market opportunities and regulations microfinance in indonesia

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  • 1.Introduction Microfinancebeexplained intermsof the inferiorityof limitations,namelythe inferior-ityof thepoors thataredifficultor limitedaccess to financialservices/banking.TheAsianDevelopmentBankexplaindefinitionmicrofinanceastheprovisionoffinancialservicesisthebroadest,suchasdeposits,loans,paymentservices,moneytransfersandinsurancetopoorandlow-incomehouseholdsandmicrobusinesses1.Indonesiahasthepopulationofover253millioncoveringanexpanseof17,508islandsandisoneofamembertheG20inSoutheastAsia.Indo-nesiaseconomyhasgrownatforthepasttenyears,withkeyimprovementsinbusinesscli-mateandpovertyreduction.Indonesiaisrenownedforitslarge-scalemicrofinancesectorwitharangeofcommercialbanksandover60,000MFIsreachingmorethan50millionpeople2.

    Ph.DStudentatTheGraduateSchoolofEastAsianStudies,YamaguchiUniversity.

    JournalofEastAsianStudies,No.13,2015.3.pp.173-194

    AbstractThispaperprovidesasystematicassessmentofmarketopportunitiesandregulationsmicrofinancein Indonesiabasedonsocialeconomic,demographicconditions,potentialSMEsIndustry,marketsegmentation,marketpenetrationandhownewregulationsmicrofinanceinIndonesia.Indonesiahaspotentialmarketformicrofinancesector,witharangeofcommercialbanksandover60,000MFIs,morethan28,07millionpoorpeopleor11,37%fromtotalpopulationandmorethan55,8millionmicroenterprisesrepresenting98,79%ofthetotalbusinessindustryinIndonesia.Currently,manypeople in Indonesiadonothaveadequateaccess to thebank financing theyneedtogrowtheirbusinesses,particularly inruralareasand lackof training formicrobusinessesandpoorpeople.Tothatend,BankIndonesia issuedarulethatrequiresbankstohaveat least20%oftheir loanportfoliodedicatedtomicroloansby2018openingupnewopportunitiestofurthergrowthesector.Successfulmicrofinanceinfluencedbysomefactorssuchassocial-economic,demographicconditionsandregulations,so it is importanttoknowaboutthisconditions.LawActNo.1of2013givesfullauthoritytoOtoritasJasaKeuanganorOJKasaFinancialServicesAuthorityInstitutiontomakeregulations,licensing,andsupervisionsMFIsandexpectedtohelpthegovernmentofIndonesiatoimproveeconomicgrowthandreducepovertyinmicrofinancesector.Thispapergiveinformationnewregulationsmicrofinanceandconcludeswithpresentingrecommendationto improvingthemicrofinanceinIndonesiaforsustainabledevelopmentofthemicrofinancesectorinIndonesia.

