Concept Paper. Project Number: P44252-INO May Republic of Indonesia: Financial Market Development and Integration Program (2012)

Transcription

1 Concept Paper Project Number: P44252-INO May 2012 Republic of Indonesia: Financial Market Development and Integration Program (2012)

2 CURRENCY EQUIVALENTS (as of 17 April 2012) Currency Unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp9,180 ABBREVIATIONS ADB Asian Development Bank CMDPC Capital Market Development Program Cluster CMNMP Capital Market and Nonbank Financial Industry Master Plan COBP country operations business plan CPS country partnership and strategy FMDIP Financial Market Development and Integration Program FPO Fiscal Policy Office GMRA Global Master Repurchase Agreement IDX Indonesian Stock Exchange NMTDP National Medium-Term Development Plan OCR ordinary capital resources OJK Otoritas Jasa Keuangan (Integrated Financial Services Authority) P3F post-program partnership framework RRP report and recommendation of the President TA technical assistance Shariah Islamic law GLOSSARY Sukuk A financial document or certificate which represents the value of an asset evidencing an undivided pro rata ownership of an underlying asset. Takaful A form of Islamic insurance based on the principle of mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of loss incurred by one of its members. NOTE (i) In this report, "$" refers to US dollars

3 Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division, SERD Team leader Team members Peer reviewers S. Schuster, Senior Financial Sector Specialist, SERD R. Hattari, Public Management Economist, SERD S. Ismail, Financial Sector Specialist, SERD L. Jovellanos, Senior Economics Officer, SERD B. Konysbayev, Senior Counsel, Office of the General Counsel K. Sanchez, Operations Assistant, SERD L. Schou-Zibell, Senior Economist, Central and West Asia Department S.M. Lee, Capital Markets Specialist, Office of Regional Economic Integration In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page I. THE PROGRAM 1 A. Rationale 1 B. Impact, Outcome, and Outputs 2 C. Program Costs and Financing 3 D. Indicative Implementation Arrangements 3 II. TECHNICAL ASSISTANCE 3 III. DUE DILIGENCE REQUIRED 4 IV. PROCESSING PLAN 4 A. Risk Categorization 4 B. Resource Requirements 4 C. Processing Schedule 4 V. KEY ISSUES 4 APPENDIXES 1. Basic Project Information 5 2. Problem Tree 6 3. Design and Monitoring Framework 7 4. Initial Poverty and Social Analysis 10

