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Islamic Approaches towards Poverty

)Alleviation: the Special Purpose Vehicle (SPV
)model & Shariaa Retirement Village (SRV
Putri Swastika
Kumara Adji Kusuma

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BANKING & FINANCIAL STUDIES

Biannually Refereed Journal Issued by Center for
Research, Publishing & Consultancy
Sudan Academy for Banking & Financial Sciences
ISSN 5949 - 1858

Issue No. (19) (Safar 1433 H) /January 2012

Topics in this Issue:

Islamic Approaches towards Poverty

Alleviation: the Special Purpose Vehicle (SPV)
model & Shariaa Retirement Village (SRV)
Putri Swastika, Kumara Adji Kusuma

The Impact of Pressures Facing the Accounting

Standards Setters on Accounting Standards
Setting Decisions: Analytical Study
Dr. Abdalla Ibrahim Yousof Osman and
Dr. Elhadi Adam Mohamed Ibrahim

The Transformation in Microfinance

Industry in Sudan
Nawal Majzoub Abdalla Hamad

A Proposal for Evaluation and Rating of

Sudanese Banks Performance in Providing
Microfinance
Dr. Badr El Din Abdel-Rahim Ibrahim

Commentary on:

A Proposal for Evaluation and Rating of

Sudanese Banks Performance in Providing
Microfinance
Group of Discussants

Book Review:

The International Financial Crises and the

Role of Arabic Cooperation in Mitigating its
Impacts
Saef Alnasr Ibrahim

Islamic Approaches towards Poverty Alleviation

The Special Purpose Vehicle (SPV) model & Sharia
Retirement Village (SRV)

PUTRI SWASTIKA (INCEIF)

KUMARA ADJI KUSUMA (INCEIF)

Abstract
The perfection of Islam (Syumuliyatul Islam) has been empowering Muslims
to think beyond the secular minds. It is such due to the later limits itself by
segregating its follower minds between daily matters and values of a religion.
Meanwhile Islam empowers all who accept Islam as their religion by incorporating
the Islamic values in every juncture of life, thus no segregation between daily life
and values of Islam in the life of a muslim in solving everyday problems, including in
an effort to combat against poverty. Many empirical studies done has proven that
the recent financial crisis and economy recession which strikes the West (U.S. and
E.U.) resulted in growing number of poor, unemployed and homeless. Now, poverty
is not only the problem of developing world, but also the problem of developed
countries. Many studies have shown too that the current economy system that is
adopted, in which is alien to religions moral values such as justice, equity, and
brotherhood, is the cause of increasing number of the poor.
This paper used literature review to identify the problems, discuss the issue,
and seek out the findings. It is proposed that Islamic approaches in combating
poverty are through the Special Purpose Vehicle (SPV) as the bridging agent
between entrepreneurs and the Islamic Financial Institutions (IFIs) as the source to
capital fund. Another is the Sharia Retirement Village (SRV) as the creative way to
empower senior citizens and a way to mobilize idle human resources. Idle human
resources means that those who are orphans, unemployed, homeless people, and
senior citizens-and-the retirements, in which these people still have the ability to
work and creativity to open new small businesses. Henceforth, the SRV is
intended to enable them to continue in contributing to the real-sector economy, as
like what Islam has been aspiring.
Key words: Poverty Alleviation, Special Purpose Vehicle, Sharia Retirement
Village, Entrepreneurship, Islamic Banking, Islamic Microfinance

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Table of Contents

Cover

Page

Abstract (English) ............ i

Abstract (Arabic) ii
Table of Contents .... iii
List of Table and Figures ......... iv
1. Introduction .... 1
1.1. Financial Crisis and Development Perspective 1
1.2. Youth Employment in Islamic Countries . 4
1.3. Social Role of Islamic Finance . 7
2. Discussion 10
2.1. Review of Existing Model . 10
2.1.1. Indonesia ..... 11
2.1.2. Malaysia .. 14
2.1.3. Bangladesh .. 16
2.2. Critical Review of The Three Models 17
2.3. Special Purpose Vehicle (SPV) ..25
2.3.1. Challenges of The SPV ... 31
2.4. Sharia Retirement Village (SRV) .32
2.4.1. Challenges of The SRV ...36
3. Conclusion 38
Bibliography ..42

iii

List of Table
Table 1. Youth Unemployment in Selected Islamic Countries 5

List of Figures
Figure 1. The World Population Pyramids ... 3
Figure 2. MFIs in Indonesia .. 12
Figure 3. Mechanism of SPV as The Bridging Agent .. 28
Figure 4. Mechanism of SPV as The Bridging Agent in Partnership Contracts 30

iv

1. Introduction

The recent financial crisis that hit U.S. and E.U. are expected to
sharply reduce economy growth globally and shift global economics
condition. Certainly, the crisis entails an increasing number of poverty and a
deepening to the current level of poverty in which it depends on the size of the
macroeconomic shocks that one suffers. Chen and Ravallion (2009) compared
the projected growth rate of consumption per capita (i.e. an expenditureweighted mean for the same set of countries), projected in 2007 for 2009
estimation, and post-crisis growth rate estimated on April 2009. It is found that
in 2007, the estimated growth rate of consumption per capita is 5.1%, while
for April 2009 it is only 0.7%. As comparison, The World Banks forecast of
growth rate of consumption per capita pre-crisis was 5.1% for 2009. This
shows that the worlds growth is in slow pace.
Moreover, the number of working poor is also increasing as the
result of the crisis (Habib et.al., 2010). As the global economy faces new
challenges and more attention is given to Islamic financial system as viable
alternative to current system, therefore, two issues are highlighted to
understand better the discussion of mobilizing idle resources towards
socioeconomic development. They are namely financial crisis and
demographic perspective, and social role of Islamic finance.

1.1. Financial Crisis and Demographic Perspective

The global financial crisis has proven to be the cause of deteriorated

labor market and economy recession. In the case of OECDi countries for
example, according to OECDs projections indicate that unemployment rate
among its countries will be increasing from 34 million in 2008 to 42.1 million
in 2010, and is believe to be the most rapid rise ever since 1990 (OECD,
2008). In minor perspective, take example of Spain. Aftermath of 2008 global
financial and economic crisis, the impact on the labor market, however, has
been much severe than in most of other EU countries. It is reported that, in
Spain, the unemployment rate stood at 21.3% that is over 13 percentage points
more than in 2008 whereby youth and workers with temporary contracts have
1

been disproportionately affected by the increase (ILO, 2011). This has made
experts conclude that the world is currently in the eye of the hurricane with job
losses, financial market crashes, and losses in almost all asset classes, bailouts,
and bank failures spreading lurking fear that it might be only the tip of the
iceberg (Ahmed, 2010).
The failures of too big to fail companies have also been affecting in
labor market. Besides that many have lost their jobs, supply of young
professionals is becoming abundant while lesser jobs are created. There are
plenty reasons for this to be happened. First is that many companies are out
from the market, making the demand for employee is not as much as before
crisis. Second, even if companies managed to stay, they are trying to increase
their level of efficiency in their activities, cutting their costs, and most
probably delayering their organization for the sake of efficiency and cost
reduction. Third, companies will prefer hiring experienced employee as
oppose to young fresh graduates that have zero experience in the business.
Hiring experienced employee brings advantage to the company as that
would help them to reduce the training and development costs, and achieve
their level efficiency of a company activity, as the experienced workers can
start working from the day zero. As reducing youth unemployment is an
exigent project, entrepreneurship can be the way out, as it promises to solve in
the demand-side; job creation.
Besides the impact of financial crisis towards deterioration of labor
market and economy recession, the population pattern has also shown that
youth is the main pillars to support the elder and care the younger. The
evidence has shown that todays world population pyramids and perpetually is
predicted to be in rocket shape in 2050 and 2100 holding everything the
same (Figure 1). It implies huge implication for economics mapping, that the
worlds economy will ultimately be dependent to the youth in order to
function properly. Young people have the obligation to support the upper layer
of pyramids and care the lower layer of pyramids. On 2006, more than 1
billion people are between 15-24 years and nearly 40% of the worlds
population is below the age of 20 and it is estimated that 47% of all
unemployed persons globally are young women and men and 660 million
young people will either be working or looking for work in 2015 (ILO, 2006).
2

As result, global labor market is occupied by the youth, thus making its
competition stiff. Meanwhile as the number of elder people is shrinking, the
number of experienced workers will also be shrunk. Coming back to Spain,
after 2008, it is reported that in Spain 45% of labor market participants aged
15-24 were unemployed in the first quarter of 2011 (ILO, 2011) while many
most of them are from upper layer- have been given gold-hand shake from the
companies.
Moreover, the increasing number of population is not only occurring to
young people (> 15 years old) group, but also the number of senior citizen.
Though there is no exact standard for categorizing senior citizen, it is
commonly understood that senior citizens are those who have retired,
commonly in the age of 65 years old and above.
Figure 1. The World Population Pyramids

Source: United Nations (2011)

According to UN, the number of aging population (to refer senior citizen, -red)
is increasing perpetually. As it is delivered in 2001 UN Report that over the
next 50 years, the proportion of children (< 15 years old) is projected to
decline by almost one third, so that by the year 2050, the share of persons aged
60 or over in the population will, for the first time in history, match that of
3

persons younger than 15 (about 21% each) (UN, 2001). This prediction would
ultimately fetch economics problem as older people today are significantly
less likely to participate in the labor force than they were in the past. Another
social problem might also be coming from urban middle class where most of
them are potentially degraded to be working poor or even hardcore poor.

