Microfinance for agricultural producers in West Nusa Tenggara (WNT) Province, Indonesia: Issues and opportunities for a sustainable financial intermediary system

ADP/2000/126: Microfinance for agricultural producers in West Nusa Tenggara (WNT) Province, Indonesia: Issues and opportunities for a sustainable financial intermediary system

Indonesia

University of Queensland, Australia

Shankariah Chamala
Phone: 07 3365 2159
Fax: 07 3365 9016
Email: schamala@uqg.uq.edu.au

• University of Mataram, Indonesia
• Private Bank of Nusa Tengara Barat (Pt. Bank NTB), Indonesia
• Centre for Agro-Socio Economic Research and Development, Indonesia

$243,477

01/07/2001 - 30/06/2003

01/07/2003 - 31/03/2004

Dr Ray Trewin

Since the 1960s, the Indonesian government has consistently given strong support to the agricultural sector. As well as trying to promote technical know-how the government has provided farmers with cheap loans for inputs such as fertiliser and pesticides, and sometimes for the establishment of small, off-farm enterprises.
However, financing arrangements of this type have had a rather chequered history, with difficulties such as the targeting of the loans and their distribution, and repayments. The system has been revised many times. Performance of the loan delivery schemes has rarely been satisfactory with respect to credit access and use, and the sustainability of the whole system has not been well established.
A developmental financial service, such as Indonesia's, in which poor people operating small-scale (often subsistence) enterprises are given financial assistance and/or services, is referred to as 'microfinance'. There are now many examples of this around the world, and experience from elsewhere suggests that it should be possible to improve micro-financing for farmers. This project was therefore designed to create a new, more effective and sustainable microfinance system for agricultural producers in West Nusa Tenggara (WNT) Province. This region was chosen because it was economically backward, farmers made up a large proportion of the population, and because its social and cultural characteristics may differ significantly from those of the agriculturalists in West Java, under which the existing financing system was built.

Project objectives were to identify issues and opportunities, and to develop innovative microfinance systems or institutions for rural communities of WNT Province.

The research involved the key stakeholders of the micro-finance system, and concerned mainly KUT schemes - national credit schemes for general farming activities, funded by the central government using central bank liquidity credit. The work consisted of three phases.
In Phase One, the team undertook a critical evaluation of strengths and weakness in the existing credit schemes, looking at credit access, appropriateness, transaction costs, repayments, saving services and institutional arrangements. This evaluation involved data collection and informal interviews with farmers, cooperatives, NGOs, rural banks and district government officials. In Phase Two, the measures for improvement identified from the earlier evaluation were developed into training and research programs.
Phase Three evaluated the training activities and the pilot system activities of Phase Two, and compared the pilot systems with the original delivery system recorded in Phase One. This evaluation determined the extent to which the credit awarded to farmers was meeting their needs, especially in regard to the amount, timing and form of the credit (e.g. whether it was in cash or inputs).

The main outputs of this were in three forms:

1. Publications: In addition to several reports written during the project life, a special issue of Komunitas (2003) Journal of Rural studies was published, focusing on microfinance programs in Indonesia. This journal was circulated to government agencies and Pt. Bank has distributed it to various banks including the Asian Development Bank (ADB) and World Bank, also the Indonesian Department of Finance and Treasury. In addition, three papers were written and presented in national and international conferences. They were: (i) 'Micro finance for agricultural producers in WNT province, Indonesia: Issues and opportunities for a sustainable financial intermediary system'; (ii) 'Why do rural credit programs fail? Is it lack of empowerment or other factors? Lessons learned from Indonesian rural micro finance and development programs'; (iii) 'One-gate approach to sustainable rural microfinance institutions: A learning outcome from ACIAR project in Lombok, Indonesia'. There have been further publications in Lombok Post and other newspapers.

2. Capacity building: More than 440 participants (Staff of PT. Bank, government agencies, The University of Mataram and other MFIs and community leaders) attended capacity-building programs.

3. Generic model development: A generic 'one-gate' model was developed. Pt. Bank in collaboration with the research team.

Monitoring, Evaluation and Multiplication:

Monitoring, Evaluation and Multiplication: The following outcomes have already been achieved:

1. Institutional and social impacts: Institutional change in the Pt. Bank is accomplished and they have accepted a one-gate model and developed operational guidelines to work with Micro Finance Institutions (MFIs). The Mataram Municipal Government-Village MFI is called LKK and the PINBUKNTB and GTZ and University of Mataram are developing MFIs and have also adopted a one-gate model. The Mataram Government and project team signed another project called 'Legislative Drafting for Rural Micro Finance' and the first draft of 'Micro Finance Bill for Mataram Municipality' is complete. Pt Bank has been approached by ADB to develop capacity-building programs for MFIs. Social change is noted among the community leaders because the project followed principles of community development such as participatory action and an action learning process to resolve conflicts and develop a MFI.

2. Environmental impacts: The project team facilitated capacity building in Batu Kuta village to produce compost from animal waste. This also solved an environmental problem as the waste was finding its way to irrigation canals and causing water pollution.

3. Economic impacts: MFI intermediaries linked to the commercial banks can increase savings and credit facilities for the rural community. In one of the villages savings are already mobilized by forming a women group and credit needs are still met by the direct credit programs. One of the bank staff trained in Australia took retirement and started a Cooperative in Lombok, based on Bendigo Community Bank. It has successfully completed one year of operation. The quantitative cost benefit analysis indicated that total benefits from improved access to institutional credits and saving services in just one year with NPV more than $A1 million. The economic benefits will be much larger if the project team can quantify the project's spill-over effects. However, the
se potential benefits depend on many other factors. The social capital, empowerment and financial education areas need further research to develop sustainable MFIs in rural Indonesia.