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SINGAPORE: Islamic financing principles can work in the favour of SMEs (small- and medium-sized enterprises).
This is according to experts at a Singapore seminar to raise awareness about the Islamic capital market.
They also said that although there's no lack of demand for such products, creating new, compelling Islamic products will be a challenge.
Singapore SMEs have been urged to tap into Islamic financing.
Industry players say Islamic financing principles - such as fixed selling price and upfront contractual agreements - give SMEs and their investors certainty, even in times of crisis.
Baljeet Kaur Grewal, Chief Economist and Head of Research, Aseambankers Malaysia, Maybank Group, said: "If you look at cash flows, the Islamic structures tend to be very consultative in nature in that it allows the SMEs to grow at the same time. So you're also holding the SMEs' hand in growing together. It's more of a partnership rather than a straight loan. Assuming a crisis occurs and the SME tanks, then the interest rate compared to the conventional side cannot sustain you. Whilst on the Islamic side, everything is agreed upfront. So in an event of a dispute, it's all agreed upfront."
The Islamic finance market is estimated to be about US$300 billion globally.
Singapore is seeking a pie of the sector, which is growing at between 15% and 20% annually.
Islamic financing refers to products and banking practices that comply with Muslim Sha'riah laws which promote profit-sharing but prohibit interest payment.
The Monetary Authority of Singapore has made provisions to include such banking principles in existing regulatory framework.
It has also levelled the playing field for some Islamic financial investments.
Industry players say financial institutions with Islamic products can tap into funds from the Gulf region, which presents over US$1.5 trillion worth of investment money.
Analysts say the drive by Middle Eastern funds to invest outside their region will spur demand for such investment options in Asia.
But they also note that the challenge is in creating more innovative Islamic financial products.
Baljeet Kaur Grewal said: "We're starting to see a lot of Islamic structured funds that cater for various types of asset class. We have commodities, equities, bonds, oil and gas products and so on. The move towards increasing the structured products and the private wealth or private equity portion in Islamic financing, really, is the next challenge because of the depth of the market."
As investors get familiar with Islamic products, analysts say they are also expecting demand from non-Muslim investors to grow.
Baljeet Kaur Grewal said: "In Malaysia's case, we're seeing a lot of non-Muslim tapping the market. That's very encouraging. And then you also have the Middle East that's looking at diversifying their investments. The US and Britain have already established Islamic banks in those specific countries to cater for their Islamic clients. So now it's at the stage where there's a need for increased market awareness and market knowledge." - CNA/ir
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