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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
Heading towards the right path . . . Conventional Banking vs Islamic Banking
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
Possible Islamic Banking Solutions
Heading towards the right path . . . Conventional Banking vs Islamic Banking
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
Possible Islamic Banking Solutions
Possible Islamic Banking Solutions
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
Islamic Mode of Financing Brief Introduction
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. Delivery of goods
3. Payment of Price Customer
Islamic Mode of Financing Brief Introduction
Istisna 3
Underlying Principle Made to order
Tenure Short term
Pricing Fixed
Application Financing cost of production
1.Istisna agreement
& payment
2. Delivery of goods
as per schedule
3. Sale of goods
4. Sale proceeds Buyer Customer
Islamic Mode of Financing Brief Introduction
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
Islamic Mode of Financing Brief Introduction
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
Islamic Mode of Financing Brief Introduction
Diminishing Musharakah 6
Underlying Principle Joint ownership
Tenure Long term
Pricing Fixed / Variable
Early Termination Allowed
Application Fixed asset financing
1. Rent
2. Gradual transfer of
ownership
Customer
Islamic Mode of Financing Brief Introduction
Mudarabah 7
Underlying Principle Investment into Islamic assets
Tenure Short term / Long term
Pricing Variable based on weightages
Early Termination Allowed
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
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