October - December 2008

Noor Islamic Bank – Potentially another ‘Dubai’ Story Guest Column

Credentials, challenges and opportunities for Noor Bank within the SME scenario and this competitive
regional market
A new start up with the publicly stated Despite the booming economy SME’s access to nancing remains
ambition of being the world’s largest limited. The question remains as to why the banks are hesitant to
nancial services player, Noor Islamic cater to this client base. In order to understand this we need to
Bank (NIB) is no ordinary startup with a look at both the nancier and the borrower’s perspectives.
startup capital of AED 4 Bn, a direct equity
stake by Sheikh Mohammad and his key All banks consider the SME segment to be lucrative, as the
lieutenants on the board. Noor Islamic spreads (banking terminology for the diěerence in deposits
Bank aims to launch full scale banking and nancing for the banks) are far higher (3% to 10%) than
Mr. Ahsan Ali operations across the UAE with three the established corporate businesses. However, when it comes
Head - SME Banking,
Noor Islamic Bank PJSC
business lines Consumer, Corporate and to actual nancing the banks shy away and prefer dealing with
treasury/FI; in excess of 75 products, a established players.
distribution foot print of 8 branches and over 100 ATMs.
From the SME perspective the cost of nancing from the banks is
NIB has a focussed business banking division (Noor Business) prohibitive and access to nancing at best tedious and diĜcult.
dedicated to serving SME entities. What sets NIB apart is Noor Unlike the big corporate concerns the products available are oě
Business that is a key focus area for the bank. Instead of taking the shelf solutions and oěer liĴle or no customization.
the traditional approach of exhausting the bank’s balance
sheet on big ticket nancing activities (a common regional
phenomenon), NIB has dedicated a substantial portion of its Bank’s Perspective Customer’s Perspective
resources to develop products and services for the SME segment.
Unknown entity, unknown auditors, Starting out in business, good cash
The bank denes SME as any entity with a revenue turnover of liĴle or no collateral, limited track ows, conrmed orders, available
AED 0.5 Mn to AED 90 Mn. The interesting fact is that the bank’s record bank statements, big auditors too
solutions are not limited to established players. expensive and not interested

“Noor Business has a strong undercurrent of Corporate Social

Responsibility, as a local bank we are keen to participate in
the development of the UAE. Secondly, as a startup concern Informal management and lack of Specialized knowledge and a passion
we actually understand the challenges and frustrations our succession planning to succeed, formalization will take
customers have had to endure when they launched their place along the way

businesses. Therefore we have put together programs and

products with the help of our partners which will cover SMEs High risk, a high probability of No access to nancing, availability
at any stage of their life cycle. So for us you are a customer if losing money at unaěordable cost, nancing costs
you t either our commercial aspirations or developmental throĴle the business
commitments.”

Criteria
Employee
Annual Annual
Plant & Fixed Equity Productive
Limited understanding of nancial In business to make a prot, limited
planning, cash ow management, training but decent practical exposure,
Turnover Balance
size machinery Capital Status Assets
Region Receipts Sheet tota;

marketing and accounting as a beĴing my own assets on the success

EU business

US

UAE Small amounts of nancing Needs specic to business, require

translates to high costs for business advisor rather than a sales
Singapore customized nancing, oě the shelf person, need continued support and
product, salesman approach, invest one interface to the bank
India in collection staě

Pakistan

Bangladesh

Defind Factors
NIB recognizes the divergence of views and therefore has
Factors not considerd
diěerentiated its business model by:

As per the table for the UAE an SME entity is not dened 1. Discarding the ‘salesman approach’ by developing diěerent
in terms of the factors outlined by any central authority or product distribution channels which the customers trust, e.g.
regulatory agency. In the absence of a universal denition each a free zone entity would be able to bundle nancial solutions
bank denes an SME on the basis of its own business model. This along with the regular services it provides. This ensures
detracts from the developmental aspect as sectoral or segmental continuity of contact coupled with business advice.
development strategies and consequently specialized programs 2. Providing a ‘one window’ solution where the businesses are
cannot be formulated. NIB is working with multiple commercial able to renew licenses, develop feasibility reports, undertake
and developmental organizations to formulate an SME Forum training, fulll labor requirements etc, apart from nancial
focussed on the long term development of SME concerns. products.

