PNPM SUPPORT FACILITY (PSF) Project Proposal Project Title: Objective: Executing Agency: Estimated Duration: Estimated Budget: Geographic Coverage: Implementation Arrangements: PNPM Mandiri Revolving Loan Fund (RLF) Capacity-Building and Sustainability Project The objective of the five year Project is to support the capacity building, restructuring and institutionalization of the PNPM RLF scheme and strengthen linkages between the PNPM RLFs and the commercial microfinance sector so as to help ensure growth and sustainability in the provision of financial services to the poor. World Bank Entire duration of the Project: 2010 2014 (5 years). Funding is being requested for activities covering August 2011-December 2012. A total of US$ 31,000,000 has been tentatively committed for the five year Project. A first allocation of US$4,211,000 was approved by the JMC on 15 January 2010. This proposal is seeking JMC approval for a second allocation of US$ 4,679,866. Four provinces (3,300 RLFs): Central Java and D.I.Yogyakarta West Sumatra and East Nusa Tenggara (NTT) To implement activities presented in this Project Proposal, the World Bank will use funding from the PSF Trust Fund to issue grants/sub-contracts to qualified service providers. I. Background 1. PNPM Mandiri and its predecessor projects (KDP and UPP), have provided financing for community-managed revolving loan funds (RLFs) since their inception over a decade ago. PNPM s provision of RLFs has been focused on facilitating access to credit for the poor, especially women, to overcome market failure. Access to credit from commercial banks, including banks which specialize in microfinance provision such as BRI, is indeed still very low in Indonesia, particularly in rural villages and low-income urban neighborhoods. Research conducted under this Project (2009) 1 shows that less than 18% of Indonesians have access to credit from the banking sector, while only 20% of poor households have access to banking services. The original of the Government of Indonesia (GoI) for the PNPM RLFs was that loan provision under PNPM would help poor people start-up and grow businesses, thus becoming more bankable, which would encourage the commercial banks to become more active in servicing the productive poor. 2. These RLFs have become a significant national, community-based revolving fund operation reaching poor people who typically have no or limited access to other sources of credit. Over the past 10 years, the revolving loan programs under PNPM have continued to grow and reached a significant volume, scale and outreach. The volume of RLFs under PNPM is much larger than originally estimated. According to latest data and estimates, the RLF capital in both PNPM Rural and Urban has reached more than US$600 million and about 700,000 groups (many of them women groups), with an estimated outreach of nearly 5 million individual borrowers. Client surveys suggest that RLFs have had positive impacts on household income, business development, job creation and children s education. 2 1 The World Bank (2009), Improving Access to Financial Services in Indonesia 2 See MICRA Microcredit Strategy Formulation Mission for PNPM, November 2008, page 39 Program Impact.
3. Yet, there is little evidence that the original GoI objective of supporting the uptake of RLF borrowers by commercial banks has been achieved. The sheer volume of funds currently revolving in PNPM communities reinforces the need to put the RLFs on a clear path towards sustainability. RLFs present an inherently high potential risk of misuse of fund and corruption, as well as a potentially high incidence of non-performing loans. A number of measures have been taken to reinforce formal and social controls on RLFs operation, resulting in improvements in redress processes and repayment rates on new loans, which now exceed 80%. Phasing-out the GoI s direct support of RLFs by supporting the transition of the RLFs from being a government-backed scheme to becoming operationally and financially independent microfinance institutions has been defined by GoI as a strategic objective. Addressing systemic issues faced by current RLFs operations under PNPM (e.g. improve oversight and capacity building, data accuracy and reporting etc.) also requires attention during a transition period. 