ABAC Malaysia - SME Finance Forum

Workshop on Innovative Financing for SMMEs

InterContinental Kuala Lumpur, Malaysia

Ahmed RostomFinancial Sector Specialist

Finance and Markets Global Practice

May 2015

Opportunities for SMEs in the New Era of Islamic Financing

• Shariah Compliant Financing Supports Economic Development

• A Global Snapshot of Islamic Finance

• WBG’s multi-pronged approach for Islamic finance activities

• WBG’s Lending, Investments and Guarantees for

• Reality Vs. Potential Gap Challenges Islamic SME Financing

• Looking Foreword

• Key Questions Going Forward

2

A Global Snapshot of Islamic Finance: Uptrend Persists

0

500

1000

1500

2000

2500

2006 2007 2008 2009 2010 2011 2012 2013 2014e

US

D B

illio

n

Takaful Assets Under Management Sukuk Outstanding Banking Assets

3

A Global Snapshot of Islamic Finance: Sukuk Market is Maturing

Pakistan

Turkey

UAE

Qatar

Bahrain

Malaysia

Indonesia

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

-10 -8 -6 -4 -2 0 2 4 6

Change in Number

Change in Volume

Developments of Sovereign Sukuk Issuances in Selected Countries

([Jan. - Sep.]: 2013 Vs. 2014)

Luxembourg

Dubai (UAE)

South Africa

Hong Kong

Indonesia

Sharjah (UAE)

UK

0

1

2

3

4

5

6

0 2 4 6 8 10 12 14

Yield to Maturity

No. of times Oversubscribed

Oversubscriptions Vs. Yields to Maturity(Jan. - Sep. 2014)

0.005

0.2050.343

0.500

1.000

2

1 1 1 1

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0

1

2

3

Bangladesh Senegal UK Sounth Africa Honk Kong

Volume of Issuance(USD Bn)

Number of Issuances

New Entrants to Global Sovereign Sukuk Markets (Selected Countries)

Jan. - Sep. 2014

Sov Bonds VolsSov Bonds #

48

135

80 78

60

134

42

27

8,690.23

15,145.00

11,106.50

14,768.40

11,180.50

9,495.49

8,793.78

3,264.77

0

2000

4000

6000

8000

10000

12000

14000

16000

0

20

40

60

80

100

120

140

2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2

Amount and Number of Deals of Sukuk Issuances*

#Deals USD (Mln)

* 4

A Global Snapshot of Islamic Finance: Efficiency is Picking Up

0.25

0.35

0.45

0.55

0.65

0.75

Ma

r-1

4

Ma

r-1

4

Ap

r-14

Ap

r-14

Ma

y-1

4

Ma

y-1

4

Jun

-14

Jun

-14

Jul-

14

Au

g-1

4

Au

g-1

4

Se

p-1

4

Se

p-1

4

Oct-

14

Oct-

14

No

v-1

4

No

v-1

4

De

c-1

4

Jan

-15

Jan

-15

Fe

b-1

5

Fe

b-1

5

Ma

r-1

5

Ma

r-1

5

Ap

r-15

Ap

r-15

Murabaha Rate vs LIBOR

6 Month USD Murabaha 6 Month LIBOR USD

2300

2400

2500

2600

2700

2800

2900

3000

250

260

270

280

290

300

310

320

330

340

350

Ma

y-1

3M

ay-1

3Jun-1

3Jul-1

3A

ug-1

3S

ep-1

3O

ct-

13

No

v-1

3D

ec-1

3Jan-1

4F

eb

-14

Ma

r-1

4A

pr-

14

Ma

y-1

4Jun-1

4Jul-1

4A

ug-1

4S

ep-1

4O

ct-

14

No

v-1

4D

ec-1

4Jan-1

5Jan-1

5F

eb

-15

Ma

r-1

5A

pr-

15

Dow Jones Global vs Dow Jones Islamic Indices

Dow Jones Global Index

Dow Jones Islamic Market World Index

5

6

Lending and Investments

Guarantees

TA and Advisory Services

Knowledge and

Learning

Global Influence

WBG’s multi-pronged approach for Islamic finance activities

WBG’s Lending, Investments and Guarantees

Egypt: Inclusive Financial Access includes an Islamic finance component providing Sharia-compliant financing to MSMEs

Turkey: The Third Access to Finance for SME Project (SME III) includes an Islamic finance component, whereby Participation Banks (i.e. Islamic banks) will finance leases to SMEs under a Shariah compliant Wakalah contract

Jordan: SME Access to Finance Loan that includes a Shariah compliant component availing finance for rural areas with a Shariah compliant third party guarantee (kafalah)

West Bank and Gaza: Setting up a Shariah compliant partial credit guarantee scheme that allows for financing SMEs affected in Gaza by recent aggressions.

