Opportunities for Expanding Islamic Trade Finance

4.2 Key factors to get major Malaysian exporters to utilize ITF

Product customization to cater to a different level of needs of clients is crucial.

Digitalizing ITF products and services with standardization and simplification

Business enterprises still need to use financial institutions’ end-to-end services for specific
market segments.

Help to cater to
the issues of complexity in satisfying different shari’ah requirements and ensuring that transactions are
processed on time.

This is where product customization is essential.

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MNCs will mostly use internal resources to finance their international business transactions, mainly when dealing with their regular international clients. Inter-company credit will be used when the buyer directly accords the credit to the seller (buyer’s credit), or inversely by the seller to the buyer (seller’s credit), depending on the ability of one or the other to extend credit and the moment at which the two parties agree that the final payment is due.

4.4 Digital ITF and a Global Role for Malaysia

1. The global supply chain environment has become more complex.

Production and supplies are now integrated through supply chain networks, leading to companies using online trade finance transactions.

These platforms offer transparency, efficiency, reduced costs, and time, enabling transactions to be completed in minutes.

2. Challenges which hinder digitalization.

i. There is not much volume as most ITF activity was conducted between Muslim-dominated economies or to a certain extent, between OIC members.

In 2016, OIC total trade reached $3.1 trillion, with $141 trillion in exports and $165 trillion in imports.

Intra-OIC trade accounted for 19.3% of total trade, with steady growth in export flows.

ii. Public-listed companies and large corporations have inter-firm credit options for global trade, while SMEs face challenges in financing their activities.

Supply-demand mismatch arises due to regulatory burdens, low bank credit ratings, and lack of awareness among SMEs about digital finance, limiting trade finance access and growth.

4.3.2 Role of trade in boosting recovery from the adverse effects of the pandemic

3. Challenges in Traditional Trade Financing

i. Manual processes on contract creation

ii. Higher Compliance Risk on KYC and AML

iii. Time consuming

iv. Higher Fraud Risk

v. Duplications

vi. Slower processess may affect supply chain

vii. Tedious reconcilation and veriication processes

viii. Higher potential of slower release of payment

4. Trade finance.

Global supply chains require extensive paperwork and documentation for various activities, including issuing letters of credit, lending, and financing.

Business operators face challenges like interoperability, connectivity, multiple jurisdictions, regulatory requirements, cybersecurity, fraud, and process inefficiencies.

5. Digitalization.

Add value by improving efficiency and transparency and transforming traditional paper-based processes to a fast and efficient digital experience

i. enhances cash forecasting, credit collection, and working capital deployment.

ii. Improves business credit control, fees, and application speed without additional financing.

iii. offers Islamic transactions opportunity.

6. Blockchain as the next step of revolutioning ITF.

Blockchain: electronic ledger for documented transactions across a network.

4.3.1 Impact of Covid-19 on cross-border transactions

A single blockchain stores all necessary information in a digital document, accessible to all network members.

Global gross domestic product contracted by 4.3 percent in 2020,

Benefits of Blockchain and Digital Trade Finance

The pandemic and its associated restrictions on economic activity, on travel and transportation have shaped the dynamics of international supply chains.

Global trade finance market dropped by 14.83 percent in 2020 to US$7.62 trillion

i. Single platform accessible to all

ii. Instant validation

iii. Free-up working capital

iv. Faster turnaround

v. Reduced perceived risk

vi. Faster financing and supply chain decisiion

vii. Lower transaction cost

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i. Trade can support overall economic recovery and GDP growth;

ii. The diversification, regionalization, and replication of supply chains can lead to new trade relationships that foster global and national growth;

iii. Trade involving the least-developed countries (LDCs) – especially those with limited social protection

iv. Trade involving SMEs and microenterprises can be especially supportive of the recovery, as these segments have been most vulnerable to the crisis.

4.1 Major users and a potential untapped segment of ITF in Malaysia

4.3.3 Potential of ITF in the context of Covid-19 recovery

ITF, like conventional trade finance, can broadly support economic recovery and GDP growth

ITF is asset-based and linked to the value of real assets.

Including ITF as part of an overall pandemic response ties directly to the four levers.

Trade involving least developed countries

Diversification, regionalization, and replication of supply chains

Trade involving SMEs and microenterprises

Islamic finance instruments have been recognized as relevent to Covid-19 recovery

2) The total of Shari’ah-compliant companies

3) The efforts to positioning Malaysia as a global hub for the halal industry

1) The total value of Malaysian Islamic finance assets

4) Export of agriculture

4.1.1 Investment Funds Supporting Islamic Finance

  • Current global environment of low yields for highly rated debt, ITF may represent a significant opportunity.


  • Rated sukuk remains strongly oversubscribed, suggesting a scarcity of fixed-income securities available to Islamic investors


  • The outlook for sukuk suggests ongoing demand, with global sukuk issuance in 2021 expected to be approximately US$150 billion.


  • The issuer-friendly sukuk market, leading IFIs’ strong credit ratings, and the expansion potential for ITF, creating investment products linked to trade finance portfolios could benefit multiple stakeholders


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UDNP has noted that Islamic finance instruments can be part of the recovery across the short, medium and longer terms.

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Support overall GDP growth

The diversification, regionalization, and replication of supply chains can create opportunities for new trade partnerships.

Some LDCs who are OIC members are already significant exporters for whom additional trade finance could accelerate the recovery.

ITF can be important in enhancing trade finance for SMEs and microenterprises.

This may make it possible for SMEs and microenterprises that otherwise would not qualify for credit ( due to a lack of credit history or limited assets) to access finance.

Other LDCs who are OIC members have more nascent export industries, and access to trade finance could help fuel their development.

A companies seek new suppliers closer to home, opportunities for intra-OIC trade can increase.

Trade finance may be especially important for businesses that previously did not utilize bank-intermediated trade finance and instead bought or sold through supplier credit.

One key beneficiary of this financial inclusion has been the SME and microenterprise sector.

4.3.4 Policy and institutional implications

Target LDCs and countries with limited social protection

Target SMEs and microenterprises as recipient of trade finance

Include trade finance as part of the policy response

Include ITF facilities in the response

Policy responses that provide immediate relief and financial support, policy makers can consider trade finance programs.

Policy makers and institutions especially those with an international development mandate may wish to target LDCs and countries with limited social protection when crafting their trade finance policies.

SMEs and microenterprises have similarly been vulnerable, even in more developed economies.

ITF facilities has the important benefit of reducing religious barriers to participation.