Allah and Micro-Finance? Investigating Islamic Banking Principles in Indonesia’s Microfinance Sector, and its Potential for Economic Empowerment

8/7/2019 Allah and Micro-Finance? Investigating Islamic Banking Principles in Indonesias Microfinance Sector, and its Potential

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Allahand

Micro-

Finance?

InvestigatingIslamicBanking

PrinciplesinIndonesia'sMicrofinance

Sector,anditsPotentialforEconomic

Empowerment

Name:AminaSamy


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Despitethefactthatthenotionofdevelopmenthasbecomemoreholisticinnaturein

recentdecades,theimportanceofeconomicgrowthstillremainspronounced,anditisdifficult

tofindadefinitionofdevelopmentthatfailstoincorporatethis.However,ourunderstandingof

economicgrowthhasshiftedawayfromthesimplisticnotionofatotalincreaseinGDP

(TodaroandSmith2007,15),andnowincludesideassuchasimprovedlivingstandardsandthe

freedomtosucceed(Stiglitz2003)aswellasconceptsofabsolute(extreme)andrelative

poverty(Sachs2005,20).

Povertyiswidelyconceivedtobethelargestmoralandeconomicchallengeofthis

century,andthusitcomesasnosurprisethatthefirstMillenniumDevelopmentGoalattempts

totackletheissueofpovertyeradicationandhalve,between1990and2015,theproportion

ofpeoplewhoseincomeislessthana1$USDaday(TheUnitedNations2009).One

increasinglysignificantinstrumentofpovertyalleviationandcommunitydevelopmentisthatof

microcreditandmicrosavings,popularizedbyProfessorMuhammedYunusandtheGrameen

Bank(Seibel2008,87).Microfinanceisbestdefinedastheprovisionoffinancialservicesand

productstothosewhoseloweconomicstandingexcludesthemfromconventionalfinancial

institutionsorprograms(Chowdhry2008).Microfinanceinitiativeshavebeenfoundto

increasehouseholdincomeandeconomicsecurity,buildassetsandreducevulnerability

amongthemostimpoverishedinsociety(Obaidullah2008,4),andassuchtheyarepotentially

centraltothechallengeofendingpoverty.

AccordingtoMohammedObaidullah,Muslimsocietiesfarefarworsethantherestof

theworldinmattersofaddressingtheproblemofpoverty(Obaidullah2008,1);heclaimsthat


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inIndonesiaalone,overhalfofthenationalpopulationliveon-orunder-amereUS2%daily

(Obaidullah2008,1).ThesuccessfulestablishmentofmicrofinanceinstitutionsintheMuslim

worldcouldprovetobeavaluableassetinthefightagainstpoverty.However,anadditional

obstacleisposedbyIslamicshariah1whichchallengesconventionalbankingprinciples,

mandatingandpromotingitsownIslamicbankingprinciplesinstead.Asaresultofthis,afew

strandsofIslamicmicrofinance,formalandsemi-formal,haveevolved(Seibel2008,86)in

recentyears,combiningIslamicbankingprinciplestotheprinciplesofmicrofinance,inorderto

meetthegrowingneedsoftheMuslimpoor.

AccordingtoHansDieterSeibel,whohasconductedextensiveresearchonboth

conventionalandIslamicmicrofinancialservicesinIndonesia,Indonesiaisprobablythe

countrywiththegreatestdiversityofbothconventionalandIslamicmicrofinance(Seibel2008,

89).OfcentralinteresttothisinvestigationaretheBaitulmalwaltamwili.e.thehouseoffunds

andfinance(herebyreferredtoasBMTswhichprovideanIslamicalternativeformicro-

enterprisesinsearchoffunds(Antonio2008,256).ThecaseoftheBMTshasprovedthatthe

applicationofIslamicvaluesinmicrolendingcouldbecarriedoutprofitablyandinasustainable

forminIndonesia(Antonio2008,256)resultingintheeconomicempowermentofIndonesias

urbanandruralMuslimpoor.Furthermore,thelevelsofsocialoutreachdemonstratedbythese

BMTssuggestsocietalgrowthandtransformationinawaybeneficialtothepoor.However,it

hasalsobeenindicatedthatthesuccessoftheseBMTsismixedandithasbeenimpliedthat

1ShariahisanArabicterm,literallymeaningwayorpathandreferstoIslamiclawandjurisprudence(Obaidullah

2008,12)


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weakinstitutionsandpoorgovernancehavebeenakeybottleneck,preventingtheirsuccess

(Obaidullah2008,9).

Inthispaper,themainquestionthatwilladdressediswhethertheapplicationofIslamic

bankingprinciplestomicrofinanceinIndonesiahasbeenmorebeneficialinpromoting

economicgrowthamongtheMuslimpoorthanconventionalmicrofinancepractices.And

further,whatthisapplicationcanimplyfortherestoftheMuslimworld.

