The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries

The core principles of Islam lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have nots. Islamic finance addresses the issue of "financial inclusion" or "access to finance" from two directions -- one through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and the other through specific instruments of redistribution of the wealth among the society.

Use of risk-sharing financing instruments can offer Shariah-compliant microfinance, financing for small and medium enterprises, and micro-insurance to enhance access to finance. And redistributive instruments such as Zakah, Sadaqat, Waqf, and Qard-al-hassan complement risk-sharing instruments to target the poor sector of society to offer a comprehensive approach to eradicating poverty and to build a healthy and vibrant economy.

Instruments offered by Islam have strong historical roots and have been applied throughout history in various Muslim communities. The paper identifies gaps currently existing in Organisation of Islamic Cooperation (OIC) countries on each front, that is, Shariah-compliant micro-finance and financing for small and medium enterprises and the state of traditional redistributive instruments. The paper concludes that Islam offers a rich set of instruments and unconventional approaches, which, if implemented in true spirit, can lead to reduced poverty and inequality in Muslim countries plagued by massive poverty.

Therefore, policy makers in Muslim countries who are serious about enhancing access to finance or "financial inclusion" should exploit the potential of Islamic instruments to achieve this goal and focus on improving the regulatory and financial infrastructure to promote an enabling environment.

World Bank.Author:  Mohieldin, Mahmoud ; Iqbal, Zamir ; Rostom, Ahmed ; Fu,Xiaochen.Document Date:2011/12/01.Document Type:  Policy Research Working Paper.Report Number:  WPS5920.Volume No:  1 of 1

The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries

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New EU fundraising rules:boosting venture capital for SMEs and easing access to credit

European Commission. Press release.Brussels,07 December 2011. Access to finance is essential to enhance the competiveness and growth potential of SMEs. In the context of the current crisis, marked by a fall in lending to the real economy, it is increasingly difficult for such companies to access loans. For this reason the European Commission is presenting a strategy to promote better access to finance for SMEs with an EU Action Plan (see MEMO/11/879) which includes increasing financial support from the EU budget and the European Investment Bank and a proposal for a regulation setting uniform rules for the marketing of venture capital funds.

The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation "European Venture Capital Fund" across the EU. No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.

In addition to the measures presented last week, including €1.4 billion of new financial guarantees under the Programme for the Competitiveness of Enterprises and SMEs (COSME (2014-2020) - IP/11/1476), the European Investment Bank will keep its SME loan activity at a sustained pace, close to the 2011 level of €10 billion.

European Commission Vice President Antonio Tajani, responsible for Industry and Entrepreneurship, said: “Easing access to finance for SMEs is priority number one to get out of the crisis. Our Action Plan underlines that Europe is doing its utmost to improve SMEs' access to finance. We aim to strengthen our EU financial instruments for SMEs and to improve their access to finance markets.”

Internal Market Commissioner Michel Barnier said: "We need more venture capital in Europe. By helping companies become more innovative and competitive, venture capital will create Europe's companies of the future. In order to support the most promising start-ups, venture capital funds must become bigger and more diversified in their investments. Today's proposals will help develop this emerging market."

SME Action plan

Europe's economic success depends largely on the growth of small- and medium- sized enterprises (SMEs) achieving their potential. SMEs contribute more than half of the total value added in the non-financial business economy and provided 80% of all new jobs in Europe in the past five years. The European Commission is presenting in an Action Plan the various policies that it is pursuing to make access to finance easier for Europe's 23 million SMEs and to provide a significant contribution to growth. Proposed regulatory and other measures aim at maintaining the flow of credit to SMEs and to improving their access to capital markets, by increasing the visibility to investors of SME markets and SME shares, and by reducing the regulatory and administrative burden.

Venture capital for SMEs

Venture capital, which provides early finance to start-ups, forms an important source of long-term investment to young and innovative small- and medium-sized enterprises (SMEs). However, small fund sizes and only being able to provide low levels of capital have prevented them from playing a more important role in start-up financing. As a result, SMEs continue to depend on short-term bank loans. But in the context of the current crisis, marked by a fall in lending to the real economy, it can be very difficult for such companies to access this type of loan.

Evidence examined by the Commission shows that a company with long-term venture capital investors is more successful than a company that needs to rely on short-term finance from banks. This is commonly attributed to the rigorous screening that a venture capital fund undertakes prior to investing in a company. But the average European venture capital fund is small and far beneath the optimal size necessary for a diversified investment strategy to make a meaningful capital contribution to individual companies and thereby produce real impact. While the average venture capital fund in the European Union contains approximately €60 million, a U.S. counterpart has a fund size of €130 million on average.1 Economic studies show that venture capital funds can make a real difference for the industries they invest in once their size reaches approximately €280 million.2 Furthermore, U.S. venture capital funds invested around €4 million on average in each company; whereas European funds could only muster investment volumes of €2 million on average per company. Early-stage capital investments in the U.S. were on average €2.2 million per company while early-stage capital contributions in the EU were on average €400 000 per company. 

Bigger venture capital funds mean more capital for individual companies and will give the funds the ability to specialise in particular sectors such as information technology, biotechnology or health care. This is turn should help SMEs have a more competitive edge in the global marketplace.

