The Network Triangle and Societal Sector Institutions Methodological Approach on Islamic Microfinance to Micro Entrepreneurs in Indonesia

THE NETWOK TIANGLE AND SCIETAL SECTOR INSTITUfIONS
METHODOLOGICAL APPROACH ON ISLAMIC MICROFINANCE TO MICRO
ENTEPENEURS IN INDONESIA
Muiay isyah
Faculty of Economic and Business IN Sf idaatullah Jta
BSTACT
Isac iae pt s sd y Musim ig s, h ae y 'isd in e sse
ad at ifall in e atm m Isac uk ad iae ysm wh e ro s. s
ar aim to fs n e e f Isac iae ad is al to e iaig for e ro
es in Muslim ss sh as in IS. e jie f e ar s to ie aiss f
Isac iae ysm y ,g an w f e arsts adprs fIsac iae
S'sm ad is istital ks at ae idd in ,g iaal sus to or s�
eirs in Muslim scits suh as IS. In , to ,n hat Isac ia: s e rmt
ftie ss to ro s' iaal s, fsig n dr aiuts hat e apial t ae
sig ad sw as, y sig e pt f sl istits win e Nk Tae
�l h. Te asiiliy fiig a iacig ysm wh e k ae ad sal
istits pt xpaid at Isac iae d fuae usul is to e c
h ady auatm in e Muslim d ;aly in Id5.
Keyword· k tnag, Isac ia, ro s

1. INTRODUCTION

Islamic icrofinance represents the convergence of two rapidly grong industies,
microfnance and Islamic finance. Islamic finnce as a worldwide phenomenon, which is
nvolving Islamic banking, variety of institutions and instnunents, plas in1portant role to the
microfinance sstem especially when it comes to providing finncial access for the poor. The
paper t1y to determine various aspects about Islaic microfinance to micro entreprenew-s, and
how Islamic banking and microfinance could be the ey to provide fin,mcil access for millions
of poor or micro entrepreneurs especially in Muslim developing countries and societies such as
Indonesia.
As the world's lgest population of Muslims, Islamic banks, institutions and
instruments in Indonesia are developing rapidly, and have lots of enthsiastic support from
many young people and ntellectuals. It evidence proved that there are considerable demands
for Islamic bs especially n low and middle ncome predominantly by Muslim societies and
many cow1ties where the majority of the populations are constituted by Muslims, who
cu1Tendy reject microfinance products that do not comply with the Islamic law (shaiiah)
although in general Islamic microfinance sstem in these cotmtries is still in its fancy, and
business models are just emerging. However, even if the interest is high, there are very few
examples of actual operating in the field of Islainic banks involved n microfinance. In fact,
only minimum amoLmt of capital assistance available for micro entrepreneus in Indonesia and
most of them generally borrow from moneylenders or private sectors that require them to pay
lots of interest. Theefore, the Islaic b, as a bak without interest, constitutes an example

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of how Islamic microfinnce represent effective solutions to rucro entrepreneus financial
needs, focusing on their activities that lack capital but are promising.

2. METHODOLOGY
his paper uses quaitative methodology to gather an in-depth undestanding about
networks and societal sector institutions in relation with the financing for micro entrepeneurs
byIslamic microf inance system and how its influence in the Muslim world in general nd in the
context of Indonesian society.
In order to studythe issue byusing the qualitative methodology, this paper divides into
four sections. The fist section includes a bief description of Islamic banking and different
investment modes used by Islic banks. Second section includes a brief dscussion about
icrofnance as a contetual review and Islamic microfinance as a different concept. The third
section includes a brief description about the concept of networks and societal sector
institutions. he last section of the paper includes discussions about vaious issues of how

Islic microfinance pomotes different network relationships and the influence of societal
sector institutions in Islamic microfinance. In each sections also includes desciptions within
the context of Indonesian societythat might provide compaison and cetain differences within
the general context.
The result of this qualitative study reflects the view of how Islamic bng and
microfinance system, if properly in1plemented, will help in promote and complement the
development of micro entrepreneurs in the Muslin1 world including Indonesia.
3. ANALYSIS
a. Islamic Banking
In the past few decades, Islamic bnking ,nd institutions have developed in many
counties including the United States and United Kingdom. In certain countries such as Iran,
Sudan, and Pakistan, most of their financial inte1mediaries confo1111 to the principles of Islaic
law, as defined by local authorities. In most other counties such as Indonesia, whee Muslims
constitute the majority of the population, Islamic transactions and institutions make up a small
pat of the total and must compete with conventional financial institutions. Because of this
reason, many involved n Islamic banking, would like to minize the differences between
Islanuc and conventional banking. However, the basic principle of Islam.ic banking is different
with the conventional one because all financial transactions dealings with the Islamic banking
system have to avoid nterest. As interest is prohibited n Islam, Islanuc bank cannot be justified
or sin1plyconverge with the conventional ones.