    Keywords:Indonesia.Microfinance.Market.Opportunities.Regulations

    MarketOpportunitiesandRegulationsMicrofinanceinIndonesia

    DeviErnaRachmawati

    173

  • Indonesiahasapotentialmarket todevelopmentmicrofinance throughmicro-businessenterpriseswithmorethan55,8million (MicroEnterprises), representingsome98,79%ofallenterprisesandcontributingno lessthan35,81%ofGDPgrowthin20123. Despitethisprog-ress,theCentralBankIndonesiareportinMay2014,Indonesiastillfindsonly10,1millionhaveformalaccountsformicrocredit.Indonesiahasapproximatelyonehundredmillionpeoplewhocannotordonotaccessfinancialservicesofanykindacrossavastanddiverseeconomy.Cur-rently,manyof thesedonothaveadequateaccesstothebankfinancingtheyneedtogrowtheirbusinesses,particularlyinruralareas.Tothatend,BankIndonesiaissuedarulethatre-quiresbankstohaveatleast20%oftheirloanportfoliodedicatedtomicroloansby2018open-ingupnewopportunitiestofurthergrowthesector4. Indonesiahasarelatively longmicrofinancehistory,especiallycommercialmicrofinance.Theendofthe19thcenturypreciselyin1890IndonesiahadalreadyestablishedtheIndonesianPeoplesCreditBanksandnowweretheBankRakyatIndonesia(BRI).Indonesiahasmicrofi-nancepotentialmarket,butthestrictregulationsandhigh-interestrateshavehamperedeffortstothedevelopmentofmicrofinanceandforcingpoorpeopletrappedbyunscrupulousmoney-lenders.DemographicconditionsinIndonesiaischallengemicrobankingthatstillnotabletoreachthewholeruralcommunityinIndonesia,sotheroleofMFIsinIndonesiaveryimportanttoreducepovertyinIndonesia. Theslowpaceofreformintheregulatoryandlegalenvironmentalsodetersgrowthinthemicrofinancesector.In8thJanuary2013thegovernmentofIndonesiafinallymakenewlawreg-ulationonMicrofinanceInstitutions.ThisrulegivesfullauthorityOtoritasJasaKeuanganorOJKasaFinancialServicesAuthorityInstitutiontomakeregulations, licensing,supervisionsmicrofinanceinIndonesia.TheroleofOJKasaFinancialServicesAuthorityInstitutionverynecessaryfordevelopmentmicrobankingandMFIstogivefinanceaccessformicrobusinesssectorandpoorpeople.Expectedtohelpthegovernmentprogramtoeconomicgrowthandre-ducepovertyinIndonesia. Theindicatorsofsuccessonmicrofinancenotonlyreflectedbytheeconomicgrowthofacountrybutalso influencedbyotherfactorssuchassocial-economic,demographicconditions,regulationsmicrofinance5.Soitisimportanttoknowaboutthisconditions,thispaperprovidesasystematicassessmentofmicrofinancebasedonexistingkeyreportsonsocial, economicconditions,demographicconditions,potentialSMEs Industry,market segmentation,marketpenetrationandhowregulationsmicrofinanceinIndonesia.Thispapergiveinformationaboutnewregulationsmicrofinance inIndonesiaandconcludeswithpresentingrecommendationtoimprovingthemicrofinanceforsustainabledevelopmentofthemicrofinancesectorinIndone-sia.

    174

    JournalofEastAsianStudies

  • 2.IndonesiaPotentialMicrofinanceMarket Indonesiawasonethe firstcountriestodevelopcommercialmicrofinance inAsia6. Indo-nesiahastotalofpopulationofover253millionandtotalofpoorpeopleinIndonesiareached28.07millionor11.37percent (data fromCentralStatisticsAgencyIndonesia inSeptember2013),butMFIspenetrationrate/activeborrowerstotheextremepoorpopulationonly1,2%(verylow).Thiscaseshowsthatthemarketshareofmicro-financeforthepoorpeopleinIndo-nesiaisstillquitelarge,soittakesagovernmentpolicythroughappropriateregulationtore-ducepovertythroughmicrofinancebyenhancingtheroleofMFIs.Table1showscomparativethehistoryofstartingmicrofinance industryandMFIspenetrationrate (activeborrowerstotheextremepoorpopulation).

    Table 1. Comparative history microfinance industry, MFIs penetration rate (Active Borrowers to the ex-treme poor population) Indonesia and selected Asian countries.

    Country History Microfinance (starting from)

    MFIs penetration rate (active borrowers to the extreme

    poor population)

    Bangladesh 1970s Relativelyhigh(32.5%)

    China 1990s Verylow(0.4%)

    India 1960s Low(6.7%)

    Indonesia 1890s Verylow(1.2%)

    Pakistan 1950s Low(5.2%)

    Philippines 1960s Low(2.0%)

    Sources:SustainableMicrofinanceinAsia,Landscapes,ChallengesandStrategies,MilkenInstitute,January2014.