Totacklethis,aseriesofshorterquestionswillbeanswered.First,whatdistinguishesIslamic

microfinanceinstitutionsfromconventionalmicrofinanceinstitutions?Secondly,havethe

BMTsassistedinpromotingeconomicgrowthandcommunitydevelopmentinIndonesia?If

yes-how?Andifnot,whynot?Thirdly,Iintendtoassesswhetherthemixedsuccessofthe

BMTsisbasedonthereligiousprinciplesunderlyingthem.

InordertofullyunderstandtheimplicationsoftheapplicationofIslamicbanking

principlestomicrofinancepractices,itisusefultofirstappreciateIslamicviewsonpoverty

alleviationandfamiliarizeourselveswiththeseprinciples.

AsObaidullahpointsout,Islamviewspovertyasacursetobeeradicated,anditisthe

collectiveobligationofMuslimsocietytotakecareofthebasicneedsofthepoor(Obaidullah

2008,13).Ideally,thisistobeachievedinaccordancewithasystembasedoncooperation,

brotherhoodandsolidarityratherthanoncompetitionwhichleadstoexploitation(Seibeland

Agung2005,56).Itisbelievedthattheconventionalfinancialsystemfailstooperatethisway.

TheIslamicbankingsystemcanonlybeunderstoodinthecontextofIslamicattitudestowards

ethics,wealthdistribution,andsocialandeconomicjustice(DhumaleandSapcanin1999,1).In


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Islam,concernforthelesswell-off(Antonio2008,254)isstronglyemphasized;somuchso,

thatoneofthefivepillarsofIslam(zakat2)issolelydevotedtoaddressingthisandassuringa

moreequitabledistributionofwealth.Furthermore,theimportanceofjusticeishighlighted

throughrespectforpropertyrights,protectingthesanctityofcontractsandsharingbothrisk

andreward(Antonio2008,254).

ThethreebasicprinciplesofIslamicfinanceare:i)itsinterest-freenature,ii)the

emphasisofprofitsharingandmutualbenefit,andiii)itsdealingsinonlyrealeconomic

transactions.

Asiswidelyknown,InterestfreetransactionsareabasictenetofIslamicbanking

(DhumaleandSapcanin1999,2);however,Islamicfinanceismuchbroaderthanthat.InIslam,

extractingasurplusvalueinanunfairway(ElHawaryandGrais2005)isconsideredharam3,

whichstemsfromconcernsoverjusticeandfairness(ElHawaryandGrais2005);assuch,

interest-basedtransactionsareprohibited.Instead,transactionsarebasedonprofitsharing

andmutualbenefit.AsDhumaleandSapcaninargue,profit-makingaddressestheIslamic

idealsofsocialjusticebecauseboththeentrepreneurandthelenderbeartheriskofthe

investment(DhumaleandSapcanin1999,2).Therefore,theIslamicbankorfinancial

institutioncanbeseenasaninvestororshareholder,withdirectinterestsinthesuccessesor

failuresofentrepreneurialprojects.Indeedbecauseofthis,Islamicbankingencouragesthe

formationofmutuallybeneficialpartnerships(SeibelandAgung2005,56)inorderforboth

theshareholderandentrepreneurtomaximizetheirbenefits.Ifprofit-sharingmechanismsare

2AmandatoryformofIslamiccharity;itistheamountpayablebyaMuslimtocharityasaproportionofhisorher

ownwealth(Obaidullah2008,10,62)3Indiscordwithshariah(DhumaleandSapcanin1999,2)


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notenoughforaprofit-seekingIslamicbank,theymayoccasionallyaddanextrafeeto

compensateforcostsincurredbytheadditionaltransactionstheymustundertake(Dhumale

andSapcanin1999,5).ThisisnotthecaseinIslamicmicrofinancialinstitutions.Finally,Islamic

bankingisconservativeincharacterandonlyrealtransactionswithsufficientcollateral,butno

speculativeinvestments,arefinanced(Seibel2008,98);thisistosaythatanyandallfinancial

transactionsneedtobedirectlyorindirectlylinkedtoarealeconomictransaction(ElHawary

andGrais2005).

TheseprinciplesareeasilysubscribedinboththelargerIslamiccommercialbanks,and

themoremicroIslamicinstitutions.ThisisparticularlytruefortwoformsofIslamicbanking-

themudharaba4andmusharaka

5models.Themudharabamodelisonewherepartnersshare

profits(DhumaleandSapcanin1999,3).Inthiscase,thebankprovidesthecapitalforthe

projectwhiletheentrepreneurprovidesthelabourandexpertise(DhumaleandSapcanin1999,

3,ElHawaryandGrais2005,Brugnonin.d.,2).Whilstprofitsareshared,financiallossesare

assumedentirelybythebank(DhumaleandSapcanin1999,3)andtheentrepreneurwillnot

befoundliableunlessfoundguiltyofnegligenceormismanagement(DhumaleandSapcanin

1999,4).Theonlylosstotheentrepreneuristimeandeffort.Oncealoanisrepaidinfull,a

percentageofprofitisnolongersharedbetweenthebankandtheentrepreneurandthebank

nolongeroccupiesasupervisoryroleintheproject(ElHawaryandGrais2005);ineffect,the

financierearnslessprofitwitheachpaymentreceived(DhumaleandSapcanin1999,8).The

musharakamodeldiffersinthatthereisoftenmorethanonefinancier(DhumaleandSapcanin

4TrusteeFinancing(ElHawaryandGrais2005)

