Financing of Small and Cottage Industries in Bangladesh by Islamic Banks: An Institutional-Network Approach

University dissertation from Lund Business Press, P.O.Box 7080, SE-220 07 Lund, Sweden

Abstract: This study is characterized by its development of an analytical framework for describing and explaining the lender-borrower financing relationships of rural-based small and cottage industries by including contextual conditions. It applies this framework to the socio- environmental conditions of Bangladesh with special emphasis on the role of Islamic banks. A theoretical framework based on institutional and network approaches and a qualitative method of inquiry are used to conceptualize the exchange relationships between financing organizations and small and cottage industry owners in Bangladesh. The results reveal the nature of lender-borrower network relationships and the influence of different background institutions such as religion, culture, the political and legal system, and families/clans on their exchange functions from the viewpoint of the socio-economic environmental context of Bangladesh. The major theoretical finding in this study is concerned with the development of an ‘Institutional-Network Framework’, where a clear concept of different institutions (for example, major financing systems and small and cottage industry systems) is developed to study lender-borrower relationships in a particular socio-economic environment. Furthermore, the theoretical findings are characterized by the development of various network concepts. Thus, the theoretical framework developed by combining institution and network concepts is used to analyze and understand differences in exchange activities among economic actors within different institutional contexts. The empirical findings suggest, among other things, that any financing system characterized by close supervision of borrowed funds develops the lender-borrower network relationships and assists rural-based small and cottage industry owners in making proper use of their borrowed funds. The study also shows that the supervisory and ‘in kind’ lending policy of Islamic banks not only contributes in promoting inter- and intra-organizational network relationships within and between economic actors in the Islamic financing system and the small and cottage industry systems, but also contributes in developing saving habits among borrowers in rural Bangladesh.

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