Roles of Islamic microfinance institutions in improving financial inclusion in Indonesia: empirical evidence from baitul maal watamwil

Abstract

Indonesia, which has the biggest Muslim population in the world, is well-known for its microfinance institutions (MFIs) that serve the lower-middle class sector. With approximately 56.5 million Micro, Small and Medium Enterprises (MSME), the sector contributed more than 60% of Gross Domestic Product (GDP) in 2018. However, many of the MSMEs do not have adequate access to financial services, especially in rural areas. Moreover, 8.77% of Indonesians are at the bottom of the economic pyramid (BOP). The purpose of this study is to investigate the roles of Islamic microfinance institutions (IMFIs) in improving financial inclusion in Indonesia by taking six geographical areas, namely, Jakarta, Bogor, Depok, Tangerang and Bekasi (JABODETABEK); West Java; Central Java; East Java; Yogyakarta and Lampung province as samples. In this regard, only managers of the IMFIs are taken as respondents since they are the decision makers and they understand and appreciate the missions of the IMFIs, thus are practically responsible for achieving the IMFIs objectives by anticipating issues or regulatory changes. A total of 100 managers of Baitulmaal Wa Tamwil (BMTs), which registered with Shariah Cooperative Centre (INKOPSYAH) are interviewed. Two instruments were developed to collect data. The first instrument is a questionnaire related to conceptual framework of this study which is based on the research objectives, as well as adapting from previous studies. The second one is an in-depth interview to outline data related to the model design. The findings of this research are divided into four categories: first, the current conditions and issues relating to financial inclusion; second, the roles of IMFIs in improving financial inclusion by increasing wealth and alleviating poverty; third, the determinants that influence the roles of IMFIs in improving financial inclusion; and the last, providing the most effective strategies of IMFIs to improve financial inclusion. This research provides important inputs to decision-making of the IMFIs in efforts to optimize their roles in improving financial inclusion in Indonesia. Finally, this research recommends a program development to integrate IMFIs in collaboration with bank and association of BMTs for providing microfinance services.