Local Governance in Relation to Shariah Cooperatives in Indonesia

Abdul Ghafar Ismail, Muhammad Hasbi Zaenal


This paper examines governance issues more closely and in relation to rural institutions and sustainable livelihood improvement, drawing on evidence from shariah cooperatives in Indonesia. More specifically, this paper provides a diagnostic of governance systems in Indonesia, which basically follow the Dutch law origin. Indonesia and the role that shariah cooperatives might play in strengthening such systems. This paper offers a description of both formal and informal rural governance systems in Indonesia, the role of shariah cooperatives and other membership-based rural producer organizations in these systems, and possible avenues through which rural organizations can play a larger role in improving rural governance. By using a combination of survey data and case studies, it sheds light specifically on the influence of local governance systems on people’ cooperatives in Indonesia. The relationships and interactions between local governance systems and cooperatives are an important issue in Indonesia because both play an essential part in promoting and implementing the Government of Indonesia’s far-reaching rural development and poverty reduction strategies. These strategies include the government’s agricultural development-led program, its unitary policy, its administrative and fiscal decentralization efforts, and a whole range of social welfare and capacity building programs designed to support these strategies. Findings suggest that local governance systems and cooperatives are closely linked by interactions at multiple levels and with varying effects on rural people. These interactions have the potential to strengthen the role of cooperatives in local development, but also run some serious risks. Underlying these risks is the long-standing issue of trust between government and community. While it is difficult to provide explicit policy recommendations based on the analysis provided in this paper, at least one key issue can be raised for consideration by policymakers at all levels in Indonesia. If efforts to strengthen local governance systems and to build effective cooperatives can focus on this issue of trust between government and community, there is much cause for hope. However, getting this balance right is difficult and, in the long run, will be a significant challenge for policymakers to address.


Keywords: governance; cooperative organization;

JEL Classification: G21; G23; G38; P13; Z12

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