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.