Exploring the Impact of Islamic Finance Principles on Micro and Small Enterprise Performance: A Literature Review

Abstract

Both micro and small enterprises (MSEs) can drive economies to growth and eradicate poverty, but numerous challenges challenge their finances. The principles of Islamic finance, with other-centered equity, ethical quality, and risk-sharing, have the potential to considerably benefit MSE development and commercialization as compared to conventional systems. This review systematically analyzes existing literature relating Islamic finance principles to MSE performance based on the synthesis of work conducted in Uganda, Oman, Indonesia, and Nigeria with an objective of identifying the gaps to be covered by the preceding empirical study using a qualitative approach. The findings show a positive relationship between the application of mechanisms of Islamic finance, including profit-sharing, interest-free financing, and partnership-based models, and the business performance indicators of profitability, revenue growth, and sustainability. However, the review pinpointed major gaps in available research, including a constricted geographical cover, a small sample size of enterprises, and inadequate gender-dimensional exploration. Further, some inherent methodological inconsistencies, such as ambiguous performance indicators and sampling biases, additionally hamper the generalization of findings. To overcome such gaps, this study suggests that research should be extended into the rural and less-represented regions, should explore gender issues, and should use more solid methodological approaches. This would enable researchers, policy-makers, and financing bodies to appreciate and utilize the very full potential of the principles of Islamic finance in empowering MSEs to promote inclusive economic development.