Development Strategy for Micro, Small, and Medium Enterprises through Islamic Financial Inclusion

This study calculates and analyzes the Islamic financial inclusion index which covers three dimensions; accessibility, availability, and usage of sharia banking. The results showed that the level of Islamic financial inclusion in Indonesia was classified as low during the study period and DKI Jakarta Province was the most inclusive province in Indonesia. Furthermore, this study analyzes the effect of the Islamic financial inclusion index on Islamic financing channeled to Micro, Small and Medium Enterprises (MSMEs) in Indonesia. Using the saturated sampling method, a total of 33 provinces in Indonesia were selected as samples with an observation period. The results show that the Islamic Financial Inclusion Index (IIK) has a significant positive effect on sharia financing channeled to the MSME sector, one of the regions that appears to be growing faster than other regions is Aceh. This research is different from previous financial sector inclusiveness studies that still see and study conventional (non-sharia) financial inclusion and find out the impact of sharia financial inclusion based on sharia financial inclusion indexes on sharia financing distributed to Micro, Small and Medium Enterprises in Indonesia and discuss comprehensively for MSME.


Introduction
Access to formal financial services is an important factor that supports poverty alleviation efforts. 1 The formal financial sector, especially banking, plays an important role in providing access to the public to utilize financial services because banking is the financial sector that controls the financial industry in Indonesia. OJK Statistics noted that banks have the largest assets compared to other financial institutions, reaching Rp 8,068 trillion in December 2018 or around 78% percent of total financial industry assets in 2018. Based on the National Literacy and OJK Financial Inclusion Survey, Banking is the main financial service provider in Indonesia because it has the highest sectoral financial inclusion index after BPJS Health in 2016 which amounted to 63.63%. and distribution facilities, consumer protection. The target of this policy is very concerned about the poor lowincome, productive poor, migrant workers, and people living in remote areas. 2 Inclusive finance is closely related to the Micro, Small and Medium Enterprises (MSME) sector. MSME has an important role in inclusive finance because it is the majority economy of the people. Based on data from the Ministry of Cooperatives and Small and Medium Enterprises of the Republic of Indonesia in 2017, the MSME sector has a proportion of approximately 99 percent more than the total number of Indonesian business people or as many as 62.92 million business units and is capable of absorbing more than 116 million people. MSMEs have a workforce absorption rate of around 97% of the entire national workforce. The contribution of MSMEs to the National Gross Domestic Product (GDP) is greater than that of large businesses, namely GDP according to current prices in 2017 at 60%, while GDP based on constant prices is 57.08%.
Graph 1.2The Proportion of MSMEs and Large Enterprises in 2017 Source: depkop.go.id, processed 2019 Based on these data, the MSME sector has a large contribution to the country's economy. Efforts to advance and develop the MSME sector will be able to absorb more available workforce so that it can improve the welfare of the workers involved in it and reduce unemployment which will ultimately reduce poverty. 3 Although MSMEs occupy a fairly central economic foundation as the majority of businesses, MSMEs have limited access to capital, especially financing or credit from bank financial institutions. MSME access to capital is still not optimal. MSMEs are difficult to access capital from formal financial institutions because their business background can be categorized as unbankable or also called a deficit business group. 4  One indicator used to measure the extent to which inclusive financial services have been carried out by a country is through measurement of the financial inclusion index. 7 In addition, the measurement of the level of financial inclusion based on the financial inclusion index can also be used to determine the distribution of banking sector services. 8 Considering the role of financial sector inclusiveness is very important for economic growth, the measurement of Islamic financial inclusiveness in Indonesia can be one of the efforts to increase Islamic financial inclusion by providing input for the government and related parties in designing inclusive economic and financial policies based on evidence and empirical findings.
Based on the background that has been stated, this study measures and analyzes the inclusiveness of the Islamic financial sector in 33 provinces in Indonesia by using  An inclusive financial system must have as many users as possible, therefore an inclusive financial system must reach widely among users. The proportion of the population that has a bank account is a measure for banking penetration.  Table 4.1). Of the 33 provinces, DKI Jakarta Province has the highest number of Islamic banking deposits compared to other provinces, reaching an average of 18.736 billion rupiah per 1000 adult population.
