Microfinance Law Finally Enacted

Law No. 1 of 2013, dated January 8, 2013, on Microfinance Institutions (“Microfinance Law”) has been enacted after more than two years of deliberation in the House of Representatives. The Microfinance Law forms the legal basis for the establishment of Microfinance Institutions (“MFIs”) to increase access
to credit, promote productivity and economic empowerment, and support the financial and social welfare of poor/low‐income people.

MFIs are defined as financial institutions that are not exclusively motivated by profit and that support community development by offering loans or financing to micro‐enterprise, limited consumer banking (savings deposit management), and business development consultation services. Lending, financing, and
deposit management can be based on conventional or sharia banking principles.

MFIs can be established as cooperatives or as limited liability companies (PTs) and must meet applicable capitalization and licensing requirements, both of which will be regulated by the Indonesian Financial Services Authority (Otoritas Jasa Keuangan – OJK). An MFI may be owned by Indonesian citizens,
village/sub‐district Government‐owned Enterprises (Badan Usaha Milik Desa/Kelurahan –BUMDes/BUMK1), local governments, or cooperatives. Foreign ownership, direct or indirect, is prohibited. Limitations on share ownership and participation apply to MFIs in the form of PT: at least
60% of shares must be owned by the local government or BUMDes/BUMK, while the remaining shares can be owned by Indonesian citizens and/or cooperatives. Indonesian citizens can hold shares up to 20% of shares.

MFIs are prohibited from receiving deposits in the form of giro and participating in payment flow, conducting foreign exchange, engaging in insurance business, acting as guarantor, or making loans to other MFIs, other than to assist with liquidity problems of MFIs in the same regency/city. MFIs and local
government agencies can form deposit insurance organizations to protect depositors’ funds. Further elaboration on permitted business activities will be issued under OJK regulation, and elaboration of deposit insurance requirements will be issued in a Government Regulation.

MFI operations are limited to one village/sub‐district, district, or regency/city and will be adjusted to the MFI’s business scale as set out in Government Regulation. In order to expand business outside the regency/municipality where the MFI is domiciled, the MFI must be converted into a Bank, meeting all relevant requirements determined by the OJK.

1 Locally owned enterprises such as BUMDes are authorized in Minister of Home Affairs Reg. No. 39 of 2010 on Village‐owned Enterprise, Law No. 32 of 2004 on Regional Government, and Government Regulation No. 72 of 2005 on Villages. M‐00357
2 MFIs are obliged to maintain records in accordance with accepted financial accounting standards and to submit financial reports to OJK every four months, along with other reports as required by regulation. The Microfinance Law also contains provisions on consumer protection, confidentiality, and information sharing among MFIs.

MFIs must obtain prior approval from the OJK before merging or consolidating with other MFIs. If an MFI encounters liquidity or solvency problems, the OJK may order it to conduct necessary corporate actions, including selling property or assets, changing the board of commissioners or directors, raising capital, transferring liability, and merging or consolidating with another MFI, among others. OJK has the authority to revoke an MFI’s business license and dissolve the entity if such action does not resolve the liquidity or solvency problem. Revocation and liquidation will be further regulated by the OJK.

The Microfinance Law stipulates administrative and criminal sanctions for MFIs that do not fulfill their obligations. Administrative sanctions include fine, warning letter, suspension of business activities, dismissal of directors or managers, and revocation of the business license. Criminal sanctions include imprisonment for one to three years and criminal fine of up to Rp.1 billion.

Institutions engaging in microfinance business prior to the issuance of the Microfinance Law may continue to operate for up to one year after the Microfinance Law comes into effect, during which time they must obtain a new business license and OJK permit. The Microfinance Law will enter into force on January 8, 2015—two years after the date of enactment—during which time the necessary implementing regulations will be promulgated.