5 I. THE PROGRAM A. Rationale 1. The proposed program. The Financial Market Development and Integration Program (FMDIP) is a stand-alone policy-based loan, and represents the culmination of the long-standing engagement of the Asian Development Bank (ADB) with nonbank financial regulator and executing agency Bapepam-LK. The FMDIP will support the ADB-sponsored transformation of Bapepam-LK into a unified, independent regulator of the finance sector. The FMDIP will also begin an expanded engagement with the Government of Indonesia s Fiscal Policy Office (FPO) to support continuing development of the financial markets. The FMDIP is fully consistent with and supports the government s medium-term reform priorities as set out by the National Medium-Term Development Plan (NMTDP), and implemented through the Capital Market and Nonbank Financial Industry Master Plan (CMNMP) 1 for the period These objectives have been incorporated into the first strategic pillar of the country partnership and strategy (CPS), which is pro-poor, sustainable economic growth. The FMDIP and the (proposed) supporting capacity development technical assistance (TA) are included in the country operations business plan (COBP) for Encouraging progress to date. ADB has supported finance sector development in Indonesia for well over 10 years. Initially, ADB programs supported the development of the basic legal, regulatory, and supervisory frameworks. During the Asian financial crisis of 1998, ADB participated in efforts to restore the finance sector's health and then initiated efforts to strengthen its supervision. More recent initiatives have promoted deeper and more liquid financial markets, strengthened market surveillance and investor protection, and supported extensive capacity development. The impact of these ADB-sponsored reforms is reflected in a gradual but consistent improvement in the fundamentals of the capital markets, including the supervisory effectiveness of Bapepam-LK. 2 Benchmark government debt issues have been established around which a reliable risk-free yield curve is emerging. 3 Prudent fiscal and debt management have produced the most long-dated maturity structure of any government bond market in emerging East Asia. 4 Reforms have also provided support to the corporate bond market, which exhibited quarterly growth rates of 10% throughout 2010, and of more than 30%, year-on-year, through the third quarter of Likewise, the contractual savings industry (e.g., pension and insurance) exhibits promising trends, as total assets rose from Rp192 trillion in 2006 to Rp530 trillion in During this period, insurance density more than doubled while the number of individuals covered by a pension fund increased to 2.7 million. The sukuk market has also exhibited remarkable growth, increasing by an average of over 100% every year since 2006 to reach IDR 57 trillion in Achieving Indonesia s full potential. The NMTDP sets an overarching goal of Indonesia becoming a prosperous, self-reliant, and democratic country. To attain the desired growth rate and reduction in poverty, the government has established a cumulative investment target of Rp12,000 Rp12,500 trillion over the next 5 years. A substantial proportion of this will be sourced from banks, nonbanks, and the capital markets. While Indonesia has achieved significant progress, more needs to be done to deepen the finance sector and to establish vibrant nonbank financial institutions, without which Indonesia will not be able to meet its internal investment targets. Such reforms have become even more critical in light of the The CMNMP was developed with ADB support under the 1 st Capital Markets Development Program Cluster. CLSA Corporate Governance Watch Hong Kong. From 2007 to 2011, the aggregate amount traded for five recognized benchmark issues has increased by a factor of 25. ADB Asia Bond Monitor. Manila.

6 2 increased capital flows associated with the country s December 2011 credit rating upgrade and need for infrastructure funding The government s medium-term plan. The CMNMP seeks to increase economic growth by exploiting the links created by the coordinated development of contractual savings, sharia-compliant funding arrangements, and the traditional capital markets. The link between economic growth and private credit and stock market liquidity is well known and has been empirically supported. 6 However, studies also indicate that contractual savings (e.g., insurance companies, and mutual funds and pensions) play a significant role in fostering economic development, especially when combined with rising bank credit and stock market liquidity. 7 To support this reform effort, the government has requested ADB assistance in the form of a standalone policy-based loan. The resulting FMDIP builds on the government s accomplishments under the post-program partnership framework (P3F) of the 1 st Capital Market Development Program Cluster (CMDPC). 8 At the same time, the FMDIP's modality as a single tranche disbursement recognizes that Bapepam-LK will no longer be able to serve as an executing agency for ADB programs after 1 January B. Impact, Outcome, and Outputs 5. The impact of the FMDIP will be an expanded nonbank finance subsector and hence more intermediation. The outcome will be greater domestic participation in the nonbank finance industry. 6. Output 1: Strengthen Regulatory Oversight. The credit rating upgrade has led to an influx of investment and will further increase Indonesia s exposure to global contagion through capital flows, and exposure to sophisticated and interlinked investment schemes. In light of these risks, the government has recognized the need to continue strengthening the regulatory infrastructure to assure investors of stability and proper governance of the finance sector. Under output 1, the government has launched the ADB-sponsored initiative to provide for independent and harmonized supervision of the financial markets. The creation of the Integrated Financial Services Authority (OJK) was authorized in law in 2011, and will be operational by the end of Timely ADB support is considered crucial to this reform given its complexity, cost, and close link with past ADB development efforts. In addition, Bapepam-LK has further enhanced its supervisory capabilities, and those of the successor OJK, by initiating the revision of three primary finance sector laws (on capital markets, insurance, and pensions) to include supervisory immunity and resolution powers. 7. Output 2: Deepen the Capital Market to Provide Expanded Access to Nonbank Financing. To deepen the capital markets, efforts were focused on the ongoing and coordinated initiatives to strengthen the primary and secondary government debt market, including sukuk, to hasten the formation of a risk-free yield curve. Bank Indonesia has supported the short end of the yield curve and stimulated secondary market trading through the initiation of open-market operations. Measures have been implemented to ease the issuance process and to encourage the use of municipal bonds. To improve transparency, Bapepam-LK has continued to progress toward full convergence with international accounting standards (IAS) and international financial reporting standards (IFRS). To strengthen investor protection, Bapepam-LK has initiated a plan to launch a Securities Investor Protection Fund and has further increased participation in the Investor Area facility to provide investors with the ability to self- 5 Asia Wall Street Journal A Bridge to the Next Asian Boom. 30 January. 6 R. Levine and S. Zervos The American Economic Review. Vol. 88, No. 3, pp M. Arena The Journal of Risk and Insurance. Vol. 75, No. 4, pp Under this framework, the government has completed 38 of 54 indicative actions, and another seven are expected to be completed before FMDIP is presented to ADB s Executive Board for consideration.

