26 IJIBEC Joint Liability Based Financing To Prevent Non-Performing Financing In Bank Wakaf Mikro Purwanto1*, Abdul Ghofur2, Shodiq3 1Departement Islamic Economics, Al Husain Islamic College, Magelang 2,3Departement of Islamic Studies, Universitas Islam Negeri Walisongo Semarang *Corresponding Email: purwanto@staia-sw.ac.id Abstract The Indonesian government has made various efforts to reduce it, one of which is establishing a Micro Waqf Bank. The focus of the establishment of the Bank Wakaf Mikro is to empower the poor by providing assistance and providing microfinance for productive activities. Interesting to assess is the financing mechanism applied, namely joint liability. The purpose of this study is to examine whether joint liability-based financing can prevent non-performing financing. Data were collected from 215 respondents from Micro Waqf Bank customers in Magelang Regency. Data analysis was carried out statistically by using Structural Equation Model (SEM) Partial Least Square. The results show that joint liability-based financing has a significant effect on preventing non-performing financing. This means that joint liability based on Bank Wakaf Mikro can prevent defaults or non-performing financing. This means that joint liability based on the distribution of fund financing by Bank Wakaf Mikro can prevent defaults or non-performing financing. Problem financing in joint liability-based financing can be prevented because of the necessity of forming a group when applying for financing, so prospective customers will choose group members who have integrity and can be trusted. International Journal of Islamic Business and Economics Available at http://e-journal.iainpekalongan.ac.id/index.php/IJIBEC ISSN 2599-3216 E-ISSN 2615-420X Vol 6 No 1 2022 Keywords: Joint Liability; Non-Performing Financing; Micro Waqf Bank DOI: 10.28918/ijibec.v6i1.4361 JEL: L31, G23, G41 Article Info Article History: Received : 16 September 2021 Accepted : 14 May 2022 Published : 1 June 2022 International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 27 1. Introduction The Indonesian government has made various efforts to reduce poverty; the most recent is establishing a Bank Wakaf Mikro hereinafter abbreviated as BWM (OJK, 2018). The establishment of BWM is to empower the poor by providing assistance and providing microfinance for productive activities. The source of financing from BMW is profit sharing from sharia deposits, profit sharing from financing, and other income (OJK, 2018). In its implementation, BWM cooperates with Islamic boarding schools as the frontline. The Financial Services Authority cooperates with Islamic boarding schools in implementing the BWM program because of the great potential of Islamic boarding schools in community empowerment. This potential can be seen from the number of Islamic boarding schools that have reached 28.194 (OJK, 2018). Apart from the large number, the function of Islamic boarding schools is not only to carry out education but also to have the function of community empowerment (UU No. 18 Tahun 2019). This empowerment function is a manifestation of Islamic teachings, especially in helping each other in goodness (Muhtifah et al., 2015). In order to realize this function, the Pesantren also offers non- religious lessons, such as agricultural skills, vehicle repair, and other activities (Tan, 2014). As of September 2019, BMW in Indonesia reached 53 units, and 12 of them were in Central Java Province (OJK, 2019b) including in Magelang Regency. In order to support its business processes, BWM received an allocation of Rp.4,000,000,000. The funds are then divided into two, with a composition of Rp.1,000,000,000 distributed to the community and Rp3,000,000,000 into endowments deposited in Islamic banks. In general, the business scheme of BWM can be seen in Figure 1: Source: Financial Services Authority (2018) Figure 1. Scheme of Bank Wakaf Mikro The presence of BWM is expected to overcome poverty so that it can realize community welfare, especially for small communities. BWM was established to provide access to finance for small communities that have had difficulty accessing capital in the formal sector (OJK, 2019a). With this access to capital, it is hoped that the presence of BWM can at least reduce poverty and improve people's welfare. Study conducted by Zayanie et al., 28 International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 (2019) proves that the presence of BWM is beneficial for the community in accessing micro- scale financing. The presence of BWM also has a positive impact on increasing people's income (Yeubun et al., 2021). Compared to other microfinance institutions, BWM is unique in providing its financing. The uniqueness is that the distribution of financing is tanggung renteng (Rozalinda & Nurhasnah, 2020) which in this study is called joint liability. Joint liability is basically one of the many ways to avoid problems