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A Synthesis of Time Zakat, Islamic Micro-finance and the Question of the Future in 21st-Century Indonesia

A Synthesis of Time
  • Book Title:
 A Synthesis Of Time
  • Book Author:
Konstantinos Retsikas
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A Synthesis of Time Zakat, Islamic Micro-finance and the Question of the Future in 21st-Century Indonesia – Book Sample

Contents A Synthesis of Time

  • Disclosing Intervals 1
  • Dividing the Present 37
  • Justifying Law 67
  • Anticipating Life 105
  • Promising Deliverance 141
  • Contracting the Future 177
  • Soliciting Time 213
  • Rewinding the Reel 249
  • Bibliography 255
  • Index 271

Micro-financing alternatives

In a recent appraisal of the global arena of Islamic micro-finance institutions, Malcolm Harper (2017), a distinguished expert, keenly notes the novelty of the practices at hand. Islamic micro-finance, he writes, is a relatively new phenomenon, having grown alongside the practise of main- stream micro-finance that has itself been operating on a globally significant and commercially successful scale since the 1990s. Out of a total of 15 Islamic micro-finance institutions from across the globe included in the survey conducted by Harper and Khan (2017), the vast majority (13) begun their operations after the year 2000.

In Indonesia, the first Islamic micro-finance institutions, the Islamic Savings and Credit Cooperatives, commonly known as Baitul Maal wat Tamwil, date from the early 1990s: their establishment has been part of the creation of a dual banking and finance system in the country—conventional and Islamic (or syariah– based), a process that witnessed the foundation of large Islamic commer- cial banking institutions such as Bank Mualamat Indonesia and several Islamic rural banks (Bank Perkreditan Rakyat Syariah) (Antonio Muhammad 2008, Lindsey 2012, Sakai 2014).

Despite Indonesia being a latecomer in Islamic banking when compared with Egypt or Malaysia, for example, it does count amongst the earliest cases to experiment with Islamic micro-finance. This has to do with Indonesia being home to one of the most successful conventional micro-finance models worldwide, that is the reformed village units developed by Bank Rakyat Indonesia in the 1980s which furnished ‘the largest financially self-sufficient micro banking system in the world’ (Henley 2010: 173).

Despite such promising beginnings, Islamic cooperatives found hard to replicate the successes of their conventional counterparts. After a period of rapid expansion around the time of the Asian financial crisis (1997), BMT faced an array of challenges that eventually led to their significance in providing religiously approved financial services to the enterprising poor, mainly small-scale traders in urban areas, declining steeply.

Such was the rate of waning influence that according to Seibel (2012) the majority of 3000 registered BMT in 2012 were assumed to be dormant or technically bankrupt.

Parallel to the establishment of Islamic cooperatives, the Islamic reform movement in Indonesia also proceeded with the foundation of a series of zakat management agencies—LAZ or Lembaga Amil Zakat.

The latter are significantly less well known in scholarly circles for their engagements with syariah-compliant micro-finance: though dating from the same period as other Islamic finance providers, LAZ are, as I have already noted, Islamic welfare foundations the purpose of which is to alleviate poverty through promoting and delivering what are perceived as philanthropic activities.

Such activities conform to a model inspired and sanctioned by the practice of zakat, the third pillar of the faith and an obligatory ritual involving a wealth transfer all well-to-do Muslims are required to complete once a year as a testament of their faith, for the benefit of others, the poor and the needy being the most prevalent.

 Within this remit, LAZ have sought to mediate relations between haves and have-nots, managing increasingly fraught class tensions in the country. By expanding into the dispensing of Islamic micro-financial services to the country’s enterprising poor and providing much-needed support for the small-scale businesses, LAZ have engaged in running community empowerment programmes on an explic- itly non-commercial, not-for-profit basis.

The manner in which leading LAZ have proceeded to do so, the complexities involved in the delivery of services, the innovations implemented, the challenges faced and the con- troversies given rise to, as well as the multi-stranded, multi-level set of relationships promoted and cultivated with those construed as recipients of financial and other aid, are the subject matter of this book.

Microfinance refers to the provision of financial services to the poor, especially those who are traditionally excluded from financial services, on a scale appropriate to their capacity to service the obligations involved.

The term includes facilities for savings, insurance and money transfers (remittances); however, the micro-financial activity that has attracted the most attention—commercial, governmental and scholarly—is micro- credit. Micro-credit refers to the provision of small loans, usually on a short-term basis and with the requirement for collateral having been replaced by group guarantees, for the purpose of investment in productive activities (Goenka and Henley 2010; Elyachar 2005; Hospes and Lont 2004).

The United Nations designation of 2005 as the ‘International Year of Microcredit,’ meant that micro-finance had within a short period of time been widely acknowledged by reputed international organisations such as the International Monetary Fund and the World Bank, as a funda- mental instrument for breaking the vicious cycle of poverty in which many people are trapped on a global scale.

Such recognition inaugurated a new epoch in governmentality according to which the repeat advancement of credit on the basis of ever larger in value interest-bearing loans, is deployed as a fundamental tool for creating adequate levels of investment and opportunity for self-employment amongst the poor so that the latter are able to realise their full entrepreneurial potential.

In this context, Islamic micro-finance was conceived as a response to the perceived shortcomings the propagation of financial capitalism was positing for Muslims, especially as far as their reliance on the charging of interest for the generation of profit was concerned. Islamic micro-finance initiatives also meant to dem- onstrate Islam’s provision of an all-encompassing alternative for the pur- suit of human social, political and economic welfare: this claim had been a central component of the discipline of Islamic economics ever since calls for its creation were first voiced in the 1960s and 1970s (see Azhar 2010).

