Islamic banking for Micro & Small businesses

@Atef Elshabrawy 2014
ISLAMIC BANKING
FOR M&SME’S
Dr Atef El Shabrawy
Al-Maali Consulting Group-UAE
Ex. CEO of Family Bank-Bahrain
MIM Mediterranean Economic
Forum – 24th October 2014
The Xara Lodge, Malta

CHALLENGES FACING M&SME’S
FINANCE
 Tough competition in the markerts
 Tough control on finance (selection criteria& rules, Basel III
 Huge financial deficit gap
 $3.2 to 3.9 trillion credit gap for MSMEs worldwide
 Less than 20% of SME’s in MENA use external finance
 50% of the population in are “unbankable”
 High business mortality rates
 Lack of financial & money management skills

WHERE TO LOOK FOR MONEY
1- Venture capital
Actually, venture capital financing is very rare. Only a very few high-
growth plans with high-power management teams are venture
opportunities.
Decrease number of deals

WHERE TO LOOK FOR MONEY
 Commercial lenders
 Actually, banks don’t finance business start-ups. Banks aren’t
supposed to invest depositors’ money in new businesses.
Ireland -82%
Netherland -32%
Portugal -42%
France -37%
Spain -66%
fall in
European
SME lending
Source: Bain & Company, 2013

Where to look for money
Characteristics Developing countries Industrialized countries
Focuses Poverty Social exclusion
unemployment
Average loan size ≥ $200 in Asia to $1,600 in Latin
America
≥$6,500 to $25,000 in
Belgium
Interest rates 17 % in Bangladeshi, 70 % in
Latin American
5 % in Belgium up to 7.5 %
in France
180 millions by 2015
Offer& demand gap In
Microfinanc
e providers

A NEW FINANCE
PHILOSOPHY IS NEEDED

THE DEFINITION
Sharia Complaint Finance is a financial
system operates according to Islamic
law (sharia).
It features banks, capital markets, fund
managers, investment firms, and
insurance companies.
It is not a religious nor a geographical
matter,
It started in the Middle East but became a
global growing financial industry,

THE HISTORY
11th to 16th centuries, financial transactions in Middle East
were on basis of a profit-and loss-sharing.
1960s : the re-initiation in small scale in Egypt
1970s : the creation of banks
 Nasser Social Bank - Egypt
 Islamic Development Bank , Dubai Islamic Bank,
1990-2000s : the expansion
 ISLAMIC FINANCE grow at 15-25% annually,
 some countries “islamize” their entire banking systems,
 Global expansion in most Western Countries

THE GROWTH
38 million customers globally
400Islamic financial institutions from 58 countries
$2.1 trillion global assets estimated end of 2014
$3.4 trillion forecasts estimate in 2018
$38 billion Sukuk (Islamic bonds) by London Stock Exchange for 52
issuers
$2 billion Sukuk joint venture Aramco-KSA & US-Dow
Chemical, 2013,
$25.4 billion issued Sukuk only in Gulf in 2013

THE INDUSTRY IN WESTERN EUROPE
• 31 Islamic financial institutions in Western Europe 22 only in UK,
some of London’s recent iconic real landmarks
Shard Skyscraper Battersea Power Station
Aston Martin
Athletes’ village for “2012
Olympic Games

THE INDUSTRY IN WESTERN EUROPE

BUT WHAT ARE THE
MAIN PRINCIPLES OF
ISLAMIC FINANCE?

MAIN PRINCIPLES
1. No interest (riba),
2. Profit & Loss sharing (Risk sharing)
3. No hazard, uncertainty (gharar),
4. No forbidden assets (haraam)
5. Promotions of real economy
6. Disclosure of information

Ex President Obasanjo, commented the debt Nigeria
faces at the G8 Summit 2000:
$5 billion borrowed in 1985
$16 billion paid until 2000
$28 billion they still have to pay
“If you ask me what is the worst thing
in the world, I will say it is compound
interest.”
STORY about ‘’Loan Interst’’

CONVENTIONAL
BANKING
ISLAMIC BANKING
Rules Banking industry
principles
Banking industry + Sharia
principles
Money As commodity to be sold
& rented out.
Money is not a commodity
Time The basis for earning Profit making is the basis for
earning
Risks It is almost risk free Profit and loss sharing based
Values Priority on profits, Focus
on speculative ventures
Permissible businesses& linked to
social &religious, Focus on real
economic value
THE MAIN DIFFRENCES

M& SME BANK

ENTERPRISE LANDSCAPE
IN EMERGING COUNTRY
Corporate &
multinationals
Large
Medium
Small
Micro
65-75%
20%
5-10%
0.9%
0.1%
Micro
finance
SME’s
finance
Ex: GCMI Microcity Loan Fund ($1,000 to $35,000) -USA
Equity
finance

FINANCE & BUSINESS SIZE
formal /larger
Microfinance Family & friends Debt placement
Crowd funding Angels VC Private
Supply chain finance ,Public debit market
Export credit Securitization
Seed Start-up Early growth
Sustained
growth
Factoring , Asset finance, Inventory, Public equity
Informal /smaller

HOW IT DOES WORK
IN REALITY?

