Islamic finance for Small and medium enterprises obstacle and solution

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Islamic banking has been a sector that continues to grow each year. The sector is considered to be the only one that is growing while many financial institutions face collapse due to the credit crises. It is estimated that Islamic finance sector enjoyed an annual growth of 27% during the last two years (Divanna 2009). This study will be related to Islamic banking. In particular, this research will develop a framework for a Small and Medium enterprises financing in Saudi Arabia banks, challengers and solution. Also, the study will shed some light into the best practice that can reduce the risks of Small and Medium enterprises financing in Saudi Arabian's bank to the lowest possible degree.However, one has to ask what an Islamic bank is in the first place and what difference it has from a conventional bank.

Islamic banking can be defined as the merger of the Islamic legal doctrine stated by the early days of Islam with the modern banking. The main concept of the Islamic banking lay around the risk sharing method instead of a financing that is based on a fixed rate of return (Schaik, 2001).

There are many important features that differentiate an Islamic bank from a conventional bank. First of all, the objective and mission of the Islamic banks is deferent in that it moral principals play a much bigger role in guiding the Islamic banks operations and management actions. Secondly, because of the risk sharing principal, Islamic bank will not offer an interest -bearing services to its customers. Thirdly, Islamic banks must have an Islamic committee or board made of Islamic scholars to make sure that the bank operation and services are in accordance with Islamic law " Sharia law". There are many examples that can be given to illustrate what is usually named as Islamic transaction. For example, the term "Murabaha" describe a deal that is based on profit sharing (Dhumale. and Sapcanin) in this type of agreement, the bank will provide capital and the entrepreneur will use the funds to meet his business needs. The entrepreneur will provide the labor in form of running the business.

Profits made are shared between the bank and the entrepreneur according to prearranged ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. According to Islamic law, financial risk, justifies the bank's claim to part of the profit. Until the loan is fully repaid, the profit-sharing will continue. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits (Siddiqui S,1983).

Islamic banking in Saudi Arabia is newer than the system running in other Islamic countries such as Malaysia. That is why Saudi Arabian's Islamic banking needs more enhancement and development. Meanwhile, the assets of Saudi Arabian's Islamic banking are more than Malaysian assets and less in operational site. In fact, Saudi Arabian Islamic banking is providing Islamic finance through different ways such as current Islamic Banking, Islamic branches of conventional banks, and windows of some Islamic service of conventional banks. As a result, this new Islamic banking system in Saudi Arabia provides less information for researchers.

1/2 definition of SMEs

There is no a common definition for SMEs. But according to organization for economic cooperation and development (OECD) the definition of SMEs not only depend on the economical situation of a country but also it is depending on the social and cultural dimensions. However these differing patterns are leading to the different definitions of SMEs depend by different countries. Huns some countries looking for number of employers, others use capital, and some other use industry type. In addition some countries use annual sales and assets. For example, the European Commission (EC) definition adopts staff headcounts, annual sales and assets. So Multilateral investments guarantee agency (MIGA).So, the international finance corporation (IFC) definition of the small enterprises have two of three conditions. First, the enterprise has employees number less than 50. Second, the enterprise has a total assets less than 3$ million. Third the enterprise has total annual sales less than 3$ million. On the other hand, medium enterprises have two of these three conditions. First, the enterprise has employees number less than 300. Second, the enterprise has a total assets less than 15$ million. Third, which has a total annual sales less than 15$ million.

Asia Pacific Economic Cooperation (APEC) defines the small enterprises are the number of employed personal between 5 and 19. So the medium enterprises have employees between 20 and 99 people.

United nation industrial development organization (UNIDO) definition is no common definition but the definition depends on the purpose of classification. So the UNIDO advises countries depend into account the quantitative indicator for SMEs definition (Rana and Farah 2007).

