“growth & innovation in islamic finance · islamic, pt bank mandiri etc companies i.e....
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“GROWTH & INNOVATION “GROWTH & INNOVATION
IN ISLAMIC FINANCEIN ISLAMIC FINANCE””
STRICTLY PRIVATE & CONFIDENTIAL
IN ISLAMIC FINANCEIN ISLAMIC FINANCE””Dato’ Sri Zukri SamatDato’ Sri Zukri Samat
Managing Director, Bank Islam Malaysia Managing Director, Bank Islam Malaysia BerhadBerhad
TRANSFORMATION OF THE ISLAMIC TRANSFORMATION OF THE ISLAMIC
FINANCIAL LANDSCAPEFINANCIAL LANDSCAPE
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FINANCIAL LANDSCAPEFINANCIAL LANDSCAPE
Bahrain
Dubai Malaysia
Saudi
Arabia
London
Hong Kong
TokyoCalifornia
Sudan
Pakistan
France
Hong Kong
� Aims to become an Islamic finance hub
� Hang Seng Islamic China Index Fund in
2007
� Shariah Advisory Council formed
UK
� Govt sets an objective to ‘entrench’ London as a global
gateway for Islamic finance
� 5 FSA-approved Islamic banks and 2 Takaful operators
Japan
� New law allowing banks to
offer Islamic finance
France
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- TODAY : MOVING INTO UNCHARTERED TERRRITORIESTODAY : MOVING INTO UNCHARTERED TERRRITORIES
Brunei
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Singapore
Australia
Sudan
… rapid expansion is reflected in more than 600 Islamic financial institutions operating in more than 75 countries, even beyond so-called Muslim nations. Total assets > USD1trillion
Indonesia
Australia
� Islamic co-operative finance
& mortgage established
� Consider to establish Islamic
bank
Dubai, UAE
� Fast emerging as a financial centre through
DIFC’s aggressive promotion efforts
� Passed rules/regulations to support
Islamic finance activities
� Considering licensing first Islamic
bank
Singapore
� Established first Islamic bank
� Introduced tax neutrality for
Islamic finance
� Aspiring to be centre for Islamic
finance
� Issued sukuk
Brunei
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- ISLAMIC BANKING JOURNEY : MALAYSIA EXPERIENCEISLAMIC BANKING JOURNEY : MALAYSIA EXPERIENCE
Instituting Foundation
• 1970 – 1992 (Establishment of Enabling Infrastructure)
• Merely as an alternative to conventional banking
Institutional Building, Activity Generation & Market Vibrancy
• 1993-2005 (Deepening, Creating Critical Mass &
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• 1993-2005 (Deepening, Creating Critical Mass & Liberalization)
• Ensuring greater access to Islamic finance
Strategic Positioning & International Integration with Global Financial System
• 2006 onwards
• Becoming an international hub of Islamic finance
… a step-by-step approach. 1st Phase – Discovery & Familiarization; 2nd Phase – Mainstream Acceptance; 3rd Phase – Integration & International linkages.
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- ISLAMIC BANKING MODALITYISLAMIC BANKING MODALITY
Standalone Full-Fledged Islamic
Banks
• Independent financial institutions
• Independent infrastructure (IT, Risk Management, Human Talent, etc)
• High cost-to-income ratio
• Offer full range of Islamic compliant products &
Islamic Windows
• Specialized set-ups within conventional banks
• Different balance sheet but common operations /infrastructure
• Dominated by global players with limited presents in the country
Subsidiaries of Conventional Banks
• Subsidiaries of domestic conventional banks
• Dedicated governance structure
• Shared infrastructure (branch networks, IT, Risk Management, etc)
• Transfer Pricing - cost
• Minimal staffing
Specialized Institutions
• Takaful & Re-Takaful Players i.e. Syarikat Takaful Malaysia Bhd
• Islamic Mortgage Companies i.e. AmeenHousing Co-operative of USA
• Islamic Investment Fund Management
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compliant products & services
• Retail banking, Wealth/Asset Mgmt/ Corporate Banking, Advisory & Capital Markets
• Bank Islam Malaysia Bhd, Bank Muamalat Bhd, Al Rahji, Al-Baraka Banking Group, Kuwait Finance House, PT Bank Syariah Muamalat, etc
presents in the country that they are operating
• Similar offerings to standalone Islamic banks
• Generally targeted at affluent market segments and institutional investors
• Private banking, structured deposits, and corporate banking
• CitiIslamic, Bank Simpanan Nasional, PT Bank Rakyat Indonesia etc
• Minimal staffing
• Low cost-to-income ratio and high productivity index.
