Indonesia: How Islamic micro-finance offers a fair go

A modern take on piety is fostering a more just society

Indonesia has more Muslims than any other country in the world and during the past couple of decades it has undergone an Islamic resurgence. Yet the growth of Islamic banking has been slow and on a smaller scale.

In neighbouring Malaysia, for instance, some 20% of bank assets are held by Islamic banks, but in Indonesia the corresponding figure is less than 5%.

That's not to say, however, that Islamic finance doesn't play a role among Indonesia's population of 255 million, of whom about 205 million are Muslims.

Instead, Islamic savings and credit co-operatives, or Baitul Maal wat Tamwil (BMT), are the nation's primary Muslim financial institutions and function very differently from banks. These are grassroots institutions offering financial services to relatively small-scale traders in urban areas.

Minako Sakai, discipline head in the Indonesian Studies Program and Southeast Asian Social Inquiry at UNSW Canberra, has been researching these little-studied institutions and argues that the propagation of Islam is an important factor among the BMT founders and workers.

While there is a lot of study about how Islam interacts with politics in Indonesia, Sakai says she was interested in exploring how Islam operated in everyday life, particularly in finance. Some Muslims pursue "grand and idealistic" notions of establishing an Islamic state, but those who work in the BMTs take a different approach.

"I don't think [an Islamic state is] what the majority of Muslims actually think [is] achievable. They [would] like to see Islam being used much more effectively to deal with daily problems such as poverty, or to provide more inclusive financial options so that people can live in a more just world," says Sakai.

'There is a profit involved and that is how they maintain, sustain and grow their business, but they do not use the word interest’

MINAKO SAKAI

Propagation by deeds

BMTs offer financial services based on Islamic jurisprudence to small and medium-sized enterprises. Aside from for-profit business transactions, a social mission wing – known as baitul maal, attached to the parent BMT – offers non-profit-making activities.

BMTs aim to combine the mission of both for-profit and not-for-profit businesses in order to redistribute wealth in a more equitable way than conventional capitalism.

For pious Muslims, working at a BMT offers a "middle way" to live a modern life in contemporary Indonesia. BMTs pay reasonably good salaries to their professional staff, such as trained accountants, though not as much as the Islamic banks.

"It is a way which allows them to gain a reasonably good, steady income and they can also express their religious commitment by working for Islamic financial institutions," says Sakai.

The BMT movement has developed as part of a new form of Islamic propagation by deeds, known as dakwah bil hal, says Sakai.

The movement arose against the backdrop of the increasing influence of Islam in day-to-day life in Indonesia. Reducing the gap between the rich and the poor was one of the emergent concerns of Muslims and in the 1980s Muslim university students started to look to Islam for solutions for social and economic disparity and created a wide range of new Islamic groups and organisations.

The Dompet Dhuafa Foundation, or the Wallet of the Poor Foundation, encouraged the BMT movement in Indonesia. It was originally an Islamic alms-collecting organisation and has developed creative Islamic theology to assist the poor. Its leaders see education, small business skills and health as a solution for poverty in Indonesia.

The movement to promote BMTs gained a momentum in the 1990s because the Islamic banks failed to assist small businesses. 

On the other hand, Islamic banking has not grown significantly either. In part this is because it doesn't receive the sort of state support that the sector does in Malaysia. But also, the piety of the upper and middle classes doesn't translate into support for Islamic banking. Instead, they make more pragmatic choices for their finance.

 Partnerships with borrowers

BMTs have two main functions. The first is to operate as a baitut tamwil, or Islamic business centre, providing savings and loan services to customers. The second is to operate as an Islamic treasury, known as a baitul maal, which redistributes the various alms, such as obligatory zakat, collected from the Islamic community and used to improve community welfare.

Projects include providing start-up capital to the poor who want to start their own businesses; offering scholarships or free healthcare to the needy; and finding study groups and workshops to increase knowledge about Islamic business concepts and teach basic financial and accounting skills.

