Sunday, October 24, 2021

Lidasan: What is Baitul Mal Wa Tamwil?

FEW weeks ago, I wrote an article about the seminar-workshop on Bangsamoro Islamic finance that we conducted last March 24 – 26, 2014. In that article, I mentioned briefly about Baitul Mal Wa Tamwil (BMT).

BMT is a microfinance institution in Indonesia that is a shariah compliant and operates with profit sharing principle. It aims to develop micro and small business enterprise for the poor and economically marginalized sector in the society. BMT is a financial institution which is sought after by small entrepreneurs for financing their business operations. This institution provides finance to help small entrepreneurs who cannot access finance from the larger banking sector.

In addition, the existence of BMTs is a blessing for the lower income group in society, keeping them away from illegal money lenders who burden them with much higher interest rates. Since its appearance in 1992, the BMT has been receiving positive responses from all sections of society in Indonesia. (International Journal of Academic Research in Business and Social Sciences August 2013, Vol. 3, No. 8 ISSN: 2222-6990)
BMT is a small financing institution which operates using mixed concepts of "Baitul Maal" and "Baitul Tamwil" with its target focused on the small business sector (Andriani, 2005). The concept of Baitul Maal in a BMT institution is that of the role as a religious and social institution which collects funds from Zakat, Sadaqah, and Infaq, and distributes these funds to beneficiaries (e.g., Asnaf of Zakah, and other recipients).

By this concept, BMT also acts as Zakah institutions (Amil). The concept of Baitul Tamwil in a BMT institution has a role as a business institution which conducts its business activity involved in trading (sale and purchase of commodities), and as a financial institution which provides savings facilities and financial products.

In a research conducted by Aminah Zuria (2012) mentioned that BMT was first recognized in Indonesia through the initiative of Aries Mufti by establishing BMT Bina Insan Kamil in Central Jakarta. From that day, thousands of members (usually from Islamic community) join and conduct financial transactions using BMT as a framework and as an alternative to conventional finance/banking institutions that applies 'riba' or usurious interests. However, BMT was formally established in 1995 soon after the establishment of Bank Muamalat Indonesia (BMI) as the first Islamic Bank in Indonesia. The establishment of BMT was initiated by Indonesian Muslim Intellectual Association (ICMI), Indonesia Ulama Council (MUI) and Bank Muamalat Indonesia BMI. BMT has been in operation since 1995 under the supervision of Incubation Center of Small Business (PINBUK) (Subkhan, 2008).

The success of BMT was mainly because of the contributions of the ustadzes, azatidz or the Islamic teacher and Muslim activists. They were fully involved in the community work and assist Muslim communities in their religious obligations.

Let us then look first at how this concept evolved in Islam. It was said that in early Islamic history, financial institutions were neither well known nor well understood. However, the principles of exchange, barter and borrowing was already in existence, right from the days of Prophet Muhammad (SAW).

However, the Western financial institutions and their framework are different from that of the Islamic finance. Based on the western principle, financial institutions are oriented towards earning profits through the flotation of interest-bearing schemes which may be recognized in Islam as “harram” or forbidden because of the principle of riba. Following this frame, "an entrepreneur who seeks funding from any financial institution in order to increase his business or industrial production must bear the burden of interest levied on the borrowings which may be higher than the anticipated profits. Since interest is calculated as a fixed cost in the production of goods and services, it constitutes part of the production cost, and will definitely affect the sale price of the end product. Thus, consumers will be directly affected by the interest element, and they will have to pay the higher production costs".

Furthermore, "the entrepreneur in need of funds will be tied up with a financial institution which will lend him funds. Unfortunately, except for Islamic financial institutions, the majority of financial institutions today function under an interest-based system. Islamic financial institutions place emphasis on the financial mechanism which is through a profit and loss sharing (PLS) system, thus shielding a firm or entrepreneur from the practice of interest/usury/riba. (International Journal of Academic Research in Business and Social Sciences August 2013, Vol. 3, No. 8 ISSN: 2222-6990)

At present, the role of BMT as an Islamic microfinance institution has become increasingly important, particularly with respect to its positive impact on eliminating the problem of poverty in Indonesian society. It provides financial facilities to selected entrepreneurs either in the form of macro- or micro-financing. According to Subkhan (2008), there are around three million customers who have obtained micro-financing from BMTs in Indonesia. There are three main reasons why BMT has grown so rapidly:

1. The increasing demand from small entrepreneurs to obtain financing from BMT to develop their business simply because they cannot obtain a loan, or financing, from other financial institutions. In addition to the strict administration procedures, most of the financial institutions are quite uninterested when it comes to providing small loans ranging from IDR 500,000 - 5,000,000 (MYR 150 - 1500).

2. A Muslim has the highest expectation to conduct his business activities based on Islamic principles without involving in a riba transaction. BMT provides suitable financial facilities which fulfill their hopes and expectations.

3. Success stories from some BMTs also encouraged other people to set up similar institutions. Moreover, the establishment of a BMT in Indonesia is relatively easy and not complicated. This is because establishing BMT institutions in Indonesia does not need large seed capital.
For the Bangsamoro political entity, we envisioned to establish a BMT model in order to help our Muslim brothers and sisters. This can help our communities develop economically based on the principle of Islam and the Hadiths of prophet Muhammad (SAW).
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