Maqhashid Sharia in Clean Water Financing Business Model at Islamic Bank

Maqhashid Sharia in Clean Water Financing Business Model at Islamic Bank

Maqhashid Sharia in Clean Water Financing Business Model at Islamic Bank

ABSTRACT: Micro-financing for the purchase of clean water connection is very important for people who have limited cash to pay clean water connection. In this conceptual paper has explained the role of sharia bank for the poor people who don’t have the ability to pay in cash for the clean water connection. Clean water is a basic human need for survival, related to this consideration, Sharia Bank creates microfinance products to clean water connections to the poor because of this program also in line with the maslahah ummah or maqhasid sharia. This product requires intervention feasibility analysis of credit/financing used, or commonly referred to as the feasibility analysis 5C's (character, capital, capacity, collateral, and condition). Intervention feasibility analysis microfinance clean water connection is required because our goal of providing clean water connection financing for the poor people. Regarding the micro financing analysis, if we using a feasibility analysis 5C's it will be not feasible for granted financing. To speed up the distribution of micro financing clean water connection, and have a broad impact on society, especially the poor (the benefit of humanity) to improve their welfare, the role of government is necessary in order to mitigate the risk of micro finance portfolio. The government's role as an authority has responsibilities for change people's behavior to better care for their health. Furthermore, the role of the government in mitigating the risk of this financing model very important. To mitigate this financing, the insurance is required in the micro-financing for the connection of clean water, and insurance premiums paid by the government.

KEYWORDS–the basic need, intervention analysis, maslahah ummah, maqhasid sharia, micro-financing for clean water connection, poor people, sharia bank, the role of government.

I.INTRODUCTION

Water is a vital resource for all living things, especially for humans to be able to sustain their life in the future. The benefits of water for human life are vital mainly used as drinking water, cooking food, washing, bathing, and toilet. The importance of clean water for human needs, making the availability of clean water for people in urban and rural areas is one of the targets of the Millennium Development Goals (MDGs). The MDGs are a global development paradigm with eighteen goals. Targets relating to the provision of clean water are the tenth goal, which decreased by half the proportion of people without access to safe drinking water and sustainable as well as the availability of sanitation facilities for all levels of society in 2015 (UNDP, 2004). MDGs are the world's time-bound and quantified targets for addressing extreme poverty in its many dimensions-income poverty, hunger, disease, lack of adequate shelter, promoting gender equality, education, and environmental sustainability.

Availability and access to clean water became one of the problems faced by the government and society in Indonesia. In fact, of the eight targets set in the Millennium Development Goals (MDGs), Indonesia is still difficult to achieve the target of increasing access to clean water and sanitation. Some of the factors that constrain the provision of clean water in developing countries or third world countries included in Indonesia cases are as follows (Lenton and Wright, 2004):

1. Political factors, in developing countries the water and sanitation sector is not a priority in government development policies;
2. The financial capacity factor of society or the majority of the population in developing countries are poor, hence, the availability of and access to clean water is not their priority;
3. Technical factors (e.g. spreading of the house).

Nevertheless, factors that greatly influence the clean water supply is poverty (CGI, 2000). Therefore, micro-financing through Islamic banks with intervention analysis is an alternative solution for the people and the poor in particular to be able to obtain clean water at an affordable cost to meet the needs of everyday life.

The basic principles of microfinance by Muhammad Yunus as the founder of the Grameen Bank in Bangladesh and the recipient of the Nobel Prize for peace in 2006 was access to financial services is a human right. The same things also stated by several researchers that originality of microfinance objective, it's to achieve the double bottom line. That is mean microfinance institutions are mindful not only of financial performance but also by social indicators. Furthermore, the main objective of microfinance is to help the poor become economically independent, not be dependent on government assistance or a burden State (Rahim, 2010). Microfinance can also devote and dedicated to the public or people who have not been able to provide collateral for financing, collateral banking is intended to protect from the risk of loss if there is a failure to pay installments (Abu and Rafique, 2009).

