Matching SMEs with Islamic finance

Matching SMEs with Islamic finance

Date: 21 November 2015
Source: The Borneo Post

KUCHING: The world of Islamic finance is one that continues to grow beyond any border or limitations, serving to fulfill the conventional needs required by banks while adhering to their Islamic duties.
On one end of the spectrum, there are millions of small and medium enterprises (SMEs) thriving in communities across the Islamic world.

Thus, there is a need to provide them greater opportunities to expand and be able to compete in wider markets.

According to Prime Minister Datuk Seri Najib Tun Razak, there is a financing gap of up to US$13 billion for SME Islamic financing in the Middle East and the North Africa region.

He said Islamic finance, which is currently gaining greater visibility, is in a good position to assist the SME industry.

For example, as of last year, Malaysia’s total SME financing exposure in Islamic finance grew by 40.5 per cent year-on-year to more than US$10 billion.

“Islamic finance, with its equity-based partnership schemes, offers a truly workable alternative to conventional banking, it is also a partnership that embeds the participating financial institution as a provider of advise and consultancy.

“With the sharing of risks and its rewards, the Islamic requirement for fairness and equity is served,” Najib said during his opening speech at the World Islamic Economy Forum (WIEF) 2015.
The 11th WIEF attracted global leaders, ministers and government representatives, leading corporate figures, businesswomen and young entrepreneurs, key decision makers, thought leaders, academia and representatives of the business community, civil society and creative arts industry from 102 countries.

Taking the lead role

As chair of Asean this year, Najib said Malaysia is also taking the lead in enhancing the role SMEs can play in the ten-nation group’s continued development.

“Through the establishment by year-end of the Asean Economic Community, member states will work to expand the regional SMEs sector through five strategies.

“This includes, allowing SMEs to gain access to a larger and more extensive marketplace, lowering regulatory barriers to trade, strengthening connectivity, improving SME-specific policies, and enhancing Asean’s strategic economic linkages with greater Asia and other parts of the world,” Najib added.
He said business owners are continuously seeking fund-raising instruments and investment alternatives that add value to their portfolio, as well as providing them with security against market uncertainty and volatility.

“In this, Islamic bonds or sukuk are a perfect fit, with their requirement for good risk management and propositions linked to assets or economic activity,” he said.

Focus on developing ecosystems for SMEs

The 11th WIEF will continue to develop an enabling ecosystem for the SMEs sector. According to WIEF Foundation Chairman Tun Musa Hitam, the SME Business Pavilion would be introduced to act as a platform for SME business communities to promote themselves, seek investment and partnership opportunities.

“A total of 14 countries are participating in the SME Pavilion and the United Kingdom is leading the largest contingent with 11 companies,” Musa told a press conference in conjunction with the three-day forum.

He said the forum would see the participation of over 3,000 global leaders, ministers, speakers, delegates, exhibitors and artistes from 98 countries across five continents.
Seven clusters would be featured, namely finance, women and youth, education, halal, sustainable living, technology and creative arts.

“For the first time, we clustered subjects under these seven particular headings, each having special treatment in separate groups,” he added.

Islamic finance assets to hit US$3.2 trn by 2020

The global Islamic finance assets are projected to grow to US$3.2 trillion by 2020.

According to Thomson Reuters head of Islamic Finance, Mustafa Adil, Islamic finance was considered the most developed sector within the various pillars of the Islamic economy and its growth in the global industry was broadly measured by the value of Islamic finance assets.

“In 2014, Islamic finance assets totalled US$1.8 trillion, with Islamic banking representing 74 per cent of this, followed by sukuk at 16 per cent,” he said in a Bernama interview on the sidelines of the WIEF.
He said the information was based on Islamic Corporation for the Development of the Private Sector (ICD) Thomson Reuters Islamic Finance Development Indicator 2015.

“According to Thomson Reuters’ projections, Islamic finance assets are projected to grow to US$3.2 trillion by 2020, with Islamic banking reaching US$2.6 trillion,” he added.

As global acceptance of Islamic finance continues to grow, he said more corporates and non-Muslim sovereigns were announcing Islamic finance initiatives such as ethical finance or syariah-compliant regulations, as well as sukuk issuances.

