International Journal of Islamic and Middle Eastern Finance and ManagementCommitment and trust in achieving financial goals of strategic alliance: case in Islamic microfinance:Imam Wahyudi

Article information:To cite this document:Imam Wahyudi , (2014),"Commitment and trust in achieving financial goals of strategic alliance: case in Islamicmicrofinance", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 Iss 4 pp. -Permanent link to this document:http://dx.doi.org/10.1108/IMEFM-10-2013-0113

Downloaded on: 05 November 2014, At: 09:23 (PT)References: this document contains references to 0 other documents.To copy this document: permissions@emeraldinsight.comThe fulltext of this document has been downloaded 39 times since 2014*

Users who downloaded this article also downloaded:Nasrun Mohamad, Asmak Ab Rahman, M. Kabir Hassan, (2014),"Tawarruq application in Islamic banking: a review of theliterature", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 Iss 4 pp. -Abdul Ghafar b. Ismail, Achmad Tohirin, (2010),"Islamic law and finance", Humanomics, Vol. 26 Iss 3 pp. 178-199Rifki Ismal, (2010),"Assessment of liquidity management in Islamic banking industry", International Journal of Islamic andMiddle Eastern Finance and Management, Vol. 3 Iss 2 pp. 147-167

Access to this document was granted through an Emerald subscription provided by 383794 []

For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors serviceinformation about how to choose which publication to write for and submission guidelines are available for all. Pleasevisit www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio ofmore than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of onlineproducts and additional customer resources and services.

Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on PublicationEthics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Commitment and trust in achieving financial

goals of strategic alliance: case in Islamic

microfinance

1. Introduction

At the present, the market segment of Islamic banks, both on the side of the depos-

itors and the debtors (client), is dominated by personal entrepreneurs, micro, small

and medium-sized businesses (Wahyudi et al., 2013). In executing its function as

financial intermediary, Islamic banks often face the problem of asymmetric infor-

mation, contributing to the occurrence of adverse selection (Akerlof 1970) and

credit rationing (Stiglitz and Weiss, 1981). Moreover, the type of financing that

occurred is of a granular nature; the quantity of clients financed is high yet the

value of individual financing is low (Srinivas, 2005).

At the same time, Islamic banks in Indonesia are also expected to be the an ex-

tension of the government for credit programs aimed at micro, small and medium-

sized businesses, i.e. small business credit (KUK), farming ventures credit (KUT),

and society business credit (KUR), so that the potential of micro, small and medi-

um enterprises are spread evenly and well-nourished (Bank Indonesia, 2010). To

realise this, Bank Indonesia decreed that Islamic banks’ financing to micro, small

and medium enterprises can be done directly or through partners (or with linkage

programs) with other financial institutions like baitul maal wa tamwil (BMT).

These linkage programs can take the form of several schemes: channeling, execut-

ing, or joint financing (Bank Indonesia, 2010).

This does not mean that BMT does not have its own share of problems in build-

ing an alliance with Islamic banks, particularly strategic alliance. There are many

tasks that need to be done by the Islamic banks and the BMT. From the side of the

bank itself, the problem of adverse selection and credit rationing makes the bank

reluctant to partner with BMT. Even with the presence of political willingness and

encouragement from the government to include BMT as part of the finance indus-

try (Act no. 1/2013 about microfinance institutions) and as an extension of a

bank’s outreach towards medium, small and micro enterprises (MSME), BMT it-

self still contains various potential problems. BMT in general operates at a small

scale, a limited operating theatre, with a relatively undeveloped management and

organization system, as well as limitations in their capability to develop financial

products and services. The variability of BMT also makes it difficult to develop

institutional standards for them, procedures for day-to-day management, new

product development and the operation of implementing financial products in the

field. Variability in BMT is affected by the informality of the BMT’s form. Dif-

ferences from one BMT to another can cover the number and structure of its man-

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

agement, the BMT’s size, operational area, ownership, and the most significant is

variability in terms of business model and conduct of business. Between them,

there are BMT similar to a micro bank, and there are also those that only run sav-

ings and borrowings between members like a cooperative. For the Islamic banks

themselves, funds channeled to the BMT in the form of equity exposes the bank to

capital-loss risk as well as power-loss risk.

Even with many obstacles on the way, both internal (from BMT’s side and Is-

lamic bank’s side) and external, the trend of making strategic alliances between

the Islamic bank and the BMT is still increasing. Among its contributing factors is

the increase in the amount of success stories in the strategic alliances around the

world. Empirically, the number of strategic alliance has increased almost twice-

fold in 10 years, and is predicted to continue increasing in the future (Herbert and

Morris, 1987). To improve failure prevention, the parties involved need to be

aware of the synergy required as well as the challenge faced in any close partner-

ship relationship (Zineldin and Bredenlow, 2003).

Using the framework of social capital theory, this paper illustrates theoretically

and empirically the decision and result of strategic alliance between BMT and Is-

lamic banks as a relationship based on trust, mutual-trustworthiness and commit-

ment. This paper also identifies the basic criteria for the resilience of a strategic al-

liance, the challenges and the barriers in a strategic relationship along with

managerial and operational implications. This paper is constructed based on the

following order. Section 1 is the introductions, section 2 is institutional back-

ground, section 3 is literature review, section 4 is about methodology, section 5 is

analysis, section 6 is the conclusion and section 7 is the limitations of the research

and the suggestions for further research.

2. Institutional background

2.1 Baitul maal wa tamwil (BMT)

In Indonesia, the regulations governing BMT is the Constitution of the Republic

of Indonesia 1945 (article 27 and 33) and Act no. 17/2012 about cooperatives,

where BMT is categorized as an Islamic financial services cooperative. At this

point, baitul maal wa tamwil (BMT) exists in the form of an Islamic financial ser-

vices cooperative (KJKS), not as microfinance organisation. This has a large im-

plication on several issues. First, as a cooperative, BMT is not allowed by regula-

tion to draw funds from the public in the form of savings or deposits. This limits

the fund that a BMT can raise easily. BMT can only rely on primary, mandatory

and voluntary savings from its members, each limited in amount and tied down by

its charters/bylaw (AD/ART). Other sources of funding that accessible by the

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

BMT are third-party loans and donations. Second, BMT cannot channel their

funds to the wider public in the form of financing, except to its own members.

This creates a restriction on the operational area of the BMT. The solution is to

create inter-BMT strategic alliance to strengthen their network. Inter-BMT strate-

gic alliance is an agreement between one BMT and another BMT in the context of

business. This can still create conflict in the long-run since it is still possible for a

BMT to open a branch in a different county or municipality.

Third, as a cooperative, there are at least three parties involved in the running

of a BMT, the saving members, the management and the borrowing members (Az-

iz, 2008). With principles catering to its members, by its members and for its

members, there is a particular lack of professionalism in the management of BMT.

This would especially come to a head when the overseers and the management

have differing opinions. Management as the idea-creator (business) and network

can be fired at any time through the end-of-year assembly or special meeting, even

without the presence of the management in those meetings. Fourth, since they’re

not considered as financial institutions, their regulations are not under the auspices

of Bank of Indonesia or the Ministry of Finance, but under the Ministry of Coop-

eratives and Small and Medium Enterprises (Kemenkop). It cannot be denied that

in Indonesia, a rigorous and standardised regulation only exists in the financial in-

dustry and not much else, the Ministry of Cooperatives included in this last cate-

gory. This means that BMT is relatively weak in micro and macro prudential as-

pects.

