Leveraging Islamic Banking and Finance for Small Business: Exploring the Conceptual and Practical Dimensions
2020
Small businesses are considered one of the sources of innovation, productivity and dynamism
in many countries. Thus, to translate innovative ideas into sustainable businesses, access to
capital becomes a part and parcel of their business lifecycle. Despite their potential importance
for economic development, small businesses are facing difficulties in attracting external
finance at the early and middle stages of the entrepreneurial lifecycle in many countries,
including developed and developing countries. As a response, the Addis Ababa Action Agenda
on Financing for Development (2015) recognized the role of additional financing, in particular
using innovative mechanisms, instruments and modalities. It encourages mechanisms based
on models combining public and private resources (blended finance) and joint ventures that
bring significant impact investing. In line with this, Islamic banking and finance is a broad
framework that has great potential for supporting development finance particularly related to
small business, given their fundamental criteria emphasizing generating positive societal
impact. The main objectives covered by this paper are: (i) to perform a landscape analysis of
financing small business for selected Asian countries, particularly Malaysia and Indonesia; (ii)
to identify and unpack innovative financing opportunities within Islamic banking and finance
instruments such as Mudharabah (profit-sharing), Musharakah (profit-loss sharing),
Murabahah (sale with cost plus profit margin, Ijarah [Islamic leasing]), and Salam (forward
sale) as potential solutions for addressing small businesses’ funding gaps; and (iii) to initiate
the development of systematic principles for the utilization of Islamic banking and finance
instruments in financing small businesses
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