SUSTAINABLE ISLAMIC MICROFINANCE INSTITUTIONS IN INDONESIA: AN EXPLORATION OF DEMAND & SUPPLY FACTORS AND THE ROLE OF WAQF

Whereas Indonesia is the largest Muslim country in the world, the growth of Islamic microfinance institutions (MFIs) has being sluggish and far behind their conventional MFIs. Islamic MFIs are struggling to survive amid the fierce competition in the provision of microfinance services, from both the conventional and Islamic institutions. Meanwhile the high unemployment rate in Indonesia calls for searching for ways in which financing can be provided to the jobless and poor. One way to resolve this is to provide MFIs with low cost funds that can be used to finance viable micro-businesses. The aim of this thesis is to examine the demand and supply side factors related to operations and growth of Islamic MFIs. It also investigates the scope of integrating microfinance and waqf to enhance the social mission of providing access financial services and opportunities to the needy and the poor. A survey was conducted to explore the perceptions, understanding and preferences of 581 MFI’s borrowers from four MFIs—two Islamic (BMT and BPRS) and two conventional (BRI and BPR) in Indonesia. A total of 18 MFIs’ managers and two waqf managers/nazirs were interviewed. Secondary data, case-study and a focus group discussion (FGD) were also conducted in order to understand the problems. The results show that while the majority of MFI’s clients indicate preference for Islamic MFIs, in reality their choices of MFI are based on economic/finance (low interest rates and size of loan) and non-economic/non-finance factors (quality of services variables easiness, promptness, nearness, method and loan officers’ profile). While the MFIs clients prefer Islamic MFI compared to conventional, in the end, the practical and economic reasons became dominant factors in their choice of MFI. Therefore, the demand for Islamic microfinance can be enhanced if the level of their economic and non-economic factors can be brought to the levels of conventional MFIs. The research reveals that there is still a gap between needs and knowledge of Sharia’h financial products and services. When the practice of murabahah product is considered, there appears to be no difference in substance between conventional and Islamic MFIs. In order to understand the operational structure of each type of MFI, their performance was assessed by using the balanced scorecard (BSC) with four perspectives. A balanced non-financial and financial performance is extremely important to create sustainability for microfinance institutions. The relationships between the different components of BSC indicate strong significant correlations between the internal process and customer’s perspectives. There are also significant correlation between customer’s perspectives and learning-and-growth and slightly significant correlation between learning-and-growth and financial performance. Overall scores of the Balanced Scorecard from the four perspectives for MFIs cemented BRI as the best performer, BPRS in the second place, followed by BPR and BMT in the third and fourth place respectively. The advantage of BRI is partly due to robust government support which makes it difficult for other smaller MFIs to compete. In contrast, BMT showed a weak institutional structure in terms of internal processes, learning-and-growth and customer satisfaction. It seems that BMT is not managed well according to BSC’s key performance indicators. This thesis also proposes to add one more perspective i.e, Social Perspective, for ‘The BSC based Islamic MFIs’ Model’ to help waqf institutions to appraise and choose a MFI in a more balanced and comprehensive way. Social perspective comprises the social mission of Islamic MFIs which can be reflected in providing qard hassan and giving more opportunities to the needy, jobless and the poor to start their own micro business. Indicators of the social perspectives can be the amount of funds contributed for qard hassan, how many needy clients are being served, and how many months a MFI permits clients to use the qard hassan loan. Islamic MFIs such as BPRS and BMT are expected by Muslims to perform more social functions than others. Therefore, one way to implement the social mission is to incorporate qard hassan in BPRS and BMT’s operations to help the poor and jobless with the low cost loans to start their viable micro-businesses

Islamic Microfinance Institutions in Indonesia and The Challenges in the Supply Chain Perspectives

The Indonesian economy has recently been discouraging. There are more than forty millions Indonesian people living under the poverty line. With supply chains extending throughout microfinance institution, it can be expected to be one of the solution. Though microfinance institutions (MFIs) have different organizational formats, they have to deal with daily management issues. In order to understand the operational structure of different MFIs, this paper assesses their performance by using the Balanced Scorecard (BSC) from four different perspectives. The BSC provides the balanced and integrative financial and non-financial perspectives of a MFI such as internal business processes, growth and learning, financial and customer perspectives that are extremely important to create a sustainable MFI. This paper reports the results from in-depth interviews with 18 MFI managers in Bandung, Indonesia. The Key Performance Indicators (KPI) of a MFI from four perspectives is identified and the relationships between the different components of BSC are also learned. Overall scores of the BSC reveals BRI to be the best MFI, BPRS as the second, followed by BPR and BMT in the third and fourth place respectively. The advantage of BRI is partly due to robust government support that makes it difficult for other smaller MFIs to compete. In contrast, BMT showed a weak institutional structure in terms of BSCs elements. It seems that BMT is not well managed according to BSCs key performance indicators. The results indicate that clients, mostly Muslim, had chose the MFI based on the best performance in daily operations and also those affordable instead of choosing a religious/Shariah compliant one

