LONDON, 3 October 2005 — Small-and-Medium Enterprises (SMEs), usually considered to be the backbone of an economy, are set to receive a major boost especially in the Islamic banking and finance sector. Countries such as Saudi Arabia and Malaysia are encouraging greater allocation of financing for SMEs by the banking sector in an effort to stimulate the private sector and to boost rural and inner city poverty alleviation policies.
In Malaysia, for instance, according to Bank Negara, the central bank, financing for SMEs by the Islamic banking sector continued to increase from RM3.5 billion in 2002 to RM6.2 billion in 2003 to RM8 billion in 2004. The year-on-year increase in 2004 was almost 30 percent. More encouragingly, the market share of Islamic banking financing out of total financing for SMEs in Malaysia almost doubled from 7.5 percent in 2003 to 13.9 percent in 2004.
However, the Islamic SME financing in Malaysia in 2004 is merely RM8 billion out of a total financing by the Islamic financial sector of RM57.882 billion, which suggests that there is a huge challenge and business opportunity for Islamic banking in Malaysia in respect of financing SMEs.
This trend is reflected elsewhere in member countries of the Islamic development Bank (IDB), as the role and contribution of the SMEs to GDP and economic activity assumes greater importance.
Saudi Arabia is also encouraging the financing of SMEs. The country’s largest bank, National Commercial Bank (NCB), which is owned 69.3 percent by the Saudi Public Investment Fund (SPIF), earlier this year launched a Shariah-compliant financing scheme aimed at small businesses and self-employed professionals.
The “Al-Ahli Program for Free Tradesmen” offers Shariah-compliant loans of up to SR1 million repayable over three years to small businesses and professionals such as consultant doctors, engineers, and accountants who own and manage their own activities.
This financing program, according to Al-Sharif Khalid Al-Ghalib, head of NCB’s customer management group at the time, was the first of its kind on the Saudi market, and offers financing without collateral to all qualifying business people whether they are NCB customers or not.
“The small business sector makes up 80 percent of the Saudi market”, stressed Ibrahim Al-Buloushi, head of NCB’s small business group, “and the bank’s aim is to expand the national economic structure; provide additional support to increase sources of income; and activate the economy to create more jobs and investment opportunities.”
Some Islamic bankers have criticized the sector’s over-concentration on corporate, institutional and high networth clients, and its slowness in targeting SMEs.
“The reasons why SME financing should be a natural niche for Islamic banking,” stresses Dr. Adalet Djabiev, CEO of Badr-Forte Bank in Moscow, which is Russian sole Islamic bank, “is that it deals directly with the real economy; creates employment; involves the productive use of resources especially capital and finance; and contributes directly toward the alleviation of poverty.”
The IDB offers lines of financing for onward financing of SMEs in member countries along with extension, in principle, of full delegation of authority to selected National Development Financial Institutions (NDFIs), which are also encouraged to use the IDB’s technical assistance facilities.
At the 29th annual meeting of the IDB board of governors in Tehran in September 2004, SME financing was high on the agenda with particular emphasis on the need for using modern banking products to help alleviate poverty by generating wealth in rural areas.
The biggest policy boost for SME financing has come from Malaysia in the last two years. Bank Negara in October 2004 embarked on a project to enhance the capabilities of its development financial institutions (DFIs) such as Bank Pembangunan; Bank Industri; EXIM Bank; MECIB; and Bank Pertanian Malaysia.
The Bank Negara SME policy thrust is part of Prime Minister Abdullah Badawi’s so-called “agro-revolution”, whose priorities include reducing poverty significantly, especially among the hardcore poor; rooting out corruption; and reforming education.
Indeed of the 22 banking measures introduced by Bank Negara in 2003, some eight dealt with measures to improve access to financing and those promoting active consumerism.
Malaysian Second Finance Minister Tan Sri Nor Mohammed Yakcop last year rightly called on Islamic finance to impact more on the ordinary citizens and not just bring value to shareholders, and bonuses to senior executives.
For instance, in the context even of an Islamic Capital Market (ICM), he is suggesting greater use of equity-based and hybrid financial instruments, and more non-collateral-based Islamic financial products to promote entrepreneurial development.
