https://orcid.org/0000-0001-9363-5993
Abstract
One of the ways to increase the financial capacity of village-owned enterprises is to strengthen their own assets. Sharia Banking, as a financial institution that carries out intermediation and social functions, has a strategic function in strengthening the assets of village-owned enterprises. Assets strengthening of village-owned enterprises, which can be carried out by Sharia banking through its intermediation and social functions, has become an interesting subject to research. This research combines normative legal research with analytical descriptive research parameters, especially research on secondary data in the form of primary, secondary, and tertiary legal materials, by collecting systematic information regarding relevant facts and rules. Strengthening the assets of village-owned enterprises can be carried out through the intermediation function of Sharia Banking, namely through murabahah, mudharabah, and musyarakah financing. Meanwhile, through the social function of Sharia Banking, strengthening the assets of village-owned enterprises can be sourced from grant funds and other social funds or can come from cash waqf funds and utilized through managing the potential business activities of village-owned enterprises. This research is expected to be useful for village-owned enterprises and Sharia Banking, especially in terms of increasing the assets of village-owned enterprises.
1. Introduction
Sharia banking still dominates the Sharia financial industry, as stated in the Islamic Finance Development Report 2022. Based on the 2023 Islamic Financial Services Industry (IFSI) Stability Report, the Islamic banking segment maintained its dominance and contributed 69.3% of global IFSI assets in 2022. The proportion of total Sharia banking assets reached US$ 2,756 billion in 2021, or equivalent to 70% of the Sharia financial industry’s total assets in that period (Financial Services Authority, Citation2023). Apart from having the largest total assets in the Sharia financial industry, along with its function, Sharia banking has a strategic role in increasing the distribution of social welfare. Rizvi found that Sharia banks have increased the growth of loans and deposits in the banking system and have contributed to stability through assets and liability channels (Rizvi et al., Citation2020). As mandated in Article 4 of Law no. 21 of 2008 concerning Sharia Banking as amended by Law no. 4 of 2023 concerning the Development and Strengthening of the Financial Sector (Sharia Banking Law), Sharia banking is not only carried out as an intermediation function but also a social function.
Sharia banking’s intermediation function can connect persons who have an excess of funds with people who have a need for funds. Sharia banking collects funds from society in the form of savings and re-channels them as funding. As the cycle moves continuously, Sharia banking is recognized as the driving force of the economy. The funds that flow from a society that is experiencing a surplus of funds to a society that is experiencing a lack of funds can increase production and the value of money when it is utilized in the productive sector. Sharia financial intermediation has unique characteristics; despite having the same economic function as conventional intermediation, it also supports the social and ethical functions which make Sharia banking intermediation unique (Drissi & Angade, Citation2019).
Sharia banking also performs social functions, namely function-related receiving, managing, and distributing social funds in the form of zakat, infaq, alms, grants, cash waqf, or other social funds for social purposes. Apart from that, in carrying out its social functions, Sharia banking can also act as Sharia Financial Institutions—Recipient of Money Waqf (LKS-PWU) by collecting social funds originating from money waqf and at the same time becoming the manager of the money waqf (Nazir) or channel it through other money waqf managers in accordance with the wishes of the waqf donator (wakif). Islamic social finance in the form of zakat, infaq, alms, grants, waqf, and so on, has proven to be the main instrument that has a central role in sustainable poverty alleviation, which has an impact on the benefit of the entire society (Adinugraha et al., Citation2023).
With this primacy, Sharia banking has proven its resilience in facing crises and providing a positive influence in socioeconomic aspects, compared to conventional banking (Financial Services Authority, Citation2023). Therefore, the aspect of socioeconomic impact is one aspect of the transformation of Sharia banking, which is carried out through synergy in the Sharia economic ecosystem and plays an active role in optimizing Islamic social finance to increase Sharia banking inclusion and support sustainability finance (Financial Services Authority, Citation2023). In this way, Islamic banking is expected to make a greater positive contribution to inclusive and sustainable development. Poverty alleviation, which leads to social welfare, is the answer to the objectives of the Islamic financial system (Saputri et al., Citation2023).
