Journal of Islamic Monetary Economics and Finance.
Vol.
No.
, pp.
7 - 34
p-ISSN: 2460-6146, e-ISSN: 2460-6618
THE ROLE OF DEPOSIT INSURANCE IN SUPPORTING
ISLAMIC MICROFINANCE INSTITUTIONS:
INSIGHTS FROM INDONESIA
Bayu Arie Fianto1*.
Bagus Aryo2.
Syed Alamdar Ali Shah3.
Muhammad Ubaidillah Al Mustofa4.
Ade Intan Ismi Nur Anisha5 and Rafiatul Adlin Hj Mohd Ruslan6 Corresponding Author.
Islamic Economics Department.
Faculty of Economics and Business.
Universitas Airlangga.
Indonesia, bayu.
fianto@feb.
Universitas Indonesia.
Indonesia, bagus.
aryo19@ui.
Forman Christian College (A Chartered Universit.
Pakistan, alamdarshah@fccollege.
Institut Teknologi Sepuluh Nopember.
Indonesia, almustofa@its.
Universitas Airlangga.
Indonesia, and Birmingham Business School.
United Kingdom, axa2455@student.
Faculty of Business and Management.
Universiti Teknologi MARA.
Malaysia, rafiatul@uitm.
ABSTRACT
This study assesses the necessity of a Deposit Insurance System (DIS) for Islamic Microfinance Institutions (IMFI.
It first identifies key factors influencing knowledge of DIS among stakeholders and then proceeds to evaluate the social impact of IMFIs and examine the urgency for a DIS and respondentsAo willingness to pay deposit insurance Conducting survey using purposive sampling, we obtain required data for the analysis from 405 respondents.
Applying the logistic regressions, we find reveal that education, work experience, and financial behaviors influence DIS awareness.
The findings underscore the urgency of implementing DIS to bolster stakeholder trust and financial system stability, with respondents expressing willingness to contribute premiums.
These insights contribute to designing a Shariah-compliant DIS that aligns with the unique operational characteristics of IMFIs, supports sustainable industrialization, and advances SDG-9 goals.
The study highlights actionable pathways for policymakers, regulatory bodies, and IMFI managers to foster a resilient and inclusive financial ecosystem.
Keywords: Islamic microfinance.
Deposit insurance.
Economic growth.
SDG-9.
Indonesia.
JEL classification: G21.
G28.
O16.
P43.
Q14.
Article history:
Received : October 18, 2024 Revised : November 25, 2024 Accepted : February 28, 2025 Available online : March 24, 2025 https://doi.
org/10.
21098/jimf.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia
INTRODUCTION
Deposit insurance is vital for fostering financial stability and promoting economic growth, particularly in the context of Islamic Microfinance Institutions (IMFI.
in Indonesia.
By protecting depositors against potential losses during bank failures, deposit insurance helps maintain confidence in the institutions, which is essential for sustainable economic development.
A stable financial environment mitigates the risks of panic and bank runs, thus ensuring a robust economic framework.
While existing literature emphasizes the importance of deposit insurance for traditional banking systems, there is a significant research gap regarding its specific implications for IMFIs in Indonesia.
IMFIs in Indonesia face distinct challenges that underscore the urgency for a tailored Deposit Insurance System (DIS).
Unlike traditional financial institutions.
IMFIs primarily serve underserved and economically vulnerable populations, often operating in areas with limited access to financial services.
These institutions manage both commercial activities and Islamic social funds such as zakat and waqf, positioning them uniquely as economic and social drivers.
However, the lack of a DIS framework tailored to their operational and Shariah-compliant principles exacerbates their exposure to liquidity risks and undermines depositor confidence.
Studies highlight that without a robust DIS.
IMFIs are less capable of withstanding financial shocks, which may impede their ability to support infrastructure development and inclusive industrialization as outlined in SDG-9 (Fianto, et al.
, 2019.
Mawardi et , 2.
Moreover, existing literature predominantly focuses on the impact of DIS in conventional financial systems, with limited studies addressing its role in IMFIs.
For instance.
Demirgyy-Kunt & Huizinga .
explore the stabilizing effects of DIS but do not account for the ethical and operational complexities of Islamic finance.
Similarly.
Kusairi et al.
examine deposit insurance in ASEAN countries but highlight the absence of specific mechanisms for IMFIs, particularly in Indonesia.
These gaps indicate an urgent need for research that integrates Shariah-compliant deposit insurance frameworks into the broader financial ecosystem, ensuring resilience and inclusivity for IMFIs.
This study aims to address this gap by exploring how a tailored deposit insurance system could enhance the operational resilience of IMFIs and contribute to broader economic objectives, particularly in achieving Sustainable Development Goal 9 (SDG .
, which emphasizes sustainable industrialization, infrastructure development, and IMFIs, including institutions like Baitul Maal Wa Tamwil (BMT), play a critical role in poverty alleviation and financial inclusion.
However, many potential members remain hesitant to engage with these institutions due to the absence of a deposit guarantee system.
This lack of confidence often hampers their ability to mobilize funds and limits their outreach to underserved communities.
The absence of a deposit insurance scheme may also inhibit investment in infrastructure projects and increase vulnerability to financial crises.
Research indicates that Islamic finance can offer more stability than conventional finance, primarily due to its risk-sharing principles and ethical investment practices (Boukhatem & Ben Moussa, 2018.
Masrizal & Trianto, 2.
However, the unique challenges faced by IMFIs, including heightened risk levels Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 and the potential for bank runs, necessitate a regulatory framework that includes deposit protection measures.
Studies show that prospective members frequently inquire about deposit insurance, indicating a clear demand for such systems to enhance trust and encourage savings (Amin, 2013.
Kusairi et al.
, 2018.
Noor & Haron, 2.
