Regional Microfinance Development Nusa Tenggara Barat _NTB_

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					             Regional Microfinance

       Nusa Tenggara Barat (NTB)

            Concept and Implementation Strategy

Dr. Wolfram Hiemann, Berlin
Stefan Jansen, Denpasar
I Ketut Budastra, Ph.D., Mataram

November 2005
EXECUTIVE SUMMARY                                               I

RINGKASAN EKSEKUTIF                                            IX

1     INTRODUCTION                                              1


3     THE RURAL MICROFINANCE MARKET IN NTB                      4

3.1    DEMAND FOR MICROFINANCE                                  4
3.2    SUPPLY OF MICROFINANCE                                   5
3.3    THE SUPPLY-DEMAND GAP                                   18
3.4    THE ROLE OF UPKD IN RURAL MF                            19


4.1    UPKD PROFILE                                            20
4.2    UPKD PERFORMANCE                                        22
4.3    CONCLUSION                                              28


5.1    RATIONALE                                               30


6.1    IMPROVING SERVICE QUALITY                               36
6.2    INCREASING THE NUMBER OF SOUND MFI                      38
6.4    UPKD IN THE REGIONAL FINANCIAL SYSTEM                   49
6.5    UPKD ACCESS TO FINANCE                                  50

7     IMPLEMENTATION 2006-2008                                 52

7.2    SEQUENCE OF ACTIVITIES                                  53
7.3    DRAFT CONCEPT: IMPLEMENTATION PHASE                     53
7.5    UPKD MANAGEMENT SUPPORT                                 56
7.6    SUGGESTIONS FOR MID-TERM PLANNING                       63

ANNEX 1: HOUSEHOLD SURVEY RESULTS                              64

1. INTRODUCTION                                                64
2. THE SAMPLE HOUSEHOLDS                                       64
5. SUMMARY AND CONCLUSIONS                         69

ANNEX 2: MFI SURVEY RESULTS                        70

2. THE MFI SAMPLE                                  71
3. SAMPLE MFI CHARACTERISTICS                      71
4. SAMPLE MFI PERFORMANCE                          75
5. SUMMARY & CONCLUDING REMARKS                    79

ANNEX 3: UPKD – ORIGINS                            81


1. ASSETS                                          84
2. LOAN FUND OR INITIAL FUND                       85
3. ADDITIONAL CAPITAL                              86
5. INTEREST INCOME                                 87
6. DEPOSIT MOBILIZATION                            87

ANNEX 5: UPKD – SWOT ANALYSIS                      88

ANNEX 6: UPKD – CAMEL RATING                       90

ANNEX 7: UPKD – MANAGEMENT SURVEY                  91


1. SK BUPATI BIMA ON UPKD                         102
2. STATUTES (ANGGARAN DASAR, AD)                  104



ANNEX 11: MUSYAWARAH DESA (MUSDES)                113

ANNEX 12: BADAN KREDIT DESA (BKD)                 114


REFERENCES                                        117
Currency Equivalents (as of September 2005)

Rp     Rupiah
Rp m Rupiah million
Rp b   Rupiah billion
USD1 = Rp10,300

The authors attempted to provide useful and accurate information wherever possible.
The authors had to rely on statistics, information gathered and processed by other
institutions, and on the statements of respondents, most of which were not further
verified. Some information was fragile and required skilled interpretation.
The authors judged the information based on their professional experience very
carefully. They believe that the findings presented in this report reflect sufficiently
accurate the conditions in the institutions and the environment in which they operate.
This report also contains personal opinion, both of the authors and opinions of
various contributors, which are offered in good faith. They are not necessarily the
opinions of Bank Indonesia, GTZ or the Government of Nusa Tenggara Barat.
5C             Character, capital, conditions, collateral, capacity (Loan assessment criteria)
AD             Anggaran Dasar (Statutes)
ART            Anggaran Rumah Tanggah (Bylaws)
BI             Bank Indonesia
BKD            Badan Kredit Desa
BMT            Baitul Mal Ta’mil (Non-bank financial institution based on syariah/Islamic principle)
BP             Badan Pengawas (Supervisory board of UPKD)
BPD            Bank Pembangunan Daerah (Regional Development Bank)
BPR            Bank Perkreditan Rakyat (People's Credit Bank or Rural Bank)
BRI            Bank Rakyat Indonesia (Commercial bank, 51% state-owned)
BUMD           Badan Usaha Milik Daerah (Province/district-owned enterprise)
BUMN           Badan Usaha Milik Negara (state-owned enterprise)
CAMEL          (bank rating or assessment by:) capital, assets, management, earnings, liquidity
CDF            Community development facilitator
CGAP           Consultative Group to Assist the Poorest
FI             Financial institution
GDP            Gross Domestic Product
GoI            Government of Indonesia
GoNTB I / II   Provincial / District Government(s) of Nusa Tenggara Barat (PemDa I / II)
GTZ            Gesellschaft für Technische Zusammenarbeit
IMS-NTAADP     Inisiatif masyarakat setempat (local people’s initiative) of NTAADP
KSP            Koperasi Simpan Pinjam (Savings and credit cooperative)
KUD            Koperasi Unit Desa (Village cooperative)
KUT            Kredit usaha tani (Farm enterprise loan)
LKP            Lembaga Kredit Pedesaan (Rural credit institution)
MF             Microfinance
MFA            Microfinance advisor, field worker, facilitator
MFI            Microfinance institution
MoA            Ministry of Agriculture
MoF            Ministry of Finance
MoHA           Ministry of Home Affairs
MSE            Micro small enterprise
MSME           Micro small medium enterprise
Musdes         Musyawarah desa (Village consultation)
NPL            Non-performing loan
NTAADP         Nusa Tenggara Agriculture Development Project
NTB            Nusa Tenggara Barat
PDM-DKE        Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi (Local empowerment
               by overcoming the impact of the economic crises)
               Proyek Hubungan Bank dengan Kelompok Swadaya Masyarakat (Project linking banks
               and SHG)
PKS-BBM        Pengganti Kompensasi Subsidi Bahan Bakar Minyak (Compensation for fuel subsidy)
PNM            PT Permodalan Nasional Madani (PNM) (State-owned financing agency in charge for BI
               liquidity financed program loans)
PPK            Program Pengembangan Kecamatan (Sub-district development fund)
ProFI          Promotion of Small Financial Institutions
SCC            Savings and credit cooperative
SCG            Savings and credit group
SHG            Self-help group, savings and credit group
SME            Small medium enterprises
SMoCSME        State Ministry of Cooperatives and small medium enterprises
SUTA           Sistem Usaha Tani, Agriculture loan scheme of UPKD
UEP            Usaha Ekonomi Produktif Ternak (Productive husbandry business, UPKD Loan
UEPT           Usaha Ekonomi Produktif (Productive business, a UPKD Loan scheme)
UPK            Unit Pengelola Keuangan (Financial management Unit of PPK project)
USP            Usaha Simpan Pinjam (Savings and credit business of multi-purpose cooperatives
Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

Executive Summary

In May 2005, the Government of the Province of Nusa Tenggara Barat (NTB) and
ProFI – Promotion of Small Financial Institutions (a joint project of Bank Indonesia,
Ministry of Finance, and GTZ) signed Agreed Minutes concerning the Microfinance
Development Project in NTB.

NTB belongs to the provinces with below average GDP, and has the second-lowest
Human Development Index in Indonesia. Its 4.2 million inhabitants live on the islands
Lombok (almost 3m) and on Sumbawa (about 1m). They earn income mainly from
agriculture, fishery, and from working abroad.

The rural microfinance market analysis compares current demand and supply to
identify gaps.

The demand side analysis draws on a survey of 90 households in all administrative
units of NTB. The survey found that a substantial proportion of the households save
their excess incomes. Large savings are generally placed with commercial banks,
while small savings are generally placed with nearby non-bank financial institutions
(particularly UPKDs). More than half of the households regularly borrow from
financial institutions, particularly from UPKD and credit cooperatives. Most loans from
these MFI are small, with sizes less than IDR 2 million. A few of the households also
borrow from informal sources, in particular friends and family. Child education is the
main purpose of saving, whereas the main purpose of borrowing is working capital.

The households generally accept that financial services apply interest, and that
borrowers should repay their loans. The households suggested that microfinance
could be improved through demand-driven and convenient services, and better
marketing of available services. The survey concludes that household demand for
financial services indicates a large potential for savings mobilization and effective
financial intermediation. The households are generally accustomed to saving and the
application of interest rates on financial services. These provide the basis for the use
of the financial system approach for further development of the rural-microfinance
sector in the province.

Based on the sample, the potential demand of rural households in NTB for
institutional saving and loan services has been estimated very roughly. It amounts to
between 275,000-288,000 saving deposit clients, and between 372,000-390,000 loan
clients, including almost 40% of the households.

Microfinance supply comes from a broad range of sources. Commercial Banks are
centered in Mataram, the capital with about 700,000 inhabitants. Two banks are
leading with regard to their presence in district capitals, i.e. Bank Rakyat Indonesia
(BRI) and Bank NTB, the regional development bank owned jointly by the province
and district governments. BRI’s branches do not offer micro loans and Bank NTB
only to fixed income earners (government employees) and selected urban clients.
BRI’s microfinance outlets are 51 BRI Units in about every second of the 100 urban
and rural sub-district capitals. BRI Unit clientele are fixed-income earners and in
particular traders with bankable collateral. Also on sub-district level, NTB’s
government operates 46 Rural Banks, BPR-LKP. BPR-LKP provide complementary
financial services by extending smaller loans with more lenient collateral
requirements. These institutions reach village people through PHBK (loans to
groups), but these loans contribute to only about 3% of the loan portfolio.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

The cooperative sector recorded substantial growth if measured by the number of
institutions and their balance sheets. In particular savings and credit cooperatives
(SCC) have an urban bias. Many government and private enterprise employees are
members of a cooperative just for the purpose to obtain a loan. In rural areas, SCC
are known as moneylenders for short-term loan with daily repayment. The multi-
purpose village cooperatives (KUD), also in sub-district capitals, do not have
sufficient funds just when farmers would need them most. Recently, “members”
founded a number of SCC with a prohibitive high membership fee (and effective
interest rates twice those BRI Units charge), so that these cooperatives appeared like
a privately-owned BPR. They reported a demand, also from farmers, in excess of
their capacity. In contrast to NTT, credit unions are not established in NTB.

Also in contrast to NTT, only very few NGO support villagers with microfinance for
self-help groups (SHG). SHG are popular in NTB though: the Kecamatan (Sub-
district) Development Program (PPK) supports more than 500 SHG in 23 sub-
districts. Many people enjoy the quick and uncomplicated services of moneylenders,
who help with their loans settling installments with banks and MFI.

All major national social programs with microfinance components were
implemented in NTB: MoA experienced low repayment rates for its KUT and BPLM
programs. The P4K facility was more successful until recently, but it is not anymore
prolonged. Revolving funds (IDT, Inpres Desa Tertinggal; PDM-DKE, an economic
crisis assistance program) turned out to be problematic as many groups were just
arranged only to receive “capital assistance”. They easily dissolved. PKS-BBM, a
working capital support project for cooperatives and Microfinance Institutions (MFI),
implemented by the State Ministry for Cooperatives and SME (SMoCSME) between
2000 and 2003, incorporated training, monitoring and supervision by commercial
banks for fund recipients. The banks, notably BRI and BPD, did not fulfill their
contractual obligations, although MFI even paid a fair amount. The project was
seemingly less successful and the funds, which were planned to remain with the MFI,
have to be repaid in ten annual installments. The Kecamatan development project
presents a unique feature, namely UPK (Unit Pengelola Keuangan, finance
management unit) as a second-tier or apex organization providing loans to SHG and
MFI. Preliminary figures indicate a high loan quality but also very high administrative

Projects and programs assist only temporarily and often only locally. Most MFI do not
provide loans to villagers, because of the distance, or they provide a facility that
villagers cannot use for their businesses. UPKD close both gaps, the distance gap
and the financial gap: they are village institutions and they offer three loan products
that are in demand: loans from Rp0.2m to Rp2m, no monthly installment, maturities
of 4 to 12 months, and lenient collateral requirements. UPKD have a profound
transaction cost advantage for both the lender and the borrower. However, UPKD do
not close the gap for deposit services.

The 245 UPKD in NTB are unrivalled in NTB in their number as a group of similar
MFI. 214 UPKD were founded 1999 as non-bank, non-cooperative MFI to administer
some Rp45b funds from IMS-NTAADP, the World Bank financed Nusa Tenggara
Agriculture Area Development Project that started 1996. This poverty-oriented
project assisted villages in backward districts. IMS stands for “inisiatif masyarakat
setempat”, local people’s initiative. People empowerment, decision and
implementation of investments, and control by villagers through joint liability groups
and Musdes, a village forum, became prominent project features. District

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

governments financed the establishment of at least 30 additional UPKD village
financial institutes.

Until its closure in September 2003, IMS-NTAADP trained UPKD management
(three or four managers, and a supervisory team (Badan Pengawas, BP), in
administration, bookkeeping and loan appraisal. Monthly reports were submitted to
district Bappeda, the implementing agency. Already at that time, quite a number of
UPKD reported increasing arrears, averaging at 17%.

In 2005, all respondents reported further deteriorating conditions of most UPKD. It
is difficult to describe this development with figures, as an increasing number of
UPKD, in Sumbawa more than 50%, stops reporting.

However, this does not always mean discontinuation of activities. There are
significant differences among UPKD even in close vicinity, concerning
performance, assets, and income, although they were guided by the same
institutions and facilitators. Flourishing UPKD can be found even in dry areas, which
are commonly considered very poor.

In 2005, the average UPKD reports assets of Rp235m, almost the same as in 2003.
The average loan portfolio of Rp180m is shared among about 50 groups with 500
members. Analyzing (fragile) interest income data yields an average of Rp110m non-
performing loans, a 60% NPL-ratio. In the absence of reliable figures, it is assumed
that at least Rp55m (>25% of all loans) are not at all recoverable. In total, some
Rp12b of the original Rp40b loan fund have certainly to be written off. About 40% of
all loans went repeatedly to (very) poor people. Many simply do have not the means
to repay. These loans need to be finally written off. The remainder, Rp55m, can
presumably be recovered through various measures, including loan reconditioning or
seizing assets, political will and support provided. Only few UPKD practice
appropriate bad-debt provisioning. The managers contribute decreasing loan income
to seasonal influence, deferred payments which ”will be paid soon”, and to the social
orientation, i.e. prolongation of loans without interest payment. UPKD contribution to
the village coffers amounts to perhaps 1% of the loan fund, often it is a donation to
the village head.

A high NPL-ratio does not immediately endanger the viability and sustainability of
a UPKD – although, of course – a lower NPL-ratio increases sustainability prospects.
If stripped of its bad debt, UPKD are still about twice the size of Java’s quite
sustainable BKD (Badan Kredit Desa, village credit board). The remaining performing
portfolio of between some Rp60m to Rp100m generates sufficient income to cover
expenses (not costs!), which are flexible to a very high degree. As long as they
operate, UPKD have much better chance to recover bad debt and increase the
performing loan portfolio. Calculations, based on NPL-assumptions and different
sustainability ratios, predict that 91 to 117 UPKD have a realistic survival prospect, if
political will and assistance are provided.

Most reasons for increasing NPL and decreasing income are related to the nature
of UPKD as a former project institution. When the project closed, UPKD management
lost (also moral) support from facilitators, and debtors start questioning the origin and
nature of the fund and the legality of the institution from which they received a loan.
UPKD managers were burdened with too many and too conflicting aspirations and
they were neither sufficiently prepared for this, nor had many actively applied for a
management position in the UPKD.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

Another important reason for increasing NPL is weak credit risk management: non-
prudential loans to people without diversified sources of income, who cannot offer
“the second way out”, and to people who, as fixed income earners, are anyway
indebted. The managers could not prevent this: they complied with the request of the
project and with the request of their fellow villagers. Largely, supervision “by the
people” failed. The conflict is perhaps best described by BP members who received
loans and defaulted. UPKD managers and BP members cannot be dismissed
because auf missing regulations.

IMS-NTAADP financed and developed a microfinance infrastructure in rural areas of
NTB: working capital, fixed assets, rented offices, human resources development,
products and marketing channels. Without further attention, the number of NTB’s
active UPKD-MFI will decrease by about 3 or 4 per month. Financial losses due to
worsening loan portfolio quality alone are estimated to amount to Rp20m every day.
The question is, whether and how these losses can be prevented or at least
substantially reduced. Fortunately, most of the infrastructure is still in place: people in
government agencies monitoring UPKD development, statutes and bylaws, UPKD
offices, records, working capital and fixed assets, and the managers.

The proposed new approach to UPKD development departs from the identified
weaknesses, resulting from the UPKD nature as a project institution with exclusively
social orientation. Its statutes and bylaws, the legal foundation, are entirely
unsuitable for post-project times. Consequently, a follow-up project has to focus the
attention to one single objective, the sustainability of UPKD. The vision for UPKD is
proposed as: “increasing the welfare of village households through offering its
services and products, and contributing to the community through its profits”. The
corresponding UPKD mission shall be: “the sustainable provision of financial
services and products, which are adapted to the demand of village-community
members and based on prudent procedures”.

It is suggested to change the name of the institution: “Unit” should be substituted
by “Usaha” (Company, Business) to express the new orientation: generating profits
for the village community. Simultaneously, social tasks should be transferred to the
village government. This allows UsPKD (Usaha Pelayanan Keuangan Desa,
Village Financial Services Company) to act market-oriented and increase interest
rates to get closer to market rates. The village government decides, who will be
eligible for interest subsidy and use UsPKD profits, i.e. only the surplus and not the
substance, to finance (transfer to UsPKD) this subsidy. People, who can afford
higher interest payments, contribute to more profits for more village development and
assistance to the needy. Financial transparency and village solidarity can become

It is essential that UsPKD become profitable entities because only strong and
profitable financial institutions can gain the community’s confidence and grow.
People repay loans when the prospect of a larger follow-up loan looms.

In particular it is proposed that:

-   The transfer of assets from Unit PKD to Usaha PKD includes verification and re-
    assessment of all loans. They amount to about 80% of UPKD assets. The real
    value of many loans has to be established, which is often much lower than the
    nominal value or the book value. One cannot create sound financial institutions
    without transparent accounting. UPKD cannot carry past project burden. It is
    expected that loan verification will meet reluctance or even resistance from
    various persons. Government assistance on all levels is required for this task.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

-   The village shall 100%-own the new UsPKD. The ownership of IMS-NTAADP
    funds needs to be clarified before deciding on a legal status of UsPKD. The role
    of district governments in a board of commissioners will also depend on IMS-
    NTAADP fund ownership. A law on MFI or implementing regulations on BUMDES
    (Badan Usaha Milik Desa, village-owned enterprise) could provide options for
    UsPKD legality. Cooperatives are less suitable: they member-oriented companies
    from which their members benefit, but not the community.
-   The IMS-NTAADP loan fund shall become a long-term sub-ordinate loan to
    UsPKD, which strengthens equity, a key feature when UsPKD look for finance to
    expand their business.

The objectives of the “Regional MF Development in NTB” project, as laid out in
the Agreed Minutes, are:

    a)   improve the quality of MFI services;
    b)   increase the number of sound MFI;
    c)   create a conducive environment by means of regulation and supervision;
    d)   increase the cooperation between MFI and other financial institutions;
    e)   increase the capacity of MFI to access capital from various sources.

Strengthening UPKD will contribute to achieving these objectives.

a) Service quality: On average, UPKD mobilize Rp10m deposits, most of all
   compulsory fees from borrowers. UPKD have not been active or inventive in
   attracting deposits, among others due to a Bank Indonesia regulation that
   restricts mobilizing deposits to banks. On the other hand, people are reluctant to
   deposit funds when they question the sustainability of the MFI. UsPKD might
   cooperate with a bank. Regarding lending, most people want access to individual
   loans with individual repayment schedules instead of the current group loans.

b) Increasing the number of sound MFI has two components: the number of
   institutions and the quality, or soundness of MFI. Uplifting less sound MFI to
   become sound MFI counts also. Unfortunately, improvement from unsound to
   less sound does not. District governments intend financing the formation of new
   UPKD. It is believed that some 20 of these MFI will be added in three years.

    Whether the project will succeed increasing the number of sound MFI can only be
    answered once the initial number of sound MFI, here: UPKD, is known, which is
    certainly below 10 if measured by BPR standards. The standard for a “sound”
    non-bank non-cooperative MFI needs to be developed. However, an assessment
    based on the five CAMEL rating criteria appears to be suitable for UPKD, too.

    “C”apital rating, derived from the capital adequacy ratio (CAR), increases when
       bad loans are removed from the balance sheet, when IMS-NTAADP funds
       becomes a sub-ordinate loan, and if part of this loan is converted to equity.
    “A”ssets consist mainly of the loan portfolio. Renewal and rescheduling of
       overdue loans are methods to improve portfolio quality. A “sound” portfolio is
       also a result of suitable loan products and conditions, i.e., when loan
       contracts or products are adjusted to the borrower’s cash flow and risk
       structure, such as loans that allow flexible repayment.
    “M”anagement rating improves through introduction of manuals and other
       written procedures, implementation of internal supervision and control
       mechanisms. Managers need training to comprehend and apply these tools.
    “E”earnings can be doubled by enforcing interest payments for the time an
       installment or loan is overdue and by introducing penalties for late payments.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

       The income will again double when UPKD management applies interest
       conditions similar to those of savings and credit cooperatives in rural areas.
       Earnings increase when costs decrease but only few high income UPKD can
       think about decreasing expenses. Costs for bad debt provisioning decrease
       because of prudent lending.
    “L”iquidity is, in general, not a particular UPKD concern. Deposit withdrawals
       are predictable or negligible. Other expenses can be deferred and negotiated.

    Summarized, there is an extensive field of activities to improve UPKD
    “soundness”. As a best guess, if one would qualify the ten best performing
    UPKD as “sound” today, some 20 would be sufficiently sound, 40 less sound and
    160 unsound. It is expected that an intervention would see after 2 to 3 years
    about 40 (+30) sound UsPKD, 50 (+30) sufficiently sound, 65 (+25) less sound
    and 95 (-65) unsound. These 95 MFI are estimated to drop out or remain
    “dormant”, among others because already the portfolio verification fails.

c) Regarding regulations, three issues need attention: (i) for UsPKD incorporation
   still missing procedures for BUMDES, and the Law on MFI, which will impact the
   formulation of new statutes and bylaws; (ii) regulations allowing village MFI to
   accept deposits (probably a chapter in a Law on MFI); and (iii) regulations and
   clarifications regarding ownership of the IMS-NTAADP fund, including write-off

    The project left UPKD with a set of “sunshine” rules and regulations, which might
    have been applicable for the project implementation, but become an obstacle for
    UsPKD development. It is proposed to prepare decrees for portfolio verification,
    and for temporary UsPKD statutes and bylaws. The case should be re-opened
    after a Law on MFI and regulations concerning BUMDES were issued. Without a
    regulation on write-offs it seems not possible to increase the number of sound
    MFI, unless only the sound loans are transferred to UsPKD and the
    unrecoverables remain “UPKD assets”.

    This report discusses supervision extensively because the success of UsPKD
    hinges on people having access to means that they do not own in a society that
    values family and neighbor bonds, and respect and obedience to superiors much
    higher than temporary (project!) employment regarding administrating
    anonymous funds. The presence of supervision, i.e. internal audit, strengthens
    the morale of managers. UPKD performance would be worse without supervision
    by BP-teams. However, their strength, i.e. being embedded in and knowing the
    village people, is also a major weakness. Supervisors are fellow villagers,
    therefore often not neutral, and shy conflicts. For many the task is too demanding,
    for others too irregular (once in three months). No one guides, supervises,
    controls, or monitors supervisors. Consequently, the formation of full-time semi-
    professional supervisor teams on district level, an externalization of internal audit,
    is recommended. About 15 to 25 specialized and – over time - experienced and
    full-time employed persons can perform this task better than the 735 persons can
    now. On provincial level, a professional coordinator shall guide, train, and
    supervise the performance of these teams. The expenses for financing
    supervision will increase substantially to about Rp500m annually. UsPKD can
    carry these expenses and they are very low compared with costs for proper bad
    debt provisioning amounting to probably more than Rp5b at present.

d) BPD Bank NTB, BPR-LKP and UPKD have a common bond in that they are
   owned by the Government of NTB. Their products and the area they are covering
   complement each other. UsPKD could serve as a prolonged arm, e.g. as a

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

    savings collector for the banks. For UsPKD clients it would be attractive to know
    that their FI is not entirely standing alone but part of a province-wide financial
    system. In addition, cooperation among UsPKD (Forum) should be enforced, not
    only regarding supervision, but also in fields such as developing simple
    information and scoring systems.

e) UsPKD can provide services as cashier of the village government and its
   deposits. They could offer their services to administer financial components of
   government programs. With an immediate unmet loan demand of about Rp350m
   per village UsPKD may attract the attention of lenders for whom it is impossible to
   tap this market segment directly. UsPKD cannot offer physical collateral. They
   have to offer a performance record and this is a main reason why UsPKD
   managers have to learn to monitor the CAMEL rating of their UsPKD.

Project implementation includes several UPKD support measures. The
sustainability of UsPKD shall be achieved through a sequence of following measures:
(i) asset verification to increase transparency (2 months), (ii) on-the-job training
(business-orientation, 4-6 months), (iii) consultation (problem solving, 6-12 months),
(iv) co-operation among MFI, especially regarding supervision, and with other FI. The
sequence of institution building will be accompanied by provision of manuals, in-class
training, and certification.

The project will have a pilot phase, including preparation, pilot-testing of asset
verification in selected villages and clarification of IMS-NTAADP fund ownership. The
project will be continued if these activities have been implemented successfully.

At the beginning of the pilot phase, consultations with GoNTB in the Forum of
Regional Microfinance Policy (FoMFIDa) aim at an agreement about common
objectives and the basic project design. A Project Director will use a preparation
phase of two months to conclude cooperation agreements with selected village
governments. This is one of the project’s most crucial points: An environment that
does not support asset confirmation, i.e. transparency, is not conducive. Time should
be allowed between announcing asset verification and the actual start to give some
people the opportunity to settle their overdues. Latest in the third month, three
Microfinance Advisors (MFA) shall begin portfolio verification in two villages each.
Successful portfolio verification is one of the preconditions for asset transfer from
UPKD to UsPKD and further assistance.

Simultaneously, GoNTB will clarify the ownership of IMS-NTAADP funds and
develop guidelines on handling bad debt and write-off procedures, which constitutes
the other precondition for granting further assistance after the test phase. MFA will
add a third and fourth support village the following months. The project should have
gained sufficient experience after three months of pilot-testing asset verification and
cooperation with 12 villages to decide on and design the multiplication in other

Provided the pilot phase was successful, i.e. asset verification has been conducted
in at least 12 villages, and ownership of IMS-NTAADP funds has been clarified and
allows for village-owned MFI development, the project will begin scaling-up. Based
on the pilot experience, it will be decided how many new MFA and Deputy Project
Directors would be recruited to continue the UsPKD institution building sequence of
asset verification, followed by on-the-job training, consulting and parallel training. Up
to 3 Deputy Directors and 21 MFA may be needed in total if UsPKD development
realizes its full potential. Before new MFA would be hired, co-financing during project
time and cost coverage after out-phasing need to be clarified to ensure sustainability.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

The proposed project implementation will see an overlapping of these sequences
because it starts in a pilot area and will be multiplied in stages only after having
gained experience and made necessary adjustments. It is estimated that asset
verification of one UPKD employs a MFA for about 7-10 days per month, whereas
on-the-job training requires only 2 to 5 days presence and consulting just 1 to 2 days
a month. Therefore, one MFA will assist simultaneously, for example, one UPKD with
asset confirmation, three UsPKD with on-the-job training, and another three with
consulting. The project directors themselves have to visit UsPKD in order to confirm
and learn first hand about the UsPKD performance and their problems, and in order
to assure that the MFA fulfill their duties, among others regular internal audits until
the supervision teams take over this task in the project’s second year.

It is envisaged that during the second year scheduled in-class training takes place
and scheduled visits by supervision teams start. The number of MFA can be reduced
latest starting at the beginning of the third year. The project will concentrate on
developing and strengthening the Forum or association towards supporting a
certification system for managers as well as for institutions. It will also be concerned
with attracting funds to performing UsPKD.

Many of the proposed measures, such as manuals and training materials, shall be
made available to all interested other MFI. The training capacity will allow inviting
also non-UsPKD participants. Although the proposed project concentrates on UsPKD,
it is beneficial for the rural people and for the financial system development when
they operate in an environment with healthy, i.e. self-sustaining, competition.

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

Ringkasan Eksekutif

Pada bulan Mei tahun 2005, Pemerintah Propinsi Nusa Tenggara Barat (NTB) dan
ProFi – Promotion of Small Financial Institutions (proyek bersama Bank Indonesia,
Departemen Keuangan, dan GTZ) telah menandatangani sebuah Nota Kesepakatan
tentang Pengembangan Keuangan Mikro di NTB.

NTB termasuk golongan propinsi dengan GDP dibawah rata-rata, dengan Indeks
Pengembangan Manusia terendah kedua di Indonesia. Jumlah penduduknya
sebesar 4,1 juta orang tinggal di pulau Lombok (hampir 3 juta orang) dan di pulau
Sumbawa (sekitar 1 juta orang). Mereka memperoleh penghasilan terutama dari
pertanian, perikanan, dan dari bekerja di luar negeri.

Analisis pasar keuangan mikro pedesaan membandingkan permintaan dengan
penawaran pada saat ini untuk mengetahui berbagai kesenjangan yang ada.

Analisis dari segi permintaan termasuk survai terhadap 90 rumah tangga di NTB.
Survai tersebut menemukan bahwa sebagian besar rumah tangga menabung
kelebihan penghasilan mereka. Tabungan besar pada umumnya ditempatkan pada
bank umum, sedangkan tabungan kecil pada umumnya ditempatkan pada lembaga
keuangan mikro bukan bank yang letaknya berdekatan (termasuk UPKD). Lebih
setengah dari jumlah rumah tangga meminjam dari lembaga keuangan secara
teratur, terutama dari UPKD dan koperasi kredit. Sebagian besar pinjaman dari
berbagai LKM ini jumlahnya kecil, dengan ukuran kurang dari IDR 2 juta. Sebagian
rumah tangga juga meminjam uang dari sumber tidak resmi, khususnya dari teman
dan keluarga. Pendidikan anak adalah tujuan utama dari menabung, sedangkan
tujuan utama meminjam adalah untuk mendapatkan modal kerja.

Rumahtangga umumnya sadar bahwa jasa keuangan memperhitungkan
pembayaran bunga, dan bahwa peminjam wajib membayar kembali pinjaman
mereka. Berbagai rumahtangga menyarankan bahwa keuangan mikro ditingkatkan
melalui pelayanan yang digerakkan oleh permintaan dan rasa nyaman, serta
pemasaran yang lebih baik dari jasa pelayanan yang ada sekarang. Survai
menyimpulkan bahwa permintaan jasa keuangan oleh rumahtangga menunjukkan
adanya potensi besar bagi penggalangan tabungan serta intermediasi keuangan
secara efektif. Berbagai rumahtangga pada umumnya sudah biasa menabung dan
membayar bunga atas jasa keuangan. Hal ini menyediakan landasan bagi
pendekatan sistem keuangan untuk pengembangan lebih lanjut dari sektor keuangan
mikro didalam propinsi.

Berdasarkan contoh tersebut diatas, maka potensi permintaan rumahtangga
pedesaan di NTB bagi jasa tabungan dan pinjaman secara kasar dapat diperkirakan.
Jumlahnya berkisar antara 275,000-288,000 pelanggan tabungan, dan antara
372,000-390,000 pelanggan pinjaman, termasuk hampir 40% dari jumlah

Penawaran keuangan mikro datang dari beraneka ragam sumber. Pemusatan Bank
Umum terjadi di Mataram, ibukota NTB yang memiliki sekitar 700.000 orang
penduduk. Dua bank mengemuka sehubungan dengan kehadiran mereka di ibukota
kabupaten, yaitu Bank Rakyat Indonesia (BRI) dan Bank NTB, sebuah bank
pembangunan daerah yang dimiliki bersama oleh pemerintah propinsi dan
kabupaten. Kantor-kantor cabang BRI tidak menyediakan pinjaman mikro sedangkan
Bank NTB hanya menyediakan pinjaman bagi peminjam yang berpenghasilan tetap

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

(pegawai negeri sipil) dan pelanggan pilihan di pedesaan. BRI menyalurkan jasa
keuangan mikro melalui 51 kantornya di setiap dua dari 100 ibukota kecamatan yang
ada. Pelanggan BRI Unit umumnya berpenghasilan tetap dan khususnya terdiri dari
pedagang dengan agunan yang memenuhi persyaratan bank. Ditingkat kecamatan,
pemerintah NTB juga mengoperasikan 46 Bank Pedesaan, yaitu BPR-LKP. BPR-
LKP menyediakan jasa keuangan pelengkap melalui pemberian pinjaman yang lebih
kecil dengan persyaratan agunan yang lebih lunak. Lembaga-lembaga ini
menjangkau penduduk desa melalui PHBK (pinjaman kepada kelompok), tetapi
pinjaman jenis ini hanya sekitar 3% dari seluruh portofolio pinjaman.

Sektor koperasi berhasil mencatat pertumbuhan yang pesat bila diukur dari jumlah
lembaga dan laporan keuangan mereka. Khususnya pertumbuhan koperasi simpan
pinjam (KSP) di perkotaan. Banyak pegawai negeri sipil dan karyawan perusahaan
swasta menjadi anggota koperasi hanya untuk memperoleh pinjaman. Didaerah
pedesaan, KSP dikenal sebagai pemberi pinjaman jangka pendek dengan angsuran
harian. Koperasi usaha desa (KUD), juga di ibukota kecamatan, tidak mempunyai
cukup dana bahkan di saat para petani paling membutuhkan bantuan mereka. Belum
lama ini, sejumlah KSP didirikan oleh “para anggota” mereka dengan iuran
keanggotaan yang sangat tinggi (dan suku bunga efektif dua kali dari BRI Unit),
sehingga berbagai koperasi ini ibarat BPR yang dimiliki oleh pihak swasta. Mereka
menunjukkan adanya permintaan, juga dari para petani, yang melebihi kemampuan
mereka. Berlainan dengan NTT, koperasi kredit tidak terdapat di NTB.

Juga berlainan dengan NTT, hanya sedikit sekali NGO yang membantu penduduk
desa melalui kelompok arisan. Namun demikian arisan sangat populer di NTB:
Program pengembangan kecamatan (PKK) memberikan bantuan kepada lebih dari
500 kelompok arisan di 23 kecamatan. Banyak orang menikmati pelayanan yang
cepat dan tidak rumit dari para pelepas uang (moneylenders), yang dengan
pinjaman mereka, membayar angsuran kepada bank dan LKM.

Berbagai program pembangunan nasional yang berkomponen keuangan mikro
dilaksanakan di NTB: Departemen Pertanian mencatat adanya tingkat pembayaran
kembali yang rendah dari program-program KUT dan BPLM-nya. Fasilitas P4K lebih
berhasil baik, namun demikian tidak lagi diperpanjang. Dana bergulir (IDT, Inpres
Desa Tertinggal, PDM-DKE, sebuah program bantuan krisis ekonomi) ternyata
bermasalah karena banyak kelompok hanya diatur untuk menerima “bantuan modal”.
Mereka mudah bubar. PKS-BBM, sebuah proyek modal kerja pendukung bagi
koperasi dan Lembaga Keuangan Mikro (LKM), dikelola oleh Departemen Koperasi
dan UKM sejak tahun 2000 hingga 2003, mengikut sertakan pelatihan, pemantauan
dan pengawasan dari bank umum bagi para penerima dana. Bank-bank
bersangkutan, yaitu BRI dan BPD, masih kurang optimal dalam memenuhi kewajiban
sebagaimana diperjanjikan, meskipun LKM sudah membayar secukupnya. Proyek
tersebut nampaknya kurang berhasil dan dananya, yang menurut rencana tetap
tinggal di LKM, wajib dibayar kembali dalam sepuluh kali angsuran tahunan. Proyek
pengembangan kecamatan tersebut menghadirkan ciri-ciri yang khas, yakni UPK
(Unit Pengelola Keuangan atau satuan pengelola keuangan) sebagai second-tier
atau organisasi apex yang menyediakan pinjaman kepada kelompok arisan dan LKM.
Angka-angka secara kasar menunjukkan mutu pinjaman yang tinggi tetapi juga biaya
administrasi yang sangat tinggi.

Proyek dan program hanya membantu untuk sementara waktu dan seringkali hanya
bagi masyarakat setempat. Sebagian besar LKM sperti BRI Unit dan BPR-LKP tidak
menyediakan pinjaman untuk penduduk desa, karena jarak yang jauh, atau mereka
menyediakan fasilitas yang tidak bisa dimanfaatkan oleh para penduduk desa bagi
usaha mereka. UPKD bisa menutup kedua kesenjangan tersebut, yaitu

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

kesenjangan jarak dan kesenjangan keuangan: mereka merupakan lembaga
pedesaan dan menyediakan tiga produk pinjaman yang dibutuhkan: pinjaman dari
Rp0,2 juta sampai dengan Rp2juta, tanpa angsuran bulanan, jangka waktu dari 4
hingga 12 bulan, dan persyaratan agunan yang lunak. UPKD memiliki keunggulan
tinggi dalam biaya transaksi bagi pemberi pinjaman dan peminjam dua-duanya.
Namun demikian, UPKD tidak dapat menutup kesenjangan jasa pelayanan simpanan.

Sebagai kelompok LKM serupa jika dilihat dari segi jumlah, maka seluruh 245 UPKD
yang ada di NTB tidak punya bandingan. Pada tahun 1999 terdapat 214 UPKD yang
didirikan sebagai LKM bukan bank bukan koperasi untuk mengelola sekitar Rp45
milyar dana yang dikucurkan oleh IMS-NTAADP, sebuah Proyek Pengembangan
Daerah Pertanian Di Nusa Tenggara yang dibiayai oleh Bank Dunia sejak tahun
1996. Proyek yang berorientasi pada pengentasan kemiskinan ini menyediakan
bantuan kepada desa tertinggal di berbagai kabupaten. IMS adalah singkatan dari
Inisiatif Masyarakat Setempat. Pemberdayaan masyarakat, putusan dan
pelaksanaan investasi, serta kendali oleh penduduk desa melalui kelompok
kewajiban bersama dan Musdes, sebuah forum desa, adalah ciri-ciri terkemuka dari
proyek. Pemerintah kabupaten membiayai pembentukan sekurang-kurangnya 30
UPKD tambahan.

Hingga proyek ditutup pada bulan September tahun 2003, IMS-NTAADP telah
menyelenggarakan pelatihan bagi para pengelola UPKD (tiga dari antara empat
manajer, dan satu tim pengawasan (Badan Pengawas, BP), di bidang administrasi,
pembukuan dan penilaian pinjaman. Laporan bulanan dikirimkan ke Bappeda tingkat
kabupaten, selaku badan pelaksana. Banyak juga UPKD yang melaporkan
tunggakan, yang rata-rata adalah 17%.

Dalam tahun 2005, sebagaimana dilaporkan oleh semua responden, sebagian
besar UPKD makin memburuk kondisinya. Sulit untuk memaparkan
perkembangan ini dalam angka, karena makin banyak UPKD di Sumbawa, lebih dari
50%, yang berhenti mengirimkan laporan.

Namun demikian, ini tidak selalu berarti berhentinya kegiatan. Ada perbedaan yang
signifikan diantara UPKD bahkan yang saling berdekatan, perihal kinerja, aktiva,
dan pendapatan, meskipun mereka menerima pembinaan dari lembaga dan
fasilitator yang sama. UPKD yang tumbuh bagus dapat dijumpai bahkan di daerah
yang tandus, yang lazimnya dianggap sangat miskin.

Dalam tahun 2005, UPKD rata-rata melaporkan jumlah aktiva sebesar Rp235 juta,
yang hampir sama dengan tahun 2003. Portofolio rata-rata sebesar Rp180 juta
dimiliki oleh sekitar 50 kelompok dengan 500 orang anggota. Analisis (cermat) dari
data pendapatan bunga menghasilkan adanya kredit bermasalah rata-rata sebesar
Rp110 juta, dan rasio NPL sebesar 60%. Dengan tidak adanya angka-angka yang
dapat dipercaya, menurut taksiran sekurang-kurangnya Rp55 juta (>25% dari
seluruh pinjaman) macet. Secara keseluruhan, sekitar Rp12 milyar dari pinjaman
awal sebesar Rp40 milyar secara pasti harus dihapuskan. Sekitar 40% dari seluruh
pinjaman bergulir ditujukan kepada masyarakat (sangat) miskin. Banyak yang tidak
sanggup membayar kembali. Berbagai pinjaman ini akhirnya harus dihapuskan.
Sisanya, yang Rp55 juta, agaknya dapat ditagih kembali melalui berbagai cara,
termasuk reconditioning pinjaman atau penyitaan harta, kemauan politis dan
pemberian bantuan. Hanya sebagian kecil UPKD yang membentuk penyisihan
penghapusan kredit macet secara benar. Para manajer menyalahkan berkurangnya
pendapatan pinjaman pada pengaruh musim, tunggakan pembayaran yang “akan
diselesaikan segera”, serta orientasi sosial, seperti perpanjangan jangka waktu
pinjaman tanpa pembayaran bunga. Jumlah kontribusi UPKD untuk kas desa

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

mungkin sebesar 1% dari jumlah dana pinjaman, yang seringkali adalah sumbangan
bagi kepala desa.

Rasio NPL yang tinggi tidak serta merta membahayakan kelangsungan hidup dan
berkelanjutannya sebuah UPKD – walaupun, tentu saja – rasio NPL yang lebih
rendah meningkatkan prospek berkelanjutannya. JIka kredit macet dihilangkan,
maka ukuran UPKD masih sekitar dua kali BKD (Badan Kredit Desa). Sisa portofolio
sehat sekitar Rp60 juta hingga Rp100 juta menghasilkan pendapatan yang cukup
untuk menutup pengeluaran (bukan biaya!), yang lentur (flexible) hingga ambang
batas sangat tinggi. Sepanjang mereka beroperasi, UPKD punya peluang yang jauh
lebih baik untuk memperoleh pembayaran kembali kredit macet dan meningkatkan
portofolio pinjaman. Berbagai perhitungan, yang berlandaskan perkiraan NPL dan
berbagai rasio berkelanjutan yang beragam, meramalkan bahwa 91 dari 117 UPKD
punya prospek kelangsungan hidup yang realistis, jika saja ada kemauan politis dan
bantuan tersedia.

Alasan paling sering bagi meningkatnya NPL dan berkurangnya pendapatan
terkait erat dengan sifat UPKD sebagai bekas lembaga proyek. Ketika proyek
bersangkutan ditutup, pengelola UPKD kehilangan (juga dukungan moral) dukungan
dari para fasilitatornya, dan para debitur mulai mempertanyakan asal dan sifat dari
dana bersangkutan serta keabsahan lembaga dari mana mereka menerima pinjaman.
Para manajer UPKD merasa terbebani oleh aspirasi yang terlampau banyak dan
yang saling bertentangan, serta mereka tidak memiliki cukup persiapan untuk
menghadapi hal ini, atau banyak dari mereka kurang mendambakan kedudukan
sebagai manajer UPKD.

