Microfinance is an essential instrument for realizing the Government of
Indonesia’s three-pronged approach for development to create jobs, increase incomes and
alleviate poverty. Access to sustainable financial services is a prerequisite for micro
entrepreneurs to improve their businesses and poor households to reduce their
vulnerability and increase their incomes. Microfinance is an important tool in the
countries’ development strategy directed at achieving the Millennium Development
Goals. Even though Indonesia has a wide variety of microfinance services’ providers, a
demand-supply gap of (micro-) financial services persists. A majority of Indonesian
households do not have access to financial services, and most of these households are in rural areas and in provinces outside Java and Bali, where the incidence of poverty is highest. This problem is caused by a restrictive legal framework for microfinance, inadequate regulation and supervision, and the ongoing “old paradigm” of subsidized and targeted credit coexisting with the “new paradigm” built on commercial and market oriented microfinance institutions.

A national policy on microfinance is needed to overcome the current limitations for microfinance by creating an enabling environment, which will allow existing microfinance institutions to expand their services and new microfinance institutions to fill the gap of demand and supply, especially in rural areas. This policy and the strategy for its implementation will be based on international good practice and lessons learnt from the Indonesian experience. The present absence of a concise microfinance policy, however, prevents stakeholders from aligning their efforts and creating a sustainable microfinance system. This vision has at its core the sustainable access to quality financial services, i.e., savings, deposits, loans, payments and insurance products by every household in every village on every island all over the wide Indonesian archipelago. This creates opportunities to increase wealth of the population by reducing vulnerability, enhancing business activities, generating employment and increasing income of poor and low-income households. To achieve this vision, the Government of Indonesia and all relevant stakeholders shall jointly work on removing the limitations for microfinance development.

Microfinance in Indonesia has already recorded success story in providing financial services to MSMEs. Simple and well-adapted credit approval and administrative procedures, often coordinated with appropriate technical assistance combined with socio-cultural approach, are all the aspects that support the successful of microfinance in Indonesia.

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