Microfinance Initiative in Indonesia

November 30, 2009

Sahil Sondhi


Overview of Micro-Business in Indonesia

There are 51 million businesses in Indonesia, most of which do not have access to formal banking. A breakdown of the industry is shown below:

Our partner organization KOMPIP (discussed below) has and will continue to service the productive poor segment.

An overview of loans and savings in Indonesia’s financial system is provided in the table below. Legal structures for microfinance initiatives in Indonesia vary and include banks, non-bank financial institutions (NBFI), non-profit foundations, and cooperatives.

While the above data is outdated it is still useful to demonstrate the low level of microfinance representation in the aggregate financial activity of Indonesia. This implies a significant potential for growth. More current data will be acquired from Bank Indonesia if needed.

The KOMPIP Model

Branches of KOMPIP:

  • Social Justice
  • Good Governance
  • Microfinance (DARMA & DAMAR-KOMPIP)

KOMPIP attempts to achieve a holistic approach to improving the lives of marginalized people in central Java by focusing on both social empowerment and economic advancement. This includes social service delivery, community organizing, disaster risk-reduction training, advocacy, livelihood and employment education, and microfinance. The organization’s long-term vision is to achieve the provision of healthcare, education, housing and employment to as many people as possible. The management structure of KOMPIP consists of a seven-member supervisory board, seventeen daily officers split across four branches and a four-person administrative structure for each neighborhood.

KOMPIP has a strong presence in central Java and has established a wide network and broad-based support.

The microfinance wing of KOMPIP is comprised of a three-year old neighborhood endownment fund and a newly created cooperative.

1. NEF

This is the fourth operating year of DARMA-KOMPIP’s revolving fund. Out of 198 original neighborhoods, 193 are still operating with a membership of 7000 people. 5 neighborhoods are in Jogjakarta and the remainder are in Klaten. DARMA-KOMIP’s neighborhood endowment fund provides its members with access to small loans for microbusiness purposes. Each neighborhood has an administrative structure composed of a leader, secretary, treasurer and debt collector.

DARMA-KOMPIP provides marketing and microbusiness management training to its borrowers. Loan repayment percentage rates have been in the high 90’s and the community has responded well to KOMPIP’s holistic approach. Additionally, in all 193 neighborhoods the revolving fund has grown substantially larger, allowing increased access and larger loans.

Due to the success of this program in increasing incomes and standards of living, DARMA-KOMPIP is in the process of replicating its NEF model in the Solo area, encompassing 2668 neighborhoods and 500,000 people. In order to facilitate this pilot project, a 2.3 billion rupiah (~US$240,000) seed grant has been pledged by the government of Solo from its poverty alleviation budget. It is hoped external grants will be obtained to cover adminstration and capacity building costs.

2. Cooperative

The cooperative will act as a legally independent microfinance institution that builds on the successful NEF model and supplements the services it currently provides. This is imperative because while the NEF has been remarkably successful in improving the lives of its members, it is limited in that it only provides access to relatively small loans. Vital services such as savings are not provided.

Named DAMAR-KOMPIP (“Power of the Marginalized People”), the cooperative will allow members to access larger loans, savings, and retirement services. The NEF will act as a screening process to identify the most economically productive poor who will thereafter be eligible for membership and access to these services. In addition, KOMPIP will use its network and ten years of experience in community empowerment to assist the cooperative’s members to gain access to social services that have been pledged by the government, especially in the areas of education and healthcare.

A separate office with new staff will be established for DAMAR-KOMPIP. For the first year, a small staff consisting of a treasurer, coordinators and secretaries will oversee the initial base of 2000 members. At this juncture, a conceptual model is being put together that will capture the strategy and specific mechinisms of DAMAR-KOMPIP. An ensuing financial projection will provide a timeline for reaching profitability.

A draft proposal has been submitted to HIVOS for consideration and we have received a response requesting clarification on certain issues, a strategy for measuring development outcomes and a financial projection for three years.

Requirements for the Cooperative’s Conceptual Model & Financial Projection
Scale to be sustainable and profitable

a. Financial model?
b. Branch model?
c. B.E.P (break-even point) –> 3 or 5 year model
d. Roll out

Questions for the model:


  1. First and foremost, what is the purpose of the proposed entity and efforts? This must be at the core of everything that is done. Broadly, the purpose of microfinance initiative is to improve the lives of impoverished people. Using the NEF as a base, the cooperative is hoped to expand on the success seen so far by expanding scope and reach.
  2. What is the target community of this operation? Geographically based? Industry-based? (i.e. Agriculture, seller, micro-business, service.) What kind of money are the potential members/clients currently working with? Who are the main players (microfinance) in the arena? What are the needs of the members/clients?
    The target community begins with the Solo area but is hoped to expand outwards over time. Using the existing geographically-based neighborhood structure, members/clients of a variety of micro-business backgrounds will be included. The cooperative will target the “productive poor” category with loan sizes less than 3 million rupiah ($315). These communities mainly need access to savings services and loans at reasonable cost. While it is unclear what other microfinance options are technically available to our target community, it is evident that most people have effectively little or no access to microfinance services.
  3. What is the “Unique value position” here? What is this proposed operation offering that differs from what is currently available? How will the results likely be different to those of other operations?
    Firstly, KOMPIP is an established organization that has served the Solo area for years. KOMPIP has experience in community organizing and has good networking. In the economic realm, the NEF has operated for over three years and its success is known throughout the community. Therefore, attracting membership to the cooperative will be easier to facilitate. Also, KOMPIP aims to supplement its economic empowerment projects with social empowerment, such as advocating access of its members to government-subsidized heathcare and education so that increased economic power is used for livelihood instead of necessity.
  4. What is the working system of this operation? The people? The process? (recruitment, training, performance management, management information system, measurement and evaluation techniques, etc.) Also, what is the key process- credit, operational, compliance?
    There is currently no concencus on the working system of the cooperative but we are close to an agreement. The progress of the conceptual model is detailed below in “Issues to explore.”

All these factors must be in the financial model (3 or 5 years) that shows the approach to the break-even point.

Issues being explored

1) Objectives and results
Financial sustainability must be balanced with development outcomes; financial returns must be enough to ensure a path towards sustainability but modest enough so as not to dampen development outcomes. A framework of measuring results which combines these two umbrella objectives must be put in place.

i) Financial sustainability
A management report will be developed that regularly provides results based on the following items:
– Net interest income
– Operating expenses
– Cost of credit
– Delinquency
– Recovery
– Profit (dividends that can be re-injected into the community)
– Interest rate for borrowers and for savers
– Size of the solidarity groups (Most neighborhoods consist of 30-50 people; Grameen groups are usually 20 people)
Financial projection will be created at the solidarity group level and will be aggregated and extrapolated based on number of groups. The information above will be included in the projection, as well as the roll-out plan (number of groups in years 1, 2 and 3) and the break-even point.

ii) Measurement of development outcomes
Most microfinance initiatives share the same development outcome goals. Mitra Bisnis Keluarga’s (MBK- the most well-known Grameen-based microfinance initiative in Indonesia) method to measure these goals uses control groups that do not have access to finance and comparing several of their indicators to those of client groups
A) Housing index- access to and quality of housing
B) Financial- average income per household and per capita
C) Health & welfare- spending patterns, diet and meat consumption, education and healthcare
D) Empowerment- mumber of hours worked, rates of employment, change in level of participation, change in authority over spending decisions, and ID cards for access to government services

We will adapt and apply MBK’s method after assessing feasibility and availability of relevant data in KOMPIP’s operations.

2) Conceptual model for the cooperative

– What will be the decision-making process on matters such as membership eligibility, loan approval, loan extension, interest rates, etc?
– To what extent can the Grameen model be applied?
– Gender partiality in groups? All female like Grameen or representation by both genders? Current KOMPIP NEF model has strong male representation and therefore Grameen policy of females only may not be viable if we are to build on the NEF structure.
– Solidarity group lending and mutual responsibility?
– Size of groups? The most straightforward way to employ the current NEF structure would be to use existing neighborhoods as groups, yet Grameen groups consist of twenty people while the NEF neighborhoods are between thirty and fifty people in size. Should these neighborhoods be split into two groups or is one much larger Grameen group viable?
– Systems of checks and balances
– Measurement and evaluation techniques
– How can the model become profitable as soon as possible, and how can profits be best re-injected into the community?

3) Mitra Bisknis Keluarga (MBK) Partnership issues

MBK is known as the most successful microfinance institution (MFI) in Indonesia and is renowned in microfinance circles around the world. Detailed information about this MFI can be found at

Currently, we are working to form a partnership with MBK. Operating mainly in West Java, MBK is looking to add a healthcare component to its communities. RMF is looking to set up a mobile clinic for MBK. Meanwhile, MBK has pledged its support and expertise for KOMPIP’s operations in central Java. The current challenge regarding this partnership is how to best make use of the assistance MBK will provide for KOMPIP’s NEF expansion and cooperative creation. Our operating assumption at this point is that it is more reasonable to employ an existing and successful model for microfinance than to formulate a new and untested one. MBK’s Grameen implementation has met with great success and we hope to apply this model to KOMPIP’s cooperative as much as possible.

RMF’s objective with KOMPIP in Indonesia is the creation of a successful and replicable model for Microfinance. The realization of this objective depends on strong capacity building support and funding. With MBK as a partner and with the strong network of contacts listed below, capacity building support has likely been achieved. This support will facilitate the formation of strong proposals and financial projections to receive funding support.