COMPARING THE SUSTAINABILITY OF CONVENTIONAL AND ISLAMIC MICROFINANCE MODELS IN INDONESIA Ascarya and Widodo Cahyono Center for Central Banking Education and Studies, Bank Indonesia Jl. MH Thamrin No.2, Sjafruddin Prawiranegara Tower, 20 th fl., Jakarta 10350, Indonesia Email:
[email protected]; Phone: +6221.381.7345; Fax: +6221.350.1912
ABSTRACT The role of Micro Enterprises (MEs) in Indonesia, especially after monetary crisis, considered as a safety valve in the process of national economic recovery both in enhancing economic growth and reducing unemployment rate. MEs have always been in difficulties to access loan or financing from the banking industry (conventional as well as Islamic financial institutions) for a number of reasons. This study is aimed to determine and evaluate several existing models of conventional and Islamic microfinance (MF) for MEs to find the best existing microfinance model. Survey results show that the best conventional Grameen model is Koperasi Setia Bhakti Wanita (SBW), Surabaya, while the best Islamic Grameen model is KUBE (Kelompok Usaha Bersama) Sejahtera No.021, Surabaya. The best cooperative is Kodanua (Koperasi Dana Usaha Kota), Jakarta, while the best BMT is UGT (Usaha Gabungan Terpadu), Pasuruan. The best conventional rural bank is BKK (Bank Kredit Kecamatan), Purwodadi, while the best Islamic rural bank is Amanah Ummah, Bogor. The best micro unit of conventional bank is BRI Unit Mikro, while the best micro unit of Islamic bank is Bank Syariah Mandiri. Overall, BRI Unit is the overall best microfinance model, while UGT is the second overall and the best Islamic microfinance model. Moreover, KUBE has the best financing and social-development programs, Amanah Ummah has the best MFI performance, while BRI Unit has the best outreach. ANP results show that the best MF model is BRI Unit (Micro-banking Unit of conventional bank) followed in a distance by UGT (BMT) and Amanah Ummah (Islamic Rural Bank). The most important sustainability criteria are: 1) Aid Independent (MFI Performance); 2) Savings Program (Soc-Dev. Program); 3) Coverage (Outreach); 4) Risk Mitigation (Financing Program); 5) Average Financing (Outreach); and 6) Channeling-Executing Independent (MFI Performance). KUBE, UGT, Amanah Ummah and BRI Unit can be used as benchmark models for replication. JEL Classifications: G21, G28, O17 Keywords: Microfinance, Islamic Microfinance, Microfinance Institution, Micro Enterprises
1. INTRODUCTION 1.1 Background The role of Micro Enterprises (MEs) in Indonesia, especially after monetary crisis, considered as a safety valve in the process of national economic recovery both in enhancing economic growth and reducing unemployment rate. Several data show the significance of MEs‟ contribution towards Growth Domestic Product for about 32.68% in 2009, and it could absorb 91.03% labor force. The most valuable lessons
Paper presented at the International Conference: “Political Economy of Trade Liberalization in Developing East Asia: Sustainability, Governance, and the Role of Small Business”, Faculty of Economics and Business-University of Brawijaya, Malang, November 24-25, 2011.
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that should be taken into account are (Tambunan, 2004): (1) Indonesian economy cannot depend mostly on large enterprises, (2) SMEs has more resistant compare to the large one and (3) there is no clear industrial policy that enhances economic growth and creates vocation for poor and unemployed people. Despite historical success of MEs, there exist unresolved issues that need to be further discussed whereby MEs have always been in difficulties to access loan or financing from the banking industry (conventional as well as Islamic financial institutions) for a number of reasons. Among 52.18 million MEs, Mohamad (2011) finds that 30 percent of them need loan up to Rp50 million, while 70 percent of them need loan below Rp5 million, with very low penetration. Certainly, limit credit formula ranging < Rp.50 million for the micro-enterprise should be reviewed carefully as so many poor or low-income society only need credit for about Rp300.000 - Rp1 million, as also suggested by Ascarya and Sanrego (2007). However, only about 30-40 percent of them have access to financing (including cooperation 5.7 million and BRI Unit 5.1 million). Based on these issues this study is trying to identify best sustainable conventional and Islamic microfinance models which can be replicated in different areas to serve micro enterprises throughout Indonesia. 1.2 Objective The objective of this study is to determine and evaluate several existing models of conventional and Islamic microfinance for MEs to find the best existing conventional and Islamic microfinance models. Moreover, this study will propose sustainable conventional and Islamic microfinance model which is suitable for MEs to progress gradually, feasible for microfinance institutions, as well as sustainable in the long run. 1.3 Methodology This study will apply Analytic Network Process (ANP) method with three steps. First, in-depth interview will be conducted with various stakeholders, such as micro-enterprises, Islamic banks, experts, academicians, as well as regulators of MSMEs and Islamic bank, to fully understand the real problems and to identify factors causing financing problems of MEs. Second, the results of the first steps will be used to develop an appropriate ANP network and its questionnaires to obtain proper data from MEs and Islamic bank. Third, ANP analysis will be applied to set priority on alternative solutions as well as policies and strategies to formulate optimal policy recommendations.
