Role of Microfinance and Informal Finance in Stabilization of Saudi Arabian Economy

This research paper examines the role of microfinance and informal finance in stabilizing the Saudi Arabian economy. It explores the impact on the financial sector and the growth of micro, small, and medium enterprises (MSMEs). The study aims to assess the change in the number of loan defaulters, the role of the informal financial sector, and the business growth in the MSME sector after the introduction of microfinance policies.

Running head: ROLE OF MICROFINANCE AND INFORMAL FINANCE IN
STABILIZATION OF SAUDI ARABIAN ECONOMY
Role of Microfinance and Informal Finance in Stabilization of Saudi Arabian Economy
Name of the Student
Name of the University
Author Note

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ROLE OF MICROFINANCE AND INFORMAL FINANCE IN STABILIZATION OF
SAUDI ARABIAN ECONOMY
Chapter 1: Introduction
Industries and businesses need investments to start operation and remain functional,
and these investments come from different modes of finance. Finance is thus one of the
primary necessity for a business that needs to be fulfilled. Recognizing the need for monetary
assistance banking and non-banking financial institutions emerged. However, the service of
the financial sector had been limited to big businesses. The micro, small and medium
enterprises are not always able to get finance from banks and other formal financial
institutions. It led to the emergence of the informal financial sector. Informal financial sector
contrarily charges a higher rate of interest that formal sector. In every developing or
emerging economies, both formal and informal financial sector exists. Microfinance policies
and informal sector, therefore, must have some impact on the financial sector as it caters to a
large sector of a developing economy.
1.1 Background of the study
Microfinance is related to the financial support to the poor people who are deprived of
financial services and supports from the mainstream financial institutions. Mainstream
financial institutions are mostly interested in lending to big business firms and try to lend all
their designated amount of money for a loan to them. Thus, in Saudi Arabia, the policy for
financing poor and micro, small and medium enterprises (MSME) have been implemented,
and this policy of finance is known as the microfinance. Previously, the poor had no options
other than taking a loan from informal, but with the introduction of microfinance, the
financial conditions of the poor and MSMEs have improved. However, there occurred a
change in the financial sector, with the introduction of microfinance in Saudi Arabia. The
impact of the microfinance and informal finance in the financial sector of Saudi Arabia needs
to be assessed.

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ROLE OF MICROFINANCE AND INFORMAL FINANCE IN STABILIZATION OF
SAUDI ARABIAN ECONOMY
1.2 Research objective
The objective of the research will be to find out the effect of microfinance and
informal finance on the stabilization of the financial sector in Saudi Arabia with an emphasis
on economic factors. Thus, to find the impact the research will try to find
 The change in the number of loan defaulters with emphasis on the micro
sector that includes poor and MSMEs
 The role of the informal financial sector and its effect on the micro sector
 The business growth in MSME sector after the introduction of microfinance
policies
1.3 Research Questions
Q1) Has the number of loan defaulters increased or decreased in the micro sector?
Q2) What effects informal finance has on the financial sector and is it necessary?
Q3) How the MSME sector is doing after the introduction of microfinance?
1.4 Research structure
The structure that the research paper will follow will start with an abstract that will
provide a summary of the entire paper. The main chapters the paper will include are
introduction, background of the study, background of the Islamic microfinance and informal
finance in Saudi Arabia, literature review, justification of the research, research objective,
research structure, research methodology, research limitations, findings from the research and
future research prospective in the concerned area1. Under the research methodology, data
collection, sampling and data analysis methods will be explained in the research paper.
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