Leveraging the Potential of Islamic Banking and Finance for Small Businesses

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 the business lifecycle of small businesses. 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. 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 chapter are: (i) 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 (ii) to initiate the development of systematic principles for the utilization of Islamic banking and finance instruments in financing small businesses.