The role of microenterprises in economic development has been generally recognised, as discussed so far. However, MEs continue to experience challenges in developing their businesses, including financial problems, input material, markets, management and external factors. Since this research mostly focuses on financial problems, particularly access to financing, the discussion will centre on financial issues.
2.7.1. Conventional Perspective
The literature generally indicates that limited capital and lack of access to financing are the MEs’ hardest problems (Barber, et al., 1992; Khandker et al., 2013). Banks do not tend to risk making loans to MEs since they have limited or zero collateral and, given the banks’ high administration costs, preference is given to larger and established enterprises with good credit ratings. Thus, to solve the capital problem in Bangladesh, MEs borrow money from family members, moneylenders or other informal sectors who charge very high interest, sometimes reaching 180% to 240% per year (Khandker et al., 2013: 25).
There are certain reasons why MEs have difficulties in accessing finance. For example, in European countries in particular, these could include “discrimination in assessment criteria”, which is a common problem as people with assets have higher credit ratings; loans are refused on the basis of “previous county court judgements”; “preference is given to those with an employed spouse and many of the unemployed have non-working spouses”; “preference is given to existing customers”; and there is “poor presentation of business proposals to finance providers”(Westall et al., 2000: 82).
The problems faced by MEs have also been explored by Liedholm (1999) based on survey results from five countries in Africa. He locates three main problems: capital, markets, and access to raw materials including other intermediate inputs. His research does not show strong evidence that government control and regulation is the most
important problem. He also looks deeply at problems in each stage of MEs’ development: start-up, the growth period, and the situation at the time of the survey. Each stage has quite different problems: while ‘starting-up’, businesses have problems finding fixed capital, ‘growing’ businesses have problems in expanding, such as finding tools, equipment, transport and workers. When the survey was being conducted by Liedholm (1999: 75-79), most enterprises claimed that access to raw materials and intermediate inputs was the biggest problem.
It should be noted that finance is indeed not the only problem; other problem include legal underdevelopment and corruption could hinder a firm’s growth, in which the smallest size of firm are the most negatively affected (Beck et al., 2005: 170). On top of such matters, financial difficulties tend to create further problems, such as inability to reach a wider market outside the local community, and inability to create higher-quality products, as well as failure to utilise the proper technology (ADB, 2009: 36).
Other problems to be considered by MEs include ‘management’, ‘poor attitude and motivation’ of both owner-manager and employee, ‘lack of managerial training’, ‘lack of entrepreneurship skills’, ‘poor response to technology’, and ‘unfavourable quality background’ (Barber et al., 1992: 9-10).
2.7.2. Islamic Perspective
Since they mostly concern operational issues rather than conceptual ones, the problems faced by Muslim and non-Muslim MEs seem to be the same, and mostly involve access to financing. Chapra (1992: 328) argues that there is an unequal distribution of credit and wealth among different groups of enterprises, which results in most credit going to large enterprises. Generally, SMEs are considered to have potential; however their poor condition is due not to a lack of spirit or a disinclination to work or becoming micro entrepreneurs, but mainly to a lack of capital sources (Chapra, 1992: 329). In exploring the financial exclusion issues, Chapra (1992: 330) identifies some reasons why the banks do not want to serve the SMEs: (i) serious economic disadvantage; (ii) the high risk and expense of providing the services. However, Chapra (1992: 328) asserts that propagation of and support for the development of SMEs to reach large numbers as a tool to reduce
poverty will remain a dream unless serious attention is given to financial access, since this financial aspect seems to be the biggest challenge for SMEs.
The same problem is also identified by Obaidullah (2008b: 4-6), who assumes that the main problem facing poor people is lack of access to financial services: on average, only 20%-30% of the population of a developing country can be served by financial services, and the rest are neglected. However, lack of financial access is not the only problem; the poor, particularly the self-employed, have inadequate assets, and the majority of them use assets belonging to others, which then may create exploitation and asymmetry between efforts and earnings due to ownership (Haq, 1996: 221). This basic problem must be resolved, and there is a need for the government and other related institutions to be more active in providing such access.
Another related problem is collateral; Obaidullah (2008b: 6) points out that this is a consequence of people’s lack of assets. The bank requires collateral to reduce the risk of non-repayment of credit. Without collateral it is hard for the bank to provide credit; hence, an alternative approach to replace collateral should be devised.
However, the issues discussed so far are not necessarily generalisable to all parts of the world. For example, a study by Nasr (2002: 186) points out that the lack of financial access is not the major constraint in Egypt, where there are other more essential problems affecting the growth of microenterprises. These are impoverished market circumstances and inadequacy of appropriate public services, including utilities and healthcare. Nasr (2002) finds a relationship between religious background and financing pattern.