Fundamental of Islamic Banking - Principles of Islamic Banking
Islamic Banking and Financeislamicfinanceevents.com/2009/pdf09/IFN_Roadshow_Turkey... · Islamic...
Transcript of Islamic Banking and Financeislamicfinanceevents.com/2009/pdf09/IFN_Roadshow_Turkey... · Islamic...
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Sohail Jaffer, June 4, 2009
Islamic Banking and FinanceTrends, Opportunities and Challenges
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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Islamic Finance Overview
Faith based financing systemproviding alternative products
to those available in theconventional financial markets
Competitive alternative toconventional products
attractive to Muslims andnon-Muslims
• Transparency and full disclosure• Fairness with all parties involved• Profit and loss sharing• Real transactions
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Islamic Finance overview
Islamic jurisdictionsSecular jurisdictionsProgressive juridictions
StandardisationTransparencyNeutralitySeparation of Shari’a from law and politics
Global Reach
Future directions
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Islamic Banking and Finance Overview
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Growth of Islamic Finance
Source: Dow Jones and Company, Inc.
1975-1990Commercial Banking SyndicationsIslamic Conglomerates
1991-2000Hard Asset Private EquityFund ManagementIslamic Indexes
Market exposure: 20m
Onset of Islamic Banks (Malaysia, UAE, etc.)
Inefficient Command SOEsin Iran and Sudan, and Pakistan
Market exposure: 100m
Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh
Market Exposure: 900m
Conversions, Islamic Windows & Subsidiaries of Mega Banks,
Establishment of significant Islamic Banks in Non-Muslim states
Muslim populated states getting interested Syria, Libya, Soviet bloc
Timeline 1975-2010Source: S. Farooq, BIBF
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Where are we today in Islamic Finance ?
Source: Dow Jones and Company, Inc.
Cost-Plus
Leasing RealEstate
Equity
PrivateEquity
Venture Capitalist
Timeline: Products/Returns/Players
ActivitiesRisk
IslamicFinance
IFProducts
ConventionalFunds
ConventionalFund Products
40 years 300+ years
ConventionalFund Institutions
Islamic Financial Institutions
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Screening: Common Shared Values
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Key Characteristics of Islamic and Ethical Funds
The Performance of Islamic Equity Funds, Falaika 28/05/2008
Islamic Ethical
Clear definition of action limits
Faith-based rules
Supervisory Committee
Sector Exclusion
Best-In-Class
Environmental filters
Human rights
Transparent corporate practice
Restriction on investment mgt
Financial screens
YES
YES
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
NO
YES
YES
YES
YES
YES
NO
NO
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Trends: Regional ChampionsRegional Champions emerging
Islamic Mega Bank:Shaikh Saleh Kamel, chairman of Al Baraka Banking Group, to launch the world's biggest Islamic bank before the end of the year, with an initial public offering of $3 billionAl Baraka Banking Group will launch Islamic Banking in FranceNBK to launch a private banking arm in SwitzerlandAl Salam Bank and Bahrain Saudi Bank to merge creating a bank with a market value of USD 400 million
Emergence of International Financial CentersDIFCMIFCBFHQFC
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Trends: Global and Regional Brands
Islamic Banking:HSBC RBSStandard CharteredBNP ParibasCredit Agricole
Takaful:AvivaZurichAIGINGFortis
Fund ManagersDeutsche BankCAAMBNP ParibasSocieté GénéraleDexiaING
Global Brands Regional Brands
Islamic Banking:DIBADIBAl RahjiKFHNoor
Takaful:SolidarityTakaful MalaysiaSalama
Fund ManagersShuua Capital NCBEIS
110.31710.3171ING International High Dividend Fund
0.14230.1423ING Asian Equity Fund
1.04691.0469ING Asian Debt Fund
1.99011.9901ING Dana Suria Ekuiti
-1.0091PB-ING All Weather Fund
-0.9801PB ING Baraka Commodities Fund
-1.0357ING Global Equities Link Fund
1.68551.6855ING Income Fund
1.68481.6848ING Equity Fund
1.47441.4744ING Dynamic Fund
1.62351.6235ING Balanced Fund
OfferBid
Unit Price (RM)Fund Name
Prices as of 29-Apr-2009
International activities of ING and Dexia
• 75% of Denizbank’s shares in Turkey were purchased by Dexia for $2.43 billion
• RBC Dexia is a custodian for Sharia Compliant funds and Takaful Companies
Malaysia MENA - Malaysia
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Maybank Fortis – Etiqa
• joint-venture in 2001 between Malaysia’s largest local bank, Maybank (70%) and Fortis (30%)
• in 2005, Mayban Fortis is the second largest insurer in Malaysia
• acquisition of Malaysia National Insurance and Takaful Nasional: rebranded as Etiqa in 2007
• Etiqa will be the single master brand for all conventional and takaful businesses under Mayban Fortis to become the No.1 insurer in Malaysia by 2009.