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Jumal Erikonomi Vol. 12 No. 2 Agustus 2013 -·1. An Islaic Banc: A Bank ithout Inteest
An Islamic bank my be defined as a financial ntemediy whose objectives and
operations s ell as pnciples and practices mst confom to the pnciples of Islmic law; and
consequently, is conditioned to operate all its activities without interest (Alam, 2001). The
introduction of Islic banking in modem wold is bsed on the principles of Islamic
econ0mics. A, 0L,1,rved by Mola et.al. (1988), the ·aim of Islaic econoi�, is not oly the
elimination of interest-bsed transactions but also the establishment of just and blanced social
order free from all kinds of exploitation.
Schaf (1983) explained that Islamic banks could make a seful contibution to economic
growth and development paticularly in a situation of recession, stagflation and low-growth
level because the core of their operation is oriented towards productive investment. Practical
and mmediate co-opeation possibiliy eists between Islmic banks and enteprises all over the
world. he possibiliy of introducing an inteest-free financing system through Islamic banking
principle, Scharf (1983) also argues that the establislunent of Islamic financial sstem bs ed on
the prnciple of shaiah is not only feasible but also profitable.
Financial intermediation in Islaic banking between the bank and the client takes place
as a patner ather than debtor-creditor relationship as in conventional banks. Accordng to

Alam (2000), the financial activities of modem conventional banks are based on relationships
between depositors and bank on the one hand and between the borrower and the bank on the
other hand. Conventional banks regard interest s the price of credit reflecting the oppommiy
cost of money. Banking in an Islamic framework could not be based on the debtor-crediror
relationships as interest is prohibited in Islam. This principle is appicable to two main factors
of production, i.e. labor and capital. According to this principle, as no payment is allowed to
labor, unless it is applied to work, no rew,u·d for capital should be allowed, unless it is exposed
to business isk From these two principles of the theoretical basis of Islamic baing, it may be
said that Islaic financial relationships are of a paticipatory nature {Ahmad, 199 3). Based on
the interest-free financing principle, business practices especially sources and uses of bank's
ftmd, there are several different modes of investments used by Islamic banks.

Investment Modes Used By Islamic Banks
Investment modes in Islamic Banking are done in several main ways (Zaher and assan, 2001):

(1). Mudaaba or capital inancing
Mudaraba is a trust based financing agreement whereby an investor (Islanuc bak) entrusts
capital to an agent (Mudarib) for a project. Profits are based on a pre-anged and agreed
on a ratio. This agreement is akin to the Westen style limited partnerslup, ith one paty
contr�buting capital while the other runs the business and profit is distributed based on a

negotiated pecentage of ownership. In case of a loss, the bak ens no retn or negative

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E NEWOK TRIANGEL AND SOOETAL SETOR INSTITUTIONS EHODOLOGICAL
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retn on its investment and the agent receives no compensation for his (her) effort".In
this kind of contract, all the financial responsibilities rely on the business itself: the
financial institution invests on an idea, a project nd shaes its fate.

(2). Mushaaka or patneship inancing
This contract is very similar to a jont venture ith paticipation financing. "Two pties
provide capi:al fc: a projc:: which beth ma;; c..,-.;:. Profit; are shared in pre-agreec. he
peculiar aspect ratios but losses are bone in propotion to equity paticipation" of this
contract is not the shing the profit and losses, but sharing the management and the
decision making process.
(3). Muabaha or mak-up ( coss-plus poit based inancing)
his constitutes one of the most well known Islamic products, consisting in a cost-plus
profit financing transaction in which a tangible asset is purchased by an Islamic institution

at the request of its customer from a suppier. he Islamic institution then sells the asset to
its customer on a deferred sale basis with a mark-up reflecting the institution's profit.
(4). Ijaah (leasing) and Ijaa wa-Iqtina (leasing puchase)
hese concepts are very close to the Westen idea of leasing. In the fist case, the finncial
institution leases an asset to its customer agreeing on lease payments for a cetain period
but excluding the option of ownership for the client. In the second case, the client has the
option ownership by buying the asset from the financial institution. The conditions
govening both tpes of leasing are that assets must have a long or secure productive life,
and must not be handled in an un-Islanuc way, meaning that the lease payments must be
agreed on in advance to avoid any speculation.
(5). Bai-Muajjal or cost plus sales under defen-ed payment
The Bai-Muajjal mode of investment is as W.e as Murabaha mode of investment with an
exception that the sale under this cost-plus sale modes investment is made on a credit
basis rather thn cash (Alam, 2002).
(6). Bai-Salam or advance puchase.
Under bai-Salam mode of nvestment the bank puchases industrial and agriculture
products in advance from ther customes. The_ main features of thie mode are: the p1�ce is
nonnally paid ith the execution of an arangement, and according to the terms of
egreement the bank receives the goods in due ti.me (Alan1, 2002).

(7). Quard E Hasan or inte1est fee loan given to the needy people.
The practice of deaing with this sot of investment diffes from bank to bak. Quard E
assan is normally given to needy students, small producers, fam1es, entrepreneus and
econonucally weaker sections of the society, who ae not in a position to obtain loan or
ny finncial assistance from any other nstitutional so-ces. The main aim of this loan is

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Junal Etikonomi Vol. 12 No. 2 Agustus 2013 __

i
I�

to help needy peple in a society in order to make them self-sufficient and to raise their

income and standars of iving (Alam, 2002).