2. LITERATURE REVIEW Islamic microfinance can be referred to microfinance in Islamic perspective. Conventional microfinance is started as for profit instruments, while Islamic microfinance naturally can be not for profit as well as for profit instruments. Recently, conventional microfinance also introduced not for profit instruments. Therefore, this section will discuss Islamic microfinance by first discussing microfinance in general, and then microfinance which is in accordance with Islamic perspective. 2.1
Microfinance
Definitions of microfinance have been given by many authors, such as The Consultative Group to Assist the Poorest or CGAP in Mukherjee (1998), Seibel and Khumar (1998), Khan (2008), and Obaidullah (2008). In summary, microfinance can be defined as provision of financial products and/or services (such as, micro-credit, micro-savings, micro-equity, micro-transfers and micro-insurance) in sustained manner to the poor, marginalized people and/or low-income people whose low economic standing excludes them from formal financial systems. The main difference between microfinance and mainstream finance systems is its alternative approach to collateral that comes from the concept of joint liability, since the poor do not have necessary asset for collateral. CGAP (2004) has come up with eleven key principles of Microfinance on decade-long consultations with its members and stakeholders. Microfinance products and services are usually provided by microfinance institution (MFI), which includes a wide range of providers that vary in their legal structure, mission, and methodology. However, all share the common characteristic of providing financial services to clients who are poorer and more 2
vulnerable than traditional bank clients. An MFI can operate in the form of a commercial bank, rural bank, credit union, cooperative, other non bank financial institution (NBFI), development organization, or non government organization (NGO). In practice, microfinance mostly manifested in terms of small loans or micro-credit available to poor people (especially those traditionally excluded from financial services) through programs designed specifically to meet their particular needs and circumstances. Typically, the characteristic features of microfinance programs are as follows (Khan, 2008). • Loans are usually relatively short term, less than 12 months in most instances, and generally for working capital with immediate regular weekly or monthly repayments – they are also disbursed quickly after approval, particularly for those seeking repeat loans. • The traditional lender‟s requirements for physical collateral such as property are usually replaced by a system of collective guarantee (or solidarity) groups whose members are mutually responsible for ensuring that their individual loans are repaid. • Loan application and disbursement procedures are designed to be helpful to low income borrowers – they are simple to understand, locally provided and quickly accessible. Obaidullah (2008) confirms that good microfinance programs are characterized by small, usually shortterm loans; streamlined, simplified borrower and investment appraisal; quick disbursement of repeat loans after timely repayment; and convenient location and timing of services. 2.2
Islamic Microfinance
Islamic microfinance is one of Islamic approaches to alleviate and eradicate poverty, so that the main target is not only the poor, but more importantly is the poorest of the poor, which has always been left out by mainstream microfinance. In Islam, poverty is in conflict with one of the primary objectives (maqasid) of Shariah, namely, “enrichment of self (nafs)”. Moreover, Islamic jurists have unanimously held the view that it is the collective obligation (fard kifayah) of a Muslim society to take care of the basic needs of the poor. According to Obaidullah (2008), principles of Islamic approach to poverty alleviation include: a) Compulsory charity (zakah) and voluntary charity (sadaqa jariya and waqf). Zakah is the third among five pillars of Islam (QS At-Taubah [9]:103; QS Ar-Ruum [30]:39; QS Adz-Dzaariya [51]:19; QS AlBaqarah [2]: 43 and 110). Meanwhile, sadaqa in general is encouraged in Islam (QS Al-Baqarah [2]: 261). Therefore, charity plays a central role in Islamic scheme of poverty alleviation and eradication, especially for the poorest of the poor. b) Economic empowerment. Islam encourages people and nation to be independent (including financial independent). A famous Hadith of Sunan Abu Dawood, Kitab al-Zakah, Book 9, Number1637 explains, step-by-step, how to design and implement a strategy of poverty alleviation through economic empowerment (Obaidullah, 2008). c) Debt avoidance. Islam teaches Muslims to abstain from wasteful and luxurious living and live within their means, so that debt should be avoided, although it is not prohibited QS Al-A‟raf [7]:31; QS Al-Israa [17]:26-27). Obaidullah (2008) states some Hadith of Muslim and Bukhari: “The best among you are those who are best in paying off debt” (Muslim); “Procrastination in repaying debts by a wealthy person is injustice” (Bukhari); “Whoever contracts a debt intending to repay it, Allah will repay it on his behalf, and whoever contracts a debt intending to waste it, Allah will bring him to ruin” (Bukhari). d) Cooperation and solidarity. Chapra (2008) states that social solidarity and brotherhood are two of many requirements to achieve falah (real well-being in this life and in the hereafter) as one of the indispensible ways to achieve the ultimate goal of all Islamic teachings, which is Rahmatan lil-‘Alamin or to be a blessing for mankind and all that exist (QS Al-Maidah [5]:2; QS Al-Hujuraat [49]:10). Obaidullah (2008) also mentions a Hadith of Bukhari and Muslim: “Believers are to other believers like parts of a structure that tighten and reinforce each other" (Bukhari and Muslim). e) Family cohesiveness. Islam gives utmost importance to family as nucleus social institution that plays a major role in shaping the future of mankind. Obaidullah (2008) adds that Islam also sees a balanced role for men and women in ensuring the economic and social well-being of the family (QS Adz-Dzaariya [51]:49; QS An Nisaa [4]:32). 3
f) Shari‟ah compliance of contracts. Islamic microfinance is part of Islamic finance with products and services that are also in the nature of contracts, so that they must comply to Shari‟ah norms, such as prohibition of ribā (interest), maysir (excessive speculation and gambling) and gharar (uncertainty, deceit or unclear transaction). g) Islamic norms and microfinance best practices. Islamic microfinance can be viewed as a combination of microfinance and Islamic finance, so that it retains mainstream microfinance best practices and models, while modifying the conducts, products and services to make them comply with Shari‟ah, which promote justice, fairness and equity. Islamic microfinance can range from fully charity-based, a certain combination of charity-based and market-based, to fully market-based models. 2.3