• Etiqa is a leading provider of takaful products in Malaysia with a market share of 54 per cent in 2006. It is also ranked second and third in the life and general insurance businesses respectively.
Fortis / Maybank Takaful: Strategic alliance
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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Capital Markets overview
Islamic Finance
Islamic Fund Management
Takaful (Insurance)
Sukuk (Bonds)
IslamicBanking
Capital Markets CommercialBanking
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Islamic Banking and Finance: Major Instruments
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Islamic Banking and Finance: Major Instruments
Source: Pricewaterhousecoopers
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Islamic Debt like instruments – Ijara
Ijara is the Arabic word for rent- providing goods and services for temporary use for a fee.
An ijara contract is an agreement whereas a lessor(mu’ajjir) leases a physical asset or property to a lessee (musta’jir) who receives the benefits associated with ownership of the asset against payment of predetermined rentals. Ijara is for a known time period.
Utilized by banks to provide customers with short to medium-term financing leases
The asset is owned by the bank and is leased to the user. Typically the lessor is required to obtain insurance.
Source: Pricewaterhousecoopers
18Source: Pricewaterhousecoopers
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Islamic Banking and Finance: Major Instruments
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Islamic Banking and Finance: Major Instruments
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Sukuk is a Shariah compliant capital market instrument
By nature, it is analogous to conventional asset backed securities (with several exceptions)
Business activities/assets that would be used as underlying assets backing the Sukuk would need to be Shariah-compliant. The proceeds of the Sukuk must be used for Shariah-compliant purposes only
Sukuk can be issued under various structures
The primary subscriber can resell the Sukuk in the secondary market; the secondary market buyer will be the new pro-rata beneficial owner of the underlying assets
Islamic Banking and Finance: Sukuk Overview
Source: HSBC Analysis (17 November 2008)
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Sukuk vs. Conventional Bond
Islamic Banking and Finance: Sukuk Overview
ConventionalIslamicParameter
• A comparatively smaller pool of conventional bond investors will mean that there is less demand for the paper.
• A larger pool of Sukuk investors creates more demand, hence may help to achieve slightly more competitive pricing (Malaysia ’s experience)
Financing Cost
• No additional administrative costs associated with conventional bond issues
• Additional fees: legal and Shariah advisory feeAdministrative Cost
• Conventional bonds can only tap the conventional bond investors
• Sukuk issues enjoy a wider investor base from both sets of investors –Islamic (Islamic banks, takaful cos, Islamic asset management cos) & conventional
Investor Base
• An issuer of conventional bonds is not limited in its business activities
• A Sukuk issuer shall be engaged in business activities which are permissible under Shariah
The Issuer
ConventionalIslamicParameter
• A comparatively smaller pool of conventional bond investors will mean that there is less demand for the paper.
