The Challenges of Islamic Microfinance

in Indonesia

The Milestone in Indonesia

The establishment of Islamic Financial Cooperative namely, “Bait at Tamwil Salman” in 1980

Established by student activist of Bandung Institute of Technology (ITB) at Masjid Salman, Bandung

The Milestone in Indonesia

The establishment of the first Islamic bank in Indonesia BMI (Bank Muamalat Indonesia) in 1991.

It geared up the development of Islamic microfinance both in form of Islamic Financial Cooperative (BMT) and Islamic Rural Bank (BPRS) during 1990’s

Typology of Islamic Financial Institution in Indonesia

Two types of institutions:

1. Banking Institution

2. Financial Cooperatives

Typology of Islamic Financial Institution in Indonesia

1. Banking Institution Full fledged Islamic Commercial

banks Islamic Banking Units of commercial

banks Islamic rural banks (fully perform

microfinance)

Typology of Islamic Financial Institution in Indonesia

2. Financial Cooperatives BMT : Baitul Maal wat Tamwil comprising

95% of Islamic cooperatives BTM : Baitul Tamwil Muhammadiyah,

comprising 5% Islamic cooperatives guided since 1999 by Muhammadiyah. Informally supervised by Pusat Pengembangan Ekonomi Muhammadiyah (PPEM)

BMT usually have a mixed and commercial and social orientation while BTM have a more definite commercial orientation

Achievement and Development – Islamic Rural Banks (BPRS)

Source: Seibel & Agung, 2005, modified with data 2007

No Phase Period No. of BPRS

1 Gradual expansion 1991-1996 71

2 Slow down of expansion

Up to 1998 78

3 Stagnation Up to 2003 84

4 Re-expansion Up to 2007Up to Oct 2008

114

128

As of October 2008: There are 128 BPRS in Indonesia. The total asset of BPRS is IDR 1.57 trillion;

comprises 4.17% of total aset of BPR

Achievement and Development – Islamic Rural Banks (BPRS)

Source: Seibel & Agung, 2005, modified with data 2007

Achievement and Development – Islamic Financial Cooperatives (BMT)

No Phase Period No. of BMT

1 Initial Growth 1990-1995 300

2 Rapid growth promoted by PINBUK

1996

1997

1998

700

1,501

2,470

3 Slowing of growth 2000 2,938

4 Stagnation and decline 2001

2003

3,037

2,856

5 Re-expansion 2007 3,200

Achievement and Development – Islamic Financial Cooperatives (BMT)

As of 2007: There are approximately 3200 BMTs in

Indonesia. The total asset of BMTs is approximately IDR 2 trillion; with average of asset growth is 10 percent per

annum. These BMTs are scattered to all the provinces in

Indonesia Most of BMTs (65.7%) are located in Java Island.

41 percent of BMTs are having asset between IDR 50 million to 250 million (approximately US$ 5,555 to US$ 27,777)

40 percent of BMTs are having asset between IDR 250 million to 500 million (approximately US$ 27,777 to US$ 55,555)

Achievement and Development – Islamic Financial Cooperatives (BMT)

Overall Overview of Microfinance Institution in Indonesia - 2000

Banks amount % in '000 % Rp bn % Av loan RpBRI Microbanking Div 4,049 8% 29,859 64 14,183 54 4,575,000Rural Banks BPR 2,213 4% 4,698 10 5,628 21 3,225,000Financial Cooperatives 40,527 76% 11,043 24 4,787 18 431,500Unit Simpan Pinjam (USP) 35,218 66% 10,141 23 3,629 18 358Koperasi Simpan Pinjam (KSP) 1,123 2% 551 1 708 4 1,285Credit Unions 1,071 2% 296 nil 272 1 920BMT 2,938 5% 46 nil 51 1 701Swamitra/Bukopin 177 0% 55 nil 127 1 3,960Non Bank financial institution 0%

Village MFIs (BKD) 4,482 8% 535 1 193 1 466,000Other MFIs (LDKP) 1,428 3% 834 2 328 1 783,000

Pawnshops 772 1% 0 0 1,355 5 86,000Total Institution 53,471 46,969 100 26,474 100 815,500

Loans OutstandingDeposit accountsUnits

Source: Seibel & Agung, 2005

Country Population

Poverty head-count +20%

Number of poor people

(P)

Number ofPoor

household(H=P/7)

Potential market (70%)

(M=H*0.7)

Islamic preference

(50%)(I=M*0.5)

Active borrowers

Market pene-

tration(%)

Indonesia 237,512,352 35 83,129,323 11,875,618 8,312,932 4,156,466 74,698 1.80

Source: CGAP, Focus Note No.49, August 200813

Country Population

Poverty head-count +20%

Number of poor people

(P)

Number ofPoor

household(H=P/7)

Potential market (70%)

(M=H*0.7)

Islamic preference

(50%)(I=M*0.5)

Active borrowers

Market pene-

tration(%)

Afghanistan 32,738,376 90 29,464,538 4,209,220 2,946,454 1,473,227 53,011 3.60

Bangladesh 153,546,896 70 107,482,827 15,354,690 10,748,283 5,374,141 111,837 2.08

Indonesia 237,512,352 35 83,129,323 11,875,618 8,312,932 4,156,466 74,698 1.80

Jordan 6,198,677 32 1,983,577 283,368 198,358 99,179 1,481 1.49

Mali 12,324,029 80 9,859,223 1,408,460 985,922 492,961 2,812 0.57

Nigeria 146,255,312 70 102,378,718 14,625,531 10,237,872 5,118,936 102,379 2.00

Pakistan 172,800,048 50 86,400,024 12,342,861 8,640,002 4,320,001 6,069 0.14

Somalia 9,558,666 90 8,602,799 1,228,971 860,280 430,140 50 0.01

Sudan 40,218,456 50 20,109,228 2,872,747 2,010,923 1,005,461 9,561 0.95

Syria 19,747,586 40 7,899,034 1,128,433 789,903 394,952 2,298 0.58

Yemen 23,013,376 53 12,197,089 1,742,441 1,219,709 609,854 7,031 1.15

Total 857,885,715 470,697,964 67,242,566 47,069,796 23,534,898 397,227 1.69

Source: CGAP, Focus Note No.49, August 200814

Affiliations and Support

PINBUK (Pusat Inkubasi Usaha Kecil): An NGO and has become the most promoter of

Islamic cooperatives since 1995 Provides basic, intermediate and advance training,

and training for trainers Published manuals for the establishment of BMT,

regulation and statute of BMT, management, computerization and performance assesment.

Suplies BMT with MIS

Affiliations and Support

PNM (Permodalan Nasional Madani) is a commercially operating state owned

corporation Acting as wholesale apex for financing small and

medium enterprise programs or projects of commercial banks, rural banks (BPR) and cooperatives.

It plans to emphasis on providing both financial and social capital for BPRS and BMT

Affiliations and Support

INKOPSYAH (Induk Koperasi Syariah): Is a secondary level cooperative since 1997 Facilitate access of BMT to credit, monitoring

members and BMT that are non members, channeling fund form PNM to BMT

ASBISINDO (Asosiasi Bank Syariah Indonesia) Is an association of Islamic rural Banks since 1992

and since 2002 also include Islamic commercial banks

Provides training of management and staff of the members

Problems of BMT

There is no formal regulation Lack of supervision both management and

shariah compliance A number of them are run by relatively

inexperienced personnel There is no deposits Insurance Corporation

just like commercial banks.

Problems of BPRS

Capital shortage: the average size of Islamic BPR is less than half of the size of the average conventional BPR

Lack of management skill and dynamics