ADB

Project Completion Report

PCR: INO 26471

Microcredit Project
(Loan 1327-INO)
In Indonesia

January 2005

Asian Development Bank

 CURRENCY EQUIVALENTS

Currency Unit – rupiah (Rp)

At Appraisal At Project Completion

(June 1994) (July 2002)
Rp1.00 = $0.000108 $0.000112
$1.00 = Rp9,269 Rp9,195

ABBREVIATIONS

ADB – Asian Development Bank

BI – Bank Indonesia
BPD – Bank Pembangunan Daerah (regional development bank)
BPR – Bank Perkreditan Rakyat (village bank)
CGAP – Consultative Group to Assist the Poorest
GNP – gross national product
LDKP – Lembaga Dana Kredit Pedesaan (small nonbank financial institution)
MFI – Microfinance institution
NGO – nongovernment organization
PAM – project administration memorandum
PCR – project completion report or project completion review
PIU – project implementation unit
SFI – small financial institution
SHG – Self-help group
TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 30 March. FY
before a calendar year denotes the year in which the fiscal year ends; for
example, FY2000 ends on 30 March 2000.

(ii) In this report, "$" refers to US dollars.

 CONTENTS

Page

BASIC DATA i
I. PROJECT DESCRIPTION 1
II. EVALUATION OF DESIGN AND IMPLEMENTATION 1
A. Relevance of Design and Formulation 1
B. Project Outputs 3
C. Project Costs 6
D. Disbursements 6
E. Project Schedule 7
F. Implementation Arrangements 7
G. Conditions and Covenants 7
H. Related Technical Assistance 8
I. Consultant Recruitment and Procurement 8
J. Performance of Consultants, Contractors, and Suppliers 9
K. Performance of the Borrower and the Executing Agency 9
L. Performance of the Asian Development Bank 10
III. EVALUATION OF PERFORMANCE 10
A. Relevance 10
B. Efficacy in Achievement of Purpose 11
C. Efficiency in Achievement of Outputs and Purpose 11
D. Preliminary Assessment of Sustainability 11
E. Environmental, Sociocultural, and Other Impacts 12
IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12
A. Overall Assessment 12
B. Lessons Learned 12
C. Recommendations 14

APPENDIXES
1. Project Framework 16
2. Project Poverty Indicators 19
3. Project Implementation Schedule: Projected vs. Actual 20
4. Consultant Staffing Schedule 23
5. Project Loan Sizes in Perspective 24
6. List of Subloans 25

SUPPLEMENTARY APPENDIXES (available on request)

A. Bank Indonesia Project Completion Report
B. Bank Indonesia Report: Social Impacts on Subborrowers
 BASIC DATA

A. Loan Identification

1. Country Indonesia
2. Loan Number 1327-INO
3. Project Title Microcredit Project
4. Borrower Republic of Indonesia
5. Executing Agency Bank Indonesia
6. Amount of Loan SDR17,469,000
7. Project Completion Report Number

B. Loan Data

1. Appraisal
− Date Started 6 June 1994
− Date Completed 15 June 1994

2. Loan Negotiations
− Date Started 22 September 1994
− Date Completed 23 September 1994

3. Date of Board Approval 25 October 1994

4. Date of Loan Agreement 10 January 1995

5. Date of Loan Effectiveness

− In Loan Agreement 10 April 1995
− Actual 21 July 1995
− Number of Extensions

6. Closing Date
− In Loan Agreement 30 June 2000
− Actual 5 July 2002
− Number of Extensions Three

7. Terms of Loan
− Service Charge 1% per year
− Maturity (number of years) 35
− Grace Period (number of years) 10

8. Terms of Relending
− Interest Rate 1% per year
− Maturity (number of years) 35
− Grace Period (number of years) 10
ii

9. Disbursements
a. Dates
Initial Disbursement Final Disbursement Time Interval

10 January 1997 25 April 2002 64.4 months

Effective Date Original Closing Date Time Interval

21 July 1995 30 June 2000 60.3 months

b. Amount (SDR ‘000)

Last
Category Original Revised Amount Amount
Number Category Allocation Allocation Canceled Disbursed

01 Computers 108 550 (190) 360

02 Vehicles 663 782 (153) 629
03 Other Equipment 35 0 0 0
04 Consulting Services 810 596 415 1,011
05a Credit Facilities 13,277 14,774 (1,234) 13,540
05b Training 1,362 30 0 30
05c Consulting Services 646 418 (418) 0
06 Service Charge during Construction 263 263 (16) 247
07 Prior TA Cost 140 56 0 56
08 Unallocated 165 0 0 0

Total 17,469 17,469 (1,596) 15,873

TA = technical assistance

C. Project Data

1. Project Cost ($’ 000)

Cost Appraisal Estimate Actual

Foreign Exchange 3,700 3,159
Local Currency 38,800 17,710
Total 42,500 20,869

2. Financing Plan ($’ 000)

Cost Appraisal Estimate Actual

Financing Plan ($ million)

Borrower Financed 16,800 7,271
ADB Financed 25,700 13,598
Other External Financing 0 0
Total 42,500 20,829
IDC Costs
Borrower Financed 263 321
ADB Financed 0 0
Other External Financing 0 0
Total 263 321
ADB = Asian Development Bank, IDC = interest and other charges during implementation.
 iii

3. Cost Breakdown by Project Component (SDR’ 000)

Component Appraisal Estimate Actual

01 Computers 108 360

02 Vehicles 663 629
03 Other Equipment 35 0
04 Consulting Services 810 1,011
05a Credit Facilities 13,277 13,540
05b Training 1,362 30
05c Consulting Services 646 0
06 Service Charge During Construction 263 247
07 Prior TA Cost 140 56
08 Unallocated 165 0

Total 17,469 15,873

TA = technical assistance.

4. Project Schedule

Item Appraisal Estimate Actual

I. Sustainable Small Financial Institutions (SFIs)
(i) Identify SFIs and Disburse Credit Funds Feb 1995−Dec 1999
(ii) Prepare SFI Training Materials Jul 1995−Jun 1997
(iii) Trains SFI Staff Jan 1996−Nov 1997
(iv) Computerize SFI Activities Jul 1995−Oct 1996
(v) Provide Vehicles for Bank Supervisors, Jan 1996−Nov 1995
Banking Staff
(vi) Provide Loans for NGOs’ Working Oct 1995−Dec 1997
Capital and Field Worker Vehicles

II. NGOs Able to Organize and Provide Self-

Help Group (SHD) with Appropriate Skills,
Training, and Other Services Necessary for
Income-Generating Activities
(i) Mobilize LT Consultants Jul 1995
(ii) Promote Project to NGOs
Jan 1995−Jun 1995
(iii) Recruit New NGO Field Staff
Jul 1995−Sep 1995
(iv) Prepare Training Materials
(v) Train Existing and New NGO Staff Apr 1995−Feb 1996
(vi) Computerize NGO Activities Sep 1995−Sep 1996
Oct 1995−Mar 1996
III. Bank Indonesia Able to Implement, Monitor,
and Supervise a Range of SFIs and NGOs
(i) Project Start-Up
(ii) Conduct Special Studies to Support NGO Jan 1995−Jun 1995
Component Oct 1995−Dec 1998
(iii) Produce Project Reports
(iv) Determine and Procure Vehicles Jul 1995−Dec 1999
(v) Design and Conduct Baseline Survey Jan 1995−Jun 1995
(vi) Collect and Process Follow-Up BME and Jul 1995−Dec 1995
Impact Data Jan 1996−Sep 1999
(vii) Analyze Impact Data for Completion
Report Oct 1999−Dec 1999
BME = benefit monitoring and evaluation, NGO = nongovernment organization, SFI = small financial institution,
SHG = self-help group.
iv

5. Project Performance Report Ratings

Ratings
Implementation Period Development Objective Implementation Progress
1 January–31 December 1999 S S
1 January–31 December 2000 S S
1 January–31 January 2001 HS HS
1 February–30 April 2001 S PS
1 May– 31 December 2001 S S
1 January–31 June 2002 S S
HS = highly satisfactory, PS = partly satisfactory, S = satisfactory.