• A larger pool of Sukuk investors creates more demand, hence may help to achieve slightly more competitive pricing (Malaysia’s’experience)
Financing Cost
• No additional administrative costs associated with conventional bond issues
• Additional fees: legal and Shariah advisory feeAdministrative Cost
• Conventional bonds can only tap the conventional bond investors
• Sukuk issues enjoy a wider investor base from both sets of investors Islamic (Islamic banks, takaful cos, Islamic asset management cos) & conventional
Investor Base
• An issuer of conventional bonds is not limited in its business activities
• A Sukuk issuer shall be engaged in business activities which are permissible under Shariah
The Issuer
Source: HSBC Analysis (17 November 2008)
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Sukuk – A significant development in Islamic Banking
Global Sukuk IssuanceCorporate and Sovereign Sukuk Issuance
Leader –issuance volume
Source: Bloomberg
Source: HSBC Analysis (17 November 2008)
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Islamic Banking and Finance: Sukuk - developments
Differences in underlying asset :Wide range of sukuk structures – debt-based, equity-based, asset-backed structuresSophistication of structures:New innovative and complicated Sukuk especially Hybrid Widening range of Assets
Tangible assets (real-estate, aircraft, production plants and machinery)
IPR, cash-flows – requires Shariah scholar approval
Secondary MarketRestrictions on trading in Debt (Malaysia vs. GCC)
GCC – foreign ownership and controls
Market beginning to see some level of secondary trading
Singapore issued in January 2009 its first sovereign Al Ijarah Sukuk worth $134m to attract petro dollar investment and promote Islamic finance in Southeast Asia's financial capital.
• Predominately driven by and distributed into the local Islamic accounts with some additional follow-on demand from Asian and European Islamic funds
Sukuk
Middle East (60%)
Europe (25%)
Asia (15%)
Banks (80%)
Funds (15%)
Other (5%)
Comments Sector
Source: HSBC Analysis (17 November 2008)
Country
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Islamic Banking and Finance: Sukuk - developments
Singapore issued its first sovereign Al IjarahSukuk worth $134m in January 2009 Indonesia offered ist second sukuk in 2009Malaysia established Financial Guarantee Institution The Islamic Development Bank (IDB) to issue a US$500m global SukukBNP Paribas on behalf of Darahim Capital of Bahrain issued a US$40m Darahim SukukBasket - a 3-year Note (January 2009)
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Islamic Banking and Finance: Sukuk - developments
UK Budget provisions facilitating sukuk issuance.
Turkish and Jordan government paves the way for the issuance of theirs debut sovereign Sukuk.
Hong Kong to facilitate tax neutrality between Islamic financial products and equivalent conventional ones.
According to the Oliver Wyman 2009 Report – Next Chapter in Islamic Finance, “Exponential growth in Islamic Finance expected to reach $1,200 billion in 2012 “.
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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The mandates for Islamic funds are widening and becoming more global.
In 2002, 45 % of Islamic funds were mandated to Asian securities, whilst 32 % more were focused on GCC regional securities.
In 2007, 33 % of Islamic funds ran Asian mandates of which only 24 % were GCC funds.
As research and analysis has widened and the index providers have started to create new series and subsets of Shariah compliant indices, so other markets come into play
In 2007, 2 % of Islamic funds were Emerging Market funds.
Islamic Banking and Finance: the Funds
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Sharia Compliant Mutual FundsImproved coverage across asset classes and geographical mandates:
2008: over 500 Sharia compliant funds in the world
Forecast: the number will reach 1,000 funds by 2010,
CAGR of 24 % for the period 2007 to 2010.
Equities remains dominant:
allocation of 52 % for the Sharia compliant universe ( 42 % in conventional universe)
Fixed income is underdeveloped:
7% for the Sharia universe (22 % in conventional universe)
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Sharia Compliant Mutual Funds promoters/managers
Regional International
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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« Bancatakaful is defined as the delivery and distribution of a suitable range of tailored ‘bankable’ protection and long term savings and pension products designed to meet the lifecycle needs of the customer base of a bank or other financial institution.»
