Transcript (%) Shariah-Compliant Finance: Opportunities

Shariah-Compliant Markets:
Challenges & Opportunities
İbrahim M. TURHAN, Ph.D.
Chairman & CEO
September 20, 2013
Agenda
I. Global Outlook of Shariah-Compliant Finance
 Global Shariah-Compliant Financial Assets
 Global Shariah-Compliant Banking Assets
 Global Shariah-Compliant Capital Markets
II. Shariah-Compliant Finance: Challenges
 Lack of Standardization
 Conflicts among the opinions of Shariah Boards
 Lack of enough Expertise and Human Capital
III . Shariah-Compliant Finance: Opportunities
 Asset-based Structure
 Reduction in Systematic Risk
 Sukuk: Opportunity for Long-term Funding
20.09.2013
2
Agenda
I. Global Outlook of Shariah-Compliant Finance
 Global Shariah-Compliant Financial Assets
 Global Shariah-Compliant Banking Assets
 Global Shariah-Compliant Capital Markets
II. Shariah-Compliant Finance: Challenges
 Lack of Standardization
 Conflicts among the opinions of Shariah Boards
 Lack of enough Expertise and Human Capital
III . Shariah-Compliant Finance: Opportunities
 Asset-based Structure
 Reduction in Systematic Risk
 Sukuk: Opportunity for Long-term Funding
20.09.2013
3
Global Outlook of Shariah-Compliant Finance
Composition of Global Financial Assets in
2012
(USD trillion)
Trends in Global Islamic Financial Assets
(USD billion)
80
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1900
1600
1340
1188
985
690
72.0
Total Shariah-compliant
assets consist less than
1% of global assets
(USD 332.6 tr)
70
60
50.5 49.0
50
43.0
40
29.0 28.0 27.3
30
19.5
20
180
5.0 4.0
2.0 1.7 1.6
10
0
1
• Growth forecast in global Shariah-Compliant financial assets in
2013: 11%
2
3
4
5
6
1 Bank Assets
2 Stock Market Capitalization
3 World GDP
4 Private Debt Securities
5 Pension Funds
6 Mutual Funds
7 Public Debt Securities
7
8
9
10
11
12
13
8 Insurance Companies
9 Reserves ex Gold
10 Sovereign Wealth Funds
11 Hedge Funds
12 Private Equity Funds
13 Shariah-Compliant
Finance
• The size of Shariah-Compliant financial assets are expected to
reach USD 4 trillion by 2020.
Source: Bloomberg and KFH Research
Source: Bloomberg and KFH Research
20.09.2013
4
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Financial Assets
Composition of Global Shariah-Compliant Financial Assets
in 2012
ShariahCompliant
Funds, 4.0%
Takaful, 1.1%
Sukuk, 14.6%
ShariahCompliant
Banking, 80.3%
Source: Bloomberg, KFH Research
20.09.2013
5
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Banking Assets
1600
Trend in Global Shariah-Compliant Banking
Assets
(USD billion)
1530
Country Share of Global Shariah-Compliant Banking
Assets in 2012
1400
Saudi Arabia,
12.2%
1200
Malaysia, 10.0%
Iran, 42.7%
1000
UAE, 8.0%
800
Kuwait, 7.9%
600
Others, 8.7%
400
200
Qatar, 4.0%
Turkey, 3.1%
0
Source: Bloomberg, KFH Research
Bahrain,
2.0%
Indonesia, 1.4%
Source: Bloomberg, KFH Research
20.09.2013
6
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Capital Markets
Global Sukuk Issuance (USD billion)
137.5
140.0
120.0
92.4
100.0
80.0
60.0
53.0
50.0
37.9
33.8
40.0
24.3
20.0
1.2
1.4
7.1
9.5
13.7
0.0
• Based on current growth forecast, Shariah-Compliant financial institutions will require at least US$ 400 billion of
short term, credible, liquid securities for liquidity and capital management purposes, by 2015.
Source: IIFM Database
20.09.2013
7
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Capital Markets
Structural Breakdown of International Sukuk Issuance
Globally - (2001-2013)
Structural Breakdown of Domestic Sukuk Issuance
Globally - (2001-2013)
Salam, 2.0%
Wakalah, 14.0%
Musharakah,
14.0%
Hybrid, 8.0%
Mudharabah,
6.0%
Exchangable,
8.0%
Istisna, 1.0%
Hybrid, 4.0%
Ijarah, 45.0%
Salam,
1.0%
Mudharabah,
3.0%
Bai Bithaman
Ajil, 8.0%
Musharakah,
16.0%
Ijarah, 17.0%
Murabahah; 3.0%
Murabahah,
50.0%
Source: IIFM Database
Source: IIFM Database
20.09.2013
8
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Capital Markets
Comparison of Issuances: Sukuk vs. CMBS
350
314.0
300
236.3
USD bln.