As specified in the roadmap for the development and strengthening of Indonesian Sharia banking 2023–2027, one of the main pillars of Sharia banking policy is increasing the contribution of Sharia banking to the national economy (Financial Services Authority, Citation2023). One of the attempts is to increase the role of Sharia banking in the micro, small, and medium enterprises sector (MSMEs). MSMEs are productive economic enterprises carried out by individuals or business entities that meet the criteria for MSMEs as regulated in the provisions of laws and regulations concerning MSMEs. (Article 1 Number 44 Law No. 4 of 2023 concerning Development and Strengthening of the Financial Sector (UUP2SK). The work program that can be carried out by Sharia banking is to increase its access and assistance in the unbankable MSMEs sector through Islamic social financial instruments. (ZISWAF, benevolent fund, CSR) and increasing the distribution access to People’s Business Credit (KUR) and commercial financing through MSMEs. Programs carried out by village-owned enterprises must be able to support MSME business activities in each village so that when Sharia Banking distributes financing to village-owned enterprises, it also indirectly supports the development of MSMEs. The programs carried out by village-owned enterprises must be able to support MSMEs business activities in each village so that when Sharia banking distributes financing to village-owned enterprises, it indirectly also supports the development of MSMEs.
Village-owned enterprises are legal entities established by villages and/or together with villages to manage businesses, utilize assets, develop investment and productivity, provide services, and/or provide other types of businesses for the greatest welfare of the village society (Article 1 Number 1 Republic of Indonesia Government Regulation No. 11 of 2021 concerning village-owned enterprises (PP village-owned enterprises). Village-owned enterprises are present as a new approach in efforts to improve the economy in rural areas according to their needs and potential (Sofyani et al., Citation2019). Village-owned enterprises’ status as a legal entity makes their role increasingly important as consolidators of society products/services, producers of various social needs, business incubators, public service providers, and various other functions. Village-owned enterprises can be a contributor to the village’s original income, which is believed to be a lever for village independence in the future. One of the roles of Village-owned enterprises in the economic sector is to help provide capital for rural home industries (Sinarwati & Marhaeni, Citation2019). Village-owned enterprises can directly run their business (operating company) or become the parent of their business unit, which has a legal entity (investment company); as an operating company, village-owned enterprises carry out business in their own name.
In 2023, the number of village-owned enterprises that have been established is about 57,248 village-owned enterprises spread throughout Indonesia (Village Ministry Indonesia, 2023). As a comparison, Thailand, as a neighboring country in Southeast Asia, also launched the One Tambon (district) One Product (OTOP) program, which encourages each tambon (district) to utilize local resources (Natsuda et al., Citation2012). Japan also launched the One Village One Commodity (OVOC) program, which succeeded in raising the dignity of the poor village of Oyama because of the superior agricultural products on a small scale (Thi & Thu, Citation2013). Another example is Saemaul Undong, a rural development program in South Korea that supports participatory development and promotes the principle of integrating agricultural values in villages in South Korea (Schwak, Citation2023). So with these practices in other countries, the presence of village-owned enterprises in Indonesia is expected to maximize the utilization of village potential and improve community welfare.
The enormous potential of village-owned enterprises in improving the welfare of village society must be supported by adequate financing access. village-owned enterprises’s assets can come from capital participation and non-binding assistance including grants, business results, loans, and/or other legal sources. (Article 45 PP no. 11 of 2021 concerning village-owned enterprises (PP village-owned enterprises)). Village-owned enterprises assets are property or wealth belonging to Village-Owned Enterprises, whether in the form of money or other objects that can be valued in money, whether tangible or intangible, as an economic resource that is expected to provide benefits or results. One way for village-owned enterprises to obtain assets can be through financial institutions, including Sharia banking through financing.
