Whereas Indonesia is the largest Muslim country in the world, the growth of Islamic Microfinance institutions (MFIs) has being sluggish and far behind their conventional MFIs. Islamic MFIs are struggling to survive amid the fierce competition in the provision of microfinance services, from both the conventional and Islamic institutions. Meanwhile the high unemployment rate in Indonesia calls for searching for ways in which financing can be provided to the jobless and poor. One way to resolve this is to provide MFIs with low cost funds that can be used to finance viable micro-businesses. The aim of this thesis is to examine the demand and supply side factors related to operations and growth of Islamic MFIs. It also investigates the scope of integrating microfinance and waqf to enhance the social mission of providing access financial services and opportunities to the needy and the poor. A survey was conducted to explore the perceptions, understanding and preferences of 581 MFI’s borrowers from four MFIs—two Islamic (BMT and BPRS) and two conventional (BRI and BPR) in Indonesia. A total of 18 MFIs’ managers and two waqf managers/nazirs were interviewed. Secondary data, casestudy and a focus group discussion (FGD) were also conducted in order to understand the problems. The results show that while the majority of MFI’s clients indicate preference for Islamic MFIs, in reality their choices of MFI are based on economic/finance (low interest rates and size of loan) and non-economic/non-finance factors (quality of services variables easiness, promptness, nearness, method and loan officers’ profile). While the MFIs clients prefer Islamic MFI compared to conventional, in the end, the practical and economic reasons became dominant factors in their choice of MFI. Therefore, the demand for Islamic Microfinance can be enhanced if the level of their economic and non-economic factors can be brought to the levels of conventional MFIs. The research reveals that there is still a gap between needs and knowledge of Sharia’h financial products and services. When the practice of murabahah product is considered, there appears to be no difference in substance between conventional and Islamic MFIs.