The Viability of Profit-Loss Sharing Models to Finance Small and Medium Enterprises: The Case of Saudi Arabia

This study aims to explore the role of profit-loss sharing (PLS) models to alleviate access to finance for small and medium enterprises in Saudi Arabia, in the light of the stringent requirements of traditional financial institutions, to ensure the growth and development of the SME sector. A central question of this study is the extent to which Islamic banks can adopt profit-loss sharing modes to finance SMEs. The main results present the barriers preventing Islamic banks from the application of profit-loss sharing that increase incidence of agency problems for such institutions. High asymmetry of information and the nature of Islamic banks as depository institutions place more constraints on extending finance on the basis of profit-loss sharing. Profit-loss sharing dominates the literature of Islamic finance, however, there is a lack of rigorous empirical evaluations of the potential benefits of profit-loss sharing to finance SMEs. There is a need for public intervention to stimulate the role of non-banking institutions that are considered more suitable for long-term, riskier investments to offer alternative finance for SMEs on the basis of profit-loss sharing