Issues and challenges in financing the poor : Lessons learned from Islamic microfinance institutions

• New data set on Islamic MFIs. • Islamic microfinance more important than previously recognized. • Outreach of Islamic MFIs exceeds that of conventional MFIs. • Conventional MFIs show stronger financial performance. Conventional microfinance institutions (MFIs) can promote financial inclusion, but they also prompt ethical concerns regarding the social consequences of commercialization and high interest rates. Islamic MFIs, which adhere to Sharia’s prohibition of riba (usually interpreted as a ban on interest), present an alternative. Differences between conventional and Islamic MFIs in terms of outreach and financial sustainability remain underexplored; no comprehensive data set details Islamic MFIs either. With new data, collected with a global survey, the authors construct a unique panel of 543 conventional and 101 Islamic MFIs, operating in Islamic and non-Islamic countries. These data suggest that the market for Islamic microfinance is more important than previously recognized, has grown in recent years, and is likely to continue growing in every region of the world. Statistical comparisons, using various estimation techniques, regarding the outreach and financial performance of Islamic and conventional MFIs also reveal that the breadth and depth of Islamic MFIs exceed those of conventional MFIs, though conventional MFIs achieve stronger financial performance. This latter result is not robust though.

Development Model of BMT(Baitul Maal wat Tamwil) in West Sumatra

The role of women in Islamic microfinance institutions, particularly Baitul Maal wat Tamwil (BMT), is a crucial aspect of modern Islamic economic development. Although Islamic principles emphasize justice and equality, women’s representation in BMT leadership and decision-making remains limited, even though they are primary beneficiaries and possess strong social awareness of members’ needs. This study aims to analyze the role and influence of women in BMT governance while identifying gender gaps in the adoption of Islamic finance. It also examines the factors that shape Islamic finance adoption among small and medium enterprises and explores gender-based differences. Using qualitative methods through in-depth interviews and focus group discussions with BMT management and female members, combined with quantitative analysis using a simple logistic model, this research assesses key determinants of women’s decision-making. Fairlie’s decomposition analysis is applied to evaluate gender disparities in the implementation of Islamic financial systems with a sample of 1,358 SMEs. The findings show that women’s involvement in BMT leadership enhances transparency, social empathy, and alignment with maqāṣid al-sharī‘ah. Moreover, gender differences in Islamic finance adoption highlight the need for more inclusive governance strategies to ensure justice and equal participation. The study emphasizes the importance of policies that strengthen women’s roles and contribute to more inclusive, equitable, and sustainable BMT development.

This study examines the poverty alleviation efforts undertaken by the Islamic microfinance institutions (IMFIs) in Indonesia. We focused on the role played by the IMFIs in view of their direct involvements in the process of dealing with the borrowers, and their better understanding about the financial inclusion agenda as well as the financial guidelines and regulations issued by the relevant authorities. In methodology, a total of 34 managers of Baitul Maal wat Tamwil (BMTs) were taken as respondents from the Jakarta, Bogor, Depok, Tangerang and Bekasi (JABODETABEK) areas. A two-step approach was adopted in arriving at enriching findings: first, a survey questionnaire was distributed to the respondents, and subsequently, an in-depth interview was conducted to outline data related to the model design. The findings of this study highlight specific dimensions to improve financial inclusion among the poor. Apart from providing important inputs for better decision-making for the BMTs to further enhance its role in poverty alleviation, this study suggests a variety of strategies to warrant success of poverty alleviation efforts by BMT.

This study aims to analyze the influence of brand image and service quality on members’ decisions to obtain productive financing at Baitul Maal wat Tamwil (BMT) Al-Barokah Kaladawa, Tegal. The research is motivated by the vital role of BMTs in providing sharia-compliant financing access for communities underserved by conventional financial institutions, and the need to strengthen brand image and service quality amidst increasing competition among Islamic microfinance institutions. This study employs a quantitative associative approach. Data were collected through questionnaires distributed to 100 active members of the BMT and analyzed using multiple linear regression with SPSS. The results indicate that brand image has a positive and significant effect on members’ decisions in choosing productive financing. Similarly, service quality shows a positive and significant influence on financing decisions. Simultaneously, both variables explain 60% of the variation in members’ financing decisions. These findings suggest that strengthening a sharia-based brand image and improving responsive, empathetic, and reliable service quality can enhance members’ decisions to use BMT’s financing products. This study contributes theoretically to the development of Islamic marketing management literature and provides practical implications for BMTs in formulating strategies to improve competitiveness and member loyalty.

