ISO/ COPOLCO WORKSHOP

BMT (Baitulmaal wa Tamwil) ISLAMIC MICRO FINANCIAL SERVICES FOR THE POOR

Prepared by:

Ahmad Juwaini Mursida Rambe Nana Mintarti Rury Febrianto

BALI INDONESIA MAY 26, 2010

CONTENTS
1. Introduction 1.1 Microfinance and Poverty Alleviation 1.2 The basic principle of Islam and Islamic Microfinance 1.3 BMTs as Islamic Microfinance in Indonesia 2. Foundations of BMTs 2.1 The Key Factors of Successful BMTs 2.2 Shariah-Compliant Instrument of BMTs 2.2.1 Instruments for Mobilizing of Fund 2.2.2 Instruments of Financing 2.2.3 Instruments of Risk Management 2.3 The legal and regulatory context for BMTs 3. Challenges of BMTs 4. Case study of BMT Best Practice: BMT Bina Dhuafa Beringharjo, Yogyakarta

INTRODUCTION Microfinance and Poverty Alleviation Poverty is the biggest moral challenge of this century. More than three billion human beings in this world live in abject poverty. Poverty levels have also been associated with high inequality alongside low productivity. In Indonesia alone with worlds largest Muslim population, over half of the national population - about 129 million people are poor or vulnerable to poverty with incomes less than merely US$2 a day. Microfinance (MF) is a powerful poverty alleviation tool. Microfinance initiative is acclaimed as a new approach to poverty alleviation and to bring about development. Central to the challenge of ending poverty is creating wealth through development of microenterprises. Microfinance is a critical input in this wealthcreation process. It implies provision of financial services to poor and low-income people whose low economic standing excludes them from formal financial systems. The banks are not interested in financing microenterprises since the transaction cost per unit of credit is high. Microfinance is a new concept in banking and has distinct characteristics. Microfinance institutions provide to the entrepreneurial poor financial services that are tailored to their needs and conditions. Access to services such as, credit, venture capital, savings, insurance, remittance is provided on a micro-scale enabling participation of those with severely limited financial means. The provision of financial services to the poor helps to increase household income and economic security, build assets and reduce vulnerability; creates demand for other goods and services (especially nutrition, education, and health care); and stimulates local economies. Good microfinance programs are characterized by small, usually short-term loans; streamlined, simplified borrower and investment appraisal; quick disbursement of repeat loans after timely repayment; and convenient location and timing of services. The basic principle of Islam and Islamic Microfinance The principles of Islamic finance are laid down in Islamic law, the sharia, . Islamic finance is based on the concept of a social order of brotherhood and solidarity. Islam emphasizes ethical, moral, social, and religious factors to promote equality and fairness for the good of society as a whole. Principles encouraging risk sharing, individual rights and duties, property rights, and the sanctity of contracts are all part of the Islamic code underlying the financial system. There are a number of key Shari'a principles and prohibitions relevant to finance and commercial transactions which distinguish Islamic finance from the conventional forms. The key Shari'a principles which underpin Islamic finance, and have led to the creation of a separate finance industry, are as follows: prohibition on usury and interest (riba), prohibition on realising a gain from speculation (mayseer), no uncertainty (gharar) in commercial transactions, and, all activity must be for permitted purposes (halal). Most of the microfinance institutions (MFIs), however, have non-Islamic characteristics. Their financing is interest-based. Interest (one form of riba) being prohibited in Islam. Islamic microfinance offer micro-credit using a variety of Shariah-nominate mechanisms.

The Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic conditions of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor. There are certain aspects of the Islamic approach that need added emphasis. First, transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. Second, a common feature of successful microfinance experiments is group-based financing and mutual guarantee within the group. This is a highly desirable feature of Islamic societies. Mutual cooperation and solidarity is a norm central to Islamic ethics. Islamic microfinance institutions (IMFIs) can retain the innovative format of operation of conventional MFIs and orient the program towards Islamic principles and values. BMT as Islamic Microfinance in Indonesia Islamic microfinance institutions in Indonesia may be placed in three categories- the microfinance divisions of Islamic banks, the Islamic rural banks (BPRS) a subcategory of the rural banks (BPR); and the Islamic financial cooperatives that are not part of the formal financial sector. They are generally referred to as Baitul Maal wal Tamwil (BMT). Islamic credit cooperatives (Baitul Maal Wat Tamwil or BMT) are an emerging provider of micro-finance in Indonesia. BMTs are grass-roots developments programs supported by funds from Islamic community members. Muslim economic activists are the main drivers of the BMT movement in Indonesia. BMTs are often regarded as Islamic micro-financing institutions, with a similar legal basis to cooperatives. BMTs usually operate on the principle of profit-loss sharing instead of charging interest rates, and use Islamic moral values and group solidarity to encourage repayment of loans. Group solidarity is fostered through regular meetings and counseling. BMTs sometimes themselves also run retail businesses to support micro-finance schemes. In Indonesia, the BMT movement has been developing without much support, systematic supervision or regulation from the Indonesian government to date. The majority of business activities in Indonesia are micro, small and medium enterprises. Their ability to absorb labour means they have great potential to create employment and reduce poverty. But microenterprises have limited access to financial institutions. Consequently, microentreprises need other alternatives to access finance. Microenterprises prefer using BMTs due to their convenience and faster loan approval. As a community financial institution, BMTs offer microentreprises a wider range of services to support their growth such as entrepreneurship training and social empowerment programs.

FOUNDATION OF BMT The Key Factors of Successful BMT Social entrepreneurship is an emergent subfield in entrepreneurship studies. It is a process involving the innovative use and combination of resources to pursue opportunities to catalyse social change and/or address social needs (Mair and Marti 2006:37). The defining characteristic of social enterprises is that they are driven by a sense of mission and social values, not solely by maximising private gains (Certo and Miller 2008:267).

Most BMTs are run by social entrepreneurs with a strong commitment to establishing social justice based on Islamic principles. Identifying BMTs as social enterprises is important for two reasons. Firstly, social entrepreneurs and their ventures, are capable of finding effective solutions to social problems, if public policy recognises and deliberately harnesses their potential (Dees 2007:29). The implication is that we need to be cautious about creating a more rigid regulatory environment, as previously recommended. This is because BMTs have developed as cooperatives, offering more flexible financing schemes than banks. Enforcing the same regulatory rules to the financial services of the BMTs would therefore make BMTs services less attractive. Secondly, identifying BMTs as a social venture will necessitate a new framework to evaluate and identify the capacity-building needs of BMTs. This is because the operators of social ventures gauge their success not solely by typical business growth measurements such as profitability, employee numbers and asset size (Sharir and Lerner 2006). BMT operators are strongly concerned with offering entrepreneurial skills, promoting Islamic values and muchneeded funds to a larger number of clients in a viable way (Sakai and Marijan, 2008). In order to achieve this social justice objective, most BMTs offer three services (microfinancing, zakat and social welfare programs, and business/entrepreneurial training) to their members and the community. They are fundamentally social enterprises, distinctively different from businessoriented ventures. The nature of BMTs, as not merely microfinance institutions, but also as social institutions. Lack of promotion of BMTs services in general has hampered the growth of BMTs. It has created the perception that BMTs are charity organisations. Such perceptions have created problems for BMTs in ensuring repayment of loans. Social capital is the foundation upon which the BMT industry is built. Success is highly dependent on the quality of leadership and the ability of leaders to generate and direct social capital. The research of Sakai and Marijan (2008) has found that the currently successful BMTs still have their founders involved in their day to day operations. Leadership and commitment significantly affect operational success as much as the presence of regulations. BMT managers view Islamic values as important in improving human resources. Some of BMTs run training programs for their employees on a regular basis. One of the training programs emphasises self-discipline. In order to promote professional conduct among their employees, values taken from the Quran are directly linked to operational activities. Employees are constantly reminded that they have to be accountable in the eyes of God. The employees, as such, not only work to earn a living but also take the work as part of their religious duty. This acts as an incentive to work effectively and decreases the shirking behavior of the staff members of BMT. Shariah-Compliant Instrument of BMT a. Basic rule 1) Prohibition of interest as riba. No contractual guarantee(s) on investment. No taking profit from time value of money 2) Profit creation equivalent with counter-value (no risk no gain) 3) Elimination of uncertainties/ ambiguities (gharar) in contractual agreement 4) Prohibition of Gambling (maisir) 5) Committing to knowledgeable consent on the contrac