Indonesia: IFC invested in a Mudarabah fund managed by Bank Muamalat for financing SMEs

Global Issuance: World Bank Treasury successfully arranged an SRI Murabahah sukuk to finance immunization in poor countries

Djibouti: MIGA used an Islamic financing structure to guarantee the construction of the DoralehContainer Terminal in Djibouti and finance Axis Telecoms Project in Indonesia

7

Innovative Finance for SMEs: Egypt’s Inclusive Financial Access Project

(2014)

Instrument

Musharakah IBRD SFD

IBRD InvestmentProject Finance

PFISME/ MCE

Conventional finance Shariah compliant finance

Musharakah(Risk Sharing)

IBRD funds

Murabahah, Ijarah, Mudarabah etc.

fundsfunds

Islamic

Commercial

Banks

fundsmatching 1:1

8

Long Term Finance for SMEs: Turkey’s Access to Finance for SME Project III

(2014)

TSKB PFI SME/ MCE

Wakalah and Kafalah Murabahah, Ijarah etc.

funds

repayments

funds

repayments

TSKB PFI SME/ MCENon-

repayment

Instrument

Wakalah

Kafalah

IBRD

IBRD funds

TSKB repayments

repayments basedon Kafalah 9

CBJ PFI: IIAB SME/ MCE

Wakalah and Kafalah Murabahah, Ijarah etc.

funds funds

repayments

CBJGuarantor:

JLGCSME/ MCE

repayments basedon Kafalah

Non-repayment

Instrument

Wakalah

Kafalah

IBRD

IBRD funds

TSKB repayments repayments

Rural SMEs Access to Finance: Jordan’s Access to Finance Project

(2015)

10

PMA(Takaful

Pool)

PFI SME/ MCE

Wakalah and Kafalah Murabahah, Ijarah etc.

funds

repayments

SME/ MCE

repayments basedon Kafalah

Non-repayment

Instrument

Wakalah

Kafalah

Donors

Seed funds

Managers

Contributions/ Management Fee

PMA(Takaful

Pool)

Shariah Compliant Partial Credit Guarantee for SMEs: Gaza PCG Facility

(2015: Pipeline)

11

Mudarabah SMEs Fund: Bank Muamalat Indonesia Syariah (BMIS) (2014: IFC)

Instrument

Shariah

Compliant

SME

financing

IFC(Rab

Almal)

Mudarabah

SMEs FundSME/ MCE

Shariah compliant finance

Mudarabah Investment(Risk Sharing)

IFCfunds

Mudarabahincome

Murabahah, Ijarah, Mudarabah etc.

funds

BMIS

(Mudarib)Mudarabah

12

13

Periodic

Distributions

Issuer/Trustee/SellerSukuk Holders

Delegate

under the

Declaration.

Trust

Commodity Agent

Supplier for

Purchase

IFFIm/

Purchaser

Supplier for

On-Sale

Certificates

Proceeds

CommodityCost

Price

Cost

Price Commodity

CommodityCost

Price

Source: World Bank Treasury

International Finance Facility for Immunization -SRI Sukuk(2015: WB-TRE)

14

Periodic

Distributions

Issuer/Trustee/SellerSukuk Holders

Delegate

under the

Declaration.

Trust

Commodity Agent

Supplier for

Purchase

IFFIm/

Purchaser

Supplier for

On-Sale

Certificates

Proceeds

Undertaking to Purchase Commodity

Sale of

Commodity

Deferred Price

CommodityCost

Price

Cost

Price Commodity

CommodityCost

Price

Source: World Bank Treasury

International Finance Facility for Immunization -SRI Sukuk(2015: WB-TRE)

Commodity Seller

Deutche Bank Luxembourg

(Facility Agent))

Syndicate Banks(Financiers)

Contractors / Suppliers

NTSCommodity

Buyer

Option to Sell Back

Commodity

Funding

MurabahaPrice

Payment for Capexand other costs

Commodity Price

Commodity

Commodity

Commodity Price

Capex and services

Guarantee for SC Financing for Axis Telecoms Project: Indonesia

(2011: MIGA)

15

Guarantee for SC Financing for Doraleh Container Terminal Project: Djibouti

(2007: MIGA)

16

Reality Vs. Potential Gap Challenges Islamic SME Financing

Short term murabahah financing is still predominant

Doubts about the consistent application of profit andloss-sharing principle

Increasing tendency to mimic conventional products

17

Enhancing corporate governance and risk management

Enhancing the regulatory and supervisory framework

Promoting standardization of products and documentation

Strengthening bankruptcy and insolvency frameworks

Raising public awareness (financial literacy)

Increasing the number of skilled professionals

Looking Foreword: Islamic Finance Development Remains a Function of:

18

Thank you