Definition of SMEs in selected regional countries according to World bank






GNI per


Income group

MAMEs per 1000 pop

MAMEs empl as a% of total

















Upper middle


















Upper middle













United Arab Emirates



















World bank January,2007

1/3 financing SMEs

Financing of SMEs has much attention in the recent years and has become important issue for experts working in financial and economical development. However, most banks want to engagement SMEs because this segment profitable as a competition in the retail sector. Financing SMEs is just one of a large overall package banks provide to this segment Such as saving, payments, and advisory services. As a result, the SMEs financial market is becoming increasingly competitive. Thus banks have developed new business model, Risk management systems and technologies to serve SMEs.( the world bank 2008).So, Almost of banks have SMEs clients, because the banks perceive SMEs service is a profitable. However, there are significant differences in lending practices, business models, obstacles and drivers of SMEs finance for banks operating in developed vis-à-vis developing countries. The differences are likely the deficiencies in the contractual and informational frameworks and less stable macroeconomic environment in developing countries.( Beck.T,Kunt.A,Laeven,Peria.M 2006).

1/3/1 drivers

Banks deal with SMEs mainly for commercial reasons not because government policies or requirement. Thus when banks want to deal with small business loans the banks require collateral. Also, the rate of arrears is a factor in determining the small business loans.(Jenkins.H ). In general banks interest in SMEs because that other sectors profit are decreasing due to competitions, that effect banks strategic to look for new markets which give banks able to grow with the consumer and corporate sectors decline (La torre.A, Peria.M, Schmukler.S 2008).

1/3/2 obstacle

Small firms have higher financing obstacles than large and medium enterprises. In addition, younger, smaller and domestic enterprises have higher financing obstacles than large, older and foreign owned. However, financing obstacles affect small firms' growth than large firms' growth. Small and large enterprises face big for some of financing obstacles such as interest rate payments, Banks Lack of financing resources and firms need special relationship. Also, the access to firms financing such as leasing, export and long term finance are more constraining for SEs. These affect SEs growth than large firms' growth. Moreover, higher level of institutional development has lower financing obstacles than enterprises in countries with less developed institutions. So, the property right increases SEs external finance (T.beck2007). Moreover, the enterprises characteristics such as younger, smaller and domestic ownership have higher obstacles than older, larger and foreign ownership. Also, the enterprises in countries that have high level of stock markets, financial intermediary development, higher legal system and higher GDP per capita have lower financial obstacles.(Beck.T,Kunt.A,Laeven.L,Maksimovic.V 2006). For example, In Eu banks, the main obstacle to SMEs lending is a lack of equity base. However, the large EU banks lend to the SMEs less than small and medium - size banks.(Waganvoort.R 2003).

1/3/3 risk management

SMEs financing is higher risks compared to large enterprises. Because of the SMEs always do not provide the banks inadequate information and the quality of the information that banks needed. Thus banks deal with SMEs as a short - term financing methods such as banks loans, overdraft and trade credit (European commmission2003).thus banks today are creating separate units to serve SMEs. So banks can reduce the risk of dealing with the SMEs sector by developed the bank mechanisms to deal with informality, documentation, regulation requirements and the costly constitution of guarantees. In addition, banks limited the range of products that offer to SMEs which offer mostly short - term.(La torre.A, Peria.M, Schmukler.S 2008).

1/3/4 constraints

Small enterprises have financing constraints more than large enterprises. Also, the improving the institutional environment will increasing the access to small and medium enterprises to external finance. However, small enterprises are facing adequate of information to access to financial markets .thus, small enterprises use more informal finance than large enterprises. .(Beck.T,Kunt.A ,Maksimovic.V 2008).

1/3/5 technology

Small enterprises have financial information problems to obtain external finance. Thus relationship lending is one of the strongest technologies to reduce information problems of SMEs.

Small business lending technology has Categorizing small business financing by financing intermediaries can be divided into four main lending technologies. Asset based lending, financing statement lending, relationship lending and credit scoring.

