Why Is Growth of Islamic Microfinance Lower Than Its Conventional Counterparts in Indonesia ?

Islamic Microfinance and Poverty Alleviation Program: Preliminary Research Findings From Indonesia

“…In addition Masyita and Ahmed (2013) reports that in Indonesia Islamic microfinance also still in a niche market in the public as total number of Islamic micro finance (in the form of Cooperative or NGO under name Baitul Maal Wat Tamwil/BMT) only around 3,000 compare to total amount microfinance institution which reach 40,000. Important note should be underlined also in their survey that even though most of Islamic microfinance clients are Muslim and their preference to choose Islamic microfinance cause of fit in Shariah compliance but in choosing financial provider this microfinance customer has rational behavior in considering economic factors such as low interest rate, quality service and low collateral.…”

“…On the other hand, Masyita and Ahmed (2013) underlines two crucial issues related to Islamic microfinance modus operandi. Firstly, it should be considered that the poor not only need to increase their income but also to mitigate vulnerable risk for their future.…”

“…In this sense, issues of institutional and organizational features should properly put in place in order to build a strong institutional capability to resolve the trade-off problems in running their business. In this sense, Masyita and Ahmed (2013) concludes that Islamic microfinance has two approaches to providing financial services for the poor: 'poverty approach' and self-sufficiency approach'. Under poverty approach, it is preferable that the Islamic microfinance operate as non-profit institution as mainly the financing program will be focused on the poor and core-poor recipients.…”

“…Many studies have shown that microfinance institution has positive impact in combating poverty problem, especially in increasing income and reduction vulnerability of the poor (Masyita & Ahmed, 2013).…”

Spiritual Intermediation in Islamic Microfinance: Evidence from Indonesia

“…Indonesia, a country with a majority of Muslim population, only ranks at 140 (15) . Thus, it gave rise to various negative stigma in society that IMFIs are no difference with MFIs (16) The manifestation of low-level of Islamic financial literacy and social piety can be seen from the preferences of the Muslim community who prefer MFIs based on economic factors (low interest rate, small collateral, and the size of the loan) and the non-economic factors (quality of service, ease, speed, closeness, the methods and profiles of loan officers), than relying on religious factor (17) . In relation, several studies (18,19,20,10,21) highlights that IMFIs as a result of the integration of Islamic finance in microfinance, not only has two functions: social and financial intermediation, which is known as a dual mission or double bottom line (22,23) , but it also has a spiritual function (24).…”