THE EMERGENCE OF ISLAMIC FINANCE I N MALAY S I A

AMIR ALFATAKH YUSOF

ISLAMIC BANKING

SPEAKER PROFILE

1. Started in Conventional Banking Sales for OCBC Bank Retail, Business Banking and Corporate Banking, Kuala Lumpur Main Branch (1997-2003)

2. Grabbed opportunity to become OCBC Bank Islamic Banking Windows (IBW) Product Developer (2003-2005)

3. Led the Islamic Banking Personal Financial Services to build business (2005-2006)

4. Jumped : Kuwait Finance House (2007), ABN AMRO for IBW (2007-2009), Al-Khaliji Commercial Bank Qatar (2009-2011), AmIslamic Bank (2011-2012), Standard Chartered Saadiq (2012-2015)

5. Now Acting Country Head for IBW UOB Malaysia (2016-Present), recently launched IBW business (July 2016)

6. Committee Member of AIBIM’s Qard WG, Investment Account WG, Tawarruq WG. Industry awareness task-force with BNM. IBFIM trainer (Deposits & Financing products).

7. Maintains a free-to-use website Islamic Bankers Resource Centre (https://islamicbankers.me/)

AMIR ALFATAKH

UITM, HULL (UK), IIUM

INTRODUCTION TO ISLAMIC BANKING INDUSTRY

OUTLOOK BEYOND 2017

INTRODUCTION

On Par

Recent developments on Shariah views or

Business Practices = on par with conventional

features & global standards

Islamic Banking to the Forefront

For some time now, Islamic Banking has been the focus of the Banking world, arising from greater acceptance and faster

growth in the industry than the conventional space. There is also greater awareness on the structures being offered

Ethical Banking

Desire to include Islamic Banking as “Ethical Banking” in practice puts responsibility to

Shariah Committee to re-look at banking rules more carefully

Segment Banking, Not Religion

Better understanding that Islamic Banking is NOT religion banking, especially for non-Muslim customers. It is an alternative model or infrastructure, that follows certain rules which complies with the

requirements of the Shariah

THE GLOBAL ARENA

Islamic Assets in 6 core markets (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey) set to show double digit growth in 2016. The YOY growth is expected to sustain at 16%-17% growth until 2020.

Malaysia is expected to sustain the 2015 growth of 11% for 2016-2017

Source: World Islamic Banking Competitiveness Report (EY2016)

The Global Profit of Islamic Banks set to TRIPLE and is in line to reach USD$1.6 trillion in Assets by 2020.

OPPORTUNITIES ABOUND • Middle East

• North Africa

• South East Asia (+Malaysia)

Highest Growth

• Eastern Europe / Turkey

• Hong Kong / Singapore

• United Kingdom

Emerging Markets

• China

• Western Europe

• Russia

Untapped Potential

Overseas work opportunities for Islamic Banking

Specialists (4-6 years background)

Active hiring of experienced individuals esp for

short-term contracts in Middle East

Consultancy work / start-ups

Support Areas – Legal / Advisory / Shariah

Consultancy / Operations / IT

Growth in Islamic Financial Institutions:

Local Islamic Banks

Locally Incorporated Foreign Islamic Banks

Islamic Subsidiaries of Local / Foreign Banks

Development Financial Institutions (DFI)

Islamic Banking Windows of Conventional Banks

Islamic Investment Banks

Takaful Companies

GROWTH OF ISLAMIC BANKING

BECOMING AN ISLAMIC BANKING HUB

There is an on-going push by BNM to position Malaysia as the foremost leader in Islamic Banking products and services:

Clear Guidelines

Business-Friendly

Close Supervision

SAC Oversight

BNM target for the industry : 40% of all Banking Assets to be booked under Islamic Banking by 2020

ISLAMIC BANKING FINANCIAL INSTITUTIONS (MALAYSIA) excluding DFI & IBW

1. Affin Islamic Bank

2. Al Rajhi Banking & Investment Corp

3. Alliance Islamic Bank

4. AmIslamic Bank

5. Asian Finance Bank

6. Bank Islam

7. Bank Muamalat

8. CIMB Islamic

9. HSBC Amanah

10. Hong Leong Islamic Bank

11. Kuwait Finance House

12. Maybank Islamic

13. OCBC Al Amin

14. Public Islamic Bank

15. RHB Islamic Bank

16. Standard Chartered Saadiq

BUT WHY IS ISLAMIC BANKING GROWING?

