III Impact of COVID-19 on Islamic microfinance

11 COVID-19 pandemic

COVID-19 pandemic: the Islamic social capital perspective in Baitul Maal Wat Tamwil institutions movement in Indonesia

Rahmawati and Fitri Rinaldi

11.1 Introduction

The financial crisis in late 1997 was caused by the unbalancing of fundamentals at a macroeconomic and microeconomic level. The financial crisis of 2007-2009 occurred by the widespread fraud in the mortgage security industry around the world. The previous financial crises are different from the pandemic crisis, which, due to health cases. The COVID-19 pandemic is, first and foremost, a health crisis (McKee & Stuckler, 2020).

The governments of countries affected by COVID-19 have imposed restrictions to reduce the spread of COVID-19 with social distancing policies and lockdown restrictions that reduced economic activities and caused interruptions to productivity and the functioning of global chains (McKibbin & Fernando, 2020). The lockdown measures had impacted financial liquidity position of small and large organizations (Ozili & Arun, 2020). As such, the respective government of affected countries are coming up with appropriate macroeconomic and microeconomic policies to overcome the fiscal constraints and stabilise the economy (McKibbin & Fernando, 2020). Financial intermedian’ services and institutions such as banks and cooperatives responded to COVID-19 disruptions and expected the government to rescue them from the damage of COVID-19.

Indonesia has a huge number of cooperatives operating in the country that have reached 123.048 with a total membership of 22,463,738 in 2019 of which only 1.5% are Islamic cooperatives (depkop.go.id, 2020). The number of Islamic cooperatives decreased from 2017 to 2019 because most of the cooperatives went bankrupt. The economic crisis, due to the pandemic, caused the cooperatives to go bankrupt again. To handle these issues, since 16 March 2020, the Ministry of Cooperatives has made a data collection hotline for cooperatives affected by the COVID-19 pandemic linked through a 1500-587 hotline and special message WhatsApp: 08111-450-587.

From 17 March to 13 April 2020, it was reported that there was a 56% decrease in demand for products or services in cooperatives, 3% delayed production, 22% capital problems, and difficulty in sourcing raw materials by 4% and this impeded operations as much as 15%; 1,785 cooperatives were affected by the pandemic. Through the Ministry of Cooperatives. The government provided support in the form of government assistance programs, subsidized electricity tariffs, and tax payments for six months, from April to September 2020. The Agency for Revolving Fund Management for Cooperatives and Small and Medium Enterprises of Indonesia, Lembaga Pengelola Dana Bergulir (LPDB) carried out a relaxation and restructuring of payments. With this pandemic, inevitably, cooperatives must increase their creativity by utilizing information and communication technology'.

Since the COVID-19 pandemic, Baitul Maal Wat Tamwil institutions (BMTIs) have faced the threat of lack of liquidity due to the coronavirus outbreak and survival in the face of sudden shocks of economic downturn. The members’ activities have been disrupted, their businesses temporarily closed, and so the return of loan funds to the BMTIs has stalled. Several BMTI members withdrew their savings to meet their increasing needs amid the coronavirus pandemic. PBMT Ventura states that 326 BMITs have problems with disbursement or financing, and liquidity problems due to the COVID-19 outbreak (Aldi et al., 2020). BMTIs face a financial crisis that they should survive and could be solved by strengthening all their resources and capacity.

The pandemic crisis is affecting developed and developing countries because of the lack of a cure or vaccine for this virus. The coronavirus has had an impact on the economy and finance of small and more significant institutions such as microfinance and cooperative institutions (Bartik et al., 2020). Coronavirus has affected the loan repayment ability of the members of BMTIs/Islamic cooperatives. This is due to the economic repercussions created by the pandemic due to the lockdown policies that led economic activities to be halted.

The financial crisis has created psychological issues among people too (Lindstrom & Giordano, 2016). As such, the psychological well-being of people needs to be addressed by financial institutions by understanding the circumstances in which people are living their life and taking actions which are appropriate to the situation to recover the debt owed by them to financial institutions. In this regard, institutions should make trust a priority and an initiative in a time of crisis because trust has remained an essential buffer against poor psychological wellness. Social capital is positively related to psychological wellness (Coleman, 1988; Putnam, 1993). During a financial crisis, a social movement will be needed more and essential to the recovery' of the economy by developing social capital elements after the crisis (Aldrich, 2010). Interestingly', social capital should also concern the effects of the financial crisis on community institutions. The social interactions that occur among various individuals in these social environments and settings are also meaningful.

