PBP60502

ISLAMIC BANKING OPERATION

TITLE : REGULATORS INSPIRE ASSET

GLOBAL GROWTH

NAME: AZLYN RABAITUL SYUHADA BT AHMAD SUHAIMI

STUDENT’S ID: 62361219005
LECTURER’S NAME : Assoc. Prof Dr Aimi Zulhazmi
 SUMMARY

The global Islamic finance industry has continued its sustained double-digit asset growth,
expanding by 17.9% y-o-y to reach USD1.91tln as at 1H143. Between 2009 and 2013, the
industry's assets have expanded at an impressive compounded annual growth rate (CAGR) of
16.94%4. It is expected that the industry will surpass the USD2tln asset mark during the third
quarter of this year (3Q14) Islamic finance has notably served as a viable funding mechanism for
various economic sectors including power and utilities, education, infrastructural development,
telecommunications, transportation and other corporate sectors.
In 2014-to-date, the industry's geographical outreach and sectoral-penetration have continued
expanding as various national authorities have initiated efforts to support the growth,
development and expansion of the Islamic financial sector in their domestic markets. Based on
current growth momentum, the Islamic finance industry is forecasted to peak as much as
USD6.5tln in assets by the year 2020. It includes capital market products and services such as
Islamic securitised assets (sukuk), Islamic equities, Islamic investment funds, and also Islamic
insurance services.
In Islamic banking sector continues to account for the largest share of the Islamic finance industry worth
an estimated USD1.53tln or 80% of the total industry's assets. The assets of the sector grew between 2008
and 2013 at a CAGR of 17.4 per cent. Islamic banking has gained growing acceptance among market
participants as increasing recognition of Shariah-compliant initiatives has encouraged more countries and
entities to join the global cohort of stakeholders in Islamic finance. In a few countries such as
Azberbaijan, India , Malaysia, Morocco, Oman, Pakistan, Qatar, Tajikistan and Uganda, Islamic banking
growth can be found. The Azerbaijan International Bank (IBA) is collaborating with national authorities
to draft an Islamic Banking Law. The IBA is also looking to create a region-wide Islamic banking centre.
Driven by the interest of Russian banks in Islamic Banking, IBA will also prepare a package of proposals
to be submitted to the Central Bank of Russia. Reserve Bank of India ( RBI), the central bank of the
country, started a study last month in India of the regulations on Islamic banking. It is confirmed that the
central bank has formed an internal committee composed of senior RBI officials. The call for a re-
evaluation of Islamic banking regulations came after RBI launched separate banks in India. Islamic
banking proponents are building a case for sharia-compliant banking in the face of India's banking sector
reforms. The new Malaysian Islamic Financial Services Act 2013 provides the legal basis for the shift
towards a regulatory framework based on contracts. BNM is currently developing various Shariah
requirements for main Islamic contracts in this regard. It will serve as guidance to the Islamic
financial industry to enhance end-to-end compliance with Shariah and strengthen the integrity
and sustainability of the Islamic banks, says BNM. The standard on Murabahah and concept
papers for Musharakah and Mudharabah have been issued to the industry in December last year.
Morocco's government adopted a bill regulating Islamic banks and sukuk issues in January. A
final vote by the parliament of the North African kingdom is expected later this year. Approval
of the law will be the last step before establishing full-fledged Islamic banks in Morocco.The
Central Bank of Oman is in the process of finalising initial works for issuing short-term Islamic
finance instruments. A viable interbank market could boost the profitability of Oman's Islamic
banks. The Pakistani central bank has launched a five-year strategic plan for Islamic finance.
SBP had earlier issued new rules for the operation of Islamic banking windows. Tajikistan's law
on Islamic Banking Activity has come into force in the country. Uganda's cabinet of ministers
has approved the introduction of Islamic finance in the republic in May. The government is
working together with the Islamic Chamber of Commerce, Industry and Agriculture to introduce
Islamic finance, it said in a statement on May 28. The Islamic Banking Bill 2014 will be
forwarded to the parliament committee responsible who would then table it in the parliament for
vote.The Islamic banking sector is forecasted to amount to almost USD1.7bln by the end of
2014. The impressive growth in assets is being throttled by the continuous regulatory progresses
and developments. Overall, Islamic banking is set to penetrate further in global markets.
The global primary sukuk market has outperformed in the first six months of 2014 with new
issuances amounting to USD66.2bln. Between 2009 and 2013, the global Sukuk outstanding has
expanded at a CAGR of 21.6%, enabling it to be the fastest growing sector in the Islamic finance
industry. Global Sukuk maket is rapidly surguing forward . Despite economic uncertainties and
other challenges afflicting the global financial system at the start of this year, issuers have
overwhelmingly tapped the suKuk sector to raise liquidity. In recent years, a number of
jurisdictions (including non-Organisation of Islamic Cooperation countries) have debuted in the
global sukUK market. In 2014-to-date, debut issuances were recorded in Maldives, Senegal and
the United Kingdom. In this regard, this year has been no exception and some of the regulatory
developments in the sukuk sector over countries.
The Central Bank of Bahrain has introduced consolidated regulatory guidelines for issuing and
listing of financial securities. The Capital Markets Authority (CMA) of Kenya submitted a
proposal in March for a separate regulatory framework for Islamic finance to the National
Treasury. The purpose of the proposed framework is to further the development of the country's
fledgling Islamic finance industry. The Malaysian Prime Minister had introduced the Socially
Responsible Investments (SRI) Sukuk initiative in the Malaysian Annual Budget 2014 last year.
Malaysia is expected to take lead in spearheading issuances of socially responsible Islamic bonds
which will further drive growth in the global sukuk industry.  .Dubai Financial Market (DFM),
which is one of the United Arab Emirates’ main bourses, has officially published its
comprehensive sukuk standard on 2nd April 2014 as part of its efforts to enhance regulatory
