Can Islamic banking effect positively on the performance and motivation of entrepreneurial and medium enterprises in Malaysia
Objectives
To identify factors influencing individuals’ courage to start business.
To establish econometric model based on variables, which may affect entrepreneur motivation.
To identify to what extent development of Islamic banking system affects start-ups.
The main objective of this paper is to understand the relationship of Islamic banking and entrepreneurship and to determine how it can improve medium enterprise efficiency in Malaysia. This topic has been focus point for numerous public studies and hence, has been explored by various researchers over the years. There are certain papers, which have been reviewed from international literature, which focuses on the Islamic banking system in different countries. For instance, Farahmand (2014) conducted a research on the topic of “Boosting entrepreneurship by the use of Islamic Banking in Iran”. He concludes that, Islamic banking is similar to direct investment, which can be helpful for the improvement of the economy. Small or extremely talented enterprises may suffer from imperfections in the financial market. For instance, transaction costs and information asymmetries. In addition, without inclusive financial system, small enterprises have to take all the costs on their own and invest from their own wealth or internal resources in order to become an entrepreneur. Moreover, small enterprise also may suffer from lack of credit histories and collateral or even lack of connections. These obstacles may reduce their opportunities, which causes an inequality in the market, and reduces economic growth. Nevertheless, Islamic banking in Iran proved that they have huge potential to growth and boosting the entrepreneurships in this nation. In Malaysia, year by year, Islamic banking becomes more common and the number of Islamic banks are increasing. The objective in this paper is to introduce the Islamic banking tools that cause growth in economy and promote entrepreneurships in Malaysia.
Another study conducted by Hove et al. (2014) is “impact of Islamic Banking on entrepreneurial motivation, firm competitiveness and performance in South African small and medium enterprises”. In their findings, they state that Islamic banking has a positive effect on firm competitiveness. It would be great if banks apply interest free policy in order to help and support Small Medium Enterprises (SME). Firms obviously face challenges such as lack of financial resources and high rate of interest, which leads them to stay uncompetitive. The paper also claims that Islamic banking effects positively to the entrepreneurial motivation. According to these findings, Islamic banking is recommended for the financial institutions in order to help and motivate the skilled entrepreneur. The Islamic banking offers should be promoted more by the government to the SMEs. Besides, by offering to conventional banks a reduction on tax policies, they should be encouraged by the government to offer Islamic banking services.
There are also other papers examining this issue from different aspects. For example, Mohammad Hassani (2010) lists some issues that Islamic banks are facing these days in Iran. Hamid Zangeneh (2001) addresses some operational and theoretical problems of Islamic banking. Islamic banking is facing a huge contradiction in Sudan and Iran because of the economic sanction in these countries. (Humayon Dar 2010). Noor Ahmed (2007) explains the role of financial intermediaries for the society and the role of Islamic banking system as a financial intermediary. He argues that Islamic banking is not useful as it directly enters the industry and trades and so on. Thus, they should leave the market for other conventional banking systems. Raquib Zaman and Hormoz Movassaghi (2001) analyzed the growth of Islamic banking in the last four decades. They observed services and product, which are offered by the Islamic banking and its financial performance. They believe that all the process were not done under the Islamic banking principles and it needs to be improved. Conclusions are hypothetical because all the survey, which have been done are theoretical studies.
(Askari, et al 2011) The basis of the modern Islamic banking is Mudarabah, which consist of two main principles: first, the providers of the capital shares the profit with the bank in case the provider is depositor. Second principle is the profit sharing for vice versa case where the bank lands money. The profit gained from the business would be divided between bank and entrepreneur, depended on a contract amongst them. However, if the entrepreneur faces a loss in project the only party that takes it, is the bank. Significance of profit sharing is the main highlight of Islamic banking, which can influence positively to the economy. All in all two main factors that encourages the small enterprises in Islamic banking is risk-sharing and promotion of entrepreneurship. In general, by studying international and national papers it can be summed up that Islamic banking can definitely contribute not only to the Malaysian market but also to the world welfare.
Majority of researches on this topic have been done conceptual and theoretical. This report will analyze this case empirically. Moreover, the paper illustrates the relationship of Islamic Banking and Entrepreneurial Motivation and Medium Enterprises Performance in Malaysia. The main reason for the shortage of the empirical researches are, firstly the data scarcity, secondly the number of Islamic banks are few compared to conventional banks. This study will be beneficial for investors and small entrepreneurs to access the contribution of Islamic banking to the small businesses and startups in Malaysia.
