DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
21
and impact of these markets, and as a direct result of the evolution of trade flows across the
MENA Region and Asia (Trade & Forfaiting Review, 2013). The related suggestion is that
corporate and banking executives globally will need to become more familiar with and more
comfortable in the use of Islamic Trade Finance structures.
At the most basic level, companies engaged in trade require financing and other forms of
support, whether they are based in or trade with Islamic jurisdictions or not.
“Islamic trade finance refers to financing import and export through Islamic financing
modes and instruments. Trade finance has become one of the major challenges facing
SMEs today. The situation of trade finance even becomes more complicated due to
shortage of liquidity and scarce financial resources due to the recent global financial
crisis. Unlike the larger competitive corporate firms which have strong economic and
political bargaining power, SMEs have lower capital, high risk and less competitiveness.
For these reasons and in addition to the recent difficulties facing the conventional
finance, Islamic trade finance becomes the legitimate alternative to provide SMEs with
the required working capital, shrink the liquidity gap, reduce the risks of insolvency and
may help in improving their competitiveness. Good facilitating Islamic trade finance
might play vital role to the growth of SMEs in the IDB member countries.”
Source: The Challenges of Islamic Trade Finance in Promoting SMEs in IDB Member
Countries, Abdelrahman Elzahi Saaid Ali, Islamic Research & Training Institute, 2013.
Starting from this premise, and considering the unique characteristics of Islamic Trade Finance
in the context of a framework discussion, the reality is that Shari’ah compliance requirements
will be increasingly important in regional trade flows, certainly among OIC Member States, and
increasingly with importers and exporters based in non-Islamic markets but seeking to engage
in trade with counterparties wishing to conduct business in Shari’ah-compliant manner.
It is worth illustrating the parallels between conventional and Islamic Finance through a
straightforward example. It is well-known that Islamic Law forbids the charging of interest,
and perhaps less well-known to non-specialists that the transfer or sale of a debt is also
deemed non-compliant. This might seem problematic at first, considering the core role of debt
transfer (sale of a receivable, for example) in conventional finance, however, the desired
outcome can be achieved in full compliance with Shari’ah Law, if a bank takes ownership of the
goods and facilitates the transfer of ownership from seller to buyer. Linking this process to a
Shari’ah-compliant “Murabaha” contract allows a trade finance solution to be provided, while
fully respecting the requirements of Islamic Finance.
From a framework perspective, the conclusion must be that there are sufficient similarities at
the core of conventional and Islamic Trade Finance that enable consideration of both varieties
in the context of broader trade development and collaboration initiatives to be conceived and
developed for OIC Member States. The direct linkage between financing and an identifiable
flow of goods, the non-speculative, “back-to-basics” focus of trade practitioners, and the
merchant banking parallel where a financier takes ownership of the goods financed, all
combine to provide a strong sense of compatibility between conventional and Islamic Trade
Finance.