See also MEMO/11/879
More information: http://ec.europa.eu/enterprise/policies/finance/index_en.htm

Key elements of the proposal on venture capital:

The proposal lays down a uniform "single rule book" governing the marketing of funds under the designation "European Venture Capital Funds". A "European Venture Capital Fund" is defined by three essential requirements: 1. It invests 70% of the capital committed by its sponsors in SMEs; 2. it provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and 3. it does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted). All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

The proposal creates a uniform approach for the categories of investors which are eligible to commit capital to a "European Venture Capital Fund". Eligible investors will be professional investors as defined in the 2004 Markets in Financial Instruments Directive (MiFID - see IP/04/546) and certain other traditional venture capital investors (such as high net-worth individuals or business angels). The uniform rules on venture capital investors will make sure that marketing can be tailor-made to the needs of these investor categories.

The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive (AIFMD - see MEMO/10/572) as the existing passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million. In addition, the rules of the AIFMD create a legal framework typically aimed at hedge funds and private equity firms, and are less suitable for the typical venture capital fund which would get a tailor-made regime.

Next steps:

The proposal on Venture Capital now passes to the European Parliament and the Council (Member States) for negotiation and adoption under the co-decision procedure.

See also MEMO/11/880.

Proposal for a Regulation on European Venture Capital Funds

The proposal sets out a new “European Venture Capital Fund” label and includes new measures to allow venture capitalists to market their funds across the EU and grow while using a single set of rules. Every fund using the label will have to prove that a high percentage of investments (70% of the capital received from investors) are spent in supporting young and innovative companies. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger. Bigger venture capital funds mean more capital for individual companies giving them the ability to specialise in particular sectors such as information technology, biotech or life-science. This is turn should help SMEs have a more competitive edge in the global marketplace.

Citizens’ summary

FAQs

Proposal of the Commission(Provisional version. The final text will be available soon)

Impact assessment:

• Full text(Provisional version. The final text will be available soon)
• Summary(Provisional version. The final text will be available soon)

More information:

http://ec.europa.eu/internal_market/investment/venture_capital_en.htm

Contacts :Chantal Hughes (+32 2 296 44 50)
Carlo Corazza (+32 2 295 17 52)
Carmel Dunne (+32 2 299 88 94)
Sara Tironi (32 2 299 0403)

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Costa Rica.Public Finance and Competitiveness Development Policy Loan Project

Ratings for the Public Finance and Competitiveness Development Policy Loan Project for Costa Rica were as follows: outcomes were satisfactory; risk to development outcome was low or negligible; Bank performance was satisfactory and borrower performance was also satisfactory.

Some lessons learned includes: the operation was developed within the objectives of the Government's medium-term plan, which establishes clear priorities developed through wide consultation with stakeholders and broader civil society.

The priority legislative agenda was developed in consultation with the Parliamentary leadership on an ongoing basis. Agree up front with the government and other financial partners on a coordinated accountability framework. Choose actions critical for achieving results as prior actions for disbursement.

World Bank. Document Date:2011/03/08. Document Type:Implementation Completion and Results Report.Report Number:ICR1703.Volume No: 1 of 1

Costa Rica.Public Finance and Competitiveness Development Policy Loan Project

A Theory of Domestic and International Trade Finance

This paper provides a theory model of trade finance to explain the "great trade collapse." The model shows that, first, the riskiness of international transactions rises relative to domestic transactions during economic downturns, and second, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis.

The basic model considers banks' optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism of the model.

Ahn, JaeBin. November 01, 2011.Working Paper No. 11/262
This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

A Theory of Domestic and International Trade Finance

Job growth and finance: are some financial institutions better suited to early stages of development than others?

This paper combines firm-level data from 89 countries with updated country-level data on financial structure, and uses two estimation approaches. It finds that in low-income countries, labor growth is swifter in countries with a higher level of private credit/gross domestic product; the positive effect of bank credit is especially pronounced in industries that depend heavily on external finance; and banking development is positively associated with more physical and human capital investment.

These findings are consistent with predictions from new structural economics. In high-income countries, labor growth rates are increasing in the level of stock market capitalization, which is also consistent with predictions from new structural economics, although the analysis is unable to provide evidence that the association is causal. It finds no evidence that small-scale firms in low-income countries benefit most from private credit market development.

Rather, the labor growth rates of larger, capital-intensive firms increase more with the level of private credit market development, a finding consistent with the history-based political economy view that banking systems in low-income countries serve the interests of the elite, rather than providing broad-based access to financial services

Author:Cull,Robert;Xu,L.Colin. Document Date: 2011/11/01.Document Type:  Policy Research Working Paper. Report Number: WPS5880.Volume No:  1 of 1

Job growth and finance: are some financial institutions better suited to early stages of development than others?

World Bank.India,The project Karnataka Watershed Development II is now in the pipeline.

As noted in the India Country Assistance Strategy (CAS) 2009-12, national Gross Domestic Product (GDP) grew at more than 9 percent per annum from 2004-2007. High rates of investment and savings and strong export growth, and rapid growth generated substantial public and private resources for investment and development programs.

From 2008 to 2010, average annual GDP has moderated to approximately 6.5 percent due to the global recession. More than 400 million people still subsist on under USD1.25/day, with the majority living in rural areas and dependent on agriculture or other land-based resources.

Agriculture accounts for around 16 percent of Indian GDP. Approximately 60 percent of India’s population depends on agriculture for primary livelihood, largely from rainfed agriculture.

Out of a net sown area of 141 million hectares in India, approximately 68 percent are under rainfed cultivation, mostly in arid and semi-arid areas. Thirteen states, including agriculture as used in the PAD includes crops, horticulture, livestock and agro-forestry, all components of rural land-use in India.

Document Date:  2011/11/09.Document Type: Project Information Document.Report Number: AB6853.Volume No: 1.Country: India. Doc Name: India-Karnataka Watershed Development II

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