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Malaysia’s Islamic banks need not fear digital challengers — as long as they embrace financial inclusion

The pandemic has forced Islamic banks to change how they look at Malaysia’s growing unbankable population.


KUALA LUMPUR: The head of one of Malaysia’s main Islamic banks insists he has no fear of a new wave of digital banks that will open in the country next year.

Arsalaan Ahmed, chief executive of Al-Rajhi bank, is himself gearing up to unveil the institution’s new suite of digital services at a time when Malaysia’s central bank will issue five licences for challenger banks.

Nevertheless, he is urging other Islamic institutions to beware of the intentions of these digital banks, which will be only too willing to deviate from their social remit and face them on their own turf.

“I don’t think for one second that the digital banks are only going to stick to financial inclusion. I’m sure their application will say that, but I’m certain their business case won’t,” Ahmed said.

Early in 2022, Bank Negara Malaysia, the central bank, will name the recipients of the new digital banking licences, which are set to transform the country’s traditionalist financial landscape. At least one of the winners is expected to be an Islamic bank.

The successful banks, chosen from 29 applicants, will be expected to contribute towards greater financial inclusion by offering products and services to address market gaps in the financially underserved and excluded segments.

“Whose market share do you think they are going to take? It will be the largest banks in the country. For the likes of [Saudi Arabia’s] Al-Rajhi bank, which is a behemoth on the globe but still modest in Malaysia, I’m not worried about these new digital banks,” said Ahmed at the recent Islamic Fintech Dialogue, an online conference in Kuala Lumpur.

Bank Islam, one of Malaysia’s Islamic banking giants, appears to have foreseen this and is preparing to tackle the newcomers head on. By tailoring its business to attract a legion of financially excluded customers, it is preparing to squarely face off against the socially inclusive challenger banks.

Financial inclusion is becoming an important strategy for Malaysian banks, not least because of the wholesale changes to society brought about by the pandemic that have seen more people denied access to the banking market.

Before the first lockdowns in 2020, one in four Malaysians were already self-employed or part of the gig economy according to the World Bank.

“Over the last two years, this number is expected to have risen substantially,” said Mohd Muazzam Mohamed, Bank Islam’s chief executive. “Since banks continue to use traditional means of gathering data to examine loan applications, those people will be considered to be excluded from banking. We need to prepare a roadmap for these unbankables so that they become bankable.”

To this end, Bank Islam has set up a financial inclusion division and recently launched several microfinance products for micro-entrepreneurs and low wage-earners that use instruments such as zakat, waqf and sadaqah in combination with traditional banking products.

Mohd Muazzam predicts that more institutions will follow by finding new ways to assess risk when providing loans, in place of the traditional rating model, which assumes the applicant will have a credit history.

“One of the key things we are trying to do is understand the persona of the unbankable people. We are developing products and services to address their needs and to evaluate the credit-worthiness of this group,” he said.

The current model focuses on the ability to pay, he said, whereas a new one that Bank Islam is working on will look at different data-points that touch on the willingness to pay. These may include metrics such as financial behaviour, cashflow data and even psychometric assessment.

“Soon enough, this new approach to credit assessment will be part of the mainstream financial system,” Mohd Muazzam added.


© SalaamGateway.com 2021 All Rights Reserved

Islamic Finance
Indonesia's Bank Muamalat to increase equity with rights issue

JAKARTA–Indonesian Islamic bank Muamalat will increase equity through a pre-emptive rights issue of 39.81 billion new c-series shares next month, with an indicative price 30 rupiah per share, in the hopes of raising 1.19 trillion rupiah ($83.9 million) from investors. In addition to this, the lender will also issue 2 trillion rupiah ($140.5 million) sub debt (sukuk), Hayun Aji, its corporate secretary, told Salaam Gateway.

The fund will be allocated to strengthen its capital structure. Bank Muamalat is weighed down with bad assets as non performing financing soared to an unhealthy level of around 5 percent in the last three years. Its NPF soared to 4.64% in the third quarter of 2019 from 2.5% in the third quarter of 2018, and it soared to 5.69% in the third quarter of 2020 and 4.94% in the third quarter of 2021. 

“After this right issue, our focus is on changing the business model from the majority corporate segment into the retail segment. In the past, our financing went mostly (65%) to corporates and it turned out that it led to surging NPF. We should focus on Indonesian Muslims, which comprise a huge market,” Aji said. 

