Dear Colleagues,

Good Day,

Here is a very good article entitled " Islamic Finance: An Opportunity for SME Financing", By - by Nafis Alam, Associate Professor of Finance, University of Nottingham Malaysia | August 24, 2015 .

This a brief of it : 

"Small and medium enterprises (SMEs) are widely recognized as engines of economic growth and key contributors to the sustainable gross domestic product (GDP) of all countries, including developing and emerging economies. SMEs play an important role in creating employment opportunities for both skilled and unskilled workers across many sectors, including manufacturing and service. However, higher costs and strict regulatory environments do not support SME growth and access to finance in the countries they operate.

SMEs, by number, dominate the world business stage; although precise, up-to-date data are difficult to obtain, estimates suggest that more than 95% of enterprises across the world are SMEs, accounting for approximately 60% of private sector employment (Small vs. Young Firms Across The World—Contribution to Employment, Job Creation, and Growth, Policy Research Working Paper 5631, World Bank Development Research Group). Given the importance of the SME sector, it is unfortunate to notice the lack of financing options available for them. A study by the International Finance Corporation (IFC) showed that approximately 35% of SMEs in the Middle East and North Africa (MENA) are excluded from the formal banking sector because they seek Sharia-compliant products that are not readily available in the market.

SMEs faces similar problems in the countries and regions where Islamic finance is flourishing, negating one of the aspirations of Islamic finance: access to financing for all Shariah-compliant businesses irrespective of the size of business operations. In the aftermath of recent global financial crises, various financial institutions and regulatory bodies have claimed that Islamic finance is more stable than conventional finance. This argument is supported by the foundation of Islamic finance, which is structured on strong ethical precepts and prohibits interest and speculation as well as asset-based financing. Moreover, Islamic financial institutions are considered to be a good platform for increasing access to financial inclusion, including access to finance for SMEs, thereby supporting growth and economic development. This aspiration is further supported by a recent finding by the International Monetary Fund that states that “Islamic Finance’s emphasis on asset-backed financing and risk-sharing feature means that it could provide support for small and medium–sized enterprises.”"

please, see the attached link for the complete article:

https://www.ifac.org/global-knowledge-gateway/islamic-finance/discussion/islamic-finance-opportunity-sme-financing

Here is another good article, entitled "Closing the Gap: The Next Big Step for Islamic Banking", By Wasim Saifi, Global Head, Standard Chartered Saadiq, Consumer Banking.  

"Fifteen years ago, Muslims wishing to take out a home finance, use a credit card or deposit money into a current account would have been hard pushed to do so and stay compliant with Shariah law. With few Islamic banks around - and a limited range of Shariah products - banking as a Muslim invariably involved compromising either your faith or your financial needs.

Today, in many markets, such compromise is no longer necessary. Islamic banking is becoming a part of the mainstream, widely available across financial products and geographies. In 2012, Islamic banking assets are expected to reach USD1.1 trillion globally, up 33 per cent on 2010, according to Ernst & Young. Within just a few years, Islamic banking has transformed into a global industry.

There are three major drivers behind this extraordinary journey - three reasons why I believe Islamic banking will keep on growing far into the next decade.

First, increased competition has resulted in a widening of the Islamic product offering, bringing it within scope for larger numbers of Muslims. In the early 2000s, a move by Islamic banks to make Shariah-compliant products more commercially compelling was a real game changer in the industry. For the first time, Islamic Banks were reaching customers for whom the commercial aspects of banking were just as important as Shariah compliance. Conventional banks, keen to retain their Muslim customers and make the most of the Islamic opportunity, have subsequently joined the fray, helping to grow the total market around the world.

Second, as the Islamic banking proposition has become more attractive, Muslims have converted from conventional banking at a rapid pace, spurring the industry to make the product offering even more sophisticated. Muslims who have been accustomed to using credit cards, for example, will not want to lose this benefit when switching to Islamic banking. Whether in terms of access, technology, products or services, they expect nothing less than they have been getting from conventional banks, and Islamic banks are responding. Muslims now have a choice: to bank in a Sharia-compliant way, they no longer need to sacrifice the convenience, products and services they have been used to in the past.

