developing a computer simulation based approach to
TRANSCRIPT
Developing a Computer Simulation Based Approach to Simulate Potency of Islamic Voluntary Sector to Alleviate the Poverty in
Indonesia Using System Dynamics Methodology
Dian Masyita ([email protected] and [email protected] ) The Faculty of Economics, Padjadjaran University, Bandung, Indonesia
Submitted to First International Conference on Inclusive Islamic Financial Sector Development:
Enhancing Islamic Financial Services for Micro and Medium Sized Enterprises (MMEs), Brunei, 17th – 19th April 2007
Abstract
This research tries to find out the potency of Islamic Voluntary Sector as financial instrument to alleviate the poverty in Indonesia. This research also tries to offer a computer simulation based approach design of the cash waqf fund management system and zakah fund as a part of Islamic Voluntary Sector in a system dynamics model. Using the system dynamics methodology, we try to know the structure of the cash waqf funds management system and simulate the behaviour of cash waqf and zakah fund.
Zakah and Cash Waqf fund are expected to become the alternative instruments for the poverty alleviation programs in Indonesia. These programs require huge amount of fund that cannot be provided thoroughly by the government. Therefore, development of the voluntary sector for such a program is inevitable. In the Islamic sosio-economic concept, there are some sources of social fund that are economically and politically free of charge, namely cash waqf and zakah, infaq and shodaqah. In this research we focus in Cash Waqf Management and Zakah fund. In these concepts, Nadzir collects the fund from Waqif and invest the money in the real sector (mainly Small & Medium-sized Ventures) and in any syariah-based investment opportunities and Amil also collects the fund from Muzzaki. Amil will distribute all of Zakah fund for Mustahiq and Nadzir will then allocate all profits and returns gained from the investments to any poverty alleviation programs to enhance the quality of poor people’s life, such as free education and health service, cheap basic food, etc.
Not just like Amil, who is allowed to distribute all of zakah fund, Nadzir is obliged to maintain the amount of fund in such a way that it does not go below the initial amount. Therefore, Nadzir not only should be highly capable, but also needs a financial institution, which has been proven to be experienced, highly capable and effective in helping Micro and SMEs development efforts, since such a microfinancing program is considered as the most vital portfolio in the poverty alleviation program. Therefore, it’s necessary to design an instrument which is able to control the cash waqf management.
Keywords: the cash waqf fund, zakah fund, portfolio investment, microfinance, poverty alleviation, system dynamics
1. Preface
Since the Indonesian poverty rate has been still discouraging, development the Islamic voluntary sector is a must in a country that has almost ninety percent Moslim. Based on the Indonesian Statistics Central Bureau (BPS)’s data, there are about 40 million Indonesian people who are under the poverty line. Indonesia has come into debt trap made by the Indonesian government and the private sectors. Large amount of debt has weakened Indonesian economy for the past ten years. Meanwhile, the government has been confronted with the deficit budget almost every year since 1997, which means that the government may find it difficult to cover its routine expenditures. Those regular balance sheet items require so large amount of fund that government cannot provide adequate fund for other strategic needs, such as good education, appropriate health, poverty, and Micro & SME’s development. Mismanagement of debts is the largest of all factors that make Indonesia go into crisis. Consequently, all of citizens and their offsprings have to carry the heavy burden of that debt.
2. Problem Identification
The potential sources of fund to the necessity of sufficient fund for public needs are a special endowment fund, cash waqf, and zakah from people’s donation. People donate their money as cash waqf by purchasing cash waqf certificate. The gathered fund will be then invested in various investment portfolio and the profit of which can be spent for the above mentioned public necessities. The gained profit will also be used for funding poverty alleviation programs, while the principal of funds will be reinvested in various highly profitable investment opportunities. Waqif donates his/her money as waqf fund to Mauquf’alaih (a person who is entitled to get benefit from waqf fund) through Nadzir (a person/an institution being in charge for managing waqf fund and distributing returns of waqf investment). Only gains of the invested waqf fund will be delivered to Mauquf’alaih. The principal of funds keep being invested in potential investment opportunities. In relation to its role as waqf fund investment manager, Nadzir on behalf of Waqf Institution may allocate some waqf funds to financial portfolio and finance Micro & SMEs’ businesses on the basis of profit-loss sharing system. The larger the investment returns, the more fund can be allocated to poverty alleviation program. In some countries1, waqf fund management has reduced poverty effectively and enhanced people’s welfare, by providing additional fund for education & health development programs, cheap houses & public facilities development programs, and so forth. On the other hand, Muzzakki (person who are obliged to pay zakah because they have wealth or properties that are subject to zakah) donates his/her money as zakah fund to Mustahiq (rightful recipient of
1Mannan, M.A.Abdul, Cash Waqf Certificate- an Innovation in Islamic Financial Instrument: Global Opportunities for Developing Social Capital Market in the 21stCentury Voluntary Sector Banking”, Presentation at the Third Harvard University Forum on Islamic Finance, October 1, 1999
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zakah because they are included as one of those mentioned in Al-Quran as the recipient of zakah) through Zakah Management Institution.
3. Objectives of Research
This research is expected to be able to find out the potency of the Islamic Voluntary Sector, expecially cash waqf and zakah, to alleviate the poverty in Indonesia. This research also tries to offer a computer simulation based approach of the cash waqf fund investment management system and the distribution of zakah fund in a system dynamics model. Using the system dynamics methodology, we try to study the structure of cash waqf management and zakah distribution system and then simulate the behaviour of them.
4. Research Metodology
This research used system dynamics methodology to capture dynamic
phenomenon of a system, in which variables change simultaneously as time moves. The field of system dynamics began in 1956 at the Massachusetts Institute of Technology, Cambridge, MA, USA. Since that time, the concept of dynamics behavior and feedback systems have enhanced the understanding of social, economic, management and physical systems2.
