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The foregoing analysis of the constraints of the development of small-scale business in the formal sector tends to suggest that ‘collateral‘ encourages lending for unproductive uses and causes shortage of equity which is a chronic and critical problem for SSB financing. In many cases the equity of the entrepreneur is financed by loans from relatives and friends, or from moneylenders. Equity financing is undoubtedly a high risk area requiring careful appraisal and follow-up. In some developing countries, efforts have been made to provide finance to the SSB with sound projects but with inadequate collateral, through risk-sharing arrangements which are usually in the form of equity.” This indicates a major shift in policy. It is widely recognized that for the conducting of efficient business and. for the proper use of public money, financial aid from specialized financial institutions should not be made available unless the small-scale business shares ownership and control with the lending authorities. The view that financial institutions should not bear the administrative responsibilities of enterprise is also changing.

The emerging shift from debt to business partnership is also accompanied by a greater degree of control and coordination among various agencies serving the SSB. Some countries have established multipurpose corporations to bring under unified control the functioning of various institutions distributing finance, raw materials, tools and machinery and assisting in the selling of products. Such a unified pattern has already emerged in the United States where small business investment companies work in collaboration with the Small Business Administration. The lending authority of the Small Business Administration commences as soon as the procedures regarding the lending of the funds are completed.

The shift in emphasis from ‘collateral’ to the viability of the project as a basis of lending puts ‘risk evaluation’ in its proper perspective. In business finance, ‘safety’ is not permanently attached to any specific form. Lending on the basis of collateral can be hazardous because in case of business failure, it is difficult for a normal asset to be disposed of for a price equal to the value of the loan for which it was created. On the other hand, an economically viable project judged along with the integrity and ability of the management ensures the repayment of the loan.

The development of small-scale business in the Islamic perspective, apart from changing the basis of assessment, should lay more emphasis on establishing a sound industrial base, with special emphasis on the development of the capacities and capabilities which can contribute to the promotion of resource-based industries. The costly error of establishing financial institutions before building industrial capabilities should be avoided. In most Islamic developing countries, adequate indigenous technical skills and managerial skills already exist which could be easily modernized with a minimum infusion of capital and know-how.

Policy biases against small enterprises should be removed. Incentives should be provided to attract people with means and modern skills. Small-scale enterprises should not be isolated in industrial enclaves as a result of the erroneous notion that they are “infant industry”. They should be encouraged to establish links with large manufacturing enterprises. In well-planned industrial programs, small-scale and large scale business enterprises should play a complementary and supplementary role.

The most crucial need of the small-scale business is the provision of equity capital, and the Islamic modes of finance based on risk bearing and profit sharing fully ensures this. The broad parameters of an integrated policy program within an Islamic framework are explained in the following section.


WRİTER: Mohammed Mohsin

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