Microfinance Institutions

​Background
Comprehensive support from financial institutions is required in effort to drive community empowerment, particularly middle to low-income society and micro, small and medium enterprises (UMKM). This group of enterprises has limited access to formal financial institutions so far. Therefore, in order to deal with such problems, many non-bank financial institutions have grown and developed in society, running services in business development and community empowerment, and are established by government or society. Those institutions are well-known as microfinance institution (MFIs). However, many of the MFIs still do not have legal entity or business license yet. In order to provide a strong legal groundwork for MFIs` operation, Law Number 1 of 2013 on MFIs has been issued on January 8, 2013.

Legal Groundwork

1. Law Number 1 of 2013 on microfinance institutions (MFI Law).
2. Government Regulation Number 89 of 2014 on loan interest rate or yield of financing and MFI`s business coverage.
3. OJK Regulations (POJK) :
   1. OJK Regulation Number 12/POJK.05/2014 on business licensing and institutional matters of MFIs.
   2. OJK Regulation Number 13/POJK.05/2014 on business management of MFIs.
   3. OJK Regulation Number 14/POJK.05/2014 on fostering and supervision of MFIs.

Definition of MFI
Microfinance institution (MFI) is a financial institution that is especially established to provide services in business development and society empowerment by giving loans or financing for micro-scaled business of MFI members and society, providing deposit management, or giving consultancy services in business development that is conducted not merely for profit.

MFI`s Business Activities

1. MFI`s business activities cover business development and community empowerment through loan or financing for micro-scaled business of MFI members and society, deposit management, or giving consultancy services in business development.
2. Business activities as mentioned above can be carried out using conventional practices or based on Sharia principles.

Objectives of MFI

1. To improve access to micro-scaled funding for society;
2. To help improving economic empowerment and productivity in society; and
3. To help increasing society`s income and prosperity, mainly of disadvantaged and/or low-income society.

Obligation to Gain Business License as MFI

1. Any institution intending to run MFI business after effectuation of Law Number 1 of 2013 on MFI is obligated to gain business license as MFI.
2. MFIs that are already established and have operated since before the effectuation of the MFI Law but do not have business license as required by the prevailing laws, are obligated to gain business license by consolidating as MFI to OJK by January 8, 2016 at the latest. The MFIs are, among others:

   Village bank Village granary Market bank Employees` Bank Village Credit Bureau (BKD) Sub-District Credit Bureau (BKK)

   People`s Small Enterprise Credit (KURK) Sub-district Credit Institution (LPK) Village Producers` Bank (BKPD) Rural Credit Enterprise (BUKP)

   Baitul Maal wa Tamwil (BMT) Baitul Tamwil Muhammadiyah (BTM) And/or other equal institutions

3. Proposal for new business license or consolidation as MFI must be submitted to regional office/OJK Office/Directorate of MFIs where the MFI is located.

Legal Entity of MFI

1. Cooperative; or
2. Limited liability company (minimum 60 percent of shares is owned by regional/regency/city government or village/rural enterprise, while the rest of the shares can be owned by Indonesian citizens and/or citizen-owned cooperative with maximum ownership of 20 percent).

MFI Ownership
An MFI can be owned by:

1. Indonesian citizen;
2. Village/rural enterprise;
3. Regional government (regency/city); and/or
4. Cooperative

Business Area Coverage and Capitalization of MFI

1. MFI`s business area covers a village, sub-district, or regency/city in accordance with the MFI`s business scale.
2. MFI`s business scale is stipulated according to distribution of customers in credit or financing, described as follow:
   1. MFI is defined to have village business scale if it provides loans or financing to residents of 1 (one) village;
   2. MFI is defined to have sub-district business scale is it provides loans or financing to residents of 2 (two) villages or more located in the same sub-district;
   3. MFI is defined to have regency/city business scale if it provides loans or financing to residents of 2 (two) sub-districts or more located in the same regency/city.
3. MFI`s capital comprises of paid-in capital for MFI that has legal entity as limited liability company; or basic deposit, obligatory deposit and grant for MFI that has legal entity as cooperative, with amount of capital as follow:
   1. Village business coverage: Rp 50,000,000.
   2. Sub-district business coverage: Rp 100,000,000.
   3. Regency/city business coverage: Rp 500,000,000.

MFI Transformation
MFI is obligated to transform into rural bank or Sharia rural bank if:

1. MFI runs its business activities with coverage broader than 1 (one) regency/city; or
2. MFI has:
   1. Equity of at least 5 (five) times of minimum paid-in capital required for rural bank or Sharia rural bank pursuant to stipulations in laws and regulations; and
   2. Amount of third-party fund in the form of deposit collected within the last 1 (one) year reaches at least 25 (twenty five) times of minimum paid-in capital required for rural bank or Sharia rural bank pursuant to stipulations in laws and regulations.

MFI Financial Report

1. MFIs are obligated to submit financial report to OJK every 4 (four) months for the periods ending on April 30, August 31 and December 31.
2. Financial report submission must be received at the latest by end of the following month.
3. Stipulations about MFI financial report are regulated in OJK circular letter.

Prohibition for MFIs
In carrying out business activities, MFIs are prohibited from:

1. Receiving deposit in the form of demand deposit and involving in payment traffic;
2. Performing business activities in foreign currency;
3. Running insurance business as insurer;
4. Acting as insurer;
5. Giving loans or financing to other MFIs, except for handling liquidity problems of other MFIs located in the same regency/city;
6. Performing distribution of loans or financing outside business area coverage; and/or
7. Performing business other than business activities as described in Article 2 of OJK Regulation Number 13/POJK.05/2014 on business management of MFI.

Fostering, Regulation and Supervision of MFIs

1. Fostering, regulation and supervision of MFIs are carried out by OJK.
2. In order to foster MFIs, OJK coordinates with ministry that administers cooperatives and Ministry of Home Affairs.
3. Fostering and supervision of MFIs are delegated to regional government (regency/city) or other appointed parties.

Links
Business Licensing for MFIs
FAQ (Frequently Asked Questions)
Regulations associated with MFIs
- Law Number 1 of 2013 on MFIs.
- Government Regulation Number 89 of 2014 on loan interest rate or yield of financing and MFI`s business coverage.
- OJK Regulation Number 12/POJK. 05/2014 on business licensing and institutional matters of MFIs.
- OJK Regulation Number 13/POJK.05/2014 on business management of MFIs.
- OJK Regulation Number 14/POJK.05/2014 on fostering and supervision of MFIs.