Indonesia: Improving Access to Finance in Aceh and North Sumatra

Sovereign Project | 45266-001

Summary

Link to Country Partnership Strategy/Regional Cooperation Strategy:

The proposed TA will support the Government of Aceh and the Government of North Sumatra in developing integrated support to improve access to finance in Aceh and Nias. On the supply side, the TA will (i) provide support to enhance the capacity of the governments in Aceh and North Sumatra in managing the MRF; (ii) assist local banks to develop new microfinance products, including Gremeen-type products and suitable follow-on products, and (iii) support the Government of Aceh to develop sustainable Local Guarantee Cooperation to facilitate credit access of feasible borrowers. From the demand side, the TA will provide assistance, on a pilot basis, to the cluster of potential borrowers/producers to make them more bankable for more financial products. To encourage and sustain knowledge development in this area in the two provinces, the TA will involve local universities in the survey and training activities.

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Project Name Improving Access to Finance in Aceh and North Sumatra
Project Number 45266-001
Country Indonesia
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8224-INO: Improving Access to Finance in Aceh and North Sumatra
Japan Fund for Poverty Reduction US$ 800,000.00
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Sector / Subsector Finance - Inclusive finance - Small and medium enterprise finance and leasing - Trade finance
Gender Equity and Mainstreaming
Description

Link to Country Partnership Strategy/Regional Cooperation Strategy:

The proposed TA will support the Government of Aceh and the Government of North Sumatra in developing integrated support to improve access to finance in Aceh and Nias. On the supply side, the TA will (i) provide support to enhance the capacity of the governments in Aceh and North Sumatra in managing the MRF; (ii) assist local banks to develop new microfinance products, including Gremeen-type products and suitable follow-on products, and (iii) support the Government of Aceh to develop sustainable Local Guarantee Cooperation to facilitate credit access of feasible borrowers. From the demand side, the TA will provide assistance, on a pilot basis, to the cluster of potential borrowers/producers to make them more bankable for more financial products. To encourage and sustain knowledge development in this area in the two provinces, the TA will involve local universities in the survey and training activities.

Project Rationale and Linkage to Country/Regional Strategy

Providing sustainable access to finance services to support MSME growth and diversification of the province's sources of growth is a key pillar of sustaining poverty reduction in Aceh. While the poverty rate declined to 21.0% in 2010 from 28.4% before the tsunami, the poverty rate in Aceh is still much higher than the national average of 13.2%. In addition, poverty distribution across districts in Aceh varies considerably, from 8.6% in Banda Aceh to 28.0% in Pidie Jaya.

ADB provided an assistance to support the recovery of the commercial microfinance system in Banda Aceh and Nias under the Livelihood and Microfinance Support (LMS) component of the Earthquake and Tsunami Emergency Support Project (ETESP). The LMS focused on rebuilding activities and introducing Grameen-type microfinance to the rural banks through both provincial government-owned rural banks and private rural banks in Aceh and Nias. Under the LMS, ADB supported the merger of the Aceh's twelve provincial government-owned rural banks (PD BPRs), allocated seed capital in a form of microfinance rollover fund (MRF) and provided training on the start-up of Grameen microfinance operations. As there were no rural banks in Nias, Bank Sumut (the provincial development bank of North Sumatera) participated in the training activities. In addition, ADB provided assistance (JFPR: INO 9079) to pilot commercial microfinance to Bank BPD Aceh (the provincial development bank).

ADB's earlier supports and the subsequent efforts to enhance the rural banking system in Aceh and North Sumatra have provided a good base for improving credit expansion in Aceh. However, Aceh in particular is still in early stage in its efforts to improve access to finance. Further progress is needed in a number of areas, including to (i) manage the MRF more productively, (ii) develop more microfinance product beyond those suitable for trading and service sectors, (iii) manage the local risks affecting access to finance, and (iv) efficiently support the capacity of producers in a potential sectors. The project completion memorandum of JFPR: INO 9079 suggests that continued capacity building needs to be sustained. The Government of Aceh and Bank of Sumut have also requested further capacity building assistance from ADB.

