Difference Between Islamic Banking And Conventional Banking By Dr. Maulana Ejaz Ahmad Samadan
Islamic Finance Within Conventional Banking System – Opportunities and Challenges
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Transcript of Islamic Finance Within Conventional Banking System – Opportunities and Challenges
Islamic Finance Within Conventional Banking System – Opportunities and Challenges
02 July 2010III Astana Economic Conference
By
Musa Abdul Malek
Executive Director and CEO HSBC AMANAH Malaysia
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Islamic Finance Window Operations
Models for Establishing Islamic Finance
Islamic Finance – Success Recipe
Overview of Islamic Finance
CONTENTS
Challenges in Islamic Finance
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OVERVIEW OF ISLAMIC FINANCE
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OVERVIEW OF THE ISLAMIC FINANCE INDUSTRY
Each region is contributing in a unique way
…with worldwide momentum from retail to
regulator involvement
Examples
Malaysia’s Islamic Banking Act 1983 and the Banking &
Financial Institutions Act 1989 are enacted as
separate statutes
Kuwait adopted a new regulatory framework for
Islamic finance in 2003, by introducing a new section into the Central Bank Law
of 1968
Iran
Governmentdriven
Marketdriven
Saudi Arabia
Malaysia
United Arab Emirates
BahrainKuwait
Indonesia
Brunei
USA
PakistanSudan
Qatar
Singapore
Bangladesh
Oman
TurkeyEgypt
Sri Lanka
South Korea
China
HIGH
LOW Japan
Hong Kong
Asia-Pacific Middle East Others
UK
HIGHLOW
Note: Circle sizes denote estimated size of the Islamic financial market in these respective countriesSource: HSBC Amanah, Illustrative Comparison Model for the development of Islamic Markets and Regulations
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OVERVIEW OF ISLAMIC FINANCE
Islamic Finance In The Last 30 Years
Islamic finance has followed in the wake of innovations in the global financial services industry
A natural progression of the Islamic finance industry:
– competitive retail offerings
– sophisticated corporate banking products
– innovative project finance solutions
1970s
commercial banking
1980s
commercial banking
project finance & syndications
1990s
commercial banking
project finance & syndications
equity Ijarah
2000s
commercial banking
project finance & syndications
equity Ijarah sukuk al ijarah structured
alternative assets
2005+
commercial banking
project finance & syndications
equity Ijarah sukuk al ijarah structured
alternative assets liquidity
management tools
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9458 1007311661
14761675
2027
0
2500
5000
7500
10000
12500
15000
2007 2008 2012
Conventional (UK) Conventional (non UK) Islamic
267366
605
500
1500
262
235.0
67.076.0
0
200
400
600
800
1000
1200
1400
1600
2007 2008 2012E
Islamic Assets GCC Iran Malaysia Others
Of the total 1.6 billion Muslims globally, there are approximately 640 million in tier 1 & 2 markets.
Today, there are more than 390 Islamic banks and institutions spread across 75 countries.
Total Global Islamic banking assets growth (USD bn)
CAGR 28%
CAGR 20%2
640
Banking Assets in key markets (USD bn)
37%
7%
Sources: The Banker, Oliver Wyman1 2007 – 2008 asset figures are based from The Banker 2 Oliver Wyman growth estimates
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ECONOMIC GROWTH IN SOME GEOGRAPHIES
Prioritization CountryTotal
Population (m)
(% Muslim)
GDP (% real change per
annum)
2008 2009f 2010f 2011f 2012f
(Tier 1)Saudi Arabia 24 (99%) 4.3 -0.1 3.9 5.9 5.2
UAE 5.2 (76%) 7.0 -1.2 4.3 6.4 6.1Malaysia 26 (60%) 4.6 -3.8 6.3 6 6.0
Tier 2
Qatar 1.2 (77%) 15.2 9.8 8.82 9.4 7.5Bahrain 1.0 (98%) 8.1 5.6 6.02 5.4 5.0Pakistan 176 (97%) 0.6 2.4 2.9 4 4.0
Indonesia* 240 (88%) 6.1 3.8 5.3 6.2 6.1Brunei 0.4 (64%) 0.61 na na Na Na
UK 61 (3%) 0.7 -3.8 1.6 1.8 2Bangladesh 29 (88%) 6.22 6.02 6.22 6.5 6.4
Egypt 75 (85%) 7.2 4.3 4.1 6.4 7
Tier 3
Turkey 77 (97%) 1.1 -4.4 2.0 3.5 6China 1300 (2%) 9 8.5 9 8.5 8.5India 1100 (13%) 7.5 6 7.5 7.2 7.2Iraq 29 (97%) na na na na na
Source: HSBC Group economic forecast.
