"Islamic Finance Researches" (IFR)

Narrative of the Study of Credit Management Policies in the Islamic Banking Industry (The Case Study of Small and Medium Businesses)

Document Type : Science - Research (Islamic Banking)

Authors

1 M.A in Financial Management, Department of Islamic Financial Management, Faculty of Management and Economics, Imam Hussein University, Tehran, Iran

2 Faculty Member, Islamic Financial Management Department, Faculty of Management, Imam Hussein University, Tehran, Iran

Abstract

1. Introduction and Objective
Credit guidance in financing small and medium-sized businesses (SMBs) plays a pivotal role in transforming and strengthening the production sector of any country. In the context of Iran, despite the presence of sufficient liquidity in the economy, the inability to channel credit effectively towards productive activities remains a key challenge. Without understanding and addressing the causes behind this misdirection, sustainable industrial growth cannot be achieved.
     The main objective of this study is to investigate the mechanisms, challenges, and policy solutions for credit guidance in financing SMBs in Iran. The research specifically focuses on the Islamic banking industry, aiming to identify structural, behavioral, and perceptual barriers faced by the key actors involved in financing SMBs.
2. Methods and Materials
This study adopts a problem-oriented narrative research method, chosen for its suitability in analyzing complex, dynamic, and multi-actor economic issues. Given the evolving nature of the research problem, the three-layer analysis technique was applied to dissect the situation at three levels:

Perceptions of the main actors,
Institutional and regulatory structures,
Observed behaviors within the credit allocation system.

     The research employed a purposeful sampling strategy of the judgment type, selecting representative participants from each group of stakeholders in the banking and production sectors. Data were validated through focus group discussions, ensuring that multiple perspectives were captured and cross-verified. The final narrative of the problem was constructed based on the integration of these analyses.
3. Research Findings
The analysis revealed a set of interconnected obstacles hindering effective credit guidance towards SMBs, including:

Inefficiencies in the banking system’s credit evaluation and risk assessment mechanisms,
Overbearing governmental financial control over the banking sector,
The prevalence of mandatory loan allocations that reduce operational flexibility, and
Structural misalignments between monetary policy objectives and production sector needs.

     Moreover, the three-layer analysis uncovered differing viewpoints among stakeholders:

Producers seek economic stability and predictable financing conditions but often encounter bureaucratic and risk-averse banking processes.
Banks tend to prefer low-risk lending to larger, established firms, seeing SMBs as financially unstable.
Regulators emphasize the socio-economic benefits of SMB credit allocation but often lack adequate oversight mechanisms to ensure effectiveness.

4. Discussion and Conclusion
The study confirms that the credit guidance system in Iran’s Islamic banking industry is constrained by both structural inefficiencies and conflicting stakeholder priorities. Without targeted reforms, the misalignment between banking operations and production needs will persist, undermining industrial growth and employment opportunities.
     Based on the findings, the following policy recommendations are proposed:

Strengthen banking sector resilience by improving capital adequacy ratios and asset quality.
Review and rationalize mandatory credit facilities to ensure better alignment with production priorities.
Reduce the government’s financial dominance over the banking network, promoting alternative and sustainable financing channels.
Enhance the efficiency of the credit facilitation system through modernized evaluation and monitoring tools.
Balance monetary policy objectives with production sector needs, ensuring inflation control while preventing financing bottlenecks for SMBs.

     These measures, if implemented collectively, could create a more equitable, efficient, and sustainable credit allocation system in the Islamic banking sector, ultimately supporting the growth and competitiveness of SMBs in Iran.

Keywords

Main Subjects

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Volume 14, Issue 1 - Serial Number 31
August 2024
Pages 115-150
  • Receive Date: 18 May 2024
  • Revise Date: 01 February 2025
  • Accept Date: 31 August 2024