The Islamic social finance system is facing a crises of trust during the pandemic. A lack of proper governance mechanisms within financial institutions to minimize the social impact of debt default has significantly' eroded the trust between society and financial institutions (Smolo & Mirakhor, 2010). In this respect the modes of Islamic social finance through Islamic social capital has the potential to provide an effective alternative to adequate governance mechanisms by' handling customers

COVID-19 pandemic 169 of financial institutions who are unable to pay their debt by providing them relief through a mechanism like zakat (alms).

Historically, during periods of crisis, the values of cooperation, solidarity, and mutualism experience an increase in popularity. BMTIs in this regard have practically shown a social mutual cooperation governance system where one member helps the other to survive and become economically empowered to build a self-sufficient society. Members participate by supporting and using other members’ products or services. To strengthen social capital in BMTI Baitul Maal is activated as social assistance to BMTI members.

Therefore, this study aims to investigate the ability of Islamic social capital to buffer against potential financial turmoil in BMTIs in Indonesia. This paper aims to analyze the Islamic social capital movement in the form of networking, spirituality, norms, and trust to resolve economic hardship created by pandemic in societies.

11.2 Literature review

Islamic microfinance is the ability to make a change that will eradicate poverty. The contractual framework of Islamic microfinance has been developed using Islamic principles, which are Islamic finance (profit-sharing finance) and Islamic social finance (zakat, infak, sadaqah, and waqf (Smolo & Ismail, 2011). It proves that Islamic social finance can be used to solve the crisis (Ahmed, 2010; Smolo & Ismail, 2011; Wilson, 2007). BMTIs were established based on Islamic finance and Islamic social finance (Ascarya, 2017).

A BMTI is a microfinance institution that carries out activities based on Islamic principles that have two objectives, social and financial missions. The social mission is known as baitul maal, which focuses on collecting and distributing charity (e.g., zakat, infak, sadaqah) to the poor. Baitul maal is supported by donors (Nasution, 2013). BMTIs were established to help Muslim micro-entrepreneurs as a strategy for the eradication of rural poverty. Baitul tamwil operates based on commercial or economic activities, and collects deposits from its members tomake productive investments. BMT is a unique institution; its nature and characteristics are derived from Islamic and cooperative principles. Sometimes BMTs are also called Islamic cooperatives.

BMTIs are considered to represent a distinct type of economic and social organization, designed to serve the needs of members rather than generate profits for investors. The dual nature of Islamic cooperatives is based on two principles: Islam and cooperative principles (Adnan & Ajija, 2015; Muttaqin, 2012; Wardiwiyono, 2012). The concept of cooperation enhance the social and psychological well-being of members of the society (Valentinov, 2004).

Coronavirus (COVID-19) changes the planning and strategy used to evaluate the risk of financing sustainability programs of institutions. Coronavirus may cause major setbacks for financing sustainable development (OECD, 2020). More than ever, due to the pandemic the number of low-income and middleincome families that need financial assistance has increased as the pandemic has turned back the poverty clock. As such, financial institutions including BMTIs have a moral role to play in societies by promoting the concept of shared economic prosperity; rather than using the pandemic as an opportunity to make more profit by charging interest to those who are unable to pay their financial obligations due to loss of income created by the pandemic.

Bamidele (2019) pointed out that sustainable development needs to consider the role of all forms of capital: natural, social, financial, and cultural, and the complex ways in which they interact. Social capital is a set of shared values that enables individuals to collectively work together to efficiently achieve a common goal, and this is a concept that is normally utilized to show how members of a society are able to stick together like one family and work towards achieving prosperity.

During the crisis, social capital was proven to help communities face a crisis and recover from the COVID-19 pandemic (Pitas & Ehmer, 2020). The individuals, communities, and the governments should be strengthening social capital by bonding (networks are made of close ties, usually with family, friends and neighbours), bridging (made of weaker ties, usually among people with different backgrounds, or people engaged in different occupations or organizations) and linking (based on connections between community residents and community leaders or institutions) (University of Minnesota Extension, 2018).