2. Islamic Banking In Indonesia
Indonesia, with the world's lgest population of Muslims, has come to Islamic banking
a.,. a slow stat and lach: bel.nd cou,pare to �1alays�a a.1! ;ingapo.�. he fist Islamic

cooperatives were established in Indonesia in 1990, followed by al banks n 1991 and an
Islamic commercial bank (IB) in 1992.
According to Timberg (2004), Islamic bankng in Indonesia has some nusual
characteristics. Like most microfinance institutions in Indonesia, Islamic institutios, micro or
otherwise, are geneally private, for-pofit institutions based on the intemediation of depositor
funds secured on a competitive market. In this they are different from microfinance institutions
n almost every other county in the world. They typically have no explicit social goal other than
profit mation and confoity with Islam, though n some cases a social element is
present, as we ill see. Social impacts re thus the result of the market impacts of the Islamic
nstitutions. Many Islamic institutions in Indonesia, particularly Bait Maal Wat Tamwil (BT,
Islamic financial cooperatives) are located in l areas and provide agricultural financing.
Nonetheless, the focus of Indonesian Islamic financial institutions is typically urban and geared
toward the financing of trading operations.
a. Islamic Commecial Banks
The market leades in Islic finance in Indonesia are the Islamic conunercial banks.
DUi.ng the repotng period, 1991-2003, they focused on medium and large-scale finance. As of
2003, they accounted for a mere 0.74% of total assets of the banking sector. However, du.ring
2001-2003 ther share had increased from 0.17% to 0.74% and stood at 2.19% in Dec 2005 (see
Table.1). Ctu-rently, there are 5 Islan1.ic commercial banks ncludng the Bank Muamalat, which
has been functionng since 1992 as the fist Islaic commercial bank in Indonesia (see Table.2).

Accordng to Seibel (2007), the growth of Islanuc fnance in Indonesia is mainly due to
an expansion of supply, gladly accepted, rather than broad popular demand. When Bank
Indonesia, the central bank, commissioned swveys in provinces with an average Muslim
population of 97%, it fond that only 11% undestood products and benefits of Islamic
banlcing. It concluded that, "There is stll a gap between needs and knowledge of Islamic
financial products and services. The gap could delay the success to mobze potential public
fund to investment because of low switching rate from potential demand to real demand.
Furrhennore, the gap ill also mke marketing and selling effort for Islamic banking products
and services more ifficult 1".

' Bank Indonesia, The Blueprint of Islamic Banking Development in Indonesia, Jakai1a 2002, p. I 0.

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Junal Erionomi Vol. 12 No. 2 As tus 2013

c. Islamic Financial oopeatives
ccording to Siebel (2007), the development of Islamic bnking in Indonesia has been
palleled by that of Islamic financial cooperatives. hey evolved in seveal stages. he fist
Islmic coopeative was established in 1990. After 1995 PIBK, an NGO, stated pomoting

Islamic cooperatives. here were big jumps in numbes dng the cisis eas 1997 and 1998,
followeJ bya slowing-down, stagnation and declinv(.,ee able.3).
Table.3
The Evolution
of
Islamic oopeatives
�lo. Phae
Number of BMT
Peiod
1 lnlUal growth
300
1990-"1995
2 Rapid growh promoted by PINBUK
700
1996
1501
1997
2470
6f"l998
3 Slowing-dwn of aowh
2,938
2000
Stagnation and declt11e
2001
3,037
2856
2003
Source; Seibel, 2007
In sum, the outreach of Islamic coopeatives is negligible, their overl pe1formance poor
(Seibel, 2007) because;
• here is a lack of regulation, supervision and reliable reportng.
•

The large majorityof Islamic cooperatives is donnant or technically bankrupt.

• Their outreach is negigible, accounting for 7.2% of all financial cooperatives, but less thn
1% of bon-ower outreach of the sector; their loan potfoEo (much of it overdue) accounts
for 1.1% of the financial cooperative sector and 0.19% of the m.icrofinance sector.
•

111e savings of the depositos are at great 1isk.
Overall there is little difference in peformance between conventionl and Islamic
cooperatives, the latter having inherited most of their problems from the f01mer.

• No remedy is in sight, except in the framework of a total overhaul of the cooperative
system.
•

Fresh money pumped into the sector without effective regulation nd supervision will
further aggravate their dofall, as has been histoically the case of state supported
coopeative sectos.

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E NEWOK TIANGEL AND SOQETAL SECTOR INSTITTIONS ETI-IODOLOGICL
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Table.4
Financing Composition of Islamic Bak and Islaic Business Unit
Mlli;u lup!-Jtl {in Sllli:,nlOR}

>d lsdsfl, /btlhn•J

.337

Ahd Qardh (OardlJ

3S1

3!6

836

516

Ill

2SO

540

359

365

165

78!