Since the application of Act no. 1/2013 about microfinance institutions (lem-

baga keuangan mikro – LKM), BMT is given the option to stay in the form of

KJKS (the cooperative form) or change into an LKM. Act no. 1/2013 requires a

BMT to change status to an LKM, if the BMT does not want its development to be

limited by zoning rules. When converting into an LKM, the BMT has to sacrifice

some business flexibility available in the KJKS form. When a BMT changes to an

LKM, the form and operation of the BMT will be formalized and standardized

according to various rules and regulations already in place in the financial industry

(highly regulated), and is under the supervision of the Financial Services Authori-

ty (Otoritas Jasa Keuangan – OJK) just like other entities that are part of Indone-

sia’s financial industry. In other words, the BMT has the option to stay as a KJKS

and supervised by the Ministry of Cooperatives and SMMEs, or to change into an

LKM and be supervised by the OJK (see Table 1).

Tabel 1 Difference in the treatment of Act no. 17/2012 and Act no. 1/2013 towards

BMT

Act no. 17/ 2012 Act no. 1/2013

Definition Koperasi jasa keuangan Islam Micro financial institutions

Regulator and Supervi-

sor

Kementerian UMKM, Lem-

baga Pengawas Koperasi Sim-

pan Pinjam

OJK

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Act no. 17/ 2012 Act no. 1/2013

Operating License Ministry of Cooperative OJK

Legal Form of Institu-

tion Cooperative

Limited liability company

(PT) or cooperative

Supporting Regulations Government Regulations None Yet

Operational Area National Regency/municipality

Guarantor N/A

Indonesian Depository Insur-

ance (Lembaga Penjamin

Simpanan – LPS)

This implies that Islamic banks often face a series of risks and problems when

deciding to use BMT as the medium and method of channeling funds to micro,

small and medium enterprises. Among the risks faced are capital-loss risk and

power-loss risk as a result of information gap (or asymmetric information), as well

as the potential for moral hazard from BMT. When the Islamic bank commits to a

strategic alliance with the BMT, there is a potential for synergy and coordination

between the two of them, as well as the risk of alliance failure. To avoid it, the Is-

lamic bank can choose to do early initiation before entering a strategic alliance

(Zineldin and Jonsson, 2000). Early initiation was done by selecting BMT that

will be its strategic alliance partner. Usually the BMT chosen is one with the busi-

ness scale of middle-sized and higher, and with a good track record.

Zineldin and Bredenlow (2003) have tried to analyse formative indicators to

differentiate between succesful alliances from failed ones while reviewing the

risks and issues involved with entering and maintaining the success of a strategic

alliance. Zineldin and Bredenlow (2003) used 5 criteria of successful partnership

from Zineldin (1998), that is: the presence of individual willingness, motivation

and strategic fit; interdependence; cultural fit; organizational arrangement and in-

stitutionalization; and integration and integrity.

2.2 Existence of asymmetric information

Islamic financial system is based on the principle of trust and trustworthiness be-

tween the involved partners (Ayub, 2007). Akerlof (1979) stated that there is in-

formation asymmetry between the management and the owners of the firm (inves-

tor or creditor). Only management knows with a high degree of accuracy the

internal conditions, prospect and risks faced by the firm. In favourable conditions,

the firm will use debt to finance itself since it would prefer not to share its abun-

dant cash flow more than necessary, and the reverse is also true; the firm will use

equity-based instrument conditions are predicted to be unfavourable to it (Myers

and Majluf, 1984).

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

This sort of condition is also faced by Islamic banks when they invest their

funds in their debtors, including BMT, both in contracts based on the sale of debt

or equity (Wahyudi et al., 2013). By using two-tier mudharabah, Islamic banks

can minimise the financial risk faced, but this is not beneficial for the depositors

who will absorb the loss in their capacity as fund owners (Vogel and Hayes,

1998), because the principle of loss-sharing is based on the proportion of funds

and not an initial agreement like profit-sharing (Ayub, 2007). Islamic banks often

ask for a guarantee on funding channelled, both in terms of asset collateral (rahn),

or guarantee (kafalah) from a third-party (Venardos, 2006; Iqbal and Mirakhor,

2007).

As experienced by conventional banks, this condition of asymmetric infor-

mation exposes the Islamic bank to adverse selection risk in choosing debtors or

business partners (Stiglitz and Weiss, 1981). This research will be very useful in

studying the relationship between an Islamic bank and BMT, especially when one

is considering information asymmetry as one of the critical factors of it, in the var-

ious fields of a bank’s channeling performance, a bank’s financial health, how the

Islamic bank handles issues of granularity in channeling funds, how it handles in-

formation asymmetry and the potential for moral hazard from BMT, as well as in-

creasing the welfare of SMME’s in general through BMT. Right now, to over-

come these problems, the bank needs to use an effective selection method and

procedure in choosing debtors or business partners (Bester, 1985). Though, rahn

(asset collateral) and kafalah (third party guarantor) are expected to be an effective

credit risk-mitigation tool (Vogel and Hayes, 1998). In principle, a financing

scheme based on the form of a debt (conventional debt), or debt based on a sale

(murabahah, salam, istishna’), ijarah and qardhul hasan in an Islamic bank, can

use rahn and kafalah to automatically mitigate capital recovery risk from default,

both for reasons of the debtor’s inability to pay and the debtor’s unwillingness in

paying (moral hazard). But in a financing based on investment in equity (mudhar-

abah or musyarakah), rahn and kafalah is only effective to mitigate capital recov-

ery risk from the risk stemming from debtor’s moral hazard, and does not mitigate

the risk stemming from the debtor’s inability to pay (Wahyudi et al., 2013). But,

any occurrence of default from debtors or business partners will cost the bank op-

portunity loss and reduced long-term bank profitability (Wahyudi et al., 2013).

2.3 The necessity of strategic alliance

The alliance interaction pattern between Islamic banks, baitul maal wa tamwil

(BMT) and micro, small and medium enterprises is shown by Figure 1. Since

forming a strategic alliance will blur boundaries between the Islamic bank and

BMT involved, a close and tight bond is expected to form between the two parties

(Kanter, 1998). With the strategic alliance, a long-lived and strong relationship be-

tween the two of them will reduce the potential for any opportunistic behaviour

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

(John, 1984). Gradually, this relationship will contribute to increased information

linkages, managing deeper interaction and relationship, and capture dynamic ex-

change of information and resources between the partners.

Fig.1. Formation of strategic alliance between Islamic bank and BMT

Inventarizing any aspect of alliance:§ Distribution aspect of human resource and capability

§ Aspect of efficiency in business

§ Aspect of operational risk andrelation

Islamic bank:§ Issue of organizational and regulation framework§ Value and Islamic principle that held§ Commitment in applying the Islamic rule in business§ Goals and business scope§ Aspect of bank’s operation and business§ Size of bank§ Source of fund, nature of business, restriction that faced and expectation of the return

§ Geographic coverage of bank’s business

Baitul Maal wa Tamwil (BMT):§ Issue of organizational and regulation framework§ Value and Islamic principle that held§ Commitment in applying the Islamic rule in business§ Goals and business scope§ Aspect of bank’s operation and business§ Size and business’s coverage§ Source of fund, nature of business, restriction that faced and expectation of the return

§ Geographic coverage of business§ Characteristic of debitur (micro, small, and medium enterprise) that financed

§ Information technology and database system § Human resource§ Standarization of product and operation among BMTSelection criteria of partners and alliance

structure:§ Goals of partnership§ Benefits that want to achieved§ Power would be obtained§ Weakness that would be eliminated§ Perception§ Rule of the game§ Core business§ Right and obligation among partners§ Transparancy§ Coverage and definition of tasks andworks

Coverage of strategic alliance:§ Management§ Investment or shared capital

§ Business operation

Self-selection alliance (Arend dan Amit, 2005)

Form of alliance between Islamic bank and BMT:1. Joint venture2. Equity strategic alliance3. Non-equity strategic allianceFinancing to micro, small and

medium enterprise:§ Sale-based contract(murabahah, muajjal, salam, istishna’ and ijarah)

§ Equity-based contract(mudharabah, musyarakah)

§ Debt-based contract (qardhul hasan, hiwalah)

§ Other financing services(jualah, wakalah, kafalah, wadiah)

Asymmetric information versus trust&trustworty

Asymmetric information versus trust&trustworty

Asymmetric information versus trust&trustworty

Source: Wahyudi (2014). Realizing knowledge sharing in strategic alliance: case

in Islamic microfinance. Forthcoming in Humanomics.

