28/11/2022 - 4 Min Read

4 Types of Cooperatives and How Sharia-Based Cooperatives Create Contributions to Community

Throughout history, human beings have been working collectively to reach a common goal. They form organizations and institutions for certain objectives including meeting their social, economic, and cultural needs. 

Among organizations that are formed to reach the aforementioned objectives is a cooperative.  In this article, we will explain about cooperatives and their status according to the sharia, and how cooperatives have successfully improved the welfare of their members. Keep reading to find out more about it!   

What is a cooperative? 

Encyclopedia Britannica defines cooperatives as an organization owned by and operated for the benefit of those using its services. 

The International Cooperative Alliance, on the other hand, defines it as an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

From the above definitions, we can conclude that cooperatives exist to help a group of people reach their common goals through an association whose ownership is shared with each of its members who operate the said association democratically and voluntarily. 

Cooperatives are established based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. 

To help put the above values into practice, there are seven main principles that become the foundations based on which many cooperatives in the world are run. These seven principles, called the Rochdale principles after the city where these principles were set out, are the following: 

1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training, and information
6. Cooperation among cooperatives
7. Concern for community

Types of Cooperative

There are several types of cooperatives that serve to reach different goals. The main division of cooperatives are the following:

Producer Cooperative

Producer cooperatives is a type of cooperative that aims to help move products to the point of consumption. Among the examples are agriculture and fishery cooperatives. This type of cooperative can also assist producers in marketing and distributing their commodities. 

Producer cooperatives can also be organized by small businesses to pool their money for capital to be accessed by its members.  

Consumer Cooperative

Consumer cooperatives are a type of cooperatives that are co-owned by consumers. Their objective is to facilitate the consumers to obtain certain items at lower costs. This type of cooperative includes retail, housing, and utility cooperative. 

A subtype of consumer cooperative is credit unions, cooperative banks, and cooperative insurance. 

Worker Cooperative

A worker cooperative is a cooperative that is co-owned by members who are also employees in the said cooperative. They can either participate in all of the decision-making processes or elect a management committee.  

Purchasing Cooperative

A purchasing cooperative is a cooperative arrangement that is organized to procure items at lower prices by aggregating demands. A type of purchasing cooperative is the retailer cooperative whose function is to pool resources from its members in order to be able to procure supplies in bulk to get discounts from manufacturers. 

Sharia-based cooperatives and its role in supporting small communities in Indonesia

As Islamic economic and financial institutions continue to thrive in Muslim-majority countries, cooperatives have also taken sharia-compliant forms. What sets the sharia cooperatives apart from their conventional counterparts? 

Here’s a table showing the differences between sharia-based and non sharia-based cooperatives based on a publication titled Understanding Islamic Cooperatives: Mechanisms for the Accessibility Promotion of Islamic Finance in Malaysia 

Islamic cooperatives have six major characteristics, namely 

1. Recognizing the members’ ownership of business capital
2. No interest-based transactions allowed
3. The ZISWAF (Zakat, Infaq, Sadaqah, Waqf) institution is functioning well 
4. Admitting profit-oriented motives as long as the sharia rules are strictly followed
5. Acknowledging freedom of business and economic endeavor
6. Acknowledging common rights

To learn more about sharia-compliant contracts that are common in investments, you can read this article: 

Understand These 6 Sharia Contracts before Investing to Make Sure It’s Halal and Blessed

In certain Muslim countries, the sharia-based cooperatives have been essential in providing financial services to small and medium enterprises (SMEs) that are often underserved by financial institutions.   

A study by Priyonggo Suseno, Ph.D from Universitas Islam Indonesia published in 2020 revealed that sharia-based loan, saving, and financing cooperatives (KSPPS) or also known as Baitul Mal Wat Tamwil (BMT) can distribute financing up to IDR 19.07 trillion. Additionally, according to the study, these institutions have shown their ability to survive during the harsh financial crisis in 1997 and later crises.

The social goal of Islamic cooperatives in the form of BMT in Indonesia has helped local communities to get rid of moneylenders. One of the success stories is how an Islamic cooperative established in Pondok Pesantren Sidogiri, a prominent traditional Islamic boarding school in East Java, has come up with the financing scheme that is accompanied with saving.

Take part in ALAMI’s endeavor in creating impacts by supporting SMEs

When it comes to creating positive impacts on the community through economic empowerment, ALAMI and cooperatives are on the same page. ALAMI’s mission is to support the Indonesian economy by providing productive financing to Indonesian SMEs which make up the backbone of the Indonesian economy. 

ALAMI has accumulated a total disbursement of more than IDR 3 trillion for more than 10,000 SME business projects across Indonesia. Additionally, ALAMI’s funding has indirectly contributed to the creation of thousands of formal and informal jobs through funding for fish farmers and manpower companies. 

Do you want to take your part in empowering the community? Click the buttons below to download the ALAMI P2P funding app!