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BMT (Baitulmaal wa Tamwil) ISLAMIC MICRO FINANCIAL SERVICES FOR THE POOR
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CONTENTS
1. Introduction 1.1 Microfinance and Poverty Alleviation 1.2 The basic principle of Islam and Islamic Microfinance 1.3 BMTs as Islamic Microfinance in Indonesia 2. Foundations of BMTs 2.1 The Key Factors of Successful BMTs 2.2 Shariah-Compliant Instrument of BMTs 2.2.1 Instruments for Mobilizing of Fund 2.2.2 Instruments of Financing 2.2.3 Instruments of Risk Management 2.3 The legal and regulatory context for BMTs 3. Challenges of BMTs 4. Case study of BMT Best Practice: BMT Bina Dhuafa Beringharjo, Yogyakarta
INTRODUCTION Microfinance and Poverty Alleviation Poverty is the biggest moral challenge of this century. More than three billion human beings in this world live in abject poverty. Poverty levels have also been associated with high inequality alongside low productivity. In Indonesia alone with worlds largest Muslim population, over half of the national population - about 129 million people are poor or vulnerable to poverty with incomes less than merely US$2 a day. Microfinance (MF) is a powerful poverty alleviation tool. Microfinance initiative is acclaimed as a new approach to poverty alleviation and to bring about development. Central to the challenge of ending poverty is creating wealth through development of microenterprises. Microfinance is a critical input in this wealthcreation process. It implies provision of financial services to poor and low-income people whose low economic standing excludes them from formal financial systems. The banks are not interested in financing microenterprises since the transaction cost per unit of credit is high. Microfinance is a new concept in banking and has distinct characteristics. Microfinance institutions provide to the entrepreneurial poor financial services that are tailored to their needs and conditions. Access to services such as, credit, venture capital, savings, insurance, remittance is provided on a micro-scale enabling participation of those with severely limited financial means. The provision of financial services to the poor helps to increase household income and economic security, build assets and reduce vulnerability; creates demand for other goods and services (especially nutrition, education, and health care); and stimulates local economies. Good microfinance programs are characterized by small, usually short-term loans; streamlined, simplified borrower and investment appraisal; quick disbursement of repeat loans after timely repayment; and convenient location and timing of services. The basic principle of Islam and Islamic Microfinance The principles of Islamic finance are laid down in Islamic law, the sharia, . Islamic finance is based on the concept of a social order of brotherhood and solidarity. Islam emphasizes ethical, moral, social, and religious factors to promote equality and fairness for the good of society as a whole. Principles encouraging risk sharing, individual rights and duties, property rights, and the sanctity of contracts are all part of the Islamic code underlying the financial system. There are a number of key Shari'a principles and prohibitions relevant to finance and commercial transactions which distinguish Islamic finance from the conventional forms. The key Shari'a principles which underpin Islamic finance, and have led to the creation of a separate finance industry, are as follows: prohibition on usury and interest (riba), prohibition on realising a gain from speculation (mayseer), no uncertainty (gharar) in commercial transactions, and, all activity must be for permitted purposes (halal). Most of the microfinance institutions (MFIs), however, have non-Islamic characteristics. Their financing is interest-based. Interest (one form of riba) being prohibited in Islam. Islamic microfinance offer micro-credit using a variety of Shariah-nominate mechanisms.
The Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic conditions of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor. There are certain aspects of the Islamic approach that need added emphasis. First, transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. Second, a common feature of successful microfinance experiments is group-based financing and mutual guarantee within the group. This is a highly desirable feature of Islamic societies. Mutual cooperation and solidarity is a norm central to Islamic ethics. Islamic microfinance institutions (IMFIs) can retain the innovative format of operation of conventional MFIs and orient the program towards Islamic principles and values. BMT as Islamic Microfinance in Indonesia Islamic microfinance institutions in Indonesia may be placed in three categories- the microfinance divisions of Islamic banks, the Islamic rural banks (BPRS) a subcategory of the rural banks (BPR); and the Islamic financial cooperatives that are not part of the formal financial sector. They are generally referred to as Baitul Maal wal Tamwil (BMT). Islamic credit cooperatives (Baitul Maal Wat Tamwil or BMT) are an emerging provider of micro-finance in Indonesia. BMTs are grass-roots developments programs supported by funds from Islamic community members. Muslim economic activists are the main drivers of the BMT movement in Indonesia. BMTs are often regarded as Islamic micro-financing institutions, with a similar legal basis to cooperatives. BMTs usually operate on the principle of profit-loss sharing instead of charging interest rates, and use Islamic moral values and group solidarity to encourage repayment of loans. Group solidarity is fostered through regular meetings and counseling. BMTs sometimes themselves also run retail businesses to support micro-finance schemes. In Indonesia, the BMT movement has been developing without much support, systematic supervision or regulation from the Indonesian government to date. The majority of business activities in Indonesia are micro, small and medium enterprises. Their ability to absorb labour means they have great potential to create employment and reduce poverty. But microenterprises have limited access to financial institutions. Consequently, microentreprises need other alternatives to access finance. Microenterprises prefer using BMTs due to their convenience and faster loan approval. As a community financial institution, BMTs offer microentreprises a wider range of services to support their growth such as entrepreneurship training and social empowerment programs.
FOUNDATION OF BMT The Key Factors of Successful BMT Social entrepreneurship is an emergent subfield in entrepreneurship studies. It is a process involving the innovative use and combination of resources to pursue opportunities to catalyse social change and/or address social needs (Mair and Marti 2006:37). The defining characteristic of social enterprises is that they are driven by a sense of mission and social values, not solely by maximising private gains (Certo and Miller 2008:267).
Most BMTs are run by social entrepreneurs with a strong commitment to establishing social justice based on Islamic principles. Identifying BMTs as social enterprises is important for two reasons. Firstly, social entrepreneurs and their ventures, are capable of finding effective solutions to social problems, if public policy recognises and deliberately harnesses their potential (Dees 2007:29). The implication is that we need to be cautious about creating a more rigid regulatory environment, as previously recommended. This is because BMTs have developed as cooperatives, offering more flexible financing schemes than banks. Enforcing the same regulatory rules to the financial services of the BMTs would therefore make BMTs services less attractive. Secondly, identifying BMTs as a social venture will necessitate a new framework to evaluate and identify the capacity-building needs of BMTs. This is because the operators of social ventures gauge their success not solely by typical business growth measurements such as profitability, employee numbers and asset size (Sharir and Lerner 2006). BMT operators are strongly concerned with offering entrepreneurial skills, promoting Islamic values and muchneeded funds to a larger number of clients in a viable way (Sakai and Marijan, 2008). In order to achieve this social justice objective, most BMTs offer three services (microfinancing, zakat and social welfare programs, and business/entrepreneurial training) to their members and the community. They are fundamentally social enterprises, distinctively different from businessoriented ventures. The nature of BMTs, as not merely microfinance institutions, but also as social institutions. Lack of promotion of BMTs services in general has hampered the growth of BMTs. It has created the perception that BMTs are charity organisations. Such perceptions have created problems for BMTs in ensuring repayment of loans. Social capital is the foundation upon which the BMT industry is built. Success is highly dependent on the quality of leadership and the ability of leaders to generate and direct social capital. The research of Sakai and Marijan (2008) has found that the currently successful BMTs still have their founders involved in their day to day operations. Leadership and commitment significantly affect operational success as much as the presence of regulations. BMT managers view Islamic values as important in improving human resources. Some of BMTs run training programs for their employees on a regular basis. One of the training programs emphasises self-discipline. In order to promote professional conduct among their employees, values taken from the Quran are directly linked to operational activities. Employees are constantly reminded that they have to be accountable in the eyes of God. The employees, as such, not only work to earn a living but also take the work as part of their religious duty. This acts as an incentive to work effectively and decreases the shirking behavior of the staff members of BMT. Shariah-Compliant Instrument of BMT a. Basic rule 1) Prohibition of interest as riba. No contractual guarantee(s) on investment. No taking profit from time value of money 2) Profit creation equivalent with counter-value (no risk no gain) 3) Elimination of uncertainties/ ambiguities (gharar) in contractual agreement 4) Prohibition of Gambling (maisir) 5) Committing to knowledgeable consent on the contrac
6) Avoiding the production of prohibited commodities e.g. alcoholic beverages 7) Comply with Islamic Ethic e.g. equality, avoid bribery and robbery Interest Based on capital Profit Sharing Based on profit gained