WAR 26 THE CHALLENGES OF ISLAMIC TRADE FINANCE IN PROMOTING SMES FOR HALAL INDUSTRY IN MALAYSIA

ABSTRACT Small Medium Enterprises is the backbone of Malaysia in term of employment and economic growth. SME's GDP growth continuously outpaces the overall economic growth of the country. However, the major challenge faced by the SMEs is access to finance. The financing issue becomes severe since financial institutions such as banks widely consider SMEs as being too risky due to factors such as lack of collaterals and non-sufficient credit history. This creates difficulty for the SMEs to expand their business, especially expanding in halal market. Islamic financial institutions are presented with an opportunity to target companies in the halal sector and provide them financial solutions which can further expand the asset base and outreach of the global Islamic finance industry. The halal industry is a cross border business sector, as such; halal firms are heavily involved in International trade. In this process, halal firms are in critical need of trade financing to support international trading activities. Among the product offered by Islamic banks for trade financing are trade working capital financing-I, bills of exchange purchased-I, accepted bills-I and bank guarantee-i. The study identified among the challenges faced by the Islamic trade financing to promote SMEs globally are laws and regulations and various rules of trade in other countries, awareness among the SMEs and strict requirement of banks