7 monitor their investment portfolios. To improve efficiency and to strengthen risk management, the Global Master Repurchase Agreement (GMRA) is being introduced to Indonesia. 8. Output 3: Increase Mobilization of Long-Term Savings through a Broader Investor Base. To develop the capital market, the government has also recognized the need to strengthen and deepen the domestic investor base and to encourage the accumulation of longterm funds. Bapepam-LK has simultaneously increased the contractual savings industry s demand for capital market products. Specifically, Bapepam-LK has encouraged greater participation in retirement planning and has also provided an enabling environment for Islamic insurance by issuing takaful guidelines, including basic principles and standards of financial soundness for sharia insurance and reinsurance. 9 To strengthen the conventional insurance industry, Bapepam-LK raised the minimum capital standards and has coordinated with the industry to improve pricing and risk management in the life and non-life insurance subsectors. To broaden the investor base, the development of Islamic finance has been encouraged by providing tax neutrality and equivalence with conventional finance. The number of sharia-based contracts has been expanded and the number of sharia-compliant securities was increased. Finally, Bapepam-LK strengthened governance in the contractual savings industry by strengthening the role of the pension fund controllers committee. C. Program Costs and Financing 9. The FMDIP will be set at $300 million and will be funded from ADB s ordinary capital resources (OCR). Indonesia s budget deficit totaled $16.8 billion or 1.3% of gross domestic product in 2011, and is expected to total $13.8 billion or 1.5% of gross domestic product in Adjustment costs associated with the transition to OJK are expected to be significant start-up costs are estimated at $24 million in 2012 alone. A detailed assessment of the expected adjustment costs of the proposed program will be provided as part of the linked documents to the report and recommendation of the President (RRP). Table 1: Tentative Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank D. Indicative Implementation Arrangements Total The executing agency will be Bapepam-LK. The implementing agencies will be: (i) Bapepam-LK, the Debt Management Office, and the Directorate of Taxes, all three under the Ministry of Finance; (ii) Bank Indonesia; (iii) the Indonesian Stock Exchange (IDX), (iv) the Indonesian Clearing and Guarantee Corporation; (v) the Indonesian Central Securities Depository; and (vi) the Indonesian Financial Transaction Reports and Analysis Center. 3 II. TECHNICAL ASSISTANCE 11. Capacity development TA is planned with FPO as the executing agency. This reflects the next phase of ADB s engagement with the government and recognizes the emerging role of FPO as the lead in establishing a high-level strategy and policy to support the continuing development of Indonesia s financial markets. The TA will provide capacity development as well as long-term support to FPO to continue the implementation of the CMNMP. It will also support risk mitigation to ensure full and continuing implementation of policy actions under the FMDIP. 9 World Bank. Feyen, Lester and Rocha What Drives the Development of the Insurance Sector?

