
Cooperative Centre.


SMEs – Small and medium enterprises.


Tanggung renteng system – Mutual guarantee system.


UNCDF – United Nations Capital Development Fund.


USP (Unit simpan pinjam) – Savings and credit unit.




                                                                                       115
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ActionAid, “Savings and Credit: Management Control Systems” and “Savings and Credit
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CGAP, “Key Principles of Microfinance”,        http://www.cgap.org/keyprinciples.html,
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                                                                                   116
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                                                                                          117
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                                                                                    118
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                                                                                  119

				
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