Financial Inclusion Through Islamic Finance: A Key to Unlocking Indonesia’s MSME Sector
Indonesia, the world’s fourth most populous country, is facing a significant challenge in achieving financial inclusion. With over 260 million people living in the country, financial exclusion is a major obstacle that needs to be addressed.
The Current State of Financial Inclusion in Indonesia
According to data from Bank Indonesia, there are approximately 600,000 non-registered microfinance providers in the country, excluding cooperatives and state-backed institutions. This vast number of unregulated providers creates a challenging environment for creating a level playing field and increasing competitiveness in the sector.
The Role of Islamic Finance in Achieving Financial Inclusion
Despite having only 5% market share compared to total banking assets, Islamic finance has emerged as an important area for achieving overall financial inclusion in Indonesia. With a significant number of Muslim populations living in the country, Islamic finance has the potential to tap into this large segment.
The Role of FinTech in Enhancing Financial Inclusion
Financial technology (FinTech) is also playing a crucial role in enhancing financial inclusion in Indonesia. With over 80 startup FinTech companies operating in Indonesia, creating an enabling environment with necessary infrastructure and regulations is essential for their successful engagement in reaching financially excluded individuals.
The Challenges of Financial Literacy
Financial literacy remains a significant demand-side constraint in Indonesia. A recent survey by InterMedia found that lack of knowledge has been identified as the biggest barrier for using mobile money services among women in Indonesia.
Recommendations for Achieving Financial Inclusion
To address these challenges, we recommend:
- Creating an enabling environment for Islamic finance and FinTech companies to operate.
- Providing adequate support for the development of non-registered microfinance providers.
- Strengthening consumer protection regulations and ensuring coordination among regulatory bodies.
- Developing well-designed financial literacy interventions targeting different groups through appropriate delivery methods.
Key Findings
- 600,000 non-registered microfinance providers in Indonesia
- 5% market share of Islamic finance compared to total banking assets
- Over 80 startup FinTech companies operating in Indonesia
- Lack of knowledge identified as biggest barrier for using mobile money services among women in Indonesia
By providing an enabling environment for emerging players and addressing the challenges of financial literacy, we can accelerate overall financial inclusion and promote economic growth in Indonesia.