INDUSTRY COMMENTATORS SEE ISLAMIC FINANCE INDUSTRY CONTINUING ITS RAPID GROWTH
Note: Key markets include Tier 1 and 2 markets Source: The Banker, Central Bank Reports
13%
4%
1
13%5%
7
35
57
0
10
20
30
40
50
60
70
2008 2012E
3364 3768
6000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2007 2008E 2012E
420562
1000
0
100
200
300
400
500
600
700
800
900
1000
2007 2008E 2012E
175 213
470
0
100
200
300
400
500
600
700
800
900
1000
2007 2008E 2012E
CAGR 22%
Islamic Retail Banking Assets (USD bn)
Islamic Wholesale Banking Assets (USD bn)
CAGR 19%
Source: Oliver WymanNote: Wholesale includes corporates, wealth funds and private clients.
CAGR 12%
Global Islamic Mutual Fund Assets (US bn)Islamic Gross Takaful Contributions (USD m)
CAGR 12%
RISING ISLAMIC PENETRATION WITH GROWTH ACROSS DIFFERENT INDUSTRY SECTORS
Source: Oliver Wyman
Source: Ernst & Young Source: Cerulli Associates Report
Penetration rates 2007 - 2008 2008 - 2012
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 20 40 60 80 100 120 140 160 180 200
Islamic Banking Assets (US bn)
Isla
mic
Ba
nkin
g P
en
etr
ati
on
UAEBahrain
Malaysia
Kuwait
Qatar
Indonesia
Pakistan
Egypt
Brunei
Bangladesh
Saudi Arabia
Sources: Oliver Wyman, Morgan Stanley, McKinsey, Zawya, Central Bank Reports
Being validated bottom up with Countries
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ISLAMIC FINANCE – SUCCESS RECIPE
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ISLAMIC FINANCE PROPOSITION – Success Recipe
Success Recipe
Majority or good percentage of population are Muslim
Market have strong demand for Shariah proposition but no issue to consider conventional
Government resolute in pursuing Islamic finance agenda and introduce conducive regulatory framework eg. Tax, legal etc.
Central Bank able to regulate Islamic financial institutions
Decide and provide guidelines on Shariah issues
Treatment of balance sheet - segregating or co-mingling
Provide framework to support and regulate the institutions
One stop centre to resolve issues by industry players
Sufficient talent to manage the business both the Shariah scholars and practitioners
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MODELS FOR ESTABLISHING ISLAMIC FINANCE
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VARIOUS MODELS FOR CONSIDERATION
Comprehensive infrastructure to support the
business
License only to do Islamic finance
business
Stand Alone Islamic Finance
Islamic Subsidiary
Leverage infrastructure from the parent
infrastructure
Separate Board of Directors
Subsidiary of the existing conventional in
the country
Supervise the operations to
ensure Shariah compliance
Using the main Bank
infrastructure to support the
business
Structure Islamic
products for distribution by conventional
branches
A division within the existing
conventional bankIslamic window
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ISLAMIC WINDOW OPERATIONS
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ISLAMIC ‘WINDOWS’ OPERATIONS
Windows Operations
A division within the conventional bank
Preferably to be headed by a Muslim
Need to set up Shariah Committee and Shariah department to ensure business undertaken is Shariah compliance
Minimum to have own product development team and dedicated IT team
Sharing the same system platform – tweak to meet with Shariah
Accounting treatment eg. penalty fee not compounded
Wordings on the statement and advises must be Shariah compliance
Leverage from existing infrastructure thus cost to do the business is lower
Preferable for the balance sheet to be separated
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ISLAMIC ‘WINDOWS’ OPERATIONS
Windows Operations
ADVANTAGES
• Sharing the same infrastructure
• Sharing the same system platform – tweak to meet with Shariah
• Cost to do the business is lower
• Inclusive proposition
DISADVANTAGES
• Always guided by the conventional banking way
• Business requirements may conflict with Shariah
• CHALLENGES
•Awareness on Islamic finance amongst the internal customers is low
•Shariah compliance to be the main driver for the business
•Potential canabalising the conventional business
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CHALLENGES IN ISLAMIC FINANCE
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CHALLENGES IN ISLAMIC FINANCE
Challenges
Strategy and Plan to develop the right
business model
Willingness to invest in Human
Capital Development
Information system to cater to Islamic
Finance transactions
Replication v. Authenticity
Comprehensive Shariah Governance
& Audit *
Meeting evolving consumers’ demand
Risk Management*
Legal, Regulatory & Accounting
Framework*
Wealth Management
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SHARIAH GOVERNANCE AND FRAMEWORK
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Islamic Financial Services Board (IFSB) Guiding Principles of Risk Islamic Financial Services Board (IFSB) Guiding Principles of Risk
Management indicates:Management indicates:
Shariah Compliance is categorised as higher priority in relation to Shariah Compliance is categorised as higher priority in relation to
identified risks and;identified risks and;
There must be a comprehensive and sound Shariah Compliance There must be a comprehensive and sound Shariah Compliance
framework and mechanism in place.framework and mechanism in place.
