Transcript Dr. Mohsen Abu Awad - Jordan Loan Guarantee Corporation

SMEs Financing & Loan Guarantees
24th – 25th November 2014
Dr. Mohsen Fayez Abu Awad
Chief Business Officer
Islamic International Arab Bank
KAFALA Program
Sharia compliant financing for SME in cooperation
with the Jordan Loan Guarantee Corporation
Why KAFALA
• The idea of developing and launching Kafalah was created by the
need to remove a large obstacle:
• most of the loan applications coming from the SME sector
are rejected because of insufficient collateral, which forms
a major obstacle for the bank and the client
• For this reason, it was necessary to find a solution that would
enable the bank to increase its SME portfolio and at the same
time maintaining its ideality and with minimal risk.
“ MORE PROFIT MEANS MORE RISK”
LESS RISK
The Challenge
• Finding a Sharia compliant solution for
financing SME projects.
• Conventional JLGC programs are not Sharia
compliant .
• In Islamic Sharia, Gharar (uncertainty) , and
Riba (usury) are prohibited.
The solution
• IIAB Business and Product Development Teams found a
creative plan:
• Based on Kafala and Qard Hassan (Charity Loans).
• Similar to Letters of Guarantee (L/G).
• Through Kafala, JLGC issues a L/G which guarantees the
loans granted to SME clients.
• This way the client does not have to provide other
collateral, and obtaining a loan from IIAB is made easier.
Program Overview
• JLGC has been providing loan guarantee for conventional banks
in Jordan since 1994.
• Kafala is the first Sharia compliant loan guarantee program in
Jordan.
• It aims to facilitate SMEs’ access to Islamic financing and thus
stimulate the local economy.
Kafala program parameters
•
•
•
•
Segment: SME as defined by CBJ.
Tenor: up to 72 months
Amount: up to JOD 100,000 (USD 140,000)
CAP: %10 default
Target sectors
Various economic sectors: Commercial sector.
 Industrial sector.
 Services sector.
 Transportation.
Loans guaranteed by Kafalah are granted for:
Starting new projects, expanding existing businesses, purchasing
working capital and fixed assets.
conditions: enterprises applying for loans must :
•Have Identified Cash flow.
•Have Less than fifty workers.
•Be Owned by the private sector and working within the kingdom.
Projects excluded from Kafala
• Household (domestic) Projects.
• Projects that are inconsistent with the
provisions of the Sharia (alcoholic beverages,
cigarettes, etc. ..).
• The agricultural sector (horticulture and
fields).
• Weapons manufacturing.
• Stocks and currencies.
IBRD
Wakala
Agreements
with
CBJ
Central bank of Jordan recognizes the importance of supporting the
growth of SME sector in the local economy. One way of obtaining this
growth is through increasing bank loans granted for this sector.
Funding from reputable global parties such as IBRD is obtained by CBJ
to be injected into SME sector through Bank Loans.
Wakala Agreements with CBJ
• Central Bank of Jordan is utilizing grants
from international and regional parties for
supporting MSME sector through bank
loans.
• Wakala agreements have a reduced cost of
fund, which enables banks to offer
competitive rates on loans for MSME.
• IIAB offers special programs for loans with
a rate as low as prime rate.
Wakala Agreements with CBJ (cont’d)
Fund
Wakala
• Organizations such as IBRD (Grantor)
• Central Bank of Jordan (representative
of Jordan Government)
• Central Bank of Jordan (Principal)
• Islamic International Arab Bank (agent)
Wakala Agreements with CBJ (cont’d)
Finance
contract
Kafala
• Islamic International Arab Bank (Creditor)
• SME Client (Debtor)
• SME Client (Guaranteed party)
• Islamic International Arab Bank (Beneficiary)
• Jordan Loan Guarantee Corp. (Guarantor)
Wakala Agreements with CBJ (cont’d)
Wakala highlight:
• Period: 10-15 years
• Grace period: 3 years
• Incentive: paid to Bank
• Expected return: Fixed or LIBOR+
Wakala Agreements with CBJ (cont’d)
Financing parameters:
• Segment: MSME as defined by CBJ
• Tenor: up to 72 months
• Amount: up to JOD 100,000 (USD 140,000)
• collateral: Kafala (JLGC guarantee)
• CAP: equal to the principal amount specified in the
Wakala agreement
• Special conditions: as set by the Granting
fund/party.
Achievements
• Hundreds of SME businesses have benefited
from the Kafala program and Wakala
agreements.
• IIAB is able to launch products targeting SME
sector without focusing on collateral, being
able to rely on the JLGC guarantee.
• IIAB channels funds from reputable global
parties such as IBRD and ARAB FUND,
putting them to use in supporting the MSME
sector.
Success Strategy
• Periodically reviewing the performance of
Kafala in order to understand the changes of
SMEs’ needs and look out for possible points
of default.
• Taking a further step exploring the SME
market and its ever-changing needs, coming up
with new ideas and programs under Kafalah
such as JADDED.
• This will help extend our financing services to
reach more segments within the SME sector,
allowing more chances of growth:
JADDED PRODUCT
for Medical Sector
(one of Kafala’s Sub agreements)
Features:
• Jadded is an especially designed program for
financing medical machines and equipment
and renewing medical labs & clinics.
• Financing limit is up to JOD
100,000 (USD 140,000)
• up to %100 of the cost
• Tenor: 36 months
• No need for collateral-all loans
granted are guaranteed by the JLGC.
Successful SME startup business in Jordan, are
witnessing a great demand if financing is
available
Success Elements
• IIAB understands and identifies clients’ needs, always
seeking to meet those needs through Sharia compliant
programs.
• Central Bank of Jordan recognizes Kafala as acceptable
collateral for MSME sector.
• Funding granted by global parties to support MSME.
• JLGC understands the special nature and requirements of
Islamic banking.
• Cooperation between IIAB and JLGC.
Thank you