Mathbor (2007) emphasizes that there are three levels to achieve social capital value, which are bonding with communities, bridging communities, and linking communities through ties to banking, health institutions, religious affairs, NGOs, and government. There are two ways to solve the COVID-19 impact, which are from external and internal BMTIs. Externally, BMTIs need financial assistance from the government to sustain their business and internally, BMTIs need to build capacity in terms of financial resources and human resources by adopting technological progress available in this era of Industry 4.0.

11.2.1 Development of Islamic social capital

Dariah (2012) observes that it is essential to enhance Islamic social capital value by creating activities related to trust, norms, spirituality, and networking. Islamic social capital strengthens the BMTIs to achieve their social and financial objectives comprehensively. Islamic social capital enhances the relationship with Allah (SWT) and humans. There are four dimensions that ought to be developed in Islamic social capital which are trust, norms, networking, and spirituality.

To increase trust and confidence of stakeholders in Islamic microfinance, the Islamic microfinance institutions ought to put in place good governance systems (Dowla, 2006). Ng et al. (2015) stated that the development of trust should relate to the principles and values of institutions by developing codes of ethics. The development of the governance of the Islamic institutions’ framework should align with the institutions’ principles and promote the values by making a public declaration. Chapra (1992) highlighted that there is a lack of harmony between Islamic vision and the Islamic financial system. Smolo and Ismail (2011) found that a few Islamic microfinances are aligned with Islamic principles. Besides, Rixon (2013) also points out that most cooperatives do not link their strategic initiatives

COVID-19 pandemic 171 to the seven cooperative principles: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; cooperation among cooperatives; and concern for community. Novkovic (2005) points out that only 50% of members of cooperatives understand the objectives and activities of the cooperatives they belong to. This suggests that there is a gap between theory and practice in Islamic financial institutions (Azman & Ali, 2019) and Islamic cooperatives.

Ng et al. (2015) point out that the development of norms relates to social expectations that need regulation to guide activities. The regulations should align with the principles of institutions and be developed responsibly and mutually to reduce the regulator}' gap. The principles-based regulatory approach will reduce the regulator}' gap. Siebel and Agung (2006) showed that unsupervised Islamic cooperatives are an outright menace to their members, which risk losing their savings. Based on Bank Indonesia regulation No.l5/12/PBI/2013, commercial banks should allocate 20% of their total credit at least to micro-business (Prasetyo et al., 2018). Abusharbeh (2014) found that most Islamic banks use a sales-based system (murabahah) rather than profit and loss sharing. Islamic banking avoids using riskier contracts such as mudarabah (Rahman, 2007).

Networking is significant to establish and strengthen the social structure relationship in communities (Putnam, 1993; Woolcock & Narayan, 2000). Ng et al. (2015) stated that social capital based on Islamic financial instruments (risksharing finance) is essential to increasing investment opportunities and infrastructure. Network intermediaries can establish a communication network to generate a mutually beneficial relationship that fulfils social and business needs, which are: equit}' participation by finance from the government; developing principles based on a regulator}' framework to protect and spur equit}' crowdfunding and SME pool investment; enhancing literacy in equity crowdfunding and SME pool investment; and creating community networks comprising various stakeholders to facilitate coordination and cooperation in equity crowdfunding and pooling of SMEs (Farooqi, 2006).

There is also a connection between social capital and spirituality (Maselko et al., 2011); spirituality strengthens the social capital (Adhariani, 2017). Therefore, it is essential to combine and elaborate on the spirituality activities in the management process of institutions.

The Quran mentions that Muslims have an individual obligation from Allah (SW) to pay zakat, (Quran 2: 43; 9: 60; 103; 104; 4: 77); infaq and sadaqah (Quran 2:254, 57: 7, 51: 19, and 70: 24-25). These verses found in the Quran show that zakat is an obligation for Muslims and helping those in need financially in the community is a religious obligation as well as a communal obligation for Muslims.

11.2.2 On building Islamic social capital for a social movement

Social capital is a sociological concept that is an indispensable resource facilitating social movement and mobilization. Social capital relates to the spirit of cooperation influenced by cultures, values, and attitudes internalized by individuals in communities through socialization (Putnam, 1993). According to Bourdieu (1989), developing and improving access to social capital movement is not based on maximizing individual behaviour but on maximizing the network relationship by enhancing the connection between individuals, groups, and organizations.

