BEDER INTERNATIONAL έΪ˰˰ΑΔ˰˰ό˰˰ϣΎ˰˰Ο

UNIVERSITY
Δ˰˰ϴ˰˰Ϥ˰˰ϟΎ˰˰ό˰˰ϟ΍
THE ROLE OF ISLAMIC BANKING ON
JAAMACADDA BEDER AND
SUCCESS OF SMALL EE CAALAMIGA
MEDIUM AH
BUSINESS (case study: premier bank)
FACULTY OF ISMALIC ECONOMIC AND BUSINESS

BEDER INTERNATIONAL UNIVERSITY (BIU)

Submitted by
Sumaya Hassan Garaw
&
Umalkheir Ibrahim Dua’le

In Partial Fulfillments of the Requirements for the Award of Bachelor

Degree in Islamic Economics and banking

DECLARATION

This thesis is our original work and has not been presented for a Degree or any other academic
HARGESIA,
award in any University or Institution SOMALILAND
of Learning".
Name of the student____________________________ Signature: _________Date: __/___/__ ID_____

Name of the student____________________________ Signature: _________Date: __/___/__ ID_____

Name of the Advisor______________________ Signature __________Date: __/___/___

Faculty of Islamic Economics and Business

Beder International University

24/AUG/2019

We confirm that the work reported in this thesis was carried out by the candidate under our
supervision".

ACKNOWLEDGEMENT
Praise is to do ALLAH who made it possible for this research paper to be completed
and We would also like to .

1
First aim extremely thankful to our honorable advisor Direct of Academic and Students
Affairs Mr MUKHTAR IBRAHIM BATUN for significant contribution of this paper from
the beginning and having supported us win.
In addition aim also thanks our faculty BIEB once again. I extend our special thanks to all
lectures who have teaches us for long time .
Secondly , we would to express our gratitude families such as mothers , fathers , brothers
and sisters for their long tire support of moral, encouragement satisfaction that of our
education cycle.
In addition , I have highly appreciated all our friends and our class mates for their great
encouragement sustainable support to put this book on end.
Finally, we are also grateful to all respondent for their honesty responses whose answers
critical to the success of this study.

Abstract

Table of Contents

CHAPTER ONE: INTRODUCTION.............................................................................................................

1.1. Background.....................................................................................................................................5

2
 1.2. Problem Statement..........................................................................................................................6
1.3 purpose of study…………………………………………………………………………..7
1.4. Research Objectives........................................................................................................................7
1.5 Research question …………………………………………………………………….…...8
1.6 Hypostasis………………………………………………………………………………..8
1.7. Scope of the study………………………………………………………………………………..9

1.6. Significance of the study.....................................................................................................................9

1.9 Definitions………………………………………………………………………………….10
CHAPTER TWO: LITERATURE REVIEW...............................................................................................

2.0 introduction: ….…………………………………………………………………………………………..…………...10

2.1 Theoretical review……………………………….. …………………………………………………………………..10

2.1.1 Concept of Islamic banking …………………………………………………………………………………………10

2.1.2 Theory of Islamic banking ……....…..………………………..……………………………………….…………….11

2.1.3 Theory of profit and loss sharing …………………………..………………………………………………………11

2.1.4 Islamic model finance……………………. ………………………………………………..………………………12

2.1.5 Investment and advisory service…………………………………………………………………13

2.1.6 Low and interest rates ………………..……………………………….……………………………………..….14

2.2. Concept of small and medium business ………………………………………………………………….14

2.3. Importance of small and medium business ……………………………………………………………….15

2.4 Empirical Review …………………………………………………………………………………………..15

2.5 Islamic banking and its effect of financial literacy ………………………………………………………..16

2.5.1 Islamic financial behaviors and attitudes ………………………………………………………………….16

2.5.2 Financial Decisions………………………………………………………………………………………… 17

CHAPTER THREE: RESEARCH DESIGN.................................................................................................

3.0. Introduction...................................................................................................................................18
3.1 Research design …………………………………………………………………………………….……….……18

3.2. Research population......................................................................................................................18

3.3. Reseach instuments.......................................................................................................................19
3.4. Data gathering and procedures......................................................................................................19
3.5. Data Analysis and Interpretation..................................................................................................20
3.6. Ethical consideration.....................................................................................................................20
3.7. Limitation......................................................................................................................................21

3
CHAPTER FOURE..........................................................................................................................................

4.0. Overview.......................................................................................................................................20
4.1 Data analysis …………………………………………………………………………………….……….……21

CHAPTER FIVE............................................................................................................................
5.1. Introduction...................................................................................................................................38
5.2 Discusions ....................................................................................................................................39
5.3 Conclusion…………………………….……………………………………………………..40
5.4 Recommendation..........................................................................................................................41
5.5 Reference .....................................................................................................................................42
5.4 Questioneir ...................................................................................................................................43

4
 CHAPTER ONE
1. Introduction
In This chapter we were discussed the following sub-sections, which gives a comprehensive
over view of the study, background of the study, this will be followed by problem statement,
purpose of the study, objectives of the study, research questions, significance of the study, scope
of the study, and lastly operational definition of key terms(words).

1.1 BACKGROUND
The banking system whose activities and operations are governed by the Islamic or Shariah rules
is generally defined as Islamic Banking (Haron, Sudin& Wan-Nursofiza-Wan-Azmi, 2009). As a
system of banking or activity which complies with the Islamic law Shariah principle and guided
by the Islamic economics whose key objective is premised on the notions of equitable resource
distribution and social justice. The term Islamic banking has gained a lot of significance in the
contemporary world on the basis of provision of zero interest loans coupled with sharing of
profits and losses through the principle of modaraba (profit-sharing) and musharakah
(jointventure) (Buksh, 2010).
According to Fasih (2012) Islamic banking is an interest-free banking system founded on real
assets and the risks are shared between the lender and borrower under the mechanisms of
partnership, joint ownership, lease, and sale. The main features of Islamic banking include
interest free loans, low consumer lending and profit and loss sharing. With the interest-free
loans, banks are prohibited from paying or earning interest on loaned funds. As such, these banks
are only allowed to collect the amount equivalent to the loaned principal amount (Aburime &
Alio, 2009). Islamic banking also refers to a way of banking or banking activity that's in the
accordance with the principles of the Shariah (Islamic rulings), i.e. adherence to Islamic values
and principles of trading. The Shariah (Islamic rulings) does not allow the use of Riba
(interest/usury) that, literally means an "increment' or addition" (Khattak & Rehman, 2010).
Islamic banks and financial institutions are enjoying remarkable growth globally with estimated
asset of US$1.1 trillion in 2012, a significant jump of 33% from 2010 level of US$826 billion
(Rahman& McDonald, 2015).The largest centers of Islamic banking are concentrated in
Malaysia and the Middle East, including Iran, Saudi Arabia, UAE and Kuwait (UKIFS, 2013), it
has however expanded throughout the Middle East, Indonesia, the United Kingdom, North
Africa, and, more recently, in some Sub-Saharan African countries (Gelbard, Hussain, Maino,
Mu &Yehoue, 2014).

