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@Atef Elshabrawy 2014 SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SME’S Dr Atef El Shabrawy...
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Transcript of @Atef Elshabrawy 2014 SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SME’S Dr Atef El Shabrawy...
@Atef Elshabrawy 2014
SHARIA COMPLAINT FINANCE A NEW AVENUE FOR M&SME’S
Dr Atef El ShabrawyAl-Maali Consulting Group-UAE
Ex. CEO of Family Bank-Bahrain
@Atef Elshabrawy 2014
STEVE STRAUS, Planet Entrepreneur’s Author
‘’THIS IS THE BEST TIME IN HISTORY TO BE AN ENTREPRENEUR”
@Atef Elshabrawy 2014
A NEW ERA FOR ENTREPRENEURS
More……
Business: 500 million MSME, 137,000 per day worldwide,
Money :$1 trillion for 68,000 new SME loans in Chain from 2008
Tools : VC/ Angle/Microfinance/Crowd; Incubators, Accelerators, Training, Social media,
Recognition : 100s of awards for entrepreneurs,
Valuation : 25 start-ups are valued at $1 billion
@Atef Elshabrawy 2014
BUT …… Tough competition Control on finance (selection criteria& rules,
Basel III Large financial gap
$3.2 to 3.9 trillion credit gap for MSMEs worldwide Less than 20% of SME’s in MENA use external
finance 50% of the population in are “unbankable”
High business mortality rates Lack of financial & money management skills
@Atef Elshabrawy 2014
WHERE TO LOOK FOR MONEY1- Venture capital Actually, venture capital financing is very rare. Only a very few high-growth plans with high-power management teams are venture opportunities.
Decrease number of deals
@Atef Elshabrawy 2014
WHERE TO LOOK FOR MONEY Commercial lenders Actually, banks don’t finance business start-ups. Banks aren’t
supposed to invest depositors’ money in new businesses.
Ireland -82%
Netherland -32%Portugal -42%
France -37%
Spain -66%
fall in European
SME lending
Source: Bain & Company, 2013
@Atef Elshabrawy 2014
Microfinance
Characteristics Developing countries Industrialized countries
Focuses Poverty Social exclusionunemployment
Average loan size ≥ $200 in Asia to $1,600 in Latin America
≥$6,500 to $25,000 in Belgium
Interest rates 17 % in Bangladeshi, 70 % in Latin American
5 % in Belgium up to 7.5 % in France
180 millions by 2015
Offer& demand gap In
@Atef Elshabrawy 2014
NEW FINANCE PHILOSOPHY IS NEEDED
@Atef Elshabrawy 2014
THE DEFINITION Sharia Complaint Finance is a financial
system operates according to Islamic law (sharia).
It features banks, capital markets, fund managers, investment firms, and insurance companies.
It is not a religious nor a geographical matter,
It started in the Middle East but became a global growing financial industry,
@Atef Elshabrawy 2014
THE HISTORY
11th to 16th centuries, financial transactions in Middle East were on basis of a profit-and loss-sharing.
1960s : the re-initiation in small scale in Egypt
1970s : the creation of banks Nasser Social Bank - Egypt Islamic Development Bank , Dubai Islamic Bank,
1990-2000s : the expansion ISLAMIC FINANCE grow at 15-25% annually, some countries “islamize” their entire banking systems, Global expansion in most Western Countries
@Atef Elshabrawy 2014
THE GROWTH 38 million customers globally
400 Islamic financial institutions from 58 countries
$2.1 trillion global assets estimated end of 2014
$3.4 trillion forecasts estimate in 2018
$38 billion Sukuk (Islamic bonds) by London Stock Exchange for 52 issuers
$2 billion Sukuk joint venture Aramco-KSA & US-Dow Chemical, 2013,
$25.4 billion issued Sukuk only in Gulf in 2013
@Atef Elshabrawy 2014
THE INDUSTRY IN WESTERN EUROPE
• 31 Islamic financial institutions in Western Europe 22 only in UK, some of London’s recent iconic real landmarks
Shard Skyscraper Battersea Power Station
Aston Martin
Athletes’ village for “2012 Olympic Games
@Atef Elshabrawy 2014
THE INDUSTRY IN WESTERN EUROPE
@Atef Elshabrawy 2014
BUT WHAT ARE THE MAIN PRINCIPLES OF ISLAMIC FINANCE?