336

'1S

4Jl

165

. %2

l,C59

).10

l.195

959

l,?11

l,?Ol

1,318

1,40

Soce: Bank Indonesia, Islamic Baing Statistic, September 2009
However, the work of the Shaiah Bureau of Bank Indonesia demonstrates that
Indonesia, especially in particular pats of the conty, has considerable unmet demand for
Islamic banking2 • It is illustated in Table.4 and Table.5 below that the mode of Murabaha is the
highest compositions of Islamic financing sstem in Indonesia, folowed by Mudharaba and
Musharaka, Murabahah as trade financing at a fixed margin, is felt to be ittle different from
conventional banking, except that it requires two contracts by the bank: one with the seller and
one with the borrower to whom the bank sells the commodity. he strength of Islamic baing
lies in its conservative character: only real tansactions with sufficient collateral, but no
speculative investments, are financed. This however has substantially reduced fin:rncings to
st,u:- ups and micro emreprenems without collateal; a mjor section of a potential
microfinance market.

Table.5
Financing Composition of Islamic Rual Bank

Ad {cntnxf}

1005

l�O�

zo,

M0!

fan·OS

A,JJ i•�Utih1rJi'lh (Mu(!ha/ilti)

N,2)7

61,342

0.< il

80,367

i08,t93

AA!d Mt:w.:r1lh (Mi:lr,c,uta}

·10,065

:Ei,351

41.114

•\O,lll

·1S;3S$

H7,56£,

S05,6B

716.HO

90

,o

l!4;

l,36!

f\Ud !jar Jh (,/�re}

&.�.-

�J$)

!.6E:

>•.:�o

5)11

6.SS!

S.S!8

6.55/

S.14�

e.1 ...1

8,lSl

�rd "lndh ;c,:H1}

�i Et

9.96�

l'l,038

?,,5.11

!),.J,44

)0,S66

40,30$

li,Sll

SUOl

$5,0JI

>.t.]01

S.lU6

7,119

!0,26�

13,361

l7,9S.i

!9,4!0

.5,762

17,132

23,0SS

), 1 :n�o,�,

l. 247;S1

1,2ss.i1�

•' �4�9!9�-

,s�:ss3

1S3l15:

,·�.uJ !.\lti:&t,oh f1.JJ�ufio)
-\�Jd SJ!im /�!or.iJ
4-id ls!i�h11J (.i';Jwc)

f,:uu1Ja�, (,\•ulri Pitpos: ,,,.;r.C.'tJ)
. ',>totl '
:., ·'

��7�Sl

GlS,�6_9

13,4"

$90,79.

.

50,HO

1H,37S

11t,211

1}5.338

1.:r1,s11

US,$95

42.952

:s,:.

10.110

52,Sll

52,}0G

1.1n.so�

U9633

33,0!0

3•,65,

71S,Q�S

90296S

�9:,1$1

l,OH./43

l,Oll,17/

l.ll0 /SS1

39

3S

,S

38

u

H

11,i61

lSA�H

12.0l�

2

27.?Si

� !S1�-�1

/S

121,H�

,,·c,. ,._

3li,JU

.�0

Sotuce: Bank Indonesia, Islamic Banking Statistic, September 2009

1 Bank Indonesia, Bluep1int of Islamic Banking Development in Indonesia,
http://www.bi.go.ibank indonesia2/utama/publikas/ upload/sva1iah% 20blue%20p1int-cngl.pdf.

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Junal Etikonoi Vol. 12 No. 2 Agustus 2013 Althogh Indonesian-banking sstem hs a slow stat and lack behind Malaysia, along

!
i"

with Singapore, Bank Indonesia's official still believes that Indonesia could improve its Islamic
banking sstem and l become the lgest one in SEAN regions. As its growth ate in 2009
has increased up to 35.6%, while the global Islamic banking system growth is oly about 15%
to 20% (Nibra, 2009). he deputy Director of Shaiah Division of Bank Indonesi , Mula E.
Sirega,., has predicted that away fowrd, Islamic banking sstem in Indonesia will be improved.
heefore, there is a need of mapping stategy in order to aim the right target of Islamic bank's
market share, by implementing good coporate govenance in Islamic banking operation
petaining to human capital and IT (Nib, 2009).

Mico Finance
1. Micoinance: A onteual Review3
Microfinance emerged in the 1970s as social innovatos began to offer financil sevices
to the working poor - those who were previously considered "unbankable" becase of their
lack of collateral. The most common microfinance product is a microcredit loan- usually less
than US$ 100. his tiny loans are enough for hardworng micro-entrepreneus to stan or
expand small businesses, or buying wholesale products to sell in a market. Income from these
businesses provides bener food, housing, health cre and education for entire families, and
most important, additional ncome provides hope for a bener future.
Microfinance institutions (Fis) eist in many forms, credit unions, commercial banks
and most often, non govemental organizations (NGOs). Many microfinance institutions use
social collateral in the fon1 of peer groups to ensure loan repament. Microcredit loan cycles
are usually shorter than traditional comercial loans - tpically six months to a year with
paments plus interest, due weekly. Shaner loan cycles and weekly payments help the
borrowes stay cuTent and not become overwhelmed by lge paments. The global repayment
rate for rnicrocredit lons is higher than 95%, which allows MFis to re-lend these funds to even
more clients. During the past 30 yeas, microfinance has been proven to be a powerful poverty
alleviation tool. It is one of the development tools with the potential to be financially selfsustarung.
Even though the industy has demonstrated that MFis can self-sustaining business, most
still rely on a .ted pool of donor dollars. Without access to ca.ital, groth traditionally stops
once initial grant money is distributed as microcredit loans. Even after more than 30 years of
industry effot, 80 percent of the woring poor are stil without access to microfinance services.
At current growth rates, the gap will not closed for decades. Fis must access l ge amounts of
capital to expand their operations and provide lons and other financial products to
3

