Micro Financing Regulation in Sharia Banks Connected with the
Bank Function as Financial Intermediary Institution
Neneng Nurhasanah and Neni Sri Imaniyati
Bandung Islamic University, Jl.Rangga Gading No. 8, Bandung, Indonesia
{nenengnurhasanah, nenisriimaniyati}@unisba.ac.id
Keywords: Micro Financing, Regulation, Sharia Banks.
Abstract: A bank, as a financial intermediary institution, collects funds from fund surplus party (excess funds) and
distributes to fund minus party (lack of funds). As an agent of development,it distributes funds through
microfinance distributed to micro enterprises aimed at improving the level of people’s incomes to overcome
income gap problems. Micro small enterprises need to get support for strengthening technology,
information, marketing, capital, access to financial resources, and access to good markets as well as big
enterprises. The institutional role has not been maximally overcome the gap problems seen from the lack of
Sharia Bank issued micro finance products. Meanwhile, sharia cooperatives and BMTs given attention to
UMKMs face the problem of bad financing and sharia compliance in its implementation. Therefore, this
research is conducted to know the regulation of micro financing in sharia banks connected with the function
of banks as the Financial Intermediary Institution and the constraints faced in implementation. The method
used is descriptive analysis with normative juridical approach. Data type consists of secondary data and
primary data. The data is collected by literature study and interview.
1 INTRODUCTION
Sharia banking has an important role in encouraging
the growth and equity of the national economy
through its intermediary role of collecting funds
from people who have excess property with those
who have lack of funds for both consumptive and
capital and business development. It has a
characteristic as multi finance of financial institution
and a function to bridge economic problems such as
economic disparities, unemployment, etc. Indonesia
is one of the countries whose current economic gap
is quite worrisome because of the unbalanced of
poverty and wealth rate. It is proven by Bank
Indonesia recorded about the increasing economic
gap (Gini Ratio) of 0.41% from 2012 to 2013 and
the lowest Indonesia’s ratio in 2008 of 0.35%.
Poverty level in March 2014 was 11.25% or
decreasing 0.11% compared to March 2013. This
decline was followed by gini ratio in which, since
2011, it became increasingly slower. Absolutely, it
was decreasing less than 1 million of poor society
each year because of present poverty conditions that
have reached chronic step and yet optimum
macroeconomic conditions. Disparity among
provinces has been happening in which the poverty
level in provinces in eastern Indonesia is relatively
higher than western Indonesia. In other parties, Gini
Coefficient was increasing until 0.42 in 2013
(Rahma, 2014). According to Syamsyuddin (2011),
inequality tended to increase in 2009-2010 and
needed a local justice formula to muffle
enhancement rate of GINI ratio magnitude
coefficient. This poses a challenge to Bank
Indonesia to help reducing the poverty rate and the
level of disparities in Indonesia.
In March 2017, the Central Bureau of Statistics
(BPS) noted the level of inequality of Indonesian
population expenditure as measured by gini ratio is
0.393. The GINI ratio decreased 0.001 points from
0.394 in September 2016. Meanwhile, it decreased
0.004 points from 0.397 in March 2016. The gini
ratio in urban areas in March 2017 of 0.407
decreased from 0.409 in September 2016 and 0.410
in March 2016. Meanwhile, gini ratio in rural areas
in March 2017 of 0.320 increased from 0.316 in
September 2016 and 0.327 in March 2016. While
the Gini Ratio in rural areas in March 2017 was
0.320, it was 0.316 in September 2016 and 0.327 in
March 2016. It is also revealed that Indonesia’s gini
ratio experienced fluctuations nationally and ranging
from March 2015 to March 2017 began to decline as
Nurhasanah, N. and Imaniyati, N.
Micro Financing Regulation in Sharia Banks Connected with the Bank Function as Financial Intermediary Institution.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 763-767
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
763
an improvement in the distribution of expenditure in
Indonesia.
Based on the explanation above, microfinance is
defined as the provision of legitimate small
businesses and individuals who have limited access
to traditional banking services, financial and
supplementing social services in terms of
macroeconomic effect on the smoothing of social
tension in society, improving living standards,
employment, and development of entrepreneurship
(Churchill and Frankiewicz, 2006). Promotion of
economic growth, reduction of poverty, achievement
MDGs (Millennium Development Goals) and
employment creation are among the first important
policy priorities and strategy pillars of the
Government of Sudan to address the challenges of
high poverty, unemployment, an increase of
inflation due to the secession of the South in
2011.Within this context and as articulated in the
Interim Poverty Reduction Strategy Paper IPRSP for
Sudan, microfinance is one of the major tools given
due to priority by the government to alleviate
poverty particularly in marginalized and conflict
areas.
