Does Qard ul-Hassan Enhance the Impact of Microfinance on Clients' Income and Expenditure?
Case Studies of Three Islamic Charity Based Microfinance in Indonesia
Aimatul Yumna*
Professor Matthew Clarke
Deakin University
School of Humanities and Social Sciences
221 Burwood Hwy
Burwood
Victoria, 3125
AUSTRALIA
*Corresponding author: ayumna@deakin.edu.au, phone: +61 403313423
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Declaration
The authors declared that there is no competing interest in writing this paper that can lead into
commercial or intellectual conflict of interest in the future.
Aimatul Yumna
Professor Matthew Clarke
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List of Abbreviations
BAZNAS
: Badan Amil Zakat Nasional is Indonesian government owned zakat institution.
BMMI
: Baitul Maal Muamalat Indonesia is licensed zakat institution. In Indonesia, the
organization that can collect zakat and Islamic charity has to obtain a license from
the government as zakat institution
BMT
: Baitul Maal wat Tamwil is Islamic microfinance under licensed as Islamic
financial cooperative
KUMMM
: Komunitas Usaha Mikro Mumalat berbasis Masjid, economic empowerment
program of BMMI that providing revolving working capital for microentrepreneur in surrounding Mosques in Indonesia
MFI
: Microfinance Institution
OLS
: Ordinary Least Square
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Abstract
Integrating zakat and microfinance has been proposed as a new model of poverty alleviation. This model
is benefited with the availability of zakat funds as alternative financing sources for providing qard Hassan
loan for the extremely poor clients. This research will provide empirical evidence of the impact of zakatbased microfinance in Indonesia on several client welfare indicators. In total, 153 clients of zakat-based
microfinance institutions (MFIs) and 82 non-clients participated in this study. We employed Ordinary
Least Square regression to compare the welfare of the client and non-client group. The findings show that
the clients of zakat-based microfinance earn significantly higher annual income per capita than those in
the non-client group, but the impact on monthly expenditure is not evident. Given the short period of
intervention, the real impact of the program is notoriously hard to measure due to the possibility of
systematic mis-reporting on income as well as the selection bias of the clients. It can be argued that the
nature of qard Hassan loan is merely for direct social assistance and for safety nets program. For the
purpose of poverty alleviation, this mechanism has to be integrated with commercial microfinance model.
Key words: zakat; microfinance; qard al Hassan; impact study; OLS
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Does Qard ul-Hassan Enhance the Impact of Microfinance on Clients' Income and Expenditure?
Case Studies of Three Islamic Charity Based Microfinance in Indonesia
I.
Introduction
In the last ten year, Indonesia has shown a significant economic growth as well as a remarkable
achievement in poverty reduction. The poverty rate has been consistently decreasing from 23.4% in 1999
to 11.96% in 2012. Indonesian Statistical Bureau (BPS) just released that in March 2012, the number of
people living in poverty is 29.13 million people or 11.96% of total population. It falls by 0.53% or 0.89
million people than last year. However, declining the poverty rate does not give the real picture of poverty
incidence in Indonesia. The study of The World Bank reveals that many Indonesian households face high
degree of vulnerability, as they are clustered just above the national poverty line. The data shows that
50% of the poor in the current year were not poor in the previous years. These households are households
with monthly per capita expenditure around 1.5 time national poverty line. While, the rest 50% are
households that live in poverty at least once in the last three years, and 10% of them stay in chronic
poverty in three consecutive years. These vulnerable household easily falls into poverty and destitutions.
Although poverty rate has reduced in the last decade, the improvement of key indicators in health and
education remain constant. The income inequality among regional provinces is also very obvious. In rural
areas of Java, around 12% of people live in poverty, but in east part of Indonesia, around 70% of
population is the poor. The improvement of welfare is still a big challenge for Indonesian government
since both chronic and acute poverty occur here. To help the extremely poor and to protect the vulnerable
population, it is important to provide social assistance as well as safety nets program. However, the
government budget on social assistance is very limited; which is only $4.6 billion a year or 0.5% of gross
domestic product in 2010. This budget only can reach 18.5 million poor or half of the total poor in
Indonesia. This budget constraint limits the ability of the government in poverty alleviation.
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As the country with the largest Muslim population in the world, Indonesia is benefited with a huge
potency of Islamic charities collection that reaches $21.7 billion or 3.4% of the Indonesia GDP in 2010
(Firdaus et al. 2012). This charity is a major instrument for poverty alleviation since in Islam
helping the poor is a central tenet of the faith. Islam addresses the issue of poverty by establishing the
concept of social justice, solidarity and equality. Resources have to be distributed from the wealthier to
the needy through several Islamic charity mechanisms, including zakat, waqf and shadaqa. The Qu’ran
notes that the importance of fighting for poverty is equivalent to the importance of fasting and prayers.