Bank Muamalat attempted to issue new shares five times in the last three years, but it always failed to attract investor’s trust due to its bad financial performance. In March, Vice President Maaruf Amin asked Chairman of Sharia Economy Society Erick Thohir, who is also Minister of State Owned Enterprises, to bail out Bank Muamalat. And in September, a master restructuring agreement was signed between Indonesia's Haj Fund Management Agency BPKH, national asset management company and the bank. 

The agreement rules out strengthening Muamalat capital and asset structure. Later in November, Muamalat existing shareholders such as Boubyan Bank, Atwill Holdings Limited, National Bank of Kuwait, IDF Investment Foundation and BMF Holdings Limited donated their shares to BPKH. It is now owned by BPKH as the majority shareholder with 78.45% of total shares and IsDB with 10% of shares with the remainder held by public investors. 

Bank Muamalat Indonesia was established in November 1991, founded by ​​the Indonesian Ulema Council (MUI), the Indonesian Muslim Intellectuals Association (ICMI) and Muslim entrepreneurs. 

© SalaamGateway.com 2021 All Rights Reserved


Islamic Finance
Oman's Sohar International seeks to initiate merger talks with Bank Nizwa

Published 23 Nov,2021 via Muscat Daily - Sohar International Bank has expressed its intention to initiate merger discussions with Bank Nizwa. The bank on Tuesday sent a letter of intent to the board of directors of Bank Nizwa for a merger between the two entities.

“The board of directors of Sohar International Bank would like to announce that on Tuesday it has sent a letter of intent to the board of Bank Nizwa proposing a merger of the two banks,” Ahmed al Musalmi, chief executive officer of Sohar International Bank said in a disclosure to the Muscat Stock Exchange.

Musalmi said the Sohar International Bank’s board will keep the market updated with any progress on this matter, which will be subject to necessary boards, shareholders and regulatory approvals and the applicable laws of the sultanate.

Mergers between the banks are quite rare in Oman. Last year Alizz Islamic Bank was merged with Oman Arab Bank’s Islamic banking window, and before this erstwhile Oman International Bank was merged with HSBC Oman in 2012.

Bank Nizwa is the leading and fastest-growing Islamic bank in Oman. The bank’s total assets grew by 22 per cent to RO1.385bn as of September 30, 2021 from RO1.139bn a year ago.

Bank Nizwa’s gross financing portfolio grew by 19 per cent year-on-year to reach at RO1.130bn in September 2021, while its total customer deposits reached RO1.074bn recording a growth of 18 per cent compared to the same period of last year.

On the other hand, Sohar International Bank’s total assets increased by 9.3 per cent to RO4.023bn as of September 2021 compared to RO3.681bn a year ago.

The bank’s net loans and advances increased by 3.4 per cent to RO2.550bn in September 2021 against RO2.467bn a year ago.

Sohar International Bank’s customer deposits, however, decreased by 5.1 per cent to RO2.229bn in September this year compared to the same period a year ago.

© Apex Press and Publishing

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Islamic Finance
Islamic banking in Egypt valued at $25.8 bn

Published 24 Nov,2021 via Daily News Egypt - The volume of Islamic banking in Egypt increased to EGP 407bn ($25.8 bn) in September 2021, an increase of 14.5% from September 2020.

According to the Egyptian Association for Islamic Finance, Islamic banking currently accounts for about 5% of the Egyptian banking market.

Mohamed El-Beltagy, President of the Egyptian Association for Islamic Finance, said that the volume of Islamic deposits amounted to about EGP 335bn at the end of September 2021, and constitutes 7% of the size of the Egyptian banking market, with an increase of EGP 35.1bn and a growth rate of 11.7% over September 2020.

He added that the volume of financing at the end of September 2021 recorded about EGP 313.2bn, which constitutes 5.5% of the size of the Egyptian banking market, an increase of EGP 28.2bn and a growth rate of 10% compared to September 2020.

El-Beltagy explained that there are 245 Islamic branches in Egyptian banks, which constitute 5.5% of the number of branches in the Egyptian banking market, providing services to more than 3 million customers.

There are 14 banks that have a license from the Central Bank of Egypt (CBE) to provide Islamic banking products, including three fully Islamic banks, which are Faisal Islamic Bank of Egypt, Al Baraka Bank Egypt, and Abu Dhabi Islamic Bank – Egypt, in addition to 11 banks that have Islamic branches alongside their traditional ones.