that arise in the distribution of financing. Small communities, in general, do not have access to financing because they do not have collateral and do not have adequate financial records (Ghatak & Guinnane, 1999). By means of joint liability, even people who do not have collateral can obtain financing. The distribution of joint liability financing has two advantages when compared to the distribution of individual financing. The first advantage is that group members may know more about other members (i.e., each other's types, actions, and status) than other people. The second sanctions given to members who are unable to pay are the responsibility of fellow group members (Ghatak & Guinnane, 1999). Joint liability is the highest embodiment of trust and a sense of loyalty among members of the group. The benefits of the joint responsibility system are to strengthen group cohesiveness and trust from outsiders to members. The implementation of joint liability models requires strong social control; therefore, this system will work effectively if applied in a group with a unifying bond and strong ties of interest (Saripudin, 2013). The research results conducted by Srivastava and Samanta (2015) prove that the application of joint liability financing can increase trust and solidarity. Furthermore Kumar (2012) states that joint liability has its own uniqueness and is different from others. BWM has provided assistance to the community's economic empowerment through the provision of training for prospective customers. In practice, the financing of financing by BWM begins with the formation of groups, and this is the main condition for obtaining financing (Rozalinda & Nurhasnah, 2020). Prospective customers must create a group called Kelompok Usaha Masyarakat in the vicinity of the Islamic boarding schools hereinafter referred to as KUMPI before applying for financing. The minimum number in one KUMPI is 5 people. It doesn't stop there; every KUMPI is required to hold a weekly meeting called Halaqoh Mingguan hereinafter referred to as HALMI. HALMI activities are in the form of weekly installment payments and also the delivery of materials such as religious studies, business development, and others (OJK, 2018). The joint liability financing model is a group financing distribution system in which all group members are responsible if one of the group members is unable to pay (Attanasio et al., 2015). This mechanism basically benefits financiers because of the low risk of non- performing financing. This is because if one member is unable to pay, the other members are also responsible for making payments. Thus, joint liability can avoid problematic financing because the selection stage for group members is carried out strictly so that each group will get credible and trustworthy members. The results of research conducted by Ghatak & Guinnane (1999) show that joint liability models allow for better repayment rates than individual loans. Likewise, the research conducted by Bayer & Shatragom (2013) which states that the shared responsibility model can increase payback. This is because the shared responsibility model in financing will increase trust and solidarity (Srivastava & Samanta, 2015). Research related to joint liability-based financing to prevent non-performing financing in micro waqf banks is important to do because research with this theme is still little done. International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 29 The majority of studies on BWM are related to the impact of BWM on the economy, as research conducted by Zayanie et al., (2019) Yeubun et al., (2021), Dewanti et al., (2021) and Apriliawan et al., (2021). Thus, research on the extent to which the application of joint liability-based financing in preventing the occurrence of non-performing financing is important to do. 2. Method The research approach used in this study is quantitative. Quantitative research is quantitative research which is in the process of analyzing data using numbers and analyzed using statistical methods (Apuke, 2017). Meanwhile, Williams (2007) provides an understanding that quantitative research involves collecting data so that information can be quantified and analyzed using statistics to support or refute alternative hypotheses. In quantitative research, research activities begin with a statement of the problem, determine hypotheses or research questions, review related literature, and conduct analysis. The method used in this research is a survey method. Survey research uses a scientific sampling method with a questionnaire designed to measure the characteristics of a particular population through the use of statistical methods (Sukamolson, 2007). Basically, survey research is used to describe quantitatively the population and then study the relationship. In the survey research method, data is obtained from the research sample which is part of the population. From the sample, it is then