Hometown Investment Trust Fund Implementation Approach in Indonesia

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Beside the issue with access to finance, Indonesia’s SMEs also face the other major constraint, which is lack of innovation and business knowledge. Therefore, it will be desirable to develop a Hometown Investment Trust Fund (HIT) implementation approach that can also overcome this problem. There are two implementation models that will be discussed; the first one is to incorporate universities as the business operator of the HIT and the second is to utilize the role of cooperative for developing HIT to reach the SMEs in rural area.

Incorporating Universities as The Business Operator of HIT

The basic argument about this approach is the universities will provide knowledge and guideline through their business incubation center to the SMEs. Business knowledge is crucial because it will determine the successful execution and the growth of their business. By acquiring an adequate level of knowledge, SMEs can obtain a strategic advantage to enhance their business productivity, understand the market, differentiate their products, and expand their market base. Without this strategic advantage, the potential investors will not eager to invest in the SMEs because they are unsure that the SMEs can survive in the market even after receiving their investment.

The initiative to enhance the growth of SMEs has become one of the universities’ focuses toward becoming entrepreneurial university. One of the common strategy to achieve that is through developing business incubation center to assist SMEs for developing their business, and up until now there are 82 major universities in Indonesia that have a center for SMEs development or business incubation center.

The framework of this model starts with the investor’s access to the list of SMEs project database in the website (see figure 1). In this website the investor can check all of the information about the SMEs and their projects, such as the company profile, detail of the project and potential yield of the project. The website also acts as the investment platform where the investors can invest their money directly through the website to the projects that suit their interest, just like in a crowd funding online platform (e.g. kickstarter.com). In this model, the main sales channel for HIT will be through the website, however there will be further sales channel development through bank, post office and cooperative.

The universities play a big role in this model, because they will be the business operator of the HIT. The main activities of the universities in this model are building an online investment platform for the HIT, promoting HIT to the potential investors, valuating the SMEs project to minimize the risk as well as to foresee the potential of each SMEs’ projects, providing development package (knowledge, guidance and consultancy) to the SMEs, and do the monitoring and auditing of the SMEs.

Figure 1. Universities – HIT Framework Diagram

There will be some advantages by implementing HIT through the universities’ business incubation, such as:

1. The universities have a lot of experts (e.g. professors and researchers) that are capable of developing and also guiding the SMEs to grow their business. These experts from the universities will become the SMEs’ mentor and consultant, and it will be a great benefit for the SMEs
2. Many potential students that can become consultants for the SMEs (either under a pro-bono scheme project consultant or as an intern).
3. This model also allows the students to learn directly from the SMEs key players, so that they will be motivated to become entrepreneur, hence it can increase the growth of SMEs in Indonesia.
4. Gaining better trust from the investor, since the universities have already gained credibility through public exposure as well as because of the experts inside the universities.

Rural Development Strategy Through the Integration of HIT and Cooperative

Cooperative has played an important role to the development of rural areas in Indonesia. There is a government organization that manages all of the cooperatives in Indonesia and it is called Induk KUD. Induk KUD is the national federation of rural co-operatives in Indonesia, and it was founded on 12 November 1979.

Induk KUD mission is to help the co-operative movement expand joint business relationships, ensure creation and implementation of a business climate that supports co-operative survival and development, education and training, develops co-operative business, and improves the welfare of its members and as a result the community. Induk KUD currently has members in 27 provinces with three overseas representative offices. In 2010, Induk KUD consisted of 30 member societies with 9,437 co-operative members that represented 13.4 individual members.

The cooperative has a savings and loan business unit for members of staff, their members (individual and SMEs), and potential members. They also procure and distribute goods such as raw materials and production facilities to increase production for members and staff. The organization also assists in helping members market and open up markets in domestic and foreign countries in the various sectors that their members are in – agriculture, fisheries, livestock, plantation, mining, forest and crafts.

