CHAPTER 6 EMERGING ISLAMIC BANKING AND FINANCE
6.4. Islamic Microbanking Development and Performance
The Islamic microbanking system was embraced since the first faith-based commercial banks (BMI) and Islamic rural banks (BPRS) were established. The banks offer several types of Islamic-compliant microfinance and MSE financing to their clients through the PLS system, mark-up financing, leasing, debt and benevolent loans. The Islamic banks are involved in the microbanking business in several ways, for instance, direct and indirect models. The former works in a similar way to the unit banking model, where a bank sets up its own unit business and outlets to reach the ultimate clients. The later, or a linkage, program is a partnership between the banks, BPRS and BMT to deliver financial services into the communities.
By and large, the leading BUS and several UUS engage in the Islamic microbanking sector. The pioneer has been BMI which employs both models through providing a non- interest financial scheme via its own branch offices, and establishing a partnership with BMT and BPRS as extension channels (Arifin, 1999). Historically BMI, in collaboration with MUI and PINBUK, have been the initiators of the BMT system, and the latest BMI program is to support the establishment of 500 new BMT (popularly called BMT Shar-E). With this alliance, BMI provides technical assistance by providing a standard operating procedure (SOP) and an information and technology (IT) system to the start-up BMT. In return, these BMT partners are to promote the bank’s card-based saving (Shar-E) to the communities and the mobilised funds should be placed with the BMI. The primary objective of the BMT Shar-E program is to increase the contribution of SME financing up to 70 per cent of the overall portfolio (Republika 2009). Beside a linkage with BMT and BPRS, BMI collaborates with Pos Indonesia (the government- owned post office) in reaching Muslim customers beyond the bank’s outreach, including channelling the government’s microcredit program (KUM3) to stimulate rural microenterprises and household-based productive economic activities.
Bank Syariah Mandiri (BSM) a subsidiary of Bank Mandiri, the biggest Islamic bank, also embraces a similar model to the BMI approach. The bank established an Islamic microbanking division in the head office and field operational units called BSM micro- shops (Warung Mikro) within its branch networks. The micro-shop outlets provide diverse financing schemes ranging from start-up funds (PUM-Tunas), growth funds
(PUM-Madya) to established clients (PUM-Utama), and offers financing amounts from IDR 2million up to IDR 100 million (BSM, 2010). As a subsidiary of a government bank, the BMS micro-shop has been appointed to disburse the microcredit guarantee scheme (KUR-Sharia) along Islamic bank principles. However, the growth of the KUR- Sharia is still far below that of the KUR-Mikro (interest based) of the BRI Unit. In addition to its own microbanking system, BSM is involved in the linkage program by extending loans to BPRS, loan and saving cooperatives (KSPs), BMTs and other non- bank institutions including Perum Pegadaian.
In contrast, according to Eko Sukapti (Business Director of Bank Mega Syariah or BMS) the bank employs a direct approach through brand name Mega Mitra Syariah (M2S). The M2S outlets mainly operate near traditional markets and other suburban business centres in Java and Sumatera; the network comprises over 200 branches (interviewed on 23 August 2009). The nature and growth strategy of M2S is akin to its competitors, i.e. DSP (the conventional microbanking unit of Bank Danamon) that focuses on financing the well-established SME sector and the upper-bankable clients who are keen to switch their business to Riba-free banking transactions. This approach allows the bank to maintain low operational costs and to achieve economies of scale within a short period of time, instead competing in the lower-bankable segment where the BRI Unit prevails.
The indirect approach is adopted mainly by UUS. This model is quite effective since majority UUS own very limited offices. Similar to the linkage program of BUS, the financing partners of UUS are BPRS, BMT and other Islamic microfinance organisations (Antonio 2004). The alliances executing financing largely by buying and selling contracts which generate several advantages to UUS, such as increase outstanding financing with very economical operational costs, and at the same time it minimises financing risk since the ultimate customers are under the control of the UUS partners. It is also important to explain the growing role of Bank BRI Syariah (BRIS) and Bank Syariah Bukopin (BSB). These Islamic banks are owned by BRI and Bank Bukopin, the leading conventional microbanking institutions. The banks’ market share has grown, however their position in the microbanking sector would be a problem because the banks are likely to compete with their parent banks.
Table 6.3. Leading BUS in Islamic Microbanking as of 2009
Bank Loan
(IDR billion)
Share (%)
Network (unit)
Microbanking Approach
BSM 16,063 5.5 390 Direct (Warung Mikro); linkage (BPRS/others) BMI 11,428 39.4 286 Direct (KUK scheme); linkage (BMT/BPRS)
BMS 6,022 69.5 320 Direct (M2S)
BRIS 1,644 - 58 Direct (IB-Micro); linkage (BPRS/BMT)
BSB 1,279 - 41 Direct; Linkage (cooperatives)
Source: Annual report and financial statement; banks’ websites
It is common that the BUS and USS Islamic microbanking networks operate in a similar market to that of their conventional counterparts. The banks prefer to serve well- established bankable clients by promoting Islamic religious values including using Arabic terminology and other socio-religious features. According to a Bloomberg report, small- and medium-enterprise financing have been the most important portfolios of the Islamic banks (Permatasari 2010).
