Third Fiscal Devolution For Neighborhood Endowment Fund (NEF) Résumé From 7 Years of Field Laboratory KOMPIP-Indonesia

March 30, 2008

Akbar Oedin Arif

KOMPIP is developing a new model of Community Savings called the Neighborhood Endowment Fund (NEF). The development of this new fund goes along with the effort to realize the third fiscal devolution.

The first fiscal devolution happens when the central government delivers publicly budgeted finance and a certain degree of authority to the regency level. The second fiscal devolution happens when regency governments deliver comparable budgeting from the regency to the city. The third fiscal devolution is KOMPIP’s proposed next evolution in public finance. The third fiscal devolution happens when cities and villages deliver budgetary discretion to the village and neighborhood level.

KOMPIP has worked on materializing the third fiscal devolution for over seven years. After a long struggle together with other NGOs in Indonesia to manifest the second fiscal devolution, Indonesia has now implemented this second fiscal devolution.

Since 2003 KOMPIP has succeeded to persuade one village to implement the third fiscal devolution as an example. However, it is important for KOMPIP to continue this process and to keep piloting this vision to determine how the funds should be used in the most effective way and for the highest benefit to the poor.

As the CEO of KOMPIP, I have piloted participatory poverty assessment since the year 2003. The piloting has been followed by giving seed grants to three neighborhoods in Boyolali City in Central Java, Indonesia. These three neighborhoods used the seed grants for poverty alleviation applying different strategies. The first neighborhood, Tegal Harjo, used the seed grant implementing revolving ducks. The second neighborhood, Deresan, used the fund for revolving goats. Different from the other two neighborhoods, the third neighborhood used the seed grant for the implementation of community saving. We received our inspiration from this third neighborhood.

After one year, the first and the second neighborhoods stopped their process of poverty alleviation. Meanwhile, the third neighborhood has been sustaining the implementation of community savings up to today.

A pilot program of the Neighborhood Endowment Fund has run for the past five years. Through field laboratory work, we could prove that Community Endowment funds, which work like community savings, are not only feasible, but they produce returns of over 100% per annum in the most successful cases.

However, the NEF is different from community saving. The difference is in its management which is organized by volunteers and it does not attract individual saving. Can it survive being managed voluntarily? The answer is yes. NEF’s members meet once a month to collect savings and distribute loans. By meeting only once a month, the burden on the volunteer workers will not be too much. Volunteers rotate every year so all members take responsibility in how to sustain the NEF.

Why does it not need to attract individual saving? So it won’t have to risk sustainability. Why does individual saving risk sustainability? Because the individual saver tends to ‘invest’, not to donate. When a member starts to save individually, he will make it a priority to receive benefits of his investment. The more benefit he wants, the more will he try to control and direct the rules in the save and loan processes. Rules should always go in direction of the poor while the rich merely support and strengthen them.

Individual saving would also direct the saving and loan process to a need of professionals who need salary. Imagine as an example that if there are 40 members in one neighborhood of NEF, there will be potentially about 80 to 120 transactions a month. Officers will very soon complain: I work everyday now! I cannot go to do other work now! Finally, they will say: You have to pay me! When NEF has to pay professionals, the professionals will start to swallow the benefit of interest or even all the endowment in the neighborhood.

Rules that people can learn from NEF is that “You as people in your neighborhood can donate without you losing your money!” But if you are very much eager to donate your money without having to get it back, that would be great! People from anywhere else may donate to NEF, but the rules of the NEF will be the only ones applied:

So, possible sources of NEF could be:

  1. Membership savings
  2. Monthly savings
  3. Interest
  4. Donations
  5. Third Fiscal devolution

So, if community savings and coop are mostly entertaining the idea of taking the model for-profit, NEF should ultimately be maintained as having not-for-profit status. To focus on plowing profits back into the respective funds is the most effective way to grow the funds while providing maximal grants to prospective borrowers, namely the extremely poor.

KOMPIP is currently replicating the experiment in Sorowaden to seven villages in earthquake areas in Central Java and Yogyakarta. The NEF in the seven villages is very promising in its sustainability, as the total seed endowment has increased 37% after a mentoring period of four to six months. This again verifies that after every year the fund can increase 50 to 100%.

Judging from our experiences in the field, one neighborhood can potentially collect NEF US$3,000 to US$5,000 after seven years. Imagine you have US$5,000 and you will need to alleviate half of the families in your neighborhood out of poverty.

The biggest challenge of NEF in neighborhoods in Indonesia within the next two to five years is to establish a good example and model that one city in Java adopted for its third fiscal devolution for NEF. It is also important to have a good example in each of the big islands in Indonesia. Why? Because NEF should be able to be successful, sustainable and scaleable in different social and cultural contexts. It is our goal to pioneer and practice, and to find challenges in different neighborhoods, in different social and cultural situations, to resolve those challenges before NEF is truly replicated in a wide range of neighborhoods in Indonesia.