Download pptx - @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

@Atef Elshabrawy 2014

SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SME’S

Dr Atef El ShabrawyAl-Maali Consulting Group-UAE

Ex. CEO of Family Bank-Bahrain


STEVE STRAUS, Planet Entrepreneur’s Author

‘’THIS IS THE BEST TIME IN HISTORY TO BE AN ENTREPRENEUR”


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


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 SME’s in MENA use external

finance 50% of the population in are “unbankable”

High business mortality rates Lack of financial & money management skills


WHERE TO LOOK FOR MONEY1- 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


WHERE TO LOOK FOR MONEY Commercial lenders Actually, banks don’t finance business start-ups. Banks aren’t

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


Microfinance

Characteristics Developing countries Industrialized countries

Focuses Poverty Social exclusionunemployment

Average loan size ≥ $200 in Asia to $1,600 in Latin America

≥$6,500 to $25,000 in Belgium

Interest rates 17 % in Bangladeshi, 70 % in Latin American

5 % in Belgium up to 7.5 % in France

180 millions by 2015

Offer& demand gap In


NEW FINANCE PHILOSOPHY IS NEEDED


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,


THE HISTORY

11th to 16th centuries, financial transactions in Middle East were on basis of a profit-and loss-sharing.

1960s : the re-initiation in small scale in Egypt

1970s : the creation of banks Nasser Social Bank - Egypt Islamic Development Bank , Dubai Islamic Bank,

1990-2000s : the expansion ISLAMIC FINANCE grow at 15-25% annually, some countries “islamize” their entire banking systems, Global expansion in most Western Countries


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


THE INDUSTRY IN WESTERN EUROPE

• 31 Islamic financial institutions in Western Europe 22 only in UK, some of London’s recent iconic real landmarks

Shard Skyscraper Battersea Power Station

Aston Martin

Athletes’ village for “2012 Olympic Games


THE INDUSTRY IN WESTERN EUROPE


BUT WHAT ARE THE MAIN PRINCIPLES OF ISLAMIC FINANCE?


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


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’’


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 earning

Profit making is the basis for earning

Risks It is almost risk free

Profit 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

@Atef Elshabrawy 2014Video


M& SME BANK


ENTERPRISE LANDSCAPE IN EMERGING COUNTRY

Corporate & multinationals

Large

Medium

Small

Micro65-75%

20%

5-10%

0.9%

0.1%

Microfinance

SME’sfinance

Ex: GCMI Microcity Loan Fund ($1,000 to $35,000) -USA

Equity finance


FINANCE & BUSINESS SIZE

formal /larger

Microfinance Family & friends

Debt placement

Crowd funding Angels VC Private

Supply chain finance ,Public debit market

Export creditSecuritizati

on

Seed Start-

upEarly

growthSustained growth

Factoring , Asset finance, Inventory, Public equity

Informal /smaller


HOW IT DOES WORK IN REALITY?


THE CONVENTIONAL FINANCE

23

Friends and family

Private investors

PartnersAngels

Venture capitalists

Personal savings

Forms of Equity

Financing

Banks

SME's investment companies

Government programsfor SME's

Commercial finance

companies

Microfinance

Trade credit

Sources ofDebt

Financing

Equity Financing Debt Financing


THE ISLAMIC FINANCE

Trade-based FinanceMurabahaSalamIstissna

Free-LoanQard-Hassan

Rental-based FinanceIjara

DiminshingMusharaka

Equity-based FinanceMusharakaMudarabaMuzaraa

Takaful(INSURANCE)

1. Equity 2. Trade3. Rental 4. Free loans

non-bankable individuals


Main diffrences

25

Friends and family

Private investors

PartnersAngels

Venture capitalists

Personal savings

Forms of Equity

Financing

Banks

SME's investment companies

Government programsfor SME's

Commercial finance

companies

Microfinance

Trade credit

Sources ofDebt

Financing

Equity Financing+++

Debt Financing

Trade-based FinanceMurabahaSalamIstissna

Free-LoanQard-Hassan

Rental-based FinanceIjara

DiminshingMusharaka

Equity-based FinanceMusharakaMudarabaMuzaraa

Takaful(INSURANCE)


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.


$100

$110


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.


Profits

Enterprise

Divided according to pre-agreed ratio

Sharing fund for agreed time

Losses

Musharaka


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..


Ijarah (operating lease) contract1

2Purchase of asset

3 Asset is leased to client

4 Period lease payment over life of contractAsset remains the property of the bank, and revert back to it

at the end of ijarah contract

Ijarah


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.


Mudarib Rabbulmal

Profits

Enterprise

Divided according to pre-agreed ratio

Mudaraba fund for agreed time

Losses

Mudaraba

PLS (no pain no gain)


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


SELECT THE RIGHT PRODUCT

Working Capital

Trade Finance

Business Projects

Car Finance

Persoanl Fianace

Construction

Finance

Home Finance

Real Estate

MurabahaMudarabaMusharaka

Working Capital

Service Finance

Car Finance

Persoanl Fianace

Construction

Finance

Home Finance

IjaraIstisnaaSalam


Lender (Banks) Expectations

Angel Investor

Expectations

VC Investor Expectations

Islamic financeExpectation

-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.


EXAMPLE OF NEW GENERATION OF ISLAMIC SME BANK

kingdom of Bahrain


The Shareholders

• Paid-up capital: $15m & allowed $45m

• Licensed by CBB as Islamic microfinance bank

Public & semi organization Islamic & commercial banks


THE PHILOSOPHY

Innovation in Islamic finance services :

1. 100% Sharia- complaint M&SME bank

2. Collateral/ guarantee free finance

3. No legal or formal entity required

4. Priority for youth & women

5. Provide Non-financial services

6. Partnership with NGO’s to deliver

7. 100% Social Business


THE PROGRAMS

1. SME’s interest free finance

2. Microfinance by Grameen model

3. Microfinance (savings, housing, education, live improvement, )

4. Finance schemes through NGOs/ MFI

5. Non-Financial Services (training, counseling, marketing,)


Award of Sheikh Mohammed Rashid, Ruler of Dubai, the best SME’s supporting bank in Arab World, December 2013.


www.almaaligroup.com

Consulting | Training |Sharia Advisory

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