MICROCAPITAL STORY: Bank Indonesia Welcomes The Competition Of Foreign Banks Into Indonesia’s Microfinance Sector

Bank Indonesia (BI) Deputy Governor Mulyanaman D Hadad stated recently that the entry of foreign banks into the microfinance sector in Indonesia will have a positive impact in expanding the reach of financial services and that Indonesian banks should not be concerned. He commented that the increase of foreign banks into Indonesia’s microfinance sector will improve the competitiveness of local banks, and will bring capital money as well as knowledge and managerial skills to the sector. Additionally, a recent Asian Development Bank (ADB) publication also called for increased competition in rural and microfinance markets in order to enhance the capacity of the financial sector to provide long-term financing, one of the ADB’s strategic focuses for Indonesia. While the number or foreign banks that have recently begun operations in Indonesia was not reported, there are currently 30 foreign banks registered as either ordinary or associate members of The Foreign Banks Association of Indonesia.

A large part of the microfinance market is currently made up by Bank Rakyat Indonesia (BRI), which has been involved in microfinance for over 20 years and Bank Perkreditan Rakyats (BPRs), which is a generic term for people’s credit banks. These include village-owned Bada Kredit Desas (BKDs) and Lembaga Dana dan Kredit Pedessan (LDKPs) which are Rural Fund and Credit Institutions. Of the 42 MFIs registered with the MIX Market, 30 are a form of BPRs. There are reportedly over 50 thousand MFIs operating in Indonesia, some that have been existence for over 100 years. MBK Ventura, an Indonesian MFI, ranked first in the MIX Global 100 Composite Ranking for 2008, summarized in this MicroCapital Paper Wrap-Up and was also recognized at the Grameen Foundation 2008 Awards in November 2008.

The Indonesian microfinance industry is one of the largest in the world, however it faces a variety of challenges. The Promotion of Small Financial Institutions (ProFI) has highlighted three major challenges to the Indonesian microfinance system, including inadequate outreach to remote and marginal areas, inadequate depth of financial services to the poorer sections of the population, and inefficiency of large numbers of MFIs and their integration into the financial system. The Microfinance Innovation Center for Resources and Alternatives (MICRA) concurs, stating that MFIs cite lack of access to affordable capital as their main constraint.

Bank Indonesia is an independent state banking institution whose mission is to achieve and maintain monetary stability by promoting financial system stability for Indonesia’s long term sustainable development. At the end of 2007 its assets totaled Rupiah 973 trillion (USD 85.3 billion).

Bank Rakyat Indonesia was established in 1895 which provides banking services mainly to small and medium enterprises to support economic development. At the end of 2007 BRI had over 3.5 million active borrowers, 47.8 percent of which were women, and the average loan balance was USD 988. Its assets totaled USD 6.4 billion, with a gross loan portfolio of USD 3.5 million. In 2006 its debt to equity ratio was reported at 1,946.43 percent and it return on assets was 6.88 percent.

By Lori Curtis, Research Assistant

Additional Sources:

Antara News: “VP launches 41 micro-financing units in West Sumatra” “BI unconcerned about foreign banks` entry inti micro sector

Asian Development Bank: “Home” “Country Operations Business Plan: Indonesia 2009-2011

Banking With The Poor: “Indonesia Country Profile

Foreign Banks Association of Indonesia: “Home

MicroCapital Story: “Mercy Corps Buys a Commercial Bank in Bali to Service the Microfinance Sector in Indonesia

Promotion of Small Financial Institutions: “Home

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