Microfinance Models
Common models of microfinance in general can be distinguished into several types, namely: 1) Association model; 2) Bank Guarantee model; 3) Community Banking model; 4) Cooperative model; 5) Credit Union model; 6) Grameen Bank model; 7) Group model; 8) Individual model; 9) Intermediary model; 10) Non-Government Organization (NGO) model; 11) Peer Pressure model; 12) Rotating Saving and Credit Association (ROSCA) model; 13) Small Business model; 14) Village Banking model; 15) Self Help Group model; 16) Graduation model; and 17) Micro-banking Unit model. However, four microfinance models are stand out, namely Grameen Bank model, Village Bank model, Cooperatives or Credit Union model, and Self-Help Group model (Obaidullah, 2008). Other important microfinance models are Graduation model introduced by Bangladesh Rural Advancement Committee (BRAC model), Grameen La Riba model, and Social Islami Bank Limited (SIBL) model introduced by MA. Mannan (2007). Among various microfinance models, some of them have been successfully implemented in Indonesia, namely: 1) Grameen bank model, represented by various non government organizations or NGOs, cooperatives, Baitul Maal wa Tamweels or BMTs, or venture capitals; 2) Cooperative model, represented by cooperatives and BMTs; and 3) Community banking model, represented by conventional and Islamic rural banks; and 4) Micro-banking Unit, represented by conventional and Islamic commercial banks which establish micro-banking unit. Grameen Bank model (established by Muhammad Yunus in October 1983) is group-based and graduated financing that substitutes collateral as a tool to mitigate default and delinquency risk. In Grameen Bank model, a small group of people (5 on average) is formed to apply for financing, who guarantee each other‟s loans. Obaidullah (2008) explains that members of these small groups are trained regarding the basic elements of the financing and the requirements they will have to fulfill in order to continue to have access to funding. Funds are disbursed to individuals within the group after they are approved by other members in the group. Repayment of the financing is a shared responsibility of all of the group‟s members. In most cases, microfinance programs are structured to give credit in small amounts and require repayment at weekly intervals and within a short time period (usually a month or a few months). Detailed descriptions can be found, among others, in Khandker (1996) and Yunus (2007). Cooperative or Credit Union (CU) is micro financial institution based on the concept of mutuality. According to Obaidullah (2008), Cooperative or CU model is in the nature of non-profit financial cooperative owned and controlled by its members. Cooperative or CU mobilize savings, provide loans for productive and provident purposes and have memberships which are generally based on some common bond. Cooperative or CU generally relate to an apex body that promotes primary credit unions and provides training while monitoring their financial performance. Credit Unions are quite popular in Asia, notably in Sri Lanka. A variant of Cooperative or CU is the member-based Islamic financial cooperatives in Indonesia called Baitul Maal wat-Tamweel (BMT) which provide charity-based not-forprofit social services and margin-free loan or Qardh and/or Qardh Hasan (Bait ul-Maal function), as well as for-profit financing (Bait ut-Tamweel function). Community bank is financial institution based on the concept of local bank to serve local community. Community bank is locally owned, locally operated and is focused to provide the financial needs of the businesses and families in the community where the bank holds offices and branches. Employees of the bank are local people who understand the local financial needs of businesses, farmers and families. Most community banks offer all standard banking services including checking, savings, loans and mortgages, safe deposit boxes, etc., for both consumers and businesses customers. Most community banks do not offer some of the services that large banks offer, such as brokerage and large financing. 4
Micro banking is a downscaled operation unit of (conventional and Islamic) commercial bank to meet the needs of the micro finance market in the rural area, and brings various banking services to the doorstep of the rural community. Micro banking unit provides micro-savings, micro-lending/micro-financing and other micro financial services, such as money transfers and micro-insurance/micro-takaful. Micro banking unit may also offers a comprehensive package of services, including financial assistance, technical know-how and marketing arrangements to the micro entrepreneurs of the area. 2.4
Sustainable Microfinance Model
Sustainable conventional and Islamic microfinance model that is capable to meet the needs of MEs to progress gradually should have certain features, such as salient characteristics, financial sustainability, impact sustainability, and external shocks sustainability. Microfinance model should possess certain characteristics to fit the specific needs of MEs for financial and non-financial assistances, which usually represented in its financing program (such as, Easy access; Simplicity; Social collateral; Risk mitigation; Risk sharing; Low cost; Ample monitoring) and sociodevelopment program (such as, Health care; Social messaging; Subsidized financing; Regular meeting; Skills training; Savings program; Social services). Financial sustainability of a (microfinance) program includes the ability of the model or scheme to sustain its operation on the basis of financial viability (Khandker, 1996). Mayoux (2006) states that to be financially sustainable, microfinance program ultimate aim is large programs which are profitable and fully self-supporting in competition with other private sector banking institutions and able to raise funds from international financial markets rather than relying on funds from development agencies. Recent guidelines for CGAP funding and best practice focus on production of a „financial sustainability index‟ which charts progress of programs in covering costs from incomes. Financial sustainability variables could include: FDR; NPF; Profitability/ROA; Staff productivity; Operational productivity; Aid independent; Low cost. Microfinance model sustainability can also be viewed from its impact (economic and social impacts) to individuals or targeted poor people (Fernandez, 2006). Economic Impact could include: Consumption smoothing; Income increase; Graduation; Poverty alleviation; Asset building. Meanwhile, Social Impact could include: Outreach; Family empowerment; School attendance; Health awareness; Skills development; Knowledge improvement; Religious adherence. Moreover, microfinance model should also sustainable from macroeconomic and external shocks, such as interest rate, exchange rates, inflation and economic growth. 2.5