The concept of Islamic social finance instruments already exists in Islam, as zakat, sadaqah, infak, and waqf, and are used to solve societal challenges (Zain & Ali, 2017). Islamic social finance instruments are valuable contributors to social development creating wealth development (Shahwan et al., 2018). The structure of BMTIs is to collect zakat, sadaqah, infak, and waqf and use them for social objectives (Cokrohadisumarto et al., 2016). It implies that to achieve social objectives, BMTIs need to develop the Baitul Maal system, which is supported by the BMTI movement to enhance Islamic social capital activities.

A social movement appears when there is a difference between principles and practices. A social movement challenges the implementation of principles related to the objective of the cooperative and how it works (Balkin & Siegel, 2006). Social movements are influenced by social-psychological means (i.e., changes in values, opinions, and beliefs); transformation in cultural products (e.g., literacy, books, fashion, music, visual); and transformation of the community. Currently, the COVID-19 pandemic is influencing the social-psychological means (Lindstrom & Giordano, 2016; Yamaguchi, 2013). It implies that knowledge is essential for movements in times of crisis (Porta & Pavan, 2017).

Based on the above explanation, this study emphasizes enhancing the BMTI movement through Islamic social finance.

11.2.2.1 Spiritual movement by setting Islamic goals

Based on Al-Quran and Hadith, Islam’s goals are a guide to life with balance in both material and spiritual needs, and emphasizes brotherhood and socioeconomic justice (Chapra, 1992) by ensuring social wellbeing and emphasizing increasing the development of human potential (Ahmed, 2002). Zakat has defined beneficiaries in the Quran that includes poor and needy among others and today there is a need to increase the zakat money given to poor (Stnolo & Ismail, 2011) as poverty is widespread.

Shalat enhances the connection between Muslims. Bowen (1989) highlighted congregational prayer (sbalat jamaah) as an Islamic ritual of worship that has received relatively little attention from anthropologists. Islamic activities include shalat/ibadat (either alone/congregation), rites of passage, sacrifice, recitations of the Quran, and the commemorations of births. It is essential to integrate the baitul maal and baitul wat tamwil with sustainable programs that enhance holistic inclusion, which integrates social inclusion, financial inclusion, and spiritual inclusion comprehensively in BMTIs in Indonesia (Ascarya, 2017).

In general, Islamic cooperative use the shirkah mufawadah contract, which means the business starts when two or more people contribute the same amount

(Jamaah principles). Each partner bears each other’s rights and obligations, and they cannot give a different level of contribution. Islamic cooperatives use gotong royong (mutual help/ta’awun ala al-birrî) and kinship principles. Members are the priority in cooperative activities (Syamsiah et al., 2019).

Cooperatives should have strategies to achieve sustainable economic development and greater social cohesion to counteract the adverse effects of neoliberal globalization (Bretos & Marcuello, 2017). To achieve sustainable economic development, cooperatives could play a leading role in the reduction of poverty by providing financial assistance to those who cannot access it from formal financial institutions like banks and the deposits placed by members of cooperatives can be invested in a productive manner to achieve shared prosperity in the community.

BMTI should enhance member participation. Member participation is influenced by factors like availability of facilities and infrastructure, motivation material, the management capability of board of cooperatives, education, and training focused on satisfying the needs of its members (Emita & AlRozi, 2014). As such, there is a need for cooperatives to enact strategic action plans in such a way that the members would be motivated to participate actively in the cooperative’s activities.

The cooperative should evaluate and monitor in a timely manner the satisfaction levels of its members about the running of the cooperatives (Bretos & Marcuello, 2017). The focus of cooperatives’ management is to plan the activities of the cooperative, lead the members, monitor the implementation of cooperative goals, and identify the problem areas related to the application of cooperative management and propose appropriate recommendations to reduce problems (Lcndel, 2015). It is also imperative for the governments when making policies related to cooperatives to consult the respective cooperatives and its stakeholders (Aldrich, 2010).

The BMTI movement is expected to increase Islamic social capital value. It is suggested that BMTI and other stakeholders (government, zakat institutions, waqf institutions) need to comprehensively develop the Baitul Maal Wat Tamwil system through a stakeholder approach and integration it to achieve sustainable development goals (Azman & Ali, 2019).

