Young Dreamers Take Action: New Ways of Financing and Capacity Building in Indonesia

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There was a young face sitting at the panel in one of the sessions at the UNEP Sustainable Consumption and Production in Asia conference. With no name in the conference agenda or on the table, there were no clues as to her identity. While everyone was still wondering who she was, she started her presentation on new models of microfinancing and capacity building for socio-eco-preneurs (innovative entrepreneurs who minimize or eliminate negative ecological and socio-cultural impacts when developing goods and services for profit). Given that the attendees were here for both practical and innovative solutions, Vrilly Rondonuwu, along with her three colleagues, Idda Mahbubah, Adie Nugroho and Airin Azizah did not fail to deliver as they represented Leadership for Environment and Development (LEAD) Indonesia to a captivated audience.

These young people’s main objective is to create a sustainable financing and capacity building model for Indonesia by involving multiple stakeholders, which include financial institutions, banks, corporations, and socio-eco-preneurs. Ultimately, they hope that their model, which considers the unique social and economic structure of Indonesia, can further promote economic development in a green and socially responsible way. It aims at helping socio-eco-preneurs, who can create positive impacts on both social and environmental aspects through their business, to get sufficient financing and capacity building assistance. It is also a framework that can create opportunities and benefits for all stakeholders – small socio-eco-preneurs get their support; banks and financial institutions get new groups of loyal customers; bigger corporations get a more socially responsible supply of inputs for their business; and capacity builders get new skills and experiences. By considering the benefits of different stakeholders, it is hoped that the whole framework can be sustainable and profitable for all stakeholders, as well as run independently and continuously.

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An example of a successful implementation was offered by way of a soybean socio-eco-preneur, who can potentially become a supplier to a big corporation like Unilever. Unilever would then endorse the soybean farmer and agree to fully absorb all the agreed-upon products of the farmer. With the support of Unilever, the bank can raise the credit rating of the farmer, providing further financing opportunities. Capacity builders can also step in to provide consulting support for the socio-eco-preneur and help to ensure that they have reliable management and reasonable funding arrangements. By cooperating with financial institutions and big corporations, capacity builders can not only help the socio-eco-preneur and earn the service fee for themselves, but also gain knowledge and experience for themselves during the process. Thus, the cycle of socially and environmentally responsible economic growth is perpetuated.

The project is still in its early stages, and more improvement is needed to increase the model’s acceptability by all of the stakeholders involved. In the interview, the team explained the current stage, and the major challenges of the project: how to introduce a new collateral model and quantify intangible items. We also delved into how government institutions like the Indonesian Central Bank and different industries react to the framework.

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Like most micro financing projects, LEAD is attempting to address the collateral conundrum of the small- and medium-sized enterprises (SMEs). The collateral requirement in conventional models for financing usually refers to tangible assets, such as land and property. However, for most of the SMEs in developing countries, real assets are exactly what they lack, and as a result, loans are beyond their reach. The LEAD team therefore suggests the banks and governments to look at more innovative ways to find the collateral, which includes positive environmental impacts such as carbon credits emanating from the proposed project.

The concept of using carbon credits as collateral has become more popular in developed countries in recent years and there are already several articles discussing this idea. However, there is still a long and tough way for the LEAD team to make this new collateral model practical. For example, the pricing mechanism for intangibles like carbon credits is very complex and it requires well-established legislation and regulation. Moreover, the price can vary significantly since the carbon trading markets have not matured yet, on top of suffering from, as seen with the European Emissions Trading Scheme, incomplete information. All of this adds to the uncertainty and volatility when pricing carbon credits. Thus, it’s not very difficult to understand why the banks may not want to take the risk to accept these intangibles as collateral.

The good news is that the LEAD team has currently been receiving positive feedback from the Central Bank of Indonesia and their project is supported by Bank BNI, one of the most popular banks in the country for providing green banking services. In the near future, the team hopes to gain more feedback from regulators and the academic field in order to finalize their model.

It is definitely a big step taken by LEAD Indonesia and the project certainly seems to be heading in the right direction. Though microfinancing has been gaining in popularity over the last few decades, a successful model (and story to go along with it) can further boost the morale of investors looking at sustainable financing options. However, there remain significant challenges and risks that must be addressed for LEAD’s widespread success. How can we mitigate the potential risks that financiers must bear? Does the answer lie in the new and volatile carbon credits market or will there be other avenues for loan guarantees? This is the conversation that must be had going forward from this conference as we move beyond simply talking the talk and start walking the walk.

Feature image: Rice Fields in Bali. Source: Eric Bézine, Creative Commons License

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