FROM MICROFINANCE TO POVERTY REDUCTION: TRACING THE CHAIN EFFECTS OF RURAL BANKS ON MSMEs AND POVERTY IN INDONESIA

Abstract

This study aims to analyze the influence of the number of Bank Perkreditan Rakyat (BPR) and Bank Pembiayaan Rakyat Syariah (BPRS), as well as the volume of credit financing provided by these institutions, on the number of micro and small enterprises (MSEs) in Indonesia. It further examines the relationship between the number of MSEs and the distribution of poverty in both urban and rural areas in Indonesia during the 2014-2023 period. Utilizing the chain rule approach in Ordinary Least Squares (OLS) regression and Granger causality testing, the study finds that an increase in the number of BPR and BPRS significantly contributes to reducing poverty in rural areas. These findings reaffirm the role of BPR and BPRS as microfinance intermediaries in promoting financial inclusion and empowering local economies. Furthermore, the Granger test results reveal a unidirectional causal relationship from poverty levels and credit financing to the number of BPR and BPRS, indicating that socio-economic pressures also influence the expansion of microfinance institutions in Indonesia. The implications of these findings highlight the importance of policy support for the institutional transformation of BPR and BPRS within the framework of the national financial system, while also strengthening the argument that BPR and BPRS serve as strategic instruments in addressing shadow banking practices and expanding access to inclusive formal financial services.