In addition to banking penetration (accessibility), availability of banking services (availability) is also used to measure financial inclusion that illustrates the reach of the public in accessing banking financial services. The indicator of the availability of banking services is the number of outlets (be it offices, branch offices, ATMs, etc.). The availability of banking branches that can be reached by the public shows the spread of banking services. The more and more widespread the spread of banking branches, the higher the banking services provided. 11 This study uses the number of sharia banking offices which include Sharia Commercial Banks and Sharia Business Units per province per 100,000 adult population to measure the availability dimension. In 2015-2018, the average number of sharia banking offices to serve every 100,000 population in Indonesia was 1.17 units or in other words there were 11 units available to serve 1 million residents (See Table 3.1). This amount is certainly a minimal amount related to the availability of Islamic banking services in the Access to charged financial services is not enough so this usage dimension indicator is also included in the measurement of an inclusive financial system. In this study, the usage indicator is seen from the proportion of the amount of Islamic banking financing to the GRDP value of each province during the 2015-2018 period. The calculation results show that the average total contribution of financing to GRDP per province is around 1.5 billion rupiah (See Table 3 Determination of the maximum value and minimum value used is based on data from 33 provinces in Indonesia. The lower limit or minimum value (mi) of each dimension in this study is 0. From the proportion of the three dimensions that comprise the Islamic financial inclusion index in table 3.3 above, the availability index has the best average value over the period 2015-2018, followed by the dimensions of usage then accessibility. These results indicate that Islamic financial inclusion in Indonesia is mainly determined by the availability and usage dimensions. While the accessibility dimension has a relatively small proportion compared to the two even though it has always increased during the study period.
A higher availability index value than the accessibility index shows that with the availability of Islamic Similar to the low level of accessibility, this is due to various reasons such as the distance that is far enough to reach the nearest bank, the product offered is not appropriate to the needs, or has a bad experience with the service provider. 15 In accordance with research conducted by the World Bank, only 17% of the total population of Indonesia borrowed from banks, and around one third borrowed from the informal sector. The main reason for not borrowing is due to incomplete documents indicating the unavailability of collateral as a second problem. Loans are not a top priority. The use of credit or financing is still highly concentrated in the informal sector 15  Graph 3.4 shows the highest index value owned by DKI Jakarta province. in 2015, this province recorded a very high Islamic IIK value of 1. As was the case in 2015, in 2016-2018 the province of DKI Jakarta had the highest Islamic IIK value with a successive index value of 0.847; 0.847 and 0.852. While the lowest index is owned by the province of East Nusa Tenggara (NTT) during 2015-2018 with sharia IIK values respectively 0.022; 0.012; 0.011 and 0.010. Based on the value of Islamic financial inclusion index, the level of Islamic financial inclusiveness in Java is lower than in Kalimantan and Sumatra. When viewed from the number of deposits, bank offices and the amount of Islamic banking financing, the island of Jawarelatif is higher than Kalimantan and Sumatra, but the value of the Islamic financial inclusion index in Java is relatively lower, this is because the number of Islamic banking deposits representing the number of accounts, number of offices banks, and the amount of Islamic banking financing is not proportional to the total population in Java. The results of the calculation of Islamic financial inclusion index in 33 provinces in Indonesia show that DKI Jakarta Province is categorized as the province with the highest index, which has an average index value during the 2015-2018 research period of 0.887. DKI Jakarta has the highest level of financial inclusion among other provinces because of the high three dimensions of financial inclusion. The province included in the current IIK is Nanggroe Aceh Darussalam (NAD) with an index of 0.443. At first the province was in a low position, then in 2016 and 2017 it experienced an increase and entered into a moderate position. This is because the dimensions of availability (banking availability) and the dimensions of usage (use of banking services) Nanggroe Aceh Darussalam reached 0.5 or at a moderate position in 2016-2018.
When viewed from the distribution of the three dimensions of Islamic financial inclusion, DKI Jakarta province is much higher compared to other provinces. As a result, the level of financial inclusion in all provinces looks much worse. But if Jakarta is excluded from the calculation, the value of each province's financial inclusion index is too large. While 31 other provinces besides DKI Jakarta and NAD are classified as low level IIK.
The average value of the Islamic financial inclusion index achieved by Indonesia is 0.139. This means that the level of Islamic financial inclusion in Indonesia is in the low category during the 2015-2018 period. The decline in the Islamic financial inclusion index in most provinces in Indonesia led to the low level of Islamic financial inclusion in Indonesia. In addition, there is only one province with an index value that is included in the high category in Indonesia, generally showing poor performance in terms of the inclusiveness of the Islamic financial sector during this period..  Until December 2018, the proportion of distribution of sharia financing in the MSME sector to total sharia financing was 20.14 percent. This figure is only a quarter of the amount of Islamic finance disbursed to the economic sector. This is evidence that the financial services available cannot be utilized or utilized to the maximum by the existing MSMEs. Through the usage index in the preparation of the Islamic financial inclusion index in this study, obtained results that support this. The average index value of the use of financial services by the people in Indonesia during 2015-2018 was only 0.099 from a scale of 1.