6) Avoiding the production of prohibited commodities e.g. alcoholic beverages 7) Comply with Islamic Ethic e.g. equality, avoid bribery and robbery Interest Based on capital Profit Sharing Based on profit gained

Fixed Rate setting when transaction is made with assuming profit Bank interest is debatable by all religion

Based on profit and Loss Portion/nisbah is defined when transaction is made with assuming profit and loss Profit & loss sharing is not disputable

b. Instruments for Mobilizing of Fund Instruments for mobilization of funds may be broadly divided into (1) charity that includes zakah, sadaqah, awqaf; gifts that include hiba and tabarru; (2) deposits that may take the form of wadiah, qard al-hasan and mudarabah and (3) equity that may take the form of classical musharakah or the modern stocks. While sadaqah, hiba and tabarru have parallels in conventional microfinance, such as, donations or contributions, zakah and awqaf have a special place in the Islamic system and are governed by elaborate fiqhi rules. Zakah is one of the five pillars of Islam and is meant to finance the poorest of the poor. Awqaf creates and preserves long-term assets that generate income flows or indirectly help the process of production and creation of wealth. By targeting its benefits towards the poor, awqaf can play an important role in poverty alleviation. Though there has been significant improvement in management of zakah and awqaf in recent years, their role as vehicles of microfinance and poverty alleviation is grossly underestimated. Their growing popularity evidenced through establishment of many a zakah fund and awqaf fund is an indication of their vast potential in Muslim societies. Deposits in the form of wadiah, qard al-hasan and mudarabah have their parallel in savings, current and time deposits respectively and are a regular source of funds for Islamic microfinance institutions. Wadiah deposits attract gifts to compare favorably with returns available on interest-bearing deposits. Qard-based deposits do not provide any return and in some cases, involve a charge. Mudarabah deposits are based on profit-loss sharing with the depositor as rabb-al-mal and the microfinance institution as the mudarib. Microfinance institutions also have the option of raising funds through participatory modes, such as, musharakah or modern equity. Villagers buy shares and become owners of the

program. Financing of course is made using the murabahah methodology and dividends are distributed annually to the shareholders if profits are sufficient. c. Instruments of Financing Instruments of financing may be broadly divided into (1) participatory profitloss-sharing (PLS) modes, such as, mudarabah and musharakah; (2) sale-based modes, such as, murabahah; (3) lease-based modes or ijarah and (4) benevolent loans or qard with service charge. Musharaka (partnership) Musharaka involves investors injecting equity into a business venture and sharing any profits and losses from that venture according to predetermined ratios. Each partner retains (though is not obliged to exercise) management rights in the venture, must receive accounting and other information on business activity, must authorise the raising of capital from any new partners and may receive a salary in return for participating. This is not a popular structure, however, in the context of microfinance as the thorough reporting and transparency requirements surrounding the just distribution of any profit and loss can result in substantial operating burdens and costs on small enterprises unaccustomed to formal accounting. Mudaraba (trust financing) Mudaraba involves an investor or investors providing funding for a business venture and a manager with fiduciary responsibilities providing managerial or market specific expertise (and sometimes additional funding). Investors retain ownership of the assets but have no management rights. The investor(s) and the manager share any profits according to predetermined ratios. The investor(s) share any losses according to their respective funding contributions. As with the musharaka, however, this is not a popular structure in the context of microfinance as the thorough reporting and transparency requirements surrounding the just distribution of any profit and loss can result in substantial operating burdens and costs on small enterprises unaccustomed to formal accounting. Murabaha (cost-plus mark-up) Murabaha involves a finance party purchasing tangible assets from a seller and selling them to a buyer at a predetermined profit margin. In the context of trade finance, the buyer will settle the marked-up purchase price by way of immediate lump sum payment. In the context of consumer finance, the buyer will settle the marked-up purchase price by way of deferred instalments. Using a tawarruq structure and an asset for which there is a highly liquid market, the buyer will settle the marked-up purchase price by way of deferred instalments but will also appoint the finance party as its agent to on-sell the assets on a spot basis andremit to the buyer the proceeds of any such sale. Murabaha is the most popular and flexible Shari'a-compliant structure and is used in microfinance initiatives. However, it is costly to implement and a growing number of Shari'a scholars do not approve of it, especially in tawarruq structure, on the basis that it is merely disguised lending where the participants have no interest in actually acquiring the underlying commodities. This applies all the more in the context of providing microfinance to start-ups and small companies whose businesses do not involve the sale and purchase of commodities and which do not have sufficient surplus funds to be credibly investing in commodities. Ijara (sale and leaseback) Ijara involves making available a known benefit arising from the use, possession and/or occupation of a specified asset in return for a payment. In the context of consumer financing, a finance party will purchase an asset from a client and lease it back to the client at a