Strengthening the assets of village-owned enterprises through financial institutions is achieved by obtaining capital injections. The limited capital experienced by village-owned enterprises causes village-owned enterprises to be unable to carry out various types of businesses (Nurhayati et al., Citation2018). Limited capital causes economic activities to not run, so it is necessary to formulate rural development policies that combine financial sector institutions with government policy to be able to drive economic activities in rural areas, especially micro business (Ni Kadek, Citation2021). For instance, PT. BCASyariah Sharia Bank provided funding of IDR 25,000,000,000 (twenty-five billion rupiahs) to the Tepian Bina Bersama village-owned enterprise, which was used to finance investments and company equipment needs (BCASyariah, Citation2022).
The enormous potential of village-owned enterprises in improving the welfare of village society and the very strategic function of Sharia banking in national development are two aspects that are very related and supportive in increasing the contribution of Sharia banking and village-owned enterprises in national development. It is interesting to research how the strategic roles of Sharia banking, particularly its social and intermediation functions, might be used to increase the assets of village-owned enterprises.
2. Theoritical framework
2.1. Sharia banking as economic driver
Banking in Indonesia is carried out by a dual banking system, where conventional banking and Sharia banking are carried out side by side with separate management. A Sharia banking is everything that concerns Sharia Banks and Sharia Business Units, including institutions, business activities, and methods and processes in carrying out its business activities. Sharia Bank is a Bank that carries out its business activities based on Sharia Principles, and according to its type, it consists of Sharia Commercial Banks and Sharia Financing Banks. The major distinction between conventional banking and Sharia banking is the application of Sharia principles. Based on Article 1 number 12 and Article 26 paragraph 2 of Sharia Banking Law, it is determined that the Sharia principle is an Islamic law concept that governs banking activities based on fatwas given by institutions with the ability to issue fatwas in the Sharia sector, specifically the National Sharia Council-Indonesia Ulema Council (DSN-MUI).
Compliance with Sharia principles is mandatory because Sharia financial institutions, including Sharia banking, are financial institutions that utilize Islamic values and principles in all their financial transactions, so it is impossible for financial institutions that apply the word “syariah” to not comply with the provisions set out in Sharia Principles (Usman, Citation2022). Public interest in Sharia banking services is significantly influenced by spiritual intelligence (Yeni et al., Citation2023). This is closely related to Sharia compliance, which Sharia banking must comply with. The Sharia banking system has a higher level of stability compared to the conventional banking system. In other words, Sharia banking is more stable than conventional banking (Zahra et al., Citation2018). The Basic requirement for Islamic financial institutions, including Sharia banking, is Sharia compliance, where all business activities are carried out by adhering to firm Sharia principles (Al-Ali, Citation2022).
Elucidation of Article 2 of the Sharia Banking Law states that business activities based on Sharia Principles are business activities that do not contain elements of usury, maisir, gharar, haram, and dzalim. The explanation of Article 2 of Islamic banking also provides definitions of usury, maisir, gharar, haram, and dzalim, namely: usury is the illegal addition of income (batil), among other things, in exchange transactions for similar goods that differ in quality, quantity, and delivery time (fadhl), or in lending and borrowing transactions that require the Facility Recipient Customer to return the funds received in excess of the loan principal because of the loan time (nasi’ah). maisir is a transaction that is dependent on an uncertain situation, and lucky, gharar is a transaction whose object is unclear, is not owned, its whereabouts are unknown, or cannot be handed over at the time the transaction is carried out unless otherwise regulated in Sharia, Haram is a transaction whose object is prohibited in Sharia, and zalim is a transaction that causes injustice to another party.
Sharia financial institutions are commercial companies that act as investment managers, investors, and service providers. Sharia financial institutions, being social enterprises, serve as managers of social funds for the collecting and distribution of zakat, infaq, and alms. Sharia banking has an intermediation function that carries out profitable business activities as a business entity, and as a social entity, Sharia banking carries out a social function as a Baitul Mal institution and collects social funds originating from money waqf, as stipulated in Article 4 of the Sharia Banking Law (Harrieti & Abubakar, Citation2020a,Citationb).
In the history of Islamic law, the state has the authority to manage Islamic social funds such as zakat, infaq, alms, and waqf, so for this reason, the baitul mal institution was established to manage these funds (Syahbandir et al., Citation2022). Zakat management in Indonesia is specifically regulated in Law No. 23 of 2011 concerning zakat management; it provides definitions regarding zakat, infaq, and alms.The primary distinction between the three types of social funds is the law that governs their creation. According to Islamic law, zakat is mandatory for all Muslims, both persons and legal entities. Zakat is issued to be paid to mustahik, but infaq and alms are assets issued outside of zakat for the public good. The distinction between infaq and alms is based on the object; infaq can only take the form of assets, whereas alms can take the shape of assets or non-assets. The social function of Sharia banking as a Baitul Mal institution only to accept funds originating from zakat, infaq, alms, grants, or other social funds and distribute them to zakat management organizations; the definition of other social funds include bank revenues originating from the imposition of sanctions on customers (ta’zir). So, the authority to manage these social funds is in the hands of the zakat management organization, and Sharia banking is the only recipient. Institutions authorized to carry out national zakat management are based on the zakat management law and government regulation no. 14 of 2014 concerning the Implementation of Law no. 23 of 2011 concerning zakat management is the National Zakat Amil Agency (BAZNAS), which is a non-structural government institution that is independent and responsible to the president through ministers.
Similarly, in managing money waqf, Sharia banking acts as a Sharia Financial Institutions-Recipient of Money Waqf (LKS-PWU) that receives money waqf funds from the wakif by issuing a money waqf certificate and managing the funds as a nazhir or handing over the waqf funds to another nazhir appointed by the wakif, to separate and/or handing over some of his property, to be used forever or only for a certain period of time according to its needs for the purposes of worship and/or general welfare according to Sharia (Harrieti & Abubakar, Citation2020a,Citationb). Money as one type of waqf property can be donated through Sharia financial institutions. The proof of handing over the money waqf is in the form of a cash waqf certificate. Government Regulation no. 42 of 2006 concerning the Implementation of Law no. 41 of 2004 concerning Waqf provides a definition of cash waqf certificates, namely a letter of proof issued by the Sharia Financial Institution to the wakif and Nazhir regarding the handover of money waqf. The placement of money waqf through LKS-PWU is intended to be a deposit (wadi’ah) (Harrieti & Abubakar, Citation2020a,Citationb). Next, Nazir can manage it by paying attention to the wakif’s wishes and the investment manager’s recommendations, if any.
The aim of Sharia Banking, as specified in Article 3 of the Sharia Banking Law, is to support the implementation of national development in order to increase justice, togetherness and equal distribution of society welfare. This objective is in line with the function of Sharia Banks as Intermediation Institutions, namely collecting and distributing society funds. The intermediation function of Sharia banking can be illustrated in the chart below:
Chart 1. Sharia Banking Intermediation Function.
Source: adapted from Law no. 21 of 2008 concerning Sharia Banking as amended by Law no. 4 of 2023 concerning Development and Strengthening of the Financial Sector (Sharia Banking Law).
Explanation
Investor Customers invest their funds through Sharia Banking.
Sharia Banking invests Investor Customer funds in Facility Recipient Customers through Financing Products.
Facility Recipient Customers submit profit and loss sharing to Sharia banking based on the contract.
Sharia Banking distributes profit and loss sharing to Investor Customers based on an agreed contract.
Deposit customers entrust their funds to Sharia banking through savings products.
The very strategic role of Sharia banking in the national economy also has very strategic potential in strengthening village-owned enterprises assets. Through their intermediation and social functions, Sharia banks are able to provide financing to strengthen village-owned enterprises assets. Sharia bank as an Islamic financial institution is closely related to real sector, namely the production of goods and services permitted by Sharia (Zubair, Citation2022).
2.2. Village-owned enterprises capital and assetss
As a legal entity, village-owned enterprises’ regulations are adapted to corporate principles in general but still place the spirit of kinship and mutual cooperation as the main pillars of its management. Village-owned enterprises, as legal entities, play an important role as consolidators of community products and services, producers of various community needs, community business incubators, public service providers, and various other functions. Village-owned enterprises are institutions that were formed to improve community welfare (Badaruddin et al., Citation2021). It is believed that village-owned enterprises can be a lever for village independence in the future as a contributor to the village’s original income. Village-owned enterprises must be able to create a stronger rural economy (Hilmawan et al., Citation2023).