The increased appetite demonstrates that the investors are attracted to the benefits surrounding the ethical principles of Islamic finance, linking finance to physical assets, productive fiscal activities and real economic growth.

On another area, Mustafa said the global halal food and lifestyle sector, whose consumption stood at US$1.8 trillion in 2014, was projected to increase to US$2.6 trillion by 2020, according to findings from the ‘State of the Global Islamic Economy Report 2015/2016’ that the company also introduced at the 11th WIEF.

“The halal food sector, with current consumption of US$1.13 trillion, is expected to grow to US$1.56 trillion by 2020, with the demand for ethical treatment of animals alone resulting in a US$100 billion organic food market,” he said.

Mustafa also gave an introduction to Salaam, the global Islamic economy gateway that was launched at the Global Islamic Economy Summit in Dubai in October this year.

Industry lacks white collar professionals

The Islamic finance industry is facing a shortage of close to 56,000 competent professionals to serve its growing needs.

Finance Accreditation Agency (FAA) chief executive officer Dr Amat Taap Manshor said the acute shortage is felt in the Islamic capital market, as well as takaful and banking sectors, especially in dominant markets like Malaysia, Indonesia and the Middle East.

“For Malaysia alone, the whole of the Islamic finance market is experiencing a shortage of about 40,000 professionals, which is projected until 2020.

“We are lacking in specific areas, especially at the middle level. We need experienced and specialised people to serve the industry,” he told Bernama on the sidelines of the WIEF here.

Dr Amat said the situation emanated from a mismatch in skills training and market needs.
“A strong collaboration is needed between the industry and institutions of higher learning in order to produce more skilled and competent employees to serve the industry.

“Training institutions like the International Centre for Education in Islamic Finance (INCEIF), which was set up by Bank Negara Malaysia, has industry-based training for graduates. These could help overcome the shortage,” he said.

INCEIF runs professional programmes and quite a number of them are accredited by the FAA, he said.
“The shortage (of professionals) is an ongoing problem. We don’t have a definite timeframe when it can be overcome. A continuous effort by all parties is needed.

“With the current growth rate (of the Islamic finance industry) of between 15 and 18 per cent, it’s quite a challenge to meet the demand,” he said.

On the growing number of non-Muslim joining the Islamic finance industry, he said it is a good sign as it gives the impression that what is more important is the value proposition of each products.

Body for Islamic finance quality standards launched

Within Malaysia, the Chartered Institute of Islamic Finance Professionals (CIFF) was launched on November 6 as a professional body responsible for global quality standards for Islamic finance professionals, in what specialists laud as a move in the right direction.

As a newly incorporated entity replacing the Association of Chartered Islamic Financial Professionals Malaysia (ACIFP), the CIFF is expected to raise the bar for professionalism and ethics in the industry.
According to Bank Negara Malaysia (BNM) Deputy Governor Datuk Muhammad Ibrahim, who launched the event, the establishment of CIFF follows the increasing need for a global reference point for professional talent development as the Islamic finance industry continues to expand internationally.
“We aspire for CIFF to become the global body for professionals in Islamic finance.

“As we envisage CIFF as the leading driver and advocate for professionalism and ethical conduct, we should expect the new body to adopt the global best practices of similar professional institutions,” he said.

At the launch, the CIFF and industry players, the Association of Islamic Banking Institutions Malaysia, Malaysian Takaful Association and the Malaysian Investment Banking Association (MIBA) signed the Islamic Finance Profession Charter, as a commitment to further strengthening talent development in Islamic finance.

“The CIFF will continue the mandate originally held by the ACIFP, as outlined in the Financial Sector Blueprint 2011-2020 of Bank Negara Malaysia, as the professional body responsible for setting global quality standards for professionals in Islamic finance.

“The issuance of standards is expected to spur the expansion of its membership base worldwide,” CIFF President Badlisyah Abdul Ghani said at the launch.

At the press conference later, he said CIFF’s current membership base of 240 could hit 3,000 by next year.

