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It's time to impose criminal sanctions for illegal MFIs in Indonesia

By Bitra Suyatno - posted Thursday, 16 December 2021

In Indonesia, 9.8% of the population or around 26.8 million people lived below the national poverty line in 2020. Most of them are in rural areas. Most of these rural households do not have access to financial services. This is major constraint to poverty alleviation: if poor and low-income households do not have access to sustainable financial services, they cannot finance their micro-enterprises and agricultural activities, and improve their standard of living.

Referring to GTZ-ProFI's academic paper in 2002, it is increasingly recognized that well-targeted microfinance (MF) programs can help the poor pull themselves out of poverty. MF services, if provided on a sustainable basis, can have a significant effect on poverty reduction, and on the empowerment of the poor. However, to achieve the above, the provision of MF services requires strong financial systems consisting of institutions that are committed to achieving sustainable financial viability.

Comprehensive support from financial institutions is required in effort to drive community empowerment, particularly middle to low-income society and micro, small and medium enterprises. This group of enterprises has limited access to formal financial institutions so far. Therefore, to deal with such problems, many non-bank financial institutions have grown and developed in society, running services in business development and community empowerment, and are established by government or society. Those institutions are well-known as micro-finance institutions (MFIs). However, many of the MFIs still do not have legal entity or business license yet. To provide a strong legal groundwork for MFIs` operation, Law Number 1 of 2013 on MFIs has been issued on January 8, 2013.This Act shall come into force after two (2) years from the date of promulgation (January 8, 2015).


However, since the Law was enacted in 2013 and effectively come into force in 2015, only a few MFIs have shown the willingness to apply and get a license from Financial Services Authority of Indonesia (OJK), which are only 227 MFIs (data of August 2021).

According to some informants, the majority, which is more than 5,000 informal MFIs, remain operating illegally. Based on article 40 of MFI Act, OJK, the Ministry of Cooperatives and SMEs, and the Ministry of Home Affairs should have completed to identify how many illegal MFIs there were in Indonesia in 2015. However, until now, it seems that the three institutions have not finished the task. Consequently, we do not know exactly how many illegal MFIs exist.

Arguably, some of the illegal MFIs could not afford to be formal MFIs under the OJK's rule in 2021 because for instance, the capital entry requirement is too high, which is 300 million rupiah in rural area, 500 million rupiah in sub-district, and 1 billion rupiah in districts or municipalities. However, for those who could not afford to be licensed MFIs, they actually can transform to be savings and loans cooperatives or merge with others. The government should not open a new window for ultra-MFIs or such things. Some argue that if the government kills informal MFIs, the poor will borrow money from loan sharks. However, we do not have evidence for such a claim. Moreover, there is no guarantee that illegal MFIs do not behave like loan sharks.

On the other side, other MFIs are suspected not to want to get a license from OJK because they do not want to be "formal". To be formal often means they could not evade tax, or they must obey prudential regulations imposed by OJK.

The reasons for many informal MFIs existing are multi-faceted and manifest themselves in different ways. We know that it is not that simple.

However, we suspect that one of the main problems is that OJK do not strictly enforce the article 34 of MFI Law (criminal sanctions) for those illegal MFIs.


Article 34 verse (1) of the MFI Law clearly states that every person who conducts business like an MFI without a license from OJK, shall be punished with imprisonment of a minimum of 1 (one) year and a maximum of 3 (three) years and fined at least fifty million rupiah and at most one billion rupiah.

To the best of our knowledge, OJK never applies the article to the illegal MFIs. It means informal MFIs do not see any disadvantages in operating illegally since the authority does nothing. The resulting conduct has potentially been detrimental to consumers, left them without sufficient costumer protection at all. Moreover, without prudential supervision, illegal MFIs might be used in money laundering crimes in Indonesia

It has been more than six years since the MFI Law came into force. OJK must start imposing article 34 of the Law to the illegal MFIs. Do not repeat the same mistake of lenient actions for illegal P2P lenders that have caused many people to fall victim and suffer in debt. Many of them are unable to pay back their debts because of extremely high loan interest rates. Some debtors experienced significant losses, which even reach hundreds of millions of rupiah. Similar losses potentially would be experienced by borrowers of illegal MFIs if OJK did nothing to stop.

In conclusion, OJK, please use your license to stop the illegal MFIs' operations and to protect the public from any potential abuse of illegal financing activities.

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About the Author

Bitra Suyatno ( is a Doctor of Business Administration who graduated from Victoria University, Melbourne, Australia in 2018. Currently he is working at the Ministry of Finance the Republic of Indonesia. His posts represent his own views. He blogs at

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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