Opinion – The development of Islamic financing for Namibian SMEs

The world has become a global village because of its revolution. It has been said that the world is becoming a global village in which there are no boundaries to trade. I obtained a postgraduate qualification in Islamic Banking and Finance in 2020. This article aims to investigate the opportunities for development and growth, as well as the main challenges to Islamic financing for SMEs. 

Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The main concept of Islamic banking is the prohibition on the collection of interest and its utilization for business purposes. Banking in Islam is a savings money framework that depends on the standards of Islamic law, additionally known as Shariah law, and is guided by Islamic financial matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefits and misfortune.

There are different banking systems in the world, but the most famous ones are conventional banking and Islamic banking. The main function of conventional banks can be summed up in one sentence: The banks borrow to lend. They borrow in the form of deposits and lend this money to earn interest. In contrast, the Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors, and the borrowers would all participate on a profit-loss sharing basis. 

Small and Medium Enterprises (SMEs) are considered to be the engines of development and progress in emerging countries that can help governments to reduce extreme poverty and high rates of national unemployment. This in turn can assist governments to achieve their developmental goals. Significant resources have been invested by both the public and private sectors to support SMEs’ growth and sustainability to ensure that they create jobs and contribute to national economic growth. Thousands of SMEs were opened and some were closed, while others are growing at a slow pace. One of the main constraints faced by SMEs is the lack of finance. Islamic bank financing products may help to solve this problem.

The Islamic participatory schemes, such as Modarabah and musyarakah, integrate the assets of lenders and borrowers. Therefore, they allow Islamic banks to lend on a longer-term basis to projects with higher risk-return profiles, thus support economic growth. The influence of small and medium-sized enterprises (SMEs) on the structure, performance, and prospects of a nation‘s economy is the subject of increasing interest among policymakers at the national, regional, and global levels. 

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. They also play an important role in decreasing the level of unemployment and creating new employment opportunities. With their flexible production structure, they can also follow the changes in the market conditions more effectively. Addressing these challenges properly will put Islamic financial institutions in a position to design and offer financial products that are relevant to SMEs, while reducing transaction costs and adequately securing their exposures. 

Conventional banks can sell Shari’ah-compliant products because Islamic law does not require that the seller of the product is Muslim, or that its other services also be Islamic. It does require that the product or service comply with Shari’ah guidelines.

Islamic finance has the potential to contribute to higher and more inclusive economic growth by increasing access to banking services to underserved populations. In addition, Islamic finance‘s risk-sharing features and the strong link of credit to collateral means that it is well-suited for SMEs and startup financing – which we know can promote inclusive growth. 

Islamic finance has, in principle, the potential to promote financial stability because its risk-sharing feature reduces leverage, and its financing is asset-backed, and thus fully collateralized. In addition, besides deposits, Islamic banks offer profit-sharing and loss-bearing accounts that can help mitigate losses and contagion in the event of banking sector distress. This leads, de facto, to higher total loss-absorbing capital, one of the key objectives of the new global regulatory reform measures. Since SMEs are important for the economy, the Islamic banks and Islamic financial institutions must play a significant role in financing these businesses. Supporting SMEs is one of the objectives of religious institutions. Thus, the most important goal of Islamic banks and Islamic financial institutions is to contribute to the economic and social development of society. 

In conclusion, I hope that we will all continue to work together towards the sustainable development of the Islamic financial services industry, bolster its contribution to alleviating poverty, and foster shared prosperity in developing and emerging markets. 

Courtesy: New Era Newspaper