Translated from an Arabic article titled: نحو حشد موارد مالية متنوعة للتمويل الأصغر The current global and regional economic landscape presents a challenge and heightened …
Translated from an Arabic article titled: نحو حشد موارد مالية متنوعة للتمويل الأصغر The current global and regional economic landscape presents a challenge and heightened …
Translated from an Arabic article titled: نحو حشد موارد مالية متنوعة للتمويل الأصغر
The current global and regional economic landscape presents a challenge and heightened risks for small and emerging businesses. These challenges extend to the institutions that finance them, underscoring the urgent need for innovative solutions to mobilize financial resources—especially amid intense competition from various economic sectors.
Importance of Microenterprises
Microenterprises are vital to most economies, particularly in developing countries. Their small size often makes them more agile and innovative than larger firms, enabling them to quickly adopt new trends and technologies. Globally, they account for approximately 90% of all businesses and over 50% of employment. In emerging economies, formal microenterprises contribute up to 40% of national income. According to the World Bank, 600 million new jobs will be needed by 2030 to accommodate the growing global workforce, making the development of small and medium enterprises (SMEs) a top priority for governments worldwide.
Difficulty Mobilizing Finance
In emerging markets, small businesses create 70% of most formal jobs. However, access to finance is a major impediment to their growth. Small businesses are often self-employed ventures unlikely to be listed on stock markets and typically owned by a small number of shareholders, often from a single extended family.
When small businesses are unable to obtain bank loans compared to larger companies, they rely on self-funding or cash from friends and family to initially launch and run their operations. The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal micro, small, and medium enterprises (MSMEs) in developing countries, have unmet financing needs of US$5.2 trillion each year, which is 1.4 times the current amount.
The Funding Gap
Small businesses often complain that a lack of funding prevents them from growing and fully exploiting lucrative investment opportunities. This gap between available funding and productive use is known as the ‘funding gap.’ Limited financial offerings and low returns on typical deposit accounts make investments unattractive. Additionally, the market for investor funds is highly competitive, with governments and large corporations having a significant appetite for available funds, putting pressure on the small business sector.
The microcap sector tends to suffer due to high levels of uncertainty and potential risk. Smaller companies typically have a limited track record of maximizing investment and providing adequate returns to their investors, few internal controls, and limited external controls. They are unlikely to adhere to stock exchange rules and attract in-depth auditing efforts. Smaller companies often have few tangible assets to offer as collateral, making investors wary due to uncertainty about how their money will be used and the returns they may receive. Consequently, investors may shy away from investing in them, especially when other investment opportunities are available.
While it is difficult to change the supply of funds or the competitive market for those funds, it is possible to reduce the perceived risk level for small businesses, thereby improving their ability to mobilize finance. Small businesses can demonstrate that they have treated previous investors well, adopted key internal controls, and have a rigorous and documented approach to decision-making, making them more attractive to investors. The size of the financial gap varies greatly from region to region, with the Middle East and North Africa experiencing the highest ratio of financial gap to potential demand at 88%, and about half of formal microenterprises lacking access to formal credit.
Potential Sources of Funding for Small Businesses
While there are many potential sources of funding for small businesses, many have practical issues that may limit their usefulness. Some these sources are highlighted below.
Self-Funding and Business Owners
Self-funding is a good source of financing because these investors may accept lower returns, as their motives are not purely financial. However, personal funding and contributions from friends and family are limited for most. Wealthy business owners willing to take on the risk of investing in small businesses are also limited in number. They are usually specific about their investments but can be very useful due to their business acumen and useful contacts.
Bank Financing and Leasing
Banks are usually willing to lend over the long term, secured on major assets such as land and buildings. However, obtaining medium-term financing to fund operations is often more difficult for small businesses, as Islamic banks are traditionally conservative. The loss of one bad loan requires many good loans to recover that loss. Consequently, many small businesses end up financing medium- and long-term assets with short-term financing, known as the ‘maturity gap.’ Banks often require personal guarantees from the owner-manager, risking personal wealth to finance the business. Leasing assets rather than buying them is beneficial for small businesses as it avoids raising capital costs, but leasing is limited to tangible assets such as cars and machinery.
Venture Capital and Listing
To attract venture capital funding, small businesses must present a business idea that will create high returns sought by venture capitalists. For many small businesses engaged in mundane work, venture capital funding may not be feasible. Venture capitalists rarely want to continue investing for the long term. Proposals must show how they will ‘exit’ or release their value after a number of years, often by selling the company to a larger company or growing it to a size that allows listing on a stock exchange. Achieving a listing makes it easier to raise funding, but many small businesses cannot hope to achieve the necessary size.
