REVOLVING LOAN FUND CAPACITY BUILDING AND SUSTAINABILITY PROJECT

Transcription

1 REVOLVING LOAN FUND CAPACITY BUILDING AND SUSTAINABILITY PROJECT World Bank PNPM Support Facility (PSF) Gedung Bursa Efek Indonesia Tower 1, lantai 9 Jl. Jenderal Sudirman Kav , Jakarta Ph: ; Fax: Printed in April 2011, 2nd version

2 Background Project Over the past 10 years, and its predecessor projects (KDP and UPP) have provided financing for community-managed revolving loan funds (RLFs). Despite the provision of loans to microenterprises, many of them women-led, is considered small (less than 30% out of community block grants), it has supported income generation and job creation of the poor communities and become one of the key poverty alleviation activities financed by. By September 2010, it was estimated that there are at least 4,000 revolving funds operating under PNPM-Rural alone with total capital of about US$476 million. These funds are providing loans to more than 327,000 groups with an estimated outreach of at least 3 million individual borrowers. On the other hand, under the PNPM-Urban as of October 2010 it was estimated that 9,110 financial management units (UPKs) have undertaken revolving loan activities with total capital of about US$67.9 million. These funds are providing loans to more than 378,000 groups of borrowers with an estimated outreach of 1.8 million individual borrowers. Given the scale of s outreach and the Government s policy to support sustainable access to finance down to the village level and the poor, it has been recognized by both the Government and the World Bank that PNPM now needs to focus on adopting microfinance best practices and actively encourage linkages with commercial banks with an interest in scaling-up microfinance. This requires RLFs to build a sustainable solution in providing credit to the communities served using a financial sector approach. Such an approach requires addressing a number of deficiencies of RLFs from a sustainable microfinance perspective. 1

3 Overall Objective To contribute to poverty reduction initiatives within the target communities by building the management capability and institutional sustainability of the RLFs so as to scale up access to financial services for communities that have limited access to formal financial services. Specific Objectives 1. Supporting the capacity building and institutionalization of the RLFs. 2. Ensuring growth and sustainability in the provision of financial services to the poor. 3. Providing fiduciary oversight of microfinance operations and tracking the institutional develop ment and performance of the RLFs. 4. Developing a clear policy and strategy by supporting the transition of the RLFs from being a government-backed scheme to becoming operationally and financially independent microfinance institutions. 2

4 expected results 1. Eligible RLFs that have the capacity to manage the funds in a professional way and based on good practice microfinance principles. 2. Linkages between the RLFs, KUR/cluster 3 micro credit programs, cooperatives, local financial institutions, as well as the commercial financial sector are established. 3. Effective and timely monitoring and supervision system for RLFs is in place. 4. Clear policy and strategy for sustainable RLF operations is developed and agreed (including a phasing-out of the Government s direct support to RLFs) Project description 1. The project will help to improve the quality and sustainability of s RLF activities both in rural and urban areas through the provision of technical assistance, clarification of legal status, and facilitation of commercial bank linkages as well as other sources of fund. 2. The project s operation will be based on the following principles: Retaining the ownership of the loan funds for the benefit of the community and maintaining the community reinvestment element (i.e. that a portion of RLF profits is invested in the social needs of the community). Providing clarification on the legal ownership of the loan funds; the form and function of the organization(s) that manages these funds; and appropriate governance, management and supervision structures. 3

5 Encouraging a savings-based model, where possible, to maximize impact on poverty and sustainability. Taking a financial systems approach aimed at not requiring government subsidies or direct government involvement. Ensuring linkages to the commercial microfinance sector to enhance sustainability. Recognizing that provincial or district-level solutions may differ according to the local context and should be in line with the Government s decentralization strategy. Providing what people want such as: To be treated like customers Products that meet their needs Non-traditional collateral Loans for non-productive activities (e.g. education and housing loans) Larger loan amounts 3. The project will act as a bridge between Cluster 2 (community empowerment) and Cluster 3 (access to finance for the poor and for private sector development) of the Government s overall national poverty reduction strategy. This is a strategic project in the sense that it has the potential to leverage in commercial bank finance for the benefit of Indonesia s poorest communities. 4

6 Financial and capacity-building needs assessment PNPM-Urban BKM Project Consultants BP UPL UPS UPK Groups PNPM-Rural BKAD Project Consultants TV BP-UPK UPK non- RLF UPK RLF Groups 5 This assessment focuses on three aspects: governance, management, and financial performance. It assesses RLF operational structure in both Urban and Rural (please refer to the shaded areas). The results of this assessment will feed into the capacity building program.

