The 1990s was a politically challenging decade in Indonesia, with little focus on economic growth and financial inclusion. The 1997 Asian financial crisis made this worse for the country’s financial growth. Yet, an entirely new business model emerged within this time period and thrived through the massive economic setbacks of the decade. It was the Baitul Maal Wat-Tamwil – or more commonly known as the BMT.

The BMT model represented a local, grass-roots strategy for economic growth. BMTs displayed resilience during the asian financial crisis of the late 90s.

What is a BMT, and how did the BMT model evolve?

Grass Roots Plan for Economic Growth

Microfinance can play a vital role in economic growth by providing opportunities to the segment of the population with the lowest income to help improve their standard of living. In a country like Indonesia with low financial inclusion, microfinance models gained quick popularity from the very start.

What is Microfinance?

Typically, the lowest income economic segment lacks access or enough capital to open traditional bank accounts. But access to a safe place to keep your money, along with access to financing to start or grow a productive business is a critical tool to help reduce poverty.  Without access to savings and financing, the cycle of poverty is almost always destined to repeat from generation to generation. Microfinance is a grass-roots answer to solve this lack of access. A microfinance institution acts as a small bank, oriented towards helping providing free savings products and non-predatory financing to the local community. These are critical tools for reducing poverty in a community.

Historical Economic Climate of Indonesia

Before the 1980s, government backed microfinance programs evolved into microfinance banks and cooperatives with economic missions. Then, a shift in Indonesian economic policy known as the "Paket Oktober 1988" significantly changed the playingfield of microfinance in Indonesia: it gave room to new entrants to enter the financing space.

Since the Indonesian microfinance market was largely untapped, the new players found their space to grow. This evolution coincided with the increasing popularity of Islamic Finance in the early 1990s, paving the way for Islamic microfinance institutions in the form of Islamic savings and loan cooperatives - Koperasi Simpan Pinjam Pembiayaan Syariah (KSPPS) - manifested primarily in the BMT model. While the Islamic Banking industry had little room for innovation, the BMT model provided a less regulated stream to explore new economic opportunities. More than 3,000 BMTs were formed during the first decade alone.

BMT Model: For the Community, By the Community

The BMT model is unique to Indonesia. It combines the Islamic concept of Maal - public wealth coming from mandatory and voluntary alms-giving (zakat, sadaqah, waqaf or infaq) which is to be used for public welfare – with the concept of Tamwil – wealth creation through economic activity.

BMTs are faith-based, and often socialize their services via the local masjid (mosque). Generally, their underwriting principles include a "social underwriting" principle built upon commuunity reputation and traditional face to face meetings known as silat-al-rahim. 

Helping Traditional Traders

BMTs primarily emerged as a result of the individual aspirations to help small traders in a more religiously compliant manner. Small traders did not qualify for financing from the large commercial banks in the country and relied heavily on local rentenir (loan sharks) to fulfill their working capital and other financial needs. Local activists in various areas started working towards using the concept of social finance in Islam in a more institutionalized manner to funnel more help for the local businessmen. As these informal organizations grew more formalized, the BMT model became a more concrete implementation of the local objectives to help develop local communities through economic empowerement.

Uniquely Sustainable & Successful

While the traditional microfinance concepts implemented in Asia and Africa often struggled to deliver a social mission on economically sustainable grounds, the Indonesian BMTs have delivered phenomenal success in terms of the number of institutions, geographical outreach, and share in the total amount of financing provided by all microfinance institutions in the country.

In a recent research paper, Universitas Islam Indonesia took a deep dive into the workings of five of the oldest BMTs in Indonesia to understand the reasons of their survival and expansion over the years. As the paper explores the history and evolution of these BMTs in Indonesia, it can be seen that they began as localized attempts to free the small traders from the loan sharks. After paying the high interest rates of the money lenders, the traders rarely had any money left to reinvest in their businesses, forcing them to borrow again.

These first BMTs offered support through social finance as well as financing with a lower cost of capital, thus aiming to eradicate poverty and support the bottom tier of the population.