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Indonesia is home to the largest Muslim majority financial market in the world, and has a highly complex micro finance and rural finance sector which has evolved over the last century. Interestingly, micro financing services have always accounted for the largest component of financing activities extended by Islamic banking institutions in Indonesia, due to the fact that the majority of Indonesian people are in the middle to low level income category. This study highlights the history and development of micro financing in Islamic Financial Institutions (IFIs) in Indonesia and attempts to evaluate the shariah aspects in micro financing products in Indonesian Islamic banks which covers 7 (seven) Islamic banks and 15 (fifteen) Islamic rural banks (BPRS). There are five major contracts that are used in micro financing products in Indonesian Islamic banks which are murabahah, ijarah, mudarabah, musharakah and rahn. In Indonesia, until June 2012, the murabahah contract still dominated as the instrument of choice for Islamic banks that uses micro financing for MSMEs (Micro, Small and Medium Enterprises) comprising of 56% of the total financing portfolio. Interestingly, the contract of qard (loan without interest) increased significantly from only IDR1.829 trillion in 2009 to IDR12.937 trillion (12%) in 2011. This study discusses and evaluates the shariah compliance of micro financing products in Islamic banks in Indonesia in accordance with the fatwas of DSN-MUI (National Shari'ah Board Indonesian Council of Ulama), Bank Indonesia Regulations (PBI), and classical fiqh doctrines. This study indicates that the majority of micro financing products in Islamic banks in Indonesia comply with Fatwa DSN-MUI and Bank Indonesia Regulations. However, there are some relevant shariah issues that need to be further addressed despite their compliance with sharīcah regulations issued by DSN-MUI and Bank Indonesia, including combination of contracts and selling gold on installment which is clearly prohibited in a hadith of the Prophet Muhammad (pbuh).
“Bank Indonesia terus berupaya mendukung pengembangan keuangan syariah melalui blueprint dengan pembentukan lima pilar strategis: Pengembangan produk dan pasar keuangan syariah, pengembangan sumber daya manusia, memperkuat kerangka kerja, pembiayaan untuk sektor riil dan UMKM serta mempromosikan struktur industri yang lebih efisien dan berpartisipasi dalam keuangan syariah global. Lahirnya buku Dinamika Produk dan Akad Keuangan Syariah di Indonesia ini tentu sejalan dengan upaya tersebut.” Agus D.W. Martowardojo Governor of Bank Indonesia “No doubt, Islam is a system and way of life which is intact and unified. It is not just a torch to truth and salvation, but also a complete guide to all aspects of life in this world, including in the financial sector. Publication of the book entitled The Dynamics of Islamic Financial Products and Contracts in Indonesia is one such proof. Islam emphasizes the ‘dualism of piousness’; pious in terms of spirituality and financial matters, and clearly the book is one of the ‘white paper’ that everyone should read” KH. Ma’ruf Amin The Chief of Indonesian Ulama Council
This book, the first of two volumes, highlights the concept of financial inclusion from the Islamic perspective. An important element of the Sustainable Development Goals (SDGs), financial inclusion has been given significant prominence in reform and development agendas proposed by the United Nations and G-20. The significance of Islamic financial inclusion goes beyond improved access to finance to encompass enhanced access to savings and risk mitigation products, as well as social inclusion that allows individuals and companies to engage more actively in the real economy. It represents one of the important drivers of economic growth. Gender disparity exists within financial access and its extent varies widely across world economies. South Asia, the Middle East and North Africa have the largest gender gaps, with women in these regions being forty per cent less likely than men to have a formal account at a financial institution. Analysing how Islamic financial inclusion can empower individuals, this volume explores the contribution of Islamic microfinance in achieving SDGs and solving income and wealth inequality. Comprising a combination of empirical evidence, theory and modelling, this edited collection illustrates how to improve access to finance, making it essential reading for those researching both Islamic finance and development finance.