Capacity Support in Managing MRF. The ESETP includes a grant of $8 million allocated to support microfinance expansion in Aceh and Nias. Initially, the fund was managed by central government through one of its state-owned enterprise (Penanaman Modal Mandani) to be used as rollover fund for microcredit extension in Aceh and Nias. So far, the fund has not provided optimal support for sustainable microfinance expansion in Aceh. While the MRF has been prudently managed, the disbursement to the two regions has been slow due to the delay in the establishment of the Board of Director overseeing the fund. With more parties involved, decision making process required to disburse funding from MRF has also been longer than earlier expected. On the demand side, efforts are still needed to address significant constraints to extending microcredit beyond MSMEs operating in the trade and service sectors. Recently, at the request of the two provincial governments, the Ministry of Finance decided to on-grant the MRF to the two provincial governments. The TA will assist the two provincial governments to improve their capacity in managing the MRF fund and develop sustainable microfinance extension programs.

New Microfinance Products. Under JFPR: INO 39195, ADB with BPD Aceh developed a pilot product known as Kredit Kemandirian Usaha (KKU) focused on micro loans to enterprises. Now BPD Aceh has adopted the piloted product as its permanent product line and has used its own internal funds to expand this program. Likewise, the Grameen pilot has shown good growth and ownership by both BPD Aceh and BPD Nort Sumatra. In fact, the progress has been very rapid in Nias and other part of North Sumatra. The TA will support further product development efforts to better suit the need of selected cluster of producers involving in the production of tuna, shrimp, soft shell crab, cocoa, and patchouli. Initial analysis suggests that these commodities have high

export potential. In addition, the TA will also develop a follow-on product for borrowers graduated from the Grameen-type product and sariah and other Islamic microfinance products..

Local Government Credit Guarantee Corporation (LGCGC). Lack of qualified collateral and local risks have been perceived as key constraints for credit extension in Aceh. As part of the tools addressing these constraints, the Government of Aceh is in the process establishing a LGCGC. The TA will support the government by reviewing good practice currently available in the country and sharing international practice of sustainable and commercially credit guarantee system. The consultant working under the TA will also support the Aceh Government in the initial establishment of the LGCGC.

Support for Pilot Clusters of Producers. Under the JFPR: INO 9072 and 9073, ADB has provided support to pilot clusters of producers by linking them to better practice to improve their productivity, introducing them to a new market and accelerating the sharing good practice by developing good cluster information system for its members. The TA will maintain the key support provided for these clusters under INO 9072 and 9073 and complement them with financial advisory services to (i) reduce the risks of default after receiving the loans, and (ii) make the cluster members more bankable to wider range of financial products, including for trade finance for exporters and for simple but productive innovation.

The Central Government has also declared poverty reduction to be one of the highest development priorities. The Medium-Term Development Plan 2010-2014 (RPJMN) explicitly includes the Government's aim to lower the poverty rate to 8-10 percent by 2014 by implementing pro-growth, pro-jobs and pro-poor development strategy. The strategy recognizes that improving access to services is essential in expanding economic opportunities to the poor household. Increasing access to finance to poorer segment of the population not only will encourage economic growth but will also improve income distribution. The new ADB Country Partnership Strategy (CPS) currently being finalized has two key pillars, inclusive growth and environment sustainability including climate change. The CPS, aligned with Strategy 2020, includes improving access to finance as one of its focus areas to support the country's efforts tin achieving higher and more inclusive growth.

