THE role of banks in promoting entrepreneurship is a strategic issue to any economy, since financial capital is arguably one of the important factors in entrepreneur development. This is especially so as Malaysia is recovering from the financial crisis that hit this country in mid 1997.
Though we have not yet recovered fully, there are signs that this is possible in the near future.
It is the aspiration of the Government that the positive economic forecast will give budding entrepreneurs hope for better opportunities.
Certainly, this country is not short of innovative entrepreneurs, but getting start-up capital has always been a problem for them.
This is so because the abilities of prospective entrepreneurs to provide the initial capital are limited.
Therefore, the reliance on external sources cannot be avoided. However, new entrepreneurs also face difficulties in securing financing from banks.
There are several reasons why banks are reluctant to extend a helping hand to them. Firstly, banks normally require borrowers to produce past business records.
These records are necessary for the banks to evaluate the potential of the business while trying to judge the ability of the borrowers to repay the loan.
As new entrepreneurs are just about to start their businesses, this requirement is impossible to fulfil.
Secondly, it is difficult to convince banks of the potential and viability of a new business venture, especially one that involves a new product or service yet to be proven in the market. The level of risk associated with this kind of business proposal is too high to be assumed by the bank.
It is not unreasonable to suggest that the reluctance of banks to assume high risks reflects the lack of expertise in the types of business proposed by the entrepreneurs.
Therefore, the former find it difficult to estimate the earning potential of the proposed venture.
Thirdly, banks also require entrepreneurs to provide collateral to secure loans. This problem can be solved if a family member is willing to offer any form of fixed asset to be used as collateral. At this stage we can say new entrepreneurs cannot really rely on the banking system for their initial capital.
This, to a certain extent, has a negative impact on the entrepreneurship development in this country. The difficulty or inability to secure financing could destroy the spirit of prospective entrepreneurs. This is not consistent with the aspiration of the Government, which is to see more participation in business, especially among the Malays.
The reluctance of banks to offer financing may drive new entrepreneurs to loan sharks.How does Islam view this problem?
The banking system, especially the Islamic one, should find alternative ways of financing for these budding entrepreneurs. The commonly used debt financing (or al-Bai’ Bithaman Ajil for Islamic banking) which allows the borrowers to assume all risks may not be the way forward in promoting entrepreneurship.The way forward is for the banks and the entrepreneurs to form a partnership and share all risks as well as the profits. Islam does allow debt financing, with the condition that no interest is applied on the borrowers.
In Islam, such a financing facility is known as the qardul hassan.
However, viewing the present reality, it is unreasonable to expect a qardul hassan facility to finance a risky new business. Therefore, Islam proposes an alternative method, which emphasises the sharing of both risks and returns by both the banks and the entrepreneurs.
Two such facilities available in Islam are known as contracts of al-mudharabah and al-musharakah. In these two methods of financing, the banks provide the financial capital and the entrepreneurs will offer their expertise and knowledge.
The banks, as financiers, then can choose whether to get involved in the management of the businesses (al-musharakah) or allow the entrepreneurs to totally manage the businesses (al-mudharabah).
The concept of partnership promoted by both methods of financing is conducive for the development of entrepreneurship in this country. It is a win-win situation for both entrepreneurs and bankers.The entrepreneurs will get the much-needed financing and, at the same time, do not have to carry the burden of debts. On the other hand, the banks will get a higher rate of return on their investments, consistent with the level of risk they have to assume.
However, one might argue that the al-mudharabah and the al-musharakah contracts will eventually reduce the returns for entrepreneurs because they have to share the profits with the banks.
But we have to bear in mind these contracts represent partnerships between the two parties.
Since both parties share the risks, it is only fair to expect that they also share the profits on the pre-agreed ratios. At the same time, we must view these two contracts in line with the efforts made by the Government to promote Islamic banking in this country.
From the Islamic point of view, the risk and profit sharing between the entrepreneurs and the banks could eliminate the implementation of the interest-based debt financing.
Usury is prohibited by Islam as Allah says: “Those who devour usury will not stand except as stands one whom the Evil One by his touch has driven to madness. That is because they say: ‘Trade is like usury’, but Allah has permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); But those who repeat (the offence) are Companions of the fire; they will abide therein (forever). Allah will deprive usury of all blessings but will give increase for deeds of charity; for He loves not creatures ungrateful and wicked.” (al-Baqarah:275-276).
It is my view that the al-musharakah contract is a more effective form of financing new business ventures. Through their involvement in the management of the businesses, the banks could extend their expertise in the financial management of the businesses.
Financial management is a very important aspect of managing business, especially in the early stages.
Poor financial management is said to be one of the many reasons why new companies fail Consistent with the sunnah that business is a prime source of livelihood (nine out of ten), it is hoped that the development of the Islamic banking system in this country will benefit budding entrepreneurs, Muslims and non-Muslims alike.
Nevertheless, the first step forward is for banks to enhance their levels of expertise to meet the demands of entrepreneurs.
At the same time, to ensure successful partnerships, the banks have to exercise more prudent investment procedures to protect the interest of the shareholders and the depositors.