Seminar on Islamic Finance:MICRO FINANCE

Is Islamic MicroFinance a Promising Solution to Lift People Out of Poverty?

Source : Coordinator Minister of Economy, BI, BSM & ABSINDO

LAKSMI MUSTIKA NINGRATSENIOR ADVISOR INDONESIAN ISLAMIC MICROFINANCE

Jakarta, 27 NOVEMBER 2012

LAKSMI MUSTIKA NINGRATSENIOR ADVISOR INDONESIAN ISLAMIC MICROFINANCE

Jakarta, 27 NOVEMBER 2012

OUTLINE

Part I : Back Ground Part II : Micronomics (Financial Inclusion =

Islamic Micro Finance) What is Financial Inclusion How does it contribute to economic

growth and poverty reduction? Part III : What We Should Do Part IV : Expectations

Fact and Figures Some key facts of Indonesia:

– Population of Indonesia: 237 million– GDP per capita: USD 3,508– Banking industry holds more than 80% of financial sector assets– 97.4% of banks accounts are less than IDR100 million (less than USD10,000)– Number of commercial banks: 120– Number of rural banks: +1.667– Number of cooperatives: +71.000– Number of islamic microfinance institutions: +5.500

Category Quantity Percentage on Total Population

Population 237.641.326 Number of Loan Account 37.929.527 15,96%Number of Insured life Insurance 34.564.028 14,54%Number of pension fund participant 2.817.997 1,19%

Public access on financial services is relatively low that is reflected by (a) the number of loan accounts which reach only 15.96% of the population, (b) the number of insured life insurance which reach only 14.54% and (c) the number of pension fund participants which is only 1.19 %

BACK GROUNDBACK GROUND

SOURCE : BI

No Indicator Indonesia Malaysia Thai Phil Brazil

1 Financial Services Utilization*) (Percentage of Total Population)

Account at Formal Financial Institution 20% 66% 73% 27% 56%

Adults saving in the past year (using Formal Account) 15% 35% 43% 15% 10%

Adults Originating a new loan in the past year (Formal Financial Institution)

9% 11% 19% 11% 6%

Adults With Mortgage 1% 13% 5% 4% 1%

Adults paying personally for health insurance 1% 16% 24% 5% 8%

2 Banking Services Access**)

Number of Bank Branch per 1.000 km2 7,71 6,18 11,59 15,69 2,33

Number of Bank’s Branch per 100.000 adult population

8,32 10,48 11,16 7,69 13,76

Number of ATM per 1.000 km2 12,39 33,12 80,68 30,35 20,46

Number of ATM’s per 100.000 adult population 13,37 56,18 77,69 14,88 120,62Source : *) WorldBank Policy Research Working Paper, April 2012**)IMF & WorldBank, 2010

Financial Services : Comparison

BACK GROUNDBACK GROUND

ACCESS TO FINANCE IN INDONESIA

Below Poverty

Line

Living in Rural Area

13.33% 64.25%

Without access to bank

60%

% MSME compare to total business

unit

99.91%

MSMEs that have not been linked to bank

60-70%

5

BACK GROUNDBACK GROUND

SOURCE : BI

The purpose of Islamic Economic is the wealth creation and distribution

Al Muwafaqat Fi Ushul Al-Syariah, 2:8

Acoording Imam Al-Syatibi:

God say:

“God have been created you from the earth (soil) and asked you to create a prosperity on it (earth)” Q.S. Hud: 61

6

BACK GROUNDBACK GROUND

SOURCE : BSM

1. Prohibition of interest (riba): Conventional interest on loans or savings, as a fixed return without sharing any risk, is not allowed.

2. Risk sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profit.

3. Money as “potential”‖ capital: Money is treated as “potential”‖ capital, which means that it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money only when it acts as capital, not when it is “potential”‖ capital.

4. Prohibition of speculative behavior: An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks.

5. Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information. In sales contracts, the product or service that is bought or sold must be clear to both parties. This feature is intended to reduce the risk of asymmetric information and moral hazard.

6. Sharia-approved activities: Muslims cannot profit from activities considered immoral. Only those business activities that do not violate the rules of the Sharia qualify for investment.

7. “Short selling‖ is not permissible: Muslims are not allowed to sell what they do not own, therefore, “short selling‖ is not allowed.