Alasan penting lain bagi peningkatan NPL adalah lemahnya manajemen risiko
kredit: pemberian pinjaman dilakukan tanpa mengacu pada prinsip kehati-hatian,
tanpa adanya diversifikasi sumber pendapatan, yang tidak dapat menyediakan “cara
pemecahan kedua”, dan kepada mereka yang, yang berpenghasilan tetap tetapi
sudah memeroleh pinjaman dari pihak lain. Para manajer tidak bisa mencegah
terjadinya hal demikian: mereka memenuhi permintaan dari proyek dan permintaan
dari sesama penduduk desa. Sebagian besar pengawasan “oleh masyarakat umum”
mengalami kegagalan. Konflik tersebut mungkin paling tepat digambarkan seperti
para anggota BP yang menerima pinjaman dan lalu macet. Para manajer UPKD dan
para anggota BP bersangkutan tidak mungkin dipecat karena telah mengabaikan
peraturan yang berlaku.

IMS-NTAADP membiayai dan mengembangkan infrastruktur keuangan mikro di
daerah pedesaan NTB: modal kerja, aktiva/harta tetap, sewa ruangan,
pengembangan sumber daya manusia, produk dan saluran pemasaran. Namun
tanpa adanya perhatian lebih lanjut setelah proyek NTAADP berakhir, jumlah UPKD-
LKM yang aktif di NTB akan berkurang dengan sekitar 3 atau 4 lembaga tiap
bulannya. Kerugian uang karena memburuknya mutu portofolio pinjaman
diperkirakan sebesar Rp20 juta tiap hari. Pertanyaannya adalah, apakah dan
bagaimana kerugian ini dapat dicegah atau sekurang-kurangnya dikurangi secara
signifikan. Untunglah, sebagian besar infrastruktur masih berjalan baik: para pejabat
di lembaga-lembaga pemerintah yang memantau perkembangan UPKD, anggaran
dasar dan anggaran rumahtangga mereka, kantor-kantor UPKD, catatan pembukuan,
modal kerja dan harta/aktiva tetap, serta para manajer mereka.

Pendekatan baru bagi pengembangan UPKD diusulkan untuk dilaksanakan
setelah berbagai kelemahan mereka diketahui, sebagai akibat dari sifat UPKD selaku
lembaga proyek yang semata-mata berorientasi sosial. Anggaran dasar dan
anggaran rumahtangga, serta dasar hukum mereka sama sekali tidak sesuai

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

manakala proyek tersebut sudah selesai. Maka dari itu, proyek susulan perlu
memusatkan perhatian pada satu tujuan tunggal, yaitu berkelanjutannya UPKD. Visi
UPKD yang diusulkan adalah: “meningkatkan kesejahteraan anggota masyarakat
desa melalui penyediaan produk dan jasa keuangan, serta menyumbangkan labanya
untuk pembangunan desa”. Bersamaan dengan itu maka misi UPKD yang diusulkan
adalah: “menyediakan produk dan jasa keuangan secara berkelanjutan, yang sesuai
dengan permintaan masyarakat setempat dan menerapkan prinsip kehati-hatian”.

Disarankan untuk merubah nama dari lembaga: “Unit” diganti menjadi “Usaha”
(Perusahaan, Bisnis) untuk menyatakan orientasi yang baru: menghasilkan laba bagi
masyarakat desa. Bersamaan dengan itu, berbagai tugas sosial perlu dialihkan
kepada pemerintah desa. Ini memperkenankan UsPKD (Usaha Pelayanan
Keuangan Desa) untuk bertindak sesuai dengan orientasi pasar dan meningkatkan
suku bunga mendekati suku bunga yang berlaku di pasar. Pemerintah desa akan
memutuskan, siapa saja yang memenuhi syarat untuk menerima subsidi bunga dan
menggunakan laba UsPKD, yaitu hanya kelebihannya (surplus) dan bukan isi
pokoknya (substance), untuk membiayai (transfer ke UsPKD) subsidi ini. Mereka,
yang sanggup membayar bunga lebih tinggi, menyumbang lebih banyak laba bagi
pengembangan lebih besar dari desa dan memberikan bantuan kepada yang
membutuhkan. Keterbukaan dibidang keuangan dan kesetiakawanan/solidaritas
desa bisa diwujudkan.

Adalah penting bahwa UsPKD menjadi badan usaha yang menguntungkan
karena hanya lembaga keuangan yang tangguh dan menguntungkan yang dapat
menarik kepercayaan masyarakat serta tumbuh. Orang membayar kembali
pinjamannya dengan prospek untuk memperoleh pinjaman susulan yang lebih besar.

Khususnya diusulkan:

-   Pengalihan harta/aktiva dari Unit PKD ke Usaha PKD termasuk verifikasi dan
    penilaian kembali seluruh portofolio pinjaman. Jumlah mereka sekitar 80% dari
    jumlah harta/aktiva UPKD. Nilai sesungguhnya dari seluruh pinjaman harus
    ditentukan, yang mungkin sekali jauh lebih rendah dari nilai nominal atau nilai
    buku. Orang tidak bisa menciptakan lembaga keuangan yang sehat tanpa
    adanya akuntansi yang terbuka (transparent). UPKD tidak bisa menanggung
    beban dari proyek lama. Mungkin verifikasi pinjaman akan dihadapkan pada
    keengganan atau bahkan perlawanan dari banyak orang. Bantuan pemerintah di
    semua tingkatan dibutuhkan untuk pelaksanaan tugas ini.
-   Desa akan menjadi pemilik 100% dari UsPKD yang baru. Kepemilikan dana
    IMS-NTAADP perlu di klarifikasi sebelum menetapkan status hukum UsPKD.
    Peran pemerintah kabupaten dalam dewan komisaris juga akan bergantung pada
    kepemilikan dana IMS-NTAADP. Undang-undang tentang LKM atau peraturan
    pelaksanaan BUMDES (Badan Usaha Milik Desa) dapat menyediakan pilihan
    bagi keabsahan UsPKD. Koperasi kurang cocok: mereka merupakan perusahaan
    yang berorientasi pada keanggotaan dari mana para anggota mereka menarik
    manfaat, jadi bukan masyarakat.
-   Dana pinjaman dari IMS-NTAADP akan menjadi pinjaman subordinasi
    jangka panjang untuk UsPKD, yang memperkuat permodalan mereka, sebuah
    fitur kunci ketika UsPKD mencari pembiayaan untuk memperluas bisnis mereka.

Tujuan proyek “Pengembangan Keuangan Mikro Wilayah di NTB”, sebagaimana
dipaparkan dalam Risalah Perjanjian, adalah:

    a) meningkatkan mutu pelayanan LKM;
    b) meningkatkan jumlah LKM yang sehat;

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

    c) menciptakan lingkungan yang kondusif melalui peraturan/pengaturan dan
    d) meningkatkan kerjasama diantara LKM dengan lembaga-lembaga keuangan
    e) meningkatkan kemampuan LKM dalam menjangkau modal dari berbagai

Memperkuat UPKD menyumbang pencapaian berbagai tujuan ini.

a) Mutu pelayanan: Secara rata-rata, UPKD menghimpun Rp10jt simpanan, yang
   sebagian besar merupakan pembayaran wajib (compulsory fee) dari para
   peminjam. UPKD kurang aktif atau kurang berdaya cipta dalam menarik
   simpanan, antara lain disebabkan oleh peraturan Bank Indonesia yang
   membatasi penggalangan simpanan oleh bank saja. Sebaliknya, orang segan
   menyimpan dana kalau mereka meragukan berkelanjutannya LKM. Dalam hal ini
   UsPKD bisa mengikat kerjasama dengan bank. Berkenaan dengan pemberian
   pinjaman, kebanyakan orang menginginkan akses atas pinjaman pribadi dengan
   jadwal pembayaran angsuran pribadi daripada pinjaman kepada kelompok yang
   ada sekarang.

b) Meningkatkan jumlah LKM sehat mengandung dua komponen: jumlah lembaga
   dan mutu, atau kesehatan dari LKM. Memperbaiki tingkat kesehatan LKM dari
   kurang sehat menjadi sehat juga masuk dalam perhitungan. Sayang bahwa
   perbaikan dari tidak sehat menjadi kurang sehat tidak masuk dalam perhitungan.
   Pemerintah-pemerintah kabupaten telah menyatakan minat mereka untuk turut
   membiayai pembentukan UPKD baru. Diharapkan bahwa dalam jangka waktu
   tiga tahun ada sekitar 20 LKM tambahan seperti ini.

    Apakah proyek berhasil meningkatkan jumlah LKM sehat hanya dapat dijawab
    segera sesudah jumlah LKM yang sehat, disini: UPKD, diketahui, yang
    nampaknya dibawah 10 jika diukur dengan standar BPR. Sebuah standar bagi
    LKM “sehat” bukan bank bukan koperasi perlu dikembangkan. Namun demikian,
    penilaian yang berlandaskan kelima kriteria penilaian CAMEL kelihatannya
    sesuai juga bagi UPKD.

    “C”apital rating atau peringkat modal, yang berasal dari rasio kecukupan modal
       atau capital adequacy ratio (CAR), meningkat kalau kredit macet dihilangkan
       dari neraca, ketika dana IMS-NTAADP menjadi pinjaman subordinasi, dan
       jika sebagian dari pinjaman ini diubah bentuknya menjadi modal.
    “A”ssets atau harta/aktiva sebagian besar terdiri dari portofolio pinjaman.
       Perpanjangan dan penjadwalan kembali (rescheduling) pinjaman tertunggak
       dapat meningkatkan mutu portofolio, yaitu, ketika perjanjian pinjaman atau
       produk disesuaikan dengan arus kas peminjam beserta struktur risikonya,
       seperti pinjaman yang membolehkan pembayaran kembali secara lentur
    “M”anagement rating atau peringkat pengelolaan meningkat melalui
       pemberlakuan berbagai pedoman dan prosedur tertulis lainnya, pelaksanaan
       pengawasan intern dan mekanisme pengendalian. Para manajer
       membutuhkan pelatihan supaya dapat mengerti dan mengaplikasikan
       peralatan ini.
    “E”earnings atau penghasilan dapat mencapai duakali melalui penagihan
       pembayaran secara intensif pada saat jatuh temponya angsuran pinjaman
       dan pembebanan denda bagi keterlambatan bayar. Pendapatan akan
       mencapai duakali lagi kalau pengelola UPKD menerapkan kondisi bunga
       yang serupa dengan yang diterapkan oleh koperasi simpan pinjam di

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

       pedesaan. Penghasilan meningkat kalau biaya berkurang namun hanya
       sedikit UPKD yang tinggi pendapatannya yang mampu memikirkan
       bagaimana mengurangi pengeluaran. Biaya penyisihan penghapusan kredit
       macet akan berkurang karena pinjaman diberikan berdasarkan prinsip kehati-
    “L”iquidity atau likuiditas, pada umumnya, bukan merupakan keperihatinan
       khusus dari UPKD. Penarikan kembali simpanan bisa diramalkan atau bisa
       diabaikan. Pengeluaran lainnya dapat ditangguhkan dan dirundingkan.

    Jika diringkas, ada banyak kegiatan untuk meningkatkan “kesehatan” UPKD.
    Sebagai terkaan yang paling tepat, jika hari ini ada sepuluh UPKD yang
    kinerjanya paling bagus, maka sekitar 20 cukup sehat, 40 kurang sehat dan 160
    tidak sehat. Dengan adanya campur tangan diharapkan bahwa setelah 2 hingga
    3 tahun ada 40 (+30) UsPKD sehat, 50 (+30) cukup sehat, 65 (+25) kurang sehat
    dan 95 (-65) tidak sehat. Menurut perkiraan 95 LKM ini tetap “dormant” atau
    tidur/tidak aktif, antara lain karena dari hasil verifikasi, portofolio mereka sudah
    terlanjur rusak.

c) Berkenaan dengan peraturan, ada tiga persoalan yang perlu disikapi: (i) untuk
   menjadikan UsPKD sebagai badan hukum maka prosedur bagi BUMDES belum
   ada, dan juga belum ada Undang-undang tentang LKM, yang akan berdampak
   pada perumusan anggaran dasar dan anggaran rumahtangga yang baru; (ii)
   peraturan yang membolehkan LKM di pedesaan untuk menghimpun simpanan
   (mungkin bisa ditambahkan satu bab dalam Undang-undang tentang LKM); dan
   (iii) peraturan dan klarifikasi berkenaan dengan kepemilikan dana IMS-NTAADP,
   termasuk prosedur penghapusannya.

    Proyek meninggalkan sekumpulan ketentuan dan peraturan “sunshine” bagi
    UPKD, yang berguna bagi pelaksanaan proyek lama, namun menjadi hambatan
    bagi pengembangan UsPKD. Diusulkan untuk menyiapkan surat ketetapan
    (decree) bagi verifikasi portofolio, serta bagi anggaran dasar dan rumahtangga
    sementara UsPKD. Kasus tersebut perlu dibuka kembali sesudah Undang-
    undang tentang LKM terbentuk dan keluarnya peraturan tentang BUMDES.
    Tanpa adanya peraturan tentang penghapusan rasanya tidak mungkin
    meningkatkan jumlah LKM yang sehat, kecuali kalau hanya pinjaman sehat yang
    dipindahkan (transfer) ke UsPKD dan pinjaman yang tidak tertagih ditinggalkan
    sebagai “harta/aktiva UPKD”.

    Laporan ini membahas pengawasan secara luas karena keberhasilan UsPKD
    berpusat pada orang yang menangani uang yang bukan miliknya didalam sebuah
    masyarakat yang menghargai ikatan keluarga dan tetangga, serta rasa hormat
    dan kepatuhan kepada atasan yang jauh lebih tinggi daripada pekerjaan (proyek!)
    sementara berkenaan dengan pengaturan dana tanpa nama (anonymous funds).
    Kehadiran dari pengawasan, yaitu pemeriksaan intern (internal audit),
    memperkuat moral dari para manajer. Kinerja UPKD akan semakin memburuk
    tanpa adanya pengawasan dari tim-tim BP. Namun demikian, kekuatan mereka,
    yang terlekat dalam dan mengenal penduduk desa, juga merupakan kelemahan
    utama mereka. Para pengawas adalah sesama penduduk desa, dan oleh karena
    itu seringkali tidak netral, dan cenderung menghindari perselisihan. Bagi banyak
    orang tugas tersebut terlampau besar tuntutannya, sedangkan bagi orang lain
    terlalu tidak menentu (satu kali dalam tiga bulan). Tidak ada pihak yang membina,
    mengawasi, mengendalikan, atau memantau para pengawas. Maka dari itu,
    direkomendasikan pembentukan tim-tim pengawas yang bekerja penuh waktu
    dan semi-profesional di tingkat kabupaten, sebagai perwujudan dari pemeriksaan
    intern. Sekitar 15 hingga 25 orang spesialis yang dipekerjakan – dengan

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

    lewatnya waktu – akan sudah berpengalaman dan mampu melaksanakan tugas
    ini dengan lebih baik dibandingkan 735 orang yang ada sekarang. Di tingkat
    propinsi, seorang koordinator profesional akan membina, melatih, dan
    mengawasi kinerja tim-tim ini. Pengeluaran untuk membiayai pengawasan akan
    meningkat tinggi dan mencapai sekitar Rp500jt per tahun. UsPKD mampu
    menanggung pengeluaran ini yang relatif sangat kecil jika dibandingkan dengan
    besarnya biaya untuk membentuk penyisihan penghapusan kredit macet yang
    sekarang sudah mencapai lebih dari Rp5 milyar.

d) BPD Bank NTB, BPR-LKP dan UPKD mempunyai ikatan bersama dalam hal
   kepemilikan oleh Pemerintah NTB. Berbagai produk serta cakupan daerah
   bersifat saling melengkapi. UsPKD dapat bertindak sebagai kepanjangan tangan,
   misalnya sebagai penghimpun tabungan bagi bank. Bagi para pelanggan UsPKD
   menarik untuk mengetahui bahwa lembaga keuangan tersebut tidak sepenuhnya
   berdiri sendiri tetapi merupakan bagian dari sebuah sistem keuangan propinsi
   yang menyeluruh. Tambahan pula, kerjasama diantara UsPKD perlu diterapkan,
   bukan saja berkenaan dengan pengawasan, melainkan juga di berbagai bidang
   seperti pengembangan sistem informasi dan pemberian nilai yang sederhana.

e) UsPKD dapat menyediakan pelayanan sebagai kasir dari pemerintah desa serta
   simpanannya. Mereka dapat menawarkan pelayanan untuk mengurus komponen
   keuangan dari berbagai program pemerintah. Dengan adanya permintaan yang
   belum dapat dipenuhi yang jumlahnya sekitar Rp350jt per desa, maka UsPKD
   bisa menarik perhatian para pemberi pinjaman yang tidak mampu melayani
   segmen pasar ini secara langsung/sendiri. UsPKD tidak dapat menyerahkan
   agunan fisik. Mereka harus membuktikan prestasi kinerja dan ini adalah alasan
   utama mengapa para manajer UsPKD perlu mempelajari bagaimana memantau
   pemeringkatan CAMEL dari UsPKD mereka.

Pelaksanaan proyek mengikut sertakan beberapa langkah pendukung UPKD.
Berkelanjutannya UsPKD bisa dicapai melalui urutan langkah sebagai berikut: (i)
verifikasi harta/aktiva untuk meningkatkan keterbukaan (2 bulan), (ii) pelatihan on-
the-job (orientasi bisnis, 4-6 bulan), (iii) konsultasi (pemecahan masalah, 6-12 bulan),
(iv) kerjasama diantara LKM, terutama berkenaan dengan pengawasan, dan dengan
lembaga keuangan lain. Urutan pengembangan kelembagaan akan dilengkapi
dengan penyediaan berbagai pedoman, pelatihan kelas (in-class training), dan

Proyek melalui tahap percobaan (pilot phase), termasuk persiapan, uji coba
verifikasi harta/aktiva di berbagai desa pilihan dan klarifikasi kepemilikan dana IMS-
NTAADP. Proyek dapat dilanjutkan jika seluruh kegiatan ini telah berhasil
dilaksanakan dengan baik.

Pada awal tahap percobaan, dilakukan konsultasi dengan Pemerintah NTB dalam
Forum Kebijakan Keuangan Mikro Wilayah (FoMFIDa) yang bertujuan memperoleh
persetujuan atas berbagai tujuan bersama serta rancangan dasar dari proyek.
Seorang Direktur Proyek membutuhkan waktu dua bulan untuk tahap persiapan
menyelesaikan berbagai perjanjian kerjasama dengan pemerintah dari desa-
desa yang terpilih. Ini merupakan salah satu bagian paling gawat (crucial) dari
proyek: Lingkungan yang tidak mendukung konfirmasi harta/aktiva (asset
confirmation), yakni keterbukaan, akan tidak kondusif. Waktu yang cukup perlu
disediakan sebelum pengumuman verifikasi harta/aktiva untuk memberikan
kesempatan kepada sementara orang untuk menyelesaikan tunggakan pinjaman
(overdues) mereka. Paling lambat dalam bulan ketiga, tiga orang Penasehat
Keuangan Mikro (Microfinance Advisors) atau MFA dapat masing-masing mulai

Executive Summary - Rural Microfinance Development in NTB – Concept and Implementation Strategy

melaksanakan verifikasi portofolio di dua desa. Verifikasi portofolio secara sukses
adalah salah satu pra-kondisi bagi transfer harta/aktiva dari UPKD ke UsPKD serta
pemberian bantuan selanjutnya.

Bersamaan dengan itu, Pemerintah NTB akan mengklarifikasi kepemilikan dari
dana IMS-NTAADP dan mengembangkan garis pedoman tentang penanganan
pinjaman macet beserta prosedur penghapusannya, yang membentuk pra-kondisi
lain bagi pemberian bantuan selanjutnya setelah tahap uji coba. MFA menambah
dengan desa ketiga dan keempat dalam bulan-bulan berikutnya. Proyek seharusnya
sudah menimba cukup pengalaman sesudah tiga bulan uji coba verifikasi
harta/aktiva dan kerjasama dengan 12 desa untuk memutuskan dan merancang
duplikasi (multiplication) di berbagai kabupaten lainnya.

Sekiranya tahap percobaan (pilot phase) sukses, yakni verifikasi harta/aktiva telah
selesai diselenggarakan di sekurang-kurangnya 12 desa, dan kepemilikan dana IMS-
NTAADP sudah diklarifikasi dan memperkenankan pengembangan LKM yang dimiliki
desa, maka proyek akan mulai beranjak ketingkatan yang lebih tinggi (scaling-up).
Berdasarkan pengalaman uji coba, akan diputuskan berapa banyak MFA baru dan
Deputi Direktur Proyek akan diterima bekerja untuk melanjutkan urutan
pengembangan kelembagaan UPKD dari verifikasi harta/aktiva, yang diikuti dengan
pelatihan on-the-job, konsultasi dan pelatihan yang sejajar (parallel). Maksimal 3
orang Deputi Direktur dan 21 orang MFA mungkin akan dibutuhkan jika
pengembangan UsPKD mewujudkan potensi sepenuhnya. Sebelum MFA baru
dipekerjakan, maka pembiayaan bersama selama jangka waktu proyek dan cakupan
biaya setelah out-phasing perlu diklarifikasi untuk memastikan berkelanjutannya.

Pelaksanaan proyek yang diusulkan akan menjumpai tumpang tindihnya barbagai
urutan ini karena proyek tersebut akan dimulai di daerah percobaan (pilot area)
dan akan digandakan secara bertahap hanya setelah berhasil memperoleh
pengalaman dan membuat berbagai penyesuaian yang perlu. Diperkirakan bahwa
verifikasi harta/aktiva dari satu UPKD akan mempekerjakan seorang MFA untuk 7-10
hari per bulan, sedangkan pelatihan on-the-job hanya membutuhkan kehadiran
selama 2 hingga 5 hari dan konsultasi hanya 1 hingga 2 hari per bulan. Oleh karena
itu, MFA akan membantu secara bersamaan, misalnya, satu UPKD dengan
konfirmasi harta/aktiva, tiga UPKD dengan pelatihan on-the-job, dan tiga lain dengan
konsultasi. Para direktur proyek sendiri perlu mengunjungi UsPKD untuk
mengkonfirmasikan dan mempelajari dari tangan pertama perihal kinerja UsPKD dan
permasalahan mereka, dan untuk memastikan bahwa MFA memenuhi tugas mereka,
antara lain melalui pemeriksaan intern yang teratur hingga saatnya tim-tim pengawas
mengambil alih tugas ini pada tahun kedua dari proyek.

Diperkirakan bahwa selama tahun kedua dijadwalkan pelatihan kelas (in-class
training) dan kunjungan dimulai oleh tim-tim pengawas. Jumlah MFA dapat dikurangi
paling lambat diawal tahun ketiga. Proyek akan memusatkan pikiran pada
pengembangan dan penguatan Forum atau asosiasi yang menuju pada
pemberlakuan sistem sertifikasi bagi manajer dan lembaga. Proyek juga akan terlibat
dalam penggalangan dana bagi UsPKD yang bagus kinerjanya.

Banyak dari langkah-langkah yang diusulkan, seperti pedoman dan materi pelatihan,
juga tersedia bagi semua LKM lain yang berminat. Pelatihan dapat mengundang
partisipasi dari peserta yang bukan berasal dari UsPKD. Meskipun proyek yang
diusulkan memusatkan pikiran pada UsPKD, proyek tersebut juga bermanfaat bagi
masyarakat pedesaan dan bagi pengembangan sistem keuangan pada saat mereka
beroperasi dalam sebuah lingkungan yang sehat, yakni persaingan tanpa
memerlukan bantuan dari pihak lain.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

1 Introduction

Sustainable access to financial services has a powerful impact on economic growth
and poverty reduction. Indonesia has a substantial and very diverse landscape of
Microfinance Institutions (MFI), but access to finance is still very limited in rural areas,
and most difficult at the village level.

The Government of Indonesia (GoI) has made reducing poverty and achieving the
Millenium Development Goals a top policy priority. To assist these efforts, German
Technical Cooperation (GTZ) supports Bank Indonesia and Ministry of Finance in
implementing the “Promotion of Small Financial Institutions” Program (ProFI).

ProFI aims at increasing outreach and sustainability of MFI in Indonesia. Developing
sustainable MFI with outreach to the poor has been most successful when following
the “Financial Systems Development” paradigm. This implies that the Government
provides an enabling environment to facilitate MFI growth, and assumes a
promotional role in MFI capacity building. ProFI advocates these principles, including
a commercial approach to microfnance, because it is most likely to reach more
clients on a sustained basis.

ProFI works with a diverse range of institutions, from Rural Banks and Cooperatives
to village-based MFI, and supports MFI development through four components:

    (1)   National Microfinance Policy
    (2)   Development Strategy and Enabling Environment for BPR and LPD
    (3)   Capacity Building and Professional Certification
    (4)   Regional Financial Systems Development

Decentralization opens new opportunities to improve access at the village level,
because it enables locally adapted conditions for successful MFI development. ProFI
is pilot-testing decentralized approaches under Component 4: “Regional Financial
Systems Development” aims at creating an enabling environment and improving
institutional capacities of MFI in Nusa Tenggara Barat (NTB) and Nusa Tenggara
Timur (NTT). Agreed Minutes between the Provincial Government of NTB and GTZ,
signed on May 17, 2005, create the framework for the “Regional Microfinance
Development in NTB” project. The project objectives aim at adapting a financial
systems development approach to the market for rural microfinance in NTB.

This study has the purpose to develop a feasible concept and an implementation
strategy from 2006-2008. To this end, demand and supply of financial services to
village households have been investigated to identfy potential gaps. The MFI
landscape in NTB has been screened for institutions which could contribute to
narrowing these gaps. 245 Unit Pengelola Keuangan Desa (Village Financial
Management Units, UPKD) are the most promising development option to increase
sustainable outreach to the village level. They have been set-up as village-owned
MFI by a World Bank poverty alleviation project from 1999-2003. UPKD are analyzed
in detail, and the study proposes both a concept and an implementation strategy for
achieving the project objectives. The concept builds on transforming UPKD into
profitable business units. Implementation focuses on UPKD portfolio review and
intensive capacity buidling through on-the-job training, feeding lessons learnt back
into improved UPKD regulations.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

2 The Province of Nusa Tenggara Barat (NTB)

NTB covers some 20,000 km2 and is composed of Lombok and Sumbawa, and more
than a hundred minor islands. The distance from Western Lombok to Eastern
Sumbawa is about 350km. NTB is inhabited by slightly more than 4 million people,
living in about 1 million households. The population is unevenly distributed: Lombok
covers slightly more than 20% of the area, but accounts for more than 70% of the
population (population density 600/km2). In contrast, Sumbawa occupies 76% of the
province, but accounts for less than 30% (population density 80/km2).

Government Administration

The province is divided into nine administrative units: seven districts and two
municipalities, which are divided into 100 sub-districts / municipalities, and 792
villages. Four of them are in Lombok (Mataram, West, Central, and East Lombok)
and five in Sumbawa (West Sumbawa, Sumbawa, Dompu, Bima, and Bima City).
Mataram, Bima City and West Sumbawa came into existence after decentralization,
separating from the districts West Lombok, Bima, and Sumbawa. Hence, official data
are often not yet available for these new districts.

Demography and employment

The majority of the population lives in rural areas (65% according to the 2000
Population Census) and more than 50% of the labor force works in the agricultural
sector. Other important employment sectors include industry (manufacturing), trade,
and service, which account for 10% or more of the labor force. The majority of the
industrial entities are labor intensive and family owned small and micro enterprises
processing foods, wood (furniture), and tobacco.

Socio-economic conditions

The province is one of the least developed economies in Indonesia. It has the
second-lowest Human Development Index. 20 per cent of the population were very
poor (earning less the dollar value of 240 kg rice p.a.), and more than half of the
villages were ‘backward’ villages in 1993. The poverty level should have even more
risen following the 1997 economic crisis and several recent vast increases in fuel

After the 1998 financial crisis with a shrinking GDP, the economy began to grow
around 3 per cent in 1999. The inflation rate was down from 90% in 1998 to 6% in
2004. The growth of the economy, however, is about half of the growth level prior to
the crisis (1993-1997).

In 2003, the Regional Gross Domestic Product (RGDP) was estimated about IDR
17 trillion or IDR 4 million per capita. After the Mining and quarrying sector which
contributed 28 % to the RGDP (foreign investment), the agriculture sector contributed
most (24% of RGDP) to the economy. Two other sectors with a relatively substantial
contribution to the economy were trade, and hotel and restaurant (13% of RGDP)
and the service sector (12% of RGDP). The manufacturing sector consists of micro-
and small enterprises. Although it played a relatively important role in number of
business entities and employment, it contributes little value to RGDP.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

The provincial RGDP is not evenly distributed. For instance, the mining activities
are concentrated in Sumbawa and West Sumbawa districts. In 2003, both districts
accounted for the largest share of the sector’s provincial RGDP (40%) while the other
districts accounted for 14% or less. On the other hand, the Trade, Hotel and
Restaurant activities are concentrated in West Lombok and Mataram City districts.
The agriculture sector is equally important across the districts, except for the city
districts where the service sector is dominant.

Paddy, soybeans, peanuts, maize, shallots, garlic, chili and cassava are the major
agricultural food products of the province. The major cash crops are coconut, coffee,
cashew, and tobacco. The livestock sector is dominated by the production of cows
and buffalos. The major manufacturing sectors include food, tobacco, wood and non-
metal processing. The main export products are copper concentrate, pearls, cashew
nuts, and various fishery products. In 2004, however, the copper concentrate made
up almost 100% of the total export value (USD 975 million). Japan, The Philippines,
India, Korea, and Germany were the major recipients of the exports.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

3 The Rural Microfinance Market in NTB
The analysis of the market for rural microfinance investigates demand and supply to
identify gaps. Potential demand has been estimated through surveys of 90
households and the management of 60 UPKD. Both surveys indicate substantial
scope for more savings and loan services in rural areas of NTB. Analysis of rural
microfinance supply aims at identifying MFI which could be developed further to
narrow the identified gaps.

3.1 Demand for Microfinance

To identify demand-supply gaps, 90 households from villages in the 9 districts /
municipalities were surveyed during June/July 2005. The first objective was a better
understanding of household demand for financial services. The second objective was
to investigate household perceptions of microfinance supply. The survey is attached
in Annex 1, the following summarizes the main results.

The households in the sample have an average annual income of around to Rp15m,
the estimated value of their physical assets is Rp18m. The household heads, mostly
farmers and traders, have on average eight years formal education. They live at a six
km distance from the nearest MFI offices. The households’ demand for institutional
savings and loans are summarized in the table below:

Table 1: Household Demand for Institutional Savings and Loans
                      Saving:          Avg. Savings         Borrowing:        Avg. Loan
    Institution       Share of           balance             Share of          amount
                        HH                (Rp’000)             HH             (Rp million)
 BRI (Units)            14%                      324             4%                  7.7
 BPD                     6%                    2,440             0%                    -
 BNI                     1%                   35,000             2%                 25.0
 BPR                     1%                       85             2%                  1.5
 KSP & USP               6%                      720           19%                   1.5
 UPKD                   10%                      130           27%                   0.7
 Others                  3%                      117             1%                  5.0
 Total                  41%                    2,537           56%                   2.7
Source: The Household Survey, 2005, see Annex 1

The survey found that a substantial proportion of the households normally save their
excess incomes: 34% in cash (mostly with financial institutions), 6% in kind, and 2%
in a combination of cash and kinds. Large savings are generally placed with
commercial banks (particularly BRI Units) while small savings are generally placed
with nearby non-bank financial institutions (particularly UPKD). More than half of the
households regularly borrow from financial institutions, particularly from UPKD and
credit cooperatives. Most loans from these MFI are small, with sizes less than IDR 2
million. Larger loans were borrowed from the commercial banks, mainly BRI Units. A
few of the households also borrow from informal sources, in particular friends and
family. Child education is the main purpose of saving, whereas the main purpose of
borrowing is working capital.

Based on the household sample, a very rough estimate of the potential demand of
rural households in NTB for institutional saving and loan services can be made. The
results are arrived at by simple projection of the samples behavior on the entire
population or rural households in NTB, and are given in the table below. The

Rural Microfinance Development in NTB – Concept and Implementation Strategy

potential demand of rural households for institutional savings and loans in NTB
province amounts to between 275,000-288,000 saving deposit clients, and between
372,000-390,000 loan clients, i.e. almost 40% of the households. Excluding the
households’ demand for the services of the commercial banks, others than BRI Units,
roughly gives the potential for micro saving and loan services.

Table 2: Potential Demand of Rural Households for Financial Services in NTB
  Institution       Savers         Saving Deposit         Borrowers       Loan balance
     Type          (persons)          (Rp million)         (persons)          (Rp million)
 BRI (Units)       96,626                312,176           29,731               230,118
 BPD               37,164                 90,680                -                     -
 BNI                7,433                260,146           14,866               371,638
 BPR                7,433                    632           14,866                21,704
 KSP & USP         37,164                 26,751          126,357               195,853
 UPKD              66,895                  8,696          178,386               132,006
 Others            22,298                  2,601            7,433                37,164
 Total            275,012                697,647          371,638               988,557
Source: The Household Survey, 2005, see Annex 1

The households generally agree that financial services should apply interest to the
clients, and that borrowers should repay their loans. Households perceived that
microfinance development after financial liberalization has improved their access to
financial services. The households viewed that the provision of microfinance services
could be improved through demand-driven and convenient services, good and
honest management, and better marketing of available services.

The survey concludes that household demand for financial services indicates a large
potential for saving mobilization and effective financial intermediation. The
households are generally accustomed to saving and the application of interest rates
on financial services. Awareness of the responsibility of loan borrowers prevailed
among the households. These provide the basis for the use of the financial system
approach for further development of the rural-microfinance sector in the province.

The limited role of village-based microfinance institutions, such as UPKD, in the
mobilization of household savings – despite substantial demand - points to gaps in
the rural financial market. Further evidence for a demand-supply gap are several
mismatches between the characteristics of the services demanded by the
households and the services offered by the financial institutions. For instance, loans
for purposes other than working capital are generally not supplied to the households.

In addition, 60 UPKD managers were asked about prospects to extend lending in
their villages. According to their estimates, on average around 250 potential
borrowers would demand loans up to Rp500,000 is, about 100 would demand loans
from Rp500,000 to Rp2m, and slightly more than 60 would demand loans of more
than Rp2.5m. Based on these figures, the average village has an unmet micro loan
demand of about Rp350m. Hence, the potential micro loan demand in NTB’s 800
villages would amount to Rp280b.

3.2 Supply of Microfinance

Microfinance includes a range of financial services, from savings and loans to
payment services and insurance, provided to poor and low-income households or
small firms. The Consultative Group to Assist the Poorest suggests 150% of per

Rural Microfinance Development in NTB – Concept and Implementation Strategy

capita GDP as upper limit to define microfinance. Bank Indonesia considers a loan to
be micro up to Rp m 50, about five times Indonesian per capita GDP.

A variety of sources supply Microfinance services in NTB: bank and non-bank
financial institutions in the formal financial system, moneylenders on an informal
basis, and social programs with Microfinance components.

Commercial and Rural Banks

Most Commercial Banks in NTB are branches of larger private and public national
banks. They are concentrated in the provincial capital of Mataram. In addition, Bank
NTB, the Regional Development Bank (Bank Pembangunan Daerah, BPD), operates
exclusively in NTB.

Bank Rakyat Indonesia (BRI) remains the only commercial bank providing
microfinance services in rural areas all over Indonesia. Some commercial banks offer
services to micro entrepreneurs and villagers in places where large clients, e.g.
plantation companies, need banking services. Bank Negara Indonesia (BNI) stopped
its network expansion to rural areas just recently. Other commercial banks intend to
extend micro loans to traders in rural market centers, but not loans below Rp10m,
and not to farmers or cottage industries.

The Rural Banks (Bank Perkreditan Rakyat, BPR) include private and government-
owned entities. The private entities operate as limited liability companies (Perseroan
Terbatas, P.T.), the public BPR are regional enterprises (Perusahaan Daerah, P.D.).
Public BPR were initially established as LKP (Lumbung Kredit Pedesaan, Rural
Credit Institutions). LKP are non-bank financial institutions and belong to the category
of Lembaga Dana dan Kredit Pedesaan (LDKP), which operate in most Indonesian
provinces, but under different names and regulations. The majority of LKP obtained
BPR status in the late 1990s, becoming P.D. BPR-LKP. The least performing entities
remained LKP. The recent development of banks is given in Table 3.

Table 3: Development of Banks in NTB, 1997-2005 (IDR Million)
      Type of banks and          1997      2001        2004      Av. Annual change
     Development Indicator                                      1997-2004 2001-04
 Commercial Banks
 Number of banks                      16        10          12          -4%      7%
 Number of branches                  115       101         119           0%      6%
 Number of BRI Units                  48        49          51           1%      1%
 Assets                       1.207,592 2,800,958 4,433,000           38%       19%
 Savings and deposits           821,829 2,303,132 3,315,865           43%       15%
 Loan Outstanding               916,905 1241,957 2,760,310            29%       41%
 Private & Gov Rural Banks
 Number of banks                      30        61          62        15%        1%
 Number of branches                   30        61          63        16%        1%
 Assets                          16,786    104,854    227,786        180%       39%
 Savings and deposits             12,231    49,640    121,666        128%       48%
 Loan outstanding                 16,568    74,912    160,197        124%       38%
 Government Rural Banks
 Number of banks                                46          46                   0%
 Number of branches                             46          46                   0%
 Assets                                     52,743    116,967                   41%
 Saving deposit                             14,731      40,402                  58%
 Loan outstanding                           39,691      87,528                  40%
Source: Bank Indonesia Mataram and The Economic Bureau of NTB Province.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

PT. Bank Rakyat Indonesia (BRI)

BRI offers MF services exclusively through its prominent Units with four to six staffs,
which are located in sub-district capitals. BRI has not added immediately new Units
after sub-districts split and new sub-districts emerged. BRI Units keep accounts for
government institutions and the upper level of the rural population. BRI Unit is the
“safe haven” for deposits. The successful credit operation is based on loans to fixed-
income earners and traders with collateral. Common village people are not the target


The Regional Development Bank extends most of its micro loans to government
employees who finance consumption goods (according to the loan’s classification),
but, because of their low salary, quite often small income-generating activities. The
bank’s branch network does not go beyond district capital level and serves few rural
clients only near its branches. Farm households do not belong to the target group.

Table 4: Microfinance Supply in NTB
 Institution                      BPR               BPR LKP   Bank NTB        BRI Unit
                                                                              (May 2003)
 Kota/Kabupaten              Lombok Barat: 8                           18
 Kecamatan Level             Mataram:           4       46                            51
 Village posts               Others districts: 10                                     17
 - Value (Rp m)                     134,280          69,043      399,054        196,951
 - No. of loans                                      34,864                      41,793
 - Value (Rp m)                  49,321      21,091        527,078          209,718
 - No. of accounts              139,280      88,322                         391,858
Sources: Bank Indonesia, Bank NTB, Bank Rakyat Indonesia, Biro Pusat Statistik
P.T. Bank Perkreditan Rakyat (BPR)

Four out of 22 private BPR are domiciled in Mataram, and eight in Lombok Barat, i.e.
mostly bordering Mataram. Only 10 private BPR operate in NTB’s other seven
districts. BPR receive assistance from ProFI through “Certif”, a system to qualify and
certify BPR managers. BPR have access to funds either through mobilizing deposits
or through loans from commercial banks and PT. PNM. Some BPR serve clients in
villages using “motorcycle units”.


Provincial and district governments own 46 BPR-LKP. Alike BRI Units, they operate
in sub-district capitals. They employ at least twice as many people who administer a
loan portfolio a third, savings accounts a fourth, with a savings account balance only
a tenth of BRI’s. The BPR are located in sub-district capitals where they complement
(not compete with!) products and services of BRI Units. BI suggests these BPR to
merge and become one BPR with branches and cash offices, among others because
several of them are not profitable and do not comply with the regulation to employ
two directors (they still have only one). District governments prefer merging BPR
district-wise. The issue is under discussion and BPR-LKP directors in a seminar
indicated already their support to merger(s) – as long as their income is not cut –
because they gain a carrier prospect (promotion from small to larger BPR). Similar

Rural Microfinance Development in NTB – Concept and Implementation Strategy

set-ups were reportedly successful in Central and East Java. Recently, GTZ’s ProFI
rendered assistance by providing a study on the envisaged BPR merger. BPR-LKP
have founded an association. BPR-LKP serve rural clients. They lend to self-help
groups, for which they received technical assistance from PHBK, a joint BI/GTZ

Lembaga Kredit Pedesaan (LKP, Village Credit Institution)

BI still registers seven LKP. They displayed the weakest asset quality and were the
smallest among local government-owned FI and, therefore, not converted into BPR.
According to Bank NTB, there were only six active LKP Units in 2000 with assets
amounting to Rp767m or Rp128m per unit,1.

Table 5: MFI in NTB by District (2003)
   District             LDKP UPKD            BMT      P4K     BPLM*) T.P. Bun Nak Hort
  Mataram         1                            2                 0
    Lobar           7        2       30        4       1        13 >      5            8
    Loteng          9                53        1       4        18 >                   4    14
    Lotim           8                35        8       24       21 >      3            8    10
    Sumbawa        11        2       30        1       2         9 >                   2    7
    Dompu           4                24        4       4        23 >             2     10   11
    Bima            6        3       57        1       3        15 >      2            3    10
    Total          46        7      229       21      38       99 >
*) MoA, Program Bantuan Pinjaman Langsung Masyarakat (Direct loans to people), 2001-
2003, see below under Pilot Project Proyek CF-SKR

Non-bank Financial Institutions – Cooperatives and Pawn Shops

Non-bank financial institutions include several types of cooperatives and the large
public network of pawnshops, as well as MFI originating from former social projects.

Cooperatives are the only type of non-bank MFI with a legal status which allows for
mobilizing deposits – however – limited to members of cooperatives, including
members of other cooperatives. They provide small short-term loans in rural areas
through motorcycle units of district capital-based cooperatives.

Table 6 shows that cooperatives have grown significantly from 2002-2005. Number
of KSP and USP establishments, and their assets and clients increased by more than
10 per cent per annum during the period. Thus, there are more KSP/USP than
villages in the province.

Table 6: Saving and Credit Cooperatives in NTB, 2002-2005
          Indicator            2002        2004        2005                   Annual Change
                              (Dec)        (Dec)      (June)                    2002-2005
 Number of cooperatives          2,203       2,447       2,447                     4%
 Number of KSP & USP               820       1,123       1,123                     12%
 Assets (IDR Million)         156,974      293,303     296,236                     30%
    Loan clients (person)        134,749       330,996       334,306                 49%

 Matrik Konsolidasi LKM Berdasarkan Hasil Penelitian Tahun 2004, Tim Pengkajian LKM
Data from Holloh, D., Microfinance Institutions Study, 2000.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Source: Dinas Koperasi dan Usaha Kecil dan Menengah Provinsi NTB
However, their spatial distribution is uneven, concentrating in areas where their
businesses are beneficial. In comparison to the growth of Rural Banks (see Table 3),
Saving and Credit Cooperatives grow faster in number but slower in assets. This is
because licensing requirements are easier for a cooperative than for a rural bank.

