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    Islamic Finance for SMEs
    Islamic Finance for SMEs
    Islamic Finance for SMEs
    Ebook191 pages2 hours

    Islamic Finance for SMEs

    By Hussein Elasrag

    ()

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    About this ebook

    According to several research studies in the last decade there are greater opportunities for development and growth of Islamic financial system because Muslim community is eager to take financial products and they are willing to spend their lives according to their religion. Islamic Finance is a promising solution to SMEs to meet the requirements of formal financing. And can prove particularly effective to facilitate access to finance for SMEs. Although there is a wealth of literature around Islamic finance and around finance in general for SMEs, literature that draws and connects these two areas together is limited. The purpose of this book is to investigate the opportunities of development and growth as well as the main challenges to Islamic finance for SMEs. This book will help to deepen understanding of the concepts of Islamic finance  as well as SMEs. In addition to evaluate how Islamic financial institutions can support SMEs.
    LanguageEnglish
    PublisherHussein Elasrag
    Release dateMay 29, 2018
    ISBN9788828329992
    Islamic Finance for SMEs

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      Book preview

      Islamic Finance for SMEs - Hussein Elasrag

      SMEs.

      LIST OF ABBREVIATIONS

      Table of Contents

      LIST OF ABBREVIATIONS

      Introduction

      CHAPTER 1: Understanding SMEs

      SMEs Definitions

      1. Quantitative Criteria for Defining SMEs

      2. Qualitative Criteria for Defining SMEs

      SMEs distribution in various parts of the world

      Contribution of SMEs to employment and economic growth

      1- Contribution of SMEs to employment

      2- Number of SMEs in the total enterprise population, in the informal economy

      3. SMEs and job creation

      SMEs and Access to Finance

      CHAPTER 2 :Understanding Islamic finance

      Fundamentals of the Islamic finance

      Shari'ah law defined

      Key Shari'ah principles and prohibitions relevant to finance

      Regulation of Islamic Finance

      Global Islamic financial infrastructure

      Islamic banking

      What is Islamic banking?

      Advantages of Islamic banking

      CHAPTER 3:Islamic Financing products for SMEs

      Obstacles Faced by Banks in SME Financing

      Islamic Financing Options for SMEs

      A.Trade with markup or cost-plus sale (murabaha)

      B.Profit-sharing agreement (mudaraba)

      C.Equity participation (musharaka)

      D.Leasing (ijara)

      E.Salam

      F.Istisna

      Islamic bonds (Sukuk)

      CHAPTER 4: key elements required to unlock the full potential of Islamic finance for SMEs

      Challenges of Islamic banking n SME Financing

      Unlock the full potential of Islamic finance

      1- Creating an Enabling Environment

      2- Developing the industry and markets

      3- Ensuring financial stability

      Strategic operational adjustments to target SMEs

      GLOSSARY

      References:

      Introduction

      A growing economy requires a well-functioning financial system. The financial sector is essential not just for tasks like running the payment systems, ensuring a flow of funds from savers to investors, including small and medium-sized enterprises, and creating information and opportunities for investment. The financial sector is also necessary for diversifying investments, managing risk, and providing liquidity and other resources necessary for growth.(Stiglitz, 2015)

      Since the establishment of banks and other financial institutions, the primary objective is to provide support for the development of Large Scale Enterprises (LSEs) and the development of small and medium-sized enterprises (SMEs). Unfortunately, initial efforts were unable to provide favourable results for SMEs.

      As governments around the world continue to grapple with uncertain economic prospects and important social challenges, they are looking to small and medium-sized enterprises (SMEs) and entrepreneurs as an important source of economic growth and social cohesion. Appropriate access to finance is a critical prerequisite to enable these businesses to invest, grow and create jobs, and the issue has been climbing steadily up the policy agenda in recent years. But effective policy responses for SME finance require coherent and meaningful evidence.(OECD, 2016)

      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.

      The lack of funding is one of the most important constraints faced by SMEs. Marketing and administrative barriers, the lack of an integrated accounting system, shortage of trained manpower, institutional constraints and government legislation are also limitations faced by the SMEs. (Mumani, 2014)

      High interest rates and the lack of

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