D. Data on Asian Development Bank Missions

Name of Date No. of No. of Specialization

Mission Persons Person-Days of Members
Loan Appraisal 6−15 Jun 1994 3 30 project economist, senior counsel,
financial analyst
Loan Review 1−21 Dec 1998 3 63 senior economist, loan administration,
staff consultant
Loan Review 30 Aug−1 Sep 1999 1 3 manager, AEAR
Loan Review 4−18 Dec 2000 1 15 senior economist
Loan Review 24 May −9 Apr 2001 2 32 project specialist, associate project
analyst
1
PCR 18−22 Sept 2004 1 5 credit specialist
PCR = project completion report, AEAR = Agriculture and Rural Development Division (East).
1
The project completion report was prepared by Roger Thomas Moyes, Credit Specialist.
 I. PROJECT DESCRIPTION

1. The goal of the Project was to increase income and employment in rural areas, and the
objectives were to alleviate poverty and promote the participation of women in development
activities. The Project proposed to achieve these through four related components:

(i) lending to the poor and near-poor for the development of small, simple, low-cost
microenterprises through a credit line to small financial institutions (SFIs);
(ii) strengthening of SFIs to provide efficient and cost-effective small-scale financial
services for the development and sustainable operation of microenterprises;
(iii) strengthening nongovernment organizations (NGOs) to organize and provide self-
help groups (SHGs) with skills training and other services necessary for income-
generating activities; and
(iv) strengthening of Bank Indonesia’s (BI) capacity to implement, monitor, and
supervise a range of SFIs and NGOs that provide small-scale financial services in
rural areas.1

2. A four-fold rationale was presented for the Project:

(i) loans from SFIs to microenterprises help create jobs and increase incomes, and
SFIs have real funding constraints;
(ii) SFIs are overly dependent on short-term funding sources and need long-term
funding to provide efficient and cost-effective small-scale financial services for the
development and sustainable operation of microenterprises;
(iii) NGOs provide a valuable service in organizing poor people into groups, and
preparing them to receive small amounts of credit, and NGOs lack resources; and
(iv) institutional strengthening is required to build sustainable providers of
microfinance.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

3. The Project was designed around a credit line to SFIs and NGOs, and loan-funded
technical assistance (TA) was incorporated to meet institutional capacity-building requirements.
Implementation was managed by a project implementation unit (PIU) at BI, the Executing
Agency.

4. The credit line could be accessed by different kinds of SFIs, which for the purposes of
the Project include Bank Pembangunan Daerah (BPDs) (regional development banks),
Lembaga Dana Kredit Pedesaan (LDKP) (small non-bank financial institutions, usually found at
the village level), and Bank Perkreditan Rakyat (BPRs) (village banks). Proceeds of borrowing
by BPDs would be for onlending to LDKPs, representing a wholesale arrangement. Borrowing
by LDKPs would be primarily for onlending to individual microenterprises or to groups.
Similarly, BPRs could borrow for onlending to microenterprises or to groups. Both LDKPs and
BPRs could borrow for fixed assets or for training, which would allow them to expand and/or

1
ADB. 1994. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the
Republic of Indonesia for the Microcredit Project. Manila. Project coverage initially was limited to five provinces,
including West Java, Central Java, East Java, Nusa Tenggara Barat, and South Kalimantan. Ten additional
provinces were later added, including Aceh, North Sumatra, West Sumatra, Bengkulu, Riau, Lampung, Yogjakarta,
Bali, South Sulawesi, and North Sulawesi.
2

improve their operations. NGOs could borrow from either BPRs or LDKPs and use the funds for
internal capacity building or for group onlending.

A. Relevance of Design and Formulation

5. The Project, designed in 19942 was consistent with ADB's country program and strategy
and development objectives of that time, and also was consistent with the Government’s
concurrent goals and policies, which were to direct development assistance to projects that
improve the lives of the poor. 3 To a great degree, the Project anticipated refocusing ADB’s
operations towards poverty alleviation. This project was one of ADB’s first microfinance projects,
and the first such project in Indonesia. The design team drew lessons from the economic and
sector work undertaken in Indonesia by World Bank and the United States Agency for
International Development. At the time the Project was conceived, knowledge of microfinance
was generally poor among the donor community and developing countries. ADB had no
microfinance strategy, there was no Consultative Group to Assist the Poor (CGAP) 4,
significantly less understanding of the impacts and benefits of microfinance, and no internal
consensus on how best to measure a microfinance project’s success or failure. At the time,
ADB’s agricultural divisions viewed microfinance as a rural poverty intervention that must
demonstrate quantifiable poverty impacts.

6. Project design assumed that lack of access to financial services by poor rural dwellers
acts as a genuine constraint on real incomes and reduces employment opportunities,
reasonable assumptions then and now. Key to evaluating design relevance is demonstrating the
linkage between access to credit and positive impacts on real incomes and employment. This is
challenging in that financial services such as loans only allow people to take advantage of
economic opportunities; financial services do not create new economic opportunities or
generate wealth. Also, money is fungible. SFIs have multiple sources of funding and individual
borrowers and microenterprises mix funds between family and business. It is difficult to isolate
economic impacts and ascribe specific benefits to funds provided through a credit line.

7. The project design was highly relevant from the point of view of outputs and relevant in
terms of the goal and objectives, although the way in which these were stated was problematic.
It was sensible to formulate the project as an effort to provide microloans to poor people through
SFIs, with poorer clients assisted by NGO intermediaries to access credit. There was a large,
unmet demand for funds from microenterprises and the rural working poor, a need for additional
funding sources from the SFIs, and a willingness on the part of all participants to pay market
interest rates. It was reasonable to expect that a microfinance project’s impact on incomes and
employment would be positive and relevant to evaluate poverty and social impacts. However,
the specific targeted amounts by which incomes were to be increased was not appropriate. In
addition, the objective related to employment generation was assigned a measurable target,
expressed as a specific number of person-days of work to be created. So, increased
employment was expected to be an outcome of the project, but the RRP does not state explicitly
that the project was expected to create positions for new wage-earning employees within MSEs,
though this is a reasonable inference. Ultimately, it appears that the project did create

2
ADB. 1993. Project Preparatory Technical Assistance to the Republic of Indonesia for Microcredit Design Study.
Manila (TA 1849-INO).
3
IMPRES Desa Tertinggal (IDT) (Presidential Instruction for Backward Villages) was a $200 million concurrent
government project, implemented starting in fiscal year 1994/1995, designed to reach the 20,000 poorest rural
villages. The Microcredit Project initially targeted areas not covered by IDT.
4
CGAP is an agency organized and funded by the World Bank that promotes pro-poor financial system
development. ADB is a member and a senior ADB staff member sits on its board.
 3

employment, but in an indirect way, as impact surveys showed that microenterprise borrowers
were able to spend more time working in their businesses (measured in person days), and, in
some cases, to get other family members involved in the business.

8. Another problematic feature of project design was the assumption that a standardized
banking software program could be developed and shared among all participating SFIs. This
proved overly ambitious because (i) different SFIs had varying product offerings and differing
methods for calculating, interest rates, fees, and other items; (ii) the ability to absorb banking
software varied widely among more than 1,000 SFIs; (iii) BPRs could not meet the value
proposition for banking software even at very low subsidized prices; and (iv) one local
information technology (IT) consultant was insufficient to create, effectively market, install, and
provide ongoing service for banking software.

9. The Project was designed as a poverty intervention with implications for the financial
sector. In hindsight, it might have been more appropriate to consider it a financial sector
intervention with poverty impacts. The present view promoted through CGAP and embodied in
ADB’s microfinance strategy is that the purpose of microfinance interventions is best defined as
financial deepening, or providing greater access to financial services to poor people or those
with low incomes. It is now considered axiomatic that increasing access to financial services by
poor people can provide tangible economic benefits, although it is difficult to quantify precisely
microfinance’s economic and social impacts on poor people. Microfinance projects should be
evaluated based upon (i) expanded outreach to microenterprises, measured by activity
indicators such as the number of borrowers and savers, number of women borrowers and
savers, average loan size (with very low loan sizes serving as a proxy for lending to the poor),
and total amount of microlending; and (ii) increased sustainability of microfinance institution
(MFI), as measured by, among other indicators, the capacity of an MFI to cover operational
costs (operational sustainability), cover financial costs (financial sustainability), achieve high
loan recovery rates, and generate returns on assets and equity that approach those at
commercial financial institutions.

B. Project Outputs

10. The table below compares the original project target outputs 5 with actual results. Unless
otherwise indicated actual figures presented are as of 31 December 2001, just prior to project
closure.