Savings and Credit Cooperatives (SCC, Koperasi Simpan Pinjam KSP)

A KSP is an independent business entity, generally privately owned. In 2000, only 13
 KSP in West Lombok       SCC/KSP with assets amounting to Rp2.4b operated in
                          NTB. 2 This number increased significantly. For
   Year          KSP      example, in West Lombok the number more than
   1996            1      doubled since 2003, assets almost tripled to Rp7.1b,
   1999            5      three KSP alone account for Rp5.6b. Some resemble
   2000            6      banks: 36 members but loans to 2,056 people! 3 The
   2002            9      services of KSPs, although smaller in size, resemble the
   2004           17      services of the private rural banks
   2005           20

USP (Usaha Simpan Pinjam)

USP are the savings and credit businesses of multi-purpose cooperatives. For 12
different types of multi-purpose cooperatives, the district West Lombok reported a
loan balance of Rp18.8b, out of which loans to government employees accounted for
Rp12.6b (67%). 4 The “village unit cooperative” (KUD), a sub-district multipurpose-
cooperative with a savings and credit unit (SC-Unit or USP), provides only few loans
to the rural population although these cooperatives have commonly a membership of
more than 1,000. Most loans in the portfolio are “forgotten” small balances (regularly
below Rp100,000) of loans that were disbursed many years ago. 15 KUD in West
Lombok report a loan balance of Rp0.9b for 3,896 borrowers (average less than

The majority of the USPs were developed from previous social development
programs. For example, USPs of Koperasi Unit Desa (USP-KUD) were originated
from the green revolution program, and USPs of Koperasi Karya Mandiri (a
secondary cooperative) were originated from P4K groups.

TPSP (Tempat Pelayanan Simpan Pinjam)

Under the auspices of the sub-district based KUD (Koperasi Unit Desa, village
cooperative), 975 TPSP were created in 24 provinces since 1994. They received a
start-up capital of Rp8m (USD3,500). They are almost identical to BKD (see Annex
14) in their structure and function. One BRI supervisor oversees 18 TPSP (for which
he receives 15% of interest collected) and one KUD technical administrator 6 TPSP.

Credit Union (CU or Koperasi Kredit, Kopdit)

More than 1,000 CUs have been established all over Indonesia under the umbrella of
the World Council of Credit Unions (WOCCU). CU are prominent providers of MF in
rural NTT, but, surprisingly, not a single unit was founded in NTB.

  Holloh, D.(2001), p. 166
  Laporan Perkembangan Koperasi Simpan Pinjam Kabupaten Lombok Barat Juni 2005,
  Laporan Perkembangan USP Koperasi Kabupaten Lombok Barat 31 Januari 2005

Rural Microfinance Development in NTB – Concept and Implementation Strategy

BMT (Baitul Mal Ta’mil)

Most reports on MFI development carry over year 2000 figures on BMT activities. In
contrast, all respondents answered unanimously that, compared to three or four
years ago the number of BMT declined sharply, at least by more than half. They
suppose that many BMT were founded during the monetary crisis in order to obtain
government program funds. BMT are said to play (or have played) a role in urban
areas rather than in villages. As expected, most of the registered syariah-finance
SHG or cooperatives operate in East Lombok.

Pawn shops (Perum Pegadaian)

The Indonesian law restricts pawning to state-owned pawn shops, which are a
source of short-term loans from below Rp50,000 to above Rp10m. The service in a
clean and comfortable (chairs, television) environment is quick (computerized). The
loans, less expensive than loans from most MFI, have a tenor of four months but -
pending re-evaluation of the pawn and payment of interest - they can be extended
several times.

Pawn houses are located in all district capitals and increasingly in sub-district capitals.
The 24 pawn shops in NTB are not evenly distributed: seven operate in the districts
Lombok Barat and Sumbawa (plus two more sub-branches), four in Bima, three in
Lombok Timur, and only two in Lombok Tengah and in Dompu.

The Bima branch records about 5,000 transactions p.m. (200/day). The average
transaction is about Rp500,000, disbursements per month amount to Rp2.5b. The
demand for micro loans grows, for example from Rp17.1b (2002) to Rp29.9b (2005
estimate) in Bima, where a new branch will open 2006. The 20% p.a. expansion
underlines increasing demand for loans in the popular Rp200,000 to Rp2m range.

However, pawnshops are not village-ased and do not offer deposit services, and are
only useful for people with moveable assets, which are not needed for business.

MFI originating from Social Programs
There are also unregistered microfinance institutions resulting from previous social
development credit programs such as the Income Generation Program for Small
Farmers (P4K Program, see below), and the Agribusiness Development Program.

The agribusiness development program of the Ministry of Agriculture resulted in rural
financial institutions, Koperasi Tani or KopTan (farming cooperatives). Data indicate
that there are 210 Koptan in the NTB in June 2005 with, on average, assets of IDR 9
million, and 33 members. Koptan are much smaller financial institutions than
resulting from the P4K program, and NTAADP programs.

There is also a secondary cooperative. One is the centre for women cooperatives,
Pusat Koperasi Serba Usaha Karya Terpadu Madani (PKSU-KTM), which were
formed by associations of P4K groups. PKSU-KTM appears to have a potential to
extend its member financial institutions in future, given it receives right supervision
and management, and external supports. It is fully commercial, charging market
interest rate and the managemetn is profit-oriented. To date, however, the PKSU-
KTM’s role is limited. Its assets are slightly larger than IDR 200 million and its
members are 14, including 6 multipurpose cooperatives and 8 LKMs.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Informal Supply: Self-Help Groups, NGO and Moneylenders

Self-Help Groups and Savings and Credit Groups (SHG/SCG)

Dinas Koperasi regards savings and credit groups (SHG/SCG) as LKM (MFI)
“embryos”. The agency records and monitors larger SCG in order to assist them with
registering as a savings and credit cooperative (SCC) once membership exceeds 20
persons and capital Rp25m. Records on SCG are incomplete and therefore they are
not part of official statistics.

Bank Indonesia’s PHBK (Proyek Hubungan Bank dengan Kelompok Swadaya
Masyarakat, Project linking banks and SHG) monitors banks financing SCG. Based
on April to June 2005 figures for NTB, some banks, almost exclusively BPR-LKP,
continue extending on average more than 40 loans to groups monthly (i.e. one per
BPR-LKP). By end of June 2005, 48 banks record 568 group loans with balances
amounting to Rp1,9b or about 3% of the BPR loan portfolio. Most end-users live in
rural areas, which are difficult to access for formal financial institutions.

SHG/SCG or LKM have not developed a system or apex organization in which they
work together.

Non-Government Organizations (NGO)

NGO are active in community development rather than financial service provision. No
agency in NTB collects data on NGO-MF activities. People who work with NGO or
observed the MF market and can compare the situation with NTT confirmed that
neither international, nor national, or local NGO are a significant MF provider
anywhere in the province.

Plan International is about to start a project in Dompu. ProMIS (GTZ) revived IDT-
groups (see below) and support SHG in Lombok Timur, Dompu and Bima. However,
activities do not center on financial institution building.

Supposedly, the government does not repeat MF-programs with NGO channeling
funds, such as KUT and PDM-DKE (social safety net programs) in 1999. In all
probability, as long as no disaster hits NTB (as Flores 1991), NGO will remain
engaged in facilitation only.

Private MF Providers (Moneylenders)

Credits from moneylenders remain popular. MFI can learn from moneylenders whose
services are (i) most accessible, (ii) not bureaucratic and fast, (iii) simple terms, (iv)
without collateral, (v) convenient (doorstep), (vi) without fines and penalties, if delays
are not provoked deliberately. In the surroundings of active UPKD, the presence
of moneylenders decreased significantly. People observed that moneylenders
offer loans to those who face difficulties to repay their BRI or UPKD loan. People
reported also that the services of moneylenders (including traders who offer loans
before harvest or purchase the harvest in advance) were increasingly sought after in
places where UPKD activities decreased.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Social Projects with Microfinance Components

Many popular MF programs are similar to IMS-NTAADP in addressing groups, who
become recipients of a revolving fund. Most of these programs fail5, because they
use a “participatory” approach, which only functions if the implementation capacity is
sufficiently mature. This is quite difficult to expect in poor villages – not only in
Indonesia. In addition, rules and regulations are unclear or incomplete, supervision is
missing or does not function, sanctions are not in place or not enforced.

The design of most social programs contradicts fundamental MF experience and best
practice: no competition for limited funds, low interest rates indicating a grant, poor
people using a loan for non-productive purposes first, and reluctance to repay a
program loan or even grant from donor agencies, in particular without access to a
follow-up loan.6

Other prominent shortcomings include no effective information campaign,
incompetent facilitators7, inexperienced management, ineffective supervision, lack of
transparency, no sense of responsibility (managers and project staff consider their
part-time employment temporary), reluctance to collect repayments, and no (or not
enforced) fines or penalties (avoiding conflicts).

Table 8 lists efforts to provide people in rural areas with micro loans:

Table 8: Micro Loan Programs
         Type                Project                               Comment
                                                     Banks, cooperatives and NGO as
                          KUT, 1998/99               channeling organizations: high default
    MF for individuals
                          KUT, 2000 -                Banks executing: insignificant volume
                          BPLM, 2001-2003           High default rate, stopped
                                                     Village based poverty alleviation
    Group formation       IDT, 1994-1996
                                                     program, unclear ownership;
                          P4K, up to 2005            Default rate increases
    From group to
    cooperative           Pilot project Proyek       Depending on Bank Pembangunan
                          CF-SKR, 2006               Daerah (BPD) support
                                                     Probably best program, but failed
    Support to existing   PKS-BBM, 2000/03           because banks neglected their
    MFI                                              obligations
                          PPK, ongoing               High, unsustainable cost
    New village           UED-SP, 1996-1998          Too small
    microfinance                                     Missing support to develop from project
    institutions          UPKD, 1999 - 2003
                                                     to sustainability

  “Judged on performance, nearly all program credit schemes such as KUT, IDT, PMD-DKE
(social safety net program), UED-SP and UP2K have been unsuccessful. This is especially
the case with all those schemes which depend upon a revolving fund mechanism…” SMERU,
Monitoring the Social Crisis in Indonesia, No. 11, November 2000
  The perspective to obtain a higher follow-up loan made the P4K program more successful.
  In the presence of a facilitator, 19 (33%) out of 57 UPKD managers stated that facilitation
was not or less satisfying. Source: Questionnaires Lombok Tengah and Sumbawa,
September 2005, for more see Annex 6.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

IDT Presidential Instruction on Backward Villages (Inpres Desa Tertinggal, IDT)

Each district identified the 30% most backward villages and asked the village
government to establish groups of 20 poor families. From 1994 until 1996, GoI
transferred directly to these groups a “revolving fund” amounting to Rp20m to
Rp60m8 per village. After one loan period (one year) the groups would revolve the
fund to another group in the same village. In the absence of a follow-up loan
revolving did not happen as expected. Meanwhile, monitoring IDT groups stopped.
Most likely, less than 10% of the groups still operate the fund in a Savings and Credit
Group. ProMIS, a poverty oriented project supported by GTZ, invested heavily in field
motivators to revive IDT groups in the districts East Lombok, Dompu and Bima.

IDT was not only a MF program; it was at that time a movement to reduce poverty.
The financial impact in rural areas, with a current purchasing power of more than
Rp200bi, was significant. However, IDT groups did not grow from below (poor people
were grouped), their cohesiveness was weak and they collapsed easily. The financial
crisis (1998) afterwards made it inopportune to demand repayment.

Kredit Usaha Tani (KUT)

KUT is a commercial low-interest seasonal loan scheme for farmers that once
reached a volume of Rp8t nationwide (repayment below 50%). Formerly, banks
acted as channeling agencies and did not spend noteworthy efforts in recovering
arrears. Farmers have to contact the branch office of a participating bank, i.e. apply
for this loan in a district capital, which makes transaction costs prohibitive. Since
banks became executing agencies, the volume of this loan scheme dropped by more
than 90%.

P4K (Rural Income Generation Project)

P4K was a nation-wide income-generation project for small farmers and fishers
promoted by the Ministry of Agriculture, and jointly funded by donors and GoI since
the 1970s. The project used a group approach to empower small farmers, which
were organized into small groups of 8-16 households. Women accounted for about
half of the participants.

The government and the donor provided loanable funds (with 6% interest rate per
annum) to BRI, which was responsible for the loan administration. The P4K loans
were group liability loans with 12-18 month tenor, 12% annual flat interest rate, and
compulsory group savings. Several groups mobilized members’ savings for on-
lending to the members at 5% per month.

A national evaluation by Ravicz (1998) for the period of 1990-1996 reported that
less than 2% of the groups continued until the fifth loan, 21 % never received loans.
Loan arrears ranged from 6% to 18.7%, and subsidy dependence index (SDI) was
262 %.
In May 2000, the outstanding loans to 4,076 groups in NTB amounted to Rp7,026b,
or about Rp1.7m per group. The project was successful as long as new and
increasing loans were a reward for loan repayment. After a peak in 2001, the number
of the P4K groups sharply declined from 7,760 groups to just 174 groups in June
2005. At national level, the project terminated in 2005.

    This is equivalent to a current purchasing power of about Rp80-240m.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

A similar outcome appears in NTB: the number of the P4K groups sharply declined
in after the project, from 7,760 groups in September 2001 (end of the project) to just
174 groups in June 2005. Of those surviving, however, some have formed financial
institutions, including a secondary cooperative, several multipurpose cooperatives,
and several LKMs. 9

New Pilot Project in NTB: Counterpart Fund – Second Kennedy Round (CF-SKR)

The Ministry of Agriculture intends to launch a new program in which financial
institutions play a major role. West Java, Central Java and NTB were selected as
pilot project areas. The 2006 budget for NTB amounts to about Rp250m out of Rp1b.

Table 9: CF-SKR Project is based on MoA’s experience with loan facilities for farmers:
 1998/1999:   When farmers suffered from the monetary crisis aggravated by adverse
              weather conditions (El Nino), Kredit Usaha Tani (KUT) was disbursed
              through different channels, also through NGOs and MFIs, some of which
              were allegedly set-up only for this purpose. The entire volume of KUT
              exceeded Rp8t. This was ten-fold compared to the years before. Until now,
              less than 50% could be recovered.
 1999/2001:   Banks became executing agents for KUT. Total loan volume dropped far
              below Rp1t. Farmers complained about difficulties to obtain loans.
 2001-2003:   MoA recognized that high transaction costs made KUT unattractive for banks
              and farmers. The new program BPLM (Bantuan Pinjaman Langsung
              Masyarakat, direct loans to people) made extension service staff (Petugas
              Penyuluhan Lapangan, PPL) taking over the function of bank officers:
              assessing the farmers’ credit capacity, extending loans and collecting
              repayments. The delinquency rate was far above projections and MoA may
              have lost Rp1t nation-wide.

The scheme’s main pillars are:
- MoF deposits directly an “eternal fund” (“dana abadi”) with BPD.
- BPD shall pay 5% p.a. interest for this deposit.
- The deposit serves as a cash collateral or credit guarantee fund.
- BPD will extend loans at 7% p.a. (proposed) to qualified or certified non-bank MFI.
- The non-bank MFI disburse working capital loans to farmers at 12% – 18% p.a.
   (proposed). The interest rate shall not result in a market distortion. However, the
   loan shall be priced well below “about 33% p.a. BPR are charging”.
MoA’s Finance Center (Pusat Pembiayaan) in cooperation with qualified and
experienced NGO (LSM) will extend technical assistance to BPD with regard to
assessing non-bank MFI. Provincial Bappeda will conclude a MoU with BPD
according to which BPD will be responsible for guiding and monitoring the MFI.

Provincial Bappeda and other agencies (Dinas Pertanian, Dinas Koperasi) will
cooperate in upgrading MFI embryos to become certified MFI. The MFI shall obtain:
- a 5-day training for the head (Ketua) and treasurer (Bendahara)
- a set of stationary, forms, office equipment, including white board and typewriter.

It is envisaged that MFI register as a Savings and Credit Cooperative. It is assumed
that, without a clear legal status, BPD would probably hesitate to disburse loans.

The scheme contributes to the quantitative and qualitative development of MFI in
rural areas. However, it does not support building a MFI system. With regard to the

 Based on experience, the ratio is 200 groups – 30 SCG – 1 SCC, based on: some 5,500
groups form 960 SCG and 30 SCC, see: Holloh, D., p.19

Rural Microfinance Development in NTB – Concept and Implementation Strategy

sustainability objective the following problems arise - despite an “eternal cash
collateral fund”:

-    A low 2% p.a. gross margin for BPD will definitely be an obstacle for prudential
     lending to MFI that includes proper loan assessment and continuous loan
     supervision. Most probably, BPD will regard funding small MFI under these
     conditions not feasible, despite zero risk. For comparison, commercial banks
     obtain a 5% margin when lending much higher amounts to BPR.
-    If BPD has easy access to the “eternal fund”, efforts for loan assessment and
     supervision will be limited and it is predicted that eternity does not last long. After
     a short time the scheme will cease to exist because of a decreasing loan
     guarantee fund.
-    Few MFI that extend loans to farmers can cover the costs from an 11% p.a.
     margin, in particular cost for personnel and reserve for bad debt. Professional
     management is more expensive and if managed by laymen costs for write-off will
     increase. For comparison, UPK formed under the PPK run at a loss with a margin
     of more than 12% p.a. when extending loans to groups.

Fuel Subsidy Compensation - PKS-BBM (Pengganti Kompensasi Subsidi BBM10

In 2000, SMoCSME introduced the PKS-BBM program to strengthen existing, viable
MFI in their efforts to make more small individual loans available to micro
entrepreneurs without bankable collateral and addressing the reluctance of
commercial banks and BPR to respond to loan requests in the Rp0.2m to Rp1m
range. In almost all districts, about five to eight qualifying cooperatives received
Rp100m each, and about three to five capable non-cooperative MFI Rp50m each for
onlending to MSME. SMoCSME repeated the scheme 2002 and 2003. The total
volume for NTB amounts to some Rp10b.

This program tried to avoid common shortcomings of group-oriented lending by
carefully selecting experienced and performing MFI, and charging commercial banks
with training and supervision (monthly visits, advice, and monitoring). MFI selected
the individual clients. Restrictions were few and simple: for business, maximum
Rp1m, maximum interest 30% or 2.5% p.m. (sufficient margin to cover risks). The
MFI pay for the contractual services to banks annually an amount equivalent to 4% of
the fund (Rp2m – 4m). After about 4 years it has been observed in NTB:
- Banks did not fulfill their contractual obligations to assist MFI from the very
    beginning; after four years, most bank officers moved to other positions and
    locations and new personnel is not informed about the contracts; they do not
    know “their” MFI.
- Similarly, Dinas Koperasi officers have been moved, new officers are “not yet”
- Dinas Koperasi officers indicated that less than half of the cooperatives and MFI
    could benefit and strengthen their institution. MFI will weaken, some perhaps
    even collapse, after SMoCSME’s decision that they have to repay annually 10%
    of the fund. (The initial concept remained unclear in the question of fund
    ownership; as the fund should remain with “performing” cooperatives/MFI.)

   GoI fixes the nation-wide fuel prices, which are below international market prices. Indonesia
has to import fuel at these prices, as refineries for local crude oil cannot cover the domestic
demand. In particular kerosene for cooking and lighting in rural areas is subsidized. Fuel price
rises reduce GoI’s subsidy but burdens especially low income households. Different
measures served to soften this burden, including broadening access to micro loans.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Based on this experience, which is not limited to NTB and not limited to one bank,
one cannot rely on banks to fulfill non-financial contractual obligations regarding MFI,
even if they are paid for their services. Neither SMoCSME, Dinas Koperasi nor the
MFI signing the contract with the bank tried, or were successful in insisting that the
banks fulfill their contractual duties.

Sub-District Development Fund (PPK, Program Pengembangan Kecamatan)

For participating sub-districts, PKK made available Rp1b for different purposes,
predominantly investment in infrastructure. The sub-district could decide to invest up
to 10% of the amount in the support or strengthening of MFI. In NTB, PPK financed
seven MFI with Rp439m, including two UPKD, and three P4K groups.

In three districts and 23 of NTB’s about 100 sub-districts, PKK finances Unit
Pengelola Kegiatan (UPK). UPK are apex institutions: They provide exclusively loans
(amount about Rp5-20m, interest rate 12-18% p.a.) to village based savings and
credit groups (SHG).

Table 10: UPK in NTB (August 2005)
                      # of participating        Allocation       Balance      Groups Members
                        sub-districts              Rp m           Rp m
 West Lombok                   6                  2,383           1,166        126       1,797
 Central Lombok                9                  2,574           1,131        219       2,866
 Dompu                         8                  1,960             924        162       2,358
 Total                        23                  6,917           3,221        507       7,021

Table 9: UPK Arrears in NTB (August 2005)
 1 – 2 installments      Rp 126.5m         3.9%        Loans at risk/arrears are, even for a
 3 – 4 installments      Rp 29.9m          0.9%        second-tier organization, rather low,
 5 – 6 installments      Rp 15.9m          0.5%        in particular when considering only
 > 6 installments        Rp 9.0m           0.3%        arrears exceeding two installments
 Total                   Rp 181.3m         5.6%        (1.7% of the portfolio).

Until August 2005, the 23 UPK report cumulative income from interest on loans to
groups (operational income) amounting to Rp536m. Despite obtaining the PPK-funds
at zero percent interest, interest charged to groups were much too low to cover basic
costs, such as Rp486m honorarium for UPK managers (on average almost Rp1m per
group), and Rp218m for other operational cost (including reserves for bad debt). The
operational deficit amounts to Rp168m.11

The sustainability of the attractive two-tier MF system is questioned, if income cannot
be raised (50% higher effective interest rates) and/or costs lowered. It seems
inefficient to operate a UPK for an average of about 22 clients (groups) only.12

   Also, from the viewpoint of sustainability, the income-cost calculations do not take account
of (see also Annex 9 on sustainability):
- interest or other charges for the initial fund, which UPK received for free; this is a value of at
least 7% p.a. (opportunity cost)
- reserves for balancing inflation (keeping real value of funds constant), about 9% p.a.
- reserves for participating in real economic growth, about 6% p.a.
   507 groups served by 23 UPK

Rural Microfinance Development in NTB – Concept and Implementation Strategy

UED-SP Usaha Ekonomi Desa Simpan Pinjam (Village Economic Enterprise)

Since1995/96, Ministry of Home Affairs decreed villages to use Rp1.5m and twice
Rp2.5m 13 of their annual budget for developing micro entrepreneurs, including
offering MF. UED-SP was the embryo of a village-based micro bank. The fund for 20
or 30 very small loans was obviously too tiny to cover expenses, in particular the cost
of recovering bad debt. The subsequent monetary crisis with much larger programs14
covered up the failure of most UED-SP. An unknown small number of villages
applied for PDM-DKE or other funds, such as PKS-BBM, through their UED-SP. By
bundling programs, UED-SP became a viable and growing village-based MFI, which
serves repeatedly as an institution for receiving and administering various
government and donor programs.

The impact in NTB was rather insignificant because of the low amounts (estimated
about Rp3.5b).

MFI Access to Finance


Banks provide loans to MFI:
- Nationwide, about 30 commercial banks finance “sound” BPR.
- Since 2002, a number of banks, even those without a local branch network,
   finance increasingly SCC and other cooperatives, in particular those that extend
   loans to government employees. Teachers at village elementary schools are
   among those who benefit from these loans.
- BPR-LKP offer loans to SCG/SHG (PHBK).

PT Permodalan Nasional Madani (PNM)

PNM was one of the first financial institutions extending loans to MFI, namely BPR,
using the CAMEL approach instead of the 5C assessment. This institution is
interested in financing qualifying MFI. PNM has not yet opened an office in Lombok
and still operates in NTB from its Denpasar branch.

Klinik Usaha Bisnis (KUB), Selong, East Lombok

In 2000, in the aftermath of the economic crisis, East Lombok’s government founded
this alternative finance institution with Rp7.5b equity. At that time, for SME to obtain a
loan was extremely difficult. This hampered the implementation of infrastructure
projects, as contractors had no source of prefinancing. KUB resembles provincial
venture capital companies in extending loans to companies that cannot provide
bankable collateral.

Meanwhile, it has become easier for enterprises to obtain bank loans and the
government explores opportunities to finance MFI. KUB offers loans at interest rates
similar to bank deposit rates and could become a local apex organization for MFI.

As of June 2005, the KUB advanced loans to microfinance institutions (LKMs) with
10% flat interest rate for a 20 month fixed term (or .5% interest rate per month). This
   Rp6.5m is equivalent to more than Rp30m today.
  for example, in the framework of PDM-DKE (Pemberdayaan Daerah dalam Mengatasi
Dampak Krisis Ekonomi, Local empowerment by overcoming the impact of the economic

Rural Microfinance Development in NTB – Concept and Implementation Strategy

rate was far below the interest rate of commercial loans (about 1% per month).
Conceptually, therefore, the KUB may not have a bright future as KUB repeat the
past mistake, the direct credit programs whose failure were widely reported in the

3.3 The Supply-Demand Gap


BRI Unit, BPR(-LKP), Savings and Credit Cooperatives (SCC, KSP), and UPKD are
the most popular MFI in NTB’s rural areas. When comparing their products it
becomes evident that UPKD close gaps, namely loans in the range Rp0.2m to Rp2m
with a tenor of more than four months. BRI and BPR are reluctant to offer these loans,
especially if borrowers do not live in the close vicinity of the bank office. They regard
these loans as too risky and less profitable. Therefore, UPKD can successfully exist
side by side with other MFI almost without competition.15 UPKD loan products such
as SUTA and UEPT are particularly suitable to finance farm activities, because
borrowers repay the loan after harvest or after selling cattle.

Table 11: Popular Loan Products of MFI16
       MFI        Loan Amount          Collateral              Tenor              Repayment
                                vehicle ownership
                                                                          no grace period,
                                book, land certificate         12 – 36
 BRI Unit            > Rp5m                                               monthly installment
                                and notary contract,           months
                                SK on employment
                                vehicle ownership              12 – 18    monthly installment
 BPR                 > Rp2m
                                book, land certificate         months     loan, no grace period
 LKP               Rp0.2 – 1m none                            3 months    weekly
                                membership and                 40–100
 cooperatives     <Rp0.5m – 2m                                            daily
                                regular savings                 days
                                gold, vehicles,
 Pawn shops       Rp0.05m->5m                                 4 months    bullet repayment
                                electric appliances
                                                                          monthly, seasonally,
 UPKD               Rp0.2m – 2m none                        4-12 months
                                                                          cash flow oriented

Deposit products

It is undisputed that the demand for safe and any time unrestricted accessible
deposit facilities for people in villages is not met. Villagers have a potential and a
need (especially the poor) to save in order to be prepared for emergencies and to
balance economic shocks. No commercial bank enters villages with deposit products
through cash offices, mobile units or agents. Transaction costs are too high in view of
the low amounts and low margins of deposit products for both FI and depositor.17
Only less healthy BPR that are not eligible for a commercial loan could be interested
in mobilizing funds in remote areas.

   Despite the different products, people in villages mentioned repeatedly that UPKD reduced
the business of moneylenders considerably.
   Other products are offered only reluctantly or to special target groups only, e.g. BRI loans
“up to Rp3m without collateral”.
    Transaction costs make small (up to Rp300,000) deposit less attractive for banks and
villagers (travel cost). For example, some UPKD group leaders receive an incentive of about
15% of interest collected, i.e. equivalent to some 3% of the entire installment. Collecting
deposits would not earn a third of that.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

3.4 The Role of UPKD in Rural MF

Formal financial services in NTB’s rural areas are scarce. No commercial bank has a
branch in a sub-district capital. Bank-MFI, i.e. BRI Units and BPR are present in just
about half of 100 sub-district capitals and, through cash offices, in less than 10% of
NTB’s villages. A number of cooperatives provide services in rural areas, but their
distribution, range of products and capacity is limited. UPKD are the FI with the by far
highest number of offices (245) at village level in all districts. Private investors are
absent – seen apart from moneylenders. Minimum capital and staff requirements
prevent establishing BPR and even SCC in villages.

For most commercial banks, services in rural areas are too expensive. Interest
income from small loans does not cover costs for bank personnel (five to ten times
the cost of UPKD personnel), time and cost for travel, loan processing, loan
supervision, and loan losses. UPKD have decisive transaction cost advantages, and
have the most outreach with regard to the poor and underserved. They are
convenient and close a finance gap.

Table 12: MFI in NTB and their Services in Rural Areas
              Main operation                                                       Technical
Institution                        Target group          Sustainability
                   area                                                       Assistance Needs
                                Fixed income                                  BRI Units and staff
BRI Unit                        earners, MSE with Yes                         receive technical
                                bankable collateral                           support from BRI
              Mataram, district MSE who are not /                             Technical
              capitals and      do not want to be   Yes                       assistance from
              growth centers    served by BRI Unit                            BI/ProFI/Certif
                                MSE who are not / Only about 50%;
              capitals, larger                                                Technical
                                do not want to be   it is discussed to
BPR-LKP       villages with a                                                 assistance from
                                served by BRI Unit, reform the BPR-
              high economic                                                   BI/ProFI/Certif
                                SHG (PHBK)          LKP organization
                                Households,         No; conversion to
                                                                              Yes, through BPR-
LKP           sub-district      emergencies, petty become
                                                                              LKP (7 units only)
                                traders             LKM/UPKD?
                                Households,         Yes, if internal
              bias to urban
KSP                             emergencies, petty supervision                Not required
                                traders             functions
                                                    depends on other,
                                                                              TA from/through
              in urban and                          businesses of the
USP                             includes farmers                              SMoCSME, Dinas
              rural areas                           cooperative, often
                                                    weak internal
                                rural households,
                                                    Yes, in other parts
UPKD          in villages       farmers and micro                             Recommended
                                                    of Indonesia
MSE = micro and small entrepreneurs

Rural Microfinance Development in NTB – Concept and Implementation Strategy

4 UPKD: Outreach and Sustainability at the Village Level
4.1 UPKD Profile

UPKD are non-bank, non-cooperative MFI, borne out of the necessity to administer
IMS-NTAADP funds of a poverty alleviation project implemented from 1999 until
2003. UPKD are intentionally established in villages of backward sub-districts, where
the population is poorer and the economic foundation weaker than in average
villages. This poverty orientation is certainly one reason for the present sub-standard
loan portfolio quality. For more UPKD background information see Annex 3

IMS-NTAADP financed through UPKD income generating activities proposed by the
villagers. Since October 2003, UPKD were left with project-oriented regulations and
without a clear role and business concept for post-project times. The number of
active UPKD will decrease very fast without immediate assistance. At least about
Rp12b or 25% of the loan fund, government funds, have to be written off, probably
even more. This amount increases by about Rp20m every day.

Almost all UPKD are similar in their history of establishment, their organization, their
products and their sources of finance.18 They are also similar in their size, but differ
strongly in their performance. A number of successful UPKD indicate that there is a
considerable potential for weak UPKD to improve.

Musyawarah Desa (Musdes), a village assembly, is UPKD’s highest authority (ee
Annex 11). Musdes selected three to five managers and/or staffs from among the
village community to administer the fund. Three persons were appointed as internal
supervisors (BP, Badan Pengawas). Community development facilitators (CDF)
trained and assisted the general manager, treasurer/teller, secretary/bookkeeper,
and one or two field staff in applying for funds, disbursement, recovery and reporting.

Table 13: UPKD Profile (2005)- Average Values
 Assets                       : Rp235m
 Assets growth 2002-2004         :   7% p.a., recently declining
 Loans to groups                 :   Rp180m Loans are bundled in a group loan
 Borrowers                       :   50 groups = 500 individuals
 Non-performing loans            :   Rp110m = 60%, Rp55m recoverable over 5 years
 - out of which loan losses      :   Rp55m      estimated to be unrecoverable
 Potential loan expansion        :   Rp350m more than doubling assets
 Potential additional borrowers :    300 individuals
 (Very) poor borrowers           :   40%
 Interest income p.a.            :   Rp20m
 Income potential p.a.           :   > Rp80m
 Staff                           :   3 - 5 (3 - 4 “managers”, 1 - 2 field staff)
 Fixed assets                    :   furniture, computer, very seldom safe; some have
                                     motorcycle, very few own office building
 Supervision      internal       :   Supervisory board: 3 appointed village people
                  external       :   Bappeda, Dinas Koperasi (Loteng); no audit

     14 UPKD in Lombok Tengah and 15 in Sumbawa were established with PPW funds.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Loans to groups (80% of assets) dominate the balance sheet. Fixed assets account
for about 10% on average. Many UPKD acquired a computer (80% in Lombok Barat),
motorcycles, and, some few even acquired land and erected an office building. Cash,
bank, and advance payments (office rent) sum up to the remaining 10%.

UPKD offer three loan products to two different clients, i.e. to groups with a loan
channeling function (most popular), and to joint liability groups.

Table 14: UPKD Loan products

 Product           Purpose            Maturity             Repayment          Max. Amount

                    seasonal                              according to
 SUTA                              up to 6 months                                Rp2m
                   agriculture                        agreement /cash flow
                                                            one or two
 UEPT              husbandry      up to 12 months                                Rp3m
 UEP            non-agriculture      12 months               monthly             Rp2m

IMS-NTAADP required UPKD to charge a minimum interest rate of 15% to 18% p.a..
Most UPKD ask 1.5% to 2% p.m. UEP loans became the most popular product.
People requested the same conditions that apply to SUTA and UEPT loans, i.e. only
one loan repayment at due date. Reportedly, there was a high pressure to disburse
loans to poor people and quick at that, and also a high repayment pressure, which
loan rescheduling could solve19. The management imposed fines only irregularly and
did not document reasons for waiving.

UPKD have more applicants (waiting up to one month) than funds available. The
demand is high in the absence of other sources of credit, low interest rates and
lenient, if any, collateral requirements. Many villagers do not apply for a loan because
they are not member of a group, they do not want to become a group member, and it
is not sure, when they would obtain a loan.

NTB’s government agencies on provincial and district level, in particular Bappeda
officers, are (still) familiar with UPKD. District governments support UPKD
development and make available a budget to finance monitoring, consultancy, and
even seed capital for additional UPKD.

UPKD managers in Lombok Tengah and in Sumbawa were invited to a meeting in
the district capital. During these meetings, questionnaires were distributed.
Accompanied by explanations, the UPKD representatives answered 23 questions.
For the result see Annex 7. UPKD Strengths, weaknesses, opportunities and threats
are analyzed in Annex 5.

  This statement sounds credible because the committed IBRD loan amount had to be

Rural Microfinance Development in NTB – Concept and Implementation Strategy

4.2 UPKD Performance

CAMEL measures performance of financial institutions. The data available on UPKD
are not suitable for a meaningful CAMEL assessment. Alternative indicators for
assessing UPKD performance were asset size, capital growth, repayment rates and
arrears ratios.

Capital and Capital Growth

According to a September 2003 report based on July 2003 data 20 , UPKD
performance in NTB was superior if compared to other ADP regions:
- Average assets are higher: 214 UPKD, average Rp239m, 96% > Rp100m.
- Gross capital growth excelled with 14%.
- The cumulative repayment rate was 85% and the average arrears ratio 17%.

Based on the data made available in mid-2005,
- average assets dropped slightly: 229 UPKD21, average Rp235m, 92% > Rp100m;
- gross capital growth remains at 14% after two more years;
- data on repayment performance was not requested, because UPKD apply
   different standards and therefore the data would be misleading. All respondents
   admitted that, for more than 80% of the UPKD, the overall portfolio quality
   deteriorated continuously since the project’s closure.

Additional small PPW-financed UPKD (loan fund average below Rp100m) explain
insufficiently why average UPKD assets did not increase until mid-2005. For this and
other reasons, asset size itself is not a particular suitable performance indicator. For
example, performing BKD in Java are just half or less the size of small UPKD.

Capital growth22 is a more meaningful indicator. Bima, where the average UPKD are
much smaller,23 recorded highest growth (21%). Though, the “gross capital growth”
indicator is flawed because many UPKD do not account for a fair amount for bad
debt reserves. Almost all UPKD have not sufficiently adjusted the value of the loan
portfolio to loan repayment performance. UPKD developed different standards for
calculating and reporting on arrears and on loan quality. The reports indicate loan
repayment also for those loans that were prolonged, renewed, and revolved without
actual cash flow. Therefore, no figures are available that reflect reliably – or at least
comparably – repayment performance, assets value and subsequently capital growth.

Also, monitoring staff in Bappeda (in Lombok Tengah: Dinas Koperasi) mentioned a
deterioration of the quality and reliability of the financial figures. Therefore, a
meaningful quantitative comparison of assets and asset growth between UPKD in
July 2003 and in September 2005, two years later, is not possible.

Two indirect indicators were tested in order to quickly assess UPKD performance:
- reporting and

   SMFP Preparation Mission September 2003, Holloh, D.: Report to GTZ, p.11
   Local government financed from PPW 14 UPKD in Lombok Tengah; the data of local
government (APBD) financed 15 UPKD in Sumbawa were not available and therefore not part
of this analysis.
   Capital growth: assets/loan capital; according to Holloh, this is the gross capital growth
whereas the net capital growth is: (assets-overdues)/initial capital; initial capital = loan capital
   For details see Annex 3 UPKD – financial figures.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

-     loan interest income.


It is believed that non-performing UPKD stop reporting whereas the successful ones
continue sending every month their balance sheets to a number of addressees.

Presently, probably less than 50% of the UPKD send their monthly reports to various
government agencies, some regularly, others on request. If reporting is a gauge for
performance, then the situation worsens very fast as indicated in the development for
Sumbawa district in 2005.

Table 15: Monthly UPKD Reports, Sumbawa 2005
    Month                  Jan       Feb        Mar       Apr       May       June
    Reporting UPKD            26      23        21         17        15        15
    Monitoring n=36*)         72%      64%       58%       47%        42%      42%
*) In Sumbawa, NTAADP financed 30 UPKD, local government (APBD) 15 units; 9 units, the
difference, are located in the new district West Sumbawa.

Similarly, the government in Lombok Barat received 16 reports from 29 UPKD (55%).
In Lombok Tengah, the government receives monthly reports from probably less than
50% of the UPKD, some send reports to Bappeda, others to Dinas Koperasi.24

It was confirmed that some non-reporting UPKD stopped their activities. However,
there are many other reasons for discontinuing reporting. For one UPKD non-
reporting was a result of lack of printer ink. Another UPKD was used to be assisted
by a CDF. A third one argued that the project has closed and so did the obligation to
report, etc. In contrast, there are also UPKD with almost no transactions that
continue sending monthly reports. Therefore, one can find very low performing UPKD
among those reporting and average UPKD among those not reporting. Largely, the
declining number of reports sent to district Bappeda reflects deteriorating UPKD
development. For more details see Annex 6.

Interest Income Analysis and Loan Portfolio Quality

“Interest income from loans” is a position in the monthly UPKD reports. Figures on
income from loans of a number of UPKD were gathered from reports and from
questionnaires. The following analysis does not include 15 local government financed
UPKD in Sumbawa for which comparable data were not made available.

Unless the figures were picked directly from the monthly reports, it was not always
obvious whether the number would refer to income in the reporting month or
cumulative income for the year or even cumulative since the UPKD’s establishment.

During visits to UPKD some common techniques were detected that cover up the
real interest income. For example, the loan amount of a loan renewal or prolongation
was higher than the previous loan’s combined arrears of principal and interest, a
practice called “plafondering” that can disguise non-performing loans (NPL). There
are also instances when UPKD deducted interest upfront and reported the full
amount as interest income in that month. Consequently, this UPKD reported interest

  In a meeting in September 2005, in which managers from 40 UPKD (out of 53) attended, 20
(50%) admitted not having send a report in 2005.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

income, which should have been allocated to several months. The position “interest
income on loans” was overstated for that particular month – and understated in the
following months.

Despite severe shortcomings, for 216 UPKD, the reported interest income figures
were set against the outstanding loans balance. The resulting percentage indicates
that some UPKD earn much more interest on their loans than others do. This ratio
will be lower for a large NPL portfolio and higher for a UPKD with a healthy portfolio.

Table 16: Income Performance
 Interest Income on                                  Reporting UPKD in          Bad Debt
                                All UPKD
 Outstanding Loans                                     Lombok Barat           (Best Guess)
 up to 5%                     78         36%           5          33%             >80%
 > 5% up to 10%               38         18%           3          20%           60%-80%
 > 10% up to 15%              36         17%           2          13%           40%-60%
       0% – 15%              152         70%          10          67%            40-100%
 > 15% up to 20%              26         12%           4          27%           20%-40%
 > 20% up to 30%              19           9%          1            7%            <20%
 > 30% up to 40%              11           5%
 more than 40%                 8           4%
 n=                          216                      15
 average                    13.3%                                10.6%

The table above results from this comparison. For about one third (36%) of the UPKD
gross interest income was reported to be extremely low.25

Additionally, the income statements and balance sheets of all 15 UPKD in Lombok
Barat were analyzed for which monthly reports from June or July 2005 were available.
The return on portfolio (in % p.a.) was calculated based on interest earned since
January 2005 and the average outstanding loan amount: 33% (5) of these UPKD
earn less than 5% p.a. on their portfolio and 34% more than 15%. The percentage of
all 216 UPKD and the 15 selected Lobar UPKD in the different income brackets does
not differ substantially: 70% and 67% report interest income of up to 15%. However,
it can be assumed that the income situation of all 216 UPKD is worse because the 15
UPKD belong to the reporting UPKD with, most probably, over average performance.

The extend to which UPKD loans perform can be estimated by the ratio: realized
interest income on loans / target interest income on loans. Without bad debt UPKD
would earn as follows:
- The most common interest rate is 2% flat per month for the most popular
    installment loans (UEP). The resulting effective interest rate is, in theory and
    depending on the formula, about 40% to 50% p.a.
- In reality it happens that after, for example, five months, when the outstanding
    loan amount dropped from Rp2m to Rp1m, group members ask for a new Rp2m

    It cannot be concluded that 36% of “all UPKD” earn less than 5% interest on their portfolio.
It is not known whether interest income refers to income in the reporting month (income in %
would be much higher), income accumulated for all months in the reporting year (income in %
p.a. would be higher), income received previous year (income in % would be right), or UPKD
income accumulated since its inception (income in % would be much lower). Perhaps the
inaccurateness balances.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

     loan, from which Rp1m will be taken to repay the old loan. The effective interest
     rate drops to about 35% p.a. 26
-    A 2% p.m. rate is often also applied on other loan types with repayment at the
     end of the loan period (SUTA, UEPT). The resulting effective interest rate is 24%
     p.a., and it is higher for upfront interest deduction.

If all loans perform, UPKD earn some 30% p.a. (target) on the average outstanding
loan amount (depending on the portfolio mix). When UPKD earn less than 15% p.a.,
it can be assumed that less than 50% of the loan portfolio provides income, or more
than 50% of the portfolio is bad debt or NPL.