Impact Improved access to finance in Aceh and North Sumatra
Project Outcome
Description of Outcome Enhanced capacity of key stakeholders by improving the environment for the expansion of sustainable and commercially viable microfinance programs in Aceh and North Sumatra
Progress Toward Outcome The TA has started effectively since February 2014. The TA will close as scheduled on 8 October 2015
Implementation Progress
Description of Project Outputs

Improved capacity of local governments in managing the MRF

Enhanced stakeholders' product development capacity

Improved capacity and readiness of local government to establish commercially viable LGCGC

Enhanced capacity of pilot producer clusters for better access to financial services

Status of Implementation Progress (Outputs, Activities, and Issues)

To enhance the capacity of the provincial governments to manage the MRF Fund, the TA has prepared MRF transfer documentation requirements and recommended micro finance services manual; MRF transfer status report for Ministry of Finance; facilitated production of the parliamentary evaluation (Nasca) and exchange visit for North Sumutra. The remaining TA activities include production of parliamentary decree (Perda) in North Sumatra and development of monitoring systems on use MIF in Bank Aceh and Bank Sumut

To assist local banks to develop new microfinance products, the TA has developed integrated supply chain loan products, ensured MIF services are included in Bank Aceh and Bank Sumut annual business plans; and focused MSME lending on rural cluster commodities. The remaining TA activities include introduction of supply chain accounting and shared value analysis; tailoring existing microfinance products for integrated MSMEs lending; introduction of key products business development and mentoring (Sentra partnership).

To support the Government of Aceh to develop a sustainable local government credit guarantee company (LGCGC), the TA produced a step-by-step guidance manual for both conventional and Syariah banking; financial modelling tool for future LGCGC funding and cash flow forecasts. There are no remaining TA activities as the Aceh local government has delayed formation of the LGCGC until 2016 after the formation of their new bank Aceh Syariah.

To provide MSME capacity building and assistance on a pilot basis, the TA piloted cluster supply chain's connecting micro producers to export market; developed standard operating procedures (SOP) on mobile phones and created online business planning for MSMEs. The remaining TA activities include development online portfolio of integrated supply chain MSME plans and MIF loan processing through Bank Aceh, linkage rural banks (BPRs) and Bank Sumut.

The TA has involved local universities in participatory action research and online MSME planning. The remaining TA activities include continuing MSME mentoring at the University Business Incubator Centre and introducing a full curricula and syllabus for MSME business planning.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design Stakeholders of the TA are actively contributed to the project design. These include the stakeholders from the provincial government, the banking and microfinance sectors, and the champions in the cluster of producers both in Aceh and North Sumatera.
During Project Implementation Based on discussion with the government, the Ministry of Home Affairs (MOHA) will be the Executing Agency for the TA. The TA team will be invited to the national focal discussion group on financial inclusion organized by BI to share the outputs and lessons learned from the TA.
Business Opportunities
Consulting Services In consultation with MOHA and the provincial governments of Aceh and North Sumatra, ADB will recruit consultants as required under the TA (52 person-months of consulting services, consisting of two international consultants for 12 person-months and two national consultants for 40 person-months). The team of consultants, led by the international consultant, will be responsible for producing the TA outputs and deliverables in a timely and effective manner, and for organizing and carrying out all TA activities. The consultants will be selected and engaged on an individual basis by ADB in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time). With a small number of consultants involved in the TA, it will be more efficient to engage consultants on an individual basis.
Procurement The proceeds of the TA will be disbursed in accordance with ADB's Technical Assistance Disbursement Handbook (2010, as amended from time to time). All procurement under the TA will be carried out in accordance with ADB's Procurement Guidelines (2010, as amended from time to time).
Responsible ADB Officer Edimon Ginting
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Indonesia Resident Mission
Executing Agencies
Ministry of Home AffairsDir General of Regional Autonomy
Jl. Medan Merdeka Utara No. 7
Jakarta Selatan
Timetable
Concept Clearance 02 Sep 2011
Fact Finding 05 Sep 2011 to 09 Sep 2011
MRM -
Approval 08 Nov 2012
Last Review Mission -
Last PDS Update 31 Mar 2015

TA 8224-INO

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
08 Nov 2012 08 Apr 2013 08 Apr 2013 31 Oct 2014 08 Oct 2015 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 800,000.00 0.00 0.00 0.00 0.00 800,000.00 08 Nov 2012 472,574.53
Title Document Type Document Date
Improving Access to Finance in Aceh and North Sumatra Technical Assistance Reports Nov 2012

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