Stages of the Islamic Social and Commercial Financing for
Microfirms
Anisa Fitria Wulaningtyas, Zuliani Dalimunthe and Yusuf Wibisono
Universitas Indonesia, Depok, Indonesia
Keywords: Staged Financing, Islamic Microfinance, Zakah Management Institution, Islamic Social Funds.
Abstract: Zakah, shadaqah, and waqf are among the Islamic social funds work as instruments for poverty alleviation.
Islamic social funds in Indonesia collect through authorized zakah institutions. This study analyzes how zakah
institutions provide micro financing in several stages to develop micro-business. We interviewed three zakat
institutions in Indonesia. We found that micro-business financing through zakat institutions provided in three
stages. Each stage has different schemes and provisions. At the first stage, the fund granted to individuals
without an obligation to pay the fund back. It is a zakah fund distributed according to a transfer payment
scheme. In the second stage, financing provided to individuals or business groups with interest-free
repayment. It is a non-zakat social fund used to finance a micro business with 0% interest, lower than the
market rate for micro-financing. Moreover, the repayment at this stage is not to the zakat institution, but rather
to the group, either become revolving fund among group members or become group-owned resources. The
third stage is commercial financing using murabaha or profit sharing scheme.
1 INTRODUCTION
Globally, micro finance is encouraged as one of the
main instruments to alleviate poverty. The United
Nations Children’s Fund, formerly known as the
United Nations International Children’s Emergency
Fund (UNICEF), combines access to micro credit and
social services as an effective and efficient approach
to getting people out of the poverty chain. In
Indonesia, the development of micro enterprise units
is certainly not apart from the provision of financial
services micropreneurs can use. The development of
micropreneurs is important because about 99% of
them Indonesian business is categorized as microfirm
and absorbing a large labor force.
Islamic financing is divided into two broad
categories, social funding and commercial funding.
Islamic social funds consist of zakah, waqf, infaq, and
sadaqah. Islamic social funds are allocated for several
social activities. Typically, zakah is an obligation
payment made by the wealthy to the poor, and in this
capacity it functions as a measure to reduce poverty.
Zakat funds given to mustahik can play a role in
supporting economic activities when allocated to
productive activities. Asnaini (2008) states that
productive zakat is given to mustahik as business
capital to meet their basic living needs. The utilization
of productive zakat is expected to overcome the credit
crunch that often occurs in the micro sector.
Islamic finance has multiple roles that support
each other, namely social interests and business
interests. Islamic micro finance also plays a role in
receiving and distributing zakat funds, infaq, and
sadaqah for social causes. It receives these funds from
the public for distribution to eligible communities.
Islamic micro finance also has an important role to
play in developing productive business in the micro
sector. Zakat management institutions in Indonesia
use social and commercial financing schemes
simultaneously (Obaidullah and Khan, 2008).
This study examines the financing scheme run by
the Zakah Management Institution (ZMI) in
Indonesia, which often provides financing by
integrating social funds with Islamic commercial
funds. Specifically, this research aims to evaluate
how the disbursement of funds is implemented in the
context of poverty reduction. This research is
expected to contribute to the development of Islamic
micro financing schemes to alleviate poverty and
promote economic growth, especially in Indonesia.
The second section of this article describes
literature studies related to the idea of the role of
Islamic micro finance and how the Zakah
746
Wulaningtyas, A., Dalimunthe, Z. and Wibisono, Y.
Stages of the Islamic Social and Commercial Financing for Microfirms.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 746-750
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

Management Institution (ZMI) plays a role in the
process of poverty alleviation and economic
empowerment simultaneously. The third section
presents the methodology used, while the fourth
section presents the results and discussion. The last
part of the paper presents a conclusion followed by a
list of the references used.
2 LITERATURE REVIEW
2.1 The Need for Micro Finance
The financing of micro firms has long been
acknowledged as a mechanism to alleviate poverty in
developing and developed countries. According to
Rahman (2007), this system focuses on addressing
the needs of the poor. World Bank (1999) states that
micro finance refers to the provision of financial
services to low-income communities, including self-
employed communities. These financial services
include the provision of micro savings and micro
loans. Micro firms are an important sector in the
Indonesian economy because they account for more
than 95% of business units and provide more than
98% of the labor market. But the high cost of micro
firm financing has become a major problem in
achieving the goal of alleviating poverty. This high
cost problem reduces the chances of business survival
and the ability of micro firms to grow. They operate
mostly under the prevailing levels of economies of
scale because their limited capital prevents them from
growing beyond the micro stage. The growth of these
micro businesses is also stunted by a lack of
innovation and insufficient business skills on the part
of managers or owners.
