1st Workshop on Integrated Reporting

"On the frontiers of finance : Islamic finance islamique,

sustainable finance, integrated reporting" Sfax, 8th November 2014

Islamic Finance : Future Research Directions for Young Researchers

Mahmoud Sami Nabi

Tunisia Polytechnic School

IRTI & ERF

Islamic Financial Services Industry Continuous growth

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• The Islamic financial services industry (IFSI) has grown in size and geographic coverage. More than 600 Islamic Financial Institutions operating in more than 75 jurisdictions.

Islamic Finance Assets Growth

Source: KFH Research (2012)

Islamic Financial Services Industry Continuous growth

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Banking Assets

81%

Sukuk Outstanding

13%

Islamic Funds Assets

5%

Takaful Assets

1%

Islamic banks and Islamic banking

windows: central pillar with 40.3% og

CAGR over 2004-2011 and total assets

estimated to USD 1.1 tln.

Sukuk : issuances growing at CAGR

of 42.3% over 2004-2011 passing

from USD 7.2 bln to USD 85.1 bln.

Global aggregate sukuk 1996-2012

USD 396.4 bln.

Cooperative Insurance (Takaful): small

segment but its total gross contributions

have grown by a CAGR of 23.1% over

2004-2011 with an estimate of USD 15.2

bln in 2012.

Islamic funds (680) : assets under the

management of passed from USD

29.2 bln in 2004 to USD 64 bln in Oct.

2012 .

Breakdown of Islamic

Assets by type (2011e)

Sources: KFH, 2012 ; Thomson Reuters, Zawya, 2012.

Doing research to ensure that Islamic finance will develop…with its distinguish features

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Risk sharing

Ethical (charity,

solidarity)

Connection to the real economy

Sustainability

Financial inclusion,

Social cohesion

Innovation, entrepreneurship

and PSD

Investment and Trade

Health, Education, Transport, Housing

Transport, Housing

Food security, Renewable

energy, Green economy,

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Role of the Islamic International Institutions

The 10-year framework and strategies

http://www.ifsb.org/docs/10_yr_framework.pdf

• A document published by IDB and IFSB in 2007 to mainly provide a platform for countries in formulating their national and regional master plans to promote Islamic financial services industry.

Mid-Term Review of 10Y Framework & Strategies:

• Identify the progress, gaps and also to examine the need to have a reorientation of priorities and initiatives

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Source: Islamic Banking and Finance Information System (IBFIS) - IRTI

How to avoid deviation from the distinguish principles and replication of the conventional finance spirit ? Example : Islamic Banks in practice

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One of the explanations of the low use by Islamic banks of the “Profit and Loss Sharing” modes of finance relatively to “mark-up” modes is the difficulty to deal with the agency problems (moral hazard and adverse selection) (Siddiqui, 2006).

According to Ul Haque and Mirakhor (1987, p161) “bankers ascribe the problem of moral hazard or asymmetric information to be an important explanation for individual preference for short-term liquidity.”

Example : Islamic Banks in practice

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• The empirical studies revealed that the current practices of IBs deviate from their theoretical model.

• Zainol and Kassim (2010) and Cevik and Charap (2011): CB deposit rates Granger cause returns on PLS accounts in Malaysia and Turkey.

• Chong and Liu (2009): in Malaysia showing the retail Islamic deposit rates mimic the behavior of conventional interest rates.

• Beck, Demirgüç-Kunt and Merrouche (2013) "Islamic vs. conventional banking: Business model, efficiency and stability", Journal of Banking and Finance carried an empirical investigation on a broad cross-country sample and reached the following:

few significant differences in business orientation.

IBs less cost-effective, have higher intermediation ratio, higher asset quality and better capitalized.

large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes.

Example : Islamic Banks in practice

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• Hasan and Dridi (2010) “The effects of the global crisis on Islamic and conventional banks: A comparative study, “ IMF WP 10/201 analyse the effects of the crisis on profitability, credit growth, asset growth and external ratings of 120 Islamic and conventional banks in 8 countries.

IBs’ showed stronger resilience in the early stages of the crisis. However, as the crisis moved to the real economy in 2009, IBs’ profitability has steeply declined relatively to the CBs.

IBs contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of CBs.

Resilience to the global crisis Example : Islamic Banks in practice

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•Bourkhis and Nabi (2013) "Islamic and conventional banks' soundness during the 2007–2008 financial crisis," Review of Financial Economics. analyse the effects of the crisis on a set of financial soundness indicators (FSIs) related to banks‘ earnings and profitability, capitalization, asset quality, efficiency, liquidity and financial stability using a matched sample of 34 IBs and 34 CBs from the 16 countries covered on the period 1998–2009.

