A Comparative Study of Islamic Micro Financing for SMES in Somalia and Nigeria: Experiences, Challenges and Opportunities

In most underdeveloped African countries, Small and medium enterprises (SMEs) employ the greatest number of people in the market. Somalia and Nigeria are among the countries where many poor people depend on the informal business sector to earn a living. This study makes a comparative analysis of Islamic Microfinancing for SMEs in Somalia and Nigeria in order to investigate if the existing Islamic Microfinance Institutions (IMFIs) are covering current needs and will be able to meet future expectations for SMEs sector. Primary data was collected through the use of a questionnaire to SMEs in Hargeisa, Somalia and Ilorin, Nigeria. The research revealed that due to the lack of a formal financial sector and challenges including heavy collateral requirement; 80% of SMEs in Somalia did not utilize the products of IMFIs while in Nigeria 53.3%, used the products of IMFIs. These figures are surprising given that in Somalia, there is a huge underserved informal sector available within the country. The SMEs in Nigeria have better opportunities than the SMEs in Somalia considering the constraints they are facing. The SMEs in Somalia are not receiving sufficient credit loans to improve their businesses. Thus, the study recommend that the Somalian government should focus on creating of a proper formal financial system; settling up a proper microfinance sector; providing easy access to finance; minimizing the collateral requirements; building the capacity of SMEs and providing them a professional training; integrating the economic system; building a strong legal framework and creating ways of attracting international investors. Solving the above issues might encourage SMEs in the future, and that, in turn, might have a positive impact on the economic development of the country.