predetermined rate at predetermined intervals over a predetermined period of time. The finance party is responsible for maintaining and insuring the asset (though may engage another (often the client) as its servicing agent) and the asset must exist for the duration of the lease. The financier may grant the client a sale undertaking and the client grant the financier a purchase undertaking, giving the client the option to purchase the lease assets for a pre-agreed residual sum at the end of or during the lease. It is also possible to structure the lease so that the leased asset is simply transferred to the client at the end of the lease. Istisna (construction / manufacturing) Istisna involves the construction or manufacture and deferred delivery of specified madetoorder assets of predetermined quality and quantity in return for instalment or lump sum on delivery payments. The manufacturer must procure his own goods but, unless those goods do not conform with the contracted terms, the contract is irrevocable after the commencement of manufacture. Salam (future delivery) Salam involves one party making an upfront payment to another party for the future delivery of assets of predetermined quality and quantity. The contract is irrevocable after the payment of the purchase price. Although not accepted in many jurisdictions, in a parallel salam structure, the finance party will enter into a parallel but unrelated contract to on-sell the assets on delivery at a profit. However, salam is costly to implement and, in the context of forward crop-financing in agrarian societies, it covers little more than production costs and it is the financiers rather than the clients that realize any potential gains at (post harvest-season and post asset-delivery) market maturity. Qard Hasan Charitable loans free of interest and profit-sharing margins, repayment by installments. A modest service charge is permissible.

Instrument Mudarabah/ Musharakah

Ijarah

Suitable For Fixed assets, Working capital (Declining form suitable for housing and equipment finance) Fixed assets

Cost of Capital Very high

Risk to Borrower Low

Risk to Institution Very high

Remarks Costs of loan administration and monitoring are high given the complexity of the repayment schedule and lack of proper accounting; Perceived to be ideal but not popular in practice Costs of loan administration and monitoring are low given simple repayment schedule allowing for flexibility and customization based on client preferences; Popular among Islamic MFIs and potential for easy adaptation by conventional MFIs Costs of loan administration and monitoring are low given simple repayment schedule; multiplicity of transactions in working capital financing can push up costs; Highly popular in practice notwithstanding popular perception of it being a close

Moderate

High

Moderate

Murabahah

Fixed assets and Working capital

Moderate

High

Moderate

Qard

All-purpose

Very low

Very low

Moderate

Salam

Working capital

High

High

High

Istisna

Fixed assets

High

High

High

Istijrar

Working capital

Moderate

Moderate

Moderate

substitute of riba-based lending Charity-based usually combined with voluntarism; low overheads; Popular because perceived to be the purest form of financing Back-to-back nature creates risk of lack of double coincidence; Untried Back-to-back nature creates risk of lack of double coincidence; Untried Ideal for micro repetitive transactions; Complexity not easily understood by parties; hence not a popular mechanism

d. Instruments of Risk Management Instruments of risk management and insurance in Islamic microfinance are based on the concept of guarantee (kafalah) and collateral (daman). In case of financing individuals, guarantee is used as an alternative to collateral and as a tool to manage the risk of default and delinquency. Mutual guarantee (kafalah) is used by almost all microfinance institutions both conventional and Islamic. A relatively smaller number of Islamic microfinance institutions require collateral in the form of physical assets. For protection against unforeseen risks by borrowers/ members, micro insurance would take the form of micro-takaful based on mutual guarantee. However, microtakaful products are yet to appear in the market place. In the absence of micro-takaful products, real life projects seek to protect their members in a variety of ways that are informal and perhaps inefficient.

