Lender of the Last Resort of Islamic Microfinance Institutions
Imron Mawardi and Tika Widiastuti
1
Faculty of Economics and Business, Universitas Airlangga Jl. Airlangga 4, Surabaya, Indonesia,
Keywords: Islamic Microfinance Institution, Islamic Cooperatives, Lender of the Last Resort, Liquidity.
Abstract: As a financial intermediary institution, Islamic Microfinance Institutions (IMFI), that are known as Islamic
Financial Cooperatives, accepts short-term deposits and disburses to long-term loans. This situation makes
IMFI desperately need a lender of last resort (LOLR). So far, there has been no LOLR for Indonesian IMFI,
so they formed its own LOLR. This study aims to find out how IMFI formed LOLR and find the best LOLR
model for IMFI in Indonesia. This study use a qualitative approach with case study analysis. Subjects of this
study are IMFIs in Indonesia that selected purposively with 30 managers as key informants. Triangulation
of sources and techniques are used to confirm and test the veracity of the information. The results show that
there are four models of LOLR of IMFIs; individual, other IMFIs, Islamic bank, and Islamic secondary
cooperatives. The best model of LOLR is secondary cooperatives, because the form of IMFIs in Indonesia
are primary cooperatives. Some primary cooperatives build a secondary cooperative as LOLR and places
excess liquidity. All members of secondary cooperatives have deposit as reserve requirement on Central
Bank in banking industry.
1 INTRODUCTION
Islamic Microfinance Institutions (IMFI) growing
rapidly in Indonesia. Since it was first established in
1990, in 2016 the number reached 6,051 (Absindo,
2017). The name used vary, such as Baitul Maal wa
Tamwil (BMT), baitul tamwil, Islamic cooperative,
Islamic financial services cooperatives (KJKS), and
the Credit Unions and Islamic Financing (KSPPS).
However, over 98% of Islamic microfinance
institutions used cooperatives institution as legal
entities (Bank Indonesia and LPEI, 2011).
Islamic Microfinance institutions (IMFI) are
intermediary institution in the micro sector with
Islamic law principles. As an intermediary
institution, IMFI faces liquidity mismatch. IMFI
obtains short-term funds and releases them in the
form of long-term credit. It makes makes them
inherently vulnerable to liquidity risk (BCBS, 2008).
Liquidity risk is defined as the potential loss
arising from the inability of financial institutions to
fulfill obligations (Dusuki, 2007; Greuning and
Bratanovic, 1999). This risk occurs when depositors
collectively decide to withdraw their funds in an
amount greater than the funds owned (Hubbard,
2002). For intermediary financial institutions,
liquidity risk is the inability to meet short-term
obligations.
Factors that cause intermediary financial
institutions experiencing liquidity risk is the
mismatch between the nature of funding short-term
and long-term loans. In addition, liquidity and
profitability is trade off for intermediary institution.
When financial institutions want huge profits by
channeling most of their funds, the liquidity
decreased. Conversely, if the financial institution
providing substantial funds to maintain liquidity, the
funds are rotated decreased so that profitability also
declined.
As an intermediary, IMFI also facing these two
things. Moreover, as an Islamic intermediary
institution, IMFI also face unique characteristics,
both in terms of funding and financing. In terms of
funding, most of the deposits using mudarabah
contract that included an uncertain contract. On the
financing side, IMFI using various contracts, each of
which has unique characteristics. It makes IMFI face
the possibility of a large liquidity crisis.
The inability of IMFI to pay its obligations will
make depositors do not believe and withdraw their
funds so that there is a rush. If it happens, IMFI will
collaps. It could also effect other IMFIs and
causing liquidity shock in the IMFI industry.
734
Maward, I. and Widiastuti, T.
Lender of the Last Resort of Islamic Microfinance Institutions.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 734-739
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

To avoid a liquidity shock, IMFI requires the
lender of last resort (LOLR) like the institutional
banking intermediation. LoLR is the provision of a
loan facility to IMFI experiencing liquidity problem
and serves to avert a systemic financial crisis on the
industry. Differences with the banks, the
government did not provide lender of the last resort
for IMFI. Therefore, IMFI establishes itself LoLR as
a step to avoid the failure to pay obligations,
particularly payments to depositors who withdraw
funds at any time. This study aimed to identify the
form of LoLR of IMFI in Indonesia. In addition, also
found suitable models for IMFI’s LoLR in
Indonesia in the form of Islamic cooperative.
2 LITERATURE REVIEW
2.1 Islamic Microfinance Institution
More than 98% of IMFI in Indonesia operated as
Islamic cooperatives, pursuant to Rule Minister of
Cooperatives and SMEs No. 16 in 2015. IMFI is a
cooperative that runs savings, loan, and financing
with Islamic pattern which is called Credit Unions
and Islamic Financing (KSPPS). IMFI is a
intermediary institutions, ie receiving deposits and
disbursing financing with Islamic Shariah
compliance covenants only to members of the
cooperative. Additionally, as a business organization
that is also social institutions, IMFIs can receive and
distribute zakat, sadaqah and infaq, as well as
manage the waqf property. IMFIs in Indonesia
adopted the concept of the Baitul Maal wa tamwil,
which as a business institution (baitul tamwil) and
social institutions (Baitul Maal) (Hamdan, 2009).
According to the Ministry of Cooperatives and
SMEs, the number of IMFIs in Indonesia was 3,307
in 2010 with assets of Rp 3.6 trillion. In 2015, the
number of IMFIs has increased to more than 5,000
with assets of more than Rp 4.7 trillion, and increase
6.000 in 2016. Most IMFIs have many branches to
provide services to members and the community in
various villages and towns (Hasbi, 2015).
Microfinance is financing institution that
includes many types of financial services, one of
which is microcredit. Microcredit is the type of loans
given to customers with medium-scale enterprises
and is likely to have never been in touch with the
world of banking. Customers of micro-loans often
do not have anything to serve as collateral, does not
have a fixed income, and administrative
requirements needed to access a loan of this type
tend to be easier. Easily create customers from more
middle-class people accessing these loans, so the
amount of confidence that microfinance is a very
important strategy for poverty alleviation.
Increasing people’s understanding of Islamic law
which forbids usury and allows the sharing system,
as well as the saturation of the conventional
financial system calculation of the profit on the
flowers, are among the reasons that encourage
people to use the Islamic system the profit
calculation is based on the bond for the results.
Based on (Muttaqien, 2013) explaination, the
Islamic economic system not only regulates the
technical seek profit but also serves a basic
philosophical outlook in the context of the human
economic activity. The presence of Islamic Micro
Finance Institutions (BMT, USPPS or KSPPS) is to
be appreciated, because according to (Alam, 2012)
where IMFI basically complement the financial
institution that is able to serve all segments of
Indonesian society.
According to Law No. 25 in 1992, the
cooperative is a business entity consisting of persons
or legal entities with the bases cooperative activities
based on the principle of cooperation as well as
people's economic movement based on family
principles. Swasono in (Hendar and Kusnadi, 2005)
explains some reasons for the cooperative to
become the backbone of the Indonesian economy.
Cooperative is a container accommodating the
political message that the poor economic colonized
and dominated by the colonial economic system.
Cooperative realize mutual interests, help
themselves collectively to improve the welfare and
productive capabilities. Cooperatives are appropriate
container to build a small economic group (native).
The small economic group is not a problem partial
macro issues in the economic life of Indonesia, both
in quality and quantity.
2.2 Lender of the Last Resort
Concepts Lender Of The Last Resort according to
Law No. 3 of 2004, the Central Bank is a state
institution that has the authority to issue legal tender
of a country, to formulate and implement monetary
policy, regulate and maintain the flow of payment
system, regulate and supervise the banking system
and running the function of lender of last resort.
Bank Indonesia in carrying out the functions of
lender of last resort to give credit or financing based
on Islamic principles to banks experiencing short-
term liquidity problems caused by the mismatch in
fund management. The loans provided by Bank
Indonesia to banks that need it for a period of
Lender of the Last Resort of Islamic Microfinance Institutions
735

maximum 90 days. In addition, requirement
provided by Bank Indonesia to the receiving bank is
a bank loan the borrower is required to provide high-
quality collateral, the collateral must be liquefied
with the minimal collateral value equal to the loan
amount.
Particularly financial institutions such as Islamic
microfinance institutions (IMFI) are vulnerable to
liquidity problems, namely the ability of financial
institutions to meet the obligations of customers who
save or borrow. is motivated by the liquidity
problem not match the time between customers save
money and borrowed funds, customers tend to save
money in a relatively short time span while
customers who apply for loans in Islamic
microfinance institutions have a long period. Lender
Policies Of The Last Resort (LoLR) is the key to
these problems because LoLR proved to be one
effective tool in the prevention and crisis
management.
In principle, LoLR divided into two conditions,
namely: 1) Normal LoLR loans from the one
financial institution temporary to the other that have
liquidity problems but do not have a systemic
impact, the receiving loans should also provide
adequate collateral with a minimum value of the
loans. Normal LoLR aims to keep the payment
system and monetary stability remain smooth and
stable. 2) LoLR crisis is a loan provided a financial
institution that is experiencing a shortage of
liquidity, and could cause systemic risk to the entire
financial system. Potential systemic impact factor
primary consideration in awarding LoLR to a crisis,
this LoLRinstitution guarantee given to the less and
unable to pay debts, but no warranty is given by the
government. LoLRinstitution can provide
emergency financing to commercial funding borne
dby the government.
2.3 Liquidity
Based on (Brigham and Houston, 2001) explaination
the liquidity ratio is a ratio showing the relationship
of cash and other liquid assets with short-term
liabilities. A company can be said to be liquid if the
company is able to pay off its short-term financial
obligations or long-term liabilities maturing during
the year. Meanwhile, if a company is not able to pay
off their financial obligations then categorized into
companies that are illiquid.
According to (Riyanto, 2001), the factors to be
considered in determining the liquidity can be
divided into three parts as follows. First, The amount
of investment in fixed assets compared with the rest
of long-term funds. Second, The volume of
corporate activities. Third, Control current assets.
In theory, liquidity risk management (LRM) can
be analyzed from the balance sheet (assets and
liabilities) and LRM policies (Ismal, 2010). On the
asset side, the LRM analysis takes into account the
efforts of Islamic financial intermediation
institutions in monitoring financing; Arranging the
right allocation of financing; Standardize financing;
How to deal with financing in poor economic
conditions; And how the intermediary financial
institutions handle liquidity shortages (Akhtar et al.,
2011).
In the context of an intermediary institution,
liquidity risk occurs in two cases. First, it appears
symmetrically to the debtor in relation to the
intermediary institution, for example when the
intermediary institution decides to stop the credit,
but the debtor cannot afford it. Secondly, it appears
in the context of bank relations with depositors, for
example when depositors decide to withdraw their
deposits but the intermediary institutions cannot
afford them (Greenbaum and Thakor, 2007).
In other words, good liquidity management
shows good Sharia implementation as well. Sharia
implementation is a good consequence for Sharia
financial institutions that will get closer to the
achievement of the goal of Sharia, the maslahah
(Chapra, 2001).
However, as previous explanation related to how
important LoTR of Islamic microfinance, has not
been found research that addresses that institution.
the studies that have been done more to discuss the
Islamic bank, such as research conducted by
(Aldoseri and Worthington, 2009; Ben et al., 2014).
Risk of liquidity of microfinance institutions is
something urgent that need to answer, and this
research be expected can give useful solution.
3 METHODOLOGY
This study use case study analysis. The Subjects are
Islamic Microfinance (IMFI) that known as Islamic
cooperatives in East Java selected purposively with
managers and co-manager of IMFI as key
informants. Triangulation of sources and techniques
are used to confirm and test the veracity of the
information.
Data mining is done in several stages. Data
mining is an effort to dig deeper into the information
as long as it has not yet been realized by many
parties from a data. The first is through a Focus
Group Discussion (FGD) with the IMFI managers,
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
736

representatives from the Department of Cooperatives
of government, and a companion which is Microfin.
FGD is done to look for a variety of important
elements in determining the lender of last rsort
(LOLR) of IMFI. In addition, the FGD is also aimed
at obtaining information on LOLR models of
IMFIs which are different to one another. Once the
elements of the LOLR model is set, then the data
mining done by interviewing managers of IMFI
indicated to have different LOLR. The second stage
is a process where we are realize that there are four
models of LOLR of IMFIs; individual, other IMFIs,
Islamic bank, and Islamic secondary cooperatives.
At the last stage, the researchers found that the best
model of LOLR is secondary cooperatives, because
the form of IMFIs in Indonesia are primary
cooperatives.
The data analysis techniques of this research is
using content analysis method. Content analysis
method is defined as a technique to draw
conclusions by identifying specific characteristics of
a message in an objective, systematic, and generalist
(Holsti, 1969). This method is intended to analyze
the whole discussion about the BMT’s LOLR.
4 RESULTS AND DISCUSSION
Islamic Microfinance Institution (IMFI) is a
financial intermediary institution. IMFI receives
deposits from third parties that surplus funds, then
distribute it to parties who need funds (deficit). The
short-term nature of deposits and long-term
financing make IMFIs often face liquidity problem.
Most of the 128 IMFIs being questioned, all claimed
to have liquidity problem experienced.
According to the managers of IMFIs, liquidity
problem can be anticipated. Therefore, liquidity
problem can be predicted when it occurs. The main
cause of liquidity problem by IMFI is the
commemoration of religious holidays such as
Ramadhan and Idul Fitri, new school year, and
planting season. This is as revealed by Nyakdin,
director of IMFI Hero Tulungagung, “Historical data
about customer behavior is an important lesson in
regulating liquidity.
The importance of liquidity is well understood
by IMFIs. Abdul Madjid Umar, director of IMFIs
UGT Sidogiri which is the largest IMFIs in
Indonesia said, as an intermediary institution,
liquidity regulating is very important for IMFIs.
Therefore, liquidity is the pulse of intermediary
financial institutions, so that if fails to regulate
liquidity, then the future of IMFIs business will be
destroyed.
Liquidity is a trade off of profitability. If
liquidity is good, then generally profitability is
disrupted, and vice versa, if profitability is good,
liquidity is threatened. Because, to maintain
liquidity, IMFIs need to reserve a certain amount of
funds so that if at any time taken by the depositors,
the IMFIs will have no liquidity problem. However,
the reserve fund is idle, so it cannot be used to make
profit.
It is known that 82 of 128 IMFIs (64%) claim to
be able to solve their own liquidity problems. IMFIs
that can overcome their own liquidity rely on
customer deposits to overcome liquidity (35 of 46
IMFIs). In addition, linkage with other financial
institutions, either linkage with sharia banks, linkage
with other IMFIs or other financial institutions.
Some IMFIs rely on multiple sources at once.
From this fact, it appears that linkage becomes
very important for IMFIs. If they cannot rely on
customer deposits to cope with the usually urgent
liquidity, then they rely more on linkage with
Islamic financial institutions. During this time, most
of IMFIs in East Java is already doing linkage with
Sharia banks. Meanwhile, IMFIs that can not cope
with their own liquidity, 48% rely on ownership
capital (first rank), from other IMFIs (13%), from
government (13%), and from personal bank loans.
IMFIs who can solve their own liquidity perform
productivity improvement measures (36%), internal
process optimization (32%), and productivity
improvement (32%).These three are quite effective
in overcoming liquidity independently. Generally,
those who do this are IMFIs who are experienced in
performing their intermediary function, so they
already know when liquidity difficulties will occur,
such as before Idul Fitri, new school year, and
planting season for farmers.
Activities in addressing the need for liquidity
independently is very diverse. In optimizing the
internal process, the way in which is done is to
reduce the financing (40%) and increase the capital
(53%), while the efficiency step is done by reducing
the operational cost (51%) and the optimization of
working hours. While in improving productivity,
which is done to improve employee performance
(47%) and billing (45%).