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 3. Building a supply chain network, where suppliers to
corporate concerns have the ability to obtain nancing
facilities without any collateral requirements.
4. Business networking and market access opportunities,
where through NIB SME concerns can build a sustainable
business through protected market places.
5. Access to private equity, angel investors and development
nance institutions through our trusted network.
Case study of the Malaysia market as a model for
SME nancing
Despite NIB’s two pronged approach (commercial and
developmental) the SME space requires a far greater level of
commitment for these enterprises to ourish.
As an emerging market Malaysia has been able to sustain
its growth momentum by focussing a large chunk of its
developmental activities within the SME segment. The
nancial sector has been instrumental in supporting SMEs
throughout their life cycle as depicted by the table.
As per the SME Annual Report (2006) a bank’s share of SME
nancing grew to cross the RM 100Bn ($28Bn). This is particularly
signicant as on an annual basis SME nancing is now 44.5% of
the total business nancing that the banks undertake. The SMEs
constitute 99.2% of the total entities in Malaysia and contribute
32% of the country’s GDP.
The key learning points from the Malaysian success story are:
a) Clear denition of what constitutes an SME enterprise
(turnover of RM 5Mn or less and Max of 50 employees. This
is bifurcated into Micro, Small and Medium by sector).
b) An independent body (SME Development Forum) that
coordinates between commercial and developmental
agencies and charts out a long term strategy.
c) Mandatory financing targets for commercial institutions
as well as incentives for meeting them from the central
bank (particularly for the institutions in the growth
phase onwards).
SME – Typical lifecycle (Malaysian Example)
SME Financing Landscape in Malaysia
Various providers to meet SME financing needs
Stages of
Expasion/
Seed Start-Up Growth Established
Graduate to LE
Business
Lifecycle
Devt Fin Ins Commercial Banks
US$0.8 b US$26b total loans o/s to SMEs in 2005
Key Provides of SME Financing
total loans o/s
SMEs in 2008 Leasing & Factoring
US$0.2 b extended in 2005
Small Debt
Restruturing
Venture Capital
48 funds , US$0.7 b func size in 2005
Scheme &
Rehabilation
Govt Funds/Schemes
84 funds, US$6.7 b allocation
Bursa Malaysia
MESDAQ, Second Board & Main Board
6
d) Provide SMEs access to the equity markets for raising
funds in order for them to continue growing.
e) Obtain assistance from development nance institutions,
angel investors and introduce government funds and
schemes to focus on SME institutions in the seed or
startup phase.
The denition of SME under this project is:
Annual Revenue should be ǂ AED 30.00 million
and/or
Paid up capital should be ǂ AED 5.00 million
and/or
Number of employees should be ǂ 50
Benets that SMEs would reap from this project are:
• Separate SME Trading Portal: SMEs would have access to
separate auction /trading area for SME’s under this project on
the Tejari portal. This would enable the SME’s to participate
in the guaranteed Government Procurement Program (GPP)
for SMEs. Currently as per a royal decree all governmental
agencies are supposed to procure 5% of their total purchases
from SME concerns. The bidding process takes place online
on Tejari (B2B portal), however the orders are not segregated
between 95% (open) and 5% (restricted to SMEs).
• Franchising Potential: A rating process would also benet
the franchising of global brands to the UAE entrepreneurs,
as well as help local businesses to franchise their brands.
Shortlisted entrepreneurs will have access to start up
nancing for seĴing up franchises or nancing to franchise
their existing business activities.
• Global Rating: Dun & Bradstreet an International
Credit rating agency would provide the SMEs with an
internationally accredited rating. This will enable the rated
entity (SME) the ability to tap into nancing with various
banks. The rating standard would ensure that all banks view
the concern with the same standards.
• Access to Financing: Noor Islamic bank would provide
nancing to the rated SMEs preferential rates compared to
the market.
• Training: Once the businesses have been proled and their
weakness have been identied during that process, project
partners in conjunction with training & polytechnic
institutes would be engaged to help rectify and strengthen
the productive resources employed by the businesses.
Decline/ • Business matching: The shortlisted concerns will be provided
Distress
access to guaranteed business through the SME Forum’s
network, ensuring sustainability of the SME venture.
The project has been on for the last 6 months and is anticipated
Fund
to be launched in November 2008.
US$54 m
Denition of “Discounting”, how it works, how it can be
applied (small example of a business that could benet
from the discount system; how the math works).
Discounting of receivables is one of the key products required
for SME concerns. The biggest constraint to any SME business is
 October - December 2008