250
252.6
200
150
137.5
127.8
98.7
100
92.4
80.8
33.8
50
1.4
7.1
9.5
13.7
50.0
24.318.9
53.0
37.9
52.6
34.1
7.3
14.6
0
SUKUK
CMBS
Source: www.cmalert.com, IFIS, Zawya
20.09.2013
9
Agenda
I. Global Outlook of Shariah-Compliant Finance
 Global Shariah-Compliant Financial Assets
 Global Shariah-Compliant Banking Assets
 Global Shariah-Compliant Capital Markets
II. Shariah-Compliant Finance: Challenges
 Lack of Standardization
 Conflicts among the opinions of Shariah Boards
 Lack of enough Expertise and Human Capital
III . Shariah-Compliant Finance: Opportunities
 Asset-based Structure
 Reduction in Systematic Risk
 Sukuk: Opportunity for Long-term Funding
20.09.2013
10
Shariah-Compliant Finance: Challenges
A) Lack of Standardization
• Lack of harmonization in regulations (Different terminologies, procedures
and applications)
• Does time value of money in Islam exist?
• Non-standardization of products
• Market centered (Conventional) vs. Bank centered (Shariah-Compliant)
• Financial Intermediation in Shariah-Compliant Finance is restricted.
20.09.2013
11
Shariah-Compliant Finance: Challenges
A) Lack of Standardization
• Latent Organized Exchange for Sukuk: 17% of Total Global Sukuk Issued in Stock Exchanges.
• 65% of Sukuk (issued in organized exchanges) located on outside of Islamic countries.
Global Sukuk Issuances by Stock Exchange Location in 2012
(USD million)
Saudi SE
Kazakhstan SE
LFX (Labuan)
Hong Kong SE
Bahrain SE
Bursa Malaysia
Nasdaq Dubai
Singapore SE
Dubai FM
Indonesia SE
Irish SE
London SE
0
2000
4000
6000
8000
10000
12000
Source: Zawya
20.09.2013
12
Shariah-Compliant Finance: Challenges
B) Conflicts among the opinions of Shariah Boards
• Lack of consensus among scholars (various Shariah boards)
 Number of Shariah Boards around the World is more than 400
 Total number of board membership around the World is 1,141
• Diversification in the interpretation of Shariah-compliance.
Source: Funds@Work
20.09.2013
13
Shariah-Compliant Finance: Challenges
C) Lack of enough Expertise and Human Capital
• Shortage of human capital
• A group of 20 prominent Shariah scholars sit on 55% of total Shariah board
memberships.
• Top 2 Scholars hold 85 board memberships.
• With scholars holding dozens of portfolios, it is impossible for them to have
good performance.
Source: Funds@Work
20.09.2013
14
Shariah-Compliant Finance: Challenges
C) Lack of enough Expertise and Human Capital
• There are only 123 Shariah-Compliant programs that cover five continents and are
distributed over 26 countries.
30
Shariah-Compliant Finance Programs Around the World
28
(Total of Undergraduate and Graduate Level Programs)
25
21
20
15
11
10
5
10
7
6
5
5
3
3
3
3
2
2
2
1
1
1
1
1
1
1
1
1
1
1
0
Source: Belouafi, A., Belabes, A., & Daoudi, M. (2012). Geo-education of Islamic finance in the global space. Procedia-Social and
Behavioral Sciences, 46, 5335-5339.
20.09.2013
15
Agenda
I. Global Outlook of Shariah-Compliant Finance
 Global Shariah-Compliant Financial Assets
 Global Shariah-Compliant Banking Assets
 Global Shariah-Compliant Capital Markets
II. Shariah-Compliant Finance: Challenges
 Lack of Standardization
 Conflicts among the opinions of Shariah Boards
 Lack of enough Expertise and Human Capital
III . Shariah-Compliant Finance: Opportunities
 Asset-based Structure
 Reduction in Systematic Risk
 Sukuk: Opportunity for Long-term Funding
20.09.2013
16
Shariah-Compliant Finance: Opportunities
A) Asset-based Structure
Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks
(Bankscope Data for 2956 banks around the world)
Ratio
Business Model
Non-deposit funding
Gross Loans
Efficiency
Overheads
Cost income ratio
Stability
Return on assets
Equity assets ratio
Controls
Non-loan earning assets
Fixed assets
Scaled by
Shariah-Compliant Conventional
Banks(%)
Banks(%)
Total funding
Total deposits
3.9
77.4
5.5
71.6
Total assets
2.7
54.1
3.5
62.1
1.4
13.5
1.1
10.7
41.7
2.3
44.5
1.9
Total earnings assets
Total assets
Source: Beck, T., A. Demirguç-Kunt, and O. Merrouche. (2010). Islamic vs. Conventional Banking: Business Model, Efficiency and
Stability. World Bank Policy Research Working Paper 5446.
