<Special Feature"Socio-Economic Role of Islamic Finance and its Potential in the Post-Capitalist Era">Exploring the Role of Islamic Microfinance Institution in Poverty Alleviation Through Microenterprises Development, A Case Study of Islamic Financial Cooperative (BMT) in Indonesia

Abstract

Poverty alleviation might be carried out through many different approaches. Among others, provision of access to financing for microenterprises is likely to be important considering that the main problem of microenterprises is fast and easy access to financing. Taking into account that the majority of Indonesian population are Muslim, provision of Islamic micro financing, particularly through BMT (Baitul Maal wa Tamweel) to microenterprises could be one potential solution. This study aims to explore and analyse the role of BMTs in East Java in microenterprises development and poverty alleviation by referring to their micro-dynamics. The paper also aims to propose strategies to improve their roles in local economic development. Research survey was employed by distributing questionnaires to the clients of eleven BMTs in six cities/towns, in order to find out their perceptions on economic impacts after receiving financing from BMTs for productive purposes. Primary data collected from 179 completed questionnaires, in which large majority of the respondents are microenterprises in urban area, was analysed in this research. The findings of the Wilcoxon Signed Rank Test discover statistical significant improvement after financing on the value of annual sales, net income, business expenditure, household expenditure, and employment. The respondents also indicate minor positive effect on business activities and monthly household expenditures of food, education, and household utensils. In addition, based on the Head Count Index and poverty line set up by BPS in 2012, the findings importantly suggest that the financing contributes in reducing the percentage of poor respondents: from 44.4% before financing to 36.3% after financing. Further analysis based on Spearman Rank Order Correlation suggest that there are positive significant relationships between economic impact variables and productive assets, total loan received and total workers. To improve their roles in poverty alleviation, it is suggested that BMTs should offer higher amount of financing, provide more social services to their clients, to provide more information of their financing products to wider community, to better educate their customers in order to improve customers' understandings on Islamic terms used in financing products, and to innovate their financing products to meet the customers needs. In addition, to assist the BMTs development, the government could play an important role by being more active in monitoring process and promoting stronger linkage with formal financial systems, while keep maintaining the unique characters and independency of BMTs. With such a proactive strategy, it is expected that a more positive impact can be achieved.