Islamic banking differs from conventional banking systems in many ways; the major difference
being the use of Interest or usury. Unlike conventional banking, Islamic banking is not allowed
to engage in any Haram (unlawful or illegal) business activities, this means that any business that

5
has not been permitted by the Islamic sharia principles or prohibited according to the Islamic
books (Quran, Hadith and Figh) falls under Haram (illegal or unlawful) these includes interest
bearing loans, Alcohol Business, Gambling, Pork Business or any other business activities that
has ill motive to the society. Small and medium business should look at their strengths and
opportunities in order to exploit their strategic abilities to overcome their weaknesses and threats
in order to improve their performance, effectively grow in their financial earnings and expand
their operations and produce to new markets (Papulova&Papulova, 2006).
Small and medium business (SMBs) are commonly acknowledged as the economy drivers and
the Key contributors to gross domestic product (GDP) around the globe, including those
countries in Africa and East Africa region especially Somaliland, these businesses create
employment opportunities for both skilled and unskilled person. However, market conditions
such as Banks’ strict procedures in Obtaining financings or credit facility and regulatory
environments are not always supportive of the growth of SMBs these are one of the main
obstacles they face (Buksh, 2010).
The SMBs success has also been hindered by Market inflations that keep on altering the
commercial banks rates; therefore, there is a demand for Islamic Shariah banking and
innovations such include ‘Murabaha’ ‘Modaraba’, ‘Musharakah’ and ‘service Ijara’ which are
unique to Islamic banking and that affect positively the SMEs environment. Islamic banks
simplified the mode of banking by doing business free of interest thus leading to high
competition among the banking industry and the scrabble for SME customers that contribute to
the largest customer segment in the banking industry.
Islamic banking has been in present since 1998 when the small Muslim community of the
island started receiving services from the Al Barakah Cooperative Society Limited, an Islamic
cooperative credit union, which offers tailormade Murabaha schemes, Hajj saving accounts, and
Istisna’ financing (Islamic Globe, 2012). In Nigeria, Islamic banking is very low despite the
country hosting the largest Muslim population in Sub-Saharan Africa, (about half of its 170
million people). Habib Bank (now Bank PHB) was the first bank operating an Islamic banking
window (in 1992) (Arab News, 2009). For South Africa, despite its small Muslim population
(1.5 percent), the country was the first Sub-Saharan African country to establish itself as a
potential hub for Sharia-compliant banking in the region. In 1989, Al Baraka—part of the Saudi
Arabian-based Dallah Al Baraka group—and the Islamic Bank were the first Islamic banks
granted licenses by the South African Reserve Bank (Bloomberg News, 2014).

1.2 Problem statement

Islamic banking is relatively new, its contribution to the country’s economy is relatively as well
not clear, in addition; researchers have not yet fully covered the impact of Islamic banking to the
growth of SMEs in Kenya. There is a need to comprehend how the two fully fledged Islamic
Shariah banks are affecting the growth of SME business in Nairobi-Kenya (with focus on first
community bank). With current stiff competition from conventional banks offering same Islamic

6
sharia products through Islamic windows, it’s important to understand how SMBs businesses in
Hargeisa have fully utilized the Islamic banking products to impact on SMB business.
Hove, Sibanda and Pooe (2014) established that Islamic banking had a positive and significant
impact on both entrepreneurial motivation and firm competitiveness in South Africa. The study
indicated that through Islamic banking, SMBs were able to access credit at lower interest rates
through customer relationship management and profiling. In another study, Tuitoek (2012)
established that offering sharia compliant products have improved the financial performance of
commercial banks in Somaliland. Salim (2014) identified various modes of financing used by
Islamic banking including diminishing Musharaka, Ijara and Murababa (Ismail, 2015).
Moreover, the literature on Islamic banking and finance has focused on a few credits based
instruments (Abdelsalam & El Komi, 2014) suggesting that research in the field of Islamic
finance is still lagging behind. The overriding concern in inventing or adapting new financial
instruments has been meeting the sharia (Islamic law) requirement legalistically while the
maqasid Sharia (objectives of Islamic law) has not received due attention (Siddiqi, 2006; Syed &
Hasan, 2015). All business and finance contracts in the framework of Islamic finance have to
conform to Sharia rules and aim to meet the objectives of Islamic law (Ayub, 2007; Ngalim &
Ismail, 2015).
Islam, Yousuf and Rahman (2014) conducted a comparative analysis of conventional and Islamic
banks by looking at SMB financing in Bangladesh. The findings indicated that disbursement of
SME Loan by all selected conventional banks showed about 1.5 times growth from Year 2009-
2011 as compared to disbursement of SMB Loan by all Islamic banks that portrayed about 1.35
times growth. These studies explored other aspects of Islamic banking from different contexts
which therefore limit their application in the current study. This therefore leaves a research gap
that this study sought to fill by analyzing the effect of Islamic banking on SMBs Hargeisa
(Rahman ,2014)

1.3 Purpose of the Study

This study will explore the role of Islamic banks on small and medium business in Hargeisa,
Somaliland.

1.4 Research Objectives

The general objective of the study is to find out the role of Islamic banking on success of small
and medium business Somaliland markets.

1.4.1 Specific objective

1. To examine Islamic banking affected financial performance of SMBs in Hargeisa Somaliland
2. To find out what are the effects of Islamic banking on success of SMBs in Hargeisa
Somaliland

7
3. To find out significant relationship between the Islamic banking on success of small and
medium business in Hargeisa Somaliland

1.5 Research Questions

This research paper will answer the following questions.
1. How has Islamic banking affected financial performance of SMBs in Hargeisa Somaliland?
2. What are the effects of Islamic banking on success of SMBs in Hargeisa Somaliland?
3. Is there any significant relationship between the Islamic banking on success of small and
medium business in Hargeisa Somaliland?

1.6 Hypothesis
To achieve the objectives stated in this study, the following hypothesis will be guided:
H1: Islamic banks do have a significantly affect towards fund for small and medium business in
country
H0: Islamic banks do not have a significantly affect towards fund for small and medium business
of the country.
H1: The variables of Islamic banks are real investment (Musharakah and Mudharabah) of citizen
does have any effect of Somaliland economic sector.
H0: The variables of Islamic banks are real investment (Musharakah and Mudharabah) and
citizen does not have any effect of Somaliland economic sector

Independent variables dependent variables

Investment
Islamic Banking

Financial performance

Success on SMBs

8
1.7 Scope of the Study
1.7.1 Theoretical scope
Small and medium business (SMBs) are commonly acknowledged as the economy drivers and
the Key contributors to gross domestic product (GDP) around the globe, including those
countries in Africa and East Africa region especially Somaliland, these businesses create
employment opportunities for both skilled and unskilled person. However, market conditions
such as Banks’ strict procedures in Obtaining financings or credit facility and regulatory
environments are not always supportive of the success of SMBs these are one of the main
obstacles they face.