The legal and regulatory context for BMTs While Islamic banks and BPR Syariah are regulated by Banking Law and supervised by the Bank of Indonesia, the regulations for the BMT sector involve a more complex arrangement as described below: From an institutional perspective, the establishment of a BMT is based on a Letter of the Minister of Home Affairs No 538/PKK/IV/1997 issued on 14 April 1997, concerning the Legal Status of Syariah Financial Institutions (Status Badan Hukum untuk Lembaga Keuangan Syariah). Norms for regulating membership of BMTs are regulated by Islamic Law under KUHD (Kitab Undang-undang Hukum Dagang). Arrangements for initial capital funds and members savings are regulated by Law No 25 1992 on Cooperatives. The Baitul Maal (house of treasury) function is controlled by Law UU No 38/1999 on Management of Zakat. Due to this legal complexity, the micro-finance services of BMTs suffer from a lack of supervision and reporting. In order to improve this situation, various options are under discussion.

The Bank of Indonesia is keen to encourage BMTs to convert into banks (BPR Shariah). Under the Banking Law, BMTs would need greater capital to operate, and this would likely precipitate several mergers of BMTs. The Banking Law would also require modern management with managers needing to pass an examination. The Ministry of Cooperatives intends to accommodate BMTs under its jurisdiction as cooperatives. For this, the Deputy Minister of Cooperatives and SMEs, Marsidi Rahardjo, has proposed an amendment of Law No.25 1992 on Cooperatives to clearly incorporate BMTs within the existing Law (Aziz 2008). The Department of Finance is considering special regulations for micro-financing services which would apply to BMTs. This would mean BMTs were to be viewed in the same manner as any other microfinance institution. The BMT sector itself is determined to seek a law on BMTs which reflects their multiple functions as both microfinance and social institutions.

CHALLENGES OF BMTs BMTs have displayed their sustainability and robustness in the face of grave financial crises even when the mainstream banks had to depend on governmental assistance to tide over serious financial problems. It should be noted that BMTs at the grassroots largely fall outside the financial regulatory mechanism since they operate as member-based cooperative organizations (similar to a musharakah structure) without governmental assistance or intervention. These organizations have been found to be less vulnerable to systemic risks that arise due to interdependence, as each BMT is an independently operating entity. As such, the system poses a serious challenge to the regulator how to strike a balance between the need to strengthen the linkage between formal financial system and the BMTs while retaining the benefits of flexibility and independence. A significantly large number of microfinance institutions (especially in Indonesia) are organized as cooperatives registered under the Cooperatives Act and come under the purview of the Ministries of Cooperation and not the Ministries of Finance. Many are not registered at all and operate in an informal manner, especially where they perceive additional hassles subsequent to the registration. Unlike mainstream Islamic bankers, many Islamic microfinance providers with multiple bottomlines are not comfortable with techniques like murabahah and ijarah (lease-purchase and financial lease variety) and view them as interest-basedloan-substitutes. The Islamic alternative to them is qard al-hasan what attracts them is its benevolent nature. Use of qard al-hasan where only the actual service charge is recovered from the beneficiary, does not allow the portfolio of financings to grow while inflation is likely to erode their real value, seriously threatening their long-term survival. Some suggestions like linking the loan amount to a physical commodity have been made; but without much of a consensus. Client perception towards qard al-hasan is no less worrisome. It is perceived to be free by many borrowers even when Shariah clearly distinguishes between qard al-hasan and sadaqah. There are still others who are aware of the difference and realize the need to repay the loan; but assert that qard al-hasan in its pure form provides them with flexibility (right) in deciding when to repay.