Despite previous research highlighting the importance of deposit insurance in maintaining financial stability (Cerrone, 2018.
Chiaramonte et al.
, 2020.
Fecht et al.
, 2019.
Fendi, 2020.
Kusairi et al.
, 2.
, the specific dynamics of IMFIs in Indonesia have not been thoroughly examined.
This study seeks to fill this gap by investigating the necessity of deposit insurance for IMFIs by analyzing factors influencing knowledge of deposit insurance, assessing the social impact of IMFIs, and evaluateing the urgency for deposit insurance and stakeholdersAo willingness to pay premiums.
A purposive sample of 405 respondents was surveyed, including IMFI employees, members, individuals aware of IMFIs, and those unaware of them.
This diverse sample aims to capture varying perceptions of deposit insurance and its perceived value.
This study is significant for several reasons: it highlights the critical need for a deposit insurance system tailored to the unique risks faced by IMFIs, which are often more vulnerable than traditional banks.
Additionally, it explores the knowledge and attitudes of IMFI customers and managers regarding deposit insurance, an area that has been relatively underexplored.
The findings are expected to provide valuable insights for academics, researchers, and regulatory authorities aiming to promote deposit insurance within the Islamic microfinance sector, ultimately contributing to enhanced financial stability and inclusive economic growth in Indonesia.
The paper is structured as follows.
The next section provides literature review.
Then, section i details the methodology followed by results and analysis in section IV.
Section V discusses the managerial implications of our findings and finally section V concludes.
II.
LITERATURE REVIEW
Theoretical Foundation The Theory of Reasoned Action (Ajzen & Fishbein, 1.
and the Theory of Planned Behavior (Ajzen, 1.
have been instrumental in examining the impact of Islamic banking services and instruments.
Notably, the Theory of Planned Behavior and its extended variants have been applied more consistently than other theoretical For instance.
Ali et al.
Amin et al.
Ibrahim et al.
utilize extensions of the Theory of Planned Behavior to explore behaviors among Muslim consumers.
Amin et al.
investigate the acceptability of Tawarruq within Malaysia, while Zauro et al.
analyze the dynamics of Qardhul Hassan in Nigeria.
Additionally.
Maulana et al.
apply the theory to identify factors influencing participation in Islamic microfinance.
This body of research indicates that the Theory of Planned Behavior is particularly suitable for assessing the acceptability of products and services in Islamic banking contexts.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia The Theory of Planned Behavior (TPB), developed by Ajzen .
, provides a robust framework for understanding behavior driven by attitudes, subjective norms, and perceived behavioral control.
This theory is particularly relevant for analyzing the acceptability and adoption of new financial mechanisms, such as a DIS, within the unique context of IMFIs.
In this study.
TPB is applied to assess how stakeholdersAo attitudes towards DIS, their perceptions of societal expectations .
ubjective norm.
, and their confidence in the ability to support or implement such systems .
erceived behavioral contro.
influence their willingness to adopt and pay for DIS in IMFIs.
For instance, the study identifies how education and work experience shape attitudes, while religious and community norms impact subjective norms in the adoption of Shariah-compliant DIS.
The Indonesian context adds depth to this theoretical application.
IMFIs in Indonesia cater primarily underserved populations, such as micro and small enterprises (MSE.
, operating in an environment marked by limited financial literacy and informal economic structures (Fianto, et al.
, 2019.
Mawardi et al.
, 2.
The absence of a tailored DIS hinders their capacity to build trust and enhance financial stability.
TPB, therefore, serves as a lens to analyze how socio-cultural and economic factors in Indonesia influence stakeholdersAo behavioral intentions towards DIS adoption.
Despite its relevance, previous studies often focus on TPB in conventional financial contexts (Amin et al.
, 2014.
Zauro et al.
, 2.
Limited attention has been paid to its application in IMFIs or its integration with Shariah-compliant financial mechanisms.
This research bridges this gap by adapting TPB to the unique operational realities of IMFIs in Indonesia, focusing on variables such as perceived usefulness, behavioral intention, and the role of Islamic values in shaping attitudes towards DIS.
By aligning the theoretical framework with the socio-economic and cultural dimensions of IMFIs in Indonesia, this study offers a nuanced perspective on how TPB can inform the development of effective and inclusive financial policies.
Previous Studies The Impact of Deposit Insurance on Financial Stability Deposit insurance plays a vital role in advancing Islamic finance within the framework of SDG 9 by promoting financial inclusion, enhancing stability, encouraging ethical investments, facilitating financing for small and medium-sized enterprises (SME.
and microfinance, and fostering innovation.
By aligning with Shariah principles and contributing to resilient financial infrastructure, deposit insurance supports sustainable industrialization, infrastructure development, and The literature on deposit insurance predominantly highlights the mutual benefits for financial institutions and their customers (Demirgyy-Kunt et al.
Kusairi et al.
, 2018.
LeRoy & Singhania, 2.
Most studies underscore its importance for banking system stability (Cerrone, 2018.
Chiaramonte et al.
, 2020.
Kusairi et al.
, 2.
However, there is evidence that deposit insurance schemes (DIS) may malfunction in countries with weaker financial systems, leading to increased fragility and vulnerability (Anginer et al.
, 2014.
Krimminger, 2008.
Qi et Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 , 2.
A poorly designed DIS can exacerbate crises and fragility due to moral hazard during stable periods (Chiaramonte et al.
, 2.
Moreover, deposit insurance has spillover effects on non-banking financial institutions and financial systems in other countries (Donnelly, 2017.
Ji et al.
, 2018.
Qi et al.
, 2.
, resulting in both positive outcomes, such as enhanced trust and stability, and negative consequences, such as financial crises.
Research on capital adequacy shows that DIS can significantly influence the risk profiles of banks (Gymez-Fernyndez-Aguado et al.
