Microfinance Institutions, Financial Inclusion, and Household Welfare: Evidence From the Indonesian Context

This study investigates the impact of microfinance institutions (MFIs) on household welfare within the Indonesian context, where financial inclusion remains uneven despite substantial sectoral expansion. Using nationally representative microdata from 175,749 households across 13 provinces, the analysis employs Propensity Score Matching (PSM) to estimate the causal effect of microfinance usage on welfare, proxied by per capita household consumption. Results reveal that only 6.75% of households accessed microfinance, with participants generally poorer, less educated, and more vulnerable. Both nearest neighbor and kernel matching indicate negative treatment effects, with kernel estimates showing a reduction in consumption. Subgroup analyses suggest urban households are more resilient, while rural households display greater vulnerability to adverse impacts. These findings underscore that microfinance, in its current form, does not enhance short-run welfare and may exacerbate financial pressures, highlighting the need for policy reforms in credit design and complementary support mechanisms.