islamic banking and financeislamicfinanceevents.com/2009/pdf09/ifn_roadshow_turkey... · islamic...

0

Sohail Jaffer, June 4, 2009

Islamic Banking and FinanceTrends, Opportunities and Challenges

1

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

2

Islamic Finance Overview

Faith based financing systemproviding alternative products

to those available in theconventional financial markets

Competitive alternative toconventional products

attractive to Muslims andnon-Muslims

• Transparency and full disclosure• Fairness with all parties involved• Profit and loss sharing• Real transactions

3

Islamic Finance overview

Islamic jurisdictionsSecular jurisdictionsProgressive juridictions

StandardisationTransparencyNeutralitySeparation of Shari’a from law and politics

Global Reach

Future directions

4

Islamic Banking and Finance Overview

5

Growth of Islamic Finance

Source: Dow Jones and Company, Inc.

1975-1990Commercial Banking SyndicationsIslamic Conglomerates

1991-2000Hard Asset Private EquityFund ManagementIslamic Indexes

Market exposure: 20m

Onset of Islamic Banks (Malaysia, UAE, etc.)

Inefficient Command SOEsin Iran and Sudan, and Pakistan

Market exposure: 100m

Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh

Market Exposure: 900m

Conversions, Islamic Windows & Subsidiaries of Mega Banks,

Establishment of significant Islamic Banks in Non-Muslim states

Muslim populated states getting interested Syria, Libya, Soviet bloc

Timeline 1975-2010Source: S. Farooq, BIBF

6

Where are we today in Islamic Finance ?

Source: Dow Jones and Company, Inc.

Cost-Plus

Leasing RealEstate

Equity

PrivateEquity

Venture Capitalist

Timeline: Products/Returns/Players

ActivitiesRisk

IslamicFinance

IFProducts

ConventionalFunds

ConventionalFund Products

40 years 300+ years

ConventionalFund Institutions

Islamic Financial Institutions

7

Screening: Common Shared Values

8

Key Characteristics of Islamic and Ethical Funds

The Performance of Islamic Equity Funds, Falaika 28/05/2008

Islamic Ethical

Clear definition of action limits

Faith-based rules

Supervisory Committee

Sector Exclusion

Best-In-Class

Environmental filters

Human rights

Transparent corporate practice

Restriction on investment mgt

Financial screens

YES

YES

YES

YES

NO

NO

NO

NO

YES

YES

NO

NO

NO

YES

YES

YES

YES

YES

NO

NO

9

Trends: Regional ChampionsRegional Champions emerging

Islamic Mega Bank:Shaikh Saleh Kamel, chairman of Al Baraka Banking Group, to launch the world's biggest Islamic bank before the end of the year, with an initial public offering of $3 billionAl Baraka Banking Group will launch Islamic Banking in FranceNBK to launch a private banking arm in SwitzerlandAl Salam Bank and Bahrain Saudi Bank to merge creating a bank with a market value of USD 400 million

Emergence of International Financial CentersDIFCMIFCBFHQFC

10

Trends: Global and Regional Brands

Islamic Banking:HSBC RBSStandard CharteredBNP ParibasCredit Agricole

Takaful:AvivaZurichAIGINGFortis

Fund ManagersDeutsche BankCAAMBNP ParibasSocieté GénéraleDexiaING

Global Brands Regional Brands

Islamic Banking:DIBADIBAl RahjiKFHNoor

Takaful:SolidarityTakaful MalaysiaSalama

Fund ManagersShuua Capital NCBEIS

110.31710.3171ING International High Dividend Fund

0.14230.1423ING Asian Equity Fund

1.04691.0469ING Asian Debt Fund

1.99011.9901ING Dana Suria Ekuiti

-1.0091PB-ING All Weather Fund

-0.9801PB ING Baraka Commodities Fund

-1.0357ING Global Equities Link Fund

1.68551.6855ING Income Fund

1.68481.6848ING Equity Fund

1.47441.4744ING Dynamic Fund

1.62351.6235ING Balanced Fund

OfferBid

Unit Price (RM)Fund Name

Prices as of 29-Apr-2009

International activities of ING and Dexia

• 75% of Denizbank’s shares in Turkey were purchased by Dexia for $2.43 billion

• RBC Dexia is a custodian for Sharia Compliant funds and Takaful Companies

Malaysia MENA - Malaysia

12

Maybank Fortis – Etiqa

• joint-venture in 2001 between Malaysia’s largest local bank, Maybank (70%) and Fortis (30%)

