Development and Opportunities in Islamic Finance Islamic Banking
Development and Opportunities in Islamic Finance Islamic Banking Forum Czech National Bank, Prague 29 th May 2012 Bakarudin Ishak Assistant Governor
Value propositions of Islamic finance enhances its viability Description Viable Alternative Stable & Resilient Key Observation • Guided by Shariah principles • Requires underlying productive & genuine economic activity • Contractual relationships – risk & profit sharing • Prohibits interest (riba) High growth in global Shariah-compliant assets • Islamic finance assets: hit USD 1. 3 trillion (average growth rate 15 -20% p. a) • Takaful contribution: USD 7. 2 bil, expected to reach USD 11. 2 bil by 2012 Internationalisation of Islamic finance • > 600 Islamic financial institutions in >75 countries • Increasing cross-border Islamic financial transactions & activities • Prohibits speculative activities (gharar & maysir) • Robust governance & risk management framework On average, Islamic banks show stronger resilience during the global financial crisis • Significant growth despite uncertainty Global Islamic Finance Assets Growth Trend, USD bln (1990 s-2012 F) Financial Inclusion • Meets financial needs of customers that seek ethical approach to financial engagements • Offers diverse products & services for all (Muslims & non-Muslims) Increasing market share (eg. Malaysia) • Islamic banking: >22% of total banking system - End-2011: Assets (22. 4%), Deposits (24. 6%), Financing (24. 1%) • Takaful : 13% market share - End-2011: Family takaful (10%), General takaful (3%) Increasing interest & demand for Islamic financial products & services 2
Strong interest & demand for Islamic financial products & services Islamic capital market – Effective fund raising through sukuk 1. • Continued stronger growth in Q 1 of 2012 with new issuances at USD 40. 5 bil USD bil • Progressive growth & global penetration in sukuk market 180 160 140 120 100 80 60 40 20 CAGR of 57% to reach USD 177 bil outstanding (end-2011) Others 0. 03% Source: KFHR • In Malaysia, sukuk is the preferred option for fund raising by corporates & Government Conventional 71. 45% Islamic 28. 55% Public Debt Securities USD bil Ø Deep & advanced sukuk market with active secondary market trading Ø Large amount of issuances with longer tenure • Malaysia emerges as a multi-currency sukuk market 60 50 40 30 20 10 52. 3 34. 6 5 Conventi -onal Islamic 39. 95% 60. 05% 36. 2 33. 1 32. 2 <1 4. 2 3. 0 2. 1 0 2007 2008 2009 2010 Oct 2011 RM issuance (equiv. in USD bil) Foreign currency issuance (in USD bil) Private Debt Securities 3
Strong interest & demand for Islamic financial products & services (cont’) 2. Takaful – Strong demand as Shariah compliant alternative to conventional insurance • Progressive growth & global penetration in takaful market CAGR (2005 -2009) : 29% Growth 2010: 19% Source: E&Y Takaful Report 2011 2005 2006 Saudi cooperative 2007 GCC (excl. Saudi) 2009 2008 South East Asia • Increasing market penetration in Malaysia Africa 2010(e) India Subcontinent Levant • High growth in net contributions of Malaysian takaful companies RM bil Avg. annual growth rate (2006 -2011): 27. 1% 4
Strong interest & demand for Islamic financial products & services (cont’) 3. Islamic Fund & Wealth Management – Viable investment source with competitive returns • Strong growth in number & amount of Islamic funds 10 -15% annual growth - 200 funds (2003) to 694 funds (USD 58 bil) end-2010 Source: Malta Ernst & Young, Islamic Funds & Management Report 2011 Bahrain (pending approvals) Ireland USD 0. 22 b, 8 funds Luxembourg USD 0. 46 b, 29 funds USD 1 b, 46 funds Dubai USD 0. 51 b, 14 funds • Large global participation as domiciles for Islamic funds Malaysia USD 5 b, 171 funds Cayman Islands USD 4. 13 b, 57 funds Source: Ernst & Young, Islamic Funds & Management Report 2011 Saudi Arabia USD 19. 9 b, 225 funds Mauritius USD 0. 14 b, 3 funds Singapore USD 0. 72 b, 10 funds 5