The operating staff, supervisors, advisers, and village or intervillage deliberations make up the village-owned enterprise’s organizational machinery. The village government and the village-owned enterprises are two different entities. Village-owned enterprises capitalist comprised of three components: village community capital participation, which can come from individuals, non-legal entity institutions, legal entity institutions, or a combination of village and/or local village residents; a share of business profits decided in village meetings to increase capital; and village capital participation, which comes from the village Revenue and Expenditure Budget, which is determined by village regulations.
The provisions of Government Regulation No. 1 of 2021 regarding Village-owned enterprises stipulate (Government Regulation regarding village-owned enterprises) that the assets of village-owned enterprises come from capital participation and non-binding support, including grants, business results, loans, and other legal sources. Village-owned enterprises manages village-owned enterprises assets based on sound business principles. Village-owned enterprises can make loans by complying with the principles of transparency, accountability, efficiency, and effectiveness, as well as prudence. Article 48 Paragraph 2 Government Regulation regarding Village Owned Enterprise stipulated that these loans can be obtained from financial institutions, the central government, regional governments, and other domestic funding sources with the following conditions:
Loans are used for business development/village-owned enterprises business units,
the period of obligation to repay the loan principal, interest, and other costs within a period that does not exceed the remaining term of office of the director.
provided healthy financial reports for at least two (two) consecutive years; and
does not result in a change in the proportion of capital ownership; for example, the type of loan that can change to capital participation if the village-owned enterprises is unable to fulfill the obligations arising from the loan
The loan plan is submitted by the operational implementer to obtain approval from advisors and supervisors in accordance with their authority as regulated in the village-owned enterprises Articles of Association.
One of these loans can come from financial institutions, including Sharia banking. Financing disbursed by Sharia banks includes debt and equity participation, depending on the contract agreed between the Sharia bank and the village-owned enterprises. This is in accordance with the provisions of Article 45 Paragraph 1 Government Regulation regarding village-owned enterprises, which determines that the source of assets for village-owned enterprises can come from loans, capital participation, non-binding assistance including grants, business profits, and other legitimate sources.
3. Methodology
This research used a normative juridical approach, which is a strategy that focuses on secondary data research that includes primary legal resources, secondary legal materials, and tertiary legal materials. Secondary data includes statutory rules, books, literature, legal journals, newspapers, periodicals, and official government documents (Soekamto & Mamudji, Citation2018). Through the normative juridical method, literature data will be obtained related to strengthening the assets of village-owned enterprises through Sharia banking business activities with the support of field data in the form of interviews with village-owned enterprises and so on.
The research specifications utilized in this study are analytical descriptive, which means that the facts are depicted in a systematic manner, including descriptions of the applicable rules (Soekamto & Mamudji, Citation2018). Thus, this research will describe the legal problems obtained through a positive legal inventory, especially regulations related to village-owned enterprises and Sharia banking, especially those related to strengthening the assets of village-owned enterprises through Sharia banking.
4. Discussion
4.1. Strengthening village-owned enterprises assets through intermediation function of Sharia banking
Sharia banking, through its intermediation function, is able to connect parties who experience a lack of funds with parties who experience a surplus of funds. Funds collected from parties who experience excess funds through savings products are channeled back in the form of financing to parties who experience a lack of funds. Village-owned enterprises that need to strengthen their assets in carrying out their activities can take advantage of this Sharia banking function through financing distributed by Sharia banks.