1.2. Youth Unemployment in Islamic Countries

Youth unemployment is defined as those unemployed between the ages 15
and 24. It is generally expressed as a ratio. The available data indicates the
scope of the youth unemployment problem in the Islamic countries. There are
more than 1 billion young people between the ages of 15 and 24, and 85 per
cent of them live in developing countries. Many of these young people are in
the process of making, or have already made, the transition from school to
work. According to the ILO, 160 million people in the world are unemployed,
and many more subsist on the margins of the economy or have jobs that do not
provide them with adequate means to ensure their survival. Nearly 40 per cent
of those without work are young people, and levels of unemployment tend to
be two to three times higher for this group than for the adult population. For
those young people who are employed, many find themselves in low-paying
temporary jobs with few protections ii.
Table 1 reveals that the youth unemployment is generally high in the
Islamic countries. The youth unemployment rates before the global economic
crisis were already high in Algeria, Albania and Tunisia, at this rate is high in
Turkey (25.28%) and lower in Bangladesh (9.27%). The youth unemployment
rates is low in Pakistan (7.73. %). The youth unemployment rate is higher than
the general unemployment rate, because young people have difficulties in
gaining access to the labor market and in finding jobs once unemployed.
Although young people tend to be unemployed for shorter periods than older
adults, the difference is not large enough to explain youth unemployment away
as simply a transition problem of frictional unemployment.
Another important feature of the youth unemployment in the Islamic
countries relates to its time trend. In general, the youth unemployment rates in
4

these countries show an increasing trend over time, i.e., the problem appears to
be getting worse. During the last decade, the situation is deteriorating in
Indonesia, Egypt, and -although the youth unemployment problem rate is still
not higher than the unemployment rate- in Kyrgyzstan. The situation has not
significantly changed in Algeria, Burkina Faso and Pakistan but it has slightly
improved in Bahrain, Morocco, Niger and Turkey until recently. The
improvement has been generally due to decreases in birth rates and the share
of youth in population, and the diffusion of education and training
opportunities.
Table 1. Youth Unemployment in Selected Islamic Countries iii
Country
Unemployment, youth ages 15-24 (%)
West Bank
46.9
Albania
35.46
Tunisia
30.68
Saudi Arabia
28.24
Jordan
26.98
Turkey
25.28
Egypt
24.8
Algeria
24.3
Iran
23.01
Indonesia
22.2
Maldives
22.18
Lebanon
22.12
Morocco
21.88
Bahrain
20.12
Syria
19.09
Senegal
14.8
Kyrgyzstan
14.57
Azerbaijan
14.44
United Arab Emirates
12.1
Malaysia
10.92
Bangladesh
9.27
Pakistan
7.73
Kazakhstan
6.7
Sierra Leone
5.15
Niger
3.16
Qatar
1.62
5

When the figures for the age composition (15-19, 20-24) of unemployment are
analyzed, the general picture is that, unemployment rates tend to fall with age,
which is true for the majority of countries. In some exceptional countries, such
as Germany and Turkey, the highest youth unemployment rates are recorded
for young adults (20-24).
Kyrgyzstan and Niger are among the few worldwide exceptional cases
(together with Germany, Cyprus and Central African Republic), which do not
have a youth unemployment problem (independent from the total
unemployment) i.e. youth unemployment rates are less than the total
unemployment rates in these countries. As a case illustrated frequently,
Germany operates a dual apprenticeship system offering a protected entry into
employment, and the ratio of youth to adult rate is typically right at 1.0. Ratios
are also relatively low (though above 1.0) in Austria and Switzerland, as both
countries operate systems similar to that of Germanyiv. On the other hand, the
exceptions from the developing countries can mostly be explained by the data
problem1. First of all, the information on unemployment for these countries
comes from the registered unemployment at the employment offices. It is to be
noted that the registered unemployment is likely to underestimate the scope of
youth unemployment. These records mostly reflect only the cases of people
who are already in the labor market.
According to a survey on the Middle-East North African regionv, in most
countries, the unemployed are predominantly first-time job seekers. Those
entering the job market for the first time have very low tendency to go through
the employment offices. These people are likely to be active as hidden
unemployed in agriculture or active in the extensive informal sector. For
example, it was estimated that the informal sector constituted 76% of
employment in the urban Punjab area in Pakistan in 1984/85 vi. However, in
many countries, it is especially difficult to measure employment and
unemployment in agriculturevii and in the informal sector.
To prcis, there is a need to reshape and innovate microfinance
industry in order to resolve the problem of increasing number of

unemployment coming from young-educated population and urban lowermiddle class. In near future, young-educated population soon to be the
backbone of the worlds economy, whereas its role is to support the survival of
senior citizen through high taxes while being the guardian for younger
generation. However, if this problem is remaining unresolved, it is not
impossible that the whole population will be endangered in near future.
Therefore, there is a need to stray from current practice of micro financing to
Islamic micro financing. It is believed that Islamic micro finance has great
potential to cater these challenges. Notwithstanding, it is a must to look at this
issue from Islamic perspective as out next discussion would be in the border of
Al-Maqasid Al-Sharia.

1.3. Social Role of Islamic Finance

Islamic finance is a part of an Islamic economic system in which is inspired
by Sharia. It is profoundly aimed to support the achievement of Al-Maqasid
Al-Sharia (the objective of Sharia) as the latter is the raison detre of
Sharia. Thus the goal of the system is to realize the Maqasid al-Sharia
which should manifest in the economy as it enables growth and justice, and
ultimately the economic system would serve the interests of all human beings
(jalb al masalih) and to save them from harm (daf al mafasid) (Chapra,
2008). Nevertheless, Muslim scholars choose to define Maqasid Al Sharia
from different perspective (Dusuki and Bouheraoua, 2011). Al Ghazali defines
Maqasid by stressing the Sharia concern with safeguarding five objectives
that are 1. Preservation of faith, 2. Preservation of life, 3. Preservation of
intellect, 4. Preservation of posterity, and 5. Preservation of wealth (Chapra,
2008). Imam al-Shatibi defines Maqasid al-Sharia by emphasizing the
epistemological (aqidah) dimension that is;
The primary goal of the sharia is to free man from the grip of his
own whims, so that he may be the servant of Allah by choice, just as he is His
slave [in matters about who he has] no choice.
Thus, it is the regulation set by Allah Subhanahuwataala to regulate human
beings action in order to attain his well being by the preservation the necessary
7

elements of well being, that may be hurt by human himself as he follows his
whims. Notwithstanding, this brings impact to Islamic financial system as it
should also cater the Maqasid al Sharia where social orientation is embedded
in the system.
Two conditions can be identified as requirements of fulfilling maqasid
al sharia in Islamic financial transactions, they are: first, relates to the legal
aspects of transactions, second, relate to the social requirement (Ahmed,
2011). The legal aspect of transactions comprises the structure of products
which is an imperative for IFIs to have Sharia compliant products. Sharia
compliant means that the product should meet the principles of Sharia, that
for example, no riba transactions, no gharar-maysir, there should be
exchanged of value in the transactions, etc, whereby according to Dusuki and
Bouheraoua (2011) these rulings by Islamic law are aimed at realizing the
preservation of wealth in both material and socio-psychological dimensions.
Dusuki and Bouheraoua (2011) further continue by saying that Muslim jurists
have asserted that preservation of wealth is to be achieved in at least five main
dimensions:
(1) Preservation of wealth through the protection of ownership;
(2) Preservation of wealth through its acquisition and development;
(3) Preservation of wealth from damage;
(4) Protection of wealth through its circulation;
(5) Preservation of wealth through protection of its value.
Align with that, Kahf (2006) in Ahmed (2011) asserts that maqasid at the
transactions level are achieved by fulfilling the underlying objectives of
exchange envisaged in Islamic law which include upholding property rights,
respecting consistency of entitlements with the rights of ownership, linking
transaction to real life activity, transfer of property rights in sale, prohibiting
debt sale, etc.
Second aspect of fulfilling Maqasid Al-Sharia in Islamic Financial
transactions is the social requirement. Social requirements depart from the
beliefs of Islam that encompass all aspects of a Muslims life, determining the
articles of their faith and the relationships between man and God, between
human beings, and also determining third moral and behavioral code as well
8

as giving the framework for their daily activities (Ahmed, 2010). Therefore,
fulfilling this second aspect is not merely doing corporate social responsibility
activities. Furthermore, according to Ainley et.al. (2007) in Ahmed (2010),
Islamic financial framework stems from the principles developed within:
(1) Emphasizing fairness. This is reflected in the requirement of contract
agreement that any information should be disclosed, any closure will
automatically nullify and make the contracts become void.
On macro-economic level, this aims at social justice and the economic
prosperity of the whole community by eliminating adverse selection and
moral hazards of an economic man.
(2) Encouraging and promoting the right of individuals to pursue personal
economic well-being, but makes a clear distinction between what
commercial activities are allowed and what are forbidden.
Here, anyone is given the same opportunities and access to formal
financial market and any activities of institutions that are detrimental to
society will be prohibited and thus any contracts or transactions related to
harmful activities would be void.
(3) Prohibiting riba.
This prohibition of riba makes Islamic banking developed mechanisms to
allow interest income to be replaced with exchanging values or assets
whereby cash flows from productive assets could give returns to capital
owner from wealth generating investment activities and operations. These
include profits from trading in real assets and cash flows from the transfer
of usufruct (i.e. the right to use an asset), for example, rental income
(Bahrain Monetary Agency, 2002 as in Ahmed, 2011).

Furthermore, the discussion of social requirements in Islamic financial

transactions under the shed of Maqasid Al Sharia is not only within the
border of examining IFIs contribution in social responsibilities activities,
but also on the vision of socio-economic development. All principles of
Sharia mentioned above do have direct impact on elevating the social
9

well-being, and ultimately closing the social gap between the rich and the
poor. Nevertheless, overtime, due to the influence by the dynamics of
political and socio-economic circumstances, it is said that the implicit and
explicit intentions and goals change and affect the nature and structure of
Islamic finance and IFIs that exist today. Thus, as micro finance share the
same vision of eradiating gap between the rich and the poor, it has the
potential to be the saving grace of Islamic finance and rationalize its
existence beyond legal stratagems to provide a coherent picture (Sayd
Farook, n.d.).

2. Discussion
This research is intended to develop a microfinance model which
comply to Sharia in which it does not only mobilizing savings at the banks
and granting loans to the poor, but also to mobilize all idle resources in the
society, such as Islamic charities (zakat, infaq, awqaf) and to empower
unemployed people. To start, a brief review on the existing models is pertinent
as a departure point to understand the strength of the existing model. Second,
critical analysis of the existing model is done particularly under the three
perspectives namely the significance of the model in eradicating poverty,
sustainability of gender-based business model, and lastly ended by the Sharia
perspective. Critical analysis is intended to attain shortcomings of the existing
model in order to construct a new model concept which not only inherits the
strengths but also t overcome the shortcomings of the existing model under the
three areas mentioned. In due course, the suggested model is pronounced in
the following subsection. All of these are done by employing literature review
as the methodology of this research.

2.1. Review of Existing Model

To begin, it is imperative to review the current practice of micro
financing in three different countries, namely Indonesia, Malaysia, and
Bangladesh. The models applied in these countries are not only famous on
their success stories of alleviating the poor condition, but on top of that, these
models are applied in countries where the population are majority Muslim as
such they share nearly-the-same virtues and hold a strong believe to stand for
10

Islamic rulings. Moreover, the number of Muslim population reflects the

potential market for IFIs to serve. Therefore, understanding the existing
models that are applied in these three countries is pertinent before developing
a new model concept.

2.1.1. Indonesia
In Indonesia, it is recorded that there are over 50.000 microfinance institutions
(MFIs) in which some of them are established for more than 100 years ago. This
reflects that at least two major points; first, it reflects numbers of working poor
that need to be served in which it implies the potential market of the MFIs; and
second, it reflects that Indonesia is a country which is extensively dependent on
the real sectors economy in which financing the micro has been the main focus of
government for some time. The MFIs have various aim of their existence, as some
aimed at promoting rural credit subsidies and some aimed at fostering independent
commercial financial institutions. The history of MFIs in Indonesia can be traced
back to colonial era, where the Dutch established a series of banks. These banks
were later forming the People of Indonesia Bank or Bank Rakyat Indonesia (BRI)
in which it became the spearhead of the micro finance movement in Indonesia.
Despite the influence of colonial government, the growth of Indonesians
micro finance had just flourished on the 80s and in the 90s; the alternative
financial services had born remarked by financial deregulation policy of the
government. The alternative financial services were based on various forms of
banking arrangements, cooperatives, mutual benefit societies and solidarity
groups, whereby the overall objective was to accommodate the needs and
capacities of population groups which until then had been denied access to
traditional types of financing (The World Bank, n.d.). The poor exclusion from
financial system has caused them to have lack of working capital and investment,
hence they could not grow. The poor exclusion from financial system has caused
them to have lack of working capital for their businesses; hence their small
businesses would be difficult to expand.
There are at least two grounds that are analyzed for the poor exclusion from
financial institutions. The first is that the poor are lacking of record history of
financial services. In addition to that the poor also lack of physical collateral as
such any commercial financial institutions will have less interest in serving the
11

poor. Together, lack of history and collateral, will represent the high credit risk of
the poor perceived by the financial institutions. Second is the problem of financial
illiteracy amongst the poor due to lack of education amongst themselves causing
their low self-esteem amongst society in general. These problems are realized by
the government; as such the recuperative action was taken. The MFIs were then
allowed to set their own interest rates on most loans and savings account, and
PAKTO 88 (and its continuous amendments) liberalized restrictions on opening
new domestic banks and bank branches and encouraged autonomy and
competition in banking industries. The later resulted in hundreds even thousandsof MFIs birth both private and public sectors, for profit and non-profit status. As a
result, today there are 54,444 units of MFIs, banks and non-banks, and are serving
9,479,268 creditors with credit as much as Rp. 28 trillion. Robinson (2002) then
declared that this fact of history has made Indonesia as the home of the worlds
largest financially self-sufficient micro banking system and many smaller
commercial microfinance institutions. Figure 2 shows the types of MFIs in
Indonesia.
Figure 2. MFIs in Indonesia

Source: Ismawan and Budiantoro (2005)

Despite the big numbers of MFIs in Indonesia, many of them could not sustain
in the industry, many are still survive yet less aggressive movement and programs
are done due to the limited capital have. These kinds of MFIs need to be
subsidized by third party such as local government to survive yet it is not
sufficient for them to become healthy and independent by the third partys source

12

of funds. Often, they become politicized by certain party to win the vote of the
society. Robinson (2002) noted that one of causes of failure of LDKPs of Western
South-East Nusa district were subject to political pressures from local politician or
state leader. Furthermore, other shortcoming is the lack of management skills and
leadership. Management skills among the leader of non-formal MFIs,
cooperatives, and BPRs is critical for the development of their leaded organization
as well as is imperative for the successful of their mission. Good management
matters as it promises transparency and accountability of people money they used.
Depart from that, the phenomenal success of micro financing practice was
done by BRI Unit Desa after being rejuvenated in 1984. It is the establishment
of BRI which is regarded as the beginning of Indonesian rural banking. It was
firstly meant to help indigenous people (pribumi) out of debt from Chinese
moneylenders and loan sharks. It is later reorganized into a cooperative
organization, thus enabling this institution to serve segments of the population
which had not being served by the formal commercial sectors. However, BRI
attracted

worlds

attention

through

its

Unit

Desa

achievement. The

achievement was because BRI has successfully transformed BRIs Unit Desa from
loss-making unit to profit-making unit, proved the world that BRI Unit Desa can
be sustainable and viable with the poor. It is recorded that in 2000, through its
KUPEDES program, BRI Unit Desa yields profit of 1,160 billion rupiah with only
1.9 percent of long term loss ratio viii. This is indeed a huge achievement for
them, as history records that in 1983 (when it first launched to support BIMAS
programix), it suffered from loss -12.6 billion rupiah and 55 percent default rate
in wet season.
BRIs Unit Desa was revamp and began to transform from the

loss-

making institution to sustainable microfinance institution through KUPEDES

(Kredit Umum Pedesaan or General Rural Credit). In essence, KUPEDES is a
general-purpose individual loan instrument whereas the underlying activities (or
consumption) must exist and mentioned by the applicantx. Credit officers will then
have full authority to assess credit worthiness of the applicant. It is identified that
KUPEDES could receive success due to its characteristics namely attractive loan
pricingxi, relatively small loan size xii, incentive for prompt payment xiii, and
relatively short maturity termxiv.

13

Notwithstanding, KUPEDESs commercial success also demonstrated the

greatest triumph of micro financing as it is proven that poor households can be
reliable bank customers. KUPEDES was a commercial financial institution which
was meticulously designed by involving all necessary elements of study, from
financial product developer to anthropologist, in order to understand the needs of
market and the characteristics of market. It has succeeded to re-model the overall
orientation of micro financing, from non profit to commercial mindset in which it
proves that micro financing is commercially appealing to commercial players and
investors. Moreover, credit should also be given to overall performance of BRI
Unit Desa in which despite the crisis, their system has managed to control,
continue to grow, and ensure that the program working. This resulted their
financial ratios reflected the soundness of their business. It was indeed improved
after 1998, when the financial crisis reached its deepest (Lieberman et.al., 2007).
BRI Unit could set off the insolvent BRI due to its poor portfolio investment and
thus salvage BRI from bankruptcy and merger.

2.1.2. Malaysia
Malaysia may be the wealthiest country in the study using GDP comparison.
In comparison with Indonesia and Bangladesh, it is recorded that Malaysia has
the highest GDP (real growth rate) at 7% in 2010, whereas Indonesia and
Bangladesh have equal number of growth rate; 6% xv. In 2009, number of poor
household counted as much as 3.8%% out of 6.2 million households, or as much
as 228,400 households can be classified as poor (according to governments
standard). In 2010, it is relatively small in comparison with Indonesia and
Bangladesh in which it has 13.3% and the later has 40% (2005 census) out of
each total number of populations. As such, The World Bank 92011) classifies
Malaysia as Upper Middle Income nation, where Indonesia is being put under
Lower Middle Income category and Bangladesh as Low Income country.
The history of micro finance was begun in 1971 when Malaysia Prime
Minister, Tun Abdul Razak, set up NEP (New Economic Policy) to combat
against poverty in Malaysia. The program was mainly intended for the Malays
ethnic group only (or known as well as Bumiputera) in order to close the gap of
welfare between the Malays and the immigrants, particularly the Chinese who
were controlling the countrys economy. The program was also including:
14

improving income and productivity of Malays agricultural producers, and

opening more access to basic amenities and the quality of life of low-income
householdsxvi, including the settlement of FELDA (Federal Land Development
Authority) in which the government resettled the poor Malays to a new prepared
land in order to cultivate rubber or oil palm at the destination area. As the number
of Malays poor people was decreased and overall economy was better off,
Malaysian government then begun to develop programs focusing on hardcore
poorxvii. Together with the other programs, AIM (Amanah Ikhtiar Malaysia) also
plays continuously important role in supporting governments agenda of
combating poverty.
AIM is a government program to finance the poor with the objective of
poverty eradication. To reach the objective, AIM adopted Grameen Banks
approach to reduce number of poor in the rural area by granting more access to
micro-credit (AIM, n.d.) . It was firstly established in 1987 in north-western area
of Selangor state involving 373 poorest households which comprises 232 male an
141 female, whose received their first welfare loan. The result of the credit was
90% of repayments were made including the loan capital and cost of financing,
i.e. only 10% NPF (Non Performing Financing) were made. This was considered
a success for AIM and believed that the program should be carried on in a greater
scale in order to achieve the goal. It was analyzed that AIMs success was due to
the attribute of the program in which it does not need physical collateral or a
guarantor or legal action for obtaining repayment. It was also stated that AIM is
free from fraud as it used tax-payers money, subsidized program from the
government.
AIM practice of group-based-lending is similar to Grameen Bank in
Bangladesh. AIM substitutes financial collateral with non-physical collateral such
as peer-pressures as social collateral and reputational collateral of the borrower to
the group. The group-based-lending is a concept in which it ensures the members
of the group constantly and continuously repay the loan/financing via peer
monitoring. Peer monitoring will give a pressure to the borrower who is the
member of the group to repay the loan/financing. Another important feature of
group-based-lending mechanism is potential to reduce transaction costs in credit
delivery and disbursements (searching, monitoring, and enforcement) of the
lender by shifting onto the groups (Dusuki, 2008). Nevertheless, AIM has a
15

centre meeting which is compulsory for all members to meet every week. The
centre meeting is vital as the program can be evaluated, monitored, and thus can
guide members throughout difficulties of the members, in which it will eventually
guarantee the success to all members (AIM, n.d.).
Although AIM adopts concept of Grameen Bank (GB) in Bangladesh, there
are few things that distinct AIM with GB. GB was initiated by its founder, Prof.
Muhammad Yunus, to lend out money to selected poor using money obtained
from his pocket. As the movement grew, Prof. Muhammad Yunus and few of his
students started to mobilize the repayment funds and opened saving accounts to
lend more poor people in the village. This nature is in contrast with AIM, as it has
full support from the government and educational institutions to run the program
making it as a fully subsidized program. The source of operating funds is
coming from government grants and soft loans from third party such as Islamic
Economic Development Foundation of Malaysia, and Asia-Pacific Development
Centre, and state government and management fees (or administrative charge) in
which some say that the rate of management fees is as high as the interest rate. It
is the only microfinance institutions that are under reviewed, yet in the surface,
no interest-rate charged mentioned as it claims to be Sharia compliant. This is to
ensure AIMs donators that concern on Sharia prohibition of interest.

2.1.3. Bangladesh
GB (Grameen Bank) is mostly the most famous of micro financing institutions
in the world. It gains more of the worlds attention especially after the founder,
Prof. M. Yunus, won the Nobel Prize in 2006 due to GB efforts in creating
economic and social development from below; that signifies a key to create
peacefulness in the world. GB is also often called the bank of village as the word
Grameen means of the village. Although the movement was firstly initiated in
1976, it became an independent bank in 1983 under special law that was passed
for its establishment. It gives loans to the rural poor, especially women who make
up around 97% of its customers. This is then called as Grameen type microcredit
or Grameencredit xviii by Prof. Yunus. Although microcredit generally shares the
same purpose, i.e. the disbursement of money as loans to targeted selected poor
people, Prof. Yunus claimed that Grameencredit is unlike with other types of
microcredit due to its distinctive features.
16

Grameencredit has a simple mechanism in nature. It is based on five people

who are voluntarily forming small groups. This small group is intended to make
supervising and monitoring activity easier while it is simultaneously ensuring free
adverse selection and moral hazard members in the group. The small group has
also effective peer pressures, which then known as social collateral. Social
collateral does not imply that the group shall bear the loans of the member when
the member could not satisfy his/her obligation. Yet, social collateral signifies
that the group ensures that the member fulfills his/her obligation, otherwise the
other members would not be able to obtain a loan before his/her repayment.
Grameencredit works under the assumption that the borrowers will use the
proceed to viable income-generating activities, instead of consumption activities.
This assumption might be true as it is based on GBs record which found that
women are proven to be astute entrepreneurs. Subsequently, the loan is given
after potential borrowers and theirs projects are chosen with repayment scheme of
50 weekly installments. Furthermore, GB provides not only microcredit service to
its borrowers, but also saving services.
Despite its success, there are numbers of people doubting on GB success of
attaining the goal. Some criticized on high rate of interest charged for the poor,
burdensome weekly installment, fraction created in group-based-lending which
disunity the village, and many other criticisms. These concerns are not without
evidences. However, as it was informally initiated in 1976 and attains its legal
establishment in 1983, GB has been serving more than 7 million borrowers
members (2008), or 4.8% out of total population of Bangladesh in 2008xix. GB
success is not only due to its commercial success that is proven by profit up to
USD 1.56 million in 2006, but also due to its success in improving the quality of
life of the poor, and most important achievement is empowering women which
are proven to be economically feasible and proficient clients in repaying credits.
These all resulted in one goal that the poor then have the capital and invest it in
productive activities, creating more small enterprises in the village.

2.2. Critical Review of The Three Models

In this section, the three models, which are taken from three countries above,
is critically reviewed employing literature review. In order to make a concise and
17

relevant critical review to the development of Islamic microfinance, Sharia

aspect of these three models is also pondered. To avoid redundancy in the
discussion, this review is discussed not based on countries but based on three
aspects of discussion. First discussion is based on the significance of the model to
eradicate poverty. Here, the significance of being sustainable without being
mission drifting, viability of self-sufficient or fully-subsidized organization,
would like to be pointed. Second, on the significance of being gender-biased,
would the MFIs be sustainable by being gender-biased? Would there be any of
effect of focusing only to a certain gender? Thirdly, the discussion will be on the
sharia aspect, as many of MFIs employ interest-based lending, which is
incompliance with Sharia.
Model to Eradicate Poverty
It is important to review the significance of these three models in alleviating
the burden of the poor. Nevertheless, one must understand and well known to the
object of the discussion. To synchronize the idea, it is pertinent to briefly define
the word poor by taking general measurement of poverty in this discussion,
without leaving respect to countries definition and measurement of poverty.
Depart from this; the discussion of MFIs mission drift would be embarked.
Figuring the appropriate model of self-sufficient or fully-subsidized institutions
using the assessment of the reviewed model is done in the following section.
The phenomenal success of BRI Unit Desa, AIM, and GB in micro financing
industry has proven to the world that the poor are also commercially potential
customer or financial services. The poor are indeed can be reliable customers
promising a significant return, lower risk of NPL than any customers segment,
building a good long-term customers based on strong foundation of trust, and
moreover serving the poor could bring extra benefit for positioning of the IFIs;
depicting good portray of the IFIs concern of their social role in the society. The
later would result in customer loyalty of other segments due to their virtue, ethical
values, and individual attachment to the society. The working poor would also
enjoy the advantage of more capital used in their microenterprises and
investments. As the microenterprises become larger, the entrepreneur will be
likely to continue their relationship with the IFIs and ultimately the IFIs will
enjoy loyalty from customers which reduce transactional costs, and minimal
18

adverse selection and moral hazards of the clients. Ultimately the poor would
ashtray away from poverty, and the IFIs would earn tantalizing profit. To be
successful, what to do is to find the suitable model to serve the poor.
Nevertheless, a question aroused, who is the poor?
It is often said that the poor are those who are deprived and are seen to be lack
of resources to meet their needs. Ravallion associated resources as food energy
intake with requirement of 2,100 calories per person per day as the threshold of
needs of an individual (Ravallion, 1994 in Pradhan et al., 2000). This
measurement might imply that the poor are often associated with famine and
malnutrition. However, this poverty measurement could not be a good universal
measurement as in some part of the world; the poor can also arrive to the caloric
standard by eating the cheapest possible sources of calories while the people are
still deprived in carrying out their need. For example, the poor in Indonesia still
can eat 2,100 calories per day by consuming dried-chopped cassava (tiwul) but
living in improper shelter, bad sanitation, lack of clean water, and poor health and
education. Embark here, the conventional view of resource to meet the needs
then shift to monetary terms. It is then used the unit values for food price
estimation, not calories, plus with non-food expenditure which is calculated as
equal as the amount of spending in food. Poverty is then measured by comparing
individuals income or consumption with defined threshold by authority. This
measurement is more flexible than the later, as income and consumption do
reflect the welfare of an individual. Nevertheless, should be

noted that the

difference in threshold makes disparity in measuring poverty. Each nation has its
own threshold of income and consumption, yet majority of nation are holding
the food plus nonfood poverty line. Acknowledging that, the threshold of the
hardcore poor (or absolute poverty) set by World Bank is used here. World Bank
defines hardcore poor (or absolute poverty) as people living on less than US $
1.25 (Purchasing Power Parity) per day, and moderately poor as people living on
less than US $ 2 a day.
Coming back to the discussion of three models (BRI Unit Desa, AIM, and
Grameen Bank), the customer profile of three models need to be reviewed.
Starting from BRI Unit Desa, according to BRI Annual Report in 2001, regular
BRI Unit Desa borrowers average monthly regular income is Rp. 495,731 ($
55,22 or $ 1.84/day); with average total business assets reaching to Rp.
19

49,482,056 ($ 5.512,09). This implies that BRI Unit Desa borrowers, in average,
are moderately poor people or economically active poor. Moreover, in terms of a
general portrait of the respondents, the most dramatic differences are between
regular KUPEDES borrowers who have a viable enterprise and respondents
without a viable enterprise who had never borrowed from a BRI Unit (20.7
percent vs. 3.8 percent), widowed (14.8 percent vs. 3.8 percent), over 60 years of
age (42.6 percent vs. 21.0 percent), did not complete primary school (37.1 percent
vs. 17.8 percent), and cannot speak Indonesian (25.0 percent vs. 7.0 percent). The
first and the later shows that KUPEDES has successfully attract the working
poor in rural area, and empower widow and encourage senior citizen to
becoming more independent from the society through micro financing. Two
conclusions are reached; (1) this model is appropriate only for working poor
(economically active poor), and (2) this model could not be used to empower the
hardcore poor, thus the hardcore poor remain to be served by money lenders or
worse loan shark.
However, it is not an easy task to find the customers profile of AIM and GB.
Taken from Grameens website, Grameen Bank only depict borrowers success
story, while the general overview of customer profile could not easily be found.
The only information known is that 97% of Grameen Banks members are
women. Portray of borrowers success story was to promote the products of
Grameen Bank. One of the success stories is Begums story, promoting the
struggling (beggars) member program. Moving to Malaysia, to find customers
profile of AIM is even harder. The only valid and

reliable information found

is from AIM website about basic qualification of AIM Members. To become

AIM Members, someone must show that his/her household income must be
below the current governments poverty line (RM 800/month or around USD $
228/month). As AIM is known to replicate the model of Grameen Bank, the
participation rate of female members is higher than male members. It is recorded
that the rate of repayment among female members is 95 percent, while the male
counterparts is only at 75 percent.
The importance of who the borrowers are is to identify the significance
contribution of the model to its objective of eradicating poverty. The propaganda
of GB, for example, mentioned many times of 97% of its members are women.
But gender is not (and could not be) the only information we need to measure the
20

success of a model, as a model is said to be success when the model reach

significant percentage of objectives fulfillment. It is because the raisons detre of
these three models are to ambition and eagerness to eradicate poverty by serving
financial services to the poor. But as these three models grow, their commercial
success has also successfully deviated them from their reason of existence.
Robert Cull et al. (2009) also mentioned that the lack of sharper data on the
poverty levels of customers limits the broad conclusions that can be drawn with
confidence, and the evidence lags far behind some of the rhetoric on the potential
for microfinance to reduce poverty. One or two examples of fascinating success
stories should not stray our focus to appraise contribution of models to its
objectives. The constant appraisal on who the borrowers are will also help the
MFIs to stay focus in the industry without being mission drifted by shareholders
pressure.
It is true that pressure from shareholders might have impact on the
performance of MFIs. Full-subsidized MFIs, for example, would be most likely
to be driven by political agenda of leaders in charge, straying MFIs from the
track to eradicate poverty to the track to gain more support for particular political
parties or leaders. On the other side, self-sufficient MFIs might be free from
political agenda, but should balance from pursuing commercial objective, i.e.
profit, and reaching the poorest. Debates on the extent to which trade-offs
exist between pursuing profit and reaching the poorest customers is ongoing. The
concern is that efforts to reach a significant scale by securing financial
sustainability may lead to a tendency to provide larger loans to less poor clients
and to employ stricter loan screening procedures (APPG, 2007). BRI Unit Desa
and Grameen Bank are examples of successful self-sufficient MFIs, but lack of
evidence that it has reached the poorest of the poor. From its annual report, BRI
Unit Desa shows that their model is appropriate for people living in moderately
poverty. Grameen Bank, however, claimed that they have succeeded to reach the
poorest, yet there is lack of data and

information on their average typical

borrowers. Public only knows that Grameen Bank serves the poor, but how poor
is the poor they are served is unknown. Moving to Malaysia, AIM is the
example of full-subsidized MFIs and most successful credit and anti poverty
programs in the country, whereby it is heavily dependent to government. In
21

Malaysia where the deliveries of development inputs are already highly

politicized, government provision of funding can impinge upon AIMs political
neutrality and autonomy in credit delivery (Nair, 2010). Of course it is not good
news for MFIs in which its mission is noble. Henceforth, if such of data exist, it
could be used as weapon for MFIs to evaluate their products, and if they are
succeed, they could eliminate some hard criticism thrown to MFIs, especially to
commercially-successful MFIs.

Gender Biased
GB is the pioneer of microfinance institutions in which targeted women as
their market. Due to the success story, the model is being replicated to all over
the world including AIM. It is noted that majority of GB and AIM clients are
women. Many studies have shown that women are characterized by its
dedication to family that they are eager in improving the living standard of the
family and also known as astute entrepreneurs. Women are diligence and
discipline borrowers as based on past recorded history; their repayment rate is
higher than men. However, there are some uneasy allegations sent to GB, while
other institutions particularly who adopted GB model- should be alert and
aware of.
In 1999, Aminur Rahman, an anthropologist, examined GBs success and
failures by utilizing four distinct bodies of scholarship to enable his ethnographic
assessment. They are namely: public and private texts of James Scott and
tools of subversion in hierarchical structures; Bourdieus practice theory;
Gramscian hegemonic theory; and Amartya Sens theory of entitlements.
Rahman utilizes these theoretical insights to address the hegemonic nature of
patriarchal ideology in Bangladesh, and the ways in which it permeates Bank
client (i.e. women), client-client, and intra-household interactions; the
everyday subversions used by women in a process that often infantilizes
them and reproduce hierarchical social relations in which their entitlements are
minimal and the ways in which GB ideology adjusts to the practical reality of
the field (Chowdhry, 2000). To keep the discussion brief and concise, Rahman
further concludes that loans alone (which are also debt liabilities), without
viable opportunities for women to transform the power relations and create their
own spaces in the prevailing power structure, make equitable development and
22

the empowerment of women unattainable in society.

GB initiative to serve poor women in rural areas of Bangladesh must be
appreciated; above all the objective of GB is to eradicate poverty. Yet, the
tendencies of serving only the women might raise the issue of social imbalances.
In Bangladesh where society acknowledge patriarchal norm, sudden focus to
womens empowerment creates a reverse reaction from society. Society
become

reluctant to the idea, and if they not, society put pressure to the

womens to balance their business activity, husband and their children. Social
imbalances is created not by womens human right must be erected, but by the
hard pressure to repay the loan (weekly), managing business, serving husband,
and taking care of children (without taking into account their participation in the
center meeting). Furthermore, it is found that women participating in credit
program are likely to receive more violence, as the husband was beating the wife
and threatening to ask for further dowry payments if she did not bring in more
credit (Hunt and Kasynathan, 2002). This implies women at GB may enjoy their
economic empowerment, but they would be infantilized in social

and

political empowerment. It is not only the men (or society in general) who needs
to be educated on gender equity but also the womens mentality to accept the
new role given to them in the society. When the women are not mentallyprepared for the pressures, psychological distress would be harmful for them
(and their household) and destroy our objective to see the society improving their
selves. Thus, to receive good reception from patriarchal society, promoting
gender-equity while the noble objective to eradicate poverty is the main focus,
there should be no gender tendencies in giving loan, i.e. both poor men and poor
women should have the access to financial services, and to whom money lenders
should give loan should not be based on gender, but based on individuals
determination-motivation-and his or her plan for business/investment to move
out from poverty line.
Sharia issue
Among all aspects, one might be obvious that, the discussion on interest
(riba) would be discussed here. It is obvious that three models above allow the
practice of riba, though AIM may use different term, i.e. administrative charge,
to replace the word riba. The practice of riba to assist-empower-and-improve the
23

poor might be impossible, as riba will only create more burdens for the poor. In
the eye of Sharia, riba will only create social injustice, whereby poverty would
be impossible to alleviate if there is social injustice exist in society. It is so
because social injustice is indeed the main cause of poverty. It is social injustice
which excludes the poor from financial services. And it is social injustice which
creates segregation between the rich and the poor, thus the wealth is
never healthy circulated. Thus, practice of riba in these three models would not
be advantageous for the poor. Indeed, unconsciously, it creates debt trap for the
poor.
Notably, microfinance industry is characterized by high transactional cost,
and high credit

risk. Both financial institutions and poor clients face high

transactional cost due to high

asymmetrical information problems, which

naturally appear in the financial transactions (Dusuki, 2008). Transaction

cost relate to cost of searching, monitoring, and enforcement costs, due to
inability to know the ability of the poor in meeting future obligations,
whereby previous credit history is unknown, and only for small sum of loans.
Furthermore, high credit risk does not occur due to the poor inability to provide
collateral, nor guarantor, thus leaving MFI is exposed by the risk of defaulting.
Nonetheless, some banks also dislike the nature of business risk of certain
industries, such as agricultural or livestock, which are seen to be vulnerable
due to its dependence to the nature (flood, drought, livestock disease, etc).
Thus, a common response for MFIs facing high costs is to raise interest rate, at
least to levels much higher than bank charge (Cull et al., 2009).
Some scholars have been addressing this problem, that high interest rate
charged is exploitative-in nature and cannot be justified in any means. Some
justifications for this practice are often, first is the comparison between interestrate charged by MFIs and other non-formal money lender or loan shark, second
is providing financial services to the poor could not be cheap. The first reason
often used as propaganda for MFIs in promoting their programs. Cull et al.
(2009) mentioned that it holds that small loans are costly for banks to administer
but that poor households can pay high interest rates. The evidence is that the
poor could meet their obligation to moneylenders where their annual interest rate
charged is over 100 percent, thus anything lower must be a benefit. CGAP
(1996) in Cull et al. (2009) further articulates that access to finance is more
24

important that its price. Nevertheless, to create ethical and socially responsible
perception, the excessive interest rate is shaped and calculated in such a way that
it shows a significantly small amount of money installment. GB, for example, if
the poor borrows Tk 500, he/she should pay for as much as Tk 5 every week
until it reached the total amount of borrowed money. One may think that Tk 5 is
a cheap installment, but the poor might think differently as they need to prepare
Tk 5 every week or Tk 20 every month. While the second justification, is a
natural consequences due to industry characteristics which have been mentioned
previously.
BRI Unit Desa, and GB particularly are more obvious in practicing riba,
whereas AIM is less obvious. Although AIM is less obvious in charging riba,
three models have shared one thing in common, that is the installment is
perceived to be cheap due to number of installments made by the poor. This
three models benefit from weekly, biweekly, or monthly installments. Most of
GB and AIM clients tend (and are encouraged) to pay weekly installment,
where BRI Unit Desa borrowers tend to pay it monthly. So to say, that BRI Unit
Desa may serve less poor customer segment in comparison with GB and AIM
customers. The ruse to build small amount installment is to have short
installments, such as weekly, bi- weekly, monthly, and if they are allowed they
might consider having daily installments.

2.3. Special Purpose Vehicle (SPV)

Notwithstanding on the discussion in previous section, it is felt that new

model which reflects innovation in financial services as well as to answer
todays challenges needs to be introduced. The innovation in financial services
departs from the concern to cover up the shortcomings of the current practices.
On top of that, todays challenges remains to be unanswered

by current

practices, as from time to time, the problem is found to be more complex than
the previous years. Notably, the new model should comply with Sharia as
Islamic finance is believed to have great potential to cater the challenges that
emerge due to new social phenomena and acute financial crisis.
The shifting from rural-working poor to urban-working poor has shown that
micro financing should be extended to also urban areas. Unlike rural population,
25

urban population is often characterized by relatively high educated and have

high financial awareness. They also have past historical financial records, as they
might have, at least, savings account in the bank. These characteristics, of
course, benefit the banks as it reduces both, banks and urban- working poor,
asymmetrical information which ultimately lower both of their transactional
costs. Nevertheless, the banks might have higher risk of adverse selection and
moral hazard in serving the urban compared to serving the rural. This might
imply risks that banks do not want. Unlike financing the rural, whereby peerpressure could be used as social collateral that is effective tool to reduce the
credit risk, urban people is characterized as more individualistic, thus
making the social collateral might be less effective tools.
Due to the characteristics of MFIs potential customers and also learning
lessons from three models that is previously mentioned (BRI Unit Desa, AIM,
and GB), i.e. the urban- working poor, it is foreseen that bank type of MFIs
could be the potential services providers. There are at least two reasons for this.
They are: first, bank type of MFIs has plenty of branches and offices in urban
areas. This shows sophisticated networking of the banks which implies two
meaning. First meaning is that, with sophisticated network at hand, banks must
not establish new branches or units, so it incurs almost no costs for the banks.
Second meaning is that sophisticated network of the banks might be desirable for
entrepreneurs as it transmits the message that banks could share some business
opportunities and business networks in another areas they covered. Thus the
more sophisticated the network, the more appealing

the

bank

is

for

entrepreneurs. Second, unlike NGOs, bank type of MFIs is demanded to be selfsufficient and profitable, which is desirable for entrepreneurs as they will be
motivated to perform sound and professional in order to earn profit so the
business could grow through retained earnings and as well as maintain their
relationship with the banks, as banks assess the entrepreneurs based on its
repayment as well as its business performance.
Current financial crisis that was severely hurting global economy has resulted
in slow pace of growth of worlds economy. The impact could be felt in all
joints of markets, i.e. from financial markets to the real market in the street,
where transactions are less happened. Prices dropped everywhere, making
people loss their value of business and investments and thus more people
26

keep their money at home instead of doing business and invest. Meanwhile in
micro levels, middle-class entrepreneurs are struggling to develop new business
ideas to be executed, yet they might be lack of working capital and also lack of
business channel/network to distribute and market their products and services.
They understood that buying services from non-bank moneylenders with
excessively high interest rate is their lender of last resort. However, they could
not sell their business idea to banks as banks could not foresee the value of their
business ideas and perceive it to be too riskious to do. Often, these entrepreneurs
also sometime oversee their business value due to their lack of knowledge in
arranging financial proforma. Ultimately, banks reject to finance them. Or if
banks are willing to finance, banks would demand financial collateral and must
charge the entrepreneur high interest rate to reward them in taking all possible
risks. Else, there is no word interest in Islamic banking dictionary, thus its
application in Islamic microfinance is forgotten.
Islamic finance has various products that could be used to work together with
the working poor. Partnership models such as Musharakah and Mudarabah could
be viable to finance new businesses ideas of working poor entrepreneurs, thus
ensuring risk-sharing instead of risk-transfer- concept is applied. It signifies
that Islamic MIFs type banks would not only finance the business ideas but also
ensuring that the business works and sounds through equity-financing. Even
more, with current challenges coming from social phenomena (identified through
population projections) and financial crisis, the growing number of this type of
customer segment could not be avoided nor ignored by banks. The approach in
financial services industry is that it is peculiar customers come to the bank, but
banks should come to customers. Silicon Valley is the example for this. Venture
capitalists in Silicon Valley have been using Mudharabah-type of contract since
Silicon Valley firstly established. The venture capitalists disburse loan to the
entrepreneurs who have sounds and promising business ideas without any
interest at all. Later, once the business has succeeded and firstly listed in capital
market (IPO), the venture capitalists would be repaid by shares with the agreed
proportion.
However, banks might argue that it may seem feasible but incur more costs
and resources. It might be argued that bank does not have function as partner of
business. Bank is well-known as financial intermediary, thus any activities out
27

of intermediating financial services might be seen as exhaustive and costly.

Therefore, the establishment of SPV could be the way to resolve the issues. SPV
is a legal entity which has been set up for a specific, limited purpose by another
entity, the sponsoring firm and many be a subsidiary of the sponsoring firm, or it
may be an orphan SPV, one that is not consolidate with sponsoring firm for
tax, accounting, or legal purposes (Gorton and Souleles, 2005). SPV could be the
correct legal entity for the bank to mitigate the risks that are inherent involving
the poor and small entrepreneurs. SPV could be given task to screening the
business ideas of the entrepreneurs, giving recommendation to the bank of the
feasibility of the ideas to be financed, and monitor the use of money. SPV could
also be the agent, i.e. wakeel, of the banks in partnering with the entrepreneurs.
The banks, via SPV, could be the business partner of the entrepreneurs.
Acknowledging that SPV needs the bank as the sponsoring firm, it is
recommended for banks to build an off-balance sheet SPV that must be an
existence firm as it has an added feature of bankruptcy-remoteness, thus
freed the SPV if the IFIs from entering a bankruptcy procedure. So does
whenever SPV face insolvency, SPVs creditor could not claim on the sponsors
assets to recover the loss caused. Figure 3 is the illustration of mechanism of
SPV as the bridging agent.

Figure 3. Mechanism of SPV as The Bridging Agent

1.b/4

Source: Swastika and Kusuma (2012)

With the existence of SPV as the bridging agent, the tasks and activities of
SPV should be clearly pronounced. The fail of doing so might entail the failure
28

of SPV to perform well. Following are the suggested tasks for SPVs: (1)
promoting financial awareness to economically active poor, (2) equipping
entrepreneurs with skills and knowledge required, (3) via shirkah contracts;
two-tier Musharakah

and

two-tier Mudarabah contract, SPV becomes the

banks wakeel or agent to be the partner of the entrepreneur or to be owner of the

capital. With a set of business partners, SPV would have the precious business
information that allows entrepreneurs to have faster reaction to reduce the
business risks in the real market, (4) being pool of business networks, the
yellow page of business information, which then assist entrepreneurs widen
their business network and coverage, and

(5)

screening,

supervising,

monitoring and evaluating business performance, thus reducing Islamic

banks transactional costs, and credit risks. The suggested tasks, however, is
adaptive to changes; allowing the Islamic banks to be freely in identifying
necessary tasks of its SPV. Nonetheless, ones should bear in mind that SPV
must assist and guide the entrepreneurs in implementing their ideas; i.e.
Whenever

entrepreneurs

encounter difficulties in business processes or

marketing their products, SPV should be able to assist them in solving their
business problems. Worth to be remember that the
The mechanism of SPV is illustrated in Figure 3 for contracts which have
credit implication, such as Murabaha, BBA (Bay Bithaman Ajil), or AITAB (Al
Ijarah Thumma Al Bay). Firstly (1.a), the entrepreneur approaches the SPV to
consult his business plan, including the financial proforma. The entrepreneur and
the SPV will discuss on the plan and projections and the later will become a
business consultant by giving feedback to the entrepreneur (1.b). Here, the
feasibility study on the business is done by the SPV before it is communicated
with the bank. Since the entrepreneur might be not well-informed about the
several of Islamic contracts, finding one that appropriate to the nature of their
business might be cumbersome unless someone helps the entrepreneur to do it.
As such, the SPV will be also advice what contracts of sale that appropriates
with the business risks and opportunities for the entrepreneurs to start developing
the business. Next level, the SPV communicates the business with the sponsors,
elaborating the strengths, weaknesses, threats, and opportunities of the business
(2). As such, the bank would be well-informed on the risks and potential profits
of the business that seek for financing. As such, it will ease the bank to make a
29

decision and ensure lesser good opportunities are eliminated. After receiving
feedback from the SPV, the entrepreneur will have more self-esteem in
proposing the business plan to the bank to ask for financing. The entrepreneur
approaches the bank for financing, submitting the proposal (3.a), and if
succeeded, the entrepreneur will be financed by the bank (3.b). Furthermore, the
supervising and monitoring the business as well as evaluating the business are
done by the SPV until the entrepreneur completed the obligation to the bank. As
such is to mitigate moral hazards of the entrepreneurs (4).
For the contracts that involve partnership, the mechanism would be slightly
different from the above, as it is illustrated in Figure 4.

Figure 4. Mechanism of the SPV as The Bridging Agent in Partnership Contracts

Source: Swastika and Kusuma (2012)

As partnership contracts reflect riskier type of business, the SPV would become
the partner of the entrepreneur once after the business proposal is agreed and
both parties (the SPV and the entrepreneur) enter the contracts. Nevertheless, as
a firm that is under the sponsorship of the bank, the SPV must have the approval
from the bank to precede the proposals with partnership contract with the
entrepreneur. Firstly, the entrepreneur approaches the SPV (1.a). After assessing
the business plan and proforma, the potential entrepreneurs proposal will be sent
to the bank in order for more assessment and consideration from the bank as the
sponsor of the SPV (1.b). As such is made to ensure that all the risks are
perceived, calculated, and anticipated. Afterwards, the assessment result is given
30

back to the SPV. Approval or further considerations will be spelt out by the
sponsor as a recommendation to the SPV (2.a). Furthermore, once the proposal is
approved, the SPV will enter a partnership contract with the entrepreneur with
all sharia principles and conditions must be known by both of transacted parties
(2.b).

2.3.1. Challenges of The SPV

There are numbers of studies regarding on the application of an off-balance
sheet SPV. According to Gorton and Souleles (2005), the latent issue is on the
accounting of the firms that whether the transfer of receivables from the sponsor
to the SPV is treated as a sale or a loan for accounting purposes. This is pertinent
as it affects the balance sheet of both the sponsor and the SPV. The true sale, if
the conditions are met, will affect the profit or loss of the transferor as the seller.
Financial Accounting Standard No.140 has two broad requirements for a true
sale, that the first is the SPV must be a qualifying SPV and the sponsor must
surrender the control of the receivables. Surrending the control of the receivables
means that there is transfer of ownership of the receivables from the sponsor to
the SPV. Gorton and Souleles in their research in 2005 explained in greater
detail on the accounting issue of SPV. Nevertheless for a SPV of an IB, it is a
must that they need fulfill all the requirements of FAS 140 without exceptions in
order to attain true sale.
Another issue of the establishment of SPV is taxes problem. As in the
mechanism of SPV as the bridging agent between entrepreneur and IFIs, the
SPV is also receiving profit from the partnership contract once the business is
profitable. That is one source of income of a SPV. Other source of income is
from the IFI as the sponsor. This problem is related with previous mentioned
problem, whether the receivables transferred to the SPV shall be categorized as
true sale or loan. For an IFI, the later source of income shall be coming from a
true sale or qardul hasan (i.e. a loan where no interest shall be charged to
the borrower). When the profit-sharing income is taxable and the receivable
transferred from IFI to the SV is categorized as true sale is also taxable, thus
there would be double tax. This is unfavorable for the SPV, since the SPV needs
to be an organic organization which should be able to finance their activities thus
profitability is also the bottom line of their existence. Moreover, if the SPV is not
31

profitable, there will be no incentive for an IFI to establish a SPV as such only
adding up their costs. Therefore, special treatment of tax shelter should be given
to SPV in order to grab the untapped market mentioned above.
Nevertheless, the feasibility study shall be conducted in order to assess
further operational problems of setting up a SPV. As this model proposes the
SPV to exist, not only on the paper but also in the real meaning, there might be
some other issues need to be pondered thoroughly such as policy implication,
that as a SPV shall have different taste of risk with the sponsor. This is so due to
the objective of a SPV to become partner of entrepreneurs and thus shall
eliminate less business proposals. As a SPV is separate entity, they are funded by
the IFIs thus many of their policies might be intervened by the sponsor firm.
Furthermore, an IFI might want to estimate the capital needed for the
establishment of a SPV and conduct a cost-benefit analysis before taking off to
the establishment of a SPV.
2.4. Sharia Retirement Village (SRV)

The unprecedented fact of increasing number of senior citizens is something

we could not avoid. Since the mid 1980s, World Bank has responded to the
need to strengthen social insurance and contractual savings systems towards
providing old age income support in developing countries. This framework starts
with an assessment of initial conditions and capacities followed by the setting
of core objectives. Potential modalities for pension systems are evaluated and
developed by applying a multi-pillar model of potential reform designs. The idea
is that a diversified system can deliver retirement income more effectively and
efficiently. Multi-pillar designs provide more flexibility than mono-pillars
and are therefore typically better able to address the needs of the main
target

groups

in

the population and provide more security against the

economic, demographic and political risks faced by pension systems. Holzmann

et al. (2008), mentioned that the pillars are;
(a) Zero pillar: Non-contributory basic benefit financed by the state, fiscal

conditions permitting,
(b) First pillar: Mandatory with contributions linked to earnings and objective of
32

replacing some portion of lifetime pre-retirement income,

(c) Second Pillar: Mandatory defined contribution plan with independent
investment management,
(d) Third Pillar: Voluntary taking many forms (e.g. individual savings; employer
sponsored; defined benefit or defined contribution), and lastly;
(e) Fourth Pillar: Informal support (such as family), other formal social programs
(such as health care or housing), and other individual assets (such as
home ownership and reverse mortgages).
It is noted that the first pillar of retirement income will play a less dominant
role than it does now because the demographic changes will force the public
pension systems to realign their replacement rates. For example, among the
Southeast Asian countries, Singapore and Malaysia essentially rely on a single
mandatory savings pillar, which is the first pillar, for retirement financing. In
Singapore, its citizens and permanent residents who work in Singapore make
mandatory contributions to the Central Provident Fund (CPF). CPF members
can withdraw their savings for various approved purposes such as retirement,
housing, healthcare, education, investment and payment for selected insurance
schemes. A simulation study suggests that for a CPF member who begins
contributing in the year 2000 under the then prevailing rules, about three-fourths
of the total CPF wealth will be in the form of housing and the replacement rate
will be 28 percent (McCarthy et al., 2001). In Malaysia, all individuals who
work for wages are required to make EPF contributions. The EPF authorities
have not published the replacement rate for its members. While the
replacement rate is expected to be higher than Singapore, it is unlikely to exceed
25-30 percent of the middle income workers (Asher and Nandy, 2006). This
reinforces the need for other pillars to provide sufficient retirement income.
A retirement village is essentially a community for the seniors. The fourth
pillar of pension systems framework plays a significant role in supporting
retirees. As family sizes are decreasing and will be even smaller in the future,
future generations of older persons may have fewer kin to rely upon for support.
Moreover, many older people may prefer the freedom to live independently, if
perhaps near to their children and grandchildren. Many older people do not wish
to live in the same house as their children and do not wish to be perceived as
33

burdens on them, especially in hard economic times. Thus, retirement villages

offer a positive choice of housing with care to older people.
Studies conducted show clearly that retirement villages offer older
people an attractive combination of independence, security, opportunities for
social engagement and an active life (Croucher, 2006).Retirement village can
promote independence through allowing older persons their own home and
control over their privacy as well as their daily activities. It reduces social
isolation as it creates opportunities for residents to interact through formal
and informal means. It also gives a sense of security to residents knowing that
care staffs are onsite day and night and that help is available in all aspects
including benefits and financial advice and home maintenance/repair. Security
can also be derived through living in a comfortable, barrier-free environment,
with a reduced risk of being a victim of crime or harassment, a sense of
belonging, security of tenure and confidence in the provider of the retirement
village.
Entry is generally restricted to those who have attained a certain age or have
retired from full-time employment and their spouses. For certain retirement
villages, physical and health status may also determine the eligibility of new
residents to manage the costs and types of healthcare that can be provided for all
residents. The size and style of retirement village accommodation varies
enormously, from bed-sitter apartments to spacious brick and tile homes. Most
retirement villages have common areas and a range of facilities available for the
use and enjoyment of all residents. These facilities cater to the needs and wants
of retirees, and should be adjusted according to cultures where the village
belongs. These facilities help schemes to become places to live rather than care
settings.
Nonetheless, Islam does not recognize retirement as long as a person is
still breathing. Thus, in Islamic perspective, senior citizens could be still working
although in far less effort

compared to younger people. Depart from this

perspective; it always believed that senior citizens should be given some part of
light works, such as gardening or caring livestock, as therapy for them to release
any tensions they had in life. Furthermore, the Islamic retirement village,
34

ideally, should employ the orphans and unemployed young people, and if it
is possible, young
religious

homeless, beggars, and other members of society; i.e.

institutions

graduates

(bahasa:

santri

pesantren)

to

work

together in this retirement village in serving the senior citizens. The best
ideal picture that could be proposed for Islamic retirement village is that there
must be sufficient land for the villagers to grow necessary food plants and to
raise livestock and or fishery, where they could live independently from growing
food plants and raising livestock or fishes, and the surplus could be sold in the
market and the proceed could be used as retained earnings of the business.
It is realized, it may take some time and much effort-and-full focus to develop
such village. It is also acknowledged that it needs not-little-money as working
capital needed for developing such village. However, Islam is complete way
of living, thus enabling us to circulate wealth through zakah, infaq, and
awqaf. In countries like Indonesia and Malaysia, there are numbers of Islamic
foundations (bahasa: yayasan and pesantren) which pool ummahs money
whereas the amount of money is not little, that today, the ummahs money is
still parked in the foundation account and being idle without management
of the foundation knows what to do with the infaq money. It is clear, that Allah
Subhanahuwataala has ordered that zakah must be distributed to 8 recipient of
zakah, namely; The Destitute (Masakeen), The Needy or Poor (Fuqaraa), The
Alms Collector (Amil Zakah), The Fi sabiLillah, Heavily indebted people
(Gharimun), The Wayfarers (Ibn AsSabil), People in Bondage or Slavery
(Riqab), and Those who have inclined towards Islam (MuAllaf). The potential
of mobilization of zakah, and awqaf could not be deviated to another cause of
spending other that

what

has

been

regulated

by

Allah

Taala

and

Muhammad SAW His messenger. Nevertheless, it is saddening to know

that there are potential uses of the idle money (especially coming from
infaq) to contribute in poverty alleviation and job creation. Henceforth, it is
concluded that this Sharia retirement village is an integrated proposal that might
be applicable to answer the todays challenges of alleviating the hardcore poor,
job creation for young people, and as well as supporting the elder in their golden
ages.

35

2.4.1. The Challenges of SRV

As it is relatively new proposals, there is little research on the feasibility of
SRV to attain its objective as a whole approach in alleviating poverty. The make
the SRV established, there must be full support from the government that stood
behind this program. Full support from the government should be also reflected
not only through bestowing and moral supporting but also all needed support,
including finding the right areas for the village, setting up legal framework that
protects the activities of the SRV, appointing the right individual to sit in the
management of SRV who share the same vision, and also financial support in
starting up the SRV. Finding the right areas to allocate the senior citizen yet not
excluding them from the society as a whole is pertinent because fail in finding
this, the residents of SRV might be felt excluded from the society and thus
giving the uncomfortable feeling with the surroundings there. Fail in finding this
would make the SRV stop functioning from the first day.
Furthermore, the activities of SRV which combine the independence and
entrepreneurships of the residents must be identified. Without activities, SRV
would be indifferent with a nursing home and thus is not appealing for the senior
citizen itself. However, to create independence of the senior citizen, basic
necessities must be fulfilled through the programs of SRV, such as planting
vegetables, raising life-stocks or fishery, and other basic activities should be
implemented. The excess of the result of these activities would then be sold in
the market. As the name of this concept is SRV, it does not actually reflecting
that all residents in the SRV are senior citizen. Using the concept of mobilizing
everything that are idle, the idle human resources such as the orphans, the
unemployed, and of course the senior citizen shall be working hand-in-hand with
the mentioned group of people. This might not be an easy task to be anchored
due to the age gap amongst the residents would make unwanted frictions in the
village. Therefore, management of SRV is an important player that should be
carefully selected.
The management of SRV should be consist people who understand, share the
same vision, and must have genuine intention of developing this. This might not
be easy, as they are all qualitative conditions. However, another condition is that
the management should be native people who know the culture, the language,
and most importantly know how to best approach to empower and motivate the
36

idle resources while putting them in a comfortable and convenient

environment is also one key indicator of the success of SRV. Adding up,
combine this with people with business success and agricultural knowledge
would affirm the business and operational sides of SRV.
Lastly, the financial support from government and any third parties are
needed. To put this idea into practice, a lot of financial support would be as
important as having moral support from any parties in the society. Nevertheless,
as SRV is intended to be organic, too much dependence with third party financial
support would be less advantageous for the SRV itself. Governments fund is
one financial source of the SRV, followed by sources of funds from zakah, infaq,
sadaqah. Because SRV is using peoples money, audit from government is
important to support the financial transparency of SRV which is vital to keep
peoples trust on the program. Maintaining peoples trust is pertinent as such will
boost the managements morale and confidence in working on the project. As the
society is the real owner of the project, the audit and peoples supervision is
hopefully keeping the project on track. Peoples supervision is one way of check
and balances of the program, even though sometimes peoples supervision might
be subjective and unfair as people tend to use their values to judge others
mistakes. However, any kind of check and balances methods should be
allowed as long as it is supportive and constructive to SRV.
Al Jenderami is one example for retirement village that has succeeded in
developing their reach. They label themselves as Kota Ahli Sunnah Wal
Jamaah or The Islamic City. Although there are numbers of differences of Al
Jenderami and SRV in this proposal, both also share the similar nature. Al
Jenderami is a dawa community which opens to senior citizens who are
unsatisfied with their life in the old age and look for happiness through attending
Islamic classes, attending ceremony, etc. It is further developed as many senior
citizens are voluntarily coming from various places near Kuala Lumpur to live
there. However, these senior citizens must pay sum amount of money to stay at
Al Jenderami, and thus not all senior citizens could enjoy this. Starting in
Jenderami village near Bangi, Kuala Lumpur, Al Jenderami started everything in
small community and is not forming a real village. Their concept is to provide a
place for senior citizens to find happiness by creating an Islamic environment in
their surroundings. As this place needs to be financed, donations such as infaq
37

and sadaqah, and also the entrance and living fees are the main source of
income, as this organization claimed to not receive any funds from government.
Nevertheless, the concept of SRV and Al Jenderami is different in nature, as the
prior is intended to build an independent community that can contribute to
economy. Entrepreneurship and the principle of brotherhoods which is translated
through an establishment of a village where the idle is mobilized. Therefore,
leaving SRV has no example to follow yet.