For the research purposes, some of previously researches support it. One of them is a survey on possible implementation of cash waqf in Jakarta and West Java (Masyita, 2001). The survey concluded that most people did not trust any existing government institution to manage cash waqf fund and control its investment activities, especially because cash waqf management will involve large amount of endowment funds. Most of them also recommend that if a special purpose institution is established to manage cash waqf fund, it has to be highly capable of detecting any potential dishonesty and assessing performance of cash waqf fund manager, i.e. nadzir. Therefore, it’s necessary to design an instrument which is able to control the cash waqf management.
Based on the survey’s result, using exclusively designed computer program then simulated some scenarios of cash waqf implemention to formulate some policy concepts applicable in Indonesia. The computer program was designed to help the policy makers (1) estimate cash waqf potential in alleviating poverty in Indonesia, (2) supervise performance of nadzir or waqf fund management institution, and (3) identify appropriate policies conducive to poverty alleviation programs (Masyita, 2005).
For cash waqf data purposes, since there was no similar study preceding the research, some assumptions were applied. The ability of three national TV corporations (RCTI, SCTV, and Indosiar) to collect donation amounting IDR 2 billions in two nights in 2000 and the other charity programs to collect donation in 2001-2005 were used as an assumption basis of amount of fund could be gathered by cash waqf management institution. This research also used data supplied by
2 Forrester, Jay.W. (1968), “Principle of System.”Wright-Allen Press, Inc
3
Biro Pusat Statistik Republik of Indonesia (National Beaurau for Statistics), BKKBN Republic of Indonesia (National Coordinating Agency for Family Planning) and Islamic Financial Institution. For zakah fund data purposes, the potency of zakah fund in Indonesia is obtained from some zakah institution historical data and predictions.
5. Limitation of Research
This research put more emphasived on financial management expecially for raising, investing of cash waqf fund and distributing of zakah fund. The duties of Nazir, as a cash waqf fund manager, are to increase the cash waqf funds and invest those funds in profitable portfolios. On the other hand, the duties of Amil, as a zakah fund manager, are to increase the zakah fund and distribute these funds to the appropriate Mustahiq. As we know, the poverty alleviation problems are complicated. However, they need multi and interdiscipline knowledge to formulate and figure out the solutions. With this research we want to try to make an early design of poverty alleviation program in the financial viewpoint using system dynamics modeling.
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Figure 1.
National Waqf Institution
N A Z I R
Islamic Financial Institutions
Society Organizations
Charity Institutions
Cash Waqf Fund WAQIF Zakah Fund
Microfinancing Portfolio
Islamic Mutual Funds
Microfinance Institutions
Direct Investment Portfolio
Islamic Financial Portfolio (domestic)
Company B M T Islamic Capital
MarketIslamic Financial
InstitutionIslamic
Banking
Islamic Bonds
To Create New Waqf To Maintain Waqf Assets
Traditional Waqf Assets
BUILDINGS
Non-Profit Projects Comercial Projects
Free Education
Management Fees
Ready to Distribute the Funds To Poverty Alleviation Programs in Indonesia
LAND
Agricultural
Free Health Service
Waqf Buildings Rental
___ (eliminate)
THE PROFIT- LOSS SHARING from Cash Waqf Investment
Indonesia citizens Foreign Citizens
National Zakah Institution
MUZAKKI
Indonesia citizens
Foreign Citizens
AMIL
Global Fund Management
Mudharabah Deposit
Waqf Land Rental Real Estate
Figure 2.Figure 2.
Ready to Distribute the Funds To Poverty Alleviation Programs in Indonesia Microfinancing Portfolio
Poor Family Rehabilitation
Health & Sanitation
Establishing health care
programs for the poor
Supplying pure drinking water
Natural Disaster (Tsunami, Flood,Volcanics)
Social Fasilities & Services
Educational & Culture
Improving the condition of poor living below the poverty line
Public Utilities Services
To Alleviate the Poverty in Indonesia
Supporting local culture, art & heritages
Social Infrastructure
Religion Fasilities
To promote self-sufficient & dignity for the poor
Rehabilitating physically handicapped
Free Education (i.e. free tuitition fee, books free
of cost, scholarships etc)
Supporting any projects in the
area of education, research,
religious, etc)
Increasing The Standard of Life of Indonesian Citizens
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6. General Description of System Conceptualization The system conceptualization involves establishing model boundary,
identifying causal relationships and policy framework3. In this research the model boundary includes all relevant factors that are considered important in the problem context. The model comprises seven interrelated components in the voluntary sector management as shown as Figure 3.
THE POORTHE RICH
CASH WAQFFUNDS
INVESTMENTPORTFOLIOS
+INVESTMENT
PROFITS
AVAILABLE FUNDSFOR THE POVERTY
PROGRAMS+
+
-+
+
(-) loop 1
(+) loop 2
+ (+) loop 3
-
ZAKAH FUNDS+
+
Figure 3. A Macro-view of Model
As depicted in the above causal loop, the model links among the rich, cash waqf fund, zakah fund investment portfolios, investment profits, available funds for the poverty programs and the poor.
A general system of cash waqf model, derived from a macro-view of model above, consists of six sectors i.e: 1). The cash waqf & zakah fund raising sectors (the rich links to the collected-cash waqf funds), 2) The Islamic financial portfolios sectors, 3) The global fund management sectors, 4) The direct investment in large and medium scale enterprises, 5) The microfinance sectors. (number 2,3,4,5 are investment portfolios which link to investment profits) 6) The distribution sectors of the profits of cash waqf investment. (Investment profits link to the poor through the poverty programs). The Interrelationship among variables can be seen in Figure 4. 3 Sushil (1993), System Dynamics “A Practical Approach for Managerial Problems”,Wiley Eastern Limited.
