Islamic MFIs, Alternatives in Increasing Customer Income

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Illustration by Feri Fenoria

UNAIR NEWS – Sharia Micro Financial Institution (LKMS) is a financial institution whose products and services are under Islamic values. In LKMS itself, there are two types of financing, namely profit-sharing financing and non-profit sharing financing. In a previous study, Bayu Arie Fianto, SE., MBA., PhD., And the team had successfully examined the factors causing financing problems. Whereas, Bayu and his team researched the impact of financing from LKMS on the welfare of LKMS members.

In this study, Bayu and the team will observe the impact of profit-sharing financing and non-profit sharing financing for customer welfare in terms of income and the level of consumption or expenditure of the customer. In its implementation, this research uses a difference-in-difference method.

“With this method, it will be observed before, and after receiving financing, the impact will be like for customers,” he explained.

Bayu divided his observations into two groups. Namely the control group, meaning those who did not receive funding and the treatment group, i.e. those who received funding. Researchers will look at the impact of LKMS funding on the two groups.

BAYU Arie Fianto, SE., MBA., PhD. (Photo: Courtesy)

“One does not get any funding at all, and one can get it from LKMS. It will be seen how the impact on income and consumption, “he added.

This research was conducted using 414 respondents consisting of 274 customers and 140 non-customers. Researchers will compare between customer groups and non-customer groups, whether there are differences in the impact on income and consumption or not. This study found that in the customer group, there was a change in income.

“So, this model uses difference-in-difference, but in this method we use double-difference-in-difference,” he said.

The first is the difference-in-difference between profit-sharing customers and non-customers. The second is the group of non-profit customers with non-customers. So, after being divided into two groups, then we split it again.

By using the difference-in-difference method, the profit-sharing helped increase customer income by 3.25 % over two years. Whereas for non-profit sharing, the impact helped increase customer income by 2.9 %.

“So both of them together help increase welfare, in this case, income. But the higher the profit sharing, “he said.

It can be concluded that financing from LKMS helps increase welfare by increasing income, while the impact on consumption is not significant.

The impact on the community will undoubtedly help alleviate poverty in the long run because Sharia MFI financing is proven to increase income. The increase in income occurred in two types of investment, especially in profit-sharing agreements.

“The production sharing agreement will greatly help to increase income compared to non-profit sharing,” he said.

But the problem is that LKMS is still asking for guarantees from customers. It might become a challenge for the government concerning to MFIs. There may be a grant from the government, so there is no need for safeguards. (*)

Author: Sandi Prabowo

Editor    : Khefti Al Mawalia

Bayu Arie Fianto, Christopher Gan, Baiding Hu, Jamal Roudaki. 2018. Equity financing and debt-based financing: Evidence from Islamic microfinance institutions in Indonesia.

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