According to a report by the association, Faisal Islamic Bank of Egypt maintained its first position in the Islamic banking market in Egypt with a turnover of EGP 126bn at the end of September 2021, constituting 31.1% of the volume of the Islamic banking industry in the Egyptian market.

The branches of Banque Misr for Islamic transactions came in second place with a turnover of EGP 90bn, at a rate of 22.1%, then Abu Dhabi Islamic Bank Egypt in third place with a turnover of EGP 84.5bn, or 20.8%, and Al Baraka Bank in fourth place, with EGP 78.2bn, or 19.2%.

It is noteworthy that the size of the Islamic banking industry worldwide amounted to more than $3tn in 2021, according to the report of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and it is expected to reach about EGP 3.3tn in 2022.

According to El-Beltagy, the Egyptian market may witness the development of many Islamic banking products that meet the needs of customers, which are more than 55 banking products and services. The market needs more innovative products within Islamic Sharia and provide these products to clients, which is what the association is working on in terms of providing a professional master’s degree in Islamic finance issued by the General Council of Islamic Banks and Financial Institutions, certificates of the Accounting and (AAOIFI), and specialized programs to develop skills and increase the knowledge of employees in Islamic banks.

In a related context, El-Beltagy said that the volume of sukuk issuance at the end of September 2021 amounted to EGP 8.1bn, expecting that many companies will issue sukuk by the end of this year with an expected value of about EGP 10bn, as about three new sukuk issuances are being considered.

El-Beltagy stressed the importance of reducing the fees collected on sukuk issuances by FRA to encourage industrial companies to issue sukuk to finance their expansion and development projects. He noted that the completion of the executive regulations of the state’s sovereign sukuk law encourages the Egyptian market to witness the issuance of the first sovereign sukuk of the state before the end of 2021.

© 2021 Daily News Egypt.

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Islamic Finance
Indonesian Islamic bank BSI to open an office in Dubai

JAKARTA–Indonesia’s state-owned Islamic bank, Bank Syariah Indonesia (BSI), is planning to open a representative office in Dubai next year, the bank’s corporate secretary Gunawan Arif Hartoyo told Salaam Gateway.

“Now we are in the final stages. We are waiting for a license from the Dubai Financial Service Authority (DFSA)  and hopefully by the end of the year we will receive it,” Hartoyo said. 

He added that the representative office is set to become a joint lead manager or underwriter in the upcoming issuance of global sukuk, including Indonesian sovereign sukuk and corporate sukuk from state-owned enterprises and private companies in Indonesia. The Dubai BSI business entity has identified three key business models in the future: global sukuk, remittance and trade finance.

With expansion in Dubai, the lender also hopes to become a top ten global Islamic bank based on market capitalization by 2025. BSI's presence in Dubai is expected to not only contribute to the development of the Islamic banking industry in Indonesia but also to strengthen relations between Indonesia and Middle Eastern countries, especially the United Arab Emirates (UAE). Bank Syariah Indonesia will also seek financial services and information to empower export and import businesses to the Middle East. 

“We surely can do technology transfer from UAE as one of the global investment and Islamic finance centers. The Dubai representative office is also a connecting bridge between Indonesia and global investors, to invest funds in government projects, state-owned enterprises and also for other projects in Indonesia. In October 2021, the Indonesian government had just inaugurated the Indonesian Trade Promotion Center (ITPC) in Dubai to optimize trade business from Indonesia to the Middle East. So it is in line with our business goal,” Hartoyo added.

As end of September, total assets of Islamic financial institutions in Indonesia grew by 17.32 percent year on year, worth $132.7 billion; consisting of $43.58 billion in Islamic banking assets, $80.95 billion in sharia capital markets (sukuk and mutual funds) and an $8.16 billion in sharia non-bank financial institutions. Islamic financial assets represent 10.11 percent of total financial assets in Indonesia, data from the Indonesian Financial Service Authority showed.

© SalaamGateway.com 2021 All Rights Reserved

Islamic Finance
Malaysia’s Halal Development Corporation signs $100 mn deal to boost trade with MENA

Standard Chartered Saadiq to offer financing to Malaysian businesses as part of HDC’s goal to open up new halal markets.


