Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013

Shariah-Compliant Markets: Challenges & Opportunities

İbrahim M. TURHAN, Ph.D.Chairman & CEOSeptember 20, 2013

20.09.2013 2

Agenda

I. Global Outlook of Shariah-Compliant Finance

Global Shariah-Compliant Financial Assets

Global Shariah-Compliant Banking Assets

Global Shariah-Compliant Capital Markets

II. Shariah-Compliant Finance: Challenges

Lack of Standardization

Conflicts among the opinions of Shariah Boards

Lack of enough Expertise and Human Capital

III . Shariah-Compliant Finance: Opportunities

Asset-based Structure

Reduction in Systematic Risk

Sukuk: Opportunity for Long-term Funding

20.09.2013 3

Agenda













Global Outlook of Shariah-Compliant Finance

Source: Bloomberg and KFH Research

1 2 3 4 5 6 7 8 9 10 11 12 130

10

20

30

40

50

60

70

80 72.0

50.5 49.0

43.0

29.0 28.0 27.3

19.5

5.0 4.0 2.0 1.7 1.6

Composition of Global Financial Assets in 2012

(USD trillion)

1 Bank Assets2 Stock Market Capitalization3 World GDP4 Private Debt Securities5 Pension Funds6 Mutual Funds7 Public Debt Securities

8 Insurance Companies9 Reserves ex Gold10 Sovereign Wealth Funds11 Hedge Funds12 Private Equity Funds13 Shariah-Compliant Finance

Total Shariah-compliant assets consist less than 1% of global assets (USD 332.6 tr)

CAGR (2008-2013): 18.4%

4

• Growth forecast in global Shariah-Compliant financial assets in 2013: 11%

• The size of Shariah-Compliant financial assets are expected to reach USD 4 trillion by 2020.

Source: Bloomberg and KFH Research

20.09.2013

mid-1990s 2008 2009 2010 2011 20122013E

0

200

400

600

800

1000

1200

1400

1600

1800

2000

180

690

985

11881340

1600

1900

Trends in Global Islamic Financial Assets (USD billion)


Source: Bloomberg, KFH Research

Shariah-Compliant Banking, 80.3%

Takaful, 1.1%

Sukuk, 14.6%

Shariah-Compliant Funds, 4.0%

Composition of Global Shariah-Compliant Financial Assets in 2012

Shariah-Compliant Financial Assets

520.09.2013



20072008

20092010

20112012

2013E

0

200

400

600

800

1000

1200

1400

1600 1530

Trend in Global Shariah-Compliant Banking Assets

(USD billion)

Iran; 42.7%

Others; 8.7%Indonesia; 1.4%

Bahrain; 2.0%Turkey; 3.1%

Qatar; 4.0%

Kuwait; 7.9%

UAE; 8.0%

Malaysia; 10.0%

Saudi Arabia; 12.2%

Country Share of Global Shariah-Compliant Banking Assets in 2012

CAGR (2007-2013): 17.7%


Shariah-Compliant Banking Assets

620.09.2013


20012002

20032004

20052006

20072008

20092010

20112012

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1.2 1.47.1 9.5

13.7

33.8

50.0

24.3

37.9

53.0

92.4

137.5

Global Sukuk Issuance (USD billion)

Source: IIFM Database

• Based on current growth forecast, Shariah-Compliant financial institutions will require at least US$ 400 billion of short term, credible, liquid securities for liquidity and capital management purposes, by 2015.