1.7.2 Geographical scope

The present study is confined to the role Islamic banking on success small and medium business
in Somaliland with the premier bank the study will be conducted with the help of data that will
be obtained from manager and staff premier bank.
The study targeted SMBs business premier bank in Hargeisa Somaliland. This study will be
limited in Somaliland special in Hargeisa districts within the context of business markets; it will
primarily focus on the relationship between Islamic banking and success of small and medium
business.

1.7.3 Content scope

This study focuses on the role of Islamic banks on small and medium businesses the significant
relationship between Islamic banks on SMBs and also, we examine Islamic banks on SMBs in
Hargeisa Somaliland.

1.8 Significance of this Study

The study is significant in the following ways: The findings of the study is going to enable
Islamic banking institutions to better understand their role in the success of SMBs in Somaliland
in order to implement better and effective programs. The study has also exposed possible areas
of improvement in Islamic banking financing activities in Somaliland.
The findings of the study are importance to the government. It is going to assist in setting up
specific management policies that enhance effectiveness and sustainability of SMBs in
Somaliland Potential investors in the Islamic banking finance sector as well as entrepreneurs
willing to start SMBs shall find this study relevant to them.
The findings have shed light on the future of Islamic banking finance institutions and SMBs thus
enabling potential investors to make sound decisions.

9
 The study is also of significance to scholars in understanding the level of SMBs development in
Somaliland which play a significant role in providing ancillary services to multi-national
corporations. Finally, this study contributes to the future development of this area of research,
particularly in a developing country like Somaliland.

1.9 Operational Definitions of Key Terms

1 Islamic Banking: -Islamic banking is also known as non-interest banking, is a banking system
that is based on the principles of Islamic or sharia law and guided by Islamic economics.
2 Riba: -It’s an Arabic word, meaning increase or adds, using money as a commodity.
Translated as interest by English Sharia -The Islamic law that is usually governed by the
teachings of Islamic books (Quran, Hadith and Fig) (Khattak&Rehman, 2010).
3 Musharakaha: - is a joint enterprise or partnership structure in Islamic finance in which
partners shares in the profits and losses of enterprise
4 Modaraba: - is an Islamic contract in which party supplies the money and other party provides
management expertise to undertake a specific trade.
5 Murabaha: - also referred to as cost-plus financing is an Islamic financing structure in which
the seller provides the cost and profit margin of asset
6 Small and medium business (SMBs): - are decided by the number of employees and or
revenues they have. To be considered a small and medium business, these two determinants must
fall under a certain standard held by the respective country. Different countries have varying
standards to qualify for this identification.

CHAPTER TWO
LITERATURE REVEIW
2. INTRODUCTION
This chapter examines the literature and investigates theories related to Islamic Banking, the
concept of small and medium business, importance of Small and Medium business, a review of
past studies by different authors on the study from literature review. In addition, the chapter
presents a summary which clearly illustrates the research gap to be filled by this study.

2.1 Theoretical Review

This study will examine concept of Islamic banking, profit and loss sharing theory, theory of
Islamic banking, trust-financing theory to understand the principles of Islamic banking and
Modes of Funds in Islamic Banking

2.1.1 Concept of Islamic Banking

10
Islamic banks became a reality not only in the Islamic world, but rather, throughout the whole
world by introducing a revival of outstanding economics, after attempts to obliterate Islamic
financing over a period of fourteen centuries, it managed to overcome fear, doubt and the
fallacies of impossible or inappropriate application for the economic and non-economic needs of
modern transactions today ,Islamic banks are defined by Almanaseer (2014). as a bank that
operates in accordance with Shari’ah and is guided by Islamic economics. In particular, Islamic
law prohibits the collection and payment of usury (interest) on the bank’s loans and deposits. In
addition, it prohibits Islamic banks from using or dealing in certain commodities and activities
such as pork, alcoholic liquor, gambling and dealing in derivatives. The depositors also share in
the profits of the bank according to a predetermined ratio. This is unlike a conventional bank,
which borrows funds paying interest on one side of the profit and loss account, and lends funds,
charging interest, on the other side (Iqbal et al., 2005).
The main principles of the islamic financial system can be summarized in the following:
Prohibition of interest, risk sharing, prohibition of activities with element of uncertainty,
prohibition of gambling activities, prohibition of the production and sale of goods and services
that are prohibited in islam, sanctity of contracts, moral dimension and zakat (al manaseer,
2009).

2.1.2 Theory of Islamic banking

The earliest writing the theory of Islamic banking is based on the idea that interest is strictly
Forbidden in Islam, and that Islamic teachings provide the required guidance on which to base
the Working of banks (Hassan and Lewis, 2007).
writings on the subject of Islamic banking and Finance date back to the forties of the twentieth
century by Siddiq the basic postulate that has guided all theoretical work on Islamic banking is
that while interest is forbidden in Islam, trade and profit is permissible. The basic principle in
Islamic law is that exploitative contracts or unfair contracts that involve risk or speculation are
impermissible (Hassan and Lewis, 2007).
Theoretical work on Islamic banking encompasses several aspects related to both the operating
procedures of Islamic banks and the possible socioeconomic consequences of the adoption of the
new system (Ahmad, 2006). Islam seeks to establish a society based upon fairness and justice
(Holy Qur’an 2:239). Thus, the concept of Islamic banking has proceeded on the basis that
guidance for all institutionalized developments in an Islamic society should be derived from the
principles of Shari’ah. The form and content of Islamic banking practices have, therefore, to be
derived from the teachings of Islam (Ahmad, 2006).

2.1.3. Profit and Loss Sharing Theory

The originality of Islamic banks consists of the principle of Profits and Losses Sharing (PLS)

11
Between the provider and the user of funds. This notion of equitable sharing is a key element in
the concept of Islamic finance as it is supposed to reflect the values of Islam. Under the rules of
Shariah, no one can claim any compensation without incurring some of ex ante investment risks
(Jedidia&Hamza, 2014).
The Profit and loss sharing concept used by the Islamic banks according to the Islamic Shariah
laws and according to this rule in Islamic banks, investment depositors are customers with some
rights of ownership in the bank. Profit and loss sharing difference introduces a mutuality concept
in Islamic banking. The main factor, which contributes to the emergence of the PLS-banking
system, is the prohibition of Interest (Riba) in the Holy Quran (Ashraf, 2013). The underlying
principles of Shari’ah that govern Islamic banking are to promote a profit and loss sharing
framework as an ideal mode of financing to achieve justice and socioeconomic objectives
(Zamil, 2014).
PLS is a contractual arrangement between two or more transacting parties, which allows them to
pool their resources to invest in a project to share in profit and loss. PLS is based on two major
modes of financing, namely Mudaraba and Musharaka, which are desirable in an Islamic context
wherein reward sharing is related to risk sharing between transacting parties (Farooq, 2006).The
Islamic profit sharing concept helps to foster economic development by encouraging equal
income distribution and which results in greater benefits for social justice and long-term growth.
In addition, profit-loss sharing scheme improves capital allocation efficiency as a return on
capital depends on productivity and the allocation of funds is based on the success of the project
(Nedal, 2011).