The agency charged with promoting Malaysia’s halal sector to the world has negotiated a $100 million loan deal to enable more Malaysian companies to penetrate markets in the Middle East and North Africa.

The agreement, between the Malaysia’s Halal Development Corporation (HDC) and Standard Chartered Saadiq, will encourage businesses of all sizes to access loans and support to broaden their trade links with the region. The financing programme will also assist large halal manufacturers and suppliers in the Middle East to invest in Malaysia’s halal parks and open up the local market.

“This is an excellent opportunity for HDC to play a role in completing one of the most vital needs of many halal companies,” said Hairol Ariffein Sahari, Chief Executive of HDC.

“The financing programme will enable these companies to enter strategic halal markets including the Middle East and Africa,” he said at the signing ceremony in Dubai on November 18.

It took six months for HDC to negotiate the deal with Saadiq, which will be available through the recently launched Halal Integrated Platform (HIP), the agency’s online hub that connects all its services, including gaining certification to sourcing international customers and securing finance.

The terms of the financing have not yet been released, but it is understood that there will be a focus on supporting small and medium enterprises (SMEs). The funds will be offered as loans, rather than grants.

“I’m not in a position to give the details, but basically, what Saadiq have given us is to our liking in terms of the percentages of returns,” said Adly Mohamed, HDC’s chief commercial officer, to Salaam Gateway.

“We want to open up the Middle East market, so we talked to Saadiq to say that SMEs that would like to enter it need financing. At the same time, we are also encouraging businesses on that side of the world who want to come into Malaysia to come to our halal parks. They can access that money too.”

Malaysia has been heavily promoting its 14 dedicated parks for halal manufacturing, services and logistics. Tenants at these parks can gain access to incentives such as waived import duty and tax exemption for up to 10 years through HDC.

HDC and Saadiq will together arrange a trade facilitation programme whereby Malaysian businesses can be matched with selected buyers from the Middle East. This will be made available through HIP.

Part of the function of the giant online resource is to link halal manufacturers and suppliers in the global halal ecosystem with their Malaysian counterparts.

“We are still very focused on Malaysian businesses, but we want to spread trade all round the world through HIP. What I would like to have is a virtual highway between Malaysia and other countries,” said Adly.

With the Middle East is poised to become a new halal trade hub for Malaysia through the Saadiq deal, HDC is also planning to focus on Australia and the United Kingdom next year as new destinations for the agency’s virtual highway.

It has already been guiding countries in the Far East, such as China, Japan and South Korea, in terms of their halal strategy in recent years. With these now established in the halal ecosystem, and the Middle East, Australia and UK soon to come onboard, Malaysia will soon be “touching half the world” through its halal trade ties, said Adly.

“Sooner or later, apart from creating awareness, we will see more companies engaging with us in terms of trade and finance. That’s exactly what we want,” he added.


© SalaamGateway.com 2021 All Rights Reserved

Islamic Finance
Flailing Garuda Indonesia working on sukuk restructuring plan

Garuda Indonesia is struggling to settle a $500 million sukuk payment.


JAKARTA – Following the coupon payment default of a $500 million sukuk that matured lin June 2020, Indonesia’s national flag carrier is formulating a restructuring plan, hoping to provide clarity for its certificate holders.

Irfan Setiaputra, CEO of Garuda Indonesia, told Salaam Gateway that the company is currently focusing on restructuring schemes to its lessors and creditors first, before solving the pending matters with the sukuk certificate holders.

“We have appointed Guggenheim Securities LLC as our advisor and we have a detailed plan. We can’t share it at the moment, but I can say that we have made progress regarding our restructuring plan. We have proposed the scheme to our lessors and creditors. This could be a significant initial step in efforts to rebound (in terms of) our performance. If this step is going well, then later we can talk more about sukuk restructuring,” he said.

On 10 June 2020, Garuda Indonesia garnered the support of 90.88% of sukuk holders, who hold $454,391,000 of the principal of the bond, to extend the tenure of the repayment of its $500 million sukuk by three years from the original maturity date of June 3, 2020.

“We gave our restructuring proposal that includes our long-term business plan and offerings regarding our debt repayment to our lessors, creditors and main suppliers. It is the initial step towards being a more adaptive, efficient and profitable business entity,” said Setiaputra.

The proposal was sent through a digital channel that can be accessed in real-time by lessors, creditors and other parties in line with a non-disclosure agreement agreed by the stakeholders. They can give feedback while the process should be as transparent and fair as possible.

