The Role and Impact of Islamic Microfinance on the Development of MSME in Rural Indonesia

Abstract

This study investigates the role and impact of Islamic microfinance on the development of micro, small, and medium enterprises (MSME) in Garut, Indonesia. Utilizing a mixed-methods approach, the research combines a survey of 50 MSME beneficiaries with in-depth interviews involving Islamic microfinance institutions (BMTs, BPRS) and BAZNAS Garut officers. The findings reveal that 64% of MSMEs experienced increased business revenue, 48% expanded assets, and 36% created new employment opportunities after receiving Islamic financing. Most respondents reported high satisfaction with Sharia-compliant contracts, citing religious alignment, transparency, and ethical values as core advantages. Qualitative insights show that Islamic microfinance institutions foster strong trust among clients due to their community-based and faith-driven operations. However, the study also identifies challenges, including low financial literacy, misperceptions of Sharia contracts, limited post-financing support, and institutional constraints. Government Zakat Institution in Garut provides role in distributing productive zakat has shown promising results in supporting women-led groups and ultra-micro entrepreneurs, though sustainability mechanisms remain underdeveloped. This research contributes to the literature on financial inclusion and Islamic economic empowerment, offering practical recommendations to enhance the effectiveness and long-term impact of Islamic microfinance in rural areas.