The Islamic microfinance institution model, such as BMT institutions, has been established and developed in Indonesia for the past two decades. The institutions' development has definitely been very helpful to the country's economy, particularly for Muslim entrepreneurs. However, besides this development it has been found that society has some doubts about the operation of some products and services offered by BMT institutions in terms of whether they are Shari'ah compliant or not. Therefore, this study is designed mainly to assess the Shari'ah compliance of the products and services offered by selected BMT institutions in Riau Archipelago Indonesia, which are relatively unique compared to conventional ones and which operate under the banner of Islamic principles and values. This study employs the descriptive statistic analysis based on responses obtained from the research sample and qualitative data as well as a critical analysis from the Shari'ah perspective. The study utilizes questionnaires to obtain the perceptions of BMT's customers and employees while it uses interview to obtain the assessments of Shari'ah Supervisory Board (SSB) members. There are 150 customers, 50 employees and 8 SSB members who are actively involved as the respondents of the study. As a result, the study found that the products and services of selected BMT institutions were problem and not totally Islamic although in a sense that they are so much better, if compared to conventional products and services. The most reasonable arguments of the problem were derived from the operating system of selected BMT institutions which is parallel with the conventional counterparts that prohibited by Islam. Therefore, to overcome the significant problem, it is necessary to reform the current operation of microfinancial system in order to uphold and include the Islamic microfinance system as an alternative of conventional microfinance and one of the important vehicles in the grass root economic and financial system. Besides that, the optimalization of the Shari'ah supervision (al-raqabah Sharciyyah) aspect should be taken positively and seriously by the National Shari'ah Council of the Indonesian Ulama' Council in order to prevent the BMT institutions from breaking the Shari'ah principles and values. Currently, there are more than four thousand units of BMT institutions scattered throughout the entire provinces of Indonesia, including 48 BMT institutions in Riau Archipelago. Without efforts towards this direction, it will cause many problems and will be considered a disaster to the future of the entire BMT institutions in Indonesia, particularly in Riau Archipelago.
Islamic finance has started to grow in international finance across the globe, with some concentration in few countries. Nearly 20 percent annual growth of Islamic finance in recent years seems to point to its resilience and broad appeal, partly owing to principles that govern Islamic financial activities, including equity, participation, and ownership. In theory, Islamic finance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risk taking, and strong link to real activities. Empirical evidence on the stability of Islamic banks, however, is so far mixed. While these banks face similar risks as conventional banks do, they are also exposed to idiosyncratic risks, necessitating a tailoring of current risk management practices. The macroeconomic policy implications of the rapid expansion of Islamic finance are far reaching and need careful considerations.
Islamic micro-finance is a growing industry in several Muslim countries such as Bangladesh, Nigeria, and Malaysia. Islamic micro-finance is at the heart of Islamic finance as it addresses one of the fundamental roles of financial intermediaries demanded by Shariah. Over the past few decades, many initiatives have taken place to alleviate poverty in Muslim countries. This paper provides the Islamic thoughts and motives behind these initiatives and then, it discusses the mechanisms proposed by Islam to improve the life of poor, prevent them to become poor, and also to improve the general economic relations among members of society. Later on, mudarabah, Musharakah, murabahah, Ijarah, and qard al-hasan are discussed as different types of Shariah compliant contracts that can be used as the base of micro financing business model.
This book provides new perspectives and innovative solutions to issues facing the Islamic microfinance industry. Bringing together comprehensive papers from leading authorities on microfinance, it includes chapters exploring case studies from a number of countries as well as more theoretical topics.
Islamic Microfinance critically examines the performance of fifteen institutions and demonstrate how Islamic methods can efficiently satisfy the needs of some types of client but not all. It asks which types of products are affordable and beneficial, for which purposes and for whom.
Islamic finance distinguishes itself from conventional finance with its strong emphasis on the moral consequences of financial transactions; prohibiting interest, excessive uncertainty, and finance of harmful business. When it comes to risk mitigation, it is unique in its risk sharing approach.