8 4 III. DUE DILIGENCE REQUIRED 12. FMDIP is exposed to two inter-related risks: corruption and weak public financial management. However, these risks have been mitigated by the government s efforts to combat corruption. Since 1999, various laws have been enacted to combat corruption and moneylaundering activities, and to strengthen public expenditure management. Several state entities have been established with mandates to fight corruption. Building on this momentum, ADB TA has been committed to improve the transparency and efficiency in public procurement processes. Evidence of the government s continuing commitment in the fight against corruption can be found in Transparency International s Corruption Perception Index for Indonesia, which has improved from 2.8 in 2010 to 3.0 in IV. PROCESSING PLAN A. Risk Categorization 13. The FMDIP is considered complex due to its loan size. However, risk is mitigated somewhat as ADB s previous experience in the sector has been satisfactory and Bapepam-LK has proven to be a reliable executing agency. B. Resource Requirements 14. Project preparatory TA is not attached to the program. Preparatory work for the loan is being supported by TA 7466, 10 which is funding a variety of activities, including launch of the investor protection fund and the introduction of the GMRA. In addition, regional TA is being used to support the introduction of a corporate governance scorecard. C. Processing Schedule 15. The proposed processing schedule is detailed in Table 2. Table 2: Proposed Processing Schedule Milestones Expected Date Loan fact-finding mission April 2012 Management review meeting June 2012 Loan negotiations July 2012 Board circulation of RRP 6 September 2012 Board consideration 27 September 2012 RRP = report and recommendation of the President Source: Asian Development Bank V. KEY ISSUES 16. Succession arrangements. The pending transition from Bapepam-LK to OJK has complicated efforts to establish a mutually acceptable P3F. However, by identifying FPO as the successor Executing Agency, ADB will ensure continuity of reforms and broaden its engagement with the government to overcome development constraints such as taxation, which had previously been outside of Bapepam-LK s control. The extent of the ongoing policy dialogue and the commitment of FPO to increase the depth of this engagement are reflected in the content of the proposed capacity development TA. 10 ADB Technical Assistance to Indonesia for Strengthening the Capital Market. Manila. 11 ADB Regional Technical Assistance Promoting an Interlinked ASEAN Capital Market. Manila.

9 Appendix 1 5 BASIC PROJECT INFORMATION Aspects Modality Financing COBP Classification Arrangements The Financial Market Development and Integration Program (FMDIP) is a stand-alone policy-based loan. Financing will be sourced from ADB ordinary capital resources. The COBP for is based on the same core areas of operations as those specified in the COBP for , and is consistent with the CPS for The CPS defines five areas of engagement, including deepening the finance sector. The FMDIP has been scheduled for board consideration in 2012 in recognition of the large unfinished reform agenda in capital markets, the Government of Indonesia s strong commitment to reform in this area, and a request for ADB to remain engaged beyond the end of the CSP in Sector (subsectors): Finance (finance sector development, money and capital markets, insurance and contractual savings) Themes (subthemes): Economic growth, governance, capacity development, and private sector development (widening access to markets and economic opportunities, economic and financial governance, institutional development and policy reforms) Targeting classification: General intervention Gender mainstreaming category: No gender benefits Location impact: National (high) Safeguards: C (Environment); C (Involuntary Resettlement); C (Indigenous Peoples) Risk categorization Partnership(s) Use of a PBA Parallel PIU Department and division Mission leader and members Complex. ADB will not engage in cofinancing or other partnership agreements. Yes. No. Southeast Asia Department (SERD) Public Management, Financial Sector, and Trade Division (SEPF) S. Schuster, Senior Financial Sector Specialist Mission Leader R. Hattari, Public Management Economist, SERD S. Ismail, Financial Sector Specialist, SERD B. Konysbayev, Senior Counsel, Office of the General Counsel L. Jovellanos, Senior Economics Officer, SERD K. Sanchez, Operations Assistant, SERD ADB = Asian Development Bank, COBP = country operations business plan, CPS = country partnership and strategy, PBA = program-based approach, PIU = project implementation unit.