5EquityParticipation(ElHawaryandGrais2005)


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worldbyofferingIslamicbankingservicesincommunitiesreluctanttodealwithconventional

financeinstruments,suchasinIndonesiawhereitisestimatedthat50%ofhouseholdsclaim

tolackaccesstothecredittheyneedtofundtheirenterprises(Sakai2008,268),despitethe

surgeinmicrocreditschemesfacilitatedbytheIndonesiangovernmentsince1980.

Islamicmicrofinanceismosteasilydefinedasthecollectionofsmallsavingsand

provisionofsmallloansbasedonshariah(Seibel2008,87)i.e.basedontheIslamicbanking

principlesdetailedabove.ItisagreedthatIslamicbankingandmicrofinanceprogrammes

complementoneanotheronideologicalandpracticalterms(DhumaleandSapcanin1999,1,

Brugnonin.d.,1,ElHawaryandGrais2005,Obaidullah2008,10).Theconceptofshared

responsibilityisespeciallyrelevanttothetwoprinciples.Withthisconceptofjointliability,

individualscometogethertoformsmallgroupsandcollectivelyapplyandrepayforthe

financing(Obaidullah2008,6);inthecaseofcooperatives,theyalsopooltogethertheir

resources,andmanagethecooperativecollectively.

Despitetheseparallels,initiativesinIslamicmicrofinancearenotwidespread(El

HawaryandGrais2005)andonlyahandfulofsuccessfulunitshavebeenestablished.These

includethoseoftheIslamiBankBangladesh,FINCAinAfghanistanandthoseinJabalal-Hoss

Syria(mandatedbytheUNDP)(ElHawaryandGrais2005).

Forthispaper,wewillfocusontheeffortsofthemember-basedIslamiccooperativesin

IndonesiacalledBaitulmalwaltamwil(BMT)thatprovidecharitybasednot-for-profitaswell

asfor-profitfinancing(Obaidullah2008,7)andserveasanexampleofacreditunionwhichis

non-profitinnatureownedandcontrolledbyitsmembers(Obaidullah2008,7).


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BeforewebeginanalysisonthesuccessorfailureofBMTsinIndonesia,itwillbeuseful

tounderstandthebasichistoryofIndonesiaseconomyintermsofthegrowthand

developmentofIslamicbankingandmicrofinance.Sincetheearly90sIslamicbankinghas

evolvedandhasbeenpopularizedinIndonesia,mainlyasaresultofpoliticaldemandsfrom

Muslimscholarsandorganizations(Seibel2008,90).In1998theBankIndonesia(central

bank)gaveofficialrecognition,aspartofanewbankingact,totheexistenceofadualbanking

system:conventionalandIslamic;figure1inappendix2illustratesthegrowthpatternof

IslamicbankinginIndonesiafromitsconceptionintheearly90suntil2006.Thehighgrowth

ratesshownareindicativeofthegrowingpopularityofIslamicbankinginIndonesia.Asfigure3

inappendixtwoillustrate,therearethreetypesofIslamicbanks:IslamicCommercialBanks

(CBs),IslamicRuralBanks(BPRs)andIslamicSavingandLoanCooperatives(BMTs).Ofthese,

onlyCBsandBPRsareofficiallyrecognizedandregulatedbythegovernment(SeibelandAgung

2005,13).Islamicbankingprincipleshavealsogainedfootholdinconventionalcommercial

banks;duetoincreasesinpopularity,manynon-Islamiccommercialbankshavediversifiedtheir

servicestoincludesomeshariahbankingprinciples.Asaresult,thenumberofIslamicbanking

unitswithincommercialbankshasincreasedaswell,thoughtheyarenotrecognizedasIslamic

banks.

Withregardstomicrofinancialservices,aspreviouslymentioned,Indonesiapossesses

oneofthemostdifferentiatedmicrofinanceinstitutionsinthedevelopingworld(Seibel2008,

90),providingbothconventionalandIslamicmicrofinance.Themajorityofthesemicrofinance

institutionsarelocatedinurbanandperi-urbanareas(Seibel2008,90).Indonesias

microfinancesectorcaterstobothlivelihoodandgrowthorientedenterprises.AsObaidullah


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differentiates,programsfordevelopinglivelihoodenterpriseshavepovertyreductionastheir

mainobjective(Obaidullah2008,4).Incontrast,growth-orientedmicroenterpriseprograms

haveenterprisedevelopmentastheirimmediateobjectiveandattempttoliftmicroenterprises

toaqualitativelyhigherlevelofsustainability(AsianDevelopmentBank1997,36).