7

Islamic Economic

Source: BSM Research

BACK GROUNDBACK GROUND

Source: CK Prahalad, 2004. The Fortune at The Bottom of The Pyramid

Islamic Economic Institutions should become the locomotive in flipping up the economic pyramidThe flipped economic pyramid once occurred in caliphate of `Umar ibn `Abd al-`Aziz, where it was very difficult to find zakat beneficiary (mustahiqq)

At least, 4 billion people live on less than $2 a day

Poo

r

8

Islamic Economic

Source: BSM Research

BACK GROUNDBACK GROUND

OUTLINE

Part I : Back Ground Part II : Micronomics (Financial Inclusion =

Islamic Micro Finance) What is Financial Inclusion How does it contribute to economic

growth and poverty reduction? Part III : What We Should Do Part IV : Expectations

10

Poverty Reduction

Financial inclusion (Access

to Finance)

Expand the financial capacity of

the poor

Social inclusion(Access to Basic

Services )Promote

empowerment among the poor

(e.g., Health & Education, Social

mobilization)

Economic inclusion

Increase access to the income generating

opportunities for the poor (e.g., MSME

development)

Without inclusive financial systems, poor individuals and small enterprises will have to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs or take advantage of promising growing

opportunities

MICRONOMICSMICRONOMICS

SOURCE : WORLD BANK

11

Poorest(Cluster 1) with limited assetsSocial In

clusion

Poorer(Cluster

2)with sources

of income

Social Inclusio

n

Poor(Cluster

3)almost

graduate (still vulnerable)

Social Inclusio

n

i.e. PNPM Program:• Mandiri Rural-Urban, Revolving Loan Fund (RLF)• PISEW (regional infrastructure development)• P2DTK (enhancing the development of underdeveloped region)

• KUR Program (partial guaranteed credit)• KUBE program (joint business group program for productive poor)

NEEDS:•Asset Building•Entry point for Formal Financial Services (saving)

•Asset Building & business start up•Start Accessing Broader Formal Financial Services ( Saving, Credit, remittance etc)•Financial management & Planning Skills

Escape from

poverty

•Asset & income expansion•Regular Access to Formal Services •Asset/life protection (insurance)

•PKH (CCT program)•Scholarship & school operational assistance

•Jamkesmas (health assistance)•Raskin (rice assistance)

MICRONOMICSMICRONOMICS

SOURCE : WORLD BANK

MICRONOMICSMICRONOMICS

SOURCE : WORLD BANK

13

Insurance

Finance Companies

Cooperatives

Pawn Shop

Zakah Fund Institutions

Banking

BUSSINESS PLAYER SERVICES

APEX for BPRS & BMTProduct:

auto/motorcycles financing

Product : microinsurance

Product : funds for start-up/existing micro business

BUS/UUS Product :

microfinancing

Microfinance Institutions: BPRS

Microfinance Institutions:

BMTs

Empowerment Programs

Micro-Small Enterprises

Poorest of the Poor

Islamic Life Insurance 3Islamic Non Life Insurance 2

Sharia Unit of Life Insurance

17

Sharia Unit of Non Life Insurance

18

Sharia Unit of Reinsurance 3TOTAL 43

Islamic Finance Co. 2Sharia Unit of Finance Co. 12Finance Co. Offer Islamic

Prod 2

TOTAL 16

Islamic Com Bank 11Islamic Windows 24Islamic Rural Bank 155Offices 2.380

Islamic Cooperatives (BMT) > 5,500

Conventional Cooperatives (Financial Sector) 71,365

Conventional Cooperatives (Total) 187.598

Zakat Fund Institutions >500

MICRONOMICSMICRONOMICS

SOURCE : BI

14

Cooperatives

Banking

BUS/UUS Products:

microfinancing

Microfinance Institutions: Islamic Rural Banks (BPRS)

Microfinance

Institutions: BMTs

Banking ProfilesNumber of institutions: 11 Islamic Commercial Banks, 24 Islamic Banking Units, 155 Islamic Rural Banks (1,820 total Rural Banks)Assets ICB: IDR 149 tr (USD 17 bio) or 4% Market shareAssets IRB: IDR 3.6 tr (USD 400 mio) or 6% market shareAnnuall Growth: 45–50% (ICB); 25–30% (IRB)Total Customers: 9 mio (ICB); 684,167 (IRB)

BMT ProfilesNumber of Institutions: More than 5500 BMTs (Conventional Cooperatives 71.365 units)Assets: IDR 3,5 tr (USD 389 mio)Annuall Growth: 30 – 40%Number of Employee: 5 – 10 (average)Total members: 10 mioNon-Performing Financing/Loan: 4-5 % (Modus)Mostly initiated by group of people in particular community; Islamic Mass Organization, Mosque Comm.