CustomerLife CycleDemandDriven
STUDENT LOANS
LIFESTYLE SPEND
CAR LOANS
MORTGAGESSAVINGS
LIFE INSURANCES
RETIREMENT PLANS
ANNUITIES
Definition of Bancatakaful
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Growth drivers
Source: PWC, “Takaful: Growth opportunities in a dynamic market* 2008
• In some countries with majority Muslim populations (Turkey, Egypt, Pakistan, Indonesia) the takaful market is at an embryonic stage.
• Untapped markets: insurance penetration is below 2% of GDP in the Middle East Region
• The global takaful industry is growing at 20% per year, far outstripping the 2.5% annual growth for conventional insurance premiums
• Moody’s has predicted that global takaful premiums will rise to $7bn by 2015.
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Untapped market potential
Source: PWC, “Takaful: Growth opportunities in a dynamic market* 2008
• Potential customer base: world’s 1.5 billion Muslims
• Bulk of the world’s Muslim population is young: 60% of the global Muslim population is under 25 years of age.
• The potential to be a customer for 40 years or more.
•Takaful products must be price competitive with conventional insurance products;
• Takaful is inherently ethical and is obliged to invest in sustainable investments.
• Further, it distributes the annual retakaful surplus back to the policyholders.
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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Islamic Banking and Finance Challenges
Product InnovationCross Border distributionCorporate Governance Global Sharia StandardsDifferentiated customer service
Pre global crisis
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Islamic Banking and Finance Challenges
Funding costs expected to rise, liquidity to shrinkRegulator are expected to introduce tougherconsumer lending guidelinesRetail lending volumes are expected to slow down even temporarily as banks adjust to new realities
Source WIBCR 2008-209 McKinsey
Post Global crisis
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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What’s driving the demand?
As far as the Sukuk market is concerned, Moodys expect more (August 2008 Islamic Finance Notable Trends):
Complexity and diversity
Issuance volumes and widening gaps in terms of issuer creditworthiness
Securitisation, structuring and subordination
Liquidity
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What’s driving the demand?
As far as IFIs are concerned, Moodysexpect more (August 2008 Islamic Finance Notable Trends):
Geographic diversification
Operating diversification
New entrants and competition
De-correlation with oil prices
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Product penetrations are low and indicatesizeable headroom for growth
GCC population is still young with sizeableunderserved segments
Customers are seeking more tailored segmentedproposition but banks are currently fosuced on a few
Beyond topline, banks have opportunities to improve profitability through other efficiencylevers
Source WIBCR 2008-209 McKinsey
What’s driving the demand?
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1. Overview of Islamic Finance
2. Capital markets
3. Sharia Compliant Investments
4. Takaful
5. Islamic Finance Challenges
6. Islamic Finance Opportunities
7. Conclusion
Contents
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Notable Trends There are many reasons why new Islamic financial institutions (IFIs) have been mushrooming across the board:
i) booming and profitable market naturally attracts new entrants because excess demand needs to meet additional supply;
ii) retail banking in the Middle East was discovered in the 1990s and there's still a lot to do, where IFIs can offer attractive solutions;
iii) governments have been very supportive of the Islamic financial industry. Asset-backed, infrastructure, and project finance is naturally in line with the principle of Islamic finance, just like mortgage lending.
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Islamic Financial Marketplace – Sources of Funds
1.3 billion Muslims (20% of population)Fastest growing and one of the most active religions
More than two thirds of Islamic funds are from the Middle East
SE Asian Islamic Marketplace experienced rapid expansion
Islamic banks have EU footprint through UK
Overview of the Global Islamic Market
Source:
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Islamic Banking and Finance: Fast track growth in EuropeIslamic retail products appeared in the UK in the 1990sIn 2009, with over $18 billion in Shariah compliant assetsThe UK comes 8th in The Banker’s league table of Islamic assets worldwide
In 2009, the UK hosts:5 Islamic banks: (Islamic Bank of London and the Middle East (BLME) will focus on London Stock Exchange listing in 2010; Islamic Bank of Britain, ...)over 20 conventional banks with Islamic windows, 1 stand-alone Shariah compliant insurance provider;at least 9 fund managers providing opportunities for investment in Shariah compliant funds 1 Shariah compliant hedge fund manager;the exchange upon which almost half of all global sukuk by value are listed
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3 Middle East banks are submitting their applications to the French authorities: the Qatar Islamic Bank (QIB) the Kuwait Finance House, Al Baraka Islamic Bank, from Bahrain.