7 Legal and regulatory advice on RLF schemes PNPM-Urban BKM BP UPL UPS UPK Rp Ownership PNPM-Rural BKAD TV BP-UPK UPK non- RLF UPK RLF Rp Ownership 6 The purpose of this activity is to: (i) review available and suitable legal options to provide a firm legal basis for RLF schemes; (ii) clarify ownership of financial assets accumulated by RLFs; and (iii) provide advisory service on both (i) and (ii).

8 PNPM-Urban Technical assistance and training for RLF stakeholders BKM Project Consultants BP UPL UPS UPK PNPM-Rural BKAD Project Consultants TV BP-UPK UPK non- RLF UPK RLF 7 Results from performance and needs assessments are used to develop capacity-building programs/schemes. The capacity building programs include: bookkeeping, basic microcredit, and technical assistance on linkages with financial institutions. This capacity-building is aimed at UPK staff, Tim Verifikasi, BP-UPK, BKAD/BKM and project consultants (Fasilitator Keuangan, Fasilitator Kecamatan, Korkot, Askot, dan Fasilitator Kelurahan).

9 Linkage Program with formal financial institutions The linkage program seeks to provide mutually beneficial partnerships between RLFs and formal financial institutions. There are three types of potential linkage in this activity: at the institutional level, the group level, and the individual level. In order to allow PNPM to focus on serving the needs of the poor, this linkage activity would introduce those graduating from PNPM to formal financial institutions. Possible Linkage Types Potential Benefits 1. Institutional Level Partnership with financial institution and receive fee income from the partnership to introduce groups or individuals that need larger amount of loan than what UPK can provide. Possible access to additional funding (capital) from financial institution. 2. Group Level Access to larger amount of loan and other government initiatives i.e. KUR. Access to other financial service such as saving, payment system,micro-insurance. 3. Individual Level Access to larger amount of loan and other government initiatives i.e. KUR. Access to other financial service such as saving, payment system, micro-insurance. Note: The ownership of assets in RLFs remain unchanged and does not transfer to financial institutions. 8

10 estimated Duration 1 The pilot project started in early 2010 and will last until the end of 2012 for a total duration of 5 years. project location In order to ensure replicability, the project will be tested in four provinces: Two Java provinces: Central Java and D.I.Yogyakarta Two off-java provinces: West Sumatra and East Nusa Tenggara (NTT) project activities 1. Conducting coordination with the Government, National Management Consultant (NMC) and other key national stakeholders to the project design. 2. Conducting a needs assessment of current RLF operations and then restructuring and improving their performance by providing technical assistance and training.* 3. Determining the legal structure of the RLFs based on a menu of institutional options that takes into account the institutional capacity of the RLFs and the local context, and supports RLFs in their transformation towards a new legal entity where appropriate. 4. Developing clear policy and strategy to deal with poorly performing RLFs. 5. Linking best performers into the commercial microfinance sector, helping to expand client outreach and sustainability of the microfinance operations. 6. Ensuring appropriate monitoring and supervision systems are in place. 7. Developing the long-term strategy for RLFs. *Needs assessments are currently being conducted by M-CRIL, an international firm hired through competitive selection in September The program is designed to be completed by December 2014 but subject to the government and donor approval, the current completion date is December 2012.

11 project implementation The World Bank team will cooperate closely with the Government of Indonesia and PNPM staff on the implementation of the project and will be responsible for the implementation, closely supervised by the GoI. The handing over of the execution of the project from the World Bank to the GoI will start at a later stage. The Secretariat of RLF Revolving Loan Fund (RLF) Capacity-Building and Sustainability Project World Bank office Jakarta Indonesia Stock Exchange Building Tower 1, 9th Floor Jl. Jenderal Sudirman Kav , Jakarta Ph: ; Fax: pnpm-rlf@psflibrary.org 10