Apart from the solution offered in the proposal, according to Setiaputra, some of Garuda’s creditors prefer the suspension of a debt payment obligations route. They have submitted this to a court to present a composition plan that includes an offer to pay all or part of their debts to unsecured creditors.

Other efforts has been carred out in order to save Garuda, including reviewing its management costs and operational efficiency.

Setting the precedent

Toto Pranoto, an economist at the University of Indonesia, told Salaam Gateway that there is no mechanism to protect the interests of investors at the moment, referring to court supervised debt moratoriums and bankruptcy proceedings for sukuk being rare cases in Indonesia. There is speculation as to whether Garuda’s case will be dealt with in court or through an out-of-court settlement.

The default has significantly damaged the airline’s reputation, with the risk of investing in Garuda becoming higher in the eyes of investors and creditors. As a result, future lenders will charge higher interest on loans to the national carrier.

“Garuda must firstly complete the onrgoing restructuring programme. Reducing the aircraft and other operational aspects of efficiency must become their priority, in addition to diversifying revenue, especially increasing the cargo business. The last option is for government assistance through working capital loans,” said Pranoto.


© SalaamGateway.com 2021 All Rights Reserved

Islamic Finance
Startup fever is gripping the world’s last big untapped nation

Published 17 Nov,2021 via Bloomberg Markets - The startup scene in the world’s fifth-largest nation is having a breakout year.

More money has flowed into Pakistan’s nascent technology sector during 2021 than in the previous six years combined, with investors from the U.S., Singapore and the United Arab Emirates joining the rush. And one former Microsoft Corp. and LinkedIn Corp. employee has been involved in about half the fundraising deals.

Until 2018, Pakistan-born Aatif Awan was living the dream in Silicon Valley. After more than a decade working for tech heavyweights, he’d become an angel investor for American startups and bought a house in San Francisco. Then he went to visit his parents in Lodhran — a small town known for growing mangoes and cotton — and new opportunities became clear.

Multiple local entrepreneurs got in touch, seeking advice on funding and how to accelerate their startups. That’s when Awan, 41, saw the possibilities in Pakistan’s startup space. He moved back in February last year and started his early-stage venture capital fund, Indus Valley Capital.

“The law and order situation is so good, mobile penetration is there, everything seems right for this to happen,” he said.

While neighboring India has long had a vibrant startup scene, foreign investors have traditionally viewed Pakistan with trepidation: Security concerns, power shortages and poor digital infrastructure have all counted against it in the past. But by other measures, the potential in fintech and retail is huge. Two thirds of the 200 million population are under 30, most shopping is still done in cash and relatively few people have a bank account. Internet users have more than tripled in the past five years, to about 110 million.

By global standards, the sum poured into the country’s startups this year — about $300 million, according to Crunchbase and Invest2Innovate data — is tiny. But it’s a record for Pakistan and the funding surge is expected to continue.

Silicon Valley-based Kleiner Perkins, an early investor in Alphabet Inc. and Amazon.com Inc., made its first investment there this year. Defy Partners Management LLC, Singapore’s Wavemaker Partners LLC and UAE’s Zayn Capital Ltd. are also on the list of investors.

Pakistan “has all the necessary ingredients to be a large market that is growing rapidly,” said Mamoon Hamid, a partner at Kleiner Perkins. “Just given the youth of the population, we believe that they will adopt the new way of doing things much faster than most countries on the globe.''

The venture industry is enjoying something of a boom everywhere.

Global deals this year surged to $524.1 billion by the end of October, according to research firm Preqin — 66% higher than last year’s total and more than double the amount invested in 2019. The Covid-19 pandemic has made some things easier for international investors, as Zoom meetings and exchanging documents by email have replaced in-person meetings. Meanwhile, China’s tech crackdown has also prompted investors to hunt for new opportunities, with startups from Southeast Asia to India seeing increased interest from venture capital and private equity firms. To some, the capital flowing into Pakistan is yet another sign of frothiness in the market; to others, it’s the logical next step in a global race to invest.

“The Internet economy has exploded over the last five to seven years, and I think that is the main catalyst,” said Ali Mukhtar, general partner at Fatima Gobi Ventures, whose portfolio companies have been involved in about 40% of Pakistan’s fundraising this year. The large diaspora in places like Silicon Valley, London and New York has also helped to provide a talent base and funding, he added.

