THE ROLE OF DEPOSIT INSURANCE IN SUPPORTING ISLAMIC MICROFINANCE INSTITUTIONS: INSIGHTS FROM INDONESIA
Abstract
This study assesses the necessity of a Deposit Insurance System (DIS) for Islamic Microfinance Institutions (IMFIs). 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 respondents' willingness to pay deposit insurance premiums. 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.
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/UN3.15/PT/2023.
References
Abdul Rahman, R., & Dean, F. (2013). Challenges and solutions in Islamic microfinance. Humanomics, 29(4), 293-306.
Abdullah, R., & Ismail, A. G. (2014). Al-Tawhid in relation to the economic order of microfinance institutions. Humanomics, 30(4), 325–348.
Acharya, S., & Dreyfus, J. F. (1989). Optimal bank reorganization policies and the pricing of federal deposit insurance. The Journal of Finance, 44(5), 1313-1333.
Adnan, M. A., & Ajija, S. R. (2015). The effectiveness of baitul maal wat tamwil in reducing poverty: The case of Indonesian Islamic microfinance institution. Humanomics, 31(2), 160-182.
Ajzen, I. (1991). The theory of planned behavior. Organizational Behavior and Human Decision Processes, 50(2), 179-211.
Ajzen, I., & Fishbein, M. (1975). A Bayesian analysis of attribution processes. Psychological bulletin, 82(2), 261-277.
Ali, A., Ali, A., Xiaoling, G., Sherwani, M., & Hussain, S. (2018). Expanding the theory of planned behaviour to predict Chinese Muslims halal meat purchase intention. British Food Journal, 120(1), 2-17.
Ali, S. A., & Hassan, A. (2017). Employees’ attitude towards Islamic banking: An exploratory study in Malaysia. International Journal of Research in Social Sciences, 7(4), 114–138.
Amin, H. (2013). Some viewpoints of Islamic banking retail deposit products in Malaysia. Journal of Internet Banking and Commerce, 18(2), 1-13.
Amin, H., & Hamid, M. R. A. (2018). Patronage factors of tawarruq home financing in Malaysia. International Journal of Business and Society, 19(3), 660-677.
Amin, H., Rahim Abdul Rahman, A., & Abdul Razak, D. (2014). Consumer acceptance of Islamic home financing. International Journal of Housing Markets and Analysis, 7(3), 307-332.
Anginer, D., Demirguc-Kunt, A., & Zhu, M. (2014). How does deposit insurance affect bank risk? Evidence from the recent crisis. Journal of Banking and Finance, 48, 312–321.
Ben-Akiva, M. E., & Lerman, S. R. (1985a). Discrete choice analysis: Theory and application to travel demand (Volume 9). MIT Press Business Office.
Bhattacharyya, S. S., & Jagadeesh, K. (2018). Working capital management of micro & small enterprises. Indian Journal of Industrial Relations, 54(1), 177–192.
Boukhatem, J., & Ben Moussa, F. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected MENA countries. Borsa Istanbul Review, 18(3), 231–247.
Calomiris, C. W., & Jaremski, M. (2019). Stealing deposits: Deposit insurance, risk‐taking, and the removal of market discipline in early 20th‐century banks. The Journal of Finance, 74(2), 711-754.
Cerrone, R. (2018). Deposit guarantee reform in Europe: does European deposit insurance scheme increase banking stability? Journal of Economic Policy Reform, 21(3), 224–239.
Chiaramonte, L., Girardone, C., Migliavacca, M., & Poli, F. (2020). Deposit insurance schemes and bank stability in Europe: How much does design matter?. The European Journal of Finance, 26(7-8), 589-615.
Demirgüç-Kunt, A., & Detragiache, E. (2002). Does deposit insurance increase banking system stability? An emperical investigation. Journal of Monetary Economics, 49(7), 1373–1406.
Demirgüç-Kunt, A., & Huizinga, H. (2004). Market discipline and deposit insurance. Journal of Monetary Economics, 51(2), 375–399.
Demirgüç-Kunt, A., Kane, E., & Laeven, L. (2015). Deposit insurance around the world: A comprehensive analysis and database. Journal of Financial Stability, 20, 155–183.
Donnelly, S. (2017). Advocacy coalitions and the lack of deposit insurance in Banking Union. Journal of Economic Policy Reform, 21(3), 210–223.