3. Conclusion

To conclude, in order to translate the grand idea of mobilizing the idle

resources by empowering them, two suggested proposals are named. First, the
establishment of SPV that is intended to be bridging agent between IFIs and
entrepreneurs. As the current practices of micro financing that ignores too much
the potential business plan through equity and risk-sharing financing, SPV could
be an innovative way to move on to equity and risk-sharing type financing while
contracts of sale that incur the same effect of debt may still be used for lower
risk businesses. The second proposal is the creation of SRV as more
comprehensive, though exhaustive, approach in alleviating the poor. It is known
that the financial crisis embedded with the demographic transition will add the
burden of productive age to function the economy. SRV is a combination of an
establishment of a Sharia compliant community, entrepreneurial skills,
brotherhood, and the believe that there is no retirement in Islam as all people of
all ages need to do good deeds (amal as shalih) until their time is finished. SRV
is hoped to be the answer of the challenges, although it is understood that it is
not an instant answer to solve the problem.
Notwithstanding, it is later hoped that this two concepts could enrich the
discussion of discovering integrative Islamic approach towards poverty
alleviation. It is also hoped that further discussion on this two concepts might
arise into a greater detail and minutes on the mechanism and operation of this
two basic concepts. Discussion on details of these two concepts would be more
appealing for the Islamic banks and the Islamic foundations, as it would
eliminate their doubts on the end result of these two concepts. Ultimately, it is
hoped that this two concepts could be adopted or at least triggered another better
38

concepts of answering todays challenges of poverty alleviation.

OECD (Organization for Economic Co-operation and Development) established in 1960, OECD was a group
with 18 European countries plus United States and Canada as members. Today, 34 member countries span the
globe from North and South America to Europe and the Asia-Pacific region have subscribed to the membership
of OECD. Their mission is to promote policies that will improve the economic and social well- being of people
around the world by providing a forum in which governments can work together to share experiences and
seek solutions to common problems.
ii

ILO (2001), Youth and Work: Global Trends, Geneva.

iii

CIA World Factbook, accurate as of January 1, 2011

iv

ILO (1999). Key Indicators of the Labour Market (KILM). Geneva. Page 235

The World Bank, Will Arab Workers Prosper or Be Left Out in the Twenty-First Century, Regional Perspectives
on World Development Report 1995, Washington, page 3.
vi

National Manpower Commission (1989), Unemployment and Underemployment in Pakistan: A Review of the
Past, Government of Pakistan, National Manpower Commission, Study, No. 3, Islamabad, page 107
vii

The World Bank (2001), World Development Indicators, Washington. Page 59

viii

Long-term loss ratio measures the cumulative amount that has come due and been unpaid since it opened
relative to the total amount that has come due. It measures KUPEDES performance since a unit opened, and is
useful as historical record.
ix

BIMAS credit program is government supported programs which consist of four part service delivery program
composed of agricultural extension, credit, input supply, and output marketing services. This program was
seen as a key to increase domestic rice production, which result in increasing rural income and improving
nutritional standard, and thus ultimately maintain political stability and eliminate dependence on rice imports
(Robinson, 2002).
x

Notwithstanding that applicant is eligible to get credit for consumption activities, BRI does not actuallypermit KUPEDES loans to be taken for purposes such as ceremonies, health care, education, housing,
consumer durables, and basic household needs. What the most important point to consider is that the
applicant credit trustworthiness which most of the time is reflected through the provided collateral.
Nevertheless, some of borrowers did use the proceeds to pay their consumption activities.
xi

Loan pricing connects directly to interest rates charged by the MFIs. In 1984, KUPEDES monthly interest rate
was set on flat basis at 1.5 percent for working capital loans and 1.0 percent for investment loans, and was
increased at 1.5 percent (still on flat basis) for both types of loans. In 1995, BRI Unit Desa policy was to lower
the interest rate on larger loans. This feature attracts the borrowers as it is much lower than lofty interest rate
of loan shark, and the later policy gives the incentive for borrowers who qualified to engage longer-term with
the bank. Besides, the attractively low interest rate, BRI Unit Desa also offer regular monthly installment. They
found that monthly installments perform better than other payment schedules. Unlike other payment
schedules, monthly installment appeals to borrowers due to regularity of this schedule so gives them
perception that the monthly installment is lighter than other schedules, such as single and seasonal payments.
xii

When it was began in 1984, KUPEDES were offering 25,000 1 million rupiah. It was raised from 25,000
25 million rupiah in 1996. The increase in the ceiling was due to the incentive policy which allows qualified
borrowers to borrow larger loans. Nevertheless, it is found that only 3 percent borrows above 5 million

39

rupiah, average loan is 2,5 million but most loans fell well below 2,5 million. This attribute implies that the
borrower benefit from small loan size which is barely impossible to be given by commercial banks. It is
important to note that the borrowers are economically active poor which live in rural areas and mostly work
as farmers. The borrowed money is used to finance productive activities, such as planting, buying fertilizer,
and so on, which most of time reflect the climate risk that commercial banks do not want. Thus BRI Unit Desa
also enjoy from serving this segment and benefit from low credit risk as it is reflected by small loan size. The
increasing amount of loans up to 25 million reflects the effort of BRI Unit Desa to reduce transactional and
operating costs, thus BRI Unit would remain competitive.
xiii

This feature gives attractive offer to borrowers as borrowers perceive it as discount to their loan price.
Incentive for prompt payment is basically a return back of forfeited money, i.e. a flat 0.5 percent per month, by
BRI Unit Desa to the customer as an incentive for making payment on time. This feature, of course, is
appealing to BRI Unit Desas creditors especially creditors with large loans- since they would enjoy lower
amount of to be repaid money and stimulates them to meet their obligation. For BRI Unit Desa, it could be a
way to discipline the borrowers and thus lower the risk of adverse selection and moral hazard of creditors.
xiv

This feature allows borrowers to conclude their obligation in relatively short term period, thus is perceived
as flexible from creditors point of view. KUPEDES offers borrowers a relatively short term of maturity ranging
from 3 months to 24 months for working capital loans and to 36 months for investment loans. Taken from
Robinson (2002), according to BRIs 1995 loan survey, 40 percent of loans were taken for 12 months, 17
percent were for 18 months, and 25 percent were for 24 months. Only 7 percent of loan maturities were
longer than 24 months; 11 percent were fewer than 12 months. It implies that this type of borrowers usually
do not want to be engaged in obligation with banks in long period (> 24 months) nor very short (12 months). It
is seen by them as inflexibility and implied bigger risk for defaulting due to the underlying business in
borrowers point of view.
xv

Retrieved from http://www.indexmundi.com/map/?v=66

xvi

Retrieved from http://www.bwtp.org/search.php?q=malaysia&search=Go

xvii

The programs are as follows: (1) Income-generating projects, primarily for cash crop cultivation, livestock
rearing, aquaculture, petty trading and cottage industries, (2) programs to provide and upgrade low-cost
housing and to provide basic amenities and facilities such as electricity, safe drinking water and health
facilities, (3) direct welfare assistance and attitudinal change programs, (4) programs to meet the food and
nutritional requirements of undernourished children, and to assist school children from hard-core poor
families, and last (5) the Amanah Saham Bumiputera scheme, a special investment scheme which enables
hard-core poor Bumiputera households to obtain an interest-free loan of RM5,000 ($2,000) to invest in a
unit trust program. Retrieved from http://www.bwtp.org/search.php?q=malaysia&search=Go
xviii

Retrieved from http://www.grameeninfo.org/index.php?option=com_content&task=view&id=28&Itemid

Prof. Muhammad Yunus further elaborated the general features of Grameencredit, they are; a) promoting
credit as a human right, b) having mission to help the poor families to help themselves to overcome poverty
by targeting to the poor, particularly poor women, c) not based on any collateral or any legally enforceable
contracts, as trust is hold firmly, d) offering for creating self-employment for income-generating activities
and housing for the poor, as opposed to consumption, e) initiated as a challenge to the conventional
banking which rejected the poor by classifying them to be not creditworthy, f) providing service at the
door-step of the poor based on the principle that the people should not go to the bank, bank should go to
the people, g) obtaining loans a borrower must join a group of borrowers, h) loans can be received in a
continuous sequence as borrowers become available to a borrower if her previous loan is repaid, i) are
loans are to be paid back in installments (weekly or bi-weekly), j) simultaneously more than one loan can be
received by a borrower, k) coming with both obligatory and voluntary savings programs for the borrowers,
l) giving through non-profit organizations or through institutions owned primarily by the borrowers, m)
giving high priority on building social capital through formation groups and centers, developing of
leadership quality through annual election of group and center leaders, election board members by the
borrowers.

40

xix

Taken from http://www.grameen-info.org/, number of members of Grameen Bank in 2008 is 7,670,203

members. It is known from world bank estimation of total population of Bangladesh in 2008 is 160,000,000.
Taking number of members divided by total population, it is calculated that 4.79% of population has been
outreached and enjoying services of Grameen Bank.

41

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