• in 2005, Mayban Fortis is the second largest insurer in Malaysia

• acquisition of Malaysia National Insurance and Takaful Nasional: rebranded as Etiqa in 2007

• Etiqa will be the single master brand for all conventional and takaful businesses under Mayban Fortis to become the No.1 insurer in Malaysia by 2009.

• Etiqa is a leading provider of takaful products in Malaysia with a market share of 54 per cent in 2006. It is also ranked second and third in the life and general insurance businesses respectively.

Fortis / Maybank Takaful: Strategic alliance

13

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

14

Capital Markets overview

Islamic Finance

Islamic Fund Management

Takaful (Insurance)

Sukuk (Bonds)

IslamicBanking

Capital Markets CommercialBanking

15

Islamic Banking and Finance: Major Instruments

16

Islamic Banking and Finance: Major Instruments

Source: Pricewaterhousecoopers

17

Islamic Debt like instruments – Ijara

Ijara is the Arabic word for rent- providing goods and services for temporary use for a fee.

An ijara contract is an agreement whereas a lessor(mu’ajjir) leases a physical asset or property to a lessee (musta’jir) who receives the benefits associated with ownership of the asset against payment of predetermined rentals. Ijara is for a known time period.

Utilized by banks to provide customers with short to medium-term financing leases

The asset is owned by the bank and is leased to the user. Typically the lessor is required to obtain insurance.

Source: Pricewaterhousecoopers

18Source: Pricewaterhousecoopers

19

Islamic Banking and Finance: Major Instruments

20

Islamic Banking and Finance: Major Instruments

21

Sukuk is a Shariah compliant capital market instrument

By nature, it is analogous to conventional asset backed securities (with several exceptions)

Business activities/assets that would be used as underlying assets backing the Sukuk would need to be Shariah-compliant. The proceeds of the Sukuk must be used for Shariah-compliant purposes only

Sukuk can be issued under various structures

The primary subscriber can resell the Sukuk in the secondary market; the secondary market buyer will be the new pro-rata beneficial owner of the underlying assets

Islamic Banking and Finance: Sukuk Overview

Source: HSBC Analysis (17 November 2008)

22

Sukuk vs. Conventional Bond

Islamic Banking and Finance: Sukuk Overview

ConventionalIslamicParameter

• A comparatively smaller pool of conventional bond investors will mean that there is less demand for the paper.

• A larger pool of Sukuk investors creates more demand, hence may help to achieve slightly more competitive pricing (Malaysia ’s experience)

Financing Cost

• No additional administrative costs associated with conventional bond issues

• Additional fees: legal and Shariah advisory feeAdministrative Cost

• Conventional bonds can only tap the conventional bond investors

• Sukuk issues enjoy a wider investor base from both sets of investors –Islamic (Islamic banks, takaful cos, Islamic asset management cos) & conventional

Investor Base

• An issuer of conventional bonds is not limited in its business activities

• A Sukuk issuer shall be engaged in business activities which are permissible under Shariah

The Issuer

ConventionalIslamicParameter

• A comparatively smaller pool of conventional bond investors will mean that there is less demand for the paper.