An important factor contributing to the lack of interest in microfinance is the absence of institutional credit guarantee systems in most Muslim countries. The individual borrower guarantee that is prevalent lifts the burden of loss of the business due to natural hazards, death or disability of the borrower. Nevertheless, the portfolio guarantee approach, whereby the guarantor covers whole or part of the default of the microfinance institution according to a specific agreement, is non-existent. Lack of liquidity and capital are among the perpetual problems confronting the Islamic microfinance players. The absence of any real capital market activity by Islamic microfinance providers may be due to various possible reasons, such as, the lack of awareness on the part of microfinance providers and/or lack of conducive legal and economic environment. Rating agencies that play an important role in raising of debt capital by providing indicators of default risk are also conspicuous by their absence in the Islamic microfinance sector. There is need and considerable scope for Islamic microfinance providers to develop new products as solutions to a variety of financial problems. However, the right approach to product development is a strategic one that takes a holistic view of microfinance as a composite product meeting the needs for financing, savingsand-investment, insurance, remittance and other services. Mission: The BMTs mission to help the enterprising poor in the vicinity and to empower them economically. Their particular target market are very small micro-entrepreneurs including itinerant traders and food vendors (kaki-lima). The majority of BMT customers are urban-based and provide services to both poor and non-poor households. Legal status: According to Bank Indonesia, only about 500 of the 3,000 BMT are registered as KSP (savings and credit cooperatives) with the MoC. All others are regarded as precooperatives. With reference to the draft MFI law of 2001, BMTs are as sharia/ Islamic MFIs, which may be considered as semiformal institutions: recognized but not regulated. Ownership: As cooperatives, BMTs are owned by their members. However, many BMT make a distinction between members with voting rights and partnership members without. Board and management: Board size and composition of BMT are not standardized. Internal control is generally in the hands of a supervisory board, which either meets monthly or on an ad hoc basis. External auditing and supervision vary widely. BMTs which are registered as cooperatives with the MoC, are required to send annual reports, formerly to the MoC as the official supervisor. And now, under decentralization, to their respective provincial and district cooperative authority (Dinas Koperasi). Their function is effectively limited to registration and the receipt of annual reports. There are no auditing requirements; there is no effective supervision and no enforcement of any norms; and to our knowledge no official closing of non-functioning cooperatives. BMT suffer from the same regulatory and supervisory neglect as the rest of the sector. After a period of rapid growth during the 1990s, they are now in decline, with perhaps only one-fifth in good health. In the absence of effective supervision, reliable data on both Islamic and onventional cooperatives are missing.

The outreach of Islamic cooperatives is negligible, and their overall performance poor: There is a complete lack of regulation, supervision and reliable reporting Most are reported to be dormant or technically bankrupt Their outreach is negligible, accounting for 7.20% of all financial cooperatives, but less than 1% of the borrower outreach of the sector Their loan portfolio (much of it overdue) accounts for 1.10% of the financial cooperative sector and 0.19% of the microfinance sector The savings of depositors are at great risk. A comparison of Islamic and conventional financial cooperatives reveals that both have been doing poorly: The whole cooperative sector has historically suffered from a complete lack of regulation and supervision, paralleled by excessive government interference and subsidies which have distorted rural financial markets and undermined self-help. The majority of Islamic cooperatives are reportedly dormant or technically bankrupt. Outreach and volume of services of Islamic cooperatives are negligible compared to conventional cooperatives, which are also in a state of acute ill-health. The savings of depositors are at great risk; cooperatives should not be authorized to accept savings of non-members. No remedy is in sight, except perhaps in the framework of a total overhaul of the cooperative system, which in fact is now under serious discussion.

CASE STUDY of BMT BEST PRACTISE: BMT Bina Dhuafa Beringharjo, Yogyakarta BMT Beringharjo is an established BMT, catering for the micro-financing needs of urban traders including the Beringharjo market. It has been operating since 1994 and in 2009 its assets reached 31 billion rupiah. BMT comprises 4 words which are taken from Arabic. The meaning of Baitul is house Maal is wealth Wa is 'and Tamwil is Management . So the meaning is a house where the wealth of social and business interest is managed. Social interest is a certain kind of corporate social responsibility, is a division that give empowering program to the poor, it is said to be Dhuafa. This BMT has continued to assist small and medium enterprises through its Baitul Tamwil (literally a house of business), while their Baitul Maal (a house of treasury) offers various empowerment programs. Since 2006 BMT Beringharjo has been offering not only saving schemes, but also investment schemes, particularly targeting overseas workers in Hong Kong (Beringharjo Investasi Shariah or BISA). Through this scheme, overseas workers (who are mainly female housemaids from East Java) can become investment partners and establish a new BMT in their hometown. This scheme led to the establishment of new BMT Beringharjo branches in Ponogoro, Madiun, Bandung and Kediri in 2008. BMT Beringharjo describes its services as Not only providing financial assistance and saving facilities, but also entrepreneurial motivation and training sessions for its members.