SHARIAH COMPLIANCE IS FUNDAMENTAL IN ISLAMIC BANKING AND FINANCIAL INSTITUTIONS
IFSB
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The business of the Company will be transacted in ACCORDANCE with the :
MEMORANDUM & ARTICLES OF ASSOCIATION OF MOST ISLAMIC FINANCE INSTITUTIONS PROVIDE:
Islamic Principles Rules Practices
In this respect, the Company is PROHIBITED from carrying out any transactions which involve any elements that are not in compliance with the Islamic principles, rules and practices.
Compliance
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SHARIAH STRUCTURE
Shariah Committee
Shariah Dept
Internal Policies,
Procedures,
Guidelines, Manuals,
Matrix & Certificates
Shariah Structure
Term Of Reference of Shariah Committee
Rulings of Shariah Committee
Shariah Advisory & Development Shariah Compliance & Review Shariah Research
Shariah Compliance Manual Guidelines on the Shariah Committee Shariah Compliance Certificate Guidelines on Services & Transactions
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LEGAL, REGULATORY & ACCOUNTING FRAMEWORK
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LEGAL, REGULATORY & ACCOUNTING FRAMEWORK
Legal
Need a Robust Structure
Regulatory
Flexible yet decisive
Accounting
AAOFI vs IFRS
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LEGAL FRAMEWORK – Need a robust structure
Ensure compliant with Shariah but yet enforceable under applicable secular law
Current transactional practise with respect to existing legal opinion
- Different islamic jurisprudence interpret Shariah differently
- Lack of binding precedents and published decision
- Is Shariah compliance considered in judgement eg Zulkifli vs Affin Bank (Malaysia),
Investment Dar vs Lebanon Blom Bank
Untested certainty/predictability for Shariah compliant transactions in different jurisdiction
Willing to change to accommodate Shariah requirements eg. legal ownership over home financing if structure based on Ijarah or Musyarakah
Legal
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REGULATORY FRAMEWORK – Flexible yet decisive
Willing to change the act to accommodate Islamic Finance
- Land Code
- Tax issue eg. VAT, property gain tax
Propose to adopt tax neutralityRegulatory
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ACCOUNTING FRAMEWORK (AAOIFI vs IFRS)
Accounting 1
AAOIFI
Develop the accounting, auditing and banking practices through relating to the activities of the Islamic Financial Institutions (IFIs)
Prepare, promulgate and interpret accounting and auditing standards for IFIs in order to harmonize the accounting practices and auditing procedures
Review and amend the accounting and auditing standard for IFIs to cope with developments in the accounting and auditing through practices
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ACCOUNTING FRAMEWORK (AAOIFI vs IFRS)
Accounting 2
IASC Foundation and IASB
To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRS) through its standard-setting body of IASB
To promote the use and rigorous application of those standards
To bring about the convergence of national accounting standards and IFRS to high quality solutions
Main Differences AAOIFI and IFRS
AAOIFI
Specific for Islamic industry
Accounting, Auditing, Ethics, Governance & Sharia
IFRS
Entire economic & social activities
Specific to accounting
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ACCOUNTING FRAMEWORK (AAOIFI vs IFRS)
Accounting 3
Consideration
Standalone and fully Islamic Group – AAOIFI
Subsidiary with conventional parent – IFRS
Window – IFRS
Rationale for window to adopt IFRS
Consolidation
Accounting treatment eg. Unrestricted investment as a separate item instead of presented as liabilities (along with other liabilities) in IFRS
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RISK IN ISLAMIC FINANCE
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Credit Risk Market Risk Insurance Risk Sustainability Risk Liquidity Risk Pension Fund Risk Residual Value Risk Reputation Risk Operational Risk
RISK MANAGEMENT IS
Accounting
Business Continuity
Fiduciary
Fraud
Information
Legal
Compliance
Operations
People
Tax
Technology
Shariah Risk ManagementEmbedded within the conventional
business risk management framework
Non-compliance with Shariah rules and regulations
New product due diligence including simplification of product complexities
Application of Late Payment / Penalty for default in a Shariah compliance manner
Advise on debt restructuring
Changes in fatwa resulting in existing product being non-compliance
Advising / guiding with ongoing Shariah requirements
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MAJOR SHARIAH RISKS Concentrated reliance on a single
broker for transacting commodity murabaha (substantial Global Business is based on this structure)
Untested legal infrastructure (case laws or court proceedings) supporting products
Major RisksCredibility of “Commodity Murabaha” / “Tawarruq” structure questionable
Manual Processes increase operational risks
Lack of inter-bank market creates challenges in matching assets and liabilities
Identification of new brokers required and find alternative to existing commodity (eg. Bursa Al Sila’)
Using experienced legal counsel for preparing documentation and structures
Looking to diversify to other structures.
To address concerns raised.
Rationalisation of product range. Long term, automation and standardisation required
This has to be addressed and financial linkages required
RISKS ACTIONS
Thank You