Time to bump up Shariah-compliant trade finance facilitation

There is signi cant growth potential for trade nance facilitation to support halal exports, says BNM


Bank Negara Malaysia (BNM) plans to bump up Shariah-compliant trade finance facilitation to 10% of total national trade in the next three years, up from the current level hovering at about 3.5%. The central bank has identified it as an “important development priority”.

“Drawing from the intrinsic principles of Shariah which encourages trade and entrepreneurship, the Islamic banking industry is particularly well-placed to support the sustainable growth of productive economic activities,” the central bank commented in the Financial Stability and Payment Systems Report 2016.

“There is significant growth potential for trade finance facilitation to support halal exports which can be seen through the increasing participation of small and medium enterprises in the halal economy, initiated by the government, to meet the strong demand for halal products and services globally.”

The report, released in March 2017 along with the central bank’s annual report, noted that the Islamic finance industry at that point of time represented only 3.4% of total trade, valued at RM50.3 billion, with conventional finance taking the lion’s share at 88.8%, or RM1.32 billion.

In the same report, the central bank announced that it “aspires for Shariah-compliant trade financing to support 10% of total trade in the next three years”.

It noted process inefficiencies that contribute to higher operational risks continue to be a challenge for the banking industry as a whole.

“Banks, including Islamic banks, have increasingly applied technological solutions to streamline trade finance operations and reduce reliance on manual document-intensive business processes. Six Islamic banks have established a web-based platform supporting more efficient provision of trade finance and working capital management solutions,” it said.

To encourage an expanded role of Islamic banks in facilitating trade finance, BNM was prepared to look at a broad range of initiatives, including the integration and digitalisation of trade finance offerings as well as enhancing the availability of trade credit takaful as a risk mitigant.

“These initiatives aim to further improve the efficiencies in trade finance facilitation and connectivity with the trade community in Malaysia,” it said.

Under trade financing, CIMB Group Holdings Bhd, for example, provides Accepted Bills-i (AB-i). Here, the bank extends a financing facility extended to a customer to finance his purchases or sales. AB-i purchase is based on the Shariah principle of Murabahah.

The bank also provides the Shariah version of the trust receipt, which is a short-term trade financing facility offered to customers to finance the purchase/import of goods. CIMB’s Trust Receipt-i Shariah Solution is based on the Shariah principle of Murabahah, whereby the customer (buyer) is appointed as an agent for the bank to purchase the goods from the supplier (seller) on behalf of the bank. The bank will then sell the goods to customers at the bank’s sale price which includes a profit margin as agreed upon by both parties payable on a specified future date.

On broadening the intermediation role of the Islamic banking sector, the central bank had noted the increasing importance of Tawarruq financing, which grew over 34% to account for 22.4% of total outstanding Shariah- compliant financing in 2016.

It said the growth has been largely spurred by the commodity trading operation of Bursa Suq Al-Sila which has reduced costs and risks associated with Tawarruq-based transactions. Islamic deposits based on Tawarruq also increased by 7.5% in 2016, reflecting higher demand for fixed rates of return on deposits offered under Tawarruq contracts.

“The increased use of Tawarruq as the underlying contract for Islamic banking business has accelerated efforts to further strengthen capabilities within Islamic banking institutions to effectively manage credit and market risks emanating from trade transactions under the Tawarruq arrangement.

“This would lay the foundation for more innovative applications of tawarruq in combination with other Shariah contracts, as provided under the Shariah standards and operational requirements on tawarruq issued by the bank which came into effect on July 1, 2016,” the report noted.