Third, the industry is receiving increasing regulatory support with governments in many markets actively encouraging the development of a healthy Islamic banking ecosystem. In the UAE, all new local banking licenses granted in the last 15 years have been for Islamic banks. Countries such as Oman, Uganda and Nigeria are opening up their markets. Issuance of Sukuk, or Islamic bonds, has become widespread, and Islamic finance is used increasingly for government support programmes. In Bahrain for example, Standard Chartered Saadiq now works with independent employment authority Tamkeen to provide Shariah-compliant financing for small and medium-sized enterprises (SMEs)."

The complete article is attached, please, see the link:

https://www.sc.com/ae/insights/2012/the-next-big-step-for-islamic-banking.html

Good answer.Thank you very much Drear Dr. Hazim

we invented a new Islamic lending tool, based on Musharakah, Murabaha and Takaful, we are seeking a government body to implement the system.

https://www.researchgate.net/publication/265381743_Gambling-free_lottery_a_new_Islamic_lending_ticket

Article Gambling-free lottery, a new Islamic lending ticket

Thanks Dr.Ahmad Hassanat for the interesting post

Thank you Dear Abhishek kumar Pathak for your comment

Thanks Dear Saeed

 Good question that is composed of 2 parts; first which is the the importance and weight of the SMEs that exceeds 90% worldwide however have lack of finance and banks refusal for funding them due to several reasons like lack of strategic management, business plans, corporate governance, limitation of knowledge, ....and many others. On the other hand the Islamic finance could be an opportunity for SMEs to get financed but this means they have to be Sharia compliant which could be challenging to western companies,and after passing this stage comes the second part of your question which is in my view more important of how to protect investors rights and encourage banks to finance them? and this is a real threat in the SMEs as for example in Europe and I can take Italy as an example where the major part of SMEs are family business and the management (board of directors) members are all family members. This fact leads us to many doubts about not only minority rights and investors protection but also doubts of banks to finance them. What is really needed is as you said working on how to have strong risk management for them with all several types of risk.

Dear Dr.Maha Radwan

Thank you very much for your helpful answer.

Well, equity crowdfunding for SMEs in Islamic finance may be a good idea nowadays.  This will solve the problem of financing. 

I'd be concerned about positioning crowdfunding as a solution.  It may be part of the solution but the volume of the issue of SME finance is much more than can be filled by crowdfunding alone which is estimated to be $34 billion in 2015.  Banks and other source of financing (e.g. ijara companies) must also be part of the solution.

http://www.crowdsourcing.org/editorial/global-crowdfunding-market-to-reach-344b-in-2015-predicts-massolutions-2015cf-industry-report/45376

Dear Blake Goud,I agree with you.The issue of SME finance is much more than can be filled by crowdfunding alone .Thank you very much for your helpful answer.

Very interesting discussion,

One one side the SME sector in general is facing the issue of access to finance irrespective of being conventional or Shariah-compliant financing.

Banks are reluctant to finance SMEs in general both conventional and Islamic and I agree a risk management framework would support that in general but key points to be addressed are:

1. The use of movable collateral and the development of registries since about 80% of SME assets are movables.

2. Relying and developing further non-banking financial services and their providers

3. Further development of credit guarantees especially in the Islamic domain

Next month there will be a global report officially launched which we finished about Leveraging Islamic Finance for SMEs where we tackled all these different venues.

What is the opportunity for islamic finance to fund sme

Financing SMEs can be done through Equity-based mechanisms like Musharaka and Mudaraba that adapt the profit and loss principle. Or using Debt-Based mechanisms like Murabaha, Ijara , Salam and Istisna. But again the problem is not in which tool or instrument to use but in the protection that can be offered to the investors and/or banks. However the opportunity of SMEs to get financed through Islamic finance is considerably higher than to get financed through traditional finance since Islamic finance encourage poverty allevation, social inclusion, economical equillibrium , justiceand equality.

Article Sharia Compliant " Possibility for Italian SMEs "

https://www.researchgate.net/publication/305815587_The_Dhaka_Mercantile_Co-operative_Bank_Limited_A_Case_of_Islamic_Shari'ah_Banking_in_Bangladesh

Article The Dhaka Mercantile Co-operative Bank Limited: A Case of Is...