Thus, the percentage of NPL can be allocated to respective interest income brackets.
More than one third (36%) of all UPKD have NPL amounting to more than 80% of the
portfolio. Approximately 34% of UPKD have a portfolio with 40% to 80% NPL, and
30% less than 40% NPL.

Sustainability and NPL

UPKD are sustainable if they can provide financial services without depending on
support in kind or cash from non-clients and income from business with clients is
projected to equal or exceed costs for these services.27

An increasing NPL-ratio results in decreasing income. A high NPL-ratio does not
immediately endanger the viability and sustainability of UPKD, because expenditures,
i.e. cash outflow, are low and can be reduced accordingly. Increasing NPL result in
decreasing interest income that meets a flexible cost structure with few, if any,
- no interest or principal payment for the IMS-NTAADP fund;
- salaries and incentives are a percentage of UPKD income, they are not fixed;
- the computer need not to be repaired: no income means no activity and no report;
- office rent has been prepaid, sometimes for years;
- addition to depreciation and to loan loss reserves are not cash transactions;

Decreasing the arrears ratio through write-offs and flexible loan repayment conditions
can improve some financial ratios, but not the real performance. A UPKD with a
Rp200m loan portfolio and a 70% NPL-ratio has still an active loan portfolio of 30% x
Rp200m = Rp60m. An MFI of this size is larger than most SCG/SHG; it is larger than
P4K groups, manifold larger than UED-SP or TPSP funds for a village. It is as large
as a BKD, or as large as many sustainable credit cooperatives (Kopdit or Credit
Union, CU) in Sulawesi or NTT.

A unit this size earns interest amounting to Rp60m x 2.5% p.m., or about Rp1.5m
p.m. This sum can finance the operating cost of about 10 group accounts or 100
individual loan accounts, which one person can manage half-time, but two persons
should manage (reason: four-eyes principle, and efforts to recover NPL):

   In these cases many banks, in particular BRI Unit, ask for an interest compensation
   For a discussion on sustainability see Annex 9.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Table 17: UPKD with 70% NPL - Possible Projected Monthly Income Statement
 Income per month                              Rp      Remarks
  interest from loans                   1,500,000      PL-portfolio Rp60m x 2.5% p.m.
  administration, fee                     100,000      1%-2% fee for new disbursements
 Total income                           1,600,000
 Expenses and cost
  two managers, part-time                 700,000      2 persons (part-time) x Rp350,000
  Stationary, transport,
  postage, electricity, etc.
  rent of premises                        100,000
  depreciation (for equipment)            150,000      Rp9m x 20% (for 5 years)/12 months
  bad debt reserves (PPAP)                300,000      6% p.a., or 0.5% (p.m.) x Rp60m
  supervision                             150,000
 Total cost                             1,600,000
 Surplus/Profit                                 0      no incentives, no growth, no HRD

If interest could be raised to 3% p.m., this UPKD would earn a monthly Rp300,000
surplus and grow by about 5% annually. However, this UPKD cannot support three or
even four managers: The concept to allocate 40% of gross income to four managers
results in that they earn just Rp160,000 per month.

A project should not exclude UPKD with a 70% NPL-ratio from a program that
supports the development of village based MFI. An active portfolio of only Rp50m
allows continuing MF operation in a village28 if one would adapt regulations regarding
the management set-up. The BKD system in Java proves that even very small village
based MFI are viable and sustainable (see Annex 14).

Sustainability Projection

Based on the interest income analysis, only about 23 UPKD (10%) record less than
20% NPL. In total, about 103 UPKD show an NPL-ratio below 60%. Probably more
than one third or about 80 UPKD record more than 80% NPL. A high arrears ratio
does not mean un-sustainability, but it severely diminishes the survival prospect.

In the absence of other meaningful indicators, the table below bases sustainability or
survival prospect on the assumed NPL ratio. The percentage of sustainable UPKD is
higher for UPKD with low NPL. The projected survival ratio decreases with increasing
NPL. Not all 23 category-1 UPKD are projeted to survive. Perhaps two or three will
drop out. It is assumed that of those UPKD with 80% and more NPL some 10-15% or
8 – 12 units can survive as very small MFI or as a service point of another UPKD. It
is estimated that technical support to UPKD will enable at least about 100 (40%) of
all 245 units to develop into sustainable MFI.

  One would need about Rp50m working capital to revive a dormant UPKD, which could then add to its
capital by engaging in bad debt collection efforts.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Table 18: Predicted Sustainability of UPKD

                 Cate-     UPKD      UPKD      Sustainability      Sustainable    Reserves
                 gory       (%)       (#)       % of UPKD           # UPKD       (Bad Debt)

 <20%              1        10%        23        85% - 90%            20 - 21      1.5%

 20%-40%           2        20%        46        70% - 80%            32 - 37      6.0%

 40%-60%           3        15%        34        50% - 70%            17 - 24      7.5%

 60%-80%           4        20%        46        30% - 50%            14 - 23      14.0%

 >80%              5        35%        80        10% - 15%            8 - 12       31.5%

 Total                     100%        229                           91 - 117      60.5%
The analysis is based on 229 UPKD for which data were available

Reserves for Bad Debt and Write-Off

On average, category-1 UPKD have 15% NPL for which they have to allocate
reserves for bad debt. Probably less than 10% of all UPKD belong to category 1.
Therefore, NPL and related bad debt reserves of these UPKD account for 15% x
10% = 1.5% of the entire outstanding loans of all UPKD. It is assumed that, on
average, 90% of the loans of category-5 UPKD are NPL and that 35% of all UPKD
belong to category 5. Consequently, their NPL share in all loans is 90% x 35% =

Based on above analysis and calculation, bad debt reserves should amount to:
    60.5% x Rp40.3b (all outstanding loans of 229 UPKD) = Rp24.4b.
Respective provisioning will reduce the average UPKD asset by Rp113m or 48%.

It is estimated that, per September 2005, at least 50% of the amount required for bad
debt reserves has to be written off, i.e. about Rp12.2b in total for all UPKD or Rp55m
per average UPKD. This amount increases daily.

Without a concerted action to revive and strengthen UPKD and to recover arrears,
write-offs will perhaps triple in three years until 2008 from Rp12b to become Rp36b.
With other word: Losses amount to Rp8b annually, or more than Rp20m every day,
the equivalent of loans to 10-20 families in villages!

The proposed project cannot completely prevent further loan losses but reduce them
perhaps by 50% or more. This will limit losses to not more than Rp10m daily

Performance Indicators of Government Agencies

Pembina apply different standards for assessing UPKD. Among these are a number
of non-financial issues, e.g. concerning the office (own office, or even own office
building), equipment (computerization, motor cycles), meetings with village elders
and group leaders, reporting, savings mobilization, etc. A common standard for
classifying UPKD does not exist. Government agencies estimate that about 30% of
the UPKD “perform”, some 40% are weak, and the remainder (almost) not active. An
evaluation of 45 UPKD in Sumbawa resulted in 14 (31%) sound, 12 (27%) sufficiently
sound and 19 (42%) unsound units. This assessment is in line with above results.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

If measured by CAMEL standards for BPR, “performing” UPKD are unsound to a
high degree, because the amount of NPL and loss-loans exceeds accumulated
“profits” (see Annex 5 for a CAMEL assessment of a “good performing” UPKD).
UPKD are only “profitable” because their loan loss provisions are minimal. It is
justified to classify a number of UPKD as “performing” after stripping them of their
bad debt, the project burden, and measure them by their most recent performance.

4.3 Conclusion

The performance of most of NTB’s 245 UPKD deteriorates; they have to reduce new
lending; they are not sustainable, because their income is insufficient to cover
adequate loan loss provisioning.

An increasing number of loans are not repaid and interest income decreases

-    loans were extended to poor and very poor people who, for a number of reasons,
     have not the capacity to repay their loans from their income;
-    some people regard project loans as a grant and, although they have the
     capacity, they do not want to repay the loan;
-    people do not repay the loan because they doubt receiving a follow-up loan, in
     particular when installments are already overdue;
-    supervision, if carried out, remains without immediate (re-)action, and sanctions29,
     both on part of lender and borrower.

However, the post-project business of a number of UPKD is promising and they are
profitable if measured by their active portfolio.

Without a fundamental change in UPKD business approach, the number of active
UPKD will decrease very rapidly, most of all because the management cannot cope
with the increasing number of arrears. A substantial part of these delinquencies result
from borrowers unsure about the prospect to obtain a follow-up loan.

   For UPKD managers, a bad loan has the character of a sanction, because their income is a
percentage (up to 40%) of the UPKD’s interest income. Surprisingly, this has not been a sufficiently
strong incentive. Perhaps, this income has to be shared among too many persons. Similarly, managers
revealed that in Sape/Bima one performing UPKD refunds 15% of interest income to group leaders,
whereas in an almost neighboring village the UPKD refunded even 18%, but was found under-
performing. It is suggested to explore reasons for this behavior.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

5 The Project Concept: Strengthening UPKD

The Government of NTB and ProFI agreed to develop microfinance in NTB. 30 The
parties have decided to use a financial systems approach, as outlined in the
Yogyakarta Communique (see Annex 13). The financial systems approach builds on
independent and commercially-oriented MFI to expand sustainable access to
financial services for poor and low-income households.

To this end, the approach addresses three areas of intervention:

        Institution building: Business strategy, ownership, governance,
        Operating environment: Policy, regulation, external supervision
        Capacity building: Management and staff skills

Based on the analysis of the rural microfinance market in NTB, it appears feasible to
significantly increase outreach (= access to financial services for poor and low-
income households) to the village level on a sustainable basis.

It is recommended to focus project activities on UPKD, which have the highest
potential to improve both outreach and sustainability of access to financial services at
the village level. However, other MFI which are willing and able to achieve
sustainability should be included in the project.

The following proposed project objective would contribute to expanding outreach
and sustainability of microfinance in NTB:

“Operating environment, institutional and human capacities of UPKD are

This objective can be achieved through strengthening village ownership, improving
regulations, supervision and governance of UPKD, and providing access to capacity
building and consulting services. Progress towards this objective will depend on the
strategic decision to promote a commercial approach towards UPKD development,
which shall be guided by the following vision and mission:

-    Vision: UPKD contribute to higher welfare of village households through sustain-
     nable access to financial services, and to the village community through its profits.
-    Mission: UPKD aim at sustainability by increasing income and reducing costs.
     They provide financial services adapted to the demand of village households and
     based on prudent procedures.

The following are the pillars of the proposal:

1. UPKD shall convert from project fund administering “Units” to become service
   and profit-oriented village MFI. To this end, Unit PKD assets are transferred to a
   Village Financial Services Company (Usaha Pelayanan Keuangan Desa, UsPKD).
2. The village owns UsPKD.
3. A small board of commissioners is the highest authority, in which district
   government is a member as long as UsPKD operate with district government
   Agreed Minutes between the Government of the Province of NTB cq. Bappeda and ProFI-Promotion
of Small Financial Institutions concerning “Microfinance Development in the Province of Nusa Tenggara
Barat”, May 17, 2005

Rural Microfinance Development in NTB – Concept and Implementation Strategy

5.1 Rationale

Empowerment and member participation were key project features under IMS-
NTAADP. For the future, it is proposed to put greater emphasis on good banking
practice, so that village households can benefit from ongoing access to finance.

Frequently, sustainable (= cost-covering) provision of financial services and outreach
of these services to poor households are perceived as conflicting objectives.
However, there are many examples which illustrate that a conducive environment
and efficient management can significantly reduce the trade-off between these
objectives. In fact, decades of experience have proven that subsidized loans rarely
reach target groups, repayment rates tend to be low and, thus, funds are quickly
exhausted. On the other hand, it is possible to develop financial institutions which
provide access on a sustainable basis and do not need ongoing subsidies: the poor
are willing and able to pay market-based interest rates, if their demand for savings
and loans is served.

Willingness and potential to achieve sustainability should be the key criteria
for MFI to receive support from the Rural Microfinance Development project.
Sustainability of MFI means that these institutions get sufficient income from lending
activities to cover their costs, including cost for loans which are not repaid, and that
they generate a positive return for their owners, the village community. Actively
increasing repayment rates and charging cost-covering interest rates are key steps
towards sustainability.

Supporting UPKD offers the unique opportunity to build on existing institutions and to
achieve efficiency through replication: all UPKD are confronted with similar
challenges. Additionally, these MFI enjoy attention of government agencies, which is
required to solve legal, regulatory and organization-related questions.

Sustainable MFI do not depend on financial support from third parties, or on the
engagement or charismatic leadership of protagonists. A sustainable system of MFI
will provide for mechanisms that support weak institutions, and allow substituting
persons without endangering the continuation of services.

The market analysis provides evidence that it will be feasible to develop a substantial
part of the UPKD industry into a sustainable system of MFI, by providing a
conducive operating environment, capacity and institution building as well as
facilitating cooperation among MFI and between MFI and other financial institutions.

The development of microfinance systems requires:

-   finance or working capital to run the institutions: UPKD have capital;
-   manpower: UPKD provide experienced manpower;
-   rules and regulations: UPKD work with statutes, bylaws and internal regulations.
-   common institutional bonds: UPKD share in the same history, source of finance,
    regulations and ownership; the Kecamatan Forum is their common platform.

UPKD need attention and assistance because

-   new UPKD are established, but the capital of many UPKD declines;
-   managers need training to manage a market-oriented MFI;
-   regulations need adjustment from project orientation towards business orientation;
-   common activities will make UPKD more efficient and enhance their presence.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Higher Interest Rates on Loans to               If the speculation succeeds (successful
Poor People?                                    harvest), poor people can repay the loan
                                                together with market-based interest. If the
Typically, poor people hesitate to sign a       speculation fails, the lender is responsible for
loan contract. They are not sure that they      the non-prudent loan and, consequently, for
can fulfill the repayment obligations.          their final write-off. This is not only a technical
                                                but also a moral obligation.
A business loan means taking risks
(speculation, no guarantee!) to increase the    The lender has to take these risks into
leverage of work and income. For working        account, if the borrower cannot. The lender
capital loan repayment, borrowers have to       does this when pricing such a loan: if
divest, e.g. selling goods, mostly those that   experience shows that 10% of the loans to
were purchased from the loan. Interest is       poor people are not repaid, the lender can
paid from the difference between purchase       charge an 11.1% extra premium on all loans
and sales price. If the loan-financed goods     to this target group. The additional incomes
die (chicken), or are stolen (merchandise),     from nine debtors balance the loss. The
or become victim of weather (harvest), the      lender manages joint liability. This is one
loan and interest have to be repaid from        reason why loans to poor people carry a
other income sources or by liquidating other    higher interest rate.
assets (collateral).

Often, poor and very poor people do not
have additional income sources or assets        Poor and very poor people especially need
from which they can repay the loan.             assistance to save so they can build reserves
Therefore, extending loans to poor people is    which protect them against economic shocks.
speculative and risky!

5.2 Elements of a Financial Systems Approach for NTB

UPKD provide the unique opportunity to develop a large and coherent group of MFI
into a sustainable system of MFI with significant outreach to poor households.
Realizing this opportunity requires a comprehensive financial systems development
approach. Consequently, decisions have to be taken on expected results of support
in the proposed areas of intervention:

        Institution Building: Business strategy, ownership, governance
        Operating Environment: Policy, regulation, external supervision
        Capacity Building: Management and staff skills

In addition, the roles of the stakeholders in developing UPKD into a sustainable
microfinance system during project support and after phasing out need to be clarified.
Key stakeholders are GoNTB I and II, Village Governments, and UPKD.

The following outlines key issues to be addressed by the project. The following
chapter lays out the implementation strategy to achieve the proposed results.

Institution Building

Business Strategy: It is highly recommended that UPKD develop into commercially-
oriented enterprises. The transformation from project fund administering Units to
demand-oriented enterprises is symbolized by the transfer of UPKD assets to the
new “Village Financial Services Company” (Usaha Pelayanan Keuangan Desa,
UsPKD). This implies less emphasis on community participation. Instead, it implies more
emphasis on prudent credit risk management, as opposed to endangering financial
soundness for social purposes.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

UsPKD shall act as profit-oriented enterprises in order to grow and to enhance
confidence in the institution. Confidence through better performance will be the key to
attract funding, including commercial loans, with the objective to offer more and
better services to its rural community members.

UsPKD profits will be (i) re-invested (increase UsPKD capital) and (ii) transferred to
the village coffers, the only social obligation of the UsPKD. The village government
will decide on the allocation of these profits for general village community
development and for assistance to individuals, for example through subsidizing
interest for target groups, or in the framework of developing particular income-
generating activities.31

Ownership: UsPKD should be 100% village-owned enterprises. The institutions
have been conceived as such by IMS-NTAADP project design. Village ownership is
today more important than ever to mobilize village efforts for better management and
monitoring of UsPKD. To this end, it is very important and urgent to clarify the legal
status of IMS-NTAADP funds. These are currently recorded as a liability of UPKD,
whereas it is not yet clear who originated the loan.

Once the legal basis of fund ownership is clarified, it is recommended to convert the
IMS-NTAADP loan into a long-term sub-ordinate loan – unless the funds constitute
a grant to UPKD and, consequently, equity. The objective is to improve UPKD
performance indicators (Capital Adequacy Ratio, CAR) on which future loans to the
MFI may depend - for BPR, 50% of sub-ordinate loans are considered equity for the
CAR calculation.

Governance: A small board of commissioners shall constitute the highest authority.
The composition of this board depends on the ownership of the IMS-NTAADP funds.
The role of the district government needs to be clarified.

Product Development – Deposit Mobilization: UsPKD shall be allowed to demand
cash collateral as a deposit, i.e. a percentage of the loan amount. UsPKD can use
this deposit for lending. It is recommended to investigate legality, conditions,
possibilities and advantages of UsPKD acting as agents of a bank.

Conflict Management: It is recommended to systematically investigate conflicts that
came up in more than 200 UPKD during six years of operation. The proposed review
of statutes and bylaws (AD/ART) has to address these conflicts and offer solutions.
Frequently, conflicts between commissioners and managers arise. Commissioners
have a strong position, because they employ and dismiss managers, who are
    Presently, UPKD disburse loans at far below market interest rates (1.5% p.m. or lower, indirect
subsidies), although many, perhaps most, borrowers could afford paying higher interest rates.
In future, UsPKD management decides on interest rates based on demand for its products. UsPKD shall
not disburse “subsidized” loans anymore. If the village government wants lower interest rates for target
groups, such as new cottage industries for cashew processing, the village has to transfer funds (subsidy)
to the recipients (or to the UsPKD) so that the target group can afford UsPKD’s commercial interest rate.
Hence, those who can afford a higher (subsidy-free) interest rate contribute via UsPKD profits to a
higher income for the village coffers. This allows the village to assist more people in need. The
economic strong support the economic weak!
This procedure contributes to transparency, and reduces misallocation of subsidy. The influence of the
village government is limited to decide on the profits only, not on the UsPKD’s portfolio or interest policy
itself. This does not exclude that, for example, loan conditions may provide for one or two delayed
installments without additional interest or fine (e.g. if the borrower needs urgently money for settling
hospital bills). This is a feature of the product. This would be different to waivers of late payment fines
that are part of the loan agreement.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

responsible for prudently running the MFI. Special thoughts should be spend on
regulations concerning the process of dismissing managers, in particular the general
manager. Handling political influence will be a particular challenge.32
It is proposed to agree on an organization for conflict facilitation.

Operating Environment

Regulation: The future legal form of UsPKD could be MFI (Lembaga Keuangen
Mikro, LKM) or Village-owned enterprise (Badan Usaha Milik Desa, BUMDES). A
final decision on the legal form of UPKD depends on developments regarding a law
on MFI and implementing regulations on BUMDES, which have not yet been
issued.33 The project protagonists shall lobby for a regulation allowing BUMDES or
LKM to mobilize funds.

For the time being, the SK Bupati and corresponding statutes and bylaws (AD/ART)
will be adapted to the new UsPKD. Cooperatives are less suitable, because they are
private, member-oriented companies from which members benefit, not community-
owned institutions from which the community benefits.

Supervision: The commissioners will contribute to develop and introduce a system
that guarantees regular and periodic off-site and on-site supervision of UsPKD by
competent and qualified independent persons or institutions. In most instances, these
supervisors are not community members.34

GoNTB/district governments and/or village government as commissioners will be
responsible for monitoring UsPKD supervision.

GoNTB should introduce sanctions such as dismissal of managers and closing or
merging UsPKD for deliberate mismanagement.

UsPKD have to contribute to the expenses for supervision.

Capacity Building

The transformation of UPKD from fund administrating project institution into
commercially-oriented MFI requires capacity building in several regards. The project
shall apply a variety of tools to equip UPKD management with the required know-how.

   For example when UPKD managers are advised to stop collecting overdue loans because of an
imminent village head election, or when a village head candidate promises write-offs.
   Since 2001, ProFI has been advocating the legal body of MFI to accommodate non-bank, non-
cooperative financial institutions which mobilize deposits on a small scale. Currently, a feasibility study
on a proposed “3rd (regulatory) window” for such institutions is being carried out. The proposal is based
on a draft National Microfiance Strategy, which has been elaborated by key stakeholders at the national
level and facilitated by ProFI. Law 32/2004 on Local Governance, Article 213, introduces BUMDES
(Badan Usaha Milik Desa) as a legal form for an enterprise owned by the village. Implementing
regulations are pending.
   BP members, community members, have UPKD loans with substantial arrears. They are “involved”,
have vested interest, and are not suitable supervisors.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

On-The-Job Training: At the beginning of cooperation with individual UPKD, and
before asset transfer to UsPKD, a stock-taking of the institution’s portfolio needs to
be undertaken. UPKD staff will trained by the project regarding the necessary
procedures. The process will be followed by a 1-2 week on-the-job training to instill
better credit and portfolio management.

Classroom Training: On-the-job training will be complemented by several
classroom training modules, which could form the basis for a management
certification in the future.

The above outlined concept implies roles for the stakeholders:

GoNTB I and II

-    Will improve the operating environment for UPKD by
     o Clarfying the legal status of IMS-NTAADP funds;
     o Harmonizing the regulatory framework and endorsing the new business
         strategy of UsPKD;
     o Supporting asset transfer to UsPKD by appropriate regulations on asset
     o Strengthening external UsPKD supervision, preferably by assigning this task
         to Bank NTB and providing adequate funding;
-    Will support capacity building of UsPKD by subsidizing training material
     development and/or training of UsPKD management and staff

The Village Government

-    will act as chairman of the board of commissioners, and shall - together with the
     district government - support UsPKD, among others with:
     o urging all government agencies entering the village with programs with
          microfinance components to coordinate with UsPKD, and to employ UsPKD
          services for administration;
     o depositing village budgets with the UsPKD, for which the UsPKD will pay
          interest that do not exceed interest paid by banks;
     o offering sufficiently representative office and electricity; if available;
-    decides on the allocation of UsPKD profits; Village Government will be
     responsible for subsidizing from these profits non-commercial programs so that
     people with low income and insufficient collateral can obtain loans.
-    can charge UsPKD with tasks in their competence as a financial institution,
     including implementation of loan schemes, also non-prudent loaning to non-
     bankable target groups, as long as the village government will settle all deficits
     and losses from these schemes (the village government may also act as loan
-    gives recommendations for loan products, loan conditions, and loan policy, which
     are binding as long as they do not contradict income-orientation and prudent

  The principle is: village government may risk its income (profits from UsPKD, budget, other sources)
but never endanger the viability of the UsPKD.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

-    supervises as first commissioner UsPKD activities and is allowed to gather any
     information on UsPKD activities and procedures for internal purposes;
-    proposes as commissioner the employment and dismissal of managers to the
     regent (Bupati);
-    decides on the fixed salary and a profit- or performance-oriented bonus for the
     UsPKD management.
-    Internal control on whether the UsPKD follows its (the owner’s) policy guideline.


-    UsPKD management will be responsible to earn profits for the village coffers.
-    UsPKD will prioritize service to clients in the community who have no access to
     other sources of formal loans. If funds allow, UsPKD will extend loans to other
     applicants from the same village and from adjacent villages.
-    UsPKD will extend loans to individuals and to joint liability groups 36 following
     prudent procedures.
-    UsPKD management decides on loan products and loan conditions.
-    UsPKD will channel loans the condition of which are determined by third parties
     provided costs, in particular loan risks, are fully covered.

Sequence of Priority Activities

1. GoNTB I and II decide that the post-project phase of IMS-NTAADP has ended.
2. GoI, GoNTB and Village Governments clarify legal status, ownership, and
   conditions attached to PPW and IMS-NTAADP funds administered by UPKD.
3. Unit PKD assets will be transferred to a new Usaha Pelayanan Keuangan Desa
   (UsPKD), a market-oriented sustainable village MFI.
4. GoNTB issues decrees on data collection for loan portfolio classification, and
   write-off procedures for overdue loans, observing the law and best practices.
5. GoNTB, Village Govnernment and UPKD conclude a contract on IMS-NTAADP
   funds. GoNTB provides and continues providing working capital for UsPKD,
   among others through not withdrawing PPW and IMS-NTAADP funds that shall
   remain, e.g. as a sub-ordinate loan, with the UsPKD as long as the UsPKD are
   active. GoNTB may charge interest on these funds the rate of which shall not
   exceed the interest rate state banks offer for savings accounts. The charge must
   not endanger the viability of the UsPKD.
6. Regulations will be developed for unprofitable and unsustainable UsPKD, such
   as transitional management assistance and merger with UsPKD in neighboring
7. GoNTB will appoint the agency in charge for the new project and allocate
   annually funds (budget) to this project, e.g., to Bappeda or to Biro Ekonomi
   (preferably an agency also in charge of BPD Bank NTB and/or BPR-LKP).

   In this respect, it is proposed that group loans are only recorded as such if the group practices group
solidarity and when the group members reconfirm joint and severally liability for their group loan.
Presently, most group loans are loans to individuals with a group leader as loan collector.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

6 Implementation Strategy: Achieving Results

A number of indicators have been agreed between the Government of NTB and
ProFI (BI/GTZ) to measure progress towards Regional Microfinance Development in
NTB. The indicators describe expected results of the project’s activities:

     1.   Improving the quality of MFI services;
     2.   Increasing the number of sound MFI;
     3.   Creating a conducive environment through better regulation and supervision;
     4.   Increasing the cooperation between MFI and other financial institutions;
     5.   Increasing the capacity of MFI to access capital from various sources.

The following strategy addresses key issues for implementation of the proposed
concept, which aims at strengthening UPKD through the financial systems approach.

6.1 Improving Service Quality

Village people prefer convenient services, not products that cost least. The office in
the village with daily office hours, hassle-free administrative procedures (an expired
KTP identity card is accepted), without letters from RT/RW, village head and even
sub-district head, and loan collection services illustrate this convenience.

Product Development: Deposit Mobilization

Villagers request a convenient place, a place close to their home where they can
place their emergency savings and access them almost anytime. This is a key
reason why ATM are popular also in rural areas (sub-district capitals). However, it
has to be considered very carefully if it can be recommended that poor villagers
deposit their savings with an institution that has no deposit insurance.

In order to address the demand for savings products and to increase the UPKD’s
services and assets, it is proposed to investigate the following:

-    implementing a kind of lottery for savings accounts together with other UPKD on
     district or sub-district level, based on the experience that interest earnings are not
     a major motive for saving, whereas the chance to win a prize makes “saving”
-    cooperation with a bank: UPKD act as savings mobilization agent for a bank
-    cooperation with neighboring UPKD to overcome liquidity problems
-    cooperation with other UPKD to realize deposit insurance, for example up to a
     maximum of Rp1m38
-    offering a loan contract instead of a time deposit certificate (circumventing BI
   Many people prefer a small chance (6% winners) of a high return (100%) instead of a high probability
(100% = sure) of a small return (interest rate 6%).
   It might be possible to insure savings up to a certain limit, if at least 50 participating institutions agree
on a cooperation, in which they build up an emergency fund. All participating institutions may contribute
4% of their savings mobilization to this fund and allow the fund manager to perform regular audits (which
are recommended anyway) in order to secure that no mismanagement endangers the UPKD. This 4%
fee can cover claims if 4% (i.e. 2 out of 50 only) of the participating UPKD fail:
Cost for savings mobilization would be high: 6% interest, + 4% administration costs, + 4% insurance, +
2% for audit: total 15%. This amount equals cost of a commercial loan, which however, the UPKD may
not obtain! The insurance should cover a limited amount only in order to protect in particular poor people
(moral hazard stipulation).

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Combined Deposit / Loan Products

It is strongly recommended to ask a minimum 10% deposit as collateral for loans,
which even could be deducted from the loan amount, or for which the loan amount
could be raised. This deposit can bridge an installment period (preventing arrears),
the debtor will own a savings account after loan repayment (richer than before), and
the deposit increases the MFI’s effective interest earned for the loan.

It is recommended to offer a savings-plus-loan product that allows savers after some
time to obtain immediately without further investigation or collateral an emergency
loan twice or three times the balance on the savings account. These loans can be
offered at competitive nominal interest rates, i.e. below those of BRI Unit. This
product is also attractive for MFI because many people open a savings account only
in order to secure access to a loan in case of individual emergency. Most people do
not need to use this loan facility.

For people who are most of all attracted by a low (nominal) interest rate it is
proposed to offer those loans that CU or KopDit promote. These installment loans
with up to 50% cash deposit can be offered at 15% p.a. or 1.25% flat p.m.

Loan Products

At present, UPKD extend loans to individuals in groups. All persons in this group
have the same repayment schedule although their income source and cash flow
differs. It is proposed that UPKD shall serve three types of borrowers:
- joint liability groups;
- individual households, i.e. loans to husband and wife;
- individuals who can provide a guarantor or suitable collateral
Regarding individual loans, UPKD may employ a “group leader” or any other
trustworthy person as a loan collector.

So far, UPKD offer loans only for income generating activities. It is best practice that
MFI offer also loans for non-productive purposes. Especially poor people need
access to funds for “consumptive” purposes, such as house repair, health and
education, and repayment of expensive loans from money lenders.

All villagers without a loan record and those with clean loan records shall be entitled
to a small consumptive loan. This reduces the burden of households that otherwise
have to rely on moneylenders.

Flexibility – (learning from the moneylender)
People with regular income from employment, or traders and shop owners do
normally not face problems to obtain a loan. In contrast, the turnover of many trade
businesses in villages fluctuates seasonally, also with weather conditions, in
particular in rural areas. In particular months, incomes can become too low to settle
monthly installments. Quite a number of these debtors take an expensive short-term
loan from moneylenders just in order to meet their obligation.

In particular in rural areas loan repayment conditions have to be kept flexible. The
obligation to repay an installment loan on time means stress for many rural

Rural Microfinance Development in NTB – Concept and Implementation Strategy

households, in particular if a bank like BRI waves IPTW39-refund. This is one reason
why people prefer the moneylender. His product allows deferring installments without
extra interest or fine (it is already priced in the product). Recently, a commercial bank
offered an installment loan product that also allowed this flexibility.

Money Transfer and Payment Services

Only commercial banks execute money transfer services themselves. UPKD might
offer access to these services to the community through opening an account with a
commercial bank, e.g. BRI Unit for incoming transfers, also from overseas workers. It
is proposed to investigate whether UPKD can become a payment point for electricity
and telephone bills.

6.2 Increasing the Number of Sound MFI

The objective: “increasing the number of sound MFI” will be achieved
- through increasing the number of MFI (limited potential) and
- through improving the soundness of MFI (main training and consultancy activity).

6.2.1 Increasing the Number of MFI

According to information from provincial and district Bappeda, the local government
intends to create additional UPKD, and to support with funds private efforts to
establish UPKD (as happened in Lombok Barat). Supposedly, GoNTB and district
governments will provide Rp2b to Rp4b for the establishment of about 20 new UPKD
until 2008, if these efforts are backed by technical assistance. In the table below, the
new UPKD appear as five additional MFI in each 2006 and 2007, and ten additional
MFI in 2008.

6.2.2 Improving UPKD Soundness (CAMEL)

A common standard to determine the soundness of UPKD has yet to be developed. It
is recommended that this standard should take into consideration the experience that,
in contrast to loans to traders and fixed income earners, poor people in rural areas
require more loan repayment flexibility.

Bank Indonesia’s instructions on BPR rating follow a CAMEL approach. SMoCSME
also bases the soundness of SCC on these rules. Four of the five criteria concern
financial figures, with capital/equity (C) weighing 30% (most important), and assets
(A = portfolio quality) weighing 25%. M = management (weight 20%) is a checklist
regarding mainly internal organization and procedures of the MFI.

UPKD can be assessed using the CAMEL approach. Although UPKD started without
equity, after a number of years, accumulated profits substitute paid-in equity.
However, the loan loss reserves of very few UPKD are sufficient, if one would apply
BI or SMoCSME standards. Even with some adjustments (write-offs), a still optimistic
guess would result in that, most probably, not more than 10 (4-5%) UPKD are sound
or healthy (sehat), perhaps another up to 20 (less than 10%) UPKD are sufficiently
sound (cukup sehat). Without efforts of GoNTB and ProFI to improve the quality of

   Insentif Pembayaran Tepat Waktu, a refund for always paying on time, which amounts to 25% of total
interest payments.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

UPKD, the number of sufficiently/sound UPKD will probably decrease to below 20
units by the end of 2006.

The situation improves when the proposed transfer of assets from UPKD to UsPKD
takes place and the IMS-NTAADP fund becomes a sub-ordinate loan, which, for 50%,
substitutes equity. About 70 UPKD, those with NPL up to 40%40, will achieve a score
that qualifies them as “sufficiently sound” or “sound”.41 Afterwards, the situation will
worsen again. Several loans will turn bad among those up to 60% that perform at the
time of asset transfer.

The following measures would enhance the soundness or CAMEL rating of UPKD:

C: Increasing Capital

UPKD started business without equity. The following would increase UPKD capital:

a) The IMS-NTAADP fund becomes a sub-ordinate loan.
b) Conversion of loan and retained profits to become equity:
   o About 20% of the IMS-NTAADP or PPW loan (after write-off) shall be donated
      to the village and become village-owned UsPKD equity.
   o Retained profits until end of 2005 shall be converted to become UPKD equity.
   o At least 40% of profits shall remain in the UPKD to strengthen capital.

Measures to increase UsPKD profits (see below: “Earnings”) are simultaneously
measures to increase UsPKD capital. It is recommended that UsPKD should aim at a
minimum capital adequacy ratio (CAR) of 15%, or a capital/asset ratio of minimum
20%. A high CAR is an important argument when UsPKD explore sources of
additional (credit) finance.

A: Improving Assets / Portfolio Quality

It is necessary to determine the actual portfolio quality by screening all borrowers and
categorizing them according to repayment prospects.
- A procedure has to be developed and implemented for loans that are regarded
     unrecoverable (write-off).
- It is proposed to introduce loan products that respond flexibly to the cash flow of
     households with irregular income.
- It is necessary to train UsPKD management in identifying and follow-up loans
     with arrears (internal instruments and procedures).
- Introduction of maximum loan amounts to one family, and to one commodity or
- UsPKD management needs to be trained in rating and continuously monitoring
     loan quality.

  See estimate for sustainability in chapter 4.3.4
  These are UPKD with: net equity = 50% x IMS-NTAADP fund – NPL > 15% ;
IMS-NTAADP = 110% x loans (kredit yang diberikan)
50% x 110% loans – 40% NPL = 55% - 40% = 15%

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Improving the portfolio quality

In most instances a low quality portfolio is the result of inappropriate loan conditions.

UPK figures show that 1-2-month arrears account for 70% of all arrears. Provided, the
borrower deposits two installments as cash collateral, the FI can transfer twice installments
from the deposit account to balance arrears on the loan account and no arrears will appear.
The same effect happens if loan conditions allow a debtor to defer twice loan repayment.

As by far most arrears are balanced after two months, alternative loan products reduce
arrears by 2/3 (example: from Rp180.3m to Rp54.8m) and cost, i.e. reserves for bad debt, by
more than 60% (from Rp36.98m to Rp13.46m).

Arrears and risk provisioning for same repayment under different loan conditions
                                                       Risk         Alternative loan condition
                      Amount               Risk
 Delay                                               provision                    Risk provision
                      (Rp m)             provision                   Arrears
                                                      (Rp m)                         (Rp m)
 1-2 installments        125.5   70%         10%        12.55         29.9              2.99
 3-4 installments         29.9   17%         25%         7.48  15.9                         3.98
 5-6 installments        15.9    9%       50%       7.95                                    2.50
 > 6 installments         9.0    5%      100%       9.00                                    4.00
                        180.3                     36.98        54.8                    13.47
From NTB Collectibility Report August 2005, PPK Phase 2, UPK

M: Management

It is proposed to review procedures and forms (tools) and to develop a manual for
UsPKD management. The manual shall also refer to those 25 questions supervisors
check when visiting BPR and SCC. The project will offer in-class and on-the-job
training for improving UsPKD management capacity. By 2008, managers shall have
passed a compulsory test (certification). For suggested in-class training courses
see below.

E: Earnings or Profitability

Asset profitability (Return on Assets, RoA) and operational profitability of many MFI is
high because they work – as UPKD – with subsidized or even interest-free funds.
Unfortunately, the earnings rating could decrease when UsPKD mobilize funds
despite absolute income might increase. Effective income, not a percentage or ratio,
is a more decisive key to achieving soundness, because high income can balance
through generous bad debt provisioning and write-off an otherwise inferior loan
portfolio. Measures to increase UsPKD earnings encompass
- higher income from loans through
    o enforcing penalty and interest payments for loan repayment delays;
    o market-oriented interest rate setting; effective UPKD interest rates are despite
         low amounts and high risks not higher than those charged by BRI Units; they
         are far below interest rates of money lenders; effective interest rates of similar
         loans from non-KUD cooperatives in rural areas are about twice as high;
- additional income from payment services

Rural Microfinance Development in NTB – Concept and Implementation Strategy

-    reducing cost:
     o cost for bad debt reserves through enhanced portfolio quality (collection and
        rescheduling efforts)
     o by adjusting other expenses to income.42

L: Liquidity

Almost all UPKD have no liquidity problem because they can defer new loan
disbursement. There are few short-term liabilities (savings accounts) and no
repayment plan exists for the NTAADP loan fund.


In summary, for increasing the number of sound UPKD it is crucial:

-    to improve loan quality through

     o   bad debt write-off,
     o   repayment-capacity-based loan assessment including the second way out
         (collateral, insurance, joint liability, alternative income),
     o   flexible, cash-flow-oriented loan conditions and cash (deposit) collateral,
     o   loan repayment collection efforts and monitoring procedures,

-    to increase income through

     o   enforced on-time repayment, else charging interest for flexible, and fines for
         delayed payments,
     o   market-oriented interest rates43,

-    to train managers.

Expected Impacts: Development of Sound UsPKD

By any standard, without technical assistance the average soundness and the
number of sound UPKD will further decrease. Typically, for statistical purposes, MFI
without financial transactions will not be closed and evicted from statistics. Most
probably, they will be categorized as “dormant” and the last financial report will
repeatedly be part of the aggregated figure of the annual UPKD report.

   According to UPKD bylaws the managers’ honorarium is a percentage of gross interest income. They
receive a very low income when many borrowers do not pay their installments, just when the
engagement of UPKD managers is urgently required. It is suggested to review this provision.
   It is recommended that not the government decides on the interest rate rural people can pay. The
decision has to be made by the people themselves. They vote for it by accepting the products and

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Table 18: Increasing the Number of Sound MFI
 Category                    Year            2005                    2006         2007            2008
 sehat                   Unit PKD                 10             5
 sound                              Usaha PKD                               15           30           40
 sukup sehat,            Unit PKD                 20             10
 sufficiently sound                 Usaha PKD                               25           40           50
 kurang sehat            Unit PKD                 40             20              10           5
 less sound                         Usaha PKD                               30           45           60
 tidak sehat             Unit PKD                 175            140             115          90
 unsound                            Usaha PKD                                5           15           20
                         Unit PKD                 245            175             125          95
                                    Usaha PKD                0              75          130          170
 Total                                                 245            250             255          265

In 2006, the proposed project plans to assess more than 100 Unit PKD. It is expected
that 75 Unit PKD qualify to become Usaha PKD (including five new entrants), among
others finished portfolio assessment) whereas some 25 remain Unit PKD (not viable,
not transparent). Out of these 75 it is estimated that 15 are sound, 25 sufficiently
sound, 30 less sound, and 5 unsound (dropouts, assistance was not successful). The
number of unsound Unit PKD decreases from 160 to 125 Unit PKD.

Towards the end of the project (2008) the number of “sound” and “sufficiently sound”
UsPKD increases to 40 + 50 = 90, or 200% more than 2005. The number of “less
sound” Units drops to 5, UsPKD increases to 60, because some of the “unsound”
ones improve their performance.44 By the end of 2008, some 150 UsPKD (less sound,
sufficiently sound, sound) will render services in rural areas of NTB.

Training requirements

The transfer from UPKD to become sound and sustainable UsPKD requires training
support. Project staff shall provide on-the-job training and coaching (six months x
average 3 days), and once monthly one day for training (bookkeeping, reporting),
information campaigns, and meetings for exchanging experience on sub-district level
(Forum UPKD).

With respect to a qualification and certification of UsPKD managers it is proposed to
develop training material (modules) covering about eight topics with most of them
centering on loans:
Focus 1-3: features of loan products, analysis of rural households economy,
business loans vs. loans to households, characteristics of main local commodities,
collateral and collateral substitutes, pricing and other conditions, monitoring and
supervision, contractual issues, bad debt management and loan recovery, risk
management, etc.
Focus 4: UsPKD CAMEL-rating and internal monitoring and evaluation.
Focus 5: Target-oriented planning and incentive setting
Focus 6: Internal supervision, audit and controlling
Focus 7: Ethics and responsible loans to poor
Focus 8: Communication and conflict management

   It is a progress when the number of less sound MFI increases if this is a result from improving
unsound UPKD.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

It is suggested to present the topics in 2-day packages. Over a period of two years
UsPKD management shall participate in training measures as follows:

Table 19: Suggested training measures
 Training                                             days          total
 - General manager,      modules          5             2            10
 - Finance manager,      modules          3             2             6
 - Secretary,            modules          3             2             6
 Total training sessions per UsPKD       11             2            22
 200 UsPKD x 11 modules/topics         2,200        no. of participants
 Class-size per session (participants)   20
 Training sessions /2 years             110
 Training sessions / year                55         about 1/week
 Training days / year (2d/session)      110
 = 2 persons half-time                              1 session = 2 trainers

Each UsPKD sends three managers to participate in 11 training sessions. Assuming
that 200 UsPKD join, 600 persons will be trained in 110 training sessions with 20
managers per session. Training takes place on 110 days per year and employs two
half-time trainers for two years. The following years, demand from UsPKD for in-class
training will drop by 60 – 70%.

