The impact of islamic banking on entrepreneurial motivation, firm competitiveness and performance in South African small and medium enterprises

Abstract

Through its commonly recognised characteristics of zero interest loans and the sharing of profits, losses and risks Islamic banking is rapidly gaining importance in the contemporary business world. Yet, there is little empirical evidence that point to the impact of Islamic banking on the key economic drivers such as entrepreneurship, competition and performance of small and medium enterprises (SMEs) particularly in South Africa. Hence, this paper examined the impact of Islamic banking on entrepreneurial motivation, firm competitiveness and business performance of SMEs in South Africa. To this end, a survey was carried out and data was gathered by means of questionnaires on a sample of 150 SME owners/managers in the Eastern Cape and Gauteng Provinces. Structural equation modelling was employed to analyse data using the Smart Partial Least Squares (PLS) software. The findings reveal that Islamic banking has a positive impact on both entrepreneurial motivation and firm competitiveness while the relationship between entrepreneurial motivation and the business performance of SMEs was found not to be significant. Furthermore, the study found that firm competitiveness has a highly significant and strongly positive impact on business performance of SMEs. In view of these findings, the paper concludes with some implications and policy recommendations for both the banks and the government.