Previous Studies
There are plenty of studies on conventional as well as Islamic microfinance in Indonesia (or including microfinance in Indonesia). Some that will be discussed here include two worldwide studies of microfinance including Indonesia by Lapenu and Zeller (2001) and Morduch (1999) and one study of conventional microfinance in Indonesia by Ravicz (1998). Lapenu and Zeller (2001) compare the performance of MFIs in the world (which extend average loan size of less than $1000) which mostly reside in Asia, Africa and Latin America. In 1999, the database of MFIs from 85 developing countries showed 1,500 institutions (790 institutions worldwide plus 688 in Indonesia) supported by international organizations. They reached 54 million members, 44 million savers (voluntary and compulsory savings), and 23 million borrowers. The total volume of outstanding credit was $18 billion. The total savings volume was $12 billion, or 72 percent of the volume of the outstanding loans. MFIs have developed at least 46,000 branches and employed around 175,000 staff. Morduch (1999) compares five conventional microfinance models from four different countries, namely, Grameen Bank Bangladesh, Banca-Sol Bolivia, BRI Unit Desa (Village Bank) Indonesia, Bank Kredit Desa (Village Bank), and FINCA (Village Bank) Latin America. Morduch concludes that microfinance may be an important aid for households that are not destitute but still remain considerably below poverty lines. The tension is that the scale of lending to this group is not likely to permit the scale economies available to programs focused on households just above poverty lines. Subsidizing may yield greater social benefits than costs. Moreover, in the best of circumstances, credit from microfinance programs helps fund self-employment activities that most often supplement income for borrowers rather than drive 5
fundamental shifts in employment patterns. It rarely generates new jobs for others, and success has been especially limited in regions with highly seasonal income patterns and low population densities. Ravicz (1998) reviews five conventional microfinance models in Indonesia in search of sustainable microfinance model. The samples include BKK (Badan Kredit Kecamatan) of South Kalimantan, LKP (Lumbung Kredit Pedesaan), PHBK (Program Hubungan Bank dengan KSM), P4K (Pembinaan Peningkatan Pendapatan Petani-Nelayan Kecil), and BKD (Badan Kredit Desa). Aspects to be evaluated include loan products, savings products, supervision, performance (outreach and sustainability), response to regulation and competition. There are also some empirical studies comparing various conventional and Islamic microfinance models. Most comparison studies include Grameen Bank model as one of the microfinance model as benchmark model, since this is the most successful microfinance model worldwide and has been replicated with necessary modifications (to fit the local conditions) in many parts of the world. Robbani (2007) analyses Grameen Bank (GB) which has social orientation to help the poor out of poverty by using interest based microfinance. In sum, if GB stopped charging Interest and adopted an alternative which is within the Shari‟ah – then it will become more Islamic than most Islamic banks & financial institutions currently in operation throughout the world. However, Grameen Bank cannot be regarded as an Islamic solution to poverty alleviation. Nevertheless, we should not lose sight of the fact that what GB is doing is helping the poor. However, even this is contrary to the spirit of the Shari‟ah as God has already given us the solution to poverty alleviation in the form of the organized collection and distribution of Zakah (not GB‟s Interest based micro-loans, funded from Interest charging sources). Furthermore, the GB‟s contribution is in the field of poverty alleviation and its program or framework was not guided or motivated by any Islamic consideration (See the holy Qur‟an, Surah Al-An‟am [6]:162). Thus, if our actions are not guided or motivated without a reflection of God in our thoughts (i.e. without any Islamic consideration) - then what real (non-temporal) value is there in such actions? Mannan (2007) compares conventional microfinance model (Grameen Bank or GB) with Islamic microfinance model (Social Islami Bank Ltd. or SIBL) in Bangladesh. He concludes that micro-credit as practiced by GB is not an answer to the reduction of poverty; it just helps poverty to continue. Meanwhile, family empowerment micro-credit program of SIBL represents a paradigm shift in microfinance, capable of reduction of poverty and growth with equitable distribution of income. Mazher (2010) compares two conventional and five Islamic microfinance models operating in Pakistan, which includes Grameen Bank model, Banco-sol progressive model, Grameen La Riba model, Islamic Lending model, Akhuwat Islamic Loan model, NYMT Islamic microfinance model, and Farz Islamic microfinance model. The areas to be compared include Staff behavior, Additional services, Business improvement, Loan type preference, Living improvement, and Loan utilization. The results show that Islamic microfinance models are better in all areas, especially in Business improvement, Living improvement, and productive loan utilization.
3. METHODOLOGY 3.1 3.1.1
Analytic Network Process Overview
ANP is a new approach in decision making process that provides general framework in treating decisions without making any assumption about independency of elements in higher level from elements in lower level and about independency of elements within the same level. Moreover, ANP uses network without having to determine level as in hierarchy used in Analytic Hierarchy Process (AHP), which is a starting point of ANP. The main concept of ANP is influence, while the main concept of AHP is preference. AHP with its dependency assumptions on clusters and elements are a special cases of ANP. In AHP network, there are levels of goal, criteria, sub criteria, and alternative, where each level has its own elements. Meanwhile, in ANP network, level in AHP is called cluster that can consist of criteria and alternative which now is called node (see figure 3.1) 6
Linear Hierarchy ■
Goal Criteria
■■■■■
Subcriteria
Feedback Network C4■■■■ Component, Cluster (Level)
■■ C1■■
■■■
Feedback
■■■ C2■
Element Alternatives
■■■■
C3■■■ A loop indicates that each element depends only on it self
Source: Saaty and Vargas (2006)
