Islamic Financing and SMEs

Small and medium sized enterprises are the backbone of both developed economies and emerging markets and developing countries in terms of employment and international sustainability as well as economic growth. Globally, SMEs contribute 45.5% to total employment and account for 57.8% of total new jobs created. The major challenge faced by SMEs, however is access to finance. Financial institutions such as banks widely consider SMEs to be too risky due to such factors as lack of collateral and insufficient credit history. One way of increasing and diversifying the sources of financing for SMEs, is to identify the strength and potential of participatory finance such as Islamic finance which could provide asset-based and equity-based financing to SMEs.

Even though the Islamic banking and finance industry is still relatively small in terms of size compared to conventional finance, its growth rate and increasing global outreach is significant, and indicative of the potential this industry can reach in the long-term. Since its modern emergence in the 1970s, Islamic banking and finance has shown unprecedented global success in terms of growth, expansion, and institutional and product diversification.

Ovamba Logo

Some SME platforms are getting into the Shariah-compliant financing act. This true for Ovamba, which supports African economies by improving access to credit for the SMS market. They were recently certified by the Bahrain-based Shariya Review Bureau (SRB) which now allows Ovamba to help structure Islamic SME products based on Ijara (leasing), Wakala (agency), Mudaraba (trust financing) and Musharabian (equity participation) contracts.

Marvin Cole. CEO of Ovamba stated “We believed that the timing was perfect to approach SME funding and financial inclusion via Islamic structures.  With over 400m underserved Muslims contributing to the continental GDP, Ovamba saw this as an opportunity to bridge a key a socio-economic gap.”  In addition, he stated, “This journey to serve African Muslim traders would not have been so achievable without the support and guidance of the Shariya Review Board.  We are confident that this new development will attract and interesting new cadre of Islamic investors into the space.”

Sources: African Business, February 2016