Strong interest & demand for Islamic financial products & services (cont’) 4. Human capital development – A key component to support the Islamic financial system • Dedicated institutions have been established to enhance learning & understanding on Islamic finance & Shariah issues • Global university in Islamic finance offering certification & post graduate studies in Islamic finance International Centre for Education in Islamic Finance (INCEIF) Global collaboration • As to date, there are 20 Memorandum of Understanding (MOUs) & Memorandum of Agreement (MOA) signed with 19 countries (i. e. UK, USA, Saudi Arabia & Hong Kong) – for online programme participation, course incorporation & training programmes Global student enrolment • Has >2, 000 students from >70 countries • Centre in Shariah & fiqh muamalat research to support Shariah developments International Shariah Research Academy for Islamic Finance (ISRA) • Robust platform for comprehensive discourse among scholars, academicians, regulators & practitioners Global engagement • Organises interactive forums for regional & international discussions to enhance understanding on Shariah issues 6 6
Building blocks for an effective Islamic finance ecosystem LEGAL & SHARIAH FRAMEWORK ü Facilitative & robust framework to support Islamic financial transactions & to provide legal certainty ü Effective dispute resolution mechanism/ judicial system ü Facilitative tax regime – tax neutrality policy ü Effective Shariah governance framework in accordance with Shariah principles ü Dedicated laws or minor amendments to existing acts FINANCIAL MARKET INFRASTRUCTURE HUMAN CAPITAL DEVELOPMENT ü Well functioning infrastructure for efficient management of liquidity & surplus funds ü Effective, comprehensive & holistic talent development infrastructure ü Progressive development of financial market instruments ü Greater partnerships & collaboration between industry & academia ü Effective firewalls for Islamic window operations to avoid commingling of funds ü Efficient clearing & settlement system ü Focused research in Islamic finance for greater innovation ü Strong safety net – Deposit protection scheme ü Supportive Central Bank liquidity management operation – specific Islamic instruments REGULATORY FRAMEWORK ü Robust regulation & supervision to ensure financial stability & market discipline which considers uniqueness of Islamic financial institutions ü Adoption of international best practices: Basel & IFSB ü Dedicated training institutions & research centres or leverage on existing infrastructure ü Share existing financial infrastructure or develop specific infrastructure Increases potential to conduct cross-border Islamic financial transactions, leading to greater internationalisation of Islamic finance 7 7
Malaysia has a comprehensive ecosystem within a dual financial system Governance Diversified Players Islamic Banks & Takaful Companies • Legal & Regulatory – Islamic Banking Act – Takaful Act – Government Funding Act – Capital Market Services Act Islamic Money Market • Shariah Advisory Council – Central Banking Act • Dispute Resolution – Judicial system: dedicated high court – KL Regional Centre for Arbitration – Financial Mediation Bureau Malaysian Financial System Islamic Capital Market Capital market Money market Conventional Banks & Insurance Companies Supported by human capital infrastructure Professional Service Infrastructure – Payment, clearing and settlement, custodian – Principal Dealers – Listing on Bursa with authorise exchange status – – – Legal firm Accounting Financial Intermediaries Financial Advisors Consultancy Service • Banking – 21 full-fledged Islamic banks – 10 Islamic windows – 6 off-shore full-fledged Islamic banks • Takaful – 12 takaful operators – 4 retakaful operators – 5 off-shore retakaful companies • Fund Management – 38 fund management companies Financial Markets – Islamic Capital Market – Islamic Money Market – Foreign Exchange Market – Bursa Suq Al-Sila (Commodity) 8
Informative websites: § § § http: //www. bnm. gov. my http: //www. mifc. com http: //iimm. bnm. gov. my http: //bondinfo. bnm. gov. my http: //www. sc. com. my http: //www. pidm. gov. my - Bank Negara Malaysia - Malaysia International Islamic Financial Centre (MIFC) - Islamic Interbank Money Market - Malaysian Government Securities Market - Securities Commission Malaysia - Malaysia Deposit Insurance Corporation Disclaimer: While every care is taken in the preparation of this presentation, no responsibility can be accepted for any errors. Copyright: All or any other portion of this presentation may be reproduced provided acknowledgement of the source is made. Notification of such use is required. All rights reserved. 9
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