• A larger pool of Sukuk investors creates more demand, hence may help to achieve slightly more competitive pricing (Malaysia’s’experience)

Financing Cost

• No additional administrative costs associated with conventional bond issues

• Additional fees: legal and Shariah advisory feeAdministrative Cost

• Conventional bonds can only tap the conventional bond investors

• Sukuk issues enjoy a wider investor base from both sets of investors Islamic (Islamic banks, takaful cos, Islamic asset management cos) & conventional

Investor Base

• An issuer of conventional bonds is not limited in its business activities

• A Sukuk issuer shall be engaged in business activities which are permissible under Shariah

The Issuer

Source: HSBC Analysis (17 November 2008)

23

Sukuk – A significant development in Islamic Banking

Global Sukuk IssuanceCorporate and Sovereign Sukuk Issuance

Leader –issuance volume

Source: Bloomberg

Source: HSBC Analysis (17 November 2008)

24

Islamic Banking and Finance: Sukuk - developments

Differences in underlying asset :Wide range of sukuk structures – debt-based, equity-based, asset-backed structuresSophistication of structures:New innovative and complicated Sukuk especially Hybrid Widening range of Assets

Tangible assets (real-estate, aircraft, production plants and machinery)

IPR, cash-flows – requires Shariah scholar approval

Secondary MarketRestrictions on trading in Debt (Malaysia vs. GCC)

GCC – foreign ownership and controls

Market beginning to see some level of secondary trading

Singapore issued in January 2009 its first sovereign Al Ijarah Sukuk worth $134m to attract petro dollar investment and promote Islamic finance in Southeast Asia's financial capital.

• Predominately driven by and distributed into the local Islamic accounts with some additional follow-on demand from Asian and European Islamic funds

Sukuk

Middle East (60%)

Europe (25%)

Asia (15%)

Banks (80%)

Funds (15%)

Other (5%)

Comments Sector

Source: HSBC Analysis (17 November 2008)

Country

25

Islamic Banking and Finance: Sukuk - developments

Singapore issued its first sovereign Al IjarahSukuk worth $134m in January 2009 Indonesia offered ist second sukuk in 2009Malaysia established Financial Guarantee Institution The Islamic Development Bank (IDB) to issue a US$500m global SukukBNP Paribas on behalf of Darahim Capital of Bahrain issued a US$40m Darahim SukukBasket - a 3-year Note (January 2009)

26

Islamic Banking and Finance: Sukuk - developments

UK Budget provisions facilitating sukuk issuance.

Turkish and Jordan government paves the way for the issuance of theirs debut sovereign Sukuk.

Hong Kong to facilitate tax neutrality between Islamic financial products and equivalent conventional ones.

According to the Oliver Wyman 2009 Report – Next Chapter in Islamic Finance, “Exponential growth in Islamic Finance expected to reach $1,200 billion in 2012 “.

27

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

28

The mandates for Islamic funds are widening and becoming more global.

In 2002, 45 % of Islamic funds were mandated to Asian securities, whilst 32 % more were focused on GCC regional securities.

In 2007, 33 % of Islamic funds ran Asian mandates of which only 24 % were GCC funds.

As research and analysis has widened and the index providers have started to create new series and subsets of Shariah compliant indices, so other markets come into play

In 2007, 2 % of Islamic funds were Emerging Market funds.

Islamic Banking and Finance: the Funds

29

Sharia Compliant Mutual FundsImproved coverage across asset classes and geographical mandates:

2008: over 500 Sharia compliant funds in the world

Forecast: the number will reach 1,000 funds by 2010,

CAGR of 24 % for the period 2007 to 2010.

Equities remains dominant:

allocation of 52 % for the Sharia compliant universe ( 42 % in conventional universe)

Fixed income is underdeveloped:

7% for the Sharia universe (22 % in conventional universe)

30

Sharia Compliant Mutual Funds promoters/managers

Regional International

31

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

32

« Bancatakaful is defined as the delivery and distribution of a suitable range of tailored ‘bankable’ protection and long term savings and pension products designed to meet the lifecycle needs of the customer base of a bank or other financial institution.»

