AANZFTA BUSINESS SEMINAR: Partners In Growth: Services Trade

with Southeast Asia

Amora Hotel, Wellington; Friday 3 June 2011

Assoc. Prof. Dr. Asyraf Wajdi Dusuki

Head, Research Affairs

Global Outlook of Islamic

Finance

AANAFTA
Business
Seminar

Growth of Islamic Financial

Assets

The Impact Financial Crisis to

Islamic Finance

Salient Features of Islamic

Finance

Showcase of Malaysian Islamic

Financial Centre

The Framework of Islamic

Finance

Characteristics of Islamic
Finance

Conclusion

ENDS /

The
Framewor
k of
Islamic
Finance

Maqasid al-Shariah
(The Objectives of Shariah)

MEANS/

1st Level
of
Complian
t
Nominate Contracts
Non-Nominate
Contracts

Investment
Activities&
Rectifying
2nd
Level of
Complia
nt

Shariah-Compliant
Operation

Purifying
Conversion Process
Hedging
Instruments
Monitoring
&
Supervision
Social Responsibility

Asset Classes in Islamic Finance

Promote Public
Interest
(Maslahah)
Free from
Riba (Usury)

Entitlement to
Equal, Adequate,
Accurate Info.

Promote
Equity

Free from
Gharar (Ambiquity)

A system grounded
on moral and
ethics

Free from
Dharar (Detrimental)

Freedom to
Contract

Characteristics of Shariahcompliant Banking and

Financial System
Free from
Price control &
Manipulation

Free from
Gambling

Entitlement to
Transaction at
Fair Price

Illustration on
Sukuk
Structuring

Literal
Meaning
Sukuk is the plural
of sak which means
certificates. Other
similar terms:
Taskik process of
dividing assets into
papers (sukuk)
Tawriq to render
something into cash

Technical
Meaning

SUKUK

AAOIFI
Investment sukuk are
certificates of equal value
representing undivided shares in
ownership of tangible assets,
usufructs and services (in the
ownership of) the assets of
particular projects or special
investment activity

Sukuk refers to
securities, notes,
papers or
certificates, with
features of liquidity
and tradability
(except for salam
and murabahah
sukuk)

Malaysian Securities
Commision
A document or certificate
which represents the value of
an asset
Asset may include financial
asset such as receivables and
debts, as well as non financial
assets like tangible assets,
usufructs and services.

Obligor/Project
Developer

Proceeds from
Sukuk Sales

Issuer/Trustee

BASIC
STRUCTU
RE OF
SUKUK

Issue
Proceeds

Sukuk

Income from
project

Income Generating
Project

Sukuk
Investors

Comparing SUKUK to
BONDS Bonds
Sukuk
1. Holder owns assets

1. Holder owns cash flow only

2. Use a variety of contracts to

create financial obligations
between issuer and investors;
e.g. Sale, lease, equity
partnership, joint-venture etc.

2. Simply use a loan contract to

create indebtedness

3. Return linked to profit elements 3. Return linked to interest

in-built in the sale, lease or
charged out of the loan contract
partnership
4. Instrument may be equity or
debt depending on underlying
contract

4. It is a Debt instrument

5. Tradability of the sukuk

depends on the nature of the
underlying asset

5. No restriction on the tradability

6. Investment in Shari`ahcompliant activities

6. Proceeds are invested in any

business without restrictions

Emerging interest on Islamic finance as viable

alternative to the global financial system

Starting in 1971 with the first Islamic

bank in Egypt,
there are now more than 600 Islamic
financial institutions in 75 countries

Germany

UK

First Islamic bank to

operate in 2010

South Korea
Parliament expected
to pass the law
related to offering of
tax waiver on foreign
investors interest
income from sukuk
issued
Japan

Turkey
IFC Istanbul in
Sep 09 with focus includes
Plans to issue sovereign sukuk,
interest-free financial
Law passed
amend tax law on IF
business
IranBahrain
allowing banks to
Qatar Pakistan
do Islamic finance
France
Saudi
Malta
UAE
Arabia
Kuwait Thailand
Plans to
Passed
Hong Kong
Malaysia
rules/regulations to
position as
Aims to become Islamic
Sudan
support Islamic
Islamic finance
finance gateway to
finance activities
hub for the
Indonesia China
Mediterranean
In process of licensing
Plans to issue sovereign
Islamic banks
Jordan
sukuk
Made fiscal & legal
Plans to tap sukuk
Hang Seng Islamic China
adjustment for IF
market to finance its
Singapore
Index Fund in 2007
transaction i.e.
deficit

Brunei
Established first Islamic bank
taxation guidelines on

Govt sets an objective to

entrench London as a global
gateway for Islamic finance

Saxony-Anhalt state
issued government
sukuk

5 FSA-approved Islamic banks

and Takaful operators

sukuk & murabaha

Muslim-majority countries offering Islamic

finance (IF)
Non-muslim countries starting to offer IF

Announced

Introduced tax neutrality for Islamic

finance

Aspiring to be centre for Islamic

finance

Launched Islamic ETF

Aim to become
Islamic financial
services hub for
Asia

Courtesy of Bank Negara

Growth expected to
continue By 2020, estimated to

Almost 90% of global market

share are in top 6 Islamic
financial markets

reach USD4t

Global growth rate of 15-20% per annum

over the last 10 years
Mid

1990s approximately USD150b

2009

approximately USD780b

2010

estimated USD956b

2012

USD1.6t (IFSB estimate)

11
Courtesy of Bank Negara

Continued to expand in
2009

12
Courtesy of Bank Negara

Global developments
Breakdown of Islamic finance assets

The largest share of Islamic financial

assets remains in Islamic banking,
although growth is slowing
Sukuk

and takaful continues to grow

Islamic

funds registers a slight

decrease
13
Courtesy of Bank Negara

Impact of global financial

crisis
Not spared as sukuk is
seen in the same asset
class as bonds

USD34b

but has since staged a recovery

USD20b in 2008
USD33b in 2009 (70%)
14

USD50b ( 55%) in 2010

Courtesy of Bank Negara

Post crisis global Islamic banking industry

Largely shielded
Study on Top 10 Conventional banks vs Top 10 Islamic banks
Between
Dec 2006- May
2009

Conventional

Islamic

42.8%

8.5%

Declined from
USD116b to
USD42b loss

Increased by
9% from
USD4.2b to
USD4.6b

Total assets growth

36%
(USD17.4t)

55%
(USD147b)

Total equity growth

24%

36%

From 16.6x
to18.2x

From 5.8x to
6.6x

Combined market
capitalisation
Net profits

Leverage ratio
(Assets/equity)

2008

Only 1 Islamic financial institution required government

assistance

5 top conventional banks received government assistance of

USD163.0b or 26% of their combined equity

Not a single Islamic bank required to be rescued

2009
15
Courtesy of Bank Negara

Source: IFSB-IRTI-IDB Islamic Finance and Global Financial Stability

Report,

Global Islamic banking industry

Largely shielded: reasons why

Surrounding factors
Market deregulation followed by unprecedented levels of
leverage, relaxed lending standards
Rapid issuance of mortgage-backed securities
Tremendous growth of CDS market
Growth of complex securities and derivatives
US Commercial Papers Outstanding

16

Courtesy of Bank Negara

Global Islamic finance industry

Largely shielded: reasons why

Avoidance of unethical
activities

Avoidance of maisir
(gambling) & riba
(interest) & nonpermissible goods &
services

Screening investment

Forbearance for
customers in difficulties
Greater transparency &
disclosure-

additional Shariah
governance

Real

Activities

Ethical

Governance

Direct link to real

economy

Certainty supported by
underlying activities
(prohibition of gharar uncertainty)

Prohibits excessive
leveraging

Money is not commodity

Different contractual
relationship

Equity-based & risksharing transactions

Clearly defined risk &

profit-sharing
characteristics serve
as additional built-in
mechanisms

unique risks

Greater fiduciary duties &

accountability

Emphasis on clear
documentation & contract
add to soundness &
stability

17

Courtesy of Bank Negara

Context setting

The Malaysian
Financial
Landscape

18

Malaysia: the worlds most

Islamic financial system

Islamic
Banks & Takaful
Companies

Governance
Legal &
Regulatory
Islamic Banking
Act
Takaful Act
Government
Funding Act
Capital Market
Services Act

Islamic
Money
Market

Labuan
IBFC

Shariah
Advisory Council
Central Banking
Act
Dispute
Resolution
Judicial system:
dedicated high
court
KL Regional
Centre for
Arbitration
Financial
Mediation
Bureau

comprehensive
Diversified
Players
Banking
17 Islamic banks
10 Islamic windows
3 International Islamic
Banks
14 International
Currency Business Units
(ICBU)

Islamic
Capital
Market

Malaysian
Financial
System

Capital
market

Money
Conventional
market Banks & Insurance
Companies

Professional
Service

Legal firm
Accounting

Financial
Intermediaries
Financial Advisors
Consultancy Service

Takaful
8 takaful operators
4 retakaful operators
7 ICBUs
Fund Management
9 Islamic fund managers

Financial
Markets
Capital Market
Money Market
Foreign Exchange Market
Commodity Market
Bursa Suq Al-Sila

35 Islamic fund
management windows

Infrastructu
re

Payment, clearing and

settlement, custodian
Principal Dealers
Listing on Bursa with
authorise exchange
status

More than 30 years of experiences in developing

Courtesy of Bank Negara
Islamic finance

Malaysia has a well-developed sukuk market

Source: Malaysian ICM Bulletin, June09, SC

58% of outstanding corporate bond are

sukuk
Malaysias outstanding sukuk (public &
private) = USD66 billion @ end June 2009
62% of total outstanding sukuk
globally
Malaysia as centre for innovative sukuk

More than 80% of the sukuk are private

sectors sukuk
Courtesy of Bank Negara

ISRA @ INCEIF
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MALAYSIA
General Line : +603-2781
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Fax : +603-2691 1940
Email
:
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Website
: www.isra.my