Microfinancialinstitutionsthatfocusonlivelihoodenterprisesthustargettheimpoverished,

whilemicrofinancialinstitutionsthatfocusongrowthorientedenterprisestargetsmalland

mediumenterprises;neverthelessbothareessentialtopovertyalleviationinanarea

(Obaidullah2008,6).

Firstestablishedin1992,BMTscompromiseabout95%ofIslamiccooperatives(Seibel

andAgung2005,13).Acooperativeisbestunderstoodasanautonomousassociationof

personsunitedvoluntarilytomeettheircommoneconomicandsocialneedsandaspirations

throughajointly-ownedanddemocratically-controlledenterprise(InternationalCo-operative

Alliance2007).TheBMTmodelisanexampleofacreditunioncooperative.Creditunionsare

bestunderstoodascooperativefinancialinstitutionsthatareownedandcontrolledbyits

members,andoperateforthepurposeofpromotingthrift,providingcreditatreasonablerates,

andprovidingotherfinancialservicestoitsmembers(WorldCouncilofCreditUnions2009).

Althoughcreditunionsoperateonamacroandmicroscale,BMTsoperateonthemicro-scale.

Thisisdemonstratedinfigure3inappendix2.Asindicated,BMTsofferaccessiblemicro-loans

totheirmembers.Aswelltheyrequireminimumcapitalfromtheirclientsanddonotrequire

businesslicensesorpermitsasapre-requisiteforloans.ThisimpliesthatBMTsareableto

providefinancialaccessandservicestotheunderservedandimpoverished.Theaveragesizeof

aBMTcooperativerangesfrom20-45members(ObaidullahandKhan2008,27),andas


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cooperativestheyareownedbytheirmembers(SeibelandAgung2005,40).BMTsclaim

thatprofitsharingismoreintheinterestofthecustomersthaninterest-taking(Seibeland

Agung2005,50),andassuchtheloanportfolioofBMTsissharedbetweenmurabaha7,

mudharabaandqardal-Hassan8,asillustratedbyfigure4inappendix2.

WithinIndonesia,BMTsarethoughttorepresentoneofthemostappropriate

institutionsforaddressingentrenchedpoverty(Antonio2008,258).Assuch,theirgrowthand

developmenthasbeenadvocatedbynationalorganizationssuchastheCentreforSmall

BusinessIncubation(PINBUK)whichwassetuptoactasanumbrellagroupforfurtherBMT

developmentinIndonesia(Antonio2008,257,Utama2006,3)andtheMuslimorganization

NadhatulUlama(SeibelandAgung2005,13).Withthissupport,BMTsdiversifiedfromtheir

JavaneseoriginstocitiesandregionsacrossIndonesia,andtodaytheyrepresentovertwo

thousandinstitutionsservingmillionsofpoorIndonesianMuslims(ObaidullahandKhan2008,

29)andconstitute7.2%ofallfinancialcooperative(SeibelandAgung2005,32).

TheBMTshaveamixedcommercialandsocialorientation;inotherwords,theycaterto

theneedsofbothgrowthorientedandlivelihoodenterpriseswhilstalsopromotingpositive

socialchange(Sakai2008,276).TheroleofBMTsinenrichingsmallandmediumenterprises

(SMEs)isparticularlynotedandrelativelywelldocumented.

Formanydecades,SMEshaveplayedasignificantroleintheIndonesianeconomy

(Antonio2008,252),enhancingeconomicgrowthandreducingunemployment.Itisestimated

7Wheretheprovideroffundsactuallypurchasesthecommodityandresellsittotheuserwithamarkupagainst

installmentsordelayedpayment(ElHawaryandGrais2005)8Beneficenceloans:Aloanextendedwithoutanyinterestoranyothercompensation.Thelenderexpectsonlya

rewardfromGod(Obaidullah2008,60,ElHawaryandGrais2005)


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thatSMEscontributedto54.2%ofIndonesianGDPin2005andabsorbedabout79million

workers,equivalentto96.8%oftheIndonesianlabourforce(Antonio2008,251).Despitetheir

economicsignificance,SMEscontinuetohavegreatdifficultygainingaccesstoformalfinancial

institutions(Antonio2008,251).

Overthedecades,SMEdevelopmenthasbeenconnectedtocontentiousstatepolicies.