Table 1: Project Target Output6 Indicators and Actual Results

Project Targets
Component (i)
Projected § 300,000 new borrowers reached
§ 66% of SHG members are poor
§ 50% of SHG members are women
Actual § 801,103 borrowers participate, of which 484,625 were new borrowers
§ 64% of SHG borrowers were poor or near poor
§ 53% of SHG borrowers were women
Component (ii)
Projected § 1,125 SFIs financially sound and providing both savings and loan services at
the village level

5
Detailed reviews of outputs, outcomes, and impacts are contained in Supplementary Appendixes 1 and 2.
6
The Project Framework is presented in Appendix 1.
4

Project Targets
§ Savings mobilized at least equal to 30% of project loans
§ Compulsory savings at least 5% of each subloan
Actual § 982 (87% of target) SFIs participated in the Project, including 843 BPRs and
139 LDKPs in 15 provinces. LDKPs were not allowed to participate unless
they converted to BPR by 1999. BI’s survey of financial results at 90
participating BPRs during 1998 and 1999 found:
§ Percentage of BPRs achieving a sound rating increases from 47% to 73%
7
(highest BI rating, based on CAMEL analysis);
§ Loan recovery rates improved (87.3% before, 90.7% after), and
nonperforming loans (NPL) declined from 12.7% to 9.35%;
§ BPRs expanded lending by more than 150% (in nominal terms);
§ BPRs increased the number of microenterprise borrowers served by 33.8%,
while microenterprise borrowers accounted for a larger share of BPR clients,
67%, than prior to the Project, when 53% of their borrowers were
microenterprises;
§ 170% increase in deposits at surveyed BPRs, indicating that the target of
30% of project loans has been achieved many times over;
§ Number of overall borrowers increased by 9.7%; number of savings
customers rose by 23.4%; and the average savings amount rose by 75%;
§ BPR overall productivity and profitability increased substantially.
Component (iii)
Projected § 30 NGOs strengthened to provide financial and business help to the poor
§ 90,000 group-based borrowers in 9,000 SHGs linked to BPRs and LDKPs
Actual § 65 NGOs participated in the Project, 37 of which BI deemed “active” as of 30
June 2001 (still in the business of working with SHGs);
§ 147,020 group-based borrowers in 5,367 SHGs linked to SFIs;
§ BPRs/LDKPs created SHGs on their own, with 84,109 total group borrowers
as of 30 June 2001;
§ BI survey found that among BPRs providing funding to SHGs, only about
41% lent to SHGs formed by NGOs, while more than 75% of BPRs formed
their own SHGs for lending.
Component (iv)
Projected § PIU established
§ 13 additional SFI supervisors employed at BI branches
Actual § PIU established four BI staff seconded to PIU; three international and six
local consultants retained
§ 13 project cars, 13 computers purchased for 13 BI branches; 24
nonpermanent staff and 3 consultants recruited for participating BI branches.
BI = Bank Indonesia, BPR = Bank Perkreditan Rakyat (village bank), LDKP = Lembaga Dana Kredit Pedesaan (small
nonbank financial institution), NGO = nongovernment organization, NPL = nonperforming loan, SFI = small financial
institution, SHG = self-help group.
Source: ADB. 1994. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to
Indonesia for the Microcredit Project. Manila (Loan 1327); Bank Indonesia, Final Report of the Microcredit
Project, 2002.

11. The number of new borrowers reached was 162% of the targeted figure, and the number
of project beneficiaries (BPR borrowers receiving funds onlent through the project credit line)
was 267% of the target. The target for participating SFIs was substantially met, with the final
figure for SFI participation 87% of the target. Indicators for participation by women and poor
people were met or exceeded. In one exceptional case, 66% of SHG borrowers were to be
classified as poor, but the final survey found that only 64% could be classified that way. This

7
CAMEL refers to a rating system for banks that evaluates and grades five factors including capital, assets,
markets, earnings, and liquidity.
 5

case still represents substantial fulfillment of the initial project target. This is particularly
remarkable because of the financial, economic, and political crises that rocked Indonesia from
1997 through 1999 and whose effects lasted for years. The rupiah was severely devalued,
inflation spiked dramatically, and several large banks failed.

12. The Project’s institutional development outputs appear to have been achieved. It is not
clear, however, if the improvement in soundness of SFIs may be attributed to project capacity-
building activities or other factors. No control group of SFIs was available for comparison and
only the strongest SFIs were selected to participate. SFIs were able to raise their loan interest
rates substantially while increasing their deposit rates more modestly. SFIs enjoy significant
pricing power in their local areas, and they were able to increase their spreads and improve
their bottom lines. A significant number of NGOs participated in the Project—more than
originally targeted—and a high number remain engaged with groups still. The project organized
and funded a significant amount of NGO capacity building activities, yet it is difficult to ascertain
to what degree the project strengthened NGOs. Many NGOs participated in another project8 that
worked with groups, and thus were already engaged in the business of group formation.

13. Achievement of the targeted outputs was matched to a great degree by achievement of
higher-level outcomes and impact. The following table reviews the Project’s goal and objective.

Table 2: Project Goal and Purpose

Goal
Projected § 300,000 families in five provinces will see income levels increase by an
average of Rp633,000. 33% of beneficiaries are women and 33% are poor
Actual § Project survey data shows that incomes in the original five provinces
increased by Rp1,824,579 per family from 1997 to 1998, but the nominal
increase, 57%, was less than the inflation rate of 78% over the same period.
A survey during 1998–2001 showed that incomes increased 81% in nominal
terms to Rp9,047,195, greater than cumulative inflation of 21% over this 3-
year period. Real incomes did rise over the period of the two surveys.
§ 85% of surveyed borrowers report nominal increase in money income.
§ Baseline survey data show 60% of individual borrowers were poor or near
poor, rising to 68% at the final survey; 70% group borrowers were poor or
near poor at the baseline survey and 64% at the final survey (see
Supplementary Appendix 2, p.18).
§ Women represented 50% of all individual borrowers, and 53% of all group
borrowers (see Supplementary Appendix 2, p. 43).
Objective (Purpose)
Projected § 125 person-days of jobs created in each of 300,000 microenterprises
§ 156,000 full-time equivalent jobs created for subborrowers, of which 33% are
for women, and 33% are for the poor
Actual § The social survey found that 47% of subborrowers increased their average
number of working days per year from an initial 178 days per year to 262
days per year. Applying this to all subborrowers (801,103) the projected
figure for full-time equivalent jobs would be 184,363. If we consider only the
new borrowers reached by the Project (484,625) the number of new full-time
equivalent jobs created would be 111,530.
Source: ADB. 1994. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to
Indonesia for the Microcredit Project. Manila (Loan 1327); Bank Indonesia, Final Report of the Microcredit
Project, 2002.

8
PHBK, or “Linking Banks and Self-Help Groups Project,” begun in 1988, was supported with $9 million from GTZ,
and was completed in 1996.
6

14. The employment objective was achieved: the Project created employment equal to
110,000 to 180,000 full-time equivalent jobs (projected from survey data). These were not,
however, in the form of new positions for wage employees. According to the project social
survey, only 4% of subborrowers hired paid workers. Borrowing from SFIs resulted in an
increase in the activity of the microenterprise owner/operator (which could be characterized as a
reduction in underemployment), and, in many cases, of his or her family members. The project
goal appears to have been achieved, though the employment impact is best described as
indirect, rather than direct, as would be the case if new jobs were created. Beneficiaries saw an
increase in real incomes, although the true picture is clouded by inflation, and, to a certain
degree, currency devaluation. The nominal increase in beneficiary incomes was certainly
greater than Rp633,000, which was the projected goal.9 Both goal and purpose were
expressed with a specificity that was not based on empirical data. The project framework’s
outcomes and impacts were relevant, but the specific numbers were not necessarily appropriate
as targets for the goal and purpose.

C. Project Costs

15. The Project did not experience any significant cost overruns or underruns, nor were
there any major shifts between foreign and local costs.

D. Disbursements

16. Disbursements were delayed by slow startup and by controversy surrounding the
passage of the new Central Bank Law. The initial implementation and disbursement delays
were largely related to slow recruitment of consultants. Negotiations with the consulting firm
initially selected broke down before a contract was signed. The point margin separating the
second- and third-ranking firms was so narrow that ADB staff recommended a re-evaluation,
and the second-ranked firm ultimately selected was forced to replace its candidate for team
leader well into the negotiation process (see Appendixes 3 and 4 for projected schedule vs.
actual timing of project activities and consulting services inputs, respectively). The drafting of
onlending agreements with SFIs took much more time than anticipated. These negotiations and
arrangements were further slowed by an internal reorganization of BI. Finally, BI did not have
sufficient personnel to administer the Project during the first 3.5 years of implementation.

