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Seibel, Hans Dieter; Dwi Agung, Wahyu
Working Paper Islamic Microfinance in Indonesia
Working Paper, No. 2006,2
Provided in Cooperation with: University of Cologne, Development Research Center
Suggested Citation: Seibel, Hans Dieter; Dwi Agung, Wahyu (2006) : Islamic Microfinance in Indonesia, Working Paper, No. 2006,2, Universität zu Köln, Arbeitsstelle für Entwicklungsländerforschung (AEF), Köln
This Version is available at: http://hdl.handle.net/10419/23656
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Islamic Microfinance in Indonesia
By Hans Dieter Seibel1
with the collaboration of Wahyu Dwi Agung
1 Support by Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, Sector Project Financial Systems Development, is gratefully acknowledged. Abstract: Islamic Microfinance in Indonesia
Indonesia, the largest Muslim country, has a highly differentiated micro- and rural finance sector which has evolved over more than a century. Islamic finance has emerged in 1991, comprising Islamic commercial banks and banking units, rural banks, and financial cooperatives. In this study we deal with the emerging Islamic microfinance sector in Indonesia, particularly rural banks and financial cooperatives: how they have evolved, how they compare with conventional institutions, and what their prospects for growth are.
Islamic finance, after 13 years, accounts for a mere 0.74% of total assets of the banking sector. However, since Bank Indonesia gave official recognition in 1998 to a dual banking system, conventional and Islamic, interest in Islamic meso and macro finance has spread among commercial banks, fuelled by low rates of non-performing loans, and the share of Islamic commercial banks more than quadrupled during 2001-2003: from 0.17% to 0.74%.
Islamic rural banks (BPRS) are under the same effective prudential regulation and supervision as commercial banks and conventional rural banks (BPR). After a promising start in the early 1990s, their development has almost come to a standstill. Despite the fact that they had only two years less than conventional BPR, they have attained a mere 4% of the number and 1.5% of the assets of the rural banking sector.
Islamic financial cooperatives (BMT) suffer from the same regulatory and supervisory neglect as the rest of the sector. After a period of rapid growth during most of the 1990s, they are now in decline, with perhaps not more than one-fifth in good health. Fresh money pumped into the sector without effective regulation and supervision will contribute to their downfall, as has been the case in the state-supported cooperative sector.
Options: Islamic microfinance, lacking popular demand and Islamic banking expertise, is not off to a promising start in Indonesia. Only commercial banks appear to be able of acquiring the art of Islamic banking by training young and dynamic people, but lack experience in Islamic microfinance. Islamic, unlike conventional, rural banks, have failed to prove themselves as effective and efficient providers of microfinance services; Islamic, like conventional, cooperatives are an outright menace to their shareholders and depositors, who risk loosing their money. On the basis of 13 years of experience with Islamic finance in Indonesia, decision-makers in favor of promoting Islamic financial services are now confronted with two major options: