Determinants of the Establishment of Islamic Micro Finance Institutions: The Case of Baitul Maal wa Tamwil (BMT) in Indonesia ABSTRACT

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2 Determnants of the Establshment of Islamc Mcro Fnance Insttutons: The Case of Batul Maal wa Tamwl (BMT) n Indonesa Alfah Hasanah Aref Anshory Yusuf Center for Economcs and Development Studes (CEDS) Unverstas Padjadjaran, Indonesa March, 2013 ABSTRACT As a country wth the largest number of muslm populaton n the world, Islamc mcro fnance nsttutons have a large potental to play a greater role n the country's aspraton to poverty reducton. However, the determnants of the establshment of Islamc Mcro Fnance Insttutons, partcularly n Indonesa, has not been extensvely studed. Ths paper attempts to explore the determnants of the establshment of Batul Maal wa Tamwl (BMT), one of the man Islamc mcrofnance nsttutons n Indonesa. A probt model of BMT establshment s estmated usng an Indonesan vllage-level data. The result suggests that the extent of economc actvtes partcularly n agrculture sector, and hgh accessblty to market are strong determnants of BMT establshment n Indonesan vllages. It s also found that vllages that experenced recent calamtes partcularly drought are more lkely to have BMT establshed. Ths may ndcate the role of BMT as a provder of fnancal servce n the mdst of hardshp. Relgon s among the strongest determnant of BMT establshment. Vllages wth Islam as the domnant relgon s more lkely of havng BMT establshed. However, ths effect s strong only n rural areas. In urban areas, ths effect s weak. Keywords: Mcro Fnance Insttuton, Batul Maal wa Tamwl, Indonesa, Islamc bankng JEL code: P490, G21 1

3 1 INTRODUCTION 1.1 COUNTRY CONTEXT Indonesa, to any standard, can be regarded as successful n ncreasng GDP per capta. Snce the start of the New Order government, up to and pror to the 1997 Indonesan economc crss, t has brought about ncrease n ncome per capta by almost four tmes. The ncreasng ncome of the average Indonesan has also been accompaned by outstandng reducton n poverty (See Error! Reference source not found.). Number of poor people fell from 54.2 mllon people n 1976 (40.1% of total populaton) to become 22.5 mllon people (11.3% of total populaton) n 1996 (Alsjahbana, Yusuf, Chotb, Yasn, & Soeprobo, 2003, p. 3) Income Per Capta (US$) Kemsknan (%) Income Per Capta (US$) Kemsknan (%) < 1996 Kemsknan (%) > 1996 Fgure 1. Long run trend of ncome per capta and poverty Whle apprecatng the achevement of the long-run Indonesan economc development descrbed above, some problems n the socal ssues stll reman. Frstly, the rapd ncrease n per capta ncome, despte reducng the poverty ncdence has not been followed by the reducton n ncome nequalty. The ncome growth of the poor s stll lower than the rch, whle a few of the rchest enjoy the beneft of the development n a very large proporton. More recently there s a trend of ncreasng ncome nequalty n Indonesa. Secondly, the growth of poverty reducton has been slowng down n the 1990 s compared to n the 1970 s and 1980 s. As can be seen from Table 1, there s stagnaton n the reducton of the number of populaton lvng below poverty lne, especally usng natonal poverty lne and nternatonal standard of $2 per day. In fact, n the year 2009 there are stll more than 120 mllon people lvng below the nternatonal standard poverty lne of $2 per day, more or less the same number of people as n the 1980 s (Fgure 2). There s arguably some ndcatons that the rate of poverty reducton n the perod after the fnancal crss s slower than the before fnancal crss. Comparng the rate of poverty reducton for the last 11 years ( ) wth the rate of poverty reducton (as shown n Table 1) suggest that the concern s qute well-founded. The rate of the reducton n 2

4 both the number of poor populaton and head count poverty ndex for the perod of s a lot slower compared to the perod of , more notably for urban areas. Mllon of People Natonal $1.25/day $2/day Fgure 2. Number of people under poverty lnes Table 1. Trend n poverty ncdence and number of poor populaton Number of poor populaton (mllon, %) a (%) a (%) Urban Rural Urban + Rural Poverty ncdence (%) b (%) b (%) Urban Rural Urban + Rural Note: a ) annualzed change (%), b ) average annual change Source: BPS In short, from socal perspectve alone, the success of Indonesan economc development could have been over rated. 1.2 ISLAMIC MICRO-FINANCE IN POVERTY ALLEVIATION It s wdely recognzed that mcro-fnance has an mportant component n poverty allevaton strateges. Poor households face dffculty n generatng ether regular or substantal ncome to save for future and make them vulnerable to economc, poltcal, and physcal downturns. Ther need for fnancal servce can be fulflled by the mcro fnance nsttuton (MFI). Mcrofnance experences all around the world have now defntely found that the poor demand a wde range of fnancal servces, are wllng to bear the expenses related to them and are absolutely bankable. CGAP report that the target group of mcrofnance s not consttuted by the poorest of the poor, who need other nterventons such as food and health securty, but those poor who lve at the border of the so called poverty lne, those who could 3

5 reach more easly a decent qualty of lfe and who have entrepreneural deas but lack access to formal fnance The promotng of the mcrofnance has been seen to support the Unted Naton s target of the MDGs to reduce poverty up to 50% of all poor people n the world n The mcro fnance servces can play mportant roles to acheve these goals. The government of Indonesa also ntated 2005 as a year of mcro fnance. The exstence of several fnancal nsttutons has been recognzed as an effectve way of deepenng the fnancal sector snce t seeks to scale up fnancal ncluson through expandng access to fnancal servces and subsequently contrbute to wealth creaton and poverty reducton (Hogarth, Anguelov and Lee, 2005; Mohan, 2006). As a country wth the largest number of muslm populaton n the world, Islamc mcro fnance nsttuton has a hgh potental to play a greater role n the country's aspraton to poverty reducton. The Islamc world s enormous wth more than 1.2 bllon people, stretchng from Senegal to the Phlppnes. Poverty rate s qute hgh n all Muslm countres except a few countres n Southeast Asa and the Mddle East. Poverty levels have also been assocated wth hgh nequalty alongsde low productvty. Half of the Indonesa populaton (about 129 mllon) s lvng below the poverty lne of US$2 a day. Whle n South Asa two largest Muslm states - Bangladesh and Pakstan alone account for 122 mllon each lvng below the poverty lne where as 100 mllon Muslms of Inda are also lvng below the poverty lne (IRTI, 2007, p.18). 1.3 BAITUL MAAL WA TAMWIL (BMT) IN INDONESIA The Islam tenets regards poverty allevaton s one of the most mportant dutes, and the God orders every Muslm to combat poverty and help poor and the needy through chartes manly n forms of zakat as well as nfaq, shadaqah and waqaf. Ths practce has been n exstence snce the era of Prophet Muhammad. The Prophet establshed the Batul Maal or house of treasure and employed an nclusve system to address the complex phenomena of poverty n the socetes. It ncluded basc safety nets for the needy, soco-economc empowerment to narrow the dsparty among the ctzens, and natural resources management for the welfare of human bengs. Nowadays, the teachng of the Prophet on poverty s clearly relevant partcularly n framework of the Islamc mcrofnance. Structurally, BMT encompasses Batul Tamwl and Batul Maal. The Batul Tamwl s desgned to conduct fnancal ntermedatons through moblzng deposts from member clents and fnancng commercal ventures. In addton, the Batul Maal s dedcated to perform soco-relgous roles by collectng charty donatons from Muslms and helpng the needy along wth ther sprtual lves. Mcrofnance refers to makng small loans avalable to poor people (especally those tradtonally excluded from fnancal servces) through programs desgned specfcally to meet ther partcular needs and crcumstances (Khan, 2008; p.6). Bascally, the Islamc mcrofnance s an extenson of the Islamc bankng and fnance concept whch s free of rba (non-nterest based) fnancng arrangements. Instead of chargng nterest, the transacton s n a form of proft and loss sharng contract and mutual partnershp. In addton, ts practces should be ted to tangble goods and real economc actvtes, prohbt speculatve transactons, llct busness, cheatng and decepton as well as unjust practces. Above all, the practce of these fath based nsttutons must be n lne wth and guded by the Sharah Laws. 4

6 In Indonesa there are four types Islamc or Sharah fnancal nsttuton. General Islamc commercal banks or BUS (Bank Umum Syarah), Islamc Busness Unt or Unt Usaha Syarah (UUS), Islamc Rural Banks (Bank Perkredtan Rakyat syarah (BPRS) and the subrural fnancal nsttutons wdely known as the Batul Maal wa at-tamwl (BMT). Unlke the frst three types of Islamc bankng, BMT s not explctly regulated by the Bankng Act No. 10, 1998 BMT s an Islamc mcro-fnance nsttuton, establshed by ndvdual or group ntatves to help mcro-entrepreneurs as a strategy for eradcatng rural poverty,especally n vllages or tradtonal markets, operatonally based on Sharah prncples and cooperaton. It s the most smplfed form of Islamc fnancal Insttutons. Most of BMT enterprses are small and run n the form of cooperatve type of busness and some others operated n non-formal way. In some other countres BMT s communty-based mcrofnance nsttutons that operate under the cooperatve system. Formal fnancal nsttutons take two forms: bank and non-bank. Accordng to the Bankng Act No. 10/1998, only Bank Umum (commercal banks) and Bank Perkredtan Rakyat (rural banks) are classed as banks. Non-bank formal fnancal nsttutons nclude varous types of Lembaga Dana Kredt Pedesaan (LDKP, vllage-based nsttutons for small enterprse fnancng) and cooperatves. Informal fnancal nsttutons cover almost unlmted forms of savng-lendng ntatves n socety, such as Kelompok Swadaya Masyarakat (KSM, people s self -help groups), Kelompok Smpan Pnjam (KSP, savng and credt groups), Lembaga Swadaya Masyarakat (NGOs) and KSM-based Bayt al-m l wa al-tamw l (Islamc savngs and lendng ntatves). The categorzaton of Small and Mcro Fnancal Insttutons n Indonesa s summarzed n table 2. Table 2. Categorzaton of Small and Mcro Fnancal Insttutons n Indonesa Bank Commercal Bank (Bank Umum) FORMAL Rural Bank (Bank Perkredtan Rakyat) Non-Bank -LDKP (Lembaga Dana Kredt Pedesaan- Vllagebased nsttuton for SME fnancng) -Co-operatve INFORMAL -KSM (Kelompok Swadaya Masyarakat- Self-Help Group-SHG) -LSM (Lembaga Swadaya Masyarakat- Non-Governmental Organzaton) -BMT (Batul Mal wa Tamwl- Islamc cooperatve or SHG) In Indonesa, the root of BMT was developed n decade of 1980 by Muslm actvsts. Later on, the BMT has flourshed snce n the md of 1990s, after the establshment of Bank Muamalat Indonesa, the frst Syarah bank n the country. In general, the BMT nsttutons have been ntated and led by leadng Islamc organzatons such as PINBUK and Dompet Dhuafa foundaton, Syarah banks, Islamc boardng schools (pesantren), respected clercs and Muslms patrons who have strong soco-economc and relgous nfluences n the communty. An estmated fgure from Pusat Inkubas Bsns Usaha Kecl (PINBUK) or Centre for Mcro Enterprse Incubaton mentoned that by September 2010, out of 3,068 BMTs under ther supervson, fnancng has reached a total of 1,67 bllon IDR. The total asset of the above nsttutons was estmated around 2.16 bllon IDR. It s mportant to note that these data 5

7 underestmate the sgnfcance of BMTs n Indonesa, snce not all BMTs are under the provson of PINBUK. Although there s no formal regulaton from the Central Bank of Indonesa (BI) regardng the operatonal of Batul mal wa tamwl (BMT), BI urged many banks n Indonesa to have lnkage program wth BMT and other MFI due to the facts that ths MFIs very mportant to the development of SMEs. (BI,Monetary Polcy Quarterly Report Q-1,2009) BMTs have attracted many attentons. Frst, because they are generally unregstered under the normal practce rule of Bank Indonesa. Second, they have developed very sgnfcantly n quantty and spread n very wde areas of dfferent provnces and have played sgnfcant role n brdgng the access of fnancal servces to the poor and SME. However, soco, economc, and cultural determnants of the establshment of Islamc Mcro Fnance Insttutons, partcularly n Indonesa, has not been extensvely studed. Ths paper attempts to explore quanttatvely the determnants of the establshment of Batul Maal wa Tamwl (BMT), one of the man Islamc mcrofnance nsttutons n Indonesa. 2. REVIEW OF THE LITERATURE The development of the mcrofnance sector has ncreased attenton from academcs, tryng to understand performance and development of MFIs. Wthn ths research feld, one strand of lterature searches for the determnants for MFI-performance. Some of the nvestgatons about the contrbuton of macro factors to the performance of MFIs are conducted by Ahln et al., Vanroose (2006) has done a frst attempt to lnk mcrofnance and the macroeconomc envronment for the Latn Amercan regon through a lterature study on the regon. Honohan (2004) studes a number of macro-economc varables that may explan the varaton n the development of mcrofnance markets on a global level. Annabel Vanroose (2008) nvestgated about the development of MFIs usng the worldwde survey from CGAP (2004) expanded wth data from the Mx Market and dfferent ratng agences. Results ndcate that mcrofnance s more present n countres that receve a hgher proporton of nternatonal support. Moreover, the mcrofnance sector s more developed n the rcher countres of the developng regon. Ths means that wthn poor regons mcrofnance has developed fastest n the rcher countres. Populaton densty plays a sgnfcant role, but the level of ndustralzaton and human captal does not. Further nvestgaton by Annabel Vanroose & Bert D Espaller (2009) analyzed the relatonshp between performance of mcrofnance nsttutons (MFIs) and the development of the formal fnancal sector of the country n whch the MFI s actve. They found that MFIs reach more clents and are more proftable where access to the formal fnancal system s low. Ths fndng s n lne wth the market-falure hypothess: MFIs respond to a need that banks do not fulfll and floursh where the formal bankng sector fals. However they also found ndcatons of nterdependences between MFI-performance and formal fnancal sector development. Kwon ( 2009) Investgated the mpact of organzatonal, market and soco-cultural factors on the supply of nsurance, lendng and also savngs servces by MFIs n developng countres. The research about the factors affectng to the dstrbuton of MFIs n Ghana developed by Peprah & Muruka (2010). In ther study they used Ghana Lvng Standard Survey (GLSS 4). 6

8 The study found that poverty and level of development are not sgnfcant n nfluencng the decson to establsh MFI n a partcular localty. Populaton sze, populaton densty and economc actvtes are mportant factors that drve the dstrbuton of MFIs. Lterature on the determnants of the establshment of Islamc mcro fnance nsttuton n Indonesa s qute rare especally those nvestgated BMT n macro analyss. One research conducted by Pusat Inkubas Bsns Usaha Kecl (PINBUK) or Centre for Mcro Enterprse Incubaton a study of development evaluaton of Pondok Pesantren Cooperatve (KOPONTREN), a cooperatve operatng n a wdely establshed Islamc boardng schools n Indonesa, and BMT. The study was conducted based on the survey upon 24 BMTs and 30 KOPONTREN n three provnces, west Java, mddle Java and east Java provnces. The study concludes that there are three external factors whch possbly support the exstence of KOPONTREN and BMT. They are (1) the conscences and wllngness of Muslms to utlze and assst the Islamc fnancal nsttutons. (2) KOPONTREN and BMT bascally serve the customers well, both n delverng the products or servces, and collectng the customers oblgaton; (3) KOPONTREN and BMT provde the easy procedures to get the fnance projects. The Followng table summarze the research regardng factors affectng the mcrofnance establshment and or BMT exstence. Table 3. Summary of the Studes on the determnants the MFIs performance, establshment or exstence Research by Varables used nvestgaton Data Peprah & Muruka (2010) Al-Azzam, Mmoun, Abu Al (2012) Vanroose (2008) Annabel Vanroose & Bert D Espaller (2009) poverty levels, populaton densty, number of economc actvtes, populaton sze and level of development countrywde socoeconomc characterstcs, fnancal access Populaton densty, rural areas, the level of ndustralzaton and nflaton access to the formal fnancal system, nterest rate, nflaton to test the factors affectng the dstrbuton of Mcrofnance n Ghana Factors that contrbute to the success of mcrofnance nsttutons MFIs. Investgate whether countrywde socoeconomc characterstcs and fnancal access can mpact MFIs performance development of mcrofnance nsttutons, whch has been hghly uneven and dentfes factors that explan why mcrofnance nsttutons are reachng more clents n some countres than n others analyzes the relatonshp between performance of mcrofnance nsttutons (MFIs) and the development of the formal fnancal sector of the country n whch the MFI s actve Ghana Lvng Standard Survey (GLSS 4) data on 222 MFIs crosscountry analyss on a unque dataset coverng 115 countres a large unque panel dataset of 1,073 nsttutons over 10 7

