ISSUES IN REGULATING AND SUPERVISING ISLAMIC MICRO FINANCE INSTITUTION IN INDONESIA: ITS POLICY

DIRECTION AND REMEDIES UNDER THE NEW REGIME

Akhmad Affandi MahfudzIslamic Business SchoolUniversiti Utara Malaysia

Presented atRoundtable Discussion: Regulatory and Supervisory Framework in Islamic

Microfinance Organized by

IRTI-IDB in collaboration with Sudan University of Sciences and Technology and Agricultural Bank of Sudan

18-19 March, 2014Khartoum, Sudan

Content• Introduction• The Establishment of Financial Services Authority: New

Regime of Regulation and Supervision for IMFI• Issues in Regulatory Aspect of Islamic Micro Finance– The Legal Framework of IMFI– Government Policy– Regulation Related to Customer’s Deposit– Capital Adequacy

• Policy Direction and Remedies under the New Regime– Policy Direction– Strategies and Remedies towards Existing Problems

• Conclusion

Introduction

• Islamic micro finance in Indonesia• Overlapping legality aspect in operation of

IMFI• The establishment of Financial Services

Authority (FSA)

The Establishment of Financial Services Authority: New Regime of Regulation and Supervision for IMFI

Issues in Regulatory Aspect of Islamic Micro Finance

• The Legal Framework of IMFI– The main foundation for operation of IMFI is

Islamic Cooperative Financial Services based on regulation of Ministry of Cooperative 2004

– IMFI law differs with that of Islamic bank

• Government Policy– Risk management, rating agency, SOP, financial

ratio etc

Regulation Related to Customer’s Deposit

• The existing law on deposit protection not sufficient to secure risk liquidity due to lack of supervision and monitoring by ministry of cooperatives

Capital Adequacy

• The implementation of capital adequacy requirement varies depending on the size of IMFI

• The policy remains ambiguous since there are many types of MFI operating under ministry of cooperatives

Policy Direction and Remedies under the New Regime

• Policy Direction– Definition of independent legal entities for IMFI– Establishment of IMFI as the main IMFI of all IMFI

in Indonesia– Supervision of the IMFI conducted by an

independent monitoring agency

Strategies and Remedies towards Existing Problems

• The need for a clear long term strategy i.e, blue print or architecture

• The law on Microfinance Institutions should be structured as an umbrella both for business practitioners and providers of funds.

• The government should have a database of Microfinance Institutions in Indonesia

• Integration of social approach to business development and finance with charity organizations

• Systematic mentoring through collaboration with various stakeholders i.e, universities

• Improving the quality of human resources • The existence of strategic knowledge in

business.• Paradigmatic aspects of development• Horizontal and vertical network• Intensive supervision• Increase the number of IMFI• Rating agency for IMFI

Conclusion

• There are many IMFI in Indonesia who encounters critical condition due to lack of legal basis, supervision and clear regulation.

• The new regime of FSA is the hope of legal reform, regulation and supervision of IMFI

• Issues in Regulatory Aspect of Islamic Micro Finance are; legal framework which states that IMFI has no independent law, government policy, protection for depositors and capital adequacy

• In terms of policy direction, this paper concludes that the establishment of central IMFI in Indonesia is essential and urgent to oversee and monitor the performance of each IMFI just like the bank

• Supervision of the IMFI conducted by an independent monitoring agency and Fatwa