Islamic Microfinance in Indonesia

This paper gives an overview of the emerging Islamic microfinance in Indonesia. The key stakeholders of Islamic microfinance are:

• Islamic commercial banks and banking units;
• Rural banks;
• Financial cooperatives.

The paper highlights their:

• Evolution;
• Comparison with conventional institutions;
• Prospects of growth.

The paper asserts that due to regulatory and supervisory neglect the Islamic:

• Finance accounts for a mere 0.74% assets in the banking sector;
• Rural banks (BRS) account for 1.5% of the assets of the rural banking sector;
• Financial cooperatives (BMT), after rapid growth in the 1990s, are in decline.

According to the paper, given the current situation, following options may be considered:

• Complete focus on Islamic commercial banks and establishment of branch networks with Islamic microfinance products;
• Reassessment of the challenges and realistic opportunities for Islamic rural banks and cooperatives in a participatory manner.

For the development of a healthy Islamic financial sector in Indonesia, the paper recommends:

• Setting up branch networks of Islamic MFIs by Islamic commercial banks;
• Revamping Islamic rural banks;
• Adopting prudential regulation, mandatory auditing, and full finance from equity and savings of members for Islamic cooperatives.

The paper concludes with a brief note on Islamic finance in the province of Aceh, post Tsunami, and asserts that building strong Islamic financial institutions in Aceh will lead to effective reconstruction and development of the province.