Microfinance institutions (MFIs) play pivotal roles to providing financing and services to micro and small enterprises (MSEs) in Indonesia. Islamic MFIs, which follow Shariah principles in their operations, aim not only to provide financing, but also to improve the socioeconomic conditions of poor people. There is heightened interest in the factors influencing the development of MFIs, such as relationship lending. This study aims to explore the effectiveness of such lending and the uniqueness of the implementation of social purpose in Islamic MFIs. The paper adopts a quantitative methodology, using cross-sectional survey data from 1,001 microloan borrowers from five MFIs, three of which are Islamic MFIs which provided financing in 13 regions in Indonesia in 2018. The results show that Islamic MFIs do not differ in the implementation of relationship lending. Furthermore, there is a likelihood that they are able to be more focused on profit-oriented transactions ensuring sustainability, due to their unique characteristics, as they have Baitul Maal with the social instruments of zakat, infaq and sadaqa to provide social-oriented transactions to improve outreach to the poor. The study enhances our understanding and adds knowledge to the existing literature on Islamic MFIs, especially in Indonesia.
The Indonesian government wants to promote small and medium enterprise financing as a type of relationship lending while at the same time reducing interest margins. Otherwise, relationship lending tends to lead into high levels of interest margins. This paper examines the relationship between SME financing and interest margin in Indonesia using panel data on 124 banks in Indonesia from 2008 to 2014. Furthermore, we also identify the direction of SME financing in relation to the ownership of banks. We use panel data regression and GMM methods to ensure the robustness of the result. The overall results suggest that SME financing positively increases the interest margin since relationship lending charges greater margins for each transaction. The results confirm the regulatory conflict between the interests of promoting small/medium enterprise financing and reducing the interest margin. However, we find a difference in sign and significance level of SME financing for each type of bank ownership as the result of SME financing readiness.
Microfinance and SMEs have significant roles as economic growth drivers. However, interest rate and credit availability for SMEs depend on various factors. This research tries to find the impact of having a relationship between the Microfinance Institution (MFI) and the borrowers as the deciding factor for interest rate charge and the percentage of approved loan applications. By utilizing cross-sectional survey data of 1001 ultra-microloan borrowers in Indonesia during 2018 from five MFIs, it is found that relationship lending, as proxied by duration of relationship between the MFI and the borrower, does not have significant influence on the interest rate setting but does have a significantly positive influence on credit availability, especially for borrowers with an at least five-year relationship duration. Meanwhile, having previous credit history with a bank actually increases interest rate significantly and reduces credit availability.
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