BNM Push

Strong support and incentives given by government to support the BNM vision and desired infrastructure

Market Demand

There is a sizeable demand for Islamic

products, based on a more ethical & fair adoption of

banking practice

Shariah Compliance

Shariah requirements allow for “compliant” activites which allows for a bigger access to investors.

Asset Backed transactions – Not overly-geared as deals are based on real assets

Prudent products – the limited range of “sophisticated” products limits the risks

Financing of stable activities – real economies

Growing Confidence – removal of many contentious conventional and “old skool” Islamic Banking practices

Demand by Customers

DEMAND BY CUSTOMERS

MUSLIM CUSTOMERS

i. Greater awareness of Shariah requirements in Banking

ii. Comfort of being involved in Shariah-compliant businesses only

iii. Good measure of fairness

iv. Prefers “simple to use” products

NON-MUSLIM CUSTOMERS

i. Attractive features of Islamic Products (at par)

ii. Reasonable treatment for penalties on their financing

iii. Fair terms and conditions = maximise financial benefits

iv. No inclination to religion, just on features and benefits

FUN FACT : ON AVERAGE, NON-MUSLIMS MAKES UP TO 80% OF CUSTOMERS-BASE FOR ISLAMIC BANKING Excluding the top 6 local banks such as Maybank, Public Bank, CIMB, Hong Leong, Bank Islam & AmBank

11%

54%

35%

Non-Muslims

BANK NEGARA MALAYSIA AS THE DRIVER

ISLAMIC FINANCIAL SERVICES ACT 2013 (IFSA)

i. The Islamic Financial Services Act 2013 (IFSA) was introduced to re-align all the existing Acts governing Islamic Banking into a single Act.

ii. The scope of business has been re-defined to encompass all entities offering Islamic products and services

iii. Some contractual nature was also re-defined

iv. The responsibilities of all the stakeholders in an Islamic Banking business is emphasized, especially Shariah Committee

BNM POLICY DOCUMENTS & GUIDELINES

i. Since 2013 when IFSA was introduced, BNM had released multiple Guidelines and Concept Papers to be discussed with the industry players

ii. Comments and feedback on the intended guidelines were received from the various industry players

iii. Shariah Advisory Council (SAC) of BNM is also consulted before the paper is finalised.

iv. The final version : Policy Documents are introduced to Banks to comply

SHARIAH AS THE ULTIMATE LINE OF DEFENSE

WITH GREAT POWERS COMES GREAT RESPONSIBILITIES

i. IFSA 2013 outlined the roles and responsibilities of bank’s Shariah Committee

ii. Shariah Committee are required to discuss, deliberate and decide on all matters pertaining Islamic Banking in the bank

iii. Responsibility is on the Shariah Committee to make quality decisions, backed by proper research and robust deliberations

iv. Stiff penalties for negligence : RM25 million fine and/or 8 years jail

SHARIAH GOVERNANCE FRAMEWORK (SGF)

i. One of the important requirements by BNM on the operations of Islamic Banking business is the establishment of the Shariah Governance Framework (SGF)

ii. SGF governs the operations of the Islamic Banking business including all review and oversight functions in the bank

iii. SGF outlines the roles and responsibilities of Shariah Committee and all other internal committees for Islamic Banking

iv. Detailed requirements to be set by bank.

MISCONCEPTIONS ABOUT ISLAMIC BANKING

More Expensive

Name Change

Back Door

1. Is Islamic Finance more expensive

due to Selling Price?

2. Additional Documents = More

Legal Fees?

1. Is Islamic Finance just a change in

terminologies?

2. At the back end, is it still the

same processes used?

1. Are the products really Islamic in

nature?

2. Are the end result all the same

as a conventional Product?

1. No. Rebate (Ibra’) guidelines

bring us to par as conventional

2. No. Additional legal fees will be

a small nominal stamping costs

1. It is a revamp of documents and

clauses consistent with Shariah

2. No. 80% are same processes,

additional Shariah process exists

1. The tenets of each contract,

Maqasid and intention are met

2. End Result is the same, with

operationalising Shariah rules

EXAMPLES OF KEY DIFFERENCES (BANKING MODEL)

A conventional bank is designed to have 2 main functions i.e. 1) Collect

Deposits and 2) Give Loans. As such, income and pricing becomes

important when introducing their products.

In Islamic Banks, while income and pricing remains important, there is also

consideration on why a product is launched and the impact it has on customers.

Not all fees can be charged, and not all features can be used in Islamic

Banking. The Islamic Banking Model itself is not a standalone arrangement.