Salwana et al. (2013) revealed that traditional
microfinance has failed to satisfy the Muslims
communities because of its shift from poverty to
focus on profit oriented business. Riwajanti (2013)
suggests that Islamic Microfinance should be
considered contributing to poverty alleviation,
financial development, and also financial inclusion
because it offers unique characteristics with rich of
values and human oriented. Salwana favours the
Islamic Microfinance because risk is shared between
financial institutions and beneficiaries, allowing the
entrepreneurs to concentrate on what they do best. A
survey conducted in Azad Kashmir Pakistan by Al
Huda Centre of Islamic Banking and Economics in
2011, exhibited that 99% of respondents showed
strong demand for Islamic microfinance services.
Microfinance is one of the efforts to overcome
the level of disparities in society through distributing
funds to micro-enterprises. The financing instrument
is ideally expected to assist the government in
addressing this gap issue such as some contracts in
sharia banking i.e. rahn, qardh al hasan, and
mudharabah. These contracts do not only contain
blessings, but also empirically show great benefit for
respective parties (shahibulmaal and mudharib),
especially in mudharabah. This is in line with what
Allah has coveted in QS.Al-Hashr [59]: 7 follows:
“And what Allah restored to His Messenger from the
people of the towns - it is for Allah and for the
Messenger and for [his] near relatives and orphans
and the [stranded] traveller - so that it will not be a
perpetual distribution among the rich from among
you. And whatever the Messenger has given you -
take; and what he has forbidden you - refrain from.
And fear Allah; indeed, Allah is severe in penalty”.
The word duulah (ةلود) is something that is
circulated and obtained by succession. The sentence
intends to affirm that
property should not be people’s asset and powet, but
it must be circulated to be enjoyed by all members
of society. With these verses, Islam rejects all kinds
of monopolies, but holds the principle of equitable
circulation of wealth for all members of society
(Shihab, 2007). According to Meby and Latif (2015),
KUR (Micro Business Loan) distribution is
hampered by high interest rates and access
difficulty. Conceptually, KUR is categorized as a
passive poverty reduction program that does not
make poor households as the main targeted
recipient. In the implementation of KUR, executive
banks remain bound and follow microprudential
banking rules such as NPL, LDR, CAR, and GWM.
On the contrary, distributing KUR to UMKM
owned by poor households is seen to increase bank
risk and violate microprudential principles, such as
rising NPLs. About 70%–80% of government
guarantee have to bear their own likelihood of non-
performing loans (NPL) about 20%–30%. To
minimize the increasing NPL, it appears the
tendency to continue to require collateral to UMKM
in proposing KUR. The problem is that poor
households often do not have something (according
to bank) to be their collateral. Hence, in its
implementation, micro financing has not been
optimally implemented, including in sharia banking.
Thus, this study was conducted to know the
regulation of microfinance in sharia banks and the
role of regulation in encouraging the role of
intermediary social sharia banking.
2 METHODS
The method used in this research was descriptive
analysis with normative juridical approach. Its data
source consisted of primary data obtained from
Sharia Banks to get description about the
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
764
implementation of micro financing in sharia banking
and secondary data obtained through tracing
primary, secondary and tertiary legal documents,
and reviewing legislation and government policies
related to microfinance in sharia financial
institutions (Soekanto, 1995). Data collection
methods were interview and documentation, then it
is analyzed qualitatively.
3 DISCUSSION
3.1 Micro Financing Regulation in
Sharia Banking
Micro financing optimizes the intermediary role of
sharia banking to overcome the problem of
economic inequality and poverty. One of its
products is KUR program in which its lending is
done by government banks such as BRI and
distributed by Bank Syariah Mandiri (the only bank
appointed to distribute KUR that also has “Warung
Mikro” as its product). Quantitatively, according to
Muhammad (2013), its role is still not satisfactory to
UMKMs because there are fundamental issues
related to sharia financial system, function of sharia
banks, lack of currency standards, and permissive
mindset of capitalistic environment.
Wulandari (2012) explains that microcredit is a
small lending program to the poor society who have
a yield of 100 million per year to finance their
productive activities in earning income. According
to Law No.20 Year 2008, micro small and medium
enterprises are a productive business owned by
individuals and/or business entities. There are four
financial institutions that distribute credit/micro
financing: Formal Microfinance Institutions (Bank
and Non-Bank), Non-Formal LKM (legal and non-
legal), LKM of government programs, and informal
LKM (regular social gathering, loan sharks).
