Credit rationing at the bottom of economic pyramid : a case of Islamic microfinance in Indonesia

Abstract

This study sought to analyze credit rationing determinants and accessibility of Muslims at the Bottom of the Economic Pyramid (BOP) to Islamic microfinance in achieving welfare improving goals in three BOP regions, namely Daerah Istimewa (DI) Yogyakarta, Nusa Tenggara Barat (NTB) and Makassar, Indonesia. Another primary focus of this study is to highlight the suggested solutions from Islamic microfinance practitioners to overcome the challenges in the practice of credit rationing assessment. A total of 2,650 borrowers at the BOP in 26 Islamic Microfinance Institutions (MFIs) in Indonesia were chosen based on cluster sampling and purposive sampling methods. Two instruments were developed to collect data; the first instrument was a questionnaire adapted from several previous studies and the second instrument was an in-depth interview to profile the data related to the suggested solution. The findings of this study are divided into four categories. First is the determinant of credit rationing based on socio-demographic factors. It is shown that being of certain socio-demographic factors (age, gender, account balance, dependents, salary, monthly income, formal education, access to financing facility in the previous year, distance, and years of saving) have significant influence on the probability of getting financing. Second, in terms of financial services consumption determinants of credit rationing, this study discovered that eligibility, accessibility, affordability, and adequacy give impact on the amount of financing to the poor. Third, access to Baitul Maal wa Tamwil (BMT) has a positive effect on achieving the first welfare improving goal which is eradicating extreme poverty and hunger. It also has a positive effect on the second welfare improving goal which is universal primary education. However, access to BMT has no impact on the third welfare improving goal which is gender equality and women empowerment dimension. In achieving the fourth welfare improving goal which is the mission of reducing child mortality, access to Islamic microfinance has a positive influence on increasing the number of BOP borrowers. Fourth, this study also provides several solutions related to credit rationing problems to enhance the influence of accessibility to BMT for welfare improving goals. Thus, in order to reduce the credit rationing problem, the major implications from this study are that BMT should enhance the participation of women, using monthly income rather than salary determinants, provide credit plus financing, realize a one village one BMT program, implement lower requirements of collateral, create an eligibility standard that provides various financial products and control financial aspects of their clients. Moreover, the government should allocate an additional budget and provide clear regulations to support BMT since BMT deals with poverty. These solutions would enhance the participation of BOP borrowers at BMT.