Indonesia has achieved impressive progress in certain human development outcomes. In 2007, the gross primary enrolment rate was above 90 per cent and junior secondary enrolment, at 75 per cent, had more than quadrupled since the early 1970s (Permani 2009). Yet income inequality remains a problem. Despite the rapid economic growth of the 1990s, between 1960 and 1996 the Gini coefficient measuring income inequality remained relatively constant, in the range 0.32–0.38 (Asra 2000). This persistent income imbalance has had serious effects for children born into severe poverty. In the absence of a mechanism to allow poor students to complete their education or to give parents access to credit to finance their children's education, some Indonesian children will remain trapped in poverty. Inequality in education breeds future income inequality. To avoid this, special attention should be paid to ensuring that children from low-income families get a good education.

This chapter is particularly interested in the Islamic education sector, for several reasons. First, despite its alleged links with terrorism, the Islamic sector is of great importance within the Indonesian education system. Although enrolments in both public and private Islamic schools (madrasah) are much smaller than enrolments in other types of schools (particularly the public non-religious schools), the sector nevertheless provides education to over 6 million students. Second, madrasah have a comparative advantage in reaching subgroups at risk of dropping out of school, such as school-aged married females and female students from poor families (ADB 2006). Third, in some rural areas the madrasah are the only schools that are able to deliver basic education to students from low-income families.

Unfortunately, Indonesia's Islamic schools have a reputation for being second-class schools. Given that most of their students come from low-income families, government policies to improve the quality of the education provided by the madrasah – that is, targeting the lower end of the population distribution – are likely to be an effective way of reducing income inequality. Such policies are likely to be especially effective for rural and female students.

Finding an appropriate method to deal with the reputational and other problems of madrasah requires an understanding of the underlying characteristics of the schools themselves, and of their students and the families from which they come.