Figure 3.1 Comparisons of Hierarchy and Network With the feedback, alternatives can depend on criteria, like in a hierarchy, but it can also depend on other criteria. Furthermore, those criteria themselves can depend on alternatives and other criteria (see figure 3.1). Meanwhile, feedback improves priority which derived from judgment and makes prediction more accurate. Therefore, the result of ANP is expected to be more stable. From feedback network in figure 3.1, it can be seen that the parent node or element and nodes to be compared can be in different clusters. For example, there is a direct link from parent node cluster C4 to the other clusters (C2 and C3), which called outer dependence. Meanwhile, there is parent node and nodes to be compared lie within the same cluster, so that this cluster will be connected with itself and create loop link. This is called inner dependence. The intended output of ANP is to determine the overall influence from all elements. Therefore, all criteria must be configured and set their priority in a framework of control hierarchy or network. After that, do the comparison and synthesis to obtain the order of priority from these criteria. Then, we derive the influence from element in feedback system with respect to each criterion. Finally, the results of these influences are weighted according to the important level of the criteria, and summed them up to get overall influence from each element. AHP and ANP utilize ratio scale, which makes basic arithmetic operation possible. It should be noted that ratio scales are also absolute scales. Both of them are derived from pairwise comparisons using judgments or derive from pairwise dominance ratios using actual measurements. When using judgments, in AHP one asks “which one is more preferred or more important?” while in ANP one asks “which one has greater influence?” The second question obviously requires factual observation and knowledge to produce valid answer. This makes the second question more objective than the first one. 3.1.2
Axiom of ANP
Every theory is based on axioms. The simpler and the fewer the axioms, the more general and applicable the theory is. AHP has four (ANP has three) relatively simple axioms which carefully restrict the scope of a problem: 1) Reciprocal, which requires that if A is 4 times larger than B, then B is one forth as large as A; 2) Homogeneity, which states that the elements being compared should not differ by too much, else there will tend to be larger errors in judgment (the verbal scale of ANP ranges from one to nine, or about an order of magnitude); 3) Hierarchy Structure (not applicable to ANP), which requires the application of hierarchy structure; and 4) Individuals who have reasons for their beliefs should make sure that their ideas are adequately represented for the outcome to match these expectations. 3.1.3
Basic Principles of ANP
There are three related basic principles of AHP/ANP, namely decomposition, comparative judgments, and hierarchic composition or synthesis of priorities (Saaty, 1999). 1. Decomposition. The principle of decomposition is applied to structure a complex problem into a hierarchy or network of clusters, sub clusters, sub-sub clusters, and so on. In other words, decomposition tries to model the problem into AHP/ANP framework. 2. Comparative Judgments. The principle of comparative judgments is applied to construct pairwise comparisons of all combinations of elements in a cluster with respect to the parent of the cluster. 7
These pairwise comparisons are used to derive „local‟ priorities of the elements in a cluster with respect to their parent. 3. Hierarchic Composition or Synthesis. The principle of hierarchic composition or synthesis is applied to multiply the local priorities of the elements in a cluster by the „global‟ priority of the parent element, producing global priorities throughout the hierarchy or network and then adding the global priorities for the lowest level elements (usually the alternatives). 3.2
Step of Research
Based on ANP discussion, the main steps of ANP modeling are: 1) Decomposition, which is the development of ANP network of the problem; 2) Measurement, which is pairwise comparisons on the elements and relative weight estimation of all dependence and feedback relationships in the ANP network; and 3) Synthesis, which includes construction and calculation of original unweighted supermatrix, weighted supermatrix, and limiting supermatrix (the global priority weights). Literature Review FGD Indepth Interview ANP Model Construction ANP Model Validation
PHASE 1 Model Construction
PHASE 2 Model Quantification
RESEARCHER
PHASE 3 Results Analysis
Pair-wise Questionnaire Design Pair-wise Questionnaire Testing Pair-wise Survey Data Synthesis & Analysis
EXPERTS
Results Validation Results Interpretation
Figure 3.2 Steps of Research This study comprises of several extended steps of main ANP modeling, which can be grouped into three phases. Phase 1 is model construction or decomposition to identify, analyze and structure the complexity of the problems into an appropriate ANP network, which includes: a) Literature reviews, questionnaires and in-depth interviews with experts and practitioners (Islamic bankers) to comprehend the problem fully; b) Construction of ANP network; and c) Validation of ANP network. Phase 2 is model quantification or pair-wise comparison, includes: a) Design pair-wise questionnaires in accordance with ANP network; b) Test the pair-wise questionnaires to respondents (experts and/or Islamic bankers); and c) Survey to respondents to fill out pair-wise questionnaires. Phase 3 is synthesis and results analysis, which includes: a) Data processing and synthesis using ANP software SUPERDECISIONS, as well as results analyses to calculate geometric mean and rater agreement; b) Validation of the results; and c) Interpretations of the results. 3.3
Conceptual Framework
Based on the first phase of model construction, Conventional and Islamic microfinance models will be evaluated using four main aspects, namely: 1) Financing Program; 2) Social and Development Program; 3) MFI Performance; and 4) Outreach. Each main aspects comprises of seven criteria, as can be seen in figure 3.3 in the appendix. [Insert Figure 3.3] Microfinance models which will be evaluated include: 1) conventional Grameen model; 2) Islamic Grameen model; 3) conventional cooperative; 4) Islamic cooperative (Baitul Maal wa Tamwil or BMT); 5) conventional rural bank; 6) Islamic rural bank; 7) Micro-banking unit of conventional bank; and 8) Micro-banking unit of Islamic bank. Four microfinance models will be selected for each category based on their characteristics and outreaches. [Insert Table 3.1] Therefore, based on the above conceptual framework, the ANP network can be illustrated as follows.