2.1.4 Islamic modes financing

The modes of finance in Islamic banks are based on the profit and loss sharing mechanisms. The
profitability of the projects is the main determinant of financing, not the credit worthiness of the
customers or the collateral as applied by commercial banks. This kind of financing provides a
code of economic ethic combining the material and spiritual values for the conduct of its system
(Abdul Mannan, 1986).
El-Naggar (1985), argues that the investment policy of Islamic banks must include incentives
aimed at motivating the whole population to participate in the process of development.
Moreover, it will promote economically profitable investments that have socioeconomic benefits
for the whole population, such as creating additional jobs, introducing new technology, reducing
the imbalance of payments by increasing the production and adjusting regional imbalances so far
Islamic banks have focused on the following financial instruments:

I. Musharakah as a Mode of Islamic Financing

Musharakah or shirkah can be defined as a form of partnership where two or more persons.
Combine either their capital or labor together, to share the profits, enjoying similar rights and
liabilities. This concept is normally applied to business partnerships or joint ventures and is fairly

12
similar to mudarabah financing, except that both the financier and the entrepreneur, take an
equity stake in the venture. Therefore, the bank as well as the customer has a stake in the equity
capital, and either of them can only be liable for losses amounting to the contributed capital
(Lewis et al., 2001). Musharakah is widely used for joint venture investments. It is also used by
Islamic banks for the purchase of real estate, equivalent to a traditional bank mortgage but
instead of interest, the Islamic bank receives a share of the rent of the property.

II. Mudarabah as Islamic Mode of Financing (Common Speculation)

This is an arrangement or agreement between a capital provider and an entrepreneur, whereby
the entrepreneur can mobilize funds for a business activity. The word Mudharabah is derived
from the (Dharba in Ard) or (the quest in the world), that is, the travel for trading. In Islamic
jurisprudence, it is based on the principle that the capital shall be provided by one partner
(rabbul-mal) and the work shall be provided by another man (mudarib) provided.
Any profits made will be shared between the capital provider and the entrepreneur according to
the ratio that they agree upon at the time of the contract. However, although both parties share in
the profits, only the capital provider bears all of the residual losses if the entrepreneur fails unless
the loss has resulted by negligence from the entrepreneur. In this case, the entrepreneur has to
bear the loss. Profit-sharing continues until the capital is repaid. Mudarabah contracts take two
forms, restricted mudarabah where the contract is in a particular business, and unrestricted
mudarabah, where the mudaraba is authorized to invest in any business he deems fit (Al-
Manaseer, 2014).

III. Murabaha as an Islamic Mode of Financing (Trust Financing Theory)

Presley (1988) indicates that this model refers to the intermediation of a bank in the purchase of
a commodity upon the request of a customer, and then selling this commodity to the customer on
deferred payment terms for a price equivalent to the total cost of purchase plus a fixed profit
agreed upon by both the bank and the customer.
These cover the purchase price and the delivery costs in addition to an agreed-upon amount of
profit. The jurists classified Murabaha as trust sales because the seller is entrusted with the
information from the purchaser on the purchase price. Murabaha is most widely used for short-
term financing and accounts for around 70% of all Islamic financial transactions (Al-Jarhi et al.,
2001).

2.1.5 Investment and Advisory Services

On a global scale, Islamic banks have been rendering investment and advisory services to the
regions’ banks and other financial institutions to build their capacity in SMBs banking so that
they can profitably and sustainably reach out to the SMB sector. This is achieved through
providing equity finance, lines of credit, risk sharing facilities, trade finance, disseminating best

13
practices, improving processes and products, and streamlining delivery channels (Baumbark &
Lawyer, 2013).
Availability of the advisory and investment services enhances the competitive edge of the
SMBs. According to Muchai (2012) the growth of SMBs in Kenya can be determined by
opportunities for profitable investments besides availability capital, labor and their appropriate
management.

2.1.6 Low Interest Rates

Walid (2015) undertook a study on the role of Islamic Banking on economic growth in Kenya
and stated that as interest rate contribute to higher economic growth. Whenever interest rates are
favorable bank lending increases and this contributes to economic growth. Islamic banks
generally provide lower bank rates or no bank rates at all but rather use Islamic model of
financing business. This makes it easier for businesses to access funds or credit since the periodic
repayments are low. The result is increased spending thus enhanced Gross Domestic Product
(GDP) and economic growth. Borrowing usually encourages investment from both the local and
international level for all types of businesses in the country.
Wajdi Dusuki (2008) undertook a study on banking for the poor: the role of Islamic banking in
microfinance initiatives and identified that credit provision and finance accessibility was an issue
of concern among entrepreneurs. It also identified that Islamic banking has a great potential to be
involved in microfinance programmes to cater for everyone especially those who fall outside the
formal banking sector. This is because Islamic banking provided for very low interest rates that
could favor people especially the underfunded to invest in their businesses. Bakhshoodeh and
Karami (2008) states that most of the people who own small businesses usually consider
borrowing money from local money-lenders at very high interest rates that prevent them from
getting higher income and

2.2 Concept of Small and Medium Business (SMBs)

Small and medium business may have different definitions in different areas. For instance, what
is categorized as SMBs in Europe or America may not be similar to that of Africa. Definitions
are mainly based on the number of employees as well as the total assets of the enterprises. We
thus, attempt to compare and contrast various definitions. According to Nigerian National
Council of Industries, SMBs are those enterprises whose total costs (excluding land) are 200
million Nigerian Naira (equivalently, around 553,000 USD) maximum (Onugu, 2005).
In Britain, small scale business is considered as that industry with annual turnover of not more
than 2 million pounds (equivalently, around 2.6 million USD) with fewer than 200 paid
employees (Bakare, 2014). Organization for Economic Cooperation and Development (OECD)
provides a slightly different but close definition. As far as the number of employees is
concerned, “[t]he most frequent upper limit designating an SMB is 250 employees, as in the
European Union.

14
However, some countries set the limit at 200 employees, while the United States considers SMBs
to include firms with fewer than 500 employees…Financial assets are also used to define SMBs.
The turnover of medium-sized enterprises (50-249 employees) should not exceed EUR 50
million [equivalently, around 58.7 million USD]; that of small enterprises (10-49 employees)
should not exceed EUR 10 million [equivalently, around 11.7 million USD] while that of micro
firms (less than 10 employees) should not exceed EUR 2 million [equivalently, around 2.3
million USD]” (OECD, 2005:17).

2.3 Importance of Small and Medium business

The importance of small and medium business is stems from the following:
Small and medium business serve to reduce unemployment directly as they rely fundamentally
on labor. Small and medium business serves to provide new jobs, thus assisting in the
distribution of income and discovering new efficiencies. Small and medium business serves to
support economic development as they are based mainly on production capacities.
The spread of small and medium business, unlike the big companies, contributes to reducing the
marginalization of some geographical areas.