11.3 Methodology'

Furthermore, to answer the research questions of this study, an interview session was conducted using a semi-structured interview with questions prepared as an interview guide to identify the views of respondents. The semi-structured interview is suitable for this study since there is a list of issues available that need to be discussed but further probing is needed to get clarification. The purpose of sampling is used to inform the selection of field research sites.

The data that informs this discussion was obtained from interviews with senior managers of BMTIs in June and July 2020, which were undertaken in Jakarta, Yogyakarta, West Java, Tangerang, and Lampung. These key informants also facilitated access to some documents containing statistical and other secondary data from the interviewee’s results. In totally nine respondents participated in the interview including two regulators (Rl, R2) and six senior managers of BMTIs (Ml, M2, M3, M4, M5, M6), and one manager from a zakat institution (Zl); the medium of conducting the interview was the Indonesian language and was conducted via zoom and phone. In-depth interviews with senior managers provided insight into the development of Islamic cooperative management and how they are handling the COVID-19 pandemic.

11.4 Discussion

This section discusses the responses of the respondents regarding the way BMTI/ Islamic cooperatives are handling the impact of the COVID-19 pandemic. The respondents were asked how they would solve the pandemic problem. In general, the majority of respondents strongly agreed that emphasizing the understanding of cooperative principles and Islamic principles, restructuring member payments, enhancing knowledge in Islamic and cooperative principles, integrating Islamic finance and the Islamic social finance system through Islamic social capital, and transparency on the distribution of profit and loss sharing in BMTI. This implies that regulators, BMTIs, and other stakeholders should support BMTIs as an institution that improves the Islamic social finance system that helps reduce social problems. This study builds on the insights into how the BMTI solves its crises and problems by helping their members face liquidity problems in paying their loan. Interviews with general managers of BMTIs/Islamic cooperatives, zakat institutions, w^finstitutions, and regulators lead to a series of insights.

From the above information, senior managers of BMTIs found that the coronavirus pandemic poses a high risk to human health and increases the cost of living. The central government has issued large-scale social restrictions (PSBB) to reduce the spread of coronavirus, which affects the financial liquidity and social connections of BMTI members.

11.4.1 Response from the regulator

The response from the regulator of the Ministry of Cooperative and SMEs is that the government provides assistance in financing facilities to overcome the problem of liquidity for cooperatives, Islamic cooperatives, and SMEs who were affected by the pandemic. The government issued a relaxation and restructuring policy for loans or financing customers for cooperatives and Islamic cooperatives. Based on the Minister of Cooperatives and SME Decree No. 15 of 2020, has given legal guidance on restructuring of revolving loan/financing to micro-enterprises (cooperative, Islamic cooperatives, and SMEs). The policy issued in April 2020 is a relaxation policy in the form of loan/financing restructuring for cooperatives during the COVID-19 pandemic, which expects to be a fresh breath of air for cooperative members in Indonesia. Loan restructuring is essential to reducing the economic burden on the community and operational risk, especially for members of cooperatives affected by COVID-19 in 2020. The Ministry of Cooperative and SMEs also provided tax relaxation for six months for cooperatives.

However, the BMTIs that can receive financial support from the government are those that meet administrative requirements, and the BMTI must not have arrears of principal or interest. It shows that BMTIs, which have good governance and a reasonable return rate, will be assisted in these programs. While Wahyuni (2008) mentioned that the accountability of BMTIs was low, that shows that not all BMTI could apply for these programs.

11.4.1.1 Response from senior managers of BMTIs

For more clarification, this chapter’s research objective is to analyze the BMTI movement with Islamic social capital in the form of networking, spirituality, norms, and trust to solve the impact of the COVID-19 pandemic. This section analyzes and discusses the responses from senior managers of BMTIs.

11.4.2 Restructuring members’ payments

The pandemic crisis meant that members of BMTIs found it challenging to repay their loans. Members of BMTIs have already lost their income and become unemployed. Members of BMTIs struggle to repay their loans to BMTIs. BMTIs make a policy to reduce BMTIs’ capital buffers to finance the rescheduling of loans/financing and to allow a temporary deferment of financing repayments of members affected by the economic fallout of COVID-19.

