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SR1 billion SME Fund to promote enterprises: Al Aboodi
v / 17 June 2011
JEDDAH — A SR1 billion SME Fund is planned to promote the growth of Small and Medium Enterprises, or SMEs, according to Khaled M. Al Aboodi, CEO, and general manager of the Islamic Corporation for the Development of the Private Sector, or ICD, private sector arm of the Islamic Development Bank Group.
“In terms of financing in Saudi Arabia we are looking at establishing the Fund,” Al Aboodi told Khaleej Times in an interview last week. “It should be Shariah-compliant and could take the form of a declining ‘musharaka’, which could address the issues.”
‘Musharaka’ is the purest form of Islamic financing where the investors share in the project risks and benefits. Normally, all parties involved contribute towards the financing of a venture and they agree to share profits on a pre-agreed ratio while losses are shared according to each party’s equity participation. Management of the venture is carried out by all, some or just one party member.
Al Aboodi said ICD has been working for a long time in developing special programmes for development of the SME sector in IDB member countries. “It is clear that job creation has become a big issue that needs to be addressed. Recent events in the Middle East confirm that unemployment sometimes makes people unhappy to the extent of almost overthrowing regimes,” he said.
“ICD has been developing SME programmes to support governments’ efforts in member countries by providing ingredients for establishing a good SME authority in each country. Because in many countries no such authority exists to take care of SMEs affairs in terms of regulations and creating an environment ensuring their development. Or sometimes, the authorities exist but they are not well-equipped, or are bureaucratic,” he added.
According to him in Saudi Arabia there is no SME Authority per se but there are many initiatives and institutions that are trying to address the issue of SME development and because they are looking at it mostly from a financing point of view, their work is important but not sufficient to address the SME development challenge. He explained that by providing financing through establishing special funds we could help SMEs “grow further, grow bigger and become bankable so that they could go to the bank and get financing.”
Al Aboodi said that providing technical assistance could also help the growth of SMEs. He explained that there are cases where the business model of the company is good but because of the lack of the knowledge as to how to run it as a business the growth is sometimes hampered. “We want SMEs to grow and act as a corporate so that when they apply to bank for financing they can get it,” he added.
He said that ICD, established in November 1999, aims to promote the economic development of its member countries by encouraging the establishment, expansion and modernisation of private enterprises. In this respect, ICD complements the activities of the IDB, which provides financing primarily to public sector projects and promotes economic development in its member countries. ICD finances private sector entities and facilitates their access to other sources of finance.
ICD, which has an authorised capital of $2 billion, focuses on a broad range of sectors, mainly SMEs development, modern manufacturing, ICT and power, health and education, financial sector and advisory services.
Al Aboodi joined the IDB Group in November 2001 as Deputy Director General of the ICD, and since 2007 has served as its Chief Executive Officer. He has over 20 years of experience serving the developing finance industry in the Middle East and US. He started his tenure with the Ministry of Finance and National Economy of Saudi Arabia in 1982 as an Economic Researcher, and served as Director of the Environment Unit and Acting Director of the International Financial Institutions Department. In 1995 he moved to Washington DC to serve as Assistant to the Saudi Executive Director at the World Bank; and was later appointed Alternate Executive Director for Saudi Arabia at the World Bank Board until 2000. Later in 2000, he joined the Saudi Public Investment Fund (Ministry of Finance) as Senior Economist where he was in charge of several privatisation operations.
Talking about alarms being raised last year because of fears of further asset bubbles in various parts of the world, he said these fears had been ignited to a large extent by transactions of a speculative nature, and added that such market failures would have been practically impossible, or to say the least minimal, under proper Islamic finance principles.
Although he agreed that Islamic finance is still at an early stage of development, with assets values expected to reach $1.5 trillion by the end of 2012, he predicted, “we will certainly start to see a greater impact of Islamic finance products on global financial markets.”
Al Aboodi said the main challenge is uncertainty. “I know a lot of investors who want to invest, but they are reluctant because they don’t know what will happen. Investors are saying that cash is king ‘they want to keep their cash’ and make sure that things are moving in the right direction before they spend anything. So an institution like ours must step in and invest and encourage others to do so,” he added.
He said that because of lingering effects from the global economic crisis and lack of existing institutions, there is still a lot of work to do.
Al Aboodi said that ICD has begun its regional work in Azerbaijan. Because it was difficult at first to convince investors to put their money into the country, ICD decided to first establish companies there, working in conjunction with the Azeri government.
“We actually do more financing than investment. But we are doing investment in the (CIS) region because we want to encourage investors in other member countries to come and invest,” he said, and added, “In the beginning it was difficult, but now we more or less understand the mentality and the way they do business.”
In other CIS countries, ICD is focused on smaller projects and building infrastructure, as there are not yet many projects that meet the institution’s requirements for financing in terms of size and level of private ownership. For example, ICD won’t finance any company that is more than 49 per cent owned by a government.
Another issue ICD has had to deal with is the perception that since ICD is part of an Islamic bank, its finance would be free. It quickly had to educate businesspeople that, just like any other bank, there would be a cost for the financing.
Al Aboodi said that though the legislative process can be tedious, CIS governments are generally supportive of the ICD’s work. “There is a different level of willingness to open up. We just started in the region and we started to see that many projects are growing to be eligible (for financing),” he added.
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