Rural poverty in Indonesia and Islamic economic as a sustainable solution

Based on the preliminary research about household poverty in rural area of West Kalimantan in 2016, we found that working days, age and loan gave significant effect to the rural poverty. Therefore, the aim of this paper is to examine the solution of reducing poverty rate in the rural area through Islamic economic concept. In Islamic economic approach, poverty is not merely caused by material aspect but also moral/ spiritual aspect. Thus, this explanatory research used elaboration of Islamic Economic theory on both aspects to improve well-being in rural society. The Ibnu Khaldun‟s dimension of poverty and the axiomatic approach are used to modify the sustainable livelihood framework into Islamic economic sustainable livelihood framework. The paper found that to reduce the poverty rate in rural area, development of man and his moral aspect should be emphasized and the establishment of Islamic Microfinance as a free interest institution in rural area must be developed.

RURAL POVERTY IN INDONESIA AND ISLAMIC ECONOMIC

AS A SUSTAINABLE SOLUTION

Susilo Nur Aji Cokro Darsono

MRDM: susilonuraji@hotmail.com

Fanny Arumsari

SE: fannyarumsari@gmail.com

Assoc Prof Dr Mongkon Donkwa

mondon@kku.ac.th

1 Faculty of Economic and Business, Universitas Muhammadiyah Yogyakarta,

Yogyakarta, Indonesia

2 Center for Economic Development and Public Policy, Faculty of Economic and Business,

Universitas Muhammadiyah Yogyakarta, Yogyakarta, Indonesia

3 Faculty of Education, Khon Kaen University, Khon Kaen, Thailand

Abstract

Based on the preliminary research about household poverty in rural area of West Kalimantan in 2016, we found that working days, age and loan gave significant effect to the rural poverty Therefore, the aim of this paper is to examine the solution of reducing poverty rate in the rural area through Islamic economic concept In Islamic economic approach, poverty is not merely caused by material aspect but also moral/ spiritual aspect Thus, this explanatory research used elaboration of Islamic Economic theory on both aspects to improve well-being in rural society The Ibnu Khaldun‟s dimension of poverty and the axiomatic approach are used to modify the sustainable livelihood framework into Islamic economic sustainable livelihood framework The paper found that to reduce the poverty rate in rural area, development of man and his moral aspect should be emphasized and the establishment of Islamic Microfinance as a free interest institution in rural area must be developed

Keywords: Islamic Economics, Rural Development, Sustainable Development

1 Introduction

Poverty also divided based on the places, such as Rural Poverty and Urban Poverty The characteristics of poverty in Rural area and Urban area have some differences Perhaps the most valid generalizations about the poor are that they are disproportionately located in rural areas, that they are primarily engaged in agricultural and associated activities, that they are more likely to be women and children than adult males, and that they are often concentrated among minority ethnic groups and indigenous peoples Data from a broad cross section of developing nations support these generalizations We find, for example, that about two-thirds of the very poor scratch out their livelihood from subsistence agriculture either as small farmers or as low-paid farmworkers Some of the remaining

one-third are also located in rural areas but engaged in petty services, and others are located on the fringes and in marginal areas of urban centers, where they engage in various forms of self-employment such as street hawking, trading, petty services, and small-scale commerce

In 2015, the number of poverty in rural area around 17,893 million and in urban area around 10,619 million In total, the number of poverty in Indonesia in 2015 had increased compared the total number of poverty in 2014 around 27,727 million (Statistics Indonesia, 2016) Based on the data form Statistics Indonesia, Poverty in rural area of Indonesia is still higher than urban area of Indonesia In rural areas, agriculture contributed

to almost half of rural household income (wages and farming income) The International Fund for Agriculture Development (IFAD) found that the poorest people in rural areas are tend to be labor farmer who working on other people land, and smallholders on small plots

of land less than 0.5 hectares

The focus of this research is rural poverty in small villages at West Kalimantan called, Senujuh village Poverty in West Kalimantan province were spreading in urban and rural area In September 2015 until March 2016 the percentage of poor in rural area still bigger such as 303,060 people than in urban area such as 78,290 people In March 2016, poverty line of West Kalimantan was increased to 347,880 rupiahs per capita per month (26.26 USD) Poverty line in West Kalimantan is the lowest poverty line compared with 4 others province in Kalimantan While, in the percentage of poor people, West Kalimantan was the highest percentage with 381,350 people (7.87 percent) (Indonesia Statistics West Kalimantan, 2016)