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Figure 4. The Interrelationship among Variables in the General System
Islamic FinancialPortfolio
MicrofinancePortfolio
The Profits ofMicrofinance
The risk ofmicrofinance
Microfinance PolicyScheme
Bad debts ofmicrofinance
Unemploymentrate
Technical Assistancesfor the poor
+-
-
-
-
+
-
+-
-
IndonesianPopulation
birth rate+
the richthe poor
death ratecash waqf growth
cash inflow ofcash waqf
Collected Cash WaqfFunds
Average Period toCollect Funds
InvestmentFunds
-
++
+
+
+
DirectInvestmentPortfolios
+
+
The Profits of cashwaqf investment
Management Feesfor the Nazir
The funds for thepoverty alleviation
programs-+
+
++
+
-
+
Islamic CapitalMarket
Islamic Banking
Islamic MutualFunds
Dividens capital gains
MudharabahDeposits
NAV's MutualFunds
+
+
+
++
+
+
Islamic Bond+
rate of return
+
Profits of IslamicFinancial Investment
+ + ++
+
Risk of IslamicFinancial Investment
-
+++
+
Invest to company To maintain theexisting waqf assets
To make a newwaqf assets
+ +
+
Dividen or CapitalGains
+Waqf landproductivity
To maintain newassets
Agriculture
Real Estate
+
+
++
Business Risk
SocialProjects
CommercialProjects
Free Education
Free-charge HealthServices
Waqf LandRental
+
++
+
+
The Profits of DirectInvestment
+
++
+
+++ +
+-
+
+
The povertyallevationprograms
-
+
+Global Fund
Mgt+
ForeignWaqif
+
+
+
+
Multiplier Effects ofMicrofinance towards
Family's Welfare
-
+
+
+
Zakah Funds+
12
The interrelationship among the six sectors is described as follows :
1) The cash waqf and zakah fund raising sectors The responsibilities of this sector are collecting the cash waqf fund from the waqif and then distributing them to the investment portfolios. The profits of the investment will be distributed to the poor through the poverty alleviation programs. At which the profits will be distributed depend on the waqif requests such as the education, infrastructure, family rehabilitation, public health & sanitation. At the same time, this sector also collects the zakah fund from muzakki. Different than cash waqf, the zakah fund is directly distributed to the poor. In the cash waqf raising sectors, there is several causal relationship among the rich, who have the potency as a waqif, the gathered cash waqf fund, the invested funds to various portfolios, and the gained profits from investment which will be distributed to the poor. (see figure 5a and 5b).
populationBirth rate
Cash WaqfGrowth
MicrofinancePortfolio
+
The richThe poor
Death Rate
Cash Inflow ofCash Waqf
Collected CashWaqf Funds
Average Period toCollect Funds
InvestmentFunds
-
+
++
+
+
+ +
-
The PovertyAlleviation Programs
-+
Global Fund Mgt+
Foreign Waqif
Zakah Funds
+
IslamicFinancialPortfolio
Direct InvestmentPortfolio
+
+
The Profits of CashWaqf Investment
+ + + +esManagement Fe+
+
+
++
+The funds for thepoverty alleviation
programs-
+
+
+
Figure 5a. Causal loop of The Cash Waqf & Zakah Fund Raising
13
Cash Waqf Funds Raising Sector
Principal_32
Total_Return
growth_rateCash_WaqfMin_Req_Return
Cash_InflowReturn_of_Global_FundInvestment_periode
CW_normalPrincipal_4 Current_price_of_goldCollecting_period
Principal_3
Principal_1Principal_11
Principal_12 Principal_14
Principal_13
Principal_33
Principal_31
Ratio
Global_Fund_Inv
Invest_to_Islamic_Fin
Convert_to_Gold_standard
Cash_Waqf_Mgt Mikrofinance
Global_Fund_Mgt
Return_of_Global_Fund
Total_Return
Invest_to_Direct_Investment
Invest_to_microfinance
Ratio Return_of_Microfinancin
rate_of_cash_inflowProfit_of_Glb_Fund_Mgt
Return_of_Global_Fund
Microfinace_Period
Min_Rtrn_MKPrincipal_2
Total_ReturnStop_Microfinance
Average_Return_of_Islamic_Finance
Microfinance_Policy
Average_Return_Direct_InvAverage_Return_of_Islamic_Finance
Figure 5b. Flow Diagram of The Cash Waqf Fund Raising
2) The Islamic financial portfolios sectors
The responsibilities of this sector are investing the cash waqf efficiency and effectively. The gathered cash waqf will be then invested by Nazir, a fund manager, in Islamic financial portfolios. The structure of Islamic banking and finance is firmly rooted in the Qur’an and the teachings of Muhammad which is
14
called a Islamic Law4. Islamic Law has derived from revealed text a web of interrelated norms prohibiting interest-taking and undue speculative practices.
Generally, these portfolios are divided into four kinds i.e a). Islamic mutual funds, b). Islamic Capital Market, c). Islamic Banking Products (Mudharaba Deposits), d) Islamic Bonds (sukuk). All of them are issued by Indonesian financial institutions.
The gained profits will be distributed to meet the poor’s basic needs and increase the quality of the poor’s life. Meanwhile, the principal keep being invested in potential investment opportunities. (see Figure 6a and 6b).
The richThe poor
Cash Waqf growthCash Waqf
InflowsCollected Cash
Waqf Fund
average period tocollect the funds
Investment funds
Islamic FinancialPortfolio
+ +
++
+
The profits of cashwaqf investments
Management Fees
The funds for thepoverty alleviation
programs-
+
+
+
-
Islamic CapitalMarket
Islamic Banking Islamic MutualFunds
Dividen Capital gain
MudharabahDeposits
NAV of MutualFunds
++ +
++
+ +IslamicBonds
+
rate of return+
The Profits of IslamicFinancial Investments
++ + +
+
Risk of IslamicFinance Investment
-
+
+
+
+
The povertyalleviation programs
-
+
+ -
Figure 6a. Causal loop of The Islamic Financial Portfolios
4 Frank E.Vogel and Samuel L.Hayes III (1998), Islamic Law and Finance “religion, risk and return.” Published by Kluwer Law International.
