1. Islamic Financing for SMEs
Presented By:
M.Shoaib Malick
Unit Head-SME-Meezan Bank Limited

2. Islamic Financing for SMEs
Introduction to Islamic Banking
Significance of SME Sector
Difference Between Islamic Banking & Conventional Bank
How IB, can address business needs (100%)
Comparison of Islamic Mode of Finance and Conventional
Islamic Modes of Financing
Short Term Modes of Islamic Financing
Long Term Modes of Islamic Financing
Trade Finance Facilities in Islamic Banking
Challenges in SME Financing
Conclusion

3. Significance of SME Sector1
Total Population
182Mn
100% 2
Financially Included
18.2Mn
10% 3
Financially Excluded
163.8Mn
90% 4
Financially Excluded-Major Sector
SME 5
90% of all private enterprises 6
SMEs access to finance from banking sector:
Pakistan
India
Bangladesh
04%
33%
32% 7
SME lending of total credit
06% 8
Surveyed Facts
Hard to borrow from banks
Not even have a bank account
51%
31%

4. Contribution of SME Sector to Economy

5. Current Status of SME Financing:
SME financing witnessed continues decline by banks/DFIs since 2008.
Due to consistent decline in this sector, share of SMEs also reduced from 16% to 6% in overall advances of banks in last 4-5 years.
Reasons for downfall:
Adverse economic conditions.
Law and order situation.
Shortage & rising costs of electricity and other utilities.

6. Reasons for downfall: Growing NPLs.
Natural catastrophes also hamper this sector badly in consecutive years of 2010 & 2011 and created wipeout situation for small sized units.
Banks also took a risk-averse posture from this sector, due to deteriorating business conditions for SMEs.

7. 5 Years trend of SMEs

8. 5 Years trend of SMEs

9. 5 Years trend of SMEs
9.4%
16.1%
22.1%
28.9%
32.4%
38.9%

10. SME Financing For Working Capital
Key portion of financing is used for working capital in SMEs, which constitutes 76% of total SME lending.
However other is followed by Trade Financing & Long term/Fixed Investment.

11. SMEs provide a significant portion of jobs world wide
SME contribution to formal country employment Median values
Source. Ayyagari, Beck and Demigirguc/kunt. 2003

12. GDP Contribution of the SME sector increases, and informality decreases with income

13. Definition of Riba
Any increase over and above the price, without due consideration is Riba

14. Distinguishing Features
We find the differences are on three levels:
1. Conceptual & Socio-religious level
- not money lenders
- cannot deal with interest & non permissible industries
2. Business model & Governing framework
- IB actively participates in trade and production process
- Governing framework in terms of Shariah Advisor &/or SSB

15. Distinguishing Features
3. Product Level Implementation
- usually asset backed & involve trading/renting of asset & participation on profit & loss basis
- Implementation is not just a mere change of paper work and terms but it involves
- having the right intention,
- the correct sequence of steps and timing of execution

16. PERCEPTION OF ISLAMIC BANKING
Parties: Bank & Client
Limit: Rs Mn
Rate: K+2
Tenor: 1 year
Purpose : To buy Cotton
Parties: Bank & Client
Limit : Rs Mn
Rate: K+2
Tenor : 1 year
Purpose : To buy Cotton
Islamic Banking
Conventional Banking

18. PERCEPTION OF ISLAMIC BANKING
Parties: Bank & Client
Limit: Rs Mn
Rate: K+2
Tenor: 1 year
Purpose : To buy Cotton
Parties: Bank & Client
Limit : Rs Mn
Rate: K+2
Tenor : 1 year
Purpose : To buy Cotton
Islamic Banking
Conventional Banking
Goods
= OWNERSHIP
Services

19. Islamic Banking
Basic Difference between Islamic and Conventional Modes of Finance
Conventional
Money
Client
Bank
money + money (interest)

20. Islamic Banking
Basic Difference between Islamic and Conventional Modes of Finance
Islamic
Goods & Services
Client
Bank
money