Picture 1 shows the various drivers of the relationship patterns between the

BMT and the Islamic bank. There are BMT preconditions or characteristics that

provide the BMT with the tendency to be interested in a strategic alliance, or unin-

terested in one, and similar thing applies to the Islamic bank. From the survey

done in this research, we found that large BMT with a high margin (or profits) is

not always interested in cooperating with a bank for a long time. We suspect that

the BMT will consider several criteria to select an Islamic bank as a strategic part-

ner, like issues of organizational and regulatory framework, the Islamic values and

principles held by the bank, commitment in applying the Islamic rules in business,

the goals and business scope, aspect of bank’s operation and business, size of

bank, source of fund, nature of business, restrictions and resistence from the bank,

expected return requested by the bank, and the geographic coverage of bank’s

business.

The Islamic banks have their own set of criterias too. Before entering a strate-

gic alliance with any particular BMT, the bank will consider several things, like

the issue of organizational and regulation framework, the values and Islamic prin-

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

ciples held by BMT, the BMT’s commitment in applying the Islamic rules in

business, the goals and business scope, the aspect of BMT’s operation and busi-

ness, size and business’s coverage, source of fund, nature of business, restrictions

and resistance from the BMT, the expected return requested by the BMT, geo-

graphic coverage of business, characteristic of debtors (micro, small, and medium

enterprises) that is financed by the BMT, information technology and database

system used by the BMT, the BMT’s human resource, standarization of product,

and operation among BMT. These preconditions from the bank can affect the bank

to: (i) be interested or be uninterested to be involved in a strategic alliance with

the BMT, and (ii) if the bank is interested in entering an alliance or a formal form

of cooperation with the BMT, then what sort of cooperation would the bank be in-

terested in: joint venture, strategic alliance, atau non strategic alliance?

Other than preconditions from the bank, the presence of BMT that is consid-

ered to be able to cooperate well with the bank also helps in easing the strategic al-

liance process. Because of that, the bank tend to self-select the BMT as well as the

negotiation process over the alliance structure that is about to be formed.

Theoretically, there are three types of alliance that is possible between an Is-

lamic bank and a BMT, that is: executing, channelling, and joint financing. Yet

the degree of cooperation, task division and control in each of the forms of alli-

ance is not the same and varies wildly, depending on the type of deal made. As a

result, there are many forms of alliances between a BMT and an Islamic bank

across different regions, and the alliance itself develops according to need and

agreement. One way of categorizing these various forms of alliance is by labelling

each of the cooperation projects names according to the type of contract used in

Islamic finance: sale-based contract (murabahah, muajjal, salam, istishna’), ija-

rah-based contract, equity-based contract (mudharabah, musyarakah), debt-based

contract (qardhul hasan, hiwalah), and other financing services (ju’alah, wakalah,

kafalah, wadiah). By knowing those Islamic business contracts, the researcher can

map the flow of capital, the pattern of financing from the bank to the BMT, the

control mechanisms and the division of risks between the bank and the BMT.

2.4 Islam’s encouragement to enter a strategic alliance

In Islam, the application of strategic alliance is mirrored in various forms of the

syirkah contract between partners (syarik). Linguistically, syirkah is translated as

the merging (ikhtilâth) of two or more fortune into one. According to syari’ termi-

nology, syirkah is the ownership rights towards something that is owned by two or

more people acccording to a certain percentage, and can be the partnership in a

business or just the mutual ownership of a particular object. Syirkah is divided into

two: alliance in ownership (syirkatul milk) and alliance within a contract (syirkatul

‘uqud). The law to enter into a syirkah is mubah, based on the arguments provided

by the Al-Qur'an and As-Sunnah as well as ijmâ’. Like the case of the syirkatul

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

milk of the ownership rights of mutual wealth of an inheritance, Allâh Azza wa

Jalla has said: “… then they shall be sharers in the third” (QS an-Nisââ’:12). Or in

the case of the mutual ownership the spoils of war, as the hadith from Abdullah

Ibnu Mas'ud radhiyallaahu 'anhu, he said: “I, Ammar, and Sa'ad have allied our-

selves in the spoils of war that we have gained from the battle of Badr” (Hadits

narrated by Nasa'i).

A strategic alliance in Islam is not always only related to capital and

work/efforts (‘amal), but covers a wider variety of other things, like the formation

of a strategic alliance between the ulama and an Islam bank, as has been explained

by Kahf (2002). Cooperation and synergy between them will hasten the growth of

the Islamic banking industry, expecially in forming financial products through

syariah-based financial engineering, to assist with monitoring the operations of an

Islamic bank’s business and ensure that it stays within acceptable syariah bounds

or to ensure that the manifestations of the ambitions of the bankers does not stray

from the values and principles of Islamic finance.

3. Literature review

3.1 Social capital theory

Social capital can be defined as a society’s ability to associate one member with

another, and will later on become an important resource, not just for economic

life, but also for every other aspects of social existence (Burt, 1992). While Fu-

kuyama (1995) defined social capital as a series of informal values or norms

shared between the members of a group that allows cooperation to occur between

them. The acquisition of social capital necessitates the habituation towards the

norms of a community, and in the context also adopts its acts of goodwill. Social

capital also refers to an institutional dimension, in the relationships created, and

norms forming the quality as well as the quantity of social interaction in a society.

Social capital is not just a line of institutions or groups supporting social interac-

tion. It covers a wider spectrum, it is the social glue that preserves the unity of a

group together. The dimension of social capital grows in a society containing val-

ues and norms as well as social interaction patterns that governs the daily life of

its members (Woolcock dan Narayan, 2000). Because of this, the social capital

dimension is a picture of the internal connectedness colouring the collective struc-

ture and providing a cohesiveness and mutual benefits from the dynamic social

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

process occurring in a society. Social capital, as described by the trusts, norms and

network, can increase a society’s effectiveness in coordinating and can be an ef-

fective tool when used as a social development policy, as in the “Grameen Bank”

microfinance program in Bangladesh (Feigenberg, Field and Pande, 2013). Social

capital can tie members of society together and function as a sort of social collat-

eral (joint-liability contract). It is able to reduce the default rate in a microfinance

program, and is usually done through increasing the social interaction between the

members of the group.