4. In its meeting on January 15 2010 meeting, the JMC approved a concept for a five year, US$ 31 million PNPM Mandiri Revolving Loan Fund (RLF) Capacity-Building and Sustainability Project. The overall goal of the Project is to contribute to poverty reduction initiatives within the target communities by scaling-up sustainable access to finance to support the larger underserved population and the development and expansion of microenterprises. US$ 4.2 million for were allocated for start-up activities. With this proposal, the Project team seeks approval for a second allocation for activities to be implemented from August 2011 to December 2012. II. Project Description & Progress to Date 5. The Project acts as a bridge between Cluster 2 (community empowerment) and Cluster 3 (access to finance for the poor and for private sector development) of the GoI s overall national poverty reduction strategy. The Project s strategic value lies in its potential to leverage debt from commercial banks for the benefit of Indonesia s poorer communities. This will induce client level social and economic improvements such as increases in business sales, household income, employment, assets, spending on education and health, financial literacy, increased self-esteem. 6. The Project s development objective is to support the capacity building, restructuring and institutionalization of the PNPM RLF scheme and strengthen linkages between the PNPM RLFs and the commercial microfinance sector so as to help ensure growth and sustainability in the provision of financial services to the poor. Specifically, the Project has four key components: a) Develop and implement a strategy to support the capacity building and institutionalization of the PNPM RLFs. b) Strengthen linkages between the RLFs and the commercial financial sector so as to help ensure growth and sustainability in the provision of financial services to the poor. c) Develop and establish a monitoring and supervision system to provide fiduciary oversight of the microfinance operations and to track the institutional development and performance of the RLFs. d) Develop a clear policy and strategy for the phasing-out of Government s direct support of RLFs by supporting the transition of the RLFs from being a government-backed scheme to becoming operationally and financially independent microfinance institutions. Page 2 of 10
Towards RLFs self-sustainability Component 4 (Policy and Strategy) Component 3 (Monitoring and Supervision System) Component 2 (Bank Linkage) Component 1 (Capacity Building and Institutionalization) Sub-Component 1-A: RLF s needs Assessment Sub-Component 1-B: Legal Review & TA Sub-Component 1-c: Capacity Building Sub-Component 1-D: Support for MIS The World Bank Executed Period (2010-2013) GoI Executed (2014) 7. Overall implementation progress to date. The first US $ 4.2 million allocation has supported project start-up activities, which are well underway. Milestones reached to date include: project locations selected; UPKs mapped; project concept socialized to key stakeholders at central, regional and provincial levels, as well as to a number of UPKs; and assessments of PNPM Mandiri RLFs nearly completed for Rural and well underway for Urban. Procurement of core technical assistance packages is in the final stages. Detailed information on progress to date under each component is provided in Annex 2. III. New Activities under Each Component 8. Component 1. Capacity Building and Institutionalization. This component will support the restructuration and improved performance of current PNPM RLF operations through the provision of technical assistance and training which take into account variances in human capital, operating procedures and future legal structure of the RLFs. An in-depth assessment of a representative sample of RLFs (15% or 507), which will foster a better understanding of RLFs current performance on core indicators (e.g. Governance, Management and Financial Performance), development potential and capacity building needs, will be completed by September 2011. Funding is being requested to start preparations and launch the following activities: a. A Legal Review, which will a) clarify the ownership of the RLFs capital and b) determine the appropriate legal structure for RLFs based on a menu of institutional options, which will take into account the institutional capacity of RLFs as well as their local context. An international expert on legal issues associated with micro-finance schemes has already been hired to support the replication of international best practice, and a local legal firm expected to start working in July 2011. The Legal Review should be completed by the end of 2011. b. Consulting Services for Capacity Building: This activity will be conducted after the completion of the aforementioned RLFs assessment, drawing on its findings. The Project will develop and conduct a customized capacity building program in two provinces in Java to restructure and improve performance of current RLF operations. In a second stage, capacity building will be rolled out to off- Java and to PNPM Urban RLFs, for a total of over 3,000 RLFs. A firm will be contracted to oversee implementation. Work is expected to start in July 2011 and should be completed by the end of 2012. Page 3 of 10
