Owners and managers of SMEs would like to forget 2022. SMEs were devastated first by COVID-19 and the slow recovery from the pandemic, then by an unexpected increase in prices — partly due to geopolitical crises in Europe — leading to higher interest costs on a global scale and, finally, by the grim economic recession and climate change affecting the small business ecosystem.
Islamic SMEs experience similar problems, only more intensified as Islamic banks — a crucial supplier of funds to Islamic SMEs — have had a liquidity crisis in the aftermath of the COVID-19 pandemic. The OECD reported from several Asian countries that almost 30% of the SMEs reported having 50% of their staff laid off, and only half of the SMEs had savings to survive a month. Four major areas where SMEs are primarily affected include the sectors that employ mostly semi-skilled professionals, such as tourism, restaurants, construction and personalized services (ie hairdressers, etc).
Review of 2022
Take for example Bank Negara Malaysia (BNM)’s funds for financing SMEs. BNM allocated RM31.1 billion (US$7.08 billion) and an additional RM500 million (US$113.9 million) as disaster recovery funds to support almost a million SME financing accounts. Several microfinance schemes (ie SPM and MEFs), a social finance scheme (iTekad) and online financing platforms (ie iMSME, investment account platform IAP) were activated. The Malaysian government also widened the scope of SME touchpoints for financial and general guidance during the pandemic and post-pandemic.
The Turkish government assured SMEs with a massive 18% credit guarantee scheme that benefited the sector in the mid of the pandemic. Egypt took a similar approach to guarantee SME credit, extend grants and provide tax deferrals and debt moratoriums. Indonesia, a prime Islamic finance destination, took an advanced approach to finance SMEs. Aside from the traditional tax benefits, Indonesia offered wage subsidies and facilitated fintech to maintain a healthy level of SME financing. The government also opened new digital platforms to train SMEs to get accustomed to the new digital framework. We saw similar technological means deployed in Malaysia to save Islamic SMEs. The IsDB Group also reserved US$2.3 billion-worth of funding to help member countries during crises.
Clearly, the initiatives can be divided into two groups that are a combination of traditional assistance packages coupled with some initiatives to achieve more markets and financing using technology. Malaysia and Indonesia led the digital initiatives to aggressively be involved in fintech to avail new funding and market opportunities for Islamic entrepreneurs and banks.
The IsDB Group Report 2020 suggests that Pakistan have ticked most boxes to save their local SMEs, ranging from policy cuts to digitalization and training local knowledge workers with e-learning platforms. According to the report, the three countries that took the most initiatives to work on Islamic SMEs are Bangladesh, Indonesia and Pakistan.
Non-banking financing, involving private equity funds, grants and crowdfunding, assisted several mid-budget projects in the agricultural sector in Indonesia. Smaller private equity investment, either through a separate fund or through a profit-and-loss-sharing basis, are back in the thought process.
Charitable grants, Zakat and Waqf funds are being processed to form a large pool of funds for refinancing smaller firms. Fintech firms are given special tax incentives — for example in Bahrain — to facilitate a low-cost fund transmission mechanism, which has also worked well on the objectives of financial inclusion.
Preview of 2023
The way forward is difficult not because of the lack of initiatives but because of the multitude of problems created by the triangle of crises. The year 2023 might be even worse due to higher prices of commodities, leading to high inflation and low demand of products. Initiatives taken to recover from the pandemic may fall short in helping Islamic SMEs face the negative impact of climate change. Some prime Islamic destinations are concurrently facing natural calamities that include floods in Bangladesh and Pakistan. At least three changes are suggested to maintain the Islamic SME financing level in this difficult time. Fintech has been widely cited and suggested both in academic literature and policy documents as having a positive impact on SME financing by engaging general crowds into financing small ideas.
Several fintech-based Zakat, microfinance and Waqf models are active that integrate fintech and social finance channels to generate new sources of funds for SMEs. However, the total amount of socially generated funds will decline as the global sources of Islamic benevolent and social funds decrease in the post-pandemic period. Therefore, it is important that SMEs redesign their business process to rely more on internal funds and get ready for future crises. Innovation is the key to preparing SMEs for future uncertainties in the funding market.
Conclusion
The year 2023 is not expected to be any better than 2022. Government funds and grants for SMEs will decrease. There might be more geopolitical crises affecting oil prices and general price levels. Products will be costly, which may lead to more SMEs going out of business.
In order to get ready for future uncertainties, SMEs should start their business process reengineering to generate internal funds, reduce operating expenses and reach more customers using digitalization. Innovation should be given priority at every level. In the coming days, due to a fund shortage, banks may only finance innovative projects. Instead of focusing on tax breaks, policymakers should help foster the growth of innovation, knowledge-sharing and cooperation among SMEs.
Dr Mamunur Rashid is the senior lecturer in finance at the Christ Church School of Business, Canterbury Christ Church University, UK. He can be contacted at [email protected].