Poverty differences accross the understanding of poverty definition, how it was happened, factors of poverty and how to do poverty alleviation appropriately In economic

terms, poverty is defined as a situation when a family's income fails to meet a federally

established threshold that vary across countries Typically it is measured with respect to families and not the individual, and is adjusted for the number of persons in a family While based on Indonesia Law No 24 in 2004, poverty was socio-economic condition of a person or group of people who do not fulfill their basic rights to maintain and develop dignified life Basic needs are the rights of a person or group people includes the food, health, education, employment, housing, water, land, natural resources, environment, security from treatment or threats of violence, and the right to participate in implementation of social and political life Individual characteristics include education, family size, working days, age, and loan have been studied by many scholar as the factors influencing household income (poor level) Educational level has a positive effect on off arm participation (Rozelle, Brandt, Li, & Huang, 2002)

Sustainable Development

Sustainable Development Goals (SDGs) was declared by United Nations as demonstration of the scale and ambition of new universal Agenda In 25 September 2015, leaders from 193 countries of the world came together and face the future by arranging a set of 17 goals stimulate action of a future just 15 years off The agenda focus on critical importance areas for humanity and the planet (United Nations, 2015) This paper concerns

at one of the greatest global challenge of SDG‘s agenda to end poverty in all its forms everywhere by considering material and spiritual aspects

Islamic Economics

Islamic economic system is a part of Muslims‘ life to implement the teachings of Islam in economic activities Alignment and balance between the horizontal and vertical aspects can guarantee the human‘s lives and the universe to walk in harmony and continuous prosperity in this world and the hereafter By applying the system, one may automatically fit unanswerable questions in economy as well as in human life The absence

of Shari`ah management and its application in economic system might have indirect link with poverty at almost all developing countries since long time ago Perhaps, it is because

the riba or interest based commercial dealings caused non graduation from poverty, debt

trap, asymmetric information and economic viability of the project (Ahmed, 2002) While conventional approach on poverty left the importance of committing to moral/spiritual, which resulted in bringing the severe poverty, Islamic approach has more attention on that aspect by renown the spirit of helping microenterprises through micro financing

This paper explores the preliminary research about factors which gave significant effect to the household poverty in the rural area of West Kalimantan, Indonesia in 2016 and examine Islamic strategy for that poverty alleviation through human oriented financing The sustainability aspect also occupies an important place in this formulation The rest of paper proceeds as follows: Section one will discuss about sustainable development goals, poverty concept, classification and measurement Section two will be discuss about the methodology, sampling and research area, then continued by field survey results Section four briefly discusses Ibn khaldun‘s dimension and axiomatic approach of Islamic Economic to reduce the rural poverty in Senujuh village Indonesia Finally section five will concludes the paper and some recommendations

2 Method

The area of study was in Senujuh Village, West Kalimantan, Indonesia There were

352 household in Senujuh village, we used 80 poor household to be sample in this study based

on the Slovin‘s Formula Stratified random sampling was applied to find the sample size

The methodology which employed in this explanatory research were descriptive statistics and analysis of literatures The Ibn Khaldun‘s dimension and Islamic Axiomatic

approach were used to develop the policy to reduce the rural poverty in Senujuh village

3 Results

In this study, all of the respondents were the poor people which has listed by the government From 105 poor household which listed, we used 80 poor household to be

sample in this study In Senujuh Village, the area of rice farm is around 125 hectares, plantation is around 260 hectares and others land area around 1600 hectares The main commodity based on the area of plantation in this village are palm tree and rubber

Senujuh Village is located along the left side of Small Sambas River, Sambas Regency, West Kalimantan Province The ethnics in this village are mainly Malay and Javanese The distance from Pontianak, the capital city of West Kalimantan is about 258 kilometers Most of the poor people in Senujuh village work as farmer, labor in palm tree factory and rubber factory, mechanic, teacher and small retailer The income of labor was derived from the number of working days and the income of farmers was derived from the amount of harvest income in one year then divided into 12 months The result of field surveys show the condition of household poverty in Senujuh Village, Sambas Regency, West Kalimantan Province Based on the monthly income of head household, can be categorized into 3 poverty category, such as extreme poverty, moderate poverty and nearly poor based on the World Bank poverty line and Indonesia Statistics poverty line Based on the table 1 (Categories of Poverty in Senujuh Village), according to World Bank shows that 42.5% household lived in moderate poverty, 37.5% household lived as an extreme poverty and 20% household were in nearly poor condition While, according to Indonesia statistics shows that 85% household lived in nearly poor condition and only 15% household that included into extreme poverty

