Case study

Case Study of Bank Indonesia

Islamic banking in Indonesia: A future success story?
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This study outlines the position of Islamic banking in addressing the microfinance needs of rural small and medium enterprises (SMEs) in Indonesia, the challenges faced and steps taken to address them.

The central Bank Indonesia (BI) monitors commercial and rural banks. Formal agents [such as commercial banks (BRI Unit) and rural banks (BPR)] and informal agents are well known for their simple professional operations and innovative approaches.

The study details an illustration of a success BPR - Usaha Karya Mandiri (UKABIMA). It also cites the PKM (micro credit project).

The author states that Islamic banking started in 1992 and faces three major problems:

  • It is a relatively new concept;
  • Banking infrastructure is inadequate;
  • There is a lack of human resource expertise.

BI has taken the following steps to tackle these challenges:

  • Developing the legal framework;
  • Cultivating network for greater access;
  • Building requisite monetary instruments;
  • Creating public awareness and providing human resources training.

The potential of Islamic banking is quite promising. Several surveys show that the population feels comfortable using Islamic banking. Government regulation and commercial banking support is necessary to achieve the ten-year three-phase planning set by BI.

The study concludes that:

  • The target client is kept sharply in focus;
  • Donor financing has succeeded in developing rural SMEs;
  • Islamic Banks and commercial banks need the same regulatory framework and corporate governance;
  • Distinctive features of Islamic finance are the prohibition of interest taking, speculation and immoral investments.

About this Publication

By Ibrahim, M.