How Malaysia Institutionalizes Islamic Finance in Micro & SMEs Dr Nordin Zain, PhD (Glasgow), C.A., FCPA, FIPA Executive Director Deloitte Malaysia World Bank The Exchange 10 June, 2014 Abu Dhabi, UAE
Agenda World Bank The Exchange 10 June, 2014 Abu Dhabi, UAE 1 2 3 Micro & SME landscape Key drivers in instilling Islamic finance in SME space Concluding remarks 2
The Malaysian Micro & SME landscape Establishment Size Large 1% Medium 2% Small 18% Micro 79% Member Firms and DTTL: Insert appropriate copyright (Go Header & Footer to edit this text) 3 Source: 2005 Census on Establishments and Enterprises, Department of Statistics, Malaysia
SMEs contribution to GDP 51% 39% 32% 16% Low Income Countries Middle Income Countries High Income Countries Malaysia 4
SME versus Overall GDP Growth 5
Key challenges for Micros &SMEs Innovation & Technology Adoption Access to national innovation system Low commercialization and R&D Poor technology uptake Access to Financing Limited non-banking avenues Poor creditworthiness Lack of know-how & resources Legal & Regulatory Environment Licensing / permits Complying to regulations Legislations disincentivizing formation & growth Human Capital Development Workforce lacks job readiness Low utilisation of existing training Non-competitive rewards & benefits Market Access Procurement by government & large companies Information barrier for exports Limited focus on marketing & branding Low bargaining power Infrastructure Trade clearance & facilitation system Low and infrequent trade volume Source: SME Masterplan 2012 2020, National SME Development Council 6
Access to financing remains a challenge Business plan deemed not viable 5.3% Long loan processing time 9.8% Others 5.9% No financial track record 10.7% Insufficient documents 13.1% Lack of collateral 55.2% Source: BNM Website 7
Agenda World Bank The Exchange 10 June, 2014 Abu Dhabi, UAE 1 2 3 Micro & SME landscape Key drivers in instilling Islamic finance in SME space Concluding remarks 8
Key drivers - SME Masterplan 2012 2020 To promote the development of competitive, innovative and resilient SMEs through effective coordination and provision of business support 2014 Deloitte 9
Key drivers - SME Masterplan 2012-2020 Vision Creation of globally competitive SMEs across all sectors that enhance wealth creation and contribute to the social well-being on the nation Goals Increase business formation Expand number of high growth and innovative firms Raise productivity Intensify formalisation Focus Areas Innovation & Technology Adoption Market Access Human Capital Development Legal & Regulatory Environment Access to Financing Infrastructure Institutional Support Reliable Database Monitoring & Evaluation Effective Coordination Effective Business Services Source: SME Masterplan 2012 2020, National SME Development Council 10
Energy focused on SME Financing Ecosystem Source: BNM Website 11
Key drivers - Governing bodies Minister of Finance Central Bank of Malaysia Securities Commission Islamic Capital Market Department Shariah Advisory Council Exchange Investment Banks Asset Managers, Unit Trusts Stockbrokers Listed Companies 12 Source: Securities Commission Malaysia
Energy focused on creating Islamic hub 1969 1983 1990 1994 1999 2002 2005 2006 2008 2013 Establishment of Lembaga Tabung Haji (pilgrim management and funds) Islamic Banking Act first full-fledged Islamic Bank (Bank Islam) First sukuk issued by a foreign-based company (Shell MDS) Launch of Islamic interbank money market Formation of the KLSI (Kuala Lumpur Shariah Index) First global sovereign sukuk First foreign Islamic bank from Middle East in Malaysia (Kuwait Finance House) First Islamic REIT (Al- Aqar) / Launch of MIFC Locally incorporated foreign bank establishes Islamic banking subsidiary (HSBC Amanah) Islamic Financial Services Act (IFSA) 2013 Source: Securities Commission Malaysia 13
Microfinancing schemes Central Bank of Malaysia 2014 Deloitte 14