, 2016.
Jumreornvong et al.
, 2018.
Muller, 2.
By altering risk dynamics, effective deposit insurance enables countries to compete for international capital inflows (Jumreornvong et al.
, 2018.
Muller, 2018.
Qi et al.
, as better-protected deposits attract international investors.
Despite the potential benefits, an implicit DIS may lead to excessive risk-taking (Jumreornvong et al.
, 2018.
Ngalawa et al.
, 2.
The clarity of risks associated with explicit DIS remains ambiguous (Demirgyy-Kunt & Detragiache, 2002.
Demirgyy-Kunt & Huizinga, 2004.
Qi et al.
, 2.
Therefore, while the significance of a well-functioning DIS cannot be overstated, as it helps prevent bank runs and fosters financial stability (Chiaramonte et al.
, 2020.
Dubois, 2021.
Kusairi et al.
, there are concerns that deposit insurance can distort market dynamics.
Calomiris & Jaremski .
argue that deposit insurance often increases systemic risk rather than mitigating it.
The contradictory conclusions regarding the stabilizing effect of DIS on banking systems highlight a significant research gap.
While deposit insurance aims to protect depositors and reduce bank risk by preventing bank runs and financial panic (Gropp & Vesala, 2.
, it may simultaneously undermine market discipline, resulting in moral hazards and increased risk-taking by banks.
This duality leads to systemic crises, particularly when banks engage in correlated risktaking (Acharya & Dreyfus, 1989.
Demirgyy-Kunt & Huizinga, 2004.
Ioannidou & Penas, 2.
This ongoing debate remains underexplored, especially regarding how different sources of systemic risk interact with deposit insurance.
IMFIs in Indonesia predominantly serve Micro and Small Enterprises (MSE.
, which are more relevant than SMEs in this context.
MSEs in Indonesia often operate informally, with limited access to capital and financial services, making them a primary target for IMFIs.
According to data from Otoritas Jasa Keuangan .
, 5 million MSEs in Indonesia contribute significantly to GDP but remain underserved by traditional financial institutions.
This underscores the critical role of IMFIs in bridging financial inclusion gaps for MSEs.
Existing literature further supports the alignment of IMFIs with the needs of MSEs.
Adnan & Ajija .
demonstrate that Islamic microfinance reduces poverty and enhances the economic capacity of micro-entrepreneurs.
Mawardi et al.
emphasize that IMFIs utilize Shariah-compliant mechanisms like qardhul hasan and murabahah to address the unique financial constraints of MSEs, including the lack of collateral and irregular cash flows.
In contrast.
SMEs, which often require larger capital investments and access to global markets, are more aligned with commercial banking institutions than IMFIs.
Thus, the relevance of MSEs to IMFIs lies in their shared focus on financial inclusion, ethical principles, and small-scale economic activities.
This study emphasizes the importance of designing deposit insurance systems that account The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia for the operational realities of IMFIs and their target beneficiaries, particularly MSEs, ensuring alignment with financial stability and social objectives.
Deposit Insurance System in Indonesia Since its establishment in 2005.
IndonesiaAos DIS has functioned on a flat-rate basis and has endured various banking crises and financial shocks.
Although the government has implemented measures to bolster public confidence in the financial system, these initiatives have also given rise to moral hazard issues (Erick et al.
, 2021.
Kusairi et al.
, 2015.
Trinugroho et al.
, 2.
According to Law No.
Year 2016 concerning the Prevention and Resolution of Financial System Crisis (UU PPKSK), the Indonesia Deposit Insurance Corporation collects fees for deposit insurance and may also gather other contributions from the banking sector once the Banking Restructuring Program is activated.
The corporation relies on these fees and the bail-in scheme outlined in the UU PPKSK to address banksAo financial The flat-rate scheme, which levies a fee of 0.
2% per year on the average deposits of participating banks, regardless of asset size or risk profile, has drawn criticism for being unfair.
Larger banks, despite having superior risk management practices, pay the same premium as smaller banks that may pose greater risks.
This creates a situation where smaller banks with higher default probabilities might pay less than they should, effectively subsidizing riskier behavior.
Islamic Microfinance Institutions and the Need for Deposit Insurance IMFIs contribute significantly to economic development by providing Shariahcompliant financial services.
Acting as intermediaries.
IMFIs collect funds and distribute them through Shariah-compliant contracts.
They also manage Islamic social funds, such as zakat and waqf, which enhances their role as social institutions in Indonesia (Fianto et al.
, 2018.
Mawardi et al.
, 2.
IMFIs address the financial needs of marginalized communities and the Muslim population, emerging as vital resources for those facing difficulties in accessing capital.
Islamic finance operates on principles that prohibit interest .
and advocate for ethical investments consistent with Shariah law.
Deposit insurance strengthens these principles by ensuring that deposits are utilized in alignment with ethical This encourages Islamic financial institutions to engage in projects that support sustainability objectives outlined in SDG 9 while avoiding prohibited Furthermore, deposit insurance schemes can be structured in a manner that aligns with Shariah principles, steering clear of interest-based mechanisms and promoting ethical investment practices.
Such structures foster depositor confidence, knowing that their funds will be used in accordance with Shariah law, thereby supporting sustainable development through social responsibility and environmental sustainability.
Despite the potential benefits of IMFIs, they face several barriers to providing financial access to marginalized entrepreneurs.
These include a lack of collateral among small and micro-business actors, unreliable income sources for repayment.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 and the administrative burden on banks due to small loan amounts.
In contrast, conventional financial intermediaries often employ fixed-rate mechanisms, which can lead to uneven distributions of risk and return, disadvantaging borrowers (Abdullah & Ismail, 2014.
Mawardi et al.
, 2020.
Abdul Rahman & Dean, 2.
