The Impact of Macroeconomic on the Financial Performance of the Microfinance Institutions in Java Island, Indonesia

Abstract

This study aims to analyze the macroeconomic impacts of financial performance of microfinance institutions (MFIs) in Java, Indonesia. The financial performance is measured by profitability and asset quality, while macroeconomic indicators are measured by GDP growth and inflation rate. This study uses quarterly financial data from December 2011 to September 2012 of 858 MFIs in Java, which consists of conventional rural banks and Islamic rural banks. The findings show that the MFIs in East Java have the biggest profitability and the lowest NPL ratio in Java. Graphically, in Java Island, the raise of inflation is inconsistent in decreasing the MFIs’ profitability and increasing the MFIs’ NPL ratio. In addition, the findings also show that the location has an impact on the financial performance of MFIs in Java. Empirically, there is no significant impact of macroeconomic indicators on the MFIs’ profitability, but there is a negative impact of inflation on the MFIs’ NPL ratio, and also there is a significant difference in the MFIs’ financial performances in East Java.