G.J.C.M.P.,Vol.4(5):9-16 (September-October,2015) ISSN: 2319 – 7285 9 The Impact of Access to Islamic microfinance Institutions (Islamic MFI) on Poverty Alleviation in Rural Bogor West Java, Indonesia: A Propensity Score Matching Approach Yani Mulyaningsih 1 , Nunung Nuryartono 2 , Rina Oktaviani 3 , & Carunia M. Firdausy 4 1 Economic Research Center-The Indonesian Institute of Sciences, Jakarta, Indonesia 12710 2 Department of Economics Faculty of Economics and Management, Bogor Agricultural University, Indonesia 16680 3 Department of Economics Faculty of Economics and Management, Bogor Agricultural University, Indonesia 16680 4 Economic Research Center-The Indonesian Institute of Sciences, Jakarta, Indonesia 12710 Abstract In general, microfinance institutions focus their outreach on the poor, thus it is hoped that Islamic microfinance institutions do to. Currently, the operation of Islamic MFI is headed towards commercialization, signified by the fact that most of the funds originate from public fund mobilization instead of originating from the government. Will the commercialization of Islamic MFI be aligned with the purpose of microfinance institutions in general, which is to help alleviate poverty? The Propensity score matching will be used to estimate the impact of access to Islamic MFI towards poverty. The issue that often arises in studies assessing impact is the presence of selection bias, especially in observational studies. To avoid this issue, propensity score matching is applied. The results of this study demonstrate the absence of impact of access to Islamic MFI towards poverty alleviation in rural areas in Bogor, Indonesia, if the Islamic MFI operates commercially. Keywords: Islamic MFI, poverty alleviation, propensity score matching. 1. Introduction 1.1 Background The number of poor in Indonesia is still relatively high. In 2013, there were 28,066,560 people living in poverty and most of them were residing in rural areas, 17,740,000 people (BPS, 2014). The poor, especially those in rural areas face several obstacles, one of them being denied access to formal financial services such as banks. According to the global financial inclusion data of 2011 from the World Bank, there are still many Indonesian citizens above 15 years old who had no access to loans from financial institutions (42%). These people have been relying on loans from relatives or friends. Some studies have declared that rural households in developing countries lack access to bank credit (Nuryartono, 2007; Mpuga, P., 2010; Saptonoet al., 2010; Thoha, et al., 2010). The 2011 global financial inclusion data from the World Bank states that only 26.03% of the rural population in countries with medium to low incomes (including Indonesia) has accounts in formal financial institutions. To deal with this issue, numerous microfinance institution were founded, especially in rural areas, providing more access to financial services for rural households, specifically poor households (Navajaset al., 2000). Many studies state that access to microfinance institutions is able to reduce poverty (Khandker, 2005; Imai et al., 2010; Rahman, 2010; Li et al., 2011). 1.2 Issues As a new generation of microfinance institutions, the presence of Islamic MFI is relatively new in Indonesia’s financial industry, but it is quite significant. Islamic MFI known as BaitulMaalwaTamwil or BMT have existed in Indonesia before the economic crisis of 1997. Even though these institutions were a novelty, they had relatively rapid growth and had operations in rural and remote are as untouched by banks (Buchori, 2012). Based on the studies by the Bank of Indonesia and several universities (UNDIP, UNPAD, and UNAIR) that mapped the potentials and profiles of Islamic MFI/BMT in West Java, Central Java and East Java (Buchori, 2012) it was declared that the fact that these institutions were readily available to the population was the reason that made BMTs develop in addition to other factors such as their location in religious strongholds (26.24%), their simple procedures (22.38%), the presence of many small and medium businesses (11.60%), the local culture (5.80%) and the absence or the rareness of other microfinance institutions (5.2%) According to Sakai et al. (2009), Islamic MFI as providers of micro financing (small business) in Indonesia are developing quite well. The BMT is a grass root empowerment effort supported by funds from members of Islamic communities. This small business financing institution usually operates based on the principles of profit (and loss) sharing and utilize Islamic moral values and group solidarity as social capital to encourage loan repayment. Group solidarity is built through periodic meetings and consultations. This means that the initiative to form BMT is not from the government to channel subsidized credit, but is based on community funds (66-75%) and in its development utilizes various other commercial funds through linkage with banks. Funds from the government are relatively small, only 2.08%. The relatively small amount of government funds compared to the relatively large mobilization of community funds indicate that Islamic MFI operate commercially. If a microfinance institution leans towards commercialization in its operations, how will it be able to fulfill its social mission pertaining to poverty?