15
Islamic Financial Portfolio Sector
Investment_periode
Return_Islamic_Finance
Invest_to_Islamic_Fin
Principal_14
Invest_to_Islamic_Fin
Principal_12
Islamic_Mutual_Funds
Invest_to_Mutual_Funds
Min_Req_ReturnReturn_Islamic_Mutual_Fund
Profit_of_Islamic_Bonds
Return_of_Islamic_Bonds
Invest_to_Islamic_Bond
Islamic_Bonds
Principal_13
rn_Islamic_Finance Min_Req_Return
Invest_to_JII
Islamic_Capital_Market
Profit_of_Islamic_Cap_Mrkt
Invest_to_Mudharabah_Deposits
Principal_11Return_Islamic_Finance
Profit_of_Islamic_Mutual_Funds
Investment_periodeInvest_to_Islamic_Fin
Return_of_Deposit
Profit_of_Islamic_Deposits
Profit_of_Islamic_Bonds
Mudarabah_Deposits
Profit_of_Islamic_Finance
Investment_periode
Average_Return_of_Islamic_Finance
Profit_of_Islamic_Deposits
Return_of_Islamic_Stocks
Return_Islamic_Finance
Return_of_Islamic_Bonds Profit_of_Islamic_Mutual_FundsReturn_of_Islamic_Bonds
Return_Islamic_Mutual_Fund
Return_of_Deposit
Return_of_Islamic_Stocks
Min_Req_Return
Figure 6b. Flow Diagram of of The Islamic Financial Portfolios
3) The global fund management sectors The responsibilities of this sector are to invest the cash waqf fund in the global financial portfolios as known a global funds management such as Amanah Fund, Lariba Fund, Islamic Indices, etc. A fund manager should choose the portfolios not only high return but also safety. The better Nazir choose the investment portfolios, the higher profits will be gained and the more funds will be acquaired by the poor.
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The principal then will be reinvested in various highly profitably investment opportunities. (see Figure 7a and 7b)
The richThe poorThe growth of cash
waqf fund
Cash inflow ofCash Waqf
Collected CashWaqf Funds
Average period tocollect cash waqf
Investment Funds
+ ++
+
The Profits of cashwaqf investment
Management Fee
The funds forthe povertyalleviationprograms
-
+
+
+
-
The poverty alleviationprograms
-
+
+
Global Fund Mgt
+
Foreign Citizens+
+
Figure 7a. Causal loop of the global fund management portfolios
Global Fund Management Sector
Total_Return
Principal_4Investment_periode
CW_normal
Convert_to_Gold_standard
growth_rateCash_WaqfMin_Req_Return
Cash_InflowReturn_of_Global_Fund
Current_price_of_goldCollecting_period
Global_Fund_Mgt Ratio
rate_of_cash_inflowProfit_of_Glb_Fund_Mgt
Return_of_Global_Fund
Return_of_Microfinanc
Figure 7b. Flow Diagram of The global fund management portfolios
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4) The direct investment in large and medium scale enterprises A cash waqf fund manager, Nazir, allocates the gathered funds to the big companies in the forms of stocks which the gained profits are dividends or capital gains. The nature of this sector is the long term. The other forms of direct investment are building the new waqf buildings and maintaining the existings waqf assets either for social projects or the commercial projects. (See Figure 8a and 8b.)
The richThe poor
Cash Waqf growth
Cash Waqf InflowCollected Cash
Waqf Fund
Average Period toCollect Funds Investment Funds
+ +
+ +
Direct InvestmentPortfolio
The Profits of CashWaqf Investment
Management fees
The funds for povertyalleviation programs
-+
+
+
-
Invest tocompany To maintain the
existings waqf assetsTo make the new
waqf assets
+ ++
dividen or capitalgains
+Waqf LandProductifity
To maintain waqfbuldings
Agriculture
Real Estate
++
++
Business Risks
SocialProjectsCommercial
Projects
Free EducationFree-Charge
Healthy Services
Waqf Landrental
+
++
++
The Profits of DirectInvestment
+
++
++ + + +
+-
+
+
The poverty alleviationprograms
-
+
+
Foreign Waqif+
+
Figure 8a. Causal loop of the direct investment to real sectors
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Direct Investment to Real Sectors
Figure 8b. Flow Diagram of the direct investment to real sectors
Invest_to_Agriculture
Invest_to_Waqf_Assets
Principal_33
Principal_331b
Principal_331
Invest_to_Real_Estate
ocksTo_Increase_Waqf_Productivity
Average_Rtrn_Waqf_Land
Return_Real_Estate
Return_of_AgricltrProfit_of_agriculture
Invest_to_Waqf_Land
AgricultureReal_Estate
minimum_ROI
Age_of_Waqf_Prodctvty
Profit_of_Waqf_Land
Profit_of_Real_Estate
Profit_of_agriculturePrincipal_331b
Return_of_Waqf_Land
Principal_331a
Return_Real_Estate
Principal_331a Age_of_Waqf_Prodctvty
minimum_ROI
To_Increase_Waqf_Land_Productivity
Return_of_Agricltr
Invest_to_Direct_Investment
Total_Rtrn_Waqf_ProdctvtyPrincipal_331
Principal_332Total_Rtrn_Waqf_Prodctvty
Average_Return_of_Waqf_Prodctvty Average_Rtrn_Waqf_Land
Invest_to_Waqf_Building
Principal_332
To_Increase_Waqf_Building_Productifity
Age_of_Waqf_Prodctvty