17. For approximately 3.5 years (from loan effectiveness to midterm review mission), no
ADB loan review missions were fielded. ADB and BI communicated constantly during this time,
but the prolonged period without a visit from ADB headquarters undoubtedly contributed to
disbursement delays.

18. The Central Bank Law, enacted 17 May 1999, prohibited BI from disbursing funds under
the Project after 16 November 1999, and confusion related to the legal basis for BI continuing
as Executing Agency slowed disbursement and briefly suspended consulting services. By the
end of 1998, 3.5 years into a 5-year project, disbursements amounted to only 13% of the total
loan. Starting in early 1999, well in advance of the November 1999 deadline, BI accelerated its

9
Attempts to measure incomes of a similar group of poor people who did not have access to finance appear to have
provided unclear results. “Nonbeneficiaries ” (poor or near-poor people in the project area that did not borrow from
BPRs and did not have any contact with a local NGO) were interviewed during the baseline and midterm social
surveys, but no results or analysis of their responses were presented in the report. BI staff available at the time of
the PCR mission report that the results, in terms of income growth, were similar for nonbeneficiaries as for
beneficiaries because nonbeneficiaries often had access to alternative sources of finance.
 7

disbursements under the Project, meeting 100% of project financing needs for this period in
order to meet its overall 40% counterpart funding obligation under the Project. BI made no loan
disbursements after November 1999. ADB’s loan disbursements were effectively suspended
during this time. The Ministry of Finance informed ADB on 8 August 2000 that the new Central
Bank Law would “grandfather” BI as the Executing Agency, so there would be no disruption in
management for ongoing projects even though BI would be legally blocked from disbursing its
own funds in support of future projects. To overcome the initial disbursement delays, BI
recommended and ADB approved the expansion of the project area (footnote 1). BI also held
down the interest rate charged to SFIs, many of which were not prepared to pay the high rates
that were the product of the Project’s calculations. These two decisions, combined with the
mobilization of additional project personnel by BI, put disbursements back on track by 2000,
ensuring a high rate of utilization for the credit line.

E. Project Schedule

19. In response to the delays discussed above, the Project was extended on three
occasions, which has also resulted in changes to the amortization schedule.

F. Implementation Arrangements

20. Project implementation arrangements were generally appropriate, and the machinery for
disbursing the credit line, delivering capacity building, and measuring project impacts and
benefits proved to operate as designed. In addition to the issue of BI’s role as lender and
Executing Agency, other issues arose related to implementation arrangements.

21. The minimum loan size for onlending by SFIs to microenterprises was set at an initial
maximum value of Rp250,000, with the maximum (ceiling) for follow-on loans not to exceed
Rp500,000. At the time of project design, the equivalent US dollar values were about $120 and
$240, respectively. The Asian financial crisis and ensuing inflation meant that the initial
maximum value and the ceiling value of loans for microenterprises were dramatically reduced in
real terms. By mutual agreement, BI and ADB periodically adjusted upwards these amounts
(see the table in Appendix 5 that traces the periodic increases in allowable loan sizes). At
project completion, 31 December 2001, the initial amount was raised to Rp2,000,000 ($190),
and the ceiling amount reached Rp5,000,000 ($480).

22. Substantial implementation delays resulted in much lower disbursement than projected
during the initial 3.5 years of the Project. BI recommended in November 1998 that the number
of provinces be increased in order to achieve full disbursement within the project timeframe. The
midterm review mission fielded in December 1998 recommended and ADB approved in January
of 1999 the expansion of the Project to 15 provinces. After the midterm review, BI delegated a
significant amount of authority for project management to the BI branches, which were allowed,
for example, to determine the amount each SFI could borrow. BI branches by early 1999 appear
to have been fully staffed, and BI head office began to evaluate branches’ performance in
managing the microcredit project their periodic performance reviews. These changes rapidly
accelerated loan disbursements. Appendix 6 is the list of subloans.

G. Conditions and Covenants

23. There were no significant delays in meeting the conditions for loan effectiveness. The
covenants included in the Loan Agreement were relevant, and BI complied with almost all of
them throughout the Project. The main exception concerned the interest rate for onlending to
8

SFIs. The calculation of the interest rate for onlending to SFIs became a significant issue in the
wake of the Asian financial crisis, the impact of which began to be felt in Indonesia in December
of 1997. From 1 July through 31 December 1998, BI did not comply with this covenant.10 ADB
staff notified BI of noncompliance in early 1999 and initiated a dialogue with BI to bring them
back into compliance on this issue. BI, dealing at the time with a full-blown economic crisis, saw
the project interest rate—as calculated according to the Loan Agreement—spike from 11% per
year to more than 30% per year. With disbursements already well behind schedule, BI feared
that SFIs would not be willing to borrow at such rates in the long term (BPR deposit rates had
been observed during the same to be significantly below 30%, meaning that project funds would
not have been attractively priced). For 1998 and 1999, BI set the interest rate at 15% without
reference to the formula in the Loan Agreement. This issue was finally resolved by the end of
1999 when market conditions allowed BI to revert to the original calculation of interest rates.
ADB staff demonstrated initiative in attempting on several occasions to devise an alternative
interest rate calculation, showed patience and understanding, and a reasonable level of
forbearance under difficult circumstances.

24. The minor exceptions related to covenant compliance concerned the stipulation requiring
compulsory savings by each subborrower of 5% of the total subloan amount. This covenant was
effectively abandoned when SFIs were found subtracting the 5% compulsory savings from the
initial subloan amounts. The covenant in theory would help SFIs build up savings for the benefit
of both themselves and their poor borrowers, but in practice it served to increase the SFIs’
effective lending rates with no compelling economic benefit to borrowers.

H. Related Technical Assistance

25. Technical assistance (TA) was built into the Project and funded under the loan. The TA
provided capacity building for the SFIs and NGOs, and was divided into two packages. Under
the first package, two international and six domestic consultants were involved in developing
and delivering specific training modules to support project activities. The Government of Norway
provided a $1 million grant for training and consulting services to the Project in 1996, which was
fully disbursed by March 2002. These funds supported the second package of consulting
services, which focused on NGO capacity building and benefit monitoring and evaluation. The
start-up of TA efforts was substantially delayed, as mentioned above. Several individual
consultants (all of the them national consultants) had their inputs extended and were paid out of
cost savings.

26. The team under the first package produced training materials for SFIs, trained trainers,
and developed a series of software tools for project monitoring and for SFI operations. The
project completion review (PCR) mission was unable to verify whether the training materials
were still in use, or if the local trainers that were qualified under the Project were still available to
provide further training. The training activities were a main subject of periodic reports from
consultants under this package, and loan review missions commented on these activities
extensively. The PCR mission found the consultant reports to be neither incisive nor particularly
well prepared; the mission memoranda reveal that ADB staff raised issues related to the
relevance and quality of the training material produced, as well as the prospects for
sustainability of the training efforts after the Project. Evaluating the outcome of consulting
services related to training is difficult. Certainly staff were trained, but there are no participant

10
Loan Agreement, Section 1.02 (b,m, o), Article 1, for definitions of terms, and Schedule 6, paras 9–11 for
calculation of the interest rate.
 9

evaluations of training exercises or detailed satisfaction surveys from SFI managers who might
have been in a position to evaluate the efficacy of the training.

27. Consultants under the second package carried out most of their assigned tasks,
although ADB has no record of NGO capacity-building activities. The PCR mission verified that
these activities did take place, at least in places the mission visited. The measurement of
outcomes for package II consultants is also difficult, as there is no record of training evaluations.

I. Consultant Recruitment and Procurement

28. TA consultants were selected and contracted in accordance with ADB’s Guidelines on
the Use of Consultants. Project-related procurement was carried out in accordance with ADB's
Guidelines on Procurement.

J. Performance of Consultants, Contractors, and Suppliers

29. BPR staff said SFI training was interesting and useful, but consultants did not require
course participants to fill out post-course evaluations that might have provided more insight.
Efforts to develop standardized banking software program did not fully bear fruit (some project
monitoring and financial analysis packages were developed), and could not have been expected
to as the design was flawed in this respect. The PCR mission concluded that the TA package
for NGOs was not particularly effective, which might explain why some BI and SFI staff said
they were disappointed in the work of many NGOs. Overall, the consultants’ performance is
rated as less than satisfactory.