What the invention and implementation of Islamic micro-finance made apparent at the turn of the millennium was that most of the poor living in Muslims countries had yet to be successfully brought into the fold of Islamic financial alternatives.

As Islamic banks and other financial institutions had focused their activities for the most part, on the upper echelons of Muslim entrepreneurship, it was a matter of some urgency that Islamic finance expanded so as to encompass the lower social strata, spreading in this way the message of the faith and making sure that ethical reform and salvation was at hand not only for the select few at the top but also for those at the bottom.

To Islamic economists and activists alike, an Islamic alternative has been conceived as the contemporary pursuit of a divinely ordained model of justice in the intermediate space between capitalism and communism (Chapra 1992, 2014; Kuran 2004).

As Hefner notes, ‘Islamic economics presents itself as a salutary third way: avoiding the inegalitarian excesses of modern capitalism but unleashing the energies of entrepreneurs and merchants’ (2006: 17). The distinction from communism has been easy to assert, given the insistence of the faith on private property, un-coerced exchange and the sanctity of contracts.

At the same time, the claim that Islam supports an advanced welfare system for the prevention of exploitation, ensuring interventions on behalf of public interest, has found a most solid ground in the practice of zakat.

Zakat has been widely proposed by Islamic economists and campaigners as a key component of building an Islamic ‘moral economy’: in their eyes, it exemplifies the notion that pre- cisely because a Muslim person holds property as a trustee for God, property must serve ends higher than the mere satisfaction of one’s needs. In this regard, the transfer of zakat is extensively cited as a means for purify- ing the wealth the faithful can subsequently enjoy and an instrument for building mutuality with others (Tripp 2006: 124).

In nutshell, zakat is extorted for the promotion of social justice and the sanctioning of the redistribution of wealth, while its resource allocation efficiencies are also credited with the strengthening of economic stability and the stimulation of growth. According to the Pakistani philosopher and founder of Islamic economics, Maulana Maududi (2011), zakat is a most necessary instrument for effectively reigning over the worst excesses of the unfettered pursuit of profit in favour of a divinely approved and socially conscious mode of livelihood. According to Maududi, the significance of zakat to an Islamic economy is so great that it requires government’s intervention in the collection and distribution of dues for the benefit of the disadvantaged.

In the same vein, Sayyid Qutb, a most prominent intellectual and leading member of the Egyptian Muslim Brotherhood, argues that the transfer of zakat from the rich to the poor has major effects: increasing the spending power of the poor leads to increases in production and a general upturn in employment rates which, in turn, means that more work is avail- able for the poor who can proceed to make a living on an independent basis (see Philipp 1990: 130).

Along with the injunction to zakat, an Islamic economy is widely conceived as founded on the prohibition of riba, which most jurists under- stand as the charging of interest on capital in all forms. However when compared to zakat, it is the prohibition of riba that has become the most recognisable sign of a distinctive approach to economic well-being, oper- ating as a hugely emotive emblem of the claim that there exists a whole, coherent Islamic system for the structuring of human livelihood pursuits, equipped with its own laws and mechanisms.10

While there is still considerable debate amongst Muslim jurists and intellectuals as to whether the Quranic term riba equates with modern practices of interest,11 the major- ity of scholars are of the opinion that such equivalence is clear and unmistakable: for these scholars any contract involving a fixed, predetermined return on a loan or investment constitutes riba and is thus forbidden.

The Pakistani economist and one of the most widely cited Islamic economists in the world, who helped establish the International Centre for Research in Islamic Economics in Jeddah, Saudi Arabia, Muhammad Nejatullah Siddiqi, states flatly that ‘Muslim society never legitimised interest throughout the thirteen centuries prior to domination by imperialist pow- ers. It managed its economy and carried out domestic and international trade without the institution of interest’ (1983: 9).

The ban on any form of interest in contemporary Islamic banking and (micro-)finance is grounded partly on revivalist accounts and partly on the core tenet that money in Islam is not meant to act as an earning asset in and of itself (Warde 2010); if profit is to ensue, it can only originate in activities that require individual exertion and promote relative equality amongst partners.

In this regard, making money out of money is charged as morally reprehensible because it involves no effort on the part of the creditor whose sees his/her idleness rewarded. Earning interest is also seen as inherently unjust because the creditor is kept insulated from bearing any of the risk of the investment involved: in counter-distinction, it is the debtor who is left exposed to the possibility of business failure and default as he/she has to compensate the creditor beyond the cost of the initial loan even if the venture hits trouble though at no fault of his/her own (Mills and Presley 1999; Visser 2009).

Amongst Islamic economists, inter- est as riba is additionally abhorred for allowing or leading to the exploitation of the poor from institutional and non-institutional moneylenders who are guaranteed a return at the expenses of the vulnerable who assume all the risk. Extrapolating from such ethical and legal positions, an Islamic alternative economy is put in practice on the basis of the provision of financial services, both macro- and micro-, according to what Siddiqi identifies as the ‘principles of mudaraba (profit sharing) and shirkah (part- nership)’ (1983: 11).

Such principles apply to contractual agreements that exclude any haram or sinful commercial or productive ventures such as the sale of pork and alcohol, and are further characterised by ‘material finality,’ that is they are tied, directly or indirectly, to a real, tangible asset as opposed to speculation. While in the early days of the development of Islamic finance and banking, it was ‘profit and loss sharing’ forms of partnership such as those of musharaka and mudaraba that were taken to represent the ideal from an Islamic point of view, the list of permissible financing methods has expanded exponentially over the ensuing decades.

Key in this development has been the invention and dissemination of ever new classes of Islamic finance products to cover a huge variety of circum- stances and situations, sometimes at the expense of considerable debate and internal disagreement. Such expansion has been motivated by pres…

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