TheBentengprogrammeofthe1970sintendedtoincreasethenumberofSMEsintheimport

industry,butfaileddismallyduetoinsufficientregulationbythegovernmentandtheabuseof

thelicensingsystembytheparticipants(Antonio2008,253).Underthisprogramme,licenses

weregiventoSMEsprioritizingthemintheimportbusiness,andfacilitatingtheirgrowth.In

mostcases,theselicenseswerethensoldtomorewellestablished,Chinese-controlled,

companies(Antonio2008,253)whichclearlydefeatedthepurposeofenhancingthe

economicpoweroftheseentrepreneurs(Antonio2008,253).Followingthisfailure,the

governmentswitcheditsgearsinsupportoftheasaspemerataan-orevendistribution-

programme,whichstatedthatequalitywastobecomeaguidingprincipleindevelopment

policy,alongsidehigheconomicgrowth(Antonio2008,253).Thisinvolvedthecreationofthe

SmallIndustryCentre(LIK)tofast-trackthedevelopmentofsmallindustriesaswellasthe

introductionofthefoster-parentmechanism,whichinvolvedstate-ownedenterpriseslinking

upwithsmall-scaleindustriesinsubcontractingschemes(Antonio2008,253).Additionally,it

requiredallstateandprivatebankstoallocateatleast20%oftheirloanportfoliostosmall

businessenterprises(Antonio2008,253).Thispolicywasnotassuccessfulasintended,aswas

thecasewiththeBentengprogramme.


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recentdevelopmentsinanincreasinglydifferentiatedIslamicmicrofinancesectorduringthe

lastthreeyearsisavailable(Seibel2008,100);thereisalsoashortageofprovincespecific

informationwhichmakescross-countrycomparisonimpossible.Thisstemsfromthefactthat

BMTsareinformalinstitutions,notformallylinkedtothenationalmonetarysystem,Bank

IndonesiaortheMinistryofFinance,andassucharenotroutinelyregulatedbythem,orby

anyone(Antonio2008,258).SinceregistrationwiththeMinistryofCooperativesisoptionaland

notcompulsory,itisestimatedthatroughly,only16%ofBMTsareregisteredwiththeMinistry

ofCooperatives,andonlythose16%arerequiredtosendannualreports(SeibelandAgung

2005,40).Toaddtothat,theMinistryofCooperativeswithitsunclearandperhaps

counterproductivefunctions(SeibelandAgung2005,35)doesnotevenperformitsfunctions

adequately(SeibelandAgung2005,35),andthereisnoperformancemeasureusedtoassess

theinstitutionalqualityofeachBMT(SeibelandAgung2005,41).Withoutthese,theBMT

frameworkcannotbeexpectedtoimproveitself.Infact,itcanbesaidthatunsupervised

Islamic-likeconventional-cooperativesareanoutrightmenacetotheirownmembers,whorisk

losingtheirsavings(Seibel2008,86,100).InanincreasinglydecentralizedIndonesia,

cooperativesarenowbeingregisteredautonomously,whichislikelytomakethetaskof

regulationandsupervisionevenmoredifficultinthefuture(SeibelandAgung2005,35).

ItisalsoworthnotingthatIslamicmicrofinanceinstitutionsarefewinnumberand

roughlyonly4%ofmicroandruralfinanceinitiativesinIndonesiaareIslamicinnature(Seibel

2008,90).Conventionalinstitutionsoutnumber,byfar,Islamiconesbothintermsofabsolute

numberandgrowthrates.


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Fromwhatlittlethatcanbedetermined,itisevidentthatBMTshavenotbeen

performingaswellasexpected.AsSeibelnotes,thereisanoverallpoorperformance(Seibel

2008,96)andthelargemajorityofBMTsaredormant-orworse-technicallybankrupt(Seibel

2008,96).Thispoorperformancecanbelinkedtopoormanagementpractices(Seibel2008,94)

(SeibelandAgung2005,41)andthelackofadequateIslamicbankingexperience(Seibel2008,

95).Inmostcases,BMTmemberslacktrainingandexperienceinbanking,financialanalysis,

marketingaswellaspersonalandteambuilding(Utama2006,9).Furthermore,asindicated

above,BMTshaveatendencytowardsdebtforgivenessandleniency(SeibelandAgung2005,

57)andoveremphasizetheirfocusontheinformalsectorratherthanonthemore

profitablesectors(Seibel2008,95)-allthisindicatingpoormanagementpractices.

Furthermore,ithasbeensuggestedthatonlythelargercommercialbankshavesuccessfully

acquiredthecomplexartofIslamicbanking(Seibel2008,86),however,theylackexperience

inmicrofinanceasaspecializedfield(Seibel2008,100).

Recalloursecondquestion:havetheBMTsassistedinpromotingeconomicgrowthand

communitydevelopmentinIndonesia?Ifyes-how?Andifnot,whynot?Becauseofthelackof

adequateinformation,wecannotaccuratelyandquantitativelydeduceiftheBMTshave

assistedinpovertyalleviationinIndonesia.Inpractice,asshownintheliterature,BMTscould

proveinstrumentalineconomicempowermentandenterprisedevelopmentinIndonesia.

However,intheory,itisindicatedthatmanagerialandbureaucraticbottleneckshave

preventedBMTsfromreachingtheirfullpotential,andunlesstheseissuesareresolved

effectively,thesuccessoftheBMTmodelislimited.


