gif Risk Management
Dennis Cox, CEO, Risk Reward Lim- ited
ing goes to small and medium enterprises, which is above average for commercial banks. Bank Muamalat intends to “selec- tively [distribute] its financing with empha- sis on small businesses by using its Shariah financial institution network,” 29 of the 78 BPRS, and 100 of the 2,000 BMT, and as- pires, as well, to serve the kopontren (regis- tered multipurpose cooperatives connected with pesantren, Islamic school dormitories), which often have a savings and credit unit.
What are the advantages and disad- vantages of using risks tools to man- age risks in Islamic Banks?
The only disadvantages are that the tools may not be as effective as in tra- ditional banks due to the limited ability to validate the output to ensure that the model has good predictive ability. However this should not reduce usage, rather it should lead to a review of all output.
What are the main differences be- tween the risk management in Islam- ic Institutions and those appropriate for conventional banks?
The key difference is that the Shariah committee are involved throughout the product process. The risk function needs to ensure that any conclusion that they come to also incorporates the Shariah element and therefore solutions need to be compliant with the rules in the country. Of course the variation in what is acceptable globally does make this more complex for the institution operating globally.
What are the most challenging issues with risk management in Islamic In- stitutions?
Management of liquidity risk in coun- tries where there are limited products available to offset the risks. Secondly there is the risk posed by potentially in- creasing interest rates since Islamic fi- nance to date has not operated in such an environment.
Bank Perkreditan Rakyat Shariah The roughly 80 Shariah BPRS have Rp 80.5 billion in total assets. They were created as a legal category under the 1988 bank- ing reforms. They are permitted to borrow and lend money but do not have access to the payments system, have lower capital requirements than commercial banks, and are subject to inspection by Bank Indonesia. BPRS have been growing rapidly (as noted in the Bank Indonesia Blueprint) although they still constitute a small portion of the total.
Bait Maal Wat Tamwil Islamic Savings and Loan Cooperatives The BMT savings and loan cooperatives fol- low Islamic procedures as well. So far only a few of these are registered with the Ministry of Cooperation and Small Enterprise and are subject to its rules. The BMT, like the BPRS, more or less follow the general rules for savings and loan co-ops. Most BMT are associated with Induk Koperasi Syariah BMT (Inkopsyah BMT), which was established by 18 registered Islamic BMT and 2,200 unreg- istered “pre–coops.” Other BMT are associ- ated with other organisations, especially the foundation Dompet Dhuafa and some reli- gious organisations, or are independent.
The registered cooperatives are both free- standing savings and loan cooperatives (Koperasi Simpan Pinjam–KSP) or units in broader cooperatives (Unit Simpan Pinjam— USP). I visited one Islamic USP that was part of a multipurpose cooperative that operated a store and garment factory as well as the USP; another was part of a kopontren. BMT, even free-standing ones, typically are close- ly associated with other Islamic institutions. The Mohamadiya Polyteknik in Karaganyar told us that it has five BMT associated with it.
The legal status of BMT, unless they are registered as cooperatives, is ambiguous, although the Ministry of Cooperatives and local governments often work with them. Pusat Inkubasi Bisnis Usaha Kecil (Center for Incubating Small Businesses [PINBUK]) has helped develop a regulatory system for them, and USAID contributed to a national seminar on the subject. A strong consen- sus exists on the need for some regulatory scheme to be developed, but the form that
34 Global Islamic Finance April 2012
such a scheme would take is still unclear. As of June 1998, there were 330,000 mem- bers in 2,470 BMT with Rp 187 billion in out- standing loans in this network. The number of BMT rose from 300 at the end of 1995 to 700 at the end of 1996 and 1,501 at the end of 1997. The BMT currently have 8,253 paid staff, mostly university graduates, who have been trained by PINBUK. As of June 1998, of the $20 million of outstanding BMT loans, the overwhelming amount was short term, averaged $100 per loan, and went to micro enterprises.
About half of the borrowers are reported to be “micro enterprise groups.” Some of these are possibly guarantee groups of individual micro entrepreneurs, but most are presum- ably classic NGO group enterprises. The bor- rowers are predominantly small traders.
This $20 million of small lending was 83 percent funded by the savings of members, and 14 percent from the capital of the co- operatives. Apparently, no funds came from BPRS, though some funds have come from Bank Negara Indonesia, a government bank, Bank Maumalat, and some govern- ment enterprises, especially Pertamina. The BMT appear to be 100 percent lent up, with no liquid funds in bank accounts or cash. So far, overdue amounts are negligible; less than one-third of amounts due are more than a month overdue.
Kopontren Cooperatives Connected with Pesantren The 1,500 kopontren connected with pe- santren are registered with the Ministry of Cooperatives. Most of their savings units do not follow the Islamic system, although some are beginning to do so: One hundred to 300 of the kopontren savings units are estimated to have shifted to Islamic bank- ing. The Islamic financial institutions look on them as an important target market seg- ment, but much of the kopontren leadership does not want to identify solely with Islamic financial institutions. Because the pesant- ren are mostly in rural areas, their coopera- tives and credit are frequently connected with agriculture.
Findings and Recommendations Though Bank Muamalat and the BPRS of- fer a full range of Islamic deposit and credit products, most Islamic credit in Indonesia has taken the form of trade finance (bai al salaam, bai bitsama ajil, istishna, or mura- baha), though the proportion declines as the partnership or trust provision of work- ing capital (musyarakat and mudharabah) increases. Rates (charged and paid) differ considerably between institutions and from time to time, but the average rates on Islam- ic credit often approximate those of other institutions.
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