Determinants of SMEs’ intention to use interest free microfinance service in Ethiopia. The case of Siltie Zone

Forschungsarbeit , 2022 , 145 Seiten , Note: 1.00

BWL - Bank, Börse, Versicherung

The purpose of this research is to investigate determinants of SMEs’ intention to use Interest Free (Islamic) Micro Finance services and products by using TPB developed by Ajzen. The study also added two new variables (religiousity and awareness) in the Ajzens Model and investigates their effect on SMEs’ intention to use Interest Free (Islamic) Micro Finance services and products.

For this purpose, the researcher able to collect 282 questionnaires from the total 291 sample size and the collected questionnaires inserted into SPSS. To achieve the objective of the research, the Structural Equation Model (SEM) was applying factor analysis called exploratory factor analysis by reducing not producing useful factors. Before going into hypothesis testing, internal consistency measure such as Cronbach alpha reliability, composite reliability, Discrimant validity, convergence validity, collinearly diagnostic, model fit and indices has adequately dealt with. Apparently, all values for composite reliability and AVE calculated in this study meet the recommended threshold values

The empirical analysis supports TPB and prior research in the field of finance and other domains by confirming that attitudes, subjective norms and perceived behavioural control are significant predictors of SMEs’ intention to use IFMF services and products. Although religiosity showed a non-significant negative relation and is not a predicting factor of SME owner-managers’ intention to use IFMF services and products, awareness did show a significant positive relation and was an important factor in predicting IFMF services and products usage intention.

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

ABSTRACT

LIST OF TABLES

LIST OF FIGURES

LIST OF ACRONYMS

CHAPTER ONE

INTRODUCTION
1.1. Background of the Study
1.1.1. Challenges for Utilizing the Full Potential of Islamic Finance for SMEs’ In Ethiopia
1.2. Statement of the Problem
1.3. Objectives of the Study
1.3.1. General Objective
1.3.2. Specific Objective
1.4. Hypothesis Development
1.5. Significance of the Study
1.6. Scope/Delimitation of the Study
1.7. Operational Definitions
1.8. Organization of the Study

CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1. Theoretical Literature Review
2.1.1. General Concepts and Definition
2.1.2. Definitions of Small and Medium Enterprises
2.1.3. Theoretical Foundations for the Financing Behaviour of SMEs’
2.1.3.1. Pecking Order Theory
2.1.3.2. Trade-Off Theory
2.1.3.3. Behavioral Decision Theory
2.1.3.4. Theory of Planned Behavior
2.1.4. Justification of Model Selected
2.2. Empirical Literature Review
2.2.1. Underlying Principles of Interest-Free Financing
2.2.1.1. The IF Business Is Based On Islamic (Sharia) Law
2.2.1.2. Paying or Receiving Interest (Riba) Is Forbidden (Haram)
2.2.1.3. Utmost Fairness in All Business Dealings
2.2.1.4. Transparency, Consensus and Contractual Agreement between Parties in All Business Dealings
2.2.1.5. Profit-And-Loss Sharing
2.2.1.6. Forbidden (Haram) Business Activities
2.2.2. Differences between Conventional and Islamic Microfinance:
2.2.3. Islamic Finance and Its Significance for SMEs’
2.2.4. Islamic Financing Products for SMEs’ and Country Experiences
2.2.5. Determinants of SME financing decision (Capital structure theory paradigm)
2.2.6. Determinants of SME financing decision (socio-psychological theory approach)
2.2.7. Empirical Reviews for Islamic Finance Customer’s Intention
2.2.7.1. Empirical Literature Review: at International Level
2.2.7.2. Empirical Literature Review: At National Level
2.3. Research Gaps
2.4. Theoretical Frame Work and Hypotheses Development
2.4.1. Theoretical Framework of SMEs’ Intention
2.4.2. Hypothesis Development
2.4.2.1. The Proposed Research Model

CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Research Approach
3.2. Research Design
3.3. Data Source
3.4. Study Area/Organization
3.5. Target Population
3.6. Sampling Methods and Sample Size Determination
3.6.1. Sampling Methods
3.6.2. Sample Size Determination
3.7. Data Collection Method
3.7.1. Primary Data Collection
3.7.2. Secondary Information
3.8. Method of Data Analysis
3.9. Model Specification
3.10. Measurement of Constructs
3.11. Ethical Considerations

CHAPTER FOUR
RESEARCH FINDINGS AND DISCUSSIONS
4.1. Sample and Response Rate
4.2. Questionnaire Pilot Testing
4.2.1. Validity
4.2.2. Scale Reliability
4.3. Descriptive Analysis
4.4. Demographic Information of The Respondents
4.5. Data Analysis: Assessing The Quality of Data
4.5.1. Assessing The Sample Size
4.5.2. Assessing Common Method Bias
4.5.3. Assessing Missing Data
4.5.4. Assessing the Outliers
4.5.5. Assessing Linearity Assumption
4.5.6. Assessing Multicolinearity Assumption
4.5.7. Assessing Normality Assumption
4.6. Data Analysis: Factor Analysis
4.6.1. Exploratory Factor Analysis (EFA)
4.6.2. Confirmatory Factor Analysis
4.7. Discussions of Empirical Findings

CHAPTER FIVE
SUMMARY, CONCLUSIONS AND IMPLICATION OF THE STUDY
5.1. Summary of the Study
5.2. Conclusion and Implication of the Study
5.3. Contribution
5.4. Limitations and Future Research

LIST OF REFERENCES

APPENDIX A:Amharic and English

Questionnarie Amharic

Questionnaire English

APPENDIX B:Valid Questionnarie English

APPENDIX C : Communalities

ACKNOWLEDGEMENTS

First, I would like to thank the almighty God for it gave me health, strength and patience to withstand the inconveniencies, which I came across through all the lines of life.
I would like to extend my heartfelt thanks to my advisor Dr. Kassahun Woldie (Associate
Professor) for his valuable advice, insight and guidance starting from proposal development to the completion of the research work. He worked hard to keep me on the right track and timely accomplishment of the study.

I would like to express my deepest appreciation to my sponsor of the study; Sankura Woreda administration for all rounded support and motivation. I also to extend
my special gratitude to all the enumerators especially sankura woreda and worabe town Enterprise & Job creation office experts who assisted me in data collection with patience, commitment and dedication. Their cooperation was not on the basis of their material benefit but is really their own commitment to help me. On the other hand, a group-wise acknowledgement is forwarded to all references used in this thesis.

Last but not least, my gratitude goes to my family members for their unprecedented support across the whole of my study in general and the research thesis in particular, with special thanks to W/ro. Mahbuba Seid and my daughters and my son: Nihal (Xubale) Zeynu and Khulayda Zeynu and Ayub Zeynu. Peace, love and blessings.

Thank you all!

ABSTRACT

The purpose of this research is to investigate determinants of SMEs’ intention to use Interest Free (Islamic) Micro Finance services and products by using TPB developed by Ajzen. The study also added two new variables (religiousity and awareness) in the Ajzens Model and investigates their effect on SMEs’ intention to use Interest Free (Islamic) Micro Finance services and products.

