Leveraging Islamic Finance Micro-, Small-, and Medium Enterprises (MSMEs)
AAOIFI International Conference Medina, Saudi Arabia May 4-5, 2016
Zamir Iqbal, PhD. The World Bank Global Islamic Finance Development Center Istanbul, Turkey [email protected]
Why Financial Inclusion is Important?
SME Financing: State of OIC Countries
Islamic Finance and SMEs
Challenges & Recommendations
I. Why Financial Inclusion is Important?
2014: 25 Focus Countries: 73% of the world’s unbanked Out of 73% of the world’s unbanked, 22.2% are Muslim countries. Countries prioritized based on share of unbanked, IDA, and FCS: 2014 FINDEX
Sources: Global Findex 2014
Universal Financial Access (UFA) 2020 Goal By 2020, adults globally have access to an account or electronic instrument to store money, send and receive payments as the basic building block to manage their financial lives
Why it matters
Strong link to Twin Goals: poverty reduction and income effects Enabler for WBG and country development goals
II. SME Financing: State of OIC Countries
Employment Contribution of SMEs Total Number of SMEs (million)
Formal SMEs (million)
Total Credit Gap*
Europe and Central Asia
East Asia and Pacific
Middle East and North Africa
Latin America and Caribbean
*Includes both of underserved and unserved SMEs Source: (Stein, et al., 2013)
SMEs employ the largest number of people in aggregate and are responsible for 57.8% of total new jobs created at the global level.
There are around 400 million SMEs in the developing world, in which only 26 million is formal.
SMEs have considerably high level of credit gap, which can be defined as the supply and demand difference in accessing bank credit for SMEs.
Main obstacles affecting current operations and growth
The main obstacles affecting the growth of SMEs in the OIC region are access to finance political instability Large firms in OIC countries enjoy a greater freedom in obtaining credit. 8
Obstacles in obtaining loans
For SMEs in the OIC region the main obstacles in obtaining loans are Lack of appropriate collateral Interest rates
Note: Sampling weights are employed. Spatial decomposition of the OIC countries in the right graph is as follows: Sub-Saharan Africa (SAFR): Benin, Burkina Faso, Cameroon, Chad, Côte d'Ivoire, Gabon, Gambia, Guinea, Guinea Bissau, Mali, Mauritania, Mozambique, Niger, Nigeria, Senegal, Sierra Leone, South Sudan, Togo, Uganda. East Asia and Pacific (EPAC): Indonesia; East Europe and Central Asia (ECCA): Albania, Azerbaijan, Bosnia and Herzegovina, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkey, Uzbekistan; North Africa (NAFR): Djibouti, Egypt, Morocco, Tunisia; Middle East (MEAS): Iraq, Jordan, Lebanon, Yemen; South Asia (SASI): Afghanistan, Bangladesh, Pakistan.
Sources of Fixed Asset Financing for SMEs Regional Decomposition
Income Level Decomposition
High dependence on retailed earnings/internal funds.
Bank loans are the dominant form of external funding for fixed asset purchases.
Why low pe