Islamic SME financing sees Mauritius royalty program as viable model
The program is structured in a way that shares the risk and reward between the Mauritian government and the companies on the basis of a ‘revenue royalty’ payment, after a two or three year moratorium, on the incremental revenue the business gains upon receiving assistance from the MBGS. (Image: Frontier Market Network)
The Mauritius Business Growth Scheme (MBGS) established by the Mauritian government to support and provide access to financing for SMEs serves as a great example on how to better incorporate risk-sharing products into Islamic SME financing.
Launched in 2010, the MBGS started operations in 2011 and operates separately from the Ministry of Business, Enterprise and Cooperative businesses.
The program is structured in a way that shares the risk and reward between the Mauritian government and the companies on the basis of a ‘revenue royalty’ payment, after a two or three year moratorium, on the incremental revenue the business gains upon receiving assistance from the MBGS.
It may be noted that, under Islamic banking, interest rates cannot be excessive and there are no additional penalties for late payment, as this is forbidden by the Shariah principles that govern Islamic banks.
Accordingly, Islamic finance has faced challenges such as how to move into innovative areas of financing that allow greater sharing of business risk with the companies being financed.
This is where the Mauritius royalty model comes to the rescue with two programs aimed at businesses of different sizes. For startups, financing is provided in the form of a stipend of up to Rs 20,000 per month for up to a year while the Technical Assistance 90:10 Payback Scheme funds 90% of the cost, up to Rs 3 million of technical assistance, business development, research and development, and quality certifications.
After the two- to three-year moratorium on payment, the SMEs are obligated to pay a royalty of the company’s incremental revenue growth based on its revenue level before it participated in the MBGS, as also submit annual audited financial reports. For startup financing, a business will pay royalty until it has returned 120% of funds provided, while in the 90:10 program it must continue paying until it returns 180% of funds provided.
As each of these program offers a different approach coming from within the conventional financial system, Islamic finance can adopt it with fewer complaints about product replication being driven by those that start with a debt-based mindset and replicating the economics of an interest-based loan.
Moreover, regulators, bankers, consumers and other stakeholders are satisfied with these hybrid products vis-à-vis products that emerge as being specifically Islamic. This is because these hybrid products trace their origins to conventional banking and the interest they have attracted from international organizations could make them easier to integrate into existing regulatory rules where they might be otherwise disadvantaged.
Incidentally, the international development community including the World Bank and USAID have expressed interest in the program and are actively looking into whether it can be reproduced in the MENA (USAID) and Southeast Asia (World Bank) regions.
Specifically, given the success of the Mauritian experiment, it is anticipated that SMEs in countries like Morocco can learn from this program. In Morocco, Islamic finance is new and financial products may not be able to offer competitive products on a straight price basis.
It is here that the flexibility of a private-sector-driven yet government-supported program could allow Islamic banks to make inroads into the SME sector.