The global success of the Islamic finance sector has prompted calls for a paradigm shift in its contributions to poverty alleviation.
Researchers .
Adnan & Ajija, 2015.
Fianto et al.
, 2018.
Haque & Yamao, 2011.
Hassan, 2015.
Hassan & Saleem, 2017.
Mawardi et al.
, 2020.
Zitouni & Ben Jedidia, 2.
recognize ShariAoah-compliant microfinance as a viable means of maximizing social benefits.
However, despite its appeal.
Islamic microfinance represents less than 1% of global microfinance outreach (Global Report on Islamic Finance, 2.
Rahim Abdul Rahman .
identifies several barriers to IMFIsAo contributions to economic development, including limited funds, high transaction costs, and unfavorable The Indonesian Financial Services Authority (Otoritas Jasa Keuangan, 2.
notes that constraints in creating microfinance institutions stem from inadequate quality and quantity of administrators and managers, impacting governance standards.
A significant limitation hindering IMFIsAo contributions to economic development is the absence of a deposit insurance system.
The Otoritas Jasa Keuangan .
indicates several regulatory and industry barriers to establishing a deposit guarantee system for microfinance institutions.
There is currently no statutory framework governing the establishment of deposit insurance for the microfinance sector.
Additionally, limited human resources and infrastructure hinder effective government supervision, coordination, and guidance for microfinance institutions, compounded by minimal budget allocations for the sectorAos development.
New or undercapitalized IMFIs often struggle to invest in comprehensive governance systems, which require substantial investments in IT and infrastructure.
METHODOLOGY
Data This study determines the extent of the communityAos need for the insurance system and the willingness to pay the premium associated with the DIS at IMFIs by gathering information from respondents who are Indonesian citizens older than 17 years.
Respondents are selected using a purposive sampling method and categorized into the following four groups.
Group A: Employees or managers of IMFI Group B: Members or users of IMFI products or services Group C: Those who know IMFI and are not employees, managers, or users of IMFI products or services Group D: Those who do not know IMFIs No database of Islamic microfinance customers exists.
therefore, convenience sampling is used following Fianto et al.
and Quinlan .
Consequently, the survey results cannot be generalized beyond the sample population.
The data collected from the survey are from 180 male and 225 female respondents .
across 25 provinces and 96 cities in Indonesia, with the majority of 85.
68% located The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia on Java Island and located in Surabaya City .
24%).
Sidoarjo District .
%) and Malang City .
49%).
A total of 74 respondents are representatives from Group A, and there are 106 from Group B, 123 from Group C, and 102 from Group D.
Method This study aims to identify the factors that lead to awareness of IMFIs, their products, and the urgency of deposit insurance in such institutions.
A discrete choice model (DCM) may be deemed the most suitable method to achieve the goal because DCM models offer a selection of mutually exclusive and comprehensively exhaustive events (Li et al.
, 2011.
Umoh, 2.
DCM is based on utility maximization, wherein only the alternative with the highest utility is Consequently, following Li et al.
, let Un(Ani.
Bn.
be the utility functions of masses n, where An is a dichotomous variable and Ani is the model identifier for deposit insurance in the Islamic microfinance institution, their profile, or the urgency of DIS .
if yes.
0 otherwis.
Finally.
Bni represents each modelAos components that aid our understanding (Li et al.
, 2.
Proposed Model This study employs three logistic regression models and a DCM to address the research objectives.
Logistic regression is particularly suitable for modelling binary dependent variables, such as awareness of DIS or willingness to pay for deposit insurance premiums (Train, 2.
Similarly, the DCM framework aligns with the utility maximization behavior observed in financial decision-making processes, enabling the analysis of preferences among mutually exclusive options (Ben-Akiva & Lerman, 1.
The use of these models is supported by prior studies in microfinance and financial inclusion.
For instance.
Li et al.
demonstrate the effectiveness of DCM in analyzing access to microcredit in rural China, while Fianto, et al.
validate logistic regression in exploring financing decisions within Indonesian IMFIs.
The integration of these models allows for a comprehensive analysis of the factors influencing awareness, perceptions, and adoption of DIS within the context of IMFIs in Indonesia.
This study constructs three logistic regression models.
The first model analyses the factors influencing knowledge of deposit insurance concerning IMFIs .
The second model analyzes respondentsAo perceptions of IMFIs .
, and the third model attempts to determine the urgency for a DIS and the membersAo willingness to pay higher operating costs .
nsurance premium.
The following equations are used for each model:
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 Where:
LIKN = Literacy and knowledge of deposit insurance in IMFIs
PSP
= Perception of the respondents about the social purpose of IMFIs and its role in SDG-9
IDI
= Need to adopt Islamic deposit insurance The binary choice model determines the knowledge of deposit insurance in IMFIs, respondentsAo perceptions regarding the social purpose of IMFIs, and the necessity of Islamic deposit insurance in IMFIs.
Therefore, the logistic .
model is best suited for achieving the three research objectives.
Three relevant logit models are:
An,I equals 1 if there is knowledge about deposit insurance in IMFIs and respondents believe that IMFIs have a social role and require an Islamic DIS.
otherwise, the score is 0.
Furthermore.
Pn,i is the probability of having such The formulation of probability functions for the models indicates that they are similar to logit models.
therefore, logit models are suggested (Train.
Additionally, the logit model is advantageous when the probability is logically distributed (Ben-Akiva & Lerman, 1985.
Li, 2.
As Fianto et al.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia recommend for similar studies.
Table 1 provides variable descriptions for all three models regarding knowledge of IMFIs, their products, social objectives, the urgency of Islamic deposit insurance and the willingness and ability of consumers to pay deposit insurance premium.
Table 1.