2.4 Empirical Review

Kadubo (2010) investigated the factors influencing the development of Islamic banking in
Kenya. The study adopted a case study approach focusing on four Islamic compliant banks in
Kenya, which included the First Community Bank; Gulf African Bank; Dubai Bank; Kenya
commercial Bank Ltd and Barclays Bank Ltd. A sample of 33 customers, who were the holders
of accounts in the respective banks and 11 managers were involved. Data was collected by use of
questionnaires. The study revealed Islamic banking compliant was driven by religious
compliance and customers need being met. It also revealed that continuous review and
improvement of Shari’ah compliant products together with diversifying market niche would lead
to drastic development and marketing of Islamic banking products. The study concluded that the
factors that influence development of Islamic banking products in Kenya are purely religious
compliance and customers need being met.
Alam (2015) states that SMBs’ limited access to finance reflects the interaction of demand,
supply, regulatory, institutional, and other policy factors that are a hindrance for the growth of
SMBs. Growth is also hindered in those countries with well-established Islamic banking by the
lack of appropriate Islamic finance offerings for SMBs. On average, around 35% of SMBs in
Middle East and North Africa (MENA) and Pakistan according to the study are not borrowing
money to grow their businesses despite the significant demand due to the lack of Islamic finance.
Several studies have been carried out on Islamic banking and its effect on growth of SMBs under
various factors. Alam (2015) identifies that most SMBs approach banks for working capital
requirements. This is very instrumental in the growth of a particular business as it enables a

15
business owner to launch his/her idea and nature it into growth. Nondi and Achoki (2006)
conducted a study of financial management problems in small hotels and restaurants in Kenya;
found that 26% of these establishments reported lack of working capital as the most serious
problem they face in their operations. The study further identified that the provision of working
capital by banks would go a long way in improving the financial performance of the business.
International Financial Corporation (IFC, 2013) in their study have identified that Small and
medium business (SMB) financing in Pakistan has risen over the past couple of years and is
gradually gaining momentum due to initiatives by the State Bank of Pakistan (SBP) and the
Pakistan government. Some of these initiatives include the introduction of prudential regulations
for Islamic SMBs. Prudential regulation involves promoting the safety and soundness of the
firms in this case the SMBs the banks regulate. This is an effort to enhance the relationships
between the Islamic banks and the SMBs and make it easier for the businesses to access credit.
Alhafi (2015) stated that Islamic baking focusing on building relationships with SMBs would
ensure quick delivery of credit. Islamic banks should put in place the right infrastructure and
capabilities to provide SMBs with a good revenue source.
International Financial Corporation (IFC, 2013) a member of the World Bank conducted a study
on Islamic Banking opportunities across Small and Medium Business(SMBs) in Pakistan and
identified that awareness about Islamic banking services largely determined the level of usage of
the banking services amongst SMBs. According to the study which was done in Pakistan,
approximately 25% enterprises showed strong interest in Shariah-compliant products. This
translates into many businesses and entrepreneurs being financial

2.5 Islamic Banking and its Effect on Financial Literacy of SMBs

According to Hung, Parker, and Yoong (2009) on their study titled defining and measuring
financial literacy financial literacy is defined to as the ability of a person or a corporate to use
information and skills to manage financial resources effectively for a lifetime of financial well-
being. Bhabha, Khan, Qureshi, Naeem, and Khan (2014) on their study on the impact of financial
literacy on saving-investment behavior of working women in the developing countries define
financial literacy as a combination of knowledge, skill, awareness, behavior and attitude required
to make sound financial assessments and also finally attain individual financial wellbeing.
Financial literacy can be achieved by undergoing financial education which is the process by
which people and corporate improve their understanding of financial services, products and
concepts, so they are empowered to make informed choices, avoid pitfalls, know where to go for
help and take other actions to improve their current short-term and long-term financial well-
being (Hung, Parker & Yoong, 2009). Financial literacy can also be described as being a specific
form of knowledge, the ability or skills to relate that knowledge, perceived knowledge, good
financial behavior, and even financial experiences. Islamic banking has greatly affected the

16
financial literacy of SMBs and several studies have been carried on the topic under different
factors.

2.5.1 Financial Behaviors and Attitudes

Antara, Musa, and Hassan (2016) conducted a study on bridging Islamic Financial Literacy and
Halal Literacy: The way forward in Halal Ecosystem and stated that Islamic financial literacy
affects the attitude of a business owner in adopting Islamic financing. Islamic financial literacy is
defined as the degree to which individuals have a set of knowledge, awareness, and skill to
comprehend the fundamental of Islamic financial information and services that affect its attitude
to make appropriate Islamic financing decisions.
Islamic banking allows for people to gain financial literacy that is usually strongly associated
with financial behaviors. Islamic banking enhances Islamic financial literacy which is usually
assumed to influence the attitude of a person in their financial behaviors. This is especially
evident in using financial knowledge to differentiate between conventional financing and Islamic
financing and adopting the most appropriate financial behavior.
Xiao, Ahn, Serido, and Shim (2014) conducted a study on earlier financial literacy and later
financial performance of college students and stated that financial knowledge is strongly
associated with financial behaviors of individuals. Lack of financial knowledge according to the
study is associated with risky, borrowing and paying behaviors. Gaining both subjective and
objective knowledge was reported to reduce specific risky paying and
borrowing behaviors that individuals engaged in. Hung et. al (2009) stated in his study that
financial literacy influences a certain behavior that an individual does. The level of financial
literacy between different people is different, and these differences in the level of the literacy
will be evident in the different types of behavior that they display.

2.5.2 Financial Decisions

Abdullah and Anderson (2015) in their study in Islamic Financial Literacy among Bankers in
Kuala Lumpur stated that financial literacy enables consumers, business owners and investors to
have the ability and confidence to make informed choices and to take the appropriate action to
improve their financial well-being and that of their businesses. The number of financial products
and services are quickly increasing individuals are constantly encouraged to access financial
knowledge in order to be more responsible in making important financial decisions.
The study explains that the current Islamic financial industry is characterized by different types
of financial instruments and assets for not only Muslim stockholders but also the non-Muslim
investors to choose from. Gaining knowledge about the differences between these instruments
and assets enables investors to take the right steps to better manage their portfolio. These Islamic
financial products can be made available to a wider range of people with a clear understanding

17
and appreciation of the unique characteristics and features of Islamic model of banking and its
real economic value.
Lusardi (2008) conducted a study on financial literacy: a vital tool for informed consumer choice
and identified that when a person is financially illiterate it automatically leads to making poor
financial decisions such as excessive borrowing or high-cost mortgage. It also assumed that
individuals with Islamic financial illiteracy will result in financial decision mistakes in
differentiating between conventional and Islamic financing. Hove et, al (2014) study findings
also states that the equipping of SMBs business owners with relevant entrepreneurial skills
increase the chances of success of the firms by making proper financial decisions.
Alam (2015) states that SMBs owners lack awareness and knowledge banking products and
what products may suit their requirements. This knowledge can be very influential in making
good and appropriate financial decisions. Plakalović (2015) identifies that certain programs of
financial education of managers and entrepreneurs mostly provided by financial institutions
would give palpable results. Financially aware and literate owners/managers make appropriate
financial decisions that contribute to the enhancement of the financial performances of
companies.