used to generalize the entire population (Apuke, 2017). The population in this study were all members of KUMPI at BWM in Magelang Regency, amounting to 219. Due to the small size of this population, in this study, all sampel numbers were used as research samples. In the Structural Equation Modelling (SEM) analysis, the number of samples required is relatively large (Santoso, 2011). Conceptually, SEM analysis requires at least 100-200 samples (Kusnendi, 2005); thus, the number of samples of 219 is considered adequate. Joint liability variables in this study were measured using indicators compiled by Kritikos & Vigenina (2005) which consists of 1) group quality, 3) informasi, 4) monitoring, 5) peer control, 6) Peer Pressure dan 7) Peer Support. Meanwhile, non-performing financing in this study was measured by the indicators presented by Angaine & Waari (2014) which consists of 1) Complete non repayment. 2) Late payment. 3) Payament after intervension measures The research questionnaire was prepared according to the indicators mentioned in the operational definition of the variables. The research questionnaire will be measured using a Likert scale with five answer options, namely "Strongly Agree" with a value of 1, Agree with a value of "2", Neutral with a value of "3", Disagree with a value of " 4" Strongly Disagree with a value of "5". Data analysis in this study used Structural Equation Modelling (SEM). SEM is a statistical model used to perform multivariate data analysis and involves complex variables (Hoyle, 1995). SEM has advantages compared to traditional regression models because it can test hypotheses about the relationship between observed variables (Carvalho & Chimma, 2014). To analyse the research data, the PLS structural equation model (SEM) analysis was used with the help of Smart PLS 3 software. Using PLS-SEM in this study was that it was easy to use and could overcome abnormal research data (Henseler et al., 2009). Before testing the hypothesis using SEM PLS analysis, it is necessary to test the quality of the research data. The quality of research data must meet the criteria of validity and reliability. In SEM PLS, there are two data validity tests, namely convergent validity and 30 International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 discriminant validity tests (Hair et al., 2011; Purwanto, 2021). An indicator can meet the criteria for convergent validity if it has a composite reliability value and a factor loading value greater than 0.7 and has an AVE average variance extract value greater than 0.5 (Hair et al., 2011). Meanwhile, the test results of the discriminant validity criteria can be seen from the cross-loading value and the Fornell-Larcker criteria. Fornell-Larcker must be a correlation between variables with the square of AVE. The correlation of each variable with AVE must be more than the correlation of other variables (Chawla & Joshi, 2018). The cross-loading criteria can be met if each indicator has a higher value when compared to indicators on other variables. Meanwhile, the validity test was carried out by looking at the Cronbach value. Data is said to be reliable if it has Cronbach greater than 0.7 (Lin & Huang, 2008). 3. Result and Discussion Profile of Respondents The planned sample in this study was 219, but up to the data collection limit, only 215 data were collected. Detailed information concerning the profile of respondents is shown in Table 1. Table 1. Profile of Respondents Variables Category N Percent Sex Male 0 0 Female 215 100 Status in family Head of family 0 0 Housewife 215 100 Family members 0 0 Age < 20 years 0 0 20-30 years old 2 0.93 30-40 years old 43 20.00 40-50 years old 135 62.79 50-60 years old 35 16.28 > 60 years 0 0 The last Education level Elementary school 98 45.58 Junior High School 90 41.86 Senior High School 12 5.58 Other 15 6.98 Business fields Farmer 65 30.23 Services 30 13.95 Culinary 115 53.49 Other 5 2.33 Income Range NPF 0.055 0.458 8.338**(> 2.58) 0.000 Accepted Notes: *t-Value > 1.65 (significance level 10 percent) ** t-Value > 1.96 (significance level 5 percent) ***t-Value > 2.58 (significance level 1 percent) Used bootstrapping to assess the path coefficients’ significance. The minimum number of bootstrap samples is 5,000, and the number of cases should be equal to the number of observations in the original sample. The critical t-value for the two-tailed test obtained a result of 8.338 which means it is greater than 2.58. Thus, it can be concluded that the research hypothesis states that joint liability-based financing has a significant effect on the prevention of funding non-performing. This result is confirmed by the results of hypothesis testing as shown in table 5 where joint liability-based financing (JL) has a significant positive effect on the prevention of non-performing financing (PNPL) (β = 0.458, t = 8.100 (> 2.58), supporting the hypothesis. The final result of this research