Lessons Learned of Zakat Management from Different Era and Countries

Zakah and its problems are as old as the Islamic civilization. This Islamic financial instrument is mandatory for Muslims who are capable and expected to reduce the poverty of the people. The potential of zakah in Indonesia reaching 217 trillion rupiah Indonesia's GDP should be able to be explored and distributed to Indonesian Muslims as effectively as possible. Potential only remains just a potential if it is not able to be realized into zakah funds collection that is ready to be distributed to the recipient who is entitled to receive it. The concept of localization/decentralization can be considered as the best way in zakah disbursement. The concept of localization/zoning or decentralization in the distribution of zakah funds closely matches the concept of Sharma in the tax disbursement issue that states that the transfer of power, resources, and responsibilities from the center to the regions is more effective in alleviating poverty in Indonesia.DOI: 10.15408/aiq.v10i2.723

Comparative study οn sustainability of sharia microfinance institutions through financial and social efficiency

This research analyzes the depth, the breadth, the scope, the length and the worth of the outreach of sustainability with financial and social efficiency. Secondary data was taken from the Baitul Maal wat Tamwil (BMT), which provides lending to Micro, Small and Medium Enterprises. The research method is a quantitative descriptive research with verification. The data analysis technique is a Partial Least Square with 5% significance level. The calculation of efficiency of the data envelopment analysis and the measurement of change in the total factor productivity is performed with the Malmquist index.peer-reviewe

Social outreach model and efficiency in Sharia micro finance institution : literature review

The aim of this research is to propose a model of social outreach in the Syariah Micro Finance Institution, which covers the Koperasi Syariah and Baitul Maal wa Tamwil in Indonesia. The data were taken from the financial reports, documentation, observation and field interviews. The research applies mixed empirical methods by combining two forms of quantitative and qualitative methodologies through the sequential explanatory strategy. The weight and the priority were given to quantitative data. The mixing of the data couldn’t be performed in each stage (partial), so we eliminated the methodologies in the partially mixed sequential dominant status design only. The efficiency calculation uses the input and output samples with the analysis instrument of Data Envelopment Analysis (DEA). Meanwhile, the inter-relationships between variables uses the multivariate analysis. The secondary data triangulation, interview and focus groups were expected to improve the credibility of the findings. The results from other studies (literature review) explain that there is a partial or simultaneous influence, there is a trade-off and also correlation between financial and social efficiency.peer-reviewe

The Impact of Integrated Marketing Communication on Corporate Image and Its Implication to Customers Loyalty – Case Analysis at Islamic Bank in Indonesia

This study was conducted to determine the influence of integrated marketing communications to the corporate image and its implications for customer loyalty in Islamic banks in Indonesia. For pilot project this study conducted in Bandung city and using Quantitative research design. This study is a pre-test to know the perception of respondents towards their loyalty to Islamic banking. this study were obtained by distributing  survey questionnaire to a sample of 40 Owner Business Enterprise in Bandung. Study assigned with purposive sampling which is particuar individuals are chossen with the characteristic relevant to the study who are thought will be most informative. The participant chosen based on time horison using Musharaka and Mudharaba services, business owner with the medium scale enterprise. The data collected by using Questionaire. Data analysis has been used Partial Least Square. Based on empirical evidence, The performance of integrated marketing communications give 26.7% influence on the image of the company. Then the image of the company amounted to 22.6% impact on customer loyalty. While the indirect effect between the performance of integrated marketing communications and customer loyalty Islamic banks amounted to 24.6%. Keywords: Islamic banking, Customer Loyalty, Integrated Marketing Communication, Corporate Imag

WHY DO PEOPLE SEE A FINANCIAL SYSTEM AS A WHOLE VERY IMPORTANT?

