The The Role of Islamic Finance and Government Support in Enhancing the Financial Performance of SMEs in Libya

Abstract

Islamic finance is a trending financing instrument in the Muslim and non-Muslim countries. However, limited studies addressed the impact of Islamic finance and the role of government support in boosting the performance of small and medium-sized enterprises (SMEs). Therefore, the purpose of this study is to examine the effect of Islamic finance on financial performance of SMEs in Libya. Design/methodology/approach – Drawing upon the Resource-Based View (RBV) and Islamic Finance Theory (IFT), the study employs a quantitative approach using survey data from 282 SME owners and managers. Smart PLS 4 is applied to test the direct effects of Islamic finance tools such Murabaha, Musharakah, and Mudarabah on SME financial performance, as well as the moderating influence of government support. Findings –The results reveal that all components of Islamic finance significantly and positively affect SME financial performance, with Murabaha exhibiting the strongest impact. Government support enhances the effectiveness of Murabaha, Musharakah, and Mudarabah on SMEs’ financial performance. Practical implications– These findings suggest that Islamic financial tools function as strategic resources for SMEs when embedded within supportive institutional frameworks. Originality/value– The study advances understanding by integrating RBV and IFT in a post-conflict economy and introducing government support as a key contingent factor. The findings also offer actionable insights for policymakers and Islamic financial institutions to tailor support mechanisms and develop financing strategies that align with SME needs and sectoral priorities.

Keywords: Islamic finance, financial performance, Murabaha, Musharakah, Mudharaba, government support