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GLOBAL TRENDS IN ISLAMIC BANKING
The MIM Mediterranean Economic Forum
BY:Jassim Mahadik
Project Manager, Al Maali Consulting Group
WHAT IS ISLAMIC BANKING?
WHAT IS ISLAMIC BANKING
WHAT IS ISLAMIC BANKING?
• Islamic banking is a banking system which is operated in compliance and conformity with Sharia.
• Prohibited activities are not undertaken. Riba Gharar Maysir Other elements
• Linked with the real economy.
HISTORICAL OVERVIEW OF ISLAMIC BANKING & FINANCE: A CLASSICAL PERSPECTIVE
• Arabs conducted business and trade during the pre-Islamic era.• Some of the pre-Islamic practices were in direct conflict with Islamic principles.• The beginning of Islamic Finance can be traced to the Prophet’s (peace be upon
him) times.• Examples:
The Prophet (peace be upon him) used to trade using Khadija’s (may Allah be pleased with her) capital.
The Prophet (peace be upon him) permitted credit sales
DAWN OF THE MODERN ISLAMIC BANKING
Egypt
• In 1963, a bank was established in Mit Ghamr which was based on the German concept of savings bank.
• No interest was paid or received.
• Based on profit and loss sharing.
• In 1968, the bank was closed due to government’s hostility towards private initiatives.
• In 1972, the Mit Ghamr Savings Bank was revived as Nasser Social Bank.
Establishment of other Islamic Banks
• More Islamic Banks established in 1970s other countries.
• Examples: Islamic Development Bank in 1973. Dubai Islamic Bank in 1975.
SIZE OF THE ISLAMIC BANKING INDUSTRY
2008 2009 2010 2011 2012
Banks 720 777 943 1105 1326
Funds 51 54 58 62 74
Takaful 8 13 21 26 31
Other 1 3 3 26 28
Total 781 847 1025 1219 1460
Global Islamic Finance Assets by Sector US$bn
2008
2009
2010
2011
2012
0 200 400 600 800 1000 1200 1400
720
777
943
1105
1326
51
54
58
62
74
8
13
21
26
31
1
3
3
26
28
Global Islamic Finance Assets by Sector
OtherTakafulFundsBanks
US$bnSource: The Banker, Ernst & Young
It is estimated that the size of the Islamic banking industry at the global level is close to $1.6 trillion and it is expected to reach $3.4 trillion by 2018 (Ernst & Young)
ISLAMIC BANKING STANDARDS SETTING BODIES
• Established in Bahrain on 27th March 1991
• Non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry.
• 200 members from 40 countries, including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide.
• Officially inaugurated on 3rd November 2002
• Dedicated at introducing new, or adapting existing, international standards consistent with Sharia principles, and recommending these for adoption
• 184 members of the IFSB comprise 59 regulatory and supervisory authorities, eight international inter-governmental organisations, 111 financial institutions and professional firms as well as six self-regulatory organisations (Industry Associations and Stock Exchanges) operating in 45 jurisdictions.
ISLAMIC BANKING STANDARDS SETTING BODIES
Till date, AAOIFI has issued a total 88 standards
ISLAMIC BANKING STANDARDS SETTING BODIES
Till date, IFSB has issued 21 standards, guiding principles & technical note on different topics related to Islamic finance
• Risk management
• Corporate governance
• Sharia issues
• Capital adequacy, etc.
ISLAMIC BANKING SYSTEMS
Three types of Islamic banking systems
Full-fledged Islamic banking system
Iran Sudan Pakistan
Dual system
“Conventional plus” system
Malaysia Pakistan UAE
UK Thailand Bangladesh
ISLAMIC BANKING SYSTEMS
Case StudyPakistan
• Jan 2014: Mufti Taqi Usmani named as the Chairman of the State Bank of Pakistan
• His major role: To Islamise the banking sector of Pakistan
• Strategic Plan: Islamic Banking Industry of Pakistan 2014 – 2018 Enabling policy environment: Enabling legal, regulatory, supervisory, liquidity management
framework, taxation regime and financial accounting & reporting framework Sharia governance and compliance: standardization and harmonization of Shariah practices, as well
as on creating distinct Islamic banking products and services. Awareness and capacity building: Enhancing awareness about Islamic finance, and building capacity
of the stakeholders Market development: Initiatives will be undertaken for product diversification and financial inclusion
with the collaboration of stakeholders
ISLAMIC BANKING SYSTEMS
Dual SystemCase Study
Islamic financial system in parallel with conventional system – Malaysian case
Conventional Financial System Islamic Financial System
Conventional banks
Conventional banks
Conventional money market
Conventional capital market
Insurance companies
Islamic banks
Islamic windows
Islamic subsidiaries
Islamic money market
Islamic capital market
Takaful operators
• Leveraging on operating infrastructure of conventional banks
• Level playing field
• Minimise regulatory arbitrage
• Comprehensive components of IFIs important to facilitate an effective intermediation processSource: Dusuki, 2011
Malaysia
ISLAMIC BANKING SYSTEMS
Case Study Conventional plus system – A Case of United Kingdom
A conventional financial system with a few Islamic financial institutions operating under the conventional regulatory regime
UK
• “No obstacles, but no special favors”
• Islamic banking has to be conducted within the existing banking laws of the land
• But there have been cases where Islamic banking has been given exceptionsExample: Murabaha case
• Only one Islamic retail bank
• Bulk of the work in Islamic finance Investment bankingSukuksListing of sukuks, etc.
