SMEs Financing Innovation : Application of Hawalah in Islamic Cooperative

Purpose – This paper analyses a case study of Islamic cooperative and the problems it faced in the Islamic financial system of Indonesia. Accordingly, it proposes a financing innovation, an enhanced structure of Shari`ah compliant hawalah financing scheme, which could improve operations of the cooperative. Discussions on factors contributing to successful implementation of the instrument are also included.Methodology/Approach – The research uses a case study approach and qualitative research methods, particularly semi-structured interview, to explore practical problems faced by the cooperative and accordingly suggest relevant recommendations.Findings – The hawalah-based financing could be used to facilitate and partnership between SMEs (muhaal), Islamic cooperative (muhaal-alaih) and corporate/business-partner (as muhil). Benefits from using the scheme could further be enhanced if appropriate mechanism, risk management practices and partnership with relevant institutions (Islamic banks, government agencies and donor organizations) are in place.Practical Implications – First, appropriate hawalah-based financing could be used as an alternative solution to financial problems faced by Islamic SMEs. Second, IFIs could potentially provide the scheme, particularly for SMEs/clients in need for managing their account receivable, which also underpin the importance of developing wider ranges of Islamic financial products that meet the need of their stakeholders. Finally, partnerships with relevant institutions are necessary especially for SMEs which contribute significantly to the economy.Originality/Value of Paper – Analysis of hawalah contract is relatively new in Islamic finance literature, particularly in the Indonesian context. A case study on Islamic cooperative and SMEs may also give some new insights into the existing Islamic literature