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Figure 3.4 ANP Network
4. RESULTS AND ANALYSIS 4.1
Survey Results
a. Grameen Model
Figure 4.1 Grameen Model Survey Results Conventional Grameen model (cGrameen) scores better than Islamic Grameen model (iGrameen), since conventional Grameen models have been established longer than those of Islamic Grameen models. The best conventional Grameen model is Koperasi Setia Bhakti Wanita (SBW), Surabaya, which has been known as the pioneer of Grameen model in Indonesia. Meanwhile, the best Islamic Grameen model is KUBE (Kelompok Usaha Bersama) Sejahtera No.021, Surabaya, supported by DEPSOS – PINBUK and has been replicated throughout Indonesia. Moreover, best financing program has been obtained by KUBE and TAMKIN (iGrameen). Best social and development program has been obtained by Islamic KUBE. Best MFI performance has been obtained by SBW. Best outreach has been obtained by Mitra Bisnis Keluarga or MBK Ventura (cGrameen), which has been named the best microfinance institution in 2008 and 2009 by MIX (Microfinance Information Exchange). b. Cooperative – BMT Model
Figure 4.2 Cooperative – BMT Model Survey Results BMT model (BMT) scores better than conventional cooperative model (COOP), even though BMT is much younger than cooperative. The best cooperative is Kodanua (Koperasi Dana Usaha Kota), Jakarta, 9
which is one of the oldest and largest cooperative in Indonesia. Meanwhile, the best BMT is UGT (Usaha Gabungan Terpadu), Pasuruan, which has been awarded the best BMT in 2010. Moreover, Ibadurrahman is the best in Financing Program, Kodanua is the best in Social and Development Program, while UGT is the best in MFI Performance and Outreach. c. Rural Bank Model
Figure 4.3 Rural Bank Model Survey Results Islamic rural bank model (IRB) scores better than conventional rural bank model (CRB), even though Islamic rural banks are still new and considered as infant industry. The best conventional rural bank is BKK (Bank Kredit Kecamatan), Purwodadi, while the best Islamic rural bank is Amanah Ummah, Leuwiliyang, Kab. Bogor. Moreover, best financing program has been obtained by Islamic rural bank Bhakti Makmur Indah, Sidoarjo. Best social and development program and best MFI performance has been obtained by Islamic rural bank Amanah Ummah. Best outreach has been obtained by conventional rural bank BKK Purwodadi. d. Micro Banking Unit Model
Figure 4.4 Micro Banking Unit Model Survey Results Micro banking unit of conventional bank (cBANK) scores better than micro banking unit of Islamic bank (iBANK), since micro banking unit of Islamic bank is still new to the microfinance industry. The best micro banking unit of conventional bank is BRI Unit Mikro, which has been well known globally. Meanwhile, the best micro banking unit of Islamic bank is Bank Syariah Mandiri, which is the largest Islamic bank in Indonesia. e. Overall
Figure 4.5 Overall Survey Results 10
BRI Unit is the overall best microfinance model, while UGT is the second overall and the best Islamic microfinance model. KUBE has the best financing and social-development programs, Amanah Ummah has the best MFI performance, while BRI Unit has the best outreach. 4.2
ANP Results
Table 4.1 in the appendix shows the summary results of ANP for all clusters, which are shown in two figures, i.e., „normalized by cluster‟ and „limiting‟. Value in „normalized by cluster‟ column shows relative value of each element to other elements in the cluster, where the total value of all elements in one cluster equals to one. Value in „limiting‟ column shows relative values of each element to the entire network, where the total value of all elements in ANP network equals to one. [Insert Table 4.1] The results of sustainability criteria in figure 4.6 show that MFI Performance (0.300) is the most important criteria followed closely by Financing Program (0.298). Next priority is Outreach (0.232) and Social-Development Program. 1Financing Program
0.298 0.171
2Soc. & Dev. Program
0.300 0.232 0.00
0.05
0.10
0.15
0.20
0.25
3MFI Performance 4Outreach
0.30
Figure 4.6 Results of Sustainability Criteria The more detailed results of sustainability criteria can be seen in figure 4.7. The most important sustainability criteria are: 1) Aid Independent (MFI Performance); 2) Savings Program (Soc-Dev Program); 3) Coverage (Outreach); 4) Risk Mitigation (Financing Program); 5) Average Financing (Outreach); and 6) Channeling-Executing Independent (MFI Performance). 0.035 0.030 0.025 0.020 0.015 0.010 0.005 0.000
Figure 4.7 Results of Detailed Sustainability Criteria Global ANP results in figure 4.8 show that the best MF model is BRI Unit (Micro-banking Unit of conventional bank) followed in a distance by UGT (BMT) and Amanah Ummah (Islamic Rural Bank). The next best MF models are KUBE (Islamic Grameen Model) and SBW (conventional Grameen Model). 1.KUBE
2.UGT
3.Amanah U
4.BSM
5.SBW
6.Kodanua
7.BKK Pwd
0.1040 0.1030 0.000
0.040
0.080
0.1260 0.1364 0.1339
0.1256 0.1148
0.120
Figure 4.8 Results of Best Microfinance Model 11
8.BRI Unit
0.1563 0.160
4.3
Analysis
The most important sustainability criteria are MFI Performance and Financing Program, where Amanah Ummah (Islamic rural bank) and KUBE (Islamic Grameen) are the best, respectively. Next most important sustainable criteria are Outreach and Social-Development Program, where BRI Unit (conventional Micro-banking Unit/MBU) and KUBE (Islamic Grameen) are the best, respectively. In more detail, the most important sustainability criterion is independent in funding (Aid Independent and Channeling-Executing Independent), especially for Grameen model, Cooperative-BMT model and Rural Bank model, where they are inferior compare to MBU model. Successful MFIs have capability to collect deposits and/or cheap funding. MBUs of commercial banks can collect cheap deposits since they have central bank as lender of last resort with cheap standing facilities (policy rate [6.5%] + 1%) when they are short of fund. Meanwhile, other models do not have the luxury of MBU model to obtain cheap fund when they are short of fund, so that they are forced to find much expensive fund from commercial banks (14-16%). Amanah Ummah (Islamic rural bank), which has the best MFI Performance, has been able to collect cheaper saving deposits more than time deposits with deposit to financing ratio of 123.4%, since the community of Leuwiliyang-Bogor give more trust to Amanah Ummah than to other banks in the area, so that it does not have to go to commercial bank for (expensive) funding. The second most important detailed sustainability criterion is compulsory savings program to discipline and familiarize customers with family financial planning, so that they will be able to improve their overall wellbeing (such as, income, health, business, education, social status, and welfare). Almost all MFIs have compulsory savings program, especially the successful ones. MBK Ventura (conventional Grameen model) does not have savings programs (venture capital is not allowed to collect deposits), so that even though it has achieved best MFI in 2008 and 2009 by MIX Market, it falls short to be the most sustainable Grameen model in this study. The third most important detailed sustainability criterion is outreach (coverage and average financing). Successful MFIs to attain national outreach are usually supported by their community based, their network, their strong funding, and, most importantly, their leader, just like Grameen bank with Prof. Mohammad Yunus leadership. BRI Unit (conventional MBU) has a very long history of trusted community bank of rural areas throughout Indonesia, while UGT (BMT) has nation-wide network of Pondok Pesantren Sidogiri teacher and alumni, as well as the leadership of KH Mahmud Ali Zain. The fourth most important detailed sustainability criterion is risk mitigation to cover high risk unsecured financing without usual collateral, so that non-performing loan/financing (NPL/NPF) can be kept low. MFIs with group-based loan/financing have shared responsibility and micro insurance/takaful, while MFIs with individual loan/financing have informal collateral and micro insurance/takaful. KUBE (groupbased Islamic Grameen model), which has the best financing program, requires no collateral and maintains Iuran Kesejahteraan Sosial (IKS) to cover health, life and financing insurance/takaful.