Crowdfunding
Crowdfunding has grown rapidly, with over US$5 billion raised worldwide in 2013. There are now more than 500 online crowdfunding platforms, and over 400 crowdfunding campaigns are launched daily. Crowdfunding allows people to invest in ideas and projects they are interested in or believe in, sometimes willing to take greater risks and accept lower returns. Enthusiastic supporters often encourage others to participate, making crowdfunding beneficial for small businesses by connecting them directly with investors willing to finance new technologies and innovations.
Government’s Role in Financing
Governments play a crucial role in financing small businesses. The inability to raise funding for profitable projects can negatively impact national wealth. Governments support innovation, an area where small businesses excel, and their growth boosts employment. Governments help small businesses by providing grants, tax breaks, counseling, loan guarantees, and equity investment.
Waqf as a Financing Solution
Several studies have discussed using cash endowment to finance projects, proposing the idea of merging endowment with Qardh Hasan to provide financing for the poor. Establishing a non-profit financial intermediary in the form of a bank that provides Qardh Hasan, with capital from cash waqf, has been recommended. Cash Waqf has been used to promote financial access for microenterprises in Malaysia and Indonesia, playing a significant role in local economic growth and socio-economic development. The different cash waqf models have shown that the combination of cash waqf and microfinance institutions can effectively address the issue of micro-entrepreneurial finance. Proper channeling of waqf funds to Islamic microfinance institutions can positively develop borrowers’ skills and capacities, contributing to the achievement of the SDGs.
Sukuk Issuance in the Form of Wakala Investment
By the end of 2023, Zitouna Tamkeen decided to issue a Sukuk in the form of ‘Wakala bi al-Istithmar’ worth 6 million dinars divided into 60,000 shares with a par value of 100 Tunisian dinars per share to mobilize financial resources for microfinance. The Sukuk issued will yield 10.65% and last for 7 years. Wakala Investment is a contract where the principal authorizes the agent to carry out investment operations with an agreement on an expected profit margin. The agent’s fee can be a lump sum or a percentage of the realized profits.
Zitouna Tamkeen is the first microfinance institution in Tunisia and the Maghreb region to adopt an economic empowerment approach that focuses on value chain finance, applying the principles of Islamic finance. The aim is to promote the financial and economic inclusion of youth and disadvantaged populations. Zitouna Tamkeen operates through a large network of 19 branches covering the majority of Tunisia’s territory and through two mobile branches to reach the deepest pockets of poverty in Tunisia. The establishment of Zitouna Tamkeen on a large scale is one of the success stories of the IsDB Group. Experience has shown that limiting interventions to only financing or capacity building was not an effective or sustainable approach to achieving the desired result, so the IsDB launched Economic Empowerment as an innovative and customized solution that enables the targeted beneficiaries to play an active role in their countries’ economies.
Importance of this Initiative
The issuance experience is a bold step given the global and regional economic conditions, especially in the wake of the Covid-19 pandemic, which hurt the Tunisian economy and impacted the liquidity of the financial sector. The direct repercussions have been seen in the pricing of microfinance products, affecting the sustainability of small businesses.
Success Factors
The key success factors for Zitouna Tamkeen focus on the productivity and economic sustainability of youth and vulnerable groups’ activities. Poverty alleviation starts with economic inclusion, establishing a real relationship between the recipient of finance and the real economy. Economic inclusion involves connecting a person to the real economy by discovering investment opportunities adapted to their skills and needs, opening communication channels with economic actors, developing technical and managerial capacity building plans, and financing. Value chain finance plays an important role in developing financial products suitable for economic inclusion and small business sustainability.
The Zitouna Tamkeen Foundation’s business model is based on building smart partnerships with the public, private, and non-profit sectors. Zitouna Tamkeen has established Tamkeen for Development (T4D), a non-governmental organization, and International Center for Economic Empowerment (ICEE), a consulting firm, to export the economic empowerment model to neighboring countries and generalize this approach internationally with competent development partners.
Innovation as a Solution
Endowment funds represent one of the advantages of Islamic finance, providing inexpensive financing. In countries where endowment funding is not possible, MFIs resort to capital markets, an innovative solution despite the relative cost of capital. The current issuance of Zitouna Tamkeen’s ‘Wakala bi al-Istithmar’ Sukuk represents an innovative and bold solution in mobilizing financial resources, especially in light of the current economic conditions regionally and globally, reflecting confidence in its performance. Waqf can be used to develop models for providing financial services to poor populations. Waqf and other charitable acts, such as Zakat and Infaq, can provide additional and sustainable sources of funding for microfinance institutions at low costs, financing the poor and micro-entrepreneurs.