Dubois, C. (2021). Deposit insurance and financial integration in the Eurozone: A DSGE model. Economics Letters, 207, 110032.
Erick, E., Salim, U., Indrawati, N. K., & Sumiati, S. (2021). Bankruptcy risk of shariah banks in Indonesia. Academy of Strategic Management Journal, 20(3), 1–7.
Fecht, F., Thum, S., & Weber, P. (2019). Fear, deposit insurance schemes, and deposit reallocation in the German banking system. Journal of Banking & Finance, 105, 151-165.
Fendi, U. A. (2020). Toward Islamic deposit insurance model. Journal of Islamic Accounting and Business Research, 11(1), 130-151.
Fianto, B. A., Gan, C., & Hu, B. (2019). Financing from Islamic microfinance institutions: Evidence from Indonesia. Agricultural Finance Review, 79(5), 633-645.
Fianto, B. A., Gan, C., Hu, B., & Roudaki, J. (2018). Equity financing and debt-based financing: Evidence from Islamic microfinance institutions in Indonesia. Pacific-Basin Finance Journal, 52, 163-172.
Fianto, B. A., Maulida, H., & Laila, N. (2019). Determining factors of non-performing financing in Islamic microfinance institutions. Heliyon, 5(8), e02301.
Global Report on Islamic Finance. (2016). Global Report on Islamic Finance.
Gómez-Fernández-Aguado, P., Partal-Ureña, A., & Trujillo-Ponce, A. (2016). A note on the adequacy of the EU scheme for bank recovery, resolution and deposit insurance in Spain. Journal of Banking Regulation, 17(4), 332-337.
Gropp, R., & Vesala, J. (2004). Deposit insurance, moral hazard and market monitoring. Review of Finance, 8(4), 571-602.
Hall, B. H., & Rosenberg, N. (2010). Handbook of the economics of innovation (Vol. 1). Elsevier.
Haque, M. S., & Yamao, M. (2011). Prospects and challenges of Islamic microfinance programmes: A case study in Bangladesh. International Journal of Economic Policy in Emerging Economies, 4(1), 95-111.
Hassan, A. (2015). Financial inclusion of the poor: From microcredit to Islamic microfinancial services. Humanomics, 31(3), 354–371.
Hassan, A., & Saleem, S. (2017). An Islamic microfinance business model in Bangladesh: Its role in alleviation of poverty and socio-economic well-being of women. Humanomics, 33(1), 15-37.
Ibrahim, M. A., Fisol, W. N. M., & Haji-Othman, Y. (2017). Customer intention on Islamic home financing products: An application of theory of planned behavior (TPB). Mediterranean Journal of Social Sciences, 8(2), 77-86.
Ioannidou, V. P., & Penas, M. F. (2010). Deposit insurance and bank risk-taking: Evidence from internal loan ratings. Journal of Financial Intermediation, 19(1), 95-115.
Iqbal, Z., & Mirakhor, A. (2011). An introduction to islamic finance: Theory and practice. Hoboken, NJ: John Wiley & Sons.
Islamic Corporation of Development. (2020). Islamic Finance Development Indicator Report 2020.
Ji, Y., Bian, W., & Huang, Y. (2018). Deposit insurance, bank exit, and spillover effects. Journal of Banking & Finance, 96, 268-276.
Jumreornvong, S., Chakreyavanich, C., Treepongkaruna, S., & Jiraporn, P. (2018). Capital adequacy, deposit insurance, and the effect of their interaction on bank risk. Journal of Risk and Financial Management, 11(4), 79. https://doi.org/10.3390/jrfm11040079
Khan, M. A., Siddique, A., & Sarwar, Z. (2020). Determinants of non-performing loans in the banking sector in developing state. Asian Journal of Accounting Research, 5(1), 135-145.
Krimminger, M. H. (2008). The resolution of cross-border banks: Issues for deposit insurers and proposals for cooperation. Journal of Financial Stability, 4(4), 376-390.
Kusairi, S., Sanusi, N. A., & Ismail, A. G. (2015). Impact of deposit insurance on banking industry of ASEAN countries: In quest of stability. Banks and Bank Systems, 10(4), 41–50.
Kusairi, S., Sanusi, N. A., & Ismail, A. G. (2018). Dilemma of deposit insurance policy in ASEAN countries: Does it promote banking industry stability or moral hazard?. Borsa Istanbul Review, 18(1), 33-40.