IBs outperformed CBs in regards to the return on average assets (ROAA)

during and after the financial crisis.

Considering the impact of the financial crisis on the banking soundness (measured by the Z-score and capital to asset ratio) : no significant difference between IBs and CBs. However, there is some evidence that IBs were in average more sound (in regards of the Z-score).

Resilience to the global crisis Example : Islamic Banks in practice

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What are the characteristics of the demand for Islamic Finance Services ? Case of Tunisia

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Case of Turkey

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Case of Morocco

Source: IFAAS Survey 2012

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What lessons can be learnt from the “Islamic finance ” experiences of other countries?

Learn from the Malaysian experience

• Over the last decade, Malaysia has implemented important reforms

in the Islamic finance industry to favor its development

• Laldin (2013): “The Malaysian Islamic financial sector is seen as one of the most progressive and attractive in the world given the numerous incentives planned and further liberation in the coming years.”

Source: Mohamad Akram Laldin (2013) "Proposed Suitable Islamic Financial Instruments for Central Asia Countries", Presentation during the Annual Meeting of IDB, May 2013 - Dushanbe - Tajikistan

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Learn from the Indonesian experience

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Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of

Malaysia (Bank Negara Malaysia), at the Islamic Development

Bank (IDB) Prize Lecture on “Islamic finance –financial stability,

economic growth and development”, Jeddah, 27 November 2013 :

•The recalibration of finance should aim to serve the needs of the

real economy and more importantly the broader society.

•This would generate positive externalities that would in the

medium term lead to more sustainable financial systems, and in

turn contribute positively to growth and development.

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How can Islamic Finance promote inclusive economic development?

How to develop the IFSD inline with the economic development priorities ?

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• Enhancing access to finance to SMEs and poor population

• Supporting entrepreneurship

• Supporting Private Public Partnership (Education, Health, Infrastructure, Transport, etc.)

• Supporting R&D and innovation in line with the development problems

• Enhancing intra-trade and regional integration

• Unemployment (Youth)

• Poverty

• Housing

• Health, Education, R&D, Transport

• Access to Water and food security

vibrant business environment

+ Adequate ecosystem for the IFSD

• What is the best business model for IBs ?

• What is the role of education and awareness about Islamic Finance

principles in the development of the sector ?

• How to enhance financial inclusion ?

• How to develop efficient and sustainable Islamic Microfinance

institutions ?

• Do we need Islamic Investment funds ?

• Do we need Islamic Venture Capital ?

• How to use Sukuk in raising financial resources for development

issues ?

• What kind of innovative Islamic financial products we need ?

•How to conduct monetary policy in a dual banking system?

• How to regulate a dual banking (Insurance) system while ensuring fair

competition and stability between the different types of actors ?

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Further questions

Contribute by your research to ensure a sustainable development of Islamic finance…coupled with inclusive growth 1) Inspire from existing research and ideas,

2) Be market oriented (connection with financial institutions, regulators, clients) 3) Innovate within the compliance sphere (cooperation)

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Recent articles KAU: Islamic Econ., Vol. 27 No. 1. (2014):

•"A Study of Islamic and Conventional Banks in Malaysia",

•"Sharīʿah Investment Screening Criteria: A Critical Review,

•Trust Fund: A Product Combining Waqf, Ẓakāh and Ṣadaqah for

Socio-Economic Agenda,”

• “Determinants of Revenue Efficiency in the Malaysian Islamic

Banking Sector “

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Recent articles Kabir & Hassan et … (2014):

•Capital adequacy and lending and deposit behaviors of

conventional and Islamic banks," Pacific-Basin Finance Journal,

Elsevier, vol. 28(C), pages 58-75.

•"Islamic bank incentives and discretionary loan loss

provisions," Pacific-Basin Finance Journal, Elsevier, vol. 28(C),

pages 152-174.

•"The assets and liabilities gap management of conventional and

Islamic banks in the organization of Islamic cooperation (OIC)

countries," Applied Financial Economics, Taylor & Francis Journals,

vol. 24(5), pages 333-346, March.

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• Empirical finding: superior efficiency of Islamic banks suggesting that Islamic banking could be beneficial for Africa.

Recent articles

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Recent articles Etudes en Economie Islamique

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Recent articles Etudes en Economie Islamique

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Recent articles Etudes en Economie Islamique

Thank you

msaminabi@gmail.com

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