Further training and upgrading measures concern:
- about 20 – 25 district based UsPKD supervisors,
- about 20 – 30 district based government officers supervising, monitoring, and
    evaluating UsPKD development,
- some 200 village heads and sub/district as UsPKD commissioners.
- government agencies with regard to monitoring and evaluation

6.3 Operating Environment: Regulation and Supervision

A conducive operating environment is based on:

-   transparent decision-making and flow of funds
-   easy access to comprehensive written information
-   sensible regulations that are easy to comply with
-   supervision
-   enforcement of regulations

UPKD are institutions created by a project for channeling funds to poor peasants. In
most locations people view UPKD as an entity left over by a project, not as a
sustainable village-based MFI. This impression is backed by the fact that there was
no clear concept for the time after project closure, namely unwinding or development
towards sustainability. Still, the government monitors UPKD development, in contrast
to many other government programs that provided revolving funds to groups but
were left unattended after some time. However, in the absence of “their” project,
villagers, village governments, and UPKD management lack a sense of ownership.

Problems and weaknesses of the organization and its set-up as a temporary
institution for a particular project phase are reflected in the Bupati Bima Decree on

Rural Microfinance Development in NTB – Concept and Implementation Strategy

UPKD45 issued three months after closure of the project. Nevertheless, this decree,
which included statutes, bylaws and procedures for UPKD, contributed to a
conducive operating environment.

6.3.1 Regulation

Three sets of regulations require attention, (i) those regarding UsPKD incorporation
and portfolio verification, (ii) clarification on the present and future ownership and
legal status of the IMS-NTAADP fund, and (iii) issues concerning savings and
deposits with non-bank organizations.

UsPKD Incorporation

-    Should GoNTB support this proposal, it is proposed that the Governor issues an
     instruction in support of UPKD loan portfolio verification.
-    The new UsPKD require a legal foundation, mission, vision, organization and
     operation that should not differ from district to district. UsPKD will work in all
     districts, consequently, it is recommended to consider issuing a temporary
     provincial regulation for UsPKD and its statutes as well as a general guideline
     for bylaws, which may slightly differ among the villages.
-    The new statutes should be a result from reviewing regulations (statutes and
     bylaws) that are valid now and the actual practice. Reasons for deviations should
     be discussed and understood.
-    It is proposed to re-open the case when the Law on MFI and regulations
     concerning BUMDES are issued.
-    Another instruction is required, which refers to the assets transfer from UPKD to
     UsPKD. In particular the question of how to handle bad debt and write-off needs
     an answer.


The foundations under which UPKD operate IMS-NTAADP funds are entirely unclear:
Opinions and perceptions among government institutions, UPKD management, and
beneficiaries (debtors) differ fundamentally. Few people are aware of the fact that the
IMS-NTAADP fund origins from a loan, which GoI has to repay with interest.

For example, many misunderstand the decree, according to which funds obtained
from IMS-NTAADP and administered by UPKD become assets, not property (milik),
of the people where the UPKD are located.46 Therefore, UPKD do not own the IMS-
NTAADP funds, which consequently have to be booked as liability. The legal owner,
namely the person(s) or institution that (has/ve to) record the fund as assets in
its/their balance sheet, remains hidden. It seems that the district government is the
fund’s owner because - should UPKD be “not sound” (no definition given) - the
district government is entitled to withdraw the fund.47 The wording “bantuan modal”
(capital assistance) for the IMS-NTAADP fund contributes to the interpretation that it
is a grant, whereas it is a credit or loan - without interest and without repayment date.

   See comments on SK Bupati in Annex 8
   SK Bupati, Ps. 12 (3): Dana yang dikelola oleh UPKD yang bersumber dari Program IMS-NTAADP
adalah menjadi asset masyarakat desa lokasi UPKD.
   SK Bupati, Ps. 12 (5): Jika sewaktu-waktu dana abadi (modal abadi) seperti dimaksud ayat (3) pasal
ini tidak mampu dikelola (UPKD dinilai tidak sehat), maka dana tersebut dapat ditarik oleh Pemerintah

Rural Microfinance Development in NTB – Concept and Implementation Strategy

People know that the local government is not the fund’s origin. They think that it is a
World Bank = donor = grant for them, even not for the UPKD, and they do not feel
obliged to repay a “bantuan modal” project loan. People need to be properly informed.

The threat to withdraw the loan fund from “unsound” UPKD (SK Bupati) should be
reviewed. Upon announcement, borrowers will immediately stop their loan service.
UPKD management will not be available for assistance, and the money in the cash
box and on the bank savings account will probably not suffice to settle claims from
depositors. It is proposed to abstain from regulations that cannot fully be enforced.

It is recommended to review all rules concerning the fund, its ownership,
management, and operating directives. It is suggested to explore whether the
fund, or part of it, could become village property. The village could conclude a
loan contract with UPKD, tenor 10 years, option for another 10 years, interest 2%
p.a., in order to secure income for the village. A provision should allow village
government to withdraw the fund should the UPKD record losses exceeding x% of
the fund. For the village government it is easier to collect overdues.

Deposit Mobilization

Bank law allows only banks to mobilize deposits from the public (masyarakat).
Members of cooperatives, in accordance with regulations, keep deposits with their
(and even other!) cooperatives. It is tolerated that a provincial decree enables Bali’s
LPD to accept deposits from community members. A proposed Law on MFI that
would allow non-bank FI to offer deposit products has not yet passed parliament.

It is proposed that UsPKD accept deposits from community members in analogy to
LPD that mobilize funds from people in the Adat village, and in analogy to
cooperatives that are allowed to accept deposits from members.

6.3.2 Supervision

Supervision is a general term for several on-site and off-site tasks to secure that no
deviation from agreed objectives, rules, regulations and procedures occur.

The different perceptions on the ownership of the IMS-NTAADP funds, which UPKD
administer, are reflected in the way these MFI are supervised and controlled:

-   UPKD are not audited.
-   UPKD are FI but not supervised by MoF or BI, or by another bank on behalf of BI.
-   UPKD are not cooperatives and not supervised by the Agency for Cooperatives.
    However, since 2005, the Agency of Cooperatives monitors UPKD in Lombok
-   District Bappeda, coordinating agency of the IMS-NTAADP, still monitors and
    supervises UPKD. Bappeda represents Tim Pembina. According to the
    organizational structure, the district government’s Tim Pembina is an UPKD’s
    highest authority, still above Musdes.
-   Tim Pembina monitors UPKD development through reporting (off-site) and
    intervenes on-site if it is asked, or if it feels the necessity, for example, if financial
    irregularities are uncovered. Former project consultants assist in supervision.
    Budget allocations are limited (e.g., less than Rp100m for all UPKD related
    activities in one district) and not available in the first half of the year.
-   In some districts, on Bappeda request (also on request of other parties),
    Bawasda was involved in inspections on embezzlements, because the IMS-

Rural Microfinance Development in NTB – Concept and Implementation Strategy

     NTAADP fund or loan fund was regarded as government property, at least until
     the end of the project.
-    According to UPKD statutes, Musdes is the highest authority, in several respects
     comparable to a board of commissioners. According to UPKD bylaws, Musdes
     appoints a team of three persons (chairman and two members) as Badan
     Pengawas (Supervisory Board, BP-UPKD) to oversee and examine UPKD
     activities. BP-UPKD might be what banks call audit committee or internal audit.
     In some UPKD, the inspectors seem to be omnipresent, whereas in others they
     do not check the UPKD at least once in three months48, and submit a report to
     the UPKD village founders (Pembina Desa) as bylaws demand.

Supervision or internal audit of UPKD by BP-UPKD failed in most instances.49
The failure has several reasons:

-    BP personnel did not apply for this position but were appointed by Musdes –
     even in absence, according to one report.
-    BP personnel was not appointed because of qualification.
-    Despite in-class training the task was too demanding for many BP members.
     Some of them admitted that upon returning from in-class training they could not
     implement their newly acquired knowledge. Qualified and engaged BP could well
     have contributed to above average performance of successful UPKD.50
-    BP itself was not supervised. In most instances, there was no feedback on the
     BP’s activities – or the lack thereof. Admittedly, the sheer presence of BP had
     certainly a preventive character.
-    BP personnel are involved in multiple loan disbursement and they are debtors
     with noteworthy arrears.
-    BP personnel prefer living in the village in harmony rather than provoking conflicts
     and making enemies.

Several days in-class training of three BP persons is certainly not efficient if their task
– should they really perform it – will take not more than one day per supervisor per
month on average. UPKD are too small to employ internal supervisors/auditors, and
their revenues are too low to pay professional external auditors. Therefore, it is
proposed that ten to twenty UPKD share external supervisors or auditors, and,
at least partly, the expenses.

Effective supervision is determined by the following elements:

-    Off-site supervision through reporting and analysis of these reports;
-    On-site supervision, i.e. supervisors visit the UPKD premises and borrowers;
-    Regular supervision, i.e. periodically: monthly reports, annual visits;
-    Irregular supervision, i.e. irregular reports on request, unannounced visits;
-    Definition of subject of supervision, e.g. performance indicators;
-    Sanctions and enforcement of sanctions; penalties should not be charged to
     general costs, and the recipient should be made known (ART imposes a fine for
     sending report delayed).
-    Monitoring supervision activities, and supervision of supervisors

  According to UPKD bylaws, BP-UPKD job description
   See also Annex 7 on the UPKD Management Survey.
   UPKD Periri, the BP chairman was manager of a savings and credit cooperative

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Investment in supervision, although costly, has a high return:

-    One non- or semi-professional (by formal education) but trained supervision team
     will cost about Rp40-50m annually.
-    This translates to around Rp3m per year for each of about 15 UPKD.
-    For 230 UPKD supervision would cost Rp690m per year.
-    Total cost for supervision for six years (2000-2005) would amount to Rp4,140m.
-    During this time, UPKD had loan losses of about Rp12,000m to Rp24,000m (or
     even much more if one takes into account lost interest revenues).
-    Supervision might have prevented perhaps 70% of this loss, i.e. Rp8,400m to
     Rp16,800m, twice to four times the amount for qualified supervision.
-    Therefore, each Rp invested into effective supervision would have saved two to
     four Rp or even more, probably six Rp, if lost interest earnings are added.

Implementing Supervision

Effective supervision and control requires tools, expertise and experience. The
following are recommendations as a consequence of the unsatisfactory performance
of internal supervision/audit (BP-UPKD):
- The UPKD chairman controls (internal controlling) activities of the other
     managers and staff.
- One of the UPKD managers is responsible for controlling adherence to rules,
     regulations and procedures based on the manual or UPKD handbook
     (“compliance director”).
- The commissioners are responsible for that they receive periodically, at least
     quarterly, reports from supervisors.
- A person appointed by the village government shall be responsible for
     investigating whether the UPKD follows the “political guideline”, such as priority
     loans to certain groups and sectors. This person is preferably UPKD
     commissioner (or appointed by a commissioner).
- Internal supervision is externalized, sub-contracted or outsourced. The
     supervisors review and audit compliance. For their work they will be equipped
     with a manual or handbook that still needs to be written. 51
     The quality of UPKD supervision or internal audit can be professionalized through:
     o Supervisor candidates apply for this position. They are not appointed. They
         are selected; because of their capacity.
     o Supervisors are qualified persons. They have proven experience in other
         organizations, e.g. cooperatives, and they have a record of participating in
         training measures and related seminars.
     o Supervisors will be offered a full-time job with full-time payment.
     o Supervisors must not supervise the UPKD where they obtained a loan.52

Organizing Supervision Teams
A head supervision teams is responsible for training, information, coordination,
monitoring and inspection of the supervision teams’ work. This is a crucial position,
because this person will become responsible for the supervision system, i.e. that
supervision takes place. This person should have the authority to dismiss a

   This handbook could perhaps be written based on experience of BPD Bank NTB’s internal
supervisors or by BI’s BPR supervisors.
   Alternatively, supervisors have to report on the status of their and their family member’s loans.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Supervisors come in a team of two. It is estimated that, initially, external UPKD
supervision requires 2 days per month (4 man days), and, latest after twelve months,
about 1 day per month for the supervision of one UPKD (equivalent to six man days
quarterly). Thus, one supervision team starts overseeing 10 UPKD and ends up with
20 UPKD. About nine teams, approximately one team in every district, are required
for about 170 active Unshaped in 2008, when technical support from the project

The following alternatives secure the implementation of effective and efficient UPKD
supervision (internal audit):

Independent (fully UPKD financed)

     1. Under the umbrella of Forum Kecamatan and Forum Kabupaten, UPKD
        establish, re-organize and finance their supervision. UPKD are already used
        to provide honorarium for their BP-teams. In a first step all interested BP-
        UPKD members in a sub-district are invited to apply for becoming full-time
        UPKD supervisor candidate. In a second step, the most suitable sub-district
        candidates would then compete with BP-UPKD candidates from other sub-
        districts in the final selection of two to four UPKD district supervisors.
        (Simultaneously, supervisors on district level could represent UPKD Forum
        and engage in and organize activities.) The final third step would then see the
        district supervisors appointing a superior or contracting a public accountant to
        become the professional supervisor, advisor, consultant, and coordinator. The
        bottom-up approach needs more technical assistance (training hitherto non-
        professional supervisors) and requires support, goodwill and coordination
        capacity on part of all UPKD. Probably, this is one of the less expensive

     2. UPKD identify managers or supervisors of Dinas Koperasi-rated cooperatives
        with substantial savings and credit activities for conducting these internal

     3. UPKD representatives from all districts contract a public accountant who
        offers supervisory services and organizes cooperation with accountants or
        special trained teams in all district capitals. (BDS 54 -concept) This system
        could become a more expensive one.

Government Assistance

     4. The government is owner of the UPKD-administered IMS-NTAADP fund and
        has the right and obligation to supervise the institutions working with this fund.
        Consequently, UPKD supervisors could be attached to or even employed by
        district government supervision authorities such as Bawasda or Dinas
        Koperasi and enjoy logistic support (office). The coordinator would be
        attached to the respective provincial authority.

   For comparison, in Bali, about 60 supervisors oversee about 1,200 LPD, a relationship of 1 supervisor
for 10 MFI.
   Business Development Services

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Bank Assistance

    5. Similar to the LPD model in Bali, UPKD can be regarded as part of the
       government-owned financial system in NTB. The coordinator of supervisors
       would be attached to BPD Bank NTB’s head office, internal audit department.
       The supervisors would be attached to the branches. One branch would have
       to employ two staffs for supervising about 20 UPKD. These teams, if
       employed by BPD Bank NTB, are the most professional (probably over-
       qualified) and perhaps the most expensive choice. They cost distinctly more
       than Rp100m annually, a costly alternative even if BPD Bank NTB would
       benefit from synergies through extending loans to UPKD.

    6. BPR-LKP could arrange and take over UPKD supervision. On average, one
       BPR-LPK would supervise five UPKD. Unfortunately, this promising
       alternative can be discussed only after BPR-LKP reorganization, perhaps in

    7. As a pilot project for future non-bank MFI supervision, BI engages in providing
       assistance for the organization of UPKD supervision. In this scenario BI would
       take over the task of head supervision teams until a new superintendent
       agency supervises FI.

Financing Supervision
It is projected that supervision (internal audit) for 170 performing UPKD may cost
about Rp500m annually. Approximately 15 to 25 qualified supervisors (ratio < 10:1)
will be employed (against more than 700 BP members at present). This compares to
about 60 persons supervising Bali’s about 1,200 LPD (ratio about 20:1), which are
also much larger. The costs may be shared as follows:
- Total cost divided by the number of UPKD: Each MFI has to pay Rp3m per year
     or Rp250,000 per month. This amount is quite high for UPKD with assets below
- UPKD pay 2% p.a. interest for the income earning part of the IMS-NTAADP loan
     fund, i.e. in total approximately Rp25b x 2% = Rp500m for the system. UPKD
     with higher share in the loan fund and higher interest income have probably also
     more transactions to be checked, and consequently pay more.
- UPKD pay a contribution amounting to 2% of the net loan portfolio (outstanding
     loans minus reserves for bad debt). This regulation takes into account loan fund
     repayment or additional funds mobilization or new loans for onlending.

6.4 UPKD in the Regional Financial System

BPD Bank NTB, BPR-LKP, LKP, and UPKD have in common that they have no
private owner. The province and the districts are owners of BPD Bank NTB, BPR-
LKP, and LKP. The future UPKD ownership needs to be determined. BI’s connected
party exposure limits are not applicable for transactions between UsPKD with BPD
Bank NTB or BPR-LKP because of different ownership.

The products of government-owned financial institutions complement each
other. A micro entrepreneur might get the first loan from UsPKD. When the finance
requirements exceed UsPKD’s competence, UsPKD might issue a recommendation
letter and attach the investor’s credit history file in order to facilitate a loan at the

Rural Microfinance Development in NTB – Concept and Implementation Strategy

nearest BPR-LKP. UsPKD could also take over for other financial institutions loan
monitoring and loan collection talks.

Similarly, BPR-LKP might refer to UsPKD should a loan applicant ask for a facility
below Rp1m. The clients remain in an association of government-owned financial
institutions. In this field, the government is not competing with other private financial
institutions, because no other contender offers financial services from village to
provincial capital. All parties might benefit from synergies.

It is proposed that UsPKD participate in, or even spearhead, a mutual sub-district
based loan information system to reduce instances of double financing. It could
become a task of Forum Kecamatan to provide the turntable for information. Similarly,
Forum Kecamatan or Forum Kabupaten can become a place to collect and evaluate
data on loans and loan performance. These data can serve as a source to build a
loan-scoring model. Scoring can contribute to easier, faster and a more reliable loan
assessment, from which especially people without physical collateral can benefit.

Cooperation among UsPKD needs to be made visible and expressed in a joint logo.

                                                                        Loan range
                Level               Government-owned
                                                                          Rp m
                                    financial institutions

                                        BPD Bank NTB
 Provincial capital                                                           > 200

 District capital               BPD branch         BPD branch                  20 - 200

                         BPR-LKP            BPR-LKP          BPR-LKP             2.0 - 20

 Village        UsPKD             UsPKD               UsPKD              UsPKD        0.2 - 2.0

6.5 UPKD Access to Finance

Project / Program Funds

UPKD is a government-financed FI with staff trained with government funds. This
institution could offer its services to administer (revolving) funds of other government
programs. As the FI, namely UPKD, already exists with experienced staff (no need to
be trained anew in bookkeeping, loan disbursement procedures, etc.), sector
programs can focus on sector specific issues. For example, for a program to provide
assistance to fishermen, fishery extension service does not need to be concerned
with managing finance of a SCG, and training fishermen (three managers, three
internal supervisors per village) to become micro bankers.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Bank Loans

According to estimates of 60 UPKD managers, the average village has an unmet
micro loan demand of about Rp350m. Thus the potential micro loan demand in
NTB’s 800 villages amounts to Rp280b. Banks cannot fulfill this demand for small
micro loans. UPKD, if provided with the means, can accelerate rural development
through the provision of the financial services rural people request.

Currently, UPKD cannot obtain a bank loan. First, no bank will consider a loan
without a final solution to the UPKD ownership issue. Second, still many banks
assess loan requests based on 5C, and therefore, FI will find it difficult to obtain a
loan. Although meanwhile, some 30 banks learned to assess BPR (MFI) based on
CAMEL, they prefer financing those BPR whose rating is “sound” since two or more
years. Therefore, it is important that UPKD management understands CAMEL rating,
manages and monitors the MFI respectively.

BPD Bank NTB may also look for opportunities to extend financing SME, including
financing creditworthy UPKD. Should BPD Bank NTB engage in UPKD supervision,
this bank would have sufficient in-depth information upon which a loan decision can
be based. Measured by the performance of even the best UPKD, it is unlikely and not
realistic to expect that they will obtain commercial bank financing before end of 2007.

Some argue that commercial bank loans that cost perhaps 15%-18% p.a. (including
fees) are too expensive. Most UPKD managers believe that they cannot earn a profit
from these funds. They had in mind that these loans need to be repaid in monthly
installments. When offering the prospect of a flexible55 3-year loan at 18% p.a. (1.5%
p.m.) some changed their mind. They could identify potential clients who would pay
3% or 4% per month for non-installment loans. If offered, they would immediately
accept the price for this loan type.

Other Sources

Before applying for a bank loan, UPKD should also tap other sources of low-cost
funds such as SME-loans from KUB (Lombok Timur) or from state-owned
enterprises. 56 PNM extends loans to MFI, however, at almost commercial interest
rates. In this respect the UPKD Kecamatan or Kabupaten Forum could lobby for
support and lead an information and promotion campaign. It would probably be too
ambitious to develop Kabupaten Forum to become an UsPKD apex organization
within three years.

   A kind of current account loan with repayment anytime and interest charged based on actual
outstanding amounts.
   State-owned enterprises (BUMN) are obliged to set aside 1%-5% of their profits for SME support.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

7 Implementation 2006-2008

The project shall assist introducing the following key success elements in UsPKD:

-   transparent decision making;
-   transparent accounting;
-   performance monitoring;
-   performance-based incentives;
-   regular and irregular supervision/audit;
-   effective sanctions.

The proposed project will have several overlapping sequences or phases, because it
is recommended to start in a pilot area, and learn from experience before scaling-up.
The project will carry out different activities at the same time, but in different locations.
The sustainability of MFI, here: UsPKD, in NTB shall be achieved through (i) asset
verification, (ii) on-the-job training (business-orientation), (iii) consultation (problem
solving), (iv) co-operation among MFI (supervision) and with other FI. Provision of
tools (manuals), in-class training, and certification are accompanying measures to
achieve sustainability.

7.1 UPKD Development and Enabling Environment

The project simultaneously aims at developing UPKD as village-based MFI and
improving the environment in which UPKD operate.

1) UPKD Development: Institution and Capacity Building

-   Inventory of assets of the “Units”, in particular the loan portfolio, by visiting all
    debtors individually; assessment of the individual loan and its book value;
-   Transfer of assets from UnitPKD to UsahaPKD, new opening balance sheet;
-   Development of manual for UsahaPKD and on-the-job training;
-   Consultation (stabilizing through problem solving, performance improvement);
-   Strengthening cooperation among UPKD through association or Forum UPKD;
    o externalization of internal supervision and audit;
    o human resources development towards certifying staff and UPKD (in-class
    o lobbying for support and access to funds;
    o data base establishment for information exchange with other banks and
        developing credit scoring;
-   Cooperation with banks in technical (data exchange, HRD) and financial (loan,
    savings) matters.

2) Enabling Environment

-   Information campaign;
-   Decrees or orders/instructions regarding loan portfolio revision;
-   Regulations concerning IMS-NTAADP fund ownership and handling bad debt;
-   Decrees and recommendations regarding UsPKD mission, vision, statutes and
-   Regulations regarding UPKD ownership and incorporation (BUMDES, MFI/LKM)
-   Regulations regarding savings services;
-   Regulations regarding UPKD monitoring and supervision.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

7.2 Sequence of Activities

The following is the proposed sequence of activities:

0      Pre-project phase
Consultations with GoNTB in order to agree on common objectives and basic project
design (see Chapter 5)

1      Preparation (Month 1-2)
Decision on pilot project locations
Informing about 15 village governments and UPKD managements
Affirmation of cooperation
Recruitment of three project staff, familiarization and training

2      Test Phase (Month 3-5)
a) Transfer of assets from UPKD to UsPKD, portfolio assessment, in pilot villages
b) Revision of UPKD manual and adoption to a profit-oriented MFI
c) Development of action plans for debt bad collection
d) On-the-job training

The project approach will be tested with 12 UPKD in pilot areas. This experience is
required to decide on further steps, in particular regarding project staff requirements
before expanding the project to all districts. By then it will be possible to estimate the
percentage of participating and promising UPKD. The project will also know whether
time allocations were realistic or need to be adjusted.

3      Multiplication (Month 6 onwards)
a) Transfer of assets from UPKD to UsPKD, portfolio assessment
b) Revision of UPKD manual and adoption to a profit-oriented MFI
c) On-the-job training
d) Consulting
e) Development of training material

4       Stabilizing towards Sustainability
a) In-class training, qualification and certification
b) Implementing internal audit/supervision,
c) Empowerment of UPKD Forum or association (training, consultation, coordination,

Parallel to activities that involve UsPKD managers, the project in cooperation with
relevant government authorities, shall develop suitable regulations governing UsPKD
and establish a supervision, monitoring and evaluation system.

7.3 Draft Concept: Implementation Phase

A project director (ProD) will be the responsible coordinator for the project’s activities.
In cooperation with government agencies, the ProD will, among others:
- coordinate with government agencies; socialization of the program in villages;
- represent and present the project;
- employ, guide, supervise, evaluate three MFA (Microfinance Advisors), starting
    Month 2;

Rural Microfinance Development in NTB – Concept and Implementation Strategy

-   employ, guide, supervise and evaluate the performance of up to three project
    deputy directors (ProDD or MFA team leaders) and 18 MFA (starting Month 4 - 6);
-   organize training, seminars, workshops, study tours (mainly within the district);
-   administer office affairs and project funds;
-   monitor and reporting project progress.

Draft Schedule for Project Pilot and Implementation Phase (for discussion)

Month 1
- Appointment of project director (ProD)
- Project preparation (procurement, logistics etc.)
- Selection/recruitment of three field workers / Microfinance Advisor (MFA)
- With government agencies, visit preparations to present the project
- Visits and negotiations with MusDes and UPKD

Month 2
- Portfolio review agreements with MusDes in at least six villages in Lombok Barat
- Preparation of forms for portfolio assessment, test runs together with UPKD (It is
   important that ProD visits a number of debtors himself.)
- Employment and training of three MFA

Month 3
- Each MFA assists two UPKD (2 UPKD x about 7-10 days)
- Securing agreements with at least three more MusDes
- ProD six days in the field supervising each MFA for two days (supervising and advising
   MFA is a major task of the superior, especially at the beginning of the assignment.)
- ProD collects information for a review of the operation manual for UPKD based on inputs
   from UPKD and MFA (month 3 – 5)
- Decision on ending or prolonging the pilot test phase

Month 4
- Each of the three MFA assists three UPKD (2 UPKD x about 4-5 days – reduced intensity
   -+ 1 “new” UPKD x 7-10 days)
- Selection / recruitment of at least six new MFA
- Selection / recruitment of one to three Project Deputy Directors (ProDD)
- Securing agreements with at least three more Musdes
- Decision on the districts to which the project will expand in Month 6
- Decision on handling bad debt from IMS-NTAADP (write-off procedures)

Month 5
- Each MFA assists four UPKD (3 UPKD x about 3-5 days + 1 UPKD 7-10 days)
- Employment and training six new MFA, accompanying the experienced MFA
- Employment and introducing one ProDD
- Securing agreements with at least twelve more Musdes
- Finalizing draft UPKD manual

Month 6
- Assistance to 24 UPKD:
- New MFA assist each two UPKD (6 new MFA x 2 UPKD = 12 UPKD)
- Experienced MFA assist each four UPKD (3 MFA x 4 UPKD = 12 UPKD)
- Securing agreements with at least six more Musdes
- Experienced MFA provide on-the-job training using the draft UPKD manual for those
   UPKD that finalized portfolio assessment.

At the end of Month 6
- one ProD coordinates the project and supervises three ProDD and three MFA directly
- three ProDD each coordinate and supervise six MFA
- about 24 UPKD receive project support

Rural Microfinance Development in NTB – Concept and Implementation Strategy

During a 3-month pilot phase, it is proposed to allocate two MFA to the district
Lombok Barat and one MFA to Lombok Tengah57 because of:
- proximity to provincial agencies;
- superior infrastructure;
- short distances (higher efficiency);
- district government proved its strong commitment in UPKD development;
- district government still employs UPKD facilitators;
- establishment of new UPKD is supported with funds from district budget;
- different government agencies responsible (Bappeda and Dinas Koperasi)
- almost all UPKD own computers, many UPKD mangers have motorcycles;
- experience on UPKD transformation can be gathered in different environments:
   o UPKD work in regions in which many other MFI are active;
   o UPKD in adjacent villages show extremely different performance;
   o UPKD operate in dry areas (low income).

7.4 UPKD Portfolio Verification and Assessment

Transparent accounting is a pillar for successful and sustainable MFI.

Provincial and district governments will promote the proposed changes and invite
MusDes for consultations. ProD will support this information campaign with the
preparation of presentations for MusDes. One of the major project uncertainties is,
whether it will be possible to arrange a MusDes meeting on short notice and to obtain
Musdes support (see also Annex 11: MusDes meetings regulations). There are
reports that MusDes members obtained loans, often not according to regulations,
which are not repaid according to schedule. The extent of irregularities is unknown,
but one has to expect reluctance and even resistance. UPKD improvement is unlikely
without MusDes support.

Because of these consultations, it is expected that MusDes will agree at least to the
proposed portfolio “stocktaking”. More than 80% of UPKD assets are loan contracts
with groups, i.e. documents signed by the group chairmen and group members. The
identity of the individual debtors, their address or homes, the validity of their
signatures, and the individual loan account balances need reconfirmation.

The project will develop, test (and adjust, if necessary) inventory forms, which will
contain all relevant details of the loan and borrower, such as income, collateral (land
ownership, condition of home as poverty indicator, appliances, other assets) and
repayment capacity. The debtors, ideally together with spouse, will be asked when
and how (source) they intend to settle overdues. These data serve to decide on
proposing a rescheduling agreement or write-offs. Therefore, it is indispensable to
pay a visit to the homes of the debtors.

The microfinance advisors (MFA, project field staff) together with UPKD managers,
staff, BP, and group leaders will elaborate a schedule or action plan to visit all
debtors. For at least one week, the MFA together with UPKD (manager, staff, BP,
group leaders) will visit as many debtors as possible and train handling the “inventory
forms” on the job. Afterwards, UPKD will continue this “stocktaking” on their own.
Based on one week experience it will be possible to agree on a date (commitment of
   Lombok Barat has 30 UPKD, out of which some 20 UPKD participate (assumption). One
microfinance advisor (MFA) can handle about 10-15 UPKD. Consequently, one MFA will be
allocated to the northern part of LoBar, another one to the southern part of the district. The
third MFA will be employed in LoTeng.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

UPKD), when “stocktaking” will be finished. The MFA will return after one week for
two or three days to review the progress and verify on the spot the data that were
meanwhile collected without their presence, e.g. by checking 10% of the “inventory
cards”. This check is indispensable. Irregularities have to be reported, sanctions to
be applied (e.g., blacklisting for future loans and participation in support schemes of
government agencies). 58 ProD has to check the work of the UPKD and the MFA
himself by reviewing 1-2% of the loans.

It is estimated that it takes from less than one month to up to two months for a UPKD
to complete “stocktaking”. It depends on the number of individual borrowers
(estimated 500 per UPKD), commitment (number of persons that will be mobilized for
the task, the time they can make available for the job), distances to borrowers,
seasons (farmer work in the field), arrears (more time-consuming), etc. and results of
re-checks by MFA and ProD. In particular the engagement of group leaders will be

It is expected that during the project’s pilot phase the local government issues
regulations regarding the handling of bad debt and transferring assets from Unit PKD
to UsPKD. Simultaneously, ProD develops a draft UsPKD manual, which shall be
used temporarily as a guideline and continuously improved.

7.5 UPKD Management Support

After the initial phase of portfolio confirmation and assessment, and establishing a
new balance sheet, the intensity to assist UPKD declines. Whereas each MFA
assists two UPKD in the first month, they will probably share their time with four
UPKD after three months and with seven or more UPKD after one year. Intense on –
the-job training for up to six months allows MFA also to gather locally specific
experience and collect information for further improvements and upgrades of the
UsPKD manual. Afterwards, for a period of up to 12 months, MFA will spend one or
two days a month accompanying, advising and supervising (initially also auditing)
UsPKD with their routine work (consultation).

Proposed sequence of assistance to one UPKD:
         Assistance                    Time Allocation                  Duration
 IS: intensive support
                                   about 6-10 days/month             up to 2 months
     (portfolio assessment)
 T: on-the-job training             about 2-5 days/month             up to 6 months

 C: consulting                      about 1-2 days/month            up to 12 months

One MFA accompanies the UPKD continuously over a period of about 12 to 20
months. Intensive support, i.e. portfolio assessment, will be extremely time-
consuming, because it has to be expected that it does not get always a broad-based
support and manipulations occur. Therefore it takes more than a year until all
qualifying UPKD receive support. Many more UPKD could receive support faster, if
they will voluntarily register all outstanding debt in a way that MFA need only to

  It is proposed to support this portfolio assessment with incentives. A modest compensation
shall be paid for completed forms.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

confirm the correctness of the records. In this respect, one village might perhaps
support the neighboring village.

Following the sequence of assistance and following the principle that a MFA should
continue advice to the same UPKD, the work plan of an MFA could look as follows:

Table 20: Suggested MFA work plan
     Month 3       4        5   6        7    8    9     10     11      12   13   14    15     16    17   18    19    20

UPKD 1        IS   IS   T       T        T    T    T        T   C       C    C    C     C      C     C    C     C      C

UPKD 2        IS   IS   T       T        T    T    T        T   C       C    C    C     C      C     C    C     C      C

UPKD 3             IS   IS      T        T    T    T        T   T       C    C    C     C      C     C    C     C      C

UPKD 4                  IS      IS       T    T    T        T   T       T    C    C     C      C     C    C     C      C

UPKD 5                                   IS   IS   T        T   T       T    T    T     C      C     C    C     C      C

UPKD 6                                             IS    IS     T       T    T    T        T   T     C    C     C      C

UPKD 7                                                                  IS   IS   T        T   T     T    T     T      C

UPKD 8                                                                                         IS    IS   T     T      T

UPKD 9                                                                                                    IS    IS     T

UPKD 10                                                                                                               IS

In month 3, a MFA gives intensive support (IS) to two UPKD, in month 7 and 8 the
MFA will train (T) four UPKD and render intensive support to one UPKD, and in
month 11, two UPKD receive consultancy and four UPKD training.

 At the beginning, the project renders intensive support to a limited number of UPKD only,
 but it will assist 117 UPKD after 12 months. Starting with all UPKD at the same time would
 require employing, training, and supervising more than 100 MFA. It is not advantageous
 when these trained, but still less experienced MFA would than meet experienced UPKD
 managers. After three months, i.e. after the end of intensive support, just when these MFA
 got some insight and could become valuable for the project, one would have to dismiss 50
 personnel and, after another six months, again about 30 personnel.

Based on above MFA work plan, the cumulative number of UPKD that receive
assistance is calculated as below:

Table 21: No. Participating UPKD (cumulative)
 Month               3      4     5     6                           7        8         9        10        11         12
 MFA 1-3                6            9        12        12       15          15        18       18        21         21
 MFA 4-6                                                6           9        12        12       15        15         18
 MFA 7-9                                                6           9        12        12       15        15         18
 MFA 10-12                                                          6        9         12       12        15         15
 MFA 13-15                                                          6        9         12       12        15         15
 MFA 16-18                                                                   6         9        12        12         15
 MFA 19-21                                                                   6         9        12        12         15
 Total              6      9                  12        24       45          69        84       96        105        117
MFA = Microfinance Advisors

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Whereas after six month only 24 UPKD received support, this number has increased
more than fourfold until end of Month 12 to become 117. It will further increase by
about 10 UPKD every month.

After the new portfolio balance was established, the main task of MFA will be guiding
- to adhere to rules and regulations (strengthening discipline, supervision),
- to respond to requests from the market (development of products for the village
- to earn profit,
- to self-monitor and –evaluate,
- to become a performing qualified MFI, eligible for a commercial loan for onlending
    to villagers.

                                       Sequence of assistance to UPKD
   Number of UPKD assisted

                                   3           9          15        21         27       33

                                       Portfolio verification   On-the-job Training   Consulting

Latest after 18 months, after assisting about 180 UPKD, activities regarding portfolio
verification and assessment finished. By that time, most of the UPKD went already
through on-the-job training. Afterwards, MFA will continue visiting UPKD as
consultants. The frequency of these visits will decline from two days per month to
less than one day per month. The project starts its “out phasing” stage when only few
UPKD require on-the-job training, latest after 24 months.

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Rural Microfinance Development Project – Staff Requirements

A        From Pilot Phase to Implementation (Months 1-18)

 Month                1    2       3   4   5       6       7       8       9       10   11       12       13    14    15    16    17    18


 Project Director
 Microfinance       R E
 Advisors (MFA 1-3) R    E

 Project Deputy Director 1         R   E
                                       R   E
 MFA 4-9                               R   E
                                       R   E
 Project Deputy Director 2             R   E
                                           R       E
 MFA 10-15                                 R       E
                                           R       E
 Project Deputy Director 3                 R       E
                                                   R       E
 MFA 16-21                                         R       E
                                                   R       E
 R = Recruitment, E = Employment

 MFA Microfinance
                           3       3   3       9   15      21 21 21 21                   21       21       21    21    21    21    21    21

 Portfolio Assessment
                                   6   9       6   15      33 45 39 27                   21       21       21    21    21    21    18    15
 On-the-job training
                                   0   0       6       9   12 24 45 69                   78       87       93    93    81    69    63    63
 Consulting UsPKD                  0   0       0       0       0       0       0    0        6        9    12    24    45    69    84    96
 Total USPKD                       6   9   12      24      45 69 84 96 105 117 126 138 147 159 165 174

 New UPKD joining with
 portfolio verification            6   3    3      12      21 24 15 12   9 12    9 12    9 12    6 15
 Accumulative                      6   9   12      24      45 69 84 96 105 117 126 138 147 159 165 180

Rural Microfinance Development in NTB – Concept and Implementation Strategy

Rural Microfinance Development Project – Staff Requirements

B        From Implementation to Outphasing (Month 19-36)

 Month (Quarters)                      19-21     22-24     25-27      28-30    31-33   34-36

 Reducing presence

 Project Director                  #
 Microfinance Advisors (MFA 1-3)
 Project Deputy Director 1
 MFA 4-9
 Project Deputy Director 2
 MFA 10-15                         2
 Project Deputy Director 3
 MFA 16-21                         2

 MFA Microfinance Advisors         #       21      19        13         13       6       6

 Portfolio Assessment UPKD         #   ?    finished
 On-the-job training UsPKD         #        60        33   finished
 Consulting UsPKD                  #       120       147      180        180     180      180
 Total UsPKD                       #       180       180      180        180     180      180

          Rural Microfinance Development in NTB – Concept and Implementation Strategy

                                                                                                          Draft Implementation Schedule
Regional MF Development                       1       2       3       4       5       6       7       8        9 #   #       12                          18                           24                       30                       36

Portfolio review instruction
Clarification regarding IMS-NTAADP
Decision on UPKD ownership
Asset transfer, bad debt write-off
Decree Governor on UsPKD,
preliminary/final (AD/ART), lawyer                                                                                                                                    L
Law on MFI (GEMA, MoF, BI,
SMoCSME)                                                                                                                                                              ?

BUMDES regulations (MoHA)                                                                                                                                                     ?

Decision on incorporation
Supporting government with supervision,
monitoring systems etc.

In-field activities
Training field workers
Meetings in villages (Musdes)                     #       6       6       #       #       #       #        #     #   #       #       #   #   #   9
Action plans with MusDes/UPKD
                                                          6       3       3       #       #       #        #     #   9       #       9   #   9   #   6
Information and socialization in … villages
(assumption 1 out of 3 refuses cooperation)
Portfolio assessment                                      6       9       6       #       #       #        #     #   #       #       #   #   #   #   #   #
On-the-job training                                                       6       9       #       #        #     #   #       #       #   #   #   #   #   #    #   #       #   #   #   #

Consulting                                                                                                               6       9   #   #       #   #   #    #   #       #   #   #   #    #   #   #   #   #   #    #   #   #   #   #   #

Rural Microfinance Development in NTB – Concept and Implementation Strategy

                                                               Draft Implementation Schedule
Regional MF Development
Month                               1                 6                       12          18           24   30            36

UPKD Management Manual
Draft, preliminary basic version
Review, adjustments
Draft final version, printing
Review, final version

UPKD Manager InClass Training
Certification team, constitution,
Preparation training material, 1
In-class training sessions,

Supervision (Internal Audit)
 BP and MFA supervision
Manual for supervision teams
Recruitment supervision team,
Supervision team responsible
Coordinator for supervisors
Transfer of responsibility,
supervision, monitoring
Supervision by project

Strengthening (Sub-)District
Lobbying for funds

Progress Review / Planning                                              P                      R   P             R   P
Progress / final report(s)

Rural Microfinance Development in NTB – Concept and Implementation Strategy

7.6 Suggestions for Mid-Term Planning

After 12 months, project participants should convene for a review to discuss
achievements and problems to be resolved. By this time in-class training material
should be ready and scheduled training sessions shall start beginning the second
year. At about the same time the project should initiate the formation of supervisor
teams and develop internal audit guidelines. Criteria should be developed to indicate
the degree of assistance UsPKD require, in particular the number of monthly visits
and the time for one visit so that a MFA can visit two UsPKD on one day.

After 18 months, supervision teams should begin with scheduled audits. A planning
workshop should decide on outphasing procedures, in particular about the number of
MFA required in 2008. Probably, latest beginning 2008 the number of MFA can be
reduced by six and by mid 2008 again by six.

The three ProDD will have to continue supervising activities of MFA on the spot and
evaluate their performance. It is suggested that they spend at least six days per
month in the field to assure that MFA give right information and qualified advice to
UsPKD management. A system of rotating MFA should be considered. ProDD will be
engaged in gathering and collecting information for writing the UsPKD manual and
preparing training material. During the last year of their assignment they will be
engaged in training and certification activities as well as strengthening UsPKDForum
or association.

Rural Microfinance Development in NTB – Concept and Implementation Strategy              Annex 1

Annex 1: Household Survey Results
1. Introduction
The household survey has two purposes. The first is to better understand household
demand for financial services in NTB, in order to identify demand-supply gaps. The
second is to investigate household perceptions of microfinance supply.

Along with the MFI survey, the survey analyzed relevant secondary and primary data
concerning the current market (supply and demand) of microfinance services in the
province. Secondary data were provided by Bappeda I and II and related institutions,
while the primary data were sampled through a survey. The sample includes
households of nine selected sub-districts (Kecamatan), each representing one of the
nine districts (Kabupaten) in NTB. Each sub-district sample contained several MFIs
and, at least, one ‘good’ performer. Sub-district selection was based on secondary
data and consultations with the respective Bappeda II. The household sample
includes 90 households; 10 households randomly selected from each of the 9
selected sub-districts.

The report is organized into five sections. Section 1 introduces the objectives and the
methodology of the survey. Section 2 discusses the characteristics of the household
sample. Section 3 discusses the demand of the households for financial services.
Section 4 discusses the households’ perception concerning the existing supply of
financial services. Lastly, Section 5 summarises the key findings and concludes the

2. The Sample Households
This section discusses the key socio-economic characteristics of the household
sample. The heads of the households were 43 year old of age with 8 year of formal
educations, in average. The majority of them received major income from Trade
sector (including small-micro industries) and Agriculture sector, 33% and 27%,
consecutively. Other occupations such as laborer, and formal employee accounted
for less than 10%, each. The average distances of thier houses from nearest offices
of MFIs were about 6 km.59

The households’ average yearly incomes were IDR 15 million with a wide gap
between the poorest (IDR 700 thousand) and the richest (IDR 190 million). Using the
recent exchange rate (about IDR 10,000 per USD), the average yearly income of the
households is lower than the poverty line incomes of a household with four members
which is IDR 29.2 million (USD 2920 per 4 persons per year, or USD 2 per capita per

The majority of them owned physical assets such as lands (including houses), and
motorcycle with estimated values ranging from IDR 3.5 million to IDR 120 million.
Among the obstacles of their economies considered important were: lack of capital,
increasing input prices, decreasing output prices, sicknesses of the households’
members, and bad infrastructure.