Table 1 Categories of Poverty in Senujuh Village Category Poverty Line

(World Bank)

Poverty Line (Indonesia Statistics)

Source: Field Survey

Based on the field survey, there are seven job categories of poor people in Senujuh village Head household that earns income under 26.26 USD were consist of 7 elderly which is not do full time job and 6 farmer who work for other land owner Most of the head household earns income in between 26.26 USD until 52.52 USD There are 30 farmers who have income in this range, all of them have farm land In this range of income also consists of 6 head household who works in rubber factory, 4 head household works in palm tree factory, 2 head of household open small workshop to repair motorcycle and bicycle, 1 head of household work as temporary teacher in elementary school and 1 head

of household who did self-employment

The result of field survey found that 57.5% of the head of household had income between 26.26 USD - 52.52 USD per month which categorized as moderate poverty, 27.5% had income more than 52.52 USD which categorized as nearly poor, while 15%

categorized as very poor which only had income below 26.26 USD per month The monthly income in this study is derived from the cash money from wage of labor and teacher, exchange rate of harvest income, income from self-employment and subsidy from government of head household per month

Education Level

In this research, we found that human resources in Senujuh village were lack of education More than 50% head of household in Senujuh village were not well educated 45% head of household not passed elementary school and 43.7% were had elementary school degree or 6 years of education, 8.8% have junior high school background (9 years study) and only 2.5% which have senior high school background (12 years study) Based

on the regression analysis, education have positive impact on the income It means the increasing of education level will increase the income of society that will lead the reducing

of poverty rate From the survey result at Senujuh village, we can see that 91.7% household which is categorized as extreme poverty did not pass elementary school and 8.3% head household only had elementary school level Household which categorized as moderate poverty, 50% of head household were not pass elementary school, 45.7% household only had elementary school level and 4.3% head household had junior high school level Furthermore, household which is categorized as nearly poor condition 59.1% had elementary school level, then 22.7% head household had junior high school level, 9.1% head household not pass elementary school and only 9.1% head household which categorized as nearly poor have senior high school level

Working Days

Based on the field survey, 41.3% head of household works 11 - 15 days per month Head of household whose works in this category mostly work as a labor in palm tree production They only can work maximum 15 days per month It was the regulation from the company for the labor They will go since 4 am early morning by walk together from Senujuh Village to the Palm Tree plantation and arrive around 6.30

am They will come back around 2 pm and arrive home around 4 pm The second biggest percentage of working days in this study was 32.5% of head of household worked for 16 - 20 days per month Mostly, head of household who had working days

in this category worked as labor in rubber plantation and also farmer who did an extra other jobs Then, number of working days below 5 days, 5 - 10 days and more than 20 days had the same percentage which was 8.8% of head of household In Senujuh village, 91.7% household which is categorized as extreme poverty had working days below 10 days per month and 8.3% extreme poverty household had 10 until 20 working days per month Household which categorized as moderate poverty 91.3% of head household had 10 until 20 working days per month, 6.5% household had below 10 days

of working and only 2.2% household which had working days 20 until 30 days per month Furthermore, household which is categorized as nearly poor condition 95.5%, the head of household had working days 10 until 20 days per month and only 4.5% head of household had 20 until 30 days of working in one month

Family size

In Senujuh village, 83.3% household which is categorized as extreme poverty had family member below 4 members in one household and 16.7% household had 4 until 6 family members Household which categorized as moderate poverty 47.9% of household had 4 until 6 family members, 39.1% household had below 4 family members and only 13% household had more than 6 family members in one household Furthermore, household which is categorized as nearly poor condition 50% had family member below 4 members and another 50% nearly poor household had 4 until 6 family members

Age

Based on the survey results, the age of head of household where categorized into groups The categorization showed that 38.8% head of household were in between 30 - 40 years old Then, 23.7% head of household were in between 51 - 60 years old, 17.5% in between 41- 50 years old, 13.8% in between 61 - 70 years old While, the youngest head of household which under 30 years old only 3.7% and another 2.5% head of household in Senujuh village were elderly people which more than 70 years old In Senujuh village, 100% household which is categorized as extreme poverty have head of household in between 50 until 75 years old There are 52.2% household categorized as moderate poverty who have head of household in between 30 until 50 years old, 43.5% moderate poverty household have head household in between 50 until 75 years old and the rest 4.3% household have head of household in below 30 years old Furthermore, there 95.5% nearly poor household in Senujuh village that have head of household in between 30 until 50 years old and only 4.5% nearly poor household that have young head household which is below 30 years old