First of all asset based lending financing decision is based on the quality of the collateral. This type of financing is very control intensive and expensive. That requires bank concentrate to the turnover of these assets. Second, financial statement lending has concentrated on evaluating financial information from the enterprises financial statement. That led to the lending decision depend on the income statement and strength of the balance sheet. Financial statement lending is appropriately for transparent enterprises with certified audited financial statement. Thus this type of technology usually use with large enterprises. Third, relationship lending, the lender in this type of technology build his decision depend on information about the enterprises and its owner with contacts over time. Owner information is gathered through deposit, provision loans and other financial products. Also, some information is gathered through members such as customers and suppliers, who has interested by information about the enterprises and owner. Fourth, credit scoring is still a new phenomenon. However, credit scoring is a deputation to lending with discrimination analysis and other statistical models used in consumer lending.( A. berger 2002) .

2 Islamic financial industries

Islam encourages Muslims to participate in a partnership as it is a form of cooperation and collaboration between individuals. Moreover, it leads to more efficient and better use of resources. Some individuals only have resources but they do not have the expertise or even the time to manage the resources. Hence, partnership projects are necessary to make use of the resources and put them in more productive and beneficial activities. With the combination of the resources and expertise, the resources would be used more efficiently and not left idle. Therefore, we can see that a number of partnership projects have been established and discussed in the area of Islamic jurisprudence. In general, partnership in Islamic jurisprudence (fiqh) is of two types: holding and contract partnerships. A holding partnership refers to the joint ownership by two or more persons of an asset by 'optional' or 'compulsory' means of inheritance or wills or joint purchase or other circumstances. In the other hand, a contract partnership refers to a 'joint commercial enterprise' or mutual agreement by two or more persons to contribute to the capital of the partnership and share in its profit or loss. Partnership projects for commercial purposes basically can be further divided into two major categories i.e. trading and agricultural partnerships, and can take place in several forms. The divisions can be illustrated by the following points (A. Muhammad 2007).:

2/1 the models of sale

2/1/1 Murabahah

This is a sale contract where the cost and the profit margin are disclosed to the buyer. Murabahah is usually called cost plus because the bank tells the client exactly that - the cost and how much they are adding to it. "I bought this machine at US$ 10,000 and I'm going to sell it to you at US$ 15,000. You can pay me within a year." This is unlike a normal sale, where the vendor's profit is not disclosed. The normal sale where only the end selling price is stated is known as Musawamah. In this type of sale, the bank discloses to the client only the sale price. "I'll sell this machine for US$ 20,000 and you can pay in 15 months. Would you like to buy this?" The buyer can agree to the price or negotiate until the parties reach an agreement. Murabahah is the instrument used most commonly by Islamic banks, although some use Musawamah. In Murabahah, the bank buys an underlying asset and then sells it. Thus, there is an exchange of asset and money, unlike a loan, in which money is exchanged for money.Islamic banks use Murabahah in two ways. First, Murabahah is utilized in asset acquisitions where the client wants to own a tangible asset, such as a piece of machinery, a building or inventory. This can be called true-trade Murabahah, where the client is interested in owning the item acquired by the bank. True-trade Murabahah cannot be used to finance business expenses such as salary and overhead expenses, as the bank cannot buy and sell those. Under commodity Murabahah (also known as Tawarruq or reverse Murabahah), Islamic banks buy certain commodities (for example, metals and crude palm oil) from a commodity broker, then sell them at cost plus profit on a deferred basis. Since this is a credit sale, the client does not have to pay immediately. The client, however, does not want this commodity. He or she wants cash. The client thus sells the commodity (either on his own or more commonly via the bank on his behalf) to another commodity broker and receives cash. The client then uses this and pays the bank the deferred payment owed. In commodity Murabahah, the client is not interested in owning the item that the bank acquired, but rather wants only cash. Commodity Murabahah is popular in the Middle East because it facilitates cash financing. The client can use the cash for working capital purposes. Although commodity Murabahah is allowed by sharia scholars, they frown upon it because the intention of the parties is solely to get cash. They are not interested in the underlying commodities in the transaction. This same reason (intention of the parties) is the basis for prohibiting Bai al Inah (sale and buyback). In commodity Murabahah, the bank buys from one broker and the client sells to another broker (i.e., more than two parties are involved). In Bai al Inah, the exchange is between two parties only (the bank and the client). The bank sells its asset (building, land lots, shares and so on) to the client on a deferred basis (say, at US$ 10,000 to be paid in six months). As the client has bought the asset and now owns it, he or she sells back the same asset to the bank on spot basis and gets cash (say, US$ 8,000). Just as commodity Murabahah is popular in the Middle East. Murabahah could be used to fund the purchase of an asset already in existence - a car, a completed building, machinery and so on. To fund an asset that is not yet in existence (agricultural produce that needs to be cultivated or properties under construction, for example), Salam or Istisna are used (A. Muhammad 2007).

