2.8.1. Conventional Perspective
In developing MEs, Johnson (2007) suggests that one should consider the complexity and diversity of MEs, as they can be categorised at three levels: new start, non-growing business, and growing business. This implies that, depending on the point in their lifecycle, MEs must be treated differently. He suggests two approaches for new MEs, considering that they do not have experience in the new business they are initiating; this
new experience can be given through internships and on-the-job training, based on past experience analysis. Treatment for non-growing businesses is quite different, considering that this type is trying to survive; credit is very beneficial in increasing the family’s income. However, Johnson also finds that credit is not the only requirement: savings facilities are also necessary, since most of these MEs tend to use savings as capital. Moreover, to help them develop the business, non-financial indirect assistance seems to be more effective. Johnson (2007: 106-112) proposes indirect programmes, as a change in policy will: (i) encourage MEs’ growth; (ii) help them to gain easier access to materials; (iii) create a link between MEs and other businesses in order to build a better marketing system. The government can play a role in MEs’ development through intervention in macro policies in two channels: providing resources for production, and collaboration with NGOs to provide training and services (Ledgerwood, 2000: 29).
Acknowledging the potential of MEs to assist poor people to become self-sufficient, Servon (1998: 25-27) proposes some strategies to enhance MEs’ development: (i) providing bigger loans to qualified MEs to improve the business; (ii) encouraging MEs to reach a larger market rather than simply focusing on the low-income population, as this will aid the business’s growth; (iii) managing specific skills training for potential MEs, removing the gender barrier, and assisting them to work with other organisations as an entry point to build up larger networking and experience; and (iv) focusing only on trustworthy and hardworking MEs when delivering resources.
On the other hand, Elkan (1995:104) argues that MEs’ development strategies undertaken by improving financial facilities, providing training in management and accounting and developing better infrastructure are misplaced. They are more suitable for application in larger businesses rather than informal businesses. Elkan (1995) considers technical training supported by volunteers to be more appropriate for MEs than management training. Thus, he suggests, they need indirect assistance, such as developing the market for the informal sector, rather than direct assistance as above.
As a strategy to expand MEs’ market, Miller (1994) suggests building links and networks among MEs and wholesalers, particularly in rural-based MEs in developing countries
(Miller, 1994). Links and networking with large enterprises can also be created in the form of franchising and subcontracting (Islam, 2003: 35).
Further, Westall (2000) suggests a comprehensive strategy for developing microenterprises, by ‘creating enterprise communities’. The proposed strategies cover vast areas, from community-led enterprises to encouraging larger corporations to supervise MEs in developing markets (Westall et al., 2000: 9-15).
The best practices of the CGAP (Consultative Group to Assist the Poor, a multi donor association committed to enhance microfinance services for the poor through providing steady, diverse, and convenient financial access) suggest some lessons to be learnt on how to develop MEs through microfinance. Those include the following (Obaidullah, 2008b: 8-9):
(i) MEs need more than just credit - they need other services such as savings, insurance, and money transfer services;
(ii) “Microfinance is a powerful tool” in poverty alleviation as it enables the poor to increase earnings, develops property, etc.;
(iii) Successful micro financing can only be realised by integrating it with the state’s financial system;
(iv) “sustainability through a shift from a charity-based, donor-dependent approach to a market-based, for-profit approach”;
(v) Committed local financial institutions are the main points of departure for developing MEs, managing all funds collected through household savings into loans and other services for the neighbourhood area;
(vi) maximum interest rates for the borrowers must be removed;
(vii) capacity-building, in terms of building solid and sound institutions and administrators, must be the focal point;
(viii) transparency throughout the disclosure of accounts, and accurate financial and social reports.
The above best practices imply that microfinance is about more than just providing micro credit; it covers the provision of non-financial services and, hence, calls attention to the notion that “…access and not the cost of microfinance should be the main focus in designing and implementing a micro finance program for poverty alleviation” (Obaidullah, 2008b: 9). Besides, those best practices cover a wide area in terms of how to build a robust microfinance process in providing services to MEs, which in the long run can contribute to poverty alleviation.
2.8.2. Islamic Perspective
The appropriate strategies in developing MEs should also reveal the difficulties they face. In view of MEs’ need for financial access and education, Chapra (1992, 2008) suggests that the following solutions can be considered: (i) opening wider access to credit by implementing Shari’ah microfinance (Chapra, 1992: 329); (ii) providing vocational training suitable to SMEs’ requirements; and (iii) provision of infrastructure and marketing facilities in both rural and urban areas (Chapra, 2008: 70).
The financial structuring system is offered with the intention of removing the disadvantages faced by conventional banking in providing credit for SMEs (Chapra, 1992: 330-331). In general, there are two reasons – as discussed in the previous subsection – why the banks tend to neglect SMEs: great disadvantages of SMEs’ business and high costs involved in maintaining the small amount of credit. Hence, removing these disadvantages requires the willingness of the government to pay more attention and commitment to help SMEs rather than large businesses; the government should also provide a “loan guarantee scheme” to secure the risk of default, although some studies have found that the repayment rates of SMEs are high (Chapra, 1992: 330). To some extent, this structuring system, especially the guarantee scheme, has been implemented in Turkey and seems capable of helping microenterprises to obtain credit and achieve more sustainable growth (Obaidullah, 2008a).
Beside the financial solution, Chapra (1992: 317) proposes some other strategies to promote and encourage the development of SMEs: (i) appreciating and consuming local products; (ii) change in political and bureaucratic policies in supporting SMEs; (iii) increasing the SMEs’ capabilities in management and technological aspects, by providing adequate training; and (iv) removing the unfair treatment of SMEs compared to large- scale companies.
Considering the needs of MEs, which include having collateral to obtain credit and other services, Obaidullah (2008a: 34-35) examines the success of a Turkish government agency called KOSGEB in developing SMEs; this provides non-financing services, such as credit guarantee services (al-kafala) and business development services. This service plays an important role in developing MEs, which then helps the MEs to grow and sustain themselves.
In conclusion, Obaidullah (2008b: 10) states that “The Islamic approach puts overwhelming emphasis on micro enterprises development through financial and non- financial assistance, empathy and cooperation…is also more inclusive with greater emphasis on the needs of the poorest of the poor”. Thus, it can be implied from the strategies for developing MEs that the conventional and Islamic perspectives are similar. However, the Islamic view on developing microenterprises is more human-oriented and covers what the conventional view has left behind, i.e. empathy.