Why is Growth of Islamic Microfinance Lower than Conventional? A Comparative Study of the Preferences and Perceptions of the Clients of Islamic and Conventional Microfinance Institutions‟ in Indonesia

Whereas Indonesia has the largest Muslim country in the world with 88 % of 237 million population belonging to the faith, the growth of Islamic microfinance institutions (MFIs) has being sluggish and far behind their conventional counterparts. Islamic MFIs are struggling to survive amid the fierce competition in the provision of microfinance services, from both the conventional and Islamic. This paper will examine the factors determining the demand for microfinance services by reporting results from a survey of the perceptions and preferences of 581 MFI’s borrowers from four MFIs— two Islamic (BMT and BPRS) and two conventional (BRI and BPR) in Indonesia. The results show that while the majority of MFI’s clients indicates preference for Islamic MFIs, in reality their choices of MFI are based on economic (low interest rates and size of loan) and non-economic factors (such as quality of services variables easiness, speed , nearness, method and loan officers’ profile). The results indicat