3.2 Strategic alliance

Strategic alliance is an alliance where several independent organizations shares the

benefit of partnership and participate continuously in one or more key strategic ar-

ea like technology or marketing (Yoshino and Rangan, 1995). Udin and Akhter

(2011) defined strategic alliance as an alliance for strategic purposes, that is, to

gain a competitive advantage (Ireland, Hitt and Vaidyanath, 2002). There are sev-

eral forms of strategic alliance, i.e. memorandum of understanding, cooperative,

joint venture, equity investment, lisensi, outsourcing, franchising, consortium,

partnership et cetera (Serrat, 2010).

There are many reason to build a strategic alliance. Some of the reasons are: the

firm’s organic growth rate on its own is not enough to fulfil expectations about its

required growth rate (Kuratko, Ireland and Hornsby, 2001), to increase adjustment

to market (Inkpen and Ross, 2001), increasing market complexity (Geletkanycz,

2001; Chesbrough, 2002), a partnership has the ability to reduce research expendi-

ture and development, and an alliance can help penetrate further into a market

(Gonzales, 2001; Bernstein and Weinstein, 2002). With alliance, the firm receives

many competitive advantages in the market (Uddin dan Akhter, 2011).

The success of a strategic alliance depends on several factors, amongst them is

how involved its member partners are in solving problems, how trustworthy and

how involved in value creation and consolidation of resources and capabilities

(Uddin dan Akhter, 2011), and persuasion between partners for cooperation and

coordination (Zineldin and Bredenlow, 2003). Considerations of operational and

relational risk in choosing partners and identifying the appropriate alliance struc-

ture needs to be done to minimise potential risk and assure the achievement of

competitive advantage (Uddin and Akhter, 2011).

Gonzalez (2001) explains that an alliance has five stages in its life cycle, where

every stage requires preparation and negotiation processes, which are determining

the alliance strategy, choosing a partner, choosing an alliance structure, managing

the alliance relationship and reevaluating the alliance performance. Strategic alli-

ance in general can be grouped into three dimensions, that is: joint venture, equity

strategic alliance and non-equity strategic alliance.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

3.2.1 Joint venture

Joint venture is the combination of two or more companies to form an independent

company to share their collaborative capabilities and resources to achieve compet-

itive advantage (Uddin dan Akhter, 2011). Usually, the partners contribute re-

sources and participate equally in the management of the new firm. The main rea-

son to do it is to share knowledge, not just profit, and through the placement of

people by partners (Berman, Down and Hill, 2002) because knowledge will be one

of the sources of the competitive advantage (Tiessen dan Linton, 2000). This

model of strategic alliance creates a new, separate entity that is prepared to access

new market(s), intelligence data and the flow technical information on a reciprocal

basis (Hoskinson dan Busenitz, 2002).

3.2.2 Equity strategic alliance

This form does not require an equal portion of equity ownership among the part-

ners involved. Usually, this form of strategic alliance is found in foreign direct in-

vestment (Harzing, 2002). In Islamic finance, this alliance takes the form of equity

contract (syirkah), as in (i) mudharabah, where one partner contributes 100% to

equity (shahibul mal) and the other partner as the manager (mudharib), (ii)

musyarakah, where some of the partners involved contributed equity and effort, or

one of the two, (iii) muzara’ah and musaqat, where both partnership form of agri-

culture management with a partner owning the land and the other managing it. All

these forms of syirkah require the existence of a profit-sharing system instead of

one with a predetermined return (Venardos, 2006; Iqbal dan Mirakhor, 2007;

Ayub, 2007).

3.2.3 Non-equity strategic alliance

This alliance is a non-formal form of joint venture. To achieve competitive ad-

vantage, two or more firms choose to form a contract-based alliance rather than

making a separate new firm or sharing equity (Uddin dan Akhter, 2011). Because

it is mostly an informal and simple relationship, the consequences are such that

there’s no guarantee regarding the degree of commitment of the partners involved

(Das et al, 1998). An alliance of this form is more flexible in responding, the com-

plexity and speed of market dynamics as well as high competition (Uddin dan

Akhter, 2011).

3.3 The determinants of a strategic alliance’s success

Islamic banks and BMT need to be able to see their relationship as beneficial, mu-

tually-dependent, and requires effort to maintain. An opportunistic action by one

of the partners will mar the relationship, prompting the other partner or both to

feel dissatisfied with the alliance due to its negative outcome, based on the map of

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

the pattern of relationships in Picture 1 and the framework of social capital theory

related to the interaction among entities. Thus, amongst the important attribute of

the strategic partnership is commitment, mutual reliance, coordination, trust and

control.

1. Commitment: this refers to the tendency of both strategic partners to direct ef-

fort based on the relationship formed (Porter et al., 1974). Commitment is a key

performance factor of an alliance (Rampersad, Quester and Troshani, 2010).

Commitment, especially in finance, is an indicator of future orientation, where

business partners aim to build a relationship (Chen, Lee and Wu, 2008). A high

commitment supplies context where both parties can achieve their respective

goals without having to resort to opportunistic behaviour. A higher commit-

ment is hopefully associated with the success of strategic partnership (Angle

dan Perry, 1981); and positively affects trust between partners (Rampersad et

al., 2010);

2. Coordination: this is related with the definition of the limits of a partnership,

and reflects the tasks that each party expects to be done by the other. In

Rampersad et al. (2010) it is said that in an alliance, coordination should be less

rigid, with more synchronisation and more moderate in intensity compared to

coordination between two units within one organisation. A successful working

partnership is marked by coordinated action with a consistent purpose with the

partner’s (Anderson and Narus, 1990). Coordination between allied partners is

positively affected by the trust that exists between them (Rampersad et al.,

2010);

3. Interdependence: when Islamic bank and BMT found their strategic partnership

for mutual benefit, this is the beginning of admitting that success relies not

solely on their own shoulders but also on the other party (Rodriguez, 2002).

This perspective grows from a social exchange paradigm (Molm, 1994). Both

parties admit that the gain from interdependence is higher than trying for it in-

dependently. In this context, trust and commitment are emergent factors that

help build interdependency through an exchange structure (Das and Teng,

1998);

4. Trust: Trust is intimately related with the intent to collaborate; when based on

trust, a partnership will be more able to manage happening conflict and show a

greater ability to adapt (Anderson and Narus, 1990). In an alliance, trust is said

to be not only a critical success factor, but also the key result of a successful

collaboration (Green, 2003). Sako (1992) defined trust as ‘a state of mind, an

expectation held by one trading partner about another that the other behaves

or responds in a predictable and mutually acceptable manner’. Then, Sako

(1992) divides trust into three: competence trust, contractual trust and goodwill

trust. More over, Green (2003) said that trust is related to performance and con-

tinuous improvement and will increase with experience and in line with the cul-

ture of the alliance partner (Jennings et al., 2000);

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

5. Control: control is achievable through functional accountability, measuring and

evaluating the performance of individual partners based on goals. When the

functional accountability system performs well, then the supervisory function

can be minimized and sometimes causes coordination to weaken. Moreover,

the more effective functional accountability is, then the more limited the con-

trolling supervision, the working team is more effective, there are more active

conflict resolution between partners with increased communication, increase in

shared knowledge and increased mutual respect between partners (Gittell,

2000).

In the end, the success of a strategic alliance between Islamic banks and BMT

relies on how both of them interpret the actions and behaviour within the life cycle

of their relationship, and maintaining an atmosphere of loyalty and commitment

(Zineldin and Bredenlow, 2003), and this often implies that both should be able to

separate it from their individual corporate goals and culture. Maintaining a differ-

ent goal, the inability to share risk and the lack of trust will lead to an early frac-

turing of the alliance (Johansson, 1997).

