In 2016, Shariah-compliant trade finance accounted for 24.1% of total trade finance provided by the Malaysian banking sector. However, our Islamic finance industry only financed about 5% of total exports in Malaysia, again, signifying an untapped growth area with large potential. Increasing bank financing for SMEs would also encourage more market based solutions to meet the funding needs of the halal sector participants, which are now largely reliant on government initiatives. There are however a number of challenges that may impede trade finance facilitation by Islamic finance players. I would like to highlight two. First is – “process inefficiencies” – that can contribute to higher operational risks such as fraud. This can be mitigated through use of technology that reduces reliance on traditionally document-intensive and multi-tiered manual processes. In Malaysia, I am happy to note that six Islamic banks have embarked on digitalisation of trade finance processes – through an integrated web-based platform that offers trade finance and working capital management solutions. The second challenge is, – the need to improve connectivity between the Islamic finance industry and the international trade community – to facilitate effective intermediation of trade finance needs. Again, the use of technology can ease the application and submission of trade-related information and documents which can expedite the whole process. If these challenges are not addressed, industry players are at risk of becoming irrelevant in the trade finance space.
This approach necessitates greater empathy, which can pave the way for Islamic banks to develop more tailor made financial solutions. Assessment of financial applications would also be based on potential value creation and not on credit scores alone – thus opening up exposure to larger segment of potentially viable businesses. This is central in uncovering new markets, such as within the presently unserved and underserved segment of society. A VBI-driven financial institution – would actively seek out opportunities to assist aspiring entrepreneurs that may be struggling to obtain funds, but have business models that, despite being untested, are more socially responsible or green in nature. VBI therefore considers a broader spectrum of criteria as opposed to the traditional method that places emphasis on credit history and availability of collaterals. VBI also promotes more holistic offerings for entrepreneurs and I would like to suggest several examples to illustrate – how Islamic banks can extend its scope of business to benefit SMEs. In providing infrastructure support, an example is through provision of physical premises that can be rented by SMEs to conduct their businesses at lower rentals. There is an example of a product in the market today, where factory spaces are provided for SMEs to rent at affordable rates, equipped with amenities to cater to the needs of the entrepreneurs. In addition, entrepreneurship training and consulting services are also offered to them. This can particularly assist in increasing entrepreneurial involvement in the manufacturing industry.