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.