This article portrays a case study in Yogyakarta, Indonesia which looks into the dynamic relationship between communities and the effectiveness of the implementation of community-based forest management (CBFM) policies and its programme, and particularly on how local institutions deal with the shifting dynamics of these policies. As there is currently an absence of research in this area, this research therefore focuses on how the local community implements policy, builds relationships with other stakeholders, and strengthens local community institutions. CBFM has been implemented in Yogyakarta since 1995 and during that time, the central government has been changing the policy for five times. At this point, this article argues that CBFM should rely on local institutions and deal with the shifting dynamics of policies. The terms of institutions can be considered to include formal institutions, such as Constitution, government laws, charters, decrees and statutes, and informal institutions, such as code of conducts, customs, local knowledge and social expectations. Furthermore, in selected communities, it is clear that the local communities can apply their informal institutions as an important component and value of traditional systems and significantly involved in forest management sustainability and establish the formal institutions simultaneously.