Even further, Elmuti dan Kathawala (2001) theoretically defined several prob-

lems faced by alliance, that is: (i) clash of cultures and incompatible personal

chemistry, (ii) lack of coordination between management teams, (iii) differences

in operating procedures and attitudes among partners, (iv) lack of clear goals and

objectives and lack of trust and opportunistic behavior, and (v) performance of

risk as a result of external factors, market factors and internal factors.

Separately, Zineldin and Bredenlow (2003) explained the weaknesses of an al-

liance, that is: (i) strategic alliance can be quite resource-demanding and an uncer-

tain investment (high risk), (ii) lack of experience makes strategic alliance a waste

of time, effort and energy and makes one or more of the partners involved to

abandon their core business, (iii) strategic alliance may end up costing highly for

coordination and control, (iv) various activities involve handing over the control

and management of various resources to a partner, where this in itself is a logical

consequence of a close relationship, and (v) power and dependence can be a

source of conflict.

4. Data and methodology

Scientific effort can, to a large extent, assist in generating theories based on empir-

ical evidence, from where it could be interpreted in various ways (Zineldin and

Bredenlow, 2003). Because of this concern, the research question as well as its de-

sign must be explained so its relevance is clarified (Von Wright, 1993). Tradition-

ally, strategic research is exploratory, using the case study method as well as in-

terview to collect empirical data (Frankel et al., 1996). With a semi or

unstructured format, the two qualitative methods enable the extraction of infor-

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

mation in the right direction, very flexible and simplify the effort of finding an at-

tractive track in exploratory research.

Yet in this study, we have chosen to use the confirmatory approach through a

structured questionnaire (Appendix) by means of field survey to 131 baitul maal

wa tamwil (BMT) spread throughout Central Java and Yogyakarta. From the total

sample, 89 BMT fulfilled the sampling criteria, that is: (i) has operated for a min-

imum of two years and did not experience any financial difficulties, (ii) has en-

tered a financing contract with an Islamic bank, (iii) channelled some of its funds

to micro, small, and medium enterprises, and (iv) is in the form of a cooperative,

and not a micro financial institute. Researchers define BMT that are not experi-

encing financial difficulties with the criteria (i) based on the survey, BMT states

that it hadn’t experienced a loss in the last 3 years, (ii) BMT is stated as financial-

ly healthy according to the standards used by Inkopsyah, and (iii) based on the

survey, BMT states that it does not face major financial problems. Data treatment

uses the method of listwise deletion. Data analysis uses equation model with the

software LISREL version 8.80.

To validate the result of data analysis, we have also run a focus group discus-

sion (FGD) with Directorate of Syariah Banking, Bank Indonesia and in-depth in-

terviews (IDI) with BMT parent clusters. FGD is done separately, that is FGD

with Bank Indonesia that is attended by the research and development team, and

IDI with the chairman of several parents Islamic cooperative, that is: Inkopsyah,

BMT Center and PBMT Ventura. FGD with Bank Indonesia is done in Bank In-

donesia on 27 May 2013, while IDI with every parent Islamic cooperative is done

a month after that, serially, starting from the 15th of June 2012 with the Director of

the Inkopsyah at the Faculty of Economic and Business, Universitas Indonesia.

FGD is done openly according to the rules in place. Ethical conduct that is held in

FGD and IDI is that the name of the FGD/IDI participants will be disguised in the

report (anonymous), and what is mentioned is only the position of the FGD/IDI

participants. During the data collection process, it is explained to the FGD/IDI

participants that all information gained from the FGD/IDI will only be used for re-

search purposes only. The transcription method used in the FGD/IDI is done indi-

rectly. The FGD/IDI will be recorded, and then the result of the FGD/transcription

of the recordings was being shown to the participants for their confirmation, and

this will become the final conclusion for the FGD/IDI. The data from this final

FGD/IDI result (transcription) will then be processed and analysed by researchers

as a form of validation and more in-depth information about the answers to the

questionnaires that is filled by the BMT. The method used in analysing the results

of the FGD/IDI is by using content analysis.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

5. Analysis and discussions

Based on the literature review of previous theoretical and empirical researches,

such as Uddin dan Akhter (2011), Zineldin and Bredenlow (2003) and Rodriguez

(2002), we at first suspected that the success of the financial performance of the

strategic alliance between Islamic banks and baitul maal wa tamwil (BMT) is only

influenced by four factors: commitment, coordination, interdependence, and trust.

Yet as the research progresses, we have found that the relationship between those

four variables and the profitability of the alliance is more complex. Commitment

from BMT is formed formally with the Islamic bank. Afterwards, the Islamic bank

will put its trust in the BMT and will continuously keep up coordinating with the

BMT to maintain commitment. At first, the trust given by the Islamic bank is build

from agreement, social capital shown by BMT, and the reality of interdependence

between the Islamic banks and BMT. Communication and coordination that is de-

veloped also affected the Islamic bank’s trust to BMT. To reach the financial goal

of an alliance, not only commitment and trust is needed, but also the transfer of

funds and knowledge sharing. Knowledge transfer is needed to help standardise

the business processes of the BMT and to help assist it be more efficient in profit

generation. Yet this transfer of knowledge if determined mainly by the amount of

trust the Islamic bank has given, the amount of commitment, coordination and so-

cial capital that the BMT has and future conflict potential. Afterwards, coordina-

tion, social capital, trust, knowledge sharing and commitment simultaneously con-

tribute to the success of achieving the financial goals of the formed strategic

alliance.

5.1 Contribution of coordination on achieving financial goal

Empirically, it has been found that only commitment has a positive influence on

the success of the alliance in reaching its financial goals, while trust, knowledge

sharing, coordination and social capital is found to be insignificant in influence at

a 5% error. On the whole, the model is significant at 1%. Even if not significant,

trust, knowledge sharing, and social capital is indicated to contribute positively

towards achieving alliance profitability.

Fig.2. The determinants of the success of the financial performance of a strategic alliance

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Interestingly, even if insignificant, the influence of coordination is negative to-

wards the achieving the financial goals of the alliance. This can happen when the

coordination mechanism built by the Islamic bank to BMT is too extensively de-

tailed, making the BMT feel constricted and less flexible in making operational

and business decisions. On the other hand, with their status as fund providers, it is

not suprising that Islamic banks often feel more dominant towards BMT. They can

easily impose various restictions on the management or operation of a BMT. This

condition is not always considered as acceptable by BMT management or owners,

unless there has already been a memorandum of understanding between the bank

and BMT. Yet even with such a memo, this domineering nature can still spark any

feelings of disappointment about the strategic alliance at large, tempting them to

act out more to their liking to balance that, and possibly not to the bank’s satisfac-

tion at all. The individual will and motivation of the BMT becomes too weak to

finish the contract of alliance with the Islamic bank. Other than that, if the inten-

tion to coordinate as well as to assuage the Islamic bank high fear in losing control

of its funds, it would undoubtedly increase coordination and monitoring costs, as

had been mentioned by Zineldin and Bredenlow (2003). Unfortunately, the whole

ends up placed on the alliance, which will distort its actual profit.

5.2 Impact of agreement dan coordination on commitment

In this model’s construct, we admit that there is both a direct and indirect effect of

agreement and coordination, through commitment, on the profitability of the alli-

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

ance. If coordination did not contribute significantly to profitability directly, both

surprisingly contribute significantly towards the financial performance of the alli-

ance.

