Implementation of Sharia Principles in Financing Practices at Islamic Microfinance Institutions

Abstract

This study aims to analyze the implementation of sharia principles in financing practices within Islamic Microfinance Institutions (LKMS), specifically Baitul Maal wat Tamwil (BMT), Islamic Savings and Financing Cooperatives (KSPPS), and Islamic Micro Waqf Banks (BWM). A descriptive qualitative approach was employed through in-depth interviews, observations, and document analysis involving managers, financing officers, Sharia Supervisory Board (DPS) members, and clients in three LKMS located in the research area. The findings indicate that, in general, sharia principles have been implemented in accordance with established guidelines, particularly through the use of murabahah, mudharabah, musyarakah, and qardhul hasan contracts. However, financing portfolios in BMT and KSPPS are dominated by murabahah contracts, resulting in a suboptimal implementation of the risk-sharing concept, while BWM with its qardhul hasan model exhibits a relatively higher level of sharia compliance. Price and cost transparency in murabahah contracts is generally well-documented, although in several cases the verbal explanation of administrative fees and late-payment consequences remains limited. DPS plays a significant role in approving and reviewing contracts, yet its supervision tends to be document-oriented rather than actively involved in field-level financing processes. Key supporting factors for sharia implementation include management awareness of sharia compliance, the availability of standard operating procedures and contract templates, regulatory support, and the close relationship between LKMS and their communities; conversely, major challenges comprise the dominance of murabahah contracts, limited capacity and intensity of DPS supervision, low sharia financial literacy among clients, and insufficient use of information technology. The study highlights the need to strengthen the role of DPS, diversify profit-and-loss sharing contracts, enhance sharia financial literacy, and leverage digital technology so that LKMS become more aligned with sharia principles and the objectives of maqashid sharia in promoting justice and sustainable economic empowerment.