Sep 28 2010
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Islamic answers to SME finance needs
With both the value of the SME and the Islamic finance sectors predicted to skyrocket over the next few years, it's not surprising that the two have successfully intertwined in the GCC region. Isla MacFarlane reviews the most recent offerings for Shari'ah-compliant SME financing
SME financing could be deemed a natural fit for Islamic finance, by virtue of the fact that it deals directly with the real economy; creates employment; involves the productive use of resources; and contributes directly toward the alleviation of poverty. Seeming to take to heart the criticisms of a few years ago about Islamic financial institutions being too focused on corporate and high net worth individuals, Islamic banks now appear to have cottoned on to the potential of the SME market with more Shari'ah-compliant offerings coming onto the market.
Last year saw more Islamic banks trying to corner the growing SME market, with
Abu Dhabi Islamic Bank
a new Shari'ah-compliant covered card for SMEs, and Noor Islamic Bank debuting a profiling and rating service, which gives credibility to customers who do not have credit profiles or balance sheets.
explained that a covered card is the Shari'ah-compliant equivalent to a credit card. Offered in Platinum and Gold versions, the Visa card provides SME customers with a line of finance up to AED $250,000 ($68,066). The card also provides SMEs with a payment tool that can help them control their expenditures, improve their accounting management and access their funds more conveniently.
Cardholders can use the cards as a substitute for less efficient and more risky cash and cheques.
Saif Ali Al Shuraifi, an ADIB customer, said, "As an SME owner, I have been missing a practical solution like this that would help me manage my business better. Having access to extra liquidity is an important factor in managing my business successfully. Sometimes you have to cope with unplanned expenses and this can be challenging, particularly in the current economic environment."
As the SME sector has been garnering more attention in the GCC, the first half of this year has been even more prolific for Shari'ah-compliant SME financing products. At the start of the year in January, Bahrain pledged its commitment to the SME sector when Tamkeen created a financial support programme for SMEs in partnership with Bahrain Islamic Bank ( BisB ).
"This agreement is part of a larger project to support SMEs in the Kingdom with the lifeline of financial aid that will help them to get past growth bottlenecks and prosper," said Abdulellah Al Qassimi, Chief Executive of Tamkeen. "Tamkeen will actively support the project by subsidising 50 per cent of the profit of the finance obtained by the SMEs to enable them to acquire the necessary financial resources at a competitive rate. But what is more important than the statistics is the fact that we are developing a viable financial support system for SMEs in Bahrain, which will help them to
develop and grow stronger."
Al Qassimi added that the scheme has already served 1,589 SMEs as of November 2009 and nearly BHD 50 million ($132.6 million) has been disbursed with the help of Tamkeen's other financial institution partners - the participation of BisB will widen the scope of the scheme. BisB 's CEO Mohammed Ebrahim added, " BisB is honoured to partner with Tamkeen in this capacity-building exercise that contributes directly to the progress of the Kingdom of Bahrain. The scheme serves a vital niche market which has little access to venture capital or financial aid and with our inputs and Tamkeen's support, we are confident of making a remarkable difference."
The aim of the finance scheme is to enable the SMEs to fulfil their financial needs at a competitive cost and in a Shari'ah-compliant manner. Tamkeen said that the finance scheme complements the other schemes that it offers to the SMEs to enable them to become more resourceful to capture potential business opportunities in the market.
In July, Tamkeen added another partner to its finance scheme with the coming on board of BMI Bank ( BMI ). The financing scheme with BMI will see Tamkeen subsidising up to 50 per cent of the profits payable to the bank as a loan repayment and entrepreneurs who fulfil the basic requirements will be able to benefit from loans ranging from BHD 10,000 ($26,522) to BHD 500,000 ($1.3 million) to design a higher growth trajectory for their company.
Jamal Al Hazeem, Chief Executive Officer of BMI Bank said, "Being a Bahraini bank, it is our responsibility to participate in and boost the local economic growth and consider the SME segment as a very crucial and increasingly important component in the country's development and together with Tamkeen, we will now be able to make a significant difference."
Standard Chartered Saadiq reiterated its support of the SME sector in February, when the bank announced that it expects to maintain at least a double digit compounded annual growth rate for its SME business over the next few years. The bank's Chief Executive Officer, in Malaysia Azrulnizam Abd Aziz, said that in order to support the growth of SME businesses the bank will be promoting alternative solutions based on Islamic values.
He said that SMEs are one of Saadiq's important revenue streams and is confident it will continue to progress well this year. He said, "Currently we have six SME products covering both the financing and cash management as well as investment needs. We hope to introduce three SME products in the area of trade working capital, foreign exchange contract and investment."
