Opportunities and Challenges for SME’s in Islamic Finance Ahmed Rostom Financial Sector Specialist East Asia and Pacific Finance and Private Sector Development (EASFP) The World Bank April, 18 th , 2013
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Opportunities and Challenges for SME’s in Islamic Finance
Ahmed Rostom Financial Sector Specialist
East Asia and Pacific Finance and Private Sector Development (EASFP)
The World Bank April, 18th, 2013
Objective
2
The objective of this presentation is to provide an overview of the opportunities and challenges facing SME’s Islamic Finance.
3
Road Map
• Global Islamic Finance Industry: A Brief Overview
• Structure of SME’s – Islamic Finance
• Foundations of SME’s – Islamic Finance: o Financial Inclusion o Entrepreneurship & Intermediation o Risk Sharing Friendliness
• Conclusion and Progress Discussion
Source: Central Banks, IFIS, Bloomberg, Zawya, World Islamic Insurance Directory 2012, The Banker, KFHR
Islamic Financial Assets 2011 (by Region and Financial Instrument)
Banks are dominating the seen
GCC 39%
Asia 21%
Others* 4% Sub-
Saharan Africa
1%
MENA (exc. GCC) 35%
Global Islamic Finance Industry: A Brief Overview
30%
26%
% of Banks offering sharia-compliant products
% of Banks planning tooffer sharia-compliantproducts in 12 months
Shariah Compliant Products Non-GCC MENA
4
413
15640 2 17
Murabaha Qard hassan Musharaka/Mudaraba
Salam Other
Portfolio, by type of product (USD million)
Global Shariah Compliant MSME finance: Concentrated …Lacks Instruments Diversification
And Relies Less on Investment Contracts
Source: CGAP 2010
Structure of SME’s – Islamic Finance
5
Foundations of SME’s – Islamic Finance
Financial Intermediaries
Projects
6
I – Financial Inclusion
II – Entrepreneurship & Intermediation
III – Risk Sharing Friendliness
Entrepreneurs
Savings
Direct partnership flows and revenues
Risk sharing contracts flows and revenues
Source: www.worldbank.org/globalfindex , The World Bank, April 2012
Islamic finance has a long way to go towards expanding financial inclusion
7
I - Financial Inclusion
8
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Arab World South Asia OIC Sub-SaharanAfrica
Latin America& Caribbean
Middle East &North Africa
Europe &Central Asia
East Asia &Pacific
New business density (new registrations per
1,000 people ages 18-64)
0
10
20
30
40
50
60
70
Entrepreneurial Intention
0
5
10
15
20
25
30
35
40Total early-stage Entrepreneurial Activity
II - Entrepreneurship and Intermediation
Despite the Entrepreneurial Potential … Entrepreneurial activities in OIC are Constrained…
Source: Global Entrepreneurship Monitor, 2013
Percentage of 18-64 population who are either a nascent entrepreneur or owner-manager of a new business (as defined above)
Percentage of 18-64 population (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years
Moreover… access to affordable finance is a challenge for SME’s growth
Share of firms reporting cost of/access to finance (percent) 0 10 20 30 40 50 60 70
High income
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Access to finance Cost of finance
Source: The World Bank 2008 9
II - Entrepreneurship and Intermediation
0.5% 1% 2% 2% 2% 2%
4% 4% 5%
6%
10%
13%
15% 16%
20%
24%
0%
5%
10%
15%
20%
25%
30%
SME loans/Total loans MENA countries
Source: World Bank 2011 10
II - Entrepreneurship and Intermediation
SME’ finance Gap is an opportunity …
Source: IFC 2011 11
II - Entrepreneurship and Intermediation
126 109 112 108
85 93 113 114 107 110
97 78
99 115
020406080
100120140
OPEC 2013 OIC 2013 OIC - GCC2013
MENA 2013 GCC 2013 EAP 2013 DevelopingCountries
2013DB 2013 DB 2011
44 35 38
23 15
36 31
43 40 44
20 15
40 38
0
10
20
30
40
50
OPEC 2013 OIC 2013 OIC - GCC2013
MENA 2013 GCC 2013 EAP 2013 DevelopingCountries 2013DB 2013 DB 2011
III - Risk Sharing Friendliness: Institutional Quality Starting a Business
Overall rank
Time (days)
12 Source: Doing Business Database; The World Bank 2013
Cost (% of income per capita)
4.2
2.6 2.3
3.6
4.5
2.4 2.5 2.8 2.3 2.1
3.3 3.8
2.0 2.0
0
1
2
3
4
5
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountriesDB 2013 DB 2011
102 115 118 124
93 91 104 110 117 120 116
94 94 108
020406080
100120140
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountries
DB 2013 DB 2011
Getting Credit Overall rank
Strength of legal rights index
3.9 4.9 5.0 3.0
4.2 6.5 5.6
3.9 4.1 4.1 3.0
4.0 6.0
4.9
02468
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountriesDB 2013 DB 2011
Source: Doing Business Database; The World Bank 2013 13
Depth of credit information
III - Risk Sharing Friendliness: Institutional Quality
111 116 116 113 110 87
115 114 116 116 115 117 88
113
020406080
100120140
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountries
DB 2013 DB 2011
592 671 682 652
588 522
654 594 667 677 664
590 547 649
0100200300400500600700800
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountries
DB 2013 DB 2011
43 41 40 44 47 37 40
28
39 41
24 20
47 47
0
10
20
30
40
50
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountriesDB 2013 DB 2011
Enforcing Contracts Overall rank
Time
Procedures (number)
14 Source: Doing Business Database; The World Bank 2013
III - Risk Sharing Friendliness: Institutional Quality
3.4 3.3 3.3 3.0 3.3 2.5
2.9 3.4 3.1 3.1 2.9
3.3 2.5
3.0
0
1
2
3
4
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountries
DB 2013 DB 2011
17.3 16.1 16.3
11.9 14.7
18.9 18.5 17.3 15.2 15.3
11.4 14.7
18.9 18.5
0
5
10
15
20
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountriesDB 2013 DB 2011
24.5 28.6 26.8 30.1
41.2
30.4 20.6 23.9 26.3 24.6 27.9
39.9 30.2
20.3
01020304050
OPEC OIC 2013 OIC - GCC MENA GCC EAP 2013 DevelopingCountriesDB 2013 DB 2011
Resolving Insolvency Time (years)
Cost (% of claim)
Recovery rate (Cents on the Dollar)
Source: Doing Business Database; The World Bank 2012 15
III - Risk Sharing Friendliness: Institutional Quality
• Extending outreach of Islamic financial services will foster financial inclusion and ensures liquidity and healthy growth of the industry.
• The entrepreneurial potential in OIC countries can galvanize growth and development through risk sharing inherent in Islamic finance.
• Islamic finance have a large potential to fill a portion of global - around USD 0.5 trillion - SME’s financing gap.
• Risk sharing friendliness is a function of a conducive business environment.
Conclusion and Progress Discussion
16
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