islamic financial service industry mr. abdul kader thomas
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Islamic Financial Services Industry: Its evolution journeyIndustry: Its evolution, journey,
growth, trends and future direction- a discussion of constitutional
issues -issues Bank Muscat /IIFM Workshop
Islamic Liquidity Management & Capital Markets May 5 – 6, 2012B Abd lk d ThBy Abdulkader Thomas
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Today’s AgendaToday s Agenda
• Where is Islamic Finance Today?Where is Islamic Finance Today?
• Where have we been?
Wh h k d ?• What are the key trends?
• Where are we going?
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The Geographic SpreadThe Geographic Spread
Emerging in North America London is a Key Service and Capital Market Center
South Asia isKey Target Market
Primary Capital
Kuala Lumpur is the
Primary Capital Source is GCC
pLargest Capital Market Center
Africa is an Emerging MarketEmerging Market
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Customersputtingthemselvesfirst• Transformation from the old market
situation: Bankers and the Affluent directing the business
• D d i i i l b tt• Demand is increasingly bottom – up:– Demand for consumer products
– Insistence on custom tailored business products
• The questions are not always deep, but q y p,the growing preference is to be free from riba - riba.ربا .رب
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Customersnotfullyconvinced• Mind your language:
– The press reports “Islamic loans”, “Islamic lenders”,…
– The teller offers you more “interest” on your mudaraba
– The murabaha desk officer tells you your interest rate and calls your car purchase a “loan”
• Should you really fund a duty free business?
• Why did so many people get upset about the perpetually delayed Goldman Sachs sukuk?p p y y
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Aninterestingalternative• The nature of Islamic finance is different:
– In lieu of a cost of funds:• Cost of Goods
• Cost of Capital/profit sharing
If dh d h i i l d l l i f i kIf adhered to, there is practical and legal meaning for risk
• The character if derivatives is different and limited:limited:– Reduces the scope of some risk taking
Changes the industry risk profile– Changes the industry risk profileDoes not reduce the risks of specific businesses or banks!
• No insulation from irrational exuberance!• No insulation from irrational exuberance!
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Notyetservingthemassneedy• Islamic Microfinance only beginning to take
form
• SME finance is well behind microfinance in its developmentp
For both to become meaningful, we require a change in the direction of investment fromchange in the direction of investment from “prestigious” landmark western deals to invisible southern dealsinvisible southern deals
Whose blessings are we invoking Basel or ….
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Wherehavewebeen?• Strongly associated with theh drocarbon price c clehydrocarbon price cycle
• Biased towards traders and theaffluent
• Somewhat short on creativity• Somewhat short on creativity• Struggling between the choice ofcutting a new path and copying theestablished financial sector
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Impact of the Hydrocarbon Cycle• Struggling with definition before 1973• Foundation of the big five post 1973ou d o o e b g ve pos 973
– IDB, DIB, KFH, Albaraka and DMI
• Expansion post 1979• Expansion post 1979• Slow growth 1986 through 2000• Booming since 2003Link will break when growth of theLink will break when growth of the
sector takes off in meaningful wayoutside of the hydrocarbon producersoutside of the hydrocarbon producers
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Traders & Affluent DemandsTraders & Affluent Demands
• Traders:Traders:– Short term financing
High demand for funds in a short cycle– High demand for funds in a short cycle
– Attractive margins in a short cycle
Th Affl• The Affluent:– Safety abroad
– Familiarity – “show me what I know”
– Money at home must be mobile
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Somewhatshortoncreativity• Creativity entails risk taking
Hi i l h h “ d id– Historical thought process: “we need to avoid losing”
C i i i R&D i hi• Creativity requires R&D within a proper framework:– Central bank and securities regulators buy-in to
the industry
S h l i i h i i– Scholars receiving the correct training
– Business people being aware of the rules
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Innovators or Copycats?Innovators or Copycats?
• Issues which come to mind in ourIssueswhichcometomindinourstrugglingbetweenthechoiceofcuttinga new path and copying the establishedanewpathandcopyingtheestablishedfinancialsector:– Credit cards– Credit cards
– Organized tawarruqInterbank wakala without disclosure without– Interbank wakala without disclosure, without risk
– Promises which can be broken for a price– Promises which can be broken for a price
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Key TrendsKeyTrends
• SukukSukuk• New markets (mostly), and
M d• More products
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What is happening with sukuk?
$85,575 $80 000
$90,000 Gross Sukuk Issuance (US$m)
$53 077$60,000
$70,000
$80,000
$27 179
$46,794 $53,077
$40,000
$50,000
$5,817 $10,798
$27,179
$20,540
$32,160
$10 000
$20,000
$30,000
$30 $336 $813 $986 $7,217 $-
$10,000
1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
This Chart cannot accommodate 2012!Source: Zawya
1
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Slide 14
1 Insert Sukuk tableAbdulkader Thomas, 5/1/2012
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Who is new? And, who might leave?ال •ال Ahlan wa sahlan اھال وسھال
– Libya
– Morocco
– Turkey
– Nigeria
– Russia
– France
• Gone – South SudanGone South Sudan
• One foot out the door - USA
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Broadening product baseBroadeningproductbase
• More banks more stylesMore banks, more styles
• More organic demand, more innovation
Mi i f h fi i l i• Migration of the financial engineers
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Expanding service mandateExpandingservicemandate
• Sophisticated capital marketsSophisticated capital markets
• Broader management of risk
S h i• Some happier customers
• Less resistance from “conventional” customers– Why: Because the sector is better?
– Or: Is the conventional sector temporarily impaired?
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Increasedregulatorycooperationd di landdialogue
• GCC regulators appear to talk more togetherGCC regulators appear to talk more together
• Global regulators slowly paying attention
IFSB• IFSB
• Indirect collaboration by the imposition of AAOIFI
• Need to address legal issues in commercial glaws, banking laws, and
• Probably need to push back against BaselProbably need to push back against Basel
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Migration of global bankingMigrationofglobalbankingmethodologytotheIslamicsphere
Th l f j b i N h A iThe loss of jobs in North America and Europe has led senior
bankers regulators and their pupilsbankers, regulators, and their pupils to come to work in the GCC, East
Asia and other markets. They bringAsia and other markets. They bring what they know, and they may be the very same people who gave us y p p g2008. Be wary of what you ask for:
!ال تبغي قرد اخر، انجك اقرد ي
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ThequestionofwhitherIslamicfinance?finance?
• Will this be a demand driven market with well informed consumers?
• Will this be a copy cat industry?py y• Will this business expand its mandates to
serve the needy as well as the affluent?yCan we innovate to our needs?The problem of one size fits all globalThe problem of one size fits all global
regulation: Basel is bad for you and meBasel is bad for you and me.
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A word on standardsAAOIFI ti l l ti lAAOIFI, national law, national Sharia’a, and various objectives
Beware of red herringsBeware of red herrings,…
We live in a world with multiple legal systems, highly negotiated
contracts, consider the US:
English law, two variants of civil law, and several forms of hybrid
E li h/ i il l d hi kEnglish/civil law – and many think that it sets a high standard of judicial
clarity and ease to do banking!y g
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Conclusions• How do these issues touch on our topics:
– More demand– More tools to work with– More problems with structure
d– More serious headaches relating to the choice of what to import and howBigger questions about how we frame our– Bigger questions about how we frame our market, who do we truly serve
– And, these point to the character and guidance , p gof our ALM policies and their meaning for our banks’ risks