Analysis of halal certification as an instrument for assessing the 5C principles in credit provision for MSME entrepreneurs

Abstract

Micro, Small, and Medium Enterprises (MSMEs) require capital to develop their businesses. One way to meet this need is by obtaining loans from banks. Banks, in disbursing loans, must adhere to prudential principles, including assessments based on the 5C principles. Halal certification serves as one of the assets owned by MSME entrepreneurs when applying for bank loans. This study aims to determine whether halal certification can be used as collateral for credit and how banks use halal certification as an instrument for credit assessment based on the 5C principles. Before granting loans, banks are obligated to perform a 5C analysis on prospective borrowers, which includes examining character, capacity, capital, collateral, and economic conditions concerning both the borrower’s profile and their business profile. This research employs a normative methodology with legislative and conceptual approaches. The findings indicate that, in terms of character, halal certification reflects the honesty of MSME entrepreneurs in maintaining the halal status of their products, thus ensuring consumer safety. Capacity reflects the ability of prospective borrowers or entrepreneurs to manage their businesses effectively. Halal certification also represents capital, or an intangible asset owned by the entrepreneur. Additionally, halal certification serves as an intangible collateral that provides assurance for debt repayment. Entrepreneurs with halal certification are better positioned to compete in both local and global markets. The 5C principles can be utilised by banks as an instrument to assess whether a prospective borrower is eligible for a loan. This study is expected to contribute to bank policies concerning halal certification as collateral and to provide MSME entrepreneurs with alternative access to capital without requiring tangible collateral.