minimum_ROI
Return_of_Waqf_BuildingAverage_Rtrn_New_Waqf_Assets
Total_Return_Direct_InvCompany_rate_of_returnProfit_of_Waqf_Building
Average_Return_Direct_InvProfit_of_Waqf_Productivity
Profit_of_Waqf_Land
19
Figure 8b. (continue…) Flow Diagram of the direct investment to real sectors
Principal_322
Invest_to_Company
Build_New_Waqf_Assets
Invest_to_new_waqf
Invest_to_build_Comrcl_Projects
Principal_32
Total_Return_Direct_Inv
Total_Rtrn_New_Waqf_Assets
Company
Total_Return_Direct_Inv
Waqf_Land_Growth Decrease_of_Waqf_Land
Age_of_Waqf_Prodctvty
Average_Rtrn_New_Waqf_Assets
Invest_to_Direct_Investment
Commercial_Projects
Commercial_Projects_investment_Perio
erage_Rtrn_New_Waqf_AssetsPrincipal_321
Total_Rtrn_New_Waqf_Assets
Principal_322
Invest_to_Social_Projects
Profit_of_Commercial_ProjectsRtrn_Commercial_Projects
minimum_ROI
Rtrn_Commercial_ProjectsCommercial_Projects_investment_
Principal_321
Company_rate_of_return
minimum_ROI
Company_Profits_
Company_rate_of_return
Time_to_Direct_inv
Invest_to_Direct_InvestmentPrincipal_31
Waqf_Land_Devaluation
he_number_of_Waqif
Fraction_of_year
Profit_of_Waqf_Land_Rental
Rental_Price
Profit_of_Direct_InvestmentProfit_of_Waqf_Land_Rental
Profit_of_Commercial_ProjectsCompany_Profits_
Profit_of_Waqf_Productivity
Time_to_invest_in_Direct_Investment
Waqf_Land_Availability
Social_Projects
n_Commercial_Projects
Adjust_to_Social_Projects
Social_Projects_PolicyReturn_Social_Projects
20
5) The Microfinance Sectors
The microfinancing programs, which used the loss-profit sharing, are one of the most important sectors for poverty alleviation. Most of funds collected through cash waqf certificate issues will be allocated as loan for microenterprises. This microcredit program should particularly be aimed at helping poor people initiate their business and enhance their quality of life, accordingly. Nevertheless, merely supplying them with capital is not sufficient, since most of them do not have adequate knowledge and skill to choose and to run a business that is suitable to their condition. Consequently, relevant business technical assistance and spiritual treatment is needed to help them survive5.
Family’s business activities have significantly influenced economy of a community, particularly in developing countries. Big manufacturing companies indeed dominate mass production processes, both for goods and services, but most of enterprises are initiated by family. In addition, family’s consumption behaviour also affects production and marketing activities, as well as other business activities. Government’s programs for family business empowerment has to do with informal sector development efforts, as most of family businesses are operated in non formal format and business system. Family businesses, which absorb the largest number of employee, are also found mostly in small and medium scale. In most developing economies, these small and medium enterprises (SMEs) have limited access to formal financing practices, as well as to adequate government’s technical assistance. (see figure 9a and 9b)
5 Muljawan, Dadang and Masyita, Dian et al. (2006), “The Pilot Project of Linkage Program for Sharia Financial Institution in Indonesia”. Bank of Indonesia report.
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MicrofinancingPortfolio
The profit ofmicrofinance
Risk ofMicrofinance
Microfinance PolicyScheme
Bad debt ofmicrofinance
UnemploymentrateTechnical
Assistances
+-
+
-
-
+
-+ -
-
Investment funds
+
The profits of cashwaqf investment
Management Fees
The funds for povertyalleviation programs
-+
+
+
Multiplier Effects ofMicrofinance towards
family's welfare
The povertyalleviation programs
+
The poor
-+
+
-
The rich+ Collected
Cash WaqfFund
+
-
+
+
Figure 9a. Causal loop of The Microfinancing Sectors
Microfinance Portofolio Sectors
Mikrofinance microcreditProfit_of_Microfinance
Indonesian_population Stop_Microfinance
Microfinace_PeriodReturn_of_Microfinancing
Pra_welfare_people
Microfinance_Policy
Policy_ratios
Figure 9b. Flow Diagram of The Microfinancing Sectors
6) The profits of cash waqf investment & zakaf fund distribution sectors The gained profits from the various portfolios will be distributed to the poor through the poverty alleviation programs such as basic needs, health services, sanitations, education, natural disasters victims, etc. The principal of cash waqf will be reinvented to various portfolio opportunities. On the other hand, the zakah fund collected by Amil is directly distributed to the poor through the poverty alleviation programs such as basic needs and natural disasters vistims. (see figure 10a and 10b).