For this purpose the researcher able to collect 282 questionnaires from the total 291 sample size and the collected questionnaires inserted into SPSS. To achieve the objective of the research the Structural Equation Model(SEM) was applying factor analysis called exploratory factor analysis by reducing not producing useful factors. Before going into hypothesis testing, internal consistency measure such as Cronbach alpha reliability, composite reliability, Discrimant validity, convergence validity, collinearly diagnostic, model fit and indices has adequately deal with. Apparently, all values for composite reliability and AVE calculated in this study meet the recommended threshold values.

The empirical analysis supports TPB and prior research in the field of finance and other domains by confirming that attitudes, subjective norms and perceived behavioural control are significant predictors of SMEs’ intention to use IFMF services and products. Although religiosity showed a non significant negative relation and is not a predicting factor of SME owner-managers’ intention to use IFMF services and products, awareness did show a significant positive relation and was an important factor in predicting IFMF services and products usage intention.

The findings of this study, provides additional insights into how SME owner-managers evaluate and select financing options for their firms. This research also contributes to the theoretical and empirical work on the uniqueness of small business and will help private and government agencies involved in the funding of SMEs to develop better policies.

Key words: TPB, Structural Equation Model, Interest Free(Islamic) Microfinance(IMF)

LIST OF TABLES

Table 2.1: Definition of SMEs'

Table2.2:Differences between Conventional and Islamic Microfinance

Table 3.2 : Conceptual definition of constructs and Source of Questionnaire Items for SMEs’ Intention to Use

Table 4.1 :Cronbach‟s alpha reliability coefficient

Table 4.5: Statistics of Multicollinearity Test

Table 4.6: Normality of Data Distribution

Table 4.7: KMO and Bartlett's Test

Table 4.8: Rotated Factor Loadings

Table 4.9: An Illustration of Recommended Cut off Values of Indices from AMOS.

Table 4.10 : Proposed Latent variables and Indicators for EFA

Table 4.11: Statistics forProposed CFA Measurement Model.

Table 4.12: Statistics of Discriminant Validity of Proposed Measurement

Table 4.13: Statistics of Modification Indices for CFA Measurement Model

Table 4.14: Statistics of Final CFA Measurement Model.

Table 4.15: Statistics of Discriminant Validity of Final Measurement Model

Table 4.16: Instrument Reliability

Table 4.17: Model Fit Statistics for Structural Model

Table 4.18: Regression Weights

Table 4.19: Direct Effect of Revised Model:

LIST OF FIGURES

Figure2.1:Theory of Planned Behavior

Figure 2.2: TPB Theoretical Framework of SMEs’ Intention

Figure 4.3: Structural Model

LIST OF ACRONYMS

Abbildung in dieser Leseprobe nicht enthalten

CHAPTER ONE

INTRODUCTION

This thesis investigates the Determinants of SME’s Intention to use Interest Free Micro Finance service by considering the effects of attitude; subjective norm; percieved behavioral control; relegiousity and awareness of SME owners/managers in the selected areas of Siltie Zone, SNNPR, ETHIOPIA. This chapter is organized in eight sections. Background of the study, statement of the problem and objectives of the study were dealt within the first, the second and the third sections respectively. Hypothesis of the study and significance of the study are presented in the fourth and fifth sections respectively. Moreover, Scope and delimitation of the study, operational definitions of the study and organization of the paper were adressed in, sixth, seventh and the final section of the thesis respectively.

1.1. Background of the Study

The establishment of interest-free banking (IFB) has been the demand of the Ethiopian Muslims for a long time. This demand has been reflected to the concerned government bodies (including the regulatory body, National Bank of Ethiopia (NBE) in different occasions both individually and collectively (Ahmed, 2019).

Following the high demand for Islamic financial products and services, in 2008, NBE revises the “Licensing and Supervision of Banking Business” proclamation and issued a new proclamation that creates room for establishing Islamic financial institutions. The new proclamation is called “Proclamation No. 592/2008” and in this proclamation Article 22, Sub-article 2 states “The National Bank may issue a directive to regulate banking businesses related to non-interest-bearing deposit mobilization and fund utilization.” This is the turning point for Islamic finance history in Ethiopia. Following the release of proclamation No. 592/2008: Article 22, Sub-article 2, the organizers of Zam Zam bank was started selling the share to establish full-fledged Islamic banking and they could raise 137 million Birr within four months. In that time the minimum paid-up capital to establish a bank in Ethiopia was 75 million Birr (Zam-zam Bank, 2012). This outstanding performance indicated that the high demand for Islamic finance in Ethiopia.

After a long effort to establish the first Interest-free banking in Ethiopia, unfortunately, the National Bank of Ethiopia issued a new direction that blocks the ways of establishing full-fledged Islamic finance in Ethiopia. The new directive is known as “Directives to Authorize the Business of Interest-Free Banking No. SBB/51/2011.” In this Directive article 2(2) define interest-free banking business as “a banking business in which mobilizing or advancing funds is undertaken in a manner consistent with Islamic finance principles and mode of operation that avoids receiving or paying interest” and article 2(3) states “interest-free banking window refers to a unit within a conventional bank exclusively offering interest-free banking services.” Article 2(3) indicated that only conventional banks can offer interest-free banking services through a separate window (Suadiq M.H, 2021).

Because of Directive No. SBB/51/2011, the ways of establishing full-fledged Islamic banking in Ethiopia is closed and finally, on January 11, 2012, the National Bank of Ethiopia informed the organizers of Zam Zam bank either to establish a conventional bank that can offer interest-free through window system or terminate the establishment process. The main objective of Zam zam bank organizers is to provide alternative Sharia-compliant financial services for those who are not accessing conventional financial serviced due to religious reasons. Therefore, they were not accepting the offer from NBE to establish a conventional bank and in May 2012 the establishment process of Zam zam bank was terminated by refunding the money to shareholders (Zam-zam Bank, 2012).

After the issuance of Directive No. SBB/51/2011, conventional banks started providing interest-free banking services through a separate window. This system is called the Interest Free Banking window (IFB window).

The privately owned, Oromia International Bank became the pioneer to take advantage of this opportunity and launched the service in 2013 followed by the giant state owned Commercial Bank of Ethiopia(CBE) and United Bank (Aman, 2019). Currently, apart from offering interest-free window services by more than 10 conventional banks, some banks are vigorously engaging on opening up interest-free branches both in the capital Addis Ababa and some regional cities.

Subsequent to the political reform in the ruling party, the NBE shows commitment to reinstate the establishment of full-fledged IFB. Right now, Zemzem Bank and Hijra Bank have obtained a license from Ethiopia’s banking regulator to become Ethiopia’s first full-fledged Interest free (Islamic) Banks and some have completed, one full-fledged Interest free (Islamic) microfinance institution is selling shares and speed up commencing the microfinance service while others are struggling to do so.

The annual reports of the banks which have interest-free window services are offering current and saving account products like wadiah and qard-hassan and mudaraba investment products. From the financing side, murabaha, salaam, isitsna and ijara are the most commonly used products (A.S. Ali, I. Bushera, & A.J. Yusuf, 2020). Despite the fact that there is limited evidence and specific information as to how these Islamic banking products are being utilized to fill financing gap for SMEs, other country experiences with comparable economic and social status show that there is a room for SMEs to get access to finance.

Like the interest-free banking services, the provision of interest free microfinance services is a recent phenomenon. Until now, the services are being offered by conventional microfinance institutions which are jointly owned by regional governments and individual shareholders. Somali microfinance institution (SMFI), a pioneer in providing interest-free microfinance services in the country, delivers Shari’ah compliant loans and savings for users in eastern part of Ethiopia (The Guardian, 2015; Aljazeera, 2019).

