Unlocking the Access of SMEs to Capital Markets through Sukuk Enhancement Fund

Turkhan Ali Abdul Manap

13 Sep, 2023


Small and medium-sized enterprises (SMEs) are vital in promoting economic growth, accounting for 90% of businesses, providing 60 to 70% of employment, and contributing 50% of the world’s GDP (World Bank). They are the backbone of societies worldwide, supporting livelihoods, especially among the working poor, women, youth, and vulnerable groups. With the proper support, SMEs have the potential to transform economies, promote job creation, and foster equitable economic growth.

According to the International Finance Corporation (IFC), approximately 65 million businesses in developing countries, representing 40% of formal SMEs, require an additional US$5.2 trillion in financing annually (World Bank). This amount is equivalent to 1.4 times the current global SME lending. Bridging this financing gap requires improving the ecosystem and introducing innovative tools to facilitate financing. SMEs need better access to capital markets and should explore new methods to acquire funding and sustain growth. The Sukuk Enhancement Fund (SEF) proposal by researchers at the Islamic Development Bank Institute (IsDBI) aims to help SMEs access capital markets for sustainable growth and financial resilience.

The Structure of the Sukuk Enhancement Fund

The SEF is a mechanism for risk mitigation through reciprocal contributions among Sukuk issuers by creating a pool of funds. The SEF operates on the principle of reciprocal support, where members make regular contributions, and those who suffer losses are compensated. The Fund does not rely on external guarantees, as members’ contributions are sufficient to meet protection needs. To reduce risks, the SEF creates a pool of funds by collecting contributions from Sukuk issuers. This allows for partial reimbursement to Sukuk holders in the event of distress or default of any individual Sukuk issue. Moreover, the SEF uses accumulated funds to compensate Sukuk holders affected by defaults or payment delays without depending on external guarantees or insurance. The SEF’s flexibility accommodates various issuers, ranging from sovereign entities to large corporations to SMEs. Extensive mathematical evaluations and simulations have been conducted to ensure the practicality and feasibility of the model. The fund has undergone thorough scrutiny to assess its ability to withstand potential default scenarios and various market conditions with resilience. (More information on the SEF is available in the 2022 Annual Report of IsDBI).

Empowering SMEs through the Sukuk Enhancement Fund

SMEs can benefit from the SEF in several ways. First, the SEF improves the risk profile of Sukuk issuance, making it a more accessible option for SMEs with financial limitations. SMEs often face challenges accessing capital markets due to their size and limited financial resources. By utilizing the SEF, SMEs gain better terms and conditions to access capital that may have been previously unavailable, opening new opportunities for project funding and expansion plans.

Second, the SEF offers SMEs risk mitigation by providing partial protection to Sukuk holders through the combined contributions of its members. This mechanism reduces the perceived risk associated with Sukuk investments, attracting more investors and enhancing investor confidence. SMEs issuing Sukuk through the SEF can benefit from a broader investor base, increasing their chances of securing funding.

Third, being part of the SEF enhances the credibility and reputation of SMEs in the market. The SEF mechanism assures investors that the fund compensates Sukuk holders in case of issuer defaults or payment delays. This improved perception among investors and lenders can facilitate future financing opportunities and business partnerships for SMEs.

Furthermore, the SEF encourages the use of performance-based Sukuk structures, aligning the financial interests of investors with the success of SME operations. If the business performs well, the SME and Sukuk holders benefit, incentivizing investors to support SMEs. Performance-based Sukuk issuances attract more funding options for SMEs.

Lastly, being part of the SEF provides SMEs with networking opportunities and access to support from other fund members. Interacting with different issuers, investors, and financial experts within the SEF ecosystem can lead to potential partnerships, collaborations, and knowledge sharing, further supporting the growth and development of SMEs.

Challenges Associated with Implementing the SEF

The implementation of the SEF offers significant benefits to SMEs, but it also presents some potential challenges. These challenges include limited awareness and understanding of Sukuk structures and the SEF, varying regulatory frameworks across different jurisdictions, and the need for capacity building among SMEs, financial institutions, and regulatory bodies. Education and awareness-raising efforts are necessary to address these challenges to ensure SMEs understand the benefits and requirements of utilizing the SEF. Harmonizing regulations and legal frameworks related to Sukuk issuance can help SMEs comply with necessary legal requirements. Finally, building the necessary capacity through training programs and resources can facilitate effective implementation of the SEF.


By motivating the SEF through the needs of SMEs for access to capital markets, we can empower these enterprises to overcome financial limitations, expand their operations, and achieve sustainable growth. As IsDB member countries strive to address the challenges of high debt levels, the SEF emerges as a valuable tool for promoting financial stability and resilience, particularly for SMEs. By embracing the SEF and leveraging its advantages, SMEs can confidently navigate the financial landscape, ensuring their long-term success and contributing to the overall economic growth of their respective countries.

However, addressing the potential challenges of implementing the SEF is important. These challenges can be overcome by raising awareness, improving the regulatory environment, and building the necessary capacity, allowing SMEs to benefit from the SEF fully. With the proper support and resources, SMEs can harness the potential of the SEF and unlock capital markets, driving sustainable growth and financial resilience.

Acknowledgment: The author acknowledges the valuable suggestions of Dr. Sami Al-Suwailem and Dr. Hylmun Izhar in preparing this article.

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