Global trends in islamic banking - MIM Mediterranean Economic Forum 2014

GLOBAL TRENDS IN ISLAMIC BANKING

The MIM Mediterranean Economic Forum 201424 October 2014

BY:

Jassim Mahadik

Project Manager, Al Maali Consulting Group

WHAT IS ISLAMIC BANKING?

WHAT IS ISLAMIC BANKING

WHAT IS ISLAMIC BANKING?

• Islamic banking is a banking system which is operated in compliance and conformity with Sharia.

• Prohibited activities are not undertaken. Riba

Gharar

Maysir

Other elements

• Linked with the real economy.

HISTORICAL OVERVIEW OF ISLAMIC BANKING & FINANCE: A CLASSICAL PERSPECTIVE

• Arabs conducted business and trade during the pre-Islamic era.

• Some of the pre-Islamic practices were in direct conflict with Islamic principles.

• The beginning of Islamic Finance can be traced to the Prophet’s (peace be uponhim) times.

• Examples:

The Prophet (peace be upon him) used to trade using Khadija’s (may Allah bepleased with her) capital.

The Prophet (peace be upon him) permitted credit sales

DAWN OF THE MODERN ISLAMIC BANKING

Egypt

• In 1963, a bank was established in Mit Ghamr which was based on the German concept ofsavings bank.

• No interest was paid or received.

• Based on profit and loss sharing.

• In 1968, the bank was closed due to government’s hostility towards private initiatives.

• In 1972, the Mit Ghamr Savings Bank was revived as Nasser Social Bank.

Establishment of other Islamic Banks

• More Islamic Banks established in 1970s other countries.

• Examples:

Islamic Development Bank in 1973.

Dubai Islamic Bank in 1975.

SIZE OF THE ISLAMIC BANKING INDUSTRY

2008 2009 2010 2011 2012

Banks 720 777 943 1105 1326

Funds 51 54 58 62 74

Takaful 8 13 21 26 31

Other 1 3 3 26 28

Total 781 847 1025 1219 1460

Global Islamic Finance Assets by Sector US$bn

720

777

943

1105

1326

51

54

58

62

74

8

13

21

26

31

1

3

3

26

28

0 200 400 600 800 1000 1200 1400

2008

2009

2010

2011

2012

US$bn

Global Islamic Finance Assets by Sector

Other

Takaful

Funds

Banks

Source: The Banker, Ernst & Young

It is estimated that the size of the Islamic banking industry at the global level is close to $1.6 trillion and it is expected to reach $3.4 trillion by 2018 (Ernst & Young)

ISLAMIC BANKING STANDARDS SETTING BODIES

• Established in Bahrain on 27th March 1991

• Non-for-profit corporate body that preparesaccounting, auditing, governance, ethics andSharia standards for Islamic financialinstitutions and the industry.

• 200 members from 40 countries, includingcentral banks, Islamic financial institutions,and other participants from the internationalIslamic banking and finance industry,worldwide.

• Officially inaugurated on 3rd November2002

• Dedicated at introducing new, or adaptingexisting, international standards consistentwith Sharia principles, and recommendingthese for adoption

• 184 members of the IFSB comprise 59regulatory and supervisory authorities,eight international inter-governmentalorganisations, 111 financial institutionsand professional firms as well as six self-regulatory organisations (IndustryAssociations and Stock Exchanges)operating in 45 jurisdictions.


Till date, AAOIFI has issued a total 88 standards


Till date, IFSB has issued 21 standards, guiding principles & technical note on different topics related to Islamic finance

• Risk management

• Corporate governance

• Sharia issues

• Capital adequacy, etc.

ISLAMIC BANKING SYSTEMS

Three types of Islamic banking systems

Full-fledged Islamic banking system

Iran Sudan Pakistan

Dual system

“Conventional plus” system

Malaysia Pakistan UAE

UK Thailand Bangladesh


Pakistan

• Jan 2014: Mufti Taqi Usmani named as the Chairman of the State Bank of Pakistan

• His major role: To Islamise the banking sector of Pakistan

• Strategic Plan: Islamic Banking Industry of Pakistan 2014 – 2018

Enabling policy environment: Enabling legal, regulatory, supervisory, liquidity management framework, taxation regime and financial accounting & reporting framework

Sharia governance and compliance: standardization and harmonization of Shariah practices, as well as on creating distinct Islamic banking products and services.

Awareness and capacity building: Enhancing awareness about Islamic finance, and building capacity of the stakeholders

Market development: Initiatives will be undertaken for product diversification and financial inclusion with the collaboration of stakeholders


Dual System

Islamic financial system in parallel with conventional system – Malaysian case

Conventional Financial System Islamic Financial System

Conventional banks

Conventional banks

Conventional money market

Conventional capital market

Insurance companies

Islamic banks

Islamic windows

Islamic subsidiaries

Islamic money market

Islamic capital market

Takaful operators

• Leveraging on operatinginfrastructure ofconventional banks

• Level playing field

• Minimise regulatoryarbitrage

• Comprehensivecomponents of IFIsimportant to facilitate aneffective intermediationprocess

Source: Dusuki, 2011

Malaysia


Conventional plus system – A Case of United Kingdom

A conventional financial system with a few Islamic financial institutions operating under the conventional regulatory regime

UK

• “No obstacles, but no special favors”

• Islamic banking has to be conducted within the existing banking laws of the land

• But there have been cases where Islamic banking has been given exceptions

Example: Murabaha case

• Only one Islamic retail bank

• Bulk of the work in Islamic finance

Investment banking

Sukuks

Listing of sukuks, etc.

ISLAMIC BANKING MODELS

Full-Fledged Subsidiary Window

Drivers• Demand• Experience & expertise• Independence• Regulations• Capital

RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS

• Meezan Bank buys HSBC Pakistan – October 2014

• Meezan Bank has already stated that it intends tomake the operations of HSBC Shariah-compliant,while ensuring that the existing customer basecontinues to receive uninterrupted bankingservices.

• Meezan Bank had acquired Societe Generale inPakistan through a similar transaction in 2002

Source: The Express Tribune


• Abu Dhabi Islamic buys UAE business of Barclays: April 2014

• Dh726.4m (£119 million)

• ADIB to take on about 110,000 extra customers from the purchase.

Source: The National Business


• Zaman Bank JSC, Kazakhstan: May 2014

• Islamic Development Bank’s (IDB) plan of acquiring 35%stake in this bank.

• As part of the plan, IDB already bought 5%.

• However, the bank had to be converted from conventionalto Islamic.

• Al Maali was appointed to convert it to a full-fledged Islamicbank

• More banks in Kazakhstan are keen on converting theiroperations into Islamic

ZAMAN BANK

We have a roadmap for development of Islamic finance until2020, adopted by the government. We have a number of

Kazakh banks seeking to convert to Islamic banks - KairatKelimbetov, governor of the central bank of Kazakhstan.

Source: Bloomberg


• CIMB, RHB Capital Bhd, and Malaysia Building Society Bhdplan a merger to create a Mega Islamic Bank with a marketvalue of more than $20 billion

Source: The Reuters

RECENT DEVEOPMENTS IN ISLAMIC BANKING

• Russian banks lobby the central bank for Islamic banking legislation: August 2014

• The Association of Russian Banks (ARB) said in a letter sent to the central bank late last weekthat promoting Islamic finance could give a boost to the economy and draw significantinvestment from the Middle East and Southeast Asia, regions where Islamic finance isflourishing.

Source: The Reuters


• US scholar body AMJA (Assembly of Muslim Jusrists ofAmerica) issues fatwa on Islamic home finance companies inUS: September 2014 Amine Housing

LaRiba Bank, etc.

Source: The Reuters


Sharia Governance

• Centralized Sharia board

Malaysia has a central Sharia board at Bank Negara Malaysia

Oman has recently announced their central Sharia board

UAE also has plans to have a central Sharia central

• Sharia board at bank level

Saudi Arabia

Qatar

• Bahrain

Sharia board of the Central Bank of Bahrain

Individual Sharia boards

AAOFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standards

Source: The Reuters

CHALLENGES & PROSPECTS

• Islamic finance in its infancy stage

• Regulatory obstacles

No Islamic finance

Accommodative but no special favours

Full support

• Customer Service

• Standardisation & harmonisation

• Lack of risk management techniques

• Education and research

Conventional mindset

Preference for conventional professionals

www.almaaligroup.com Consulting | Training |Sharia Advisory

Contact : Al Maali Consulting GroupDubai – UAE

Tel: +971 4 2942242Fax:+971 4 2942228

Email: [email protected]

mailto:[email protected]

Economy & Finance

Global trends in islamic banking - MIM Mediterranean Economic Forum 2014