The microfinance sector in Indonesia is one of the world’s largest with around 50,000 microfinance institutions serving more than 40 million people. Yet, it’s estimated that more than 52% people still do not have access to banking services and nearly half of the population lives on less than US$2 a day.
Self-employment is a key feature of the Indonesian economy. Over than 40 million people are self-employed through micro and small businesses but more than half do not have access to formal financial services. Microfinance is a proven way to help people move permanently out of poverty, however it hasn’t yet reached its full potential target or maximum scale in Indonesia.
Indonesia’s microfinance industry is dominated by small microfinance institutions (MFIs), which serve fewer than 10,000 active clients through individual lending approaches and secure their funding primarily through client savings. The MFI sector is comprised of a wide array of private and public institutions ranging from commercial and rural banks, to cooperatives and village-owned institutions.
Yet despite its size, the Indonesian microfinance sector is fractured. Significant obstacles remain that keep MFIs from improving the quality of their services and expanding their reach to a larger percentage of the country’s poor.
One key factor preventing increased outreach is the lack of sufficient access to capital. As a result, the majority of MFIs are only able to offer most basic banking services. Additionally, most poor Indonesians are beyond the reach of the formal financial sector as they live in underserved areas or are considered too risky for loans or too remote to service.