c. Implementation Support for RLF MIS: This activity will also start upon completion of the RLF assessment. The Project will develop a robust data recording and information system that captures transactional data of the groups and UPKs to help improve the efficiency and effectiveness of RLF operations and ensure that RLF data fed into PNPM s MIS is reliable. This is a critical activity, as the ongoing RLF assessments suggest that RLF data is unreliable. Accurate and transparent data will improve governance and increase opportunities for bank linkages. Implementation is expected to start in July 2011 and to be completed by the end of 2012. 9. Component 2. Bank Linkages. Activities under this component will support the establishment of actual linkages between RLFs and the commercial financial sector, building on the activities conducted under Component 1 and based on a graduating institution concept. RLFs whose performance is rated as excellent and good under component 1, will receive support to develop relationships with banks as soon as they can be registered as a suitable legal entity. For other RLFs, alternative and/or gradual linkage options will be explored. Ways to accelerate linkages between PNPM RLFs borrowers themselves will also be explored. The feasibility and cost of creating commercial bank linkages including an effective incentive scheme (e.g. providing loan funds for on-lending to RLFs) will be finally determined after the ongoing assessment of the financial soundness of the RLFs and further dialogue with commercial banks. Funding is being requested to start preparations and launch the following activities: a) Revision of Current Standard Operating Procedures: The activity will assist GoI in reviewing, updating and upgrading current SOPs for PNPM RLFs to ensure that RLFs accounting follows international best practice and support RLF borrowers with good track records in accessing to formal financial services. The on-going needs assessment conducted by M-Cril includes a review of SOPs. It findings will be utilized by the Project team to provide technical assistance to GoI for the revision of SOPs. b) Product Design: This activity will support the upgrading of RLFs as a financial product (e.g. adjustment of loan size and repayment schedule) to respond to the needs expressed by borrowers and RLFs staff during the aforementioned assessments and explore the feasibility of developing new products (e.g. micro-insurance, savings etc.). Upgraded product design (e.g. aligning RLF ceiling with the government s partial guarantee program - KUR) will support the graduation of RLFs and their linkages with commercial institutions. 10. Component 3. Monitoring and Supervision System: A project logical framework was developed as part of start-up activities to support Project monitoring and evaluation (M&E). The Project involves inherent challenges as over 3,000 RLFs, with high variance as regards capacity and incentives (especially between rural and urban UPKs), will need to be supervised and monitored on an ongoing basis. Ensuring that appropriate monitoring and supervision systems based on internationally accepted performance indicators and standards are put in place is therefore important. a) Design of Impact Assessments: In collaboration with the PSF M&E team, the Project team will design a mixed-methods evaluation to assess the Project impacts on borrowers welfare (inc. sustainability of their businesses) and access to financial services. 11. Component 4. Policy and Strategy: The aforementioned activities under Component 1 to 3 will provide a solid foundation for the development of a long-term strategy to phase out the Government s direct support to the RLFs and establish sustainable RLF operations. The Project team will provide technical assistance to GoI in the form of policy briefings and discussion notes summarizing the findings of ongoing and planned assessments and laying-out options for consideration by decision-makers. Page 4 of 10
IV. Estimated Budget 12. A total of US$ 31 million has been committed by the JMC for the Project over the five year period. An initial budget of US$ 4.211 million was allocated for start-up activities by the JMC meeting on January 15 2010, and has been released accordingly. 13. The Project team is seeking approval of an additional allocation of US$ 4,679,866 for new activities to be conducted between August 2011 and December 2012. A breakdown of the budget is provided in the table below. Reallocations across expense categories may be needed during the course of implementation. Category Aug 2011 - Dec 2012 (US$) Component 1 Legal and Regulatory Advisory Services 785,000 Training and Capacity-Building Support 1,984,000 Improving Monitoring and Information System (MIS) for RLFs operations 1,100,000 Component 2 Bank Linkage Scheme 1,000,000 Component 3&4 Monitoring & Evaluations / Strategy & Policy recommendations 300,000 Implementation costs of above all (Component 1-4) Operating Costs (inc. costs for travel/field trips, workshops etc.) 346,000 WB staff 402,500 Consultants 315,000 SUB TOTAL 6,232,500 Contingency (approx 5% of total budget) 311,625 TOTAL 6,544,125 Start-up ( Phase 1 ) activities Balance on 1 st JMC allocation 2,058,366 TOTAL FOR NEW ALLOCATION 4,679,866 V. Implementation Arrangements 14. The Task Team Leader for this Project is based within the Finance and Private Sector Development (FPD) Unit of the World Bank Office in Jakarta, and cooperates closely with the PNPM Support Facility (PSF) and the World Bank task teams for both PNPM Rural and Urban. 