21. Income Statement Sales xxx Cost of Goods Sold Raw Material xxx
Direct Labor xxx
Over Head xxx
Gross Profit xxx
Operating Expenses
Admin. & Gen. Exp xxx
Salaries xxx
Utilities xxx
Other xxx
Net Profit xxx
Liability/Deposit Products
Murahaba
Istisna/Tijarah
Istisna/Tijarah
Deposit Products

22. Balance Sheet Current Assets: Stocks xxx Receivable xxx
Cash in hand xxx
Advances & Deposit xxx
Fixed Assets:
Plant & Machinery xxx
Land & Building xxx
Total Assets xxx
Owner’s Equity:
Capital xxx
Liabilities:
Creditors xxx
Financial Liabilities xxx
Total Liabilities & Equity
Murahaba/Import Murahaba/FIM/LC
Istisna/Tijarah/Bai-Salam/Usance-Murahaba
Deposit Products
Murahaba/Istisna/Tijarah/LG
DM/Ijarah/Murahaba
Musharka
Murahaba/LGs/Ijarah/Tijarah

23. Difference Between Islamic Banking & Conventional Bank
Conventional Banks
Islamic Banks
1. The functions and operating modes of conventional banks are based on fully manmade principles.
1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.
2. The investor is assured of a predetermined rate of interest.
2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
3. It aims at maximizing profit without any restriction.
3. It also aims at maximizing profit but subject to Shariah restrictions.
4. It does not deal with Zakat.
4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.
5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.
5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer's business very well.
6. It can charge additional money (penalty and compounded interest) in case of defaulters.
6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are give for early settlement at the Bank's discretion.

24. Difference Between Islamic Banking & Conventional Bank
Conventional Banks
Islamic Banks
7. Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity.
7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.
8. For interest-based commercial banks, borrowing from the money market is relatively easier.
8. For the Islamic banks, it must be based on a Shariah approved underlying transaction.
9. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.
9. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.
10. The conventional banks give greater emphasis on credit-worthiness of the clients.
10. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.
11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors.
11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller.
12. A conventional bank has to guarantee all its deposits.
12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position..

25. Financing Product Comparison Islamic Vs. Conventional Bank
Islamic Product
Conventional Products
Working Capital Finance 1
a) Murabaha b) Murabaha - Spot c) Istisna - Export & Local d) Meezan Tijarah - Export & Local e) Murabaha FE-25 Export & Import
Current Finance / Running Finance 2
Murabaha - Pledge
Cash Finance 3
a) Ijarah - Plant & Machinery b) Ijarah - Sale & Lease Back for Plant & Machinery c) Diminishing Musharika - Plant & Machinery d) Diminishing Musharika - Premises / Land for Commercial use e) Diminishing Musharika - Sale & Lease Back (Plant & Machinery; Premises Land & Building) f) Musharaka
Demand Finance / Term Finance
Meezan Bank Limited

26. Financing Product Comparison Islamic Vs. Conventional Bank
Islamic Product
Conventional Products
Export Related Facilities: 1
a) Bai Salam against Discrepant Export Sight Bills b) Bai Salam against Export sight contract c) Murabaha against Accepted export Usance Bill (Bank Risk Line) d) Murabaha against Un-accepted export Clean Usance LC e) Murabaha against un-Accepted export Discrepant Bills under Usance LC f) Murabaha against export Usance Contract
Finance Against Foreign Bills 2
a) Murabaha against Un-accepted Local Usance LC b) Murabaha against Accepted Local Usance LC (Bank Risk Line)
Local Bill Purchases 3
a) Istisna – Export
b) Islamic Export Refinance Facility (IERF) Part I & II - under Murabaha c) Islamic Export Refinance Facility (IERF) - under Istisna (Local and Export) and Tijara (Local and Export)
Finance Against Packing Credit Part - I & II