There were some variations in the socio economic characteristics of the households
among regions. For instance, there were more agricultural households in the districts

   An exception is for the five household respondents from sub-village (Kampung) Lanci II, village
Sukadamai, sub-district Manggela, district Dompu whose home distances are between 139 km to 150
km from the sub-district town.

Rural Microfinance Development in NTB – Concept and Implementation Strategy         Annex 1

of Sumbawa island than in the districts of Lombok. Similarly, there were more
households lived in homes distant from offices of MFIs and sub-district towns in
Sumbawa than in Lombok. There were more households with ownerships of physical
assets (such as Land) in Sumbawa than in Lombok. The households’ demand for
financial services are discussed in Section, below.

3. Household Demand for Financial Services

3.1. Savings
A relatively substantial proportion of the 90 households reported that they saved their
excess incomes, 34% in cash, 6% in kinds, and 2% in a combination of cash and
kinds. Thus, more than 40% of the households were accustomed to savings. This
may suggest that there is a potential for saving mobilization, when their economies
are improved. Among the purposes of their savings included: child education, capital
accumulation, and going hajj. Savings for child education was mentioned most often.

Of those saving in cash, 54% with banks (such as BRI Units, BNI, BPD and Rural
Banks), 41% with non bank financial institutions (such as UPKDs, KSPs, USP-KUDs,
and USP-KSUs), and 5% with others (i.e., child’s’ schools) (Table 1).

Table A1: Distribution of Household Savers by Financial Institution Types, and Saving Balances
  Institution Type         Frequency        Percentage                  Balance*)
                            (person)            (%)                        (IDR)
BRI (Units)                         13              35%                             3230769
BPD                                  5              13%                             2440000
BNI                                  1                3%                           35000000
BPR                                  1                3%                               85000
KSP & USP                            5              14%                              719802
UPKD                                 9              24%                              130000
Others                               3                8%                             116667
Total                               37             100%                             2536789

BRI Units accounted for the largest shares of the households’ bank savings while
UPKDs accounted for the largest share of the households’ non bank savings. Rural
banks and other non bank financial institutions accounted for a marginal shares of
the households’ savings. Looking at the balance amounts, larger savers tended to
save with commercial banks (such as BRI, BPD and BNI) while smaller savers saved
with the rural banks, cooperatives, and UPKDs.

The households’ saving behaviors may relate to several factors such as fund safety,
office networks, and service convenient. As Units of a national (state owned)
commercial banks with a nation wide office network (up to sub-district level) and a
good performance, BRI attracted more larger savers from rural households, this
survey concerned with. The households generally concerned with the safety of their
funds, and the convenient of deposits and withdrawals. Although, the withdrawal and
deposit policies among commercial banks were not significantly different one and
another, BRI’s wide office network offered a greater access convenient to rural
households. The office networks of other commercial banks were generally up to
district level. The provincial government bank (BPD) did have several rural branches,
but none were in the sub-districts surveyed. In spite of giving more convenient
access (with their mobile services), the private rural banks and the private
cooperatives were generally regarded as less safe institutions to save with, relative to
the commercial banks. This was because the offices of the rural banks and the
cooperatives were far a way from the households’ home or work places. In other

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

words, saving withdrawals and deposits were dependent upon visits of the field
officers, rather then on the wants of the savers.

The UPKDs were different cases. If managed rightly, the institutional design of
UPKDs allowed them to win trust of the village communities to place their excess
funds with UPKDs. They were village level MFIs established for the provision of
financial services of the rural households in less populated and underdeveloped (dry
land) areas.

Some associations between the socio-economic characteristics of the households
and their institutional saving balances were found. Age, amounts of non agriculture
income, and assets were positively correlated to the households’ saving balance
amounts while education, agriculture income, and home distance from sub-district
towns were negatively correlated with the households’ saving balance amounts.
However, only the non agriculture income was significantly correlated to the
households’ institutional saving balance amounts. This suggests that households
with larger non agriculture incomes have larger saving balances than those with
lower non agriculture incomes have, with existing financial institutions. This is
because the earners of non agricultural incomes (such as traders and micro and
small industries ) tend to have more frequent cash incomes besides (perhaps) being
more bank minded, relative to farmers.

3.2. Borrowing
More than a half of the households borrowed loans, on a regular basis. They
borrowed loans for reasons, as follows: working capital, medical costs, education
expenses, and housing expenses. The first was the most often mentioned reason
(92%). The occasions during which they generally borrowed were: planting season,
and new school year. A few of them also borrowed when the households’ members
were sick, to pay for the medical expenses.

Additionally, some (32%) of the households borrowed loans from informal sources for
reasons, such as: loan repayment (45%), foods (28%), business capital (14%), and
others such as: married and migrant workers (14%). These were generally
emergency cases which were under serviced by existing financial institutions. They
borrowed informal loans as their loans with other sources (financial institutions) were
due while they did not have cash to for the due amounts. They borrowed informal
loans as they lacked of cash for the day’s foods. They borrowed informal loans for
working capitals because the households could get access to institutional loans (e.g.
due to previous loan non repayments, or simply not bankable). In a few instances,
the households might borrow informal loans as they were cheap (charging no
interest), and more convenient (from the neighbor).

In support to the informal borrowing behaviors, the majority of the households
reported that they would borrow from friends and relatives (56%) when they were in
urgent needs of cash. Only a few of them would borrow from financial institutions
(2%), or would withdraw saving deposits (2%) when immediate needs of cash were
necessary. Thus, the households relayed greatly on friends and relatives for
immediate cash needs.

Of those borrowing institutional loans, most of them borrowed from non bank
institutions, particularly UPKDs and cooperatives (including KSP, USP, Bumdes and
Koptan), which accounted for 48% and 34% of the borrowers, consecutively. Only
16% borrowed from banks (Table 2). This was contradictive to the financial
institutions with which the households saved their excess incomes. As noted above,

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 1

the households tended to save with (commercial) banks, rather than with non bank
financial institutions.

Table A2: Distribution of Households by Financial Institution and Loan Sizes
  Institution Type       Frequency      Percentage                Loan Size*)
                          (person)          (%)                      (IDR)
BRI (Units)                         4              8%               7.74 (3.95-10.00)
BPD                                 0              0%                                 -
BNI                                 2              4%            25.00 (10.00 – 35.00)
BPR                                 2              4%                  1.46 (0.10-2.84)
KSP & USP                          17            34%                   1.55 (0.35-5.00)
UPKD                               24            48%                   0.74 (0.30-2.00)
Others                              1              2%                              5.00
Total                              50           100%                     2.66 (0.10-35)
Notes: *) the minimum and maximum balances are in bracket

The dominant role of non bank financial institutions in the households’ borrowed
loans related to the characteristics of the loan services available (in one hand) and
the characteristics of the households (on the other hand). The rural households were
generally less educated, earned low and seasonal income, had limited assets
acceptable as collateral for bank loans, and lived in sparsely populated areas with
underdeveloped infrastructure. With these characters, the households generally
demanded for quick and convenient access to small loan services. This kind of loan
services was generally greater available from specialized non bank rural financial
institutions, rather than banks.

UPKDs, for instance, offered seasonal loan services specifically designed for the
farmer members. Other than memberships, sound loan uses, and simple paper
works, there were practically no requirements necessary for the households getting
the loans. Such a loan was generally not available from banks. Besides requiring
tougher requirements and procedures, banks generally offered larger loans. This was
also the case for loans offered by other institutions (i.e., agribusiness firms) to
selected Tobacco farmers in Lombok. See Table 2 for the sources and sizes of loans
borrowed by the households.

In support to this point, service inconvenient, no collateral, long loan processing,
high interest rate, and unfair loan contract were the major factors preventing the
households from borrowing institutional loans.

Some associations between the socio-economic characteristics of the households
and the amounts of institutional loans they borrowed were observed. Age, education,
amounts of agriculture income, and asset values were positively correlated to the
households’ institutional loan amounts while home distance from sub-district town
was negatively correlated to the households’ institutional loan amounts. Of the socio
economic characteristics of the households, agriculture income and asset value were
statically significant (at 5 % level or lower). This means that the larger the
households’ agriculture incomes and asset values the larger are the amounts of
institutional loans they borrow. Households with larger agriculture incomes generally
have larger (land) asset values. As so they are eligible for larger loans as they have
the necessary collaterals.

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

4. Household Perceptions of Microfinance Supply

This section discusses the perceptions of the households concerning the supply of
microfinance services existing in their sub-district. The discussions focus on several
issues, including the interest rate, impacts of recent vast development in the supply
of microfinance services on service access, who should borrow institutional loans,
obstacles of sustainable provision of microfinance services, and ways to sustain the
provision of microfinance services

4.1. Interest Rate on Microfinance Services
The households appeared to support that interest rates should be applied to
microfinance services. When asked whether interest rates should be applied to
microfinance services, the majority of them (94%) replayed with ‘yes’ answer.
This indicates that the view shared by many policy makers in Indonesia that
microfinance should not charge interest rate is not right. Moreover, the acceptance
of interest rate base financial services suggests that interest rate base ‘financial
system’ approach to microfinance development remain relevant in rural NTB.

4.2. Access to Microfinance Services After Recent Microfinance Development
The supply of financial services to rural households strongly developed since the
liberalization of the financial sector in 1980s. Many new rural banks and rural credit
cooperatives have been established. In addition, many development programs also
included the establishment of microfinance institutions such as UPKDs, P4K groups
and associations, UED-SP, and Koptan, among others.

When asked if this vast development of the supply of microfinance services have
eased access to saving and loan services, more than 70% replied that access to
saving and loan services became easier. Only one third of them informed that access
to consumptive loans became easier. This, however, doest not imply that the
households’ demand for financial services has been fully serviced As noted above,
there are evidences which indicate gaps between the services supplied by MFI and
the services demanded by the households such as loan terms, and loan sizes.

4.3. The MFI best Servicing their Demand
When asked to name the MFI best servicing their demand for financial services,
however, most of them were unable to give accurate answers. Of those responding,
they generally gave mixed responses. Each referred to the MFIs from which they
obtained financial services but unable to explain the advantages of the referred MFIs
over the other MFIs. This suggests that the households were generally not well
informed about available financial services at local (sub-district) market.

4.4. Who Should Borrow Loans
When asked about who should borrow institutional loans, their responses were:
entrepreneurs (56%), the income earners (6%), honest people (10%), anybody in
need (19%), and other (including not responding). This suggests that the majority of
the households understood that borrowers (entrepreneurs, income earners and
honest people) should be capable and have to repay their loans.

4.5. Ways to Sustain the Provision of Microfinance Services
The households perceived that non repayment, economic failure of the clients,
unhealthy market competition, lack of loanable capitals, and mismanagement were
among the major obstacles preventing MFIs to sustain their operations. As so, the
households suggested several ways to sustain the provision of microfinance services,

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

as follows. First, MFIs should have good and honest management and achieved high
rate of loan repayment. Second, MFIs should offer demand driven and convenient
services. Third, MFIs should make their services widely known by the target clients.

5. Summary and Conclusions
The household survey had two purposes. The first is to better understand household
demand for financial services in NTB, in order to identify demand-supply gaps. The
second is to investigate household perceptions of microfinance supply. To this end,
90 households from villages in the 9 districts were surveyed during June/July 2005.

The survey found that a substantial proportion of the households normally save their
excess incomes: 34% in cash (mostly with financial institutions), 6% in kind, and 2%
in a combination of cash and kinds. Large savings are generally placed with
commercial banks (particularly BRI Units) while small savings are generally placed
with nearby non-bank financial institutions (particularly UPKDs). More than half of
the households regularly borrow from financial institutions, particularly from UPKD
and credit cooperatives. Most loans from these MFI are small, with sizes less than
IDR 2 million. Larger loans were borrowed from the commercial banks, mainly BRI
Units. A few of the households also borrow from informal sources, in particular
friends and family. Child education is the main purpose of saving, whereas the main
purpose of borrowing is working capital.

The households generally agree that financial services should apply interest to the
clients, and that borrowers should repay their loans. Households perceived that
microfinance development after financial liberalization has improved their access to
financial services. The households viewed that the provision of microfinance services
could be improved through demand-driven and convenient services, good and
honest management, and better marketing of available services.

The survey concludes that household demand for financial services indicates a large
potential for saving mobilization and effective financial intermediation. The
households are generally accustomed to saving and the application of interest rates
on financial services. Awareness of the responsibility of loan borrowers prevailed
among the households. These provide the basis for the use of the financial system
approach for further development of the rural-microfinance sector in the province.

The limited role of village-based microfinance institutions, such as UPKD, in the
mobilization of household savings – despite substantial demand - points to gaps in
the rural financial market. Further evidence for a demand-supply gap are several
mismatches between the characteristics of the services demanded by the
households and the services offered by the financial institutions. For instance, loans
for purposes other than working capital are generally not supplied to the households.

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

Annex 2: MFI Survey Results

The MFI survey has three purposes. The first is to provide a reliable picture about the
origin, extent and quality of institutional microfinance services, including public and
private entities, in NTB. The second is to learn the key characteristics of household
and microenterprise demand for financial services. The characteristics include
products and volume of services, in order to identify demand-supply gaps. Lastly, the
third is to investigate perceptions of the microfinance supply by the demand side.

The survey analyzes secondary and primary data concerning the current market
(supply and demand) of microfinance services in the province. Secondary data were
provided by Bappeda and related institutions while the primary data collected through
a sample survey. The sample includes MFIs and households from nine selected sub-
districts (Kecamatan), each represents one of the 9 districts (Kabupaten) in Nusa
Tenggara Barat (NTB). The selected sub-districts have diverse types of village MFIs
and, at least, one of them performing ‘well’. The selection was based on available
secondary data and consultation from Bappeda. One MFI of each type existing in the
selected sub-districts was chosen as sample. Additionally, ‘good’ performing MFIs of
types not present in the sub-district sample were also included in the sample. Thus,
the sampling should represent each type of ‘good’ performing village MFIs in the

The sampling specified above selected 39 various types of village MFIs, 25 in
Lombok island and 14 in Sumbawa island. This island differential in number of MFI
sample reflected the differential in the density of MFIs in the two main islands of NTB
province. For example, of the 63 rural banks and 2025 cooperatives in the province,
60% and 69% are in Lombok, consecutively (Bank Indonesia Mataram & DiskopUKM
NTB province).

This report presents the major results of the MFI survey. The detailed primary data
compiled in the survey accompanies this report, in a soft (excell) file. The results the
household survey are to given in a seprate report.

1. The Microfinance System in NTB Province

A microfinance system can be defined as a system through which microfinance
services to low-income households and microenterprises are provided. Microfinance
services include small-scale (micro) saving, loan, insurance, payment and money
transfer services which are generally underserved by the ‘macro’finance institutions
such as commercial bank, finance, and insurance companies.

The microfinance system in NTB is comprised of bank and non bank institutions in
the formal sector, and various forms of informal sources such as money lenders in
the informal sector. The banks include BRI (Units), and Rural Banks (Bank
Perkreditan Rakyat, BPR). The non bank financial institutions include: the saving and
credit cooperatives (Koperasi Simpan Pinjam or KSP, and Unit Simpan Pinjam or
USP), and various entities resulting from institutional building activities of previous
and current development (social) programs. The LDKPs (the general term of
provincial government establised rural credit institutions) in the province are
Lembaga Kredit Pedesaan (LKPs). The majority of them were converted to rural
banks during the late 1990s. A few of the former program ‘induced’ MFIs have
sutained their operations and obtained formal operational status as cooperative

Rural Microfinance Development in NTB – Concept and Implementation Strategy           Annex 1

2. The MFI Sample

The MFIs included as the sample in the survey can be differentiated into 12 types
(Table 1). These include: rural bank (LKP), saving and credit cooperatives (KSP),
saving and credit units of multipurpose cooperatives (USP-KSU), saving and credit
units of the Bimas village cooperatives (USP-KUD), agricultural cooperatives
(Koptan), village own enterprise (Bumdes), urban-village credit institution (LKK),
islamic microfinance institution (BMT), rural-village credit institution (LPD), the
financial management units (UPK) of an on-going program (Proyek Pengembangan
Kecamatan, PPK), and the community direct aid fund (Bantuan Pembiayaan
Langsung Masyarakat, BPLM) of an on-going agricultural development program.

Table A3: Types and District Distribution of the Selected MFIs
Instit.                                          District                                    Total
Type         Mtr       Lobar   Loteng   Lotim    Sbw         Sbw     Dompu    Bima   Bkota
                                                 Barat       Besar
    UPKD                   3        2        2           1       1       2       1                12
      KSP          2                1                    1       1       1               1         7
 USP-KSU                   1        1        2                                   1       2         7
 USP-KUD                   1        1        1                                                     3
   Koptan                  1                                                     1                 2
   Bumdes                           1                                                              1
     LKK           2                                                                               2
     BMT           1                                                                               1
    BPLM                                                                         1                 1
     LKP                   1                                                                       1
     LPD                                     1                                                     1
     UPK                   1                                                                       1
                   5       8        6        6           2       2       3       4       3        39

Of the 12 types, UPKDs and cooperatives (KSP, USP-KSU, and USP-KUD) are
largerly represented in the sample while the others are only represented by one or
two individual institutions. The district distribution of the MFIs does not reflect the
population. An exception is for Bumdes, LKK, LPD, UPK and BPLM which are
local/program specific, and hence represent the population. However, the majority of
the MFI types existing in the province is represented in the sample.

3. Sample MFI Characteristics
This section discusses the institutional origins and other major characteristics of the
surveyed MFIs.

3.1 Institutional Origin
This survey confirms the findings of a previous study (Holloh 2001) that the majority
of the MFIs in NTB originated from social development programs. The financial
statistics provided by 18 MFIs (included in this survey) shows that more than 70 per
cent of the MFIs’ capital were originated from the previous development programs.

Among the previous development programs are the green revolution program
(Bimas), the small farmer income generation program (P4K), the backward village
development program (IDT), the social sefety net program (PMDKE), and the
agricultural development area program (NTAADP).

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

Several examples are, as follows. USP-KUDs are the units of the village
cooperatives (KUDs) which were established under the Bimas program. KOPTAN
was established by groups of farmers (formed during the Bimas program) and
received additional fundings from the Departmen of Agriculture (DEPTAN). Bumdes
was established by the village government and the community to organize funds from
various programs, targeting the community. Some USP-KSUs were developed by
groups or institutions resulting from the P4K program while some by groups or
associations of private individuals. UPKDs were established under the NTAADP
program. LKK and LPD were established by the district government to manage the
PMDKE funds. UPK was established under the sub-district development program
(PPK). LKP was established by the provincial government under its rural credit
institution development program. There are instances of multiple programs assisting
individual MFIs.

A few of the MFIs were purely established under private initiatives, by groups or
associations of private individuals. The majority of KSPs are private which were
established by a group of individual and family associations.. Several of them were
developed from ROSCAs of family associations. The origins of individual MFIs are
listed in the soft data file accompanying this report.

3.2. Ownership
Various ownerships of the MFIs were found, some owned by the communities, some
by the government (including the village government), and others by private entities.
As perceived by the respondents, 74% of them are community and government
owned institutions and 26% are private institutions.

LKP is the provincial/district government rural bank. Bumdes, LKK and LPD are the
business entities of village governments. UPK and BPLM is intented to be owned by
community members. USP-KUDs are generally owned by the community members.
KSPs are generally private. Some USP-KSUs are owned by the villages or the
communities while the others are owned by private members. BMT is also owned by
private members.

Although, conceptually, the cooperatives (USPs and KSPs) are supposedly owned
by the members, several deviations were found in this survey. Many USPs and KSPs
are practically owned by private groups and village governments as they own or
control the majority of the shares. In contrast, the clients (borrowers) which consitute
for the majority of the members are generally lack of control since each of them only
own a little share. Of those receiving grants from previous development programs, a
conflict of interest between the village government and the management, regarding
the ownership of the funds, may arise. On the other hand, the community members
are generally not aware of their rights to the ownership of the cooperatives. The
conflict of interest may creates a problem which harm the future of many USP-KUDs
and village/community owned USP-KSUs.

3.3. Governance
The governance of the MFIs relates to their operational status and ownerships. The
operation of LKP and cooperatives (USP-KUDs, USP-KSU, and KSPs) are formally
recognized by the banking laws, and the cooperative laws and cooperative
regulations, consecutively. BMT is also recognized by a cooperative microfinance
institution. Contrarily, the operations of the other MFIs are not recognized by the
national laws and regulations. Thus, only licensed rural bank and cooperatives can
be regarded as ‘formal’ MFIs. A rural bank is subject to the supervision of the central
bank while a cooperative is subject to the supervision of the department of
cooperative and small and medium enterprises (DepkopUKM). However, it is

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 1

questionable whether the authories could effectively supervise such a large number
of rural banks and cooperatives as in Indonesia. Additionally, the technical
proficiencies of the Department of Cooverative and Small and Medium Enterprises
(Depkop UKM) as the supervisor of cooperative financial institutions are also

On the other hand, the operational status of other MFI falls somewhere between
formal and informal. Thus, to simplify, they can be regarded as semi formal
institutions. They are the concern of local governments at provincial and district level.
LKK and LKP operate under decrees of the respective district heads. Koptan is not
registered as a cooperative, inspite of its name referring to a cooperative. Bumdes
operates under the village assembly’s decision. The operational status of UPKD
becomes a hot issue since the NTAADP program ended. UPK and BPLM operate as
the financial management units of present social development programs. As a
consequence, their supervision and the technical assistance are generally at stake.
No institutions are specifically assigned the supervision and technical assistance
responsibilities. The operational budget for carrying out the responsibilities is another
issue to the local government.

Attempts to introduce regional regulations (as in Bali for its LPDs) have been made in
several districts. However, the attempts have been strongly opposed by the
parliaments as they consider the proposed regulations contradictive to the national

During the early stage of its operation, the management of an individual MFI is
generally run by three key personnel, namely: the manager, the bookeeper, and the
service (credit) officer who is subject to the supervision and directions of the
assembly of owners (i.e., provincial/district/village governments, community members,
or private members). This structure resembles the standard organizational structure
of a cooperative institution. Additional personnel are recruited during the later stages
of its operations.

The majority of the MFIs (85%) employed up to 10 officers (including the key
personnel, noted above), (95%) had managers with senior high education
backrounds or above, (82%) applied accounting systems, and 46% owned offices. In
spite of these quit good characters, the governance of the MFIs generally lacks of a
supporting system capable to provide effective supervision and technical assistance.

3.4. Services
While most of the MFIs are fully financial institutions, a few of them also have other
business activities. USP-KSU and USP KUD are as the examples. They are
multipurpuse cooperatives, having multiple business activities. To illustrate, all KUDs
have rice milling units and many have agricultural input shops. In spite of having
multiple business activities, all of them consider the financial service units as core
businesses and treat them as seperate and autonomous units.

With some variations among individual MFIs, most of them offers saving and loan
services. Their saving services include compulsory saving, voluntary savings and
term deposits. The saving services offered by the MFIs are given in Table 2.

Rural Microfinance Development in NTB – Concept and Implementation Strategy             Annex 1

Table A4: Financial Services Provided by Sample Village MFI
      Institution              Product              Initial Deposit             Interest rate
         type                                                                      (%/y)
UPKD                    MD                     0                         0
                        MCS                    IDR 1000                  0
                        VS                     IDR 5000                  6-12
KSP                     MD
                        BCS                    1% principal
                        VS                     IDR 5t-25t                12
                        TD                                               15
USP-KSU                 MD                     IDR 10t-500t
                        MCS                    IDR 2500-5t
                        BCS                    2-2.5% p.
                        VS                     IDR 2t-2.5t               9.6-12
USP-KUD                 MD
                        VS                                               12
Koptan                  MD                     IDR 125t
                        MCS                    IDR 30t
Bumdes                  BCS                    1% principal
                        VS                                               12
LKK                     VS                     IDR 2500                  12
BMT                     VS                     IDR 5000                  p/l shar
LKP                     BCS                    2% p
                        VS                     IDR 2000                  8
LPD                     VS                                               9.6
Saving service products: MD= member deposit, MCS= member compulsory savings, BCS= borrower
compulsory savings, VS= voluntary (passbook) savings, and TD- term deposits

However, only a few of them offer term deposit. While there is only one form of
voluntary saving (VS) offered (the passbook savings), the majority of the MFIs
require three forms of the compulsory saving. These include: member deposit (MD),
member compulsory saving MCS), and borrower compulsory saving (BCS). The first
(MD) refers to the saving to be deposited with the institutions by new members. The
second (MCS) refers to the regular saving to be made by existing members. The
third (BCS) refers to the saving to be made by new borrowers, as a fraction of the
loan principal.

In spite of the saving services, it is necessary to note here that saving mibilization
(particullary through passbook saving and term deposit services) is not the major
concern of most of the MFIs. In contrast, lending (loan services) is generally the
major concern of the MFIs. The loan service products offered by the MFIs are
summarized in Table 3.

Rural Microfinance Development in NTB – Concept and Implementation Strategy       Annex 1

Table A5: Loan Service Products of the Sample MFI
Institution      Product              Size             Irate          Term            Adm
   Type                              (IDR)             (%/y)                            fee
UPKD          SUTA (s)            200t – 3 m           24-36          5-12 m           2.5%
              UEP (d, m)          100t – 5 m           15-17        100d-18m          2-3%
KSP           KMK (d,w, m)       250t – 20 m           24-48        100 d – 1 y       1 - 1.5
USP-KSU       KMK (i, g)         100t – 10 m           36-41         3 – 10 m          2.5-3
USP-KUD       KMK (w, m,s)         200t – 5m            36           3 – 10 m           2.5
Koptan        KMK (m)             500t – 1 m            32             10 m
Bumdes        KMK (w, m)           100t -5 m            24             11 m             2%
LKK           KMK (d,w,m)         100t – 4 m          21 – 24      100d - 10 m       IDR 75h
BMT           Mm, Aq, AI           1m – 5 m          Pls (8:2)       2 – 12 m
LKP           KMK (m)            250t – 25 m            32           3 - 36 m         1.5 %
LPD           KMK (d)             100t -2.5 m           48              3m             3%
UPK           SPP (m)                9.5 m              32             10 m
Notes: Products: s= seasonal, d= daily, w= weekly, m= monthly, Mm= mudararabah
murabahah, Aq= al-qard, Ai= al-Ijarah, KMK= working capital credit. Loan size: t= thousand,
m= million. Interest rate: pls= profit/loss sharing. Loan term: d= day, m= month, y= year

On the other hand, the loan services offered by the MFIs are mosltly working capital
loans with 2 to 36 month terms and sizes from IDR 100 thousand to IDR 20 million.
However, most of the loans advanced are less than IDR 1 million (discussed further
latter). Large loans only advanced by larger MFIs to selected borrowers. There are
variations in the terms, repayment system, size, interest rate, and requirements of
the loan services among types and between individual MFIs with similar types. For
example, some UPKDs and KSPs offer daily loan services while the others do not.
This variation may relate to the market environment in which the MFIs operate. MFIs
targeting clients with daily incomes such as traders offer daily loan services while
those targeting farmers offer seasonal loan services.

In regard to service mechanism, some variations are also observed, some MFIs use
mobile services, regularly visiting the clients at their home or work places, while the
other use in office services. The MFIs with mobile service generally have wider
geographycal service coverage than the MFIs with in office service mechanism do.
KSPs and some USP-KSUs are the MFIs which use the mobile service mechanism.
The service performance of the MFIs is discussed in Section, below.

4. Sample MFI Performance

This section discusses the service performance, the operational efficiency, and
financial sustainability of the MFIs

4.1. Saving and Loan Service Performance
The service performances of the MFIs are summarized in Table 4. It shows that the
service performances of the MFIs also widely vary among groups (types) of the MFIs
and among individual MFIs, as their service products do (noted above).

Rural Microfinance Development in NTB – Concept and Implementation Strategy        Annex 1

Table A6: The Saving and Loan Service Performances of the Microfinance Institutions
      Inst               Saving Deposit Services                     Loan Services
                        Client            Balance             Client           Outstanding
                       (person)          (IDR 000)          (person)            (IDR 000)
 Mean             389                19,600             558                 310,000
 Median           392                10,600             500                 290,000
 Min-Max          67-126             00-131,000         104-1,185           154,000-572,000
 Mean             958                400,000            570                 470,000
 Median           603                1,6000             600                 250,000
 Min-Max          110-3,224          5361-2,290,000     101-900             47,532-1,900,000
 Mean             1554               890,000            500                 620.000
 Median           402                57,000             335                 420,000
 Min-Max          143-8,771          7,630-5,800,000    100-1,754           3,100-2,340,000
 Mean             1,349              5,637              132                 220,000
 Median           1,013              4,435              170                 96,000
 Min-Max          35-30,000          3,247-9,229        41-185              67,613-492,000
 Mean             97                 2,537              88                  64,000
 Median           97                 2,537              88                  64,000
 Min-Max          67-126             670-4,403          50-126              59,868-67,697
Bumdes            285                68,000             603                 403,025
 Mean             100                2,500              379                 150,000
 Median           100                2,500              379                 150,000
 Min-Max          0-200              00-5,000           200-557             80,000-223,000
BMT               810                9,844,000          480                 166,000
BPLM              500                2,500              500                 129,000
LKP               2,119              733,000            1,275               1,670,000
LPD               1,655              113,000            716                 247,000
UPK               00                 00                 300                 77,675

In terms of saving deposit and loan service performances, the rural bank (LKP)
performs best among the MFIs. The rural bank ranks first in terms of number of
saving deposit clients, number of borrowers, and ammounts of loan outstanding while
the second in terms of saving deposit balance ammounts. In the regard to the
ammounts of saving balance, the islamic institution (BMT) performs better than the
rural bank.. USP-KUD, LKK, Koptan, BPLM, and UPK are among the institutions with
low ranks while KSP, USP-KSU, Bumdes, LPD and UPKD are among the institutions
with midle ranks. This is the average performance of each types of the MFIs.

In regard to service areas, as noted above, the MFIs which employ mobile service
generally have larger service areas. Their services areas may cover more than one
district areas while the service areas of the other MFIs are, at most, within subdtrict

The service performances of individual MFIs can be inferred from the ‘min-max’
figures (Table 4) which read the smallest and the largest service performances of
individual institutions in each of the MFI types. The figures indicate that there are
individual KSPs and USP-KSUs which perform much better than the rural bank does,
with respect to service performances. This is possible because of several reasons,
including: larger asset, more convenient services, and wider service areas, among

Rural Microfinance Development in NTB – Concept and Implementation Strategy              Annex 1

Looking at district differential, KSPs of Mataram district generally perform better than
KSPs of other districts in in terms of number of savers and total amounts of saving
deposits. In this same regard, USP-KSUs of Lombok Timur performs best, relative to
USP-KSUs of other districts. The USP-KUD in Lombok Timur perform best in saving
deposit balance while the USP-KUD in Lombok Barat better in number of saving
deposit clients. Koptan in Bima perform slightly better than Koptan in Lombok Barat.
A comparison of LKP, LPD, BMT, UPK and BPLM is not possible as the sample only
include one of them, each.

In terms of loan service, KSPs in Mataram generally perfom better than KSPs in
other districts. Similarly, USP-KSUs in Lombok Timur perform much better than USP-
KSUs in other districts. The USP-KUD in Lombok Timur is better in ammounts of loan
outstanding but the second to the USP-KUD in Lombok Tengah with respect to
number of borrowers. The UPKD in Bayan (Lombok Barat) outstands the other
UPKDs in ammounts of loan outstanding and the second to the UPKD in Pemenang
(Lombok Barat) in number of clients. On average, however, UPKDs in Sumbawa
Island perform better than UPKDs in Lombok island.

The performance differential relate to many factors, internal and external to the MFIs.
Among these factors include management and service quality, effective governance,
market competition, socio-economic, demographic, infrastructure conditions. For
instance, UPKDs whose service mainly targeting agricultural communities and their
business they generally perform better in remote areas such as Bayan (Lombok
Barat), Beru (Sumbawa Barat) and Soriotu (Dompu). In contrast, KSPs whose
services particullarly designed for quick and high return microenterprises generally
perform better in surrounding urban areas such as in Mataram. The operational
efficiency and sustainability of the MFIs are discussed in Section 5.2, below.

4.2. Operational Efficiency and Sustainability
The survey attempts to calculate a number of indicators for the operational efficiency
and sustainability of the MFIs. Three of them are presented in this Section due to low
data quality consideration. The indicators are laon productivity ratio (number of loans
per officer), deliquent rate (number of loans with non repayment of one or more
installments per total number of loans), and financial self-sufficiency ratio (operational
incomes per operational costs). The results are given in Table 5.

Table A7: Selected Indicators of Operational Efficiency and Sustainability of the MFIs
Institution type     Loan productivity           Deliquent rate            Financial Self-
                      (loans/officer)                 (%)                 sufficiency ratio
UPKD                          131                     15.15                      227
KSP                            95                      9.02                      210
USP-KSU                       108                      5.71                      630
USP-KUD                        36                     30.73                     1446
Koptan                         25                      8.00                      330
Bumdes                         19                      9.87                      338
LKK                            67                     25.00                      763
BMT                            96                      2.92                       na
BPLM                            7                       Na                        na
LKP                            91                      9.96                      153
LPD                            20                     19.97                      115
UPK                           100                       Na                      1393

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

Table A7 shows varrying operational efficiency and sustainability among the MFI
types. UPKD, USP-KSU and UPK have higher loan productivities than the other MFI
types. Several MFIs such as BMT, USP-KSU, Koptan, Bumdes, KSP, and LKP have
loan portfolios at risk 10 per cent and lower while USP-KUD, LKK, LPD and UPKD
whose loan portfolio at risk ranging from 15 per cent to 31 per cent.

The rather high loan fortfolio risk ratio, however, should not imply that high loan non
repayment will occur. This is because there is widely shared view among the MFIs
that non repayment is just a delay of repayments. The borrower are generally not
default, Instead, they will pay the loans in a latter time, given that the lender
consistently visit (remain) and ask for them to repay. The credit officers of the MFIs
generally know home, work place and relatives of the borrowers. As a result, the
actual non repayment rate (by the end of the year) may be much lower than the
deliquent rate. However, data avilable is insufficient to calculte the non repayment
rate accurately as the MFIs never wiped out their bad loans, exception for the rural
bank (LKP) which is required by the central bank to do so.

Among the reasons of loan non repayments, as recalled by the MFI officers, are
severe economic condition, marketing failure, and bad harvest. This confirms that
non repayment is not as a result of bad personal of the borrowers but rather as a
result of bad circumstances such as economic down turns, and insect attacks on the
farms of the borrowers.

On the contrary, the financial self-sufficiency ratios indicate that all the MFI groups
are profitably run, capable of generating operational incomes larger than operational
costs. However, a causion is considered necessary to made here since the costs of
their funds may be underestimated, given that majority of them recieved some
ammounts of grants and subsidies during their institutions’ lifes. Thus, a lower ratio
may result when market rate is applied for all of their funds. This is not done in this
survey as the data made available by the MFIs are not reliable. Exception is for the
private MFIs whose funds are generally commercial.

4.3. Perceptions of the Officers Regarding Servicing the Poor
Follows are selected perceptions of the majority of the MFI officers regarding several
issues of servicing the poor”

“The poor is not riskier than the rich as many of the poor repay their loans and hence

“Servicing the poor can be profitable when managed rightly: achieving cost effective
operations, and high loan repayment.”

“Provision of saving service is neccssary to the poor as saving may teach them to
live triftly and accumulate capital.”

The financial services supplied by existing financial institutions generally match the
demand as there are various financial service products available in the market. In
contrast, a few that see some gaps between the supply of and the demand for
microfinancial services present in the market argued that the loan size offered to the
poor are too small to be usefull.

Servicing the poor faces some difficulties. Among of them are:
−  It needs frequent visits to ensure high loan repayment and high saving deposit
   collection since the poor generally demand for convenient services

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 1

−   The poor generally dont have physical ollaterals, acceptable under the prudential
    banking principles. Their collaterals are often difficult to cash out.
−   It needs a longer time and passions to servicing the poor as they are generally
    less educated
−   The poor generally dont understand the MFIs’ service policies. As a consequence,
    they consider the officers as not nice persons when their demands are not met.
−   The poor are generally unable to differentiate the good MFIs from the bad ones.
    As a cosequence, good MFIs may also receive the bad image when other MFIs
    create problems (such as charging very hign interest on loans and running a way
    with people’sr saving deposits).

5. Summary & Concluding Remarks

The survey has compiled and analyzed data from secondary and primary sources,
involving 39 selected MFIs from the 9 districts (Kabupaten) in the province. The MFIs
were selected with consultation from Bappeda and associated institutions.

The microfinance system is composed of bank and non-bank financial institutions in
the formal sector, and various informal sources, such as money lenders. The banks
include BRI Units, and Rural Banks. The non-bank financial institutions include
saving and credit cooperatives, government rural financial institutions, and various
entities resulting from previous and current development programs.

The MFIs can be differentiated into 12 types, including: rural bank (LKP), saving and
credit cooperatives (KSP), saving and credit units of multipurpose cooperatives
(USP-KSU), saving and credit units of the Bimas village cooperatives (USP-KUD),
agricultural cooperatives (Koptan), village-owned enterprise (Bumdes), urban-village
credit institution (LKK), islamic microfinance institution (BMT), rural-village credit
institution (LPD), and two MFIs of on-going programs (the UPK of the PPK program,
and the BPLM of the Dinas Pertanian progam).

Only the rural bank and the cooperative are formally the national legal
frameworks. The formal status is important in several respects, i..e. supervision,
provision of technical assistance, and linking with commercial banks. These are
essentially the governance problems faced by the majority of the MFIs. Attempts to
introduce provincial or district-level regulations appeared to receive a strong
opposition from the parliaments as they were contradictive to the national regulations
(the banking laws and the cooperative laws and regulations).

The finding of previous studies that the majority of the MFIs originated from social
development programs is confiermed. The major development programs in the
province include the green revolution program (Bimas), the small farmer income
generation program (P4K), the backward village development program (IDT), the
social sefety net program (PMDKE), and the agricultural development area program
(NTAADP), among others. Only a few of the MFIs are private entities. These are
KSPs and BMT.

The ownership of the cooperative MFIs can be problematic.Although the owners of
USPs and KSPs are the member, several deviations appear in practice. Many are
dominated by private groups or village governments who own or control the majority
of the shares. Of those receiving grants from previous development programs, a
conflict of interest between related parties (particularly the management and the
government) may arise and harm the future of the MFIs. Likewise, the ownerships of
UPKDs is also not homogenous, some owned by the governement while the others

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 1

are owned by the communities. As noted above, the imprecise ownership could
result in governance problems.

While most of the MFIs are fully financial institutions, a few of them also have other
business activities. USP-KSU and USP KUD are the MFIs of the the type. They are
multipurpuse cooperatives, having multiple business activities. Most of them offer
saving and loan services. However, only a few offer term deposit services. Moreover,
it is necessary to note that saving mibilization is not the major concern of most of the
MFIs. Lending is generally their major concerns.

The service performances of the MFIs vary widely among types and among
individual MFIs.. The rural banks (LKP) appear performing best in saving and loan
services. Individual MFIs from other types (such as KSPs and USP-KSUs), however,
may perform much better in this respect because of larger assets, more convenient
services, and wider service areas. KSPs and a few other MFIs which employ mobile
services cover larger service areas.

A variation in the performance of individual MFIs are also observed among regions
resulting from differential in management and service quality, governance, market
competition, and socio-economic, demographic, infrastructure conditions.

In terms of operational efficiency and sustainability, as reflected by loan productivity
ratio, deliquent rate, and financial self-sufficiency ratio, the performances of the MFI
also vary accros institutional types. UPKD, USP-KSU and UPK have higher loan
productivity, while BMT, USP-KSU, Koptan, KSP, Bumdes, and LKP have lower
deliquency rates.

The deliquency rate, however, tend to overestimate the portfolios at risk of the MFIs.
A none repayment of several installments largerly turns out to be a repayment delay,
rather than a default. This view is widely cofirmed by the MFI respondents. Data
availability, however, prevent accurate estimates of the MFIs’ loan repaynent rates.
Loan defauts generally result from other factors than bad borrowers, such as adverse
economic condition, marketing failure, and bad harvest.

All MFIs are capable of financially sustaining their operations, generating incomes
larger than their operational costs. The perceptions of the MFI representatives
compiled in this survey also confirmed that providing microfinance to the poor can be
profitable. The representatives also view that saving services are necessary for the
poor to improve their livelihoods. The representatives also point the problems and
principles of effectively servicing microfinance. The poor generally lack of collaterals,
are less educated, and need convenient services.

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 3

Annex 3: UPKD – Origins

In March 1996, IBRD approved a USD27m loan for the Nusa Tenggara Agricultural
Area Development Project (NTAADP/IBRD Loan 3984-IND60). NTB became a project
area because of its low GDP. The potential of agriculture is limited as some 80% of
about 2m ha arable land is categorized as dry area.

Ditjen Bina Pembangunan Daerah, MoHA, coordinated the project on central level,
Bappeda Tk I on provincial level, and Bappeda Tk II implemented it on district level.
A feasibility study identified 24 poor sub-districts whereas Bappeda Tk II selected the
project villages, often IDT villages. 61 Many of these villages are not served by
financial institutions although few could be qualified as remote villages, i.e. at a
distance of more than 10 km from a bank.

The project aimed at
- increasing smallholder income through enhancing and improving the efficiency of
   agriculture production in the framework of poverty alleviation;
- strengthening local level institutions.

The sectoral government agencies, through their extension service, provided inputs
in kind, disbursed seedlings and cattle (“dropping”), rehabilitated and invested in
infrastructure, and offered micro loans.

In the wake of the monetary crisis (1997/98) a review of the project’s achievements
found out that the microfinance component was the one with highest acceptance. In
1999, Ditjen Bangda and World Bank agreed on a fundamental revision and to
continue the project as IMS-NTAADP. Poverty alleviation should be based on the
local people’s own initiative (IMS = Inisiatif Masyarakat Setempat). The IMS principle
means: People plan and allocate funds, they monitor and supervise. Community
development facilitators (CDF) were engaged to foster broad-based participation at
grassroots level. Villagers were asked to form groups of about ten families to submit
a plan to finance income-generating activities, in particular in agriculture.

The villagers, not the government agencies anymore, became responsible for input
procurement and were offered finance for their own investment plans, i.e. for
- agriculture in general (sistem usaha tani, SUTA),
- animal husbandry (usaha ekonomi produktif ternak, UEPT),
- non-agriculture income-generating activities (usaha ekonomi produktif , UEP).

The funds were channeled through and administered by UPKD (Unit Pengelolaan
Keuangan Desa). Since 1999, UPKD were established as “community-owned” non-
bank and non-cooperative MFI with independent administration and a working area
limited to the village.62

   Net commitment: USD22.1m
   IDT villages are those regarded most backward in income and development with a high
percentage of poor families; these villages received 1994-1996 in three subsequent years
three times Rp20m as a revolving fund for “IDT groups” or “Pokmas” (kelompok masyarakat).
    SK Bupati Bima:”UPKD adalah merupakan Lembaga Keuangan Mikro di Desa yang bukan
Bank dan bukan Koperasi yang pengelolaanya bersifat Independen dengan wilayah kerja di
desa setempat.”

