The Extensive Role of Islamic Finance and Its Contribution in the Rise of Small and Medium Enterprises

ROLE OF THE ISLAMIC FINANCE IN THE SMALL AND MEDIUM ENTERPRISES
The research paper discusses on the extensive role of Islamic finance and its contribution in the
rise of Small and Medium Enterprises (SMEs) over the last few years. The major topics which
has been covered includes What is Islamic finance, the proportion of the SMEs in the major
Islamic countries and their financing patterns over the last few years. The paper also mentions
the major financial bodies and institutions alongwith their responsibilities and what have been
the major obstacles faced by banks in the growth of SMEs1 and how Islamic finance has helped
in removing such hindrances.
The research paper highlights the major principles and restrictions being imposed by the
Islamic Finance which is generally controlled by Sharia and the holy Quran. Some of the
principles of Islamic finance like that of prohibition of Riba or interest portion on the debt,
prohibition on business involving risk and uncertainty like that of gambling, etc. have also
helped in the development of the SMEs2. There are various financial instruments and methods
which are practiced under Islamic finance like those of Mudarabah (division of profit and loss
based on the contribution of capital), Musharakah (joint venture between the
customer/businesses and the bank), Bai muajjall, Istisna, Ijarah and Murabaha. These have been
explained in detail along with their use. Towards the end, the paper also discusses on the
improvement areas to promote and enhance SMEs through financial services and products3.
All in all, there has been increasing shift towards the importance being given to SMEs as in the
long run, they will be contributing a significant portion to the country GDP.