Crédit Agricole and Nomura plans launching sharia compliant funds domiciled in Luxembourg.
Société Générale has done a couple of sharia compliant products in Reunion
BNP Paribas has a long standing presence in Bahrain and plans importing its investment banking experience into the French market
Europe: Investment and Retail banks in progress
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In January 2009, Deutsche Bank launched Al Mi’yar, a first-of-its-kind platform aimed at facilitating the issuance of Shariah compliant securities.
The idea of Al Mi’yar came about due to the Islamic investment space still being undersupplied, let alone underdeveloped.
Domiciled in Luxembourg,the platform was developed by DB with Luxembourg Financial Group as its Shariah investment manager and DB’s Trust & Securities Services group providing the settlement framework.
Example of cooperation between Luxembourg and the GCC region
Islamic Banking and Finance: Fast track growth in Europe
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The Luxembourg Stock Exchange was the first European stock exchange to enter the sukuk market, having listed sukuk since 2002.
In September 2008, 14 sukuk with a combined value of USD 5.5 billion were listed and traded on the Luxembourg Stock Exchange.
In September 2008 there were 31 shariah compliant investment funds held in 17 Luxembourg domiciled investment vehicles. Several large funds are in the process of being launched.
Luxembourg is recognised globally as a world class financial centre; it is the second largest investment fund centre in the world after the Unites States, with almost EUR 2 billion under management.
Luxembourg attractive to institutional investors
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Sample of Sharia Compliant funds domiciled in Luxembourg
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joint ventures/strategic alliances with more experienced GCC operators/providers European FIs like BNP, Credit Agricole, DB moving in to the regional GCC and SE Asian Sharia compliant mkts.NCB has an investment banking and asset mgt alliance with Goldman Sachs and plans to establish a UCITs sharia compliant funds family in Europe.Nomura has also established a Sharia compliant funds family in Lux.Increasing competition now between DIFC, Bahrain, Lux and Dublin to attract this business.Lux can offer an Islamic Banking and Fund admin experise, create a Training academy, provide Islamic research funding and facilities, legal fund structures for Private Equity, Real Estate and multi-mgr funds
Conclusion
UNTAPPED POTENTIAL FOR ISLAMIC FINANCE IN EUROPE
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Sohail E [email protected]
Mobile phone: +352-621-326-495
Mr Jaffer is a Partner, Head of International Business Development for “white label” bancatakaful and Sharia compliant investments within the FWU Group. From June 1998 until June 1999, he was Senior VP within the International Mutual Funds Group of Scudder, responsible for international product development. From January 1989 until May 1998, he was VP with Citibank London with the Financial Institutions Group responsible for structured products including alternative investments until 1996, then joined Citibank’s Alternative Investment Strategies (AIS) Group as Director and was also a member of Citi’s Hedge Funds Policy and Strategy Committee.
Mr Jaffer is currently a Regional Advisory Council Member (EMEA) of the Alternative Investment Management Association (AIMA), was a Council member of AIMA for the period 2001 to September 2008 and past Chairman for the period 1997 to 2000. He has written extensively on alternative investments and has edited several Euromoney publications on hedge funds, multi-manager strategies, 4 Islamic books on retail banking, asset management, insurance (takaful), wealth management and a recent CPI publication on investing in the GCC markets.
He is also a member of ALFI’s Asset Management Advisory Committee, Middle East working group and of their Hedge Fund Committee. He is also a member of MIFC's Strategic Focus Group (SFG). MIFC is the “Malaysia International Islamic Finance Centre”.
Contact details