Two-thirds of BLME's assets are from corporate business

Two-thirds of BLME's assets are from corporate business

While Islamic financial institutions have been active in offering retail products and investment banking services, regular corporate banking has tended to fall through the gaps. Now banks are correcting the balance to capture a wider client base, particularly small and medium-sized enterprises.

As the Islamic banking space matures, sharia-compliant financial institutions are eyeing every opportunity to go mainstream and transform their service offering, from one that is still largely geared to the retail space, to one that targets a much wider spectrum of clients.

Corporate banking has come into focus as a significant line of business, particularly the small and medium-sized enterprise (SME) sector, which serves as the world economy’s major growth engine.

For Islamic banks looking to break out of the confines of retail, the SME proposition is straightforward. AT Kearney estimates that SMEs control 95% of the business sector worldwide, contributing 34% to 45% of global gross domestic product (GDP) and employing 85% of the world's labour force.

Impressive growth

The SME segment has grown at almost twice the rate of GDP in most markets, and over the coming year is expected to grow at 10% to 12% per year across Asia, Africa and the Middle East, which are also the main geographic bases of Islamic financial institutions (IFIs). “SMEs are traditionally an under-banked segment and there are even fewer IFIs catering to SMEs' banking needs,” says Yakub Bobat, global head of HSBC Amanah Commercial Banking.

The average share of SME lending in the Middle East and North Africa region is low – slightly above 8% of total lending. In the Gulf Cooperation Council (GCC) states, where Islamic banking has its strongest regional footprint, it is lower still at just 2%. However, in the Middle East and key markets in Asia-Pacific, SMEs are showing a propensity to seek Islamic financial services, says Mr Bobat.

“These companies are typically owned and run by the founder and have a greater affinity for Islamic financial solutions. Recent research has shown that the awareness, consideration and usage of Islamic finance is high and growing across the Middle East region,” he adds.

Broader strategy

For the Islamic windows of large conventional institutions, a focus on SMEs works as part of a holistic business strategy. HSBC Amanah offers sharia-compliant corporate banking across six markets in Asia and the Middle East, namely Indonesia, Malaysia, Bangladesh, Saudi Arabia, Bahrain and the United Arab Emirates (UAE).

A range of Islamic commercial banking and treasury products are tailored to meet its customers’ specific needs, such as account services, working capital finance, trade finance, long-term and project finance, payments and cash management solutions and treasury hedging solutions.

“It is an extremely important part of our business strategy across a number of markets. SMEs are a large contributor to GDP and form a large part of the overall labour force, so it’s a segment we can’t afford to ignore,” says Mr Bobat.

Wherever HSBC maintains an Islamic presence it also boasts an SME franchise. The logic is simple. “Consider the value chain: if you can capture SME business and nurture the relationship, the SME franchise can grow from servicing the mid-market to large corporates,” says Mr Bobat.

Specific needs

The SME segment within Islamic banking is growing, as a broader range of sharia-compliant solutions are tailored specifically for this group of customers. Standard Chartered’s Islamic banking unit, Saadiq, has launched an enhanced customer offering for SMEs to better serve their evolving needs.

"Many of our SME customers like to bank with us in a sharia-compliant way and we offer them sharia-compliant services for their business needs through our Saadiq SME banking solutions,” says Som Subroto, global head of SME banking at Standard Chartered Bank.

Mr Subroto estimates Islamic banking has grown to about 30% of the overall SME market in the UAE alone. The bank has enhanced the product capability on the Islamic side to provide customers with the option to make deposits, financing and trade transactions the Islamic way.

“The wholesale/corporate banking product suite on the Islamic banking side is available to SMEs, ranging from trade and working capital finance to deposits and Islamic insurance [takaful]. In addition to these, specifically for small businesses, there is cash financing under a product called Tijarah Finance. Also, product development to meet the needs of our customers remains a continuous exercise,” says Mr Subroto.