• Similar offerings to standalone Islamic banks
• Retail banking, Corporate Banking, and Capital Market.
• Offered Wealth/Asset Mgmt/ Advisory via sister company, another subsidiary of conventional bank.
• Maybank Islamic, CIMB Islamic, PT Bank Mandirietc
Fund Management Companies i.e. Aberdeen Islamic Asset Management Sdn Bhd
• Islamic Trustee Companies i.e. AmanahRaya Berhad
• Ar Rahnu or Islamic Pawnbroking – i.e. ArRahnu Bank Islam
• Islamic REIT Companies
• Shariah Advisory –i.e. Amanie Advisor SdnBhd
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- STANDSTAND--ALONE VS WINDOWALONE VS WINDOW
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Source: Boston Consulting
• Dedicated vs sharing of resources & infrastructure –
balancing act between group synergy & autonomy of IS
•Lack of autonomy: Timely to review structure
•Same board members of IS and parent banks – does
governance being compromised?
•Diversity of Board composition – comprising board
members with Islamic finance knowledge?
•Sharing of expertise based on conventional mind-set
Philosophy of IS - autonomy & strategic focus of IS to harness potential of Islamic finance
Sister Co.Commercial/
investment bank
Islamic subsidiary
Timely to review?
Financial Holding Company
Raising concerns
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- ISLAMIC SUBSIDIARY (“IS”)ISLAMIC SUBSIDIARY (“IS”)
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•Lack of capacity building initiatives: Invest for long-
term benefit (Talent, product developments)
• IT system - based on conventional product parameters
•Cross-selling & branding of Islamic products/ entities
at parent’s branches - How effective branches are
pushing for Islamic products?
•Visibility of Islamic finance – ‘bricks & mortars’ –
Foreign players are more visible
•Service Level Agreement – cost sharing must reflect
cost-benefit
• Issue of cannibalization?
Financial Holding Company
Commercial/
investment bank
Islamic subsidiary
Foreign
PartnerSynergy
through
partnership
with foreign
Timely to review?
‘It is envisaged that greater strategic focus & resources as well as higher
autonomy & governance will be accorded to the Islamic Banking business’
-Governor, Bank Negara Malaysia, March 2005Source: Bank Negara Malaysia
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- SHARIAH CONTRACT DEVELOPMENT MILESTONESSHARIAH CONTRACT DEVELOPMENT MILESTONES
1983 - 1990 1991 - 2000 2001 - 2005 2006 - 2008 2009 Onwards
� Wadiah Current a/c
� Wadiah Savings a/c
� Mudharabah
Investment a/c
� Mudharabah
Financing
� Sarf Forex
� Mudharabah
Interbank
Investment
� Musharakah
Financing
� Bai Dayn,
Musharakah ,
Mudharabah ICDO
� Wadiah Debit Card
� Bai Inah Overdraft
� Bai Inah
� Commodity
Murabahah Profit
Rate Swap
� Commodity
Murabahah Forward
Rate Agreement
� Tawarruq Business
Financing
� Tawarruq Personal
Financing
� Murabahah with
Novation
Simple structure to cater for basic needs
Simple structure to cater for basic needs
Customer-driven structure/productsCustomer-driven structure/productsCost effective structure to
compete in the competitive marketplace
Cost effective structure to compete in the competitive
marketplace
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Financing
� Ijarah Financing
� BBA Financing
� Murabahah LC
� Musharakah LC
� Wakalah LC
� Bai’ Dayn Trade
Finance
� Murabahah
Working Capital
Financing
Financing
� Bai Inah Credit
Card
� Ar Rahn
� Bai Inah
Commercial Credit
Card
� Bai Inah Personal
Financing
� Bai Inah
Negotiable
Instrument of
Deposit (NID)
Rate Agreement
� Ijarah Rental Swaps-I
� BBA Floating Rate
� Murabahah Floating
Rate
� Istisna’ Floating Rate
� Mudharabah Capital
Protected Structured
Investment
� Bai Inah Floating
Rate NID
� Mudharabah Savings
Multiplier Deposit
� Tawarruq
Commodity
Undertaking
Novation
Agreement
� Istisna’ convertible
to Ijarah
� Bai and Ijarah (Sale
& Lease Back)
� Musharakah
Mutanaqisah
� Istisna’ with
