Islamic Finance

Securities Commission Malaysia releases tool to assess Shariah compliance of MSMEs

KUALA LUMPUR - Shariah advisors and operators of alternative financing platforms will get better guidance for screening the Shariah status of unlisted micro, small and medium enterprises (MSMEs) with a new assessment mechanism developed by Securities Commission Malaysia (SC).

The Shariah Screening Assessment Toolkit features a series of questions using a methodology devised specifically for MSMEs that has been endorsed by the SC’s Shariah Advisory Council (SAC).

The answers to the questionnaire provide an estimation of the MSME’s exposure to non-halal business activities and financial practices including interest-bearing loans. The SAC has established benchmarks for each of these within the tool to determine a business’s Shariah compliance.

“We anticipate that the introduction of the tool will encourage more Shariah-compliant offerings on alternative market-based fundraising platforms,” said Zaid Albar, chairperson of the SC at the launch of the toolkit on Thursday (August 5).

“It will also result in more diversified Islamic investing across asset classes and economic sectors and enable end-to-end Shariah-compliance among MSMEs in the halal sector.”

The Halal Development Corporation (HDC) is keen to support the SC’s initiative and give Malaysia’s estimated 200,000 halal-related businesses better access to Islamic alternative capital markets at a time when many have been struggling to secure loans from banks.

“MSMEs can benefit greatly from the financial capital market that can be generated via Islamic funding mechanisms such as equity crowdfunding (ECF) and peer-to-peer (P2P) financing platforms,” said Mahmud Abbas, chairperson of the government-run agency charged with promoting Malaysia’s commercial halal agenda.

Nevertheless, Mahmud also acknowledged that these alternative instruments have “yet to reach their true potential”.

The introduction of ECF and P2P financing frameworks by the SC in 2016 has provided businesses and entrepreneurs, particularly MSMEs, with additional fundraising avenues through the capital market.

That was after a funding gap of 80 billion ringgit was identified in the Malaysian MSME sector, with banks increasingly wary of offering finance to a segment that accounts for 40% of Malaysian GDP.

Over the last five years, the SC estimates that alternative market-based fundraising platforms have come to the assistance of thousands of MSMEs. Last year was a turning point for these, in the midst of the pandemic, when ECF grew by 457% and P2P saw a 20% increase, both over 2019.

By the end of the 2020 financial year, ECF had raised almost 200 million ringgit through 159 successful campaigns; between 2017 and 2020, P2P raised over 1.1 billion ringgit through 15,862 successful campaigns, according to the SC’s last annual report.

The number of Shariah-compliant solutions by these platforms has grown, and today there are six platform operators providing Shariah-compliant alternative debt instruments.

“We expect this rising trend to continue with increased interest in Shariah-compliant offerings from potential issuers, as well as investors. Therefore, the SC is fully committed to facilitating a conducive funding ecosystem for the development of the halal economy,” said Zaid.

Nevertheless, ECF and P2P fundraising have yet to take off in Malaysia as they have done in other countries, according to Tunku Danny Mudzaffar, founder and chief executive of MicroLeap, a local P2P platform that enables MSMEs to raise from 1,000 ringgit to 50,000 ringgit in financing.

“You have to understand that these are always going to be seen as alternative financing instruments, and are not part of the main financing space,” he said in response to a question from Salaam Gateway.

“If you look globally, in say the UK and U.S., the alternative financing space accounts for about 20% of the financing landscape. In Malaysia, the last figure I saw was we are only 3-5% of total financing landscape, so there is room for growth.”

ECF and P2P platforms such as MicroLeap are not as strict as banks, although they are still required to do due diligence on the businesses seeking finance through their sites. They enable companies that may have previously been turned down for loans faster access to funds, albeit at a higher profit rate—typically from 12-15%, compared to banks that charge 6% per annum.

For instance, a woman who had operated a fried banana stall in Johor Bahru for 30 years approached MicroLeap after a bank refused her application for 40,000 ringgit to be repaid over 36 months.

“She had only formalised her business two years before, and the bank wouldn’t accept that she had run a successful business for so long. She came to us and got P2P funding in two weeks,” said Tunku Danny.

“You need to assess the trade-off. Do you want more speed and easier financing versus a profit rate that is higher than in banks?”


To screen the Shariah status of MSMEs in the unlisted market, the SC’s new toolkit looks at the percentage contribution of Shariah non-compliant activities to a business’s revenue before profit.

If these amount to below a 5% threshold for activities such as income from liquor, tobacco and dividends from non-halal investments or a 20% threshold for rental received from Shariah non-compliant activities, a business may be considered Shariah-compliant.

The toolkit also looks at financial ratios setting benchmarks at below 33% for cash over total assets and below 49% for debt over total assets.

Such contributions have deliberately been set lower than they would be for publicly listed companies, according to Dr. Aznan Hassan, deputy chairman of the SC’s SAC, which sets the benchmarks.

He believes this mechanism for the assessment of the Shariah nature of MSMEs is the first of its kind in global Islamic finance, and it will make it easier for alternative investment platforms and Shariah advisors to decide on the suitability of companies to access their services.

“When we looked into it, we believed we should approach SMES differently because when they want to start to do business, their understanding of Shariah may be lacking,” said Dr. Aznan.

“Our intention was very simple: for us to allow MSMEs to tap into the Islamic capital market.

“When they see the value of Islamic finance and the Islamic capital market will help them to be able to grow, we believe, in that situation, they will continue to use the Islamic approach, and the level of conventional approach will go down.”

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