Shariah-compliant financing can support small business growth, but product awareness needs to increase
Small and medium-sized enterprises (SMEs) need financial products, services, partners and collaborators to grow their business. Speed up your digital journey. Help them enter new markets. And it provides access to scale-building innovations that enhance competitiveness.
But risk-averse banks are reluctant to lend to companies with no financial track record and limited physical assets, so new businesses can struggle to raise capital. This leads to a shortage of much-needed capital investment funds, seed funds, and venture capital.
You have the problem of asymmetric information. Funders often have a better understanding of transaction details than borrowers, and the lack of information infrastructure for SMEs exacerbates the problem.
As a result, many small businesses stymie their growth by securing funding at substantial fees and charges or by providing expensive collateral.
Sometimes overlooked, Islamic finance – an asset-based system with clear ties to the real economy – may offer a solution for SMEs seeking financing.
growing demand
Shariah-compliant banking services have experienced tremendous growth since their emergence in the 1970s. Over the past decade, Islamic finance has grown at an annual rate of 10-12%. Today, it’s his $2.5 trillion industry that spans over 80 countries.
Despite the pandemic, Islamic finance expanded at an average compounded rate of around 10% in 2020 and 2021, while traditional loan growth expanded at around 3%.
According to Moody’s, economic recovery in major Islamic financial markets will boost credit growth and demand for Shariah-compliant products. U.S. investment service providers say Islamic bank asset growth is likely to continue and could outpace the expansion of traditional lenders.
The Islamic finance sector has many drivers that guarantee future growth. First, there is a large untouched and unbanked Muslim population. The unbanked population in 57 Islamic Cooperation countries reached about 60% in 2018.
Second, the increasing breadth and quality of Islamic financial products and services continues to attract more and more customers, both Muslim and non-Muslim.
Due to the growing demand for sustainable and green development, green projects and investments are rapidly spreading around the world. Islamic finance and his ESG (Environmental, Social and Governance) principles overlap considerably, making it an attractive option for many companies.
The global halal market is highly profitable, with an estimated annual growth rate of 20%, making it one of the fastest growing consumer segments in the world. Islamic finance is expected to play a leading role in facilitating international halal trade.
There is considerable overlap between Islamic finance and ESG principles, making it an attractive option for many companies.
SME support
Islamic finance enhances business opportunities by providing financial solutions such as participatory contracts. Banks are more than just financiers, they have a vested interest in the success of small businesses.
The foundation of the Islamic banking model is based on the profit-sharing principle, where the bank and the customer share the risk. Not only does this benefit corporate borrowers, this financial intermediation system contributes to a more equitable distribution of income and wealth.
The strong ethical and moral aspects of doing business with Islamic banks play an important role in promoting socially desirable investments and promoting better behavior for individuals and businesses.
However, as with traditional banking, the size of many small businesses can limit the types of products available. Islamic banks prefer to offer short-term asset-backed facilities to the sector due to business continuity issues and the high risk involved in lending to SMEs. Long-term Islamic finance is usually only available to medium-sized companies with strong financial and business viability.
When it comes to Islamic debt products, SMEs benefit from offering savings, savings and checking accounts that are difficult to obtain from traditional banks.
Awareness promotion
Demand for Islamic financial products from the SME sector has increased over the last decade, especially in developed Islamic financial markets. The needs are mainly project finance, working capital and trade finance. Cross-country evidence points to a wide range of financing structures available to SMEs, proving the flexibility of Islamic finance.
Nevertheless, perception gaps remain in both developed and emerging markets. In 2019, Bank Negara Malaysia reported that nearly 60% of SMEs in Malaysia were unaware of the availability of Islamic financial facilities. According to the 2020 Islamic Banking Index by Emirates Islamic, in the United Arab Emirates, 27% of the sampled population were unaware that Islamic banking products existed.
Entrepreneurs are underutilizing the many financing solutions offered by Islamic banks. To ensure the growth of the SME sector and the continued success of Shariah-compliant financial services, awareness of the facilities offered should be promoted.
