Examining the Influence of Islamic Financial Principles on the Performance of Women-Owned Micro and Small Businesses in Mbarara City, Uganda

Abstract

Islamic financial principles have increasingly gained attention as alternative mechanisms for promoting ethical entrepreneurship and financial inclusion among Muslim communities. Despite their growing relevance, empirical evidence on how these principles influence the performance of micro and small businesses (MSBs), particularly those owned by Muslim women in Uganda, remains limited. This study examined the effect of Islamic financial principles on the performance of micro and small businesses owned by Muslim women in Mbarara City, Uganda. The study adopted a convergent mixed-methods design incorporating both quantitative and qualitative approaches. Quantitative data were collected from 167 Muslim women entrepreneurs using structured questionnaires and analyzed using descriptive statistics and Partial Least Squares Structural Equation Modelling (PLS-SEM). Qualitative data were obtained from four key informants and analyzed using thematic analysis. Islamic financial principles were operationalized through Sharia compliance, risk sharing, and ethical investment, while business performance was measured using profit growth, sales growth, and product/service delivery. The findings revealed that Islamic financial principles had a positive but statistically insignificant direct effect on business performance (β = 0.158, p = 0.112 > 0.05). However, Islamic financial principles significantly enhanced access to finance (β = 0.280, p = 0.015 < 0.05), indicating that their influence on performance operates indirectly through access to financial resources. Qualitative findings showed that although Muslim women strongly adhere to the prohibition of ribah (interest), most possess limited practical knowledge of Islamic financial instruments such as Qard Hasan, Musharakah, and profit-sharing arrangements. Furthermore, limited availability of Sharia-compliant financial institutions and products constrains the practical implementation of Islamic finance principles. Islamic financial principles do not directly improve business performance among Muslim women-owned micro and small businesses. Instead, their contribution to performance occurs indirectly through enhancing access to culturally acceptable and ethical financing. The effectiveness of Islamic finance principles therefore depends on the availability of Sharia-compliant financial services and entrepreneurs' understanding of Islamic financial products.