Provinces with the highest nominal sharia financing in the 2015-2018 MSME sector were dominated by provinces in the Java island region (West Java, East Java, Central Java and including DKI Jakarta), only one outside of Java, namely North Sumatra. While the lowest nominal was dominated by Eastern Indonesia (North Maluku, NTT, Gorontalo, West Papua, Maluku and North Sulawesi). Although the highest nominal sharia financing is dominated by the island of Java, including DKI Jakarta, the highest growth of financing provided by the Islamic banking sector in the MSME sector was achieved by provinces outside of Java, Aceh, NTB and West Kalimantan with an average annual growth of 20-60%. Even from 2015 to 2018 Aceh experienced a dramatic growth in Islamic financing with a growth value of nearly 200%. See Table 3 In most provinces in Indonesia, financing channeled by Islamic banks in the MSME sector is growing every year. It appears that the attention of banks, especially Islamic banking financing towards MSMEs in Indonesia is getting higher. Thus, the seriousness of Islamic banking financing to help support the improvement of MSME performance in several provinces has shown quite significant results. West Java Province has a large amount of Islamic finance in the MSME sector. However, it does not experience development every year because the nominal financing of the MSME sector always decreases. The provinces of West Papua, Maluku and Gorontalo became provinces that experienced a decrease in the nominal amount of financing in the MSME sector with an average annual decline of 21.8%. The presence of Islamic banking should have a large impact on the growth of the real sector, especially encouraging the growth of the real sector in the micro, small and medium enterprises (MSMEs) sector which currently has a very important position in the national economy because of its contribution in employment and gross domestic income (GDP) ), as well as their flexibility and resilience in dealing with the economic crisis. 18 3. Judging from the output values above, the sharia financial inclusion index is positive so it can be concluded that sharia financial inclusion has a positive and significant effect on sharia financing channeled to the MSME sector. the ease of MSMEs to access Islamic financial services with the availability of Islamic bank service offices. The ease of access arises mainly because of two things, namely firstly because of the existence of office networks and services around MSMEs and secondly because of the ease (policy) obtaining capital from banks. 22 Therefore financial inclusion needs to be increased to facilitate MSME access to Islamic financing. All parties must play a role in this matter, both the government, Islamic banks, and MSMEs themselves. Islamic banks are expected to be able to further expand access and socialize their strengths well so that Islamic banks can be a reinforcement and a companion to the development of MSMEs. While the government can provide training facilities for SMEs and create policies that are able to encourage the MSME sector in Indonesia through inclusive financial policies.
The results of the study show that financial inclusion and MSME growth have increased linearly so that a breakthrough needs to be sought to improve it, there have been many ways taken by the government, but until now the position of sharia banking is still at 5% and has not been able to go up in the last few years even though the number of Muslims in the The majority of Indonesia, the way that can be done is to raise awareness of using Islamic banking in the transaction, so far the ongoing awareness process is still sporadic not comprehensive.
As shown in Graph 3.5, there has been a decline in the inclusiveness of Islamic financial services in Indonesia for 4 years. The decline in Islamic financial inclusion in Indonesia, due to a decline in every dimension of financial inclusion except banking penetration (accessibility), although the highest nominal amount of Islamic financing is dominated by Java islands including DKI Jakarta, the highest growth of financing channeled by Islamic banks in the MSME sector is achieved by outside provinces Java namely Aceh, NTB and West Kalimantan with an average annual growth of 20-60%. Even from 2015 to 2018 Aceh experienced a dramatic growth in Islamic financing with a growth value of nearly 200%. See Table 3.6.
In general, financial inclusion is linearly in line with the growth of financing from MSMEs by Islamic banking, but some are not all the same because judging from the data of DKI Jakarta is the most inclusive, but it turns out that Aceh shows a large growth and the percentage exceeds that in DKI, there is one interesting thing there namely the level of awareness of Muslims is greater than other regions.
The process of enhancing financial inclusion comprehensively by means of all parties working hand in hand, an example that is currently being done is the government gathering ulama and providing material related to Islamic banking and forbidden banking interest laws so that they are asked to switch to the sacrifice of sharia, but in practice Islamic community organizations such as Nahdlotul Ulama, Muhammadiyah, LDII, Persis, and other ways they are not seriously responding to be seen in doctrining or giving sermons to their pilgrims not continuously and without evaluating whether the pilgrims have switched sharia sacrifices or still remain in conventional banks, but for example related worshipers whose prayers have not been good then the cleric will monitor and evaluate through various ways so that the prayer turns out to be good.
Another example of the seriousness of the ulama in the process of increasing the financial inclusiveness of Islamic banking is that there are still differences in their views regarding the law of bank interest. in the end they conveniently said they chose the same Islamic and conventional banks.
Certain Islamic community organizations even have something strange in responding to banking, whether conventional or Islamic banking, that is, they forbid using services from banking, it needs to be examined specifically why the organization prohibits, but what needs to be noted is that it requires initial awareness from religious leaders before switching to the general public, it takes equal perception and law so that later it will be easier for them to indoctrinate.