ISLAMIC BANKING MODELS
Full-Fledged Subsidiary Window
Drivers• Demand• Experience &
expertise• Independence• Regulations• Capital
RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Meezan Bank buys HSBC Pakistan – October 2014
• Meezan Bank has already stated that it intends to make the operations of HSBC Shariah-compliant, while ensuring that the existing customer base continues to receive uninterrupted banking services.
• Meezan Bank had acquired Societe Generale in Pakistan through a similar transaction in 2002
Source: The Express Tribune
RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Abu Dhabi Islamic buys UAE business of Barclays: April 2014
• Dh726.4m (£119 million)
• ADIB to take on about 110,000 extra customers from the purchase.
Source: The National Business
RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Zaman Bank JSC, Kazakhstan: May 2014
• Islamic Development Bank’s (IDB) plan of acquiring 35% stake in this bank.
• As part of the plan, IDB already bought 5%.
• However, the bank had to be converted from conventional to Islamic.
• Al Maali was appointed to convert it to a full-fledged Islamic bank
• More banks in Kazakhstan are keen on converting their operations into Islamic
• We have a roadmap for development of Islamic finance until 2020, adopted by the government. We have a number of Kazakh banks seeking to convert to Islamic banks - Kairat Kelimbetov, governor of the central bank of Kazakhstan.
ZAMAN BANK
We have a roadmap for development of Islamic finance until 2020, adopted by the government. We have a number of Kazakh banks seeking to convert to Islamic banks - Kairat Kelimbetov, governor of the central bank of Kazakhstan.
Source: Bloomberg
RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• CIMB, RHB Capital Bhd, and Malaysia Building Society Bhd plan a merger to create a Mega Islamic Bank with a market value of more than $20 billion
Source: The Reuters
RECENT DEVEOPMENTS IN ISLAMIC BANKING
• Russian banks lobby the central bank for Islamic banking legislation: August 2014
• The Association of Russian Banks (ARB) said in a letter sent to the central bank late last week that promoting Islamic finance could give a boost to the economy and draw significant investment from the Middle East and Southeast Asia, regions where Islamic finance is flourishing.
Source: The Reuters
RECENT DEVEOPMENTS IN ISLAMIC BANKING
• US scholar body AMJA (Assembly of Muslim Jusrists of America) issues fatwa on Islamic home finance companies in US: September 2014
Amine Housing LaRiba Bank, etc.
Source: The Reuters
RECENT DEVEOPMENTS IN ISLAMIC BANKING
Sharia Governance
• Centralized Sharia board Malaysia has a central Sharia board at Bank Negara Malaysia Oman has recently announced their central Sharia board UAE also has plans to have a central Sharia central
• Sharia board at bank level Saudi Arabia: Sharia b Qatar
• Bahrain Sharia board of the Central Bank of Bahrain Individual Sharia boards AAOFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standards
Source: The Reuters
CHALLENGES & PROSPECTS
• Islamic finance in its infancy stage
• Regulatory obstaclesNo Islamic financeAccommodative but no special favoursFull support
• Customer Service
• Standardisation & harmonisation
• Lack of risk management techniques
• Education and researchConventional mindsetPreference for conventional professionals
www.almaaligroup.com
Consulting | Training |Sharia AdvisoryContact : Al Maali Consulting Group
Dubai – UAETel: +971 4 2942242Fax:+971 4 2942228
Email: [email protected]