2.2 The Role and Potential of Islamic
Social Funds
In the Islamic economic system, among the many
sources of philanthropic funds aimed at alleviating
poverty are zakah, infaq, and waqf, among others. El-
Din (1986) states that zakat is a tool or instrument to
eradicate poverty. These funds should be able to
provide financing to micro firms at a very low cost.
According to Mohieldin (2012), the main focus of
Islamic finance is risk sharing and the redistribution
of wealth. According to research by Badan Amil
Zakat Nasional (BAZNAS) in 2015, the potential
collectable total of zakat in Indonesia amounted to
Rp286 trillion. However, in 2015, the total amount of
zakat, infaq, and national alms collected represented
only 1.3% of its potential. The distribution of zakat in
Indonesia is carried out through consumptive and
productive distribution by the Zakah Management
Institution (ZMI). Asnaini (2008) states that
productive zakat should be provided to mustahik as
business capital.
3 METHODS
The research design in this paper is the qualitative
method, using the case study approach and in-depth
interviews. The research object was chosen using
purposive sampling. Thus, we selected three ZMIs
that developed a zakah fund-based micro financing
program. The ZMIs are:
 Dompet Dhuafa, one of Indonesia’s largest
charitable organizations, which developed a
program called Ikhtiar Swadaya Masyarakat
(ISM) Sumber Rezeki Dompet Dhuafa;
 LAZ Al-Azhar, a nonprofit organization,
which developed a program called Kelompok
Swadaya Masyarakat (KSM) Pelita Jampang
Gemilang LAZ Al-Azhar;
 LAZ IZI, which developed a program called
KUMM Ciranjang LAZ IZI.
In this study, interviews were conducted with on
officials who understand how the programs were
developed. Interviews were conducted at Dompet
Dhuafa with the President and Director of PT Dompet
Dhuafa Niaga, as well as with the Chairman of ISM
Sumber Rezeki, and ten program participants from
ISM Sumber Rezeki. An interview at LAZ Al-Azhar
was conducted with the Chief of Da'wah & Social
Affairs, Head of the Program & Utilization division,
and ten members of KSM Pelita Jampang Gemilang.
The interviews at LAZ IZI were conducted with the
Director of Empowerment, as well as the leader of
KUMM Ciranjang and seven of its members.
4 DISCUSSION AND ANALYSIS
The funding sources of Islamic micro finance run by
ZMIs come from zakah payers, Infaq, and Sodaqah
(ZIS). The nature of ZIS funds is that there is no
payback on the funds. ZMIs act as the party that
channels the ZIS funds to those eligible to receive
them (mustahik), especially zakah funds. ZMIs pay
zakah to mustahik directly. Zakah funds do not need
payback. However, those who qualify for zakah funds
are only people in certain categories, such as the poor,
among others. Zakah funds can be used for
Stages of the Islamic Social and Commercial Financing for Microfirms
747

consumption as well as for production activities. In
the next stage, business actors may be provided with
funds that are interest free (qard hasan) to finance
current or newly started business activities. The
principal of this loan should be paid back, but instead
of being returned to ZMIs, the funds are returned to
the group or become a revolving fund among group
members. As for the next stage, financing is
classified as commercial and is provided only to
finance a business that shows good prospects. In the
following sections, we present a summary of
microfinance programs run by three evaluated ZMIs.
4.1 First Stage: Grant with Zakah
Fund
Zakah is paid to mustahik according to the provisions
of Islam, such as for the poor. Zakah is granted
without having to be returned. The challenge for
ZMIs in channeling zakah funds is to ensure that the
beneficiaries are among those eligible to receive
zakah. Mustahik can use the zakah funds to meet their
basic needs (consumption) or for production
activities. Distributions of zakah funds by the three
ZMIs evaluated are similar.