The basic argument for this approach is because the cooperative has a business model that is relatively similar with a business incubator. From the explanation above, it is clearly stated that the cooperative supports the development of its SMEs member and provide them with necessary access to low interest loan. However the cooperative’s source of funds is limited to the internal contribution of its members, which is one of the reasons for the integration of HIT to expand its external source of fund (public investors).

In this approach, the investors can invest directly to the SMEs and their projects either through the online investment platform (just like in the university approach) or by going directly to the cooperative or over the counter (see figure 2). Over the counter selling channel will be important for the cooperatives that are located and have portfolios of SMEs’ projects in rural area, since internet access will be quite difficult in this area.

While for the development of the SMEs and also monitoring and auditing, it can be done directly by the cooperative or by partnership with the university. Partnership with a university will be quite useful when the cooperative has fewer experts to develop the SMEs, so in order to fulfill the gap the cooperative can collaborate with the university to get the necessary resources.

Figure 2. Universities – HIT Framework Diagram

The advantages of implementing HIT through cooperative are:

1. The vast network of cooperative in both urban and rural areas can create a wider positive effect of HIT implementation.
2. HIT model can be easier to be implemented within cooperative than universities, since cooperative has a quite similar business model with HIT.
3. The cooperation with universities can allow the cooperative to acquire the necessary expertise to develop SMEs and executing a more effective fundraising method.
4. Better support from the government through the Ministry of Cooperatives and SMEs.

Suryo Ariyanto Nugroho

Further Reading: 

Yoshino, N., & Kaji, S. (2013). Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital (Vol. 1). Tokyo, Japan: Springer.

 

Hometown Investment Trust Fund: An Alternative Source of Finance for The SME

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Hometown Investment Trust Fund (HIT) is a small investment that focuses on regional development. The uniqueness of HIT is its model, which aims to develop an innovative financial intermediary channel outside of the indirect funding and market sectors in one country’s financial system. HIT creates a new flow of funds that can accommodate riskier business like SMEs and it also focus on enhancing the financial system to support SMEs as a form to promote real economy development.

The framework of HIT starts with its new capital supply channel where a business operator acts as an asset management company to manage the funds that have been generated from the investors (see figure 1). This business operator’s roles are to valuate the SMEs that will be invested using the funds, channeling the investment to the chosen SMEs and monitoring the SMEs by doing a business audit.

The investors of HIT can invest directly to the project that will be executed by the SMEs through the website (like the model of Crowd funding) that has been developed by the business operator or through the other HIT sales channels, such as banks, cooperative, post office, etc. (see figure 1). This concept of using the website as an investment platform can allow the investors to choose the projects that they are interested in, while also reducing the transaction cost of direct investment to the project. By implementing this direct investment model to the SMEs from household financial assets, HIT can provide other source of funds to the SMEs with better risk tolerance comparing to the banks that bound to the Basel capital requirement.

HIT uses the approach of silent partnership in order to ensure the management independence of the SMEs to run their business (see figure 1). Silent partnership allows people to invest directly to individual projects, however they will not be allowed to participate in the management of SMEs and/or the SMEs project. This approach is different from the traditional investment in the partnerships and common stock where the investors in a publicly traded company are involved in the shareholder meeting to decide the direction of the company.

Figure 1. HIT Framework Diagram

Hometown Investment Trust Fund has three major advantages. First, it can reduce the information asymmetry, because the investors have direct access to the SMEs’ projects in which they will invest their money to. Second, HIT is a stable source of risk capital, since it is a project-driven fund where the investors decide to invest in the SMEs and their projects that they are familiar with (e.g. the investors can choose to invest to the SMEs that are located in the same region / hometown as they are), thus the investors can trust the SMEs and do a voluntary monitoring whenever they want. Third, HIT can connect households (both investor and consumers) to the SMEs so that they can grow and provide more job opportunities as well as regional development, which can contribute to the economic development of Indonesia.

Suryo Ariyanto Nugroho

Further Reading: 

Yoshino, N., & Kaji, S. (2013). Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital (Vol. 1). Tokyo, Japan: Springer.