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Bank Negara Malaysia-Islamic Development Bank-Central Bank of Oman

Islamic Finance Workshop


Session 1: Global Developments in Islamic Finance

Daud Vicary Abdullah, President & Chief Executive Officer


27 January 2013

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2012 INCEIF
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Agenda

1.

Islamic Finance - Where we are :


Global Development & Progress
of Islamic Finance

2.

Shariah Matters

3.

Sharing some best practices:


The Malaysian experience

4.

The way forward

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Islamic Finance - Where we are


Global Development & Progress of Islamic Finance

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Islamic finance market


Transformation from niche to mainstream
BEFORE

NOW

Muslim
Population

21% of total world population of 6.8 billion


About 1.4 billion (CIA fact book ,2008)
Islam the fastest growing religion 1.8 %/year

24% of total world population


Estimated at about 1.7 billion

Asset Size

Mid 1990 = USD 150 Billion (KFH, 2008)


2011 = USD 1.086 trillion

IFSB expects the Global Islamic finance asset to


reach USD1.6 trillion by 2012

Growth Rate

29.7 % in 2006 (thebanker.com)

annual growth rate of > 30 % since 2000


(Bankscope & Oliver Wyman)

Market focus

Islamic countries of the MENA and South-east Asia


(SEA)

Muslim-minority e.g. US, UK and Germany, France,


China, Japan, Canada, South Korea

Market share

Islamic Finance represents 1% of global assets


2003 :the GCC 13%, Malaysia 9%, Indonesia 1,2
%

In 2010 estimated: the GCC 17% , Malaysia 22.6%,


Indonesia 3.1%

Infrastructure

Product
Innovation
Government &
Regulation

More than 300 Islamic Financial Institutions


IFIs 50 countries (S&P IF Outlook 2006)

Over 1000 IFIs currently


operating in about 75 countries worldwide

Retail financing
Vanilla & simple products

Complex products & structures

Reliance on domestic conventional regulatory

Development of International Standard


Increasing support of Government & Regulators

Source: Source: Deloitte, S&P IF Outlook 2006, thebanker.com, KFH


4

Source: Bankscope & Oliver Wayment, Kettel, etc 2010

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Significant growth factors


Some pivotal events

1973 OPEC
Oil Crisis

2001 U.S.
Reaction to
Sept 11

2006 2008
The Subprime
Crisis

IF Growth

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The global economic crisis


Islamic finance as an alternative

Islamic financial sector is in a unique position to promote financial innovation and


bring stability to global finance, as long as it is correctly nurtured and developed
internationally.
IF reaches the
mainstream (The fastest
growing Industry)

Encourage Ethical
values & CSR (Maqasid
Al Shariah)

IF proven more resilient


during crisis

Significant oil money


from middle east

Market driven
(Muslim underserved
and want to be served)

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Islamic banking
Reaching broader market
Reach non-Muslim
countries

Increasing
awareness of
customers

Growing demand
for Shariahcompliant product

Excess liquidity
but limited tool

Increasing number
of players

Product
development

Institutional
development

Global acceptance
& flexibility in
Islamic finance
system

Government &
regulation support

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Geographical target & expansion


It is time for expansion

Key Areas in Islamic Finance

Over 1000 Islamic finance institutions in


75 countries offering Islamic products to
1.7 billion potential Muslim customers
worldwide.

Annual growth rate of > 30 % since 2000

Capitalisation in excess of US$13bn today

Pool of money held by Muslims is


estimated at US$1.5 trillion

Vast potential for infrastructure financing


using Sukuk

Primary areas

Increasing demand fuelled by Muslims and growing acceptance by non-Muslims


regarding the attractiveness of the Islamic
finance model

Areas of starting Islamic


Finance activities
Untapped markets

Governments of G7 countries, such as


France, Japan and the UK, are actively
seeking to accommodate Islamic Finance
as a means of attracting Middle Eastern
capital flows.