10 PROBLEM TREE National Impacts Sector Impacts Core Sector Problem Lack of investment and savings constrains economic development and poverty alleviation Nonbank finance subsector is small and inefficient, and does not provide sufficient levels of intermediation Limited domestic participation in the nonbank finance sector Inadequate investment in infrastructure Financial system is prone to shocks that impact the poor and vulnerable sections of society 6 Appendix 2 Main Causes Small business and rural areas have limited access to finance Financial markets lack liquidity and depth Investor confidence remains low Financial infrastructure is inadequate Deficient Sector Outputs The number and size of nonbank financial intermediaries is inadequate The contractual savings industry remains small Primary and secondary debt markets are not well developed Lack of investor protection mechanisms Capacity of market participants is limited Settlement, clearing, and custody systems do not meet international standards The nonbank financial product mix is limited and distribution channels are narrow and inefficient Low level of financial literacy Quality of institutional governance and risk management remains low Weaknesses in surveillance, investigation, and enforcement powers The market lacks effective price discovery and valuation mechanisms

11 Appendix 3 7 PRELIMINARY DESIGN AND MONITORING FRAMEWORK Performance Targets and Design Summary Indicators with Baselines Impact By 2014: An expanded Increase in nonbank nonbank finance finance subsector assets subsector and hence to 65% of GDP increased (2010 baseline: 60% of intermediation GDP) Outcome By 2014: Increased domestic The level of domestic participation in the ownership of tradable nonbank finance government securities subsector increases to 75% (2010 baseline: 70%) Proportion of government bonds held by the domestic contractual savings subsector increases to 32% (2010 baseline: 26%) Data Sources and Reporting Mechanisms Bapepam-LK/OJK Annual Report DMO Periodic Reports Bapepam-LK/OJK Annual Report Assumptions and Risks Assumption Economic conditions remain positive and conducive to business expansion. Risk Increased demand for investment products is not matched with appropriately structured supply of capital markets instruments. Assumption Market volatility does not significantly reduce risk appetite of investors. Risk Ongoing market turmoil produces an overly restrictive regulatory environment. Outputs 1. Regulatory oversight strengthened By 2014: Integrated Financial Services Authority (OJK) issues its first annual report covering operations. OJK budget approved Bapepam-LK/OJK Annual Report News reports Ministry of Finance budget allocations Press releases Assumption Proposed reforms are implemented within established timelines. Risk Effectiveness of OJK is diminished by inability to harmonize disparate corporate cultures. 2. Deepened capital market provides expanded access to nonbank financing. By 2014: Total local currency bonds outstanding increase to $150 billion (2010 baseline: $106 billion) Government bond bid/ask spreads decline by 20%, (2010 baseline: 32 basis points) Asia Bonds Online website Asia Bonds Online website Risk Tax issues remain unresolved, preventing the introduction of key financial products and services. Total average trading IDX Fact Book

12 8 Appendix 3 Design Summary Performance Targets and Indicators with Baselines volume of shares on IDX increases to 1.75 million, (2010 baseline: 1.5 million) Data Sources and Reporting Mechanisms Assumptions and Risks 50% increase in the number of companies conducting initial public offerings in a year (2010 baseline: 24) Bapepam-LK/OJK Annual Report Annual corporate bond issuance increases by 15% each year from $4.2 billion in 2010 to $7.3 billion. Asia Bonds Online website 3. Increased mobilization of long-term savings through a broadened investor base. By 2014: Combined life and non-life insurance premium volume increases to 3.5% of GDP (2010 baseline: 2.6% of GDP) Bapepam-LK/OJK Annual Report Risk Low financial literacy constrains efforts to increase long-term savings. Number of individuals covered by a pension fund increases to 3 million (2010 baseline: 2.7 million) Bapepam-LK/OJK Annual Report Activities with Milestones 1. Strengthen regulatory oversight and provide a credible and reliable infrastructure 1.1 Bapepam-LK introduces risk-based supervision to the pension subsector (December 2010) 1.2 OJK authorized in law (September 2011) 1.3 Three sector laws revised (June 2012) 1.4 Bapepam-LK, Bank Indonesia, and DGDM to establish a single government securities registry (March 2012) 1.5 Bapepam-LK and IDX introduce ASEAN corporate governance scorecard to the top 100 listed companies (June 2012) 2. Deepen the capital market and expand access to nonbank financing 2.1 DGDM established a range of T-bill issuance at tenors of 3, 6, and 12 months (December 2010) 2.2 Bond Pricing Agency launches web-based price discovery (March 2011) 2.3 Capital Market and Nonbank Financial Industry Master Plan completed and adopted (June 2011) 2.4 Bank Indonesia to begin open-market operations (September 2011) Inputs ADB: $300,000,000 Item Amount ($ million) OCR $300,000,000 Government: $24,000,000 Item Amount ($ million) Budget $24,000,000 support for OJK