5. CONCLUSIONS AND RECOMMENDATIONS 5.1
Conclusions
Sustainable MFIs should have suitable financing program and social-development program which are compatible with the needs of MEs. Financing program should be easy, simple, flexible, informal and cheap, but it should also be safe and secure. Social-development program should cover healthcare, education, empowerment, financial planning, social services and ethical/religious education. KUBE (Islamic Grameen) is the best MFI in financing program and social-development program. Sustainable MFIs should also have solid overall performance to be able to sustain financially and operationally, as well as to be able to progress and grow. Social MFIs should be able to maintain their financial self-sufficiency (FSS) just above 100%, so that they could cover their expenses without charging high price to customers. Commercial MFIs should be able to generate profits for their shareholders without charging high price to customers. Amanah Ummah (Islamic rural bank) is the best MFI in overall performance. 12
Sustainable MFIs should be able to maximize their outreach to the people who need their services and always increase their market penetration nationally. BRI Unit (conventional MBU) is the best MFI in outreach with market penetration of 9.74%, which covers 22.1 million depositors and 5.1 million borrowers from 5266 offices throughout Indonesia. Each type of MFI is unique with its own specific characteristics and segment, where they are not really direct competitors to each other, but they could complement each other to serve wide range of MEs. Some of them are purely not-for-profit, some of them are purely for-profit, while others are mixed in between. Grameen model serves the poorest with financing range of 0.1 – 5 million Rupiah and average of Rp1.4 million. Cooperative and BMT serve lower active poor and MEs with financing range of 0.1 – 50 million Rupiah and average of Rp.3 million. Rural bank serve upper active MEs and SEs with financing range of 1 – 500 million rupiah and average of Rp.15 million. Micro-banking unit serves MSEs with financing range of 1 – 500 million Rupiah and average of Rp.60 million. However, all types of MFI also have common characteristics of community banking, such as personal approach, pick-up services, informal, simple, easy and quick services. Grameen model (KUBE), Cooperative – BMT model (UGT) and MBU model (BRI Unit) have been successfully replicated nation-wide, while Rural Bank model have only been successful in smaller region, due to its close relationship with its smaller municipal community. Conventional MFIs have been operating for a long time with national outreach, while Islamic MFIs are potential new comers with better Financing Program, MFI Performance and Social-Development Program, as well as higher growth rate, which could attain national outreach in the near future. 5.2
Recommendations
The most critical problem of all MFIs (except MBUs) is fair and cheap funding. Commercial banks of MBUs can access cheap standing facilities from central bank that cannot be accessed by other MFIs. This unfair setting should be corrected immediately so that the classic dilemma of expensive MEs loan/financing can be resolved once and for all. Replication of Grameen model can be benchmarked to KUBE, which has been successfully replicated for more than 100 KUBE throughout Indonesia. Replication of Cooperative – BMT model can be benchmarked to UGT, which already has 136 offices at the end of 2010. Replication of Rural Bank model can be benchmarked to Amanah Ummah, which should be combined with local culture. Replication of MBU model can be benchmarked to BRI Unit, which has been successful with 5266 offices nation-wide.
REFERENCES Ascarya and Sanrego, Y.D. (2007) „Redefine MSMEs Credit Limits and the Potency of BMTs as Intermediary Institutions in Indonesia‟, Jurnal Ekonomi dan Bisnis Islam, vol. II, no. 3. CGAP. (2004) „Key principles of microfinance‟, CGAP Publication. Fernandez, A.P. (2006) „Sustainability of Self-Help Affinity Groups or SAGs as Understood by MYRADA‟, in GTZ (2006) Towards a Sustainable Microfinance Outreach in India: Experiences and Perspectives. Mumbai-New Delhi, India: NABARD-GTZ-SDC. Khan, A.A. (2008) Islamic microfinance: theory, policy and practice. Birmingham, UK: Islamic Relief Worldwide. Lapenu, C. and Zeller, M. (2001) „Distribution, growth and performance of microfinance institutions in Asia, Africa and Latin America‟, FCND Discussion Paper, 114. Khandker, S.R. (1996) „Grameen Bank: Impact, Costs, and Program Sustainability‟, Asian Development Review, vol. 14, no. 1, pp. 65-85. Mannan, M.A. (2007) „Alternative micro-credit model in Bangladesh: a comparative analysis between grameen bank and social investment bank, myths and realities‟, Proceedings, First International 13
Conference on Inclusive Islamic Financial Sector Development; Enhancing Islamic Financial Services for Micro and Medium Sized Enterprises (MMEs), 17-19 April, Brunei Darussalam. Mayoux, L. (2006) „Women‟s empowerment through sustainable microfinance: rethinking best practice‟, Discussion Draft. Mazher, M.A. (2010) „Non productivity of microfinance loans in Pakistan: are microfinance loan productive in Pakistan?‟, Dissertation, International Open University, CA, USA. Mohamad, K. (2011) „Peta baru perbankan mikro: bertempur di zona merah‟, Infobank, vol. XXXIII, no. 383, pp. 18-22. Morduch, J. (1999) „The Microfinance Promise‟, Journal of Economic Literature, vol. 37, no. 4. Mukherjee, J. (1998) „The consultative group to assist the poorest: a microfinance program‟, CGAP Focus Note, no. 1. Obaidullah, M. (2008) Introduction to Islamic microfinance, New Delhi, India: IBF Net Limited. Seibel, H.D. and Kumar, B.K.C. (1998) „Microfinance in Nepal: institutional viability and sustainability and their compatibility with outreach to the poor‟, Köln Working Paper, No. 3. Ravicz, R.M. (1998) „Searching for sustainable microfinance: a review of five Indonesian initiatives‟, Unpublished Paper, Development Economics Research Group. Robbani, M. (2007) „The Grameen Paradox‟, Paper, The Institute of Islamic Finance, London. Saaty, T.L. (1999) „Fundamentals of the analytic network process‟. Proceedings, ISAHP 1999. Kobe, Japan, August 12-14. Saaty, T.L and Vargas, L.G. (2006) Decision making with the analytic network process: economic, political, social and technological applications with benefits, opportunities, costs and risks, New York: Springer Science+Business Media. Tambunan, M (2004) „Melangkah ke Depan Bersama UKM,‟ Paper, Economic Debate ESEI, Jakarta, September 15-16. Yunus, M. (2007) Banker to the poor: micro-lending and the battle against world poverty‟, New York, NY: Public Affairs.