Number of IRB Asset Volume

3 < 1 Billion

24 1 up to 5 Billion

39 >5 up to 10 Billion

89 > 10 Billion

155 Total

MICRONOMICSMICRONOMICS

SOURCE : BI

15

Social Activitiesas Baitul Mal

Commercial Activitiesas Baitul Tamwil

BMT OperationsSource of Funds Beneficiaries/Customers

Zakah, Infaq, Sadaqa, Awqaf Grant, Endowment, Non Commercial Fund, etc

EQUITY

MEMBERS

DONORS

APEX

Needy People

MICRO-SMALL ENTREPRENUERS

(MEMBERS)

Funding;Wadiah, Mudharabah, Musyarakah

Financing;Murabahah, Ijarah, Mudharabah,

Musyarakah, etc

MICRONOMICSMICRONOMICS

SOURCE : BI

16

Ministry of Cooperatives &Small Medium Enterprises

Cooperatives Offices of Regional Government

TA, advocacy & Participation in Policy Dialogue

Apex for Financing

MSMEs Projects

Regulations: supervision Regulations:

licensing

Capicity Building & Other Supporting

Programs

PUSKOPSYAH Regional Associations

The Lender of the Last Resort

PT Permodalan BMT Ventura

MICRONOMICSMICRONOMICS

SOURCE : BI

PC, Only 5 % penetrationNumber of PC in Indonesia 12 Million Unitsa

b

Mobile Phone no 5 in the world. Mobile Phone 165,000,000 Mobile Phonesc

Face Book no 2 in the world. FB Users 35,174,940 usersd

How About Digital Economic ?

Size of ICT Market in 2011 IDR 220 trilionsSize of ICT Market in 2014 IDR 440 trilionse

Internet, Only18,5% penetrationInternet Users 45,000,000 people

17SOURCE : ASOCIO ICT SUMMIT 2011, YOGYAKARTA - INDONESIA

MICRONOMICSMICRONOMICS

Outlet BMT Channel compared with Bank

The Future of BMT (Low Cost Banking)

Community Channel (BMT) Face Book BMT ATM EDC CDM BMT Click Mobile Money KYC (Biometric – eKTP)

MICRONOMICSMICRONOMICS

SOURCE : ABSINDO

ABSINDO Member StrengthCoverage

Nationwide

MemberAproximately 5.500 BMT’s

OutletsOver 22.000 outlets

Account HoldersPotentially over 22 million

MICRONOMICSMICRONOMICS

SOURCE : ABSINDO

OUTLINE

Part I : Back Ground Part II : Micronomics (Financial Inclusion =

Islamic Micro Finance) What is Financial Inclusion How does it contribute to economic

growth and poverty reduction? Part III : What We Should Do Part IV : Expectations

National Strategy on Financial Inclusion

21

Mission

Vision

WHAT WE SHOULD DO ?

Source: BI

22Financial Inclusion Framework

: On going Programn by BI

: Program will be conducted by BI

: Paralel program with other institutions outside of BI

RemarksInfrastructure

Financial Access to Bank andNon-Bank Financial Institutions

Saving

Credit/ Financing

Insurance related to Credit

Payment System

Other financial Services for MSMEs

Main Products

Fin.Education & Customer Protection

Mapping on Financial

Information

Intermediation Facilitation

Distribution Channel

Supporting Policy &

Regulation

WHAT WE SHOULD DO ?

SOURCE : BI

Strategic Target

23

Financial Education

The Improvement of financial literacy on: a. Banking products ;b. Consumer Protection;c. Financial management

Financial Eligibility

Increasing the number of eligible/bankable person or SME’s

Policy and Regulation

Preparing the regulation that support financial access and eliminating the various types of barriers

Intermediation

Increasing the range of formal financial system especially to remote areas community

Distribution Channel

Increasing the financial distribution channel in terms of number and quality

WHAT WE SHOULD DO ?

Source: BI

Challenges Ahead

Problems Identified Pillars Proposed Program

Lack of Customer Protection Framework for MFI Customer

Lower income people is categorized as unbankable since they can not fulfill bank requirement

WHAT WE SHOULD DO ?

Source: BI

Challenges Ahead

Problems Identified Pillars Proposed Program

Accelerating Financial education ProgramBanks and MFI compete in the same segment

Financial services for people in remote are

WHAT WE SHOULD DO ?

SOURCE : BI

Islamic banks

• Islamic banks is supposedly able to take optimally these opportunities thru advancing technology, innovating product scheme, and creating new business models, etc.

Take opportunity optimallyTake opportunity optimally

• Islamic banks should implement its main mission: wealth creation & distribution

Islamic missionIslamic mission

How Islamic banks, Finance & Bussiness Institutions should take the role?

26

Source: BSM Research

WHAT WE SHOULD DO ?