This research aims to analyze the role of the Islamic economic system in community empowerment and strengthening the economic independence of the people through the use of instruments such as zakat, infaq, sedekah, productive waqf, and Islamic microfinance institutions. Researchers use a descriptive qualitative approach with data collection techniques in the form of observation, in-depth interviews with Islamic economic actors and community leaders, and documentation studies. The research results indicate that Islamic economics not only contributes to the material aspect but also functions as a mechanism for fostering the social, spiritual, and cultural development of the community. Empowerment based on zakat and productive waqf, as well as Islamic financing through Baitul Maal wat Tamwil (BMT) and Islamic cooperatives, has proven effective in improving the standard of living of people experiencing poverty, creating jobs, and strengthening social solidarity. However, the implementation of Islamic economics at the grassroots level still faces various challenges, such as low literacy of Islamic economics, limitations in the management of waqf assets, and suboptimal synergy between Islamic institutions. Therefore, it is necessary to strengthen institutions, support regulations, and integrate Islamic economics into development policies both at the local and national levels. Thus, Islamic economics can be an alternative foundation in community development that is not only oriented towards economic growth but also towards achieving blessings and balance in life in accordance with the principles of maqashid sharia.

Purpose – This paper aims to develop an integrated waqf-based Islamic microfinance (IsMF) for poverty reduction in Bangladesh. Microfinance institutions (MFIs) have been constrained by the high cost of funds, high interest rate charges and poor human resource quality of the recipients. Islamic MFIs have recently evolved with the hope of overcoming these financial, ethical and human capital deficiencies faced by the conventional financial institutions. Moreover, a good number of integrated models have been proposed to enhance the role played by Islamic MFIs. Most of these models, however, lack empirical justifications. Design/methodology/approach – The research uses survey techniques. A total of 381 respondents were included in the survey. The integrated waqf-based Islamic microfinance model (IWIMM) was earlier on developed using literature and intellectual discussions. There are six constructs presenting the IWIMM, namely, waqf resources, IsMF, takaful, project financing, human resource development and poverty alleviation. In the survey instrument, 45 items represent the six constructs, but only 26 items have been retained after factor analysis. Structural equation modelling has been adopted to examine the relationship among the constructs. Findings – The results show that there are significant relationships between IsMF and takaful, waqf resources and human resource development, takaful and human resource development, IsMF and human resource development and, waqf resources and project financing. The results also indicate that poverty alleviation is possible through the integration of these constructs. Research limitations/implications – Though the paper has studied conventional and Islamic MFIs in Bangladesh, one of the populated Organisation of Islamic Cooperation (OIC) member countries and also where poverty incidence is high, further studies need to be conducted in other OIC member countries to adopt the model in line with practical and regulatory environment of those countries. Similarly, the study is based on the perception of the respondents, which limits the generalization of the result. Practical implications – The paper proposed a model that has the potential of being applied for poverty alleviation programmes in most of the OIC member states. Originality/value – The present paper has developed an IWIMM for poverty reduction.

This paper examines the relationship between the determinants of corporate outreach and corporate governance in Islamic microfinance institutions (Baitul Maal wa Tanwil, BMT toward Cash Waqf management using a primary data set built from the concept of Islamic MFIs collected from internal and external respondents. Islamic Micro-finance implements cash waqf management. Using the measurement model and the structural model in Partial least square (PLS), this paper examines the effects of the board and CEO characteristics, type of firm ownership, customer-firm relationship, and competition and regulation on the financial performance of Islamic MFIs and outreach to Islamic Microfinance customers and institutions Cash Waqf. This paper finds that Determinants of governance in microfinance Islamic institutions - BMT in cash waqf management is CEO/chairman duality, internal board auditor, board size, shareholder firm, individual loan, competition, regulated bank, urban market, Islamic microfinance Institutional age, portfolio at risk, firm size, and Human development index (HDI). Outreach governance of MFIs-BMT on cash waqf management is divided into three dimensions, namely: first, the internal dimensions are; CEO/chairman duality, internal board auditor, the board size, and shareholder firm. Second, the external dimensions are; individual loans, competition, bank regulation, urban market, Islamic microfinance Institutional age. Third, the dimensions of the control factor are; portfolio at risk, firm size, and Human development index (HDI). MFIs-BMT on cash waqf management in Indonesia discussed in this study proves that outreach governance of MFIs-BMT occurs only in external dimensions, including; individual loan, competition, bank regulated, urban market, Islamic microfinance Institutional age. Our research concludes that MFIs in Indonesia focus on individual loans, competition between MFIs and BMTs, are subject to banking regulations, are more developed in rural markets than urban markets, and this dimension of outreach governance depends on the age of MFIs-BMTs.