"They (SMEs) are an important key component of the country's economy transformation. This initiative (the transformation) is in line with the national agenda to move the economy up the value chain and to raise capacity for knowledge, innovation, quality and distinctive products and services. It is critical that governments, public agencies and banks collaborate to achieve this national agenda. As a financial Institution, we recognise our role and want to be part of this transformation, providing SMEs the financial assistance and viable solutions to theirs business needs."
In April, Ajman Bank announced that it too would be homing in on the SME market. Ali E Alshaqoosh Al Mueen, Deputy Chief Executive Officer, said that the bank will increase lending to SMEs and companies linked to trade sector in the UAE with solid balance sheets, and avoid newly-launched companies with little or no track records. He said, "We have devised a specific strategy targeting certain segments of the market. We feel there is very good market size towards trade services and SMEs and the two sectors are going to see steady growth. We are doing all of our services and building up relationships with the trade sector.
"In addition, we are targeting SMEs. We feel some segments are offering good opportunity to grow going forward. We feel good potential to generate more revenue towards targeting that sector."
He said that the bank did surveys and market checking and foresees good opportunities. "We can't say that all SME sector is useless. We feel some SME firms offer good opportunities. We need to assess the risk and certain terms and parameters for the SMEs. So why not invest in those SMEs that fall in to these parameters."
He added that new companies that had opened recently, a year or two earlier, are very risky and the bank will try not to enter into financial dealings with them.
That same month, Methaq Takaful Insurance Company rolled out the first Takaful package for SMEs. The package - which covers a variety of areas including property, business interruption, fidelity guarantee, legal liability and personal accident - is part of a series of products recently rolled out by Methaq including marine cargo, motor fleet and satellite insurance.
Abdullah Al Maamarri, the Managing Director of Methaq Takaful insurance company, said that the package has been in development for some time. "The ambition of the individual needs to be encouraged on all fronts as we move into a new era of globalisation and digital technology," said Al Maamarri. "SMEs need to be able to take risks in the market and spur economic innovation, and we are here to support them by providing customised, reliable Shari'ah-compliant insurance solutions."
Southeast Asia saw another first for SMEs when Maybank Singapore launched an Islamic financing package for SMEs in June. The package caters for SMEs seeking financing for completed commercial industrial properties. Named the Maybank Islamic Term Financing, the package offers fixed rates for up to 10 years. Floating rate options are also available but the effective rates will be capped at a maximum of five per cent per year.
The product is said to be the first Shari'ah-compliant one offered in Singapore with the SME sector in mind. It follows a similar product introduced a year ago by Maybank in Malaysia, where SME financing accounted for $257 million of its Islamic business.
"What was interesting was that in Malaysia, 40 per cent of our Islamic financing base is made up of non-Muslim businesses," said Mohd Ismail Hussein, the Head of Islamic banking at Maybank Singapore. "Similarly, I think the take-up of Islamic financing will be good here across both Muslim and non-Muslim SMEs because of the certainty and peace of mind it provides, especially given the current uncertain global economic environment." he said.
Meanwhile, in Kenya, Chase Bank launched a Shari'ah banking product to cater for SMEs in July. Presenting a compliance certificate to the bank, Chairman of the Shari'ah Board, Sheikh Ibrahim Lethome said that Chase Iman offers a variety of current accounts for individuals, businesses, special products for women and children. Ms Hussein, the Head of Islamic Banking, said that Chase Bank offers asset financing for SMEs.
"Chase Iman will offer faith-based saving accounts, one of which is designed to help the customer save for the annual Muslim pilgrimage-Hajj and another to assist the Muslims save money for their annual Zakat payments to the mosque," Hussein said. She reiterated that by launching the product, Chase Bank is keen on giving back to society.
The proliferation of products is not surprising given that Islamic financial instruments lend themselves well to SME financing. The most used instruments of Islamic SME financing are profit and loss sharing schemes - Musharaka - a partnership where the profits are distributed in pre-arranged proportions and any losses are shared in proportion to each partners' capital or investment. Another arrangement is Ijara, which permits the financial institution to earn a profit by charging leasing rentals instead of lending money and earning interest. Another is purchase-and-resale (Murabaha) where the capital provider purchases the required asset or product for which a loan would otherwise have been taken out from a third party. The asset is later resold at a higher price to the capital user.
Islamic finance's natural affinity with SME financing means that it's not just an option for Muslim business owners. Cia Manes, a lawyer for Howard Kennedy, said that there are several advantages to Shari'ah-compliant SME financing over conventional. She said, "When you get a loan from a conventional bank and things go wrong, the lender's main priority is to recover its money, even if that means leaving the entrepreneur high and dry. Islamic banks, on the other hand, have the obligation to share in both the risks and the rewards when offering long-term financing to businesses."
ADIB said that the introduction of the card is in line with ADIB 's commitment to develop SMEs in the UAE and also with the bank's strategy that aims to provide tailored solutions to the business community at large
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