Therefore, the righteous Muslim is the one who not only performs religious activities, but also loves
others and takes care of the disempowered.
In Indonesia, the collection and distribution of Islamic charity can be done through various channels.
Traditionally, zakat is distributed directly from the rich Muslims to the prospective recipients. It is more
personal and largely for consumption purposes. Although the direct distribution still continues, there are
significant numbers of zakat organizations that have emerged since the 1960s (Abdullah 1994). These
organizations can be off shoots of national Islamic organizations, private companies or governmental
organizations. The government has a direct involvement in this sector through the establishment of the
National Zakat Institution (BAZNAS-BadanAmil Zakat National). This institution has an imperative role
in the collection and distribution of zakat as stated in the new zakat law in 2011, which stipulates that all
activities conducted by zakat institutions have to be reported to BAZNAS.
Since this development, the amount of zakat funds collected and distributed has increased substantially.
Furthermore, the use of zakat for productive activities rather thanfor purposes of consumption has been
increasing in popularity in Indonesia. These practices will utilize zakat funds to finance microfinance
initiatives through providing qard Hassan loans and empowerment programs. By empowering zakat
recipients, it is expected that they can start to generate income, accumulate assets and, after a specific
period of time, that they will be wealthier and progress to being zakat payers themselves. In such
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practices, zakat is expected to play a more significant role in improving the socioeconomic condition of
the society.
Although the concept of productive zakat is along-established one, there are only small numbers of
studies providing specifically, empirical evidence of productive zakat. The objective of this study is to
analyze the impact of zakat-based microfinance on several welfare indicators of recipients and compare
these indicators to those of non-recipients. It is hypothesized that the welfare of the recipients of
productive zakat is better than that of the comparison group.
To start the discussion, the paper will provide, in section 2, a review of the literature on both productive
zakat and the impact of productive zakat on poverty alleviation; then the research methodology will be
presented in section 3, before the analysis of the results in section 4. The paper will conclude by
providing, in section 5, the implications of the study
II.
A review of the literature on the use productive zakat on microfinance
a. The definition and implementation of productive zakat
Productive zakat1, or, as several scholars have named it, ‘zakat for income generation’, is a mechanism
whereby zakat is distributed to help eligible recipients generate income and use zakat funds for productive
activities rather than purposes of consumption. Disbursing zakat in the traditional way by providing cash
payments to recipients basically has little impact on the welfare of the recipients. The poor, who usually
have limited resources, tend to have a high propensity to consume when receiving a cash payment (Sarif
and Kamri 2009).Therefore, distributing zakat as productive capital is a more powerful tool when seeking
to increase the livelihood of the poor.
1
The term productive zakat and qard Hassan loan used interchangeably in this paper since the productive zakat is
distributed using qard Hassan mechanism.
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The productive zakat is mostly distributed using qard Hassan mechanism by non-profit microfinance
programs in Indonesia. Qard Hassan a kind of loan returned at the end of the agreed period without any
interest or share in the profit or loss of the business (Chapra, 1995). The objectives of this scheme are to
help the poor and to establish a better relationship between the poor and the rich as well as encourage the
wealth transfer, increase the money supply and reduce the poverty by providing facility for the poor to
create employment and business venture. As charitable loan, Qard Hassan is designed for personal loan of
the needy.
There are several mechanisms involved in distributing zakat funds as qard Hassan loans in Indonesia.
Firstly, some institutions offer revolving working-capital loans to target recipients. After successfully
repaying within a specific period of time, the zakat fund can be distributed back to former loan recipients
or other recipients. Secondly, qard Hassan can be distributed as asset capital, such as providing machinery
or equipment to recipients. The asset value is the total loan that has to be installed within a specific period
of time. After being fully repaid, the zakat funds will be distributed to other recipients. By giving a loan
rather than cash zakat, the responsibility of the recipients will be increased in terms of using the money,
as well as increasing the outreach of the program.
The idea of distributing zakat for income generation was introduced several decades ago. Most prominent
scholars in Islamic economics, including Al Qaradawi, Monzer Kahf, Afzalur Rahman, Habib Ahmed,
Muhammad Obaidullah and Kabir Hassan, support the idea of productive zakat (Sarif and Kamri, 2009).