Description of Variables Variable Gender Age Marital Status Religion Child Education Occupation Job Years Family Incperson Income Expenses Job Status Health Expenses Variable type Description Binary Continuous Binary Continuous Continuous Continuous Continuous Continuous Continuous Continuous Continuous Continuous Continuous Continuous Gender of the participant Age of the participant Marital status of the participant Religious beliefs a participant is following Children of the participant Level of education completed Occupation adopted for earning source Years of experience working Number of family members in the family Number of earning persons in the family Income of the family Expenses of the family Currently employed or not Average annual expenses on health Source: AuthorsAo compilations The selection of variables in this study is grounded in both theoretical frameworks and prior empirical findings relevant to the context of Islamic Microfinance Institutions (IMFI.
Key independent variables such as education, work experience, marital status, and income are chosen based on their demonstrated impact on financial literacy, adoption of financial services, and attitudes toward risk-sharing mechanisms (Ajzen, 1991.
Lusardi & Mitchell, 2.
For instance, education level has consistently been linked to financial literacy and awareness of financial products (Lusardi & Mitchell, 2.
, while work experience often correlates with exposure to diverse financial instruments (Fianto.
Maulida, et al.
, 2.
The inclusion of health expenditure as a variable reflects its significance in household financial decision-making, particularly among IMFIsAo target demographics in Indonesia, where economic shocks can influence savings and trust in financial institutions (Mawardi et al.
, 2.
Meanwhile, the variable for willingness to pay for deposit insurance premiums addresses behavioral intentions directly, aligning with the Theory of Planned Behavior (Ajzen, 1.
IV.
RESULTS AND ANALYSIS
Profile of the Respondents Tables 2, 3, and 4 illustrate the profiles of respondents to the surveys related to Model 1, which assesses knowledge about Islamic Microfinance Institutions Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 (IMFI.
Table 2 reveals that a significant majority .
out of .
of respondents are aware of IMFIs.
Notably, those without knowledge tend to be younger than 23 and mostly unmarried.
Among respondents who are knowledgeable about IMFIs, 24% are adults without children, while a considerable portion are married parents over 23 years of age.
Regardless of their familiarity with IMFIs and their relevance to Sustainable Development Goal 9 (SDG-.
, most respondents possess education levels ranging from high school (SMA) to bachelorAos degrees (S.
The knowledge base regarding IMFIs also reflects varying work experience: 33.
of informed respondents have less than one year of experience, while 49.
5% have over five years.
Additionally, the annual health expenditures for most respondents are below 0.
5 million Indonesian Rupiah .
pproximately 35 USD).
Table 2.
Profile of Surveyed Respondents for Model 1
Respondent Characteristic No LIKN
Knowledge % to N 18Ae23 years 24Ae40 years 41Ae56 years 57Ae75 years Others Total
Unmarried Married Total
Nothing One
Two
Three
Four
More than four
Total
No School
SMP
SMA
D1 & D3
Others Total Knowledge about LIKN % to N Age All % to N N2 = 31.
6964***
N2 = 29.
9544***
N2 = 27.
1721***
N2 = 30.
0322***
Statistical Test Chi-Square Marital Status Child Education The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia Table 2.
Profile of Surveyed Respondents for Model 1 (Continue.
Respondent Characteristic No LIKN Knowledge Knowledge about LIKN % to N % to N Job Years All % to N N2 = 24.
9628***
N2 = 18.
4051***
less than 1 year 2 until 3 years 4 until 5 years more than 5 years Total <IDR 0.
IRD 0.
5M to 0.
IRD 0.
75M to 1M IRD 1M to 1.
>1.
Total Statistical Test Chi-Square Health Expenses Note: *** 1% Level of Significance.
LIKN.
Literacy and Knowledge of DIS Source: AuthorsAo calculations based on the survey questionnaire Table 3 presents the characteristics of respondents who answered questions regarding Model 2.
Most participants are under 40 years of age.
However, younger respondents .
show greater familiarity with IMFI products and their contributions to SDG-9 than those older than 23, particularly among unmarried The findings align with prior research indicating that younger demographics are more open to new financial products (Khan et al.
, 2.
The results indicate that higher educational attainment and work experience correlate positively with knowledge of IMFI products, consistent with the literature suggesting that education enhances financial literacy (Lusardi & Mitchell, 2.
Table 3.
Profile of Surveyed Respondents for Model 2 Respondent Characteristic 18Ae23 year 24Ae40 year 41Ae56 year 57Ae75 year Others Total No PSP % to N Knowledge PSP % to N Age All % to N Statistical Test Chi-Square N2 = 25.
8273***
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 Table 3.
Profile of Surveyed Respondents for Model 2 (Continue.
Respondent Characteristic No PSP Knowledge PSP % to N % to N Marital Status All % to N N2 = 18.
0240***
N2 = 24.
4446***
N2 = 32.
8945***
N2 = 28.
5189***
Unmarried Married Total
Nothing One
Two
Three
Four
More than four
Total
No School
SMP
SMA
D1 & D3
Others Total less than 1 year 2 until 3 years 4 until 5 years more than 5 years Total Statistical Test Chi-Square Child Education Job Years Note: *** 1% Level of Significance.
PSP: Perception of Social Purposes Source: AuthorsAo calculations based on the survey questionnaire Table 4 presents the respondentsAo profile for Model 3, indicating that 161 out of 180 respondents are aware of Islamic deposit insurance (IDI).
Among those knowledgeable about deposit insurance, 45% are product or service managers within Islamic financial services, while the remaining 55% are customers and users of IMFI products and services.
This distribution mirrors findings by Ali & Hassan .
, which highlight that industry professionals often possess greater knowledge of financial products compared to the public.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia Table 4.
Profile of Surveyed Respondents for Model 3 Knowledge about IDI Respondent Characteristic Product/Service Manager Product Service User Total Knowledge about IDI All Statistical Test % to N Filter 2 % to N % to N Chi-Square N2= 8.