According to the central bank, in 2009 microbanking and SME financing schemes accounted for 76.4 per cent of the Islamic commercial bank sector and the loans were predominantly concentrated in multi-service and trading sectors, and for consumption purposes. However, the Islamic microbanking sector only has 4.9 per cent of the loan portfolio of Indonesian banks (BI 2010c). From the perspective of the conventional banks, the growing operations of the Islamic banks in the microbanking sector are seen as a threat, but the conventional banks remain confident that they can maintain their dominant positions by expanding their networks and offering a variety of products, as well as providing competitive pricing in lending, deposits and other financial services.
In line with the strong presence of the Islamic banking sector, BPRS has become an emerging microbanking provider for micro-entrepreneurs and the low-income population, in particular those who seek alternative Islamic compliant-based financing and deposit services. Soon after its inception, the BPRS sector grew moderately, however its performance dropped to the lowest level during the financial turmoil in 1998. In fact, several BPRS were bankrupt and some other units were under the supervisory program of the central bank. Following the crisis, in the last five-year period, the number and financial performance of BPRS has suggested a gradual improvement. In particular the health indicators of the main banking sector have
improved, for example, asset quality, liquidity and profitability, including the emergent number of BPRS with greater total assets and the number of customers with loan and deposit accounts.
As presented in Table 6.2., total assets of BPRS have expanded progressively almost four times, as well as the amount of loans disbursed and public deposits derived from the increasing number of newly established BPRS, and the internal growth within the BPRS sector. However, further analysis reveals a downward trend of the annual growth rate of both deposits and financing (Figure 6.2a.). Apparently, the declining growth of BPRS is a direct impact of the fierce competition from more commercial banks as BUS penetrate into the BPRS segment. Therefore to maintain their growth, the BPRS sector has established cooperation with BUS and UUS through a linkage program to channel the funds to the ultimate clients; this linkage can be seen from the LDR figure that, in average, is over 100 per cent.
Table 6.4. Key Indicator of Islamic Microbanking Sector (BPRS)
Key indicator 2005 2006 2007 2008 2009
1. Total assets 585 896 1,216 1,693 2,125
2. Loan 3. NPL (%)
417 10.90
615 8.30
890 8.11
1,256 8.38
1,586 7.03 4. Deposit
5. LDR (%)
341 172
521 118
717 124
975 129
1,250 127 6. Profit
7. ROA (%)
16 2.73
21 2.34
27 2.22
30 1.77
55 2.58 8. Number of BPRS
- Assets < 5 billion - Asset > 10 billion
92 62 13
105 64 19
114 80 31
133 57 40
139 46 52
9. No. accounts 268,697 357,618 450,329 552,514 649,202
Source: BI (2010c)
It means the funding source of BPRS financing is mainly supplied by BUS, UUS and borrowing from other financial institutions. Although the alliance generates funding advantages for BPRS, to some extent it significantly reduces the profitability because the cost of borrowing funds is more expensive than public deposits. Karim et al (2008) point out the underperforming profitability, i.e. ROA would affect the long-term sustainability of the sector. Concurrently high non-performing loans (NPL) also
endanger the sustainability of BPRS even though there has been an improving trend in the last few years.
Figure 6.2. Trend of BPRS Performance 2005–09
Seibel (2008) identifies several constraints occurring with the development of the BPRS sector. The biggest problem is the lack of capital, which limits the expansion of the bank network and the development of the client base. Another critical deficiency is the shortage of competent human resources that are able to enhance the faith-based products and services. The study also reveals an interesting finding – that the BPRS has a more socio-religious orientation than a profit motivated orientation; this evidence clearly explains why the profitability of BPRS is less than the industrial standard. Yet the BPRS model is likely to be more favourable to poor Muslim clients, instead of focusing their energies on better-off business clients.
It is also important to note that despite the central bank providing some regulatory incentive, e.g. minimum capital requirement, it has not been effective in accelerating the establishment of new banks in the strong Muslim-based provinces outside the Java region. The possible answer for this is that the complexity of the Islamic banking system has been seen as a foremost disincentive by the investors.
Practically speaking, the modus operandi of BPRS requires improved human resources who possess specific banking skills and a solid knowledge of Islamic teachings. Yet, since it is still a young model, the awareness of Muslim societies regarding BPRS and its concepts of financial transactions is still marginal, therefore it will take considerable
0 10 20 30 40 50 60
2006 2007 2008 2009
(%)
(a) Annual Growth Trendline
Financing Deposit Customer
0 2 4
2005 2006 2007 2008 2009
(b) Return on Asset (ROA) Trendline
Source: BI (2010c)
effort and operational costs for BPRS to achieve the massive outreach it desires, as well as to compete with the well-established BPR. In the eyes of the banking business, BPRS is less attractive compared to the conventional BPR sector.
Figure 6.3. Performance Comparison between BPRS and BPR (2009)
A comparative analysis shows that the BPRS sector accounted for 3.2 per cent of BUS and UUS, and posted 5.6 per cent of the BPR total assets respectively (Figure 6.3). This fact was not surprising; as a young microbanking model, BPRS has been adapting to the banking industry and positioning itself in the market and with its Muslim customers.
Compared to the BPR counterpart66 which has been in existence for over century, the performance of the BPRS sector has visibly underperformed in many respects, including the number of outlets, total assets, funding and loans, asset quality and profitability.