Islamic microfinance in Indonesia has much potential for a further expansion. Yet, the development is hampered by their legal and administrative ambiguity. Reflecting this situation, our project firstly examines what sort of capacity building is needed to encourage the development of Islamic microfinance effectively. This project secondly considers how Islamic microfinance can support the growth of small and medium sized enterprises (SMEs) in Indonesia. It will thirdly articulate how the Indonesian government can effectively support the growth of Islamic microfinance. Successful microfinance schemes are important component in the development of Indonesia’s SME sector, which accounts for 50 per cent of Indonesia’s gross domestic product because it will assist in alleviating poverty in Indonesia.