the receivables being tied up with its customers. This can happen because of the trade terms (payments
due aĞer 60 days), contingent payments (event A happens for the payment to be made) or simply delays
(common in the UAE market).

Discounting is a process where a bank undertakes the responsibility of recovering the receivables on the
due date from the SME concern’s customer and pays an equivalent amount (less charges and fees) to the
SME concern today.

For example ABC Stationery suppliers provide goods worth AED 500,000 to a large corporate concern.
The payment is supposed to be received in 60 days and ABC’s prot margin is 10%. This means that ABC
has invested AED 450,000 of its own money in the order. Assuming that this amount was most of the free
cash available, ABC is unable to meet any other orders till the payment is received from its customers.
Here a bank can come in and ‘discount’ the receivable, i.e. provide AED 490,000 against the receivable
of AED 500,000 today (the diěerence being fees and charges). This frees up the cash for the SME to use
for other orders. The fees and charges need to be oěset against the opportunity cost of leĴing go of
incremental business. To clarify if ABC avails discounting it generates a prot of AED 40,000 versus AED
50,000, but it can undertake another order of a similar size and create a prot margin within the next 60
days as opposed to aĞer 60 days.

Discounting can be with recourse (in case the SME customer does not pay, ABC has to pay the money
back), or without recourse (the bank carries the default risk for ABC’s customer). What facility ABC
would get is a factor of ABC’s relationship with the bank, ABC’s transactional history, the relationship
ABC shares with its customer and the customer’s credit rating with the bank.

How do Noor Bank Islamic products sit within the SME remit? What has been the history
of Islamic products within SME consumer banking? What are the benets?
Islamic Finance has been rapidly evolving over the last few years. From basic Morahaba (Bank buys and
sells to the customer at a prot on deferred payments) transactions today an Islamic structure exists for
almost all conventional banking products. Depending on the Shariah interpretation of the Shariah Board
governing any Islamic institution, the Islamic Finance has equivalent products for Trade, Installment
Finance, Discounting of receivables, Liquidity Management, FX, Derivatives, OverdraĞ facilities and
Investments.

NIB has over 20 product solutions available to the SME customer which are available as either ‘Oě the
shelf’ or as a ‘Tailored’ oěering. All of these solutions follow Shariah approved Islamic processes, legal
contracts and accounting standards.

Islamic Finance has the following advantages over conventional means:

• Transparent charges and contractual terms, under Islamic Finance there cannot be any ‘hidden’
charges or fees. As an example any penalty fees recovered by an Islamic bank needs to be given to
charity. This reduces the likelihood of unfair penal charges as the money does not go into the bank’s
income.
• Ethical returns - an Islamic institution ensures that the use of funds is not in avenues which are
detrimental to the society in general.
• A greater understanding of the business needs and increased involvement, Islamic structures
by design involve the bank in actual transactions through either equity or buying on behalf of
the customer. This forces the bank to aĴune itself to the customer’s business and raise its level of
involvement to ensure delivery.

Noor Islamic Bank PJSC, Grosvenor Tower, Sh Zayed Road,

P.O. Box 8822, Dubai, United Arab Emirates
Oě: +971-4-4268096. Fax: +971-4-3653212
Email: ahsan.ali@noorbank.com,
Web: www.noorbank.com

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