Islamic Financing Focus on SMEs: Islamic Financing Has Been Singled out as a Good Fit for SMEs-And So Banks and Financiers around the World Are Getting in on the Act

By Parker, Mushtak | African Business, February 2016 | Go to article overview

Islamic Financing Focus on SMEs: Islamic Financing Has Been Singled out as a Good Fit for SMEs-And So Banks and Financiers around the World Are Getting in on the Act


Parker, Mushtak, African Business


Financing small and medium-sized enterprises (SMEs) is a major priority in 2016 and beyond.

Islamic SME financing is well suited to developing countries in Africa and elsewhere. Because of its asset-based nature, it removes some of the constraints relating to the need for collateral and allows financiers to concentrate on the merits and substance of the project or operation that needs financing, explained Khaled Al Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Jeddah-based Islamic Development Bank (IDB) Group, which has 26 African member countries.

The SME sector received a major boost from the G20 Summit last November.

World leaders in their final communique stressed that to "provide a strong impetus to boost investment, particularly through private sector participation, we have developed ambitious country-specific investment strategies, which bring together concrete policies and actions to improve the investment ecosystem, foster efficient and quality infrastructure, including by the public sector, support small and medium-sized enterprises (SMEs), and enhance knowledge sharing".

The G20 is strongly pushing for the promotion of long-term financing for SMEs. This is through: first, a Joint Action Plan on SME Financing based on the G20/OECD High-Level Principles on SME Financing; and, second, establishing the private sector-led World SME Forum, a new initiative that will serve as a global body to facilitate the contributions of SMEs to growth and employment, targeting Africa, Asia, Latin America and Eastern Europe.

The G20 also singled out Islamic finance as a good fit for SME financing, stressing that it also "considered alternative (Islamic) financing structures, including asset-based financing, and simple and transparent securitisation to facilitate better intermediation for SMEs and infrastructure investment". It continued: "We support policies that allow firms of all sizes, particularly SMEs, in countries at all levels of economic development to participate in and take full advantage of inclusive Global Value Chains (GVCs), which are important drivers of world trade".

Indeed, the IDB, the World Islamic Economic Forum (WIEF) and the World Bank are establishing a Working Group that will study and exchange expertise in utilising Islamic finance for the development of SMEs in member countries common to them.

According to IDB President Dr Ahmad Mohamed Ali, "the need to deal with this challenge better highlights the significance of recognising the potential of Islamic finance, which can greatly contribute to development of SMEs as it helps in promotion of collective cooperation for the sake of production, investment and job creation.

"World Bank statistics show that SMEs contribute to an estimated 43.5% of the total job opportunities created at international level, a figure that can increase to 57.8% worldwide."

Perhaps not surprisingly, Islamic banks in Africa too see SME financing as an important component of their direction of financing this year and beyond. In Kenya, for example, First Community Bank (FCB), chairman Hassan Varvani confirmed, "is currently skewed towards corporate finance and SME financing. We are making our business model as retail and small-business friendly as possible in terms of financing.

"We have also just begun to do Islamic microfinance, which our board is also keen on. But it will take time to build up the infrastructure and to develop the demand for microfinance."

FCB is even using Kenya's pioneering mobile banking platform, M-Pesa, to market its retail and microfinance products.

Varvani believes that the entry of Dubai Islamic Bank (DIB) into the Kenyan market will boost Islamic SME financing in the East African region, given that DIB, the first commercial Islamic bank to be established in 1975 and in which the government of Dubai has a majority stake, has a strong SME business in the UAE and Gulf region. …

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