Micro Waqf Banks: A New Breed of IF Providers for Indonesian Poor

I deem Indonesia, my new home, as the University of Islamic Microfinance. And I have good reasons for the same. If you exclude the replications of conventional microfinance models, most of the indigenous Islamic microfinance experiments owe their origin to creative Indonesian minds. The famous Baitul-Maal-wat-Tamweels (BMTs) continue to engage the Islamic finance community for their novelty. A recent initiative by Indonesian National Committee for Islamic Finance (KNKS) aims to take this experiment beyond national boundaries, to the shores of Nigeria and Philippines.

However, this blog is about Bank Wakaf Mikro (BWM), a relatively new breed of Islamic microfinance institution. The BWMs are for small communities. From a policy perspective, these are essentially a tool of enhancing financial inclusion among the unserved and the excluded lot, especially those in rural and remote areas.

MWBs are established with the explicit permission of the Financial Services Authority (OJK). They owe their origin to the initiatives by Pesantren or the Islamic Boarding Schools (IBS). The first MWB was set up in October 2017. Within an interval of just two months, this baby institution managed to collect 827 customers. Its impressive performance led to formalization of this model in early 2018 by the OJK. It went on to provide license to as many as 20 MWBs who collectively had 3,876 customers. As at the end of December 2018, there are 41 MWBs with over 8,000 customers. According to latest data, the number has surpassed 60. Below we underline the major stakeholders and the roles they play in the initiative


Islamic Boarding Schools (IBS) because of their wide-spread presence in rural and remote areas are identified by OJK as the pivot for the BWM experiments in financial inclusion. They bring in certain advantages in the form of familiarity with local environment which makes the process of socialization with prospective beneficiaries and distribution of loan funds easier and faster. They are backed by religious groupings that have traditionally been recipients of donor funds from the Muslim community. In addition to the Pesantren or the Islamic Boarding Schools (IBS), other religious communities can also establish the BWM institution.

Financial Services Authority (OJK)

The OJK plays an active role in the establishment of a BWM institution. There are several assessment procedures that must be cleared before an Islamic Boarding School can be declared feasible to establish a BWM. The OJK special team assisted by PBNU first examines whether there is a genuine need from the Pesantren to help the community, the impact of the intervention on  in its environment, and the required financing in the micro segment. The productivity, commitment and readiness of the Pesantren to set up and manage the BWM is also assessed.

Target Beneficiaries

Prospective customers who can apply for unsecured loans at BWM are people with limited or no access to banks or the formal financial system. They usually live in rural areas / remote areas and are far from the reach of banks. They have limited familiarity with the formal financial system – the institutions and their products. Further, they come from a class of people who have below-average income.

Capital Providers

Capital contributors to BWM are donors and not investors. They are people with a desire to help improve the economy of the lower class or those who earn below the average. The formation of a BWM usually involves a cooperation between OJK and the National Amil Zakat Institutions (LAZNAS). Each BWM receives around IDR 3 billion to IDR 4 billion (USD 215K-288K) from donors that include individuals, or companies. However, the entire funds received is not channeled into financing, and a part is placed in the form of deposits with Islamic commercial banks.

Lending Methodology

BWMs follow the time-test method of group-lending, usually involving 3-4 individuals per group. Formation of groups does not automatically lead to disbursement of loans. All group members are made to undergo intensive training and coaching and conduct weekly meetings. Financing usually starts from 1 million and attracts a modest cost of 3 percent. Financing is also provided in the form of loans of up to Rp 3 million but with special requirements and criteria. There is always a compulsory element of business coaching for the customers. By implication, the use of loan funds for purposes other than business, is strictly prohibited. It may be noted that cost of 3 percent of the financing amount is not an example of profit-sharing or revenue-sharing as is touted. However, it will still qualify as Shariah-compliant Islamic (qard) financing, since the meagre cost of 3 percent is perhaps far less than the actual cost of the lending process.

From Sadaqa/ Zakat to Cash Waqf

In the existing model, the endowment fund for providing microfinancing to the poor is created out of zakat, sadaqa and infaq collected by the zakat institutions. There is a move finetune the same and bring closure to the original idea of waqf by using cash waqf as the basis of fund mobilization. The following diagram brings forth the subtle differences.


(Source: Presentation by Reza Mustafa, OJK at Shariah Economy Festival, November 12-15, 2019 at Jakarta)

Further, an Islamic bank replaces the Amil Zakat Institution in mobilizing donation funds (replaced by cash waqf) in the reformed model. It functions as a partner institution of the BWM for managing the entire process. The waqf bank accepts term deposits (in the form of temporary cash waqf or a cash waqf with a definite time period). Funds mobilized are used to set up four specific funds – establishment fund, working capital, endowment fund and operational fund. The first three funds place all funds as deposits with the Islamic bank. The profit shares are paid back by the Islamic bank into the operational fund, which are used then to provision of Islamic finance to the poor as well as for mentoring that includes religious, household economy and micro business development.

The decision to establish waqf banks at micro-level for the poor and the excluded sections of the society not only provided them with high interest-free loan capital, but also with additional insights into building businesses and managing finances and avoiding the threat of adverse loan sharks. With some unique characteristics, the micro waqf banks have a huge potential, especially as they combine financial and business literacy concerns with financial inclusion concerns.

And they underscore the huge potential that waqf has in meeting the financing needs of the poor and other development-financing needs. For long, Islamic economists have been seeking to demonstrate through scores of publications and seminars that an integration of Islamic philanthropy with microfinance can provide a solution in terms of absorbing the high operational costs, and in making microfinance “affordable” to the poorest of the poor. OJK certainly deserves the appreciation of all for transforming the idea into a reality.

A Significant Role at the Bottom of the Pyramid

Under the new Sharia Economy Masterplan of the National Sharia Economy and Finance Committee, the BWMs will be at the bottom of the system and linked up to BMTs (Islamic Financial Cooperatives) and BPRS (Islamic Rural Banks) in that order. The Committee’s five goals under the Masterplan include providing a  boost to Islamic social finance that covers zakat and waqf. It aims to increase zakat distribution as a buffer for ultra-micro entrepreneurs, and to have the BWMs serve micro players with loans up to 3 million rupiah, and then upgrade them with up to 10 million rupiah loans from cooperatives or microfinanciers such as Baitul Maal wa Tamwil (BMT), and finally guide them to be bankable with loans of more than 10 million rupiah through Islamic banks, and Bank Perkreditan Rakyat (BPR). According to the Committee, there are currently around 9,000 small, decentralised microfinance institutions.

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