Financing, as regulated in the Indonesian Sharia Banking Law, is the provision of funds or equivalent claims in the form of profit-sharing transactions based on an agreement between a Sharia bank and another party which requires the party to finance or provide funds after a certain period of time in return for ujrah, without compensation, or profit sharing. The provisions of Government Regulation village-owned enterprises stipulate that strengthening village-owned enterprises assets can only be done through loans, capital participation, non-binding assistance including grants, business profit, and other legitimate sources so that the type of financing distributed by Sharia bank must also comply with the provisions. The following are the types of financing that can be carried out by Sharia bank to strengthen the assets of village-owned enterprises:
4.1.1. Strengthening village-owned enterprises assets through murabahah financing
Murabahah financing is financing carried out based on the principle of buying and selling. This financing is carried out by Sharia banking with the aim of providing goods needed by customers. Through this financing, Sharia Bank sells an item by confirming the purchase price to the buyer, and the buyer pays the higher price as a profit. Murabahah is a form of financial transaction in which a customer asks a Sharia Bank to buy commodities and sell them with installments of payments (Setiawan et al., Citation2022). Village-owned enterprises that need goods for operational needs or business equipment can take advantage of this financing. The following are several murabahah financing requirements related to the object of financing:
the goods that are the object of murabahah financing are clearly known in terms of quantity, quality, acquisition price, and specifications.
the goods financed must be tangible and readily available or ready to use (ready stock).
Village-Owned Enterprises can submit an application and promise to purchase the required goods or assets by stating the quantity, quality, and specifications to the Sharia bank; then, the Sharia bank will provide the goods according to the quantity, quality, and specifications requested. Once the goods are ready to be handed over, the parties, in this case, the Sharia Bank and village-owned enterprises, will sign a murabahah agreement, including agreeing on the profit margin that the bank will receive from the sale of the goods. The Sharia bank will notify Village-Owned Enterprises of the acquisition price of the goods and the profit margin requested by the bank. After the parties agree on this and other clauses, the murabahah agreement is signed, and the goods are handed over to Village-Owned Enterprises. Village-owned enterprises can pay in installments according to the agreed time period. When murabahah payments are made in installments, murabahah debt will arise. It is village-owned enterprises’s obligation to extend the murabahah debt to Sharia Bank according to the agreement in the murabahah agreement. This financing is very useful when Village-Owned Enterprises require tools or assets needed for Village-Owned Enterprises business activities. Strengthening village-owned enterprise assets through murabahah contracts is included in the category of strengthening village-owned enterprise assets through loans from Sharia financial institutions. Murabahah transactions carried out non-cash give rise to debts that must be paid by village-owned enterprises to Sharia banking. Murabahah is a type of Sharia banking financing that is based on debt; Sharia banks offer debt-based financing through various instruments obtained based on the principle of exchange or, most notably, in the form of a tough sale and purchase agreement (Jusoh & Khalid, Citation2013).
4.1.2. Strengthening village-owned enterprises assets through Sharia banking mudharabah financing
Profit and loss sharing is a system used in Sharia banks; this is known as equity-based financing, whose main characteristic is that there is profit and loss sharing between Sharia bank and customer, which losses are Sharia bank’s responsibility except for losses due to customer negligence (Mukhibad et al., Citation2023). Mudharabah financing is financing carried out based on the principle of profit and loss sharing. A mudharabah contract is a business cooperation agreement between the capital owner (shahibul al-mal), who provides all the capital and the manager (‘amil/mudharib) and the business profits are shared between them according to the ratio agreed in the contract (General Provisions of DSN-MUI Fatwa No. 115/DSN-MUI/IX/2017 Concerning Mudharabah Agreements). In accordance with the principle of profit and loss sharing, mudharabah is a form of passive investment which is treated as a limited partnership or corporation, where only the bank provides capital while the client, as mudharib, manages his business based on his experience and expertise and does not guarantee the capital invested and the realization of profits in the future (Khaldi & Hamdouni, Citation2011). The capital funds are used by the mudharib to carry out productive activities with the condition that the profits generated will be shared between the two as agreed.
Through this financing, village-owned enterprises can collaborate with Sharia Banks to carry out certain business operations. Shahibul al mal is the provider of funds in mudharabah business collaboration effort; in this context, it is Sharia Bank. While ‘amil/mudharib is the fund manager in the mudharabah business collaboration effort, it is a Village-Owned Enterprises in this context.
