1.Francisco Alcoba CruzRal Martnez-Avial Jimnez

2. Outline Bases of Islamic Markets Role of Women in Islamic Markets Evolution of Islamic Markets through History Investment and Finance Islamic Banking Money Laundering SMEs Rating Agencies Financial Crisis Malaysia 3. Bases of Islamic Markets - 4. Bases of Islamic Markets Islamic Finance is based on Shariah:Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad and supplemented by the juristic interpretations by Islamic Scholars. Shariah embodies all aspects of the Islamic faith, including beliefs and practices. 5. Bases of Islamic Markets Source: Islamic World Students 6. Bases of Islamic Markets Shariah law is based on:1. Prohibition of interest (Riba)2. Risk sharing3. Prohibition of speculative behavior (Gharar)4. Sanctity of contracts5. Investing in unlawful business (Haraam) 7. Bases of Islamic Markets Riba: Its the main principle of Islamic law. Riba, which means excess , interpreted as any unjustifiable increase of capital whether in loans or sales is the central doctrine of the system. Indeed, any positive, fixed, predetermined rate tied to the maturity and the amount of principal is considered Riba and therefore totally forbidden.Riba also covers the charging of interest. Because interest is prohibited, fund suppliers are considered as investors and not as creditors. 8. Bases of Islamic Markets Risk Sharing:Investors share business risk as they share the profit. Money is considered as a medium of exchange. So, charging interest on loans is considered unjust since money is viewed as an intermediary between goods. 9. Bases of Islamic Markets Gharar: Excessive uncertainty and speculative behavior are totally prohibited. An islamic financial system discourages hoarding and prohibitstransactions thatinvolve extreme uncertainty, gambling and risk. Gambling (Maysir) invokes enmity among the parties. Gharar involves a sense of legal trepidation. Commercial gain itself is not prohibited but uncertaintyis forbidden. Therefore,taking economic initiatives that do not involve uncertainty is not that easy. 10. Bases of Islamic Markets Sanctity of contracts: Islam holds the contractual obligations and thedisclosure of information as a sacred dutyReduce the risk of asymmetric information and moralhazard Investing in unlawful business (Haraam): Only Shariah approved activities are allowed.They do not violate the rules of Shariah qualify forinvestment, which means that investing in unethicalsectors such as casinos, tobacco companies, wine,alcohol and sex-business is totally prohibited. 11. Shariah Compliance All of Islamic financial products and services all over theworld have to be Shariah Compliant ( Obey Shariahprinciples) The Shariah Advisory Council of Bank NegaraMalaysia (SAC) was established in May 1997 as the highestShariah authority in Islamic finance in Malaysia. The SAChas been given the authority for the ascertainment ofIslamic law for the purposes of Islamic banking business,takaful business, Islamic financial business, Islamicdevelopment financial business, or any otherbusiness, which is based on Shariah principles and issupervised and regulated by Bank Negara Malaysia 12. Role of Women in IslamicMarkets - 13. TraditionProgress Source: Islamic World Students 14. Evolution of Islamic Marketsthrough History - 15. IM through History Muslims have a great trade and business tradition.Their holy book, the Quran, tell them to do it. So they have been in business world since everSource: Islamic World Students 16. IM through History The founding of the first large Islamic banks in the 1970s, including Dubai Islamic Bank and Albaraka Banking Group, is generally considered to mark the birth of modern Islamic finance The industrys growth, however, really began to accelerate in the early 1990s, bolstered in large part by liquidity in the Gulf from one crucial source: oil. 17. IM through History The influx of capital generated by rising oil prices hasspurred massive investment in infrastructure and realstate development projects in the Gulf CooperationCouncil (GCC) states of Bahrain, Kuwait, Oman,Qatar, Saudi Arabia and the United Arab Emirates,driving demand for sukuks (Islamic bonds) and loans. There were some difficulties of adaptation in theNorth of Africa to Shariah because ofmisunderstantings but nowadays NA is a completelyintegrated Islamic Market 18. IM through History Countries such as Jordan, Tunisia and the Sudan, in contrast, have welcomed Islamic finance as an opportunity to foster economic development. Gradually those nations with mainly Muslim populations that had hesitated to permit Islamic banks have started to embrace such institution (i.e. Tunisia and Morocco) 19. IM through HistoryThe biggest step; Non-Muslim Countries:Step by step, Islamic Finance has been growing duringall these years and it getting more present in countrieswith muslim population but which are not mainlyMuslim countries.Here we find some successes and failures of IF in thesenations 20. IM through HistoryThe first Islamic mortgages in Europe were offered in 1988 by Al Baraka Bank to Gulf Arabs for properties in London, with the mortgages structured through an ijara rental contract. 