Related to microfinance, June 8, 2007, the
government launched Inpres no. 6/2007 on the
Policy of Real Sector Development Acceleration and
UMKM Empowerment as the legal basis. It is
started by launching KUR program to improve
UMKM access to capital sources from formal
financial institutions in accelerating poverty
reduction, job creation, and income generation.
Then, there is an MoU among the government, the
distributing bank, and the guarantor company. In
2008, Presidential Regulation 2/2008 on Guarantee
Institution, Addendum I MoU on the maximum loan
value of KUR of IDR. 5.000.000,- with maximum
interest rate of 24%, PMK No.135/PMK.05/2008 on
Loan Amortization (IJP) of 1.5% and a guarantee of
70%. In 2010, Addendum II and Addendum III
MoU on Micro KUR with maximum loan ceiling of
IDR 20,000,000,- and maximum interest rate of
22%, and Retail KUR with maximum loan ceiling of
IDR 500,000,000,- and maximum interest rate of
14%, as well as underwriting KEP-
07/M.EKON/01/2010 on the addition of KUR
distributing banks (13 BPDA). PMK
No.189/PMK.05/2010 on the addition of IJP is from
1.5% to 3.2%. In 2011, PMK No.99/PMK.010/2011
on the Paid-in Capital Shift is from IDR50M to IDR
25M for regional credit guarantee company. In 2012,
KEP-07/M.EKON/01/2012 is the addition of two
local credit guarantee companies under the scheme
KUR in Jamkrida Jatim and Jamkrida Bali Mandara.
Then, Kep-08/M.EKON/-1/2012 is related to the
addition of KUR distributing bank (13 BPDB).
For sharia banking, the rules of micro financing
are PBI No.14 Year 2012 subsequently amended by
PBI No.17/12/PBI/2015 on Credit Financing or
Financing by Commercial Banks and Technical
Assistance in the Framework of Development of
micro, small, and medium enterprises. Article 2,
commercial banks are required to provide UMKM
credit or financing. The lowest credit is 20% based
on the ratio of UMKM credit or financing to total
credit or financing, the achievement of UMKM
credit or financing ratio at the end of each year, the
achievement of UMKM credit or financing ratio
gradually, and the calculation of UMKM credit or
financing percentage conducted jointly for all
Commercial Bank offices. Article 2 paragraph (4)
begins to apply for Sharia Commercial Bank and
Sharia Business Unit in 2014 about the obligations
of commercial banks to distribute micro credit or
financing at least 20% with gradual percentage of
distribution. In 2017, the ratio of UMKM credit or
financing to total credit or financing is 15% and
becomes 20% since 2018.
Other amendment is about the realization report
of UMKM credit or financing to BI conducted by
online and offline with the deadline set. In article 12,
if the achievement of UMKM financing at the end of
the year is not fulfilled in accordance with the
stipulated percentage in Article 2, Sharia
Commercial Bank is obliged to conduct training,
organizing, and allowances for micro, small, and
medium enterprises that have not yet been
getting/never received UMKM financing. Article 13
regulates administrative sanctions, certain nominal
payments, and recommendation from BI to the
supervisory authority of the bank to take action.
Micro Financing Regulation in Sharia Banks Connected with the Bank Function as Financial Intermediary Institution
765
According to Imaniyati (2015), sharia banks
provide some services to support the implementation
of national development to improve justice,
togetherness, and equity of the people’s welfare. As
intermediary agent, banking service provider does
not violate sharia, monetary policy transmission
instrument, fund or investment manager, and social
function manager (ZISWA). Operationally, in Law
No.21 Year 2008, the functions of sharia banking
(BUS and UUS) are (1) to collect and distribute
public funds, (2) to perform social functions in
baitul mal institutions that receive funds from zakat,
infak, alms, grants, or other social funds and
distribute them to zakat organizations, (3) to collect
funds from wakaf and distribute it to wakaf
managers (nazhir) in accordance with wakaf (wakif)
willingness. The social functions implementation in
paragraph (2) and (3) are corresponding to the
provisions of legislation.
As the executor of social activities, sharia bank
performs social activities by prioritizing justice,
prosperity, and economic equality regularly to
encourage the growth of sharia entrepreneurs from
micro to macro level, while conventional bank
engages these activities not periodically. Besides
that, halal promotion, business unit establishment,
and income opportunities increase investment
because of transparent and equitable benefits. These
activities are supported by sharia banking legal such
as Law No. 21 Year 2008 for PT to distribute funds
for social activities and PBI No. 17 Year 2017 that
requires sharia bank to distribute financing at least
20% in stages.