2076***
Note: *** 1% Level of Significance.
IDI: Need to adopt Islamic Deposit Insurance System Source: AuthorsAo calculations based on the survey questionnaire The significant chi-square (NA) results across all three models demonstrate substantial differences between respondents with and without knowledge of IMFIs (Model .
, those knowledgeable or not about IMFI products (Model .
, and those aware or unaware of Islamic deposit insurance (Model .
These findings echo the conclusions of Fianto, et al.
that there are significant gaps in awareness levels between different demographic groups.
Table 5 summarizes questionnaire statements showing statistically significant differences, as indicated by NA in Model 2.
The results highlight notable disparities in public perceptions regarding .
social missions.
strategies for delivering products and services to the impoverished to achieve SDG-9.
support for education, health, sports, and culture to advance SDG-9.
capabilities to reach illiterate and disadvantaged populations.
development of innovative financial and .
recommendations for depositing funds in IMFIs.
These findings support the view that public perception significantly influences the effectiveness of financial institutions in achieving social objectives (Mair et al.
, 2.
Table 5.
Results of Survey Questions Model 2 Respondent Characteristic No IMFI % to N IMFI social All Statistical Test Chi-Square % to N % to N In my opinion.
IMFIAos social mission is evident and perceptible for achieving SDG-9.
Um02 N2 = 24.
5922***
Total Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 Table 5.
Results of Survey Questions Model 2 (Continue.
Respondent Characteristic No IMFI % to N IMFI social All Statistical Test Chi-Square % to N % to N In my opinion, the administrators, and managers of IMFI always ensure that the organizationAos social missions are fulfilled for achieving SDG-9.
Um03 N2 = 25.
6502***
Total In my opinion, the IMFIAos strategy for reaching the poor and needy has been successful for achieving SDG-9.
Um04 N2 = 28.
1371***
Total In my opinion.
IMFI helps develop the local communities/public, especially in the fields of education, health, sports, and culture that contribute for achieving SDG-9.
Um06 N2 = 21.
6645***
Total In my opinion.
IMFI operates in poor areas and areas that require attention for achieving SDG-9.
Um07 N2 = 28.
1371***
Total The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia Table 5.
Results of Survey Questions Model 2 (Continue.
Respondent Characteristic No IMFI % to N IMFI social All Statistical Test Chi-Square % to N % to N In my opinion.
IMF reaches the illiterate underprivileged and needy people that help achieve SDG-9.
Um08 N2 = 26.
2517***
Total IMFI provides innovative financial services that are accessible to the public for achieving SDG-9.
UM10
N2 = 17.
1288***
Total I recommend keeping funds and savings at IMFIs.
UM12
N2 = 28.
1371***
Total Note: *** 1% Level of Significance Source: AuthorsAo calculations based on the survey questionnaire Table 6 outlines questionnaire statements where respondentsAo responses exhibit significant differences, indicated by NA for Model 3.
The findings suggest a notable gap between those who understand the distinction between insurance and deposit insurance and those who actively seek information about deposit guarantee schemes.
Preferences for information dissemination reveal that 75% of Groups A and B prefer information through IMFI managers, while 66% favor direct communication with branch representatives.
This underscores the responsibility of management to ensure comprehensive understanding of deposit insurance schemes among all staff, as emphasized by Hall & Rosenberg .
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 Table 6.
Results of Survey Questions Model 3 Respondent Characteristic Knowledge about IDI % to N Knowledge about IDI All Statistical Test Chi-Square % to N % to N Do you know the difference between regular insurance and deposit insurance Ins01 Yes Total Have you ever searched for information on insurance/insurance on deposits? Ins02 Yes Total N2 = 12.
0857***
N2 = 12.
9872***
Note: *** 1% Level of Significance Source: AuthorsAo calculations based on the survey questionnaire Assessment of Knowledge of Deposit Insurance in IMFIs Table 7 presents the results from the first logit regression model, identifying determinants of knowledge regarding IMFIs and deposit insurance.
The likelihood ratio (LR) statistic is 57.
05, significant at the 1% level, validating the appropriateness of the logit model for estimating respondentsAo knowledge probabilities.
The results indicate that five factorsAiage, marital status, education, work experience, and health expendituresAisignificantly influence knowledge of deposit insurance in IMFIs.
Table 7.
Determinants of DIS Literacy and knowledge Variable Gender (Mal.
Age Marital Status (Marrie.
Child Education Occupation (Govt Employee.
Job Years Family Incperson Income Expenses Job Status (N.
Health Expenses Coefficient P>z Oe0.
Oe0.
Oe0.
Oe0.
Oe0.
Oe1.
Oe0.
Oe0.
Oe0.
Oe2.
004***
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia Table 7.
Determinants of DIS Literacy and knowledge (Continue.
Variable Log likelihood Number of obs.
LR chi2.
Prob > chi2 Pseudo R2 Coefficient P>z Oe200.
0000***
Note: *** 1% Level of Significance Source: AuthorsAo calculations based on the survey questionnaire In this model, the variables influencing knowledge of the Deposit Insurance System (DIS) in IMFIs include education level, work experience, and monthly Notably, 33.
58% of respondents possess a bachelorAos degree, 59% have a postgraduate degree.
Additionally, 43.
21% have over five years of work experience.
The majority of respondents .
28%) report monthly expenditures between 2 and 4 million IDR.
The data shows that 97% of managers and 84% of members support implementing a DIS in IMFIs.
Moreover, 63.
51% of managers .
ho are also member.
express willingness to pay for deposit insurance This consensus is in line with research by Iqbal & Mirakhor .
