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The role of Islamic microfinance institutions in economic development in Indonesia : a comparative empirical study on pre and post financing states.

Riwajanti, N. I. and Asutay, M. (2015) 'The role of Islamic microfinance institutions in economic development in Indonesia : a comparative empirical study on pre and post financing states.', in Access to finance and human development : essays on zakah, awqaf and microfinance. Doha, Quatar: Bloomsbury Qatar Foundation Publishing, pp. 55-71. Developing inclusive and sustainable economic and financial systems., 1


Different institutions are engaged in the development efforts in Indonesia by appealing to different sectors of socio-economic life. Among such institutions, BMT (Baitul Maal wa Tamweel) and BPRS (Shariah People Credit Bank) are the main players of the shariah micro-finance institution in Indonesia. However, these two institutions are different in nature: whereas BMT is a shariah cooperative with only limited support, regulation and monitoring, BPRS is a bank which receives sufficient support, regulation and monitoring from the Central Bank. It should be noted that these institutions overwhelmingly prevail in the urban and rural parts of Indonesia. This study aims to explore and analyse the roles of BMT and BPRS in East Java’s economic development within Indonesia, through reference to their micro-dynamics. Based on an informed understanding of the findings established in the empirical part of the study, strategies on how BMT and BPRS may improve their roles are also proposed. For this study, primary data were collected from 348 completed questionnaires distributed to the clients of 21 BMT and BPRS branches in twelve towns/cities in East Java. The aim was to explore clients’ perceptions of the impact on their socio-economic lives of receiving financing from the relevant institutions. The findings are rather mixed: while the average annual value of sales, net income, business expenditure, household expenditure, and employment increased significantly following receipt of loans, clients’ perceptions of the impact, however, ranges mainly from ‘no impact’ to ‘some positive impacts’. Importantly, the findings also suggest that the financing has helped with a moderate decrease in poverty, there being a reduction in percentage of poor BPRS respondents under the national poverty line from 35.5% before financing to 23.1% after financing. In order to improve their roles, it is suggested that BMT and BPRS should provide more social services to their clients; promote their financing products to a wider community; better train their customers to improve understanding of Islamic terms used in financing products; and be innovative in their financial product development in order to meet the particular needs of their clients. With such a proactive strategy, it is expected that a more positive impact could be achieved.

Item Type:Book chapter
Keywords:Islamic micro-finance, BMT, BPRS, Economic development.
Full text:Publisher-imposed embargo
(AM) Accepted Manuscript
File format - PDF
Publisher Web site:
Date accepted:14 July 2014
Date deposited:23 July 2015
Date of first online publication:April 2015
Date first made open access:No date available

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