Potential and Future of OIC Capital Markets

Dr. Zamir IqbalVice President and CFO, Islamic Development Bank

13th Meeting of the OIC Exchanges Forum26 September 2019, Istanbul

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Agenda

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II. Challenges

III. Systematic Progress – Review of 10-Year Framework

IV. Opportunities and The Way Forward

I. Current Status of Islamic Capital Markets

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Islamic Financial Markets

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Source: IFSB reports

The industry’s total worth across its three main sectors (banking, capital markets and takāful) is estimated at USD2.19 trillionin 2018 marking a year on year (y-o-y) 6.9% growth in assets in US Dollar terms.

The growth was contributed actively by all three sectors of the IFSI, but the key rebound in performance was experienced bythe Islamic capital markets.

1476

.2

294.

7

75.8

21.4

1868

.1

1496

.5

290.

6

71.3

23.2

1881

.6

1493

.4

318.

5

56.1

25.1

1893

.1

1557

.5

399.

9

66.7

26.1

2050

.2

1571

.3

530.

4

61.5

27.7

2190

ISLAMIC BANKING ASSETS SUKUK OUTSTANDING ISLAMIC FUNDS ASSETS TAKAFUL TOTAL INDUSTRY

ISLAMIC FINANCE TOTAL ASSETS 2014-20182014 2015 2016 2017 2018

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Islamic Capital Markets

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Performance of Islamic Equities

Total Global Sukuk Issuances

Global Sukuk issuances have increased slightly because of domesticissuances. International issuances have slightly reduced in 2018.

Over a 10-year horizon from Jan-2009 to Jan-2019, the S&P Global 1200Sharīʻah Index generated overall higher returns than its conventionalbenchmark at 11.11%, compared to 10.29% returns generated by S&PGlobal 1200 during the same period

The number of Islamic funds increased by 11% after a slight drop theprevious year, however, the total AuM increased by a mere 1.0% indicatingthat the overall size of funds have not seen a significant increase.

Assets under Management and Number of Islamic Funds

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Challenges

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Macro-economic

Challenges

Slow Progress in

Financial Engineering

Creating an Enabling

Environment

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Savings and Market Capitalization

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-20

-10

0

10

20

30

40

50

60

1985 1990 1995 2000 2005 2010 2015 2020

Gross Savings/GDP

OIC Countries OIC-High Income OIC-Low and Lower Middle Income WB High Income

0

20

40

60

80

100

120

140

160

2002 2004 2006 2008 2010 2012 2014 2016 2018

Market Capitalization/GDP

OIC Countries OIC - High Income OIC Low and Lower Middle Income WB High Income

0

5

10

15

20

25

30

1985 1990 1995 2000 2005 2010 2015 2020

Gross Capital Formation (Investment)/GDP

OIC Countries OIC-High Income OIC-Low and Lower Middle Income WB High Income

Market capitalization does not translate into capital formation inany income group, including the high-income countries.However, there is a stark difference between the low-incomeand higher-income groups of countries.

Stock markets in their current form contribute relatively less toeconomic development than their potential and expectationsbecause of the speculative nature of these markets

Source: World Bank, World Development Indicators

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Sukuk Structures

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51%

25%

Source: IIFM Database

Global Sukuk Issuances 2010 - 2018

Source: IIFM

51%25%

Sukuk Al Wakalah is the most used structure during 2010-2018 period followed by the SukukAl Ijarah. The Sukuk Al Wakalah provides flexibility in structuring and the issue of shortage ofavailable assets is reduced.

In 2017 the Issuance by Saudi Arabia’s 9.00 billion Sukuk led to the introduction of newhybrid structure consisting of Mudarabah and Murabahah.

In the domestic market, Sukuk Al Murabahah has historically been and continues to be themost dominant structure for Sukuk issuance. In 2018 Ijarah, Mudharabah and Wakalah isalso part of the structural mix which is desirable from the diversity point of view.

0

5000

10000

15000

20000

25000

30000

35000

40000

Domestic Sukuk Issuances Jan 2018-Dec 2018

Murabahah Ijarah Murabahah/Mudarabah

Wakalah Mudarabah Hybrid-Other

Salam Wakalah/Murabahah

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

International Sukuk Issuances Jan 2018-Dec 2018

Wakalah Ijarah Wakalah/Murabahah

Murabaha/Mudarabah Mudarabah Mudarabah/Wakalah

Hybrid-Other Ijarah/Murabaha Murabahah

Ijarah/Musharakah

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Infrastructure Development and Planning

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10-Year Framework

•2007

Mid-Term Review

•2014

Present State

•2019

Integrate Islamic finance in national development plans. (Only few countries)

Strengthen governance; Enhance regulatory implementation and enforcement (Some efforts made in SEAsia, GCC, Turkey)

Foster financing of a wider set of economic sectors (Not much change)

Link Islamic financial markets across borders (Some regional efforts in SEAsia and GCC)

Fund public infrastructure projects through Islamic capital markets (Few success stories)

Strategic objective II

Develop Islamic financial products and markets

Three Pillars, namely Enablement, Performance

and Reach

Development of Key Performance Indicators to

monitor progress

Establishment of a stronger Implementation Plan to be undertaken by a range of

stakeholders

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Recommendations by Mid-Term Review

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Create More Incentives for risk sharing instruments

Standardize and Harmonize the Approach to Islamic Capital Market Regulation

Develop comprehensive and sophisticated interbank, capital and derivatives market infrastructures for the IFSI

Enhance access by the large majority of the population to financial services

Strengthen Resolution Frameworks and Investor Protection

Conduct initiatives and enhance financial linkages to integrate domestic IFSIs with other (domestic, regional and international) financial markets

Improve Shari‘ah Governance

Improve Market Liquidity by Addressing the Constraints

Develop the required pool of specialized, competent and high-calibre human capital

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Opportunities and Going Forward

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Fintech and innovative solutions

Securitization through new

platforms (P2P, B2B,

Crowdfunding)

New Sukuk initiatives (Green,

Sustainable, Social)

Innovative solutions in stock

markets (New Index Funds)

Enabling legal and regulatory

environment

THANK YOU

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