Parallel Istisna’
� Wakalah Deposit
� Waqf
� Tawarruq
Revolving Credit-I
� etc
Note – This listing is far from being
exhaustive. Although they have been
developed and/or approved, some products
have yet to be rolled out at the time of
drafting of this presentation.
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- CONDUCIVE REGULATORY FRAMEWORKCONDUCIVE REGULATORY FRAMEWORK
Tax Neutrality
ShariahAdvisory Council & Shariah
International Best Practices
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Comprehensive Legislation
Dispute Resolution (Dedicated Shariah
Commercial Court,
Financial Mediation
Bereau & Arbitration
Centre)
Tax Neutrality Policy
ShariahGovernance Framework
… essentials to stimulate product development & innovation
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- COMPREHENSIVE OFFERINGSCOMPREHENSIVE OFFERINGS
Islamic
Banking
Money Market
Debt Capital Market
Venture Capital/ Private Equity
Ancillary Services
… robust development
of these components
will enhance
sustainability and
resilience of the
Islamic financial
services industry
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Islamic Finance
Equity Capital Market
Takaful
REITS
Asset Mgmt
Wealth Mgmt
TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE
-- BRAND POSITIONINGBRAND POSITIONING
“Banking for “Banking for All”
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“Banking for Muslims”
“Banking for All”
… growing recognition that the inherent tenets of Islamic finance are aligned to sustainable dimensions of ethical banking and responsible financing.
TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELLIN A NUTSHELL
BankingBankingComprehensive Financial
SystemComprehensive Financial
System
MonopolyMonopoly Diversity of PlayersDiversity of Players
WindowsWindows Full-Fledged Islamic BanksFull-Fledged Islamic Banks
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WindowsWindows Full-Fledged Islamic BanksFull-Fledged Islamic Banks
Alternative Banking & Specific Agenda
Alternative Banking & Specific Agenda
National AgendaNational Agenda
Traditional Markets Traditional Markets Non-Traditional MarketNon-Traditional Market
… changing financial landscape has accelerated expansion of Islamic finance industry
Basic Shariah Principles
(i.e. BBA & Murabaha)
Basic Shariah Principles
(i.e. BBA & Murabaha)
Variety of Shariah Principles
(i.e. Tawarruq, Ujrah, etc)
Variety of Shariah Principles
(i.e. Tawarruq, Ujrah, etc)
Basic InfrastructureBasic InfrastructureComprehensive Infrastructure
Comprehensive Infrastructure
Limited Tax NeutralityLimited Tax Neutrality Universal Tax NeutralityUniversal Tax Neutrality
TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELL…contIN A NUTSHELL…cont
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Limited Tax NeutralityLimited Tax Neutrality Universal Tax NeutralityUniversal Tax Neutrality
“Plain Vanilla” Products “Plain Vanilla” Products Hybrid & Structured
ProductsHybrid & Structured
Products
Domestic/Local PlayersDomestic/Local PlayersCross-Border
/Regional/Global PlayersCross-Border
/Regional/Global Players
… wide spectrum of financial products and services to cater to needs of all customers from small businesses to conglomerates, from common households to high net-worth individuals
Commercial Islamic BanksCommercial Islamic Banks Mega Islamic BanksMega Islamic Banks
Shariah Compliant Products Shariah Compliant Products Shariah Based ProductsShariah Based Products
TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELL…contIN A NUTSHELL…cont
… increased focus on financial stability… increased focus on financial stability
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(…strengthened prudential standards with a focus on building capital and capital buffers, increased transparency in financial transactions and exposures)
(…strengthened prudential standards with a focus on building capital and capital buffers, increased transparency in financial transactions and exposures)