Basic Information of BMT Bina Dhuafa (BMT Beringharjo) Location of Operation Year of Establishment Number of Beneficiaries Total Outstanding (for fiscal year 2009) Total Funding Number of Employees Female Beneficiaries (% of total) Yogyakarta, Ponorogo, Madiun, Bandung, Kediri, Caruban, Semarang, Ngawi, Nganjuk 1994 18,000 22,8 milyard 22,4 milyard 107 persons 80%

Asset Structure of BMT Bina Dhuafa (BMT Beringharjo)

(in thousand)

Total (Rp) Deposits with Bank (Rp) (% of Total) Earning Asset (Rp) (% of Total) Fixed Asset (Rp) (% of Total) Cash (Rp) (% of Total)

31.115.062 3.218.790 10.34% 629.753 2.02% 2.556.059 8.21% 799.234 2.57%

Capital and Liability Structure of BMT Bina Dhuafa (BMT Beringharjo) Total (Rp) Capital Fund (Rp) (% of Total) Beneficiaries Accounts (Rp) (% of Total) Net Borrowing (Rp) (% of Total) Other Liability (Credit) (Rp) (% of Total) Income and their Sources of BMT Bina Dhuafa (BMT Beringharjo) Total (Rp) Deposits with Bank (Rp) (% of Total) Musharakah (Rp) (% of Total) Ijara (Rp) (% of Total) Murabaha (Rp) (% of Total)
(in thousand) 26.041.420 3.218.790 12.36% 16.162.015 62.06% 5.833.477 22.40% 861.566 3.31% (in thousand) 31.115.062 22.466.304 72.20% 499.390 1.60% 5.675.635 18.24% 25.159 0.08%

Characteristics of BMT Bina Dhuafa (BMT Beringharjo) Beneficiaries Female (% of Total) Average Age of Beneficiary (years) Literate (% of Total) Household Size (% of Total) Working Members (% of Total) Average Value of Assets (in Rp) PERFORMANCE Profitability and Viability of BMT Bina Dhuafa (BMT Beringharjo) The viability of BMT Bina Dhuafa can be analyzed by examining its profitability and efficiency. The following ratios to measure profitability and efficiency 1. Return on Assets (ROA) = (Net Income/ Assets)*100 2. Net Interest (Return) Margin (NIM) = [Total income from investment and interest-Total borrowing Cost (interest payments)/ Total Assets]*100 3. Operating Costs as a Percentage of Loan Disbursed (OCL) = (Operating Costs/Loan Disbursed)*100 4. Beneficiaries to Employee Ratio (BER) = Total Beneficiaries/Full-time Employees. ROA is a measure of efficiency as it indicates how well the BMTs assets (resources) are used to generate income. NIM indicates the efficiency of the intermediation of funds from different sources to users. Another measure of operating efficiency is the OCL. As BMTs advance small size of loans/funds, this ratio will be larger than conventional banks. Among different BMTs, however, if the field workers are efficient is covering a larger number of beneficiaries, this ratio will be lower. BER is used to measure the efficiency of the employees in reaching the beneficiaries. Note, however, that while a large number of beneficiaries may increase the income per employee, it may also lead to lack of supervision and increase the default rate affecting income adversely. Income, Expenditure and Profit of BMT Bina Dhuafa (BMT Beringharjo) Total income (including Donations/grants) (Rp) Income from investment (Rp) (% of Total) Income from Deposits (Rp) (% of Total) Total Expenditures (Rp) Borrowing Costs (Rp) (% of Total) Operating Costs (Rp) (% of Total) Total Profit (Rp) (in thousand) 5.632.410 5.267.522 93.52% 190.596 3.38% 5.632.410 646.315 11.47% 2.958.010 52.51% 629.753 80% 37 years 78% 20% 80% 50.000.000

Profitability and Efficiency of BMT Bina Dhuafa (BMT Beringharjo) Return on Assets (ROA) Return on Equity (ROE) Overhead Cost (OHC) Cost of Fund (COF) Efficiency 2.21% 37% 1.28% 0.57% 93.21%