CustomerLife CycleDemandDriven

STUDENT LOANS

LIFESTYLE SPEND

CAR LOANS

MORTGAGESSAVINGS

LIFE INSURANCES

RETIREMENT PLANS

ANNUITIES

Definition of Bancatakaful

33

34

35

Growth drivers

Source: PWC, “Takaful: Growth opportunities in a dynamic market* 2008

• In some countries with majority Muslim populations (Turkey, Egypt, Pakistan, Indonesia) the takaful market is at an embryonic stage.

• Untapped markets: insurance penetration is below 2% of GDP in the Middle East Region

• The global takaful industry is growing at 20% per year, far outstripping the 2.5% annual growth for conventional insurance premiums

• Moody’s has predicted that global takaful premiums will rise to $7bn by 2015.

36

Untapped market potential

Source: PWC, “Takaful: Growth opportunities in a dynamic market* 2008

• Potential customer base: world’s 1.5 billion Muslims

• Bulk of the world’s Muslim population is young: 60% of the global Muslim population is under 25 years of age.

• The potential to be a customer for 40 years or more.

•Takaful products must be price competitive with conventional insurance products;

• Takaful is inherently ethical and is obliged to invest in sustainable investments.

• Further, it distributes the annual retakaful surplus back to the policyholders.

37

38

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

39

Islamic Banking and Finance Challenges

Product InnovationCross Border distributionCorporate Governance Global Sharia StandardsDifferentiated customer service

Pre global crisis

40

Islamic Banking and Finance Challenges

Funding costs expected to rise, liquidity to shrinkRegulator are expected to introduce tougherconsumer lending guidelinesRetail lending volumes are expected to slow down even temporarily as banks adjust to new realities

Source WIBCR 2008-209 McKinsey

Post Global crisis

41

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

42

What’s driving the demand?

As far as the Sukuk market is concerned, Moodys expect more (August 2008 Islamic Finance Notable Trends):

Complexity and diversity

Issuance volumes and widening gaps in terms of issuer creditworthiness

Securitisation, structuring and subordination

Liquidity

43

What’s driving the demand?

As far as IFIs are concerned, Moodysexpect more (August 2008 Islamic Finance Notable Trends):

Geographic diversification

Operating diversification

New entrants and competition

De-correlation with oil prices

44

Product penetrations are low and indicatesizeable headroom for growth

GCC population is still young with sizeableunderserved segments

Customers are seeking more tailored segmentedproposition but banks are currently fosuced on a few

Beyond topline, banks have opportunities to improve profitability through other efficiencylevers

Source WIBCR 2008-209 McKinsey

What’s driving the demand?

45

1. Overview of Islamic Finance

2. Capital markets

3. Sharia Compliant Investments

4. Takaful

5. Islamic Finance Challenges

6. Islamic Finance Opportunities

7. Conclusion

Contents

46

Notable Trends There are many reasons why new Islamic financial institutions (IFIs) have been mushrooming across the board:

i) booming and profitable market naturally attracts new entrants because excess demand needs to meet additional supply;

ii) retail banking in the Middle East was discovered in the 1990s and there's still a lot to do, where IFIs can offer attractive solutions;

iii) governments have been very supportive of the Islamic financial industry. Asset-backed, infrastructure, and project finance is naturally in line with the principle of Islamic finance, just like mortgage lending.

47

Islamic Financial Marketplace – Sources of Funds

1.3 billion Muslims (20% of population)Fastest growing and one of the most active religions

More than two thirds of Islamic funds are from the Middle East

SE Asian Islamic Marketplace experienced rapid expansion

Islamic banks have EU footprint through UK

Overview of the Global Islamic Market

Source:

48

Islamic Banking and Finance: Fast track growth in EuropeIslamic retail products appeared in the UK in the 1990sIn 2009, with over $18 billion in Shariah compliant assetsThe UK comes 8th in The Banker’s league table of Islamic assets worldwide

In 2009, the UK hosts:5 Islamic banks: (Islamic Bank of London and the Middle East (BLME) will focus on London Stock Exchange listing in 2010; Islamic Bank of Britain, ...)over 20 conventional banks with Islamic windows, 1 stand-alone Shariah compliant insurance provider;at least 9 fund managers providing opportunities for investment in Shariah compliant funds 1 Shariah compliant hedge fund manager;the exchange upon which almost half of all global sukuk by value are listed

49

3 Middle East banks are submitting their applications to the French authorities: the Qatar Islamic Bank (QIB) the Kuwait Finance House, Al Baraka Islamic Bank, from Bahrain.