Alnm, Mohammed Nu1ul (2009), Micofinance: An Innovative Solution, slamic Banking. Net11"0rki11g all(f Micro
Enterprise. papers presented at Post Grnduate Studies at IEF, Trisakti University, Jakarnta Indonesia, November 22-26, 2009

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damatically more clients. These lge amounts of capital are accessible only through the formal
capitl markets, and curently most Fis have neither the track record nor the clearly
aticulated bsness plan to atact this funding. Thus, for micofnance to achieve its potetial
as global povety alleviation tool, the microfinance industy mst grow scale.

2. Islamic Micoinance
Islar,,;; icrofo,ance 1cf,1tS1,u.s the cunfluence of icrofinan.. e and Islaic finance.
According to Kaim et. al. (2008), Islamic microfinance has the potential to not only respond to
unmet demand but also to combine the Islamic social pnciple of cang for the less fotunate
with microfinance's power to provide fnancial access to the poor.
Between the most complete reseaches on the topic, Dhumale and Sapcanin {1999)
dfted a techical note in which they tied to anale how to combine Islamic bking ith
icrofinnce. They took into consideration the three main instruments of Islaic finance,
mudaaba, mushaka and mabha, trng to use them as tools to design a successful
icrofinance pogam (Segado, 2005):
a ). Mudaaba model: the micofinance program and the microenteprise are patners, with the
program investing money and the micro entrepreneus investng in labor. The micro
entrepreneur is rewarded for his/her work and shares the profit while the progam only
shares the pofit. Of corse the model presents a series of difficulties, given most of all by
the fact that micro entreprenems usully do not keep accurate accountabiliy which makes it
more difficult to establish the exact share of profit. As stated before the, these models are
complicated to U1derstand, manage and handle which implies that those who are involved
need specific tng on the issues. For this reason, and for an easier management of the
profit shring scheme, the muda.raba model might be more straightforward for businesses
·with a longer profit ccle.
b).Muabaha model: under such contract, the microfinance program bus goods and resells
them to the microente.prises for the cost of the goods plus a markup for administrative
costs. TI1e borower often pays for the goods in equal nstallments, and the microfinance
program owns the goods until the last installment is paid.
c ). Mushaaka model: a profit sharing joint venture, designed to limit production or
commercial activities of long duation. Under this contact, the bank and the micro
entreprenems contribute capital jointly, managerial expertise and other essential services at
agreed portions. Profit and losses are shed according to the contract agreed upon. An
individual parrner does not become liable for the losses caused by others.
Musharaka model is the most favoable finance model for micro entrepreneurs. Khalifa
& Shazali {1988) caried out a study on the possibility of using mshaaka as the financial mode
for the Financial Oganizations (FOs) in the Islamic Financial Ss tem (IFS) in Sudan, they

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Jumal Etkonomi Vol. 12 No. 2 Asts 2013

argues that the mushaka finance model is considerable as an optimum isk mnagement
stategy for the smll-scle fanes, since it does not equire collateal. Mushaka model is
used by ral bsed Smal ottage Industies (SQ) ownes in Sudan, in many different field
such as agriculture, industy, tade, manufacturing, marketng, amal production and sevices
(Alam, 2007: p.13)4.

3. Micr0in«1C� an� Islamic .Micofo.1.n:. i.1 Indofo!sia
a. Micoinance in Indonesia
In Indonesia, micro fnance services are implemented by micro finance institutions that
can be divided into two categories, i.e., bank and non-bank sectors. BRI (Peoples Bank of
Indonesia) and BPR Rural Bank) belong to bank sector, while non-bak sector cn be
classified into two nds: non-formal and formal. Formal category includes cooperative,
Lembaga Dana dan Kredit Pedesaan (LDKP/ rral credit financing institution), pawnshop, and

.

