Indonesia has the world’s largest Muslim population, so naturally, they have seen the growth of several Sharia-compliant finance institutes over the last few decades. These institutes are providing so many opportunities for the growth of small businesses and paving the way for financial inclusion.
Combining the rules of Shariah with the innovative new developments in finance resulted in the Trust Network Finance. They provide loan services with the help of mobile phones. This is a very convenient method for including a greater portion of the population as over 60% of the population owns a mobile phone. However, only 3% of the population was acquainted with mobile money and other digital financing options. This is likely to change if the mobile phone-based Trust Network Finance succeeds in its business model.
In this article, we will discuss the nature of Allianz’s Trust Network Finance’s business model, how it developed, and how it is likely to impact the population to have an in-depth understanding of Islamic financing laws and its impact on the rest of the financing world.
The Story Behind Allianz’s Sharia Acceptable Mobile Loan Service
The applications of technological innovations in finances have been manifold. It has not only promoted the growth of the financial industry but the entire economy of countries as a result of increased investments. In fact, the number of fintech startups has been growing steadily in most countries. In Indonesia as well, Allianz group has tapped into a larger market of the Muslim community by introducing their mobile-based loan services which comply with the Sharia laws as well.
Demand for Sharia Compliant Financial Service Providers
The demand for Shariah-compliant financial services and products is very hard to determine. Due to the lack of a standard questionnaire, the results of various surveys such as surveys conducted by the International Finance Corporation (IFC) and Findex often contradict each other. In an attempt to remedy the situation and comprehensively understand the overall demand for Shariah-compliant financial services and the specific factors that control this demand, Consultative Group to Assist the Poor (CGAP) and Yale University joined forces to conduct a thorough experiment among the population of Jordan.
The base of the experiment was to understand the demand for Shariah-compliant financial products by giving the clients the choice of choosing from either a Shariah-compliant loan or a conventional loan. As a control, two other randomized groups were offered only one or the other type of loan – Shariah compliant or conventional. This experiment aimed to answer three main questions:
- What is the actual demand for Shariah-compliant financial products as compared to traditional financial products?
- Does Shariah affect the demand for Shariah-compliant products?
- What is the price elasticity of the demand for Sharia-compliant products?
Although the results of this experiment speak volumes about the popular demand, it is not necessarily universal as cultural impacts may vary the results for different countries. Still, the results of the experiments can be summarized in the following points:
- Compared to similarly priced conventional loans, demand for Shariah-compliant loans was higher. The results are true when both the Shariah-compliant loan and the conventional loan are marketed to the clients independently and for the same price. However, the demand for Shariah-compliant loans did not differ too much when clients were given a choice. It is hypothesized that the increasing number of options led to a limited form of choice paralysis which ultimately decreased the demand.
- The authenticating body for judging the Shariah authenticity for the financial products is irrelevant to the demand for the said financial product. This research compared the demand for Shariah-compliant financial products when authenticated by three different authenticating bodies: the government Shariah board, the internal Shariah board, or a respected local religious figure. Surprisingly, the demand in each case remains indifferent. In fact, the highest demand was recorded for those financial products which were marketed as authenticated but the authentication body was not mentioned.
- The demand for Shariah-compliant loans decreased as the price increased compared to the prices of conventional loans. The demand follows the normal law of demand where with increasing prices, the demand for a product falls. However, it is not uniformly true. As is evident in the increase in demand among the more strictly religious population. Those sections of the population who are extremely religious are even willing to pay a much higher price for a Sharia-compliant product.
What is Trust Network Finance (TNF)?
Trust Network Finance or TNF is a Sharia-compliant mobile phone-based loan service developed by Allianz for the Indonesian population. It’s an innovative financial service provider that is developed for financing micro-entrepreneurs. The TNF aims to help micro-entrepreneurs grow to become bigger and more independent entrepreneurs. It is one of the finer examples of the new wave of partnership models between banks and fintech startups.
As Allianz has its core business in micro finances selling microinsurance products to rural banks, cooperatives, and credit unions who are also Allianz’s business partners, they could identify problems that hindered the growth towards an independent entrepreneur. These problems include:
- The available loans had high interest and collateral.
- Financial institutes that offer loans cause a lot of hassles due to strict repayment schedules.
These forces drove Allianz to develop a microfinance loan model that includes the concept of micro equity which is not considered in the conventional loan models. Equity refers to shares. The TNF provides funding to the investee in the form of equity in the investee’s business. This funding will allow the investee to grow their business by improving the product and diversifying the business and/or products. When the business grows, Allianz as a shareholder will also incur some profit.
The system continues until the business has sufficiently grown and can become independent. At this point, Allianz sells its share of the business at an increased value. It also becomes involved in the working of the business by providing marketing strategies or giving referrals to other investors.
Being a product of the combination of finance and technology it is a little difficult to promote these products to digital immigrants. One might wonder what is it like to be a digital immigrant in a developing country. It is suspected to be difficult as technologies in developing countries are now upgrading and developing to include more innovative designs and a digital immigrant might find it difficult to adapt.
The Four-phase Structure of TNF
The TNF works in four stages to help micro businesses grow and become independent.
- The investment stage – At this stage, TNF invests in the micro-enterprise but they do not claim any stake in the company. This provides an opportunity for both partners (TNF and the micro-entrepreneur) to get to know each other and develop plans for the proper implementation of their business model.
- The business coach stage – During the second phase, TNF increases its investments and also provides a business coach to guide, provide direction and support the micro business’s growth.
- Formalization of micro-enterprise – The third stage is used to formalize the micro-enterprise into an established business. The business coaches help businesses to obtain licenses. They help in following through with capital requirements, formal bookkeeping, and tax payments. This is a crucial step as it helps enterprises to gain access to larger business loans and become independent in the future. TNF also receives a stake in the enterprise at this stage.