27. Conventional Products Import Related Facilities:
Financing Product Comparison Islamic Vs. Conventional Bank
S.#
Islamic Product
Conventional Products
Import Related Facilities: 1
a) Sight LC under MMFA b) Sight LC under Master Agency Agreement (For Ijarah & Diminishing Musharaka) c) Sight LC wihthout MMFA (Exceptional Cases) d) Usance LC without MMFA f) Usance LC under MMFA (Exceptional cases) g) Usance LC under Master Agency Agreement (for Ijarah and Diminishing Musharaka)
Import Letter of Credit 2
a) Local LC(Sight) without MMFA b) Local LC (Sight) under MMFA (Exceptional cases) c) Local Usance LC wihtout MMFA d) Local Usance LC under MMFA (Exceptional cases)
Inland Letter of Credit 3
a) Murabaha - Financing of Imported Merchandise (FIM) Pledge b) Murabaha - Financing of Imported Merchandise (FIM) Spot
Finance Against Imported Merchandise - FIM 4
Finance Against Trust Receipt
Letter of Guarantee
Letter of Guarantee / Shipping Guarantee/Standby Letter of Credit
Letter of Guarantee / Shipping Guarantee
Meezan Bank Limited

28. Short Term Financing Needs
Raw Material
Overheads / Utilities
Finished Goods
Trade receivable financing
Rental financing
Long Term Financing Needs
Acquisition/replacement/ expansion of fixed assets, plant & machinery

29. Issues & Challenges of SMEs
Demand
Supply
Lack of Collaterals to Meet Bank’s Requirements
Shortage of Marketing Skills-(Bank Side)
Informal Organizational Structures
SMEs perceived as high risk borrowers
Informal Accounts & Management System
Corporate Finance Mindset
Lack of Credit & Collateral History
Lack of Infrastructure for SME Business
Low Level of Financial Literacy
High Lending Costs
Reluctance on part of SMEs
Absence of SME R&D Centers in Banks
External Shocks

30. Plain Murabaha
Advance Payment Murabaha
Suppliers Credit Murabaha
SLC under MMFA
Tijarah
Istisna
Diminishing Musharaka
Ijarah
Bai Salam

31. Plain Murabaha
Murabaha Agreement
Agency Agreement
Order Form
Purchase of Goods by Agent
Payment of Purchase Price*
Intimation of possession of goods by the agent (Declaration)
Offer & Acceptance (Murabaha Contract)
Payment of Murabaha Price
*Payment of purchase price is either direct payment to supplier or through customer account
For Detail

32. Advance Payment Murabaha
Murabaha Agreement
Agency Agreement
Order Form
Payment of Purchase Price*
Purchase of Goods by Agent
Intimation of possession of goods by the agent (Declaration)
Offer & Acceptance (Murabaha Contract)
Payment of Murabaha Price
*Payment of purchase price is either direct payment to supplier or through customer account

33. Credit Murabaha
Murabaha Agreement
Agency Agreement
Order Form
Purchase of Goods by Agent
Intimation of possession of goods by the agent (Declaration)
Offer & Acceptance (Murabaha Contract)
Payment of Purchase Price*
Payment of Murabaha Price
*Payment of purchase price is either direct payment to supplier or through customer account

34. SLC under MMFA Murabaha Agreement Agency Agreement
Order Form & LC Application
Establishment of LC
Receipt of Import Documents
Intimation of possession of goods by the agent (Declaration)
Offer & Acceptance (Murabaha Contract)
Retirement of LC Through Murabaha
Payment of Murabaha Price

35. Tijarah For Detail Master Tijarah Agreement Agency Agreement
Written Offer
Payment of Tijarah Price upon Acceptance
Delivery of Goods & Acceptance of Delivery by bank
Intimation of possession of goods by the agent (Declaration)
Offer & Acceptance (Murabaha Contract)
Retirement of LC Through Murabaha
Payment of Murabaha Price
For Detail

36. Thank You