    Microbankingmarket in Indonesia isstillverypotential,exampleoneofbankthat thefirstdevelopedmicrocreditisBRI,oneofthecommercialbankinIndonesiathatconsistentlytosupportbusinessdevelopmentsmicroenterprisesthroughBRIUnitMicrofinanceSystem.BankBRIhastotalmicro loansRp132,1trillionwithmicro loansgrew23,72%in2013andMicroLoanNPLatjust1.04%.Figure1showmarketshareBankBRIattheendof2013is29,50%fromothercommercialBank.Currently,BRIserves itscustomers through9,808operatingunitsande-channelnetworkspreadacrossIndonesia7,butthebankonlyconcentratedinJavaandSumatra.It isachallengeforbankBRIto improveservicesmicrobankingremoteruralareainIndonesia.

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    Market Opportunities and Regulations Microfinance in Indonesia

  • ThechallengesdevelopmentBRIUnitistheglobalmarketcompetitionandthecompeti-tionmicrobanking industry inIndonesia,currentsituationmanybankconventionalbegantoopentheproductmicrototakeadvantageof largemarketopportunitiesmicroeconomicsuchasBankDanamon,andBankMandiri.Thehighmicrobankinginterestratesin2014withmi-croeffectiveinterestrateof22%/yearsisconsideredbythemicroenterprisesveryweight,it isonechallengeswithpresenceofnon-bankmicrofinance institutionespeciallycooperativemakesmicrobankingcompetitionincreasinglyfiercebutmarketisstillbigpotentialformicrobusiness inIndonesiaandopenopportunity forBankBRIunitandanothercommercialbankinIndonesiatodevelopproductinmicro-banking.BankBRImustdevelopBRIUnitMicrotoremotevillages,especiallyoutsideJava isstillconsiderabledevelopmentopportunities,morecreativetodevelopformicroproductsandmoremaximizeassistanceortrainingbusinessman-agementtomicroenterpriseslikeasGrameenBankinBangladeshthathasbeensuccesswithmicrobanking. AnalysisofthepotentialmarketmicrofinanceinIndonesiacanbeseenfromtheperspec-tiveofeconomicgrowth,socio-economicconditions, thepotentialofSMEsIndustry,microfi-nancemarketsegmentationandmarketpenetration.Willbediscussedasfollows:

    2.1Indonesia Economic Growth. Economicgrowth is themost fundamental indicatorofaneconomyshealth, therateatwhichnational incomeisgrowing.It ismeasuredbytheannualpercentageratechange inanationsgrossdomesticproduct(GDP)8.Ingeneral,economicgrowthisanindicatorcommonlytoseetheprogressortheabilityofacountry.Economicgrowthcanbeapowerfulindicatortomeasurethesuccessofareductionpovertyprogram.Nowinadditiontoeconomicgrowth,focusonpovertyalleviationhasbecomethefundamentalobjectivesofdevelopmentinIndone-sia.

    Figure 1. Market Share Bank BRI

    Source:AnnualReportBankBRI,2013

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    JournalofEastAsianStudies

  • CurrentlyIndonesiawantstodevelopprogrampovertyreductionthroughmicrofinance,it isassociatedwiththeroleofthemicrofinance institution,SMEsandempowermenteffortsonthemicrolevel.Forthisreason,SMEsinIndonesiashouldfocusonacceleratingeconomicgrowth,whichinturncanabsorblabor.Inthiscontext,theroleofMFIsverycrucial,suchascooperativesinIndonesiashouldbeinvolvedineconomicgrowthandpovertyreduction.Micro-financeinstitutionsmustprovidetrainingandassistancetothemicroentrepreneursandpoorpeople,andtogetherwithgovernment throughthedevelopmentofmicrofinancewith train-ingandsocialprogramtosupportgovernmentprogramstopovertyreductionandeconomicgrowth.Figure2presentsthestatisticratiobetweenIndonesiaandglobalgrossdomesticprod-uct(GDP)from2004to2013.

    Source:Indonesiaandglobaleconomicgrowthforecastbywritercalculationbasedon:a.CentralStatisticAgency(BPS)Indonesiab.IMFc.WorldBank

    Figure 2. Indonesia and Global Economic Growth Forecast 9

    Indonesiaseconomicgrowthin2013is5,8%andtargetin

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