Abstract
Liquidity risk is one of significant risk managed by financial intermediaries including Islamic Microfinance Institutions (IMFIs). The financial intermediaries accept short-term deposits and disburse these deposits in the form of long-term loans. This situation makes IMFI desperately need a lender of last resort (LOLR). Nevertheless, there has been no formal LOLR for Indonesian IMFIs. This study intends to construct the LOLR model for IMFI in Indonesia. This qualitative study applies a case study analysis. This study's subjects are IMFIs in East Java Province that was selected purposively with thirty managers as the key informants. Research findings show that the best model of LOLR is developing a secondary cooperative since the majority form of IMFIs in Indonesia are cooperative entities. With all members of a secondary cooperative deposit for reserve requirements, they can place excess liquidity in the secondary cooperative and ask for financial support.
Highlights
High rates of poverty and income inequality remain significant issues in the world economy
To the best authors' bits of knowledge, we found no study has attempted to design Lending of Last Resort's model for Islamic Microfinance Institutions (IMFIs)
The average deposits received by the IMFI are short term deposits, while the financing
Summary
High rates of poverty and income inequality remain significant issues in the world economy. Expanding public access to the formal financial sector will help people improve their incomes as part of poverty alleviation strategies.A microfinance institution (MFI) is an intermediary financial institution that helps provide financial aid for the poor to improve their household welfare and reduce poverty.Another goal of an MFI is to reduce the income gap between the riches and the poor. Formal financial institutions such as banks usually demand requirements such as collateral and income statement, before granting credit. Access to finance is essential, and it is used to provide better education, health service, and decent housing for the poor (Berhane & Gardebroek, 2011; Fianto et al, 2018; Littlefield et al, 2003)
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