21. IM through History In Spain, Bancorreos, the entity created by the Post and Deutsche Bank, offers financial products adapted to more than a million Muslims living in our country, with interests ranging from 0% to 3% interest, that the latter peak Islam allows. For now, the bank offers other Islamic products. Also Caixa Banco Santander offer Islamic mortgages at interest 0, although the difficulties in launching these products, which have had to be approved by Islamic committees, and what little savings they currently are in the hands of Muslims in our country suggest that now multiply the offer despite rumors of the imminent opening of a wholly Islamic bank in Spain. 22. IM through History Not only finances are present in non- Muslim Countries. Recently the Muslim population gave the current presidentof French Republic, Mr. Hollande, the necessary votes to win the elections 23. IM through History But everything is not success, Islamic Finance also have to make some more efforts in another non Muslim countries. For example, on May 27th 2012it was published in an Spanish newspaper:Kansas approves a preventive law against Shariah 24. Investment and Finance - 25. Debts Based Murabaha: (Buy-sell arrangement)Essentially works by borrower asking lender to purchase asset on the understanding that after lender has purchased asset, borrower will purchase asset from lender. Bai al-Inah: (Sale and buy-back) Lender purchases asset on behalf of borrower. Borrower purchases asset from lender on deferred payment basis. Asset is immediately resold to lender for cash at discount. Preferred financing mechanism if there is any danger that lender will become insolvent. 26. Debts Based Bay Salam:(LIBOR plus margin) It can be used to provideworking capital. The main difference with Murabaha isthat, while the financier still buys an asset, the delivery isdeferred. Usually, the financier will receive a discount foradvance payment typically calculated by reference to abenchmark Istisnaa :(custom manufacturing) Is a sales contract forcustom manufactured goods which may be used for public andprivate project financing. To produce, the seller uses his own rawmaterials. 27. Equity Based Musharakah: (Partnership or joint venture financing) Anarrangement between a lender and a borrower where bothparties agree to make a capital contribution towards financing acommercial operation. Parties agree to share profits from thearrangement at a pre-agreed ratio. Losses from the arrangementneed to be shared pro-rata to the capital contributions of each ofthe parties. Mudarabah: (Profit sharing)Islamic investors agree that aMudhareb (trustee) will provide skill and expertise. Mudharebagrees to hold and manage the assets for Islamic investors. Inreturn for providing services, Mudhareb earns an agreed share ofprofits from the assets managed on behalf of Islamicinvestors. Mudhareb cannot claim any right to the assets - merelyacts as manager and trustee of assets. 28. Leasing Ijarah: (Leasing)Its a leasing agreement in which the bankbuys an asset for a customer and then leases it back over aspecific period. The customer has to pay a rent, representing anagreed profit typically calculated upon a benchmark, such as thelibor + a margin. The difference between Ijara and a conventionalfinance lease is the increased risk that the financier takes inrelation to the asset. Ijara-wa-iqtina: Its the same contract but the customer isallowed to buy back the item when the contract ends 29. Services Hawala: Literally: bill of exchange, promissory note, checkor draft. Technically: the debtor passes the responsibility forpayment of its debt to a third party who is himself his debtor.Responsibility for payment lies and ultimately to a third party.The Hawala is a mechanism for settling international accountsby book transfers. It removes a large extent the need for physicaltransfer of cash. Kafala: Underwriting agreement by which third guarantees thedebt of an agent in debt. The responsibility for the debt vis--visthe creditor returns and the two counterparties of the contract.As for the contract Hawala, Kafala does not generate fees beyondadministrative costs. 