30. NGOs did not fully achieve the outputs related to group formation and linking of groups
to BPRs. Specific targets here were based upon the limited experience of the PHBK project.
The project offered fairly limited incentives for NGOs, and provided no compelling incentives for
BPRs to work with NGOs. Incentives for NGO participation were limited mainly to local BI
offices’ reimbursement of the cost of hiring new NGO staff to form SHGs. Some NGOs sought
to participate solely because they could get funding for new staff, although their expertise or
fundamental mission may have had little to do with group formation. Some BPRs reported bad
experiences with such NGOs, and 75% of BPRs simply took on the task of group development
on their own, many with good results. NGOs’ contributions were still significant, and clearly
some NGOs stood out as good stewards of groups. Group formation on the one hand and
acceptance of the group’s credit risk on the other hand created natural tension between NGOs
and SFIs. Only in isolated cases did NGOs assume any responsibility for repaying group loans
to SFIs. There were successful cases where NGOs did indeed guarantee their groups’ loan
repayment to SFIs, cementing close working relationships between NGOs and SFIs. Many of
these relationships continue long after project completion. The NGOs performed satisfactorily.

31. BPRs were clearly appropriate vehicles for offering microloans and providing savings
and deposit services. The improvement in the soundness ratings for participating BPRs,
revealed in the SFI survey above (see Table 1), demonstrates that BPRs responded positively
to the Project despite difficult economic circumstances. This, in turn, provided both attractive
funding and useful technical assistance. The criteria that BI developed for project participation
raised expectations for BPRs’ performance: the availability of the credit line, which provided a
welcomed new source of funding, provided a powerful incentive for BPRs to reach the BI-
mandated CAMEL rating. This was the first time BPRs were participating in a credit line project
of this type. BI was very careful about SFI selection and closely monitored SFI participants.
Local BI offices also organized the training courses for the BPRs. Overall, the training program
10

may have helped to enhance the skills and professionalism of BPR staff, despite issues related
to quality of some course offerings and sustainable training delivery mechanisms. The BPRs
and BI forged a closer working relationship through the Project. This had a substantially positive
impact on BPRs’ financial performance. SFI performance is rated highly satisfactory.

K. Performance of the Borrower and the Executing Agency

32. The Borrower, the Ministry of Finance, was regularly informed of the project progress,
but was not assigned and did not play an active role in the Project. None of the implementation
issues required borrower intervention as BI and ADB developed a cordial working relationship
despite initial delays and some disagreements. The Borrower’s performance is rated
satisfactory.

33. After prolonged implementation delays, BI did finally demonstrate resolute leadership
and competent project management. SFI monitoring was particularly conscientious. Reporting
was initially a problem, but it became more timely and thorough after the midterm review. The
social surveys were carried out carefully. BI proved proactive in identifying solutions to the
disbursement challenge. Expanding the project area was pursued enthusiastically, even though
it entailed a substantial increase in BI resources. When the new Central Bank Law was passed
in 1999, BI had an opportunity to pass the Project off to another agency. BI insisted on
remaining the Executing Agency, a clear demonstration of their dedication to the Project, which
was considered successful and a source of institutional pride. BI’s appraisal as competent and
capable of managing the Project was fully borne out in implementation.

34. BI has passed the project portfolio (including the credit and foreign exchange risk) to
Bank Mandiri, a state-owned commercial bank that now manages the credit line’s continuing
operations. BI’s role in the Project has now officially ended, and according to law, it cannot
assume a similar role in future projects. This is fully consistent with international best practice,
where the central bank’s role is confined to monetary policy and supervision. BI did, however,
prove itself fully up to the task of managing a complex, multi-faceted project under the most
difficult of economic circumstances. BI’s performance as Executing Agency was satisfactory.

L. Performance of the Asian Development Bank

35. The project was very slow to start. The lack of an inception mission and the subsequent
failure to field a mission at the time when the consultants were initially mobilized undoubtedly
delayed the Project further. ADB staff ultimately demonstrated a high level of engagement in the
Project. Project staff provided leadership in working through key issues, including the interest
rate controversy, and was flexible in adapting to changing circumstances. Monitoring was
adequate, although BI might have benefited from a more detailed and critical appraisal of the
reporting systems and survey techniques used under the Project. Because of the failure to field
missions in the crucial early period, ADB’s performance is rated less than satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

36. The Project addressed microenterprises’ and poor rural dwellers’ large unmet demand
for financial services through an appropriate set of financial intermediaries. It also built upon
successful group lending methodologies pioneered in an earlier project and provided needed TA
for capacity building at SFIs and NGOs. The project was consistent with government policies to
 11

reduce rural poverty. Setting a specific, nominal target for an increase in incomes was not
appropriate as a project goal because borrowers had differing socioeconomic characteristics
and worked in various sectors. Poverty is multidimensional, so increases in nominal incomes
may not reflect social impacts accurately. The numerical specificity of income impact does not
seem to be based upon similar experience, research data, or other information that would
indicate a specific nominal amount or percentage of increased income could be achieved
through a microfinance intervention. The purpose of generating substantial amounts of new
employment was also relevant, although the Project demonstrated that the employment impact
is more indirect than direct, as the number of microenterprise employees did not increase
substantially. Considering the soundness of the project design, and the essential relevance of
poverty reduction (interpreted as increased incomes and employment), it is fair to judge the
Project relevant.

B. Efficacy in Achievement of Purpose

37. The achievement of the income- and employment-related goals and purposes can
certainly be considered an indicator of project efficacy. Incomes did rise measurably in real
terms. The purpose of generating employment appears to have been met and exceeded,
though, as noted, the employment effect was more indirect than direct, and practically all project
outputs were substantially exceeded. Many microenterprises and poor people had access to
financial services on a sustainable basis for the first time through the Project. Participating SFIs
demonstrably improved their financial performance and expanded their outreach to new smaller
customers, many of them experimenting successfully with group lending. The project expanded
the frontiers of microfinance at a time of unprecedented financial and economic difficulty. Impact
of externalities is difficult to assess, however, and there are problems related to attribution of
project benefits. The project is rated efficacious.

C. Efficiency in Achievement of Outputs and Purpose

38. Fulfillment of component output indicators—particularly the targets related to expansion

of outreach by SFIs —represents a signal achievement. It is difficult, however, to attribute the
improvement in BPRs’ soundness ratings to project activities such as training, which did not
appear to have been very high quality. BPR performance improvements likely had more to do
with (i) the imperative to improve CAMEL indicators in order to tap into the credit line; (ii) strong
monitoring by BI, bolstered by dedicated project staff; and (iii) the skill of SFI managers who
took advantage of a rising interest rate environment. Project TA resources were not efficiently
leveraged. Both BI and ADB wasted a lot of time and demonstrated an unusually high level of
tolerance for inactivity. BI and ADB finally reacted with much energy and professionalism in late
1998 and salvaged the Project. In the final analysis, BI branches, the SFIs, and the NGOs
deserve credit for the achievement of output indicators, and these participants’ efforts to reach
targets were boosted when the project area expanded from 5 to 15 provinces. The Project was
less efficient than it should have been in achieving component outputs.

D. Preliminary Assessment of Sustainability

39. A commercial bank has taken over management of the credit line, a clear indication of
potential sustainability. The Project also expended significant resources in helping NGOs form
groups, then in linking those groups to BPRs. A significant number of NGOs are continuing
these operations. Many SFIs have learned how to successfully lend to groups on their own, and
all participating SFIs were challenged to serve poorer clients. The project laid the foundation for
commercial banks to lend to BPRs and has clearly demonstrated the BPRs’ capacity to manage
12

borrowed funds. Many participating BPRs still lend to the same borrowers that they reached
under the Project, and are expanding their lending to new microenterprises based upon positive
experiences gained under the Project. Bank Mandiri only took over the credit line in 2004, and it
is still early to evaluate sustainability. The Project is likely to be sustainable.