Shariah-Compliant Capital Markets

720.09.2013


Structural Breakdown of Domestic Sukuk Issuance Globally - (2001-2013)

Structural Breakdown of International Sukuk Issuance Globally - (2001-2013)

Source: IIFM Database

Musharakah; 14.0%

Ijarah; 45.0%

Ex-changable;

8.0%

Murabahah; 3.0%

Mudharabah; 6.0%

Hybrid; 8.0%

Wakalah; 14.0%

Salam; 2.0%

Musharaka

h; 16.0%

Ijarah; 17.0%

Murabahah; 50.0%

Mudharabah; 3.0%

Hy-brid; 4.0%

Salam;

1.0%

Is-tisna

; 1.0%

Bai Bithaman Ajil; 8.0%


Source: IIFM Database820.09.2013

Source: www.cmalert.com, IFIS, Zawya

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

350

1.4 7.1 9.5 13.733.8

50.0

24.337.9

53.0

92.4

137.5

80.898.7

127.8

236.3252.6

314.0

18.97.3 14.6

34.152.6

Comparison of Issuances: Sukuk vs. CMBS

SUKUK CMBS

US

D b

ln.



920.09.2013

20.09.2013 10

Agenda













Shariah-Compliant Finance: Challenges

A) Lack of Standardization

• Lack of harmonization in regulations (Different terminologies, procedures and applications)

• Does time value of money in Islam exist?

• Non-standardization of products

• Market centered (Conventional) vs. Bank centered (Shariah-Compliant)

• Financial Intermediation in Shariah-Compliant Finance is restricted.

1120.09.2013


• Latent Organized Exchange for Sukuk: 17% of Total Global Sukuk Issued in Stock Exchanges.

• 65% of Sukuk (issued in organized exchanges) located on outside of Islamic countries.

Source: Zawya

1220.09.2013

A) Lack of Standardization

London SE

Irish SE

Indonesia SE

Dubai FM

Singapore SE

Nasdaq Dubai

Bursa Malaysia

Bahrain SE

Hong Kong SE

LFX (Labuan)

Kazakhstan SE

Saudi SE

0 2000 4000 6000 8000 10000 12000

Global Sukuk Issuances by Stock Exchange Location in 2012 (USD million)


B) Conflicts among the opinions of Shariah Boards

• Lack of consensus among scholars (various Shariah boards)

Number of Shariah Boards around the World is more than 400

Total number of board membership around the World is 1,141

• Diversification in the interpretation of Shariah-compliance.

Source: Funds@Work

1320.09.2013


C) Lack of enough Expertise and Human Capital

• Shortage of human capital

• A group of 20 prominent Shariah scholars sit on 55% of total Shariah board memberships.

• Top 2 Scholars hold 85 board memberships.

• With scholars holding dozens of portfolios, it is impossible for them to have good performance.

Source: Funds@Work

1420.09.2013


C) Lack of enough Expertise and Human Capital

UK

Malaysi

aUAE

Pakist

an

Jordan

Bahrei

nFra

nce

Indonesia

KuwaitSy

riaSu

danBru

neiQata

r

Algeria

India

Suau

di arab

ia

Yamen

Leban

onEg

ypt

Tunisia

Morocco

Seneg

alIta

lia

Switz

erlan

d

Belgium

Australi

a0

5

10

15

20

25

30 28

21

11 10

7 6 5 53 3 3 3 2 2 2 1 1 1 1 1 1 1 1 1 1 1

Shariah-Compliant Finance Programs Around the World(Total of Undergraduate and Graduate Level Programs)

• There are only 123 Shariah-Compliant programs that cover five continents and are distributed over 26 countries.

Source: Belouafi, A., Belabes, A., & Daoudi, M. (2012). Geo-education of Islamic finance in the global space. Procedia-Social and Behavioral Sciences, 46, 5335-5339.

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Agenda

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Shariah-Compliant Finance: Opportunities

Ratio Scaled byShariah-Compliant

Banks(%)Conventional

Banks(%)Business Model

Non-deposit funding Total funding 3.9 5.5Gross Loans Total deposits 77.4 71.6EfficiencyOverheads Total assets 2.7 3.5

Cost income ratio 54.1 62.1Stability

Return on assets 1.4 1.1Equity assets ratio 13.5 10.7

ControlsNon-loan earning assets Total earnings assets 41.7 44.5

Fixed assets Total assets 2.3 1.9

Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks(Bankscope Data for 2956 banks around the world)

Source: Beck, T., A. Demirguç-Kunt, and O. Merrouche. (2010). Islamic vs. Conventional Banking: Business Model, Efficiency and Stability. World Bank Policy Research Working Paper 5446.

