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Shari’ah-compliant loans can transform the Muslim-owned retail SME sector

Small and medium-sized enterprises (SMEs) make up the backbone of the South African economy. They make up 91% of all private sector businesses, provide employment to about 60% of the labour force, and their total economic output accounts for roughly 34% of South Africa’s GDP.

But the sector’s growth is being hampered by a lack of access to finance, with the credit gap in South Africa being estimated to be as high as R340bn. The situation is even more dire for Muslim-owned businesses, who seek Shari’ah-compliant products that are not readily available in the market. Alternative lender Merchant Capital estimates that Muslim-owned businesses contribute as much as 10% to South Africa’s GDP – and this could grow exponentially if they had better access to working capital.

“There’s a significant opportunity to boost the Muslim-owned small retail sector – and in the process, the broader South African SME sector – by providing Shari’ah-compliant working capital solutions that are based on sophisticated technology, and therefore far easier to access and use,” said Merchant Capital’s Ryan Cohen. “We estimate that of the approximate R300 billion funding gap in the South African small business sector, about 20% is in the retail sector alone”.

Shari’ah-compliant financial services have existed in South Africa for about three decades now, however lending products have been limited and where they have existed were filled with administrative friction for the customer and the financier, and could only accommodate certain components of a business’s working capital requirement.

This is because Shari’ah finance differs fundamentally from Western economics by not recognising money as an asset. It’s not a store of value, so lenders cannot give out money and charge interest for the use of money.

Shari’ah products look at the underlying asset, or where the intrinsic value exists. For a retailer, that value is in the trading of the business. So, in a Shari’ah contract, the concept of risk sharing exists and not the idea of transferring risk (as banks would traditionally do).

“If you look at the marketplace today, there’s an extremely limited universe of Shari’ah-compliant lending products, particularly in the field of working capital or fintech,” said Cohen.  

This is all starting to change, though. Earlier this month, Merchant Capital together with Standard Bank Shari’ah Banking launched a Shari’ah funding product, that aims to both address the significant SME funding gap in South Africa while offering a new source of working capital for Muslim entrepreneurs in the retail sector.

The new product was created to comply with Shari’ah and is the first of its kind in Southern Africa. It gives Muslim-owned retailers who have a point-of-sale (POS) device and R30,000 in monthly card sales the ability to access funding, with a flexible repayment mechanism based on monthly turnover.

Mohammed Ameen Hassen, Head of Shari’ah Banking at Standard Bank, said fintech-based working capital products had the potential to transform the lives of Muslim entrepreneurs in South Africa. “Until now, Shari’ah solutions were either non-existent or an administrative nightmare, which meant many businesses would simply go without funding, limiting their growth in the process. This new product is all about simplicity and ease, and will make a real difference to Muslim SMEs,” said Hassen. 

Merchant Capital is a proud Partner of the NSBC.