Purpose The purpose of this paper is to explore the implementation of a mobile network system for an Islamic microfinance institution, made in collaboration with a commercial bank in Malaysia. It also intends to highlight any emerging issues pertaining to the implementation of technology into the disbursement and repayment system of an Islamic microfinance institution from their clients’ perspectives. As Islamic microfinance industry is still growing in Malaysia, findings gathered throughout the course of study are also intended to boost further knowledge relating to this area. Design/methodology/approach By using a case study method, interview sessions were conducted separately with clients of the Islamic microfinance institution. The purpose of interview sessions is to identify the benefits and problem that surrounds the usage of mobile banking into the repayment system for Islamic microfinance products. Data triangulation with various public documents was conducted to enhance the credibility and reliability of data, also to support the claims that were made by the respondents. Findings It was found that clients are quite satisfied with the disbursement process through a mobile solution. However, the same cannot be said with the repayment process. The difficulties in using the mobile solution pose a major threat to its success. As most clients are not born to be technological savvy, the lack of easiness in methods for the usage of a mobile solution for their transactions pushes them away from further exploring the benefits that can be brought in by the function. Other risks which were highlighted include concerns towards breach of trust and risks of robbery. Clients of the case study, on the other hand, are concerned that the transfer of cash between their meeting venues to the bank would expose them to the public who might try to take advantage from the situation. Research limitations/implications As the current study had only focusses on mobile banking aspect of the repayment system for one Islamic microfinance institution, a multiple case study could be adapted to investigate various banking channels being implemented by different Islamic microfinance institutions in Malaysia and their current success. Practical implications By highlighting several issues through this study, it is hoped that this Islamic microfinance institution would consider applying other means of payment that are available in the market that is not only cost-efficient, but also beneficial for clients of the institution. Originality/value This study highlights the setbacks in the usage of technology by clients of Islamic microfinance institution in Malaysia. Although many approved to the diffusion of innovation in Malaysian banking sector, the same has yet to be achieved in the Islamic microfinance industry, which clients are mostly technology illiterate.

Microfinance institutions (MFIs) play pivotal roles to providing financing and services to micro and small enterprises (MSEs) in Indonesia. Islamic MFIs, which follow Shariah principles in their operations, aim not only to provide financing, but also to improve the socioeconomic conditions of poor people. There is heightened interest in the factors influencing the development of MFIs, such as relationship lending. This study aims to explore the effectiveness of such lending and the uniqueness of the implementation of social purpose in Islamic MFIs. The paper adopts a quantitative methodology, using cross-sectional survey data from 1,001 microloan borrowers from five MFIs, three of which are Islamic MFIs which provided financing in 13 regions in Indonesia in 2018. The results show that Islamic MFIs do not differ in the implementation of relationship lending. Furthermore, there is a likelihood that they are able to be more focused on profit-oriented transactions ensuring sustainability, due to their unique characteristics, as they have Baitul Maal with the social instruments of zakat, infaq and sadaqa to provide social-oriented transactions to improve outreach to the poor. The study enhances our understanding and adds knowledge to the existing literature on Islamic MFIs, especially in Indonesia.

PurposeThe purpose of this paper is to investigate factors that determine rural households’ access to finance provided by Islamic microfinance institutions (MFIs) in Indonesia.Design/methodology/approachA two-year panel data set with logistic regression is used to identify the determinants of access to finance by rural households. The study sample comprises of 289 Islamic MFIs’ clients and 140 non-clients from East Java, Indonesia. The clients consist of 111 rural households with profit and loss sharing (PLS) schemes, 162 clients with non-profit and loss sharing (non-PLS) schemes and 16 clients with both schemes.FindingsThe empirical results show that age, gender and income influence rural households to access finance provided by Islamic MFIs. The results show an increase in age and income increase the respondents’ likelihood to access finance. Further, male respondents are more likely to access finance from Islamic MFIs than females.Research limitations/implicationsThe empirical analysis is limited to data obtained from East Java province in Indonesia, and other provinces may show different results. However, this study is among the few studies that investigate access to finance from Islamic MFIs based on PLS and non-PLS schemes.Originality/valueThe novelty of this study lies in the unique financing accessibility between PLS and non-PLS schemes in Islamic MFIs. This study will be an important addition to the emerging literature on Islamic microfinance.