CHAPTER THREE
METHODOLOGY
3.0 Introduction

18
This chapter is about the methods that were used for collecting information in the field. This
chapter is mainly explaining how this study is conducted, the applied methods and techniques in
data collection
In this chapter, various items were covered. These include research design, research population
and sample size, sampling procedure, research instruments, validity and reliability of the
instruments, data analysis and interpretation.

3.1 Research Design

This study will adopt case study research design to investigating the effect of commercial islamic
banking on economic development selected premier Bank. This is a detailed an intensive
analysis of a single case. A case is an object of interest to the researcher and can be a single
organization, a single location, a person or a single event. The study will use a case study design
based on the causal design survey. A causal design survey is a design used to collect data at one
point in time from a sample selected to represent a larger population. This approach will involve
use of quantitative and qualitative methods for collection and analysis of data about the effect
Commercial bank on economic development.

3.2 Research Population

The target population of this study will be represents the officers and working staff of banks such
premier Banks, which offers various banking services to the customers in Hargeisa Somaliland.

3.2.1 Sample Size

The study population will be 30 employees regarding premier Banks of Somaliland; a sample
size of 27 respondents from the population will be used in this study using Slovene’s formula
because of calculating of sample sizes, which is stated as:
n=N
1 + N (e2)
Where:
n = number of samples
N = total population
e = margin of error

3.2.2 Sampling Procedure

The study is limited to the selected premier Bank in Hargeisa, Somaliland. Simple random
sampling is representative of the population from which they are drawn, and then will be applied
when selecting respondents from premier bank 18

19
This will be done to eliminate bias and also boost up its reliability of research paper.

3.3 Research Instrument

Sampling Procedure Research Instrument Research devices consisting of questionnaires
Developed with the aid of the researcher will be used to accumulate data. Instrument refers to a
number strategies through which a researcher obtains facts from respondents for his research
work. The term facts refers to all types of data that researcher achieves from the participant of
the study to assert that records refers “to any fact, observation or statistics pertaining to the
situation of the study” (Adodekun, 2003).
3.4 Validity and Reliability of the Instrument
Validity is the extent to which an instrument measures what it is supposed to in accordance with
dimension (Denzin & Lincoln, 2005), in this study to test the validity of the questionnaires, it
will be designed on the base of the researcher's needs in relation to the study topic and therefore
brings advantages in the sense that it measures exactly what the researcher intends to measure .
Reliability is a measure of the degree to which a research instrument yields consistent outcomes
then data after repeated trials (Mugenda, 2003). The questions in the questionnaire will be
designing taking into consideration the issue related to the problem and objectives of the study
and theories on the topic. It's therefore whispered that respondents and results from this study
will be reliable.

3.5 Data Gathering Procedures

This part is about how data was gathered in the field, the data accrued in the area were from two
sources, primary and secondary data, and the important data.

3.5.1 Primary data

Primary data is the statistics collected for the first time, therefore all through this study this facts
will be collected from the selected population. The solely major supply of information will be
employees and officers of premier Bank in this study will be questionnaire. 19

3.5.2 Secondary Data Sources

Secondary facts is data that have been amassed by the others; consequently the secondary facts
will be bought thru find out about of accessible facts from Islamic commercial banks such
Central Bank, Dahabshiil International Bank, Dara Salam Bank, and other sources such as,
internet supply and reports .

3.6 Data Analysis

Data Analysis in this study the facts collected will be analyzed using a statistical package, the
Statistical Package for Social Sciences (SPSS) profile of college students will be analyzed

20
Percentage and frequency while strength degree analyzed mean, mode, median and standard
deviation. The statistics will be sorted and coded into the SPSS and analyzed the use of
descriptive statistics. After the analysis and computation of data, the consequences will be
summarized and presented in tables and charts drawn.

3.7 Ethical Considerations

Respecting ethical aspect of research and also respecting for the dignity of research participants
will be prioritized. Adequate level of confidentiality of the research data will be ensured. The
protection of the privacy of research participants will to be ensured such as without mentioning
their specific names. Any deception or exaggeration about the aims and objectives of the
research will be avoided. Consent will be obtained from the participants prior to the study.
Therefore, the ethical aspect of research will be very strictly in this research.

3.8 Limitations of the Study

First, difficulties in contributing questionnaires, it may happen sometimes in complete due to the
conditions on the party of respondents so you must arrange and re-arrange the files and
documents that you will prepare, sometime people are nervous they insult or abuse you and even
get away for you, so you must accept every manner that faces in your trip or journey. Second, the
targets groups or respondents may be incorrect information given the researchers control,
because they fear their weakness or information to pass through or put them risk. It means there
is lack of confident or maybe there is no data to share with you and other reasons behind. Third,
personal Interest of people, all people may not be equally interested in sharing their opinions and
beliefs but researcher will try best in making the research paper successful and be kindly; fifth,
refusal to participate and leave away for you.

CHAPTER FOUR
RESULT AND DISCUSSION
4.0 Overview

21
 This chapter outlines the findings of the data collected from 30 respondents of premier bank
employees. The main purpose of this study was to find out the role of risk management in
financial performance on Islamic bank. The results was being presented as it was listed in the
questionnaire. Therefore, the research was divided into two sections (I) Democratic
Characteristics of the Respondents, such gender, age, level of education etc. and (2) the second
parties’ deals with presentation, interpretation and analysis of research questions and objectives.
4.1. Demographic characteristics of Respondent

Table4.1: Gender of Respondents

Gender Frequency Percent Valid Percent

Male 15 50 50
Female 15 50 50

Total 30 100 100

Source: Research, 2019

In the gender of respondents, table: 4.1 show that 15 of the respondents (50%) out of 30 respondents
were male while 15 of the respondents (50%) out of 30 respondents were female.

Table: 4.2: Age of the respondents

Age Frequency Percent Valid Percent
20-35 21 70 70
36-45 9 30 30
Over 46 0 0 0
Total 30 100 100
Source: Research, 2019
Table 4.2 show that 70% of respondents were between 20 to 35 years old while 30% were between 36 to
45 years old.

Figure4.1: Marital Status of the respondents

22
Source: Research, 2019
In the marital status of respondents, figure4.1 Status that 18(60%) out of 30 respondents which were
single while 12(40%) out of 30 respondents were married.

Table: 4.3: highest level of education completed

Educational level Frequency Percent Valid Percent
Bachelor degree 21 70 70
Master and above 9 30 30
Total 30 100 100
Source: Research, 2019

As show above table that 21(70%) out 30 respondents Were Bachelor degree level, 9 (30%) out
of 30 were master and above level.

23
 Table: 4.4: Work Experience
Work Experience Frequency Percent Valid Percent
Below 1 year 3 10 10
1-2 year 12 40 40
3-4 year 9 30 30
+5 6 20 20
Total 30 100.0 100.0
Source: Research, 2019
Table4.5 indicates that 3 (10%) out of 30 respondents were Below 1 year, 12(40%) of 30 were 1-2 years,
9(30%) out of 30 were 3-4 years, while 6(20%) of 30 were above 5 years.