This indicates that agreement and coordination is able to enforce BMT to hon-

our the commitment and run activities oriented at keeping the continuation of a

close-relationship. Even though it is expensive, both is necessary to ensure BMT

does not experience disorientation and demotivation.

5.3 Relationship between trust and commitment

In the results of the estimation of the structural model, there is a positive and sig-

nificant influence of trust from Islamic bank towards the commitment given by

BMT. Trust is indicated to affect the achievement of the financial goals of an alli-

ance. In practice, bank often requires a guarantee for the funds, both in the form of

collateral assets (rahn) or guarantee (kafalah). Regulation-wise, based on the Act

no. 10/1999 (article 9 clause 1), before channeling any financing, the bank is re-

quired to carefully asses the character, ability, capital, collateral, and business pro-

spect of a potential debtor. In relation to the collateral, the bank often practices the

use of a collateral margin; this is the ratio of the value of the financing to the value

of the collateral. For example, a bank has a collateral margin of 80%, and then the

value of the loan that can be given is at most 80% of the size of the collateral’s

value, except if the collateral is a loaned object.

This implies that the trust given by the bank is measurable in terms of the ratio

between the value of the collateral and the funds given; this is called contractual

trust (Sako, 1992). The higher the ratio, the lower the bank’s trust in the BMT, and

it will force the BMT to fulfil its contract. This is because the bank is less con-

cerned of the various risks faced by the BMT, how serious they are in running

their operations as well as its actual performance—the bank is only concerned

with ensuring the return of its capital at the end of the period by all means. Be-

cause of this, trust from the Islamic bank, as an external supporting factor, has a

positive and significant effect to BMT’s commitment, but not on the BMT’s abil-

ity to generate profit. This indicates that the BMT has managed to build commit-

ment internally and run a profit-oriented business activity even without adequate

trust from Islamic banks. Commmitment is measured through questions in the

questionnaire using the likert scale (Appendix).

Apart from that, these findings also indicate that BMT needs this strategic alli-

ance more than the Islamic banks. The individual willpower as well as internal

motivation seems strong in BMT. They are motivated to enter an alliance. They

possess something of value (including social capital) and they intend to actively

contribute to the success of an alliance, both in the long run or just for opportunis-

tic and short-term reasons.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

5.4 Impact of interdependence on trust and commitment

Interdependence should be the connecting thread between Islamic banks and BMT

in building a mutually beneficial alliance (Zineldin and Bredenlow, 2003). Ideally

partners should have complementary skills and resources, which when used to-

gether can help them both reach goals that they could not separately. In those con-

ditions, they will invest in each other in their mutual necessity. In reality, Islamic

bank only invests its funds to BMT, and BMT alone will run the business accord-

ing to the agreed-upon contract. The partners do not develop linkages nor share

ways of their respective operation in order to work together smoothly (Zineldin

and Bredenlow, 2003). The communication and coordination system that has been

built is mostly one way, rarely reciprocal in nature. Islamic banks only created re-

strictions that BMT is required to follow, and the complement happens on the oth-

er side; BMT only reports conditions and business performance according to the

bank’s requests. Even among Islamic banks and BMT, there is still the impression

of hoarding information, inflexibility in interaction and without according the oth-

er appropriate respect. Alliances are still built based on the opportunistic purpose

of individual organisations. One of the reasons is the practice of customer canni-

balism that can occur in the relationship between the BMT and the Islamic bank.

When the customer (or client) of the BMT grows in size, the customer moves on

to become the Islamic bank’s customer.

5.5 Risk sharing implementation in the strategic alliance

In this research, we have omitted the risk-sharing variable in the relationship con-

struct between commitment, trust and knowledge-sharing and how they influence

an alliance’s success in achieving its financial goals. As has been addressed by the

Directorate of Islamic Banking, Bank Indonesia, this occurs because the partner-

ship between Islamic banks and BMT right now has only covered several forms

yet, and these are: direct without non-financial assistance; direct with non-

financial assistance; channeling without non-financial assistance; and channelling

with non-financial assistance. What is meant by channeling partnership is that the

Islamic bank does not directly partner with the BMT, but partners with a parent

cluster of the BMT or the secondary cooperative that is the umbrella co-op for

several BMT. They said:

“The partnership forms between BMT and Islamic banks almost never use the

concept of risk-sharing. Even if there exists, then the risk shared is limited to

the risk over the funds invested by the Islamic bank itself. There are also Is-

lamic banks who decided to create their own BMT in order to enter micro and

nano scale financing like Bank XYZ”

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Theoretically, the risk sharing form of partnership should not just cover the

capital invested by the Islamic bank, but also operational costs and effort invested

(Wahyudi et al., 2013). When risk sharing only covers the capital invested, Islamic

banks have little incentive to be involved with BMT-run businesses, and several

problems may crop up. First is the potential for moral hazard and adverse selection

by BMT in managing the funds from the Islamic banks. It is probable that BMT

will act aggressively and enter into businesses (financing) with positive net pre-

sent value (NPV) but high in risk. They may do this because of (i) inadequate

monitoring by the Islamic banks, (ii) in case of success, the BMT will receive a

large share of the profit, and (iii) in case of failure, the consequences of capital

loss (financing) will be borne by the Islamic banks. Second, if BMT owns several

business lines and the partnership only occurred in on or more business lines, then

the BMT will lack enough focus to fulfill commitments. BMT in general also lack

experience and competent human resources. Running several businesses at the

same time while expecting equal focus across all lines becomes unrealistic. Not to

mention that it becomes tempting to divert funds from one business line to anoth-

er, crossing the line into fraud. Third, by not running business together within the

alliance, Islamic bank lose control over the funds invested as well as being in the

dark about the business processes of the BMT. As a result, the Islamic banks are

vulnerable to overlookthe BMT’s manipulation of financial statements.

6. Conclusions

From the result of data analysis, there are several conclusions. First, in a strategic

alliance between Islamic banks and BMT, the BMT’s commitment is the only sig-

nificant contributor in determining the alliance’s success in achieving its financial

goals. Second, bank does not place its trust on BMT. The Islamic banks’ trust is

tied to the collateral or guarantee that is required of the BMT for the funds that the

banks will provide. Third, the alliance between them is still contractual in nature,

where trust and commitment is tied by the agreement between the two of them.

Fourth, coordination contributes a positive impact to the trust placed by the bank

and the commitment from the BMT, but is negatively related to alliance profitabil-

ity. Fifth, social capital has a positive effect on trust. This means that reputation

plays a significant role in building the alliance between the Islamic banks and

BMT. Strategic alliance can also occur and increase in quality if both BMT and

the Islamic bank show initiative in forming an alliance or cooperating. BMT

should demonstrate more commitment, and the Islamic bank should give more

trust to the BMT. One of the indicators of the increase in those two variables

(commitment and trust) is an increase in risk sharing and knowledge sharing be-

tween the two institutions.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

6. Limitations and Suggestions for Further Research

The limitations of this study are that it does not directly involve commercial Is-

lamic bank in a direct survey, only using FGD from the banking regulator as a

source of supporting data. But the opinion of the regulator is not guaranteed to re-

flect the opinion of the banking industry itself in general. Further research can use

secondary data from financial statements (non-perception data) to analyse the in-

fluence of strategic alliance to profitability and the bank’s business development.