… evolves to become more diversified and more comprehensive to meet the changing requirements of the real economy
… evolves to become more diversified and more comprehensive to meet the changing requirements of the real economy
… increased pace of international connectivity
… accompanied by development of ancillary support services
“SUSTAINABLE GROWTH PARADIGM “SUSTAINABLE GROWTH PARADIGM
FOR ISLAMIC FINANCE”FOR ISLAMIC FINANCE”
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FOR ISLAMIC FINANCE”FOR ISLAMIC FINANCE”
Measure or
success or
profitability
HighEmerging
� Large number
of new
entrants
� Rapid growth
in value of the
Fast Growth� Stiff Competition
� Focus on market
share &
innovation
Saturation� Consolidation
� Demand for
greater
differentiation
Maturity� Removal of
incentives
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE
-- MATURITY CURVEMATURITY CURVE
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Early Start� Focus on
product design
and
positioning
� Customer
Awareness
1960 1970 2000 20xx
Islamic finance probably
stands here; best time in
terms of business
development BUT most
damaging when a crisis hits
Medium
Low
in value of the
industry
� Increased
recognition
and awareness
Islamic finance as national agenda
Attractive tax & non-tax incentives
Robust & comprehensive
regulatory, legal, corporate governance & Shariah framework
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE
-- KEY INGREDIENTSKEY INGREDIENTS
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Wide & knowledgeable investor base
Adequate pool of talents & capabilities
Continuous product
innovation
Liberal foreign exchange rules
… a defined strategic plan and initiatives under the Financial Sector Master Plan
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE MALAYSIA MALAYSIA -- ISLAMIC FINANCIAL SYSTEM AS AT DEC 2010ISLAMIC FINANCIAL SYSTEM AS AT DEC 2010
Assets
� 20.8% of total banking system
� Total IB asset : RM351 bil (USD116.2 bil)
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Financing
� Market share – 22.7%
� Total financings: RM222.3 bil (USD73.6 bil)
Deposits
� Market share – 22.6%
� Total deposits : RM277.5 bil
(USD91.9 bil) Capital Market
� 57% of the
outstanding PDS
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE
-- DIVERSITY OF PLAYERS : MALAYSIA’S ISLAMIC BANKING LANDSCAPEDIVERSITY OF PLAYERS : MALAYSIA’S ISLAMIC BANKING LANDSCAPE
Mega Islamic
Banks (Paid Up
Capital of US$1 bil)
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STAND-ALONE
SUBSIDIARIES OF CONVENTIONAL BANKS
ISLAMIC WINDOWS & DFIs
INTERNATIONAL ISLAMIC BANKS
17 commercial
Islamic Banks, 6 FB
windows, 6 DFIs &
4 IIBs.
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE
-- CHALLENGING MACRO ENVIRONMENTCHALLENGING MACRO ENVIRONMENT
� Global Environment
� Sovereign debt woes and geo-political uncertainties
� Financial market volatility and potential spillover effects on the
real economy
� Weak international trade conditions
� Policy Environment
� Limited policy levers especially in developed economies to tackle
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� Limited policy levers especially in developed economies to tackle
macroeconomic challenges
� Increased regulatory scrutiny
� Domestic Operating Environment
� Saturating domestic market and intensifying competition
� Margin squeeze due to stiff competition and rising costs
� Potential economic downturn due to contagion effect from a
potential global recession which could lead to rising delinquencies
SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE
-- SUSTAINABLE GROWTH PLAN : BANK ISLAM’S PERSPECTIVESUSTAINABLE GROWTH PLAN : BANK ISLAM’S PERSPECTIVE
• To continuously develop new financial solutions and product offerings that suit the ever-evolving customer needs (comprehensive, competitively priced and innovatively packaged) and benchmarked to international standards.