Figure4.2: Beneficially of Islamic banking financial services on the small and medium
business

Chart 4.2. the using of Islamic banking and financial services is

beneficial on the small and medium business:

Strong Disagree

Disagree

Agree 16.7

Strong Agree 83.3

0 10 20 30 40 50 60 70 80 90

Strong Agree Strong Disagree

Source
: Research, 2019

Figure 4.2 show that 25(83.3%) out 30 respondents were Strong Agree, 5 (16.7%) out of 30 were
Agree.

24
Table4.5: Islamic Banking Helpfulness for Small and Medium Business
Frequency Percent Valid Percent
Strong Agree 15 50 50
Agree 15 50 50
Disagree 0 0 0
Strong Disagree 0 0 0
Total 30 100.0 100.0
Source: Research, 2019

Table 4.5 show that 15(50%) out 30 were Strong Agree that Islamic banking will helpful for the
financing of small and medium business While 15 (50%) out of 30 were Agree.

Figure 4.3: Islamic Banks are highly regulated as they are governed by regulatory bodies
and also sharia board

Chart 4.3 Islamic banks are more regulated form of banking as

they are governed by regulatory bodies as well as by Sharia boards

90
80
70
60
50 90
40
30
20
10 10
0
Strong Agree Disagree Strong
Agree Disagree

Strong Agree Strong Disagree

Source: Research, 2019

As indicate above Figure that 27(90%) out 30 respondents were Strong Agree, 3 (10%) out of 30
were Agree that Islamic banks are highly regulated.

Table4.6: Islamic banking is strictly based on risk sharing model (profit &loss)
Risk Sharing Frequency Percent Valid Percent

25
 Strong Agree 12 40 40
Agree 18 60 60
Disagree 0 0 0
Strong Disagree 0 0 0
Total 30 100.0 100.0
Source: Research, 2019

Table 4.9 states that 12(40%) out 30 respondents were Strong Agree, 18 (60%) out of 30 were
Agree that Islamic banking is strictly bases on risk sharing model.

Figure 4.4: In practice Islamic banking is different from conventional banking

Source: Research, 2019

Figure 4.4 show that 30(100%) out 30 respondents yes which means that in practice Islamic
banking is different from conventional banking.

26
Table 4.7: Islamic banking has improved my level of competitiveness on the market
Frequency Percent Valid Percent
Strong Agree 24 80 80
Agree 6 20 20
Disagree 0 0 0
Strong Disagree 0 0 0
Total 30 100.0 100.0
Source: Research, 2019

Table 4.7 indicates that 6(20%) out 30 respondents were Strong Agree, and 24 (80%) out of 30
were Agree that Islamic banking has improved my level of competitiveness on the market

Figure 4.5: Islamic banking has facilitated better use of resources in accordance with small
and medium enterprise

Better use of Resource

Strong Agree Column1

90
Agree

10
Strong Agree

Source: Research, 2019

Figure 4.5 show that 3(10%) out 30 respondents Were Strong Agree,27 (90%) out of 30 were
Agree Islamic banking has facilitated better use of resources in accordance with small and
medium enterprise

Table 4.8: Islamic banking financing has led to growth on small and medium enterprises

27
 Growth Frequency Percent Valid Percent
Strong Agree 27 90 90
Agree 3 10 10
Disagree 0 0 0
Strong Disagree 0 0 0
Total 30 100.0 100.0
Source: Research, 2019
As above Table show that 3(10%) out 30 respondents Were Strong Agree,27 (90%) out of 30
were Agree that Islamic banking financing has led to growth on small and medium enterprises.
Figure 4.6: Islamic banking provides required capital for small and medium business
expansion

Captial requirement of small and medium business expension

Strong Agree Column1

Agree
70

Strong Agree
30

Source: Research, 2019

Figure4.6 show that 9(30%) out 30 respondents were Strong Agree, 21(70%) out of 30 were
Agree that Islamic banking provides required capital for small and medium business expansion
Table 4.9: Islamic banking has offered inventory loans to expand small and medium business
Inventory loans Frequency Percent Valid Percent
YES 23 76.7 76.7
NO 7 23.3 23.3
Total 30 100.0 100.0
Source: Research, 2019

Table 4.9 show that 23(76.7%) out 30 respondents Were say YES that Islamic banking has
offered inventory loans to expand small and medium business while 7 (23.3%) out of 30 were
say NO

28
Figure 4.7: Islamic banking has offered small and medium business a different banking
product from the formal banking products

Source: Research, 2019

Figure4.7 show that 26(86.7%) out 30 respondents Were say YES that Islamic banking has
offered inventory loans to expand small and medium business while 4 (13.3%) out of 30 were
say NO
Table4.10: Islamic banking has changed small and medium enterprise attitude towards loans
Changing attitude of loan Frequency Percent Valid Percent
Agree 27 90 90
Strong Agree 3 10 10
Disagree 0 0 0
Strong Disagree 0 0 0
Total 30 100.0 100.0
Source: Research, 2019

Table 4.10 shows that 10% were Strong Agree, while 90% were Agree that Islamic banking has
changed small and medium enterprise attitude towards loans

29
 CHAPTER FIVE
5. DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter presents a summary of the findings, discussion, conclusions and recommendations
of the study based on the research questions of the study. The purpose of this study was to
determine the role of Islamic banking on success of SMBs in Hargeisa Somaliland.

5.2 Discussion
5.2.1 Effect of Islamic Banking on Financial Performance of SMBs
The study sought to establish whether Islamic banking enhances resource utilization. From the
findings, respondents indicated to a no extent that Islamic banking has facilitated better use of
resources and had improved the sales growth rate of business. This therefore implies that Islamic
banking does not affect resource utilizations and this is likely to have least effect on sales growth
of SMBs in Hargeisa. The finding contradicts with that of Osoro and Muturi (2013) on their
study on the role of micro financial institutions on the success of SMBs in Hargeisa.
The respondents were in agreement to a little extent that Islamic banking had facilitated the
growth of business market, provided the required capital for business, enhanced accessibility to
capital, and improved financial management skills and level of competitiveness on the market.
This finding concurs with that of Plakalović (2015) who states that a high level of financial
knowledge gives entrepreneurs and their businesses competitive edge over their rivals. This will
contribute to the improvement in the financial performance of the business.
The respondents also to a little extent indicated that adopting Islamic banking interest free loans
enables businesses to gain competitive advantage share and SMBs have gained market share due
to interest free loans. Interest free loans imply that the SMB does not incur finance costs related
to the sources of funds and this enhances efficiency and effectiveness. This finding is consistent
with that of Hove, Sibanda, and Pooe (2014) that Islamic banking has a positive impact on firm
competitiveness. Adopting Islamic banking interest free loans enables businesses to gain
competitive advantage over those SMEs that lack financial resources mainly due to high interest
rates. According to Omerzel and Gulev (2011) indicates that a firm should possess unique
resources and also have the capabilities to exploit those particular resources so as to gain unique
competitive advantage.