2/1/2 Salam

This is a forward sale contract used for generic goods (i.e., commodities). Salam is an exemption to the general rule of sale because the vendor is allowed to sell on a forward basis, meaning the subject matter has yet to exist on the day of sale. The Prophet allowed farmers to sell their uncultivated agricultural produce on a forward basis, with the buyer paying the full price on day one and the parties agreeing on the quantity and time of delivery. This way, farmers could use the money paid as capital to start cultivation. Upon maturity, the farmer delivered the agreed quantity of the produce to the buyer. In the current banking scene, Islamic banks can use this instrument to fund small farmers. A wheat farmer can sell one ton (1 000 kg) of wheat to an Islamic bank, to be delivered in six months. The bank pays the total purchase price (say, US$ 10,000). After six months, the farmer delivers the wheat to the bank, which can sell this on the open market or to any interested third party to gain profit. Salam, however, is not popular with Islamic banks (A. Muhammad 2007).

2/1/3 Istisna

Istisna is an extension of the Salam concept. Salam is limited to generic goods and requires full payment up front. Istisna, on the other hand, is used for the construction or manufacturing of unique goods (which require certain specifications). It is similar to Salam because it is used to finance goods not yet in existence; however, it does not require full payment up front (the payment is flexible). For example, a small and medium-sized enterprise (SME) wants to start a shipping business and wishes to purchase a ship. The SME could approach an Islamic bank for help with the acquisition, asking the bank to construct the ship. In effect, the SME is buying the ship to be constructed from the Islamic bank (an Istisna transaction). The SME thus would be paying the Islamic bank the purchase price (the cost to the bank to buy the ship and the profit margin it is charging). The bank, of course, does not have the capacity to build the ship and thus would file an order with the shipbuilder. This is another Istisna contract, under which the Islamic bank buys the ship to be constructed from the shipbuilder. The second leg of the transaction is the cost of the ship that the bank is paying to the shipbuilder. Simply put, in this parallel Istisna, the bank buys the ship under construction from a shipbuilder (cost to the bank) and sells it to the SME (selling price, i.e., cost plus profit). The SME then makes a deferred payment to settle what it owes the bank (A. Muhammad 2007).

2/2 the model of Lease

2/2/1 lease

Islamic banks can also use leasing as an alternative to sale-based instruments. B ownership is transferred to the client, with money exchanged at time of sale. In a lease transaction, ownership does not transfer to the client; money is exchanged with the right to use an asset. Ijarah simply refers to a lease transaction. In an operation similar to

Murabahah, the Islamic bank first buys the asset from a supplier then leases it to the client. However, in contrast to the Murabahah undertaking, the bank continues to own the asset. Upon the expiry of the lease, the client returns the asset to the bank. In the Islamic space, all leases are treated as operating leases. If the client wishes to own the asset at the end of the lease, then the parties need to enter into an additional contract. Usually, there will be either a sale or gift at maturity, with the end of the lease followed by ownership transfer. This is known as Ijarah Muntahiyah Bi Tamleek (lease ending with ownership). Some markets refer to it as Ijarah Thumma Bai (lease then sale) or Ijarah wa Iqtina (lease and acquisition).

2/3 the models of Partnership

Unlike sale and lease transactions that involve exchange, the third category of instruments calls for the pooling assets. These are partnership-based contracts in which the Islamic bank invests capital to become partners with the client. The return to the bank depends on the actual business performance of the client. There are two basic instruments in this category (A. Muhammad 2007).