Concern over the provision of financing and financial accessibility for the poor through micro-financing is also relevant to the Islamic banks should be responsible and have a more important role in social welfare and commitment to achieve the goals of Islamic economics, which include social justice, equitable distribution of income and wealth and to support sustainable economic development (Ashraf, 2008). Therefore, Islamic banking is required to have a role to engage in microfinance programs in order to meet the needs of poor people who can not provide guarantees for microfinance (not bankable) (Al Harran, 1990, 1996, 1999; Akhtar, 1996, 1998; Dhumale and Shapcanin, 1998; Ahmed, 2001; El-Gamal, 2006). Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services.

Microfinance distribution agreements are generally not based on formal agreements. Therefore, there are opportunities for micro financing problems. The agreement between the borrower and the lender is only based on the element of trust, which is the first applicant's reputation as a man who has a good character and reputation (Diamond, 1991) and the second is the availability of sufficient capital or collateral for repayment in case of default (Holmstrom and Tirole, 1993). Nevertheless, the availability of capital or collateral element is an important barrier for the poor, especially for the poor to access micro-finance market. The poor are stamped by the banks as a high-risk borrower due to financial difficulties inherent in their lives, so it would be difficult to qualify for the assessment of creditworthiness related to their inability to provide collateral which aims to protect potential future risks (Ashraf, 2008).

The purpose and contribution of this paper are to explain the participation of Islamic Bank in implementing sharia rules, which is the achievement of the objectives of Islamic (sharia maqashid). The purpose of sharia is that wellbeing can be distributed evenly on the whole society to enforce Sharia (Islamic law) (Ibn Ashur, 2006). Moreover, according to Jumantoro et.al (2005), goals Shari'a (maqashid sharia) is to create a human welfare (maslahah):

Meaning: "Indeed, sharia aims to realize the benefit of humans in the world and in the hereafter." It is also narrated in a hadith by Musnad Shihab, Hadith No. 1234 as follows:

Meaning: "The best man is the most beneficial for others." Based on the benefits principle, Bank Syariah Mandiri (BSM) makes the business model for the distribution of micro-financing for clean water pipe connections for the poor.

Empirical studies on this research using secondary data microfinance; the object is the distribution of micro-financing for clean water connections at BSM Kudus Branch since November 2011 to March 2013. The method is based on a framework of qualitative research and data analysis includes the following stages:

1. The links Islamic banking with microfinance
2. Identify the business model of the distribution of micro-financing for clean water connection in BSM Kudus Branch.
3. The risk management required for the expansion of micro finance portfolio of clean water connection.
4. Analyzing the data distribution and micro-financing installment payments clean water connection from November 2011 until March 2013.
5. Conclusions.

II.DISCUSSION AND ANALYSIS

2.1The links Islamic banking with microfinance

Qur'an and hadith are the two main pillars of Islam. Every detail of the teachings of Islam should refer to the Qur'an and hadith. Qur'an is the principal source of Islamic teachings as a guide for mankind (Hudan-linnasi), as a guide human life towards a prosperous life in the world and safely in the hereafter. In addition, Hadith has the role of interpreting the Qur'an in the practice or application of Islamic teachings in a factual and ideal real activity in human life. We would be hard to imagine if without "intervention" hadith, the Qur'an, especially those related to legal issues can be understood and actualized in practical Muslims. As guidance of human life, of course, the teachings contained in the Qur'an and hadith should be implemented in public life. Islam as rahmatan lil 'Alamin means that Islam is a religion that brings grace and prosperity for all the whole universe, including animals, plants and the jinn, and, of course, human beings, it’s stated in Qur’an Al-Anbya verses 107:

Meaning: “And We have not sent you, [O Muhammad], except as a mercy to the worlds.” Furthermore, regarding Masyita (2009) existence of Islamic Bank has function in the figure as follow:

Figure 2.1 Islamic Bank as The Solution of Financial Intermediaries

Sources: Masyita (2009)

In the macro view the financial crisis caused by the mainstream financial intermediary. The process of the financial crisis in the word can be described in the figure as follows:

Figure 2.2 The Macro View of Financial Crisis

Sources: Masyita (2009)

Based on figure 2.2, Islamic Bank should be create wellbeing for the community or ummah in the world, in another word can be as the solution to a ban of the crisis. What is wellbeing? Wellbeing is the maslahah, its mean the Islamic bank should give the positive impact and beneficiaries to all communities. In addition, Islamic bank as the financial intermediaries has the multiple bottom lines, not only financial performance as the purposes, but also the concern about the social performance, environmental conservation, and for sure the spiritual aspects should be embedded (maqhasid sharia) in the operation.

The link between the Islamic bank and microfinance is very closer. To find out the link is not based on the interest (riba) point of view but based on the ideological and practical terms of microfinance. The originality of microfinance objective, it's to achieve the double bottom line. That is mean microfinance institutions are mindful not only of financial performance but also by social indicators. Econometric analysis is used to assess financial performance, and guidance is provided for extending the analysis of social performance indicators or MFIs have a double aspect: financial and not-for-profit. It is, therefore, appropriate to assess their performance not only of financial ratios but also by means of social indicators. (Frank, 2008; Armendariz and Labie, 2011; Hudon, 2011; Stuart, 2011; Balkenhol and Hudon, 2011; Cinca et al, 2011). In another word the MFIs was designed to serve unbanked poor and, it's seen by some as a magic wand against poverty that is supposed to solve it all (Armendariz and Labie, 2011), but microfinance neither a panacea nor a magic bullet, and it can’t be expected to work everywhere or for everyone (Armendariz and Morduch, 2010).

According to the purposes of microfinance, there is a strong similarity with Islamic bank, the in line purposes of microfinance with Islamic bank are social performance and poverty alleviation. Although the practice of Islamic finance is based on the belief that money is not a productive asset in and of itself. Furthermore, aiming to implement Islamic law sharia maqhasid, so the activities of Islamic banks emphasize factors ethical, moral, social, and religious to promote equality and justice for kindness the ummah. Although this analysis of Islamic banking focuses on the economic aspects, the system can be fully understood only in the context of Islamic attitudes towards ethics, wealth distribution, social and economic justice, and the role of the state. Principles encouraging risk sharing, individual rights and obligations, property rights and the sanctity of contracts is part of the universal values that underlie the Islamic banking system (Dhumale and Sapcanin, 1998).According to Nugroho (2014 and 2015), Islamic Banking should have a microfinance services and products which should have a commitment to the social issues such as environmental, low-income community (poor people), disabilities persons and gender. The environmental damaged was happening in Indonesia conditions is certainly contrary to the principles of Islam which the majority of the Indonesian population are Muslim. Islam is not just a religion. It covers the views and way of life in total. Islam is a religion that upholds the dignity of civilization and humanity that combines aspects of the material and the spiritual, worldly and hereafter. Therefore, the environmental damage was not due to religion but because of ignorance and low levels of education, especially those with low incomes or poor. Islam emphasizes the importance of science and knowledge to humans or the people that studying becomes a liability. One of the tangible evidence of the glory of science in Islam is the first verse revealed by God to the Prophet Muhammad related to science (QS. Al-'Alaq: 3-5) as follows:

Meaning: “Recite, and your Lord is the most Generous-Who taught by the pen-Taught man that which he knew not.” The Islamic perspective on science is very important because knowledge as a means of strategic and effective in lifting the human dignity of the downturn, as happened in the era Jahiliyya. This can be understood because of the person's knowledge will have a provision in his job, has an opportunity and a promising opportunity in the future, full of confidence, and not easily manipulated. In line with this, the Qur'an insists on the importance of intellectual responsibility in performing various activities. In this regard, the Qur'an besides teaching humans to lifelong learning requires someone to work with the support of knowledge, expertise, and skills held for the benefit of the Ummah. The work that is done without the support of knowledge, expertise and skills considered invalid and beneficial for the people and will bring destruction.