is described, as shown in Figure 2. International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 33 *** Notes: *t-Value > 1.65 (significance level 10 percent) ** t-Value > 1.96 (significance level 5 percent) ***t-Value > 2.58 (significance level 1 percent) Figure 2. Final Structural Model The results of the study prove that joint liability-based financing has a significant effect on preventing non-performing financing. This means that joint liability based in the distribution of fund financing by BWM can prevent defaults or non-performing financing. The results of this study are certainly in line with research conducted by Ghatak & Guinnane (1999), this shows that the joint liability model is more likely to allow better repayment rates than individual loans. This study also supports the results of research from Bayer & Shatragom (2013) which states that the shared responsibility model can increase the payback. This research is also in line with the study conducted by Chen et al. (2016); Zainab et al. (2020) Azizah & Islamiyah (2021), which prove that non-performing financing has a real impact on the emergence of financing. Furthermore, this research is also in line with the study conducted by Che (2002), which also proves that the features of joint obligations related to credit can reduce the risk of default. The results of this study have reaffirmed that joint liability-based financing is one of the best ways to deal with non-performing financing. Many financial institutions prevent problem financing by implementing a guarantee system, but low-income people do not own guarantees. Therefore, the joint liability-based financing implemented by the Bank Wakaf Mikro in Magelang Regency is empirically able to prevent the occurrence of non-performing financing. Joint liability models in financing distribution are basically an attempt by financial institutions to select prospective customers (Kumar, 2012). Joint liability models require prospective customers to form groups so that in the selection of group members, prospective customers will choose prospective group members who have integrity. Therefore, joint liability models basically make it easier for financial institutions to mitigate the problem of selecting prospective customers who are less credible, so that the risk of problematic financing can be avoided. With the strength of social relations, each group member will automatically choose prospective members who have integrity and can be trusted. Joint liability models in the distribution of financing in Magelang Regency run effectively according to the target because they are in groups that support each other and have a sense of kinship and cohesiveness for strong interests. In practice, in distributing Micro Waqf Bank financing, each group has explained that all group members will be 34 International Journal of Islamic Business and Economics (IJIBEC), 6(1) June 2022, 26-36 affected if one of them defaults. Like, I will not get a chance to become a customer again. With this application, all group members automatically supervise all group members. It is not uncommon for group members to help each other settle payments if one of the group members has difficulty paying installments one day. Implementing the joint liability models method in the distribution of financing to Bank Wakaf Mikro can prevent the risk of default because there are good and strong social controls in the joint liability models. 4. Conclusion The results of the study prove that joint liability-based financing has a significant effect on preventing non-performing financing. This means that joint liability based in the distribution of fund financing by Bank Wakaf Mikro can prevent defaults or non-performing financing. Problem financing in joint liability-based financing can be prevented because of the necessity of forming a group when applying for financing, so that prospective customers will choose group members who have integrity and can be trusted. Based on the results of this study, it can be said that joint liability based on the distribution of financing funds by Bank Wakaf Mikro is the best way to distribute financing, because it can prevent the emergence of non-performing financing. The joint liability based applied by the Bank Wakaf Mikro in Magelang Regency can be a model in the distribution of funds sourced from zakat, cash waqf and other social funds. This research contributes to overcoming problematic financing caused by information asymmetry. Information asymmetry in financing distribution arises because the customer has more information than the financier. The customer has an interest so that the proposed financing can be approved so that the customer is encouraged to provide inaccurate information. In this context, research results that have contributed to financing prevention are problematic because of information asymmetry. 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