BMTs comply with the Muslim prohibition on usury, so do not charge interest. This is not to say, however, that they do not seek to make a profit.

"There is a profit involved and that is how they maintain, sustain and grow their business, but they do not use the word 'interest'," says Sakai.

The BMT's like to emphasise this "partnership" with their borrowers, in contrast to conventional banks and money-lenders who they say profit at the expense of their borrowers.

According to Sakai's research, BMTs use four main lending models:

Musyarakah is an agreement between a BMT and a borrower to form a joint venture and split the profits in a pre-agreed ratio. Losses are shared based on the equity of each party in the business.

Mudharabah is a 100% loan of funds to a business, also based on the profit-sharing principle.

Under Murabahah, the BMT buys outright the item required by the client, who then repays the item in instalments, plus a margin or a spread. Sakai says the most common item is a motorcycle, because it is an essential business tool for low-income earners as well as a mode of family transport.

Finally, there's Qardhul hasan, a loan to help poor people start their own business and the borrowers are only asked to repay the money they have borrowed without paying any additional costs or margins and this is offered by a baitul maal.

 Open to all

Part of the popularity of BMTs is that they are prepared to lend to 'risky' small businesses whereas Islamic banks aren't. In the past, those rejected by the banks would have turned to money-lenders, who had no interest in their borrowers' welfare and would resort to threats and violence to have their money repaid.

Sakai says, however, that the poor still resort to money-lenders, despite what the BMTs are hoping to achieve.

"BMTs are not the only source of credit, but having access to BMTs, borrowers are less inclined to take up risky but easy loans from private money-lenders," she says.

Interestingly, the BMTs' clients are not all Muslims – as long as the loan-taker agrees with the contract, anyone can have a financial transaction with a BMT.

The sector has grown rapidly, from 24 BMTs in 1988 to an estimated 3900 in 2012.

'Their main motivation was to combat illegal money-lenders by offering transparent and fair loans to small business traders who did not have access to banks' 

MINAKO SAKAI

Three women in Yogyakarta

In her research, Sakai has charted the success of BMT Bina Dhuafa Beringharjo (BMT to Lead the Poor at Beringharjo) which exemplifies the growth of the BMT movement in Indonesia. It was established by three women in 1994 in Yogyakarta with the funding of 2 million rupiah (equivalent, at the time, to US$1000).

"Their main motivation was to combat illegal money-lenders by offering transparent and fair loans to small business traders who did not have access to banks," Sakai writes.

By 2013, BMT Beringharjo had grown its assets to IDR 55 billion, and was employing 117 employees. The business has expanded beyond Yogyakarta and now has 12 branches in Java.

One of the founders, Mursida Rambe, tells Sakai that she had seen how inhumane it was to be in debt and to lose all of one's assets for defaulting on small payments to money-lenders.

"She realised that the people first need to come out of poverty before they can become better Muslims," Sakai writes.

 Creative solutions

Despite the success and growth of the BMTs, their future is under a cloud.

First, new laws mandate that BMTs should only offer for-profit financial services. The effect of this is that BMTs will be reduced to for-profit financial services by baitut tamwil only, and not-for-profit social empowerment activities conducted by baitul maal will not be permitted. Thus, BMTs will not be much different from the banks.

Second, the zakat, or obligatory Muslim alms, are now centrally regulated and controlled by the Indonesian government, which in theory requires all zakat collecting agencies to channel their collected funds to the government. As corruption is rife in the state agencies, public trust in zakat agencies is being tested, casting doubt on the future role of BMTs. 

Sakai, however, is optimistic. "As Indonesians are so creative, I am sure they will find a creative way out," she says.

There is an increased interest in using crowdfunding, and Indonesians, who are the largest Facebook users in the world, are sure to find a new way to support the less privileged by raising funds by alternative means, Sakai says.