Microfinance: A Spark for Change

Microfinance refers to small-scale financial services designed to support individuals and micro-businesses that do not yet have access to formal banking. While their operations resemble small commercial banks, their purpose goes beyond financial returns, they aim to expand financial inclusion and empower underserved communities. This dual commercial–social function makes the sustainability of microfinance institutions increasingly important.

Microfinance appears in several institutional forms, including:

• Cooperatives & BMT
• BPR / BPRS
• Non-formal Financial Institutions : foundations and/or under government programs

All models share one purpose: enabling communities to grow through inclusive and sustainable financial access.

In Indonesia, MFI has grown has grown over the past 10 years due to several reasons. 

First,  rising MSME financing needs. As its main segment of microfinance institutions are MSMEs, where 60% of total portfolio of MFIs are serving MSMEs.  The number of MSMEs continues to rise, reaching around 65.5 million units by 2025 (OJK). Aligned with the rise of financing needs. 

Second, shrinking middle class. The middle-class population decreased from 57.33 million people (21.45%) in 2019 to 47.85 million (17.13%). About 9.48 million individuals fell to lower-income groups (CNBC). Indicates a growing bottom-pyramid population served by microfinance. 

Third, employment absorption. Microfinance institutions help create jobs—for example, cooperatives have absorbed around 669,164 workers.

Access to credit is a cornerstone for promoting equitable growth and poverty alleviation, as acknowledged by the government. Microfinance institutions play a pivotal role in achieving this objective.

Inclusive access to financial services is paramount, especially for Micro, Small, and Medium Enterprises (MSMEs), education, and women. These sectors hold immense potential for driving economic growth and empowering individuals.