Expressing Islam: Religious Life and Politics in Indonesia

14. Islamic Microfinance Initiatives to Enhance Small and Medium-sized Enterprises

251 14 Islamic Microfinance Initiatives to Enhance Small and Mediumsized Enterprises Muhammad Syafii Antonio Especially after the Asian monetary crisis, small and medium-sized enterprises (SMEs) acted as a safety valve for the national economy by enhancing economic growth and reducing unemployment. During 2000– 06, the value created by the SME sector increased significantly, while that of large enterprises decreased. SMEs contributed 54.2 per cent of Indonesian gross domestic product in 2005 and absorbed about 79 million workers (96.8 per cent of the labour force) (Setyobudi 2007). The central bank, Bank Indonesia, has acknowledged that there is little risk attached to the credit distributed to SMEs, whose repayment record has generally been sounder than that of larger enterprises (Setyo­ budi 2007). Other studies concur that SMEs proved more resilient to the financial crisis than larger enterprises, underpinning their pivotal role in the Indonesian economy (Tambunan 2004). Nevertheless, SMEs continue to have great difficulty gaining access to formal financial institutions . It is in this context that this chapter will explore the emergence of Islamic microfinance initiatives that could provide an alternative source of finance for SMEs. This chapter highlights the policy and institutional settings for SME development in Indonesia. It then discusses the main players in Islamic microfinance, emphasising in particular the role of Islamic saving and loan cooperatives (BMTs) as a strategic, community-based micro­lending initiative. The chapter highlights the importance of Islamic microfinance initiatives as part of a national program for SME development. It concludes by identifying the linkages between the various Islamic micro­ finance players, and identifying some critical aspects of their activities. 252   Expressing Islam: Religious Life and Politics in Indonesia 1 OVERVIEW OF POLICIES ON SMALL BUSINESS DEVELOPMENT Development of SMEs in Indonesia SMEs have played a significant role in the Indonesian economy for many decades, for numerous reasons. First, there is a high proportion of SMEs in the economy, whether measured by the number of enterprises or their economic output. According to the central statistics agency, BPS, Indonesia had 37 million SMEs in 1998. In that year they contributed 60 per cent of gross national product and constituted more than 95 per cent of the total number of enterprises (BPS 2000). By the end of 2006, the number of SMEs had grown to around 48.9 million (Ministry of Cooperatives 2007). Second, SMEs are a major source of employment. Shujiro Urata of the Japan International Cooperation Agency and Timberg (2000, 2006) note that in recent years the share of SMEs in total employment has exceeded 90 per cent. This figure is only expected to grow as new SMEs are formed and existing enterprises expand (BPS 2006). Over the decades, SME development has been connected to a number of contentious government policies, such as affirmative action programs to foster indigenous (mainly Muslim) entrepreneurs and programs to eradicate poverty. The two major initiatives related to affirmative action were the Benteng (Bastion) program of the 1950s and the ‘even distribution foundation’ (asas pemerataan) of Soeharto’s New Order (Robison 1986). The Benteng program was intended to increase the presence of smallscale indigenous entrepreneurs in the import sector. It was first implemented by the Natsir cabinet (September 1950 – March 1951), but its most enthusiastic advocate was Ishaq Tjokrohadisoerjo, minister for economic affairs in the first Ali Sastroamidjojo cabinet (August 1953 – November 1954). Eventually the program failed due to insufficient regulation by the government and abuse of the licensing system by the participants (Bevan, Collier and Gunning 1999: 221). Many enterprises awarded import licences under the Benteng scheme did not use the licences themselves but sold them to established, mainly Chinese-controlled, ‘Ali Baba’ companies : ‘Ali’ referring to the indigenous (pribumi) Muslims who obtained the licences through the Benteng program, and ‘Baba’ referring to the Chinese entrepreneurs who operated the businesses and took most of the profits. Arrangements such as these clearly defeated the purpose of  See ‘Perbankan Nasional Anaktirikan Usaha Kecil Menengah’ [National Banking Industry Treats Small and Micro Enterprises as a Stepson], Kompas, 25 July 2002. Islamic Microfinance Initiatives to Enhance SMEs   253 enhancing the economic power of indigenous Muslim businesspeople, and the Djuanda cabinet scrapped the Benteng program in 1957 (Robison 1986: 46). Soeharto launched his own version of an affirmative action policy in the mid-1970s. Following the Malari riot on 15 January 1974, which was sparked, among other things, by resentment towards economic domination by ‘non-indigenous’ interests, significant changes...