4.2 Second Stage: Interest-Free Loan
The second stage in the Islamic micro finance process
is the most distinguishing stage, with conventional
micro finance. In this stage, the financing is given as
interest-free loans (Qard hasan scheme). In
conventional micro financing a loan is charged
interest. Similarly, micro finance is a government
program, although the interest charged is quite low
due to government subsidy. The source of funding for
this financing is the infaq and shadaqah Muslims paid
to the ZMIs. Infaq and shadaqah are also funds that
do not need to be repaid. Also, Islam prohibits lending
accompanied by an obligation to pay interest.
However, there is no rigid provision on how to
channel funds from infaq and sadaqah, which are
different to zakah. Thus, ZMI can be more flexible in
making rules for distributing these funds.
The channeling of infaq and shadaqah funds from
all three evaluated ZMIs shows some characteristics
similar to those of micro finance in general. Table 1
presents a summary of these characteristics.
Overall, Islamic micro finance practices
conducted by the three ZMIs here conform with the
criteria presented by experts such as Masyita (2012)
and Tavanti (2012). However, what distinguishes
ZMIs’ financing from other micro finance is that the
micro finance business model adopted by ZMIs
focuses on empowering others, so it is not oriented
toward maximizing profit for the institution.
Table 1: Characteristic of microfinancing by ZMIs: 2
nd
stage.
Features
Characteristic
Dompet
Dhuafa
LAZNAS
Al-Azhar
LAZNAS
IZI
Participants
The poors (low
income household)
√
√
√
No or low physical
assets as guarantee
√
√
√
micropreneurs
√
√
√
Loan terms
Small amount
financing
√
√
√
Group guarantee
X
X
X
Easy and informal
prosedures
√
√
√
Loan period
Up to 8
months
Up to 10
months
Common
capital for
group
Repayment
Revolving
loan in
group
member
Revolving
loan in
group
member
Business
aspects
High risk profile of
micropreneurs
√
√
√
Type of business
Individual
or
household
business
Individual
or
household
business
Group
business
Cost of loan
zero
zero
zero
Empowerment
Routine meeting of
group members
weekly
weekly
Daily to do
business
activity
Savings
requirements
Volunatary,
but
suggested
At least
Rp 1.000
per week
Volunatary,
but
suggested
Savings management
By group
leader
By group
leader
By group
leader
Learning process in
business activities
√
√
√
Network building
√
√
√
Social control for
repayment
√
√
X
4.3 Third Stage: Islamic Commercial
Loan
In the third stage, the funds are provided for
commercial financing. The amount of financing is
greater than that provided in the first and second
stages. This financing requires repayment and
returns, according to the terms of the scheme used.
Program participants must show that their business
activities are already running and have good
prospects. Participants are also required to submit
collateral in the form of personal assets.
The process for granting finance in this stage is
carried out using the accepted prudential principles of
the 5Cs (character, capacity, condition of economy,
capital, and collateral). The evaluation of financing
by the three ZMIs is based on the criteria of the 5Cs
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
748

+ 1S (S relates to aspects of sharia). For example,
business activities must not engage in prohibited
goods or services, and these activities must comply
with the provisions of sharia.
In this commercial financing process, priority is
given to prospective borrowers who have a higher
rate of return on business than prospective borrowers
who are among the poorest. Moreover, financing in
this stage tend to require collateral. Features of
financing for this stage is presented in Table 2.
4.4 Impact of the Program
The impact of each ZMI program on the relevant
business actors was measured by interviewing ten
households from the community groups of Sumber
Rezeki built by Dompet Dhuafa, ten households from
the Pelita Jampang Gemilang group from Al Azhar,
and seven households from the Ciranjang group under
IZI. The interviews revealed that most program
participants acknowledged an increase in income.
Households from the Sumber Rezeki group built by
Dompet Dhuafa said they had experienced an
increase in income from about Rp30,000 per week or
to an estimated average of Rp2.5 million per month.
The Cijarang group, built by IZI, consists of
housewives. They reported that they have a business
with an average income of Rp600,000 per month,
whereas previously they had no income generation at
all. Meanwhile, the group of Pelita Jampang biaan Al
Azhar reported an increasing scale of business. In
addition to the impact on revenues and business scale,
the three business groups of each ZMI showed a
significant increase in the amount of their savings.