2/3/1 Musharakah

Under this mode of financing, both bank and client contribute capital and agree to a profit-sharing ratio. "Capital" does not necessarily refer to cash; it can also be capital in kind. Thus, an Islamic bank could provide cash capital while the client could use its tangible asset as capital in the partnership. The bank as one of the partners has the right to make strategic decisions and manage the business. The bank could also choose to be a sleeping partner. Based on the performance of the business, both partners would share the profit and losses (A. Muhammad 2007).

2/3/1 Mudarabah

In a Mudarabah financing, only the bank (Rab al maal or capital provider) provides capital while the client (Mudarib or entrepreneur) manages the business. The bank cannot interfere in the day-to-day running of the business. Any profit is shared, with the bank (as the sole Rab al maal) having to absorb losses (i.e., monetary losses). The client is not paid a salary, and if he or she does not make a profit, the client loses all the time and effort expended on the venture.

Islamic finance based on prohibitions of Riba. That's mean in Islamic financial businesses and transactions must be real. For example, sale of food, row material. However, Riba means an increase over principal in a loan transaction. So the structure of Islamic finance looks to Riba as unmoral behavioral which an increase is taken as a charge from debtor. It deal with transactions involving exchange of money for money (A. Muhammad 2007).

3 current operational statuses of the Islamic financial institutions in Saudi Arabia

3/1 The Saudi Arabia economy

Saudi Arabia economy depends on the oil sector. Which represents 85 percent of budgeted revenues and it represents 90 percent of export earnings (The NCB sustainability report for business Excellence 2008).

The Saudi GDP has increased proximity five- fold among the period 1970-2008. For example the Saudi GDP increased from 812.4 thousand million SR in 2007 to 848.5 thousand million SR in 2008. That led to increase an annual growth rate of 0.9%. That is mean real GDP per capita rose from 46.4 thousand SR 2007 to 46.8 thousand SR in 2008(ministry of Economy and planning 2009).

Over more, the productive sectors building and construction; industry; electricity, gas and water the most important actives of the economic activities in 2008. Their growth rates were 3.6%, 4.29% and 6.7 respectively. On the other hand, services sector, transport warehousing and communication; tread and hotel; and finance, insurance, real stat and business services That growth rate were 11.8%, 5.7%, 4% respectively(ministry of Economy and planning 2009).

Real of the Saudi privet sector was very effect in economic development. That added value was increased from 444 thousand million SR in 2007 to 466 thousand million SR in 2008(ministry of Economy and planning 2009).

3/2 the reality of the Kingdom of the small enterprises

Small enterprises are representing 90% percent of the total number of enterprises operating in Saudi in 2007, which are employing 82% of total employment from the private sector. Moreover the proportion of its contribution to GDP has been estimated about 28% of the total GDP that has generated by the private sector (except oil). Thus the support and the development of this sector is such as the main engine for economic development to achieve sustained and steady growth in all economic sectors. .( Centre for Development of SMEs Council of Saudi Chambers of Commerce and Industry 2008)

Saudi Arabian population will be reached proximately 81 million by 2024. The Saudi population has grown about 2.5% per year. Where the Saudi population in 2004 was 16.5 million with average age was about 17.3 years and unemployment in this period was 7% (Hassan.k almahdi 2009)

According to eight development plan, there are most important constraint of SMEs is delay of the procedures. Obtaining funds from finance institutions is difficulty administrative and technical constraints. Those represent 38% .however, marketing constraints represent 16%. After that labor constraints represent 13%. Finally, technical, organization, and information represent respectively as 12%, 11%, and 10%. Thus Saudi Arabian government set up the Saudi industrial development funds (SIDF) to relieve the legal, administrative and technical constraints on SMEs with providing training for professional worker and technical support. In addition SIDF support SMEs obtain funds from Saudi commercial banks. The SIDF guarantees up to 75% under this program from the loans provided to SMEs by the Saudi commercial banks, however, the SMEs are the highest number of the privet sector in Saudi Arabia in 2004 it represent 93% of 369,000 firms licensed (Eighth development plan )