Laeven, L., & Valencia, F. (2013). Systemic banking crises database. IMF Economic Review, 61(2), 225–270.
LeRoy, S. F., & Singhania, R. (2020). Deposit insurance and the coexistence of commercial and shadow banks. Annals of Finance, 16(2), 159-194.
Li, X. (2010). An empirical analysis of microcredit on China rural household. Lincoln University.
Li, X., Gan, C., & Hu, B. (2011). Accessibility to microcredit by Chinese rural households. Journal of Asian Economics, 22(3), 235-246.
Lusardi, A., & Mitchell. (2013). The economic importance of financial literacy, teory and evidence. Working Paper Series, 18952.
Mair, J., Mayer, J., & Lutz, E. (2015). Navigating institutional plurality: Organizational governance in hybrid organizations. Organization Studies, 36(6), 713–739.
Masrizal, M., & Trianto, B. (2022). The role of PLS financing on economic growth: Indonesian case. Journal of Islamic Monetary Economics and Finance, 8(1), 49-64.
Maulana, H., Razak, D. A., & Adeyemi, A. A. (2018). Factors influencing behaviour to participate in Islamic microfinance. International Journal of Islamic and Middle Eastern Finance and Management, 11(1), 109-130.
Mawardi, I., Widiastuti, T., Al Mustofa, M. U., & Prasetyo, A. (2020). Do Indonesian Islamic microfinance institutions need lender of the last resort?. Al-Uqud: Journal of Islamic Economics, 4(2), 235-249.
Muller, G. E. (2018). An optimal investment strategy and multiperiod deposit insurance pricing Model for Commercial Banks. Journal of Applied Mathematics, 2018(1), 8942050.
Muller, G. E. (2020). A multiperiod model for estimating the cost of deposit insurance under the Basel III minimum capital requirement. Mathematical Methods in the Applied Sciences, 43(8), 4995-5009.
Nabila, F. S., Fakhri, M., Pradana, M., Kartawinata, B. R., & Silvianita, A. (2023). Measuring financial satisfaction of Indonesian young adults: A SEM-PLS analysis. Journal of Innovation and Entrepreneurship, 12(1), 16. https://doi.org/10.1186/s13731-023-00281-4
Ngalawa, H., Tchana, F. T., & Viegi, N. (2016). Banking instability and deposit insurance: The role of moral hazard. Journal of Applied Economics, 19(2), 323-350.
Noor, A. M., & Haron, M. N. (2018). A review of shariah principle applied for takaful benefits protection scheme and its application by malaysian deposit insurance cooperation (PIDM). Al-Shajarah: Journal of the International Institute of Islamic Thought and Civilisation (ISTAC), 135-147.
Otoritas Jasa Keuangan. (2021). Microfinance Institutions.
Qi, S., Kleimeier, S., & Sander, H. (2020). The travels of a bank deposit in turbulent times: The importance of deposit insurance design for cross‐border deposits. Economic Inquiry, 58(2), 980-997.
Quinlan, C. (2011). Business research methods. Cengage Learning EMEA.
Rahim Abdul Rahman, A. (2010). Islamic microfinance: An ethical alternative to poverty alleviation. Humanomics, 26(4), 284-295.
Train, K. E. (2009). Discrete choice methods with simulation. Cambridge: Cambridge University Press.
Trinugroho, I., Pamungkas, P., Ariefianto, M. D., & Tarazi, A. (2020). Deposit structure, market discipline, and ownership type: Evidence from Indonesia. Economic Systems, 44(2), 100758.
Umoh, G. S. (2006). Empirical investigation of access to micro-credit in an emerging economy: Evidence from Nigeria. Journal of African Business, 7(1-2), 89-117.
Warde, I. (2010). Islamic finance in the global economy. Edinburgh University Press.
Zaman, B., & Iqbal, J. (2018). Citizen journalism: An inquisitive analysis of the usage of mobile applications. Putaj Humanities & Social Sciences, 25(2), 61.
Zauro, N. A., Saad, R. A. J., & Sawandi, N. (2016). The moderating effects of financial inclusion on Qardhul Hassan financing acceptance in Nigeria: A proposed framework. International Journal of Economics and Financial Issues, 6(7), 143-148.
Zitouni, T., & Ben Jedidia, K. (2022). Does Islamic microfinance contribute to economic empowerment in Tunisia?: A case study of Zitouna Tamkeen. Journal of Business and Socio-Economic Development, 2(1), 67-81.

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.