Badan Kredit Desa (BKD/ ural credit association). LDKP gets formal status fomal Pemda
(local govement) while BKD is supevised by BRI on behaf of BI (Central Bank of
Indonesia). Classified into non-formal categoy, micro finance institutions are caried out by
NGOs and self-help groups (Ismawan and Budiantoro, 2003).
he demand driven for micro finance development is so great, considering that 98.5%
business entity in Indonesia or 41.8 million of business units are still in micro categoy, of
which less than 10 million of business Lmits get finance sevices from fom1al market. The rest
are mostly trapped into iformal market called moneylenders. The interest rates chged by
moneylenders are so high (ranging from 20%-50% per month). Different from many other
countries in which microfinance is developed by NGOs, .n Indonesia microfinance
development role is hold by govenment. Unfornmately, the main weal.ness of government
project is that it is not sustainable. Psychologically in encountering such a project, the people
consider it as grant so that sometimes it is not repaid. Ftuthemore, the interest applied is
subsidized which results in negative impact or disto1tion on microfinance (commecialization)
industy (Ismawan and Budiantoro, 2003).
onsidering vaious nds of icrofinance in Indonesia, eventually it is often called as
microfinance laboratory in the world, and great need of development, a forum to develop
microfinance is required. The objective of the forum is to build microfinance as industry to
reach the poor widely. For that reason, Gema PKM 11e Indonesian Movement for
Microfinance Development) as a forum consisting of 7 stal.eholdes, i.e., government, finance
institutions, NGOs, private sector, academicins/ researchers, mass orgzations, and hmdng

Alam, Mohammed Nuiul ( .......p.13), The lslmnic Banking System in Different Socio-Cultural Environment Context (A
comparative study of Islamic banks in Bangladesh, Turkey, Cypius and Sudan

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TE NETWOK TRIANGEL AND SOOETAL SETOR INSTI10NS EHODOLOGIAL
APPROA1 ON ISLlC IROFINANE TO IRO E1REPRENERS IN INDONESIA

institutions. Gema PKM was declared befoe the President of Indonesia in 2000. Gema PKM
has main taget to seve 10 miion poor famies on 2005. Moreover, through vios effots, in
the ear of 2004 Gema PKM nearly reched the taget (Table 6), to give financial sevices for
moe than 9 milion poor fmilies Ismawan and Budiantoro, 2003).
Table.6
Micoinance in Indonesia

4

5

7

BRl Unit
Bad:m Krooit aa
.SP

USP

.DKP
Pegadaan
BMT
Crdil lllion d NGO

TOTAL

2J4S

3.916
5 r145

1.097
35,218
2.272

2,400,00
3,I00,000
400,00
,65,00

))7

5,6!0,000
29.870.000
480,000

]58.00

M

9,431,00

14.132,00

9,254,00

27,429.000

JSO

na
na

85.000

na

531,00
3,629,00

3,038

1,200,00

157,697
157,00

No savs

N-0 avings

54,444

9,479,26.S

28,95 f.(,24

JG,251,643

188,015
JS.,656,395

14

U6

1�100,000
16,867
397401

505,729

a
293,643

1,157,00

3J4,000

209,000

Source: Data compiled by Gema PKM, analsed by Ismawan and Budiantoro (2003)
b. Islamic Micoinance in Indonesia
ompare with conventional institutions, the emerging of Islaic icofinance sector in
Indonesia, paticularly rural banks and financial cooperatives, have insignificant evolves.
According to Seibel (2004), Islamic microfinance in Indonesia, lacking broad popular demand
and Islamic banking expetise, so far has been more a political than an economic project.
Experience differs substantially by sub-sector. Only conunercial banks appear to be able of
quickly acquiring the art of Islami_ c banking by tng young and dnamic people; bur most of
the commercial banks lack experience in microf inance as a specialized field.

I1s

may change

with the recent entry of BRI units and some other banks into Islamic banking. Islamic, unlike
conventional, rnral banks, have fled to prove themselves as efficient and dynarnic providers of
microfinance services. Unsupervised Islaic, like conventional, cooperatives are an outiight
menace to their member-shreholdes and depositos, who risk losing their money.
As it's already indicated before n previous section about Islamic bing in Indonesia
that the emerging of Islamic icrof inance sector compare with the conventional institutions
and its prospects to grow is that (Seibel, 2004):
(1). Islamic conunecial banks, accounts for a mere 0.74% of the total assets of the banking
sector dwing the reporting period 1991-2003 (despite 13 years of existence). However,
since Bank Indonesia officilly recognized a dual banking ss tem, conventional and
Islamic, in 1988, interest n Islamic middle and macro finance has spread among
conunercial banks, fuelled by low rates of non-peforming loans. Over the period 20012003 the share of Islamic commercial banks increased from 0.17% to 0.74%. By setting up
branch networks of Islamic Fis, may profitably len from the ich experience of