As it is common in many countries, the dominant financing tool provided by SMFI is Murabaha. In addition to SMFI, Rays microfinance institution is the other MFI giving Murabaha, Ijarah and salaam products since its inception in 2014. Harar and Dire Microfinance institutions are also offering Shari’ah complaint microfinance services in the adjacent region. The former started the services in interest free saving in 2014 and interest free financing in 2015 whereas the latter provides Murabaha and Ijarah under its financing scheme and Wadiah and Mudarabah as saving products since 2013 (Ali, 2019). One of the largest microfinance institutions, Oromia credit and savings institutions also offers Murabaha finance, Wadiah saving and qard current account services to micro-entrepreneurs. The financing product is delivered in three forms for individuals, small businesses and groups of one to five individuals.

In addition, OMO Microfinance institution is offering Shari’ah complaint microfinance services in almost all branches of Siltie Zone. The institution provides Murabaha and Tawaruq under its financing scheme and Wadiah as saving products since 2018. The financing product is delivered in three forms for individuals, small businesses and groups of one to five individuals

1.1.1. Challenges for Utilizing the Full Potential of Islamic Finance for SMEs’ In Ethiopia

Notwithstanding the interest-free banking services persist in the banking sector for nearly seven years, a number of challenges have restrained its growth (A.S. Ali, I. Bushera, & A.J. Yesu f, 2020). Among other things lack of proper and accommodative legal and regulatory frameworks, shortage of trained human workforce both in administrative and Shari’ah advisory levels, lack of awareness and erroneous understanding amongst Muslims and non Muslims about Islamic banking and its functions, lack of infrastructure appropriate for Interest free banking operation are some of the impediments. The unavailability or inadequacy of this enabling environment severely affects the capability and potential of Islamic banks to perform their financial services in general and to SMEs in particular (A.S. Ali, I. Bushera, & A.J. Yesu f, 2020).

Like Islamic banking services, there are several problems in the Islamic microfinance services in the country. Some of the challenges include under developed Islamic microfinance industry, lack of understanding of the generic Shari’ah models by clients and policy makers, shortage of Islamic finance providers including funders and donors, unavailability of clear and detailed legislation from the National Bank of Ethiopia, shortage of trained and knowledgeable workforce related to interest free microfinance services, immense and arduous administrative cost of the system and clients’ non conformity with some Shari’ah principles (Ali, 2019; The Ethiopian Herald, 2019).

The fact that most SMEs aren’t entitled to get access to finance from banks interest-free microfinance institutions can play a pivotal role if the above stated barriers are taken into consideration. All the way through this paper, access to finance has been mentioned as a major impediment for SMEs development. Islamic financial products can partly abate this barrier through innovative, comprehensive and social welfare based techniques to fuel entrepreneurial venture. Nevertheless, lack of fund is not the only nuts and bolts which happen to be a stumbling block against the success of SMEs. The fact that SMEs have small size, short experience, less skilled personnel, little access to technology and operate in an informal sector puts them in an underprivileged position (A.S. Ali, I. Bushera, & A.J. Yesu f, 2020).

In addition to these shortcomings and external challenges which were pointed out before, there are other internal factors that need consideration. The most common internal barriers SMEs face are lack of managerial and entrepreneurial capabilities to manage businesses effectively, shortage of a proper business structure, limited information to locate and analyze markets, high labor and operating costs, inefficiencies of human resource management (Al-Maskari et. al., 2019; Febriani et. al., 2018; Bouazza et. al., 2015; Kazimoto, 2014; Khattak et. al., 2011). On the other hand, SME owner-managers tend to prefer informal finance over formal finance and are seldom capable of fulfilling procedural requirements of financial institutes.

Financial constraints thus severely affect development of SMEs as for new startups and small firms it is difficult to survive in a long run (Sherazi et al., 2013). For the survival of these small and medium firms and to achieve objective of inclusive finance for the SME sector it is essential for policy makers and financial institutions to understand their owner-managers’ financial behavior. Moreover, in developing countries like Ethiopia, it is crucial to initiate different strategies for easy access of SMEs towards Interest free finance.

1.2. Statement of the Problem

The point of departure in this study is that small and medium enterprises, regardless of how they are defined, are widely recognized as engines of economic growth (Demirgüç-Kunt, & Pería, 2011, Beck & Demirguc-Kunt, 2006; Beck).

The SME sector has become significant to economists and policymakers who are making decisions on financial and economic development around the globe. In addition, the SME sector forms the backbone of economic development. There are many advantages to SMEs in that they provide job opportunities for both skilled and unskilled people, contribute to gross domestic product (GDP), promote economic diversification, and reduce poverty. Globally, SMEs constitute up to 95 per cent of the world’s firms (International Trade Centre, 2015); according to International Labor Organization (ILO) (2015) estimations, there are 420 to 510 million SMEs worldwide, with the majority 365–445 million being located in developing economies. Studies indicate that formal SMEs contribute up to 45 per cent of employment and 33 per cent of GDP in developing economies and nearly 64 percent of the GDP and 62 percent of employment in high-income countries (International Finance Corporation, 2013). The importance of SMEs is reflected in the fact that the World Bank Group’s SME finance portfolio includes almost USD 4.8 billion in active lending. As of January 2018, this group was supporting 61 lending projects in 47 economies around the world (World Bank Group, 2018).

Despite their importance to economic output, SMEs are still inadequately supported financially, with inadequate access to finance being one of the main obstacles they face. Access to finance is a global challenge for both developed and developing countries. According to the World Bank (2015), the financing gap for micro, small, and medium enterprises (MSMEs) in developing countries is approximately USD 2.4 trillion. Based on the above information, we can say that there is a huge untapped demand for Islamic microfinance. Thus, “Islamic finance can play a significant role in closing the financing gap for SMEs” (World Bank, 2015, p. xi), because Interest free financial products are founded mainly on asset-based transactions, together with equity based sharing of risk and profit.

The relevance of Sharia compliant SME financing and its risk-sharing characteristics has, from an economic development perspective, been recognized by various policymakers in different countries and by international bodies (World Bank, 2015). Therefore, policymakers and stakeholders should seriously consider promoting asset-backed and equity-based financial instruments to leverage Interest free (Islamic) finance (World Bank, 2015). Further, the World Bank (2015) emphasizes that Interest free (Islamic) finance needs to be set in the context of the broader global agenda to support SME finance.

Similarly, Ibrahim, Wohlmuth, and Knedlik (2003) emphasize that Islamic finance methods are better suited to satisfying the financial needs of SMEs. In this regard, the International Trade Centre (ITC) also emphasizes the reasons why SME owner-managers should consider Interest free (Islamic) finance for their business stating that: Interest free (Islamic) banking also advocates entrepreneurship and risk sharing. In the profit/loss sharing concept of a financed project, the financier and the beneficiary share the actual or net profit/loss, rather than leaving the risk burden to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project be fairly distributed between the two parties. If a financier is expecting to make a claim on a project’s profits, he or she is also expected to carry a proportional share of the loss of that project.(International Trade Centre, 2009, p. 50)

Backed by almost 494 Interest free (Islamic) financial institutions operating in more than 75 Muslim and non-Muslim countries, Interest free (Islamic) finance has become a growing force in global financial circles (Thomson Reuters, 2017). From insignificant beginnings, the industry had grown to USD 2.293 trillion in assets by 2016 (Dubai Islamic Bank, 2017).