In the kingdom of Saudi Arabia there are a several different definitions have been used for SME. The Saudi Arabian general investment authority has classified small enterprises that have less than 60 employees and medium enterprises have less than 100 employees. So, the small and medium enterprises center as the part of eastern province chamber of commercial and industry has been defined small enterprises employ less than 20 workers. But medium enterprises employ between 21 to 100 workers. Also, according to Kafala as the part of Saudi industrial development fund to support financing SMEs has defined SMEs with up to 20 million Saudi riyals (5.3 USD) in sales or exports. In addition, there are other definitions considering the small enterprises' capital less than 5 million Saudi riyals (1.3 million USD). Wile medium enterprises' capital between 5 to 20 million Saudi riyals (the EU-GCC camber 2009).

Small and medium enterprises in Saudi Arabia are contributing 28% of total national economic activity.

There were a total of 785.000 establishments were registered in SA during 2008.more than 700.000 from these establishments were SMEs. So, according to Riyadh chamber of commerce and industry there are 96% of Saudi enterprises have less than 100 workers. Also, according to Jeddah chamber of commerce and industry there are 95% of commercial registrations in Saudi Arabia were SMEs.

Number of employees by sector and company size in Saudi Arabia

Size of company(empl)





Social services


Contracting &building




%in total


0 to 4













5 to 9













10 to 79













20 to 39













40 to 59













60 to 79













80 to 99













100 t0 199













200 to 299













300 to 399













400 to 499













500 and more


























(the EU-GCC camber 2009)

3/3 Saudi agency responsible for MSEs

Saudi Arabia has some privet and some public agency responsible for SMEs supporting program as following.

3/3/1 public agency responsible

3/3/1/1 Saudi industrial developing fund

The Saudi Arabian industrial fund (SIDF) was established under the supervision of the ministry of finance. That is objective to support the development of the privet industrial sector. The Saudi Arabian industrial fund SIDF offers fund to SMEs under Kafala program to overcome the SMEs financing difficulty. The Kafala has been established to cover a percentage of lenders risk in case default of guaranteed SMEs to repay the loan (Saudi industrial fund ).

In term of the Saudi industrial development fund (SIDF) has been established to offer Kfala program to financing SMEs. With has a capital of 200 million Saudi riyals (53 million USD).however, Kfala program has funded 50% by the Saudi government and 50% has funded by Saudi local banks. In addition, kafala work as a loan guarantee program. In 2006 there were 36 loans have been guaranteed by 49 million Saudi riyals (EU - Gcc 2009).

3/3/1/2 Saudi credit bank (SCB)

The Saudi credit bank has established under the supervision of ministry of finance with capital total was about 939 million Saudi riyals. The Saudi credit bank aim to supply loans to Saudi citizen with free interest for people with limited financial resources (Saudi ministry of finance).however, the Saudi credit bank support social loan to low - income with 200.000 Saudi riyals (53.000 USD).

SCB programs objective to provide a new loans to encourage Saudi citizens to start their business such as limousine drivers and SMEs. Also the Saudi bank objective to self employment of Saudi citizens among micro- projects. However, SCB has faced difficulty in term of identifying its beneficiaries and their repayment (Saudi finance ministry).

3/3/1/3 centennial fund

The centennial fund has been created by king Abdullah in 2004 as a special vehicle to support microenterprises. That work with young Saudi citizen between 25 to 35 years old. However, centennial fund offers loans up to 200.000 Saudi riyals to projects have been approved and repayment of financing does not start until after six month from financing start day. So, repayment runs within five years from the financing has started. In addition, centennial fund

Provide other programs such as administrative support and training courses. Finally, the total projects have been funded in 2008 reach 1.040. So, the total number of fund since the inception is 1.520 with a total amount 264.7 million Saudi riyals (Saudi finance ministry).

