Investigating the demand for short-term Islamic finance products for small and medium enterprises with an annual turnover under R5 million in the greater Durban area, KwaZulu-Natal, South Africa.
Abstract
This study investigated the demand for short-term islamic finance products for small and
medium enterprises with an annual turnover under R5 million in the greater Durban area,
KwaZulu-Natal, South Africa. Data was collected by using the quantitative survey method.
A sample of 500 businesses was targeted for the study with 94 businesses responding.
Electronic mail surveys were utilized in this study. The data was analysed to (i) to establish
whether SMEs would prefer an alternative source of funding rather than the conventional
interest-based model; (ii) to establish the perceptions of SMEs for Islamic finance; and (iii)
to establish whether SMEs would prefer Islamic finance's profit loss sharing financial
instrument rather than the conventional interest-based model. The need for finance by
SMEs is driven by a desire either for expansion or survival. This can be achieved through
two types of financial services, namely conventional and Islamic financial services.
Conventional banking is the standard banking approach whilst Islamic banking is a system
of financial activities that is consistent with the Islamic law (Shariah). The latter financial
system prohibits interest, uncertainty and risk, speculation and gambling and investing in
unlawful activities. SMEs face multiple barriers when trying to secure conventional
financing. If they are able to secure the financing needed, SMEs shoulder the risk
irrespective whether the venture is successful or not. The demand and supply for credit for
SMEs were examined. Further, the credit gap and support was discussed. The role that
ethics plays in Islamic finance was examined and the Islamic finance instruments and
concepts were further analysed. Islamic finance and their implications on South Africa was
also discussed. The literature review and survey of the study reflected Islamic finance's
profit loss sharing financial instrument is an alternative to the conventional interest-based
model. Recommendations for the financial sector in South Africa were proposed including
recommendations for future research.