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This,however,doesnotimplythatreligiousfactorshavenotplayedaroleinthe

reportedmixedsuccessoftheBMTs.AsSeibelandAgungpointoutthereisnorealindication

thattheestablishmentofIslamicbanksinIndonesiawasprecededbybroadpopulardemand

forIslamicfinancialservices(SeibelandAgung2005,17),aspreviouslyassumed.Accordingto

theirstudy,insurveyscarriedoutinseveralprovinceswithanaverageMuslimpopulationof

97%,only11%werefoundtounderstandtheproductsorbenefitsofshariahbanking(Seibel

andAgung2005,17).Seibelslaterstudyconfirmsthatthereisalackofpopulardemandfor

Islamicbankingservices(Seibel2008,95).Itisalsoindicatedthatborrowersdidnotlikethe

profit-sharingofthemudharabamodel[whichaccountsforroughly30%ofallBMTloans]

becausetheydidnotwanttorevealtheirprofitstotheprogramme(ortherestoftheirgroup)

(DhumaleandSapcanin1999,12).Despitethisrevelation,religiousconcerns-orratherlackof

populardemandforreligiousservices-isnotasignificantenoughfactorinaccountingforthe

mixedsuccessofBMTs.Asqualitativeresearchshows,amorereligion-neutralperspectiveis

takenbythemajorityoftheBMTsclientele,whositeflexibility,accessibilityandaffordable

ratesasthemainreasonsbehindtheirchoiceofinstitution(Sakai2008);theutilityofIslamic

bankingprinciplesdidnotaffectthedecisionsofmostcustomers(Sakai2008)withthenoted

exceptionofthepesantren9students.AsSeibelandAgungpointedout,peoplepreferabank

systemforitsbetterserviceingeneral,facilitiesprovided,credibilityandbankstatus;people

tendtoavoidshariahbanksfortheirlimitedservicesandfacilities,poorservices,andlow

credibilityandnotbecauseofitsshariahnature(SeibelandAgung2005,32)Therefore,itcan

beconcludedthatthelackofpracticalsuccessoftheBMTsinIndonesiaismoreduetopoor

9IslamicboardingschoolsinIndonesia


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managerialpracticesandbureaucraticbottlenecksratherthanontheIslamicprinciplesthatare

underlyingthemodel.

DespitetheinstitutionalproblemsofthecooperativesectorinIndonesia,theBMT

modelremainsoneofthemostrobustandleast-costmodelsofdecentralizedfinancial

intermediation(Utama2006,5);InorderfortheseBMTstobemorepracticalintheeconomic

empowermentofIndonesiaspoor,thebottlenecksdescribedaboveneedtobesufficiently

addressed.Themosteffectivewaytoachievethisisthroughfinancialandinstitutional

strengthening,bymeansofincreasedcoordinationbetweenIslamiccommercialbanks,various

governmentagenciesandNGOsandotherIslamicfinancialinstitutions(Antonio2008,258).

TheBMTsshouldalsolooktoalignthemselvesmorecloselywiththeconventional,and

reportedlymoresuccessful,microfinancesector.AsSeibelcontends,theexpertiseand

knowledgeofcommercialbanksinsettingupbranchnetworksofIslamicmicro-finance

institutionsshouldbeutilized(Seibel2008,101);particularlytheexpertiseoftheconventional

BankRakyatIndonesia(BRI)whoimplementedoneofthemostsuccessfulmicrofinance

modelsworldwide(Seibel2008,90).Closeallianceswiththeformal,dual,financialsectorcan

alsoprovideBMTsaccesstofreshfunds,therebystrengtheningitsliquidity(Antonio2008,

261).Furthermore,legalactioncanbetakentoformalizeBMTs,therebyensuringtheir

registrationwiththeMinistryofCooperatives,aswellastheirregulationandsupervision.As

Obaidullahcontends,micro-financeworksbestwhenitmeasures-anddiscloses-its

performance.Reportingnotonlyhelpsstakeholdersjudgecostsandbenefits,butitalso

improvesperformance(Obaidullah2008,9).


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AnotherplausiblesuggestionforimprovingthepotentialoftheBMTmodelistoalignit

morecloselywithsuccessfulforeignNGOsandinstitutions.AsinthecaseoftheBMTs(aka

BaitulQuradsorBQs)intheAcehprovince,whichwereprovidedwithtechnicalassistancefrom

theGermanTechnicalAssistance(GTZ)ashighlightedbySeibelandUtama(Seibel2008,Utama

2006).Intheirjoint-programmetheGTZrealizedthefailuresoftheexistingBMTmodelandas

such,revampedittocreatetheBQmodel.Theirapproachishighlightedinfigure5inappendix

2.ThestudyandmappingconductedbytheGTZshowsthatthecooperativesysteminthe

provinceisstillunderdeveloped(Utama2006,6),butthatthereissignificantroomfor

improvement.Asfigure5demonstrates,themodeltakesplaceonfourlevels:micro,meso,

macroandmeta.Atthemicrolevel,newBQsareestablishedandthemembersoftheBQ

wouldcollectivelyraiseaselectamountofcapitalandobtainlegalstatusasasavingsand

creditcooperative(Utama2006,9)inordertobeeligiblefortechnicalassistance;this

intendedtoensureautonomyaswellasregulationandsupervision.Thetechnicalassistance

providedbytheGTZatthisstagewouldincludeeducationandtrainingforthemembers,

particularlyincooperativeprinciples,Islamicfinance,banking,financinganalysis,marketingas

wellaspersonalandteambuilding(Utama2006,9).Amoreelaboratemapofthismicrostage

isillustratedinfigure6inappendix2.Atthemesostage,theinitialBQswillcreatesecondary