1720.09.2013

A) Asset-based Structure


B) Reduction in Systematic Risk

Source: IFSB

1820.09.2013

Change in total assets

Change in equity

-150

-100

-50

0

50

100

Changes in Banking Sector (pre and post crisis)

Top 10 Conventional Banks

Top 10 Shariah-Compliant Banks

(%)

Change in mar-ket capitalization

Change in net profit


B) Reduction in Systematic Risk

Source: Ernst & Young

1920.09.2013

Corporate Government Personal Real Estate Services0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

4.2

12.9

8.510.2

12.88.3

10.0

30.4

12.8

23.5

Growth in Personal Financing Assets (CAGR, 2008-2011)

ConventionalShariah-Compliant

(%)


C) Sukuk: Opportunity for Long-term Funding

Source: IFIS, Zawya

Government66.0%

Transport Sector 11.3%

Financial Services

10.8%

Others11.9%

Global Sukuk Issuers by Sectors in 2012

2020.09.2013


20032004

20052006

20072008

20092010

2011

Aug 20120

5000

10000

15000

20000

25000

~25000Global Sukuk Issued for Infrastructure Projects (USD million)

Source: IFIS, Zawya, Bloomberg, KFHR


2120.09.2013


Sukuk Issued by Shariah Principles (2001-2012)

Malaysia; 78.7%

Iran; 0.2%

In-done-sia;

0.2%

Cay-man Is-lands; 8.8%

Brunei; 0.2%

UAE; 4.3%

Saudi Arabia; 7.1%Pakistan; 0.5%

Infrastructure Sukuk Issued by Country (2001-2012)

Musharakah; 33.4%

Ijarah; 26.0%

Murabahah, 20.7%

Mudharabah; 1.8%

Istisna; 7.1%

Combinations; 5.1%

Bai Bithaman Ajil; 4.2% Wakalah; 1.7%

Source: IFIS, KFHRSource: IFIS, KFHR


2220.09.2013


• Total housing loans in Turkey equal to TL104 billion, by August 2013.

• Urbanization process of Turkey props the increasing housing loans.

Source: CBRT, UN

Special Case: Turkey

2320.09.2013

19801985

19901995

20002005

20102015F

01020304050607080

43.852.4

59.2 62.1 64.7 66.8 70.575.1

Urbanization in Turkey (urban population, % of total)

(%)


• Under the urban transformation plan, approximately 8 million dwellings are expected to be rebuilt in 20 years.

• Urban transformation requires approximately USD 800 billion.

• For liquidity, Turkey needs secondary loan market for housing credits.

• Shariah-Compliant Finance tools such as Sukuk Issuance would be a solution.

Source: Yildirim, Y. (2012). Urban Transformation. Sabahattin Zaim Islam and Economy Symposium.


2420.09.2013


Source: IFIS


2520.09.2013

2010 2011 2012 2013 Aug0

500

1000

1500

2000

2500

3000

3500

0

1

2

3

4

5

6

Turkish Sukuk Market

Sukuk Issuance (Left) No. of Issues

US

D m

ln.

Recent Developments on Islamic Finance

Source: IFIS

2620.09.2013

Introduction of Sukuk and Equity Repo Market

World Bank Islamic Finance Research Center

Organization of Islamic Cooperation Member States’ Stock Exchanges Forum

S&P/OIC COMCEC 50 Shariah Index

S&P/OIC COMCEC 50 Shariah vs. DJIM Index

Source: Bloomberg

2720.09.2013

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DJIM Index SPOIC50P Index

Documents

Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013