In mudharabah financing, Sharia Bank provides 100% (one hundred percent) of the capital needed for business activities and village-owned enterprises as mudharib is obliged to manage these funds as agreed in the contract. Businesses carried out by Village-Owned Enterprises must be halal and in accordance with Sharia principles. Village-owned enterprises, as a mudarib, manages mudharabah funds on behalf of the mudharabah entity, and costs arising from business activities on behalf of the mudaraba entity may be charged to the mudharabah entity.
Mudharabah business profits must be calculated clearly to avoid differences and/or disputes at the time of profit allocation or termination of mudharabah. All profits must be distributed according to the agreed profit-sharing ratio, and there cannot be a certain amount of profit determined in advance only for shahibul mal or mudharib. Mudharabah business losses are the responsibility of the Sharia Bank as shahibul mal unless the loss occurs because Village-Owned Enterprises as mudharib makes negligence or mistakes in carrying out its responsibilities. Strengthening village-owned enterprises assets through mudharabah agreements is included in the category of strengthening village-owned enterprises assets originating from other sources. This mudharabah financing does not give rise to loans or debts, but Sharia banking hands over a certain amount of capital to village-owned enterprises to manage a particular business. This is the feature of profit and loss sharing finance, or mudharabah, which positions Sharia banking as the capital supplier and derives profits according to the ratio agreed upon at the outset of the agreement (Andreas, Citation2021).
4.1.3. Strengthening village-owned enterprises assets through Sharia banking musyarakah financing
Musyarakah financing is financing based on a cooperation agreement between two or more parties for a particular business, where each party contributes funds with the condition that the profits and risks will be shared together in accordance with the agreement. (DSN-MUI Fatwa No. 08/DSN-MUI/IV/2000 concerning Musyarakah Financing). Musyarakah financing has the advantage of togetherness and fairness, both in sharing profits and risks of loss. Through this agreement, village-owned enterprises and Sharia Bank partner in running certain businesses, where each party equally provides capital and contributes to managing the musyarakah business.
The capital provided by Sharia Banks and village-owned enterprises must be cash, gold, silver, or something with the same value. Capital can also consist of trading assets, such as goods, property and so on. If the capital is in the form of assets, it must first be valued in cash and agreed upon by the partners. Both village-owned enterprises and Sharia Banks are prohibited from borrowing, lending, donating or gifting musyarakah capital to other parties except based on an agreement. In principle, in musyarakah financing, there is no guarantee, but to avoid deviations, Sharia Banks can ask for guarantees from village-owned enterprises.
The participation of partners in work is the basis for implementing musyarakah, but equal portions of work are not required. village-owned enterprises or Sharia Bank can agree on their respective work portions, and the party whose work portion is greater may claim an additional share of profits.
Profits must be clearly quantified to avoid differences and disputes at the time of profit allocation or termination of musyarakah. Each partner’s profits must be distributed proportionally on the basis of all profits and no predetermined amount is assigned to a partner. The profit sharing system must be stated clearly in the contract. Losses must be shared between the Sharia Bank and village-owned enterprises proportionally according to their respective portions of capital.
One form of support for Sharia banks in economic activities is with cooperation contracts that are more equitable so that they reflect the falah in every Sharia bank policy (Ghoniyah & Hartono, Citation2019). Apart from that, mudharabah and musyarakah financing is considered to have a significant effect on the profitability of Sharia banks (Siregar & Harahap, Citation2019). As is the case with mudharabah contracts, strengthening village-owned enterprises assets through musyarakah contracts is included in the category of strengthening village-owned enterprises assets originating from other sources. This musyarakah financing does not give rise to loans or debts, but Sharia banking, together with village-owned enterprises, provides a certain portion of capital to manage a particular business together. To guarantee equitable investment, the degree of profit sharing is taken into consideration in musyarakah. The fact that business actors initially invest their own money and share the risks when earnings are divided will also indirectly lower fraud and poor management (Abdul-Rahman & Mohd Nor, Citation2016).