Baitul Maal wat Tamwil (BMT) is a sharia microfinance institution that has a strategic role in supporting the economic independence of Islamic boarding school communities. This study aims to conceptually analyze the urgency of BMT in building the economic independence of Islamic boarding school communities in Gresik Regency. The research method used is a descriptive qualitative approach with a literature study method. Data were obtained from textbooks, articles, scientific journals, research reports, and online media. The results of the discussion indicate that BMT plays an important role through its tamwil function in providing financing for productive businesses for Islamic boarding schools, students, and the surrounding community, as well as its maal function in managing zakat, infaq, and alms funds for the economic empowerment of the community. However, optimizing the role of BMT still faces various obstacles, especially in the aspects of unintegrated regulations, limited human resources, capital, and suboptimal sharia governance and supervision. Therefore, a strategy is needed to strengthen the role of BMTs through institutional improvements, human resource enhancements, integration with Islamic boarding school business units, optimization of social functions, increased Islamic financial literacy, and enhanced collaboration with the government and related institutions. With this strengthening, BMTs are expected to become a key pillar in realizing Islamic boarding school economic independence and contribute to strengthening the local Sharia-based economy in Gresik Regency.

This research is motivated by the development of Islamic microfinance institutions called Baitul Maal wat Tamwil. The 5C principle in BMT Istiqomah and BMT Pahlawan are used to anticipate the risk of problematic financing in the future. The problems that often occur in BMT Istiqomah and BMT Pahlawan are almost similar, namely the character of members or prospective members who are not honest. Based on this background, researchers are interested in conducting research with the title "Implementation of Character, Capital, Collateral, Capacity, and Condition Principles in the Risk of Murabaha Financing in Baitul Maal Wat Tamwil Istiqomah with Baitul Maal Wat Tamwil Pahlawan Tulungagung". This research is a field research. The number of informants from this study were 3 BMT Istiqomah employees and 5 BMT Pahlawan employees. Methods of data collection by observation, interviews, and documentation. Analysis of the data is descriptive analysis. The results of this study are the implementation of the 5C principle in Istiqomah BMT and Pahlawan BMT both using the 5C principle. But in the implementation of the principle of character is preferred in analyzing murabaha financing, the next principle is guarantee and ability. This is because BMT Istiqomah and BMT Pahlawan both do not have the ability to continue to monitor all financing that has been acc. So that the principle of character is preferred. But other principles are also considered important so that all 5C principles are still used in Istiqomah BMT and Pahlawan BMT.

PurposeThe purpose of this paper is to examine the influence of financial performance measures on the social norms and values of an Islamic microfinance institution (IMFI), and the actions taken by the organisational members to maintain these values in their organisation.Design/methodology/approachA qualitative case study of an NGO-based IMFI in Malaysia was undertaken, with interviews conducted with officers and managers at various organisational levels of the IMFI. Insights gained from institutional work and institutional logic were used to theorise the findings.FindingsThe IMFI used mainly financial measures to manage its performance, which were interlinked with the commercialisation approach in the industry, and the top management’s focus on the financial sustainability of the organisation. The lack of social goals and the use of reward-based financial measures did not weaken the solidified social values at the operational level, due to the independence of the operational units, the compartmentalisation of profit-making activities and the institutional work of the operational managers. The operational managers acted as carriers of this social logic. Religious values formed the pillar of the permanence of social values in the IMFI.Originality/valueThis study provides insights into the internal practices of IMFIs, and the role of religious values in the permanence of social logic in the context of an NGO-based IMFI. The lack of measurable social goals, as well as their rewards, does not compromise the focus on poverty alleviation and community development in view of the intrinsic rewards and accountability of the operational managers.

Purpose: This study aimed to examine and analyze the consequences of psychological distress on performance achievement of managers and employees in Islamic micro-finance institutions in Indonesia.Design/methodology/approach: A survey was conducted in this study, involving 194 managers and employees in Islamic microfinance institutions in Indonesia.Findings: This study confirmed that the aspects of formal justice and social justice had a significant effect on psychological distress and performance achievement. Another finding showed that psychological distress had a significant effect on performance achievement and served as a mediating variable for the effect of social justice on performance achievement.Research limitations/implications: This study only focused on the effect of psychological distress on the performance achievement of human resources in the context of Islamic microfinance institutions. Besides, in explaining the model, this study only focused on one point of view of the grand theory, i.e., social exchange theory.Originality/value: This study provided information on alternative strategies in managing and minimizing the risks of psychological distress to improve performance achievement in Islamic microfinance institutions.