OUTLINE

Part I : Back Ground Part II : Micronomics (Financial Inclusion =

Islamic Micro Finance) What is Financial Inclusion How does it contribute to economic

growth and poverty reduction? Part III : What We Should Do Part IV : Expectations

STRATEGY : TRIPLE TRACT STRATEGY

DECREADINGUN EMPLOYMEN

POVERTY ALLEVIATION

GROWTH

EMPLOYMENT CREATION INCOME GENERATION GROWTH ACCELERATION

SAVINGJOB PROFIT

ASSISTANT SYSTEMEQUITY

Sub Apex - BMT

POOR PEOPLE WEALTH PEOPLE

CAPACITY BUILDINGINSTITUTIONAL BUILDINGCHARACTER BUILDINGEQUITY BUILDING

Source : Prof. Gunawan Sumodiningrat modification

EXPECTATIONS

s

APEX PROVIDER/IMPLEMENTOR

Financing Access(Financing & Equity)

Management Standardization

(SOP, ICT, Training)

Apex

Arrangement

Technical Assistance

Financial Assistance

165.000 Cooperatives & 5000 IMF

MICRO & SMALL ENTREPRENEURCOMMUNITY

GOVERNMENT (REGULATION & SUPERVISORY)

BANK-BANK STRATEGIC PARTNER

Technical Assistance

EXPECTATIONS

SOURCE : ABSINDO

“An APEX Institution serves its owner/members (MFI’s) to strengthen their commercial position, viability and future, sound and profitable development” (Cleman Wendland GTZ; 2004).

APEX MFI

EXPECTATIONS

SOURCE : ABSINDO

• APEX is a Central for MFI (Micro Finance Institution)

• Integrated system comprising of social network microfinance, mobile payment solution, core switching for finance, groups of MFI which enable distribution of funds to the saving account holder, transaction between account holders, and payment for utilities and other services.

……APEX MFI

EXPECTATIONS

SOURCE : ABSINDO

No Function Institution Explanation Analog1 SRO Apex Internal Regulations for its

MemberBI, LPS, OJK

2 Saving Guarantee MFI-SG IDR 25.000.000,- Maximum LPS3 Mismatch Liquidity Apex SWM from Apex Member LPS, BI4. Settlement Apex Virtual Clearing Systems BI5 Payment Systems eMF Card & Mobile Payment

SystemsBI

6 Wholesaler Apex Donor Funds like World Bank BI7 Linkage Program Apex/creditor Funds from Creditor BI

8 Credit Biro Apex Credit Information Center/Call Center

BI

9 ICT eMF Back Office/ Centralized Data Center

BI

10 Rating Systems eMF System Rating (ICT Base) BI11 Management

ServicesApex SBU Training (Certif), SOP, ISO

etcBI

12 Supervision/MONEVA

Apex, eMF MONEVA to member (exclude FS)

OJK

EXPECTATIONS

SOURCE : ABSINDO

33

BMT UGT, Pasuruan – East Java

Asset IDR 287 bio (USD 25.5 mio)

EXPECTATIONS

UU No. 9/1995 ttg Usaha KecilPP No. 32/1989 ttg Pembinaan dan Pengembangan Usaha Kecil

Inpres No. 10/1989 ttg Pemberdayaan Usaha Menengah

MIDDLECOY

SMALLCOMPANY

MICRO ENTERPRISES

BIGBIGCOYCOY

Micro Enterprises :Omzet/pa until IDR 200

M Asset until IDR 50 M

Small Coy :Omzet/pa from IDR 200 M - IDR 1 B

Asset until IDR 200 M

Middle Coy Omzet/ pa from IDR 1 B - IDR 50 BAsset from IDR 200 M - IDR 10 B

Big Coy/Conglomerat : Omzet/pa > IDR 50 B

Asset > IDR 10 B

34

± 47,70 mio = 95,70%

± 120,25 thou = 0,24%

± 4,52 thou = 0,01%

± 2,02 mio = 4,05%

SOURCE : MODIFICATION FROM UMKM DATA 2007, BERITA RESMI STATISTIK No. 28 BPS 2008 SOURCE : RUU No. ../2008 ttg UMKM (Kep Sidang Paripurna DPR)Kekayaan Bersih = total nilai kekayaan usaha (asset) – total nilai kewajiban,

tidak termasuk tanah dan bangunan tempat usaha.Hasil Penjualan = hasil penjualan bersih (netto) dari barang dan jasa dlm 1 th buku

MICRO ENT :Net Assets/pa

Maximum IDR 50 M Sales Volume

Maximum IDR 300 M

SMALL COY :Net Assets/pa

> IDR 50 M s.d 500 MSales Volume

> IDR 300 M - 2,5 B

MIDDLE COY :Net Assets/pa

> IDR 500 M s.d 10 BSales Volume

> IDR 2,5 B - 50 B

BIG COY :Net

Assets/pa > 10 B

Sales Volume > 50 B

UU No. 20/2008 ttg UMKM UU No. 20/2008 ttg UMKM

To the Community : Creative MicronomicsIslamic Creative Economics should become the locomotive in flipping up the economic pyramid

MICRO

EXPECTATIONS

INDONESIAN TODAY (2012)RICH COUNTRYPOOR PEOPLEINDONESIANTOMORROW (2045)RICH & SUPER POWER COUNTRYWEALTH &ETHICAL