9 Kwon, 2009 PINBUK (Pusat Inkubas Bsns Usaha Kecl) fnancal expense rato, loan repayments n arrears, years of operaton, number of borrowers, woman borrower rato, lfe nsurance penetraton rato and famly sze there are three external factors whch possbly support the exstence of KOPONTREN and BMT. They are (1) the conscences and wllngness of muslms to utlze and assst the Islamc fnancal nsttutons. (2) KOPONTREN and BMT bascally serve the customers well, both n delverng the products or servces, and collectng the customers oblgaton; (3) KOPONTREN and BMT provde the easy procedures to get the fnance projects. The mpact of organsatonal, market and soco-cultural factors on the supply of nsurance, lendng and savngs servces by MFIs n developng countres Development evaluaton of Pondok Pesantren Cooperatve (KOPONTREN) and BMT. years. 600 mcrofnanc e nsttutons (MFIs) n 83 countres that were n operaton durng survey upon 24 BMTs and 30 KOPONTR EN n three provnces, west Java, mddle Java and east Java provnces 3 METHODOLOGY AND DATA 3.1 A PROBIT MODEL OF BMT ESTABLISHMENT The probablty model of BMT establshment can be specfed as (Greene, 2003): and D = γ X + u D D = 1, f D = γx = 0, otherwse + u > 0, where Pr Pr { D = 1 X } = Φ( γ ʹ X ), { D = 0 X } = 1 Φ( γ ʹ X ) D s a latent varable and D equals 1 f a vllage has BMT establshed and 0 otherwse, X s a vector of soco, economc, and geographcal characterstcs of the vllage, γ s the vector of parameter to be estmated and Φ s the standard normal cumulatve dstrbuton functon, and u s the error term. 8

10 3.2 INDONESIAN FAMILY LIFE SURVEY (IFLS) The data beng used n ths study s the Indonesan Famly Lfe Survey whch s a multpurpose household survey conducted n 2007 (IFLS 4) by Rand Corporaton and Gadjah Mada Unversty. IFLS s a longtudnal survey conducted n 1993, 1997, 2000 and Its frst wave n 1993 conssts of 7,730 households drawn from 13 provnces n Indonesa coverng around 83 percent of the country s populaton (Fgure 3). Fgure 3. The coverage of IFLS sample The household survey sample was stratfed on provnces and randomly selected wthn provnces. The sample frame used was based on the 1993 SUSENAS, a natonally representatve soco-economc survey of 60,000 households conducted by the Indonesan Central Bureau of Statstcs. For each IFLS communty n whch households were ntervewed, extensve nformaton was collected from communty leaders and from staff at schools and health facltes avalable to communty resdents. Ths part of the nformaton s known as the complementary to the household survey and s called the Communty-Faclty Survey (CFS). Ths CFS data s used n ths study partcularly usng the nformaton collected from the vllage head offce. As many as 312 communty/vllages were surveyed. The nformaton ncludes varous aspects of bankng and fnancal nsttutons that exst n the vllage or beng accessed by the vllage populaton. Based on the prevous lterature and data avalablty n the IFLS, we dentfy the followng varables to be tested as the determnants of the establshment of BMT. ECONOMIC FACTORS Presence of economc actvtes such as agrculture and manufacturng producton actvtes n the vllage/communty. The data have the nformaton on whether there are crops cultvated by the members of the communty and whether a factory (plant) n the 9

