Financial Literacy & Basic Financial Concepts for Entrepreneurs
🧠 1. What is Financial Literacy?
Definition:
Financial literacy is the ability to understand,
manage, and apply financial knowledge in making sound decisions about earning,
saving, investing, and spending money.
It helps individuals and businesses manage their money responsibly and plan for
the future.
Importance for Entrepreneurs:
Financial literacy is essential for
entrepreneurs in Pakistan because it helps them:
• Create realistic budgets for startups
• Avoid unnecessary loans or debt traps
• Manage business cash flows effectively
• Make informed investment decisions
• Build long-term financial sustainability
• Understand bank dealings, loan terms, and Islamic financing options
Example (Pakistan):
A small business owner in Rawalpindi uses
budgeting to keep track of raw material costs and daily sales, preventing
losses and wastage.
💰 2. Basic
Concepts of Finance
📌 A. Income
Definition:
Income is the money you receive from work,
business, or investments.
Types of Income:
• Earned Income: Salary, wages, freelance
work
• Passive Income: Rent from property, royalties, online earnings
• Portfolio Income: Dividends from shares, profit from mutual funds
Example (Pakistan):
A teacher in Islamabad earning Rs. 50,000 per
month from a school is receiving earned income.
A student renting out a spare room earns passive income.
📌 B. Saving
Definition:
Saving is setting aside a portion of income for
future needs instead of spending it.
Importance:
• Emergency funds (especially important in
Pakistan due to inflation)
• Meeting long-term goals like education, marriage, or business
• Protection against financial uncertainty
Example (Pakistan):
Saving Rs. 5,000 per month in a bank
account or a Roshan Digital Account for future business capital.
📌 C.
Investment
Definition:
Investment means putting money into businesses,
stocks, or assets with the hope of earning profit.
Types:
• Short-term: Stocks, gold, prize bonds
• Long-term: Property, PSX shares, mutual funds, retirement plans
Example (Pakistan):
Investing in the Pakistan Stock Exchange (PSX)
or buying a small plot in Bahria Town with the expectation that its value will
increase.
📌 D. Assets
Definition:
Assets are things you own that have value.
Types:
• Current Assets: Cash, inventory, bank
balance
• Fixed Assets: Car, property, laptop, machinery
Example (Pakistan):
Your motorcycle, laptop, or shop inventory in
Sialkot are business assets.
📌 E.
Liabilities
Definition:
Liabilities are financial obligations or amounts
you owe.
Types:
• Short-term Liabilities: Utility bills,
credit card payments
• Long-term Liabilities: Loans, mortgages, education financing
Example (Pakistan):
A student loan of Rs. 100,000 taken
through a bank or welfare trust is a liability until repaid.
📌 F. Equity
Definition:
Equity is the owner’s share in assets after
deducting liabilities.
Formula:
Equity = Assets − Liabilities
Example (Pakistan):
If your shop in Lahore is worth Rs. 2,000,000
and you owe Rs. 500,000, your equity is Rs. 1,500,000.
📌 G. Cash
Flows
Definition:
Cash flow is the movement of money in (income)
and out (expenses) of a business.
Types:
• Positive Cash Flow: Income > Expenses
• Negative Cash Flow: Expenses > Income
Example (Pakistan):
A home-based bakery earning Rs. 70,000/month
with expenses of Rs. 50,000 has a positive cash flow of Rs. 20,000.
☪️ 3. Islamic
Model of Financing
Islamic finance is an important part of
Pakistan’s banking system and is ideal for entrepreneurs avoiding interest
(riba).
Key Principles:
• No Riba (interest)
• Fairness, transparency, and risk-sharing
• Asset-backed transactions
• Ethical and halal investing
Main Instruments:
• Mudarabah:
Partnership where one party provides capital and
other managerial skills.
Example: Investor funds a student’s online business; profits are shared.
• Musharakah:
Joint investment where both parties share
profit/loss.
Example: Two friends invest equally in a coffee shop in Islamabad.
• Ijara (Islamic Leasing)
Definition:
Ijara is an Islamic financing method in which the
bank purchases an asset (like a car, machine, or equipment) and leases
it to the customer for a fixed monthly rent.
The customer does not pay interest (riba); instead, they pay rent
for using the asset.
Key Features of Ijara:
·
The asset is owned by the bank, not the
customer.
·
The customer pays rent for using the asset.
·
Maintenance responsibility is shared:
• Major repairs → Bank
• Minor/usage repairs → Customer
·
At the end of the leasing period,
the asset may be transferred to the customer (in Ijara-wa-Iqtina),
usually for a small token amount.
Why Entrepreneurs Use Ijara:
·
No interest (Shariah-compliant)
·
Easy access to equipment for business
·
Lower upfront cost compared to buying
·
Good for startups with limited capital
Example (Pakistan):
Example 1 – Car for Business
(Ride-hailing / Delivery):
A student in Islamabad wants a car for Careem or
Bykea delivery services.
Meezan Bank buys the car and leases it to him.