APPENDIX Best MICROFINANCE Model Grameen cGrameen
iGrameen
Rural Banking
Cooperative cCooperative
BMT
cRural Bank iRural Bank
Micro B. Unit cMicroB U
iMicroB U
SUSTAINABLE MICROFINANCE Model Financing PROGRAM Easy Acess Simplicity Flexible Collateral Risk Mitigation Pick Up Service Low Cost Ample Monitoring
Social Development PROGRAM Regular Meeting Skills Training Savings Program Social Services Health Care Social Messaging Subsidized Fin.
14
MFI Performance
OUTREACH
Funding Indep. Ch&Exe Indep. Aid Independent NPF ROA Efficiency Staff Productivity
Depositors Deposits Borrowers Loan/Financing Avg. Financing Branches Coverage
Figure 3.3 Conceptual Framework Table 3.1 List of Respondents cGrameen Kop. Setia Bhakti Wanita, Surabaya BPR Para Sahabat, Cibogo, Kab. Bogor Mitra Bisnis Keluarga Ventura, Tangerang Kop. Mitra Dhuafa, Depok
Cooperative
Conv. Rural Bank
cMicro Banking
Kospin Jasa, Pekalongan
BKK Purwodadi
BRI Unit
Kodanua, Jakarta
Mandiri Unit Mikro
CU Sang Timur, Pasuruan
Weleri Makmur, Semarang Surasari Hutama, Bangil, Pasuruan
Usaha Sejahtera, Depok
Dana Lestari, Depok
Danamon Simpan Pinjam
iGrameen
BMT
Islamic Rural Bank
Bukopin Swamitra
iMicro Banking
KSP. Baitul Ikhtiar PERAMU, Bogor Tamkin - TAZKIA, Bogor
Bina Ummat Sejahtera, Lasem
Al-Salaam, Depok
BRI Syariah Unit Mikro
UGT, Sidogiri, Pasuruan
BSM Warung Mikro
BMT Itqan, Bandung
Tamzis, Wonosobo
BMT KUBE Sejahtera 021, Sidoarjo
Ibadurrahman, Ciawi, Bogor
Harta Insan Karimah, Tangerang Amanah Ummah, Leuwiliyang, Kab. Bogor Bhakti Makmur Indah, Sidoarjo
Mega Syariah Unit Mikro BMI
Table 4.1 Overall ANP Results Normalized By Cluster SUSTAINABILITY 1Financing Program 0.2981 2Soc. & Dev. Program 0.1707 3MFI Performance 0.2998 4Outreach 0.2315 Name
Limiting 0.028388 0.016253 0.028552 0.022046
Normalized Limiting By Cluster BEST MICROFINANCE MODEL 0.1260 0.060011 1KUBE 0.1364 0.064931 2UGT 0.1339 0.063771 3Amanah U 0.1040 0.049544 4BSM 0.1256 0.059808 5SBW 0.1148 0.054674 6Kodanua 0.1030 0.049027 7BKK Purwodadi 0.1563 0.074424 8BRI Unit Name
1. FINANCING PROGRAM 1Easy Access 0.1485 2Simplicity 0.1419
0.016255 0.01553
3Flexible Collateral 4Risk Mitigation 5Pick-Up Serv. 6Low Pricing 7Monitoring
0.012233 0.025889 0.016521 0.010232 0.01277
2. SOC. DEV. PROGRAM 1Health Care 2Social Message 3Subsidized Financing 4Regular Meeting 5Skill Training 6Savings Program 7Social Services
0.014306 0.020401 0.031368 0.01288 0.017587 0.007969 0.005006
4. OUTREACH 1Depositors 2Deposits 3FinCustomers 4Financing 5Avg.Financing 6Branches 7Coverage
3. MFI PERFORMANCE 1Funding Indep. 2Ch&Exe Indep. 3Aid Indep. 4NPF 5ROA-ROE 6Efficiency 7Staff Prod.
0.1118 0.2366 0.1510 0.0935 0.1167 0.1306 0.1863 0.2864 0.1176 0.1606 0.0728 0.0457
15
0.0733 0.1558
0.007581 0.016105
0.0752 0.1353 0.1222 0.2544 0.1838
0.007768 0.013986 0.01263 0.026295 0.018996
0.1260 0.1130 0.1010 0.1723 0.1916 0.0679 0.2281
0.01339 0.012012 0.010735 0.018309 0.020364 0.007211 0.024242
