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Islamic Finance Creating an enabling framework for Azerbaijan. Neil D Miller Global Head of Islamic finance 16 November 2012. Islamic Finance – Why?. Global Islamic banking assets are growing…. Source:: Deutsche Bank, company data, Central Banks, The Banker, Reuters . - PowerPoint PPT Presentation
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Neil D Miller
Global Head of Islamic finance
16 November 2012
Islamic FinanceCreating an enabling framework for Azerbaijan
2
Islamic Finance – Why?
Global Islamic banking assets are growing…
Source:: Deutsche Bank, company data, Central Banks, The Banker, Reuters
2007 2008 2009 2010 2011$0.00
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Islamic Banking Assets
% of global banking assets
$bn
%
… and forecast to continue growing.
Source: Deutsche Bank, company data, IMF, Central Banks (The sample group of countries includes Iran, Saudi Arabia, Malaysia, UAE, Kuwait, UAE, Qatar, Bahrain, Turkey, Indonesia, Jordan, Bangladesh and Pakistan), Reuters
2010 2011 2012 2013 2014 2015 2016$0
$200$400$600$800
$1,000$1,200$1,400$1,600$1,800$2,000
26.0
27.0
28.0
29.0
30.0
31.0
32.0
Islamic AssetsAs percentage of GDP
$bn
%
Islamic finance is spreading across the Islamic world…
189
138
32 29 22 18 80
40
80
120
160
200Re
st of
Wor
ld
GCC
Suda
n
Pakis
tan
Iran
Mala
ysia
Bang
lades
h
Number of institutions offering Islamic finance products
Source: Deutsche Bank, CIBAFI, IFSL.
22
9
4 3 3 31 1 1 1 1 1
05
10152025
UK US
Aust
ralia
Fran
ce
Sout
h Afri
ca
Switz
erlan
d
Cana
da
Caym
an Is
lands
Germ
any
Irelan
d
Luxe
mbo
urg
Russ
ia
…and across the secular world.
Number of institutions offering Islamic finance products
Source: Deutsche Bank, CIBAFI, IFSL.
Islamic finance activity centres
Major activity centres:• Bahrain• Dubai• Malaysia• United Kingdom
Developing / interested centres:• Australia• Azerbaijan• Canada• France• Germany• Hong Kong• Indonesia• Ireland• Kazakhstan• Nigeria• Pakistan• Singapore• South Africa• United States
100 – 70% 29– 10%69 – 50% 9 – 2%49– 30% Less than 2%
Muslims are approximately 25% of the worlds population…
Several Muslim states are investing immense wealth across borders…
1,126
719572
478 405296
143 85 70 570
200400600800
1,0001,200
China UAE
Norw
ay KSA
Singa
pore
Kuwa
it
Russ
ia
Qatar
Libya
Alge
ria
$bn
MENA-based SWF account for approximately 43%of the top 10 or $1.7 trillion
Source: Deutsche Bank, Sovereign Wealth Fund Institute.
…and financing through the use of Sukuk
Source: Deutsche Bank, Bloomberg Finance LP, Zawya, IIFM, KFH Global Sukuk Report
2005 2006 2007 2008 2009 2010 2011 2012 (to date) -
10
20
30
40
50
60
70
80
90
100
11
22
37
20
31
50
90 93
Global Sukuk issuances (USD)
Is it worth it?Could it attract capital and funding?
Would it makes us internationally competitive?Does it force innovation and up skilling?
Is it inclusive for our citizens?Will it create employment?
Will it enhance our global reputation?Does it support the vision for our country?
Is it ethical and morally right?Does the cost benefit balance work?
Is it profitable?It is inevitable in the long term?
The commercial case for Islamic finance
11
Azerbaijan
Total Population: c. 9.3 million (with c. 93% Muslims)
Mode of governance Constitutional Secular Republic
Legal system Civil Law
GDP * US$ 64.78 billion (AZN 51.16 billion) in 2011
GDP growth rate * c. 20% in 2011
GDP per capita * US$ 7,155.7 (AZN 5,650.8) in 2011
GDP by sector * Production: 68%; Services: 26%; Net taxes on products and import 6%
Labour force by occupation * Agriculture 37,9%, Trade; repair of transport means 14,5%; Education 8%; Construction 7,1%; Other 32,5%
Unemployment rate * 5.4 %
Population below poverty line * 7.6%
Major exports Oil & gas (90%)
Enabling framework for Islamic finance Development Stage
Source: http://www.stat.gov.az/menu/6/statistical_yearbooks/SYA2012
Islamic finance in Azerbaijan
International Bank of Azerbaijan is leading Islamic Banking in Azerbaijan and opened Islamic Window.
International Bank of Azerbaijan provides various Islamic Banking Products, such as wadiah, wakala, mudaraba, etc.
Amrah Bank conducted market analysis of Takaful (Islamic Insurance).
13
Creating an enabling framework for Islamic finance
Legal and
supervisory framework
Structure of Islamic banking
institutions
Shari’a governance
and oversight
Financial accounting
and reporting
Liquidity management
for Islamic banks
Evaluate whether new laws are needed or whether existing framework can be adapted. Learn from others’ experience, including Kazakhstan. In addition to banking, the framework should also facilitate Sukuk transactions
Once an enabling environment for Islamic banking industry is created and the Islamic banking industry establishes itself it will create demand for other sectors of the economy to be similarly enabled for Islamic financial products.
