Legislation, Regulation, and Supervision of Microfinance Institutions in Indonesia

This paper discusses the legislation, regulation and supervision of microfinance institutions (MFIs) in Indonesia. The paper states that:

• Indonesia has a multi-agency and tiered regulatory framework for MFIs and a hybrid approach to MFI supervision;
• Size and type of deposit taking are the main criteria to regulate and supervise MFIs;
• Consumer protection is the ultimate rationale for regulation and supervision for commercial banks as well as for MFIs;
• In practice, the differentiation between deposit taking and non-deposit taking MFIs is difficult to make;
• All public deposit taking MFIs are regulated under the banking law;
• The country has not promulgated a special MFI law, but has adjusted its banking act to accommodate a special type of MFI.

The paper discusses:

• The issues concerning the regulation and supervision of the most important MFIs in Indonesia;
• The Bank Perkreditan Rakyat (BPRs) that are directly supervised by the Bank Indonesia;
• The rapid growth of the industry, and the shortcomings in the supervision of BPRs, which has led to a large number of unsound BPRs;
• ProFI, a pilot project launched by Bank Indonesia and the German Technical Assistance (now GiZ), which intends to develop improved regulatory and supervisory tools for the supervision of the BPR.

The paper concludes by presenting lessons drawn from Indonesia's experience with regulating MFIs.