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The richThe poorCash Waqf
Growth
Cash Waqf Inflow
Collected CashWaqf Funds
Average period tocollect the cash waqf
Investment funds
+
++
+
The Profit of cashwaqf investment
Management fee
The funds for thepoverty alleviation
programs
-+
+
+
-
The PovertyAlleviation Programs
-
+
+Foreign Waqif
+
+
To meet the poorneeds
+
Living CostHealthy Cost
Education cost
The familyrehabilitation cost
Natural DisasterVictims Cost Infrastucture
Recovery cost
Quality of Life++
++++
-
+
Zakah Funds
+
Figure 10a. Causal Loop of the cash waqf profits & zakah fund distribution sectors
23
Zakah Funds & Profits of Cash Waqf Distribution
Cost_4 needs_rate_4
needs_rate_6
Cost_2
Cost_3
Cost_5
Cost_6
Healthy_needs
Rehabilitation_needs
Profit_of_Glb_Fund_Mgt
Profit_of_Microfinance Living_cost Healthy_costNatural_Disaster_CostProfit_of_Direct_Investment
Infstructure_CostProfit_of_Islamic_Finance
Daily_needsFamily_Rehbiittion_Cost
Education_cost
Total_available_fund_for_poor
Cost_1 Needs__ratio_2
Needs_ratio_3
Needs_ratio_4
Needs__ratio_5
allocation_ratio_3
allocation_ratio_4
allocation_ratio_5
Enter_to_pra_welfare
CProfit_of_Cash_Waqf_Investment
oPotency_of_ZakahPra_welfare_people
the_poor
Waqf_Zakah Std
Enter_to_pra_welfareNeeds_ratio_1
allocation_ratio_1Inflation
available_fund_for_healthy
available_fund_for_education
available_fund_for_rehbltation
available_fund_for_infrastrctr
allocation_ratio_2
needs_rate_2
needs_rate_1
needs_rate_3
Education_needs
Disaster_needs
Infrastructure_needs
allocation_rate_6
Needs_ratio_6
Living_needsavailable_fund_for_living
Living_cost available_rate_1
Healthy_cost available_rate_2
Education_cost available_rate_3
Family_Rehbiittion_Costavailable_rate_4
needs_rate_5
available_fund_for_disasteravailable_rate_5Natural_Disaster_Cost
Infstructure_Cost available_rate_6
Waqf_ZakahEnter_to_pra_welfareInflation
Figure 10b. Flow Diagram of the cash waqf profits & zakah fund distribution sectors
24
7. The Cash Waqf Management Control
Since the zakat is considered as the buffer against the poverty, all of the
zakat fund will be directly distributed to the poor. Therefore, Amil (a person or body or organization that are specialized in managing zakah, infaq, and shadaqah) is allowed to spend all of the zakah funds to the mustahiq. Contrary to zakah, the cash waqf fund must be maintained in such a way that it does not go below the initial amount.
The survey concluded that most people did not trust any existing government institutions to manage cash waqf fund and control cash waqf investment activities, especially because cash waqf management will involve large amount of endowment funds6. Most of them also recommend that if a special purpose institution is established to manage cash waqf fund, it has to be highly capable of detecting any potential dishonesty and assessing performance of cash waqf fund manager, i.e. nadzir. Therefore, it’s necessary to design an instrument which is able to control the cash waqf management. This model tries to design a control tools which is able to detect the human error in decision making either mismanagement or dishonesty quickly. (see figure 11.)
The Control Function for Fund Management
rate_of_cash_inflow
Profits_Mobilization
Current_price_of_goldConvert_to_gold
Control_Function
Global_Fund_Mgt
Commercial_Projects
Mudarabah_Deposits
Company
Mikrofinance
Real_Estate
To_Increase_Waqf_Building_Productifity
Social_Projects
Islamic_Capital_Market
Agriculture
Islamic_Mutual_Funds
Islamic_Bonds
Cummulative_Cash_Waqf_Fun
available_fund_for_living
available_fund_for_healthy
available_fund_for_education
available_fund_for_disaster
available_fund_for_rehbltation
Total_cash_waqf_in_gold
available_fund_for_infrastrctr
Figure. 11 Flow Diagram of The Control Function for Fund Management
6 Masyita, Dian (2001), Preliminary Implementation Model Design of Cash Waqf Certificate as Alternative Instrument for Poverty Alleviation in Indonesia using System Dynamics Methodologi, Thesis, ITB
25
The collected cash waqf fund from the waqif will be distributed to the various portfolios and then the usage will be controlled periodically. The early warning system will be prepaired by the system in order to the amount of cash waqf fund will not go below the initial amount. It is the difference of the cash waqf from the other sources of funds. Gold standard can be used as the currency standard because of its stability. (see figure 11a-d).
day
rupi
ah
Control_Function1Cummulative_Cash_Waqf_Fund2
20 40 60 80 1000
500.000.000
1e9
1,5e9
2e9
1
212
1
2 1
21
2
Figure 11a. The simulation result (short term)
day
Gol
d St
anda
rd (k
g)
Total_cash_waqf_in_gold1Convert_to_gold2
20 40 60 80 1000
5
10
15
20
1
2
12
1
2
1
2
1
2
Figure 11b. The Simulation result (short term)
26
day
rupi
ah
Cummulative_Cash_Waqf_Fund1Control_Function2
5.000 10.000 15.0000
5e14
1e15
1 2 1 2
Figure 11c The Simulation Result (long term)
day
gold
sta
ndar
d (k
g)
Convert_to_gold1Total_cash_waqf_in_gold2
5.000 15.0000
5.000.000
10.000.000
1 2 1 2
Figure 11d The Simulation Result (long term)
The waqif and public can control or monitor the cash flow of cash waqf
investment. If mismanagement and dishonesty occurred, the simulation result could demonstrate the deviation. (see figure 11e-f)
day
rupi
ah
Control_Function1Cummulative_Cash_Waqf_Fund2
20 40 60 80 1000
1e9
2e9
3e9
4e9
5e9
1
21
2
1
2
1
2
1
2
day
gold
sta
ndar
d (k
g)
Total_cash_waqf_in_gold1
Convert_to_gold2
20 40 60 80 1000
10
20
30
40
50
1
2
1
2
1
2
1
2
1
2
Figure 11e. The Simulation Result (short term)
27
day
rupi
ah Control_Function1Cummulative_Cash_Waqf_Fund2
2.000 6.000 10.0000
2e13
4e13
6e13
1 2 1 2 12 1
2
day
gold
sta
ndar
d (k
g)Total_cash_waqf_in_gold1Convert_to_gold2
2.000 10.0000
300.000
600.000
1 2 1 21 2
1
2
Figure 11f. The Simulation Result (long term)
8. The Potency of Cash Waqf & Zakah Fund for the Poverty Alleviation Programs It can be concluded from the system that the larger the amount of cash
waqf collected, the larger the amount of fund can be invested in highly cost-effective profit sharing-based portfolios, and the larger the amount of return can be distributed to poor people. The more fund allocated to finance microbusiness, the sooner poverty in Indonesia can be alleviated. (see Figure 12).
