SMEs Financing & Loan Guarantees 24 th – 25 th November 2014 Dr. Mohsen Fayez Abu Awad Chief Business Officer Chief Business Officer Islamic International Arab Bank

KAFALA Program Sharia compliant financing for SME in cooperation with the Jordan Loan Guarantee Corporation

Why KAFALA The idea of developing and launching Kafalah was created by the need to remove a large obstacle: most of the loan applications coming from the SME sector are rejected because of insufficient collateral, which forms a major obstacle for the bank and the client For this reason, it was necessary to find a solution that would enable the bank to increase its SME portfolio and at the same time maintaining its ideality and with minimal risk. “ MORE PROFIT MEANS MORE RISK” LESS RISK

The Challenge Finding a Sharia compliant solution for financing SME projects. Conventional JLGC programs are not Sharia compliant. In Islamic Sharia, Gharar (uncertainty), and Riba (usury) are prohibited.

The solution IIAB Business and Product Development Teams found a creative plan: Based on Kafala and Qard Hassan (Charity Loans). Similar to Letters of Guarantee (L/G). Through Kafala, JLGC issues a L/G which guarantees the loans granted to SME clients. This way the client does not have to provide other collateral, and obtaining a loan from IIAB is made easier.

Program Overview JLGC has been providing loan guarantee for conventional banks in Jordan since Kafala is the first Sharia compliant loan guarantee program in Jordan. It aims to facilitate SMEs’ access to Islamic financing and thus stimulate the local economy.

Kafala program parameters Segment: SME as defined by CBJ. Tenor: up to 72 months Amount: up to JOD 100,000 (USD 140,000) CAP: %10 default

Target sectors Various economic sectors:- Commercial sector. Industrial sector. Services sector. Transportation. Loans guaranteed by Kafalah are granted for: Starting new projects, expanding existing businesses, purchasing working capital and fixed assets. conditions: enterprises applying for loans must : Have Identified Cash flow. Have Less than fifty workers. Be Owned by the private sector and working within the kingdom.

Projects excluded from Kafala Household (domestic) Projects. Projects that are inconsistent with the provisions of the Sharia (alcoholic beverages, cigarettes, etc...). The agricultural sector (horticulture and fields). Weapons manufacturing. Stocks and currencies.

IBRD

Central bank of Jordan recognizes the importance of supporting the growth of SME sector in the local economy. One way of obtaining this growth is through increasing bank loans granted for this sector. Funding from reputable global parties such as IBRD is obtained by CBJ to be injected into SME sector through Bank Loans. Wakala Agreements with CBJ

Central Bank of Jordan is utilizing grants from international and regional parties for supporting MSME sector through bank loans. Wakala agreements have a reduced cost of fund, which enables banks to offer competitive rates on loans for MSME. IIAB offers special programs for loans with a rate as low as prime rate.

Wakala Agreements with CBJ (cont’d) Fund Organizations such as IBRD (Grantor) Central Bank of Jordan (representative of Jordan Government) Wakala Central Bank of Jordan (Principal) Islamic International Arab Bank (agent)

Wakala Agreements with CBJ (cont’d) Finance contract Islamic International Arab Bank (Creditor) SME Client (Debtor) Kafala SME Client (Guaranteed party) Islamic International Arab Bank (Beneficiary) Jordan Loan Guarantee Corp. (Guarantor)

Wakala Agreements with CBJ (cont’d) Wakala highlight: Period: years Grace period: 3 years Incentive: paid to Bank Expected return: Fixed or LIBOR+

Wakala Agreements with CBJ (cont’d) Financing parameters: Segment: MSME as defined by CBJ Tenor: up to 72 months Amount: up to JOD 100,000 (USD 140,000) collateral: Kafala (JLGC guarantee) CAP: equal to the principal amount specified in the Wakala agreement Special conditions: as set by the Granting fund/party.

Achievements Hundreds of SME businesses have benefited from the Kafala program and Wakala agreements. IIAB is able to launch products targeting SME sector without focusing on collateral, being able to rely on the JLGC guarantee. IIAB channels funds from reputable global parties such as IBRD and ARAB FUND, putting them to use in supporting the MSME sector.

Success Strategy Periodically reviewing the performance of Kafala in order to understand the changes of SMEs’ needs and look out for possible points of default. Taking a further step exploring the SME market and its ever-changing needs, coming up with new ideas and programs under Kafalah such as JADDED. This will help extend our financing services to reach more segments within the SME sector, allowing more chances of growth:

JADDED PRODUCT for Medical Sector (one of Kafala’s Sub agreements) Features: Jadded is an especially designed program for financing medical machines and equipment and renewing medical labs & clinics. Financing limit is up to JOD 100,000 (USD 140,000) up to %100 of the cost Tenor: 36 months No need for collateral-all loans granted are guaranteed by the JLGC.

Successful SME startup business in Jordan, are witnessing a great demand if financing is available

Success Elements IIAB understands and identifies clients’ needs, always seeking to meet those needs through Sharia compliant programs. Central Bank of Jordan recognizes Kafala as acceptable collateral for MSME sector. Funding granted by global parties to support MSME. JLGC understands the special nature and requirements of Islamic banking. Cooperation between IIAB and JLGC.

Thank you