E. Environmental, Sociocultural, and Other Impacts

40. There are a series of impacts worth noting, particularly institutional ones. The Project
incorporated gender targets into the project framework, seeking explicitly to empower women
through greater access to microloans. The Project surpassed its gender targets, namely, the
percentage of women participating. The survey shows that women did benefit financially from
the Project and that their incom es rose. Bank Mandiri taking over the project loan portfolio is an
unexpected positive development. Essentially, the Project has created a financial product—the
portfolio of BPR loans—with a positive yield and a measurable financial value. Good BI
stewardship, strong incentives for improved SFI performance, and the willingness of SFIs to
experiment and learn produced substantial institutional impacts (para. 31). Participating BPRs
are sounder today, have access to commercial funding in amounts previously unavailable, and
have larger markets. The Project had no adverse environmental impact and generated
significant institutional impacts.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

41. The Project is rated successful. The project was implemented as conceived during a
period of extraordinary economic difficulty, overcoming substantial delays. The project outputs
were appropriate, readily measurable, and directly linked to project activities. Higher-level
impacts and outcomes, as well as increased income and employment, were also achieved.

42. This is a successful project that has achieved substantial outreach to poor and near-poor
borrowers, many of whom had access to bank lending for the first time. The Project has
demonstrated good prospects for sustainability as SFIs continue to serve their newly acquired
clients, and the project portfolio has proved attractive to a commercial financial institution. Social
impact surveys show that most borrowers’ incomes improved measurably over a 5-year period.

B. Lessons Learned

43. The lessons learned apply both to further operations by ADB in Indonesia and lessons
that have more general applicability.

1. Lessons for Indonesia Operations

44. BPRs Can Benefit from Continued Assistance. BPRs are well suited to microfinance,
and in fact meet CGAP criteria for being considered MFIs because the average loan size of
most BPRs is below 150% of GNP per capita (see Appendix 5). Sound BPRs are profitable and
well capitalized but have funding constraints that limit lending outreach. BPRs are confined
geographically and cannot easily expand deposit-taking activities to expand loans. They cannot
move up market because of competition from larger financial institutions, legal lending limits,
and funding constraints. They are, however, well positioned to move down market. BPRs’
competitive advantage is in their closeness and attentiveness to their customers, who are
generally individuals, microenterprises, and small businesses. BPRs, however, often lack the
 13

desire or the funds to invest in computer systems and software, and they have no easy way to
link with the payments system or wider payment networks. BPRs’ geographical and size
limitations also have negative implications for asset/loan portfolio diversification. In some cases
they are not well equipped to design new products that might facilitate moving down market to
serve poorer clients with smaller loans.

45. BPRs need to develop appropriate new products, diversify and better manage asset and
loan portfolio risk, and improve their information technology. Commercial banks are now clearly
moving down market, and this intensified competition adds greater urgency to the need to
address BPRs’ institutional weaknesses. Larger commercial banks enjoy advantages in terms of
lower funding costs, operating cost structures with scale economies (notably promotional,
training, research and development, and IT cost advantages), richer product offerings, and
technological superiority. External interventions targeting BPRs might consider creating more
formal linkages of BPRs and commercial banks—where a marketing/product channeling
symbiosis is likely—and strengthening of supporting institutions that help BPRs enhance their
competitiveness or reduce their risks by providing treasury management services. BPRs need
external assistance to overcome their operational weaknesses and have proven that they can
manage and benefit from access to additional sources of funding like commercial lines of credit.
There is broad scope for follow-on programming by ADB.

46. Interventions Should Promote Commercialization of Microfinance. Commercial

microfinance has arrived in Indonesia, highlighting new possibilities for private-sector
operations. The project demonstrates that with the proper oversight, a portfolio of loans to
BPRs—established, profitable, well-capitalized businesses—can carry low risk and earn a
commercial yield. At the very least, it is possible to reduce the scope of public-sector activity in
future microfinance projects/loans. Future ADB funding should further catalyze private-sector
participation in microfinance, meaning that ADB funds should be leveraged with private funding.

2. General Lessons

47. Use Outreach and Institutional Sustainability as Main Indicators. Because incomes
are subject to various unquantifiable externalities, success or failure of microfinance is best
measured by outreach and financial sustainability. Loan size can serve as a useful proxy for
depth of outreach to poor clients. It is important to gather survey data related to poverty and
incomes of project participants. It is necessary to understand poverty in all its dimensions—not
simply in terms of income—so well-designed social impact surveys should rightfully be
incorporated into microfinance projects. Still, an increase or decrease in income by participating
microenterprises should not be considered the central indicator of success of a microfinance
project. There is solid evidence to suggest that a well-designed microfinance intervention will
benefit those who were hitherto denied access to affordable financial services. Project
frameworks should elevate sustainable financial deepening to the outcome or impact level.

48. Don’t Expect Microenterprises to Hire New Employees. Expansion of microfinance

activity does not necessarily contribute to creation of new wage earning jobs. With access to
loans, a microentrepreneur can spend more time developing her/his business, and perhaps
support the participation of additional family members in the business. The impact of
microfinance on employment is mainly indirect, therefore, and the most significant impact of
microfinance can expected to be on family incomes.

49. Leave Client Se lection to the MFI. If challenged, and with access to effective technical
assistance, many financial institutions can move down market and adopt new methods of
14

reaching poorer clients. The key factors were the fact that (i) the SFIs set their own interest
rates to charge clients; and (ii) the Project did not limit lending to a certain sector, only a certain
size. Maximum loan sizes were attractive mainly to poorer clients, and also helped serve large
numbers of microenterprises run by poor and near-poor women because they matched the size
of their businesses. Client selection is the MFI’s business and should not be interfered with by
any project or agency.

50. Promote Diversification of Funding Sources. In most cases, SFIs were allowed to
borrow no more than 5% of their overall funding (based upon discussions with BI and BPR
personnel, reinforced by BI survey data). The project created no dependency on the part of
SFIs; BPRs needed to continue gathering funds in the form of savings and time deposits from
traditional customers. Sustainability of microfinance depends upon MFIs’ ability to attract and
retain readily available commercial sources of funding. Credit line availability should be strictly
limited so as not to create dependence on the part of the MFI. The success of a credit line
intervention might best be measured in lending outreach to new borrowers combined with a
substantial increase in the amount of local funding gathered by the MFI.

51. Expand the Frontiers of Microfinance. There is a natural limit to how far down market
SFIs can go with lending without (i) increasing operating expenses to such a point that the
lending business is no longer attractive, or (ii) finding insufficient demand for such small loan
amounts. This level will be different for each SFI. There was friction between ADB, BI, and the
SFIs during the Project over the maximum initial loan size; the Project performed a constant and
difficult balancing act to push downward the frontiers of microcredit while keeping the SFIs
interested in exploring those frontiers.11 Microfinance projects should determine a range for
commercial microlending, challenge SFIs to move down market, provide proven new
methodologies to assist SFIs to move down market, and allow SFIs some leverage to push back
from the bottom end of the range to ensure commercial sustainability. The Project demonstrates
that ADB can successfully expand the frontiers of microfinance.

C. Recommendations

1. Project Related

52. Future Monitoring. Monitoring should take the form of quarterly project reports that
include details of lending activity, and should be prepared by Bank Mandiri. ADB has developed
core indicators for monitoring MFIs that include measures of outreach, efficiency, portfolio
quality, profitability, and social impact. These indicators should be incorporated into Bank
Mandiri’s management information systems on the ongoing credit line. BI should also use its
regulatory leverage to ensure that BPRs report in a timely and proper manner to Bank Mandiri.

53. Covenants. An agreement between Bank Mandiri and the Ministry of Finance governs
continued onlending and incorporates many of the covenants in the Loan Agreement. These
covenants should be maintained by Bank Mandiri, particularly those related to BPR eligibility
and the setting of the initial and maximum loan size. The initial and maximum allowable loan
11
For the purpose of discussion, the frontier of commercial microlending in Indonesia might be loosely defined as
somewhere between Rp1 million and Rp2 million for individual loans. These values represent the approximate
average loan size of outstanding BPR project loans, and the present maximum initial project loan value,
respectively. These values represented about 10% to 20% of GNP per capita. The Project demonstrated that
microfinance in Indonesia can be commercially viable at loan levels dramatically below the international
benchmark. If the CGAP benchmark had been available at the time of project design, would the Project have been
so ambitious in pushing downward the frontiers of microlending? This example shows that future projects should
be so bold.
 15

size is likely to be revisited, and should be reviewed and adjusted annually by mutual
agreement between the MOF, Bank Mandiri, and ADB.