According to the result of some researches, the potency of zakah fund in Indonesia is approximately Rp 19,3 trillion/year7. In this model the potency of zakah fund, combined with the profit of cash waqf investment, will become the sources of fund for the poverty alleviation programs in Indonesia.
7 CSCR Research (2006), “Islamic Philanthropy and Social Development in Contemporary Indonesia” , University Islam Negeri (UIN) Syarif Hidayatullah, Jakarta
28
Indonesian_population
The Potency of Cash Waqf &Zakah for The Poverty
death_rate
Birth_rate3
death_rate2
birth_rate
death_rate3
birth_rate2
Multiplier_EffectsDaily_needsthe_poor
Waqf_Zakah
alleviation_1
alleviation The_poor_decreasePra_welfare_people
Average_of_Microfinacing
the_welfare_increase
lifetime_expectancyPopulation_growth
Microcredit_for_a_powelfare
Multiplier_effect
oIndonesian_population
the_rich
Average_period_to_become_welfare
Figure 12. Flow Diagram of The Potency of Cash Waqf & Zakah Fund for The Poverty Alleviation
9. The Simulation Result
In a system dynamics modeling process, the initial value and unit variables/parameter are the most important components to build the mathematical equations for the level, rate and auxiliary equation. In this research, the initial value and unit variables/parameter for the flow diagram shown in table 1 are as follows:
Tabel 1 Initial Value and Main Variable Parameter
Variables Initial Value and Parameter Measurement Estimation Methods8
Growth_rate of cash waqf 0.0007 /day Q Cash_Waqf 50.000.000 Rupiah/ray Q Cash_Waqf_Mgt 0 Rupiah Q Collecting_period (cash waqf) 30 Days Q Potency of Zakah Fund 40 billion – 50 billion rupiah/day Current_price_of_gold 90.000.000 rupiah/kg S Population_growth 0.0000419444444 /day S the_rich 49.405.842 Person S
8 note : P = derived from primary data S = derived from secondary data Q = derived from qualitatif information C = predicted by researcher based on another parameter
29
the_poor 37.027.472 Person S Pra_welfare_people 128.842.686 Person S Average_period_to_become_welfare 1800 Day Q lifetime_expectancy 23881.95 Day S Inflation 7.32%-12%/year (graph) /day S Adjust_to_Social_Projects 10%-40%/year (graph) /day Q Company_rate_of_return 15%-18% year (graph) /day S Min_Req_Return 5%-8%/ year (graph) /day Q Rental_Price (waqf land) 200.000 – 1.000.000 Rp/hectare/day Q Return_Islamic_Mutual_Fund -8% - 30%/year (graph) /day S Return_of_Agricltr 25%- 32%/year (graph) /day Q Return_of_Deposito 4%-18% /year (graph) /day S Return_of_Global_Fund 7%-33% /year (graph) /day S Return_of_Islamic_Bonds 12%-17% /year (graph) /day S Return_of_Islamic_Stocks -8% - 45%/year (graph) /day S Return_of_Microfinancing 0%- 15% /year (graph) /day S Return_of_Waqf_Building 10%-30% /year (graph) /day Q Return_Real_Estate 25%-31%/year (graph) /day Q Rtrn_Commercial_Prjcts 36% / year /day Q minimum_ROI 25%/year /day Q Age_of_Waqf_Prodctvty 7200 /day Q Investment_periode (Islamic Finance) 360 /day Q Time_to_Direct_inv (company) 1080 /day Q Microcredit_for_a_poor 5.000.000 rupiah/person Q Microfinace_Period 360 Day Q Multiplier_effect (pra welfare) 4.5 person/family S Multiplier_Effects (the poor) 5.8 person/family S Min_Rtrn_MK 3% / year /day S Comcl_Projets_inv_Periode 10800 Day S Waqf_Land_Availability 500000 Hectare Q Education_cost 2000 Rp/person/day S Family_Rehbilitation_Cost 2000 Rp/person/day S Healthy_cost 1000 Rp/person/day S Infstructure_Cost 1000 Rp/person/day S Living_cost 7496.733333 Rp/person/day S Natural_Disaster_Cost 1000 Rp/person/day Q Build_New_Waqf_Assets 0 Rupiah Q Needs_ratio_1 (living cost) 0.513 - Q Needs__ratio_2 ( healthy) 0.4143 - Q Needs_ratio_3 (education) 0.513 - Q Needs_ratio_4 (rehabilitation) 0.33 - Q Needs__ratio_5 (disasters) 0.10 - Q Needs_ratio_6 (infrastructure) 1 - Q allocation_ratio_1 (living cost) 0.15 - Q allocation_ratio_2 (healthy) 0.2 - Q allocation_ratio_3 (education) 0.3 - Q allocation_ratio_4 (rehabilitasi) 0.2 - Q allocation_ratio_5 (disaster) 0.1 - Q allocation_ratio_6 (infrastruktur) 0.05 - Q
Since there has been no similar study preceding the research, some assumption were applied. The ability of five national TV corporations (RCTI, SCTV, Indosiar, MetroTV and Lativi) to collect donation amounting IDR 3
30
billions in two nights in 2003 was used as an assumption basis of amount of fund could be gathered by cash waqf management institution. Another assumption came from the research which was conducted by PIRAC about Philanthropy in Indonesia.
