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  • Introduction to Islamic Finance & Banking

    World Bank – BRSA - TKBB Joint Workshop on “Innovative Product Development in Islamic Banks”

    Istanbul, Turkey March 2, 2017

    Zamir Iqbal, PhD. Lead Financial Sector Specialist The World Bank Global Islamic Finance Development Center Istanbul, Turkey

  • Globalization of Islamic Finance…

    Source: IFSB Financial Stability Report 2015, KFHR, IMF

    Islamic Finance makes into G-20 agenda

    2015- The G20 group of major nations has included discussion of Sukuk (Islamic bonds) as an

    infrastructure financing tool in its annual agenda, a move that could potentially spur the use of project-

    based Sukuk. In addition, Islamic Finance is subject of study under G20 themes of long-term investments

    and Financial inclusion.

  • Brief Modern History of Islamic Finance

     Interest in reviving a banking and financial system started in early 1900s.

     1950s – Appearance of early writings about problems of conventional

    economic systems and how Islam’s principles of economics offer an


     1960s – End of colonialism and independence of countries

     1970s – Oil revenues (Perto-$) create demand for banking without interest. 1st

    Islamic bank in Dubai is established.

     1980s – Growth of commercial banking

     1990s – Emergence of Islamic funds and investment banking

     2000s – Capital markets and Globalization


  • UK  2010 – The Financial Services and Markets Act 2000

    Order 2010 was introduced by Treasury to support

    Islamic finance and the issuance of corporate sukuk

    within the UK

     2012 - The UK Government launched an Islamic Finance

    Task Force with the aim of securing London’s status as

    the Western hub for Islamic finance

     2013 - London hosted the World Islamic Economic

    Forum during which the UK Prime Minister announced

    plans to issue a Sukuk in 2014 and to turn London into a

    global center of Islamic finance.

    France  2009 - The amendment of Article 2011 of the French

    Civil Code relating to the formation of trusts was

    interpreted as an important step towards permitting the

    issuance of sukuk out of France

     2010 - Revision of specific tax regulations covering

    Sukuk, ijarah, istisna and murabaha with a view to

    removing discrepancies


     2010 - The Luxembourg Tax Authority published a circular to clarify the tax treatment of murabahah and sukuk transactions, to ensure that

    they benefit from the same tax treatment as conventional products

     2011 - Luxembourg’s CSSF published a note that clarified that no specific legislation was required for Shariah compliant investment

    funds, since Luxembourg’s current law contains no obstacles to it.

    Germany  2012 - German banking regulator hosted an Islamic finance conference

    in Frankfurt during which the tax treatment of different Islamic

    finance products was discussed.

    Hong Kong  2014- Hong Kong has raised $1bn in its debut Islamic bond issue.

    South Africa  2014- $500m sale was more than four times subscribed, with an order book

    of $2.2bn according to the SA Treasury


     2016- Opened first Islamic Bank, The Partnership Banking Center in

    March 2016. Source: KFH Research

    ….there is increasing interest in Islamic finance from non-Muslim countries

    Recent transactions include sovereign issuance by United Kingdom (UK), South Africa, Hong Kong,

    and Luxemburg.

  • Roadmap





  • 6

    I. Market Trends

  • Source: ICD-Thomson Reuters Islamic Finance Development Report 2016

    Islamic Financial Assets

  • Market Size – Islamic Banking

    Source: Financial Stability Report 2016, IFSB

    Islamic Banking Share in Total Banking Assets by Jurisdiction (1H2015)

  • Islamic Financial Assets Have Been Growing Rapidly

    Source: ICD-Thomson Reuters Islamic Finance Development Report 2016

    Global Islamic Finance Assets by Sector Growth (2012 – 2021, US$ BN)

  • Composition and Domicile of Islamic Assets

    10 Source: Financial Stability Report 2016, IFSB

    Breakdown of Islamic Finance Segments by Region (USD billion, 2015 YTD)

  • Growth of Banking Assets

    Source: World Islamic Banking Competitiveness Report 2016, Ernst&Young

  • 12

    II. How Islamic Banking Works?

  • Risk


    Reduction of Information Asymmetry (Gharar)

    * Prohibits contracts with high uncertainty (Speculation/Gambling)

    * Requires Full Disclosure before, during and after the contract

    Prohibition of Interest (Riba)

    Eliminates Debt contracts and Leverage Materiality

    Economic and Social Justice

    Wealth, Ownership and Property Rights

    Preservation of Property Rights, Protection of Property Rights of Stakeholders, Significance of Rights of the Society

    The role of Wealth, Money, and Capital, Sanctity of Contracts

    Theoretical foundations of Islamic Financial System

  • How a banking system is designed without “Interest?”

     Prohibition of interest discourages debt and leverage

     Risk sharing

    – Because interest is prohibited, pure debt security is eliminated from the system and therefore suppliers of funds become investors, rather than creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits and losses.

     Close linkage with the Real Sector of the economy

     Promotes Asset-backed Finance

    – The system introduces a “materiality” aspect that links financing directly with the underlying asset so that the financing activity is linked to the real sector activity. There is strong linkage between the performance of the asset and the return on the capital used to finance it.

     Similarities with ethical and Socially Responsible Investments (SRIs).


  • Commonality: Ethical Investing

     Substantively: Islamic finance is “ethical finance and investing”.

     Consider: Lutheran funds, Roman Catholic funds, “green” funds,

    university investment programs (WARF-UW; UC-Berkley).

     No investments in:

    – Production or distribution of alcohol for human consumption

    – Production of tobacco for human consumption

    – Gambling

    – Prostitution and pornography

    – Defense and weapons

    – Pornography

    – Add constraint on interest-based debt => Islamic investment

  • Components of Islamic Financial System


    Islamic Financial System

    Non-banking Financial


    Takaful (Insurance)

    Micro-financial institutions

    Leasing Companies

    Project Finance

    Private Equity


    Commercial Banking

    Investment Banking

    Capital Markets

    Sukuk market

    Stock Market

    Mutual Funds

    Money Markets

  • Key Contracts – building blocks


    Contract Function Description

    Amana Custody Trust. Placing something valuable in trust with someone for custody or safekeeping.

    Bay’ al-Istisna Order to build Sale in order to manufacture or construct.

    Bay-mua’jjal Deferred Payment Sale contract where the price of the product or underlying asset is agreed but the payment in

    lump sum or installments is deferred to a specified future date.

    Bay’ al-Salam Forward Contract Sale by immediate payment against future delivery. Similar to conventional forward contract

    but requires full payment at the time of contract.

    Ijarah Leasing A sale contract that is not the sale of a tangible asset but rather a sale of the usufruct (the

    right to use the object) for a specified period of time.

    Mudarabah Trustee finance


    An economic agent with capital (rabbul-mal) can develop a partnership with another agent

    (mudarib) with skills to form a partnership with the agreement to share the profits. Although

    losses are borne by the capital owner only, the mudarib may however be liable for a loss in

    case of misconduct or negligence on his part.

    Murabahah A cost-plus-sale


    A cost-plus-sale contract where a financier purchases a product, that is, a commodity, raw

    material or supplied, for an entrepreneur who does not have its own capital to do so. The

    financier and the entrepreneur agree on a profit margin, often referred to as a mark-up

    which is added to the cost of the product. The payment is delayed for a specified period of


    Musharakah Equity


    Equity partnership. It is a hybrid of Shiraka (partnership) and Mudarabah combining the act

    of investment and management.

    Qard-al-hassan Benevolent Loan Charitable loans with no interest and low expectations of return of principal.

    Sukuk Isla