Many young nationals have left high-paying overseas jobs at places like Morgan Stanley, McKinsey & Co. and BNP Paribas SA to become entrepreneurs back home. The opportunity has also seen a few foreigners moving to Pakistan.

The country has “the last large population that hasn’t been tapped,” said U.S. citizen Jordan Olivas, 32, co-founder of QisstPay Inc. The Islamabad-based startup is modeled on Klarna Bank AB, a buy-now, pay-later fintech firm and Olivas’s former employer.

“Just the population size and the average age of the consumer alone creates a good market,” he said. “Up until this year there hasn’t been any big VC money coming in.”

In addition to rising interest from global venture capital companies, the entrepreneurial ecosystem is also benefiting from a growing network of local investors, incubators and shared working spaces. Pakistan’s government has also increased support for the tech sector after realizing its potential for exports.

The startup scene’s atmosphere is encapsulated at the Karachi offices of e-commerce startup Bazaar Technologies Pvt., which in August raised $30 million in the nation’s largest series A fundraising. Of more than a dozen investors, only one met with the company in person.

Tucked away in an old office building, it’s a modern workspace with gleaming floors and furniture that buzzes with casually dressed young workers. Co-founders Hamza Jawaid and Saad Jangda, both 28, respectively worked in Dubai for McKinsey and ride-hailing company Careem Inc. before returning home last year to start Bazaar, which operates a business-to-business marketplace for grocery stores.

Just a few years ago, startups in Pakistan struggled to raise funding. Risk-averse banks routinely turned down loan applications from entrepreneurs, while most cash-rich businesses and other private investors were not even willing to speak with them.

“In 2012, there were zero significant funding sources,” said Kalsoom Lakhani, co-founder of investment fund i2i Ventures. “You really had to have the network in Pakistan to raise your funds for business.”

“If you fast forward, there has been a support system that has been growing in speed around the startups,” she said.

A number of risks could slow the funding momentum. Investors may lose faith if Pakistan’s pace of digital adoption is slower than expected — and banks with big pockets have been failing for decades to convince most of the population to take up bank accounts. An abrupt change of government policy — such as a more punishing tax regime or stricter regulation — would be a real threat to the fledgling tech sector. Investors may also find it difficult to exit through Pakistan’s stock market since startup valuations are high relative to listed companies, according to Suleman Rafiq Maniya, head of advisory at Vector Securities Pvt. Pakistan being on the monitoring list of the Financial Action Task Force, a financial watchdog, is also a concern for investors and has created extra hurdles for startups.

For now though, there’s a lot of venture capital funding to be scooped up. “People realized this is a much larger force,” said Awan.

Several startups have found themselves attracting more money than they had initially sought, while ideas and the results of a small test-run can be enough to raise funds, according to people who asked not to be named since the matter is private. Some are also hiring staff at double or triple their current salary as they have money to spend, two of the people said.

“If you have a good team and a good idea, you’d come in and just revolutionize,” said Olivas. “There’s so much white space.”

Early-stage success stories include Airlift Technologies Pvt., a Lahore-based online shopping delivery platform, which in August raised $85 million in the nation’s largest single private funding round ahead of overseas expansion plans. Digital payments startup TAG Innovation Pvt. is now valued at $100 million after raising funds in September, while competitor SadaPay is projected to be the fastest-growing mobile wallet in the world in the five years to 2025, according to London-based fintech company Boku Inc. Neither company has begun fully fledged operations yet.

“What happened in China, India and Indonesia has started to happen in Pakistan, only faster,” said Awan. “The wheel has started turning now.”

©2021 Bloomberg L.P. All Rights Reserved

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Islamic Finance
New VC debt fund to offer alternative financing for MENA start-ups

Abu Dhabi-based Shorooq Partners’ Nahda Fund I will focus on start-up opportunities in the agri-tech, e-commerce, logistics and fintech sectors.


DUBAI: A recently established venture capital (VC) debt fund focused on offering alternative forms of debt financing to early and mid-stage start-ups in the Middle East and North Africa (MENA) region has rolled out.

Abu Dhabi-based Shorooq Partners, whose investment portfolio include regional start-ups like Pure Harvest, Sarwa, Lean, TruKKer, Capiter and Retailo, launched its Nahda Fund I at the end of October.