2.2The business model of the distribution of micro-financing for clean water connection in BSM Kudus Branch

Islamic banking is one of the Islamic financial systems must be able to provide benefits to economic development in Indonesia. Islamic banking as an institution and as ethical sharia-based intermediaries also has the potential to support the distribution of income and financial stability, one of which is to increase access to financial services to all segments of society, including the poor who have the potential to improve the welfare (Muljaman, 2013). Based on this, micro financing for clean water that provided by Islamic bank is very relevant to the Islamic Law. Nevertheless, water is very important for human, it’s also explicitly stated in Qur’an, Al Anbya verses 30 “Have those who disbelieved not considered that the heavens and the earth were a joined entity, and we separated them and made from water every living thing? Then will they not believe?”. The above verses suggests that if we want to live a more perfect and more healthy, we should consume sufficient amounts of water, both to drink, or to cleanse themselves and the environment, as well as to perform ablutions (water as a sources of life). First of all, there is an important question related to clean water connection, financing, why water connection financing is important? The answer is as follows:

1. The limitation of poor people to pay in cash for clean water connection;
2. The limitation capital of local clean water company (PDAM) to make installment payment product for clean water connection;
3. Water is very important for human life to survive.

Furthermore, in cases in the Kudus region of Indonesia, regional clean water company want to focus on the technical side of the water company, in addition, local clean water company Kudus also has cooperative employees. Because of this condition, the business model of micro-financing for clean water connection in regional clean water company at Kudus Branch, involving several parties as follows:

1. Bank Syariah Mandiri (BSM) Kudus Branch;
2. Local Clean Water Company (PDAM) Tirta Kudus Dharma;
3. Employees Cooperative Tirta Makmur Kudus (Cooperative Employees PDAM Tirta Dharma).

Based on this cooperation, the scheme can be described as follows:

Figure 2.3 Cooperation Scheme for Micro Financing of Clean Water Connection

Source: Small and Micro Division of BSM

According to figure 2.3, the mechanism of new connection for new customer as follows:

1. Make a Cooperation Agreement between Tirta Makmur cooperatives and regional water company;
2. Make a Cooperation Agreement between Tirta Makmur cooperatives and regional water company;
3. Potential customers of the regional companies propose financing of clean water clean water connections through Cooperative Tirta Makmur;
4. Cooperative Tirta Makmur forwarding submission connection clean water to regional water company;
5. Then the water company regional performs a feasibility analysis of potential customers who meet the criteria for financing micro-plumbing. Potential customers are eligible will then be processed by PT Bank Syariah Mandiri to analyze the history of the loan with the credit bureau system (BI-Bank Indoneia checking);
6. PT Bank Syariah Mandiri to process analysis based Checking data/identity that has been given by the customer;
7. If the results of the analysis of a prospective customer credit bureau feasible, then the approval of the provision of financing and the contract will be directly done by the prospective customer and cooperatives (representing PT Bank Syariah Mandiri);
8. Cooperative inform the regional water company related to new customers;
9. The local clean water company confirmed to PT Bank Syariah Mandiri to immediately execute the disbursement of funds for the cost of connecting to the water;
10. PT Bank Syariah Mandiri make disbursements to the customer's account;
11. With the transfer authorization letter from the customer, the funds for the financing to be transferred to the account of the Cooperative Tirta Makmur in PT Bank Syariah Mandiri;
12. Cooperative Tirta Makmur will confirm to the local clean water company to install water connections;
13. An area of water installing water connection to the customer;
14. Installment payments are included in the payment slip of water each month. So in this cooperation there are two payments, the first payment of water use and the second for installment payments for the connection of clean water;
15. Submit installment payments to the local clean water company;

In this cooperation there is the obligation of each party as follow: