Indonesia’s Islamic Microfinance Instutitions (MFIs) can be broken down into 3 broad categories: BMTs (Baitul Mal Wat Tamwil), BPRS (Bank Perkreditan Rakyat Shaira), and microtakaful (Islamic microinsurance).
BMTs are largely unregulated Islamic co-operatives, which are mainly affiliated with Indonesia’s Islamic mass organisations (such as Muhamadiyah and Nadhatul Ulama). There are about 2,900 of these entities with a total loan value of about US$145 million. BPRS are Sharia-compliant rural or micro-banks that undergo the same form of regulation as commercial rural banks, and are supervised by the Bank of Indonesia (BI). There are at least 100 such entities with a total loan value of about US$345 million. Lastly microtakaful is generally provided by large providers such as Allianz, Takmin and PT Asuransi Takaful Kelugara (ATK). They generally use microcredit institutions as distribution networks – the latter require their borrowers to take compulsory insurance.
Both BMTs and BPRS are significantly smaller than their conventional counterparts, each taking up less than 10% of the market share. Researchers have found that BPRS are riddled with governance and management problems, and that potential customers did not understand Islamic financial products. In addition, BMTs suffer from supervisory and regulatory neglect, with about four-fifths of the institutions either technically bankrupt or dormant. By contrast, microtakaful operators generally follow best practices from a risk-management and a Sharia-compliance perspective. However, ‘Sharia arbitrage’ risks remain as companies primarily seek to extract super-normal profits or rents through these Sharia-based mechanisms to benefit their stockholders.
There is greater need for a holistic, national poverty alleviation program that recognizes and facilitates the operation of IMFIs. Such a framework should feature positive (income-generating), preventative (income-protecting), and corrective (income-distributing) measures which all work cohesively to alleviate poverty. Such a national program should also utilise alternate funding sources such as zakat and waqf. Where Indonesia has 1,500 sq. km of largely mismanaged waqf land – if properly managed, this represents a significant resource for use in poverty alleviation programs.
Secondly, there needs to be greater cohesion in the institutional and regulatory frameworks governing these institutions. Currently, different Islamic microfinance products and ancillary charity programs are regulated by different authorities thus preventing a holistic program from being properly developed. Finally, mutuality should be a key focus for institutions under the framework. Mutuality can help ensure greater alignment with Shariah norms (e.g., social cooperation) and places greater primacy on poverty alleviation efforts over short-term commercial gains.
* A version of the paper was presented at the 11th Harvard Forum on Islamic Finance in Boston in April, 2014 by Tanvir Uddin and Maaz Rahman.