@Atef Elshabrawy 2014
MAIN PRINCIPLES
1.No interest (riba),
2.Profit & Loss sharing (Risk sharing)
3.No hazard, uncertainty (gharar),
4.No forbidden assets (haraam)
5.Promotions of real economy
6.Disclosure of information
@Atef Elshabrawy 2014
Ex President Obasanjo, commented the debt Nigeria faces at the G8 Summit 2000:
$5 billion borrowed in 1985
$16 billion paid until 2000
$28 billion they still have to pay
“If you ask me what is the worst thing in the world, I will say it is
compound interest.”
STORY about ‘’Loan Interst’’
@Atef Elshabrawy 2014
CONVENTIONAL BANKING
ISLAMIC BANKING
Rules Banking industry principles
Banking industry + Sharia principles
Money As commodity to be sold & rented out.
Money is not a commodity
Time The basis for earning
Profit making is the basis for earning
Risks It is almost risk free
Profit and loss sharing based
Values Priority on profits, Focus on speculative ventures
Permissible businesses& linked to social &religious, Focus on real economic value
THE MAIN DIFFRENCES
@Atef Elshabrawy 2014Video
@Atef Elshabrawy 2014
M& SME BANK
@Atef Elshabrawy 2014
ENTERPRISE LANDSCAPE IN EMERGING COUNTRY
Corporate & multinationals
Large
Medium
Small
Micro65-75%
20%
5-10%
0.9%
0.1%
Microfinance
SME’sfinance
Ex: GCMI Microcity Loan Fund ($1,000 to $35,000) -USA
Equity finance
@Atef Elshabrawy 2014
FINANCE & BUSINESS SIZE
formal /larger
Microfinance Family & friends
Debt placement
Crowd funding Angels VC Private
Supply chain finance ,Public debit market
Export creditSecuritizati
on
Seed Start-
upEarly
growthSustained growth
Factoring , Asset finance, Inventory, Public equity
Informal /smaller
@Atef Elshabrawy 2014
HOW IT DOES WORK IN REALITY?
@Atef Elshabrawy 2014
THE CONVENTIONAL FINANCE
23
Friends and family
Private investors
PartnersAngels
Venture capitalists
Personal savings
Forms of Equity
Financing
Banks
SME's investment companies
Government programsfor SME's
Commercial finance
companies
Microfinance
Trade credit
Sources ofDebt
Financing
Equity Financing Debt Financing
@Atef Elshabrawy 2014
THE ISLAMIC FINANCE
Trade-based FinanceMurabahaSalamIstissna
Free-LoanQard-Hassan
Rental-based FinanceIjara
DiminshingMusharaka
Equity-based FinanceMusharakaMudarabaMuzaraa
Takaful(INSURANCE)
1. Equity 2. Trade3. Rental 4. Free loans
non-bankable individuals
@Atef Elshabrawy 2014
Main diffrences
25
Friends and family
Private investors
PartnersAngels
Venture capitalists
Personal savings
Forms of Equity
Financing
Banks
SME's investment companies
Government programsfor SME's
Commercial finance
companies
Microfinance
Trade credit
Sources ofDebt
Financing
Equity Financing+++
Debt Financing
Trade-based FinanceMurabahaSalamIstissna
Free-LoanQard-Hassan
Rental-based FinanceIjara
DiminshingMusharaka
Equity-based FinanceMusharakaMudarabaMuzaraa
Takaful(INSURANCE)
@Atef Elshabrawy 2014
MURABAHA (TRADING)
How it works :
the bank supplying goods for re-sale to the customer at a price that includes a margin above the costs, and allows them to repay in instalments.
What for:
Used to provide a mortgage on a property, however, the property is registered to the buyer from the start.
@Atef Elshabrawy 2014
$100
$110
@Atef Elshabrawy 2014
MUSHARAKA (PARTNERSHIP)
How it works : a joint venture in which the customer and
bank contribute funding to an investment or purchase and agree to share the returns (as well as the risks) in proportions agreed in advance.
What for:
Plays a vital role in financing business operations.
@Atef Elshabrawy 2014
Profits
Enterprise
Divided according to pre-agreed ratio
Sharing fund for agreed time
Losses
Musharaka
@Atef Elshabrawy 2014
IJARA (LEASING)
How it works :
works as a leasing arrangement, the bank buys something for a customer and then leases it back to them:-
1- Operating Ijarah
2- Ijarah Muntahia Bittamleek
What for:
Provides the customers with short to medium-term financing to lease items: real estates, buildings, equipments, machineries, computers, motor vehicles..