Rural Microfinance Development in NTB – Concept and Implementation Strategy       Annex 3

Despite the concept adjustments, the project objectives remained unchanged63:

a) increasing the farmers’ income through agriculture, husbandry, fishery and others;
b) reducing differences in income and welfare through assisting with funds for
   economic activities64;
c) increasing the capacity of the local government and people’s participation in the
   development of economic activities among the poor villages;
d) development of small and medium sized economic activities;
e) providing employment for the rural people;
f) increase the villagers’ purchase power.

None of the official objectives were financial ones or related to a financial institution
such as UPKD, although a financial monitoring system was introduced. The project
engaged a number of NGO for providing field workers at a ratio of about one staff for
about four UPKD. According to a related tender document the project looked for
community development facilitators (CDF).65 No word mentioned that their task would
include consulting an MFI and advising UPKD management. 66 In fact, the project
engaged also “Microfinance Consultants” on district level.

Although the villagers could now submit their investment proposals for enhancing
their income through micro loan financed investments, many people felt that IMS-
NTAADP was still a top-down concept. They did not understand the mechanism (e.g.
group loans only), or they did not really support it, such as the joint liability group
approach. Many people questioned a number of seemingly contradicting regulations.
For example, the project’s priority for agriculture loans to the poor, including landless
workers without a business, and at the same time stressing the importance of timely
loan repayment.

According to IMS-NTAADP procedures, villagers discussed their financing proposals
within the groups before the group leader submitted them to UPKD. CDF assisted
with the loan application and related administration. The proposal was assessed
based on:
- poverty level of applicant
- domicile (villager)
- loans with other institutions
- repayment capacity (whether the applicant has other side income sources)

   UPKD dibentuk dengan tujuan:
      a) meningkatkan pendapatan petani melalui usaha-usaha perbaikan dan
          pengembangan system usahatani tanaman pangan, perkebunan, peternakan,
          perikanan dan usaha ekonomi produktif lainnya
      b) mengurangi kesenjangan pendapatan dan tingkat kesejahteraan melalui pemberian
          bantuan modal usaha
      c) meningkatkan daya dukung Pemerintah Daerah dan partisipasi masyarakat dalam
          pengembangan usaha-usaha ekonomi diantara sesame penduduk miskin di desa
      d) mengembangkan kegiatan ekonomi masyarakat berskala kecil dan menengah
      e) menciptakan lapangan kerja bagi masyarakat pedesaan
      f) meningkatkan daya beli masyarakat pedesaan
   The list of project objectives might have contributed to confusion:”b)” mentions “bantuan
modal”, assistance with funds or capital vis-à-vis “bantuan pinjaman”, the term normally used
when programs or projects provide loans (whereas banks disburse “kredit”). It would have
perhaps been more appropriate mentioning that UPKD receives “bantuan modal” whereas the
end users, group members, receive “bantuan pinjaman”. It would perhaps have been better to
use the term “kredit”.
   Tender of Bappeda Propinsi NTB, Mataram 27 Juni 2000;
   It is no wonder that several UPKD respondents expressed their disappointment with CDF.

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 3

-    type of enterprise (priority is given to present business, not new business)

The proposals were screened on village level and, if approved, forwarded to the
Camat (sub-district head) and Bupati (district head) who finally decided on releasing
funds to UPKD.

The IMS-NTAADP closed 20 September 2003.

Until that time, the project UPKD received funds amounting to about Rp45b or about
Rp200m per unit. The IMS-NTAADP invested a much higher working capital amount
per unit compared to other institution development programs such as UED-SP
(Rp6.5m per unit), TPSP (Rp10m per unit) or PKS-BBM (Rp50-100m per unit).
Additional, IMS-NTAADP invested in facilitation, empowerment, and training.

Two years after the project closed, NTB’s government agencies on provincial and
district level, in particular Bappeda officers are (still) familiar with UPKD. District
governments support UPKD development and make available a budget to finance
monitoring, consultancy, and even seed capital (e.g. Rp15m in Lombok Barat) for
additional “UPKD”.

People questioned the legality of UPKD.67 A decree of the regent (SK Bupati) was
the response in some (but not all) districts. This decree and the statutes and by-laws
reflect UPKD management under the project. The decree was released to “guarantee
the post-project continuation of the IMS-NTAADP program, and in order to take care
of the assets.”68

In Annex 2 to the decree one can learn that after closing the project, UPKD will
continue its activities to revolve the “NTAADP-loan”.69

Neither a mission nor a vision was formulated for UPKD.

   The legality is questioned by people looking for reasons not to repay the loan.
    Penjelasan atas Keputusan Bupati Bima, Penjelasan Umum: Untuk menjamin
keberlanjutan program pasca proyek serta menjaga seluruh asset yang ada di setiap UPKD,
perlu disusun legalitas UPKD….
   Annex 2 to the Decree No. 581/Thn 2003 tgl. 24 December 2003 of the Bupati about
Pedoman dan Panduan Pengelolaan UPKD: “untuk kesinambungan kegiatan dimana dana
kredit desa dapat bergulir dan berkelanjutan sebagai modal kerja…” (p.14), or: “5.
Collateral/Agunan: UPKD ke depan…”(p. 35)

Rural Microfinance Development in NTB – Concept and Implementation Strategy                 Annex 4

Annex 4: UPKD – Financial Performance

Financial data on 229 UPKD were made available. They do not allow a reliable
analysis because the date is not known to which these figures refer. In addition,
UPKD do not apply identical bookkeeping procedures. Despite these serious
shortcomings they are helpful to describe the variety among these MFI.

Table A8: UPKD per District, (Rp million)
                         Loan      Addit-    Out-                        Interest
 Kabupaten UPKD Kec.                                Assets                        Savings
                          fund    ional f. standing                      income           /Outstdg
 L. Barat*)   30 7        7,378     1,097    8,230   9,323                   284     565       3%
 L. Tengah        53    6      9,515               10,922       10,939    1,107       317      10%
 L. Timur         35    8      7,198                5,395        7,765      111       469       2%
 Sumbawa          30    5      7,186        126        4,380     8,520    1,067       140      24%
 Dompu            24    4      6,282        706        4,809     8,055      959       108      20%
 Bima             57    5      7,672                6,627        9,282      996       614      15%
Total NTB        229           45,231     1,929     40,363      53,884    4,524     2,213      11%
Italic figures for Sumbawa refer to 17 UPKD only

Table A9: UPKD, per average unit, (Rp million)
                          Loan       Addit-    Out-                             Interest
Kabupaten       UPKD                                                 Assets                 Savings
                          fund      ional f. standing                           income
 L. Barat*)          30      246         37      274                     311           9        19
 L. Tengah               53         180            0           206       206         21           6
 L. Timur                35         206            0           154       222           3        13
 Sumbawa                 30         240            4           258       284         63           5
 Dompu                   24         262            29          200       336         40           5
 Bima                    57         135            0           116       163         17         11
 Total NTB              229         198            8           176       235         20         10

1. Assets

Measured by their average assets of Rp235m, UPKD are placed just between two
other well-known sustainable MFI types, namely BKD (assets about Rp50m) and
BPR-LKP (assets about Rp3,000m). Approximately 20% of the UPKD record assets
below Rp150m and 20% exceeding Rp300m. Compared to July 2003, average
assets dropped Rp4m; among others a result of 15 additional locally financed UPKD
(most of them in East Lombok) with PPW-funding below Rp100m.

The growth measured as the difference between assets and IMS-NTAADP loan fund
averages 14%. The growth is significantly lowest (11%) with UPKD in the average
size range (assets Rp200-300m).

Rural Microfinance Development in NTB – Concept and Implementation Strategy      Annex 4

Table A 9: UPKD Assets (2005)
       Range          No. of            Total        Growth *)
                                                                   Growth **)
     (Rp million)     UPKD            Rp million       Rp m
 0 - 100                 19             1,477             202            16%
     >100 - 200               68         10,898          1,450           15%
     >200 - 300               97         24,805          2,476           11%
     >300 - 400               33         11,195          1,721           18%
     >400 - 500                9          3,848            631           20%
     >500 - 603 (max)          3          1,672            255           18%
                            229          53,895         6735,0           14%
*) Assets minus total loan-capital
**) Growth / loan-capital

The growth of most UPKD is very modest: Most of them grew less than 13%.

Table A10: Asset Growth
    Growth range                  UPKD            Average UPKD Growth in Districts
         up to 10%           94       41%               Lotim 8%, Lobar 10%
        >10% - 20%           72       31%         Loteng, Dompu 15%, Sumbawa 17%
        >20% - 30%           45       20%                     Bima 21%
     >30% - 69% (max.)       18          8%

Based on these figures the smaller UPKD in Bima could grow much faster than the
much larger ones in Lombok Barat.

2. Loan Fund or Initial Fund

UPKD were established for channeling funds from IMS-NTAADP to be onlend to final
borrowers through groups. UPKD received these funds without an obligation to pay
interest or to repay the loan. This “loan fund” or “initial fund”70 has not become the
property of the UPKD. It is recorded as a liability in UPKD balance sheets. It has also
not become village property. In fact, there are differing perceptions about the present
and future ownership of this fund. There is a latent conflict potential and it cannot be
excluded that the government asks for repayment.71 For the time being it is important:
- UPKD are allowed to manage this loan fund;
- UPKD decides on proceeds such as interest from the management of this fund;
- UPKD must not pay interest for this fund.

A number of UPKD, in particular those with funds below Rp100m, received finance
from local government funds (APBD). Probably, these funds were legally transferred
as grants. Very few UPKD received funds from both sources. No UPKD received
more than Rp350m.

  This term might be misleading as the fund came in several annual tranches.
  SMoCSME made available funds to MFI with the prospect that they would not have to
repay it. SMoCSME changed its mind and the fund has to be repaid within 10 years.

Rural Microfinance Development in NTB – Concept and Implementation Strategy        Annex 4

Table A 11: Loan Fund (n=228)
        Range            UPKD                Average / district      The average UPKD
  up to Rp100m              16                                       loan     fund   varied
                                                                     according to district.
  Rp100m – Rp150m           38                 Bima: Rp135m
                                                                     Whereas the average
  Rp150m – Rp250m          118               others Rp180-246m       UPKD       in  Dompu
  Rp250m – Rp300m           44                Dompu: Rp262m          received      Rp262m,
  Rp300m – Rp347m           12                                       those in Bima got only
  average: Rp198m          228

3. Additional Capital

Only three districts provide figures for “additional capital”: Lombok Barat, Sumbawa
and Dompu. Besides funds for on-lending, UPKD received grants for premises and
equipment. It is assumed that “additional capital” indicates also the accumulated
surplus or retained profit. Also, some UPKD book reserves for bad debt as
liability/(reserve) capital, whereas others record this position as negative asset (as
banks do).

Table A 12: Additional Capital
 Additional capital                   UPKD             Almost 60% of the UPKD recorded
                                                       “additional capital” amounting to not
 up toRp10m                      22          39%
                                                       more than Rp25m, an amount
 Rp10m – Rp25                    11          19%       equivalent to 10% of UPKD assets.
 Rp25 – Rp50                     12          21%       Provided UPKD would have to pay
 Rp50 – Rp100m                   9           16%       6% interest p.a. for the IMS-NTAADP
                                                       fund, these UPKD would most
 Rp100m – Rp265m                 3           5%        probably have lost capital.
 Total                           57       100%

4. Loan Disbursement and Repayment

Based on data from 229 UPKD, total loan disbursement (initial IMS-NTAADP loans
plus revolving since 2000) amounts to Rp81.7b (average Rp357m/UPKD). The
revolving factor is 1.8 and indicates a considerable ratio of non-repayment assuming
that 1999 IMS-loans should have revolved up to five times (2000/01, 2001/02,
2002/03, 2003/04, and again in 2004/05), 2000-loans four times etc. Only 15 UPKD
revolved the initial loan (loan fund) more than three times, 20 UPKD less than once.

225 UPKD report loan collection amounting to Rp35.2b (average Rp156m).

Table A13: Loan Revolving
                                 UPKD            Total            average UPKD
                                  (n)          Rp million           Rp million
 Loan disbursement                229              81,664             357
 Repayment                        225              35,188             156
 Outstanding amount               216              40,364             187

Rural Microfinance Development in NTB – Concept and Implementation Strategy         Annex 4

Data from several UPKD in Loteng (n=16) and Sumbawa (n=30) are incomplete or
probably incorrect, because figures provided for loan disbursement are not equal to
loan repayment plus loan balance.

UPKD monthly monitoring reports provide figures for arrears. UPKD differ between
arrears on the loan fund, arrears on first revolving, second revolving etc. These
figures were not part of the data set.

5. Interest Income

All 216 UPKD announced a combined interest income amounting to Rp4.52b
(average Rp20.9m/unit). This is a low figure:
- For comparison, assuming that UPKD received 15% interest on all already repaid
    loans (1.5% x 10 months), they would have collected Rp35.2b x 15% = Rp5.3b or
    Rp23.2m per average UPKD.
- If UPKD revolve their average loan fund (Rp198m) only once and receive only
    15% interest, their average income would already amount to Rp29.7m in one
- If UPKD lend their average funds of Rp198m at 2% for 3 years (2002 – 2005),
    total interest income would amount to 2% * 3 years * 12 months % x Rp198m =

Table A14: Interest Income
 Range in Rp million           No. of UPKD                     Two thirds have interest
 up to 10                           87             40%         income lower than Rp20m. It
                                                               is not recorded whether the
 >10 – 20                           52              24%
                                                               amount stated as interest
 >20 – 30                           28              13%        income refers to interest
 >30 – 50                           24              11%        earned for the current year
 >50 – 100                          21              10%        (and for how many months),
 > 100 – 160 (max)                    4              2%        the past year, or whether it is
 Total                             216             100%        the sum of interest earned so

6. Deposit Mobilization

For many UPKD it is common to ask a small amount for compulsory or membership
savings.72 Some UPKD succeeded in convincing people to deposit funds voluntarily.
In total, Rp2.2b could be mobilized, Rp10m per UPKD on average or Rp20,000 per

Table A15: Deposit Mobilization
 Range in Rp million       No. of UPKD
 0 – 10                         137            60%
 >10 – 20                        78            34%
 >20 – 76 (max)                  14              6%

  There is a latent conflict or differing perceptions. Some argue that UPKD channels funds to
members of groups and that these members are also members of the UPKD. According to
the financial records, groups are account holders, and not the individual group member.

Rural Microfinance Development in NTB – Concept and Implementation Strategy          Annex 4

Annex 5: UPKD – SWOT analysis

Major strengths, weaknesses, opportunities and threats describe in short UPKD
features of these MFI and their environment.

High number of similar financial institution
Rather equally distributed over the province
Outreach to target group (farmers and MSE in villages, un-banked poor)
Decision makers are close to clients in several aspects (decentralized decision)
Maximum convenience for borrowers in remote areas
Flexible arrangements, BI regulations do not apply
Products close financial gaps at prices for which the demand exceeds availability
Low cost of working capital (loan fund)
Low transaction costs, in particular:
- cost of information (client, family, relationships, village economy),
- cost and time for transport, for lender and borrower
- cost of administration (low wages of local labor)
- cost of institution (no or low costs for representative purposes)
Substantial working capital available that allows financial sustainability
Trained managers
Incentives for managers
Informed group leaders and borrowers
Informed and supportive local government
System through sub-district forum for coordination and lobbying
Replication: similar or same problems, challenges and opportunities with all UPKD

Unclear ownership: no sense of belonging
Without vision and mission: no direction and no priorities
No annual work or business plan: no targets
Lack of discipline and adherence to regulations: no (immediate) sanctions
Internal control fails (“Member empowerment” is not substitute for supervision.)
 “Participation” weakens organization (Social control does not substitute prudent lending.)
Organizational flaws regarding composition and role of Musdes and Management73

No access to bank loans, among others because unresolved ownership issue.
Limited capacity to mobilize deposits (legal issue and matter of confidence)

Lack of professionalism: temporary (?) part-time employment
Income incentives not balanced
Project-oriented management although project ended
Insufficient internal control mechanisms
Insufficient internal (and external) supervision
No proficiency to increase income
No revenue monitoring and control
No proper arrears monitoring, and arrears control
No action plan for arrears collection
Relevant regulations not sensible
Sanctions not effective
No cooperation with other UPKD

     Managers as Musdes members; for more see Annex SK Bupati

Rural Microfinance Development in NTB – Concept and Implementation Strategy        Annex 4

Personal relationships (managers are community members)
Avoiding conflict more important than problem solving
Management often not appointed solely based on capacity
Managers not assisted in personal relationship conflicts vs. professional decision
Managers and staff not trained or supported to manage conflicts of interest
Managers are part of the social fabric in the village and their decisions and activities are
judged by non-professional standards such as respect to the village hierarchy and harmony,
and avoiding conflicts.

Inefficient: three or more managers for 4 loans and less than 100 transactions/month
Decreasing income from increasing NPL
Deteriorating loan portfolio performance, increasing bad debt
Costs exceed income, as income from loan interest decreases
Insufficient enforcement of interest payments and fines
No instruments for self-assessment

Manual incomplete and outdated (project-oriented, especially bookkeeping)
Manual not applicable, e.g. gross income allocation to costs
Insufficient depreciation on fixed assets: no written rule or regulation
Insufficient provision for bad debt: no written rule or regulation
No regulations for write-offs
No regulations regarding profits or SHU (sisa hasil usaha)
Insufficient documentation
Weak internal control, supervision and audit
Sub-district Forum not very actively supported

Government support on provincial and district level
Local governments finance new UPKD
Sustainable and profitable village-based enterprises
Business expansion by more than 100% possible
New products for village people (loans to individuals)
Cooperation as deposit agent with banks
Partner in a system of government-owned FI
BPD Bank NTB or BPR-LKP as supervisor, auditor and HRD provider
Bawasda as supervisor and auditor
UPKD as banker for the village government and its increasing village budgets
Channeling and administration of funding for village-based programs/projects
Strengthening UPKD system through district or sub-district based Forum

Village government not supportive: no Musdes decision to renew UPKD
Fast and almost irreversible deterioration of loan portfolio quality
Government does not support information campaign
Perception that UPKD loans are grants to poor people
More government or donor programs or projects with low interest revolving fund
BUMDES and/or LKM legislation adjourned
Political influence and interference
BRI, BPR, and cooperatives establish more service points and mobile services
BRI, BPR, and cooperatives offer products similar to those of UPKD
NGO entering the MF market
External supervision of MFI too expensive
Selection of UPKD managers not transparent
UPKD managers’ authority questioned if not enforced by Bupati decree
Government does not issue write-off procedures
Government withdraws IMS-NTAADP fund

Rural Microfinance Development in NTB – Concept and Implementation Strategy                            Annex 6

Annex 6: UPKD – CAMEL Rating
Setia Kawan Sekontong Tengah/West Lombok
 Assets                           Rp m                     Comment
 Cash. bank                        16.8             5%     quite the right amount
 Loans                            289.2                    loan quality is a very optimistic assumption!
 sub-standard 60.0
 doubtful       25.0                                       (According to General Manager, about Rp100m
 loss           15.0                                       cannot be recovered!)
 Loan risk reserves                 -1.8       0.6%        should be 34.4!
 Inventory                          73.6     19.8%         should be 10% (incl. land and office building!)
 Depreciation                       -6.8    < 10%          insufficient, should be > 10.0 despite inventory
                                                           including land and building (estimated Rp43.6m)
 Others                              1.0
 Total assets                     372.0

 Savings                            4.8
 NTAADP fund                      280.7
 Equity (profit until 2004)        77.1      20.7%         of assets: sufficient (higher than average UPKD)
 Grant. inventory                   7.1
 Profit 1-6/2005                    2.3        1.2%        = RoA p.a.; should be more than 1.5% p.a.
 Equity and liabilities           372.0

 Income and costs                                          half year: 01-06/2005
                                                           p.a. equivalent of all outstanding loans. (23,2% on
 Interest income                    22.0     15.2%         Rp189m-Rp100m “no-loss” loans), higher than
                                                           average UPKD, but indicates 40% NPL
 Administration fee                  1.9       8.5%        of interest income: acceptable for 10 months loans
 Total income                       23.9

 Interest in savings               < 0.1      0.8%         on savings equiv. p.a.: should be 6% or higher
 Interest on NTAADP                  0.0      0.0%         should be 2% p.a. = 5.8m for village coffer
 Personnel cost                     13.2     55.3%         of total income: high: fringes: 13th salary, office
 Office                              1.9                   clothes, consumption for 4 persons
 Incentives                          1.0                   for group leaders, supervisory board, village
 Meetings                            4.0                   Annual meeting, including transport cost
 Risk reserve                        0.1       0.1%        should be at least 3%
 Depreciation                        1.0       6.7%        p.a. equivalent on Rp30m (computer. motorcycles).
 Others                              0.4                   should be 20% x Rp30m /2 (half year) = 3.0
 Total costs                        21.5
 Profit (6 months)                   2.3                   It takes 20 years to balance Rp100m loan loss!

 Penilaian                                                Nilai       Predikat          Bobot      Nilai Akhir
 Permodalan           CAR                                100,0    SEHAT                  30%            30,0
 Kualitas Aktiva      KAP : APYD                           3,0    TIDAK SEHAT            25%             0,8
 Kualitas Aktiva      PPAP : PPAPWD                        5,2    TIDAK SEHAT             5%             0,3
 Rentabilitas         Return on Assets (RoA)             100,0    SEHAT                   5%             5,0
 Rentabilitas         Biaya op. : Pendapatan op.          83,3    SEHAT                   5%             4,2
 Likuiditas           Alat Likuid : Hutang Lancar        100,0    SEHAT                   5%             5,0
 Likuiditas           Loan : Deposit Ratio (LDR)         100,0    SEHAT                   5%             5,0
 PENILAIAN TOTAL                                         491,6    (maks.: 700)            80%          50,2
 Dikonversikan ke bobot 100%:                                     KURANG SEHAT         NILAI:          62,7

Measured by BPR standards, above “good performing” UPKD would be “less sound”.
Alternative simulations show: 1) With Rp100m non-recoverable loans, equity would
be negative, the score/nilai <50 = unsound.
2) A strong, >20% equity/asset ratio cannot balance 20% sub-standard, 10% doubtful
and 5% loss loans when loan risk reserves are almost non-existent.

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 7

Annex 7: UPKD – Management Survey

The local government arranged meetings with UPKD representatives
- on September 6, 2005, in Prada (Lombok Tengah) and
- on September 13, 2005, in Sumbawa Besar (Sumbawa)

These meetings offered the opportunity to gather more information. A questionnaire
was prepared. The UPKD representatives jointly filled in these questionnaires during
a 1.5-hour session accompanied by explanations and clarifications.

Data and opinions on the following issues are presented in the following:
 1 Attendance
 2 UPKD and villages households
 3 Funding
 4 Asset
 5 Loan portfolio
 6 Interest earned 2005
 7 Clients
 8 Outreach to the poor
 9 Loan policies
10 UPKD intervention
11 UPKD reporting
12 Facilitation
13 Training requests
14 UPKD managers
15 Supervision
16 Legalization
17 Potential

1 Attendance
In Lombok Tengah, 40 (75%) managers of the 53 UPKD attended. In Sumbawa, 17
(47%) out of 36 UPKD (new Sumbawa district) were present, most with two

A low attendance may indicate that, on average, the performance of UPKD in
Sumbawa is worse than those in Lombok Tengah. For many managers in Sumbawa,
time for travel on a motorcycle to the district capital takes more than two hours one
way. For some of them this might have been a reason to abstain.

2   UPKD and villages households
The figures entered by the respondents point to a problem. Many do not really know
the area of their operation or the potential, i.e. the number of inhabitants. In several
cases figures given for number of villagers conflicted with the number of households,
the more important figure, if it concerns financial services. Assuming that over- and
underestimates balance (the median value is close to the average), it appears that
Lombok Tengah villages have about twice as many families as Sumbawa villages
(average 1,644 versus 785 households). The number of households, potential clients,
is important for reaching scale and sustainability. As long as there is no competition,
a UPKD in a high population density area has a better potential than a unit in a
remote mountainous region serving shifting cultivators.

Rural Microfinance Development in NTB – Concept and Implementation Strategy                           Annex 7

Table A16: Households in UPKD villages (UPKD Managers Estimates)
 District            Lombok Tengah                 Sumbawa
 median                    1,300                        766
 average                   1,664                      785
 low - high              128 - 4,750               333 - 2,500
 n                           17                        37

3 Funding
Most UPKD, namely 42, received funds from NTAADP (World Bank). District
government financed 13 (in Lombok Tengah 11) UPKD with PPW funds (APBD).
Two UPKD in Lombok Tengah claimed to have received funds from both sources.

The average NTAADP fund per UPKD is 19% higher in Sumbawa (Rp222m) than in
Lombok Tengah (Rp186m), the average PPW funds only half that size of the UPKD
funds: Rp116m in Sumbawa and Rp 84m in Lombok Tengah.

Table A17: UPKD funding
 District                    Lombok Tengah                         Sumbawa
 Source of fund            NTAADP             PPW          NTAADP            PPW
 average         Rp m           186            84              222              116
 low – high      Rp m       64 - 316         15 - 168       70 - 307        106 - 126
 UPKD                n          29                11           13                2
 Don’t know          n                  2                               2

Despite their lower funding, Lombok Tengah’s UPKD recorded a higher growth:
Rp67m (+35%) versus Rp40m (+18%), although Lombok Tengah’s PPW funded 9
UPKD grew only 10% (data not in table). Total assets remained slightly higher in
Sumbawa: Rp 261m versus Rp241m.

4 Assets
Without exact data, the annual asset growth rate can only be estimated, because
project funds were disbursed over three or four years. The project closed September
2003. In September 2005, one might base the growth rate on an average of three
years. The resulting growth of 6% to 12% p.a. does not include UPKD with worst
performance that were not present at the meetings.

Table A18: UPKD assets development
 District                        Lombok Tengah                                  Sumbawa

                         Asset              Asset growth             Asset            Asset growth

 average       Rp m       241           67               35%           261            40        18%
 low – high    Rp m      55 - 569     -23 - 253        -29%-102%     90 – 408        0 - 113   0% - 58%
 UPKD            n         30           29                29           16             13         13

Rural Microfinance Development in NTB – Concept and Implementation Strategy                  Annex 7

5 Loan portfolio
Various terms for “outstanding loans” are known. Several respondents certainly
misunderstood the term and filled in figures that rather resemble cumulative loan
disbursements, a figure which donors (not banks) are interested in. The average loan
portfolio is slightly higher than initial funding and in Sumbawa about 20% higher than
in Lombok Tengah (Rp236m versus Rp198m).

Table A19: UPKD loan portfolio
 District          Lombok Tengah                       Sumbawa

 Loans           Rp m       as of assets         Rp m         as of assets

 average          198          85%               236              82%
 low – high      39 - 442     20%-100%         114 - 406         39-100%

 UPKD       n      31           28                13               13

6 Interest earned 2005
The respondents were asked to state the amount of interest earned from January
until any month of their choice this year (accumulated interest). Many of the answers
were entirely questionable (too low – too high). Some figures reflect certainly income
earned during (not until) the previous month, others rather refer to interest earned
since UPKD establishment. In particular data from Lombok Tengah respondents
were eliminated so that only records from 50% of these UPKD were processed.

UPKD in Lombok Tengah and in Sumbawa earn more or less Rp2m interest per
month or about 1% of the portfolio. The averages hide that the tremendous variances.
Representatives from low-income UPKD demonstrated that they are interested in
reviving their village “bank”.

Table A20: UPKD interest earned on loans
 District                             Lombok Tengah                        Sumbawa
                                  n        avg      low - high      n      avg       high
 - average p.m., Rp m            23        2            0-7        17        2   0.1 – 4.5
 - Interest p.a. equivalent      20        8%       0% - 39%       14      11%   1% - 21%

Loan conditions provide for income amounting to 2% on the outstanding loan amount,
or even 2% on the initial loan amount (flat) for installment loans. When UPKD earn
only 1% the conclusion is that 50% of the loan portfolio are NPL. The income is
sufficient to cover expenses but not enough for additional bad debt provisioning.

7 Clientele
For efficiency and other reasons, a loan applicant has to join a group. UPKD in
Lombok Tengah have 73 groups-clients on average, with about 9 members (total
544). UPKD in Sumbawa provide loans to only 36 groups (clients), but with more
members, 13 per group (total 474).

The figures indicate that on average 52% on the households in Lombok Tengah’s
and 74% of the households in Sumbawa’s UPKD villages received a loan. Even

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when eliminating some extreme high figures, one can state that perhaps 30% of
UPKD village households in Lombok Tengah and 50% in Sumbawa are now
acquainted with loan application, repayment and loan procedures.

In some places the number of group members can exceed the number of village
- Against regulations, one household gets two or even more loans (e.g., husband
    and wife, child).
- The same person appears several times, for example as a member of a core
    group (kelompok inti) and again, after revolving, as a member of a development
    group (kelompok pengembangan).
- Clients from neighboring villages obtain loans.

Table A21: UPKD clients: groups and their members
 District          Lombok Tengah                       Sumbawa

               Groups    Members     M/G      Groups     Members     M/G

 average         73        544          9       36         474       13
 low – high    15 - 90    300-930    6-20      4-383     53-2600     2-26

 UPKD n=         39         38       38         13          13       11

The average loan balance per individual group member is Rp364,000 in Lombok
Tengah and Rp498,000 in Sumbawa. It can be concluded that the average initial loan
amount was about Rp750,000 to Rp1m (data not presented in the table).

8 Outreach to the poor
Poor rural people living at a distance from modest infrastructure were the target of
NTAADP. One should have this in mind before assessing UPKD performance.
Without offering any criteria, the respondents were asked to estimate how many
persons (or percent) of the group members belong to the poor, and to the very poor
strata of the population in their village. (Poverty has not only a measurable
component but one has also to consider the environment in which the people live.)
Most respondents, for example 25 of 34 managers who answered this question,
stated that all borrowers are poor or even very poor. With highest probability, those
classified as very poor are certainly people living below daily 1USD per capita. From
this perspective, Lombok Tengah UPKD dared to advance loans to a higher
percentage of very poor people (48% versus 30%) - and still record faster assets
growth than Sumbawa UPKD. The variance is extremely high: In Lombok Tengah, for
instance, the percentage of very poor borrowers varies from 2% to 100%!

Table A21: UPKD Service for the Poor
 District                                   Lombok Tengah                   Sumbawa
                                    n        avg        low - high     n      avg   low -high
 very poor borrowers, #             36       48%        2% - 100%     11    30%     5% - 80%
 poor borrowers, #                  35       42%        1% - 90%      12    55%     12% - 95%

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9 Loan policies
Regarding the responsibility for loan policies, the two districts show a remarkable
difference. Sumbawa follows project guidelines (82%) more than Lombok Tengah

In Lombok Tengah, it is the village head (25%) and the UPKD director (43%) who
have distinctly more influence on loan policies than the respective persons in

Table A22: UPKD loan policies
         District         Lombok Tengah          Sumbawa         Only three respondents
                                                                 from     Lombok      Tengah
 - NTAADP                  23         58%        14    82%       claimed, never having seen
                                                                 the project’s written loan
 - Facilitator             2          5%         3     18%       handling guidelines and
                                                                 instructions. For the others,
 - Village Head            10         25%        0      0%       who know about the
 - MusDes                  19         48%        7     41%       existence       of     these
                                                                 guidelines and instructions,
 - UPKD Director           17         43%        4     24%       the better question might
                                                                 have been if they ever had
 - Others                                                        read them.

Table A23: UKPD Intervention
                                                         10 UPKD intervention
 Intervention                               Sumbawa
                        Tengah                          It is often argued that the weak
 - No answer          2     4%                          performance of UPKD is a result of
 - No                                                   intervention from third parties.
                     31         78%         12   71%
                                                        Intervention is perhaps less
 - Yes                7         18%         5    29%    rampant than related rumors, but
 By                                                     18% (Lombok Tengah) and 29%
                                                        (Sumbawa) of the UPKD directors
 - Neighbor           1                     1
                                                        report intervention, in particular
 - Family             0                     2           from the village head. The
 - Village Head       4                     3           respondents might not be really
                                                        representative.     Those      not
 - Facilitator        2                     1
                                                        attending the meetings are said to
 - Others                   director,                   have experienced quite often
                      2      people

11 UPKD reporting
Reporting in a timely manner is indispensable. According to NTAADP regulations, the
monthly report shall be sent before the 10th (or even 7th) each month, whereas, for
comparison, BI allows BPR 15 days. BI imposes a financial penalty for submitting
reports delayed. IMS-NTAADP proposed also a respective regulation but it was
apparently not enforced.

In Sumbawa, all of those UPKD that still send their monthly reports in a “timely”
manner (within less than two months) were present at the meeting. The 14 UPKD
represent 82% of the participating UPKD but only 39% of all 36 IMS-NTAADP-and
APBD-financed UPKD in the district. Lombok Tengah’s “fast” reporting 15 UPKD
constitute also a 28% minority of all 53 UPKD there.

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Not submitting a report for 6 months, 12 months, or even longer does not mean that
the UPKD is “dormant”. Often, the UPKD just reduced the number of transactions.
Even when activities came already to a halt, there are chances to revive the UPKD
as, for example, ProMIS did this with IDT-groups. The attendance of representatives
of non- or very late-reporting UPKD underlines this observation.

Table A24: UPKD reporting
 Last time report sent        Lombok Tengah              Sumbawa
                                     n = 40                  n = 17
 - 07-08/2005                   15            38%       14            82%
 - 01-06/2005                    5            13%        3            18%
 - before 2005                  17            43%        0             0%
 - no answer                     3             8%        0             0%
 - not present                  13                      19

The district Lombok Tengah decided to move the guidance of the UPKD from
Bappeda to Dinas Koperasi. Today UPKD report to:

Table A25: UPKD Reporting (Lombok Tengah)
 Dinas Koperasi                      19       One UPKD sends the monthly report to four
 Bappeda                             11       offices. Neither Dinas Koperasi nor Bappeda
 Diskop + Bappeda                    5        have complete sets. Many UPKD do not send
                                              a report, apparently in particular those that did
 Village Head                         5
                                              not attend the meeting.
 Sub-district                         4
 Dinas Perikanan                      2       The situation is different in Sumbawa. Most
 Bawasda                              2       UPKD do not report monthly to Bappeda.
 Dinas Pertanian                      1       However, all of the 17 UPKD present at the
 Dinas Peternakan                     1       meeting claimed to send the report to the
 Facilitator                          1       facilitator. One UPKD sends a copy to the
                                              sub-district office (Camat).
 None                                 2
 UPKD not present                    13

Reasons for not reporting:
- no computer, file in computer lost, hard disk damaged, no ink for printer
- no typewriter
- not yet prepared photocopy, no refund from groups for purchasing stationary
- few transactions, no transaction 2005, no changes of data
- address for report after project closed is unclear
- report is prepared but not sent because Dinas Koperasi is now Pembina
- no legality yet
- report is year-end report and comes in December, reporting only once annually or
   once in six months
- (general) manager is not active, not active since 6 month, not interested, one
   manager went to work in Malaysia, new general manager in the process of
   reviewing assets

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12 Facilitation
Respondents from Lombok Tengah were especially critical about the facilitators.
Almost half of them (8 of17) were disappointed. Also in Sumbawa: 11 managers out
of 40 feel not or less satisfied. Although this is less than 30% one has to bear in mind
                         Lombok                       that government officers and the
             District                  Sumbawa        project’s   former    microfinance
 Facilitation                                         consultant       watched       the
 - not satisfying            0             1          respondents when they ticked the
                                                      respective     boxes     in    the
 - less satisfying           8            10
 - satisfying                8            26
 - very satisfying           1             3          More than 50% of the managers do
                                                        not only request facilitation, they
 not required                 0                0        regard it even necessary. Whereas
 requested                    6               16        10 (59%) UPKD managers in
 necessary                   11               22        Lombok Tengah want to see the
                                                        facilitator once or twice a month,
 once 3 months               7                19        this frequency is only wanted by 18
 monthly                     9                11        (45%) of Sumbawa’s managers,
 twice monthly               1                 7        who were more satisfied with past
 on request                  2                 4        facilitation.

13 Training Needs
UPKD managers have priority topics regarding training. Risk management comes
first, second loan analysis and third bad debt management.

Table A26: Training requests
 District                                  Lombok Tengah                      Sumbawa
 Training requests          total*)
                                        Score      no   1     2      Score      no   1    2

 - Bookkeeping                98         58        2    14    22      17        2    9    4

 - Reporting                  92         54        3    16    19      16        2    12   2

 - Loan analysis             117         61        0    15    23      24        1    8    8

 - Bad debt mgmt             115         59        1    11    24      24        1    6    9

 - Organization              108         59        0    15    22      21        1    9    6

 - Risk management           119         65        0    13    26      23        1    9    7

 - Liquidity mgmt            108         63        0    13    25      19        3    9    5

 - Personnel mgmt            110         61        0    15    23      21        1    11   5

 - Product design            114         65        0    13    26      21        3    7    7
*) weighted scores from both districts
Training not requested: # respondents x 0 point (no)
Training requested: # respondents x 1 point
Training very much required: # respondents x 2 points
For example, bookkeeping, Loteng: 2 respondents need no training = 0 P; 14 resp. request
training = 14 P, 22 resp. require training = 44 P; total = 58 P:
Grand total = Score for Lombok Tengah + (Score for Sumbawa / 17) x 40 (adjustment to
Lombok Tengah’s higher number of participants.)

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Lombok Tengah managers are also interested to learn more about product design,
even more than about bad debt management.

14 UPKD Manager Recruitment
For many it was a conflict of interest when asked whether the UPKD general
manager should first be professional and second coming from the village, or just the
other way round: village first. This topic was discussed into more depth in Sumbawa,
which could be an explanation for the much higher percentage opting for a

Only few insisted that a man has to head the UPKD. One argument was that
distances and road conditions would harm women, another respondent pointed to
that the villagers might not respect a woman in this position. The position of the
general manger is still occupied by men. In Sumbawa, it is common that one or two
women participate in UPKD management (and in the meeting). In fact, one might
relate more accurate data presented by Sumbawa’s UPKD managers and the higher
interest income of these UPKD to women who are more correct in recording and
bookkeeping than men are.

Many UPKD do not generate full-time employment and respective income. It was
proposed to reduce the number of managers to one or two. The vast majority of the
participants in the meetings rejected this idea.

Table A27: UPKD Management
 UPKD general manager:                    Lombok Tengah         Sumbawa
 a villager*)                                31 (72%)           9    (53%)
 a professional*)                            8 (25%)            8    (47%)
 no answer                                      1
 a male                                         3                    2
 Number of managers
            1 person                            3                    2
            2 persons                           2
            3 persons                        35 (88%)           15 (88%)
*) respondents had to choose one

15 Supervision
Several institutions to a differing degree supervise UPKD. Surprisingly, five UPKD in
Sumbawa do not feel to be supervised by any institution, in total 9 (53%), which are
not supervised regularly. The situation is similar in Lombok Tengah: 20 or 50% of
Lombok Tengah’s UPKD state that no institution supervises them regularly.

Badan Pengawas (BP) is charged with internal supervision. However, BP teams work
in only 12% resp. 20% of the reporting UPKD regularly. BP seem not to perform in
the vast majority of UPKD.

District offices are the institutions mentioned most often, in particular when it
concerns regular supervision. They play the most important role as external
supervisors. In several places village authorities and village people are also
concerned with the UPKD business.

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It is most concerning that the directors do not supervise the UPKD. Therefore, it is no
wonder that one of the directors can misuse his authority without knowledge of the
other directors. Probably, management instruments for supervision are missing.

Table A28: UPKD supervision (at present)
                                         Lombok Tengah                  Sumbawa
                                             n = 40                   n = 17
            Supervision frequency   sometimes regularly      sometimes      regularly
 none                                                 5
 Directors                              2             4            5             2
 BP (internal audit)                    15        8 (20%)         11        2 (12%)
 Village institutions                   9             4            8             2
 Village people                         8             6            4             2
 District offices (Bappeda, etc.)       18           10            8             7
Others mentioned: Pokja (working group) (2), Bawasda (1), and the consultant (1)

The respondents want the respective government agencies to continue supervision.
On should point to a distinctive difference: UPKD in Lombok Tengah favor the District
Forum to become active whereas Sumbawa wants to see a Special Agency to take
over supervision. Surprisingly, in both districts, slightly more than 40% think that
supervision by BP suffices.

Table A29: UPKD supervision (proposed)
                 District     Lombok Tengah           Sumbawa
 Government agencies           29      73%            16   94%
 District Forum UPKD           22      55%             3
 Special agency                 2                     11   65%
 BP only                       17      43%             7   41%
 Other directors only           1                      1
 Bank                           3                      3

16 Legal Status - Options
In Lombok Tengah, starting 2005, the guidance of UPKD was moved from Bappeda
to Dinas Koperasi. The UPKD managers followed already a couple of discussions
concerning the future UPKD incorporation. In contrast to Sumbawa, with no vote for
incorporation as a cooperative, a 23%-minority of Lombok Tengah’s managers favors
this model.

Table A30: UPKD Legalization, Preferred Option
                                 Lombok Tengah                      Sumbawa
                                      n = 40                         n = 17
 Village enterprise                       28 (70%)                 11 (65%)

 SC cooperative                          9 (23%) *)                    0

 BPR-LKP service post                         1                        2

 BPD Bank NTB service post                    3                        0
                                 Penggaduhan ternak
 Other                                                        UPKD 5
*) In 2005, Bappeda handed over UPKD supervision/monitoring to Dinas Koperasi.

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17 Potential
The participating managers were asked to indicate the demand for loans in their
village. They specified how many additional loans, split into three ranges, the village
people would request. The estimated potential did not differ very much despite the
larger villages with almost twice as many households in Lombok Tengah compared
to Sumbawa.

When multiplying the number of loans with an estimated average loan amount in
each category (for loans below Rp500,000 this is Rp300,000, etc.), the sum of all
three categories is the average additional UPKD loan potential. With about Rp353m,
this potential means almost tripling UPKD’s portfolio.

Table A31: UPKD Loan Potential
                                                                         Average     Total
                             Lombok                          Average
               District                     Sumbawa                       loan
                             Tengah                         # of loans
                                                                          Rp m       Rp m
 Additional loans,             1,300
                                           766 households
 average/UPKD                households
 up to Rp500,000                230             243            237            0,3     71
 up to Rp2,000,000              118              75            97             1,3    125
 above Rp2,000,000               62              63            62             2,5    156
 Loan potential            average village                                           353

Quite a number respondents pointed to a substantial prospect in neighboring villages
without UPKD or “weak” UPKD, which they wanted to tap if allowed and provided
funds were made available.

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 8

Annex 8: UPKD – Comments on Regulations

-     Keputusan Bupati Bima (SK) No 581 Tahun 2003 tentang Unit Pengelola
      Keuangan Desa (UPKD), Pemerintah Kabupaten Bima 2003
-     Anggaran Dasar (AD) (statutes) and Anggaran Rumah Tangga (ART) (bylaws)
-     Pedoman dan Panduan Pengelolaan Unit Pengelola Keuangan Desa (UPKD)
      Kabupaten Bima

In December 2003, three months after closing IMS-NTAADP, Bima’s regent (Bupati)
signed a decree (SK) which establishes the legality of UPKD. This decree and
continuous financial support to local government agencies for monitoring UPKD has
certainly contributed that most of these units are still active. Without local government
support, the UPKD performance would certainly be worse.

