Developing Islamic P2P Financing Framework as an Alternative To nMSME Funding In Nigeria

Abstract

The nano, Micro, Small, and Medium Enterprises (nMSME) sector plays a crucial role in fostering socio-economic growth, particularly in emerging economies. However, in Nigeria, the sector's contribution to economic development remains limited due to inadequate access to finance and the high cost of available funds. As a result, nMSMEs face low financial inclusion, a high mortality rate, and a minimal impact on GDP, contributing to widespread unemployment and psychological distress, particularly among the youth. Although several funding models have been proposed to address these challenges, the problem persists. Islamic Peer-to-Peer (P2P) financing has emerged as a potential solution that aligns with the principles of socio-economic justice, offering cost-effective financial options that promote entrepreneurial innovation, wealth creation, and employment opportunities. This study aims to develop an Islamic P2P financing framework as an alternative funding mechanism for nMSMEs in Nigeria. Employing an inductive research approach, this study prioritizes empirical data over theoretical constructs to ensure a comprehensive understanding of the phenomenon. The research follows a pragmatic paradigm, as it seeks to address a real world issue, providing an affordable and accessible financing alternative for nMSMEs. A qualitative methodology is adopted to explore the research problem in depth. Primary data is collected through semi-structured interviews and focus group discussions, while secondary data is sourced from journal articles, e-books, P2P financing platforms, websites, portals, and other online resources. Data analysis is conducted using ATLAS.ti 9 software to ensure systematic coding and interpretation. The study concludes that Islamic P2P financing represents a disruptive innovation with the potential to enhance nMSMEs� access to non-interest financing in Nigeria, thereby fostering inclusive and equitable economic development. This financing model offers a platform that is transparent, cost-effective, accessible, and user-friendly. The study proposes a framework based on the principle of Wak?lah bi Al-Istithm?r (Investment Agency), ensuring Shari�ah-compliant financial solutions for nMSMEs. Key findings highlight that Nigerian nMSMEs struggle to access non-interest financing due to factors such as limited awareness and understanding of Islamic finance products, lack of collateral, stringent regulatory requirements, lengthy processing times, inadequate capacity-building initiatives, and high financing costs. The study also identifies the role of financial technology (FinTech) in enhancing the accessibility and availability of non-interest financing. Furthermore, it highlights the importance of developing a Shari�ah-compliant framework for Islamic P2P financing and presents a model based on Wak?lah bi Al-Istithm?r to facilitate seamless funding arrangements, ensure transparency, and effectively connect nMSMEs with suitable investors. The proposed model is expected to promote risk-sharing, ethical financing, and a shared sense of accountability and ownership between investors and nMSMEs while narrowing the existing funding gap.