ITALIAN SMEs: Development opportunities in the real economy of Islamic Finance

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The following post is by Dr. GIANNI GREGORIS – Business consultant for SMEs, enterprise network manager for assisting in the processes of growth, internationalisation, structured finance, web marketing and social networks.

Edited by Alberto Di Gennaro

Analysis of the size characteristics of Italian SMEs: there are 3.8 million Italian SMEs with 12 million workers and are divided into three classes of size, consisting of micro, small and medium-sized enterprises, a classification developed on the basis of number of employees, turnover and total assets on the balance sheet. Only 10% of small and medium-sized Italian enterprises operate in the manufacturing sector, but they maintain a strong position of dominance with one in four employees working there, compared with the EU average of one in five. Nearly one-third of the value added is generated by small and medium-sized enterprises, compared with one-fifth in the EU. It must be said, however, that the incidence of micro-enterprises, or those with turnover of less than 2 million euro and not more than 10 employees, account for 94.6% of all small and medium-sized enterprises and contribute more to employment and value added than in other countries of the European Community, about half of total employment and one-third of value added.  In general, Italian SMEs are characterised by strong know-how in all manufacturing sectors, as well as in high-tech sectors and renewable energy, although microenterprises focus on a medium-low level of technology and on less knowledge-intensive services.  In the European Union, large enterprises were better able to handle the economic and financial situation, returning to previous pre-crisis levels, registering only a modest decline in the number of employees. Small and medium-sized enterprises, however, which were at a disadvantage because of their dimensions, had an extremely negative impact in terms of a decrease in the number of workers, turnover and value added.

The Islamic market and Halal certification: Italy could aspire to become the leading exporting country to new emerging markets such as the Islamic market, consisting of 57 Islamic States of the Organisation for Islamic Cooperation (OIC), to which only products with HQS (Halai Quality System) certification can be exported and covering the following sectors: food, cosmetics, body care and personal hygiene, chemicals, pharmaceuticals, healthcare, catering, hotel, hospitality, travel and territorial logistics, finance and insurance. The Islamic market, based on the real economy and financed by Islamic finance, is growing by 15% each year and involves about two billion Muslims in the world for a value estimated at 15 to 16 billion dollars a year. The main Islamic countries and areas affected by exports are Malaysia, Indonesia and Southeast Asia, but also the United States and Europe where there are many Muslims. Not to be underestimated are the opportunities presented by the Islamic market in Italy, with its five million Muslims, where turnover is gradually increasing thanks to Halal-certified products. There is also a growing share of the market which covers non-Muslim consumers, who are buying these products because they have understood that products with Halal certification mean greater controls and quality.

Growth in size and business network: the small enterprise must first initiate change projects oriented towards programmes of growth in size, which can be achieved through the best practice of business networks. It will also be necessary to work on development projects in digital communications such as e-commerce, web marketing and social networks.

Islamic finance and mini-bonds to finance the growth and internationalisation of Italian SMEs: growth in size and processes of internationalisation require investments in venture capital but also sources of debt financing, and Islamic finance may represent an important resource for financing business and play a key role if Italy were to adapt the Consolidated Law on Banking and Credit to the Shari’ah. The new financial instruments in force in Italy , such as mini-bonds, also supported by guarantee funds for greater protection of investors, created to finance new SME development projects, diversifying from sources of alternative financing to the classic banking channel which has a funding-gap (negative difference between deposits and loans) of 200 billion euro. If we consider that small Italian enterprises depend on bank loans for a figure that is double that of competitors in northern Europe, we can understand how necessary it is for them to have a source of funding such as Islamic Finance as an alternative to the traditional banking channel which does not always employ capital for projects intended for the real economy. Five percent of the emissions of mini-bonds were allocated to internationalisation out of a total of 63 mini-bonds issued for a total of 635 million euro. On the other hand, there are 29 funds for mini-bonds with an estimated target collection target of 5.45 billion euro (source: Mini-Bond Observatory of the Polytechnic University of Milan). In order to strengthen the endowment of funds, it would be necessary to facilitate the introduction of Islamic funds to finance mini bonds. The processes of growth in size, structured finance operations and Halal certification are the main operational instruments that small and medium-sized enterprises will have to know how to equip themselves with in order to export successfully to the Islamic market.