Ending the Cycle of Poverty
Access to financial services is a critical tool for eliminating poverty. Without access to savings accounts, it's difficult for the poor to save funds as they risk loss due to theft or unwise spending. Unfortunately, many poor communities lack access to financial services due to three main barriers.
The Working Poor Lack Access to Banks
They often feel shy to enter fancy bank branches.
Lack of Physical Access
Many communities lack physical access to banking services. For those who do have banks nearby, the banks are rarely open during hours when workers have time off to visit a bank branch. Also, in many communities where there are physical banks present, the banks are often a far drive from community members home or work, which forces them to spend time away from work and family life.
Another cultural issue is the limited access to suitable financial services. For majority Muslim communities (such as in Indonesia) the religious prohibition of riba disallows participating in the conventional banking model. Additionally, many members of the working poor don't feel comfortable entering a fancy bank branch. In the minds of many community members, the expensive bank office is something out of reach and only suitable for the rich.
High Fees for Bank Accounts
A typical bank in Indonesia charges around Rp 10,000 IDR (around $0.70 USD) in monthly account maintenance fees. But for a typical Indonesian market trade, they're only able to set aside monthly savings of roughly Rp 100,000 IDR (around $7 USD). This means 10% of their monthly savings would go just towards account maintenance. These high fees keep traditional savings accounts at commercial banks out of reach for the working poor.
Preying on the Poor: Loan Sharks
Since the working poor cannot access the conventional financial system, they often rely on traditional money lenders (rentenir) which are effectively local loan sharks. These loan sharks fail to give a clear and proper loan agreement, and charge huge fees as much as 10% to 15% compounding interest per day! That's a 14 sextillion % APR (annualized percentage rate) - a 14 with 42 zeroes after it!
With astronomical interest rates like this, it's easy to understand how once someone falls prey to a loan shark, it's nearly impossible to escape the cycle of poverty and debt.
BMT: A Poverty Eradication Machine
To eliminate the need for loan sharks, BMTs provide free savings products and affordable financing through humble yet effective local offices. In this way, BMTs solve the problems of both physical and cultural access, because BMTs are guided by and comply with Sharia (Islamic ethical system) principles which promote social justice within the local community.
BMTs also work to address the specific needs of borrowers on a more individual basis. This individualized approach takes the diverse conditions of borrowers into consideration and provides services that are tailored to meet their distinct needs.
One example is the way that community members typically deposit savings and make payments: BMT members don't need to visit an office. Instead, the BMT staff circulate on scooters throughout the community during normal operating hours to allow the members to access financial services from the comfort of their own place of work.
Overall, BMTs work to build the economic standing of each member, so that members become more financially independent and live more prosperously. This work is not only in the form of capital, but also in the form of training. BMT staff regularly conduct training programs that enhance the knowledge of their members.
Planting the Seeds of Prosperity
How can you help the poorest of the poor when they have no income, and no credit history? Simply giving money to the poor is not enough. As the philosopher Maimonides once said:
"Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime."
BMTs operate very much in the spirit of this proverb. Simply giving handouts to the poor does not help end the cycle of poverty. Instead, BMTs creatively use charitable funds in a productive way to create income-generating businesses for the poor.
The Two "Houses" of Funds Used by BMT
A BMT is an engine for productive economic growth to help eliminate poverty. The acronym BMT stands for Bait-al-Mal wa Tamwil, which can be loosely translated as "house of social and house of finance”.
These two "houses" represent the two distinct funding sources used by BMTs help eliminate poverty in their communities.
Social Funds from Islamic Charity
The Baitul Maal side of a BMT is funded by the collection of impact funds from BMT members and the general public. These funds come from zakat (obligatory charity), infaq (alms), donations, and grants. These funds are used for humanitarian activities, and for the economic empowerment of poor families.
Zakat is a compulsory charity that must be paid by all Muslims which amounts to 2.5% of their yearly cumulative wealth. Zakat forms the backbone of BMT social impact funding. When combined with infaq, donations, and various grants these moneys provide a sizable amount of capital which can be allocated to fund their various social impact programs.
Within the poor there are multiple levels:
Levels of Poverty
At the absolute bottom, the Poorest of the Poor are typically those with no employment whatsoever. In the middle, The Poor may have some form of income but still fall below the local minimum wage. And at the top, are the working poor who have already become Productive with a sustainable business that generates a livable income above the local minimum wage.
Productive Grants for The Unemployed
BMT utilizes the social funds from the Baitul Maal to issue grants to the poorest of the poor. But instead of merely giving out money or food, BMTs give grants that become sources of income.
For example, some BMTs purchase staple commodities, like rice, in bulk at wholesale prices and give this as grants to the Poorest of the Poor. These commodities are then resold at retail prices, and that generates an income source.
This practice may only generate a small source of income, but equally important to the financial aspect are the knowledge and skills developed by this process. Members become conditioned to the idea of running a business, including showing up every day and dealing with customers. These 'soft skills' are a critical component to take the budding entrepreneurs to the next level.
Funding of Commercial Services
Baitul Tamwil activities receive investments from more conventional sources such as BMT members, cooperation with other financial institutions, and funds from investors which are channeled to members who need commercial lending services. These financing contracts, known as murabaha, mudarabah, and ijarah are based on halal profit-sharing.
Through appropriate application of financial services, BMTs have proven to be able to help the community to be more productive and independent.
Helping the Business Grow with Interest-free Loans
Once a business is active, the entrepreneur may qualify for the next level of financing. BMTs offer interest-free loans to help expand the business.
For example, a home-based business that previously only sold rice might expand to other convenience items like snacks and toiletries which they'll purchase at wholesale using funds from an interest free loan. By offering these new products, they increase their profit margins and, thereby, their income.
Another example is the program pioneered by BMT Bina Ummah in Yogyakarta, Indonesia is the concept of a "Business in a Box". This model is suited to entrepreneurs who already have demonstrated strong motivation and a basic aptitude for business. The BMT provides a traditional food or beverage cart - complete with all the fully equipped cart, ingredients, cutlery, napkins, and even some petty cash in the till to make change. This concept can be deployed for around Rp 5 Million IDR (around $350 USD).
Although the funding or business is provided with no interest, the loan must be repaid. This helps develop a credit history for the entrepreneur and gets them into the habit of paying back a financing arrangement on time.
The intention is that these members will eventually earn an income equivalent to the regional minimum wage. This is about Rp 1.7 million IDR (approx. USD$130) in Yogyakarta, Indonesia for example.
Once a member’s income reaches this level of success they've graduated from social funds (Baitul Maal) to commercial finance (Baitul Tamwil).
Profitable Business & Commercial Finance
For members that already have a semi-successful business, BMTs provide commercial financing.
A BMT can also share these results with anyone who invests funds in the BMT; this is where the progressive financial services take place. BMTs not only help those who live in poverty but also help them to rise out of poverty to where they can live more prosperously via the BMTs’ virtual ramp of supportive financial services. These services provide incremental support for borrowers according to each stage of their development.
How to get involved
Through Blossom’s various investment campaigns you can support these BMTs in their efforts and provide financial services that benefit these communities. Collaborating for the mutual benefit of communities and social minded financial institutions. Together we can make positive changes for the world, and work towards the reduction of poverty and creation of prosperity.
Blossom cares and supports the BMT / Microfinance business in Indonesia.