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Market potential
At which stage is each country?
Market depth
Malaysia, UAE,
Bahrain, Saudi
Arabia, Kuwait,
Qatar

Business
motivation
Market
motivation

Turkey, UK,
Pakistan,
Brunei
Advanced Islamic

Competitor
matching
Explore market
potential
Minimum
presence
Monitor
development

Potential Islamic
finance markets

Luxembourg,
Hong Kong,
Egypt,
Singapore,
Oman

South Korea,
US, Canada,
Australia,
Germany

finance markets

Emerging Islamic
finance markets

Wait and see


Explore
market
potential

Sporadic
development

Market
development
activities

Market
expansion
activities

Market reach

Source: Dr. Volker Nienhaus

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Institutional framework
Key infrastructure of Islamic finance
Organisations

LMC, Feb, Bahrain


IIFM, Nov, Bahrain
IIRA, Oct, Bahrain
International Islamic Liquidity
Management Corporation

IDB, Jeddah

1975

March, Bahrain

1981

1990

GCIBAFI, May,
Malaysia

2001

IILM, Malaysia

Nov, Malaysia

2002

2003

2006

2008

2010

Research
March, Malaysia
IRTI, Jeddah

Education &
Training

March, Malaysia
y
Bahrain

10

Malaysia
y

Oct, Malaysia
y

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Infrastructures & supporting institutions


Towards global regulatory framework & standardisation
AAOIFI
To spread &
conduct applied
research in IF

Accounting & auditing


standard

ISRA

IFSB

IRTI

IIFM

Abbreviations :
- IFI = Islamic financial Institution
- Regulator = Central Bank, Monetary authorities,
Securities commission

1. AAOIFI = Accounting & Auditing Organization for


Islamic financial Institutions
2. IFSB = Islamic Financial Standard Boards
3. IIFM = International Islamic Financial Market
4. GCIBF = General council for Islamic Banks and Financial
Institutions
5. LMC = Liquidity management Centre
6. IILM = International Islamic Liquidity Management
Corporation
7. IIRA = International Islamic Rating Agency
8. IRTI = Islamic Research & Training Institute
9. ISRA = Islamic Scholar Research Academy for IFI

11

To create
environment for
Islamic secondary
market

IFI

Rating IFI and


Islamic finance
instrument

Governance
regulatory standard

Regulators

To promote
research & training

IIRA

GCIBAFI

IILM

To Develop and implement short


term liquidity management
solutions

LMC

To enhance market
understanding of
Islamic finance

Market maker for Islamic


secondary market instrument
(crosses government
business lines)

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Shariah matters

12

Understanding the challenges


What can we do?

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Shariah matters
Impediment of Shariah growth
Shortage of
Islamic
Finance
expertise

Lack of unanimity
in understanding
of Shariah Law

Differences in
adopting
Shariah law

Key
challenges

Lack of
marketing skills
for Shariah
compliant
products

13

Difficulty in
innovating
product
restricted by
Shariah

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Key Issue
Balance between confidentiality and disclosure

14

In most countries,
existing legal framework
and taxation might not
support Shariah
structures

Devising a perfect
structure without
compromising in any
aspect is a challenge
itself

Thus, explaining and


keeping structuring
details confidential is a
difficult task

Complicated structuring
due to legal and tax
considerations are
difficult to be explained
to investors

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Actions to be taken
The way forward

Getting
supporting
government
regulatory &
tax regulation

Shariahbased
product
innovation

Profitable
business
model

Global
harmonisation &
standardisatioin
of process

Facilitating
cross-border
liquidity
infrastructure

Getting the
right people
and doing
things the
right way

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Sharing some best practices: The Malaysian


Experience

16

Comprehensive financial landscape


Talent development and changing of mindset
INCEIF dedicated to human capital

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MalaysiascomprehensiveIslamicfinanciallandscape
GOVERNANCE
Legal&Regulatory
CentralBankAct2009
IslamicBankAct1983
TakafulAct1984
GovernmentFundingAct1983
CapitalMarketServicesAct
2007
MalaysiaDepositInsurance
CorporationAct2005
RiskManagement
Shariah AdvisoryCouncil
BankNegaraMalaysia
SecuritiesCommission
DisputeResolution
Judicialsystem dedicated
HighCourt
KLRegionalCentrefor
Arbitration
FinancialMediationBureau

