Cash Waqf Crowdfunding Model for SMEs

Cash Waqf Crowdfunding Model for SMEs

Rashedul Hasan (INTI International University, Malaysia) and Abu Umar Faruq Ahmad (King Abdulaziz University, Saudi Arabia)
DOI: 10.4018/978-1-7998-0218-1.ch019


Small and Medium Enterprises (SMEs) play a vital role in the economic growth. However, the industry has been facing challenges due to lack of access to finance among entrepreneurs. This chapter explores alternative financing platforms for SMEs and proposes specific solutions to the credit risk of SMEs. Authors used a structured literature review approach to analyse relevant publication to provide evidence on the application of cash Waqf as a viable source of Islamic finance for the SME sector. The donation-based cash Waqf model for SME financing is developed under the lens of stakeholder theory and Maqasid al-Shari'ah. The model is expected to provide greater insight to Waqf institutions on their role to operationalise the conceptual model in fostering the growth of SMEs and change the perception of stakeholders about the dynamics and potential of cash Waqf in economic development.
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Small and Medium Enterprise (SME) is a source of employment and innovation that stimulate the entrepreneurial spirit (Panitchpakdi, 2006). Definition of SME varies widely from country to country. Therefore, a universal criterion to define the SME sector is non-existent. While some countries often use a number of employees as the sole criteria, other countries often the value of a firm’s assets or the size of revenues to define SME. For example, a number of employees is widely used to distinguish an SME in South-East Asia1. Both the headcount and turnover are used as a common criterion to define an SME in the European Union2. Nonetheless, the SME sector has proven to be the backbone of both developed and emerging Economy. In most OECD economies, SMEs account for around two-thirds of total employment and over half of the value-added by the business sector (OECD, 2018). In the Middle East and North Africa (MENA) region, SMEs have proven to be the main source of private sector jobs following the recent political and economic developments (Nasr & Pearce, 2012). However, SMEs are confronting various financial and non-financial challenges that are hindering their development in Asian (Ahmad & Arif, 2015), European (Irwin & Scott, 2010) and MENA region (Nasr & Pearce, 2012).

Ahmad and Arif (2015) highlight that the choice of economic activities among entrepreneurs in Asia is focused on less profitable and traditional industries. Such choices can be attributed to various challenges faced by the SME sector. The most common challenges faced by Indian SMEs are the high cost of credit and complex procedures of lending institutions (Rao, Kumar, Gaur, & Verma, 2017). A recent field survey conducted by Bangladesh Bank3, the Central Bank of Bangladesh, reports that higher interest rates contributed as the leading factor for loan default among SMEs. Shah (2014) refers to the lack of business capital and lack of knowledge on available financing alternatives as additional factors that contribute to the loan default among SMEs in Bangladesh. The bank selection and patronage behaviour in Ghana depend primarily on price competitiveness and credit availability. The stagnation of SME finance in Rwanda is resulting from the inability of SME owners to manage their projects and the normalisation of language around the collateral requirement. Nasr and Pearce (2012) provide the lending capacity of financial institutions, enterprises’ creditworthiness, the liquidity of financial intermediaries, and the availability of risk-sharing instruments as key constraints for SME development in the MENA region. Irwin and Scott (2010) found ethnic minority businesses face greater difficulty to secure finances in the United Kingdom. Cowling et al. (2016) complement the study of Irwin and Scott (2010) by providing empirical evidence that older firms have readily available finances before the global financial crisis in the UK. SMEs in Croatia continuously encounter higher cost of borrowing which has an association with the enterprise’s size, collateral and internal credit rating (Kundid & Ercegovac, 2011) and similar evidence is provided by Xiang & Worthington (2015).

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