15. Project activities will be World Bank executed. The GoI expressed its preference for this modality, which makes it easier to test out different approaches while a parallel dialogue is being conducted between different government agencies on longer-term strategy for the RLF scheme and the Bank team coordinates with the National Team of Poverty Reduction (TNP2K). A gradual handing over of project components will take place once adequate arrangements have been agreed upon with concerned government stakeholders. The project will be fully handed over to GoI at the beginning of Year 5, at the latest. 16. GoI oversight and strategic guidance. In light of the large stake the GoI has in the PNPM Mandiri program, ensuring broad ownership over the Project among regional and national stakeholders is of crucial importance. The Bank team coordinates with key stakeholders at national and regional level, including Bappnas, Coordinating Ministry of People s Welfare, Ministry of Home Affairs, Ministry of Page 5 of 10
Public Works, National Team of Poverty Reduction (TNP2K) etc. To this end, a working group comprising relevant ministries (i.e. the Ministry of Home Affairs, the Ministry of Public Work and Bappenas) has been established, ensuring adequate institutional representation of oversight agencies for both PNPM Rural and Urban. The Project team is also assisting GoI in establishing working groups at the regional level. The Project will support the GoI in ensuring that regular information shared and discussed with key stakeholders through existing structures such as the TNP2K and Pokja Pengendali. VI. Key Performance Indicators 17. The indicators presented below are for the entire, five year program. Early results for the indicators highlighted in italic will materialize after the completion of proposed new activities in December 2012. Objectives and Outcomes Overall Goal Achieve poverty reduction in PNPM target communities by scaling up of sustainable access to financial services by Indonesia s poorer communities Project Development Objective(PDO) Sustainable provision of financial services by RLF in four selected provinces through restructuring and improving the performance of RLF operations ( Building a bridge between cluster 2 and cluster 3 ) Component 1 : Eligible RLF have the capacity to manage the funds in a professional way and based on good practice MF principles Component 2: Linkages between the RLFs and the commercial financial sector are established Component 3: Effective and timely monitoring and supervision system for RLF is in place Component 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) Result Indicators Impact assessment indicators (tbd) 1. Increase in no. and amount of loans to groups and their members. 2. Improvements in the types and quality of products and services offered (e.g. savings services)* 3. No of RLF that cover the full operating cost from their interest spread* 4. No. or % of RLFs that have received high quality microfinance technical assistance and training. 5. No. or % of RLFs that have improved in their rating based on key performance indicators. 6. No. or % of RLFs that have institutionalized in a legal form that is appropriate to the local context.* 7. No. or % of RLFs with linkages with commercial banks 8. Increased access to sustainable sources of financing: (i) bank loan amounts (ii) leverage ratio 9. No. or % of RLFs that receive less/no block grants and achieve financial self-sufficiency (for good performing RLFs) or are liquidated (for poor performing RLFs)* 10. No. or % of RLFs for which regular, complete and timely performance rating results are available 11. No. or % of RLFs under supervision of a qualified financial supervisory agency* 12. Key stakeholders have agreed on initial strategy before implementation 13. No. of good practice inputs provided to and adopted by PNPM Mandiri Page 6 of 10
