Background Paper on Microfinance Policy and Strategy

This discussion paper of 'Program Microfinance' in Indonesia attempts to derive lessons from past and current microfinance programs in the country that are relevant for its microfinance policy and strategy. The paper discusses:

• Microfinance as an inherent part of the Indonesian development strategy, examining:
  • The problem of rural outreach and the concentration of poverty in rural areas;
  • The need in rural areas for microfinance services and microfinance's role in poverty alleviation.
• The current state of microfinance in Indonesia, looking at:
  • Various types of microfinance programs and providers;
  • The legal framework for institutional microfinance.
• Problems with the existing microfinance system in terms of outreach, legal framework, regulation and supervision and support structures.
• International best practices regarding the development of a legal framework for microfinance, including:
  • Recent studies on international best practices, their findings and implications on the Indonesian policy and strategy;
  • Examples from other countries including Bangladesh, Bolivia, Cambodia, Ghana, India, the Philippines, South American countries and Sri Lanka;
  • Lessons learnt about legal framework, capital requirements, cooperatives and apex institutions.

The paper concludes by outlining 'The Indonesian Policy and Strategy for Microfinance' and its four pillars that include:

• Re-orientation of the role of Government;
• Conducive environment for commercially-viable and demand-driven microfinance and rural finance;
• Prudential regulation and effective and efficient supervision;
• Promotional role concerning human resource development and institutional capacity building.