Scaling poverty reduction in Indonesia: enhancing the institutional effectiveness of Islamic microfinance institutions

The chapter analyses approaches of Islamic microfinance institutions (IMFIs) to scale poverty reduction in Indonesia through the lens of an Islamic poverty reduction institutional framework. This framework suggests that IMFIs should take a holistic, integrated approach to poverty reduction, apply Islamic socio-religious norms and support localized socio-legal structures. Whilst recently there have been positive developments on all of these fronts in Indonesia, many tangible steps can be undertaken to significantly increase the effectiveness of IMFIs. Acknowledging the important role of government as an enabler for effective IMFIs, this chapter proposes three policy measures to enhance their poverty reduction capabilities. The authors recommend that the Indonesian government integrate IMFIs into the national poverty reduction framework, simplify the regulatory framework that unifies complementary activities, such as awqaf, zakat and microfinance, and that they expand local autonomy whilst balancing the need for central regulation to a limited set of matters such as member protection.