Global Developments in Islamic Finance

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© 2012 INCEIF

Bank Negara Malaysia-Islamic Development Bank-Central Bank of Oman

Islamic Finance WorkshopSession 1: Global Developments in Islamic Finance

27 January 2013

Daud Vicary Abdullah, President & Chief Executive Officer

The information contained in this document is the intellectual property of INCEIF and has been provided solely for viewing purposes only.

No portion of this document maybe used in any form or reproduced without prior consent from INCEIF.


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1. Islamic Finance - Where we are :

Global Development & Progress

of Islamic Finance

2. Shariah Matters

3. Sharing some best practices: The Malaysian experience

4. The way forward

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Agenda


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Islamic Finance - Where we are…Global Development & Progress of Islamic Finance

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• 21% of total world population of 6.8 billion• About 1.4 billion (CIA fact book ,2008)• Islam the fastest growing religion 1.8 %/year

MuslimPopulation

• Mid 1990 = USD 150 Billion (KFH, 2008)• 2011 = USD 1.086 trillion Asset Size

• 29.7 % in 2006 (thebanker.com)Growth Rate

•Islamic countries of the MENA and South-east As ia(SEA)Market focus

• Islamic Finance represents 1% of global assets• 2003 :the GCC 13%, Malaysia 9%, Indonesia 1,2

%Market share

• More than 300 Islamic Financial Institutions

• IFIs 50 countries (S&P – IF Outlook 2006)Infrastructure

• Retail financing• Vanilla & simple products

ProductInnovation

• Reliance on domestic conventional regulatoryGovernment &

Regulation

Source: Source: Deloitte, S&P – IF Outlook 2006, thebanker.com, KFH

Islamic finance marketTransformation from niche to mainstream

•24% of total world population•Estimated at about 1.7 billion

• IFSB expects the Global Islamic finance asset toreach USD1.6 trillion by 2012

• annual growth rate of > 30 % since 2000(Bankscope & Oliver Wyman)

In 2010 estimated: the GCC 17% , Malaysia 22.6%,Indonesia 3.1%

• Over 1000 IFIs currently

• operating in about 75 countries worldwide

• Complex products & structures

• Development of International Standard• Increasing support of Government & Regulators

Muslim-minority e.g. US, UK and Germany, France,China, Japan, Canada, South Korea

Source: Bankscope & Oliver Wayment, Kettel, etc 2010

BEFORE NOW



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Significant growth factorsSome pivotal events

1973 – OPECOil Crisis

2001 – U.S.Reaction to

Sept 11

2006 –2008The Subprime

CrisisIF Growth



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The global economic crisis

Islamic finance as an alternative

IF reaches the

mainstream (The fastestgrowing Industry)

Significant oil moneyfrom middle east

Market driven

(Muslim underserved

and want to be served)

IF proven more resilientduring crisis

Encourage Ethicalvalues & CSR (Maqasid

Al Shariah)

Islamic financial sector is in a unique position to promote financial innovation andbring stability to global finance, as long as it is correctly nurtured and developedinternationally.

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Islamic bankingReaching broader market

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Reach non-Muslimcountries

Increasingawareness of

customers

Growing demandfor Shariah-

compliant product

Productdevelopment

Increasing numberof players

Excess liquiditybut limited tool

Government &regulation support

Institutionaldevelopment

Global acceptance& flexibility in

Islamic finance

system



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Geographical target & expansion

It is time for expansion

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Primary areas

Areas of start ing Is lamic

Finance activities

Untapped markets

Over 1000 Islamic finance institutions in75 countries offering Islamic products to1.7 billion potential Muslim customers

worldwide.

Annual growth rate of > 30 % since 2000

Capitalisation in excess of US$13bn today

Pool of money held by Muslims isestimated at US$1.5 trillion

Vast potential for infrastructure financingusing Sukuk

Increasing demand fuelled by Muslims -and growing acceptance by non-Muslims

regarding the attractiveness of the Islamicfinance model

Governments of G7 countries, such asFrance, Japan and the UK, are actively

seeking to accommodate Islamic Financeas a means of attracting Middle Eastern

capital flows.

Key Areas in Islamic Finance



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Market potential

At which stage is each country?

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South Korea,

US, Canada,

Australia,Germany

Luxembourg,

Hong Kong,

Egypt,Singapore,

Oman

Turkey, UK,

Pakistan,

Brunei

Malaysia, UAE,

Bahrain, Saudi

Arabia, Kuwai t,

Qatar

Potential Islamicfinance markets

Emerging Islamic

finance markets

Advanced Islamicfinance markets

Monitor

development

Wait and see

Minimumpresence

Explore marketpotential

Competitormatching

Marketmotivation

Businessmotivation

Market depth

Exploremarket

potential

Sporadicdevelopment

Marketdevelopment

activities

Marketexpansion

activities

Market reach

Source: Dr. Volker Nienhaus



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Institutional framework

Key infrastructure of Islamic finance

March, BahrainGCIBAFI, May,

Malaysia Nov, Malaysia

IIFM, Nov, Bahrain

LMC, Feb, Bahrain

IRTI, Jeddah

March, Malaysia

March, Malaysia

Oct, MalaysiaMalaysia

1975 1981 1990 2001 2002 2003 2006 2008 2010

IIRA, Oct, Bahrain

IDB, Jeddah

Bahrain

Organisations

Research

Education &Training

IILM, Malaysia

International Islamic LiquidityManagement Corporation

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Regulators

AAOIFI

IFSB

IIFM

GCIBAFI

LMCIILM

IIRA

IRTI

ISRA

• Accounting & auditingstandard

• Abbreviations :• - IFI = Islamic financial Institution• - Regulator = Central Bank, Monetary authorities,

Securities commission

1. AAOIFI = Accounting & Auditing Organization for

Islamic financial Institutions

2. IFSB = Islamic Financial Standard Boards

3. IIFM = International Islamic Financial Market

4. GCIBF = General council for Islamic Banks and Financial

Institutions

5. LMC = Liquidity management Centre

6. IILM = International Islamic Liquidity Management

Corporation

7. IIRA = International Islamic Rating Agency

8. IRTI = Islamic Research & Training Institute9. ISRA = Islamic Scholar Research Academy for IFI

• Governanceregulatory standard

• To enhance marketunderstanding of

Islamic finance

• To promoteresearch & training

• Market maker for Islamicsecondary market instrument

(crosses government

business lines)

• Rating IFI andIslamic finance

instrument

• To createenvironment for

Islamic secondary

market

• To spread &conduct applied

research in IF

IFI

• To Develop and implement short

term liquidity managementsolutions

Infrastructures & supporting institutions

Towards global regulatory framework & standardisation

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Shariah matters

• Understanding the challenges

• What can we do?

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Keychallenges

Shortage ofIslamicFinanceexpertise

Differences inadopting

Shariah law

Difficulty ininnovating

productrestricted by

Shariah

Lack ofmarketing skills

for Shariahcompliantproducts

Lack of unanimityin understandingof Shariah Law

Shariah matters

Impediment of Shariah growth

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Key IssueBalance between confidentiality and disclosure

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In most countries,existing legal framework

and taxation might notsupport Shariahstructures

Devising a perfectstructure without

compromising in anyaspect is a challengeitself

Complicated structuringdue to legal and tax

considerations aredifficult to be explained

to investors

Thus, explaining and

keeping structuringdetails confidential is adifficult task



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Actions to be taken

The way forward

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Gettingsupporting

governmentregulatory &tax regulation

Shariah-based

productinnovation

Profitable

businessmodel

Globalharmonisation &

standardisatioinof process

Facilitatingcross-border

liquidityinfrastructure

Getting theright people

and doingthings theright way



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Sharing some best practices: The MalaysianExperience