11 communty ncludng cottage/home ndustry operatng n the communty. It s expected that the presence of these actvtes s postvely assocated wth the establshment of BMT. Accessblty to market whch s measured by the dstance from the offce of the head vllage to the nearest market. It s expected that dstance to market s postvely assocated wth the establshment of BMT. The extent of fnancal actvtes n the communty as measured by the presence of the actvtes of nformal tradtonal savng-loan actvtes and whether revolvng credt fund s operatng n the vllages. These varables are expected to be postvely assocated wth the establshment of BMT. Qualty and avalablty of economc nfrastructures whch are measured by the extent of electrcty access (percentage of the households wth access to electrcty) and the qualty of the road nfrastructure. Road qualty s dentfed by whether the road wthn the vllages are accessble by wheeled vehcles. These varables are expected to be postvely assocated wth the establshment of BMT. SOCIAL FACTORS The socal factors that can be ncluded s the extent of Islam as the man relgon. It s expected that ths varable has strong assocaton wth the establshment of the BMT. GEOGRAPHICAL FACTORS Geographcal factors s measured by whether vllages are located n urban or rural areas. It s expected that beng n urban area ncrease the lkelhood of BMT establshment. OTHER FACTORS We nclude recent experence of calamtes measured by havng experenced draught or flood n the last 5 years. The expected of the mpact of these factors s rather unclear because t can be negatve gven the negatve mpact of dsaster on fnancal prospect or postve beng the demand for the fnancal servces partcularly credt wll be hgh when populaton are n the mdst of hardshp. 10

12 Table 4.1.Summary statstcs of varables Wth BMT Wthout BMT Presence of agrculture, 1=yes, 0=otherwse (%) Presence of nformal savng/loan group, 1=yes, 0=otherwse (%) Presence of revolvng fund credt, 1=yes, 0=otherwse (%) Dstance to nearest market, km (1.01) (4.13) (4.03) Presence of publc transport, 1=yes, 0=otherwse (%) Electrcty coverage (% of household wth access) (5.05) (17.01) (16.57) Relgon, 1=Domnantly Islam, 0=otherwse (%) Areas, 1=urban, 0=rural (%) Drought n the last 5 years, 1=yes, 0=otherwse (%) flood n the last 5 years, 1=yes, 0=otherwse (%) Number of Observatons Note: Number n parenthess are standard devaton All Table 4.1 shows the statstcal summary of the varables ncluded n the analyss grouped by BMT presence. descrbes the mean of the data categorzed by vllage wth and wthout BMT presences. It shows that vllages wth BMT presence s a lttle more agrculturally based than those wthout BMT. In the vllages wth the presence of BMT there are about 63,15% that n the vllages there also exst other nformal savng/loan group nsttutons and 78,94% showed the there also exst revolvng fund as a source of nformal fnancng. Ths may seem that the exstence of BMT s purposed as a substtute to the nformal savng/loan group or exst n the places where the tradtons of nformal savng/loan n the vllage are ntense. The exstence of market n the vllages wth BMT showed that the mean dstances to the market s about 0.55km showed that most of the vllage wth BMT has close dstance to the market as busness center. The nfrastructure condtons of the vllages showed that n the vllages wth the presence of BMT there about 78,95% that there wll be the transportaton for publc and about 96,84% of the vllages have access to electrcty. The Soco-cultural-demographc varables showed that almost 94,74% the relgon of the communty where BMT presences s Islam. The geography factor showed that n the urban area, the mean of the exstence of BMT s hgher. Other varables such as droughts have means hgher n the vllage wth the exstence of BMT and varable flood showed almost the same means ether n vllages wth or wthout BMT. 11

