Dubai: Islamic banks have big opportunities to offer innovative solutions in trade finance and funding of small and medium enterprises (SMEs) said Hussain Al Qemzi, Group CEO, Noor Investment Group and CEO Noor Bank.

“Trade finance, which is relatively short term in nature, is dominated by conventional banks. Products such as factoring are used widely by conventional banks to offer financing to trade. Factoring today has a worldwide volume in excess of $450 billion (Dh1.6 trillion). There is opportunity for Islamic banks to venture into this segment through innovative structures,” said Al Qemzi.

Factoring offers a supplier extended a credit line against a buyer invoice. The facility can be with, or without, recourse to the supplier. Also, the buyer receivables can be covered through credit insurance to mitigate some of the underlying risks.

Although such structures are not common in Islamic banks’ product offerings in the GCC, Noor Bank has been working closely with its customers to optimise their working capital cycle by providing short term facilities.

“Traditionally, Islamic banks have shied away from such products because of high daily transaction volumes, complex Sharia-compliant documentation, complex risk management requirements. We have developed a Sharia-compliant factoring solution which is proving to be very popular with our corporate SME client base,” said Al Qemzi.

Opportunities

Noor Trade is a Sharia-compliant banking service specifically tailored for SMEs that contribute significantly to the UAE’s trade flows. “The steadily growing client base and portfolio size, is indicative of the success of this product,” said Al Qemzi.

At the current level, Islamic banks’ global market share is as low as 1. 4 per cent of the total global trade finance. Although, this area of business has huge opportunities for Islamic banks to expand, Al Qemzi said the Islamic bank’s entry into trade finance faces challenges such as complexity in documentation, lack of awareness among customers and lack of standardisation in the industry.

“Like every other aspect of Islamic finance, absence of standardised rules is big challenge facing Islamic trade finance. Different Sharia boards have differing views on the subject. To effectively develop this segment we need to have standardised rules,” he said.