THE PROMISE AND THE PERIL OF MICROFINANCE INSTITUTIONS IN INDONESIA

Abstract

After the 1997 East Asian crisis, central banks throughout the region tried to reduce the risk of future bank failures by promulgating regulatory reforms. The results in Indonesia have been to concentrate rather than mitigate banking risks, and to decrease the access of low-income households and enterprises to formal financial services, especially in rural areas. The most severe casualties of the ‘reforms’ have been local government-owned micro finance institutions. In the provinces where these institutions have functioned best, they have addressed a market failure by extending coverage to areas not served by conventional financial institutions. Understanding the past performance and potential for replication of these success stories continues to be important because of the substantial gaps that remain in the access of rural Indonesian households and micro enterprises to fi nancial services.