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Departmental as well as nterdepartmental links within the orgazation are essential to
promote the organzational efficiency and an intenal netwok plas an impotnt role in
this respect by providng faclities to gow strong ties among ndividuls and groups in
the ogzation.
c). Pesonal Network is a relation between pesons that is based on both social and business
activities. :Ccordng to Johannisson & Gustafsson (1984), pesonal networs rv_onstituted
by relationships based on trust and thus established through an elaborate leng pocess,
encompassing both the joint history of the paties involved nd their assumed future.
d). Industial Networks is a elationship that takes place among all actos that are involved in
making the industrial functions efficient and effective. Axelsson and Easton (1994) define
industrial network in the following words, 'A network is a model or metaphor, which
describes a number, usually a lge number, of entities, which are connected. In the case of
industrial as opposed to, say, social, comunication or electrical networks, the entities are
actos involved in the economic processes which convert esouces to fshed goods and
services for consumption by end uses whether they be ndividuals or oganzation'. s
explicated by Johansson & akansson (1993, cf. xelsson & Easton 1994), there are three
classes of viables such as actos, activities and resources in industrial networs.
e). Social Network
A social network consists of social tie or relations, which are from and chaacterzed by
social norms, based on culture, family, relatives and friends and acquaintances. Social
network s it is obseved by Anderson & arlos (1976), 'rests on the premise that a peson's
social conduct, decision, process, orientation and attachment should be viewed in the
context of his network relationship'. A Social network can also be defined as a relationship
that enables one to collect infonm1tion about the conduct and behavior of others in society.
111e concept of different neworks as indicated before is shown in the figure.I below.

Figue. I

Concept• of Networks
.
Social Network

Personal Network

�,

-t

1

NETWORKS
lndusllial N!twork

T

�-

-l
I

lnterorganizational Network

-�I

l11tra-Organi1�1tional

Actors

.

Activities

t

lnstnnnental Network
Personal Network
Symbolic Network

Resource

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3). Islamic Micoinance Netwok Relationships
a). Islamic Micoinance Sysem Pomotes Difeent Netwoks
s it's indicated before from the previous section, Islamic microfinance promotes
different network relationship such us:

(1). Pesonal netwos are constituted by relationships based on tst. It means pesonal
.dationsh:ps are d..:ep:1 noted

.1

the mutual suppot, :.Spiration nd help each other.

Because in order to obtain the loan from the organation within Islamic microfinance
ss!em, the setting of group is normally done with small scale industry ownes of the sme
nature or related to the sme nits of productions.

(2). Symbolic networs develop as the lending procedures of the Islamic microfinance sstem
develops network relationships between sml scale industy ownes of siilar nature and
backgronds that deeply ooted in the same religious, moal, political or ethnic goals that
tie membes together.
(3). Social networks establish based on the personal and symbolic relationships close ties, trust
and lllity among relatives, friends and vaious social groups intensifing the social
networks within the small scale industy sstem. Thus it is concluded that like other
networks, social networks also influence the institutionalization of the new saving habts
among the rnral-based small scale industry owners.
(4). Intra-organzational network relationships are promoted immediately by the close ties
an1ong workes within the organzations.

(5). Inter-organizational network relationships establish smce the individual savmgs are
organized and managed through group savings, an individual smll scale industry owner
develops another relationship with other small scale indusuy owners. Furthe1more, since
the entire saving activity and accumulation of required customers' deposits are supervised
by the Islamic microfinance sstem organizations, ther extenal network relationships are
extended to different organizational units in the smll scle industry system. Thus the
small scale industry ownes not only extend their network relationships with the lending
organizations within the Islamic microfinance system but also with clfferent small scale
industry owners within the sstem. The newly develop saving habit of the small scale
industry sstem ov.rners intensify both intra- and i.nter organiz.,tionl network
relationships.
Therefore, it is concluded that the new saving habits not only promote lender borower
relationships but also contribute towards the development of trnst, loalty and obedience
within the networks. he financing organzations in the Islamic microfinance sstem through
the institutionalization of saving habits not only contribute the mobilizing idle funds of the

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TIE NEWORK TRIANGEL D SOOETAL SETOR INSTITIJTIONS EHODOLOGICAL
PPROAI ON ISLIC IROFINANE TO IRO ENBEPRENES IN INDONESIA

ucro entrepreneus uuts in dfferent micro enterprises sstem, but also enable making the
proper use of their borowed funds.

b ). The Iluence of Societal Sector Institutions in Islamic Micoinance
In promoting the network between the lendes and the borowers relates to the
relationship between the Islic microfinance sstem and smal scale industy sstem, Alam
(2007) �escibes the network tr;anglc shuwn .1 the folk, Mng Ggr1-. i1is netw urk tingle does
not only consist of deeper lender-borower relationships ith different small scale industy
sstem, but also of intense extenal network relationships ith vaious individuls and socials
goups m society.
It is known that the process of evey individual small scale industry owner in the sstem
of accumulating their pesonal savings in dfferent goups and depositing the same with the
organizations in the Islamic icrofinance sstem intensifies and develops the degree of trstful
pesonal networks. hat personal network are constituted by relationships based on trust which
means that personal relationships are deeply rooted in the mutual suppot, inspiration and help
to each other.
It is also known that the organizations in the Islamic microfinance sstem use both
formal and formal procedures to collect information regarding small scale ndustry tmits n
different small scale industry system. The organizations in the Islamic icrofinance sstem
must colect information about borrowers from different sources like religious, social and local
influential leaders. Thus, the info1al procedw·e makes the Islamic microfinance system Lmits
famiiar to different groups of people n society and promotes various network relationships.
It also stimulates small scale industry owners to ncrease their network relationships with
various individuals and social groups who act as informants to the organizations in the Islamic
microfinance system. The extension of the network relations of the smll scale industry sstem
to these groups fonning a triangle network consisting of the Islamic microfinance system, small
scale industy sstem and the groups of local, social and religious leades.
c). Islamic Micoinance Newoks in Indonesia
Different from Islamic microfinance sstem in almost every other county, especially
Sudn, Bangladesh, Turkey and Cp rus, the informal procedure is not implemented in
Indonesia. Islamic microfinance sstem in Indonesia is still using the fo1mal procedure, same
with the conventional ones. Formal means of maintaining lender-borower relationships and
also collecting infonnation about customers is a westen practice that is uncommon m
developing nations like Indonesia, due to their poor socio-economic infrastructure.
Many Islamic microf inance institutions in Indonesia are still using social collateral to
ensw·e loan repayment. In order to be qualfied for loans, the individual customes are not
required to make groups and save a cenain amoLmt of money and deposit the same with the

