SUSTAINABILITY OF ISLAMIC MICROFINANCE IN INDONESIA: A HOLISTIC APPROACH.

Author:Wediawati, Besse
Position:Report
 
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INTRODUCTION

Islamic Micro Finance (IMFI) has become one of the important financial instruments in the Islamic world to alleviate poverty by providing microfinance services for the poor to the impoverished (Abdul Rahman, 2007; Obaidullah & Khan, 2008). A number of studies revealed the positive impact of IMFI on poverty alleviation and increased household incomes (Hadisumarto & Ismail, 2010) children's education and business development (Rokhman, 2013); increased sales, business expenses and net income, as well as increased product volumes (Riwajanti, 2014) and increased employment opportunity (Mohamed & Ahmed, 2015).

IMFI's positive impact can only be sustained if the institution reaches a high level of financial performance on one hand and caters the poor as broad it can reach as possible, on the other hand. Therefore, in addition to pursuing financial sustainability-which IMFI can cover operational costs and able to grow-it also must pursue social performance by reaching the poor to provide quality services and improve their lives (poverty outreach). In other words, to achieve IMFI's sustainability, financial sustainability and poverty outreach, there are two objectives that must be simultaneously achieved.

However, a number of studies have revealed that both IMFI's financial performance and outreach are still lagging behind when compared to conventional Micro Finance (MFI) (Abdelkader & Salem, 2013; Masyita & Ahmed, 2013; Seibel & Agung, 2005). The CGAP survey in 2007 showed that in Bangladesh-the country with the largest MFI reach in the world with nearly 8 million MFI borrowers, the IMFI's outreach only for 1% or around 100,000 clients. Meanwhile, in Syria and Indonesia, the figures account for 3% and 2% of total microcredit outstanding in 2006, respectively (Karim, Tarazi & Reille, 2008).

There are several empirical studies in attempts to investigate the causes of this lag (Widiarto & Emrouznejad, 2015; Khadijah et al., 2013); yet, the studies merely focused on IMFI's financial and social aspects. On the other hand, the spiritual aspect almost remains untouched. Yet, as an institution which combines of two rapidly growing industries: microfinance and Islamic finance. (Karim et al., 2008) and as faith-based microfinance, IMFI not only as a financial institution that runs a dual mission but is also as a religious institution that runs its da'wah function.

The FBM concept refers to the definition of faith Based Organization Clarke (2008) and is discussed in Hoda & Gupta (2015) articles as a microfinance that derives inspiration and guidance for its activities from the teachings and principles of the faith or from a particular interpretation or school of thought within that faith. As faith-based microfinance, where faith is the teachings of Islam (based on sharia), IMFI must ensure that all activities run well (kaffah) in accordance with the principles of sharia. Identity as a sharia-based financial institution should be reflected in all IMFI products. The processes and activities they undertake must also be ensured in line with the principles seen by their clients (Obaidullah & Khan, 2008).

The lag of the spiritual aspect in the IMFI can be noticed since the institution is not yet able to implement sharia principles thoroughly (kaffah) in its business activities. The main scheme of profit loss sharing, such as mudaraba or musharakah tends to be avoided because it is considered possess high risk. The product offered dominan is based on sale and purchase scheme of murabaha which is more certain source of income (Rammal, 2003; El-Zoghbi & Tarazi, 2013). IMFI also often imposes higher fees for borrowers (which customers consider the same as interest) due to economic scale (Obaidullah, 2008). In addition, collateral (ar- rahn) is still required to obtain financing for the poor (Alaeddin & Anwar, 2012). Meanwhile, the weak role of IMFI's spirituality in society can be seen from the preference of the Muslim community in choosing financial services based on economic factors (low interest rate, less collateral, loan amount) and non-economic factors (service quality, ease, speed, proximity and loan officer profile) rather than religious factors (Masyita & Ahmed, 2013).

Pertaining to this issue, a number of studies (Hadisumarto & Ismail, 2010; Mardhatillah & Rulindo, 2008; Riwajanti, 2014; Waspodo, 2008) highlighted that for the holistic goal of poverty alleviation and the development of IMFI's client performance, spiritual development is demanded in IMFI. This spiritual development is carried out through the internalization of Islamic moral values in the consciousness of the entrepreneur (akhlaq) to build honesty, discipline, passion, perseverance, patience, piety, social responsibility and awakening consciousness or to turn bad into good manner. Riwajanti (2014) also suggested that it is necessary to educate clients to improve their understanding of the Islamic (Arabic) terms used to name IMFI's products.

Nevertheless, there still lacks empirical researches that examine the spiritual aspects incorporated with the financial and social aspects (dual mission) as a holistic effort to achieve IMFI's sustainability. The study of faith/spirituality/religion in IMFI is mostly discussed as a separate aspect of the specific research (Mardhatillah & Rulindo, 2008; Waspodo, 2008; Wediawati & Setiawati, 2016). Therefore, this study is expected to fill the gap by proposing a holistic approach which incorporates financial, social and spiritual intermediation as the basis of IMFI's activities to achieve its sustainability.

The paper is organized as follows. In Section 2, we provide a summary of the literature on MFIs' missions, sustainability and the need for the holistic approach to achieve sustainability. Section 3 presents hypotheses to be tested while Section 4 elaborates the research method of empirical analysis. Section 5 discusses the results of the research and finally, Section 6 delivers conclusion and future research agenda.

LITERATURE REVIEW

Mission of Microfinance

Micro Finance Institutions (MFIs) concurrently have two missions which are better known as dual mission or double bottom line (Brau & Woller, 2004; Ledgerwood, 2000), namely financial and social intermediation. Financial intermediation is an activity of provision of financial products and services such as savings, financing, insurance and financial transfers to the poor and low-income groups (Ledgerwood, 2000; Obaidullah, 2008; Robinson, 2001). In order that this financial intermediation is accessible to the poor and low- income groups, IMFI also performs a social intermediation function, an investment process for human resource development with the aim of increasing self-confidence to the poor, as a preparation for them to use formal financial intermediation (Bennet et al., 1996).

Social intermediation differs from other types of social welfare services for it offers mechanisms that enable the recipient (poor person) to become an MFI's client who is then ready to access formal financial services (Dusuki, 2008). With this intermediation, the MFI prepares the poor to establish long-term business relationships through group formation, self-confidence development, literacy training as well as financial management skills among group members (Ledgerwood, 2000).

As a sharia-based financial institution, the purpose of IMFI must be consistent with the objective of sharia (maqasid syariah). This aim leads to the balance of life (falah) between the worldly purposes (material/financial and social) with the goal of the hereafter (spiritual) that is the pleasure of Allah SWT. Thus, apart from being an economic institution that runs dual mission (financial and social intermediation), IMFI is also a missionary institution that carries out a spiritual mission. It is a manifestation of Islamic values that underlies its overall strategy and purpose. Furthermore, this mission is also reflected in the spiritual intermediary activity to educate the people and propagate the principles and practices of sharia (tarbiyah); so that they are comprehensively understood and practiced by all stakeholders (Wediawati & Setiawati, 2016). This spiritual intermediary has to be taken into account that all the activities are performed in accordance with the principles of sharia so that they are not merely impractical concept.

Several studies have explored that this spiritual intermediation includes a range of activities, such as: 1) exemplary of IMFI's managers/employees in terms of good speech and Islamic manner (Wediawati & Setiawati, 2016); 2)...

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