One of the most frequently cited articles is by Rahman (1976); he noted that zakat should be utilized to
facilitate the poor in income generating activities by providing training as well as necessary technical
equipment and machinery. Specifically, he proposed that small and cottage industries should be
developed in rural areas to give opportunities for the poor to raise additional income and to increase the
family welfare that lead to the reduction of poverty rate in the future.
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The current studies on Islamic microfinance propose a model on how zakat can increase the impact of
microfinance. For example, Ahmed (2002) maintains this fund can be utilized as additional funds to
create training and skill development for the extremely poor. By using this fund to take care of the poor
clients, the possibility of diverting funds for consumption purposes will be reduced and will consequently
minimize the default rate and increase the sustainability of the microfinance program. Other studies by
Obaidullah (2008) and Hassan (2010) agree that zakat funds can be used to lift up the livelihood and skill
of the extremely poor before participating in commercial microfinance program.
To conclude, most of the theoretical studies agree with the benefit of productive zakat in increasing the
impact of microfinance. The next section will focus on the previous studies on the impact of
microfinance, specifically looking on the studies that provide the empirical evidence on the role of
productive zakat on increasing the impact of microfinance.
b. The survey literatures on impact studies on microfinance and productive zakat
The impact of microfinance is highly discussed in the literature. There is sufficient evidence support the
positive impact of microfinance on poverty reduction, specially relating to the achievement of Millennium
Development Goal. In particular, there are more evidences showing the positive effect on smoothing
income and increasing income, but less evidence on health, nutritional status and education (Morduct, et
al 2002).
Most of the literature agrees that microfinance is only suitable intervention for the poor with the ability
and skill to run microenterprise; thus microfinance will not have a positive impact to the extremely poor,
unless they have suitable product designs for them (Wright 2000). Furthermore, the impact of
microfinance can be increased if it is delivered and integrated with other development intervention. For
example, the study by Leatherman and Dunford (2009) shows the positive effect of integrated
microfinance and health on client’s welfare since health is important for financial security and affect
productivity of the clients and all family members. Other study by Matin et al (2007) looks on the
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Targeting the Ultra Poor by BRAC in Bangladesh. They found that integrating microfinance with other
mainstream development activities such as food transfer, established saving, and provide trainings for the
vulnerable are able to increase the benefit of conventional microfinance program.
Most of the study confirms the benefit of microfinance in increasing the welfare. In the Indonesian
context, Rosintan and Cloud (1999) study the microfinance program of Bank Rakyat Indonesia in
Lombok. The program specifically targets women that live below the poverty line. They found that the
women that received loan are able to increase their income substantially, improve their nutrition, and
repay loan on time. They also have higher aspiration on education and reducing fertility. Looking specific
study on the zakat based microfinance; there are a considerable number of studies in this area, although
the scope is very limited; for example, Khatimah (2004) studied the impact of productive financing in the
Community Development Cycle program in Dompet Dhuafa. She explored the influence of gender,
education, type of business and amount of zakat financing on the per capita income. She found that most
of the participants increased their income substantially after zakat had been given to them; furthermore
she found that gender, education level, total zakat received and type of business together significantly
influenced the income level.
Another study by Beik (2009) tested the welfare of 50 households of zakat recipients in the Dompet
Dhuafa area in Jakarta over two time periods: before and after receiving zakat. By utilizing several
methods of analysis – such as headcount ratio, poverty gap, Sen Index and Foster, Greer and Thorbecke
Index –he found that zakat was able to reduce the number of poor families by 10% and able to reduce the
poverty and income gap, as well as lessen poverty acuteness. Therefore, he concluded that zakat has a
very high potential to reduce poverty in Indonesia.
Although these studies have proven the success of zakat in poverty alleviation, they contain several
limitations; specifically as regards the comparison of the welfare of recipients before and after zakat is
given to them. The study of the impact of zakat on a specific program requires a sufficient time frame.
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Asking the participants to provide their historical data, such as information relating to income, possibly
creates some data bias, since people do not usually have any record on their past data. An appropriate
impact study should conduct the investigation in two phases–the baseline study and the study of the
findings, which is tested after a specific period of observation. Bias in the results might be created if the
study is not conducted in two observation periods.
A recent study by Nurzaman(2011)explores the relationship between zakat and human development.
Rather than using economic indicators, he also measured other indicators such as knowledge index and
life expectancy index. The results contradicted two previous studies. He found that, based on the Human
Development Index (HDI) estimation, the HDI of zakat recipients was lower than the average HDI level
of population in Jakarta and Indonesia. Furthermore, he also found that zakat had basically no direct
effect on the HDI value of zakat recipients.