It was then assumed that the cash waqf institution could obtain IDR 50 millions a day in form of cash waqf from various components of Indonesian people. The study also assumed that the gathered fund would grow 25% annually and it would be invested in Islamic financial products with profit sharing- based various rate of return.( see figure 13).
day
ratio
Return_Islamic_Mutual_Fund1Return_of_Agricltr2Return_of_Deposit3Return_of_Global_Fund4Return_of_Islamic_Bonds5Return_of_Islamic_Stocks6Return_of_Microfinancing7Return_of_Waqf_Building8Return_Real_Estate9Rtrn_Commercial_Projects10
5.000 10.000 15.000 20.000 25.000
0,0000
0,0005
0,00101
2
3
4
5
6
7
89
10
1
2
3
45
6
7
8910
1
2
34
5
6
7
8910
1
2
34
5
6
7
8 9
10
1
2
3
45
6
7
Figure 13. Rate of return of Cash Waqf Investment Portfolio
Using the above assumption and data supplied by Biro Pusat Statistik (National Beaurau for Statistics) , BKKBN (National Coordinating Agency for Family Planning) and syariah financial institution in Indonesia, the computer-based data process resulted in approximation of cash waqf investment return 25% annum. Such an amount of fund is expected to be available for the poverty alleviation efforts in Indonesia, especially through microfinance distribution program. If this plan can be implemented smoothly and if those assisted micro enterprises can get well run maximum of 5 years after being financed, it will take approximately 55 years to eliminate poverty. Based on the study result above and various scenarios proposed, if the gathered fund through cash waqf certificate increase i.e. IDR 100 million in a day , it will take approximately 48 years to eliminate poverty with the assumption the others parameter constant (see figure 14a). Poor people, in this study, are those with very low quality of life. In other words, poor people are not only those who cannot feed once a day, but also those who cannot afford proper health and education services.
31
days
the_poor1the_poor2the_rich3the_rich4Pra_welfare_people5Pra_welfare_people6
0 5,000 10,000 15,000 20,000 25,0000
50,000,000
100,000,000
150,000,000
200,000,000
1 23 4
5 6
1 23 4
5 6
1 23 4
5 6
1 23 4
5 6
12
34
5
6
1
3
Figure 14a. The Simulation Result (based on IDR 50 million a day for line 1-3-5
and IDR 100 million a day for line 2-4-6) Based on various scenarios, if the cash waqf fund combined zakat fund
simultantly are used for poverty alleviation program, it will able to make the great siginificant impact to the poor. It will consume less time to alleviate poverty. (see figure 14b)
days
peo
ple
Pra_welfare_people1Pra_welfare_people2Pra_welfare_people3Pra_welfare_people4the_rich5the_rich6the_rich7the_rich8the_poor9the_poor10the_poor11the_poor12
0 5,000 10,000 15,000 20,000 25,000 30,0000
50,000,000
100,000,000
150,000,000
200,000,000
12
3
4
5 6 7 8
910
11
12
12
3
4
5 6 7 8
910
11
12
12
3
4
5 6 7 8
910
11
12
12
3
4
5 6 7 8
910
11
12
1
2
3
4
5
6
7
8
9 10 1112
5 6 7 8
9 10 11 12
5
9
Figure 14b.The Simulation Result (based on the combination of cash waqf and zakah fund
simultantly)
32
10. Closing Based on the above study result and various scenarios proposed, zakaf fund
as a buffer against poverty and cash waqf fund as a motor of economy must jointly implemented for poverty alleviation program in Indonesia. Some microfinance management strategies were then carefully formulated to ensure the achievement of poverty alleviation goals on the other side.
Most of funds collected through cash waqf certificate issues will be allocated as loan for microenterprises. This microfinance program should particularly be aimed at helping poor people initiate their business and enhance their quality of life, accordingly. At the same time zakaf fund will protect them from the poverty trap. Nevertheless, merely supplying them with capital is not sufficient, since most of them do not have adequate knowledge and skill to choose and to run a business that is suitable to their condition. Consequently, relevant business technical assistance and spiritual treatment are needed to help them survive. Hence, the integration and strong commitment among Board of Indonesian Waqf (BWI), BAZNAS, Microfinance Institutions, Business Technical Assistance Provider, government and citizens for the poverty alleviation program are the most important agenda.
List of References 1. Forrester, Jay.W, “Principle of System.” Wright-Allen Press,Inc, 1968 2. Frank E.Vogel and Samuel L.Hayes III, Islamic Law and Finance “religion,
risk and return.” Published by Kluwer Law International, 1998 3. Mannan, M.A.Abdul, Cash Waqf Certificate- an Innovation in Islamic Financial
Instrument: Global Opportunities for Developing Social Capital Market in the 21stCentury Voluntary Sector Banking”, Presentation at the Third Harvard University Forum on Islamic Finance, October 1, 1999
4. Mannan, M.A.Abdul, Global Mobilization and Creation of Cash Waqf Fund for Human and Social Capital Infrastrukture for the Islamic Ummah, Social Investment Bank Publication Series no. 5, 1999.
5. Mannan, M.A.Abdul, Lesson of Experience of Social Investment Bank in Family Empowerment Micro-credit for Poverty Allevation: A Paradigm shift in Micro-financ”, Social Investment Bank Publication Series no. 10, 1999.
6. Masyita, Dian, Preliminary Implementation Model Design of Cash Waqf Certificate as Alternative Instrument for Poverty Alleviation in Indonesia using System Dynamics Methodologi, Thesis, ITB, 2001
7. Mulyawan, Dadang and Masyita, Dian et al. “The Pilot Project of Linkage Program for Sharia Financial Institution in Indonesia”. Bank of Indonesia report, 2006.
8. Sushil, System Dynamics- A Practical Approach for Managerial Problems, Wiley Eastern Limited, India, 1993
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