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Microfinance Innovation Center For Resources and Alternatives

Indonesia Fisheries Revitalization Project Credit Guarantee Program: Short Review and Recommendation

The Government of Indonesia's Directorate General for Aquaculture (DGA) of the Ministry of Marine Affairs and Fisheries (MMAF) has requested World Bank support to (a) add “fresh money” into the financial system in order to bolster their collateralized credit scheme for aqua farmer groups (AFG) and (b) finance a supporting mechanism (such as a guarantee facility) to leverage four times the financial flows to support small scale loans to aqua farmers

A well structured guarantee facility would directly leverage finance to the fisheries sector which would support MMAF’s Fisheries Revitalization Program (2006-2009) and more specifically, DGA’s Aquaculture Revitalization Program (2006-2009). The proposed guarantee facility under consideration would be a well-structured extension of DGA’s $10.6m cash collateralized loan guarantee for Aqua farmer Groups (AFGs) currently operating in 121 districts across Indonesia and reaching 4,100 households engaged in export-oriented fisheries commodity production. The current cash collateralized loan guarantee scheme is a key feature of DGAs public-private partnership with the private sector engaged in developing export-oriented fisheries production, processing and marketing. This guarantee facility would be financed as a part of the proposed $90m Fisheries Revitalization Project (FRP)—supported by the World Bank (IDA/IBRD)—as a partial credit guarantee component to the project.

DGA-MMAF has been piloting a collateralized credit scheme since early 2006 with quasi-private banks and government owned regional banks (BPD) to help enable small-scale fish farmers access to micro-banking loans. The collateralized credit or “guarantee” scheme currently financed by the Directorate General of Aquaculture (DGA) is Rp 106 billion (US$10m). DGA has an MOU with Bank Rakyat Indonesia (BRI) and some key Bank Pembangunan Daerah (BPD)--local banks in East Java, West Java, and South Sulawesi--to provide loans to small holders and micro enterprises in the fisheries sector against a cash collateral guarantee. The pilot scheme reaches approximately 200 AFGs with 4,100 households as its members. The loans extended to AFGs under the pilot range from Rp30 million to Rp1 billion.

The loan size is dependent on (a) the type of fishery commodity produced by the AFG clients, and (b) the number of members. The AFG loan is further divided and on-lent to its members at no additional cost. The size of sub-loans to households vary depending on the pond size and productivity intensiveness (for the case of shrimp) and in accordance to a loan table (Jangka Waktu and Pagu Pinjaman Permodalan) developed by DGA based on fish farm models for each export-oriented fisheries commodity.

The research will form a basis of preparation for the access to finance component of the MMAF’s Fisheries Revitalization Program (FRP). The purpose of this study is to examine the existing DGA cash collateral scheme, to assess the options for its future development and to make programmatic recommendations based on findings. MICRA examined the design, practical implementation and preliminary impacts of the credit scheme. Specific objectives of the research were as follows, to:

  1. summarize the public-private partnership model;
  2. review DGA field operations and implementation in two locations, on and off-Java;
  3. review the overall operations, clientele and outreach of target local banks to target population;
  4. analyze preliminary impacts of DGA on current beneficiaries;
  5. explore demand and general access to finance for potential beneficiaries;
  6. conduct a short mapping study of financial institutions serving target group in selected districts; and
  7. prepare detailed review of model/implementations and recommendations regarding possibility to scale-up model.

From November 13th through 25th, 2006, research teams from MICRA, an Indonesian foundation which provides technical support for the development of the microfinance sector, conducted a short study of the existing collateralized credit scheme’s model and implementation in two field locations in Purwakarta, West Java and West Lombok in West Nusa Tenggara. Locations were chosen which already have significant program activity despite the program’s early stage of development, both on and off Java.

DGA’s program model has been developed to build aquaculture capacity and access to capital, in partnership with government, local aqua farmer groups, commercial banks and private sector partners. The program provides cash collateral for loans to aqua farmer groups, coupled with technical assistance to build their capacity to successfully repay and grow their business. The ultimate vision is to graduate borrowers to commercial borrowing and to couple these viable businesses with private sector partners, to increase overall sales and export potential.

Key findings should be interpreted with caution, as this study was conducted after only six months of program operations in two locations, and with a small sample size of beneficiaries. In addition, some information from borrowers and potential borrowers may be distorted by their goal to expand the program and their access to subsidized credit with no collateral requirements.

DGA’s program model has been developed to build aquaculture capacity and access to capital, in partnership with government, local aqua farmer groups, commercial banks and private sector partners. The program provides cash collateral for loans for aqua farmer groups, coupled with technical assistance to build their capacity to successfully repay and grow their business. The ultimate vision is to graduate borrowers to commercial borrowing and to couple these viable businesses with private sector partners, to increase overall sales and export potential.

The program is fairly complex and involves a number of partners which fulfill specific roles. The following diagram generally outlines the program partners and their respective functions. Roles and responsibilities are presented in more detail in the section of the report covering program implementation

Key findings regarding the model include the following points:

  1. The program is not fully developed in terms of implementing policies and procedures and therefore appears to have highly varied objectives, implementation approaches and results.
  2. In West Lombok, the objective appears to be to establish a new industry (seaweed cultivation) with a standardized loan product and to reach very low-income, inexperienced aqua farmers. As a result, this location has very low loan repayment to date and a high rate of seaweed crop failure.
  3. In West Java, the objective appears to be support of strong, existing aqua farmers who are, in effect, already bankable, with flexible loans for a variety of existing aqua products. As a result, the credit line has excellent performance to date.
  4. There is limited practical involvement, at this stage, of Private Sector Partners, who purchase product from the borrower and are responsible for direct repayment of their loans.
  5. In some locations, Private Sector Partners are chosen by DINAS (West Lombok), while in others, the AFG are allowed to select their own private sector partners/buyers (West Java). The second approach appears more successful and efficient.
  6. Preliminary review suggests that credit line performs better when loan terms are tailored to the needs of the clients (West Java), rather than one uniform product being offered to all participants (West Lombok).

Program Implementation

  1. Field implementation at all levels, even with a small review of two locations only, involves very high levels of variation in program implementation. Processes, policies and procedures should be standardized and trained to relevant stakeholders. DGA should monitor to ensure compliance. Clearer and stronger positive and negative incentives should be built into the model for all parties.
  2. UPP is designed to function as the focal point for AFG development, technical assistance and financing. However, in practice most AFG members don’t know about UPP, either as their guarantee, group or technical services provider. This would seem to indicate that currently there is a missing link in their activities.
  3. There is wide variance between the amount of time which UPP and DINAS staff spend on program technical assistance, support, monitoring and other activities. The degree of time investment appears to have a significant impact on program success, based on the relative performance of borrowers in Lombok with high versus low levels of technical assistance.
  4. In these two areas, most UPP staff are also DINAS employees. While this involves some benefits, including access to strong technical staff, it also may have negative impact on the long-term sustainability of UPP and its ability to meet member needs in an effective, demand-driven manner. While DINAS staff are expected to phase out their involvement, local DINAS managers do not believe program would be successful without their participation in UPP.
  5. Technical assistance appears vital to the success of lending to new business sectors (like seaweed in Lombok).
  6. Same program reaches radically different clientele in different areas (average income of Lombok participants per quarter is 800,000 IDR, while in West Java it is 18 million IDR).
  7. Complete focus of West Lombok credit line on new product seaweed loans of one size and term may increases risk of failure and burden the low-income borrowers with a bad mark on their credit history.
  8. There are a range of “interesting” cases where there have been interest mark ups, at varying points in the system, which suggest that program policies and controls should be tightened before significant expansion.
  9. High repayment rates in West Java may be tied to additional efforts and requirements outside the program scope which are imposed by UPP.
  10. In West Java, the majority of borrowers are most likely “bankable” in their own right and do not need subsidized credit line. While DINAS believes that these clients cannot be banked, partner banks believes that they would qualify for a loan.
  11. In Lombok, AFG members are very low income, and would not be considered bankable. However, repayment rates in Lombok are very low, most likely caused by recent failed harvests of seaweed and lack of comprehensive technical assistance from DINAS and UPP.
  12. Lack of sufficient funding flows for full administration of the program (especially in Lombok) necessitates addition of “supplemental fees” at varying points in the program.

Banking Partner Role & Operations

  1. To date, only state-owned commercial banks have elected to participate in this program.
  2. However, feedback from participating bank regarding the program is mixed.
  3. Banks in West Java consider this is a very profitable program, due to the zero-cost capital, guaranteed return, and target borrowers selected from relatively high performing, established aqua farmers.
  4. The structure of this program provides high subsidies to participating commercial banks, which incur no risk and have access to interest-free funds over a three year period, in the form of the non-interest bearing cash collateral accounts.
  5. Banks in West Lombok are considering withdrawing from the program, due to its poor performance and high costs.
  6. There seems to be information asymmetries regarding whether the partners banks would lend to these client groups without the support of the DGA credit line, particularly in West Java. DINAS and farmers believe that the banks would not lend to this group, while the banks maintain that they do.
  7. There is also some lack of clarity in policies and procedures regarding payment of the 2% interest portion to UPP. To date, these funds are held by the participating partner banks, which has significantly decreased UPP ability to administer the program successfully, particularly in Lombok.

Preliminary Impacts

It should be noted again that these findings are made after only six months of program operations in two locations, and with a small sample size of beneficiaries.

  1. While the West Lombok program targets lower-income beneficiaries, impacts are low due to the high rate of seaweed crop failure, particularly among inexperienced borrowers (approximately 50% of total).
  2. Among “start-up” borrowers in West Lombok with failed first harvests, funding for a second round of inputs for next harvest is not available.
  3. In West Lombok, it is estimated that 50% of the loans were diverted to other business lines and household needs.
  4. Among borrowers in West Lombok with successful seaweed harvests, higher net income, production and area under cultivation are reported.
  5. In West Java, impact of the loan was high, leading to increases in net income, production and land under cultivation.
  6. Impact on employment creation seems limited, with the exception of short term laborers during planting and harvest. Start-up businesses appear to have a high failure rate, which may be due to a lack of sufficient technical assistance and inappropriate planting, linked to timing of loans.
  7. In communities where seaweed businesses are successful, some non-members are choosing to start seaweed businesses, often as side businesses.

Demand and Access to Finance

  1. There appears to be high demand both for larger repeat loans from existing clientele, as well as from potential borrowers outside of existing groups in both locations. In fact, in Purwakarta 17 new AFG groups are being formed, consisting of 255 potential borrowers, who are waiting for expansion of program.
  2. Borrowers in West Lombok have not accessed commercial credit before. Most have relied on their own income to build businesses, while a few have accessed credit through a local MFI. Most have also access short term credit through local kiosks for basic goods. Only larger scale fisheries have access to credit through suppliers.
  3. There was conflicting information on access to finance in West Java. Borrowers report that they have not had access to credit before, while the partner banks report that they have lent to this group in the past on both commercial terms and as part of other government credit lines. Borrowers report no access through MFIs, but some access through suppliers, brokers and moneylenders.
  4. All financial institutions interviewed view fisheries as a high risk sector.
  5. No borrowers and potential borrowers interviewed in West Lombok held savings accounts in formal financial institutions. Very few in West Java held savings accounts in formal financial institutions, despite the easy availability. They generally prefer to hold their savings in small, informal group schemes.

Mapping Study

  1. In West Lombok, one of the problems in program implementation is the large geographical area, with low population density and very low coverage of commercial banks. Borrowers are very distant from partner banks, making adequate monitoring too costly, which in turn drives low credit repayment.
  2. In West Lombok, only one small MFI was found to be active in the region. Alternatively, there are a wide range of government programs currently running, some of which may overlap with this program. Most of these are grant based, which may distort repayment incentives.
  3. In West Java, there are a multitude of bank, BPR and other MFIs in operations. Financial institutions are comprised of commercial banks with national scope such as Bank Mandiri, Bank Rakyat Indonesia, Bank (BPD) Jabar, Bank Tabungan Negara for state owned banks, and Bank Central Asia for private bank. There are numbers of MFIs include of cooperatives, rural banks, BMT, and other forms of financial institutions set up by local governments. However, most focus their small-scale lending on traders and consumer loans.

Recommendations

General Implementation

  1. There are a range of instances where there have been interest mark ups, at varying points in the system, which suggest that program policies and controls should be tightened before significant expansion;
  2. Ownership questions regarding DGA “seed equity” needs to be clarified for future institutional development;
  3. A key area for improvement is targeting of beneficiaries, to align with overall program objectives;
  4. Another key area for strengthening would be technical capacity and activities of UPP, which are highly varied, ranging from effective to almost nonexistent;
  5. Based on preliminary program results, it would appear that introduction of a new technology, like seaweed production, requires more intensive technical assistance that is offered currently;
  6. In large geographical areas or areas of low population density, may need more representation at sub-district level, in order to provide more technical assistance, monitoring and oversight;
  7. Loan products should be tailored to specific borrower needs, rather than imposed based on single best practice model;
  8. UPP’s marketing function is a weak link. This function should be further developed, in order to significantly expand markets for local producers, cutting out expensive middlemen;
  9. Timing of loan disbursal must be tied to seasonality factors, especially in areas like Lombok where there is a high concentration of loans in one sector and among a high percentage of beneficiaries who are new to the business; and
  10. Successful business development entails the long-term availability of credit to meet the needs of the business, rather than a one-time business loan. Planning should focus on building long-term sustainable financial access for participants.

Scale Up and Leverage

  1. There is important opportunity for scale-up of this model, but this should be undertaken only after further development and strengthening of the system (see recommendations above);
  2. Need clear criteria for success, goals, policies and procedures, reporting, etc. in order to have all partners working in alignment and better coordination;
  3. Cash collateral account should be interest bearing, with income flowing to UPP to cover their operational costs and build an incentive for UPP to ensure members repay their loans;
  4. Financial institutions should bear risk and be more involved in credit analysis, particularly in areas like West Java, where performance is high. The program should include a new phase of development for high performing regions and products that involves progressively reduced percentage of cash collateral. Interest rates to the borrower should be increased, as the percentage of cash collateral in decreased;
  5. Demonstration effect of financial viability of the model is the only way to build leverage factor;
  6. Need to build in stronger positive and negative incentives for all stakeholders to ensure high loan performance, while at the same time ensuring appropriate group selection;
  7. The role of UPP is very important, but there is almost no organizational development at this level and highly varied implementation that effects program viability. Future expansion would require more attention at this level;
  8. In order to expand the program and leverage factor, all parties must clarify question: is this a common government giveaway program or is it a serious program which is moving fisheries towards bankability and engaging financial institutions in profitable service to the sector? Perhaps it can be both, but only the second type of institution can achieve leverage; and
  9. Leverage may best be achieved in a stepped approach, following high performance. It will require more active marketing and program management at the DGA level. In some geographic areas with low commercial banking presence, a viable microfinance institution can be incorporated into programming.