Analysing the effect of zakat ont he HDI value has little meaning. Index of a group becomes meaningful
when it is compared to index of other group. Furthermore, one indicator for measuring the HDI is the life
expectancy index, which is a long-term variable. Zakat, as stated before, is a short-term instrument that is
generally spent in one year and has to be disbursed quickly; therefore, there is no doubt that the empirical
results of Nurzaman’sstudy also confirms that zakat has no effect on the HDI value
III.
Research Methodology
a. Data Source
Data used in this study was obtained through an interview questionnaire survey. The survey was
conducted in two cities in Indonesia: Jakarta and Yogjakarta in the period December 2011-January 2012.
The study includes 3 institutions as case studies. In Jakarta, two zakat institutions were selected: Baitul
Qiradh BAZNAS and Baitul Maal Muamalat, while in Yogjakarta, an Islamic Microfinance Institutions –
Baitul Maal Beringharjo – was selected as a sample institution. Since the present study is an impact study,
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the key criteria for the selection of productive zakat recipients was evidence of the recipient being clients
of microfinance for at least one year. Then, a purposive sampling method was implemented to select
respondents from those three institutions. In total, there were 236 respondents participated in this study.
Each MFI chosen in this study has different characteristics. Baitul Qiradh Baznas (MFI1) offers two types
of qard Hassan financing – cash loans and capital asset loans. The clients are located in Jakarta and West
Java. A group lending program is not implemented in this MFI. Lack of staff is the major problem;
therefore there is limited supervision and monitoring of the program.
Baitul Maal Mualamat, the second MFI, offers qard Hassan loans through several participating mosques
in Indonesia. The loan is specifically given to people who actively participate in the prayers conducted at
the mosques. Groups of borrowers set up by the MFI do not meet for the purpose of group lending
mechanisms and capital guarantees, but merely for weekly meetings. Group meetings have two purposes
–– to collect weekly loan repayments from the participants and to provide religious education to the
participants. This MFI believes that religious values are important in increasing the success of the
participants.
The third MFI, Baitul Maal Beringharjo, focuses its operation in rural areas of Yogjakarta. This MFI
implements a group lending mechanism where the group is set up to ensure the repayment by every
member in the group. The close relationship between the participants and the program supervisor is very
clear in every meeting. The topic of discussion is more diverse, ranging from religious education, success
stories of the entrepreneurs, the sharing of technical skills, simple book-keeping and fun activities. This
MFI employs close and regular supervision to enhance the success of the program.
Furthermore, the comparison group was also created. This group was selected based on its characteristics
that were similar to the productive zakat recipients in terms of their income level, type of business and the
location in which they lived. There were, in total, 82 respondents who were successfully interviewed and
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who constituted the comparison group. However, the survey cannot show similar characteristic of the
clients and non-clients from all respects.
b. Hypotheses, Variables and Measures
The impact of productive zakat will be measured in two variables: annual per capita income and monthly
per capita expenditure. The study will examine the impact variables of productive zakat recipients and
compare them to the performance of non-recipients. It can be argued that after engaging in productive
zakat programs, the welfare of productive zakat recipients will be better than in the comparison group.
Thus, the hypotheses are:
Hypothesis 1 (H1): the recipients of productive zakat earn significantly higher income per capita than the
comparison group
Hypothesis 2 (H2): the recipients of productive zakat live with significantly higher expenditure per
capitathan the comparison group
We measure the impact on both income data and expenditure expenses. The Income data is notoriously
difficult to collect because of systematic mis-reporting. Therefore, expenditure is used a proxy for
income. In addition, there are evidence that expenditure of the MFI borrowers decreases in the short-run
as they save and invest in their enterprise. Thus combining both indicators is expected provide more
robust result.
The study also collects all households’ sources of income, averaged over in a 12 months period to
consider the seasonal fluctuation of income. The data is the current year of income generation. We did not
ask the respondents to provide their initial income prior joining the programs since the high possibility of
bias result on recalling the past data.
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There are several important variables that might affect the relationship between participation in
productive zakat programs and impacts on households. The explanatory variables used in this research
can be classified into two groups: the first group contain sdemographic data, including age of household
head, education level of household head, gender of household head, and number of family members ;the
second group contains the specific data of the respondents, including state, total loan, their business
problems, health problems, other social assistance received from various sources ,including government
and NGO, and informal loan-repayment problems.