Even if this research has shown that the commitment and trust taking place in

building the relationship between the BMT and the Islamic bank is still contractu-

al, but this research has not studied more extensively the type and specification of

the contract that actually happens. Is the contract similar to the credit scheme used

in a conventional bank, and because of that the Islamic bank does not bear financ-

ing risk, or is the contract in accordance with the specifications for an equity in-

vestment (syirkah) scheme, and as such the Islamic bank is still sharing risk as

well as profit with the BMT? Further research is expected to be able to provide

more details on the contract specifications formalizing the forms of commitment

and trust, as well as checking whether the strategic alliance happening took the

form of channeling, executing, or joint financing (Bank Indonesia, 2010); it can

also move in the direction of the potential development from the stiff contractual

relationship into a dynamic one that is harmonic, synergic, based on mutual trust

and trustworthisness throught the development of honest, open, continuous coor-

dination and communication as well as the establishment of functional accounta-

bility between BMT and the Islamic bank. Finally, to study dynamic strategic rela-

tionship more extensively, some considerations for further research should be

given for the possible occurrence of paradox between coordination and control,

optimisation of relationship bond and trust to build commitment, the potential for

social exchange through knowledge sharing as well as to consider other variables,

like collaboration, structural bonding, social bonding, integration, cultural fit, in-

tegrity, partner willingness and motivation to enter into an alliance, and harmony.

References

Akerlof, G.A. (1970). The market for "Lemons": Quality uncertainty and the market mechanism.

The Quarterly Journal of Economics, 84(3), 488-500.

Anderson, J.C., & Narus, J.A. (1990). A model distributor firm and manufacturer firm working

partnerships. Journal of Marketing, 54(1), 42-58.

Angle, H.L., & Perry, J.L. (1981). An empirical assessment of organizational commitment and

organizational effectiveness. Administrative Science Quarterly, 26(1), 1-14.

Ayub, M. (2007). Understanding Islamic finance. Chichester: John Wiley & Sons, Ltd.

Aziz, M.A. (2008). The establishing procedure of baitul maal wa tamwil (BMT). Jakarta: PKES

publishing.

Bank Indonesia (2010). Indonesian Islamic banking outlook 2011. Jakarta: Bank Indonesia.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Berman, S.L., Down, J., & Hill, C.W.L (2002). Tacit knowledge as a source of competitive ad-

vantage in the National Basketball Association. Academy of Management Journal, 45(1), 13-

31.

Bernstein, J., & Weinstein, D. (2002). Do endowments predict the location of production? Evi-

dence from national and international data. Academy of Management Journal, 56(1), 55-76.

Bester, H. (1985). Screening vs. rationing in credit markets with imperfect information. Ameri-

can Economic Review, 75(4), 850-855.

Burt. R.S. 1992. Excerpt from the sosial structure of competition, in Structure holes: The social

structure of competition. Cambridge, MA and London: Harvard University.

Chen, S.H., Lee, H.T., & Wu, Y.F. (2008). Applying ANP approach to partner selection for stra-

tegic alliance. Management Decision, 46(3), 449-465.

Chesbrough, H.W. (2002). Making sense of corporate venture capital. Harvard Business Review,

80(3), 90-99.

Das, S., Sen, P.K., & Sengupta, S. (1998). Impact of strategic alliances on firm valuation. Acad-

emy of Management Journal, 41(1), 27-41.

Das, T.K., & Teng, B.S. (1996). Risk types and inter-firm alliance structures. Journal of Man-

agement Studies, 33(6), 827-843.

Elmuti, D., & Kathawala, Y. (2001). An overview of strategic alliances. Management Decision,

39(3), 205-218.

Feigenberg, B., Field, E., & Pande, R. (2013). The economic returns to social interaction: Exper-

imental evidence from microfinance. Review of Economic Studies, 80(4), 1459-1483.

Folta, T.B., & Miller, K.D. (2002). Real options in equity partnerships. Strategic Management

Journal, 23(1), 77-88.

Frankel, R., Whipple, J., & Frayer, D. (1996). Formal versus informasi contracts: Achieving alli-

ance success. International Journal of Physical Distribution and Logistic Management,

25(3), 47-63.

Fukuyama, F. (1995). Social capital and the global economy. Foreign Affairs, 74(5), 89-103.

Geletkanycz, M.A., & Black, S.S (2001). Bound by the past? Experienced-based effects on

commitment to the strategic status quo. Journal of Management, 27(1), 3-21.

Gittell. J.H. (2000). Paradox of coordination and control. California Management Review, 42(3),

101-117.

Gonzalez, M. (2001). Strategic alliances: the right way to compete in the 21st century. Ivey Busi-

ness Journal, 66(1), 47-51.

Harzing, A.W. (2002). Acquisitions versus Greenfield investments: International strategy and

management of entry modes. Strategic management Journal, 23(3), 211-227.

Herbert, M., & Morris, D. (1987). Trends in international collaborative agreements. The Colum-

bia journal of world business, 22(2), 15-21.

Hoskinsson, R.E., & Busentiz, L.W. (2002). Market uncertainty and learning distance in corpo-

rate entrepreneurship entry mode choice. In M.A. Hitt, R.D. Ireland, S.M. Camp and D.L.

Sexton (Eds.). Strategic entrepreneurship: Creating a new integrated mindset. Oxford, UK:

Blackwell Publishers.

Inkpen, A.C., & Ross, J. (2001). Why do some strategic alliances persist beyond their useful life?

California Management Review, 44(1), 132-148.

Iqbal, Z., & Mirakhor, A. (2007). An introduction to Islamic finance: Theory and practice. Sin-

gapore: John Wiley & Sons (Asia), Pte. Ltd.

Ireland, R.D., Hitt, M.A., & Vaidyanath, D. (2002). Alliance management as a source of compet-

itive advantage. Journal of Management, 28(3), 413-446.

Jennings, D.F., Artz, K., Gillin, L.M., & Christodouloy, C. (2000). Determinants of trust in glob-

al strategic alliances: Amrad and the Australian biomedical industry. Competitiveness Re-

view, 10(1), 25-44.

Johansson, J. (2011). Global marketing: Foreign entry, local marketing, and global manage-

ment. 5th edition. Burr Ridge, IL: McGraw-Hill.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Kahf, M. (2002). Strategic trends in the Islamic banking and finance movement. Working Paper.

Presented at the Harvard Forum on Islamic Finance and Banking, Harvard University, Cam-

bridge, Boston, April 6-7, 2002.

Kuratko, D.F., Ireland, R.D., & Hornsby, J.S. (2001). Improving from performance through en-

trepreneurial actions: acordia’s entrepreneurship strategy. Academy of Management Execu-

tive, 15(4), 60-71.

Molm, L.D. (1994). Dependence and risk: Transforming the structure of social exchange. Social

Psychology Quarterly, 57(3), 163-176.

Myers, S.C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575-592.

Myers, S.C., & Majluf, N.S. (1984). Corporate financing and investment decisions when firms

have information that investors do not have. Journal of Financial Economics, 13(2), 187–

221.

Niren, M.V., Williams, L.S., & Dennis, C.R. (1995). An analysis of strategic alliances: Forms,

functions and framework. Journal of Business and Industrial Marketing, 10(3), 47-60.

Porter, L.W., Steers, R.M., Mowday, R.T., & Boulian, P.V. (1974). Organizational commitment,

job satisfaction, and turnover among psychiatric tehcnicans. Journal of Applied Psychology,

59(5), 603-609.

Rampersad, G., Quester, P., & Troshani, I. (2010). Examining network factors: commitment,

trust, coordination and harmony. Journal of Business & Industrial Marketing, 25(7), 487-500.

Richard, G. (2003). Measuring goodwill trust between groups of people: three years of an oil in-

dustry alliance. Strategic Change, 12(7), 367-379.