Case - Bank Rakyat Islamic Financing products Largest cooperative Islamic bank in Malaysia 4 th largest in the world 1.0 million members 4,000 cooperative members Offers 100% Islamic financing services & products e.g. Ar-rahnu Micro Financing - i Makes funds available to hawkers, petty traders and small businesses to expand and improve their businesses Micro Enterprise Fund Financing for businesses involved by the cooperative Ar-Rahnu Gold Exchange Islamic pawn loan scheme 2014 Deloitte 15
Case - SME Bank To develop SMEs to be the nation s engine of growth, in line with the Government s economic agenda. Islamic Financing Products i-epf (Enterprise Premise Financing) i-reach (Rolling Expenditure Advance Cash Scheme) i-splash (Supply Assistance Scheme) i-surf (Supplementary Renewed Facility) i-cash 2014 Deloitte 16
Case - Maybank Islamic We want to humanise financial services across Asia by: - Providing the people with convenient access to financing - Having fair terms and pricing - Advising customers based on their needs - Being a the heart of the community Islamic Financing Products Consumer Commodity Murabahah Home/Shophouse Financing-i Home/Shophouse Equity-i Fixed/Variable Rate Financing Cash Line-i Maybank Islamic Personal Financing-i ExeCash-i Standard/Special/for GLC Al-Ijarah Thumma Al-Bai H.O.T. Broking ASB Financing-i 2014 Deloitte 17
Maybank Islamic Islamic Financing Products Business BBA Term Financing-i Musharakah Mutanaqisah Term Financing-i Commodity Murabahah Term Financing-i Cash Line-i Short Term Revolving Credit-i Fund for Small and Medium Industries2-i New Entrepreneurs Fund2-i + various deposit and trade financing products 2014 Deloitte 18
Case - RHB Islamic To be a Leading Multinational Financial Services Group Islamic Financing Products Consumer RHB Islamic Credit Card-i Equity Home/Property Financing-i Personal Financing-i Pensioner Personal Financing-i Az Zahra Ladies Banking Ar Rahnu Facility-i + various saving, current and term deposit products 2014 Deloitte 19
RHB Islamic Islamic Financing Products Business BizPower-i SME Business/Property Islamic Accepted Bills-i Islamic Trust Receipts-i Islamic Letter of Credit-i Islamic Shipping Guarantee-i Islamic Bank Guarantee-i Murabahah/Istisna/Ijarah Term Financing-i + various corporate, international business and treasury products 2014 Deloitte 20
Impact on Micros and SMEs Focus Area 2012 # of Programs Financial Commitment RM (mil) # of SMEs Benefited Innovation & Technology Adoption 29 112.4 2,402 Human Capital Development 30 34.4 42,725 Access to Financing 41 6,731.9 355,835 Market Access 29 91.3 28,115 Infrastructure 10 90.6 3,932 Total 139 7,060.6 433,009 Focus Area 2013 # of Programs Financial Commitment RM (mil) # of SMEs Benefited Innovation & Technology Adoption 25 400.7 5,736 Human Capital Development 28 139.9 42,081 Access to Financing 52 9,165.3 337,385 Market Access 20 78.7 45,212 Infrastructure 14 92.2 1,074 Total 139 9,876.8 431,488 21
Revenue Future Impact Commercialisation Platform Provide comprehensive support over a period of time Homegrown Champions Start-up Incubation Ideas Select potential high growth firms SMEs Time 22
Macro Targets of the SMEs 9 New SME growth path (8.7%) 8 7 Quantum Leap 6 5 Business as usual growth (6.5%) 4 2000-05 2006-10 2011-20 * * Forecast by SME Corporation Malaysia 23
Agenda World Bank The Exchange 10 June, 2014 Abu Dhabi, UAE 1 2 3 Micro & SME landscape Key drivers in instilling Islamic finance in SME space Concluding remarks 24
Concluding remarks Year 2020 target to increase the contribution of SMEs to the economy is achievable. Lessons learnt: Regulatory framework is facilitative and very concerted The existing robust Islamic financial framework is robust and will further drive institutionalization of Islamic finance in SMEs and Micro enterprises Key success factors are government s vision, detailed planning, robust execution; facilitative business environment for Micros and SMEs to grow; and predetermined measurable results The future is bright for SMEs and Micro enterprises to play a greater role in the economy 25
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