We will employ an ordinary least-square model as below:
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𝑦𝑖 = 𝑎 + ∑ 𝑏𝑖𝑋𝑖 + 𝑒
𝑖=1
where
Y1= annual per capita income; Y2= monthly per capita expenditure
X1-X3= dummy variable for MFI1, dummy variable for MFI2, dummy variable for MFI3
X4= state as dummy variable; 1=Jakarta and 0= Yogjakarta
X5= age of household head
X6= gender as dummy variable; 1=male and 0=female
X7=family size
X8= dummy variable; 1=received other assistance beside zakat and 0= did not received any other
assistance
X9= serious health problem in the last one year in dummy variable.
X10= business variables measured inlikert scale
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X11=length of schooling of household head
X12= total loan
IV.
Findings
a. Respondents and their characteristics
1. Welfare characteristics of the respondents.
Qard Hassan is a specific intervention for helping the lowestlevel of the poor since it does not require
interest payment on loan. In this regard, the recipient of qard Hassan loan should be the ones who live
below the poverty line. This section aims to analyse the welfare of the clients using annual per capita
income and monthly per capita expenditure as the indicators to see whether this intervention is designed
to specific group of the poor.
The poverty line in Indonesia is measured by consumption approach that includes food and non-food
expenditure. In 2012, the national poverty line in Indonesia for people living in the city is Rp. 8,914.17
per day or equal to $1.362 and Rp. 7,640.87 per day or $1.16 in the rural area. While the national poverty
line based on food expenditure is Rp.6239.8 ($0.94).
The study found that, on overall the monthly expenditure on food of the clients is Rp. 231,168.73 per
capita per month or $1.17 per day, which is higher than the Indonesian poverty line based on food
expenditure. The data shows that clients of MFI2 are wealthiest among other clients with food
2
This rate is calculated based on the purchasing power parity exchange rate in 2011 calculated by the World Bank
($1=Rp 6575)
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expenditure around Rp. 260,998.02 per month or $1.32 per day, while clients of MFI3 have the lowest
food expenditure expense at Rp. 189,750.83 per capita per month or 0.96 per day.
The study compares the food expenditure of the clients with the national poverty line on food expenditure
as a benchmark in order to determine the poverty level of the clients. We found that more than half of the
clients live above the poverty line. However, when we apply $2 per capita per day as a cutting point,
majority of the respondents live below the poverty line. These households live in the edge of poverty line
that easily falls into poverty. Using $0.96 as a benchmark, 69% of clients of MFI1 and 70% clients of
MFI2 live above poverty line; but with $2 benchmark, the percentage of clients living above the poverty
line reduce into 6% for MFI1 and 16% of MFI2.
Table1: Poverty level of the clients based on expenditure approach.
Poverty Line: $0.96
The poverty level of the client
Poverty Line : $2
MFI1
MFI2
MFI3
Average
MFI1
MFI2
MFI3
Average
Clients above the poverty line (%)
69%
70%
45%
60%
6%
16%
4%
9%
Clients below the poverty line (%)
31%
30%
60%
40%
94%
84%
96%
91%
Total
100%
100%
100%
100%
100%
100%
100%
100%
Most of the clients of non-profit MFI run self employed enterprise or slightly bigger size enterprises with
some assistance from other family members. Most of them work in informal sectors such as street
vendors and petty traders. In majority their business is in food industry; some of them run small shop/stall
in front of the house, in the market or busy locations, or offering goods from door to door. They sell
cooked food, snacks, cigarette, drinks, and daily food supplies. It is noted that only small numbers of
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clients run skilful business. In majority their business requires minimum skills with low barrier of entry
and in a very competitive environment.
On average, annual per capita income of the clients is Rp. 5,807,963.25 ($883.34) or equal to $2.48 per
day and Rp. 5,367,669.85 for the non clients or equal to $2.236 per day. This income comes from
multiple sources. This data shows that on overall, the client’s of the MFI earns higher annual per capita
income that the non client group.
The client of the MFIs are multi-earners. Besides running a single microenterprise, they also engage in
other productive activities such as paid labors. The result shows that majority of the clients have two
sources of income generated by head of households and their spouse. The clients of MFI2 generate
highest annual per capita income compared to other MFIs. The study found that 24% of clients from
MFI2 have three sources of income in a family, which is the highest percentage among other clients. The
summary of income information is presented in table 2
Table 2: Annual per capita income of the clients
Family characteristics
Mean of annual income ($ PPP)
MFI1
MFI2
MFI3
average
Non-client
group
Annual per capita
income
$769.23
$1007.05
$873.73
$883.34
Sources of income
MFI1
MFI2
MFI3
Average
One source of income
33%
22%
34%
30%
Two sources of income
49%
54%
57%
54%
Three sources of income
18%
24%
9%
16%
16
$816.38
The information of family income and expenditure shows us that most of the clients of non-profit MFIs
live above the national poverty line. However, they have high vulnerability to fall down into poverty and
destitutions. To provide the more comprehensive portrait of the client’s poverty condition the next
discussion will discuss the demographic characteristics of the respondents including age, length of
schooling, size of the family, and gender of the household head.