Islamic
Banks&Takaful
Companies
Islamic
Money
Market

Islamic
Capital
Market

Malaysian
Financial
System

Dual
banking
system

Capital
market

Money
market
Conventional
Banks&Insurance
Companies

Supportedbyhumancapitalinfrastructure
FINANCIALMARKET
MoneyMarket
Islamicinterbankmoneymarket
DailyaveragetransactionRM1bilion
BursaSuqAlSila

DIVERSIFIEDPLAYERS
IslamicBanking
16Islamicbanks
6DFIsofferingIslamic
bankingservices
5InternationalIslamicbanks
[15Internationalcurrency
businessunits(ICBU)]
Takaful
12takaful operators
4retakaful operators
1Internationaltakaful
operator
[9ICBU]
FundManagement
12 Islamicfundmanagement
companies
35fundmanagement
companieswithIslamic
mandates

CapitalMarket
57%ofoutstandingprivatedebtaresukuk
88%permissiblecountersatBursaMalaysia
144 Islamicfunds
17

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Malaysia Islamic finance model


The potential
;

One of the most successful stories in Islamic finance, besides Bahrain

Top bottom approach support from the regulatory agencies including the
government of the day

SAC as the apex Shariah body in the country standardisation of products

Central Bank of Malaysias (Bank Negara Malaysia) Law Harmonisation


Committee making Malaysia the law of choice for disputes in Islamic finance

The establishment of MIFC

Active and vibrant Islamic money (IIMM) and capital markets

18

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Malaysia Islamic finance model


The challenges

Some issues with


cross border
products acceptance

Regulatory
challenges some
countries with no
laws and regulations
with respect to IF

19

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Malaysia is one of the key Islamic finance countries


What is key towards success?

Governmentand
regulatorysupportwith
clearfinancialmaster
plans

20

Infrastructure legal,
accountingsystem,
technology,manpower

Varietyinfinancial
products:adaptationin
theearlystage,now
movingtowardsproduct
innovations

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The Way Forward:


Where do we do from here?

21

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Talent Development
Bringing our talent up to speed

Education

EnhanceShariahexpertiseandHumanCapital
IncreaseknowledgeinIslamicFinance

Encouragerightand
comprehensiveunderstanding

Perception

22

ProvidesufficientcrossborderLiquidity

Liquidity

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Islamic finance education


A three-tier process

Leaders
and
Regulators

Theworkforce
(Corporateandfinancial
industryplayers)

Themasses
(Consumers)

23

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Demystifying Islamic finance


Changing the mindset of the masses
Correctingmisconception&
demystifyingIslamicFinance

ForMuslimsonly
Replicaof
Conventional
Finance

Fundingof
terroristactivities

Ensuringvalueproposition
Lower/Highercost
offund

Misconceptions
aboutIslamic
finance

CreatingawarenessofIslamic
financeamongthepublic
No
standardisation of
thebestPractices

NoGuarantee
Moreriskythan
conventional
finance

24

Primitiveconcept
ofdoingfinance

providingsupporting
legislation&regulation

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Dedicated to human capital


Education, training, consulting, research and
collaboration

RESULT:

Skillsand
Competency
training

25

Executive
Programmes
andProfessional
PostGrad
programmes

Industry
acceptanceand
implementation
ofspecific
standardssuchas
ACIFP(forCIFP)

Researchand
Consulting
acrosskey
industry
segments

Collaborative
Partnershipthat
developsand
deliversTalent

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Thank You

David Vicary Abdullah


President & Chief Executive Officer

Tel:
+603 7651 4141
Email:
dvicary@inceif.org
Website: www.inceif.org
2012 INCEIF