30. Services Rahn: Contract under which an agent provides a debt via acollateral (pledge). This type of contracts designed tomitigate counterparty risk borne by the creditor. Theadvantage of this contract is that it allows the agent topresent a property in his possession as collateral whilekeeping its use and run property Wadiah: (Safe-keeping) Agreement between two partieswhere on agrees to look after the property ofanother. Concept is used to take deposits of money, wherebank acts as custodian of money deposited by customer.Bank agrees they will refund sums deposited on call, i.e.on demand. 31. Sukuk - Bonds They are Islamic bonds. They are medium orlong term, islamically compatible trustcertificate backed by certain approvedassets, usufructs or services . What makes a sukuk acceptable under shariah law isthat it must be backed by a real asset such as a piece ofland, a building or an item of equipment, andtherefore when sukuk are bought and sold thepurchaser and seller are dealing indirectly in a realasset, and not simply trading paper. 32. Sukuk - BondsSource: Emerging of Islamic Finance 33. Sukuk Bonds vs Eurobonds There are certain differences between conventional bondsand Sukuk. A bond represents the issuers puredebt, while Sukuk represent ownership stake inan underlying asset. An Ijarah contract that is oftenused to structure sovereign Sukuk creates a lessee/lessorrelationship which is different from a lender/borrowerrelationship. Because of the segmented market structure, Sukukoffer lower returns compared to conventionalbonds. Sukuk are also illiquid instruments compared toconventional bonds due to the lack of secondarymarket activity. 34. Islamic Banking- 35. Islamic Banking- Difference betweenconventional banking and Islamic bankingmoneyBankClient money + money (interest)Conventional Source: Islamic Banking Glossary 36. Islamic Banking- Difference betweenconventional banking and Islamic banking Bank Goods & ClientServices money Islamic Source: Islamic Banking Glossary 37. Conventional BankingIslamic BankingMoney is a commodity besides medium ofMoney is not a commodity thought itexchange and store of value is used as a medium of exchange andstore of valueTime value is the basis for charging interest Profit on trade of goods for charging onon capitalproviding service is the basis for earningprofitInterest is charged even in case theIslamic bank operates on the basis oforganization suffers losses by using banks profit and loss sharingfundWhile disbursing cash finance, runningThe execution of agreements for thefinance or working capital, no agreementexchange of goods & services is afor exchange of goods & services is made. must while disbursing funds underMurabaha, salam & Istisna contractsConventional banks use money as a Islamic banking tends to create link withcommodity which leads to inflationthe real sector of the economic systemby using trade related activities. 38. Conventional banksIslamic BanksThe investor is assured of a pre determined In contract it promotes risk sharingrate of interestbetween provider of capital (investor)and the user of funds (entrepreneur)Lending money and getting it back with Compounding calculation is strictlycompounding interest is the fundamentalprohibited under Islamic banking systemfunctions of the conventional banksIt can charge additional money incase of The Islamic banks have no provision todefaulters charge any extra money from the defaulters.Conventional banks invest their deposit in Islamic banking only deals in Halalinterest based modes products and services, all transactions must be in SHARIAH COMPLIANCEThe status of a conventional bank, inThe status of Islamic bank in relation to itsrelations to its clients, is that of creditors clients is that of Partners, Investors, andand debtors. Trader, Buyer and Seller.A conventional bank has to guarantee ofIslamic banks cannot guarantee of all itsall its deposits.deposits. 39. Money Laundering - 40. Source: Iitrade 41. SMEs- 42. SMES Small and medium enterprises (SME) sector has a great potential for expanding production capacity and self-employment opportunities. Enhancing the role of financial sector in development of SME sub-sector could mitigate the serious problems of unemployment and low level of exports.It can safely be said that Islamic banking has a great potential of playing an effective role in the development of a country. 43. SMES THE PRINCIPLES OF ISLAMIC ETHICS IN SMALL AND MEDIUM ENTERPRISES (SMEs) Justice (Adl): Means to treat people equally is a pre-requisite of fairness and justice. Truthfulness (Sidqun): Is a basic ethical value of Islam. Islam is, in a way, the other name of truth. Allah speaks truth, and commands all Muslims to be straight forward and truthful in their dealings and utterances. 