An Overview of Microfinance Linkages in Indonesia

This overview of microfinance linkage models in Indonesia provides a descriptive mapping of linkage models, and reflects on Indonesia's rich variety and wide range of financial institutions. It identifies the following linkages in the country:

• Multiple linkages between provincial development banks (BPDs) and local institutions;
• Links between microfinance institutions (MFIs)/non-government institutions (NGOs) and commercial banks;
• The links of local institutions with the retail division of Bank Rakyat Indonesia (BRI);
• 4,500 BPDs' link with BRI in supervisory and financial relationships;
• Local- or provincial-government owned entities' link with BPDs for purposes of supervision and liquidity management;
• Linkages between local and international NGOs;
• Self-help-groups' (SHGs) linkages with banks.

The paper classifies linkage models as:

• Simple bilateral linkages;
• Linkage chains from apex institutions;
• Agribusiness financing via non-financial entities.

The paper finds that:

• The linkages are characterized by several small regulated financial institutions and grassroots financial actors;
• Linkages have an explicit role in a new "banking architecture" being created by the Central Bank;
• There are distinctions between autonomous linkages and those occurring as the result of Government or Central Bank initiative.

The paper concludes that:

• There is considerable demand for savings, especially from the financially excluded social groupings;
• There is genuine utility in commercially-motivated linkage arrangements for financial institutions involved in those communities.