There is linkage between Sources and Application of Funds

Sources of Funds

Pool of Funds

Application of Funds

Islamic Banking Contracts

Income from Activities

Distribution of Income (less Expenses)

TREASURY

• Manage liquidity end to end

• Invest in compliant instruments

• Manage cost of funds

OPERATIONS

• Detailed workstream

• Commodity Desk

• Sequencing & Aqad Completion

LEGAL

• Contractual Relationships

• Aqad & Transactional Documents

• Islamic Terms & Conditions

SHARIAH REVIEW & AUDIT

• Execution of documents

• Completion of Aqad

• Shariah Non-Compliant Events

SHARIAH COMMITTEE

• Deliberation of New Products & Issues

• Decisions on SNC Events

• Approval of Products, Processes, Structures

EXAMPLES OF KEY DIFFERENCES (PRODUCT)

While most of the features between Islamic Banking and

Conventional Banking products are the same, there are

differences arising from Shariah requirements that provides

better justice and fairness to the customers.

Shariah Committee plays an Important role to regulate the rules

against business requirements. Consideration of fair-play and

justifiable charges forms part of the decisions made by Shariah

Committee

For each product, Shariah Committee is responsible to assess

the features, conditions, operations, and fees & charges.

Calculation of Installment and Profit

Calculation based on Base Rate + Margin Calculation based on Base Rate + Margin,

capped to the Maximum Ceiling Rate

Facility Amount Over Financing Period

Increases as amount is compounded and

capitalised as new Principal Amount

Capped at the Maximum Selling Price

agreed in the Aqad

Early Settlement Charges

Based on Lock-in period, ES charges =

1.0% of the Amount Settled

Not Allowed (unless to recover actual

costs incurred)

Penalty Rate (Punitive) on Non Performing Accounts

Pre-Judg: Up to BR+3.5% x new Principal

Post-Judg: Up to 8.0% x new Principal

In-Ten: Up to BR+3.5% or CR x O/S Princ

Off-Ten : IIMM Rate x O/S Balance

Late Payment Charges

1.0% on the amount in arrears

compounding into new Principal

1.0% on the amount in arrears non-

compounding into new Principal

EXAMPLES OF KEY DIFFERENCES (STRUCTURE)

The way a Conventional Banking Product

is designed and launched is as follows:

1. There is a market demand

2. There is a competitor product

3. The same structure is copied

4. Main document : Loan Agreement or

Deposit Application

5. Submission to Senior Management

6. Submission to BNM

7. Launch Product

8. Review Product

9. Amend if necessary

The way an Islamic Banking Product is

designed and launched is as follows:

1. There is a market demand

2. There is a competitor product

3. The structure is researched by Shariah

team for suitability and issues

4. The structure is deliberated by Shariah

Committee for a decision and resolution of

issues

5. Main Documents : Depending on the

approved structure (Murabahah,

Wakalah, Ijarah, BBA, Tawarruq, etc)

6. The structure is assessed internally to

ensure ability to meet Shariah

requirements, including operations

7. Submission to Senior Management

8. Submission to BNM (including Shariah JPIT)

9. Launch Product

10. Review Product, including Shariah Review

11. Amend if necessary, with Shariah

Committee approvals

CHALLENGES AND ISSUES MAKING THINGS WORK

WITHOUT COMPROMISE

EVOLUTION OF ISLAMIC BANKING

Since the introduction of Islamic Banking Act

in 1983, the industry has slowly evolved in

terms of the following:

Guiding principles of Islamic contracts

by BNM

Suitability of products towards

customers needs

Operational efficiency of Islamic

products and services

Shariah increased depth and quality of

decision making

Principles discussed with industry

Draft Robust discussion on structure

Concept Detailed and specific instructions

Policy

Looking at Market Needs for design

Idea Based on principles and competition

Develop Catering for specific needs via new design

Enhance

Shariah looks at existing regulations

Guided Questions the status quo and directs compliance

Discuss Provides solutions based on specific research

Research

OPPORTUNITIES Becoming • SHARIAH COUNTER

Development • ISLAMIC REGULATIONS

New Channels • FINTECH

Islamic Banking & Finance is Expanding at Rapid Rate

11% growth in 2015

Companies wants to access Islamic Investors (30%) by

becoming Shariah Compliant Counters on Bursa

Demand for “fairer” product terms and machanism

Clear Guidelines by BNM

Development of Investment Account Platform (IAP)

