Opportunities in Islamic Financing for SMEssme.ebi.gov.eg/networkingactivities/Conferences... ·...

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Opportunities in

Islamic Financing

for SMEs

Ariful Islam

Chief Operating Officer &

Executive Director

Meezan Bank Limited

Pakistan

January 24, 2012

Economic Overview of SME Sector Pakistan

SME sector is the major growing force behind the fastest growing economy.

Access to finance is limited

Low financial inclusion

SMEs are strong linkages with corporates; these links are crucial for making a systemic

productive capability.

Key Messages

Source: The Economic Census of Pakistan 2005/State Bank of Pakistan – Development Finance Review March 2011

53%

22%

20%

5%

Wholesale/

Retail Trade/

Hotels

Community/

Social Services

Manufacturing

Others

3.21 Million

No. of SMEs

8.6%

Access to Finance

Islamic Banking Industry Snapshot – Pakistan

Islamic banking sector is growing enormously since inception

Meezan Bank is the first and largest Islamic bank in Pakistan

Share in Banking Industry 2003 2010

Deposits 0.40% 7.2%

Net Advances & Investments 0.50% 6.20%

Islamic Branches 0.25% 8.12%

Key Messages

Deposits USD Million

74%▲ (CAGR)

1 Net Advances & Investments USD Million

65%▲ (CAGR)

2

Islamic Branches

72%▲ (CAGR)

3

Source: State Bank of Pakistan

Meezan Bank Limited Differentiating Factors

Size Large branch network of 275 branches in 80+ cities

Dedicated RMs The key is to understand the business cycle of the customer

Service Quality Independent Service Quality team reporting directly to COO

High powered Shariah Board Brand Credibility

Largest product range of all Islamic Banks Product Range

Meezan Bank Limited Background and necessary details

Background

A publicly limited company.

Incorporated in January 1997 and

started operations an investment

bank.

In January 2002, Meezan Bank was

granted the country’s full fledged

commercial banking license as a

dedicated Islamic bank, by the State

Bank of Pakistan.

Shareholders and Shariah Board

Main Shareholders are Noor Financial

Investment Company, Pak-Kuwait

Investment Company and the Islamic

Development Bank of Jeddah.

Internationally renowned Shariah Supervisory

Board chaired by Justice (Retd.) Maulana

Muhamad Taqi Usmani.

Meezan Bank Limited Key Performance Indicators

Assets USD Million

47%▲ (CAGR)

1 Deposits USD Million

50%▲ (CAGR)

2

Income USD Million

48%▲ (CAGR)

3 Profit after Tax USD Million

28%▲ (CAGR)

4

Meezan Bank Limited Key Performance Indicators

Key Messages

Meezan Bank is committed to providing Shariah compliant financial solutions

Meezan Bank is rated A-1+ (Short term) and AA- (Long term) by JCR-VIS Credit Rating Co. Ltd

Robust Product Development and Shariah Compliance framework in place

Strong focus on staff Learning and Development

No. of Staff

51%▲ (CAGR)

5 Branches

57%▲ (CAGR)

6

Meezan Bank Limited Challenges in offering Shariah Products

Documentation Being small SME’s are often averse to documentation

Lack of awareness posses to be a challenge Awareness

Organisation Unprofessional attitude of staff

Non-compliance Do not follow Process Flows

Reluctant to disclose financials due to tax reasons Disclosure

Heading towards the right path . . . Conventional Banking vs Islamic Banking

Conventional Banking

Money

Money +

Money (Interest)

Financial Models

Financial Needs of SMEs

1

3

2

4

Short Term Finance Long Term Finance

Trade Finance Fund Management

Islamic Banking

Goods &

Services

Money

Heading towards the right path . . . What are some significant/interesting results

Although SME’s are currently a very small % of our portfolio the represent a very

large population of customers that bank with Meezan and use branch banking

services–Meezan has 1259 SME relationships compared to 292 Corporate accounts

SME’s are more faith driven than larger corporations and access to Islamic finance

is increasing the Financial Inclusion of this sector - Islamic banking brings SMEs

into financial system who do not wish to enter into it due to interest based financing

More SME’s can now grow due to access to finance – Financial Access -Islamic

banking brings out SMEs from informal financial system and helps them contribute

to economy.

