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SAFIRA at the Indonesian International Centre of Excellence for Microfinance and Inclusion launch

Palladium’s DFAT-supported Strengthening Agricultural Finance in Rural Areas (SAFIRA) program, under the Australia Indonesia Partnership for Rural Economic Development (AIP-Rural), shared valuable expertise with the Indonesian Financial Services Authority (or Otoritas Jasa Keuangan- OJK) at last month’s launch of ‘OJK- PROKSI’, OJK’s International Centre of Excellence for Microfinance and Inclusion.

The Government of Indonesia is making a concerted effort to expand credit to farmers and people in rural areas through working with the financial sector. Various initiatives are being undertaken, ranging from direct partnerships with banks, to technical research and knowledge-sharing seminars. One of these initiatives is the creation of the OJK- PROKSI Centre. The Centre is designed to increase financial literacy and public knowledge across Indonesia, ensuring financial institutions can increase financial inclusion by providing products that are accessible to the public.

The OJK-PROKSI launch was officiated by the Vice President of Indonesia and supported by the Ministry of Cooperatives and SMEs, and the Coordinating Ministry of Economic Affairs of Indonesia. SAFIRA’s Team Leader Clay O’Brien shared his knowledge on financial inclusion through the promotion of value chain financing, and described the current work being undertaken by SAFIRA to strengthen agricultural finance in rural areas. While at the conference, SAFIRA also signed letters of intent to partner with six local banking and financial institutions: BRI, BTPN, Bank Sinarmas, Bank Andara, BPR Pesisir Akbar and ACA Insurance.

Said Clay, “I was very pleased to be invited to speak at the OJK Proksi’s launching event, an international microfinance and inclusion resource and learning center on microfinance and inclusion to support the poverty alleviation programs both domestic and global. Access to finance is a severe problem for small holder farmers. Value chain finance is a new approach that already has a proven track record in other countries and increasingly in Indonesia. Through the support of the SAFIRA project, we are confident that it will also make an impact here.”

SAFIRA Team Leader Clay O'Brien at last month's OJK-PROKSI launch in Indonesia

SAFIRA aims to accelerate poverty reduction through inclusive economic development.  At its core, it aims to expand agriculture value chain financing (VCF) for small and medium enterprises (SMEs) and farmers in eastern Indonesia. VCF is made possible through facilitating relationships between value chain actors that make agribusiness SMEs or smallholder farmers more commercially viable (i.e. less risky) to receive financing- in the eyes of a financial institution. For example, while banks are usually reticent to provide credit to most smallholder farmers, they are more likely to issue a loan to farmers that have a contract with a trusted buyer or a warehouse receipt from a recognised storage facility. In this way, VCF is used to reduce lending risks by leveraging relationships as assets. It can also reduce lending transaction costs by using value chain actors as loan assessors, distributors or collectors for financial services.

Value chain finance could help smallholder farmers in Indonesia

SAFIRA will work to facilitate commercially viable business models and relationships between financial institutions, SMEs (e.g. seed producers, collectors, processors) and farmers to support the application of VCF.  This should result in further credit access to smallholder farmers in eastern Indonesia.

As with other AIP-Rural projects, including PRISMA and TIRTA, SAFIRA ultimately aims to improve the net incomes of its beneficiaries- in this case 12,000 smallholder farmers in eastern Indonesia. The project will also monitor other important indicators, such as the volume and quality of its partner financial institutions' agricultural portfolios. Focus will initially include East Java, West Nusa Tenggara and East Nusa Tenggara.

SAFIRA falls under our Asia Pacific Economic Growth Practice. To learn more about the work of the Practice, please contact Alwyn Chilver at Alwyn.Chilver@thepalladiumgroup.com.