Licenced at the Abu Dhabi Global Market (ADGM), the Nahda Fund I will focus on three areas including software, platform, and fintech. The fund is particularly interested in start-up opportunities in the agri-tech, e-commerce, logistics and fintech sectors.

“Most start-up and their founders are unable to access finance or debt from either conventional or Islamic banks,” said Samir Yamani, managing partner at Shorooq. “We are here to fill in space where these start-ups can access financing to grow and scale.”

The screening process criteria for potential investee companies include that start-up founders are leaders in their field. The investee firm start-up will need to demonstrate high growth and a valuation of around $100 million plus.

The Nahda Fund I plans to finance large Series A and Series B rounds with an average ticket size of $5 million to $10 million, Yamani said, adding that it will look selectively at pre-series funding opportunities. Nahda I typical financing will be medium term of around one to three years in the investee company.

The fund will focus on debt financing rather than equity financing because it is under served, non-dilutive and what the ecosystem needs.

“Founders seek debt because it is non-dilutive with minimal operational interference whereas equity financing is dilutive and often more expensive,” said Yamani. “In terms of returns on potential investments, from a pure profit rate perspective we are senior secured high yielding in the double digits. This excludes our equity warrants.”

The debt financing into investee firms will be structured in Sharia compliant manner.

“Whilst our fund is not an Islamic regulated fund with a Sharia board, we operate and invest in a Sharia-compliant manner,” he explained. “We will use a method of financing tools like commodity murabaha and ijara arrangements.”

Adding to this, specific elements of ESG (environmental, social, and governance) and socially responsible investing (SRI) is set to play a role in the investing ethos and process.

"Suitable frameworks, monitoring, and scoring are still nascent in our region" he said. "Things like environmental impact, female inclusion and governance are important. However, certain frameworks are built for different societies and their idiosyncratic conditions. Nevertheless we see this as an important area to enhance and be ESG impactful in our region."

South Korean involvement

One key investor in the fund will be South Korea’s IMM Investment, which is a leading PE/VC house with over $5 billion in assets under management, via IMM Investment Global which is based in Hong Kong and is an arm of IMM.

“This is our first MENA fund and we are hoping this will open up new doors to exciting opportunities,” Sean Jinn, Director of VC investments within IMM Investment Global, told Salaam Gateway. “We would like to bring our experience of helping Korean start-ups to scale and provide much needed capital as well as relevant strategic advice to investee companies.”

“At the same time, we would also like to instill the international level of management discipline so that the alumni of our fund not only reap the financial benefits but also brace for the growing pain early on so that they are well prepared for the next level of scrutiny, hopefully with international investors,” he added.

Yamani believes that the involvement of IMM and Shorooq’s Asia Pacific investor base will give them the opportunity to experience and be part of Islamic structured transactions.

Sean Jinn said that IMM Investment Global doesn’t view Sharia compliance as a big hurdle as long as their target companies don’t fall short of qualifications both economic and legal.

“We are keen to engage our local network ranging from partners, legal advisors, consultants and investment bankers to review each deal, if necessary,” he said. “We at IMM went through Islamic finance structure with top legal advisors as well as local financiers. We understand it is a local practice that we rather need to adapt in the Middle East.”

Growing number of VC debt providers

Shorooq’s entrance into the VC debt market is not in isolation. The number of debt financing providers to regional-based start-ups and early-stage firms is growing.

In July, Israel-based Liquidity Capital, a fintech and fund manager, announced a joint venture with Dubai-based YAS Investments to launch the YAS Liquidity Fund, a $100 million MENA-focused venture debt fund based at ADGM.

Others like Saudi Venture Capital Company (SVC), a quasi-governmental investor, said last month it was teaming up with angel investors to launch new investment products including debt funds for start-ups and early-stage companies.

MENA first but global long-term

The Nahda Fund I will primarily focus on the MENA and Pakistan first, although they will look at opportunities in markets like Turkey and Bangladesh selectively.

“Although there are opportunities in Malaysia, Indonesia, these are outside of our key regions at the moment,” said Yamani. “We will be looking outside of the GCC over the next few years.”

Despite this growing activity, Yamani maintains that the venture capital industry is still quite nascent in the MENA.

“Historically, MENA investors needed to be comfortable with what they know,” he said. “On the debt side we have lots of low hanging opportunities which make it more attractive to target regionally and by extension support our ecosystem.”


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