Regulation, Supervision & Support of Non-Bank Non-Cooperative Microfinance Institutions

This study argues that a 'non-bank/non-cooperative' (NBNC) window is a crucial component of the future structure of the Indonesian microfinance landscape.The report examines the microfinance landscape in Indonesia and states that:

• While commercial banks are expanding their outreach to microfinance in urban areas, the demand-supply gap at the village level remains;
• Emerging microfinance institutions (MFIs) have not demonstrated a capacity to operate sustainably;
• A major reason for the lack of rural outreach is the restrictive legal framework that does not allow the establishment of new MFIs and stifles the development of existing MFIs;
• The third window for microfinance operations, the NBNCs, would allow the registration and licensing of MFIs at two levels.

The report recommends:

• An amendment to the 'Banking Law' that would enable non-banks to accept deposits;
• Regulation of small and micro MFIs by regional and district governments;
• The setting up of licensed MFIs that would operate exclusively in rural areas;
• A graduated, tiered approach to regulation and supervision of MFIs;
• A strict asset classification and provisioning system, based on international practices;
• Sound practices for capacity-building by strengthening institutions and establishing sustainable support systems.

The report concludes by examining the financial impact of the new policies and their impact on outreach to rural areas, on households and on competition, deposit protection and institutional structures.