Rodriguez, C.M. (2002). Relationship bonding and trust as a foundation for commitment in U.S.-

Mexican strategic alliances: A structural equation modeling approach. Journal of Interna-

tional Marketing, 10(4), 53-76.

Sako, M. (1992). Prices, quality and trust: Interfirm relations in Britain and Japan. Cambridge:

Cambridge University Press.

Serrat, O. (2010). Learning in strategic alliances. Washington, DC: Asian Development Bank.

Srinivas, Y. (2005). Bank finance to the SME sector: Issues and perspectives, The Chartered Ac-

countant, September 2005, 436-439.

Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. Ameri-

can Economic Review, 71(3), 393-410.

Tiessen, J.H., & Linton, J.D. (2000). The JV dilemma: coopreating and competing in joint ven-

tures. Canadian Journal of Administrative Sciences, 17(3), 203-216.

Uddin, M.B., & Akhter, B. (2011). Strategic alliance and competitiveness: Theoretical frame-

work. International Refereed Research Journal, 2(1), 43-54.

Venardos, A.M. (2006). Islamic banking and finance in South-East Asia: Its development and fu-

ture, 2nd edition. Singapore: World Scientific Publishing, Co. Pte. Ltd.

Vogel, F.E., & Hayes, S.L. (1998). Islamic law and finance: religion, risk, and return. Nether-

lands: Kluwer Law International.

Von Wright, G.H. (2004). Explanation and Understanding. New York: Cornell University Press.

Wahyudi, I., Dewi, M.K., Rosmanita, F., Prasetyo, M.B., Putri, N.I.S., & Haidir, B.M. (2013).

Risk management in Islamic bank. Jakarta: Salemba Empat Publishing.

Woolcock, M., & Narayan, D. (2000). Social capital: Implication for development theory, re-

search, and policy. World Bank Research Observer, 15(2), 225-249.

Yoshino, M., & Rangan, S. (1995). Strategic alliances: an entrepreneurial approach to globali-

zation. Boston, MA: Harvard Business School Press.

Zineldin, M., & Bredenlow, T. (2003). Strategic alliance: synergies and challenges (a case of

strategic outsourcing relationship “SOUR”). International Journal of Physical Distribution

and Logistics Management, 33(5), 449-464.

Zineldin, M., & Jonsson, P. (2000). An examination of the main factors affecting

trust/commitment in supplier-dealer relationship: An empirical study of Swedish wood indus-

try. The TQM Magazine, 12(4), 245-265.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

Acknowledgments:

This research conducted by National Collaborative Research Grant 2013. The

author is grateful to anonymous reviewer of this research grant. The author is also

obligated to Bambang Hermanto, Zaafry A. Husodo, Rizky Luxianto and Muham-

mad Budi Prasetyo for valuable discussion. Thanks to my assistants, which are

Rizki Nugrahani, Niken I. S. Putri, Rushli Fauzan and Imam Salehudin, for their

aims in collecting and tabulating the data. The remaining errors are our own re-

sponsibility.

Appendix

The following is the list of questions and research variables in the structured ques-

tionnaire:

No Variable Question

1 Profitability

After entering the partnership, we have experienced an increase in profit

This business has benefited financially since entering the partnership

This business is able to avoid loss since entering the partnership

This partnership enables us to reach a beneficial financing scale

2 Knowledge shar-

ing

After entering partnership, we experience improvements in aspects other

than finance, like organisational management, and record-keeping

This business receives assistance in many non-financial aspects since en-

tering the partnership

We have received many knowledge transfer from the partnership that we

entered

We learn a lot about the aspects of Islamic management and finance from

the Islamic bank that became our business partner

3 Risk sharing

After we entered the partnership, if we experienced a loss, we received a

grace period for payment/reduction in capital that needed to be returned

Our partner financial institution is willing to bear a part of the business

loss that we experience, according to the proportion of the capital in-

volved

After the business entered the partnership, if we experienced a loss, we

are still allowed to receive more capital from the bank

Our partner Islamic bank is willing to bear a part of the risk over the

funds that becomes a part of the partnership

4 Work agreement

The partnership that we enter into with the Islamic bank is formalised in

the form of a cooperation agreement

The partnership that we enter into has a time limit as well as terminating

terms and conditions, as well as the rights and responsibilities of both

parties

The partnership that we enter into affects the operation of our work be-

cause the nature and extent of the partnership is important

The clauses listed in the cooperation agreement between our BMT and

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

No Variable Question

the Islamic bank is balanced as is not heavier on one party than the other

5 Commitment

We are very committed with the partnership that is formed

We are very concerned with the continuity of the partnership with the Is-

lamic bank that is our partner

We will continue this partnership

We feel that this partnership is important for our future progress

6 Coordination

The program that is run is coordinted well between the Islamic bank and

the BMT.

Our business process is tightly connected with the business process of our

partner Islamic bank

The partnership activities are coordinated well between the Islamic bank

and the BMT.

We have a good communication with the Islamic bank that became our

partner

The policies taken by our partner Islamic bank also affects our work pro-

cess

7 Trust

We believe that the decisions taken in this partnership will benefit our

business

This partnership is marked by a high degree of harmony

We believe that the partnership between the Islamic bank and the BMT is

based on the principle of mutual trust

The presence of our BMT as a business partner is appreciated by our

partner Islamic bank

8 Interdependency

If we want to, we can easily move to a different Islamic bank for partner-

ship

If we want to, we can exit from the existing partnership

There are no significant costs for us to find and change partner Islamic

banks

Our partnership with the Islamic bank is only a matter of formality with-

out any organisational implication

9 Social capital

This partnership occurs because the Islamic bank has a vision of bringing

the prosperity of the people that is the same like ours

We partner with the Islamic bank because we are of one faith

Our business process and our partner Islamic bank’s process are both

based on the Islamic syari’ah

The people working in our partner Islamic bank has a simialr vision and

background with us

10 Conflict

Sometimes the partner (bank) adjusts or changes the facts a little to get

what they want

The partner often promises something that is not fulfilled in the future

The partner has given valuable information, even when it is not required b

ythe contract

We tend to question/suspect the information given by the partner

The partner usually also tend to question/suspect the information that we

give them

11 Control

This alliance has a very detailed binding contract

This alliance has a punishment mechanism (letter of warning, summons)

if targets are unfulfilled

Information from the partner and for the partner is done on a daily or

weekly basis

Performance evaluation is done routinely and on schedule

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)

No Variable Question

There is a clear division of commitment and resources (the data on

MSME clients is not for the Islamic bank)

Questions of the FGD/IDI in general are related to:

Bank Indonesia and parent BMT

1. The potential for the BMT to become representatives or extension of an Islamic

bank.

2. The BMT’s position in the Indonesian banking architecture.

3. What sort of cooperation pattern exists between the BMT and the Islamic bank.

4. The ideal cooperation pattern between the BMT and the Islamic bank.

5. The legal framework able to support the ideal cooperation pattern between the

BMT and the Islamic bank.

Parent BMT

6. Opportunities as well as resistance of the BMT in building a partnership with an

Islamic bank.

7. The role of the parent BMT in business operation and strategic decision-making

of the BMT.

8. Dilemma and degree of readiness of the BMT in facing Act no. 1/2013 about

microfinance institutions.

Dow

nloa

ded

by D

okuz

Eyl

ul U

nive

rsity

At 0

9:23

05

Nov

embe

r 20

14 (

PT)