Session 3.Opportunities in Islamic Financing for SMEs.pdf

7/28/2019 Session 3.Opportunities in Islamic Financing for SMEs.pdf

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Opportunities in

Islamic Financingfor SMEs

Ariful Islam

Chief Operating Officer &Executive Director

Meezan Bank Limited

Pakistan

January 24, 2012


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Economic Overview of SME SectorPakistan

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 o f Pakistan 2005/State Bank o f Pakistan Development Finance Review March 2011

53%

22%

20%

5%

Wholesale/

Retail Trade/

Hotels

Community/Social Services

Manufacturing

Others

3.21Million

No. of SMEs

8.6%

Access to Finance


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Islamic BankingIndustry 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

DepositsUSD Million

74%(CAGR)

1Net Advances & Investments

USD Million

65%(CAGR)

2

Islamic Branches

72%(CAGR)

3

Source: State Bank of Pakistan


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Meezan Bank LimitedDifferentiating 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 BoardBrand Credibility

Largest product range of all Islamic BanksProductRange


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Meezan Bank LimitedBackground and necessary detai ls

Background

A publicly limited company.

Incorporated in January 1997 and

started operations an investmentbank.

In January 2002, Meezan Bank was

granted the countrys 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.


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Meezan Bank LimitedKey Perform ance Ind icators

AssetsUSD Million

47%(CAGR)

1 DepositsUSD Million

50%(CAGR)

2

IncomeUSD Million

48%(CAGR)

3Profit after Tax

USD Million

28%(CAGR)

4


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Meezan Bank LimitedKey Perform ance Ind icators

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


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Meezan Bank LimitedChal lenges in offer ing Shariah Produc ts

Documentation Being small SMEs are often averse to documentation

Lack of awareness posses to be a challengeAwareness

Organisation Unprofessional attitude of staff

Non-compliance Do not follow Process Flows

Reluctant to disclose financials due to tax reasonsDisclosure


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Heading towards the right path . . .Convent ional Banking vs Is lam ic 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


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Heading towards the right path . . .What are some signif ic ant/interest ing results

Although SMEs are currently a very small % of our portfolio the represent a very

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

servicesMeezan has 1259 SME relationships compared to 292 Corporate accounts

SMEs 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 SMEs 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


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Short Term Finance1

Working Capital

Overheads / Utilities

Finished Goods

Rental financing

Long Term Finance2

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



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Trade Finance3

Sight LC

Usuance LC

Forward Cover

Shipping Guarantee

Export Credit Financing

Fund Management4

Checking accounts

Cash Management

Remittance

Murabaha / Ijarah

Musawamah

Waad

Kafalah

Murabaha / Istisna

Qard

Mudarabah




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Islamic Mode of FinancingBrief Introduct ion

Murabaha1

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

CustomerSupplier


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Salam2

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 PriceCustomer


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Istisna3

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 BuyerCustomer


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Tijarah4

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 BuyerCustomer


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Ijarah5

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 CustomerVendor


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Diminishing Musharakah6

Underlying Principle Joint ownership

Tenure Long term

Pricing Fixed / Variable


Application Fixed asset financing

1. Rent

2. Gradual transfer of

ownership

Customer


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Mudarabah7

Underlying Principle Investment into Islamic assets

Tenure Short term / Long term

Pricing Variable based on weightages


ApplicationChecking accounts /

Cash Management solutions

In case of Mudarabah Assets incur a loss, dist r ibut ion w il l be based on pro rata basis

1. Depositing funds

Investors4. ROI based on

weightages(net of management fee)

2. Investing into

Islamic Assets

3. Investment

Returns

Car Finance

Import/

Export

House

Finance


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Risk Management FrameworkIs lamic Banking offers need based f inancial so lut ions

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

Customerapproaches Islamic

Bank for financing

After making acredit decision as

per banks policy Islamic bank offers

need based mode

of financing

Key Messages

Documents

Session 3.Opportunities in Islamic Financing for SMEs.pdf