Bahrain-based General Council for Islamic Banks and Financial Institutions (Cibafi) will tackle the structural problems in the Islamic micro and small and medium sized enterprises (MSME) finance industry at an upcoming meeting in Jeddah, Saudi Arabia.

The recent Cibafi Global Islamic Bankers Survey from 83 Heads of Islamic banks in 35 countries revealed that MSME finance serves as the second key driver of sustainable growth of Islamic banks. Expanding this business line depends on the development of external factors of this market segment, as well as on how Islamic financial institutions can enhance their technical infrastructures in serving MSMEs.

Cibafi has therefore started the initiative to organize a series of Roundtable Meetings on the topic. The first roundtable was organized in partnership with INCEIF, in Kuala Lumpur, Malaysia, in December 2015, for executives of Islamic financial institutions, where the discussion focused on the recent developments in competitive and innovative strategies on Shariah-compliant SME and value chain finance.

The second meeting, which will be held on March 13-14 in collaboration with the Islamic Development Bank (IDB), will discuss cutting-edge capabilities for Islamic financial institutions to sustain the SME business through advanced technologies, distinctive product and services innovation, customized risk management, equity mode of finance for SMEs, etc.

The meeting will first discuss the regulatory issues and market infrastructure required as key enabling environment to enhance Islamic MSME finance. This covers a regulatory set (transaction laws, regulatory act, prudential standards, taxation, insolvency framework), and challenges in information infrastructure (credit bureau, scoring, credit registry, etc.).

Development of Shariah-compliant guarantee schemes and potentials to develop market infrastructures will also be discussed. The emerging trend of financial inclusion will also be addressed through a comprehensive tool to promote sustainable Islamic MSME finance, such as Aligning Islamic MSME finance with micro-Takaful, and Waqf to provide enabling business environment for MSME sector.

The second part of the Meeting will focus on capacity building for Islamic financial institutions to build in several stages. This includes building ‘distinctive’ capacities in e-banking and social media for Islamic MSME finance as competitive advantage, as well as technical infrastructure of digitization for customization.

Several issues in payment transaction infrastructures will be covered to satisfy the best interest of MSMEs. Other capabilities to generate sustainable performance of Islamic MSME finance serve as a key tools for IFIs to acquire, such as formulating a robust risk management framework for Islamic MSME finance (risk-based market segmentation, pricing model, innovative forms of collateral, screening techniques, alternative data sources, etc.), and unique product development and innovation process that satisfy the core demand of MSMEs across different jurisdictions.

Finally, the ‘risk sharing’ concept of Islamic MSME finance will be deliberated in the form of promoting equity finance to MSMEs, including regulatory issues and market structure challenges, the gaps referring to MSME behaviour in accepting equity finance, and more importantly the leading practices derived from recent developments in viable market practices of Venture Capital investing on MSMEs. In addition, the meeting will deliver several case studies from IFIs globally to provide participants with opportunities to learn from leading practices.

The meeting will also discuss the key challenges in Islamic MSME finance discovered from the Survey, including issues from over leveraged and poor credit rating, lack of acceptable collateral and guarantees, underdeveloped industry infrastructure for MSMEs finance, the need to build in-house expertise for Islamic MSME finance such as specialized MSME units, lack of variety of Shariah-compliant financing products for MSMEs, etc. – TradeArabia News Service