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Jumal Etionomi Vol. 12 No. 2 Agustus 2013

organizations in the Islamic icrofinance sstem in. In the lending procede, before give the
lending funds, the financing organizations only relay on the documents and do not need to
obseve deeply the capacity of the smal scale indsty units who borow the funds.
After lenng the funds, the finncng organiations also do not need to execise proper
supevsios and contol on the activities of the borowes, thus they could not zing the
financing pob!,.,s.
Unlike formal, informal was of collecting information about the small scale industy
units, characte�s the Islaic icrofinance sstem, since the information about the small scale
industry units is collected from ifluential local leades or social and religious leades. Ths
procedure stimulates small scle industry ownes to increse their network relationships with
vaios individuals and social groups who act as informants to the organizations in the Islamic
icofinance sstem.

The financial orgnizations in a proper Islamic microfinance sstem also reqre the
individual customer to setting of groups and save certain amount of money to be deposits with
the fnancng organizations. This procedure immediately estabish trustful pesonal networks in
the mutual support among group membes and develop the symbolic network, which deeply
rooted from the same background that tie membes together.
In this financng mode, the financing organizations also tke initiative to guide customers
to develop saving habits and take active part in educating cstomes to make proper use of the
borrowed funds. With their teachings, close monitoring and direct supevisions of borrowes
activities, the financing organizations promotes intense relationships with the borrowes. The
dfferent financing modes and the distinguished lending policies followed by the organizations
in the Islanlic financing system assist micro ente1prises in different sector of economy in
developing the lender-borrower relationships between the exchange patners. Thus, the lending
modes n the proper Islamic microfinance sstem intensify both intra- nd inter organizational
network relationships. T11is integrated network relationships wl attract many customes
especialy at nual areas where the micro enterprises in different small scale industry systems are
found satisfied with the fnancing policy of this financing sstem.
Unfonunately, the intensity of the link between Islamic microfinance sstem, smll scale
ndustry sstem and the groups of local, social and religious leaders is not well implemented and
extended in Islamic microfinance sstem in Indonesia.
4. CONCLUSION
From the above discussion it is concluded that the Islamic microfinance sstem in
Indonesia is not properly implemented. The microfinance institutions like Islamic bans,
Islamic rural banks nd Islamic financial cooperatives in Indonesia have failed to prove

125

W

E NEWOK TRINGEL AND SOOETAL SECTOR INS1IONS EHODOLOGICAL
APPROAGI ON ISLAIC I.OFINANE TO IRO ENTREPRENERS IN INDONESIA

themselves as effective and efficient provides of microfinance services. Furthermore, the
establishment of institutionalize network relationships between economic actors within the
Islamic microfinance sstem is not establish and extended.
If poperly mplemented, the Islanuc microfinance sstem will be repesenting as the
effective solutions for mico entrepreneus needs. Apt from giving credit to customes,
org.a:ic:; it. the Islamic icrofina.:e sstem normally take :ctive pat in educating
customes regarding newly developed finncing procedures and other important aspects in the
exchange activities. he oganizations in this financing sstem also take initiatives to guide
customes in developing savng habits (lam, 2002), pomoting production activities and in
investing funds in different projects. The organizations within the Islamic microfinance system
with ther teachings to borrowers not only guide them to make proper use of the borrowed
funds but lso to develop entrepreneuships mentaliy among them. Therefore, the ntense
lender-borrower relationships promote the inter-organizational network relationships.
The setting of goups and saving habits also intensifies the trustful personal network
relationships that are deeply rooted in the mutual support, inspiration and help to each other. It
also ultmately develop the symbolic network among group members that is deeply rooted in
religious, moral, political and ethnic goals, which tie the members together. This sot of close
contact promotes intra-orgational relationships.
From this pespective it is concluded that if properly implemented, the lending modes of
organizations in the Islamic microfinance system intensify both intra- and inter organizational
network relationships s an integated network, which promote effective solutions to
complement with the development of micro entreprenes in the Muslim world including in
Indonesia.
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National, Malasia
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Jnal Etkonoi Vol. 12 No. 2 Agstus 2013

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