54. Cataloguing Lessons. The project worked with more than 800,000 borrowers, a
thousand SFIs, and dozens of NGOs, sparking a great deal of creative activity and innovation.
Monitoring activity has been restricted to the quantification of project outputs and surveys of
borrowers’ economic status. The PCR Mission uncovered during a short time many innovations
that need to be more fully explored and understood. ADB should process an advisory technical
assistance in 2005 (maximum 6 months’ duration) to identify the Project’s more promising
financial innovations in group lending and new products.

2. General

55. ADB has an important institutional interest in seeing that social impact surveys are
carried out consistently and rigorously. It is important to monitor the social impacts of
microfinance interventions on poor people. CGAP has produced a number of publications
related to measuring poverty and social impacts of microfinance, and these standard survey
tools and methodologies should be applied in future ADB microfinance projects. Social impact
surveys should be consistent and comparable across projects and countries. Resources to carry
out these surveys need to be built into projects and funded by loans.

56. The form and content of microfinance project reporting must be mandated by ADB after
close consultation with all stakeholders, in particular the Executing Agencies and implementing
agencies and institutions. In this project, the Executing Agency and consultants appear to have
developed the reporting formats; no project administration memorandum (PAM) was prepared,
which in this case resulted in reporting of irrelevant data as well as incomplete reporting of
relevant data. PAMs are both useful and necessary. PAMs related to microfinance projects
should incorporate ADB's monitoring indicators for microfinance projects, which were developed
and published during 2003. The use of standard indicators will allow for more consistent project
evaluations and facilitate cross-project comparisons.

57. Further Action or Follow-Up. No follow up actions are needed to complete the Project.
Outstanding loan balances have been cancelled and no additional assistance is required. The
project performance audit report should not be prepared until after a substantial period of time
has elapsed, allowing Bank Mandiri to continue its performance. We recommend that the
Operations Evaluation Department wait 2–3 years before fielding a mission, at which time
sustainability can be properly evaluated.

Design Summary
Goal
To increase incomes in rural
areas, to reduce poverty, and to
improve the economic
opportunities for rural poor and
rural women
Purpose
Increased employment and
income-generating activities
among the poor, near-poor, and
women by promoting
microenterprises and facilitating
their sustained access to financial
services
Outputs
a. Lending to the poor and near-
poor for the development of
microenterprises
PROJECT FRAMEWORK
Project Targets
Income level of about 300,000
families increased by an average
of Rp633,000 of which at least
33% are women and 33% are
poor
About 100,000 poor beneficiaries'
income levels will increase by as
much as 50%
• An average of 125 person-
days of jobs created in each of
the 300,000 microenterprises
• About 156,000 equivalent full-
time jobs created for the sub-
borrowers, of which at least
33% are for women and 33%
for the poor
• A total of about 300,000 new
borrowers reached. At least
25% of the subborrower credit
line provided for small, non-
collateral loans to at least
100,000 poor and near-poor
small borrowers
• At least two thirds of the self-
help group (SHG) members
are poor beneficiaries
• At least 50% of the SHG
members are women
Monitoring Mechanisms
• Baseline and periodic follow-
up social surveys
• Project review mission
• Midterm review
• Bank Indonesia (BI) and Bank
Pembangunan Daerah
(BPD's) benefit monitoring and
evaluation (BME) system for
small financial institution (SFI)
compliance with lending to
poor
• Baseline and periodic follow-
up social survey
• Bank Indonesia Bank
Perkreditan Rakyat (BPR) and
Lembaga Dana Kredit
Pedesaan (LDKP) monthly
reporting system including
data loan size, volume of
savings, and number of
customers
16
Assumptions and Risks
Appendix 1
Assumptions
• General economic conditions
of growth continue
• Without the Project, the poor
and women remain excluded
from many economic
opportunities
• Rural wages do not decline
• High rate of loan recovery and
low rate of default
Risks
• Credit line do not reach the
poor and women
• Savings are not mobilized
• Microenterprise failure and
loan default
Assumptions
• SFIs effectively supervised to
meet beneficiary subloan
targets
Design Summary
b. Strengthening of SFIs to
provide financial services for
the development and
sustainable operation of
microenterprises
c. Strengthening of
nongovernment organizations
(NGOs) to organize and
provide SHGs with
appropriate skills training and
other services necessary for
income-generating activities
d. Strengthening of BI’s capacity
to implement, monitor, and
supervise a range of SFIs and
NGOs which provide small-
scale financial services in rural
areas
Project Targets
• 1,125 SFIs financially sound
and providing both savings
and loan services at village
level
• Savings mobilized at least
equal to 30% of loans
generated by Project
• Compulsory savings at least
5% of each subloan
• About 30 NGOs strengthened
and actively assist the poor in
its financial and business
activities
• About 90,000 group-based
borrowers reach (through
approximately 9,000 SHGs,
formed with an average of 10
members each)
• Project implementation unit
(PIU) established, staffed and
equipped
• 13 additional SFI supervisors
employed in branches in five
provinces
Monitoring Mechanisms Assumptions and Risks
• Savings deposits will increase
in SFIs due to compulsory
savings by sub-borrowers and
mandatory SFI savings to loan
ratio of at least 30%
• NGO's effectively linking poor
and women borrowers to SFIs
• Participating LDKPs able to
convert to BPR status by 1997
• NGO monthly reporting on • NGOs prove capable of
numbers of groups and forming SHGs with the defined
individual beneficiaries gender and income
qualifying for microcredit characteristics
• Project review missions • No cost-disincentives
preventing NGO staff from
reaching SHG target
• BPR/BI monthly reporting • BI hires additional staff to
system effectively supervise BPD and
• BPD/LDKP monthly reporting BPR lending operations
system
• Project generated report

Activities
a. Enhance capabilities of SFIs
to provide services at the
village level by
• preparing training
materials
Appendix 1
• Training programs developed
for SFI
• About 4,500 SFI and 121
supervisors trained
• About 1,125 SFIs using

17
• training existing and new improved management and
staff operating systems
Design Summary Project Targets Monitoring Mechanisms Assumptions and Risks

18
• improving outreach and • Improved service to customer
reporting functions through village posts
• •

Appendix 1
providing long-term funds $30 million long-term funds
to support loans to target provided to participating SFIs
beneficiaries for onlending to target
beneficiaries
• Training program developed
for NGO staff
• 135 field staff trained and
employed by NGOs
b. Enhance the capabilities of • NGOs with computerized • Special project reports • Core NGO staff sustainable/
NGOs to assist SHGs to systems and motorcycles • Project BME Baseline Survey, low turnover of personnel
access financial services by Impact Assessment, and • NGOs prepared to employ
• preparing training Special Reports and manage much larger
materials number of field staff
• training existing and new • Willingness and ability of
staff regional NGOs to hold
• assisting SHG member sufficient courses
microenterprises in • BI improves reporting
formulating business mechanisms with BPDs for
plans LDKP supervision
c. Establish monitoring and
evaluation systems including
BME, baseline survey,
midterm review, impact
assessment, and special
studies.
Inputs
Resources by component total
project cost ($ million)
• microenterprises 30.0
• SFIs 4.2
• NGOs/SHGs 2.8
• supervision/monitoring 4.9
• others 0.6
Total 42.5
BI = Bank Indonesia, BME = benefit and monitoring evaluation, BPD = Bank Pembangunan Daerah (regional development bank), BPR = Bank Perkreditan Rakyat
(village bank), LDKP = Lembaga Dana Kredit Pedesaan (small nonblank financial institution), NGO = nongovernment organization, PIU = project implementation
unit, SFI = small financial institution, SHG = self-help group.
 PROJECT POVERTY INDICATORS

2
Value of Official Poverty Line
"Working Real Exchange
CPI Nominal Urban Rural
Poor" Annual Rate: Rp/$
Social Survey Poverty
Poverty (1996=100) Income, at
1 Line Rp $ Rp $
Line Working Year End
($)

Baseline: 1997 2,714,760 112 2,428,446 4,650 584 504,384 108 376,392 81

Midterm: 1998 5,495,460 198 2,768,912 8,025 685 1,163,508 145 873,360 109

Final Survey: 2001 6,600,000 249 2,649,007 10,400 635 1,200,132 115 964,584 93

1
Amount represents nominal annual income of "working poor" hous ehold as defined by the Bank Indonesia (BI) social survey.
2
Official Government poverty line as per Biro Pusat Statistik (BPS); figures for annual income per capita.
Source: Bank Indonesia.