clarity on these Islamic instruments while attracting a wider pool of issuers to the market. The
DFM sukuk standard aims to clarify the legal structures of sukuk instruments while further
providing clarity on the rights of sukuk holders and liabilities attached to special purpose
vehicles (SPVs). DFM hopes that the new standards would be a point of reference for issuers and
investors around the world, encouraging more issuance of sukuk rather than conventional bonds,
and spurring development of new Shariah-compliant financial instruments. Malta recently
expressed its hopes in sending a signal to the world that the republic is open to Shariah compliant
financial instruments. The European island has demonstrated keen interest in attracting Shariah
wealth. The State Bank of Pakistan is currently in the process of finalising details on a Shariah-
compliant liquidity framework. Dubai Financial Market (DFM) has officially published its
comprehensive sukuk standard on 2nd April 2014. DFM hopes that the new standards would be a
point of reference for. Issuers and investors around the world, encouraging more issuance of.
Sukuk rather than conventional bonds, and spurring development of new Shariah. Financial
instruments.
In other hand, the global Shariah-compliant asset management industry has reached a new high
of USD75.1bln in assets under management (AuM), up 4.9% from end-2013's USD71.6bln12.
The number of Islamic funds globally increased to 1,069 with 20 new funds having been set up
during the six months of 2014.
An Egyptian Shariah-compliant index will enable easier structuring of Islamic funds have
exposures to the Egyptian financial markets. The Ministry of Minority Affairs in India has
inaugurated the National Waqf Development Corporation with the aim of developing the
country's Islamic endowments. Kenya hopes a developed Islamic capital market could help it
attract more investments from cash-rich Islamic funds in the Gulf and Southeast Asia. It is
estimated that India has 490,000 waqf properties generating an annual income of just
INR1.63bln. The Capital Market Authority (CMA) has recently approved Kenya's second
Shariah, Genghis Capital, which joins FCB Capital. In June 2014, foreign firms have been
allowed to assume complete ownership over unit trust management companies in Malaysia. In
March, Malaysia listed its second Shariah-compliant exchange traded fund (ETF), managed by i-
Vcap Management Sdn Bhd. Arabesque has received regulatory approval to start operations with
its valuebased investment strategies, which also combine religious and ethical principles. The
London-headquartered firm now has in place a team of 18 staff, with additional offices in
Frankfurt and New York. The firm is backed by its own capital from and has commitments from
several institutional investors. The government's move – part of steps aimed at liberalising the
financial sector – has been welcomed by the industry. The development is indicative of the
increasing investor appetite for the new investment tool.
Islamic fund managers are well-positioned to take advantage of the global economic recovery,
while also capitalising on Islamic finance specific growth opportunities. The sustained progress
of Shariah-compliant capital market, banking and takaful sectors will continue to fuel the
developments in the Islamic funds sector.
Other than that, takaful sector is sustaining the momentum over the globe. The global gross
takaful contributions are estimated to have amounted to USD21.5bln as at 1H14. Saudi Arabia
and Malaysia remain the two largest takafully markets by gross contributions. The two countries
generated an estimated USD6.4bln in gross tkaful contributions at end-2013. The Central Bank
of Bahrain will release a new regulatory framework for takaful this year. The new rules,
developed after two years of consultations with the industry, will cover the operations and
solvency of Takaful firms. The Kyrgyz Republic will be developing draft regulations in 2014 for
the introduction and development of takafully and Islamic securities. Kenya Re confirms that it
will begin providing re-takaful products this year . The Capital Markets Authority (CMA) of
Kenya has put forward a proposal for a Shariah advisory council to be established and appointed
by the minister of finance to oversee the Islamic banking, takaful and capital market industry in
Kenya. The legislation is currently awaiting approval by parliament, with the expectation it will
be ratified and adopted at some point in 2014. The aim of the guidelines is to increase the
penetration rate of takaful and insurance products in the market. IFSA 2013's Section 16 (1)
enforces separation of licences between the general and family takaful businesses. In April this
year, the Moroccan Government published Draft Law No. 059-13 on the Insurance Code. The
draft law includes the prohibition on insurance companies to offer both conventional and Islamic
insurance products. This is likely to create opportunities for setting up new and full-fledged
takafully institutions in the country. The framework that encourages greater operational
efficiency and flexibility, and product innovation is currently being developed to better serve the
needs of consumers and leading towards achieving a higher penetration rate of 75% by 2020.
Growth in 2014 and beyond is expected to mainly stem from emerging regions such as Southeast
Asia (ex Malaysia) and the GCC (ex-Saudi) Fast expanding markets, including Indonesia, the
UAE and Qatar, are driving the Islamic financial sector to new growth trajectories. Entry of new
jurisdictions like Oman and the expected entry of the Philippines are also bound to boost the
gross takaful contributions in these regions.
In conclusion, the global Islamic finance industry has tremendous opportunities to expand in
various regions of the world. A number of sovereign, quasi-sovereign and corporates are
increasingly tapping in the global pool of Shariah-compliant liquidity through sukuk instruments.
The total value of global Islamic Finance assets in 2014 is widely projected to surpass USD2tln
during the third quarter of this year. The industry has firmly established itself as an alternative
financial system and has also attracted a number of non-OIC countries who are also increasingly
looking towards developing their Islamic financial sectors. The efforts have been further boosted
by the facilitative regulatory initiatives implemented by various national regulatory bodies in aid
of Shariah- Compliant financial structures. The Islamic equity and funds market has established
itself in key global bourses and jurisdictions, including Dow Jones, Standard & Poor's FTSE.