Close Collaboration with Middle East

Fintech for Islamic is being developed

OPERATIONALISING REQUIREMENTS

EXTERNAL

• BNM Policy Documents

• IFSA

• Laws of Malaysia

• Best Practices

INTERNAL

• Shariah Rules

• Internal Guidelines

• Custom (Urf)

• Customer Needs

UN

DER

STA

ND

ING

REQ

UIR

EM

EN

TS

Policy & SOP

Product Design

Processes & Controls

Documents

Operations

System

Accounting & Finance

Ensuring the requirements are captured into the products and processes

BUSINESS CHALLENGES IN ISLAMIC BANKING

The key challenge in Islamic Banking is the BALANCE between Shariah Requirements & Business Needs

Additional Shariah Requirements becomes a RISK for the Bank if fail to be observed

Inadequate Controls, Human Error and Wrong Understanding of Requirements often leads to SHARIAH NON COMPLIANT EVENTS (SNCE)

With IFSA 2013, Banks do not have a choice but to comply

Shariah Business

THE ISLAMIC BANKING CAREER WHY CHOOSE SUCH A

CAREER?

CAREERS IN ISLAMIC BANKING

Regulatory Changes

New Shariah

Structure

New Markets

Innovation

Alternative Career

Market Demand

1. CHANGING REGULATORY ENVIRONMENT

New development in the way Islamic Banking is being operationalised

2. SHARIAH STRUCTURE & REQUIREMENTS

Constructive development of new requirements based on new opinions

3. NEW MARKETS & GLOBAL INCLUSION

Regional opportunities, global growth and demand for expansion

4. INNOVATIVE TECHNICAL PRODUCTS

Adapting to new challenges and requirements for innovation

5. ALTERNATIVE CAREER DEVELOPMENT

Shift from Conventional Banking into Islamic Banking

6. MARKET DEMAND

Customers seeking Shariah Compliant products

YOUR FUTURE AHEAD OF YOU What happens

after I graduate?

Which interest should I go for?

Is there a long-term future?

TOP 10 ISLAMIC BANKING POSTS (IN ORDER)

• Operationally aware of the structures Trade Financing

• Research and solutions provider Shariah Dept

• Knowledge of civil law and Shariah requirements

Legal Dept

• Sophisticated solutions for treasury & money market

Financial Markets

• Syndication structuring & Sukuk structures

Corporate Financing

• Deposits solutions for retail and corporates

Wealth Management

• Understanding intrinsic Shariah risks Risk (Ops /

Market)

• In-depth understanding of products and services

Sales

• Detailed understanding to comply with rules

Audit & Review

Product Development

The Product Development remains a

key component in an organisation. It

remains highly specialised and in

demand. Small pool of talent.

However there are also other areas

where candidates may consider, and

equally in demand.

GETTING INTO PRODUCT DEVELOPMENT

The Perception that Product Development role is difficult, with limited growth prospects.

However, personnel in the role often experience:

1. Understanding of impact of products on Sales & performance

2. Increased technical abilities

3. Appreciation of compliance to regulations

4. Improved strategic thinking

EYE OF THE STORM : PRODUCT DEVELOPMENT

Originate Design & Develop

Governance Implement Comply

Sales

Customer

Legal

IT / System

Finance

Accounting

Business

Shariah

Risk

BNM / S-C

Branches

Channels

Operations

Audit

Compliance

Review Competitor

Research

A Product Development role allows for invaluable access to almost ALL functional areas in a financial institution, as well as industry regulators.

WHAT WE LOOK FOR IN A CANDIDATE?

Banking Experience

Energy

Solve

Explore

Learn

PDT INNOVATORS – Adapt to the fast pace

RESEARCHERS – Learn & Explore possibilities

NEGOTIATIORS – Understand resource limitation & improvise

PROBLEM SOLVERS – Analysis of feedback & rectification / enhancements

CRITICAL THINKERS – Fastest / Most Efficient solutions

DAMAGE CONTROLLERS – Ability to dissect problem & identify root cause

STRATEGY ENABLERS – Close relationship with all levels of management and support units

WHAT IF I CANNOT GET IN?

Graduate as Qualified student then Intern in Islamic Banking

Department

Get Involved / Recognised in Industry Events, Seminars and

build strong network

Gain Banking Experience is key areas, even if with Conventional Bank, but with intention to move

to Islamic Banking

Difficult to enter into a Product Development position directly, as it is a senior position (with relevant experience). Existing talents “circulate” within the industry with little exits.