13 Appendix 3 9 Activities with Milestones 2.5 Bapepam-LK to issue a code of conduct for market intermediaries (December 2011) 2.6 Bapepam-LK to launch the supervisory database (March 2012) 2.7 GMRA adopted with Indonesia annexes (June 2012) 2.8 Bapepam-LK to harmonize regulations and facilitate the issuance of municipal bonds (June 2012) 2.9 Bapepam-LK to launch a Securities Investor Protection Fund (June 2012) Inputs 3. Increase mobilization of long-term savings and broaden the investor base. 3.1 DG Tax provides pensions with tax-exempt treatment for investment income (December 2009) 3.2 Bapepam-LK to require fund management companies to retain compliance officers (December 2009) 3.3 Bapepam-LK to strengthen the role of the pension fund controllers committee and require a separation between the founder and administrators (September 2011) 3.4 Bapepam-LK to introduce basic principles and standards of financial soundness for sharia insurance and reinsurance (December 2011) 3.5 DG Tax provides for tax neutrality between conventional and Islamic finance (December 2011) 3.6 Minimum capital standards for insurance and reinsurance sectors increased (December 2011) 3.7 Bapepam-LK strengthens actuarial calculations of the life and motor vehicle insurance segments (March 2012) 3.8 Bapepam-LK provides legal framework for ESOPs (June 2012) ADB = Asian Development Bank, ASEAN = Association of South-East Asian Nations, DGDM = Directorate General of Debt Management, DG Tax = Directorate General of Taxation, DMO = Debt Management Office, ESOP = employee stock ownership plan, GDP = gross domestic product, GMRA = Global Master Repurchase Agreement, IDX = Indonesian Stock Exchange, NMTDP = National Medium-Term Development Plan, OCR = ordinary capital resources, OJK = Otoritas Jasa Keuangan (Integrated Financial Services Authority). Source: Asian Development Bank. Endorsed by: Approved by: Shigeko Hattori Director, SEPF Date: Kunio Senga Director General, SERD Date:

14 10 Appendix 4 INITIAL POVERTY AND SOCIAL ANALYSIS Country: Indonesia Project Title: Financial Market Development and Integration Program (FMDIP) Lending/Financing Modality: Policy-Based Program Loan Cluster Department/ Division: Southeast Asia Department/Public Management, Financial Sector, and Trade Division I. POVERTY ISSUES A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy The Government of Indonesia incorporated the goals and objectives of its Poverty Reduction Strategy Paper (2005) into the National Medium-Term Development Plan (NMTDP) for In turn, ADB s CPS for incorporated and supported the goals of the NMTDP, which included achieving higher levels of pro-poor sustainable growth and greater social development, with a key thematic focus on governance and anti-corruption measures. Five areas of engagement were targeted, including deepening the finance sector. This emphasis on equitable and balanced pro-poor sustainable growth has continued into the NMTDP for During this period, the Indonesian economy is expected to grow, on average, by 6.35% 6.80% per annum, the poverty rate to fall below 10%, and unemployment to decline to below 6%. To attain these targets, total investment of Rp11.9 billion Rp12.5 trillion will be required over the next 5 years. Approximately 18% of this will be obtained from the government, and the balance is to be sourced from the private sector through increased intermediation provided by both the bank and nonbank subsectors, including insurance companies, pension funds, and the capital markets. In particular, the increase in domestic investment will be supported by a more stringent regulatory framework, stronger governance, and better performance of individual companies. To achieve the government s targets for more intermediation, Bapepam-LK has implemented the Capital Market and Nonbank Financial Industry Master Plan (CMNMP) for The CMNMP will broaden the investor base, improve governance, and boost market confidence, with an emphasis on the contractual savings industry. To support the government s development agenda and poverty reduction targets, the country operations business plan (COBP) for will focus on the same core areas specified in the COBP for , except with some modification to achieve better alignment with the government s new NMTDP. In particular, policy-based operations during will include continuation of support to further deepen and enlarge the local capital markets. This support will be provided through the proposed Financial Market Development and Integration Program (FMDIP), which will increase domestic intermediation by an expanded finance sector through the implementation of the master plan. Various empirical studies have documented the direct and causal link between finance sector development and poverty reduction, among them an International Monetary Fund working paper. 12 The study estimated the quantitative impact of finance sector development on poverty in 65 developing countries and found that (i) finance sector development raises economic growth and reduces poverty; (ii) finance sector development directly reduces poverty by raising the investment and interest incomes of the 20% poorest households; and (iii) finance sector instability directly reduces incomes of the poor, thereby raising poverty. B. Targeting Classification General Intervention Individual or Household (TI-H) Geographic (TI-G) Non-Income MDGs (TI-M1, M2, etc.) The impact of the proposed program loan will be increased intermediation and hence an expanded finance sector by providing an enabling environment for capital market development overall. The program loan will not target any specific population segment or geographic area. C. Poverty Analysis 1. If the project is classified as TI-H, or if it is policy-based, what type of poverty impact analysis is needed? N/A. The FMDIP is based on the government s NMTDP for , which emphasizes equitable and balanced 12 S. Guillaumont Jeanneney and K. Kpodar Financial Development and Poverty Reduction: Can there be a benefit without a cost? IMF Working Paper 06/62. Washington, DC: International Monetary Fund.

15 Appendix 4 11 pro-poor sustainable growth. In addition, the FMDIP has incorporated the findings and recommendations of the country poverty analysis (ADB 2006) as well as aspects of the government s master plan, which includes several measures designed to improve access to finance in rural areas that typically exhibit elevated poverty rates. 2. What resources are allocated in the PPTA/due diligence? N/A 3. If GI, is there any opportunity for pro-poor design (e.g., social inclusion subcomponents, cross-subsidy, pro-poor governance, and pro-poor growth)? The FMDIP includes specific actions that indirectly benefit the poor. The FMDIP directly supported Bapepam-LK to draft and implement the CMNMP for The CMNMP proposes to increase access to finance by privatizing the state-owned pawn business (Perum Pegadaian) and encouraging the expansion of the guarantee and nonbank finance institutions. These efforts will provide rural areas, which typically report higher poverty rates than urban centers, with wider access to cheaper credit by introducing well-established and effective collateralbased lending techniques to the private sector. The expansion of the guarantee business will provide a form of partial credit guarantee to private lenders as a substitute for collateral. II. SOCIAL DEVELOPMENT ISSUES A. Initial Social Analysis Based on existing information: 1. Who are the potential primary beneficiaries of the project? How do the poor and the socially excluded benefit from the project? The public, and the poor, will benefit indirectly from the FMDIP as a deeper and more liquid finance sector will increase access to finance by providing a greater diversity of financial providers and financial products at a lower cost. 2. What are the potential needs of beneficiaries in relation to the proposed project? An assessment performed by ADB's 2006 country poverty analysis and Bapepam-LK defined access to finance as a key barrier to alleviating poverty in rural areas. 3. What are the potential constraints in accessing the proposed benefits and services, and how will the project address them? As noted under Poverty Analysis above, the FMDIP will increase access, and provide those without collateral with alternative means of access, to reasonably priced credit by introducing well-established and effective collateral-based lending techniques to the private sector. B. Consultation and Participation 1. Indicate the potential initial stakeholders. Stakeholders are the Government of Indonesia, Bapepam-LK as capital market regulator, Bank Indonesia as regulator of the banking sector and the payment system, and the private sector, including both intermediaries and investors. 2. What type of consultation and participation (C&P) is required during the PPTA or project processing (e.g., workshops, community mobilization, involvement of nongovernment organizations and community-based organizations, etc.)? Consultations have been and are frequent and ongoing throughout program processing by way of missions to conduct policy dialogue with the stakeholders listed above. Consultations with the private sector included representatives of the contractual savings industry and fund managers, and the discussions encompassed proprietary concerns as well as issues arising from the industry s fiduciary representation of the investor community. 3. What level of participation is envisaged for project design? Information sharing Consultation Collaborative decision making Empowerment 4. Will a C&P plan be prepared during the project design for project implementation? Yes No. Consultations with stakeholders are ongoing as a normal consequence of loan processing. C. Gender and Development Proposed Gender Mainstreaming Category: No Gender Benefits 1. What are the key gender issues in the sector/subsector that are likely to be relevant to this project/program? Indonesia is ranked 87th out of 134 in the World Bank s 2010 gender gap assessment, although it is ranked somewhat higher when compared with its lower-middle-income and regional peers. The World Bank has assigned Indonesia higher-than-average levels of political empowerment but low scores on aspects of economic participation, educational attainment, and health. ADB s country gender assessment (2006) confirms these conclusions and notes that women do not share an equitable access to productive resources. First, women are more likely to find employment in the informal sector, which results in lower incomes, but also gives rise to higher