, which highlights the necessity of deposit insurance to enhance trust in financial The negative correlation associated with age suggests that older respondents tend to be less knowledgeable about DIS in IMFIs.
This finding contradicts prior research by Fianto et al.
, which indicates that older individuals have better access to IMFIs.
In contrast, coefficients for marital status, education, employment duration, and health expenditures are positively correlated with higher knowledge levels about DIS in IMFIs, supporting the findings of Bhattacharyya & Jagadeesh .
regarding the importance of education in financial literacy.
The importance of quality education and financial literacy is reinforced by the (Islamic Corporation of Development, 2.
, ranking Indonesia highly in educational metrics related to Islamic finance.
Generational demographics show that Generation Z .
94%) and Millennials .
87%) dominate IndonesiaAos productive age group, with 67% indicating awareness of insurance products, aligning with research by Nabila et al.
on generational trends in financial Assessment of Factors Influencing Social Perception of IMFIs Table 8 illustrates the results of Model 2, which evaluates the factors affecting knowledge of IMFIsAo products and services relevant to achieving SDG-9.
The LR ratio for the chi-square test statistics is 57.
05, statistically significant at the 1% level, validating the use of the logit model for estimating knowledge probabilities.
Key determinants identified include education, work experience, family size, health expenditures, perceptions regarding the social objectives of IMFIs, and community inclinations toward IMFI services.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 Table 8.
Assessment of Social impacts of IMFIs for achieving SDG-9 Coefficient P>z Gender (Mal.
Age Marital Status (Marrie.
Child Education Occupation (Govt Employee.
Job Years Family Incperson Income Expenses Job Status (N.
Health Expenses Variable Oe0.
Oe0.
Oe0.
Oe0.
Oe0.
Oe0.
Oe0.
Oe0.
Oe2.
Oe1.
Oe0.
Oe0.
Um01 Um05b Um05c Um12 Oe0.
Oe0.
Oe2.
Oe1.
007***
020***
Log likelihood Number of obs.
LR chi2.
Prob > chi2 Pseudo R2 Oe107.
0000***
Note: *** 1% Level of Significance Source: AuthorsAo calculations based on the survey questionnaire The findings reveal that respondents perceive the social mission of IMFIs to be clear and impactful, recognizing their role in meeting community needs and fostering social capital for SDG-9.
This perception is consistent with the argument by Warde .
that IMFIs serve both economic and social functions, aligning with their dual objectives.
Some factors, including work experience, family size, and perceptions of IMFIAos social objectives, exhibit negative correlations with knowledge of IMFI products.
This suggests that respondents with less job stability and smaller families tend to have greater awareness of IMFI offerings.
The positive coefficient for Um01 indicates that those familiar with IMFI products expect them to fulfill a social role.
Conversely, the negative coefficient for Um12 highlights that individuals with limited product knowledge are less likely to recommend deposits in IMFIs, which aligns with the findings of Zaman & Iqbal .
on the relationship between knowledge and trust in financial institutions.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia Assessment of Knowledge About IDI Table 9 displays results from the third model, which assesses factors influencing knowledge of Islamic Deposit Insurance (IDI).
The LR ratio indicates a chi-square statistic of 28.
43, significant at the 1% level, confirming the modelAos validity.
The findings reveal that product/service managers, search history regarding Islamic deposit insurance, and willingness to pay a premium for deposit insurance are critical factors influencing knowledge of IDI.
Table 9.
Need for DIS and Willingness to Pay the Premium Variable Coefficient P>z Product/Service Manager (Filter .
Ins 02 Ins 03 Log likelihood Number of obs.
LR chi2.
Prob > chi2 Pseudo R2 Oe46.
0000***
Note: *** 1% Level of Significance Source: AuthorsAo calculations based on the survey questionnaire Results from Model 3 indicate that respondents recognize the necessity of a DIS and express willingness to pay higher premiums for its implementation.
This expectation is consistent with the literature emphasizing that membersAo willingness to pay is crucial for the sustainability of deposit insurance systems.
Furthermore, the presence of a DIS may help prevent bank runs and reinforce the resilience of the microfinance sector, urging IMFIs to adhere to stricter monitoring and reporting standards, a point highlighted by Laeven & Valencia .
MANAGERIAL IMPLICATIONS
This studyAos findings have far-reaching implications for academics, researchers.
IMFI management, and regulatory authorities aiming to promote deposit insurance in the Islamic microfinance industry.
The following are some managerial implications that can be considered.
The government should recognize the significance of DIS for the Islamic microfinance industry and establish supporting laws and regulations.
In comprehending DIS for the microfinance industry, the government, in this case, the Ministry of Cooperatives and SMEs (KEMENKOP UKM) and the Financial Service Authority (OJK), must develop human resourcesAo ability and credentials to carry out the stricter supervisory duty.
The government should also offer a legal cover and a governance mechanism (IT-base.
All the above implications will go a long way for achieving SDG-9.
For the management of IMFIs and other microfinance institutions, they should prepare for human resource development through training and coaching.
This study defines customers interested in keeping their deposits in IMFIs and those Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 willing to pay higher costs to protect their deposits.
In the short term.
Islamic Microfinance Institutions must take serious steps to develop media and facilities that can be used when liquidity is scarce.
This can be accomplished, among other things, by establishing secondary cooperatives.
Secondary cooperatives can help fulfill liquidity in the short term, preventing IMFIs from collapsing during financial shocks and rushes.
IMFI managers must encourage the government through political lobbying so that this deposit insurance scheme for the Islamic microfinance industry can be implemented.
This will necessitate a lengthy period of government persistence in putting pressure on relevant stakeholders to pass laws that support establishing a deposit insurance system.
Academics should perform further research as a provision for decisionmaking for related stakeholders.
Academics can also assist the government and other relevant stakeholders in initiating various deposit insurance system schemes by considering their benefits and drawbacks.