From this study, it is known that IMFI requires a
lender of last resort to obtain short-term loans. With
the loan, IMFI can pay its obligations, so the trust of
depositor will be maintained. As a result, there is no
withdrawal of large amounts of funds that could
result in IMFI experiencing liquidity difficulties.
Lender of the Last Resort of Islamic Microfinance Institutions
737

There are four models of lender of last resort of
IMFI. Firstly, IMFI established a formal guarantor
institution in the form of a secondary cooperative
which consists of IMFI, namely the Center for
Sharia Cooperatives. In East Java, there are five
secondary sharia cooperatives. This secondary
cooperative consists of institutions, namely the
primary Islamic cooperatives. Primary IMFIs that
lack liquidity can obtain liquidity from secondary
co-operatives. Likewise, the primary cooperative
IMFIs that excess liquidity can place funds on
secondary cooperatives.
Thus, the Secondary Cooperative becomes a
lender of last resort for the IMFI. “ "We set up a
secondary cooperative, recognizing the importance
of places to place excess liquidity or otherwise seek
funding when liquidity shortages," said Nyakdin,
director of BMT Pahlawan in Tulungagung.
IMFIs Pahlawan with 39 other BMTs in
Tulungagung, Blitar, and Trenggalek districts form a
secondary sharia cooperative named Center for
Sharia Cooperatives (Puskopsyah). In addition, 40
BMTs affiliated with the Indonesian Islamic Da'wah
Institution (LDII) form a secondary cooperative
IMFIs. Similarly 40 IMFIs under Aisiyah
Muhammadiyah East Java form a secondary
cooperative Bueka As-sakinah East Java.
Secondly, IMFIs takes the financing of a stand
by loan at a sharia bank that can be taken at any time
when liquidity difficulties occured. In general,
IMFIs have assets and are bankable so it is easy to
take financing in sharia banks. In fact, many IMFIs
have linkage with sharia banks not only in case of
liquidity difficulties, but also to enlarge the reach of
financing.
This is done by BMT UGT Sidogiri, BMT
Maslahah Sidogiri Pasuruan, BMT Mandiri
Sejahtera Gresik.
Third, establishing non-formal inter-IMFI
relations or other financial institution. IMFIs that are
in one region generally have a close relationship that
can help each other. Likewise, IMFIs are affiliated
in an organization's ties, such as Muhammadiyah,
Nahdhatul Ulama, and the Indonesian Islamic
Da'wah Institution (LDII). Therefore, they usually
form non-formal relationships to help each other
when needed, including in overcoming the lack of
liquidity or vice versa.
Forth, have individual backing that can be
borrowed at any time. This step is usually done by
IMFIs with relatively small assets. Usually, people
who can lend IMFIs still have business relationships,
such as customers or administrators. When they face
liquidity problem, management borrows short-term
funds from them.
5 CONCLUSIONS
As financial intermediary, IMFIs face liquidity
problem. Most IMFIs can solve liquidity problems
by relying on customer deposits to overcome their
liquidity, linkage with other financial institutions,
linkage with sharia banks, and other IMFIs. IMFIs
that cannot cope with their own liquidity rely on
ownership capital, from other IMFIs, government,
and Islamic or personal bank loans. IMFIs that can
solve their own liquidity difficulties take
productivity improvement measures, internal process
optimization, and increased productivity. These
three things are quite effective in overcoming
liquidity difficulties independently.
To solve the lack of liquidity, IMFIs make a
lender of last resort. There are four models of
IMFIs’s lender of last resort. First, the IMFIs
established a formal guarantor institution in the form
of a secondary cooperative. Secondly, IMFIs
cooperates with Sharia bank by opening a stand-by
loan which can be taken at any time when facing
liquidity problem. Third, establishing non-formal
inter-financial institution relations. Fourth, have
individual backing that can be borrowed at any time.
The best models of lender of last resort is a
secondary cooperative.
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