Following the success of the Grameen Bank in Bangladesh, Microfinance institutions (MFIs) which apply group-lending method through the medium of small credit have been regarded as a new and effective tools for poverty alleviation for the poor in many Less Developed Countries. This study analyses the role of two MFIs, namely KUKESRA, a government administered programme and Mitra Karya East Java (MKEJ) which is a privately managed institution in poverty alleviation in Indonesia. It examines to what extent these institutions have been successful in helping the poor, and improving the living standards of the recipients. Two alternative approaches, namely the institutionalist and the welfarist approaches, are used to examine the question of whether the poor benefited from the two programmes, followed by a comparison of the performances between the two. Using data obtained from a sample survey of 393 respondents in the District of Malang in East Java, from December 1998 - June 1999, it was found that the differences in management, organisational structure, programme design, and the system of coordination all resulted in differences in performance of the two MFI institutions studied. It was found that both programmes increased the incomes of the recipients, but the impact of KUKESRA was much lower than that of MKEJ. However, KUKESRA had a greater positive effect on employment than MKEJ. Neither of the programmes resulted in a significant improvement in the consumption of basic needs of the recipients. Of the two approaches used in the evaluation of the programmes, a good performance in terms of outreach and sustainability under the institutional approach did not imply that the poor really benefited from the programme. It was found that the welfarist approach is much more appropriate in evaluating the effectiveness of MFIs in Indonesia.