These forms or schemes can take the following forms: the first, under the authority of the existing Deposit Insurance Corporation (Lembaga Penjamin Simpanan/LPS).
the second, establishing a new deposit insurance corporation specifically for Microfinance Institutions, the third, establishing a formal Secondary Cooperative.
and the last, the deposit insurance system is under a Private Insurance Company.
Furthermore, academics can assist the government in developing a sophisticated tool .
r measur.
that can be used to determine which IMFIs are eligible to participate in this system of deposit insurance programs.
Furthermore, a study must be conducted to determine the ideal premium for the deposit insurance system, which is expected to be higher than the general banking permit because IMFIs are generally exposed to greater risks than banks.
This study bridges a critical research gap by providing a comprehensive analysis of DIS tailored for IMFIs in Indonesia.
Academically, it integrates the TPB with empirical insights on depositor behavior, enriching the discourse on financial inclusion and stability in Islamic finance.
For regulators, such as the Financial Services Authority (OJK) and the Indonesia Deposit Insurance Corporation (LPS), the findings offer actionable strategies for designing Shariah-compliant DIS frameworks that address the unique operational challenges of IMFIs.
Additionally, the study provides Bank Indonesia with valuable data on depositor preferences, supporting policies that enhance public trust, financial system resilience, and the broader social mission of IMFIs.
Collaborative efforts among stakeholders are recommended to align regulatory initiatives with both financial stability goals and the ethical principles of Islamic finance.
VI.
CONCLUSION AND RECOMMENDATION
This study provides a comprehensive analysis of the necessity for a tailored DIS for IMFIs in Indonesia.
Using logistic regression and discrete choice models, the findings highlight key factors such as education, work experience, and social perceptions influencing awareness and willingness to adopt DIS.
Importantly, the study underscores the pivotal role of IMFIs in advancing financial inclusion and achieving SDG-9 by addressing the needs of underserved populations and supporting sustainable economic development.
The Role of Deposit Insurance in Supporting Islamic Microfinance Institutions:
Insights From Indonesia The unique contributions of this research lie in its integration of Shariahcompliant principles with practical DIS frameworks, offering actionable insights into designing resilient and inclusive financial systems.
By emphasizing the role of trust, ethics, and stakeholder engagement, the study bridges a critical gap in the literature on Islamic finance and financial stability.
These findings not only enrich the discourse on IMFIs but also provide a foundation for aligning financial policies with global sustainable development goals.
Age and marital status, which are significant factors in the perception of the social roles of IMFIs for achieving SDG-9, are not significant factors in the knowledge of their products.
here, family, education, years of experiences, and health expenses are significant factors, indicating that young, educated, familyoriented professionals primarily perceive the social roles of IMFIs.
This study also determines that the perception of IMFIs and their products must be disseminated more among those over 40.
The model 2 results also indicate that IMFIs should play a social role that is cost-effective and beneficial to the poor and disadvantaged, which will help in achieving SDG-9.
IMFIs has a recognizable social mission and is adaptable in providing services based on needs, especially for the underprivileged.
Respondents believe that saving money at IMFIs is important and necessary.
The model 3 results suggest that respondents willing to accept deposit insurance or guarantee are also willing to pay a premium.
The existence of a DIS for IMFIs can increase public confidence and stabilize the financial system.
In addition, this system encourages IMFIs to adhere to stricter monitoring and reporting requirements, creating a domino effect in which IMFIs must be enhanced for the This study offers several actionable recommendations for policymakers, practitioners, and researchers to enhance the effectiveness and adoption of a DIS tailored for IMFIs.
For policymakers, it is imperative to design a regulatory framework that supports the implementation of a Shariah-compliant DIS.
This could involve initiating pilot programs under the Indonesia Deposit Insurance Corporation (LPS) to evaluate the feasibility and effectiveness of such systems.
Policymakers should also strengthen the legislative foundation for IMFIs to ensure they are adequately integrated into the national financial stability agenda while maintaining their dual roles as financial and social institutions.
Practitioners, particularly IMFI managers, must prioritize capacity building through targeted training programs that enhance their understanding of DIS and its practical applications within Shariah-compliant frameworks.
In addition, raising public awareness about the benefits of DIS is crucial to building trust and fostering participation among communities with limited financial literacy.
This can be achieved through localized campaigns and stakeholder engagement activities, particularly in underserved regions.
For researchers, this study highlights the need for further exploration of Shariah-compliant DIS models that align with the unique operational challenges of IMFIs.
Future research should also include cross-country comparisons to draw lessons from successful implementations in countries like Malaysia or Pakistan.
Additionally, studies could expand on stakeholder analyses to explore demographic variations in perceptions of and engagement with DIS, ensuring that future systems are both inclusive and effective.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 1, 2025 This study has several limitations.
First, the findings may mot be generalized as it employs a small sample of respondents, mostly on Java Island.
Second, the questionnaire does not assess the respondentsAo comprehension of the distinction between Islamic and conventional microfinance institutions, which is an area that must be explored further to expand IMFIs.
Finally, this research does not include any specific IMFI product or plan that can address the needs of prospective customers.
Further research recommendations include studies to develop alternative schemes for the formation of a deposit guarantee system at IMFI, determine the criteria for institutions that are eligible to be DIS members, and determine the form of savings .
rincipal or voluntary saving.
and memberships guaranteed by DIS that are Shariah compliant.
ACKNOWLEDGEMENT
Special thanks to the National Committee of Islamic Economic and Finance of the Republic of Indonesia and Universitas Airlangga for the financial assistance.
Universitas Airlangga through International Research Collaboration Scheme Top #500.
Airlangga Research Fund.
Year 2023.
Universitas Airlangga.
No: 359/UN3.
PT/2023.
REFERENCES