Improving the effectiveness of Islamic micro-financing: Learning from BMT experience

Purpose – The purpose of this paper is to suggest a way to improve the effectiveness of Islamic micro-financing in Indonesia. Design/methodology/approach – The approach taken to measure and evaluate the effectiveness of micro-financing is to point out the change of micro-enterprises' business performance and then develop a concept based on the research findings and literature review. Findings – The implementation of Islamic micro-financing, which was preceded by selection process of micro-enterprises and also accompanied by business control, incentive system, and construct good relationship, is effective in developing micro-enterprises and improving the household income. However, an integrated program as an effort to improve the effectiveness of Islamic micro-financing is still necessary. Practical implications – Micro-enterprises' development requires not only provision of financing in an interest free-based system, but it also needs the provision of other services. For the purpose of holistic approach for micro-enterprises' development and poverty alleviation, the spiritual development, especially via internalizing Islamic moral values in an entrepreneur's consciousness, is also necessary. In addition, poverty alleviation will be successful if Islamic financing is conducted in many areas, and the government takes part in this program. Originality/value – This paper shows how, in the Islamic perspective, spiritual development is necessary in improving the effectiveness of financing.