2. Demographic Characteristics
On average, all the respondents are in their productive age (>46 years old). The respondents in MFI2 and
MFI3 are younger than the respondents in MFI1. The results show that the younger productive zakat
recipients earn higher per capita income than the older ones. It seems than young people are more capable
and motivated in conducting microenterprises. The gender of the household head is still
predominantlymeninall groups. In urban areas like Jakarta where MFI1 and MFI2 located, around 20% of
women are playing the role ofhead of the family. But for MFI3 that is located in Yogjakarta, where the
culture and tradition are still crucial in shaping daily lives, there are only around 8% of families which
areheaded by women. Length of schooling of the household heads is considered important in describing
the dependent variables. The study proposes that educated household heads are more capable in utilizing
productive zakat than uneducated ones. The descriptive statistics also confirm that respondents of MFI3
in Yogjakarta have longer schooling period than respondents in Jakarta. Further data on family size shows
that, on average, the respondents live in small families with two or three children. It can also be seen that
the comparison group has, on average, a smaller family size than the respondents from the three MFIs.
Table 3: Descriptive statistics of the respondents
Family characteristics
Mean (standard deviation
BQB Baznas
BMMI
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BMT Beringharjo
Non-client group
Age of household head
48.62
46.20
47.19
47.30
Length of Schooling of
7.55
7.72
8.98
8.17
Family Size
4.82
4.35
4.06
3.73
Percentage of Male
73%
83%
92%
80%
60
46
48
82
household head (years)
household head (%)
Total sample
3. Specific information of the respondents
Microfinance clients face various problems and constraints in their daily lives. However, the impact
studies that acknowledge the limitations acting on the clients are very limited. This study tries to
investigate the obstacles clients face in participating in productive activities; such obstacles include their
health conditions, difficulties in informal loan repayments and business problems.
a. Health problem
The results show health becomes a significant problem of the respondents. 43% of respondents in MFI1
reported having serious illness in the last year. In the other MFIs, although the percentage is lower (23%
for MFI2 and 15% of MFI3), we can see that the poor have still struggled with their health conditions.
However, overall, the health condition of the comparison group is better than that of the productive zakat
recipients.
b. Informal money lender problem
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The existence of informal moneylenders is undeniable in lower level income communities. In Indonesia,
the informal money lender is a solution for the immediate funding needs of this community. Their
operation is very personal and provocative. With very little hesitation, they come to houses in the
community and offer various funding schemes. A poor family usually borrows a small amount of money
for their daily expenditure. Although the interest rate is very high, they have to deal with these informal
moneylenders due to their family’s hardship. As an illustration, for a loan of $10, a family has to
repay$50 cents per week for12 months, with a total repayment of $24.The nominal interest rate being paid
is 140%. My interviews with the poor indicate that some of them faced difficulties in paying this high
interest rate. It was also found that some of them had to sell their valuable assets to repay the loan.
The survey shows that the percentage of respondents obtaining loan from informal money lender is very
high; 43% of the respondents in the comparison group said that they have been using informal money
lender for their financial assistance, while in the three MFIs, the results are surprisingly similar, with
44%, 27% and 38% having relation with informal money lenders respectively. Therefore, this study will
include the relation to informal money lenders as one of the explanatory variables that influences the
impact of microfinance programs.
c. Business related problem
We also examined business-related problems of the respondents. It has been reported that lack of capital
is the major problem faced by both zakat recipients and the comparison group. When we were asking
them to scale the level of difficulties in managing business, only 7 respondents from the comparison
group strongly agreed that they had a lack of skill in managing business, while there were 21 respondents
from the zakat recipients group who answered the same questions. The next problem identified in this
study was the lack of skill in selling the products. The result was consistent with the previous one –that
only 5 respondents in the comparison group faced difficulties in selling the products. However, in the
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zakat recipient group, 25 respondents agreed and 17 respondents strongly agreed that they had limited
skills in selling the products.