• Comprehensive financial landscape

• Talent development and changing of mindset

• INCEIF – dedicated to human capital

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3

M l i ’ h i I l i fi i l l d

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GOVERNANCE

Legal

&

Regulatory

• Central Bank Act 2009

• Islamic Bank Act 1983

• Takaful Act 1984

• Government Funding Act 1983

• Capital Market

Services

Act

2007

• Malaysia Deposit Insurance Corporation Act 2005

• Risk Management

Shariah Advisory

Council

• Bank Negara Malaysia

• Securities Commission

Dispute Resolution

• Judicial system – dedicated High Court

• KL Regional Centre for Arbitration

• Financial Mediation Bureau

DIVERSIFIED PLAYERS

Islamic

Banking

• 16 Islamic banks

• 6 DFIs offering Islamic

banking services

• 5 International Islamic banks

[15 International

currency

business units (ICBU)]

Takaful

• 12 takaful operators

• 4 retakaful operators

• 1 International

takaful

operator

[9 ICBU]

Fund Management

•

12 Islamic

fund

management

companies

• 35 fund management

companies with Islamic

mandates

FINANCIAL MARKET

Money

Market

• Islamic interbank money market

‐ Daily average transaction RM1 bilion

• Bursa Suq Al Sila’

Capital Market

• 57% of

outstanding

private

debt

are

sukuk

• 88% permissible counters at Bursa Malaysia

• 144 Islamic funds

Malaysia s comprehensive Islamic financial landscape

Islamic

Banks

&

Takaful

Companies

Islamic

Capital

Market

Islamic

Money

Market

Money market

Conventional

Banks & Insurance

Companies

Capitalmarket

Malaysian

Financial System

Dual

banking system

Supported

by

human

capital

infrastructure

The information contained in this document is the intellectual property of INCEIF and has been provided solely for viewing purposes only. No portion of this17

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Malaysia Islamic finance model

The potential

;

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• One of the most successful stories in Islamic finance, besides Bahrain

• Top bottom approach – support from the regulatory agencies including the

government of the day

• SAC as the apex Shari’ah body in the country – standardisation of products

• Central Bank of Malaysia’s (Bank Negara Malaysia) Law HarmonisationCommittee – making Malaysia the law of choice for disputes in Islamic finance

• The establishment of MIFC

• Active and vibrant Islamic money (IIMM) and capital markets



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Malaysia Islamic finance model

The challenges

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Some issues with

cross borderproducts acceptance

Regulatorychallenges – some

countries with nolaws and regulations

with respect to IF



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Malaysia is one of the key Islamic finance countries

What is key towards success?

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Government and regulatory support with

clear financial master

plans

Infrastructure – legal, accounting system,

technology, manpower

Variety in financial products: adaptation in

the early stage, now

moving towards product

innovations

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Talent Development

Bringing our talent up to speed



Education

LiquidityPerception

Enhance Shariah expertise and Human Capital

Increase knowledge in Islamic Finance

Encourage right and

comprehensive understanding Provide sufficient cross‐border Liquidity

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Islamic finance education

A three-tier process

Leaders

and

Regulators

The

workforce

(Corporate and financial

industry players)

The masses

(Consumers)



D tif i I l i fi

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Demystifying Islamic finance

Changing the mindset of the masses

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Correcting misconception & demystifying Islamic Finance

Ensuring value proposition

Creating awareness of Islamic finance among the public

providing supporting legislation & regulation

For Muslims only

Replica

of

Conventional Finance

Primitive

concept

of doing finance

No

standardisation of the best Practices

More risky than conventional

finance

No Guarantee

Lower/Higher cost

of fund

Funding of

terrorist activities

Misconceptionsabout

Islamic

finance



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Dedicated to human capital

Education, training, consulting, research and

collaboration



Skills and

Competency training

Executive

Programmesand Professional

Post

Grad programmes

Industry

acceptance and implementation

of specific standards such as ACIFP (for CIFP)

Research and Consulting across key

industry segments

RESULT:

Collaborative Partnership that develops and

delivers

Talent


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© 2012 INCEIF

Tel:

Email:Website:

+603 7651 4141

www.inceif.org

David Vicary Abdullah

[email protected]

President & Chief Executive Officer

Thank You

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