People’s First Endowment: Large-Scale Use of Community Savings to Reduce Poverty, A Proposed Project Between Real Medicine Foundation & KOMPIP
March 31, 2008
Nicholas Taranto & Akbar Oedin Arif
“The most important principle is that the fund is always working for and supporting the poor.”
— Akbar Oedin Arif, CEO KOMPIP
KOMPIP has arrived at a juncture in its development of the Community Savings Model. Pilot programs run over the past five years through KOMPIP’s field laboratory have proven that Community Savings funds are not only feasible, but that they produce returns of over 100% per annum in the most successful cases. While Akbar and I were initially entertaining the idea of taking the model for-profit – as has been done successfully in Mexico with Compartamos – we ultimately have decided that maintaining not-for-profit status focused on plowing profits back into the respective funds is the most effective way to grow the community funds while providing maximal grants to prospective borrowers, namely the extremely poor.
Led by Akbar, KOMPIP is now ready to begin the executive modeling phase of the Third Fiscal Devolution (TFD). The idea behind TFD is to provide Java (and ultimately the rest of Indonesia) with a model that is capable of integrating funding mechanisms and micro-credit distribution channels to eliminate Indonesian poverty once and for all. To date, federal budgeting has distributed funding through regency and city channels. The TFD focuses on bringing the distribution of public funds down to the village and neighborhood level. The distribution of public finance lower down the proverbial social ladder has been empirically shown to reduce corruption and enhance the impact of each dollar spent.
In order to begin execution of the executive modeling phase, Akbar and I have made preliminary evaluations regarding the needed financing. Akbar has engaged the district regent (Bupati) who has agreed to provide the seed capital needed to launch a district-wide community savings fund. KOMPIP’s work to date in eight different villages has proven their model, and has prepared the regent to lend district government support to the process. The regent has agreed to provide the equivalent of US$50,000 in seed capital in the form of a grant to KOMPIP to establish Lumbung Rakyat Pertama (the People’s First Endowment).
Real Medicine’s Role
The $50,000 provided by the regent will serve as the Endowment’s seed, generating returns on the order of 18-30% per annum. In addition to the seed, yet-to-be determined initial and subsequent deposits (most likely $1 per month and $.50 per month, respectively, depending on the ultimate decision framework) made by villagers who belong to the Endowment will continue to bolster the fund.
In order to execute on this strategy, the Endowment will need initial capitalization from Real Medicine to cover the costs of administration, education, and documentation. These costs, as estimated on the next page, total US$31,050. These costs include overhead for district level administration; village level administration, education, and documentation for 15 villages; and neighborhood level education for 450 neighborhoods. These costs are estimated around comparable costs incurred while establishing previous programs.
The potential exists to partner with Hands On Disaster Relief (HODR) in order to split the costs of funding. While commitments from HODR have not yet been secured, the organization has supported community savings work through KOMPIP in the past, has worked on the ground in Klaten after the 2006 earthquake, and is likely to support future financial engagements.
I have agreed to take on this project, and will serve as a consultant and liaison between Western donors and project administrators on the ground in Indonesia.
Throughout the process of implementing the People’s First Endowment, KOMPIP will, per usual, collect poverty data that can be used by local, district, provincial, and ultimately the federal government in order to, as Akbar has put it, “Spoil the poor.” When expanded to its full potential, the Endowment will provide loans to over 25,000 poor individuals.
ESTIMATE OF COSTS FOR INITIAL CAPITALIZATION
BY REAL MEDICINE FOUNDATION
|COSTS||US$ per 4 months|