d. Participation in social assistance program
As well as investigating the problems and limitations of the poor, we also gathered specific information
regarding the other types of assistance received by the respondents. There are various interventions for
poverty alleviation in Indonesia, such as rice programs for poor families, scholarship programs from
NGOs and business organisations, as well as free health-service programs. The descriptive statistics show
that more than 70% respondents in this study received such types of assistance. Therefore, we considered
that this variable was important in describing the impact variable of microfinance programs.
e. Qard Hassan loan
The most crucial variable used in this study is that of the total loan received from the MFIs. Since this is
generally a qard Hassan loan, the amount is moderately small, ranging from $76.05 to $304.2. The loan
period is relatively short-term –usually a one-year period, since the source of funds is zakat that cannot be
capitalized (Hassan, 2010). On average, respondents from MFI1 have higher loan amounts ($123.59) than
respondents from MFI2 and MFI3 ($72.5 and $103.23 respectively). Although, the comparison group did
not receive loans from any MFIs, we could see that they have outstanding loans, on average $38.97. Our
survey revealed that the sources of the loan were either informal money lenders or family assistance.
Table 4: Respondents’ specific information
Specific information of the respondents
MFI1
Percentage family received other assistance
MFI2
MFI3
Non-client groups
86%
85%
78%
23%
15%
13%
72%
percentage of family received serious health problem
43%
20
Percentage of family facing difficulties in informal
44%
27%
38%
43%
$123.59
$72.5
$103.23
$38.97
loan repayment
Average loan
a. The impact of qard Hassan loans on per capita income and per capita expenditure.
This section will answer the research questions on how qard Hassan loans impact on per capita income
and per capita expenditure. These variables will be individually tested in the hypotheses.
Hypothesis 1 is supported by the findings. Using the comparison group as a base, the results show that the
respondents of the three MFIs earn significantly higher per capita income that the comparison group.
Furthermore, respondents from MFI2 are able to earn the highest annual per capita income of all the other
MFIs and the comparison group. The results explain that the age of the household head and family size
are the only explanatory variables that are statistically significant with a 95% level of confidence in
describing the annual per capita income. One interesting result was that a loan received from a qard
Hassan program is not statistically significant influencing the annual per capita income. This indicates
that there is no effect of the qard loan on the welfare of the respondents.
Secondly, we tested hypothesis 2,–that the recipients of productive zakat live with significantly higher per
capita expenditure than the comparison group. The results reject this hypothesis, since the monthly per
capita expenditure of productive zakat recipients does not show a statistical difference to that of the
comparison group.This model suggests that the monthly per capita expenditure is influenced by several
variables including state, gender of the household’s head, family size and business problem. This result
shows that client’s problems significantly influence the welfare of the clients and it confirms the previous
literatures that client’s problem will limit the capacity of the poor in utilizing microfinance services.
Again we also found that the influence of qard Hassan loans on monthly per capita expenditure is not
evident in this case. The results of the OLS model are presented in Table 5.
21
On overall, the results show that the recipients of productive zakat earn significantly higher annual per
capita income than the comparison group, but that there is no difference in monthly per capita
expenditure. The increase of per capita income is not directly related to the increase in expenses such as
daily expenditure of the respondents. This income might be spent to enlarge the capital base of the
business or for asset accumulation purposes. Furthermore, the results also show that qard Hassan loans
are not a statistically significant influencing on all the welfare indicators used in this study. The possible
reasons are that the amount of a qard Hassan loan is very small, and the average loan period is very short
(1 year). The other possible reason of the minimal impact is that the majority of the respondents have
lived above the poverty line prior joining the programs; thus the small amount of loan will only have
minimal impact on welfare indicators.
Table 5: OLS coefficients and t-stat on annual per capita income and monthly per capita expenditure
annual per capita income
monthly per capita expenditure
Coefficients (standard
Variables
deviation)
Coefficients (t-stat)
Intercept
7.112 (4.144)
.410 (6.065)
MFI1
1.577 (2.236*)
.003 (.119)
MFI2
2.498 (3.410*)
.024 (.843)
MFI3
1.295 (1.717**)
.026 (.879)
State
.068 (.085)
.117 (3.726*)
Age of HHH
.041 (1.872**)
.000 (.454)
Sex of HHH
-.690 (-1.178)
-.059 (-2.566*)
Family Size
-.760 (-5.100*)
-.038 (-6.536*)
Any Other assistance
-.365 (-.653)
-.009 (-.411)
Health problem
-.179 (-.331)
.006 (.276)
informal loan repayment
.541(1.192)
.014 (.784)
22
Business problem
Length of schooling
Total Loan
-.422 (-1.595)
-.022 (-2.102*)
.071 (1.179)
.003 (1.089)
-5.567E-008 (-.399)
-.009 (-.493)
* Significant with a 95% levelof confidence and ** significant with a 90% level of confidence
The study runs the second model to see the difference impact indicators among the MFIs. Instead of
using non-client group as a comparison group, it selects the MFI3 as base category and compares the
impact indicators between MFI1 and MFI2 to MFI3 as the reference group. As mention before, those
three MFIs have different characteristic in their microfinance programs. Thus the aim of this approach is
to analyze the influence of type of the MFIs to the impact indicators. The model estimation is presented in
table 6.