Flaws in these regulations are most probably a result of lack of expertise to
implement a sustainable village-based banking concept. Regarding UPKD-ownership
the reader of the SK and its annexes is confronted with “village people’s ownership”,
“members of the UPKD” (“anggota”, without giving hints on how to become a
member, duties and rights of membership, etc.) and even “share ownership”74.

The decree and the two annexes reflect the transitional character of the project.
Many regulations do not solve problems. They were only applicable as long as
everything runs smooth, i.e. “sun-shine regulations”. Often, no thoughts were spent
on the general question: “What if not?” For example, one finds no answer for the
simple question: “What is the procedure, if a poor borrower cannot repay the loan?”
No one in the “happy UPKD family” ponders about how to dismiss inactive managers.

The following comments emerged when studying the decree. They do not cover all
questionable regulations. Many UPKD managers do not adhere to fundamental
AD/ART provisions. Often, deviations occur because of practicability, because of not
knowing or remembering the regulations exactly, because of different interpretation
and, perhaps most of all, just to avoid conflicts among fellow managers and villagers.

It is suggested to review the regulations and procedures once a decision has been
made on the basic concept for the future role and development of UPKD. It is
recommended that a qualified lawyer should advise on draft SK, AD and ART before

It is recommended for the development of AD/ART to compare the regulations with
- experience in the application of the decree,
- the actual UPKD practice,
- those of cooperatives (decisions are made by many people, the members, similar
     to the village community, who want affordable prices) and
- those of rural banks (decisions are made by investors who care for their
     investment, the sustainability of the institution).

UPKD origin from the program IMS-NTAADP, “Inisiatif Masyarakat Setempat – Nusa
Tenggara Agricultural Area Development Project”. “UPKD itself is an organization
established by the people being conscious about the joint objective to increase the
welfare of the members.” (Pedoman, p.2). If UPKD are a “people’s enterprise”

     “Mekanisma kepemilikan saham diatur sedemikian rupa…”, Pedoman…, BAB I, hal. 3

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 8

(masyarakat), ProFI should seriously consider not supporting these MFI, because
most “people’s-owned enterprises” concepts failed. Very few still surviving ones
convince only, if they are based on strong bottom-up developed social adhesion as in
Bali. NTB’s communities do not practice such a strong social adat system. The
deteriorating performance of the majority of UPKD is just another proof that “people’s
enterprises” fail due to the natural behavior of most people to act in their own private
interest. (In Bali, this interest is being embedded in the social fabric!)

A better choice is running an UPKD as village enterprise (BUMDES)75 with recruiting
managers and subcontracting internal supervision and audit. Alternatively, the village
government may hand over the management to another party, e.g. a neighboring
UPKD based on a profit-sharing contract (similar to Bank Bukopin’s Swamitra
concept, where Bank Bukopin manages the savings and credit units of multi-purpose

1. SK Bupati Bima on UPKD

P(asal)1        General definitions
f) Missing definition of Tim Pembina members (“suatu tim” yang memfasilitasi) .
i) “Pokmas (kelompok masyarakat, people’s group) is a community group that has a
productive business”, however, in reality, individuals have a business. In most
instances, Pokmas is a group of individual borrowers; the members appoint a group
leader (Ketua Kelompok/Pokmas) who signs loan agreements and collects the group
members’ loan installments.

P2     Status
“Working area of UPKD is the village.” This could be the way out to allow mobilizing
savings, in analogy to the LPD practice in Bali. (See also P3.)

P3       Function
The UPKD mobilizes and disburses funds” from the village community”. This
limitation might become a key vis-à-vis bank law.

P4     Purpose of UPKD
a) UPKD shall “increase the income of farmers.” Consequently, a borrower should at
least have some farming activities to be entitled for a loan. Households with other
source of income are not mentioned and do not seem to be the target group. (They
are mentioned in other places.)

P6      Legality (explanation for consideration, no comment)
(1) “UPKD is legal body once its statutes and bylaws are registered at the court
(Pengadilan Negeri).
(2) As a legal body, UPKD have the right to
- mobilize funds and disburse loans;
- sign contracts, including loan agreements;
- receive assistance and grants, financial as well as technical;
- represent cases in court (penggugat, tergugat).”

P7      Organization (explanation for consideration)

  Similar to PD (Perusahaan Daerah) as BUMD on district or provincial level, or
Persero as BUMN on national level. However, during the past decade, many of the
national enterprises changed the status and became Perseroan Terbatas (PT).

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(3) UPKD have four managers (pengurus): (i) general manager (ketua), (ii)
bookkeeper/secretary (sekretaris, bagian administrasi dan pembukuan), (iii)
cashier/treasurer (kasir), (iv) “Pembina” for development and people’s empowerment
(euphemism for credit/field officer, debt collector). UPKD in other districts have three
managers. Some UPKD employ staff (thus implementing P4 e):”…developing
employment opportunities for village people…”).

P9      Tasks, responsibilities, rights (of Musdes and UPKD managers)
(3) The management receives an incentive. An incentive for BP (badan pengawas,
internal control/audit) is not mentioned here, but appears in ART-P6 (bylaws). (It is
important that UPKD pay for reliable control. It is perhaps the best investment.)

P10 Musdes (comment concerning editing)
Compare: P10 (1) a) is a repetition of P9 (1) a)

P11 Musdes (concerning Musdes membership)
- Conflicts might arise, if one person is simultaneously a representative of more
    than one institution, e.g., if a BP-member is also Pokmas representative.
- Problems might arise, when Musdes has to decide on a UPKD manager, also a
    Musdes member. This person will decide on himself.76
- Three out of four managers have to attend Musdes, but no provisions are in place,
    if two managers do not attend, e.g., one moved to another place, or passed away,
    and another one does un(intentionally) not show up; or if two UPKD managers
    cooperate in not showing up. In these instances, Musdes is not legitimate (syah),
    even when all other participants agree on an issue.
- Musdes is also not “syah”, if the village head boycotts Musdes. The provision
    does not take into consideration constellations, which can easily arise, in
    particular, if it concerns mismanagement. It is a sunshine regulation!
(3) Missing word “minimal”: “apabila disetujui m i n i m a l oleh 50 persen + 1”

P12 Financing
(1) Loan is not mentioned as a source of UPKD’s business capital here. It remains
unclear what is meant by “non-binding” or “non-conditional” (“tidak mengikat”)
contributions and grants, as these often come with conditions.
(3) UPKD’s fund originating from IMS-NTAADP is/becomes the village community’s
asset (“adalah menjadi asset masyarakat desa”). This may result in various
contradicting assumptions and interpretations. It should be clear beyond any doubt
that the fund is not property of the village and that the village is not fund owner.
(4) The IMS-NTAAD fund is an eternal fund (“dana/modal abadi”).
(5) The local government can withdraw the fund, if the UPKD fails (indicating that the
government remains legal owner of the fund). Provisions regarding “unsound” UPKD
need to be defined to prevent arbitrary withdrawal of the fund.

P13 Business
(3) UPKD extend loans to Pokmas/groups (not to individuals), for productive
purposes, thus excluding, e.g., emergency loans for the objective “increasing the
welfare”. This is against best practices77 and does not consider the phenomenon of
money fungibility. This provision should not continue if UPKD become village banks.

P14     Income

  For example, a manager is not member of the board of commissioners!
  Loans to the poor: first loan for food or repaying another loan, second loan for clothes, third
loan for home, fourth loan for education, fifth loan for business or emergency.

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(2) This clause allocates arbitrarily (top-down!) UPKD gross income (not net income
or profit!) to (i) equity growth (40%), (ii) management incentives and operational costs
(40%), and (iii) other costs (20%). This provision is extremely unusual. It is a highly
problematic sunshine regulation that does not allow losses! Under this regulation,
when arrears increase,
- incomes decrease, and less funds are allocated to bad debt reserves;
- cost cutting happens just when money is required for various collection efforts;
- management spends more time but gets a discouraging low income.
A revision is urgently suggested. In this respect, village governments should ponder
charging at least a small fee, e.g. 2% p.a. of the project fund, so that UPKD
contribute to the village coffers.

P16     Supervision
(3) This clause appoints Badan Pengawas Daerah (Bawasda) as external supervisor.
It is suggested that Bawasda should explicitly be mentioned in the Organizational
Structure (see statutes, AD-P9).

Explanations and clarifications on the Decree (Penjelasan atas keputusan)

The decree comes with two pages explanations and clarifications. UPKD shall
support farm-based businesses. UPKD are financial institutions for farmers
(Lembaga Keuangan Petani?). It is suggested to review the necessity to link the
activities of UPKD with farmer activities as many village people produce farm goods
for own consumption only and have other sources of income. However, Musdes may
charge the UPKD management with the task to disburse a minimum percentage of
loans for financing seasonal farm activities (loan product “SUTA” Sistem Usaha Tani”,
a loan that is repaid in full after harvest or from harvest sales proceeds).

The “Explanations” mention “UPKD members” (“Untuk dapat menikmati asset yang
dimiliki masyarakat ybs. terlebih dahulu harus menjadi anggota UPKD”). This
sentence contributes to different interpretations. The SK Bupati itself does not refer to
“UPKD membership”.

Unfortunately, there is no mentioning that the district government will make a budget
available for guidance (pembinaan), facilitation of technical and management matters,
by the village, sub-district and district government.

2. Statutes (Anggaran Dasar, AD)

AD-P6 Function
“UPKD is a micro financial institution functioning as….” It is not mentioned that UPKD
interacts with groups only as indicated by the organization chart (see P9).

AD-P7 Objective
UPKD shall increase the income of villagers, decrease social envy (!), improve
welfare, increase purchase power, etc., a wide range of economic and even some
non-economic and non-financial activities (7 a) – f)), wide and not focused.
The term “bantuan modal usaha” (see sub-sentence b): often “misinterpreted” as a
loan that must not be repaid) instead of “kredit” points to the social role.
(There is a semantic flaw in P7 b): it is certainly not intended “Mengurangi ….tingkat
kesejahteraan melalui bantuan modal usaha kerja” (Decreasing…. the welfare
through financial assistance).

AD-P9     Organizational chart or structure

Rural Microfinance Development in NTB – Concept and Implementation Strategy      Annex 8

Concerning the chart, it is suggested
- to present Bawasda explicitly as a body for supervision;
- to consider having included and presented individuals of the same village as
   savers and individual others, maybe limited to the same village and split villages
   or adjacent villages, as borrowers;
- to draw (a) box(es) for group leaders (Ketua Pokmas);
- to draw (a) box(es) for members (“anggota”), if there are any.
The organization chart presents Forum UPKD Kabupaten-Kecamatan. Regrettably,
any other references (definition, participants, tasks, objectives, etc.) are missing. It is
recommended that UPKD membership in an association becomes imperative.

AD-P12 Funding
The wording should be reviewed, as (3) and (4) are not sentences. It is suggested
that (3) and (4) become (1) c) and (1) d);
(3) loans (“dana pinjaman”), e.g. from banks, can become a source of funds (not
mentioned in SK Bupati P12);
(4) UDKP started as fund administrator. This is perhaps the reason that retained
profits are not mentioned as a source of funding. The question of equity and profits
(and its legal owner) is not resolved. It is suggested to review the UPKD in this
respect in total as it also concerns and clarifies the ownership.

AD-P13 Business
(2) Regarding non-binding donations etc.: Normally, funds from programs and
projects and even donations are binding.
(3) Loans go to groups only: A revision is strongly suggested.

AD-P14 Income
This regulation concerns allocation of gross income (see comments on SK Bupati,
P14). A revision is strongly recommended.

AD-P15 Reporting
 (5) Suddenly the term “laba” (profit) appears. Before, gross income was allocated;
profits (income minus costs) could not exist. Here, profit is defined as “dari dana
pengembangan 40%” (40% from development fund), a term not mentioned or defined
before. A review is urgently required.

AD-P16 Changes
Musdes is responsible for any changes to the AD. It is suggested to indicate which of
the provisions Musdes can change, in contrast to those that are already fixed based
on the SK Bupati. The nature of the individual UPKD should not differ too much from
one another.

3. Bylaws (Anggaran Rumah Tangga, ART)

ART-P1         Musdes          (suggestions for editing only)
See SK Bupati P11 to keep this list more simple, and for review. Unclear whether
Kades (village head) plus three village representatives (= four persons), or three
village representatives including Kades (three persons) have to participate.

ART-P2        Musdes responsibility
(1) Musdes does not formulate the AD/ART, it is only changing or adjusting the
AD/ART and it should do so only with respect to the SK Bupati (dengan
memperhatikan SK Bupati). Suggestion for addition: e) mensyahkan
laporan/pertangungjawaban tahunan

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 8

(2) It seems (not undisputable clear!) that UPKD management is responsible for
inviting Musdes for the annual report. If the management fails to invite, a Musdes
would not convene, - and no solution to problems.
(4) A “Special Musdes” will convene only if UPKD managers divert funds, but not for
other reasons, such as not reporting or complete inactivity.
There should be a provision that a Musdes will be held on request of the government
(Tim Pembina), for example, if the village cannot protect the funds.

ART-P3         Management
Kabupaten Bima promotes four instead of only three managers (pengurus) as
common with cooperatives, or two directors as common with BPR, or even only one
as in BPR-LKP. The more persons share in the same income, the lower will be their
individual income, but probably also their engagement and sense of responsibility.

ART-P4          Service period
(2) “Managers are replaced with at least 60% of the managers remaining.” Following
this regulation, after a three years service period, Musdes can only replace one out of
three or four managers, even if the performance of two managers is unsatisfactory.
Reason for this questionable rule is the intention that the skills remain in the UPKD.

ART-P5          Recruitment and release of UPKD managers
(1) In connection with (2) f,g; (3) f,g, (4) f,g: When comparing the terms for UPKD
managers it was found that, in contrast to the other managers, the general manager
(ketua pengurus) seems not be obliged to work full time and that he must not have a
healthy body and spirit (“sehat jasmani dan rohani”).
In contrast to the chapter’s title, nothing is mentioned about dismissing a manager.

ART-P6           Tasks, responsibilities and rights of BP (internal supervision)
(1) a) The first task of BP, as mentioned here, is socializing the presence of UPKD. It
is proposed that the foremost task of BP should be checking whether the UPKD
management follows regulations and procedures, and proposing changes to
regulations and adoptions to procedures so that UPKD managers can always comply.
(1) e) BP should be allowed to check the UPKD anytime, also without announcing an
audit to the village head first, as stipulated here.

ART-P7          Tasks, rights and authority of the UPKD managers
The following observations on tasks relate to loan processing:
- (1) According to the job description here, the general manager (ketua) seems to
    be not involved in credit decisions, although the field manager reports his field
    observations and gives recommendations to him (see (4) d) below).
- However, according to ART-P14 (5), the ketua is the credit committee’s head.
- (2) d) The manager for administration and bookkeeping (secretary) is a member
    of the credit committee.
- (3) k) The finance manager (cashier) is not mentioned as a member of the credit
    committee but is responsible to withheld loan disbursement if its administration is
    not yet completed.
- (4) i) The field manager is the only (?) other “komite kredit” member among the
Field managers communicate with (group leaders of) “Pokmas” (groups) not with the
individual end-user. According to (4) b), field managers collect loan repayment; c)
survey and assess group loan applicants (“Pokmas calon peminjam”), e) seize
collateral from a group (groups do not have collateral, group members may have, it is
not compulsory!); g) assist with writing loan proposals; i) approves or disapproves
loan applications.

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 8

ART-P8           Rights of the managers
(1) The managers receive an “incentive” based on SK Bupati P14 (2) b), i.e. a
percentage of the operational cost; according to SK Bupati P14 (2) b), total
operational costs are 40% of the gross income.
(3) The managers receive an annual THR78 bonus amounting to one (monthly) salary
(“gaji”, the term is new here, it was not mentioned before). Probably, the “gaji” is the
projected and budgeted “average insentif”. The THR bonus is part of a 20%
allocation for “other costs” (see SK Bupati P14 (2) c)).
(4) The managers receive severance payments amounting to three monthly incentive
payments, without stating from which part of the UPKD’s income allocation.
(6) The managers are insured in the social security system Jamsostek, charged to
SK Bupati P14 (2) b) as part of the general operational cost. No manager has been
met who confirmed being registered with Jamsostek.

According to ART-P17 a) managers receive a bonus amounting to 5% of 40% = 2%
of the gross income to be deducted from the 40% allocation to the UPKD capital
development (SK Bupati P14 (2) a) ). This bonus reduces capital growth.

ART-P9          Responsibility: Reporting
(1) The UPKD management has to send the monthly report until the 7th each month
to the Coordination Team at Bappeda in Bima.
(2) A fine will be imposed for delays. However, no account of execution of this fine
has been received. According to ART-P17 b), the fine is charged to the UPKD as
operational cost. No regulations concerning fines were found or mentioned (amount,
recipient). The fine does not reduce the income of managers.

ART-P15        Loan repayment
(6) For loans repaid before due date, this provision demands payment of a certain
percentage of the interest that would have been earned.79 This regulation is sensible
if it concerns installment loans with flat interest rates. In general, even local MF
consultants do not comprehend this rule. Its application was not found.

ART-P17        Allocation of (gross) income
This provision details the allocation of gross income for cost items. It is
recommended to not allocating gross income to cost items, if there is no direct
relationship. With MFI, there are few costs directly related to income. Even worse:
Lower interest income can provoke higher costs, e.g. for loan loss reserves, as in
case of delinquent loans. It is also not sensible to allocate 10% of the gross income
for asset maintenance and depreciation (see ART-P17a): 25% from 40% allocated to
capital development = 10% of gross income). A review is urgently required.

  Tunjangan Hari Raya
  For example, loan interest payment according to loan agreement is 10 months x Rp20,000;
the loan is repaid after the sixth month and UPKD has earned 6 x Rp20,000 = Rp120,000. It
would have earned another 4 x Rp20,000 = Rp80,000 without early loan repayment.
According to this provision, the debtor would have to pay an early repayment fee of, for
example, 20% x Rp80,000 = Rp16,000.

Rural Microfinance Development in NTB – Concept and Implementation Strategy     Annex 8

4. Manual and Guidelines for UPKD Operation

Pedoman dan Panduan Pengelolaan Unit Pengelola Keuangan Desa (UPKD)
Kabupaten Bima

This instruction manual presents the UPKD administration on 70 pages.

The introduction and program background covers two chapters on nine pages. One
of the main problems is already presented on page 2: “…UPKD need statutes and
bylaws, which are decided upon by all members in the members’ meeting or
Musyawarah Desa.”80 Why: “or”? “The UPKD Program’s target are the “members and
the village people.”81 Are these two different strata?

Reasons are presented for establishing groups as borrowers, namely: coordination,
supervision, guidance and joint liability as collateral substitute. Is this the “inisiatif
masyarakat”? The answer from the field is: It is the initiative of the project! Even
UPKD managers prefer loans to individuals.

The following statements (p. 3) may explain the dilemma:
- “The UPKD fund is property of the village people.” 82
- “The authority to make use of the fund lies with the village people.” 83
- “The mechanism of share ownership (“saham”) is arranged in a way to guarantee
   the continued presence of the fund in the village.” 84

Chapter II (p.5/6) exposes underlying reasons, why a number of loans were not
repaid. Target of IMS-NTAADP loans:
- “Development of sources of income of poor people in the village by efforts to
   develop productive working places.” This means: financing new activities with a
   much higher risk of loan failure.
- “Village groups or poor farmers are preferred target whose income is not
   sufficient to finance their food, schooling, health…” It has to be anticipated that a
   substantial part of the loan will be used for non-productive purposes.
- Loan processing principles:
   o demand driven, according to the people’s request;
   o quick disbursement;
   o all village people are active in planning, executing, UPKD supervision.85

Chapter III presents ten pages about the management of the IMS program, which are
of minor relevance after the closing date 30 September 2003.

Chapter IV explains on seven pages funds management and administration. Terms
such as “tabungan anggota” (members savings) and “tabungan sukarela” (voluntary

   “…maka UPKD harus memiliki AD dan ART yang ditetapkan oleh seluruh anggota melalui
rapat anggota atau Musdes.”
   …agar manfaatnya (UPKD) betul-betul dirasakan oleh anggota dan masyarakat desa.”
   Status dana UPKD yang berasal dari proyek NTAADP adalah milik masyarakat desa.”
   Otoritas pengelolaan dana tersebut ada pada masyarakat desa.
   Mekanisme kepemilikan saham diatur sedemikian rupa ….
   Comment: This is certainly demanding - and time spent on “empowering” can become a
cost item! (In turn?, the IMS-NTAADP fund comes interest-free to the UPKD!) This is not so
easy for average farmers and time-consuming work for which the UPKD management and BP
is already paid. And what about common people who cannot express themselves and just
want financial services?

Rural Microfinance Development in NTB – Concept and Implementation Strategy        Annex 8

savings) are used but not explained (4.2 a). The example for the calculation of
interest lacks necessary information.86. A reason why “the interest rate on voluntary
savings has to be lower than the bank rate” is not given (footnote p.20).

Chapter V, the mechanism to administer loans, covers 14 pages. It presents the 5C87
concept and includes a presentation of a simple loan analysis, a calculation of the
loan applicants’ assets and loan repayment capacity. Using the forms and following
the instructions (often they were not) would have prevented disbursing quite a
number of loans that turned bad. The pages on interest calculation do not refer to
effective interest rates, or to the effect of installments and savings, or to upfront
interest deductions that are suggested for seasonal loans to agriculture (SUTA).
Regular loan monitoring does not cover monitoring arrears and loans with arrears
(see p. 38: Kartu Monitoring Kredit has no column for arrears.).

Chapter VI, four pages about cash management specifies suggestions for the
allocation of gross income. For example, the “incentive” for managers is maximum
25% of the 40%-allocation for operational expenses (BOP, biaya operasional, p.43)88,
equivalent to 10% of total gross income. The result is not convincing: A profitable
UPKD yields a monthly gross income of Rp5m to Rp8m. 89 If 10% of this amount
(Rp500,000 – 800,000) is allocated as incentive to four managers, the monthly
income would be Rp125,000 to Rp200,000, - much too low even for a half-time job!
Annual allocation to the risk fund (2% of 20% “retained profits”) would amount to
about Rp1.5m to Rp2m, less than 1% of outstanding loans and insufficient
(suggested minimum: 3%). The suggestions are not at all realistic. In most active
UPKD, incomes are less than half and incentives (or salaries) at least twice as high.

Chapter VII, ten pages about risk management, is suitable for advanced MFI
managers. It describes several ways of risk measuring in theory, but unfortunately,
no case study is presented. Very few, if any, UPKD will be able to handle risk
measuring. As a risk mitigation measure, loan insurance, is suggested, but no loan
insurance company takes over UPKD loan risks.

Chapter VIII presents 14 pages about loan supervision and loan recovery. The bad
debt classification matrix (p.57) is a helpful guideline, if the UPKD management has
the capacity and experience to classify the business of individual (!) borrowers. A
guide for loan quality differentiation is presented (p. 59/60), however, a link to bad
debt provisioning is missing. The guide fails to discuss that, after rescheduling,
interest on a “new loan” is lower (based on new, lower loan amount) (p64/65). A table
is presented with figures that need additional explanations and may need to be
revised. For example, Rp225,000 interest are stated to amount to Rp2,250,000 for
“monthly repayment for one year”. However: 12 months x Rp225,000/month =

   This concerns interest calculation: The balance of an account and transfers from the 8th of
                                                      st      th
the month onwards was given, but the balance from 1 until 7 not.
   Loan assessment by 5C: character, capital, conditions, collateral, capacity
   Maximum 75% of 40% is allocated for other operational costs. In most cases, maximum
25% plus maximum 75% is less than 100%! No hint is given how to handle a difference if less
than 75% of the allocation to operational costs are spent!
   Portfolio Rp250m x 2% - 3% p.m = Rp5-7.5m. Most probably, there are less than 15
UPKD in this income range in NTB.

Rural Microfinance Development in NTB – Concept and Imlementation Strategy                    Annex 9

Annex 9: UPKD – Sustainability Criteria
Some argue that a MFI is sustainable if it cannot only cover all costs and expenses but also
generate income to cover the following:

 - interest or other charges for the initial fund, which UPK received for free                7% p.a.
 (opportunity cost); this is a value of at least bank deposit rate or SBI rate
 - asset growth to compensate for inflation (keeping real value of funds                      9% p.a.
 constant), about
 - reserves for participating in general or sector economic real growth, about                6% p.a.
 Total                                                                                       22% p.a.

Deposit-taking institutions can fulfill this requirement with regard to equity thanks to the
leverage effect: Assets generate profits (return on assets, RoA) which are attributed to a
much smaller equity (return on equity, RoE). Owners may earn 22% on their equity, which
accounts for 10% of the balance sheet because depositors (90%) get only 7%. On average,
this MFI earned 10% x 22% + 90% x 7% = 8.5%.

It is not realistic to demand that grant-financed non-deposit-taking MFI have to earn 22% on
the entire capital. It should be demanded to develop this MFI to become a deposit-taking

Others claim that a MFI is not sustainable when it can only cover costs thanks to subsidies,
including the provision of a fund below market price or even free. UPKD obtained about
Rp200m at zero % interest. A sustainable UPKD would earn at least a profit amounting to 7%
x Rp200m = Rp14m (capital opportunity costs). This opinion is challenged.

                                                                MFI A earns 18% or Rp36m from an
 MFI                               A                 B
                                                                Rp200m donated fund. Operational
 Non-grant                                               200    expenses amount to Rp40m and do
 Grant, donation                       200                      not include costs for an office and
                                                                electricity (provided by village
 Income interest             18%       36      35%        70    government). Despite subsidy, a
 Interest cost                0%         0     12%       -24    fund at zero cost, MFI A’s net
                                                                income is negative: -Rp4m! The
 Op. expenses                          -40               -36    sustainability of MFI A is questioned!
 Office, electricity = 5                 0                -5    It is called “inefficient”, because
                                                                costs exceed income!
 Net income                             -4                5
                                                          MFI B earns 35% or Rp70m from an
Rp200m fund that it financed with a commercial loan (interest Rp24m). Operational expenses,
Rp36m, are lower (no visits from donors, no meetings, no travel, no reporting). MFI B has to
pay for an office and electricity (Rp5m). MFI B did not receive direct or hidden subsidies but
booked an Rp5m net income.

The difference between MFI A and MFI B is: MFI A passed on more than the subsidies to its
clients: The “value” of the donated fund, the subsidy from donor to MFI, is 12% x Rp200m or
Rp24m, the amount a bank would have charged. The donor required that the MFI charge its
target group maximum 18%. This is 17% below market price. The subsidy from MFI A to its
debtors amounts to (35% (market rate) - 18%) x Rp200 = or Rp34m. The donor forced MFI A
to pass on more subsidy (Rp34m) than it has received from the donor (Rp29m). One cannot
say that MFI A is not sustainable, the donor made it un-sustainable with limiting the loan interest rate!

Therefore, a pragmatic definition is proposed: A UPKD is sustainable if it can provide financial
services without depending on support in kind or cash from non-clients and income from
business with clients is projected to equal or exceed costs for these services.

Rural Microfinance Development in NTB – Concept and Implementation Strategy         Annex 10

Annex 10: Transfer of Assets to UsPKD

It is recommended to provide a strong and undisputable foundation for strengthening
UsPKD. This foundation is an agreement with the local government and village
government concerning the (enabling) environment in which UsPKD work.

The foundation for UsPKD as a profit-oriented enterprise is
- a transparent book-keeping system and a new, reality-based balance sheet;
- a set of rules and regulations that are common for MFI and are adhered to;
- a qualified management and staff to run the UsPKD business.

A well-documented transfer of assets, rules and regulations, and personnel from the
Unit PKD to Usaha PKD has to take place. This transfer, although primarily an
administrative one, has to be prepared.

Presently, Musdes is the UPKD’s highest authority. Therefore, the proposal
presented here can only be realized, if Musdes agrees to this concept. This may
become a difficult procedure, if one follows UPKD statutes and bylaws. For example,
in Bima, Musdes is an assembly of representatives of nine different village
organizations that meets only once annually (see Annex 7)

Despite these arrangements in statutes and bylaws (that may vary from district to
district), it is proposed to socialize the proposed changes and to call in a Musdes.
The local government shall request village and UPKD representatives to agree to the
transfer of assets from Unit PKD to Usaha PKD. This process is preceded by assets
verification. As loans account for about 80-90% of UPKD’s assets, it is imperative to
confirm the existence and substance of these assets and assess their value based
on the probability of repayment. 90 This assessment requires a full, renewed
documentation of all loans, at least of all loans with arrears.

Loans – intentionally, and on request of IMS-NTAADP – went to poor or even very
poor people91 and it might not be possible to recover the full amount of overdue loans.
Regulations have to be established for the assessment of the value and transfer of
assets from Unit PKD to Usaha PKD. Especially, regulations are required for
differentiating loans according to substance and quality:
- reserves for bad debt: substandard loans remain in the portfolio;
- write-off: loan collection continues, off-balance records;
- final write-off: the case is closed.

   For example, if the probability of loan repayment is only 30%, the value of this loan is loan
balance x 30%. Loan loss reserves have to cover 70% of the loan balance. If the probability
of loan recovery within two or three years is zero, the loan has to be written off.
   According to UPKD managers, 30% (Sumbawa) or even 48% (Lombok Tengah) of the
loans go to very poor people, 55% resp. 42% to poor people. (see Annex 6.8)

Rural Microfinance Development in NTB – Concept and Implementation Strategy        Annex 10

The balance sheets below demonstrate in short a transfer from UPKD to UsPKD.

Before transfer

Table A32: Unit PKD “ABC”: closing balance
                Aktiva / assets                       Passiva / liabilities and capital
 Cash                                5,000,000   Deposits                        5,000,000
 Bank                                5,000,000   IMS-NTAADP                    160,000,000
 Pinjaman (loans)                 180,000,000    Reserves for bad debt           5,000,000
 Fixed assets                      10,000,000    Capital (accumulated
 Depreciation                      (2,000,000)   surplus previous years)
 Others (including office
                                    2,000,000    Profit current year              5,000,000
 rent paid in advance)
 Total assets                     200,000,000 Total                           200,000,000

After transfer

Table A33: Usaha PKD “ABC”: opening balance
                 Aktiva/assets                         Passiva liabilities and capital
 Cash                                5,000,000   Deposits                         5,000,000
 Bank                                5,000,000
 Kredit yang diberikan92          130,000,000    IMS-NTAADP                      85,000,000
 Reserves for bad debt            (30,000,000)
 Fixed assets                       10,000,000   Equity                          23,000,000
 Depreciation                      (4,000,000)
                                                 Profit current year              5,000,000
 Others                              2,000,000
 Total assets                     118,000,000 Total                           118,000,000

The owner of the IMS-NTAADP fund has lost Rp160,000,000 – Rp85,000,000 =
Rp75,000,000, which are allocated to Rp50,000,000 write-off and Rp25,000,000 as a
contribution to increase bad debt provision from Rp5,000,000 to Rp30,000,000.

Depreciation of fixed assets increased Rp2,000,000 to become Rp4,000,000 and
was balanced with reduced capital/equity.

Total assets decreased from Rp200,000,000 to Rp118,000,000 = Rp 82,000,000
IMS-NTAADP                                                  - Rp75,000,000
Capital                                                       - Rp2,000,000
Shifting bad debt reserves from Passiva to Aktiva             - Rp5,000,000

  It is recommended to apply the word that expresses best the obligation to repay a loan,
namely “kredit” instead of “pinjaman” or “bantuan modal”.

Rural Microfinance Development in NTB – Concept and Implementation Strategy      Annex 11

Annex 11: Musyawarah Desa (Musdes)

Musdes, an assembly of village people, is the UPKD’s highest authority. Musdes has
the authority to change the UPKD’s statutes and bylaws. Therefore, the proposal to
alter the character of UPKD, can only be realized, if Musdes agrees. Representatives
of nine different organizations form the Musdes:

Table A33: Minimum Representatives of Musdes
 Organization                         Comment                                  Members
 Group leaders, Pokmas                50% + 1, if UPKD serves 30 groups:           16
 UPKD manager                         minimum three out of four (Bima)              3
 UPKD supervisors                     minimum one out of three                      1
 Village head                                                                       1
                                      perangkat desa, minimum
 and administration                                                                 2
 Badan Perwakilan Desa (BPD)          minimum                                      1
 Village elders                       minimum                                      1
 Religious leader                     minimum                                      1
 Karang Taruna, youth leader          minimum                                       1
 LKMD Lembaga Ketahanan
                                      minimum                                      1
 Masyarakat Desa
 9 organizations                      Total, minimum: 12 + group leaders          28

Musdes cannot decide if one of the above organizations is not present with the
minimum number of representatives. Decisions of Musdes are accepted if (at least)
50% + 1 of the people present agree.93 Musdes meets only once annually to approve
the annual UPKD report. Extraordinary meetings are only held if requested by
representatives of minimum five of the nine organizations, based on an indication
that “deviations” (penyimpangan) occur(ed) in the management of the UPKD.

Following UPKD’s AD/ART, Musdes can change statutes and bylaws only once a
year, namely on the opportunity of the annual meeting. The composition of Musdes
members with regard to UPKD is problematic:
- Conflicts might arise, if one person is simultaneously a representative of more
    than one institution, e.g., if a BP-member is also Pokmas representative.
- Problems might arise, when Musdes has to decide on a UPKD manager, who is
    also a Musdes member. This person will decide on himself.94
- In Bima, three out of four managers have to attend Musdes, but no provisions are
    in place, if two managers do not attend, e.g., one moved to another place, or
    passed away, and another one does un-(or intentionally) not show up; or if two
    UPKD managers cooperate in not showing up. In these instances, Musdes is not
    legitimate (syah), even when all other participants agree on an issue.
- Musdes is also not “syah”, if the village head boycotts Musdes. The provision
    does not take into consideration constellations, which can easily arise, in
    particular, if it concerns mismanagement. It is a sunshine regulation!

The local government cannot exert pressure on Musdes by threatening to withdraw
the IMS-NTAADP fund. Without village support, the local government would have to
collect outstanding loans itself, for which it is not prepared, or to contract a third party,
professional debt collectors, for which a budget has to be made available first.

   Musdes dianggap syah apabila yang hadir….Keputusan Musdes dianggap syah apabila
disetujui 50% + 1 dari jumlah peserta Musdes yang hadir.
   For example, in PT enterprises, a manager is not member of the board of commissioners.

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 12

Annex 12: Badan Kredit Desa (BKD)

When advocating support to the development of UPKD, i.e. village based MFI in NTB,
it may be useful to refer to the experience of Java’s village based MFI, Badan Kredit
Desa (village credit board). BKD are regarded reasonably successful and sustainable
at delivering MF services at the village level. Out of 5,345 BKD, 4,518 (85%) BKD are
still active.

BKD profile (rounded figures)
      assets Rp58m
      loan portfolio Rp42m
      deposits        Rp 8m
      equity and retained profits Rp50m, i.e. more than the loan portfolio
      100 borrowers with loans from Rp100,000 to Rp1m, average balance is
      120 savers, average savings account balance is Rp70,000; mostly forced

Most popular are BKD’s 12-week installment loans with forced deposits. BKD make
no efforts to mobilize voluntary savings although their status would allow doing so.

At the end of May 2003, 9% of the loans (4% of the amount) were classified as “loss”,
about 7% of the loans (5% of the amount) considered “doubtful”. BKD established a
routine, formula-based system of reserving for bad debt. After a certain period, “loss”
loans are automatically written off against reserves and moved from the balance
sheet to an off-balance sheet “black list”.

The high equity, despite routine write-offs, is a result of a loan interest rate almost
double that of the BRI Units, but at a much lower transaction cost to the borrower.
Operating costs are low because three staff open the office at the market day only.
This is not attractive for savers who need access their emergency savings anytime.

Bank Indonesia (BI) charged BRI with the supervision of these units. BRI is even
allowed to dismiss BKD personnel.

Although the equity of the average BKD exceeds the loan portfolio, the situation
differs very much. Several BKD expand and look for more funds. BRI intends to lend
to BKD and has requested permission from BI because of the still questionable legal
position of BKD.

Rural Microfinance Development in NTB – Concept and Implementation Strategy    Annex 13

Annex 13: “The Yogyakarta Communiqué 2004”

We, the Governors and Deputy Governors of Central Banks and high-level officials
from Ministries of Finance and other authorities from 10 Asian countries present at
the High-Level Policy Meeting on “Microfinance and Rural Finance in Asia” held in
Yogyakarta from the 26th to 28th February 2004 identified appropriate strategies for
Central Banks and Governments to promote Microfinance and Rural Finance.


    •   the co-existence of the conventional and the new paradigm in Microfinance
        and Rural Finance in many countries and the need for a gradual shift along
        the continuum between these different approaches,

    •   the longstanding and successful experience with commercially-oriented
        Micro-finance and Rural Finance in Asia, already providing millions of low-
        income households with financial services on a sustainable basis,

    •   the shortcomings of interventionist, directed and subsidized credit policies,
        which are very costly, do generally not achieve significant outreach and
        compromise the sustainability of poverty alleviation efforts,

    •   the imperative to focus our attention on poverty alleviation in order to meet
        the challenges arising from the Millennium Development Goals,

    •   the importance of market-based, effective Microfinance and Rural Finance
        Institutions for poverty alleviation,

    •   the need for a conducive regulatory framework for competitive Microfinance
        and Rural Finance Institutions to realize their potential outreach and impact
        on low-income households to effectively reduce poverty,

    •   the desirability of financially self-sufficient provision of institutional capacity
        building in the long run, while in the short and medium run smart subsidies
        may be necessary,

Rural Microfinance Development in NTB – Concept and Implementation Strategy   Annex 13

We, the Governors and Deputy Governors of Central Banks and high-level officials
from Ministries of Finance and other authorities, will integrate Microfinance and Rural
Finance as a powerful tool for poverty alleviation in development strategies of our
countries and commit ourselves to apply in present and future actions the following
principles of good practice:

    1) We will work towards a conducive environment for commercially-oriented
       Microfinance and Rural Finance. The key issues to be addressed comprise
       liberalizing interest rates and enabling deposit-taking as well as non-
       collateralized lending to facilitate institutional sustainability, deregulating
       market entry barriers to foster competition, and providing appropriate
       mechanisms for exit of unsuccessful institutions.

    2) We will promote cost-effective and efficient ways to regulate and supervise
       the Microfinance and Rural Finance sector to protect small savers and create
       a level playing field among bank, non-bank financial institutions, co-operatives
       and other member-based institutions.

    3) We will strive for market orientation. We are aware that interest rate subsidies
       endanger institutional sustainability and undermine deposit mobilization. Only
       if markets clearly fail, temporary subsidies may be justified. Subsidies must
       be implemented transparently and phased out gradually.

    4) We will assume an active promotional role in Human Resource Development
       and Institutional Capacity building.

    5) We will extend the regional dialogue and co-operation among our countries to
       disseminate our rich and diverse experience with market-oriented and
       sustainable Microfinance and Rural Finance institutions, which are integrated
       in the formal financial sectors and serve large numbers of low-income
       households in Asia.

    6) We will continue the dialogue commenced in Yogyakarta and discuss the
       critical issues presented today and the principles of good practice agreed
       upon today with stakeholders in our countries.

All participants welcome the excellent co-operation achieved at the High-Level Policy
Meeting in Yogyakarta, in particular the progress of practical work in the countries
represented and the constructive discussions that have taken place and the Central
Bank and people of Indonesia for their gracious hospitality as well as GTZ and the
German Government for their professional support and generous co-funding of the

                       Declared in Yogyakarta, 27th February 2004

Rural Microfinance Development in NTB – Concept and Implementation Strategy       Annex 13

 Author                   Title
 Wilhelm, Mario           Field research on the economic and social environment of UPKD and
                          their institutional setup in Lombok, Indonesia, Reported to GTZ
 GEMA PKM                 Pokok-Pokok Pikiran GEMA PKM Indonesia tentang Kebijakan
 Indonesia                Nasional Pengembangan Keuangan Mikro bagi Pembangungan
 (Gerakan Bersama         Indonesia, Indonesia, 2004
 Keuangan Mikro)
 SMERU Research           Socioeconomic Impact evaluation of the Sulawesi Agricultural Area
 Institute                Development Project (SAADP): Lessons learned from a Micro-Credit
                          Program in Indonesia, SMERU Research Report, June 2004
 Japan NGO Center         JBIC Pilot Study on Sustainable Microfinance for Poverty Alleviation
 for International        in Eastern Region of Indonesia, January 2004
 Jansen, S.; Hamp,        Microfinance in the Rural Financial System and the Development of
 M.; Hannig, A.           the Local Economy, Key Issues for a Comprehensive Strategy to
                          Develop the Indonesian Microfinance Industry, 2005
 Promotion of Small       Indonesia – Background Paper on Microfinance Policy and Strategy,
 Financial Institutions   2005
 - ProFI
 Indonesia                Utang yang Memiskinkan, Studi Kasus Proyek Bank Dunia di Nusa
 Corruption Watch         Tenggara Barat dan Sulawesi Tengah, Tim Riset dan Penulisan
 (ICW)                    Koordinator Divisi Irfan Muktiono, Penerbit, April 2002;
 Richard Patten,          Improving Access to Financial Services for Low-Income Rural
 Jay Rosengard,           Households and Microenterprises in Indonesia: The Potential for
 Don Johnston,            Further Development of Local Government-Owned Financial
 Widjojo Koesoemo         Institutions, Prepared for Deutsche Gesellschaft für Technische
                          Zusammenarbeit (GTZ) GmbH, 2003
 International            The spatial dimension of welfare and poverty: Lessons from a
 University of Japan,     regional Targeting program in Indonesia, Takeshi Daimon, Working
 Niiagata, Japan          Paper No.8, August 2001,
 Holloh, D.               Microfinance Institutions Study, ProFI, MoF, BI, GTZ, 2000
 BAPPENAS                 Indeks Produk Domestik Regional Bruto per Kapita Atas Dasar Harga
                          Berlaku Per Propinsi, 1975-1996 (Indeks of Regional Product
                          Domestic Bruto per Capita at Market Prices, 1975-1996),
                          BAPPENAS. 2002
 Budastra, K.             Rural Financial Institutions and Households in Indonesia After
                          Liberalisation: An Analysis of the Rural Financial Market of Lombok.
                          School of Natural and Rural Systems Management. Brisbane,
                          Queensland, Australia, Queensland University: 329, 2003
 Mubyarto and R.          Program IDT dan Perekonomian Rakyat Gugus Nusa Tenggara
 Budiyanto, Eds.          (Backward Village Program and People's Economy in Nusa
                          Tenggara Regions). Yogyakarta, Yayasan Agroekonomika, 1997
 Ravicz, R. M.            Searching for Sustainable Microfinance : A Review of Five
                          Indonesian Initiatives. Washington, DC, World Bank Development
                          Research Group, 1998