20.09.2013
17
Shariah-Compliant Finance: Opportunities
B) Reduction in Systematic Risk
Changes in Banking Sector (pre and post crisis)
(%)
100
50
Change in market
capitalization
Change in
net profit
0
Change in total
assets
Change in equity
Top 10 Conventional
Banks
Top 10 Shariah-Compliant
Banks
-50
-100
-150
Source: IFSB
20.09.2013
18
Shariah-Compliant Finance: Opportunities
B) Reduction in Systematic Risk
Growth in Personal Financing Assets (CAGR, 2008-2011)
30.4
(%)
35.0
23.5
30.0
25.0
8.3
15.0
10.0
Conventional
12.8
20.0
12.9
10.0
12.8
8.5
Shariah-Compliant
10.2
4.2
5.0
0.0
Corporate
Government
Personal
Real Estate
Services
Source: Ernst & Young
20.09.2013
19
Shariah-Compliant Finance: Opportunities
C) Sukuk: Opportunity for Long-term Funding
Global Sukuk Issuers by Sectors in 2012
Others
11.9%
Financial
Services
10.8%
Transport Sector
11.3%
Government
66.0%
Source: IFIS, Zawya
20.09.2013
20
Shariah-Compliant Finance: Opportunities
C) Sukuk: Opportunity for Long-term Funding
25000
Global Sukuk Issued for Infrastructure Projects
(USD million)
~25000
20000
15000
10000
5000
0
Source: IFIS, Zawya, Bloomberg, KFHR
20.09.2013
21
Shariah-Compliant Finance: Opportunities
C) Sukuk: Opportunity for Long-term Funding
Infrastructure Sukuk Issued by Country
(2001-2012)
Iran, 0.2%
Saudi Arabia,
7.1%
UAE, 4.3%
Brunei, 0.2%
Sukuk Issued by Shariah Principles
(2001-2012)
Bai Bithaman
Pakistan, 0.5%
Ajil, 4.2%
Indonesia, 0.2%
Cayman
Islands, 8.8%
Combinations,
5.1%
Wakalah, 1.7%
Mudharabah, 1.8%
Istisna, 7.1%
Malaysia, 78.7%
Musharakah, 33.4%
Murabahah, 20.7%
Ijarah, 26.0%
Source: IFIS, KFHR
Source: IFIS, KFHR
20.09.2013
22
Shariah-Compliant Finance: Opportunities
Special Case: Turkey
• Total housing loans in Turkey equal to TL104 billion, by August 2013.
• Urbanization process of Turkey props the increasing housing loans.
Urbanization in Turkey
(urban population, % of total)
(%)
80
60
52.4
59.2
62.1
64.7
66.8
70.5
75.1
43.8
40
20
0
Source: CBRT, UN
20.09.2013
23
Shariah-Compliant Finance: Opportunities
Special Case: Turkey
• Under the urban transformation plan, approximately 8 million dwellings are
expected to be rebuilt in 20 years.
• Urban transformation requires approximately USD 800 billion.
• For liquidity, Turkey needs secondary loan market for housing credits.
• Shariah-Compliant Finance tools such as Sukuk Issuance would be a solution.
Source: Yildirim, Y. (2012). Urban Transformation. Sabahattin Zaim Islam and Economy Symposium.
20.09.2013
24
Shariah-Compliant Finance: Opportunities
Special Case: Turkey
Turkish Sukuk Market
3500
6
3000
5
USD mln.
2500
4
2000
3
1500
2
1000
500
1
0
0
2010
2011
Sukuk Issuance (Left)
2012
2013 Aug
No. of Issues
Source: IFIS
20.09.2013
25
Recent Developments on Islamic Finance
Introduction of Sukuk and Equity Repo Market
World Bank Islamic Finance Research Center
Organization of Islamic Cooperation Member States’ Stock
Exchanges Forum
S&P/OIC COMCEC 50 Shariah Index
Source: IFIS
20.09.2013
26
S&P/OIC COMCEC 50 Shariah vs. DJIM Index
120
115
110
105
100
95
90
DJIM Index
SPOIC50P Index
Source: Bloomberg
20.09.2013
27