The results show that there is no difference on annual per capita income among the client of MFI1 and the
clients of MFI3. However, the annual per capita income of MFI2’s clients is significantly higher than that
of the comparison group in a 90% level of confident. This model demonstrates that family size and
business problems significantly influencing the annual per capita income. In addition, the second
estimation shows that the monthly per capita expenditure of the clients from both MFI1 and MFI2 is
significantly higher than that of the clients of MFI3. Particularly, it explains that the monthly per capita
expenditure of MFI2 clients is the highest among other MFIs. The family size and length of school are the
variables that significantly describing the monthly per capita expenditure.
This second model illustrates that the impact indicators are significantly different among different types
of MFIs. This result indicates that characteristics and geographic areas of the MFIs influence the impact
of microfinance. As mention before that the MFI1 and MFI2 are purely zakat organization located in
Jakarta. Thus it can be argued that starting income and expenditure prior joining the programs for
respondents living in the big city has been higher than those of the respondents living in the small city/
rural areas.
23
Table 6: OLS estimation with MFI3 as base category.
annual per capita income
monthly per capita expenditure
Coefficients (t-stat)
Coefficients (t-stat)
9.569 (3.861*)
.337 (3.544*)
MFI1
.186 (.250)
.100 (3.513*)
MFI2
1.385 (1.863**)
.122 (4.268*)
Age of HHH
.038 (1.275)
.002 (1.331)
Sex of HHH
-.097 (-.121)
-.050 (-1.637)
Family Size
-.894 (-4.475*)
-.038 (-5.010*)
Any Other assistance
-.899 (-1.240)
-.003 (-.112)
.295 (.441)
.005 (.185)
.853 (1.404)
.002 (.079)
-.759 (-2.104*)
-.023 (-1.670)
.080 (.949)
.007 (2.043*)
Variables
Intercept
Health problem
informal loan
repayment
Business problem
Length of schooling
On overall, the model estimation shows the minimal impact of zakat based microfinance. The study
argues that this problem related to the nature of qard Hassan loan as well as limitation in selecting the
clients. As benevolent loan, qard Hassan is designed to help the needy that can be used both for
consumptive and productive purposes. In case of the borrower face difficulties in loan repayment, the
lenders have to accept this problem and consider the loan as a charity. For the purpose of microfinance
and poverty alleviation, this natural characteristic will discourage the recipients to perform well with their
loan and their micro business. However, the study believes that qard Hassan loan for microfinance will be
more powerful if it is given in longer period and it is complemented by non-financial assistance, such as
skill training, mentoring, and health services. Therefore, the productive zakat recipients have more
flexibility in utilizing the funds.
24
Secondly, the study shows that most of the respondents live above the poverty line; this result is
unexpected since as the program is funded by Islamic charity, it should focuses on the poor and the lower
level of the poor. The study also found that age of the respondents is significant influencing the welfare
indicators. In the field, some of the clients are too old to participate in microfinance program. They are
more suitable for the target of social assistance rather than microfinance program.
V.
Implication and concluding remarks
This study provides the evidence that the income level of the clients of zakat based microfinance is
significantly higher than that of the comparison group, but the impact on monthly expenditure is not
evident. We argue that this minimal impact is due to the nature of qard Hassan loan as well as the the
possibility of mis-selection of the clients. In this case, the initial condition of the clients is not different
with that of the non-clients.
The study argues that qard Hassan loan is not sufficient intervention to improve the welfare of the clients.
The nature of the loan is merely for social assistance and for safety nets program. For the purpose of
poverty alleviation, this mechanism has to be integrated to more commercial microfinance program, such
as Islamic cooperative and profit loss sharing mechanism. The obligation to repay the loan and to share
the profit will encourage the poor to lift up their life. In the future, developing a new model of Islamic
charity based microfinance is necessary to be able to enhance the benefit qard Hassan loan for the poverty
alleviation.
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