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FeatureIslamic fintech: Alternative financing for SMEs

Islamic fintech: Alternative financing for SMEs

SMEs play a vital role in developed and developing countries and are major contributors to job creation and growth. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. However, access to finance is still a key constraint to SME growth. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal MSMEs in developing countries for example, have an unmet financing need of US$5.2 trillion every year, which is equivalent to 1.4 times the current level of global MSME lending. HASSAN DAHER writes.

Traditionally, banks have been unable to fill this funding gap for a variety of reasons ranging from regulatory constraints to inefficient customer journeys that make access to financing for SMEs through traditional methods long and complex. This has led to the emergence of alternative finance providers (peer-to-peer (P2P) lending, crowdfunding and other fintech start-ups) that were quick to develop products and processes that made access to finance quicker and easier for SMEs.

P2P lending and crowdfunding platforms use their technology to seamlessly match SMEs looking for financing with investors (individual or institutional) who are looking to generate returns by funding them.

In the Islamic finance space, even though the US$2.2 trillion global Islamic finance industry is expected to continue to grow at double-digit rates, the nascent Islamic fintech ecosystem is only just starting to have an impact on the industry as a whole. As the COVID-19 pandemic has accelerated the adoption of digital financial solutions by consumer and businesses, Islamic fintech platforms are starting to focus more and more on the underserved SME market.

Funding SMEs that were financially excluded due to a lack of Shariah compliant business financing options plays a vital role in driving financial inclusion and prosperity. Financial inclusion is positioned prominently as an enabler of other development goals in the 2030 UN SDGs. The ethical and Shariah compliant screening criteria used by Islamic fintechs also ensure that the business activities and use of proceeds of the SMEs are ethical. Investors are hence able to generate financial returns, while also making a strong social impact.
There are around four million Muslims in the UK and 25 million in Europe. Qardus was the first to offer UK SMEs innovative Shariah compliant working capital financing solutions to help them grow. The UK has a long-established track record in the P2P and crowdfunding space since 2005 and has by far the largest market share in Europe. This sector is regulated by the Financial Conduct Authority.

In the Middle East, North Africa, Afghanistan and Pakistan region, the average share of SMEs in total bank lending is about 7%, and as low as 2% in certain GCC countries according to the IMF. Liwwa, founded, in 2013 was the first to establish an SME lending marketplace in Jordan, whereas Beehive from the UAE was the first P2P lending platform to be regulated by the Dubai Financial Services Authority in 2014. Both simultaneously offer conventional and Islamic financing options for SMEs on their platforms. In Saudi Arabia on the other hand, Shariah compliant crowdfunding platforms launched from the regulatory sandbox of the Saudi Central Bank (SAMA) and only recently started obtaining licenses after successfully passing the trial phase. SAMA currently lists nine permitted debt crowdfunding platforms on its site of which some offer Shariah compliant SME financing.

In Southeast Asia, there is a US$320 billion SME funding gap according to the IFC, with 51% of SMEs in the region remaining largely underserved. Indonesia in particular, a country with the largest Muslim population in the world, presents a substantial opportunity for Shariah compliant fintechs as the penetration of Islamic banking is still surprisingly low at about 7% of the banking system (McKinsey). A number of P2P and crowdfunding platforms such as Funding Societies, Ethis and Alami Sharia are stepping in to meet the demand. Malaysia on the other hand, a country with a 37% Islamic finance penetration rate by the end of 2020 (Reuters), currently has 11 registered P2P operators of which a number of them offer Shariah compliant business finance alongside conventional business finance.

Going forward
For this sector to flourish in the long run, a number of challenges have to be addressed. The challenges range from access to credit data in developing countries to the availability of Shariah compliant institutional funding lines to help crowdfunding platforms scale. In areas where the crowdfunding experience is relatively new such as Saudi Arabia, it remains to be seen how these platforms would perform in adverse economic conditions, including the recovery mechanisms in place on behalf of investors when SMEs default. Ensuring the fair treatment of debtors as well as creditors will go a long way to establishing trust in this sector. This is especially important given that P2P and crowdfunding arrangements are not protected by deposit guarantee schemes.

Hassan Daher is the founder and CEO of Qardus. He can be contacted at [email protected].

Table 1: Islamic FinTechs that provide SME debt financing
QardusUnited KingdomExpansion and working capitalFinancial Conduct Authority
LiwwaJordanTerm/Merchant/Factoring/Working capitalN/A
LendoSaudi ArabiaInvoiceSaudi Arabian Monetary Agency
ThemarSaudi ArabiaPurchase financingSaudi Arabian Monetary Agency
Raqamyah PlatformSaudi ArabiaWorking capital/POS financeSaudi Arabian Monetary Agency
Forus FinancialSaudi ArabiaWorking capital/lnvoice/POS financeSaudi Arabian Monetary Agency
BeehiveSaudi Arabia/UAETerm finance/Working capitalDubai Financial Service Authority
Funding SouqSaudi Arabia/UAEBusiness loansDubai Financial Service Authority
Kapital BoostSingaporeAsset purchase/InvoiceFinancial Services Authority
Alami SharialndonesiaInvoice/Purchase order/Community basedFinancial Services Authority
InvestreelndonesiaOnline seller/ Invoice financingFinancial Services Authority
Ammana Fintek SyarialndonesiaBusiness capitalFinancial Services Authority
Papitupi SyariahlndonesiaVariousFinancial Services Authority
QazwalndonesiaSupply chain financingFinancial Services Authority
Dana SyariahlndonesiaConstructionFinancial Services Authority
Blossom FinancelndonesiaMicrofinanceMinistry of Cooperatives
MoneySaveMalaysiaVariousSecurities Commission Malaysia
MicroLeapMalaysiaVariousSecurities Commission Malaysia
CapsphereMalaysiaTerm/Contract/lnvoiceSecurities Commission Malaysia
CapbayMalaysiaSupply chain financingSecurities Commission Malaysia
Nusa CapitalMalaysiaGrowth financeSecurities Commission Malaysia
Funding SocietiesSouth East AsiaVariousMonetary Authority of Singapore
EthisSouth East AsiaSupply chain financingSecurities Commission Malaysia
Note: The Islamic fintechs highlighted in Table 1 are either P2P or crowdfunding (equity- and/or debt-based) platforms.Source: Qardus


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