- Selling of stakes – The last phase of the TNF and micro-enterprise alliance is where the TNF sells back its stake to the enterprise at a greater cost. The capital gained from this transaction goes towards the growth of TNF entrepreneurs.
Positive Points of TNF
The successful implementation of TNF in Indonesia promises many positive impacts on society. As a cashless, mobile financial service provider it can potentially include people from remote areas, poor communities, women, and many more. In fact, mobile services are implicated as one of the top five resources of 2013 on the financial inclusion of women.
Features of Shariah Acceptable Funds
The finance service providers that comply with Shariah laws need to follow certain rules and avoid certain kinds of businesses. These funds follow Islamic law and are prohibited from investing in all kinds of funds. The key features of the Shariah-compliant funds that make them stand out from other funds are as follows:
- Any investments that can cause physical or emotional harm to other people are not allowed. This includes companies that make weapons or even companies that cause harm to the environment. Primarily investments in companies selling alcohol, tobacco, pork, etc. are strictly prohibited.
- Any kind of investment that deals with Riba or charged interests is considered a war against God and is absolutely prohibited. These forms of investments are treated as forbidden sources of income and distributed to charity by an appointed Shariah board.
- Companies with high debts or any immoderate levels of risk are strictly avoided under the Shariah law.
- Investments in fixed-income instruments are not allowed.
- The funds are not restricted to followers of Islam. In fact, investors of every religion are allowed to invest in the fund.
Benefits of Shariah Compliant Loan Service
Islamic laws have been around for ages yet the legitimization of Islamic finances which follow the rules and regulations laid down in the Islamic scripture is a recent development. And, it is quickly spreading. There has been a boom in Shariah-acceptable financial institutes around the world, especially in Indonesia.
However, their client base is not limited to only people of one religion. In fact, Shariah-acceptable financial institutions are now enjoying a growing customer base every year. This is because both parties are benefitting from the transaction and because the business model is quite successful. The benefits of availing of Sharia-compliant financial services are as follows:
- It promotes financial inclusion by providing credits to small businesses that cannot afford to pay large interest against loans from conventional banking systems. Although these financial institutes are not allowed to charge interest, they gain a profit from market shares that allow them to grow and continue investing in other small businesses. Thus promoting financial inclusion from a consumer perspective as well.
- Islamic finance institutes are forbidden from making any transactions with industries, businesses, or individuals who do not comply with Islamic law. This excludes dealing with industries such as alcohol, tobacco, gambling, or pornography. It also restricts its financial services to enterprises that do not cause harm to the environment or any individual. Thus, by demanding a higher moral principle from their clients, Islamic banking reduces the overall harmful impacts of such practices.
- According to Islamic law, all profits and losses need to be equally shared among the participants. This is also true for risks and threats involved in the transaction. Thus, financial institutes following the Shariah law need to take responsibility for both the profits gained and the losses incurred along with their clients. This ensures responsible investing and reduces the impact of loss faced by any single business or individual.
- Since the risks are borne by both the financial institution and the customers, the institute encourages a slow, carefully thought out decision-making process to ensure that all possible risks are accounted for and necessary measures to remedy the impacts have been taken. Thus, Islamic banking promotes stability at least in the realm of investing.
- Islamic financial service providers facilitate the growth and development of the economy. As the main objective of a Sharia-compliant financial institution is to help a business grow and gain profit from that improved income, they help small businesses grow by providing funding, business coaches, and access to credits. Creating opportunities for the improvement of small businesses simultaneously creates greater job opportunities and more investment opportunities as well. This will lead to ultra-poor graduation the strongest case so far for why financial services must be a part of the solution to extreme poverty.
Frequently Asked Questions
Q1. What is Sharia Acceptable Financing?
Sharia Acceptable or halal financing refers to banking practices where the financial institution shares in both the gains and losses of the enterprise it underwrites. The Islamic bank compiles the investor’s money and invests in funds that follow Sharia rules. The pertaining rules for pooling the investor’s money are agreed upon with the depositors as well as the investors. It is mostly invested in mutual funds and some passive funds which are not prohibited in the Islamic culture.
Q2. What are Shariah Compliant Funds?
The financing institutions which follow the Shariah or Shariat law of the Muslim religion are only allowed to invest in funds that also comply with these laws. This prevents them from investing in anything related to alcohol, gambling, or pornography. This also exempts investments in companies holding too much debt. There are indexes such as the Dow Jones Islamic Market Index and the Financial Times Stock Exchange Global Islamic Index that help determine the authenticity of Shariah-compliant funds.
Q3. What are the Three Main Prohibitions in Islamic Banking?
The three main prohibitions in Islamic banking are the prohibition of Riba, Gharar, and Maysir. These form the fundamentals of Islamic finance. Riba refers to the charged interest or usury that includes charging unreasonably high-interest rates and the exchange of goods of unequal quantities or qualities. Gharar refers to uncertainty, hazards, or risks. This is prohibited as it directly contradicts certainty and openness in business dealings. Maysir or masir refers to speculation or gambling and it is prohibited as it creates wealth as a result of chance instead of productivity.
The formation of a Sharia-compliant loan provider will greatly benefit the Indonesian economy as the present level of funding is limited. As the majority of the Indonesian population follows the Islamic religion they are more likely to deal with financial institutions which follow the Islamic financing laws or the Shariah that prohibits any dealings of Riba, Gharar, or Maisir.
Thus, shariah-compliant fundings and financial institutes have the potential to improve financial inclusion and its many benefits are already evident in promoting small businesses, reducing negative impacts from harmful industries such as alcohol, tobacco, and gambling, and accelerating overall economic growth.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.