BMTIs have created a policy to extend the terms of repayment or restructure their member’s loan obligations.

11.4.3 Enhancing knowledge of Islamic and cooperative principles

The senior manager of BMTI said that BMTI should realize the members’ needs are aligned with the Islamic and cooperative principles.

The following statement was made by senior manager Ml :

Currently, most Indonesians have forgotten that cooperative institutions in the national economy are based on kinship (family relationship) principles that are reflected in the relationship among its members in the cooperative. The cooperative institutions should promote their members by providing for the members’ needs and empowering their members. Based on Act No.25, 1992, a cooperative ought to leverage mutual financial cooperation among all of its members

Senior manager M2:

During this pandemic,... Islamic cooperative institutions that operate based on the principles of cooperation will survive. Without financial cooperation from its members, cooperative institutions might not survive in this pandemic and already we have started seeing some of the cooperative financial institutions being liquidated as they do not promote the collective financial contribution practice by its members as practiced by BMTIs.

Senior manager M3:

During this pandemic, when the members know Islamic and cooperatives principles, BMTI could encourage their members to enhance the values of cooperation, solidarity, and mutual experience. In our BMTI, new members should attend cooperative education, and after becoming a member, they should attend regular meetings with members and management. The primary aim of the cooperative education is to create awareness among the members about the cooperative philosophy and provide them with sufficient knowledge and skills about the methods and techniques of operating a cooperative institution professionally. Our Islamic cooperative contributes (2%-5% of profits) towards cooperative education.

Senior manager M4:

We have to understand that the Islamic cooperative institution is a business and social organization formed and run by the members. It is owned and controlled by members through the democratic process. The cooperative’s success depends on the quality and loyalty of the members and management (staff). In order to achieve the cooperative objective, the members’ participation should be essential in cooperative operations.

Based on the above explanations, there is a possibility that if the members of BMTIs are adversely financially affected due to the pandemic, it might reduce the financial contribution made by the members of BMTIs. In line with Syamsiah et al. (2019), members prioritize BMTI activities. BMTIs need to consider the needs of its members.

Islamic cooperatives provide products and services based on the needs of their members, even though it risks providing that product or services. Senior manager M5 focused on agricultural cooperatives.

Our Islamic cooperative considers the needs and requirements of the members in their activities as farmers. We support our members by providing education such as farm inputs, farm information, fertilizer distribution, and methods used in facilities, processing, better seeds, irrigation, communications, and consumer goods. Since it is difficult to get support from the government because of budget constraints, we connected with the Japan International Cooperation Agency (JICA) and PUM Netherlands senior experts to educate us on agriculture and business support services.

This implies that the Islamic cooperative applies Islamic principles properly in contrast with Islamic banks. According to Rahman (2007), Islamic banking avoids using risky contracts such as mudarabah. To enhance the understanding of the implementation of Islamic principles, BMTI further underlines the role of BMTIs in developing Islamic education. Senior manager Ml said:

The empowerment of members should be in line with Islamic principles such as the processes of Halal and Tayyib. Most BMTIs are ignoring providing knowledge on the importance of getting Berkah in our life. Berkah relates to what our intention is and how we work with it.

M4 emphasized:

It is important to increase spiritual activities as the spirit of BMTI. The routine ibadah enhances the capacity to become more active. After team management BMTI in the morning, there is a reading of Al-Quran (at least two verses) and reading the meaning of that verse. In the afternoon, we are closed with reading Riyadhus Sholihin. In two weeks, all the team management will have a lecture about Islamic knowledge.

This infers that BMTI establishment satisfies the members’ needs on a collective basis. The participation of the members is key to the performance of the cooperative. Member participation is voluntary, which means BMTI depends on the participation of the members. Therefore, the strengthening of members should be primary goals in the BMTI, with programs such as education, relationships, and member empowerment. Islamic empowerment on how the members conduct their businesses is an essential issue in BMTIs. It is consistent with Ernita and AlRozi (2014) that education, training, and motivation material enhance the participation of members in BMTI activities.

