FAROUK ABDULLAH ALWYNI discusses Islamic microfinance in Indonesia and highlights the potential opportunities and challenges that lie ahead.
Islamic microfinance has gained momentum in Indonesia since 1997-98. It developed during the downfall of the new order government under the leadership of General Suharto. At that time, Indonesia was experiencing a severe financial crisis, causing massive depreciation of the Indonesian rupiah with the worst levels touching around US$1=IDR17,000 compared with around US$1=IDR2,350 previously.
The country also experienced a major capital flight amounting to around US$80 billion. During this period, the country also witnessed the closure of many banks and major groups, and was on the brink of an economic collapse.
Furthermore Indonesia had a wide economic disparity with a few conglomerates controlling around 80% of the economy. It was only then that the drive to improve the country’s income distribution emerged. One of the ways to improve the income distribution and narrow the economic gap was through implementing an ‘access to finance’ plan for micro, small and medium-sized enterprises.
Under General Suharto, the Indonesian economic ideology leaned more towards a neo-classical economy with its infamous concept of the ‘trickledown effect.’ This ‘trickledown-effect’ concept basically believed that to achieve solid growth and economic development, a small group of major entrepreneurs was needed which would built major corporations. The concept projected that once this pool of corporations was up and running they would automatically open employment opportunities for most of the population.
In Indonesia, Islamic microfinance is widely known as Baitul Maal wat Tamwil (BMT). Most of the BMTs have two similar backgrounds for their establishment and activities. Firstly they are known as microfinancial institutions and also Islamic financial institutions. There are around 3,900 BMT companies operating in Indonesia with total assets under management of about IDR5 trillion (US$550 million). The legal set-up of most of the BMT companies is cooperative and they serve around 3.5 million customers.
The concept of BMT
BMTs have two main scopes of activity. Firstly, they act as a Baitul Maal with social functions. As a Baitul Maal, a BMT can take Zakat, Infaq and Sadaqah and then pass them on to those who need them. There are requirements as to who can receive those charities as per Islamic laws.
Secondly, they act as a Baitul Tamwil with normal business functions. Here, a BMT will finance and give technical assistance (for those BMTs that are more developed) to micro-entrepreneurs to develop their businesses. They also act as deposit-taking entities through the promotion of a saving culture in society.
Permodalan Baitul Maal wat Tamwil (PBMT) Ventura
In reaching out to the poor, the Permodalan Baitul Maal wat Tamwil (PBMT) Ventura applies a proactive approach, which means that the BMT staff are the ones approaching customers to teach them about the saving culture and offer financial planning. Those who can help themselves may be given the capital to support their own businesses.
On the saving culture front, this is not an easy task because quite apart from saving, just meeting basic needs can be difficult.
Hence, PBMT Ventura has created an ‘awareness to save’ policy. In addition, PBMT Ventura only finances those who practice the saving culture. In the spirit of self-help, these micro-entrepreneurs are asked to upgrade their business capacity with supplementary services such as training and capital increase. These activities instill values that help them to deal with the second issue: financial planning.
The performance measurement of BMT
The performance of Islamic microfinancing cannot just be measured on the basis of financial growth, but it has to be measured within the five factors in line with Shariah.
The performance measurement of a BMT is based on the conventional financial model and Shariah. The first factor is basically a common measurement for financial institutions. There are three performance measurements based on the conventional financial model. These are sustainability, financial growth and outreach.
The second measurement is using Maqasid Shariah. The Maqasid measurement of a BMT is on a family basis. How do we measure these non-quantitative aspects of the BMT? In terms of faith, the BMT needs to protect the community’s faith through economic means.
BMT in Indonesia: Opportunities and challenges
There are three main economic issues concerning the poor (including micro-entrepreneurs) in Indonesia. Firstly, there is a lack of a saving culture. Secondly, there is no financial planning. Thirdly, there is no entity care for them. Thus, alleviating poverty has to start from these three issues. By just focusing on the micro-entrepreneurs, the BMT has survived for more than 20 years.
The BMT Association has also launched the ‘2020 Vision of BMT’, which is to grow the economic empowerment of the people and involve all parties: including the government, the parliament, and public in general, to empower micro-entrepreneurs so that they can have a more significant presence.
However, it is important to note that despite its growth, out of the millions of lower middle class people in Indonesia, there are those who don’t know and are not touched yet by the BMT.
Out of around 58 million micro-economic societies in Indonesia, many of them have not yet been reached by any financial institution.
Financial institutions often ignore them, while in fact they have significant potential. Around 40% of micro-economic players, often women, have graduated from senior high school or equivalent, even 20% of them with bachelor degrees. This means that the potential is huge and cannot be underestimated.
Conclusion
After having withstood the global financial crisis, many banks have once again started to look at the Islamic microfinance model, both local and foreign.
Note: This is a summary of the discussion on the ‘Islamic Microfinance, Maqasid Shariah and Broad Based Development Strategy’ held by the Center for Islamic Studies in Finance, Economics and Development (CISFED) in cooperation with PERBANAS (The Association of National Private Banks) Institute in PERBANAS Institute, Jakarta on the 30th June 2012.
Farouk A Alwyni is the chairman of the Jakarta-based think tank Center for Islamic Studies in Finance, Economics, and Development (CISFED). He also serves as the CEO of Alwyni International Capital.