@Atef Elshabrawy 2014
Ijarah (operating lease) contract1
2Purchase of asset
3 Asset is leased to client
4 Period lease payment over life of contractAsset remains the property of the bank, and revert back to it
at the end of ijarah contract
Ijarah
@Atef Elshabrawy 2014
MUDARABA (VENTURE CAPITAL)
How it works :
is a partnership (profit sharing agreement) where capital is provided, in cash or assets (no debt is accepted) by one party - the fund provider - and labour is provided by the other party - mudarib.
A trust-based contracts, the mudarib is not liable for losses except in case of breach of the requirements of trust or misconduct.
Contracts notify whether the mudaraba instrument is unrestricted to specific location or type of investment or restricted .
Bank can not say the enterpreneur that ” I am giving you 100.000 USD and you are going to give me 120.000 USD at the end of process” but Bank can say ” I am giving you 100.000 USD and you are going to share 20% of your profit at the end of process.”
What for:
Mudaraba is simply capital – labor partnership: bank puts all the money, enterpreneur puts the labor and they share the administration part.
@Atef Elshabrawy 2014
Mudarib Rabbulmal
Profits
Enterprise
Divided according to pre-agreed ratio
Mudaraba fund for agreed time
Losses
Mudaraba
PLS (no pain no gain)
@Atef Elshabrawy 2014
Sharia law states that all kind of businesses are permissible on condition that they do not deal with:
1. Forbidden asset: Alcohol, pork, Prostitution, Pornography, dangerous drugs,
2. Unjust personal & business behaviours :cheating, fraud, and hoarding),
3. Forbidden way to transact :using usury (riba), speculative motive (gharar), and gambling (maysir).
Sharia Compliant Businesses
@Atef Elshabrawy 2014
SELECT THE RIGHT PRODUCT
Working Capital
Trade Finance
Business Projects
Car Finance
Persoanl Fianace
Construction
Finance
Home Finance
Real Estate
MurabahaMudarabaMusharaka
Working Capital
Service Finance
Car Finance
Persoanl Fianace
Construction
Finance
Home Finance
IjaraIstisnaaSalam
@Atef Elshabrawy 2014
Lender (Banks) Expectations
Angel Investor
Expectations
VC Investor Expectations
Islamic financeExpectation
-Profitable Business -Track Record-Ability to Repay-Staying Power-Collateral- Finance less than 100% of funds
- Return- Ego- Philanthropy- Involvement
- Mastering the business:• value
proposition• Growing
Market• Strong Team• Strong Sales- Exit Strategy- Obscene Return
-Mastering the business-Sharia complaint-Community impact
Islamic banker expects
Islamic banks are expected to have risk-sharing contracts rather than fixed rate loans, they need to be convinced of the viability of the projects as their return would depend on the success of these ventures.
@Atef Elshabrawy 2014
EXAMPLE OF NEW GENERATION OF ISLAMIC SME BANK
kingdom of Bahrain
@Atef Elshabrawy 2014
The Shareholders
• Paid-up capital: $15m & allowed $45m
• Licensed by CBB as Islamic microfinance bank
Public & semi organization Islamic & commercial banks
@Atef Elshabrawy 2014
THE PHILOSOPHY
Innovation in Islamic finance services :
1. 100% Sharia- complaint M&SME bank
2. Collateral/ guarantee free finance
3. No legal or formal entity required
4. Priority for youth & women
5. Provide Non-financial services
6. Partnership with NGO’s to deliver
7. 100% Social Business
@Atef Elshabrawy 2014
THE PROGRAMS
1. SME’s interest free finance
2. Microfinance by Grameen model
3. Microfinance (savings, housing, education, live improvement, )
4. Finance schemes through NGOs/ MFI
5. Non-Financial Services (training, counseling, marketing,)
@Atef Elshabrawy 2014
Award of Sheikh Mohammed Rashid, Ruler of Dubai, the best SME’s supporting bank in Arab World, December 2013.
@Atef Elshabrawy 2014
www.almaaligroup.com
Consulting | Training |Sharia Advisory
Thank you for yourattention