3.2 The Function of Sharia Banking as
a Social Intermediation Institution
The fundamental differences between sharia and
conventional banking is not only in business
practices but also on the values that are not only
expressed in the transaction activity to achieve the
halal transaction (sharia compliance), but also
much more broadly than the role of sharia banking
for the community as a manifestation of the wealth
of Islamic values and commitment to the issues.
Acoording to Nurhasanah (2015), as collectors and
distributors of public funds (financial intermediary),
sharia banking needs to facilitate the wheels of
community economy and carry out business
(tijarah) regulated in the provisions of article 4
paragraph (1) of Law No.21 Year 2008. Its religious
functions are regulated in the provisions of Article 4
paragraph (2), (3), and (4) of the same Law.
In performing business functions, sharia banking
also performs a social function (tabarru’) in the
form of baitulmaal institution which has the same
distribution with its function above. Based on
Article 4 paragraph (2) of Law No.21 Year 2008,
sharia banking also collect other social funds, such
as bank receipts from the imposition of sanctions
against customers (ta’zir). Thus, the status of Sharia
Bank and UUS, besides being profit-seeking
company, is also as a social body in the community
that needs many strategies that are easily understood
by the community to achieve the goal of economic
empowerment (Usman, 2012).
According to Bennett in Antonio (2013), social
intermediation is an investment process formed by
development of human capital and financial
institutions aimed at increasing the poor’s
confidence as a preparation for them to use formal
intermediation. The empowerment of groups
through the provision of social services consisted of
mentoring, training and enhancing skills, insight,
financial literacy, and technological introduction.
This activity has been regulated in BI Regulation
No.17 Year 2017 regarding changes in credit and
microfinance to provide coaching and mentoring if
they cannot meet targeted percentage of their
financing distribution.
In implementing micro credit service program,
sharia bank organizes the poor into its borrowers in
small groups to strengthen them having the capacity
in planning and making decision as media liaison
with branch offices where sharia bank field officers
must attend group meetings every week. Micro
financing distribution are more profitable because of
stronger resilience than non UMKM in sharia
banking industry (Wulandari, 2012). Besides that,
not all BUS, BPRS, and UUS distribute
microfinance. By the end of September 2012, it was
recorded that the distribution of sharia financing in
micro, small, and middle enterprises (UMKM)
reached 70% of the total financing or about IDR 58
trillion (Amah, 2013). According to Wulandari
(2012), only a few banks such as BTPN Sharia, BRI
Sharia, and BSM disbursed microfinance.
In general, sharia economic and financial
institution distributed micro finance through: (1)
sharia cooperative/BaitulMaal wat Tamwil (BMT)
with a significant spearhead of micro community
empowerment, remarkable growth especially in the
last two decades, and development about tens and
hundreds billions rupiahs (Antonio, 2013; Jaenal
2010), (2) zakat, infaq, alms, and wakaf (ZISWAF)
in which the proportion of mustahikmicrofinance in
economic programs are distributed by accredited
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
766
BAZ and LAZ, on average, reached 30%–40% of
the total distribution of funds, and (3) sharia banking
institutions via BPRS and via micro unit/division of
BUS/UUS in which BPRS financing for micro,
small, and medium enterprises (UMKMs) reached
84.8%, while UMKM financing of BUS/UUS
reached 64%.
The optimization of the social intermediary role
of sharia banking does not only pay attention to
profit, but also the system that contributes positively
to the socio-economic goals of the Muslim
community (summarized in the Maqasid al-Sharia)
(Chapra, 1997). As a business entity system based
on sharia values, sharia banking is expected to fulfill
the Islamic economic objectives of ensuring that
wealth can spin fairly and equitably, without
disserving any parties. Hence, it will tend to
strengthen the relationship between banks and
entrepreneurs that is a multi-purpose bank milestone
(Chapra, 1985).
4 CONCLUSIONSAND
SUGGESTIONS
4.1 Conclusions
Micro-finance regulation in sharia banking is
adequate. Socialization and supervision of sanction
implementation and sanctioning are yet effective, so
some sharia banks assume no obligation to distribute
micro finance, no implementation, and no getting
any sanction.
The intermediary roles of sharia banking include
financial and social intermediation. It is already
contained in the Sharia Banking Law and reflected
in other rules such as the PBI.
3.2 Suggestions
BI and authority parties should socialize and oversee
the implementation of more intensive microfinance
provisions through various means and media.
The literature on sharia banking concepts should
be encouraged. The function of sharia banking as a
social intermediation should be explained in the Law
of the PT so that it is aligned with the UUPS and not
interpreted differently.
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