Over time, enabling framework can be created to facilitate all segments of Islamic finance sector
Takaful Microfinance Others
Phase 1
Phase 2
Islamic fund management
Identify and make legal changes to facilitate the establishment of a robust and well regulated Islamic banking sector.
Identify and make changes required to facilitate other segments of the Islamic finance sector
Islamic Capital
markets and Sukuk
Learning from others’ experience
15
Kazakhstan experience
Amendments made to the following laws:o Civil Code of Kazakhstan (General Part) dated 27 December 1994 (the “Civil Code - GP”);o Civil Code of Kazakhstan (Special Part) dated 1 July 1999 (the “Civil Code - SP” and, together
with the Civil Code – GP, the “Civil Code”);o Tax Code of Kazakhstan dated 10 December 2008 (the “Tax Code”);o Law On Banks and Banking Activity in the Republic of Kazakhstan dated 31 August 1995 (the
“Banking Law”);o Law On Partnerships with Limited and Additional Liability dated 22 April 1998;o Law On the Securities Market dated 2 July 2003 (the “Securities Market Law”);o Law On Investment Funds dated 7 July 2004;o Law On Mandatory Guaranteeing of Deposits in the Second-Tier Banks of the Republic of
Kazakhstan dated 7 July 2006;o Law On Licensing dated 11 January 2007; ando Law On State Registration of Rights to Immovable Property and Transactions Therewith dated 26
July 2007.
16
Kazakhstan experience (continued)
On 14 March 2009 the Prime Minister issued an order (No. 40-r) directing that 11 sets of implementing normative legal acts be adopted including the following:• amendments and changes to certain resolutions on bookkeeping and financial reporting by Islamic
special finance companies (the “ISFC” ) (National Bank of Kazakhstan (the “NBK”) Resolution No. 24 dated 20 March 2009);
• instruction on bookkeeping by Islamic special finance companies (NBK Resolution No. 25 dated 20 March 2009);
• rules governing transfer of property and liabilities under investment deposits of liquidated Islamic banks to another selected Islamic bank (FMSA Resolution No. 51 dated 27 March 2009);
• extension of rules for issuance of bank establishment permits and for licensing of banking and other operations to cover Islamic banks (FMSA Resolution No. 53 dated27 March 2009);
• requirements for the establishment and operation of ISFCs (FMSA Resolution No. 54 dated 27 March 2009);
• rules on voluntary reorganization or liquidation of Islamic special finance companies (FMSA Resolution No. 55 dated 27 March 2009);
• requirements for content of an agreement between the issuer and the representative of holders of Islamic securities and the functions and duties of the representative (FMSA Resolution No. 56 dated 27 March 2009); and
• instruction on prudential standards for Islamic banks (FMSA Resolution No. 66 dated 27 March 2009).
17
The UK experience
Commodity Murabaha transactions executed through the London Metal Exchange since 1980
Islamic finance formally acknowledged in 2003 with changes to stamp duty legislation
Changes made to tax laws in almost every Finance Act since 2003 to accommodate additional products
The term “Islamic” or “Shari’a” does not appear in any UK statute. However, these terms are used in the guidance notes issued by the regulatory authorities
No major change in the regulatory framework – Islamic finance accommodated within the existing framework
The FSA is a financial regulator and does not have the mandate to regulate on matters of Shari’a compliance
The UK does not mandate the application of AAOIFI or IFSB.
18
Malaysian experience
Islamic Banking Act enacted in 1983
Takaful Act introduced in 1984
Amendments made to Government Funding Act of 1983 to facilitate Sukuk issuances by the Malaysian government
Between 1983 to 2000, various amendments made to the Banking and Financial Institutions Act of 1989
Between 2001 to 2010, various amendments made to several laws, including:o The Central Bank of Malaysia Act of 1958 to facilitate window operationso Development Financial Institutions Act of 2002 to facilitate Islamic DFIso Capital Market Services Act 2007
Several amendments made to tax laws to remove tax anomalies and to provide incentives for IFIs
Shari’a governance framework and guidelines on corporate governance for Islamic banks issued by the regulator
A dedicated high court to facilitate dispute resolution in Islamic finance
Next steps for Azerbaijan? – The Market/Industry readiness matrix
Encourage and facilitate
Initiate and germinate
Investigate and regulate
Identify road blocks and reformCreate supporting regulations and rules
Actively invite and solicit market entrantsHelp them navigate the system
Consider creating opportunities – Pension/Sukuk?Location incentives/training subsidies
Government
Private sector
Evaluate feasibility
Develop and execute
Innovate and grow
Encourage and facilitate
Initiate and germinate
Investigate and regulate
Government
Private sector
Evaluate feasibility given potential
demand, no roadblocks, clear regulations and
facilitative environment and develop strategy
Develop products to meet demand
given clear tax and legal treatment and
supportive regulators, invest in
systems, people, training and
marketing
Deliver local demand, learn,
innovate, develop overseas demand,
attract capital, become specialist, develop leadership and dominate the
region
Next steps for Azerbaijan? – The Market/Industry readiness matrix
Evaluate feasibility
Develop and execute
Innovate and grow
Encourage and facilitate
Initiate and germinate
Investigate and regulate
Government
Private sector
PRESENT STATE
POTENTIAL
Next steps for Azerbaijan? – The Market/Industry readiness matrix