Bank Negara Malaysia (BNM) Assistant Governor Adnan Zaylani Mohamad Zahid said the country critically needs trade-based solutions that will help ease the pandemic-induced liquidity constraints facing businesses.
He noted that the COVID-19 pandemic has forced the government to introduce stringent containment measures, which led to subdued domestic demand and eventually to a liquidity squeeze among Malaysian businesses, especially the small and medium enterprises (SMEs), reported Bernama.
“To stay afloat, some companies have had to resort to increased debt to meet their payment obligations,” he said during the launch of the Islamic Trade Finance Report of World Bank.
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Although several measures have been rolled out to reduce the burden of SMEs, such as support grants, wage assistance programmes and deferment of financing instalments, such measures were merely temporary and prolonged assistance of such form may be unsustainable, said Adnan Zaylani.
He pointed that overdependence on debt-based instruments reduced businesses’ financial flexibility in supporting their recovery.
He explained that trade-based solutions provide a viable option where funding is specifically based on the lifecycle of production, enabling companies to secure short-term liquidity through the sale of current assets like inventories and receivables to financial institutions without raising their indebtedness.
The structuring of such solutions, however, entailed new sets of risks for the financial institutions.
“In contrast to debt financing, the financier is exposed to risks beyond credit, such as inventory and market risk, which calls for additional safeguards for risk mitigation, different approaches to risk management, infrastructure and practices,” said Adnan Zaylani as quoted by Bernama.
“Given the nature of the exposures, this warrants Islamic financial institutions (IFIs) to take an exploratory approach to new trade-based offerings. This allows for a better understanding of the risks and their dynamics, thus enabling IFIs to put in place the appropriate framework and policies.”
He added that the central bank, in particular Islamic finance, is also faced with the important thrust of helping businesses embrace sustainability as well as build resilience to climate change.
As a trading nation, Malaysia may lose US$65.3 billion (RM275 billion) worth of annual export revenue if it does not transition into a low-carbon and climate-resilient economy comes 2025, said Adnan Zaylani.
In fact, trade partners had started imposing expectations on sustainability as preconditions to a transaction.
“It is clear that sustainability is no longer a nice-to-have but an imperative business consideration critical for long-term survival,” he said.
“It is encouraging to see that the financial sector is stepping up on this front, including via the offering of sustainable finance solutions and assistance to companies in their transition journey. Islamic financial institutions have led and continue to lead through value-based intermediation practices.”
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