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$13.2 billion market gap persists in SME Islamic financing

June 15, 2014

The study, which was carried out across nine countries, found that of the 36 per cent of banks in the region that offer SME products, only 17 per cent offer Islamic options.

Small and medium enterprises offer a huge untapped market for Islamic banks in the Middle East and North Africa where the potential market gap for SME Islamic financing is estimated to be close to $13.2 billion, a new research revealed on Sunday.

The latest study by the International Finance Corporation, or IFC, says that around 35 per cent of SMEs in the Mena region are left out of the formal banking sector because they are seeking Shariah-compliant products that are not readily available in the market.

The study, which was carried out across nine countries, found that of the 36 per cent of banks in the region that offer SME products, only 17 per cent offer Islamic options. There is huge potential to be tapped for Islamic banks in the SME sector, provided they can come up with the right products, the study said.

The study, which covered Iraq, Pakistan, Yemen, Saudi Arabia, Egypt, Lebanon, Morocco, Tunisia and Jordan, found that demand for Islamic banking is as high as 90 per cent in Saudi Arabia while falling low as four per cent in Lebanon.

Factors hindering the growth of Islamic SME banking include a high level of risk aversion by banks, poor regulatory environments, differing perceptions of Islamic finance, and a lack of relevant products.

IFC regional director Mouayed Makhlouf, while releasing the study's findings, said there is a significant, untapped new-to-bank-funding opportunity, as lenders and other financial institutions lack adequate strategic focus on this segment to offer Shariah-compliant products. "What we see in Saudi Arabia, where the demand for Shariah-complaint products are very high, will be applicable to the rest of the GCC region as markets are very similar in that sense," said Makhlouf.

Attiq Ur Rehman, partner at Israa Capital, said the lack of innovation and strategic outlook are the main obstacles faced by Islamic banks in growing their market. He highlighted the experience of Saudi Hollandi Bank in Saudi Arabia, whose SME loan book grew from $100 million to more than $1 billion in just three years as an example of what could be achieved. Banks that have implemented an SME or Islamic banking-focused strategy have achieved phenomenal growth, he argued.

In its recent report "Islamic Finance Outlook 2014", Kuwait Finance House Research said that the Islamic finance industry is forecast to continue to chart tremendous double-digit growth rates across all sectors, with total industry assets estimated to reach approximately $2.1 trillion as at end-2014 while the Islamic banking sector's assets are expected to reach $1.6 trillion.

The Islamic finance industry's assets are estimated to have grown to $1.8 trillion as at end-2013, recording an over 16 per cent year on year growth.

Among the largest global Islamic banking jurisdictions (excluding Iran) in 2013 are Saudi Arabia, which captured 18 per cent of global Islamic banking assets, followed by Malaysia (13 per cent), the UAE (seven per cent), Kuwait (six per cent), and Qatar (four per cent).

The KFH research observed that advanced Islamic banking markets in the GCC and Asian regions are expected to evolve in greater sophistication in terms of products offerings, as well as from the aspect of regulatory advancement by financial regulators.

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Source: Khaleej Times (United Arab Emirates)

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