Islamic banking offers need based financial solutions – npl is lower

Key Messages


Short Term Finance 1

Working Capital

Overheads / Utilities

Finished Goods

Rental financing

Long Term Finance 2

Asset acquisition & Business Expansion

such as SME Auto (Buses, Coaches,

Trolleys or Oil Tankers, Fleet Car Finance)

Plant & Machinery

Possible Islamic Banking Solutions

Murabaha

Salam / Istisna

Tijarah

Lease / Sub lease

Diminishing Mushakarah

(Shirkat-ul-Milk)

Ijarah



Trade Finance 3

Sight LC

Usuance LC

Forward Cover

Shipping Guarantee

Export Credit Financing

Fund Management 4

Checking accounts

Cash Management

Remittance

Murabaha / Ijarah

Musawamah

Wa’ad

Kafalah

Murabaha / Istisna

Qard

Mudarabah



Islamic Mode of Financing Brief Introduction

Murabaha 1

Underlying Principle Cost plus profit

Tenure Short term

Pricing Fixed

Pre-payment discount Not allowed

Application Purchase of raw material

1. Payment of Cost 3. Payment of

Murabaha Price

2. Delivery of goods

Customer Supplier


Salam 2

Underlying Principle Advance payment purchase

Tenure Short term

Pricing Fixed

Application Purchase of agricultural /

homogenous commodities

1. Payment of Price

2. Delivery of goods Market


3. Payment of Price Customer


Istisna 3

Underlying Principle Made to order

Tenure Short term

Pricing Fixed

Application Financing cost of production

1.Istisna agreement

& payment


as per schedule

3. Sale of goods

4. Sale proceeds Buyer Customer


Tijarah 4

Underlying Principle Finished goods purchase

Tenure Short term

Pricing Fixed

Application Receivable financing

1.Sale agreement

& payment

2. Immediate

Delivery of goods

3. Sale of goods

4. Sale proceeds Buyer Customer


Ijarah 5

Underlying Principle Rent on usufruct of asset

Tenure Long term

Pricing Fixed / Variable

Early Termination Allowed

Application Fixed asset financing

1. Payment of

purchase price

2. Transfer of title

3. Usufruct of asset

4. Payment of rentals Customer Vendor


Diminishing Musharakah 6

Underlying Principle Joint ownership

Tenure Long term

Pricing Fixed / Variable


Application Fixed asset financing

1. Rent

2. Gradual transfer of

ownership

Customer


Mudarabah 7

Underlying Principle Investment into Islamic assets

Tenure Short term / Long term

Pricing Variable based on weightages


Application Checking accounts /

Cash Management solutions

In case of Mudarabah Assets incur a loss, distribution will be based on prorata basis

1. Depositing funds

Investors 4. ROI based on

weightages (net of management fee)

2. Investing into

Islamic Assets

3. Investment

Returns

Car Finance

Import/

Export

House

Finance

Risk Management Framework Islamic Banking offers need based financial solutions

Islamic banking offers process driven financial solutions based on SMEs need

Islamic banking facilities banks in understanding SMEs businesses to offer need based

financial solutions

Islamic banking inherently provides risk management framework to financial institutions

Islamic banking minimizes chances of mis-utilization of funds

Transactions are backed by underlying asset; and involve trading / renting of asset and

participation on profit and loss basis

Islamic banking offers Shariah compliant process flow for need based financial solution

Customer

approaches Islamic

Bank for financing

After making a

credit decision as

per bank’s policy Islamic bank offers

need based mode

of financing

Key Messages

Opportunities in Islamic Financing for SMEssme.ebi.gov.eg/networkingactivities/Conferences... ·...

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