14. By end of year 5, key stakeholders agree on longterm strategy and phasing-out of direct government support* ANNEX 1: LIST OF PROJECT ACTIVITIES (FIVE YEAR PROGRAM) Component 1 - Capacity Building of RLFs 1.1 Assessment of RLF capacity and capacity building needs in both rural and urban PNPM 1.2 Develop and clearly define good microfinance principles adapted to RLF 1.3 Assessment of support provided by the PNPM facilitators to (i) the RLF for a) establishment and b) on-going operations, (ii) formation and guidance of SPP (groups) a. Can this function be integrated in the UPK system? e.g. TPK b. If a. cannot: Can the UPK hire outside technical assistance? 1.4 Legal assessment and options for RLF legal status 1.5 Design capacity building measures based on institutional development strategies (Ref. Component 4 Policy and Strategy) 1.6 Develop eligibility criteria (based on graduation philosophy) for RLF capacity building 1.7 Implement capacity building and training for eligible RLFs Component 2 Bank Linkages: 2.1 Identify early potential RLF candidates for bank linkage 2.2 Identify potential banks and initiate discussions on feasibility and type of linkages 2.3 Develop linkage models, incl. potential role as agents for banks: Bank UPK Bank SPP Bank individual 2.4 Establish eligibility criteria for a. RLFs and b. banks 2.5 Initiate first demonstration and show cases of pilot linkages 2.6 Evaluate pilot linkages and refine linkage models 2.7 Conduct regional linkage workshops to socialize and disseminate the concept 2.8 Develop and implement a linkage training program for RLFs how to deal with a bank 2.9 Conduct short exposure programs for banks to gain a direct insight into RLF operations 2.10 Develop a cadre of linkage facilitators (e.g. twinning FK with a bank officer) 2.11 Implement bank linkages 2.12 Monitor and evaluate bank linkages Component 3 Monitoring and Supervision System 3.1 Develop a project monitoring system based on PDO, outcomes, indicators and activities 3.2 Develop a RLF rating system (governance, management and financial performance) Page 7 of 10
3.3 Develop an institutional performance monitoring system based on RLF rating system and up to date financial reporting standards 3.4 Develop institutional performance monitoring system into a supervisory rating system 3.5 Determine an appropriate supervisory agency (or agencies: non-prudential vs prudential) 3.6 Conduct capacity building of supervisors Component 4 Policy and Strategy 4.1 Develop initial strategy for restructuring and improving rural RLF operations based on 100 RLFs in CJ/Yog (year 2) - Institutional development strategies and options (as basis for capacity building Component 1) - Transition from grant (BLM) to loans phasing-out of BLM, phasing-in of bank loan - Potential legalization of RLFs 4.2 Develop initial strategy for restructuring and improving urban RLF operations 4.3 Develop refined strategy for rural and urban RLFs in four pilot provinces (year 3) 4.4 Provide lessons learned and good practice inputs to PNPM Mandiri on an incremental basis 4.5 Develop long-term policy and strategy for sustainable RLF operations and nationwide replication by the government, including exit strategy for the government s direct support for RLFs (year 5) ANNEX 2. DETAILED DESCRIPTION OF PROGRESS TO DATE 18. Overall implementation progress. Implementation is well underway, with project locations selected; UPKs mapped; project concept socialized to key stakeholders at central, regional and provincial levels, as well as to a number of UPKs; and assessments of PNPM Mandiri Revolving Loan Funds (RLFs) nearly completed for Rural and well underway for Urban. Procurement of core technical assistance packages is in the final stages. General progress and progress by component is detailed below. More information about the components is included in Annex 2. 19. Project preparation. Following project approval by the JMC in January 2010, the core project team was established; a Child Trust Fund was created and JMC-approved budget of US$4.211 million transferred to the TF account. A series of meetings were held with national level counterparts, the Ministry of Home Affairs, Bappenas, Coordinating Ministry for People s Welfare (Menko Kesra), NMC, donors and the Social Development team in the World Bank Indonesia s PSF Office. 20. A working group of relevant stakeholders from the Government has been established. A first meeting, chaired by Bappenas, was held on 5 November 2010. On that occasion, the working group endorsed the selection of the two off-java provinces (i.e., West Sumatra and East Nusa Tenggara (NTT)). Working group meetings at both national and regional level are expected to be held on a regular basis in due course. 21. The Project concept note has also been subjected to the World Bank internal peer review and was approved on 11 November 2010. Specifically, the World Bank management approved implementation of the Project by the Bank and the allocation of staff and management resources. The peer review also included external microfinance specialists from CGAP. 22. Inventory and mapping of RLFs. An inventory and mapping of all existing Revolving Loan Funds (RLFs) in the four provinces in both rural and urban areas was conducted (see table below). The project will broadly target approximately 3,300 RLFs, with the majority (75%) in Java. Furthermore, the RLFs in PNPM Page 8 of 10