Previous studies have attempted to investigate the behavior of individual investors towards Islamic finance (Amin et al., 2011; Bangash, Khattak, & Khan, 2019; Tara, Irshad, Khan, & Yamin, 2014). Research studies focusing on Islamic finance report that halal attitude and subjective norms help in explaining the intention to use Islamic banking (Butt & Aftab, 2013; Sulaiman, Mohammad & Hassan, 2016). These studies are mainly based on the theory of reasoned action (TRA) and the theory of planned behavior (TPB). The present study identifies the determinants of the behavioral intentions of small and medium enterprises towards Islamic finance in the context of ETHIOPIA with majority Muslim populated area. The behavioral intentions are explained through the theoretical lens of the theory of planned behavior (TPB; Ajzen, 1991).

To the best of the researchers knowledge, no study appears to have been made in Ethiopia in the context of Interest free financing which tries to model determinants of SMEs’ intention to use interest free financing service based on the Theory of Planned Behavior (TPB). Additionally, the researcher modified the TPB model through the addition of variables like religiosity and awareness behind TPB constructs may help to maximize the predictive efficacy of the model (Moon and Kim, 2001). So, the objective of the paper is to examine that whether non-financial factors such as SMEs’ attitudes, subjective norms, and perceived behavioral control could determine SMEs intentions to use Islamic financial instruments or not in the study area. Further the research aims to investigate whether religiosity and awareness are predictors of SMEs’ intention to use Islamic financial instruments or not in the selected areas of Siltie Zone of SNNPR, Ethiopia .

Numerous studies have discussed business firms’ and individual consumers’ attitudes and intention towards Interest free and conventional banking products and services. For example, levels of satisfaction, bank services, preferences, bank loyalty, and selection criteria for choosing financial institutions have been researched (Echchabi & Nafiu Olaniyi, 2012; Gait & Worthington, 2008; Edris, 1997). By the same token, there has also been much research on consumers’ attitudes, perception of, and knowledge about Islamic banking in Muslim and non-Muslim countries (Jaffar & Musa, 2013; Al-Ajmi, Abo Hussain, & Al-Saleh, 2009; Gait, 2009). However, “Until recently, there has been very little work undertaken on business firms’ attitudes towards Islamic methods of finance” (Gait & Worthington, 2008, p. 802).

In fact, many researchers (Badaj & Radi, 2017; Jaffar & Musa, 2016, 2013; Abdesamed & Wahab, 2015; Osman & Ali, 2008) have identified this gap in the literature. Moreover, there are only a few published works that relate to SMEs’ perceptions on Islamic banking (Abdesamed & Wahab, 2015; Jaffar & Musa, 2013; Wahab & Abdesamed, 2012 ; Gait, 2009; Osman & Ali, 2008; Shaharuddin, Hamid, Safian, & Muda, 2005; Jalaluddin & Metwally, 1999;).

These studies are not only interesting, but also confirm the significance of the SME sector’s understanding of and desire to embrace Interest free (Islamic) finance methods. Since SMEs are key players in the global economy, according to Wahab and Abdesamed (2012, p. 3715), it is crucial to understand their financing practices, as these serve as the foundation towards accelerating economic growth. While the majority of these studies have been conducted in Muslim and non-Muslim countries, i.e., in the context of a country with a predominately Interest free (Islamic) finance system and in a country with a dual-finance system), there are still many countries like Ethiopia where Interest free (Islamic) finance is at an early stage of its introduction and where Interest free (Islamic) methods of finance need to be studied.

In nutshell, the strong interest of Microfinance Institutions to commence IMF as alternative financing intermediary, existence of large Muslim community in the country particularly in the study area versus low market share of IMF compared to Microfinance Institutions, absence of literature on determinants of SMEs’ intention to use Interest free (Islamic) microfinance are the major area of this research Gap. Therefore, early exploring determinants of SMEs’ intention to use Interest free (Islamic) microfinance help all stakeholder of IMF to address the problem and speed up implementation of IMF product and service that has important contribution for economic development.

1.3. Objectives of the Study

1.3.1. General Objective

The general objective of conducting this research is to investigate determinants of SMEs’ intention to use Interest free (Islamic) microfinance service in Ethiopia with specific reference to selected areas of Siltie Zone SMEs’ .

1.3.2. Specific Objective

The specific objectives of the study are

1. To explore non financial and behavioral factors such as SMEs’ attitudes, subjective norms, and perceived behavioral control that determine SME owner-managers’ intention to use Interest free (Islamic) microfinance service.
2. To investigate if religiosity is an important factor in influencing the intention to use Interest free (Islamic) microfinance service among SMEs’ owner-managers and
3. To investigate whether awareness is an important factor in influencing the intention to use Interest free (Islamic) microfinance service among SMEs’ owner-managers.

1.4. Hypothesis Development

The following hypothesis was proposed based on the review of the respective literatures on “Determinants of SME owner-managers’ intention to use Interest free (Islamic) microfinance service” in Ethiopia with specific reference to Siltie Zone SMEs’ .

- H1 : Attitude positively influences SME owner-managers’ intention to use Interest free (Islamic) microfinance service
- H2 : Subjective norm positively influences SME owner-managers’ intention to use Interest free (Islamic) microfinance service
- H3 : Perceived behavioral control positively influences SME owner-managers’ intention to use Interest free (Islamic) microfinance service
- H4 : Religiosity positively influences SME owner-managers’ intention to use Interest free (Islamic) microfinance service.
- H5 : Awareness of Interest free (Islamic) financial products and services positively influences SME owner-managers’ intention to use Interest free (Islamic) microfinance service

1.5. Significance of the Study

Interest free (Islamic) microfinance is a relatively new business model in Ethiopian financial system. It is also growing in its applicability among Muslim as well as non-Muslim countries to accommodate the Muslim population, who otherwise, are excluded from financial services due to religion factor. It is believed that including this section of the population into financial service provision will expand the financial frontier and bring about economic benefit both to the country and the beneficiaries. It is, therefore, the results of this study will be significantly practical and helpful for;

Policy Makers : It will give significant direction to review the current policy for the positive development of IMF activities in Ethiopia

Practical : It will provide a road map for the Interest free financing and financial institutions by studying what criteria that significantly affecting SMEs’ intention to the adoption of Interest free microfinance. Thus, the interest free microfinance and financial institutions will come out with a new strategy and strengthen their institutions..

Theoretical : this study’s investigation contributes to the wider research around SMEs, particularly that on SME financing, by showing that noneconomic variables, especially psychological factors, can influence financing behavior decisions and it will also serve as a reference material a good basis to carry out for subsequent research activities on IMF and related topics.

1.6. Scope/Delimitation of the Study

As with all studies, this research is subject to some limitations. These, however, indicate fruitful avenues that future research could follow. As this study focuses on a sample of SME owner-managers in Ethiopia particularly in the selected areas of Siltie Zone , its findings cannot be generalized to other areas of the country or other entities such as large and public firms without caution. To achieve greater generalisability, further studies could consider other geographical contexts, and preferably draw upon cross-cultural samples.