13 4. RESULTS AND DISCUSSIONS The results of the Probt regressons s shown n table 5. The probt model s estmated usng the maxmum lkelhood estmaton procedure and ts qualty of the predcton s hgh gven ts 93.87% of correct predcton. Seven out of eleven covarates are statstcally sgnfcant and have expected sgns. Table 5. Results of the Probt Regresson Margnal Coef. effect ECONOMIC FACTOR Presence of agrculture, 1=yes, 0=otherwse (0.305)** (0.013)** Presence of nformal savng/loan group, 1=yes, 0=otherwse (0.229)** (0.016)** Presence of revolvng fund credt, 1=yes, 0=otherwse (0.012) Dstance to nearest market, km (0.097)** (0.004)** Presence of publc transport, 1=yes, 0=otherwse (0.014) Electrcty coverage (% of household wth access) (0.000) LOCATION Areas, 1=urban, 0=rural (0.536)*** (0.095)*** SOCIO-CULTURAL Relgon, 1=Islam, 0=otherwse (0.424)*** (0.019)*** Areas*Relgon (0.675)*** (0.182)*** OTHER FACTORS Drought n the last 5 years, 1=yes, 0=otherwse (0.441)* (0.056)* Flood n the last 5 years, 1=yes, 0=otherwse (0.012) Constant (1.191)*** Observatons 310 Pseudo-R Percent of correctly predcted 93.87% Note: ***) sgnfcant at 1%, **) sgnfcant at 5%, *) sgnfcant at 10% Numbers n parentheses are robust standard errors 12

14 The result suggests that economc factors that are sgnfcantly assocated wth BMT establshment are presence of agrcultural actvtes (at 5% level), presence of nformal savng-loan actvtes (at 5% level), and accessblty to market (at 5% level). The margnal effect suggests for example that havng agrcultural actvtes n the communty ncrease the probablty of havng BMT establshment by The estmated margnal effect of market dstance suggest beng closer to a market by 1km ncrease the probablty of havng BMT establshment by Ths also ndcates that BMT see the market as a busness center where the supply and demand for loans are hgh so that BMT can make use ts functon as ntermedary fnancal nsttuton. We cannot reject the hypothess that nfrastructure factors are not assocated wth BMT establshment as both nfrastructure varables.e., electrcty coverage and road qualty are not statstcally sgnfcant despte showng correct sgns (postve). Ths does not suggest that nfrastructure qualty does not play a role n the lkelhood of BMT establshment as there may be other nfrastructure varables that are not observed n the data. Other factors that are statstcally sgnfcant are experence wth drought n the last 5 years (at 10% level), located n urban areas (at 1% level), and Islam beng domnant relgon (at 1% level). Experence wth floodng s not assocated wth the lkelhood of BMT establshment but drought experence s. Its margnal effect suggest that havng a floodng n the last 5 years ncrease the probablty of havng BMT establshed by Drought s a common natural dsaster n Indonesa and t affects agrcultural producton. Ths result ndcates that BMT may have play a role as a provder of fnancal servce n the mdst of hardshp partcularly durng harvest falures n agrcultural areas. The sgnfcant and postve sgn of nformal savng/loan group varable ndcates that the probablty of BMT exstence s hgher n the vllages such nsttutons or actvtes exst. The exstence of ths nformal nsttuton ndcates the extent of fnancal cultures and actvtes n the communty. The postve sgn of the coeffcent ndcates that BMT and ths tradtonal fnancal actvtes are complementary nstead of substtutes. Locaton,.e., whether the vllages are urban areas, are strong determnants of BMT establshment. Its margnal effect suggest that, beng located n urban areas ncrease the probablty of havng BMT establshed by (sgnfcant at 1% level). Ths s the hghest margnal effect among the other dummy varables. Beng located n urban areas ndcate that n overall measure the vllages s more developed rather than beng located n rural areas. Ths may capture many economc factors that are assocated wth the level of development n the vllages unaccounted for n the model specfcatons. Ths also mples that BMT has a very strong urban based. The Soco-cultural-demographc varables presented by relgon varable showed postve and very sgnfcant n nfluencng to the establshment of BMT. Its margnal effect suggest that beng located n a domnantly-muslm vllage ncrease the probablty of havng BMT establshed by (sgnfcant at 1% level). Ths confrms that Islamc values (norms and prncples) are strongly behnd the establshment of BMT. The coeffcent of nteracton varables (Area*Relgon) s negatve and strongly sgnfcant (at 1% level). The nteracton varable s added to test whether the magntude of the mpact of relgon (Islam domnance) s nfluenced by locaton (beng n urban or rural areas). Its negatve sgn (and ts relatvely bg magntude) suggests that the postve effect of relgon s 13

15 attenuated by beng located n urban areas. In other words the effect of relgon on the establshment of BMT s weakened f the vllages are located n the cty or urban areas. 5. CONCLUDING REMARKS Indonesa s a country wth the largest number of muslm populaton n the world and stll face a bg challenges n poverty reducton. As Islamc tradton s qute strong n the country, Islamc mcro fnance nsttutons have a large potental to play a greater role n the country's aspraton to poverty reducton. One of the nsttutons of whch ts establshment grows qute fast s Batul maal wa Tamwl (BMT). As the determnants of the establshment of Islamc Mcro Fnance Insttutons, partcularly n Indonesa, has not been extensvely studed, ths paper attempts to fll ths gap. A probt model of BMT establshment s estmated usng an Indonesan vllage-level data. The result suggests that the extent of economc actvtes partcularly n agrculture sector, and hgh accessblty to market are strong determnants of BMT establshment n Indonesan vllages. It s also found that vllages that experenced recent calamtes partcularly drought are more lkely to have BMT establshed. Ths may ndcate the role of BMT as a provder of fnancal servce n the mdst of hardshp. Relgon s among the strongest determnant of BMT establshment. Vllages wth Islam as the domnant relgon s more lkely of havng BMT establshed. However, ths effect s strong only n rural areas. In urban areas, ths effect s weak. 6. REFERENCES Adnan,Wdarjono, Bekt, Anto Study on Factors Influencng Performance of The Best Batul Maal Wa Tamwls [BMTS] In Indonesa, I Jurnal Iqtsad, Vol 4, No 1 (2003) Akhter, Akhtar and Al Jaffr, Islamc Mcro-Fnance And Poverty Allevaton: A Case Of Pakstan Proceedngs 2 nd CBRC, Lahore, Pakstan November 14, 2009 Al-Azzam, Mmoun, Abu Al, The Impact of Socoeconomc Factors and Fnancal Access on Mcrofnance Insttutons, Internatonal Journal of Economcs and Fnance, Vol. 4, No. 4; Aprl 2012 Annabel Vanroose & Bert D Espaller, CEB Workng Paper,September 2009 Annabel Vanroose, what macro factors make mcrofnance nsttutons reach out? Savngs and Development Vol. 32, No. 3 (2008), pp Khan, A., A. (2008). Islamc Mcro fnance Theory, Polcy and Practce, Islamc Relef Worldwde, Brmngham,Unted Kngdom, February 2008 M. Amn Azz (2000), Prospek BMT Berbadan Hukum Koperas, dalam Bahaq Abd. Madjd dan Safuddn A. Rasyd (ed.), Paradgma Baru Ekonom Kerakyatan Sstem Syar'ah: Perjalanan gagasan & Gerakan BMT d Indonesa, Jakarta: PINBUK, pp Peprah & Muruka, Factors Affectng the Dstrbuton of Mcrofnance Insttutons n Ghana, Journal of Busness and Enterprse Development,

16 W Jean Kwon, an analyss of organsatonal, market and soco-cultural factors affectng the supply of nsurance and other fnancal servces by mcrofnance nsttutons n developng economes, the geneva papers (2010) 35, W.H. Greene, Econometrc analyss, (5th ed.)prentce-hall, Upper Saddle Rver, NJ (2003) 15