·
Car price: Rs. 2,000,000
·
Bank leases it on Ijara for: Rs. 35,000 per month
·
No interest is charged—only Islamic rental charges.
·
After 5 years, the student pays a small final amount
and the car becomes his property.
Example 2 – Machinery for a Small
Factory:
A bakery startup in Lahore needs a commercial
oven worth Rs. 500,000.
The entrepreneur cannot buy it upfront.
·
Bank purchases the oven.
·
Bank leases it for Rs. 12,000/month.
·
The bakery uses the oven for daily production.
·
After the lease term, the oven can be purchased or
returned.
This method supports business growth without
heavy loans.
Example 3 – Generator for a Shop:
Due to load shedding, a shop in Peshawar leases a
generator from an Islamic bank under Ijara.
·
Shopkeeper uses the generator and pays monthly rent.
·
Ownership remains with the bank.
·
No interest, only rent.
Ijara allows entrepreneurs to start or expand
their businesses without taking interest-based loans, following Islamic
financial principles.
• Murabaha (Cost-Plus Islamic
Financing)
Definition:
Murabaha is an Islamic financing method where the
bank buys an item requested by the customer and then sells it to the
customer at a fixed profit.
There is no interest (riba) involved—only a pre-agreed profit,
which is halal because it is tied to a real asset.
How Murabaha Works:
1. Customer
identifies an item (car, machine, laptop, raw material).
2. Customer asks
the Islamic bank to purchase it.
3. Bank buys the
item from the market with cash.
4. Bank sells it
to the customer at cost + profit.
5. Customer pays
back the amount in installments or lumpsum.
Key Features:
·
Must involve a real asset, not money-for-money
lending.
·
Profit rate is fixed and known to both parties.
·
No hidden interest or compounding charges.
·
Asset ownership temporarily remains with the bank
until the customer finishes payment.
Why Entrepreneurs Use Murabaha:
·
Easy to obtain business equipment and inventory
·
Predictable installment plan (fixed profit)
·
Halal alternative to interest-based loans
·
Useful for small businesses needing supplies, tools,
or vehicles
Examples (Pakistan):
Example 1 – Buying a Car for Business
(Careem, Uber, Delivery):
A student in Karachi needs a car for Uber.
·
Car price: Rs. 2,000,000
·
Bank buys it at Rs. 2,000,000
·
Bank sells it to the customer for Rs. 2,300,000
(profit = Rs. 300,000)
·
Customer pays in monthly installments for 3–5 years
No interest is charged—only a halal profit.
Example 2 – Purchasing Raw Material
for a Small Business:
A clothing shop in Faisalabad needs fabric worth
Rs. 150,000.
·
Shopkeeper requests Murabaha financing
·
Bank purchases the fabric directly from the supplier
·
Bank then sells it to the shopkeeper for Rs. 170,000
·
Shopkeeper pays installments monthly
This helps small businesses manage cash flow.
Example 3 – Buying a Laptop for
Freelancing:
A freelancer in Multan needs a Rs. 120,000
laptop.
·
Bank buys the laptop
·
Bank sells it at Rs. 135,000 (profit Rs. 15,000)
·
Payment plan: Rs. 11,250 per month for 12 months
A halal way to finance digital tools.
Example 4 – Machinery for a Startup:
A juice manufacturing startup in Lahore requires
a juicing machine costing Rs. 400,000.
·
Bank buys the machine
·
Bank sells it at Rs. 450,000
·
Entrepreneur pays in installments from business
profits
Murabaha helps new businesses acquire equipment
without heavy initial investment.
Why Murabaha is Popular in Pakistan:
·
Offered by almost all Islamic banks (Meezan, Al
Baraka, Dubai Islamic, Bank Islami)
·
Ideal for startups and small businesses
·
Easy documentation
·
Transparent pricing
·
Shariah-compliant and widely accepted
🚀 4. Sources
of Funding for Startups
Internal Sources:
• Personal savings
• Friends and family contribution
• Retained earnings
External Sources:
• Bank loans
• Microfinance (Khushhali Bank, Akhuwat)
• Angel investors
• Venture capital firms
• Crowdfunding platforms
• Government schemes
Government Programs in Pakistan:
• Kamyab Jawan Program (Youth Entrepreneurship
Scheme)
• Punjab Small Industries Corporation (PSIC)
• SMEDA support services
Example (Pakistan):
A student starts a clothing brand using Rs.
50,000 personal savings and Rs. 100,000 from an angel investor,
selling products via Instagram.
🧠 5. Why
Financial Literacy Matters for Entrepreneurs
• Prevents business failure
• Improves decision-making
• Helps manage costs and pricing
• Supports business expansion
• Enables long-term financial independence
• Builds confidence in dealing with banks and investors
📝 Conclusion
Financial literacy is the backbone of
entrepreneurship. Understanding income, savings, investments, assets,
liabilities, equity, and cash flow equips young entrepreneurs with the tools to
make smart financial choices.
With additional knowledge of Islamic financing models and Pakistan’s startup funding options, students can confidently start and grow their businesses while maintaining financial discipline and ethical practices.