11.4.4 Integrating Islamic finance and Islamic social finance through Islamic social capital

BMTIs are already involved in providing relief for their members through Islamic social finance. Islamic social finance has proved useful in delivering social services during the COVID-19 pandemic. BMTIs have provided support for their members (purchasing food for their members and employees). BMTI also receives a corporate social responsibility (CSR) fund from different companies operating in Indonesia. Senior manager M4 said, ‘We received CSR funds from the company, and we are allocating that fund into 70% for the Qard Hassan account and 30% for the charity account’.

Senior manager M2 said:

When people apply for finance, the bank will charge an administration fee. However, in our Islamic cooperative, there is no administration fee when applying for finance. We do not agree with BMTI, who charges an administration fee because the member is our family. As part of BMTI, the family has no need to pay anything related to this.

Senior manager Ml:

We already started integrating Islamic social finance and Islamic finance in our activities. When a new member joins with the BMTI, they pay a membership deposit which is considered as the equity of BMTIs. The members apply to get financing from the BMTI; they should follow the BMTIs requirements, which are: BMTI imposed a deduction of 2.5% of the employee’s salary for zakat every month; BMTI receives zakat, infak, sadaqah and distributes the funds to low-income members and non-members; BMTI does not charge an administration fee for their members who apply for finance; BMTI is charged 1% for provision, but the provision fee is not recognized as income for BMTI. BMTI is allocated the 1% provision fee for the Qard Hasan account. Qard Hasan is used for Taawun activities (0.5%), which are for the empowerment of members and helping low-income members. The Taawun account cannot be used for the management of BMTI and Takaful (0.5%) for financing member insurance. Our BMTI already used zakat, infak, and sadaqah as financing tools before the CO VID-19 pandemic, but we still need support from other stakeholders such as the National Zakat Agency. Our members are categorized as extremely poor and poor people who could not afford to pay zakat, infak, and sadaqah.

Senior manager M5 mentioned that their BMTI is focused on agriculture and uses Qard Hasan as a financing tool. I is clear from senior manager M5’s response that even in the midst of the pandemic the BMTI does not face any issue in the recover}' of financing facilities extended to its members. Senior manager M5 described how their BMTI created an Islamic finance scheme for their members. The views of senior manager M5 are detailed below:

The Koperasi Pondok Pesantren (Kopontren) which is an Islamic cooperative institution in Indonesia like BMIT, does not have any problem with the lack of payment from members even during the crisis. Our Kopontren provides the requirement that has equality for both members and management of Kopontren. We are transparent to all our members. We believe this openness had a positive impact on our Kopontren. The financing procedures carried out by Kopontren, started when the Kopontren got contracts from the supermarket to provide agricultural products. The kopontren announced to their members the supermarket’s aim to purchase vegetables in various quantities and prices. The kopontren asked their members to provide those vegetables at a lower price. The kopontren profited from the difference in price. Based on the contract, the members applied for finance to invest in their business, such as buying seeds, fertilizer, and farm tools. Then they have to pay the fund back to the kopontren. Members can pay back the loan without paying interest and fees.

This shows that the Islamic cooperative already uses Islamic social finance instruments to support their members. They support their members by providing

COVID-19 pandemic 179 demand and monitoring and evaluating their performance. This is consistent with Mansori et al. (2015), who examined how Qard Hasan has zero cost borrowing; ‘no charge’ Qard Hasan can be used to fight the pandemic crisis effectively.

The BMTI operate their institutions trying to use Islamic finance and Islamic social finance comprehensively. Since this pandemic started, it has challenged BMTI to integrate with technology.

Senior manager M6 states:

Currently, we are combining Islamic finance and Islamic social finance with the technology' to enhance reaching and achieving the expanded social and financial objectives comprehensively. The pandemic challenges BMTI to be more creative and innovative. We are working together with members who work in the traditional markets and built the website. This website can be used by members and non-members to order products through BMT. Please come to our website - https://warungtetanggamu.com’.

This implies that BMTI already uses Islamic finance contracts and integrates them with Islamic social finance. Since BMTI has a social objective, BMTI established and determined a social fund from the beginning. In the beginning, members were taught that the Islamic cooperative does not belong to management but belongs to its members. Members should give their contribution to support the capital and social fund of the Islamic cooperative. Since there are many members who are not eligible to pay zakat because zakat has a rule on determining who is allowed to receive zakat. This concept of members of BMTI contributing to pay zakatis supported by Jouti (2019) who believes that this would create an integrated approach for building sustainable Islamic social finance ecosystems.

