Islamic Finance for Small Business - Hussein Elasrag - ebook

The purpose of this book is to investigate the opportunities of development and growth as well as the main challenges to Islamic Finance for Small Business.

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Hussein Elasrag

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Table of contents


SMEs Definitions

SMEs distribution in various parts of the world

SMEs and Access to Finance

Unlock the full potential of Islamic finance for SMEs

1- Creating an Enabling Environment

2- Developing the industry and markets

3- Ensuring financial stability

4-Strategic operational adjustments to target SMEs

1- Strategy and Segmentation

2- Products and Services

3- Sales and Delivery

4- Advisory Services

5- Organization and Systems

6- Risk Management




The influence of small and medium-sized enterprises (SMEs) on the structure, performance and future prospects of a nation’s economy is the subject of increasing interest among policymakers at the national, regional and global level. This reflects the fact that in most countries, SMEs constitute the overwhelming majority of firms and are major sources of employment. Add to this evidence that SMEs, and in particular young small firms, have been net contributors to employment growth since the 2008 financial crisis, and the rationale behind the greater focus on SME performance becomes clear.(International Trade Centre (ITC), 2015)

Small and medium-sized enterprises have positive contributions in providing and maintaining balanced economic and social development. They also play an important role in decreasing the level of unemployment and creating new employment opportunities and with their flexible production structure they can follow the changes in the market conditions more effectively. SMEs make crucial contributions to job creation and income generation; they account for two-thirds of all jobs worldwide.(International Labour Office, 2015).

SMEs make up the majority of firms in the world and are responsible for a large portion of its employment. According to some estimates, SMEs constitute up to 95% of the world’s firms and between 80-90% of total employment in the developing world. However, not all that employment takes place within formal establishments. An estimate by ILO suggests: “…there are 420 to 510 million SMEs worldwide, of which 9 per cent are formal SMEs (excluding micro-enterprises)” (Navas-Alemán & Guerrero, 2016)

The constraints to SME growth – as perceived by business owners – is a relatively well-researched area. The three biggest constraints across countries are access to finance, access to electricity and competition from informal enterprises. However, constraints vary according to countries’ level of development as well as by region.(International Labour Office, 2015).

The term “SME” encompasses a broad spectrum of definitions. Different organizations and countries set their own guidelines for defining SMEs, often based on headcount, sales or assets. SMEs come in many different shapes and sizes; however, in today’s complex business environment they may have close financial, operational or governance relationships with other enterprises. These relationships often make it difficult to precisely draw the line between an SME and a larger enterprise.

This book will try to give hints and insights into this, and to present some of the Islamic financial instruments that are being supplied by the market for the financing of SMEs in particular.

SMEs Definitions

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. Formal SMEs contribute up to 45 percent of total employments and up to 33 percent of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. According to estimates, 600 million jobs will be needed in the next 15 years to absorb the growing global workforce, mainly in Asia and Sub-Saharan Africa. In emerging markets, most formal jobs are with SMEs, which also create 4 out of 5 new positions. However, access to finance is a key constraint to SME growth; without it, many SMEs languish and stagnate.

Despite the fact that SMEs account for a significant part of the country's economy and provide employment opportunities for the majority of people. SMEs are less likely to be able to secure bank loans than large firms; instead, they rely on internal or “personal” funds to launch and initially run their enterprises.

Fifty percent of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account. Overall, approximately 70 percent of all MSMEs in emerging markets lack access to credit. While the gap varies considerably between regions, it’s particularly wide in Africa and Asia. The current credit gap for formal SMEs is estimated to be US$1.2 trillion; the total credit gap for both formal and informal SMEs is as high as US$2.6 trillion. [1]

A World Bank Group study suggests there are between 365-445 million micro, small and medium enterprises (MSMEs) in emerging markets: 25-30 million are formal SMEs; 55-70 million are formal micro enterprises; and 285-345 million are informal enterprises. Moving informal SMEs into the formal sector can have considerable advantages for the SME (for example, better access to credit and government services) and to the overall economy (for example, higher tax revenues, better regulation). Also, improving SMEs’ access to finance and finding solutions to unlock sources of capital is crucial to enable this potentially dynamic sector to grow and provide the needed jobs.