JOURNAL OF CRITICAL REVIEWS ISSN- 2394-5125 VOL 7, ISSUE 08, 2020 2699 Competition And Net-Profit-And-Loss Sharing Margin In Indonesian Islamic Microfinance Institutions Naelati Tubastuvi 1 *, Bima Cinintya Pratama 2 12 Universitas Muhammadiyah Purwokerto, Indonesia Email: naelatitubastuvi@ump.ac.id Received: 11.03.2020 Revised: 12.04.2020 Accepted: 28.05.2020 ABSTRACT Microfinance institutions (MFIs) have been criticized for their tendency of taking high margin of borrowing compared to commercial bank. It is therefore important to understand factors that affect the margin in microfinance industry. This paper examines the effect of competition with four controlled variables on the margin. The total of 2815 observation were collected from Otoritas Jasa Keuangan (OJK) on Indonesian Islamic MFIs database using quarterly data spanning from 2010-2016. A panel data regression model has been adopted. Based on the Hausman test, fixed effect estimator has chosen to analyze the data. The results show that the degree of competition which proxied by Herfindahl-Hirschman Index (HHI) was positive and significant. According to HHI result, the Indonesian Islamic MFIs is under monopolistic market.. Thus, the Islamic MFIs are able to dominate the financial market and it could lead to a sustainable net profit margin in the future. Keywords: Net Profit and Loss Sharing margin, Degree of competition, Islamic microfinance institutions, Indonesia 1. INTRODUCTION Since the last decade, the development of Islamic microfinance institutions, showing a remarkable increase in number both by institutions and customers. It is predicted that microfinance institutions will have a strategic role in accelerating the process of Indonesia becoming a developed country in 2030 (Effendi, 2010). It is expected that Indonesia will be among the five largest developed countries in 2030 with microfinance institutions become one of the main pillars. Poverty alleviation programs through Microfinance Institutions (MFIs) actually has been implemented in many developing countries. This program is a means to help small-medium enterprises in financing their economic investment activities, reduce vulnerability to external shocks, reduce consumption, and allows unemployed individuals to take up entrepreneurship. Even the United Nations explicitly states that 2005 is the beginning of the international year for Micro-finance institutions, which recognizes that the microfinance institution is an important means of reducing world poverty. In the Islamic concept, any country that has clear goal, namely the formation of prosper society, will strive to consistently find and run a variety of economic activities that benefit and in accordance with the character of the nation. Islamic microfinance institution such as Baitul Mal wa Tamwil (BMT), Cooperative Sharia, and Islamic banks with micro business unit are expected to help realize these objectives. It is very interesting from the growing number of Islamic microfinance institutions, that the problems of financial support faced by the majority of the citizen of this nation would be resolved if the role of Islamic microfinance institution can be optimized. Most of the financial institutions literature that studies the issues of determinants of financial institutions net interest margin (NIM) focuses on the conventional financial institutions and mostly in banking institutions (see e.g. Demirguc-Kunt and Huizinga, 1999; Chortareas et al., 2012; Raharjo et al., 2014). Nevertheless, there is an emerging literature which studies the determinants of Islamic financial institutions like net interest margin, named net-profit-and- loss sharing margin (NPM). However, this literature is mostly focused on Islamic banking and the role of conventional banks (e.g. Ascarya and Yumanita, 2010). There is very limited studies to identifying the determinants of Islamic microfinance institutions especially the net-profit-and-loss sharing margin. This study is expected to cover this gap. Therefore, the purpose of this study is to test the impact of the degree of competition using Herfindahl- Hirschman Index (HHI) on Islamic microfinance institutions net-profit-and-loss sharing margin, with four control