Saturday, July 14, 2012

Islamic cooperatives in Indonesia look for apex organization

Several Baitul Maal wa Tamwils (BMTs), small, lightly regulated Islamic microfinance cooperatives in Indonesia, asked the government to set up an apex institution for BMTs in the country.  In a paper from 2007, Hans Deiter Seibel described (in a paper presented at a microfinance seminar organized by the Harvard Islamic Finance Project) the BMT in existence as:
Islamic financial cooperatives suffer from the same regulatory and supervisory neglect as the rest of the sector. There is not much difference between Islamic and conventional cooperatives. At most one-fifth of Islamic cooperatives are in reasonably good health. The majority are dormant or non-performing; most of the remaining ones exist for the purpose of receiving funds from the government. The Ministry of Cooperatives does not register cooperatives as Islamic or conventional and provides no information on, or special assistance to, Islamic cooperatives.
The BMTs petitioning the government for an apex organization seem to be focusing on the important issues described above.  According to a rough translation: "With the apex, more scalable performance and BMT may be more developed. Absence of functioning as an apex institution to make our activities, such as financing and distribution of the velocity of money that we manage, unrecorded and unsupervised". 

Very small microfinance institutions--both conventional and Islamic--that operate outside of a suitable regulatory structure, as well as not having an apex organization, are likely to be less beneficial to their cooperative members because there is a greater potential for the organizations to fail, as well as for money to be stolen by unsavory people being allowed to work within them.  As Seibel concluded after on-the-ground research: "Unsupervised Islamic, like conventional, cooperatives are an outright menace to their member-shareholders and depositors, who risk loosing [sic] their money".

There are also several advantages for the cooperatives and their members from having an apex organization: mostly dealing with lowering costs.  If MFIs (conventional or Islamic) are responsible for collecting, managing and safeguarding deposits, as well as providing financing, and administering the collection of the repayments from clients, they will have difficulty without a system for tracking information internally, which will be costly.  This cost will eventually be borne by the cooperative members of the BMT. 

A lot of these functions can be more cheaply provided through an apex institution that will spread many of the costs across a larger number of institutions, as well as making it easier for effective regulation of the BMTs, something which was--at least at the time when Dr. Seibel was doing research on the BMTs--much needed. 

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