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Islamic Financing for SMEs

Islamic Financing for SMEs . P resented By: M.Shoaib Malick Unit Head-SME-Meezan Bank Limited. Islamic Financing for SMEs. Introduction to Islamic Banking Significance of SME Sector Difference Between Islamic Banking & Conventional Bank How IB, can address business needs (100%)

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Islamic Financing for SMEs

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  1. Islamic Financing for SMEs Presented By: M.ShoaibMalick Unit Head-SME-Meezan Bank Limited

  2. IslamicFinancing for SMEs • Introduction to Islamic Banking • Significance of SME Sector • Difference Between Islamic Banking & Conventional Bank • How IB, can address business needs (100%) • Comparison of Islamic Mode of Finance and Conventional • Islamic Modes of Financing • Short Term Modes of Islamic Financing • Long Term Modes of Islamic Financing • Trade Finance Facilities in Islamic Banking • Challenges in SME Financing • Conclusion

  3. Significance of SME Sector

  4. Contribution of SME Sector to Economy

  5. Current Status of SME Financing: Reasons for downfall: SME financing witnessed continues decline by banks/DFIs since 2008. Due to consistent decline in this sector, share of SMEs also reduced from 16% to 6% in overall advances of banks in last 4-5 years. • Adverse economic conditions. • Law and order situation. • Shortage & rising costs of electricity and other utilities.

  6. Reasons for downfall: • Growing NPLs. • Natural catastrophes also hamper this sector badly in consecutive years of 2010 & 2011 and created wipeout situation for small sized units. • Banks also took a risk-averse posture from this sector, due to deteriorating business conditions for SMEs.

  7. 5 Years trend of SMEs

  8. 5 Years trend of SMEs

  9. 5 Years trend of SMEs

  10. SME Financing For Working Capital Key portion of financing is used for working capital in SMEs, which constitutes 76% of total SME lending. However other is followed by Trade Financing & Long term/Fixed Investment.

  11. SMEs provide a significant portion of jobs world wide SME contribution to formal country employment Median values Source. Ayyagari, Beck and Demigirguc/kunt. 2003

  12. GDP Contribution of the SME sector increases, and informality decreases with income

  13. Definition of Riba Any increase over and above the price, without due consideration is Riba

  14. Distinguishing Features • We find the differences are on three levels: • 1. Conceptual & Socio-religious level • - not money lenders • - cannot deal with interest & non permissible industries • 2. Business model & Governing framework • - IB actively participates in trade and production process • - Governing framework in terms of Shariah Advisor &/or SSB

  15. Distinguishing Features • 3. Product Level Implementation • - usually asset backed & involve trading/renting of asset & participation on profit & loss basis • - Implementation is not just a mere change of paper work and terms but it involves • - having the right intention, • - the correct sequence of steps and timing of execution

  16. PERCEPTION OF ISLAMIC BANKING Parties: Bank & Client Limit: Rs 10.00 Mn Rate: K+2 Tenor: 1 year Purpose : To buy Cotton Parties: Bank & Client Limit : Rs 10.00 Mn Rate: K+2 Tenor : 1 year Purpose : To buy Cotton Islamic Banking Conventional Banking

  17. PERCEPTION OF ISLAMIC BANKING Parties: Bank & Client Limit: Rs 10.00 Mn Rate: K+2 Tenor: 1 year Purpose : To buy Cotton Parties: Bank & Client Limit : Rs 10.00 Mn Rate: K+2 Tenor : 1 year Purpose : To buy Cotton Islamic Banking Conventional Banking Goods = OWNERSHIP Services

  18. Islamic Banking Basic Difference between Islamic and Conventional Modes of Finance Conventional Money Client Bank money + money (interest)

  19. Goods & Services money • Islamic Banking Basic Difference between Islamic and Conventional Modes of Finance Islamic Client Bank

  20. Income Statement Sales xxx Cost of Goods Sold Raw Material xxx Direct Labor xxx Over Head xxx Gross Profit xxx Operating Expenses Admin. & Gen. Exp xxx Salaries xxx Utilities xxx Other xxx Net Profit xxx

  21. Balance Sheet Current Assets: Stocks xxx Receivable xxx Cash in hand xxx Advances & Deposit xxx Fixed Assets: Plant & Machinery xxx Land & Building xxx Total Assets xxx Owner’s Equity: Capital xxx Liabilities: Creditors xxx Financial Liabilities xxx Total Liabilities & Equity

  22. Difference Between Islamic Banking & Conventional Bank

  23. Difference Between Islamic Banking & Conventional Bank

  24. Financing Product Comparison Islamic Vs. Conventional Bank Meezan Bank Limited

  25. Financing Product Comparison Islamic Vs. Conventional Bank

  26. Financing Product Comparison Islamic Vs. Conventional Bank Meezan Bank Limited

  27. Long Term Financing Needs • Acquisition/replacement/expansion of fixed assets, plant & machinery Short Term Financing Needs • Raw Material • Overheads / Utilities • Finished Goods • Trade receivable financing • Rental financing

  28. Issues & Challenges of SMEs • Demand • Supply

  29. Plain Murabaha • Advance Payment Murabaha • Suppliers Credit Murabaha • SLC under MMFA • Tijarah • Istisna • Diminishing Musharaka • Ijarah • Bai Salam

  30. Plain Murabaha *Payment of purchase price is either direct payment to supplier or through customer account For Detail

  31. Advance Payment Murabaha *Payment of purchase price is either direct payment to supplier or through customer account

  32. Credit Murabaha *Payment of purchase price is either direct payment to supplier or through customer account

  33. SLC under MMFA

  34. Tijarah For Detail

  35. Thank You

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