Business Innovation
• To build a solid foundation for sustainable revenue generation and resilient asset portfolio as well as efficient capital management.
Robust Risk Management
• To provide an infrastructure that would improve operational efficiency, increase productivity and reduce transaction costs.
Strengthening Enabling Infrastructure
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• To attract, retain and build future human capital capabilities: to capture and retain best talents in Islamic finance
• To ensure that employees are fully equipped with the right knowledge, capability and skills to excel and steer the Bank.
Building Capability & Capacity
• To establish an extensive network of branches and to expand electronic delivery channels that would enhance our reach to customers.
• To enhance brand positioning that would drive business growth and sustain its competitive edges.
Franchise Development
• To strengthen our market presence and stay ahead in an environment of heightened competition.
• To tap the vast opportunities available in the South East Asian region.
Inorganic growth & Corporate Expansion
“CAPACITY BUILDING TO ENHANCE “CAPACITY BUILDING TO ENHANCE
FINANCIAL CAPABILITY”FINANCIAL CAPABILITY”
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FINANCIAL CAPABILITY”FINANCIAL CAPABILITY”
Centre of Product Innovation
Centre of Fund Flows� Domestic players with extensive
Diversity of players
Centre of Shariah Reference
Centre of Capital & Money Markets
� Fund management and equity, Sukuk & money
markets
CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY
-- MALAYSIA AS A REGIONAL ISLAMIC FINANCIAL CENTREMALAYSIA AS A REGIONAL ISLAMIC FINANCIAL CENTRE
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Centre of Fund Flows� Domestic players with extensive
global linkages
� International players
… Malaysia has the competitive advantages to be a global Islamic financial hub
Centre of Talent Development Centre of Int’l Currency Business
Centre of Ancillary Services
� Legal, Shariah Advisory, Accounting & Processing services/Outsourcing services
CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY
-- CENTRE OF TALENT DEVELOPMENTCENTRE OF TALENT DEVELOPMENT
.
.
.
Page 23
.
.
.
… Malaysia has put in place a comprehensive talent development infrastructure
CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY
-- ENHANCING ISLAMIC FINANCIAL STABILITY ENHANCING ISLAMIC FINANCIAL STABILITY
.
.
.
Page 24
.
.)
.
Source: GTNEWS, Association of Financial Professionals
CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY
-- NEW DRIVER FOR ISLAMIC BANKINGNEW DRIVER FOR ISLAMIC BANKING
“In today’s context, the growth in Islamic finance coincides
with the current account surpluses of oil-exporting
countries , dominated by Muslim countries. The new era
of these countries desires for socio-political and economic
systems based on Islamic principles and stronger Islamic
identities.
In addition, the introduction of broad macroeconomic and
Page 25
In addition, the introduction of broad macroeconomic and
structural reforms – in financial systems, the liberalization
of capital movements, mega infrastructure projects in the
Muslim world, privatization and the global integration of
financial markets, have paved the way for a rapid
expansion of Islamic finance.
Islamic finance is not restricted to Islamic countries, but is
spreading wherever there is a sizeable Muslim population
and demand for ethical banking”
���ا ���ا
“MAY ALLAH BLESS OUR EFFORTS TO STEER “MAY ALLAH BLESS OUR EFFORTS TO STEER
ISLAMIC FINANCE TO GREATER HEIGHTS”ISLAMIC FINANCE TO GREATER HEIGHTS”
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