Crédit Agricole and Nomura plans launching sharia compliant funds domiciled in Luxembourg.

Société Générale has done a couple of sharia compliant products in Reunion

BNP Paribas has a long standing presence in Bahrain and plans importing its investment banking experience into the French market

Europe: Investment and Retail banks in progress

50

In January 2009, Deutsche Bank launched Al Mi’yar, a first-of-its-kind platform aimed at facilitating the issuance of Shariah compliant securities.

The idea of Al Mi’yar came about due to the Islamic investment space still being undersupplied, let alone underdeveloped.

Domiciled in Luxembourg,the platform was developed by DB with Luxembourg Financial Group as its Shariah investment manager and DB’s Trust & Securities Services group providing the settlement framework.

Example of cooperation between Luxembourg and the GCC region

Islamic Banking and Finance: Fast track growth in Europe

51

The Luxembourg Stock Exchange was the first European stock exchange to enter the sukuk market, having listed sukuk since 2002.

In September 2008, 14 sukuk with a combined value of USD 5.5 billion were listed and traded on the Luxembourg Stock Exchange.

In September 2008 there were 31 shariah compliant investment funds held in 17 Luxembourg domiciled investment vehicles. Several large funds are in the process of being launched.

Luxembourg is recognised globally as a world class financial centre; it is the second largest investment fund centre in the world after the Unites States, with almost EUR 2 billion under management.

Luxembourg attractive to institutional investors

52

Sample of Sharia Compliant funds domiciled in Luxembourg

53

joint ventures/strategic alliances with more experienced GCC operators/providers European FIs like BNP, Credit Agricole, DB moving in to the regional GCC and SE Asian Sharia compliant mkts.NCB has an investment banking and asset mgt alliance with Goldman Sachs and plans to establish a UCITs sharia compliant funds family in Europe.Nomura has also established a Sharia compliant funds family in Lux.Increasing competition now between DIFC, Bahrain, Lux and Dublin to attract this business.Lux can offer an Islamic Banking and Fund admin experise, create a Training academy, provide Islamic research funding and facilities, legal fund structures for Private Equity, Real Estate and multi-mgr funds

Conclusion

UNTAPPED POTENTIAL FOR ISLAMIC FINANCE IN EUROPE

54

Sohail E Jaffers.jaffer@fwugroup.com

Mobile phone: +352-621-326-495

Mr Jaffer is a Partner, Head of International Business Development for “white label” bancatakaful and Sharia compliant investments within the FWU Group. From June 1998 until June 1999, he was Senior VP within the International Mutual Funds Group of Scudder, responsible for international product development. From January 1989 until May 1998, he was VP with Citibank London with the Financial Institutions Group responsible for structured products including alternative investments until 1996, then joined Citibank’s Alternative Investment Strategies (AIS) Group as Director and was also a member of Citi’s Hedge Funds Policy and Strategy Committee.

Mr Jaffer is currently a Regional Advisory Council Member (EMEA) of the Alternative Investment Management Association (AIMA), was a Council member of AIMA for the period 2001 to September 2008 and past Chairman for the period 1997 to 2000. He has written extensively on alternative investments and has edited several Euromoney publications on hedge funds, multi-manager strategies, 4 Islamic books on retail banking, asset management, insurance (takaful), wealth management and a recent CPI publication on investing in the GCC markets.

He is also a member of ALFI’s Asset Management Advisory Committee, Middle East working group and of their Hedge Fund Committee. He is also a member of MIFC's Strategic Focus Group (SFG). MIFC is the “Malaysia International Islamic Finance Centre”.

Contact details