3/3/2 privet agency responsible

3/3/2/1 Chamber of commercial and industry

The large Saudi chamber and commercial and industry all have attention with SMEs as a separated department. That has interested by training, marketing and smaller finance, research on SMEs issues and export promotion. But most of the businesses services have offered for SMEs are not as large companies. Because of the large companies have resources for research, marketing, training….esc. On the other hand, some of the research papers are sufficiently with the official development fund (EU - Gcc 2009).

3/3/2/2 Abdullateef Jameel

Abdullateef Jameel is a privet sector has a community services program has called Bab Rizq Jamee. It has focused on microenterprises and support Saudi SMEs. Thus Bab Rizq Jamee support Saudi citizen to find job opportunities. Until the end of 2008 there are 58.000 Saudis profited from employment and self- employment programs supported by Abdullateef Jameel community services program (EU- GCC 2009).

4 National commercial bank

4/1 introduction

The national commercial bank has been established in 1953 as the first local bank in Saudi Arabia. That is one of Arab's largest bank, with total assets of 221.8 billion SA (59.1 billion USD). The national commercial bank has 5,380 employees. Whose are servicing proximity 2.2 million customers. So NCB has domestic branches network and international branches in Bahrain and Lebanon. In addition, it has representations in the United Kingdome, Singapore, Japan and South Korea. Moreover, IN 2008 the NCB had acquired of 60 percent of Turkiye Finance katilim bankasi. In 2007, NCB capital has been first saudi's bank licensed by the kingdom's capital Market Authority. However, the NCB branches in December 2008 have been reached a total of 275. So the number of ATM's machines increased to 1,393 at as a same period. While the number of point of sale machines reached to 12,806. In 2008 customer telephone banking transactions grew to 156 million (The NCB sustainability report for business Excellence 2008).

4/2 Ownership

First of all, the Saudi ministry of finance's public investment fund which majority owned a shareholding of 69.29 percent. Second, the General organization for social insurance owned a further 10 percent. Finally, fewer than 100 Saudi nationals and private companies owned the remaining 20.71 percent (The NCB sustainability report for business Excellence 2008).

4/3 NCB Islamic services

The NCB opened first Islamic branch that provide Islamic services in 1990. In 2005, the NCB committed to transfer its retail branch network to Islamic banking. In December 2006, all NCB's branches networks have been transferred to Islamic banking. (The NCB sustainability report for business Excellence 2008)

5 data

5/1 the data sources

5/1/1 the primary data

5/1/2 the secondary data

5/2 construction of the sample

5/3 characteristics of sample

5/5 limitation of the study

6 Theoretical methods

6/1 Research questions and research approach

Most of literatures do not contain the Islamic finance for SMEs. Because a lake of information in this field. But the literatures mention to obstacles and constraints of financing SMEs. According to the literatures SMEs have more obstacles and constraints than large enterprises. That limited the SMEs capability to obtain External financing. Which reflect banks performance to provide SMEs with credit services. In addition, the literatures mention to the financing SMEs in both developed and developing countries. However, the literatures have presented the obstacles regard to both the enterprises characteristics (size, age, activity, location…etc) and countries characteristics (stock market, financial intermediary development, higher legal system and higher GDP per capita….etc)

According to previous studies there are internal factors (inside the enterprises) and External factors (outside the enterprises) prevent the SMEs to get external financing.

The objective of this study is to explore if there are internal factors (inside SMEs and inside the Saudi banks) probably affect the growth of the Saudi Arabian banks Islamic financing model provided to SMEs. Following questions

Q1 - whether Saudi Arabian banks are facing obstacles to provide small and medium enterprises with Islamic financing models?

Q2- Are the Saudi Arabian banks considering the financial statement of small and medium enterprises for determining the Islamic financing obstacle?

Q3- do the Saudi Arabian banks decisions affected by the small and medium enterprise characteristics for providing the financial service according to Islamic financial model?

Q4- which kind of obstacles affect Saudi Arabian banks decisions for provide Islamic financing models to small and medium enterprises?

First of all: whether Saudi Arabian banks facing obstacles to provide small and medium enterprises with Islamic financing models?