Finally, there is a need to investigate other factors, which were not explored in the present study, but which may influence SME owner-managers’ Interest free (Islamic) financial decisions.

1.7. Operational Definitions

Considering the fact that the interest-free finance convention is an emerging concept in Ethiopian context, the researcher introduce some important key terms and concepts used in the study along with their spirits and contexts for ease of understanding of the research subject.

- Gharar : Any act of uncertainty.
- Hadeeth ; A report of the sayings or actions of Muhammad or his companions together with the tradition of its chain of transmission, or the collective body of these traditions.
- Haram : is a forbidden activity and is considered as a major sin. A haram activity is punishable by Allah, and avoidance of haram activities, such as gambling and drinking, is rewarding.
- Halal : Things permissible by the Sharia’
- Hawala : Remittance that involves a transfer of funds/debt from the depositor’s/ debtor’s account to the receiver’s/creditor’s account; a commission may be charged for the service.
- Ijaraha Financing : Lease financing. Istisna Financing: Building and plant construction financing.
- Mudharabah : (trust financing) is a partnership between a bank and a customer in which the bank provides the capital for a project and the customer or entrepreneur uses his or her expertise to manage the investment.
- Mudarib : Entrepreneurial manager in Mudharabah (trust financing) partnership.
- Murabaha Financing : Working capital financing on a cost plus a profit margin basis.
- Musharakah/Musyarakah : (partnership financing) refers to an investment partnership in which all partners share in a project‟s profits on the basis of a specified ratio but losses are shared in proportion to the amount of capital invested.
- Prohibition : business engagements forbidden in compliance with the Sharia Principle
- Qard : Interest-free financing.
- Restricted Investment Deposits : Deposits to be deployed for investment by the bank for economical financing based on the recommendation of the depositor customer.
- Riba/Usury : Interest.
- Salam Financing : Agricultural products financing.
- Standalone : a banking convention operating independently.
- Sharia Committee : a team of an independent Sharia Scholars in charge of monitoring compliance aspect of the IFB.
- Sharia Principle : Islamic law.
- Sunna : The way of life prescribed in Islam, based on the teachings and practices of Muhammad and on exegesis of the Qur’an, or Muhammad's way of life viewed as a model for Muslims.
- Unrestricted Investment Deposits : Pool of deposits to be independently deployed by the bank for any economical financing without any intervention of the depositor.
- Wadiah Deposit : Return-free safekeeping deposit.
- Wakalah : Agency service.

1.8. Organization of the Study

The remaining parts of the study are organized as follows: Chapter two deals with, review of the theoretical and empirical literatures, hypotheses and conceptual framework. The research methodology and procedures used to collect data for the study was presented under Chapter three. Discussions of results were presented in Chapter four. Chapter five finalizes the thesis with major findings, conclusion, recommendation, limitations and suggestion for future study.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

Chapter two is structured along several themes. First section of the study is theoretical literature review, explains, the general concepts and definition of interest free financing, SMEs’ and theory and models for adoption, comparisons of the model and finally justification of the model used are discussed. Second, Empirical literatures which provides insight into principles of Islamic microfinance, Islamic and conventional microfinance are described. Theory of planned behavior and their constructs are discussed to develop a research model to help investigate determinants of SMEs’ intention to use Interest free (Islamic) microfinance service in Ethiopia with specific reference to Siltie Zone SMEs ’.

2.1. Theoretical Literature Review

2.1.1. General Concepts and Definition

The term “Interest Free/Islamic finance” has no single definition. Many scholars‟ gives various meaning to this term Interest Free/Islamic finance. It refers to a system of financing or financing activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasize moral and ethical values in all dealings have wide universal appeal. Shari'ah prohibits the payment or acceptance of interest charges for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. (www.islamicbanking.com).

Islamic microfinance represents “the confluence of two rapidly growing sectors: microfinance and Islamic finance” (CGAP, 2013). As Islamic finance sector, refers to financial system based on Sharia’. The strict prohibition of paying or receiving any fixed, interest (riba) is the most widely known feature of this financial system. Therefore, Islamic microfinance institutions should operate on the basis of profit. In the vein of Islamic banks, these institutions can earn profits in three areas: trading, leasing and by direct financing in Profit Loss Sharing (PLS) contacts (Al-Omar & Abdel-Haq, 1996).

In Accordance with NBE’s Directive SBB/51/2011 “Interest Free Banking Business” refers a banking business in which mobilizing or advancing of funds taken in a manner consistent with Islamic Finance Principles and mode of operation that avoids receiving or paying interests.

2.1.2. Definitions of Small and Medium Enterprises

There is no universally agreed definition for small and medium enterprises. The term SME covers a wide range of definitions and measures, varying from country to country and varying between the sources reporting SME definitions. Some of the commonly used yardsticks are the number of employees, total net assets, sales and investment level, number of annual working hours, annual turnover, annual balance sheet or production volume, and independence of the company (Harjula, 2008) cited Fitane (2018). Therefore, there is no single SME definition uniformly accepted around the world.

2.1.2.1. Definition of SMEs in Ethiopia

In 1997, Ethiopia has defined Micro Enterprises as enterprises with a total asset of less than 20,000 Birr ($1200) and Small Enterprises as Enterprises with a total asset of Birr 500,000 ($30,000) or less. In this definition, the only base used is the total asset, unlike the international organization's definition base. To align the definition with at least some countries and international organizations, the country has revised the definition of Micro and Small Enterprises in 2011 (Esubalew and Raghurama, 2017). But the newly established definition only focuses on Micro and Small Enterprises it does not put any demarcation between Small and Medium; and Medium and Large Enterprises. According to the ministry of trade and industry development bureau (MOTI) the new Small & Micro Enterprises Development Strategy of Ethiopia (published 2011), the working definition of MSEs is based on capital and Labor. The same as 10 micro and small enterprises the definition of medium enterprises also defined based on capital and labor.

Table 2.1: Definition of SMEs'

Abbildung in dieser Leseprobe nicht enthalten

Source: Fitane (2018).

2.1.3. Theoretical Foundations for the Financing Behaviour of SMEs’

Researches on the financing decision of SMEs have suggested various theories for explaining the behaviour of SMEs regarding their financing decision. These theories are usually divided between the rational and irrational decision-making paradigm or economic and noneconomic theory divide. Capital structure theories generally used includes pecking order theory and trade off theory, while decision making theory and theory of planned behaviour (TPB) are used in studies in the on non-economic or irrational decision-making paradigm. The following sub headings provide brief explanation of these theories.

2.1.3.1. Pecking Order Theory

The role of asymmetry of information in the financial decision-making process of firms forms the basis of pecking order theory (POT). Asymmetry of information is reflected in the fact that owner/manager have higher information on the general operations and growth potential of the firm compared to investors and lenders. The arguments in the pecking order theory by Myers (1984) and Myers and Majluf (1984) does not take optimal capital structure as a beginning point, rather it postulates that the financing decision of managers follow a financial hierarchy, and the preference for the different sources of finance will be based on cost. As a result, preferences for the different sources of finance will follow retained earnings, issuing debt, and issuing external finance, this is with the aim of minimizing cost of financing. The order of preference for the various financial sources is also reflective of the relationship between managers and the providers of capital, the asymmetry of information and agency cost in this relationship allows providers of capital to charge a premium, all of which creates problems when raising debt capital but even more severe when raising external equity (Hall et al., 2004), therefore managers prefer to use less risky debt compared to equity when retained profits is not enough to meet their financing needs.