4.2. Strengthening village-owned enterprises assets through the social function of Sharia banking
Structurally, Sharia banks in Indonesia have played their role as financial institutions by collecting investment funds from third parties and channeling their into financing (Yusuf et al., Citation2023). Sharia financial institutions have two roles at once, namely as business entities and social bodies, as is the case with Sharia banking as a type of Sharia financial institution. This is reflected in the function it carries out, namely, not only carrying out an intermediation function but also carrying out a social function. The social function of Sharia banking is implemented in the form of baitul mal institutions, Sharia Financial Institutions Receiving Cash Waqf (LKS-PWU) and nazhir cash waqf.
As a Baitul Mal institution, Sharia banks receive funds originating from zakat, infaq, alms, grants, or other social funds and distribute them to zakat management organizations. Strengthening village-owned enterprise’s assets can also come from social funds, especially grants. Empowering village society through village-owned enterprises aims to improve the welfare of village society so the collaboration in distributing social funds with strengthening village-owned enterprises assets is ultimately expected to be able to improve the welfare of society in general and village society in particular.
Sharia banks can also act as LKS-PWU and cash waqf nazhir. The characteristic of waqf, "retain the principal and share the results", requires the management of cash waqf so that it can be utilized to produce profits that can be distributed to the mauqul’alaih (waqf recipients). Money as an object of waqf is utilized by investing, so it is possible for cash waqf to be utilized in the form of profit-sharing cooperation with Village-Owned Enterprises through Mudharabah or musyarakah agreements. Nazhir cash waqf, in this case, Sharia banking acts as shahibul mal, who invests funds originating from cash waqf to village-owned enterprises to be managed in certain businesses which represent village potential that needs to be developed. The profits from managing the funds are distributed according to the profit ratio agreed at the beginning of the contract. With this scheme, cash waqf funds can be utilized in potential sectors that can help improve the welfare of village society, and the results of its utilization can be distributed to mauquf’alaih (waqf recipients). Likewise, village-owned enterprises can obtain assets strengthening from other sources in the form of investment capital originating from cash waqf and optimize village potential to achieve increased welfare for village society. Waqf instruments have been proven to make a significant contribution to the history of Islamic civilization with their ability to act as a catalyst for economic change for the community; one proof of this in the past is the establishment of 500 (five hundred) cash waqfs under the Ottoman waqf system which succeeded in implementing the exclusive use of cash waqf for social goals (Mahat et al., Citation2015).
5. Conclusion
Strengthening village-owned enterprises assets that can be carried out through the strategic function of Sharia Banking is through the intermediation and social functions of Sharia banking. Through the intermediation function, strengthening village-owned enterprises’ assets can be done with murabahah, mudharabah, and musyarakah financing. Through social functions, strengthening village-owned enterprise’s assets can come from grant funds and other social funds or cash waqf funds, which are utilized through strategic management of village-owned enterprise’s business activities. This research is only limited to the activities of village-owned enterprises in Indonesia; further research is needed regarding similar institutions in other countries for comparison, including strengthening their assets.
Author contribution statement
The authors confirm their contribution to the paper as follows: study conception and design: Isis Ikhwansyah. Author; data collection, analysis and interpretation of results: Nun Harrieti. Author, Azlin Alisa Ahmad. Author; draft manuscript preparation: Nun Harrieti. Author. All authors reviewed the results and approved the final version of the manuscript.
Acknowledgments
Padjajaran University provided support for the study in this paper.
Disclosure statement
No potential conflict of interest was reported by the authors.
Data availability statement
The data that support the findings of this study are openly available in [Mendeley Data] at https://data.mendeley.com/datasets/c9syr5zcsk/1
Additional information
Funding
Notes on contributors
Nun Harrieti
Nun Harrieti has been a lecturer at Padjadjaran University’s Faculty of Law since 2009, where she teaches a variety of topics, including Sharia Banking Law. Several study findings have been successfully published in national and international publications.
Isis Ikhwansyah
Isis Ikhwansyah is a Professor at Padjadjaran University’s Faculty of Law, where He teaches a variety of topics, including Company Law. Several study findings have been successfully published in national and international publications.
Azlin Alisa Ahmad
Azlin Alisa Ahmad is a lecturer at the National University of Malaysia Faculty of Islamic Studies, where she teaches a variety of topics, including Islamic banking law. Several study findings have been successfully published in national and international publications.
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