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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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