The arguments in POT suggests that the capital structure decision are influenced by the firm characteristics including age, profitability, firm size, potential for growth, risk, availability or tangibility of assets, and tax incentives. Serrasqueiro et al. (2011) postulate that since some of these characteristics are more peculiar to SMEs, it is expected that the financing behaviour of SMEs will differ from other types of firms. This is because their smaller size coupled with inadequate tangible assets makes the issue of asymmetry of information between these firms and providers of capital more severe, thereby leading to creditors imposing stringent conditions on SMEs. Studies on determinants of SME financing decision (Rao et al., 2018, Degryse et al., 2012, Serrasqueiro et al., 2011, Ayyagari et al., 2010, Abor and Biekpe, 2009, Beck et al., 2008, Hall et al., 2004) have confirmed the applicability of POT in the SME domain with varying results, the results from studies suggest that the impact of the determinants on the financing decisions of SMEs as identified in POT differ according to industry, and other external country specific factors. For instance Serrasqueiro et al. (2011) showed differences between manufacturing and service firms. Furthermore, institutional arrangements and financial market differences between developed and developing countries are shown to play significant role in the financing behaviour of SMEs within the POT context (Ayyagari et al., 2010).

The issue of asymmetry of information is more likely to be severe for SMEs in developing countries compared to developed countries because of the weak institutional environment, lower availability of credit information, and weak regulatory environment, hence these SMEs are more likely to rely more on internal sources of finance compared to SMEs in developed countries (Chavis et al., 2010, Ayyagari et al., 2010).The main strength of POT is that highlights that owner/manager of SMEs are focused on maintaining control of the firm, and enables researchers explain the changes linked to the capital structure of firms.

2.1.3.2. Trade-Off Theory

The term trade-off theory is generally used to describe a family of related theories. The original version of the trade-off theory is based on the debate that trailed the Modigliani and Miller theorem when corporate income tax was added to their original irrelevance proposition. Trade-off theory postulates that firms have optimal capital structure therefore manager-owners seek to achieve this optimal level, which is the point whereby the marginal benefit using debt is equal the marginal cost. Trade-off theory focuses on the “tax-bankruptcy trade-off” that the trade-off between taxes and bankruptcy costs determines the use of debt by a firm, Frank and Goyal (2009) noted that by evaluating the costs and benefits of debt, firms are able to find a solution through balancing the marginal cost and benefits additional debt. By following trade-off theory, firms will usually have a target debt to equity ratio-determined by the tax advantages from debt and the cost of bankruptcy- and seek to achieve this target.

Research on SME financing behaviour have investigated the applicability of trade-off theory compared to pecking order theory in explaining the financial decision of these firms, however Serrasqueiro and Caetano (2015) asserts that both theories are not mutually exclusive. Studies (Adair and Adaskou, 2015, López-Gracia and Sogorb-Mira, 2008, Fama and French, 2002) have shown that pecking order theory is useful in explaining the financial decision of SMEs. The results from Adair and Adaskou (2015) suggest that tradeoff theory explains the financial structure of French SMEs with regards to the use of debt, they concluded that both trade-off theory and POT explains the financial behaviour of these SMEs, POT had a slightly better performance in the test conducted compared to trade-off theory. López-Gracia and Sogorb-Mira (2008) in a separate study on 3569 Spanish SMEs presented evidence that both POT and trade-off theory models explain the financial behaviour of these firms, however these authors observed a greater performance for trade-off model hence they suggested that greater trust should be placed on the tradeoff theory.

2.1.3.3. Behavioral Decision Theory

Decision theory is concerned with determining the optimal course of action when faced with several alternatives that have unknown consequences (Tryfos, 2001). It is a theory of beliefs, desires, and other preference attitudes that determine the decision of the decision maker (Steele and Stefánsson, 2015). Decision theory is generally distinguished between descriptive, normative, and more recently behavioural decision theory. Behavioural decision theory (BDT) departs from normative standards, a key theme of BDT is that individuals have limited ability to process information, hence they lack the computational and predictive skills and knowledge required, to achieve the level of rationality identified in rational or normative approaches. Therefore individuals develop shortcuts or “Heuristics” that enable them make a generally reasonable decision notwithstanding their cognitive limitations (Lau and Levy, 1998, Tversky and Kahneman, 1974). In BDT theory individuals still make calculated decision, however this is made within certain boundary which makes the behaviour of individuals characterized by “bounded rationality” as against the type of rationality suggested in economic theories on decision making (Simon, 1955).

Within the context SME decision making, the theory is concerned with how preference attitudes affect and influence the decision of SME owner/manager. It implies that managers-owners lack the required skills and resources to process the information needed to make optimal decision, therefore they rely on their beliefs and heuristics in a bid to achieve a reasonable or acceptable decision. Studies (Tversky and Kahneman, 1974) have identified some key heuristics which includes representativeness, overconfidence, and availability heuristics (these are discussed further in later section of this chapter). BDT postulates that the context within which the decision is being made is vital in the decision behaviour, also, contingent factors such as the complexity of the decision, the nature and structure of the information, decision timeframe, expertise and ability of decision maker to process information play a key role in the decision making process and the behaviour of decision maker, therefore studies and theories on decision making should take into consideration these context and contingent factors (Lau and Levy, 1998, Simon, 1955).

Within the SME decision making domain several studies (Matthews et al., 1994, Gibcus et 31 al., 2004, Busenitz and Barney, 1997) have successfully incorporated arguments from decision theory to show that the decision making in SMEs differ from large firms due to the boundaries and uncertainties in the SME environment. The varying result from these studies based on different context reinforces the arguments on the role of contingent and contextual factors in the decision-making process and behaviour of individuals.

2.1.3.4. Theory of Planned Behavior

Figure2.1:Theory of Planned Behavior

Abbildung in dieser Leseprobe nicht enthalten

Source:Ajzen (1991)

The theory of planned behaviour is a well-established social psychology theory widely used across various fields to predict behaviours, it helps understand and explain the role of beliefs, perception, attitude, in the behaviour of individuals. The theory, which was originally adapted from Theory of Reasoned Action by (Ajzen, 1991, Ajzen, 1988) is one of the most influential theories predicting behaviours (Ross et al., 2015). The theoretical framework (figure 2.1.2.4-1 above) postulates that attitude, subjective norms, and perceived behavioural control (PBC) are key factors influencing the intention of individuals to engage in a specific behaviour, it further supports that the intention to engage in a behaviour is an antecedent for engaging in the actual behaviour. TPB also suggest that these key factors are influenced by behavioural, normative, and control beliefs, which can be considered as antecedents to attitude, subjective norms, and PBC. Ajzen (1991) asserts that the TPB can be adapted to fit different research domains and additional predictors can be included in the model, however any additional predictor needs to differ from the traditional TPB predictors, such variable needs to be empirically justified, and there should be reason to believe that such predictor will have causal effect on the intention of behaviour.