16 12 Appendix 4 ownership of micro, small and medium-sized enterprises. However, women typically do not have equal rights in property, which reduces their access to collateral. In turn, this lack of collateral, and a legal prohibition to entering into contracts on their own behalf, has significantly constrained women s access to finance. Despite representing half the population, women account for only 25% of all microfinance borrowers at Bank Rakyat, Indonesia. 2. Does the proposed project/program have the potential to promote gender equality and/or women s empowerment by improving women s access to and use of opportunities, services, resources, assets, and participation in decision making? Yes No. The FMDIP indirectly provides wider access to cheaper credit by introducing well-established and effective collateral-based lending techniques to the private sector. Specifically, the state-owned pawn business (Perum Pegadaian) has developed a successful collateral-based lending model that relies extensively on collateral other than real estate. For example, Perum Pegadaian typically accepts household items such as clothing and cooking utensils as collateral and yet has a very low default rate. The export of these wellestablished collateral-based lending techniques, as well as the expansion of the guarantee industry, should compensate for the lack of collateral that typically constrains a woman s ability to borrow. However, to fully rectify such development constraints, additional measures outside the scope of this program are needed, such as removing the prohibition against entering into borrowing contracts without a husband s consent. 3. Could the proposed project have an adverse impact on women and/or girls or to widen gender inequality? Yes No Project design increases access to non-bank financing without bias to gender. Issue III. Involuntary Resettlement SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Nature of Social Significant/Limited/ Plan or Other Action Issue No Impact/Not Known Required N/A No impact None Uncertain Indigenous Peoples N/A No impact None Uncertain Labor Employment Opportunities Labor Retrenchment Core Labor Standards N/A No impact Plan Other Action No Action Uncertain Affordability N/A No impact Action No Action Uncertain Other Risks and/or Vulnerabilities HIV/AIDS Human Trafficking Others (conflict, political instability, etc.), please specify N/A No impact Plan Other Action No Action Uncertain IV. PPTA/DUE DILIGENCE RESOURCE REQUIREMENT 1. Do the TOR for the PPTA (or other due diligence) include poverty, social and gender analysis and the relevant specialist/s? Yes No. There is no project preparatory technical assistance involved. 2. Are resources (consultants, survey budget, and workshop) allocated for conducting poverty, social and/or gender analysis, and C&P during the PPTA/due diligence? Yes No