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The Forum's main task would be to monitor implementation based on the approved proposal. Revolving Funds and Credit for Economic Activities The second intervention of KDP3 will be to strengthen microfinance by providing professional oversight and supervision to the revolving funds.

the main microfinance (and rural finance) sector issues are: (a) the persistence of unsustainable program microcredit; (b) the lacking outreach of institutional microfinance to rural villages; and (c) the lack of institutionalized support and supervision for microfinance institutions operating outside the banking sector. program microcredit has been provided mainly by the government through special credit schemes and poverty alleviation programs. the prevailing features of program microcredit have been: (i) emphasis on channeling easy and cheap funds; (ii) neglect of the demand for savings and liquidity management instruments; (iii) central designs neglecting locally varying demand and conditions; (iv) instant intervention neglecting the need for longer-term and gradual strategies; (v) lack of proper program monitoring and credit supervision; and (vi) poor credit collection and de-capitalization of loanable funds.
this break with prudential microfinance standards was deepened by the channeling of huge amounts of subsidized funds during and after the financial crisis. this has impaired rather than supported low-income clients in getting access to sustained and growing microfinance services, and it tends to undermine rather than complement the development of sustainable institutional microfinance institutions. government policies in this respect have not changed. most sector ministries which continue to use subsidized program credit on a large scale. the recent draft indonesian i-prsp emphasizes ".easier access to be given to the poor to financing sources through the micro credit, small credit and cooperatives credit programs . there is neither a consistent microfinance vision and policy nor an enabling legal and regulatory framework for the sound development of non-bank microfinance institutions.
the ministry of finance is presently reviewing a drafted microfinance law. the bank has been providing assistance as part of the partnership financial sector work that concentrates on (i) assisting gol develop a vision and strategy for financial services to the poor; (ii) clarifying and unifying the legal and regulatory framework for microfinance institutions, and (iii) capacity building issues for microfinance institutions, including dissemination of best practice tools.
despite all efforts of financial deepening, the majority of villagers does not have sustained access to financial services, especially microcredit. the major demand-supply gap in institutional microfinance exists at the village level. sustainable microfinance providers such as the bri unit and the bpr systems have not been able to close this gap. the renaissance of targeted credit policy and program microcredit has been aiming at increasing outreach quickly, while neglecting institution building and sustainability. institutional microfinance outside the banking sector is usually referred to as lkm (lembaga keuangan mikro = microfinancial institution). government programs have been increasingly promoting and using lkm for channeling funds to target beneficiaries. this practice has already corrupted the integrity of cooperatives and will hardly result in the development of independent and viable non-bank microfinance institutions.
lack of supervision and monitoring a major issue for the development of non-bank microfinance institutions is the lack of institutionalized effective support and supervision. both the cooperative sector and the usually government-driven ldkp have been suffering from this situation. community-owned microfinance institutions do not have sustained access to capacity building through institutional providers of training, consultancy and supervision services. projects partly provide these services for a limited time and often without the necessary quality through individual consultants. a strategy focusing on the institutional strengthening of non-bank microfinance institutions would have to include innovative approaches of ensuring sustained access to demand-oriented technical assistance and effective supervision.
supervision of non-bank microfinance institutions is necessary for supporting their sound development and part of a capacity building strategy rather than only a function of deposit protection or enforcing regulations. it must be locally available whether or not non-bank microfinance institutions will be regulated and supervised by the central government.
the strategic challenge is to combine increasing outreach and sustainability within a financial systems approach. an important element of this strategy is a vision of the institutional microfinance landscape some 10-20 years from now. this vision most probably will have three major pillars: (a) the bri unit system increasing outreach to the village level, while maintaining its present soundness; (b) the bpr system with increased viability and downward mobility to the village level; and (c) non-bank microfinance institutions focusing on providing financial services at the village level. the latter include financial cooperatives as well as mncrofinance institutions owned and controlled by communities. a first step towards this vision would be a policy change giving priority to institution building for sustainable microfinance, thus terminating solely outreach-oriented, and politically and socially motivated, channeling of government funds, and especially refraining from using lkm as channeling devices. community-owned microfinance institutions may not in all locations be a viable or advisable option. sustainable institutional development will not be feasible in more isolated and very poor areas, in areas highly dominated by agriculture and without diversified economic opportunities, and in areas lacking the human resources required for this development.
where bri units and bprs are actively increasing outreach to villages in a competitive environment, strategies should support them rather than establishing new competitors. nonetheless, the community-driven revolving funds have indicated that there is considerable unmet credit demand and sufficient room to move for well managed community-owned microfinance institutions. objectives kdp-3 has overall development objectives of reducing poverty and improving local-level governance in rural indonesia. it is part of a long-term village level govemance program that began with the first kecamatan project in 1998. rationale for bank's involvement bank contributions to the kdp program are valuable in four main areas. first, the bank provides oversight and pressure on all stakeholders (even government) agree is poor fiduciary environment. bank participation therefore contributes greatly to effectiveness by aid is used. second, indonesian agencies normally do not carry out very rigorous monitoring and evaluation programs. this approach works reasonably well for and true programs which extend basic development benefits to groups.
constantly evolving projects such , however, require much closer monitoring and evaluation because they are at where there are standard procedures and known outcomes.. ..
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