@Atef Elshabrawy 2014 SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SME’S Dr Atef El Shabrawy Al-Maali Consulting Group-UAE Ex. CEO of Family Bank-Bahrain

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@Atef Elshabrawy 2014 SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SMES Dr Atef El Shabrawy Al-Maali Consulting Group-UAE Ex. CEO of Family Bank-Bahrain Slide 2 @Atef Elshabrawy 2014 STEVE STRAUS, Planet Entrepreneurs Author THIS IS THE BEST TIME IN HISTORY TO BE AN ENTREPRENEUR Slide 3 @Atef Elshabrawy 2014 A NEW ERA FOR ENTREPRENEURS More Business: 500 million MSME, 137,000 per day worldwide, Money : $1 trillion for 68,000 new SME loans in Chain from 2008 Tools : VC/ Angle/Microfinance/Crowd; Incubators, Accelerators, Training, Social media, Recognition : 100s of awards for entrepreneurs, Valuation : 25 start-ups are valued at $1 billion Slide 4 @Atef Elshabrawy 2014 BUT Tough competition Control on finance (selection criteria& rules, Basel III Large financial gap $3.2 to 3.9 trillion credit gap for MSMEs worldwide Less than 20% of SMEs in MENA use external finance 50% of the population in are unbankable High business mortality rates Lack of financial & money management skills Slide 5 @Atef Elshabrawy 2014 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 Slide 6 @Atef Elshabrawy 2014 WHERE TO LOOK FOR MONEY Commercial lenders Actually, banks dont finance business start-ups. Banks arent 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 Slide 7 @Atef Elshabrawy 2014 Microfinance CharacteristicsDeveloping countriesIndustrialized countries FocusesPovertySocial exclusion unemployment Average loan size $200 in Asia to $1,600 in Latin America $6,500 to $25,000 in Belgium Interest rates17 % in Bangladeshi, 70 % in Latin American 5 % in Belgium up to 7.5 % in France 180 millions by 2015 Offer& demand gap In Slide 8 @Atef Elshabrawy 2014 NEW FINANCE PHILOSOPHY IS NEEDED Slide 9 @Atef Elshabrawy 2014 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, Slide 10 @Atef Elshabrawy 2014 THE HISTORY 11 th to 16 th centuries, financial transactions in Middle East were on basis of a profit-and loss-sharing. 1960 s : the re-initiation in small scale in Egypt 1970 s : the creation of banks Nasser Social Bank - Egypt Islamic Development Bank, Dubai Islamic Bank, 1990-2000 s : the expansion ISLAMIC FINANCE grow at 15-25% annually, some countries islamize their entire banking systems, Global expansion in most Western Countries Slide 11 @Atef Elshabrawy 2014 THE GROWTH 38 million customers globally 400 Islamic 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 Slide 12 @Atef Elshabrawy 2014 THE INDUSTRY IN WESTERN EUROPE 31 Islamic financial institutions in Western Europe 22 only in UK, some of Londons recent iconic real landmarks Shard Skyscraper Battersea Power Station Aston Martin Athletes village for 2012 Olympic Games Slide 13 @Atef Elshabrawy 2014 THE INDUSTRY IN WESTERN EUROPE Slide 14 @Atef Elshabrawy 2014 BUT WHAT ARE THE MAIN PRINCIPLES OF ISLAMIC FINANCE? Slide 15 @Atef Elshabrawy 2014 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 Slide 16 @Atef Elshabrawy 2014 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 Slide 17 @Atef Elshabrawy 2014 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 earningProfit making is the basis for earning Risks It is almost risk freeProfit 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 Slide 18 @Atef Elshabrawy 2014 Video Slide 19 @Atef Elshabrawy 2014 M& SME BANK Slide 20 @Atef Elshabrawy 2014 ENTERPRISE LANDSCAPE IN EMERGING COUNTRY Corporate & multinationals Large Medium Small Micro 65- 75% 20 % 5- 10% 0.9 % 0.1 % Micro finance Micro finance SMEs finance Ex: GCMI Microcity Loan Fund ($1,000 to $35,000) -USA Equity finance Slide 21 @Atef Elshabrawy 2014 FINANCE & BUSINESS SIZE formal /larger MicrofinanceFamily & friendsDebt placement Crowd funding Angels VC Private Supply chain finance,Public debit market Export credit Securitization Seed Start-upEarly growth Sustained growth Factoring, Asset finance, Inventory, Public equity Informal /smaller Slide 22 @Atef Elshabrawy 2014 HOW IT DOES WORK IN REALITY? Slide 23 @Atef Elshabrawy 2014 THE CONVENTIONAL FINANCE 23 Equity Financing Debt Financing Slide 24 @Atef Elshabrawy 2014 THE ISLAMIC FINANCE 1. Equity 2. Trade 3. Rental 4. Free loans non-bankable individuals Slide 25 @Atef Elshabrawy 2014 Main diffrences 25 Equity Financing+++ Debt Financing Slide 26 @Atef Elshabrawy 2014 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. Slide 27 @Atef Elshabrawy 2014 $100 $110 Slide 28 @Atef Elshabrawy 2014 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. Slide 29 @Atef Elshabrawy 2014 Profits Enterprise Divided according to pre-agreed ratio Sharing fund for agreed time Losses Musharaka Slide 30 @Atef Elshabrawy 2014 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.. Slide 31 @Atef Elshabrawy 2014 Ijarah (operating lease) contract 1 1 2 2 Purchase of asset 3 3 Asset is leased to client 4 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 Slide 32 @Atef Elshabrawy 2014 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. Slide 33 @Atef Elshabrawy 2014 Mudarib Rabbulmal Profits Enterprise Divided according to pre-agreed ratio Mudaraba fund for agreed time Losses Mudaraba PLS (no pain no gain) Slide 34 @Atef Elshabrawy 2014 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 Slide 35 @Atef Elshabrawy 2014 SELECT THE RIGHT PRODUCT Slide 36 @Atef Elshabrawy 2014 Lender (Banks) Expectations Angel Investor Expectations VC Investor Expectations Islamic finance Expectation -Profitable Business -Track Record -Ability to Repay -Staying Power -Collateral - Finance less than 100% of funds - Return - Ego - Philanthropy - Involvement - Mastering the business: value proposition Growing Market Strong Team Strong Sales - Exit Strategy - Obscene Return -Mastering the business -Sharia complaint -Community impact Islamic banker expects Islamic banks are expected to have risk-sharing contracts rather than fixed rate loans, they need to be convinced of the viability of the projects as their return would depend on the success of these ventures. Slide 37 @Atef Elshabrawy 2014 EXAMPLE OF NEW GENERATION OF ISLAMIC SME BANK kingdom of Bahrain Slide 38 @Atef Elshabrawy 2014 The Shareholders Paid-up capital: $15m & allowed $45m Licensed by CBB as Islamic microfinance bank Public & semi organization Islamic & commercial banks Slide 39 @Atef Elshabrawy 2014 THE PHILOSOPHY Innovation in Islamic finance services : 1. 100% Sha