For seeking the best answer for this question should we investigate and analyze the information was provided by SMEs to Saudi Arabian banks. We look to both sides first, investigating and studying the SMEs information when the Saudi banks accept the SMEs the financial request. Second, investigating and studying the SMEs information when the Saudi banks reject the SMEs the financial request. Because of the SMEs have obstacles. On the other hand, we will audit the Saudi Arabia banks procedure according to providing the Islamic financing models to SMEs such as the regulation, liquidity, technology, marketing, competition, and government subsidy….etc.

Second, are the Saudi Arabia banks considering the financial statement of small and medium enterprises for determining the Islamic financing obstacles?

When we want to answer this question must be investigated in the financial statement .that has been provided by SME. We are looking for any financial indicators the Saudi Arabia banks depend on the determination of some of the Islamic financing obstacles. Those are facing financing the SMEs. Through determine some of the financial statement factors such as capital structure, value of sale, total of debtors, and total of creditors …..Etc. and find what a correlation between this factors and banks decisions. In the both sides first, investigating and studying the correlation when the Saudi banks accept the SMEs the financial request. Second, investigating and studying the correlation when the Saudi banks reject the SMEs the financial request. Because of the financing SMEs have obstacles.

Third: do the Saudi Arabia banks decisions affected by the small and medium enterprise characteristics for providing the financial service according to Islamic financial model?

After we got the answer of two previous questions, we knew whether if there are financing obstacles prevent the Saudi Arabia banks to provide Islamic financing to SMEs Through studying the financial statement and non financial information have been provided by SMEs to the banks. In this stage we will investigate whether there are others factors affect the Saudi Arabia banks decision to financing SMEs according to Islamic finance models. Those factors represent SMEs characteristic such as size, age, activity, management and location……etc. thus; we will determine each SMEs characteristic individual. In the next step, we look for any correlation between the each individual characteristic and the bank Islamic financing decision. In the both sides first, investigating and studying the correlation when the Saudi banks accept the SMEs the financial request. Second, investigating and studying the correlation when the Saudi banks reject the SMEs the financial request.

Forth which kinds of obstacles affect Saudi Arabian banks decisions for provide Islamic financing models to small and medium enterprises?

In this stage when we knew whether indeed some obstacles (inside the SMEs and inside the Saudi Arabia banks) prevent the SMEs to obtain the Islamic financing from Saudi banks. Here we will collect all the Islamic financing obstacles. That we were know from the investigation in the previous questions. After that we will classify the Islamic financing obstacles in to two lists. First group represent the obstacles prevent the SMEs to obtain the Islamic financing from Saudi banks. Second group represent the obstacles limit the value, kind, and term of Islamic financing.

6/2 Empirical model

In this study we will use empirical model suggest that significant relations between SMEs Islamic financing obstacle and SMEs characteristics, factor of financial statement, and Saudi Arabian bank procedure.

Financing obstacle iy = a + B SME characteristic iy + C factor of financial statement iy +L Saudi bank procedure +D region iy + e iy

SME characteristic= size, age, activity……etc

Factor of financial statement= capital, total of debtor, total of creditor…..etc

Saudi bank procedure= regulation, liquidity, technology, marketing, competition…..etc

7 risk management in SMEs

7/1 introduction

7/2 types of financial risk

7/3 risk assessment

7/4 collateral

7/4/1 determinants of collateral equipments

7/5 default

METHODOLOGY AND expected research

The study shall use questionnaires and interview methods to gather pertinent data. The questionnaires and interviews will be made in such a way that the employees will spend less time in answering it. Moreover, the study shall also use interviews with open ended questions. By using such methods the study can be probed deeply and the study will determine the importance of microfinance for the Saudi commercial banks.

This research illustrates a comparison of financing small and medium enterprises between the Islamic countries that have gone through vast experience gained through implementing Islamic financing small and medium thoroughly for a long period of time and was supported by the circumstances of religion, politics, society and economy. The results of this research will also show a comparison between these countries and the Islamic financing small and medium in Saudi Arabia to acknowledge how to benefit from the experience of these countries in this field and to avoid the factors mentioned above which effects the application of it in Saudi Arabia.