Since the members of BMTI are those with low incomes, the BMTI needs to reduce their burden by decreasing the cost related to submission and administration as members.

In terms of relationships with the zakat institution, this study asked the zakat institution manager on their connection with BMTI. Only senior managers Ml and M4 have a relationship with and are supported by the zakat collection agency. Senior manager M2 says:

We already applied to Indonesia’s national ««¿«^collection agency (BAZNAS) to allow our BMTI to get permission as an institution to receive and distribute the zakat. We expect that the zakat collection agency will give support to face the impact of the CO VID-19 pandemic. We still have not received support from the zakat collection agency (BAZNAS).

Senior manager M3 said, the ] zakat collection agency has its programs, they still do not support us yet, even during a pandemic’.

Based on the response received from the senior managers of BMTIs, it is essential to explore the views of the zakat institution on its relationship with BMTI. Senior manager Z1 said:

[The] national zakat collection agency (BAZAS) have to manage the zakat fund with high expectations on accountability in particular in financial, management, and programs. BMTI should follow the legal requirements imposed on disclosure by the regulators. We found that there is low accountability in BMT on social accountability. There is a need to rearrange the accountability process in BMTI so that it is coherent and aligned with BAZNAS requirements and expectations.

The above response implies that it needs to strengthen networking with formal and informal institutions in BMTI.

11.4.5 Transparency in the distribution of profit-sharing in BMTI

BMTIs could help build the community’s wealth through sharing profits. Based on the cooperative principles mentioned, members’ economic participation means how members give contributions (investment) to the BMTI, benefit from the surplus, and share any financial burdens the BMTI may have in difficult times. The number of beneficiaries who would be given the financing facility will depend on the decision of all members of BMTI. The transparency of the percentage of profit-sharing BMTIs should be disclosed to the public, and then the public would be interested in joining the BMTIs.

All the respondents mentioned that their BMTIs disclose the percentage of profit-sharing in the BMTIs annual reports. Senior manager M4 points out:

Based on yearly member meetings, it decided the percentage of profit should be divided into a 20% share for the reserved fund, 40% share for members, 10% sharing for management and the controller, 10% share for the education of members, 10% for supporting local government, and 10% for a social fund with a total of 100%.

This research concluded that BMTI still has potential that remains unrealized. BMTI has already integrated Islamic finance and Islamic social finance smoothly. To achieve full integration between Islamic finance and Islamic social finance, BMTI needs to strengthen its Islamic social capital. Islamic financial institutions need to measure social values and reports so that they can be used to evaluate programs’ social impact (Azman & Ali, 2019). It implies that it is essential to develop the gradual convergence of standards, regulations, and infrastructure of BMTIs so they can expand across other countries.

11.5 Conclusion

The extent and severity of the damage caused by the COVID-19 pandemic may not be clear. This study finds that the effect of the CO VID-19 pandemic causes the financial crisis of BMTIs members. Financial crises can exert a powerful influence on the shaping of Islamic social capital. The stakeholders (government, national zakat agency, waqf national agency, members, and scholars) need to support the BMTI movement through policies on increasing the function of Islamic social capital through Islamic finance and the Islamic social finance system. The BMTIs need to enhance their governance, supporting the integration process of the Islamic finance system. The integration of Islamic social finance and Islamic finance system is a useful tool to solve the financial crisis and eradicate poverty. The stakeholders expect to contribute to enhancing Islamic social values to strengthen the Islamic financial system in BMTIs comprehensively.

This study proposes a way to enhance Islamic social capital value to reduce the damage of a pandemic to society and to counter the long-term impact of the COVID-19 pandemic, which are: restructuring the members’ payment; enhancing knowledge on Islamic and cooperative principles; integrating Islamic finance and the Islamic social finance system through Islamic social capital; and transparency on distribution of profit-sharing in BMTIs. The Islamic financial system should also use technology through a stakeholder approach that increases the finance and services of BMTIs. There are still limited instruments to measure the effectiveness of Islamic social finance. The government should assist in developing Islamic social finance instruments based on the needs of members and management of BMTIs. The government could influence potential members to join a BMTI by providing financial and non-financial assistance that makes it easy to make a proper blend between BMTI and other social institutions.

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