The members of these groups are encouraged to save
during every routine group meeting, which has helped
create saving habits among program participants.
Table 2: Characteristic of microfinancing by ZMIs: 3
nd
stage.
Features
Characteristic
Dompet
Dhuafa
LAZNAS
Al-Azhar
LAZNAS
IZI
Participants
Micropreneurs
having viable
business
activities
√
√
√
Type of loan
Individual
based
Individual
based
Group loan
Loan terms
Higher amount
financing
√
√
√
Collateral
requirement
√
√
√
Type of
collateral
required
Personal
assets
Personal
assets
No clear
guarantee
Financing
scheme and cost
of fund
Murabahah-
8% margin
Musyarakah –
profit and loss
sharing
Murabahah
or
musyarakah
Mitigation
to
information
asymmetric
Mitigation to
adverse selection
problem
Business
performance
evaluation
Business
performance
evaluation
Business
activity
evaluation
Mitigation to
moral hazard
problem
Saving
records
Saving
records
Business
activity
evaluation
Repayment
record at 2
nd
stage
Repayment
record at 2
nd
stage
Business
activity
evaluation
Collateral
requirement
Collateral
requirement
Collateral
requirement
5 CONCLUSIONS
In general, micro finance on the three ZMIs evaluated
operates in three stages. In the first stage, financing is
a form of zakat payment that does not need to be paid
back. The three ZMIs carry out this process in a
similar way. In the second stage, financing is a form
of interest-free loan or qard hasan. The source of
funds for this financing is infaq and shadaqa, which
do not require the money to be repaid to the person
paying the infaq or shadaqah. However, the principal
of the loan must be returned by the business actors to
the business group, either as a revolving fund or as
joint group capital. The third stage, commercial
financing, is evaluated based on generally accepted
prudent principles and consists of cost for the
financing. Besides being conducted in stages, the
financing programs provided by the three ZMIs are
accompanied by regular mentoring and training
activities. Finally, surveys conducted on program
participants indicate that the program has had a
positive impact. This improvement is evidenced by
the significant increase in the scale of business,
household income, and participants’ savings.
However, further research is needed to evaluate the
impact of ZMIs’ micro finance programs on program
participants and what variables have an impact on
income improvement, business scale, and savings.
ACKNOWLEDGEMENTS
This research was conducted with the support of
Universitas Indonesia through the PITTA program
2017. Thanks to all the contributing parties who
assisted in the completion of this research.
REFERENCES
Asnaini, 2008. Zakat Produktif Dalam Perspektif Hukum
Islam, Pustaka Pelajar. Yogyakarta.
Stages of the Islamic Social and Commercial Financing for Microfirms
749

Badan Amil Zakat Nasional, 2015. Outlook Zakat
Indonesia 2017, Pusat Kajian Strategis Badan Amil
Zakat Nasional.
El-Din, S. I. T., 1986. Allocative and Stabilizing Functions
of Zakat in an Economy. Journal of Islamic Banking
and Finance. 3:4.
Masyita, D., 2012. Sustainable Islamic Microfinance
Institutions in Indonesia: an Exploration of Demand
and Supply & Supply Factors and the Role of Waqf,
Durham University. Durham theses. Available at
Durham E-Theses Online:
http://etheses.dur.ac.uk/5942/.
Mohieldin, M., 2012. Realising the Potential of Islamic
Finance. World Economics. 13(3), 127-142.
Obaidullah, M., Khan, T., 2008. Islamic microfinance
development: Challenges and initiatives. Islamic
Development Bank, King Fahd National Library
Cataloging-in Publication Data. Jeddah. L.D. no.
1429/2739. ISBN: 978-9960-32-180-6.
Rahman, A., 2007. Islamic Microfinance: A Missing
Component in Islamic Banking. Kyoto Bulletin of
Islamic Area Studies. pp. 38-53.
Tavanti, M., 2012. Before Microfinance: The Social Values
of Microsavings in Vincentian Poverty Reduction.
Journal of Business Ethics. Vol. 111, No. 3 pp. 1-10.
World Bank, 1999. Sustainable Banking with the Poor
Microfinance Handbook, (online) available at:
https://openknowledge.worldbank.org/bitstream/hand
le/10986/12383/18771.pdf downloaded at 5 March
2017.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
750