The Effectiveness of Linkage Programs : Case Study of BMTs in Indonesia

Despite the importance of microfinancing as a tool for alleviating poverty, formal financial institutions, such as banks, are reluctant to provide this type of financing. There is, therefore, a need to provide financing indirectly through linkage programs. Launched by Bank Indonesia on January 9, 2004, the linkage program is the first pillar of the Indonesian Banking Architecture, and serves as a comprehensive framework for the development of the Indonesian banking industry. The program provides financing through cooperatives to their members operating microbusinesses. This study was conducted to evaluate the effectiveness of linkage programs provided by Islamic banks for microfinancing through Islamic cooperatives known as houses of charity (baitul maal wa tamwil, BMT). This research was conducted by using a mixed qualitative and quantitative approach. Qualitative information was collected using in-depth interviews with the management and authorized officers from five BMTs that are knowledgeable about such cooperatives. The quantitative research was conducted by analyzing the cooperatives’ financial statements and conducting a direct survey of the recipients of financing. The effectiveness of a microfinancing program is commonly measured by three aspects, known as the “the triangle of microfinance.” These aspects are the extent to which the financing provides for the poor (outreach), whether it increases the income or assets of the target population (impact), and the business survival of institutions managing the financing (institution sustainability). We found that linkage programs had a positive impact, especially on improving the affordability of outreach in small and medium-sized but not in the large BMTs. We suggest that the Indonesian Bank or Indonesian Financial Service Authority should specifically encourage medium-sized cooperatives or BMTs to employ this program by providing more incentives for banks or reducing the barriers for BMTs to participate