BQs(Utama2006,11),aswellasestablishaBQcentretoprovidenecessaryservicesand

becomethedevelopmentcentre,providingtrainingformembers(Utama2006,11).Atthis

stage,cooperationandnetworkingbetweenBQsisstrengthened(Utama2006,11).Atthe

macroandmetalevels,cooperativeofficesmonitorandsupervisetheperformanceoffinancial

cooperativesandareinvolvedineveryactivity(Utama2006,12).Thismoreholisticapproach


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isbelievedtoresultintheregainingofsocietystrustintheIslamiccooperativesector(Utama

2006,12).However,itisinterestingtonotethatthisproposedmodelismoretop-downin

naturethanthebottom-uppreviousBMTmodel,andthismayhavefurtherimplicationsinthe

long-runfutureofIslamicmicrofinancialinstitutionsinIndonesia.

WithsurgesinpopulationgrowthintheimpoverishedIslamicworld,andgrowing

incomedisparitiesintheincreasinglyglobalizedworld,thepotentialforIslamicmicrofinance

fortheeconomicempowermentoftheMuslimpoorisenormous.AsDhumaleandSapcanin

conclude,Islamicbankingtechniquescouldgivethousandsoftheentrepreneurialpooraccess

tomicrofinance-anoptiontheymightnotconsideriftraditional,interestbasedcommercial

loanswereoffered(DhumaleandSapcanin1999,13).However,asmadeevidentbyour

investigationofthemicrofinancial,IslamicSavingsandLoanCooperativesorBMTswhatlooks

goodonpaper,doesnotalwaysmaterializesopositivelyinreality.InorderforIslamic

microfinancetobeefficientandbeneficialfortheMuslimpoorinIndonesia(andindeedthe

restoftheMuslimworld),itmustdeveloplinkswiththeformalIslamicbankingsectorand

capitalmarkets(Brugnonin.d.,23)andbuildtheappropriateinstitutionalcapabilitiesrequired.

Asnotedpreviously,thereisalackofefficientinstitutionalstructuressupportingmicro

shariahbankingoperationsandmanagersandfocusshouldberedirectedintosupporting

buildingcapacities(SeibelandAgung2005,14)andthesekeybottlenecksneedtobe

amelioratedifeffectivesocietaltransformationisdesired.

ThecaseoftheBMTsinIndonesiademonstratesthattheinclusionofreligiousactorsin

developmentpolicymaynotnecessarilyprovidetheanswertoexistingproblems.Inthiscase


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religiousactorsandinstitutionswereactivelyinvolvedinthedevelopmentprocess,andyet

despitethisthepoliciesimplementeddidnotsucceedasexpected.This,asshown,hasnothing

todowithreligiousinvolvement,butratherthefactthatthecapacityfortheirefficient

engagementwasnotbuiltandtheinstitutionsneededfortheirsuccesswerenotsetinplace.

ThecaseoftheBMTsinIndonesiaclearlyhighlightstheimportanceofstronginstitutionsand

goodgovernanceineconomicempowermentandpovertyalleviation,andonceagain

emphasizesthatthedevelopmentprocessismulti-faceted.Withtheseestablished,thereisno

reasonwhyIslamicmicrofinancecannotbesuccessfulinIndonesiaorintherestoftheworld.


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Appendix1:GlossaryofIslamicFinanceandBankingTerms

Term Definition

Bai-Bithaman-Ajil Saleofcrediti.e.asaleinwhichgoodsaredeliveredimmediatelybutpaymentis

deferred(Obaidullah2008,59)

Bai-Muajjal Deferredpaymentsorspotsalesinwhichthe

selleroftheproductacceptsdeferred

paymentsininstalmentsorinalumpsum.The

priceisagreeduponbythebuyerandthe

sellerpriortothesale,andthesellerisnot

allowedtoincludeanychargefordeferring

payments(DhumaleandSapcanin1999,5)

Bai-Salam Asaleinwhichpaymentismadeinadvancebythebuyerandthedeliveryofthegoodsis

deferredbytheseller(Obaidullah2008,59)

Ijara Leasing.Saleofusufructofanasset.The

lessor(providerofthefunds)retainsthe

ownershipoftheassetwillalltherightsand

theresponsibilitiesthatgowithit(Obaidullah

2008,59)

Mudharabah TrusteeFinancing:Theowneroffunds

financestheentireprojectwhilethe

entrepreneuroffersherlabor,timeand

expertise.Profitsaresharedbetweenthematacertainpre-determinedratio,whereasany

financiallossesareexclusivelybornebythe

financier(ElHawaryandGrais2005)

Murabaha Wheretheprovideroffundsactually

purchasesthecommodityandresellsittothe

userwithamarkupagainstinstallmentsor

delayedpayment(ElHawaryandGrais2005)

Musharaka EquityParticipationThefinancierentersinto

anequityparticipationagreementwithother

partnerstojointlyfinanceaninvestmentprojectandparticipateinitsmanagement.

