The role of maqasid shariah in the credit evaluation by islamic bank for small and medium-sized enterprises in Malaysia

Abstract

Small and Medium-Sized Enterprises (SMEs) businesses face challenges securing financing for both capital and operating expenditures. As a result, SMEs tend to utilize personal loans and credit card facilities to fund their businesses. The difficulty in securing financing for SMEs was due to various reasons, one of which was the lack of understanding of key determinants in credit evaluation for financing approval. Another issue is that Islamic Bank has been criticized for replicating conventional banking practices in credit evaluation. Islamic banking’s risk appetite is similar to conventional banking, while principally Shariah banking should promote a risk-sharing spirit. There is a dearth of research that examined the behavior of Islamic banks towards SMEs in Malaysia, especially in credit evaluation on financing. Additionally, not much research in Islamic banking discussed the credit evaluation process, but much attention was given to the issues of Shariah-compliant products. Thus, this research explores how Islamic banking evaluates SMEs’ credit standing based on character, ability, means, purpose, amount, repayment, and insurance (CAMPARI) credit evaluation model, and whether Maqasid Shariah is being considered throughout the credit evaluation process. With a single case-study approach, this qualitative research conducted eleven semi-structured interviews with the subject-matter experts from the chosen Islamic developmental bank. The data of the interviews from various respondents were coded and interpreted through thematic analysis using computer-aided qualitative analysis software called NVIVO. The research reveals that the credit evaluation approach in ABC Bank is much different from other commercial banks due to its mandated role to assist the SME sector. For the Maqasid Shariah's consideration, the officers believe that purpose of financing and the nature of business are the only core Shariah concerns when evaluating the financing applications. As a result of the research findings, a framework called Maqasid Financing Program has been developed, together with a credit evaluation template, which will help the Islamic banks to evaluate credit applications based on Maqasid Shariah. The research has significant theoretical and practical contributions through the embedment of Maqasid Shariah into the CAMPARI evaluation model and the pragmatic proposed framework that can be applied to credit practice.