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Islamic Social Finance: A Viable Way to Assist ASEAN MSMEs?

December 1, 2021
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Islamic Social Finance: A Viable Way to Assist ASEAN MSMEs?

By Aucky Pratama

As a region predominantly consisting of small enterprises, ASEAN continues to deal with a wide range of structural, financial, and other challenges, including limited access to finance in efforts to support this sector of businesses. Experts believe that Islamic social finance can bring about ample opportunities to support these enterprises, building on the principles of fairness and justice and providing pathways to stimulate economic activity and promote social welfare and financial inclusion.

The State of ASEAN MSMEs

Despite the impact of the COVID-19 pandemic to the global economy, ASEAN is expected to fulfil its potential as one of the largest economies in the world by 2030. The Asian Development Bank (ADB) in its September economic outlook highlighted a 7.1% growth forecast for developing Asia (including ASEAN jurisdictions) in 2021 (from 7.3% in April 2021), and up to 5.4% in 2022. This reflects the region’s overall optimism towards recovery from the impact of COVID-19 despite the latest resurgence in the pandemic — possibly due to new virus variants, slow progress in vaccination or waning effectiveness of the vaccines.

A major part of the ASEAN economy consists of the Micro, Small and Medium Enterprises (MSMEs). According to the ADB’s Asia Small and Medium-sized Enterprise Monitor 2020, MSMEs account for an average 97% of all enterprises and 69% of the national labour force in developing Asia’s jurisdictions. MSMEs are the backbone of ASEAN’s economy as they stimulate domestic demand, create jobs, innovate, and compete nationally and regionally. MSMEs can play an important role in contributing to the region’s recovery in demand, trade, and investment. Their development remains important to promoting inclusive growth in ASEAN. However, for many MSMEs, access to finance and expanded markets remain at the core of their growth challenges.

For jurisdiction such as Indonesia — the largest population in the region and the only member of the G20 in ASEAN, difficulties for MSMEs (comprising 98.7% of enterprises in Indonesia) in accessing finance from traditional banking industry is a major issue. “There needs to be an alternative for the MSMEs to get access to finance, and Islamic social finance can be the answer,” stated Associate Professor Dr. Murniati Mukhlisin, Member of the Sharia Accountants Compartment, the Institute of Indonesia Chartered Accountants and Rector of Tazkia Islamic University College, Indonesia.

As a regional body for the accountancy profession, AFA as part of its priorities, has identified ASEAN MSMEs as an important group of stakeholders. In addition to publishing a report on ASEAN MSMEs in 2018 and ASEAN Small and Medium Practices (SMPs) in 2020, this year the Federation launched its ASEAN SMP Webinar Series to serve as a platform for networking, learning, and sharing between ASEAN SMPs. It is a recognition for the important role of SMPs as trusted partners and advisers for the MSMEs.

Focus on MSMEs’ Financial Needs

For the ASEAN MSMEs, it is not just about recovering from the impact of COVID-19. The pandemic, in particular, has further highlighted several salient needs of the MSMEs, as they continue to elevate their productivity and dynamism to achieve their high-income aspiration. According to Puan Madelena Mohamed, Director of the Islamic Banking and Takaful Department, Bank Negara Malaysia, these may include:

Many MSMEs in the region may have significant challenges in meeting these needs without the right support from relevant stakeholders, including governments through their policies and financial institutions. Islamic social finance, built on the principles of fairness and justice, can provide pathways to stimulate economic activity, promote social welfare and financial inclusion, and address these pressing needs.

Islamic Social Finance and Its Value Propositions

What makes Islamic social finance unique other than its features to enhance quality access and inculcate responsible usage of finance for MSMEs? As discussed by Mohammad Muazzam Mohamed, Chief Executive Officer, Bank Islam Malaysia Berhad and Muhammad Syarizal Abdul Rahim, Partner and Head of Islamic Financial Services | Assurance, Ernst & Young Malaysia, Islamic social finance potentially brings several value propositions, including but not limited to reducing risks for financial institutions and indebtedness of MSMEs and enforcing accountability with amplified social benefits.

Islamic social finance is an approach to strategically offer banking products, services, and initiatives beyond traditional banking. For MSMEs that typically have an informal business structure and lack a credit track record, high credit risk is the common issue and major hurdle for them to access traditional financing. Islamic social finance serves as an alternative, as long as the relevant parties (i.e., financial institutions and MSMEs as the debtors) can match their credit risk and funding needs. In short, it is about nurturing the unbankable MSMEs to become bankable.

ASEAN Experiences

ASEAN stakeholders need to look no further than countries such as Indonesia, Malaysia, and even Cambodia to identify excellent examples of how this system is being implemented. This includes iTEKAD (now iTEKAD 2.0) and PruBSN Microtakaful Jariyah in Malaysia, as well as initiatives introduced by Phillip Bank and KIVA in Cambodia.

Bank Wakaf Mikro in Indonesia is a registered Sharia microfinancing institution which aims to provide access to capital for small communities with no access to formal financial institutions. As at October 4, 2021, there are 60 registered banks with 48,200 customers on an accumulated IDR73.1 billion in financing. “Indonesia as the largest Muslim populated country in the world has all the potential to become a major player in the development of Islamic social finance in ASEAN,” said Gunawan Yasni, Member of the Sharia Accounting Standards Board, Institute of Indonesia Chartered Accountants.

ASEAN stakeholders need to leverage the growing momentum in social impact investing, including Islamic social finance to help ASEAN MSMEs and ASEAN’s economy in general to rebuild their operations post-pandemic.

Aucky Pratama is the Executive Director of the ASEAN Federation of Accountants (AFA)

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