5.2.2 Effects of Islamic Banking on success of SMBs

The respondents agreed to a no extent that Islamic banking had offered inventory loans to
expand business and had connected them with other businesses to share business experiences.
This finding is in disagreement with that of Alam (2015) who identifies that SMBs approach

30
financial institutions for asset financing and Islamic banking can be very influential in providing
these funds as the low interest rates they charge translate to more income and profits.
The respondents also agreed to a little extent that Islamic banking had provided with the required
capital. The availability of sufficient capital for the business leads to financial growth and
soundness. According to Alam (2015) most SMEs approach banks for working capital
requirements which form part of required capital. Abdulkadir (2016) on the other hand indicates
that some of the challenges in regions that businesses face includes the lack of financing and the
need to have a wider access to financial services. Inadequacy of funds to start or accelerate the
growth of a business is a hindrance to the development of many SMBs and entrepreneurs.

5.2.3 Islamic Banking and Credit Accessibility among SMBs

The respondents were in agreement to a little extent that Islamic banking had reduced the interest
rates paid on borrowed loan. The findings concur with Walid (2015) who undertook a study on
the role of Islamic Banking on economic growth in Hargeisa and stated that as interest rate
contribute to higher economic growth and established that whenever interest rates are favorable
bank lending increases and this contributes to economic growth. Islamic banks generally provide
lower bank rates or no bank rates at all but rather use Islamic model of financing business.
Moreover, respondents agreed to a little extent that Islamic banking teaches on record keeping
and financial knowledge for SMB entrepreneurs and this likely affects their financial literacy.
According to International Financial Corporation IFC (2013) most SMBs lack financial
knowledge about Islamic banking and financial products that suit their needs. This lack of
financial knowledge is not only limited to SMBs alone.
The study established that Islamic banking has diversified collateral for loans among SMBs in
Hargeisa. This finding concurs with that of Walid (2015) that as interest rate contribute to higher
economic growth. Whenever interest rates are favorable bank lending increases and this
contributes to economic growth. Islamic banks generally provide lower bank rates or no bank
rates at all but rather use Islamic model of financing business. This makes it easier for businesses
to access funds or credit since the periodic repayments are low.

5.3 Conclusions
5.3.1 Effect of Islamic Banking on Financial Performance of SMBs
The study concludes that the management team of SMBs is able to improve the financial
profitability. Furthermore, Islamic banking has led to growth of SMBs financially. Islamic
banking has improved the level of competitiveness of SMBs on the market.

31
5.3.2 Effects of Islamic Banking on success of SMBs
The study concludes that Islamic banking offers SMBs with different banking product from the
formal banking products. Furthermore, Islamic banking has ensured equitable access to credit for
my business success. Islamic banking has improved SMB’s compliance with regulatory
provisions.

5.3.3 Islamic Banking and Credit Accessibility among SMBs

The study concludes that Islamic banking customizes its products for SMBs. Nevertheless,
Islamic banking has relationship officers who keep in touch with SMBs continuously. Islamic
banking has also diversified collateral needed for loans by SMBs.

5.3.4 Effects of Islamic Banking on Financial Literacy of SMBs

The study concludes that Islamic banking has improved SMBs’ financial decision-making
processes. Islamic banking has enlightened SMBs’ on financial products available on the market.
Islamic banking has also improved the SMBs’ problem-solving skills.

5.4Recommendations
5.4.1 Recommendations for Improvement
5.4.1.1 Effect of Islamic Banking on Financial Performance of SMBs
The study recommends that Islamic banks should use new SMB banking models to target SMBs.
The use of mobile banking to enhance financial inclusion and reduce the cost of administering an
account could be a good initial step. The management of SMBs should also seek to enhance their
financial performance by increasing their uptake of the Islamic banking products.

5.4.1.2 Effects of Islamic Banking on success of SMBs

The study recommends that to utilize Islamic financing schemes in SMB financing, one of the
problems that should be overcome is asymmetric information. The government can play roles in
decreasing the asymmetric information by acting as strategic partner for Islamic bank to identify
the potential SMBs. Furthermore, SMBs should enhance their growth by actively substituting the
different banking products given by Islamic banking system.

5.4.1.3 Islamic Banking and Credit Accessibility among SMBs

As the SMB sector develops, the needs are likely to evolve. Expansion and development of SMB
operations would lead to the demand for more long-term and financially sophisticated products.
Banks should recognize these issues and look to enhance and develop their Islamic product
offerings to meet the needs of the SMB sector. The study further recommends that the
management team of SMBs should seek highly customized financial products from Islamic
banks to enhance credit accessibility.

32
5.4.1.4 Effects of Islamic Banking on Financial Literacy of SMBs
A majority of SMBs do not have sufficient knowledge about finance and management, business
skills (such as financial modeling, future planning, and forecasting) and information related to
government rules and regulations that impact their functioning.
Furthermore, SMBs should make prudent and rational decisions in connection to Islamic banking
products as a way of enhancing their financial literacy.

33
 QUESTIONNAIRE

Dear respondents,

This study is carried by two students for the purpose as part of requirement of award of
bachelor’s degree fulfillment, we are sincerely requesting you as employee to fill this
questionnaire in order to complete our graduation research project to the best of your
ability, and return your completed questionnaire to the researchers, any information provided is
strictly confidential and not using any other purpose rather than making an academic research.

Your faithfully,

Umalkhayr Ibrahim and Sumaya Hassan

Singnature____________

Thanks for your help.

34
SECTION ONE: PERSONAL INFORMATION

i. Sex:
a. Male
b. Female
ii. Age:
a. Under 19 yrs.
b. 20 – 35 yrs.
c. 36 - 45yrs
d. Over 46yrs
iii. Educational Qualification
a. Certificate
b. Diploma
c. Bachelor
d. Masters
e. PhD
iv. Working experience
a. below 1yr
b. 1-2yrs
c. 3-4
d. +5
v. Marital Status
a. Married
b. Single
c. Divorced
d. widow

SECTION TWO: THE ROLE OF ISLAMIC BANKING ON SMALL AND MEDIUM

BUSINESS

1. The using of Islamic banking and financial services is beneficial on the small and medium
business:
A. Strongly agree

35
 B. Agree
C. Disagree
D. Strongly disagree
2. Islamic banking will helpful for the financing of small and medium business:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
3. Islamic banks are more regulated form of banking as they are governed by regulatory
bodies as well as by Sharia boards:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
4. Islamic banking is strictly based on risk sharing model (profit &loss):
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
5. In practice Islamic banking is different from conventional banking:
A. Yes
B. No
6. Islamic banking has improved my level of competitiveness on the market:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
7. Islamic banking has facilitated better use of resources in accordance with small and
medium enterprise:
A. Strongly agree
B. Agree

36
 C. Disagree
D. Strongly disagree
8. Islamic banking financing has led to growth on small and medium enterprises:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
9. Islamic banking has provided me with the required capital for small and medium business
expansion:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree
10. Islamic banking has offered inventory loans to expand small and medium business:
A. Yes
B. No
11. Islamic banking has offered small and medium business a different banking product from
the formal banking products:
A. Yes
B. No
12. Islamic banking has changed small and medium enterprise attitude to be positive towards
loans:
A. Strongly agree
B. Agree
C. Disagree
D. Strongly disagree

37
38