The action of one person will affect the others and then the action of one country will affect other countries. Financial crisis is like a contagious disease, which spreads everywhere. The failure in capturing systemic risk is the interconnected market events (’network externalities’) can produce self-reinforcing cycles then create the harmful situation. What happened in the banking regulation particularly Basel II? In reality, Basel II did not work completely in 2008. Since the implementation of risk management based on Basel II has been a prerequisite for a bank, it is supposed to make a positive impact. Misplaced reliance on mathematical model and statistics in managing risk could one of the problems in the decision making process. Using system thinking, system dynamics paradigm and theory of feedback system, this paper tries to see the risk management from different perspective and to enrich the understanding of how financial systems work: what drives them and causes the behavior. Many lessons can be learnt from this financial contagion since Islamic banking and finance system has inevitably been a part of the international financial systems.&nbsp

Organization Learning, Including Marketing Efforts, Innovation, Motivation And Commitment In Order To Obtain The Healthy Growth Of Lmfe (An approach using Qualitative System Dynamics)

Laboratory of Management Faculty of Economics, University of Padjadjaran (LMFE Unpad) is one of the units with fully supported by Faculty of Economics, University of Padjadjaran. LMFE provides services in research, training, management and business consultancy. Major problems of LMFE are the lack of adequate marketing effort, innovation, motivation, and commitment of the LMFE members and those jeopardize the healthy growth of LMFE. As a complex social system, the LMFE’s performances are extremely influenced by numerous interrelated variables. Understanding and recognizing the relevant of factors and their influence on an organization are inevitably consequences for effectiveness of organization itself. Therefore, the objective of this study is to explore and understand the complex interdependences and underlying structure at the behavioral and cognitive level, which influence organizational learning and effectiveness of LMFE over time. Marketing effort, innovations, motivation and commitment are part of organization structure variables. In order to do so, this study applies a system dynamics approach, which helps explore complexities and underlying structures that generally are not detected by the input-output type of models generally used in organizational studies. Organizations learn through their individuals. This paper describes a method of intervention by a facilitator designed to enhance organization learning through changes in individuals’ mental models. Implicit in system dynamics approach to organizational learning is organizations work the way they do because people work the way they do. And people work they way they do because of the way they think, and further, they work the way they do together because of how they think together. Therefore, if LMFE want to change the way people work together, then LMFE need to enable people to think differently – together. Participation of LMFE members in group model-building process is expected to build stakeholders’ understanding and enhance team learning. Some causal feedback loop diagrams have been demonstrated in this paper, both a source of knowledge and a process for learning. Various models of organization learning also help LMFE to start a learning process. Like many similar studies, the real learning is in the PROCESS, rather than in the CONTENT or OUTCOME. Based on that reason, a series of organizational learning workshop for LMFE members will be very important things to do as the next step.organization learning

Developing a Computer Simulation Based Approach to Simulate Potency of Islamic Voluntary Sector to Alleviate the Poverty in Indonesia Using System Dynamics Methodology

This research tries to find out the potency of Islamic Voluntary Sector as financial instrument to alleviate the poverty in Indonesia. This research also tries to offer a computer simulation based approach design of the cash waqf fund management system and zakah fund as a part of Islamic Voluntary Sector in a system dynamics model. Using the system dynamics methodology, we try to know the structure of the cash waqf funds management system and simulate the behaviour of cash waqf and zakah fund. Zakah and Cash Waqf fund are expected to become the alternative instruments for the poverty alleviation programs in Indonesia. These programs require huge amount of fund that cannot be provided thoroughly by the government. Therefore, development of the voluntary sector for such a program is inevitable. In the Islamic sosio-economic concept, there are some sources of social fund that are economically and politically free of charge, namely cash waqf and zakah, infaq and shodaqah. In this research we focus in Cash Waqf Management and Zakah fund. In these concepts, Nadzir collects the fund from Waqif and invest the money in the real sector (mainly Small & Medium-sized Ventures) and in any syariah-based investment opportunities and Amil also collects the fund from Muzzaki. Amil will distribute all of Zakah fund for Mustahiq and Nadzir will then allocate all profits and returns gained from the investments to any poverty alleviation programs to enhance the quality of poor people’s life, such as free education and health service, cheap basic food, etc. Not just like Amil, who is allowed to distribute all of zakah fund, Nadzir is obliged to maintain the amount of fund in such a way that it does not go below the initial amount. Therefore, Nadzir not only should be highly capable, but also needs a financial institution, which has been proven to be experienced, highly capable and effective in helping Micro and SMEs development efforts, since such a microfinancing program is considered as the most vital portfolio in the poverty alleviation program. Therefore, it’s necessary to design an instrument which is able to control the cash waqf management.the cash waqf fund, zakah fund, portfolio investment, microfinance, poverty alleviation, system dynamics