Bank of London and the Middle East (BLME), a UK-based Islamic bank, is also focusing on the corporate space. “Two-thirds of assets on our balance sheet are from corporate business, and as we aim to grow the balance sheet, so we are actively looking to increase corporate business,” says Nigel Denison, executive director of BLME.

The growth in corporate solutions will not come at the expense of retail franchises. Indeed, argues Mr Bobat, under a consumer-business-consumer model, business preferences for Islamic finance will in turn will drive greater levels of consumer penetration.  

Growing product range

Working capital, deposit and cash management accounts, trade finance, and payments and transfers are among the most popular SME finance products offered by Islamic banks. Murabaha financing – essentially purchase and resale – is mainly deployed for working capital purposes. Ijara, a form of leasing, is also commonly used.

Standard Chartered offers sharia-compliant products to cater to SME customers’ working capital, trade finance, term financing as well as investment needs, and the bank is committed to expanding its product offerings for this strategically important segment. The bank expects its Islamic banking book in the SME sector to go through a significant growth phase in the next three years.

“The Islamic banking focus on SMEs will help us gain further market share in the overall SME space and also maintain our existing market share, where our existing clientele starts to lean towards the Islamic banking side,” says Mr Subroto.

There is a strong link between sharia and SMEs, he adds. SMEs are dominated by trade-related businesses and trade transactions are the underlying structure of the majority of the Islamic banking activity.

“Many Muslim businessmen and entrepreneurs believe that the concept of barakah [blessing] has an impact on the health of their business. This phenomenon has a greater impact on SMEs since SMEs are primarily owner-managed and the belief set of the owner has a material impact on business decisions. There are various examples across the industry that the owner one day had a change of heart and converted all of his business to the Islamic side,” says Mr Subroto.

Competing on its own merits

But for other providers of sharia-compliant SME services, there are more prosaic advantages. "If people want sharia-compliant ownership they will come to us and see if we can do that, but what most of our clients are looking for is how competitive our financing is relative to other banks,” says Mr Denison.

BLME’s three areas of corporate business, namely leasing, lending against property and trade finance, all work well from an Islamic product perspective, says Mr Denison. BLME is keen to expand its corporate lending books, aimed at the £5m ($8.13m) to £15m per loan 'sweet-spot' range. However, there are challenges on the documentation side.

“Other than leases, sharia-compliant documentation is slightly different to conventional banking, which means that lawyers who are unfamiliar with Islamic finance can take some time to get comfortable with the differences,” says Mr Denison.

IFIs are adopting novel strategies to strengthen their SME business. In the UAE, Noor Islamic Bank has been preparing a detailed profiling service for local SMEs identified as potential growth engines, helping them to apply for internationally recognised credit and export credit ratings.

Extra support

IFIs are also teaming up with conventional lenders and development financial institutions. Qatar Development Bank signed an agreement in 2010 that enables the local (sharia-compliant) Barwa Bank to provide its customers with the benefits of its Al-Dhameen loan assurance programme for Qatari SMEs.

HSBC has shown support for SMEs across global markets by setting aside a pool of funding to support SME financing programmes. In 2010, HSBC UAE launched a $100m fund to support SMEs, which was fully utilised. A second $100m tranche has been launched this year that provides sharia-compliant as well as conventional financing. Businesses can choose to access the fund through HSBC Amanah, which enables them to leverage sharia-compliant financing to grow their businesses.

Governments have attempted to boost SME lending through support programmes. This involvement often extends beyond encouragement to risk participation with the private sector. For example, Saudi Arabia's Saudi Industrial Development Fund operates the Kafalah scheme, which provides a 75% guarantee covering credit risk in the event of a default, providing impetus for the banking sector to increase its exposure to this segment. Through this programme, the bank will offer finance to customers up to SR2m ($533m). The end result of this sustained effort will be to accelerate the maturing of the Islamic service offering.

“Islamic finance is now a mainstream proposition and that proposition is no different for SMEs than for anything else. It is on a par with the conventional, all the way from trade finance through working capital to transactional banking and treasury needs,” says Mr Bobat.

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