Johnston and Lewin (1996) have argued that TPB is not suitable for predicting the behaviour in organizational settings due to the unique, multi departmental and multi person, and complex nature of organizational process and environment. However, Southey (2011) postulates that TPB theory is suitable for predicting the decision making behaviour of small businesses due to the fact that decisions in SMEs are usually taken by an individual (the owner or manager), therefore the values and beliefs of the owner/manager is significant in the strategic decision making in the business. This author asserted the need to further explore how other variables fit within the TPB framework in modifying or constraining the behaviour of SMEs with regards to decision making in the organization.

Prior empirical studies (Al Balushi et al., 2018, Ghouri et al., 2016, Ross et al., 2015, Makpotche et al., 2015, Koropp et al., 2014, , Brettel et al., 2009, , Lee, 2009, East, 1993) have successfully adopted the TPB framework within various SME financing decision domains. Al Balushi et al. (2018) in their study successfully adapted the TPB theory and included religiosity and awareness as predictors for the SME behavioural intention in Islamic financial decision making for SMEs in Oman (this study is discussed further in later section of this chapter). Similarly, Koropp et al. (2014) successfully adapted the TPB theory to explain the financial decision making behaviour of family firms in Germany, they combined predictors from in the TPB theory and determinants identified in classical finance theory. In their study, Makpotche et al. (2015) adapted the TPB theory adding cultural factors to predict the intention for entrepreneur’s to use bank loan in Benin and Mauritania, their study showed that the main predictors in the TPB theory mediates the impact of conservatism and secrecy (cultural factors) on the intention to use bank loans. These studies have been able to use TPB theory to provide non-economic and non-rational explanation for the behaviour of SMEs within the different research contexts.

2.1.4. Justification of Model Selected

The fundamental model of the Theory of Planned Behaviour (TPB) was introduced by Ajzen (1991); this is an extension of the previously presented Theory of Reasoned Action (TRA) model, which was proposed by Ajzen and Fishbein (2000). Likewise, Ajzen (1991) in that continuity refined the previous model of the TRA, avoided the shortcomings of that model, and proposed that modified TPB model. On the one hand, the TPB model is associated with someone's belief and behaviour, and on the other hand, the TPB model has amplified the prognostic pre-eminence of the TRA model by incorporating a new dimension of perceived behavioural control (PBC). Thus, the new modified TPB model was comprised of three factors: attitude, subjective norms (SN), and perceived behavioural control (PBC) for an individual, filling the gap of the TRA model (Ajzen, 1991). According to Ali et al. (2017) and Dusuki and Abdullah (2007), the TPB model is a much better predictor compared to any other theory model. This is due to the limitation of the TRA model, as it encompasses only two dimensions, i.e., subjective norms (SN) and attitude (Cismaru et al., 2017). The TPB model has an extra dimension of perceived behavioural control, which describes someone's belief and behaviour as well. Several research studies showed the significance and superiority of the TPB model over the TRA model (Gavurova et al., 2018; Ali et al., 2017; Ercsey, 2017; Prapavessis et al., 2015; Shih & Fang, 2004). According to Shih and Fang (2004), perceived behavioural control (PBC) is described as someone’s conduct because of perceived comfort and strain through coordinated behaviour. According to Ali et al. (2017) and Dusuki and Abdullah (2007), customers have control over their behaviour in order to make decisions regarding Islamic banking products.

TPB has been successfully applied in the small business research domain (Brettel et al., 2009; Ghouri et al., 2016) where it fits particularly with understanding privately held firm financing decisions (Brettel et al., 2009; Kelley and Buultjens, 2003). Brettel et al. (2009) also supports TPB’s empirical validity in the finance context, specifically SMEs’ financing decision behaviour. While TPB has been widely used to evaluate a range of individual behaviours in the finance and investment context (Koropp et al., 2014; Sudarsono, 2015), its suitability for use in evaluating decisions in an organizational context is arguable because of the nature of the dynamic and complex ‘‘multiphase, multi person, multi departmental and multi objective’’ decision processes in organizations (Johnston & Lewin, 1996, p 1). Consequently, the predictive capacity inherent in TPB may well have relevance to evaluating decision-making within the small business field (Southey, 2011), especially as financial decisions are at least partially the outcome of owners’ personal preferences (Brettel et al., 2009). Adopting this focus, therefore, allows us to establish the role of managerial beliefs, attitudes, and experience in influencing capital structure decisions.

And even the few studies were mostly conducted in Asia- Bangladesh, Malaysia, Pakistan, European Singapore; Middle East- Jordan, Libya, Morocco, Saudi- Arabia; and Europe and America- UK, USA. In Africa, particularly in Ethiopia such studies were scarce. The current study has therefore adopted the research framework based on Theory of Planned Behavior developed by Ajzen 1991. The researcher modified this model by introducing two relevant factors: awareness and religiousity.

2.2. Empirical Literature Review

2.2.1. Underlying Principles of Interest-Free Financing

The IF financing is governed by the following pillars that basically align to the Shari’ah Law as articulated by different authors;

2.2.1.1. The IF Business Is Based On Islamic (Sharia) Law

According to Abdul-Rahman (2010), Shanmugam and Zahari, (2009,) and Hassan and Lewis (2007) the main characteristic of these financial instruments is that they are compliant with the Shari’ah – the Islamic legal system. The Shari’ah Law compliance aspect of the IFB is monitored by team of independent Shari’ah Scholars called Shari’ah Committee. These laws as referred to the convention are consolidated in (Shari’ah Standards for Islamic Financial Institutions, 1432 H 2010). The principles and sources of Shari’ah are: the Qur’an, which is the unchangeable and the Paying or Receiving Interest (Riba) Is Forbidden (Haram) proven inculcation of all God’s messages to all His prophets, including the Torah and the Gospel; and the way of life and example of living (Sunnah) and sayings (Hadeeth) of Prophet Muhammad. Moreover, they articulate the necessity of independent Shari’ah Board in that is entrusted give reasonable assurance of the Shari’ah Compliance aspect of the IF.

2.2.1.2. Paying or Receiving Interest (Riba) Is Forbidden (Haram)

As Islamic financing is interchangeably call interest-free financing paying or receiving interest (riba) is forbidden and this is considered as one of the governing principles of the banking convention. As articulated by Lina (2004) and Shanmugam and Zahari (2009,), lending money at interest has been condemned by men like Plato, Aristotle, Plutarch, Seneca and Cicero, early fathers of the Christian church; the majority of popes and councils up to 1830; likewise modern authors such as Goethe and Wagner. The author then underscores the fight against usury (interest) goes back to the earliest beginnings of civilization. (Ethics Handbook of Islamic Finance, 2013 ed.,) stated that the concept of Riba was widely recognized among the addressees of the Holy Quran, and it is that concept which is reflected in the legal definition provided for Riba either in the Hadeeth or in the later literature of Islamic jurisprudence. According to this definition, any transaction of loan where the payment of an additional amount on the principal is made conditional to the advance of such a loan is called Riba and hence forbidden in Islamic banking. As the convention basis on Shari’ah Principle that bases on Holy Quran, Riba is considered as one of the prohibitions in IF.

2.2.1.3. Utmost Fairness in All Business Dealings

Fairness in all business dealings is a peculiar feature of the convention irrespective of religion background. According to Meezan bank (2014), if we consider the injunctions of the Holy Quran, it would appear that the system for the distribution of wealth laid down by Islam envisages three objects:

- The establishment of a practicable system of economy,
- Enabling everyone to get what is rightfully due to him, and
- Eradicating the concentration of wealth. It further synthesizes that, of these three objects of the distribution of wealth, the first distinguishes Islam economy from Socialism, the third from Capitalism, and the second from both the same time.