Loan Installment

According to the survey results, it shown that 31.3% household in Senujuh village did not have any loan They did not took any loan because of they did not have capability

to pay back the loan Another reason is the people did not need any loan because of better off condition 25% household had loan below 5 USD, it used to spend on consumption and borrowed from family or neighbor Then, 21.3% household had loan in range 5 - 10 USD Mostly, they took this amount of loan for daily needs and unconditional needs 8.7% household had loan in between 20 - 25 USD, they used the money for make small store or constructed their house 5% household had loan in between 10 - 15 USD for their daily needs or education needs While, household which had loan in between 15 - 20 USD were only 3.7% and loan in between 25 - 30 USD and more than 30 USD were only same 2.5%

of household In Senujuh village, 91.7% household which is categorized as extreme poverty do not had any loan installment and 8.3% extreme poverty household had loan installment in between 1 USD until 15 USD per month There are 63% household categorized as moderate poverty who had loan installment in between 1 USD until 15 USD per month, 30.4% moderate poverty household had no loan installment per month and only 6.5% of moderate poverty household who had loan installment in between 15 USD until 30 USD per month Furthermore, there 50% nearly poor household in Senujuh village who

had loan installment in between 15 USD until 30 USD per month and another 50% nearly poor household had loan installment in between 1 USD until 15 USD per month

4 Discussion and Conclusion

Ibnu Khaldun’s Dimension

The analysis of Ibn Khaldun‘s theory of development were multidiscipline and dynamic The dimension covers all of important aspects in socio-economic and politic,

such as beliefs and rules of behavior or the Shariah (S), Human (P), Wealth of State (W),

Development (g), Government or Sovereign (G) and Justice (j) All of the aspects are in a circular and inter-influence In this dimension, there will no ceteris paribus clause in the long term because none of the aspects is assumed to remain constant Each aspect acts as the trigger for another aspect

Figure 1: Ibn Khaldun's Dimension

The main aspect of Ibn Khaldun‘s dimension is the human being (P) because the rise of fall of welfare in a country is closely depend on the well-being of the society The dependent not just on economic aspect but also the moral aspect, institutional, psychological, political and demographic factors through a process for long period of history (Chapra, 2006) According to the descriptive statistics above, we can develop model to reduce poverty based on the Ibn Khaldun‘s dimension This model is macroeconomic point of view that can

be applied by the rural government In the human aspect (P), more than half population of Senujuh village were not passed basic education or elementary school In order to solve this problem, government should encourage rural society to gain high education by providing good quality of education infrastructure from basic education until higher education which located near the village Government also need to create vocational training for the society to improve their skills Then, local government should provide scholarship for rural students

Ibn Khaldun's Dimension

P Human

W

Wealth of state

g growth &

development

S

Shariah

G

Government

J

Justice

In Senujuh village, loan give the positive impact to income generating It means, when household increase the productive loan it will increase their income Unfortunately, not all household were capable to access the financial service to get financial capital Most

of them were not eligible to get loan from financial institution In Ibn Khaldun‘s dimension, there is one aspect called Wealth of State (W) According to Chapra (2006), wealth of state provides the capital or resources that are needed for ensuring development and welfare The government should allocate financial capital that can be accessed by rural household in Senujuh village Islamic economics propose a free interest concept for the Islamic microfinance institution Islamic microfinance is to facilitate and distribute equality income from the rich to the poor, in order to providing financial capital for the poor to generate income and create employment (Usman & Tasmin, 2016) A free interest means that household will not burdened for extra charge when they repay the loan There are 3 activities of Islamic Microfinance such as micro credit to give loan and financing, micro saving to save money and investment, and the third is micro insurance to give assurance for the member of Islamic microfinance The establishment of Islamic Microfinance in Senujuh village is one of the solution to increase the household income by providing financial capital and encourage people to do saving and investment

