Abstract
Purpose The purpose of this paper is to indicate an innovative solution to address the financing issues faced by “Micro-, Small and Medium Enterprises” (MSME) in emerging economies. Design/methodology/approach Islamic Financial Institutions (IFIs) especially Islamic banks are competing for high net worth individuals, whereas the MSME sector is largely untapped. A collaborative model for IFIs is suggested, to explore the MSME sector. Islamic Non-Banking Financial Institutions (NBFIs) are operating in these markets through their extensive gross route networks. The multistep collaborative model proposes “Special Purpose Entity (SPE)” partially owned by a single Islamic Bank or consortium and NBFI/s. SPEs can be incorporated with a defined scope, focus areas, risk profile, budget and shareholding patterns. Findings Risk and profit sharing instruments also known as Musharakah and Mudarabah have less than 6 percent share within total financing offered by Islamic banks globally. Risk sharing products offered by Islamic banks are not targeting this sector due to the underdevelopment of instruments, lack of knowledge and resources. Proposed SPEs can operate regionally with a concentration on specific business sectors. Originality/value The SPE model would enable Islamic banks to enter the huge MSME market while mitigating risk. On the contrary, it would enable the large segments of emerging economies (bottom 40 percent population of developing nations) to get involved and actively play their role to attain long-term development goals.
Highlights
The Islamic banking sector is a dominant part of Islamic finance industry
The exponential growth of Islamic finance industry explains the market needs for financial services based on values of risk sharing instead of risk transfer, which is the basic principle of Islamic finance industry and central component of shared prosperity
If we look at the recent statistics regarding financing provided by the Islamic banking sector, 25 percent of financing facilitates the consumer durables, whereas 16 percent of financing goes to real estate and construction, 12 and 8 percent to manufacturing and trading accounts, respectively (World Bank and Islamic Development Bank Group, 2016)
Summary
According to Islamic Financial Service Board (IFSB, 2016), there are more than 300 Islamic Finance Institutions (IFIs) providing financial services in more than 50 countries, with assets close to US$1.9 trillion. The objective of IFIs is promotion of equitability through wealth creation, distribution and circulation by providing equitable investment opportunities and fulfilling financing needs of the existing customers. These institutions are playing a vital role in the inclusion of new customers, the ones who decided not to use the existing financial system due to personal or religious reasons. According to IFSB (2015), the size of Islamic banking industry stands at US$1.48 trillion in terms of assets.
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