“It will also support private sector development and entrepreneurship in common member countries, as well as give support to the growing number of fragile and conflict-affected countries,” he added.
Sultan Nazrin Shah also reminded the public on the ongoing humanitarian crises in the world today, whereby 90 per cent are in the Organisation of the Islamic Cooperation (OIC) countries and that 31 conflicts out of the 33 active conflicts were in Muslim-majority countries.

“Yet the majority of humanitarian funding comes from the Organisation for Economic Cooperation and Development countries,” he said, adding that the average duration of displacement from conflict was 17 years.

Sultan Nazrin Shah said better approaches were needed to support those who were truly left behind, caught in protracted crises and recurrent disasters, if the world aimed to build resilience for equitable growth and achieve the aspirations of Agenda 2030 in the Sustainable Development Goals.

“Failure to find new solutions to build the resilience not only of countries and people in crises, but also for those sharing the burden of hosting the displaced would lead to regression of development.

“Currently, more than one-quarter of the Muslim world live on less than one dollar and a quarter a day. As I speak to you this evening, we know that more than 50 per cent of under-developed countries face humanitarian crises.

“Now is the time to explore innovative ways to finance crisis management and development programmes, particularly when crises now last longer and delay development.

“The Muslim world can be more generous and has the financial tools to meet the humanitarian funding shortfall,” he added.

Beneficial for non-Muslim nations as well

Malaysia’s fast-growing Islamic finance sector benefits not only the Muslim world but also non-Muslim countries, said former Prime Minister Tun Abdullah Ahmad Badawi.

The Islamic finance industry has introduced several products including waqf, which is an important Islamic institution that supports both the social welfare and economic development objectives of society.

“The benefits it has historically provided are wide-ranging, including the building and upkeep of mosques, education and healthcare services, as well as guest houses, water wells and rest facilities for travellers,” he said in his keynote address on “The Role of Islamic Finance and Waqf in Healthcare” at the 11th World Islamic Economic Forum.

In Malaysia, he said, the government and regulatory authorities have made eye-catching efforts to enhance the depth and diversity of the Islamic financial system over the years, which have more recently extended into important initiatives for the development of waqf.

“Hailed as the first of its kind, Malaysia established the Labuan International Waqf Foundation in 2015 with the objective of managing waqf properties based on syariah principles.

“It recognises different types of waqf to attract domestic and international participants, including charitable waqf, family waqf, joint waqf and self-dedicated waqf,” he said.

Abdullah added that the potential of the waqf institution in improving the quality of life of Muslims remains as relevant today as in the past.

“The waqf sector can be further developed through supportive legislation and policy initiatives.
“To this end, Malaysia and other Muslim countries should design coordinated action plans for better exploitation of waqf resources within and beyond their countries for the benefit of the Ummah,” said Abdullah.

Efforts are also needed to make waqf self-supporting and economically viable, which would require, in turn, policy initiatives and law reforms, he added.

A platform for stronger partnership among Muslim countries

The World Islamic Economic Forum (WIEF) 2015 has flourished as a platform to foster stronger partnerships among Muslim countries, as well as the broader international community, said the Sultan of Perak, Sultan Nazrin Shah.

He said the continued success of the forum was not only a testament to the vision of its conveners but also a resounding vote of confidence in the significant potential of the Islamic world.

It was an economic bloc which collectively accounted for US$15 trillion in purchasing power parity (PPP)-adjusted gross domestic product (GDP), a level of output which rivalled those of the world’s largest economies, he said.

“The PPP-adjusted GDP of Islamic world stands at US$15 trillion compared with the United States and the European Union, whose GDP amounted to US$17 trillion and US$18 trillion, respectively,” he said in his keynote address at the gala dinner of the World Islamic Economic Forum 2015.

Islamic finance was already well accepted in the development sector.

Just last month the World Bank and Islamic Development Bank announced a historic strategic partnership agreement to significantly scale-up joint work and investment across the 56 member countries of both organisations across Asia, Africa, Europe and South America.

“This also involves co-financing work to reach US$9 billion over the next three years. Joint work, including through socially responsible investment sukuk, will support infrastructure services, regional integration and cross-border trade facilitation, water and food security, as well as education and employment.