TRY TO DIFFERENTIATE YOURSELF AND CREATE A VALUE

BREAKING THE BARRIER ALTERNATIVE STRATEGIES

ENTERING INTO THE INDUSTRY

ISLAMIC SALESMAN

VITAL SKILLS LEARNED VIA A SALES

FUNCTION:

1. Proper Communications

2. Understanding Product Details

3. Learn Customer Behaviour

4. Teaches Analytical Skills

5. Build Strong Character

6. Provide actual Operational Skills &

Experience

There’s a perception that sales is a lower

ranking job that do not provide prestige to

the personnel. But that is the opposite of the

truth.

ISLAMIC FINANCIAL TRADER

VITAL SKILLS LEARNED VIA A FINANCIAL

MARKET ISLAMIC TRADER FUNCTION:

1. Enhanced Analytical Skiils

2. Learn about Risk and Returns

3. Discipline when trading

4. Quick Decision Making

5. Performance Based Incentives

6. Understand Shariah principles for

Compliant trades

In Islamic Financial Markets, an Islamic Trader

or Dealer is a rare species. That explains

why their salaries are the best in the market!

SHARIAH DEPARTMENT/ COMMITTEE

VITAL SKILLS LEARNED VIA A SHARIAH

COMMITTEE FUNCTION:

1. Understanding Product Details

2. Learn Industry Behaviour

3. Enhance Analytical Skills

4. Inquisitive Frame of Mind

5. Engaged Discussion amongst Peers

6. Improved Research for Understanding

There’s high expectations for Shariah

Committee to ensure their decisions are

based on the right facts and considerations

ISLAMIC LEGAL

VITAL SKILLS LEARNED VIA A LEGAL

DEPARTMENT FUNCTION:

1. Understanding Product Details

2. Understand Current Decisions on Islamic

Banking

3. Continuous improvement of Islamic Legal

Documents

4. Incorporation of Shariah requirements into

Legal documents

The role of the Legal Department of an

Islamic Bank cannot be underestimated. It

builds up the backbone of a valid Aqad.

ISLAMIC COMPUTERS

VITAL SKILLS LEARNED VIA AN ISLAMIC IT

SPECIALIST FUNCTION:

1. Understanding Product Details

2. Unique & Robust Design for Islamic

Products

3. Control Mechanism in System complying

with Shariah

4. Alternative calculation method such as

Ibra, Tawidh

5. Additional Processes to cater for Aqad

requirements

6. Islamic Fintech

One of the cornerstone of Islamic Banking is

the reliance on evidence for the transactions

completed. With Computers retaining these

trails and evidences, job of Shariah is simpler

OTHER OPTIONS TO CONSIDER

Consultancy

Academic Regulator

FOCUS PLAN YOUR APPROACH AND

STICK TO IT

KEEP EYES ON THE PRIZE

1. BUILD YOUR PERSONAL BRAND

2. LEARN UP & READ

3. KEEP IN TOUCH WITH THE INDUSTRY

4. HAVE MEANINGFUL DISCUSSIONS

5. HAVE YOUR OWN OPINION BUT LISTEN TO

OTHERS

6. TAKE A JOB AND MOVE WHEN SUITABLE

7. TAKE AN INTEREST IN CURRENT ISSUES

Many graduates coming into Islamic

Financing and Banking lack the

understanding of what is required in terms of

approach and knowledge. They gave up.

OUR WISHLIST Robust Alignment between BNM SAC & BNM Policy Makers

Increased Exposure of Malaysia's Shariah Committee to International Standards

More "Ethical Banking" & "Value Based" Banking model, not purely profit driven

More Constructive discussions between Academia & Practitioners

More Entrants from Academia & Shariah Background into Banking & Finance (and vice versa)

Islamic Banking Journey is a long journey yet.

100+ years of conventional

banking

vs

40+ years of Islamic Banking

We need your support from all levels.

Everyone plays a role in Islamic Banking

1

5

2

4

3

SUMMARY

1. There are huge opportunities in Islamic Banking as it is growing globally

2. Strong support from regulators and Shariah community

3. There are challenges that needs to be addressed and resolved

4. Make a career in Islamic Banking, be part of the SOLUTION

5. Position yourselves for the job before entering the job market

6. Identify which areas that interest you the most and focus

7. Most of all, SUPPORT ISLAMIC BANKING

THANK YOU FOR LISTENING L E T ’ S W O R K T O G E T H E R T O B U I L D I S L A M I C B A N K I N G

QUESTIONS AND ANSWERS