The year 2005 was designated by the United Nations as the Year of Microfinance. Microfinance is considered aan important strategy in poverty reduction and various microfinance services have been opened by government, donor institutions, NGOs and public banks. While there has been significant growth in microfinance activities, a number of issues of concern have arisen.

Microfinance has a long history in Indonesia since the establishment of The People’s Credit Bank (Bank Kredit Rakyat) and Lumbung Desa (an institution that provided loans and collected savings in the form of rice) in the late 19th Century. After independence, the Indonesian Government supported the establishment of bank pasar as well as microfinance institutions (MFIs) formed by local governments.

The implementation of Law No. 7 of 1992 on banking established two types of banks in Indonesia: public banks and People’s Credit Banks (BPR). Other financial institutions are considered to be MFIs. Today MFIs can be grouped as: 1) formal MFIs consisting of bank and non-bank units (cooperatives, pawnshops); 2) nonformal MFIs, both those which are already legal entities (foundations) and those which are not; 3) MFIs established under government programs, as well as 4) informal MFIs, like arisan and moneylenders.