Islamic Microfinance in Indonesia:
A Comparative Analysis between Islamic Financial Cooperative (BMT)
and Shari’ah Rural Bank (BPRS) on Experiences, Challenges, Prospect and Role in Developing Microenterprises

Abstract

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 wat Tamwil) and BPRS (Shari’ah Rural Bank) can be mentioned as the main players of Shari’ah microfinance institution in Indonesia. However, these two institutions are different in nature; while, as a bank BPRS enjoys sufficient support, regulation and monitoring from the Central Bank, BMT, on the other hand, as a Shari’ah cooperative has limited support, regulation and monitoring. In their attempt to contribute socio-economic development, these institutions overwhelmingly prevail in urban and rural part of Indonesia.
The main aim of this study is to explore role and potentials of BMT and BPRS in developing microenterprises (MEs) in East Java, Indonesia. In doing so, this study also aims to measure the impact that their clients have had in their economic and social well-being. This study also aims to propose strategies on how to improve their roles through an informed understanding of the findings established in the empirical part of the study.
To fulfil the objectives, this research adopted triangulation as a research method, in which quantitative and qualitative data collection (questionnaire and interview) and analyses methods were utilised. Thus, the empirical analyses in this research are based on the data collected from 348 completed questionnaires with the clients and 22 interviews with Directors/Managers of BMT and BPRS.
The findings suggest that despite their large numbers, potential and important role in the macro economy, MEs face challenges in gaining access to financing. Similarly, the BMT and BPRS also experienced challenges in terms of risk and moral hazard, difficulty in accessing borrowers’ financial flows, lack of capital particularly during seasonal circumstances, managerial problems, lack of infrastructure, lack of personnel, lack of staff skills, lack of vehicles and lack of appropriate legal basis for BMT. With particular regard to the socio-economic impact, the empirical findings show significant statistical improvements in annual sales, business expenditures, net income and employment. It should be noted that the empirical evidence, therefore, show that the variables that correlate to the economic impact are assets owned, financing received and duration of relationship with BMT and BPRS. Similarly, a positive social impact is reported by less than half of the respondents, with fewer respondents reporting religious impact and other impacts. The strong predictor of the social, religious and other impact are social development programme/services, which indicate the importance of improving this services in term of frequency and coverage to improve the impact. Although they present a mixed picture, these findings suggest a reduction in the number of poor respondents after financing indicating positive impact.
In order to improve their role, this study suggests that BMT and BPRS should consider to improve the trainings services in collaboration with related educational institutions, to provide more information of financing services to wider community, to better train their customers to improve customers’ understandings on Islamic terms used in financing products, and to be innovative in their financial product development to meet the particular needs of their clients. With such a proactive strategy, it is expected that a further positive impact can be achieved.