Two variables that have negative impact on income of household in Senujuh villages were age and family size According to the preliminary research by Darsono amd Donkwa (2016), age negatively affects income of poor household with an influence coefficient of -0.585, it means the increasing of 1 year of age will decrease of income by 0.585 USD per month It happens because of most people in Senujuh village work as farmer and labour who needs strong physical and high effort While, the increasing of age will also decrease the strong physical condition So, it gave negative impact to their income In growth & development (g) aspect of Ibn Khaldun‘s dimension, the solution to make age variable become low impact is to make rural society grow up not only in physical condition but also grow up in intellectual and trained human resources to ensure the sustainable well-being and true happiness of life Local government should provide training to the young generation through advances technology in order to compete in working industry, empower the adults and women by encourage them to create one product that have value in the market Family size was give negative impact on average income with coefficient of -1.207, means that each increase of 1 family member will decrease the average income by 1.207 USD per month Indonesian society have paradigm that having more child will give more wealth, this paradigm can be right or wrong depend on how the parents manage and taking care their family In this case of Senujuh village, one household consist of 4-5 family members which means they have

2-3 kids to raise up

Furthermore, another 3 aspects of Ibn Khaldun‘s dimension such as Government, Shariah and Justice need to run together in order to create good governance with shariah compliance and implemented fairly and impartially The Shariah can only give rules of society behavior, it cannot play the role by itself It is responsibility of government authority (G) in creating and managing the defense and maintenance of law and order, to

ensure justice for all of the society (j), fulfillment of contracts, fulfillment of needs and compliance with the rule of behavior (S)

Approach to Improve Human Ethic and Morality of Rural Society

The axiomatic approach in this paper is to give solution to reduce poverty through Islamic microeconomic point of view which more focus on the human ethic and morality According to Sirageldin (2000), these four axioms, taken together, lead to a universal ethical system that implies that policies should not lead to dependency, limit opportunities that develop capabilities to the few, or reduce individual responsibilities to take action The axiomatic approach is based on four basic aspects of the Islamic ethical system:

1 Unity (Tauhid), it is indicates the vertical dimension of the individual ethical

system For example, each person in the society have a good relations with their god, will

lead to belief that every god creation big or small has been created for a purpose Tauhid or unity principle will guides the society to live in purpose with good moral and ethical to

have relations with other people and environment

2 Equilibrium, this axiom indicates the horizontal dimension of the equality of freedom in life For example, rural society can do an appropriate balance between the

needs of present and future, so they can generating income while do saving and investment

for the next generations

3 Free Will, this axiom provides the individual freedom to choose their own path with the careful intellection to ―interpret-reinterpret that freedom with specific contexts

and to suit the needs of changing times‖ (Naqvi, 1994) Rural household in Senujuh village

has freedom to choose their own path, they need to have more effort and good will to change their own life Government cannot change their condition if there is no willingness

from the society to improve their living condition

4 Responsibility, this aspect indicates that individuals and society need to responsible in conserving public good, public policy and social livelihood In this aspect, rural society need to have big responsibility to taking care their public asset or public good such as road, school, health care and etc Although government keep maintain the public good, if there is no big responsibility from the society, it will always cause detriment for society itself

These four axioms, applied together in rural society of Senujuh village lead to a universal ethical system that implies that policies must not lead to dependency, limit the opportunities or reduce individual responsibilities to take action Policies should magnify the motivation of society to seek knowledge, gain productivity and extend the transparency

in government When all of the four basic tenants of individual moral and ethical are well practice in rural society of Senujuh village, the solution for reduce the poverty rate and improve well-being are easy to implemented and create the significant result

Conclusion

In this paper, we focused on the socio economic condition of rural poor in Senujuh village, West Kalimantan, Indonesia We found the factors that affect poverty in rural household and develop a combination model to reduce poverty in this village based on the

Islamic economics approach There are two main approach to reduce poverty in this paper First is in macro point of view which based on the Ibn Khaldun‘s dimension In this approach, for the Human Resources aspect (P) we suggest that government should provide better higher education program and infrastructure near the village, provide vocational training and scholarship for rural society In Wealth of State (W), government or society can establish Islamic microfinance institution nearby the village to support the economic cycle and create equality Then, age and family size that gave negative impact also need to

be solved by improve the education and skills of society, empowerment of women and encourage them to have small family size but with good quality of life and happiness The second approach is micro point of view which based on the improvement of individual moral and ethical through four Islamic axiomatic approach This four basic Islamic approach must be absorbed and applied by the rural society in their life as their commitment to reduce poverty and improve the living condition Those four basic components such as Unity, Equilibrium, Free will and Responsibility Furthermore, both of concepts must be applied and run together in the society to achieve the sustainable solution

in reducing poverty

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