The Financial Services Authority (OJK) on Friday signed a memorandum of understanding (MoU) with the Home Ministry and the Cooperatives and Small and Medium Enterprises Ministry to better handle microfinance institutions, which have high potential but remain untapped.

The cooperation, built upon Law No. 1/2013 on microfinance institutions, is slated to come into effect at the beginning of next year, requiring the OJK to oversee and regulate microfinance institutions, which specifically target micro financing, deposits and advisory.

These oversight and regulatory functions are of great importance for consumer protection, especially because mismanagement of these assets could produce high risks for the institutions and customers.

Preliminary steps include the accurate recording of the number of microfinance institutions in Indonesia, according to OJK chairman Muliaman D. Hadad.

'€œThe OJK needs an exact number so that it can soon develop mapping, a capacity building program, and legal frameworks for the institutions,'€ he said during the signing event.

Microfinance institutions, which are able to reach out to low-income society, could amount to hundreds of thousands throughout the country.

According to academic data, there are around 637,000 microfinance institutions in Southeast Asia'€™s largest economy, in which the people still face difficulties in accessing banks and other formal financial institutions.

For instance, microfinance institutions in a regency could handle Rp 30 billion (US$2.6 million) to Rp 2 trillion worth of assets '€” an amount significant enough to create shocks if they remain unregulated and unsupervised, according to figures from the OJK.

However, the OJK currently had a lack of data on the institutions, which had hindered the regulatory body in conducting its guidance, oversight and regulatory functions, as instructed in the Law on microfinance institutions, Muliaman said.

Other than data collection, regional and city administrations had yet to appoint officers or employees specifically assigned to supervise the microfinance institutions, as stipulated in the law.

'€œAfter coordinating with several provincial administrations, the OJK found that the administrations still did not have a good understanding of their role to supervise and guide the microfinance institutions,'€ Muliaman said.

According to the Law, the OJK should redelegate the supervisory function to other parties should the regional or city administration fail to do so.

'€œI hope, with the MoU, coordination between the OJK and ministry can be more effective'€ in tackling these issues, Muliaman added.

In addition, he said that the OJK would also cooperate with local universities, especially their schools of economics, in hopes of raising people'€™s awareness and educating them on microfinance institutions.

A large portion of Indonesians remain '€œunbanked'€, with only 23,000 bank branches and 1,630 rural banks in the country.

Microfinance institutions, therefore, were important because they could cover the supply and demand gap unfulfilled by formal finance institutions such as banks, according to Muliaman.

Moreover, microfinance institutions could fulfill the needs of poor and low income people who seek financing.

'€œThe institutions could empower the economy of its surrounding people,'€ he added. (ask)

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