WINDHOEK, FEB 18 – The World has become a Global Village because of it revolution. It has been said that the world is becoming a global village in which there are no boundaries to trade. I have completed postgraduate in Islamic Banking and Finance in 2020. This article is to investigate the opportunities of development and growth as well as the main challenges to Islamic finance for SMEs.
The development of Islamic financing in Namibia will help in the environment characterize by VUCA (Volatility, Uncertainty, Complexity and Ambiguity). The Bank of Namibia recently increase Repo Rate (Repurchase Agreement) by 0.25 bps which increase living cost. Any increase in Repo rate would lead Namibians to pay more on their loans. In Islam, the dominant belief is that it isn’t actually that fair. When interest is charged, the lender ends up with more and the borrower with less than they both started with; the rich become richer while the poor become poorer. Islam also sees interest as sinful because it is a charge for the use of money. The difference between riba-free and charging interest is that the conventional approach looks at money as something you can rent. With riba-free, they don’t rent money, they invest with you.
Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. Banking in Islam is a saving money framework that depends on the standards of Islamic law, additionally known as Shariah law, and guided by Islamic financial matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefit and misfortune. There are different banking systems in the world but the most famous ones are conventional banking and the Islamic banking. The main function of conventional bank 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 contrary, Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors and the borrowers-all would participate on profit-loss sharing basis.
Small and Medium Enterprises (SMEs) considered to be the engines of development and progress in emerging countries that can help governments to reduce extreme poverty and high rate of national unemployment. This in return can assist governments to achieve their developmental goals. Significant resources have been invested by both the public and private sector to support SMEs growth and sustainability to ensure that they create jobs and contributing to national economic growth. Thousands of SMEs were opened and some were closed while others are growing at a slow space. 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 mudarabah and musyarakah, integrate assets of lender and borrowers; therefore, they allow Islamic banks to lend on a longer-term basis to projects with higher risk-return profiles and, thus, to support economic growth. 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. 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. Addressing these challenges effectively 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.
South African Islamic Banking Market
Total deposits Total advances
Dec-18 R23billion Dec-18 R10.6billion
Dec-19 R35billion Dec-19 R12.4billion
Jun-20 R37billion Jun-20 R14.6bilion
Conventional banks can sell Shari’ah-compliant products because Islamic law does not require that the seller of the product be Muslim or that its other services also be Islamic. It does require that the product or service be in compliance with Shari’ah guidelines. Islamic finance has the potential to contribute to higher and more inclusive economic growth by increasing access of 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 Small and Medium-Sized Enterprise (SME) 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. Since the SMEs are important for the economy, the Islamic banks and Islamic financial institutions must play a significant role in financing these businesses. Supporting SMEs are 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 the society.
In conclusion, it is my hope that we will all continue to work together toward the sustainable development of the Islamic financial services industry and bolster its contribution to alleviating poverty and fostering shared prosperity in developing and emerging markets. – Josef Kefas Sheehama
