Malaysia needs trade-based solutions


“To stay afloat, some companies have had to resort to increased debt to meet their payment obligations,” Zaylani said at the launch of the World Bank’s Islamic Trade Finance Report yesterday.

KUALA LUMPUR: Malaysia critically needs trade-based solutions to ease liquidity constraints brought about by the Covid-19 pandemic, says Bank Negara assistant governor Adnan Zaylani Mohamad Zahid.

He said the pandemic, which led to subdued domestic demand and stringent containment measures, had resulted in a liquidity squeeze among Malaysian businesses, particularly the small and medium enterprises (SMEs).

“To stay afloat, some companies have had to resort to increased debt to meet their payment obligations,” he said at the launch of the World Bank’s Islamic Trade Finance Report yesterday.

While measures have been introduced to lessen the burden of SMEs in the form of wage assistance programmes, support grants and deferment of financing installments, Adnan Zaylani said these were merely a temporary backstop akin to a band-aid and prolonged assistance of this form might not be sustainable.

He noted that the over-dependence on debt-based instruments also reduced the financial flexibility of businesses in supporting their recovery.

According to him, trade-based solutions can offer a viable option where funding is tailored to the life-cycle of production, allowing companies to obtain short-term liquidity via the sale of current assets such as receivables and inventories to financial institutions without increasing their indebtedness.

However, the structuring of such solutions entailed new sets of risks to financial institutions, said Adnan Zaylani.

“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.

“Given the nature of the exposures, this warrants Islamic financial institutions (IFIs) to take an exploratory approach to new trade-based offerings.” — Bernama

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