$13.2bn gap for Islamic SME financing

MENA banks are ill equipped to handle the high SME demand for Islamic financing, a new study revealed.

SMEs across MENA are not accessing banking services due to the lack of Shariah-compliant products, according to a new study.

The International Finance Corporation (IFC), a member of the World Bank Group, released the latest findings in its study, titled ‘Islamic Banking Opportunities across Small and Medium Enterprises in Mena’, which highlighted a potential gap of $8.63bn to $13.20bn for Islamic SME financing across the nine surveyed countries in the region.

Only 36 percent of more than 160 surveyed banks in Iraq, Pakistan, Yemen, the Kingdom of Saudi Arabia, Egypt, Lebanon, Morocco, Tunisia and Jordan, had an SME offering, the comprehensive study said.

Furthermore, 31 percent of the market offered an Islamic SME proposition while only 17 percent of banks had the marketing, product and operational capabilities to effectively serve the requirements of the Islamic SME banking sector.

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

In order to enhance Islamic SME offerings, the study suggested that the banks needed to align their strategies to the rising demand for Shariah-compliant products, with a clear focus on advancement of Islamic product offerings through effective marketing.

The study also revealed a strong demand for Islamic banking in MENA (including Pakistan) with 32.19 percent of the overall SME population expressing their desire for Islamic finance.

However, the report showed significant variation across the countries in the number of SMEs looking for Shariah-compliant products – up to 90 percent in Saudi Arabia but decreasing to four percent in Lebanon.

Mouayed Makhlouf, regional director for IFC, MENA said: “The study reveals a significant, untapped ‘new to bank’ funding opportunity, as banks and other financial institutions lack adequate strategic focus on this segment to offer Shariah-compliant products.”

IFC commissioned the study as part of its initiative to reach out to SMEs demanding Islamic products and enhance investment and advisory services offerings to Islamic financial institutions.

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