Main diffrences
21
Friends and
family
Private
investors
PartnersAngels
Venture
capitalists
Personal
savings
Forms of
Equity
Financing
Banks
SME's
investment
companies
Government
programs
for SME's
Commercial
finance
companies
Microfinance
Trade
credit
Sources of
Debt
Financing
Equity Financing+++
Debt
Financing
Trade-based
Finance
Murabaha
Salam
Istissna
Free-Loan
Qard-Hassan
Rental-based Finance
Ijara
Diminshing
Musharaka
Equity-based
Finance
Musharaka
Mudaraba
Muzaraa
Takaful
(INSURANCE)

MURABAHA (TRADING)
How it works :
the bank supplying goods for re-sale to the
customer at a price that includes a margin
above the costs, and allows them to repay
in instalments.
What for:
Used to provide a mortgage on a property,
however, the property is registered to the
buyer from the start.

$100
$110

MUSHARAKA (PARTNERSHIP)
How it works :
a joint venture in which the customer and
bank contribute funding to an investment or
purchase and agree to share the returns (as
well as the risks) in proportions agreed in
advance.
What for:
Plays a vital role in financing business
operations.

Profits
Enterprise
Divided according to pre-agreed ratio
Sharing fund for agreed time
Losses
Musharaka

IJARA (LEASING)
How it works :
works as a leasing arrangement, the bank buys something
for a customer and then leases it back to them:-
1- Operating Ijarah
2- Ijarah Muntahia Bittamleek
What for:
Provides the customers with short to medium-term
financing to lease items: real estates, buildings,
equipments, machineries, computers, motor vehicles..

Ijarah (operating lease)
contract1
2
Purchase of
asset
3 Asset is
leased to
client
4
Period lease payment
over life of contract
Asset remains the property of the bank, and revert back to it at the end of ijarah
contract
Ijarah

MUDARABA (VENTURE CAPITAL)
How it works :
 is a partnership (profit sharing agreement) where capital is provided, in
cash or assets (no debt is accepted) by one party - the fund provider - and
labour is provided by the other party - mudarib.
 A trust-based contracts, the mudarib is not liable for losses except in case of
breach of the requirements of trust or misconduct.
 Contracts notify whether the mudaraba instrument is unrestricted to specific
location or type of investment or restricted .
 Bank can not say the enterpreneur that ” I am giving you 100.000 USD and
you are going to give me 120.000 USD at the end of process” but Bank can
say ” I am giving you 100.000 USD and you are going to share 20% of your
profit at the end of process.”
What for:
Mudaraba is simply capital – labor partnership: bank puts all the money,
enterpreneur puts the labor and they share the administration part.

Mudarib
Rabbulmal
Profits
Enterprise
Divided according to pre-agreed ratio
Mudaraba fund for agreed time
Losses
Mudaraba
PLS (no pain no gain)

Sharia law states that all kind of businesses are
permissible on condition that they do not deal with:
1. Forbidden asset: Alcohol, pork, Prostitution,
Pornography, dangerous drugs,
2. Unjust personal & business behaviours :cheating,
fraud, and hoarding),
3. Forbidden way to transact :using usury (riba),
speculative motive (gharar), and gambling
(maysir).
Sharia Compliant Businesses

SELECT THE RIGHT PRODUCT
Working
Capital
Trade
Finance
Business
Projects
Car
Finance
Persoanl
Fianace
Constructi
on
Finance
Home
Finance
Real
Estate
Murabaha
Mudaraba
Musharaka
Working
Capital
Service
Finance
Car
Finance
Persoanl
Fianace
Constructi
on
Finance
Home
Finance
Ijara
Istisnaa
Salam

EXAMPLE OF NEW GENERATION
OF ISLAMIC SME BANK
kingdom of Bahrain

The Shareholders
• Paid-up capital: $15m & allowed $45m
• Licensed by CBB as Islamic microfinance bank
Public & semi organization Islamic & commercial banks

THE PHILOSOPHY
Innovation in Islamic finance services :
1. 100% Sharia- complaint M&SME bank
2. Collateral/ guarantee free finance
3. No legal or formal entity required
4. Priority for youth & women
5. Provide Non-financial services
6. Partnership with NGO’s to deliver
7. 100% Social Business

THE PROGRAMS
1. SME’s interest free finance
2. Microfinance by Grameen model
3. Microfinance (savings, housing,
education, live improvement, )
4. Finance schemes through NGOs/ MFI
5. Non-Financial Services (training,
counseling, marketing,)

Award of Sheikh Mohammed Rashid, Ruler of
Dubai, the best SME’s supporting bank in Arab
World, December 2013.

www.almaaligroup.com
Consulting | Training |Sharia Advisory

Islamic banking for Micro & Small businesses

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