44. SMES Benevolence (Ihsan):As far as kindness is concerned, benevolence to others is defined as an act which benefits persons other than those from whom the act proceeds without any obligation. It also means fineness, proficiency or magnanimity in dealing with others Sincerity (Ikhlas): Is generally understood to be truth in word and act. Trust (Amanah/Itiman): Trust makes cooperative endeavors happen. Trust is a key to positive interpersonal relationships in various settings because it is central to how we interact with others 45. Rating Agencies - 46. Rating Agencies Islamic countries are mainly evaluated by one specific agency : The Islamic International Rating Agency- 47. Rating Agencies Main pros of IIRA: Knowledge of region National / international scale rating Providing Sharia quality rating Investors/stakeholders want independent opinion on credit worthness of sharia compliant institutions & products 48. Rating Agencies: ScaleLong Term Rating Short Term RatingAAA.ns*A-1+.nsAA.nsA-1.nsA.ns A-2.nsBBB.ns A-3.nsBB.nsB.nsB.ns C.nsCCC.ns D.ns *The initials of the country for which a national scale ratingCC.nsis assigned will be substituted for ns in the above ratingsC.nsD.ns Source: Islamic International Rating Agency 49. Rating AgenciesIt is important not to forget that IIRA is not the only Rating Agencythat evaluates Islamic Markets : S&Ps in 2006 were the first non- islamic rating agency inevaluating Islamic Markets.Standard & Poors was recognized for its work assigning ratings onSukuk issues by DIFC Investments and the Jebel Ali Free Zone,which were named Deal of The Year and Best Sukuk, respectively. Moodys Investors Service has been voted Best Islamic RatingAgency in Islamic Finance News 2008 Awards poll. The awardrecognises Moodys superior ratings coverage of Islamic financialinstitutions ans Sukuk transactions during 2008 50. Financial Crisis - 51. Financial CrisisGlobal Financial Crisis 52. Financial CrisisGlobalizationGlobal Financial CrisisEverybody Affected 53. Financial Crisis But the Islamic Markets were not so affected because their trades and business relations are based on Shariah; and this means: No interest Speculation not allowed No loans among Banks 54. FinancialNo Toxic Assets Liquidity Lack of Non-Payment Risk 55. Financial CrisisS&P rated:19 rated A 24 StableTrend33 Islamic5 rated A+BanksAnalysed 9 Negative Trend 56. Financial CrisisMore than 300 Islamic Banks from all overthe world had a value of 100.000 US$M and itis expected to double their value by 2013 57. Financial CrisisOne last issue: Are Islamic Finance that stable justbecause of their followed system (Shariah)? Or is because the worldneeds them? 58. Malaysia - 59. Malaysia Capital: Kuala Lumpur Language: Malaysian Government: Federal constitutional elective monarchy and Federal parliamentary democracy Ethnic groups : 50.4% Malay 23.7% Chinese11.0% Indigenous 7.1% Indian7.8% Other Currency: Ringgit (RM) Population: 28.859.154 60. Malaysia Source: Islamic Financial Times 61. MalaysiaRelation with Islamic Markets: The industry found a powerful ally across the Pacificin Muslim Asia It provided a means for the government to reach out tothe underserved segment of its society by offeringbasic banking and insurance products that werecompatible with Shariah principles Malaysia has issued new licenses to foreign fundmanagers and stockbrokers, and has increased theissuance of licenses in Islamic banks and takaful(Islamic insurance) companies 62. Malaysia The growth in Islamic finance in Malaysia has been supported by a significant investment in human capital; International Centre for Education in Islamic Finance(INCEIF) In 2008 Malaysia established the InternationalShariah Research Academy (ISRA) to conductShariah research on contemporary Islamic finance issues 63. Malaysia Malaysia has succeeded in developing a system thatoperates in parallel with conventional finance. The main Islamic financial organizations are; Bank Negara Malaysia ( Central Bank) Bank Islam Malaysia Berhad Bank Bumiputra Malaysia BerhadTraditional Banks Malayan Banking Berhadthat also offer United Malayan Banking Corporation Berhad Islamic Banking To develop Islamic banking in Malaysia, were created anddeveloped the so-called as IIMM (Islamic interbankmarket) and the ICM or Islamic Capital Market. 64. Malaysia Nowadays information: Islamic banking assets in Malaysia, the worlds biggest marketfor Shariah-compliant debt, rose 16 percent last year (2011)after the government approved new licenses and easedrestrictions on foreign ownership, the central bank said. Assets that comply with Islams ban on interest increased to350.8 billion ringgit ($116 billion) and accounted for 21percent of the total banking system, according to BankNegara Malaysias 2010 annual report published in Kuala Lumpurtoday 65. Malaysia 2011 Sukuk Issues : 66. Thank you for your attention - 67. Bibliography- 68. 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