Small and Medium Enterprise Financing in The Gambia: Role of Islamic finance

Abstract

SMEs play a crucial role in emerging and developing countries, as they contribute tremendously to income generation, job creation, and socioeconomic growth. In the Gambia, the role SMEs play in the growth and development of the economy is tremendous as the sector contributes over 60% of the urban labour force and 20% to the country’s GDP. Despite its importance, the sector still needs support from all stakeholders, including government and financial institutions. This study aims to delineate the challenges SMEs face in obtaining finance and to further explore the level of awareness and adoption of SME managers towards Islamic finance products. For a sample of 87 SMEs in the Gambia, results of the analysis indicates that, the major challenge hampering the growth of the sector among others is lack of finance. The findings also indicate that SME owners would prefer to use Islamic financial contracts to meet their financing challenges for business expansion. Thus, Islamic finance instruments can serve as a solution to the financing problems that SMEs face. Participatory contracts, such as Mudarabah and Musharakah, can play a crucial role given their risk sharing features in increasing SMEs’ financial inclusion and ultimately enhance the development of the sector. Accordingly, there is a need for the government of the Gambia to create a robust regulatory framework required for the development of the Islamic finance industry that could offer support in mitigating the financing constraints faced by SMEs.