Islamic Banking Recent Developments and Outlook Beirut Islamic
Islamic Banking: Recent Developments and Outlook Beirut Islamic Financial Institutions Forum November 5, 2010 Strictly Private and Confidential
Product & Industry Evolution The Islamic market has witnessed unprecedented growth in players and product innovation in recent years. 2000+ 1980 s 1970 s Industry Product 1 Multilateral bank: IDB Islamic Commodity Finance New Commercial Banks 1980 s: International banks start Murabaha business out of, predominantly, London Islamic Corporate & Consumer Banking 1990 s Regulatory standards: Islamic Financial Services Board Accounting standards: AAOIFI Numerous international institutions; 300+ Islamic banks 1996: First international Islamic investment bank formed (Citi Islamic Investment Bank) Syndications, Project Financing, Mutual Funds Islamic Bond Index Islamic Bonds, Structured Products, Convertibles, Derivatives, Syndications, Hedge Funds
Islamic Finance Market *Source: IMF Islamic financial assets are estimated to be worth US$ 800 billion, having grown at 20 -30% per annum over the past decade. There are now more than 400 Islamic financial institutions in more than 50 countries* Global Islamic Assets to Exceed US$1 Trillion by 2011 Total Assets of Key Islamic Banks (US$ in Billions) (US$ in Millions) Source: Standard & Poor’s, Mc. Kinsey & Company Source: Zawya Breakdown of Global Islamic Assets Islamic Banking Assets as % of System Assets: Source: Mc. Kinsey & Company Source: Central banks, Zawya 2 (%)
Why is the Islamic Financing Relevant? Middle East and Asia Liquidity With the exponential growth in Islamic assets across the world, and particularly the Middle East (ME), Islamic banking liquidity have become and remain increasingly important ME Islamic Financial Institutions (IFI) have been exposed to global financial markets however better economic conditions, higher oil prices, and active government involvement to weather economic and financial crisis are showing high level of protectionism Middle East/Asia Liquidity IFI felt the repercussions less because Sharia law prohibits interest-based financial products and the ME remains one of the most capital surplus region of the world Islamic Banking represents c. 20% of banking system in the GCC states and c. 15%(1) of banking system in Asia Sukuk Structure Islamic Liquidity Accessing Liquidity Pool Islamic Finance Market ng rici ol Li qu i More and more global issuers (GECC, Petronas) are considering Islamic financing to access this market and diversify their investor base Structuring an Issue Islamically is the most inclusive way of tapping the Islamic market g &P es si n ion di ty Po Diversify Funding Ac c cut Exe Incremental Pool While spreads have widened, the Middle East still represents a deep, stable demand pool Both Islamic and conventional banks can and do participate in Islamic transactions Execution and Pricing Islamic structures have become standardized – with costs and time to market comparable to conventional facilities/ issues Sukuk issues priced in line with conventional instrument 3 (1) Zawya.
Sukuk Market Update After a relatively slow 2008, Sukuk market activity picked up in the second half of 2009. The pattern in 2010 appears to be a repeat of 2009, with greater volumes anticipated in the latter half of the year Overview Sukuk market activity picked up in the latter half of 2009 after low volumes in 2008. The second half of 2009 saw 7 transactions executed between July and November The largest (jointly with DP World) straight Sukuk transaction in history was executed by Petronas in August 2009 Two western issuers tapped the Sukuk market in 2009: International Finance Corporation priced a US$ 100 MM Sukuk in October, and. GE Capital priced a US$ 500 MM landmark transaction in November, becoming the first western corporate to access the Sukuk market. The GE transaction was notable for its high demand from Middle East accounts, which accounted for over 60% of the overall transaction The first Sukuk transaction of the 2010 was by Saudi Arabia’s real estate developer Dar al Arkan (Ba 2/BB-), which priced a US$ 450 MM Reg S/144 A Sukuk on February 12 at a 11% yield, followed by the Government of Malaysia, which priced a very successful US$1. 25 bn transaction in May On August 17 th, Kuveyt Turk Participation Bank, which is majority owned by Kuwait Finance House, priced a very successful debut US$100 m Sukuk in the Reg S market. The transaction represents the first Sukuk from Turkey and first financial institution Sukuk from Europe We expect several other transactions to come to market in the second half of the year in addition to Islamic Development Bank and a number of other Islamic banks’ Sukuks International Sukuk Issuance 2005 -2010 (USD billions) 4
Outlook of Islamic Banking: Filling the Gap, a Complement? Islamic Finance has a bright outlook globally in the next couple of years on the back of steady growth and geographical diversification The scale and scope of the application of Islamic finance Increasing demand not only from retail customers but also from corporate clients Underbanked Islamic population Importance of Islamic finance in project finance deals New geographies for Islamic capital markets Islamic banking filling the gap, complement, rather than a substitute 5
Outlook of Islamic Banking: Needs for and Areas of Growth and geographical diversification should be supported by standardization, regulatory framework and sovereign issuances Standardization of the products: Key role of AAOIFI and IFSB Improving liquidity of Sukuks Regulatory framework Foreign investment of Islamic banks International banks’ role and efforts by conventional players Government support, sovereign Sukuk issuances The range of Islamic investment products and key role of Sukuk funds going forward 6
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