Appendix 2
19
 PROJECT IMPLEMENTATION SCHEDULE
Projected vis-à-vis Actual

1995 1996 1997 1998 1999 2000 2001

Components / Activities 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

20
A. Sustainable SFIs
1 Identify SFIs and Disburse Credit Funds:
a) Mobilize Project Consultants
Projected
Actual
b) Determine Participating SFIs Based on Criteria

Appendix 3
Projected
Actual
c) Discuss SFIs for Participation with BI Officers
Projected `
Actual
* d) Promote Projects to BPDs and Potential SFIs; Solicit SFI Applications
Projected
Actual
* e) Review BPR applications for Funds; Perform Due Diligence Review
Projected
Actual
* f) Review BPD/LDKP Applications for Funds; Perform Review
Projected
Actual
* g) Disburse Loans to SFIs
Projected
Actual

2 Prepare SFI Training Materials:

a) Review Existing Materials and Practices
Projected
Actual
b) Formulate Curricula, Obtain Approval
Projected
Actual
c) Write Materials
Projected
Actual
d) Produce and Test New Materials
Projected
Actual
e) Edit and Publish New Materials
Projected
Actual
* f) Review and Revise Training Materials
Projected
Actual

3 Train SFI Staff:

* a) Train BPD & SFI Managers and Supervisors
Projected
Actual
* b) Train SFI Staff
Projected
Actual

4 Computerize SFI Activities:

a) Mobilize Consultants
Projected
Actual
b) Review Existing Systems
Projected
Actual
c) Write Software
Projected
Actual
* d) Test Software in Field Locations
Projected
Actual
* e) Revise Computer Software
Projected
Actual
* f) Train Software Users
Projected
Actual
 PROJECT IMPLEMENTATION SCHEDULE
Projected vis-à-vis Actual

1995 1996 1997 1998 1999 2000 2001

Components / Activities 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

20
5 Provide Vehicles for Bank Supervisors, Banking Staff:
a) Determine Needs
Projected
Actual
b) Call for Tenders
Projected
Actual
c) Procure and Deliver Vehicles
Projected
Actual

6 Provide Loans for NGO Working Capital and Field Workers Vehicles:
a) Arrange Loan Program
Projected
Actual
* b) Process and Disburse Loans
Projected
Actual

B. NGOs Able to Organize and Provide SHGs with Appropriate Skills Training
and Other Services Necessary for Income-Generating Activities.
1 Mobilize LT Consultants
Projected
Actual

2 Promote Project to NGOs

Projected
Actual

3 Recruit New NGO Field Staff

Projected
Actual

4 Prepare Training Materials

a) Conduct training Needs Assessment
Projected
Actual
b) Review Existing PHBK and P4K Materials
Projected
Actual
c) Design Improved Materials
Projected
Actual
d) Produce and Test New Materials
Projected
Actual
e) Edit and Publish New Materials

Appendix 3
Projected
Actual
f) Review Project Training Program and Revise Materials
Projected
Actual

5 Train Existing and New NGO Staff

a) Train NGO Staff Trainers
Projected
Actual
b) Train New Field Staff (3 locations)

21
Projected
Actual
 PROJECT IMPLEMENTATION SCHEDULE
Projected vis-à-vis Actual

1995 1996 1997 1998 1999 2000 2001

Components / Activities 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

20
22
6 Computerize NGO Activities:
a) Assess Computer Needs.
Projected
Actual
+ b) Arrange for Competitive Bids.
Projected

Appendix 3
Actual
+ c) Approve Purchases.
Projected
Actual
+ d) Design and Install New MIS Software.
Projected
Actual
+ e) Train Computer Operators.
Projected
Actual
+ f) Monitors and Supervise NGO Computerized Record Keeping
Projected
Actual

C. Bank Indonesia Able to Implement, Monitor and Supervise a Range of

SFIs and NGOs
1 Project Start-up
Projected
Actual

2 Conduct Special Studies to Support NGO Component.

+ a) Conduct Studies of NGO Organizational and Managerial Needs
Projected
Actual
+ b) Conduct Assessment of NGO Microenterprise Outreach Programs
Projected
Actual
+ c) Conduct Studies of NGO Effectiveness by Gender and Ethnicity
Projected
Actual

3 Produce Project Reports.

a) Inception Report
Projected
Actual
b) Semi-Annual Report
Projected
Actual
c) Annual Reports
Projected
Actual
+ d) Mid-term Review Report
Projected
Actual
e) Completion Report
Projected
Actual - March 2002

4 Design and Conduct Baseline Survey

Projected
Actual

* 5 Collect and Process Follow-up BME and Impact Data

Projected
Actual

6 Analyze Impact Data for Completion Report

Projected
Actual

- Projected
- Actual
* - Denotes activities carried out on a continuous basis.
+ - Denotes activities for which no documentation is available.
 CONSULTANT STAFFING SCHEDULE
Projected vis-à-vis Actual

No. of
Person- 1995 1996 1997 1998 1999 2000 2001
Consultant Months 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
A. Financial and Credit Aspects
1 Foreign
a) Rural Banking Specialist (Team Leader) 48
Projected
Actual
b) SFI Training Specialist 9
Projected
Actual
2 Domestic
a) SFI Mngmt and Supervision Specialist 24
Projected
Actual (extended 24 months)
b) SFI Computer Specialist 24
Projected
Actual (extended 24 months)
c) SFI Curriculum and Training Specialist 12
Projected
Actual
d) Loan Management Materials Specialist 2
Projected
Actual
e) Funds Management Materials Specialist 3
Projected
Actual
f) Bookkeeping Materials Specialist 4
Projected
Actual
B. Social and BME Aspects
1 Foreign
a) BME Specialist 6
Projected
Actual
2 Domestic
a) BME Specialist 19
Projected
Actual
b) Social Survey Specialist 6
Projected
Actual
c) WID/Gender Specialist 4
Projected
Actual
d) NGO Mngmnt and Training Specialist 24
Projected
Actual
e) Microenterprise Development Specialist 12

Appendix 4
Projected
Actual

- Projected
- Actual
- Extended

23
 24
PROJECT LOAN SIZES IN PERSPECTIVE

Appendix 5
Project Loan Size in Perspective 1996 1997 1998 1999 2000 2001

Initial Maximum Loan Amount 1 250,000 500,000 1,000,000 1,000,000 1,000,000 2,000,000
Maximum Loan Amount 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 5,000,000

Average Project Loan Amount 326,000 372,000 369,000 525,000 438,000 1,151,000

GNP per Capita 2,633,523 3,049,187 4,492,385 5,008,936 5,780,405 6,859,207

2
150% of GNP per Capita 3,950,285 4,573,781 6,738,578 7,513,404 8,670,608 10,288,811

Rupiah/$ Exchange Rate 2,383 4,650 8,025 7,100 9,595 10,400

GNP per Capita ($) 1,105 656 560 705 602 600

As a Percentage of GNP per Capita

Initial Maximum Loan Amount (%) 9 16 22 20 17 29
Maximum Loan Amount (%) 76 66 45 40 35 73
Average Project Loan Amount (%) 12 12 8 10 8 17

1
For initial year, Bank Indonesia (BI) allowed the initial maximum value of loans made under the Project to be Rp500,000 by year-end.
2
Consultative Group to Assist the Poorest (CGAP) benchmark for microlending. Loans below this amount can be considered microloans.
Source: Bank Indonesia.
 Appendix 6 25

LIST OF SUBLOANS

Disbursement Subloan Amount

Subloan Authorization Amount Disbursed Equivalent
No. Sub-Borrower Date (SDR) (SDR)

001 Urusan Credit - BI 1 Sep 97 145,409 145,409 219,032

002 Urusan Credit - Jakarta 29 Jun 98 117,421 117,421 176,874

003 Various 10 Sep 98 264,107 264,107 354,490

004 Various 5 Oct 98 458,702 458,702 629,027

005 Various 8 Apr 99 2,325,896 2,325,896 3,162,224

006 Various 9 Aug 01 4,567,177 4,567,177 5,877,135

007 Various 21 May 02 1,544,389 1,544,389 1,950,973

008 Bank Indonesia 1 Apr 02 857,832 857,832 1,104,100

009 Bank Indonesia 25 Apr 02 3,259,109 3,259,109 4,191,347

Total 13,540,043 13,540,043 17,665,201

BI = Bank Indonesia, SDR = special drawing rights.
Source: Bank Indonesia.