Urban are larger in number but much smaller in size as they are located at the village (kelurahan) level as opposed to RLFs under PNPM Rural which are operating at the sub-district (kecamatan). Pilot Province Rural RLFs Urban RLFs Total RLFs 1 Central Java 444 1,795 2,239 68% 2 Yogyakarta (DIY) 56 169 225 7% 3 West Sumatra 141 340 481 15% 4 East Nusa Tenggara (NTT) 245 110 355 11% Total 886 2,414 3,300 100% RLF sample for assessment 266 241 507 15% Note: Number of RLFs is as of December 2010. Numbers will fluctuate with formation of new groups. Component 1: Capacity Building and Institutionalization 23. This component is largely on track. Socialization of the new pilot program began in May 2010 with regional and local governments and local stakeholders in both Central Java and Yogyakarta for PNPM Rural. In a series of field workshops, initial inputs on the project concept were obtained from more than 1,000 UPK representatives and Kecamatan facilitators. This also included field visits to RLF operations in Central Java, Yogyakarta, and some other provinces. Following agreement to start expansion of the program to PNPM Urban RLFs from early 2011, the program has now been socialized to nearly 300 PNPM Urban Economic Facilitators, City Coordinators and Assistant City Coordinators in Central Java and Yogyakarta, and received support from Bappeda in both locations. The project has placed one core team member with the PNPM Urban team in the World Bank to support project preparation and implementation. 24. Sub-component 1-A: Revolving Loan Fund Assessments. One of the first major project activities is the in-depth assessment of a sufficiently large number of RLFs to gain a better understanding of the operations, the development potential and the capacity building needs of RLFs. Given the large number of RLFs in the pilot provinces, a representative sample of 507 RLFs approx. 15% of the total - has been chosen for the in-depth assessment. In line with the initial proposal, the assessment is being conducted in four stages: (i) a first batch of 100 rural RLFs in Central Java and Yogyakarta was completed in March 2011; (ii) 50 remaining rural RLFs in the same area have been completed in May 2011; (iii) 197 urban RLFs in Central Java and Yogyakarta will be completed by end-july 2011; and (iv) 116 rural RLFs and 44 urban RLFs in West Sumatra and NTT are planned to be finalized by October 2011. 25. The consulting firm to carry out the assessments of the RLFs was contracted in October 2010 following a six-month procurement process under World Bank guidelines. The following steps have been conducted regarding the RLF assessment: November 2010 Initial assessment (pre-test) of 14 rural RLFs conducted December 2010 Assessment methodology reviewed in a technical workshop and fine-tuned for rollout March 2011: - Assessment of 100 rural RLFs completed - Mid-term review of rural assessments shared in workshop with key central, regional and provincial stakeholders April 2011 - Initial assessment (pre-test) of 10 urban RLFs conducted May 2011: - Assessment of additional 50 rural RLFs completed - Assessment methodology for urban RLFs reviewed in a technical workshop and fine-tuned for rollout Page 9 of 10
- Assessment of additional 187 urban RLFs begin (to be completed end-july) 26. Sub-component 1-B: Legal Review. A second major assessment has been launched to clarify the ownership of the RLF capital and to determine the appropriate legal structure for RLFs based on a menu of institutional options. The procurement process to select a legal firm to support this activity is in the final stages. A part time international legal expert has been hired to support this activity. 27. Sub-component 1-C: Consulting Services for Capacity Building. Following the initial assessment, the Project will develop and conduct a customized program of capacity building in the two provinces in Java in order to restructure and improve performance of current RLF operations. In a second stage, capacity building will be rolled out to off-java and to PNPM Urban RLFs. Terms of Reference (TOR) were developed for the assignment, RFP issued and procurement is in the final stages. Implementation is expected to start in July 2011. 28. Sub-component 1-D: Implementation Support for RLF MIS. The Project will develop a robust data recording and information system that captures transactional data of the groups and UPKs to help improve the efficiency and effectiveness of RLF operations and provide data to PNPM stakeholders. This is a critical activity, as the assessments underway now reveal that the RLF data is weak. Accurate and transparent data will improve governance and increase opportunities for bank linkages with and sustainability of the RLFs. TORs for the assignment were developed, RFP issued and procurement is in the final stages. Implementation is expected to start in July 2011. Page 10 of 10