Fajr Capital | 1

The Principles, Aims and Evolution of Islamic Finance

Iqbal Khan5 March 2013Twitter: @IqbalKhanCEO

Sponsored by oSustainable

Business

Initiative

Fajr Capital | 2

The importance of ethical finance is underpinned in the monotheistic scriptures

CHRISTIANITY• Being in debt is equivalent to servitude because of the immense burden

to repay. Hence, “The rich rule over the poor and the borrower is slave of the lender” (Proverbs 22:7).

Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith

JUDAISM• "The first question an individual is asked in the afterlife at the final

judgment is: “Did you conduct your business affairs honestly?” (Babylonian Talmud, Shabbos 31a)

ISLAM • “However plentiful usury may look from the outside, its end is want and ignominy” (Hadith)

Fajr Capital | 3

Islamic Finance principles consist of core basic tenants

If something is immoral, one cannot profit from it

To share reward, one must also share risk

One cannot sell what one does not own

In any transaction, one must clearly stipulate what he or she is buying or selling and what price is being paid

1

2

3

4

Removing speculation and creating value-enhancing and sustainable activity

Fajr Capital | 4

Islamic Finance is the outcome of CSR derived from religion and applied to banking

Islamic Finance is capitalism with a moral compass

Corporate

governance

Corporate Social

Responsibility

Business ethics

Ethical profits

(rather than “profits-at-any-costs”)

Accountability to God“More-than-profit”

mentality

Shari`a “code of ethics”

Fajr Capital | 5

1970s insurance

The industry has developed a comprehensive product offering over its young history

1950s

60s

70s

80s

90s

00s

− Egypt and Malaysia pioneering institutions− Establishment of OIC (1969)

− Development of theoretical framework− Muslim-majority nation independence

− Islamic Development Bank (1974) and DIB− One country-one bank setup

− Advancement of Islamic products− Full “Islamization” of Iran, Pakistan and Sudan

− Entry of global institutions e.g. HSBC Amanah

− Tipping point reached in some markets− Development of industry-building institutions

1980s syndications

structuredand trade finance

1990s

equity

private equity

projectfinance

2000s

structured products

1970s

1980s1990s

2000s

Evolving richness in productsDevelopment of industry

Debt issues

Industry has near like-for-like parity with conventional offering

Fajr Capital | 6

Growth Engine

Awakening

Ripe for Growth

Future Markets

In all, the Islamic finance industry is developing a global reach…

Source: Standard and Poor’s “The Globalization of Islamic Finance”

Fajr Capital | 7

The development of the Islamic finance industry has been fuelled by pioneering institutions and industry building organisations

Fajr Capital | 8

Islamic Finance was not established by a royal decree or a presidential announcement, but it was the will of the people which created the industry.

Growth in the GCC Islamic banking markets are primarily driven by customer demand

Malaysia presents a near ideal regulatory and market-driven model for Islamic business

Government driven

Growth and drive is being led by customer demand

Market drivenSource: Central Bank, Reports, industry estimates

Key: Bubbles indicate illustrative size of Islamic banking assets

Malaysia

UAE

Qatar

Saudi Arabia

TurkeyEgypt

IndonesiaChinaJapan

USA

UKSingapore

Sri Lanka

Bangladesh

Sudan

Iran

Pakistan Bahrain

Kuwait

Brunei

Fajr Capital | 9

The Islamic finance ecosystem is growing: Total Islamic finance assets may surpass $1.8 trillion in 2013

Islamic finance continues to grow at an exponential pace. Higher growth in personal financing assets is made up from a number of factors: pricing differential has been reduced or eliminated, customers are more accepting of Islamic finance, and the industry’s distribution capability has improved immensely.

Top 20 Islamic banks make up 55% of the total Islamic banking assets and are concentrated in 7 countries, including GCC, Malaysia and Turkey. 13 Islamic banks have an equity base of more than $1 billion. Building regional institutions and participating in larger transactions requires the industry to scale up.

Source: Ernst and Young – The World Islamic Banking Competitiveness Report

Fajr Capital | 10

Some of the pioneers of the Islamic finance industry

Sheikh Ibn Baaz(1910 – 1999)

SHARI’A SCHOLAR

Sheikh Saleh Kamel(1941 – )

ENTREPRENEUR

Royal Professor Ungku Abdul Aziz

(1922 – )

ACADEMIC

Lord Eddie George(1938 – 2009 )

REGULATOR

Sir John Bond(1941 – )

PRACTITIONER

Fajr Capital | 11

Mountaineering Analogy: The Islamic Finance industry has come a long way since the days of its pioneers, but it still has a long way to go…

The evolving political and economic paradigm will drive our industry forward

A globally recognised one trillion dollar + industry.

150% increase over the last five years.

Exponential growth in core markets i.e. Middle East and Malaysia.

Creating role model institutions which facilitate the demonstration effect.

Democratizing wealth and ensuring stability.

Fortifying and strengthening the industry’s foundations.

Laying the Foundations

Beacon House

Fajr Capital | 12

Today’s interconnected and dynamic world is presenting a unique opportunity for Islamic finance to prosper

The Arab Awakening was driven by the young people facing dire socio-economic conditions, with access to social media and a hunger for change. The uprisings led to regime changes in Tunisia, Egypt, Libya – and protests in Bahrain and Syria, amongst others.

ARAB AWAKENING

The global economic crisis – sparked by the bursting of the U.S. housing bubble and fuelled by various systemic imbalances. The effects of the crisis is now being felt by those at the grassroots, and is leading to a political and economic paradigm shift.

THE GREAT RECESSION

The “Occupy Movements” have highlighted grassroots support for concrete reforms in the financial services sector. The movement led to protests and occupations in over 80 countries and across every continent except Antractica.

OCCUPY MOVEMENTS

Fajr Capital | 13

The current global economic crises highlight the need for a value-based approach to financial services

Material crisis requires moral solutions

Financial Institutions

Impact points

Global Markets

Real Economy

Policy Implications

1

2

3

4

Need for savings and investment orientation to replace consumption and credit culture

Need for savings and investment orientation to replace consumption and credit culture

Dangers of opaque sale of debt now shown to be evident

Dangers of opaque sale of debt now shown to be evident

Differentiation between deposit-taking institutions and investment managers

Differentiation between deposit-taking institutions and investment managers

Stronger links needed between banking and real economy investment

Stronger links needed between banking and real economy investment

Fajr Capital | 14

How Scotland can capture the Islamic finance opportunity

POLITICAL ENABLEMENT1• Regulatory and public sector support to make Scotland a

‘hub’ for the Islamic finance industry.

ATTRACTING ISLAMIC FUNDS2• Trade and Investment engagement with high-growth OIC

markets to attract funding for projects i.e. Sukuk model.

RESEARCH AND INNOVATION3 • Creation of a Centre of Excellence to provide much-needed research and analysis to support the industry’s growth.

THE PEOPLE PARADIGM4 • Islamic finance academic programmes at Scottish universities to attract domestic and international students.

CREATING SUSTAINABLE GROWTH5 • Boosting job creation and economic prosperity by enabling Scottish companies to expand in Muslim-majority markets.

Fajr Capital | 15

Martin Luther King, Jr. (1929-1968)

“Through our scientific genius we have made of the world a neighborhood; now through our moral and spiritual genius we must make of it a

brotherhood.”

Fajr Capital | 16

Sponsored by oSustainable

Business

Initiative

http://www.businessschool.ed.ac.uk/sbi