2.2.1.4. Transparency, Consensus and Contractual Agreement between Parties in All Business Dealings

In all business dealings transparency, consensus is a precondition so as all parties make informed decision that will subsequently is substantiated by contractual agreement. Contractual agreements set out the terms and conditions upon and subject to which the person has agreed to purchase the Goods/Service from time to time from the Suppliers and upon which the Institution has agreed to sell the same to the client from time to time by way of facility Shanmugam and Zahari (2009) and Ethics Handbook of Islamic Finance (2013 ed.).

2.2.1.5. Profit-And-Loss Sharing

The return allocation from IF is governed by the concept of sharing profit as agreed but loss as per the capital contributed for both the fund mobilization and the financing dimensions. According to Hassan and Lewis (2007), the main difference between an Islamic or interest-free financing system and the conventional interest-based financing system is that, under the latter, the interest rate is either fixed in advance or is a simple linear function of some other benchmark rate, whereas, in the former, the profits and losses on a physical investment are shared between the creditor and the borrower according to a formula that reflects their respective levels of participation. In Islamic finance, interest-bearing contracts are replaced by a return-bearing contract, which often takes the form of partnerships.

2.2.1.6. Forbidden (Haram) Business Activities

There are many prohibitions of business activities to engage in IF convention, but the following will make aqads or contracts invalid as per Islamic Banking Handbook (2010 ed.): Businesses that adversely affect public interest; Businesses that involve usury/interest (Riba); Alcohol related trade, Producing and selling goods that are of no use therefore of no value; Gharar, i.e. ambiguity or uncertainty; Maisir (gambling), i.e. anything that involves betting; Pornography; and Pork.

2.2.2. Differences between Conventional and Islamic Microfinance:

Both conventional and Islamic microfinance have common features such as serving the poor, social mission of poverty alleviation and employment generation by offering credit, savings, training and other social services, and non-profit motives. However, both systems have differences in target, pricing of products and operational models (Table 2.2).

Table 2.2: Differences between Conventional and Islamic Microfinance

Abbildung in dieser Leseprobe nicht enthalten

2.2.3. Islamic Finance and Its Significance for SMEs’

The Islamic finance industry has been growing rapidly and its popularity increasing during the last two decades. Its role on financial inclusion, saving mobilization, investment, infrastructural development, poverty alleviation is crucial in different countries. According to the Islamic Finance Development Report, more than 61 countries reported the existence and services of different Islamic financial institutions and the total asset values of the Islamic finance industry was also reached to US$ 2.52 trillion in 2018 (IFR, 2019). The Islamic finance industry has different sectors that works based on same principles. Among the different sectors inthe industry, the Islamic banking segment is the largest sector that holds $1.76 trillionor 70% of the industry’s total assets. The Islamic capital market (Sukuk) is the second largest segment contributing to 19% or $460 billion of the Industry’s assets.

Since their first establishment in the mid-1970, the Islamic banking sector is showing enormous growth despite the various internal and external challenges. With such tremendously tough operational environment, Islamic banks are concentrating on strengthening themselves through gathering adequate financial resources to accomplish their banking requirements alongside with providing Shari’ah compliant products to achieve sustainable growth and focus on undervalued sectors for anticipated future (Hakeem, 2019). One of the areas which need consideration is SMEs sector.

The presence of Islamic financial institutions in a country’s financial system is expected to contribute in the real sector including financing SMEs. The investing and financing activities of Islamic financial institutions are working based on universal values. The underpinning principles of their activities are encouraging ethics, participation, risk sharing, equity, and property rights which all are universal values (Elasrag, 2016). Based on these values, Islamic financial institutions use various Shari’ah compliant instruments to finance activities of SMEs and other projects. However, the main emphasis of Islamic finance is on partnership-style financing and risk sharing methods which improve access to finance at a fair and reasonable cost for micro, small and medium businesses. Access to SMEs and micro enterprises, consequently, could help to provide alternative agricultural financing which contributes to improve food security.

The Islamic methods of financing are based on five key guidelines and principles: Prohibition of interest (riba), Prohibition of Gharar (excessive uncertainty and speculation), Prohibition of investments in prohibited products and activities (products that harm the society), profit and risk sharing, and Asset-backing principles. All Islamic finance products and schemes are based on these core Shari’ah principles and frameworks.

Risk Sharing Principle : Islamic finance is obviously aligned with risk sharing financing. One of the unique features of Islamic financial institutions such as banks is their risk sharing. Risk-sharing is one of the fundamental principles that distinguish Islamic finance from its conventional counterpart. Islamic finance has different moods of finance and the underlying principle of all financing arrangements is that the party who contributes financial capital and the entrepreneur who runs the business share the risks of the business in exchange for explicitly stated earnings (Iqbal & Mirakhor, 2013). In Islamic finance, it not moral and acceptable to acquire return by merely provides finance without bearing the risk of what is being funded. Islamic finance can be a better alternative source of financing for SMEs using risk-sharing principles. In IMF staff discussion note, Kammer et. al., (2015) maintained that Islamic finance has the potential for added contributions as it is essentially less predisposed to crisis because its risk sharing characteristics lessen leverage and strengthen enhanced risk management on the part of both financial institutions and their customers. The conventional debt-based financing hinders SMEs from fairer access due to the perceived high risk of the SMEs (Lajis, 2018). On the other hand, the risk-sharing nature of Islamic banks and the strong relationship of loan to collateral makes it a perfect choice for SMEs and funding newly established businesses both ultimately enhances overall growth in the economy (Elasrag, 2016). It also promotes risk management via distributing the risks in the economy.

Asset-Based Financing : Financial dealings, in order to be acceptable from Shari’ah point of view and legitimate enough to claim profit, should be accompanied by tangible real assets. Financiers cannot produce money out of nothing without the involvement of real assets. Therefore, the returns of the one who provides finance are associated with the selling or leasing of an asset to the client thereby accepts the risk of ownership of the asset in question. This method promotes development in the form of enhancing asset-based investment and the partaking in risk-based capital (Ayub, 2013). In addition to the economic motive, Islamic financial institutions underline the social well-being of the people and firms. It is possible to serve SMEs by providing finance and minimize the credit gap through asset-based financial products (Hassan, 2015). Financing SMEs using asset based products will help these enterprises to create jobs, alleviate poverty and contribute for the growth of their respective nation. These two fundamental principles of Islamic finance namely risk sharing and asset-based financing methods have the potential to enhance financial stability for the reason that the risk-sharing nature of finance shrinks leverage which might lead to bankruptcy or the inevitability of cash losses. Furthermore, the asset-based characteristics of financing SMEs achieve the intended purpose of business development and circumvent any financial speculation as it is entirely collateralized.

[...]

• Veranstaltung: Accounting and Finance
• Note: 1.00
• Autor: Zeynu Mohammed (Autor:in)
• Erscheinungsjahr: 2022
• Seiten: 145
• Katalognummer: V1253897
• ISBN (PDF): 9783346697813
• ISBN (Buch): 9783346697820
• Sprache: Englisch
• Schlagworte: determinants, smes’, ethiopia, siltie, zone