Profits(andlosses)aresharedamongpartners

basedontheirrespectivecontributionsto

capital(ElHawaryandGrais2005)

QardHasan Beneficenceloans:Aloanextendedwithout

anyinterestoranyothercompensation.The


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lenderexpectsonlyarewardfromGod

(Obaidullah2008,60,ElHawaryandGrais

2005)

Riba Interest.Referstothepremiumthatmustbe

paidbytheborrowertothelender,alongwith

theprincipalamount,asaconditionfortheloan(Obaidullah2008,60)

Takaful-Tawuni Analternativetoinsurance,whereagroupof

personsagreetosharecertainriskby

collectingaspecifiedsumfromeach.Incase

ofaloss,fundsarederivedfromthispool

(Obaidullah2008,61)

Wadiah Acontractwherebyapersonleavesvaluables

withsomeoneforsafekeeping.Thisserviceis

encouragedinIslamtobefreeofcharge

(Obaidullah2008,61)Wakalah wherethebankactsasanagentoran

intermediaryandispaidafeeforitsservices

(Antonio2008,259)

Zakat AmandatoryformofIslamiccharity;itisthe

amountpayablebyaMuslimtocharityasa

proportionofhisorherownwealth

(Obaidullah2008,10,62)


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Appendix2:TablesandCharts

Figure1:GrowthofIslamicBankinginIndonesiafrom1991-2006,(Seibel2008,91)

TypeofIslamicBank 1991 1992 1999 2000 2001 2002 2003 2004 2005 20

CommercialBanks

(CB)

0 1 2 2 2 2 2 3 3 3

CBUnits 0 0 1 3 3 6 8 15 19 2

TotalCBOffices 0 1 40 62 96 127 299 401 504 63

RuralBanks(BPR) 4 9 78 78 81 83 84 86 92 10

TotalNumberofBanks 4 10 81 83 86 91 94 104 114 13

%Growth - 150% 710% 2.5% 3.6% 5.8% 3.3% 10.6% 9.6% 14

TotalNumberof

Offices

4 10 118 140 177 210 383 487 596 74

%Growth - 150% 1080% 18.6% 26.4% 18.6% 82.4% 27.1% 22.4% 24.

Figure2:CategorizationofSmallandMicro-financialInstitutionsinIndonesia(Antonio2008,

255)

Formal Informal

Bank NonBankFinancial

Institutions

CommercialBanks(BankUmum)

VillageFundingandFinanceInstitutions(LDKPs)

Self-HelpGroups(KSMs)*

RuralBanks(BankPerkreditan

Rakyat-BPRs)

Cooperatives NGOs

IslamicSavingandLoan

Cooperatives(BMTs)


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*ASelf-HelpGroupisunderstoodasaten-fifteenmembersgroupwhoarerelatively

homogenousintermsofincome;essentially,thisgrouppoolstogethertheirmemberssavings

andusesitforlendingpurposes(Obaidullah2008,8)

Figure3:IslamicBanksandFinanceCompaniesbySizeofCapitalandCreditLimit(Antonio

2008,255)

TypeofIslamic

Bank

Categorization Regulation Minimum

Capital(i.e.

minimum

amount

requiredfor

eligibility)

(Rupiyah)

Creditper

Customer(i.e.

provisionof

loans,per

customer)

(Rupiyah)

Islamic

CommercialBank

Formal,Bank BankofIndonesia 1trillion 100million+

IslamicRural

Bank(BPRS)

Formal,Bank BankofIndonesia 500million-

2billion

5-100million

IslamicSaving

andLoan

Cooperatives

(BMTs)

Informal Fosterinstitutionse.g.

theInstitutesforthe

DevelopmentofKSMs

i.e.PINBUK,andthe

Ministryof

Cooperatives(MOC)

10-100million* 100,000-10

million

Note:Foreaseofconversion,10,000,000Rupiyah=1,100CADroughly*Furthermore,theydonotrequirecustomerstoholdbusinesslicensesorpermits-documents

thatfewoftheimpoverishedwouldhold-asaprerequisiteforfunding(Antonio2008,258)


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MicroLevel EstablismentofnewBQsMesoLevel StengtheningSecondaryBQsMacroLevel CreangSupervisionSystemMetaLevel NewParadigmofBQ

Figure5:BaitulQuradDevelopmentApproach(Utama2006,8)

Figure6:FlowEstablishmentofBQunderGTZadministration(Utama2006,9)


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