As a country with the largest number of muslim population in the world, Islamic micro finance institutions have a large potential to play a greater role in the country’s aspiration to poverty reduction. However, the determinants of the establishment of Islamic Micro Finance Institutions, particularly in Indonesia, has not been extensively studied. This paper attempts to explore the determinants of the establishment of Baitul Maal wa Tamwil (BMT), one of the main Islamic microfinance institutions in Indonesia. A probit model of BMT establishment is estimated using an Indonesian village-level data. The result suggests that the extent of economic activities particularly in agriculture sector, and high accessibility to market are strong determinants of BMT establishment in Indonesian villages. It is also found that villages that experienced recent calamities particularly drought are more likely to have BMT established. This may indicate the role of BMT as a provider of financial service in the midst of hardship. Religion is among the strongest determinant of BMT establishment. Villages with Islam as the dominant religion is more likely of having BMT established. However, this effect is strong only in rural areas. In urban areas, this effect is weak.

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