Transcript Document

Osservatorio Del Mediterraneo
Ministry of Foreign Affairs
Roma, Nov. 4, 2009
Islamic Finance:
Standard & Poor’s General
Views and Ratings Approach
Dr. Mohamed Damak
Associate -- Co-Chair of Islamic Finance Workgroup
Standard & Poor’s Financial Services
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Copyright (c) 2006 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Agenda
1- Introduction
2- Impact of the crisis on Islamic Finance and Sukuk market
3- The European experience
4- Sukuk market at a glance
5- Standard & Poor’s approach to rating Islamic Financial
Institutions and Sukuk
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2.
Introduction
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3.
Islamic Finance At A Glance
Date and place of first emergence
Emergence of the first universal Islamic Bank
Market size (estimated - mid-year 2009)
Annual Growth Rate (estimated - over the last decade)
Geographic Spread
Sukuk market size (Sept. 30, 2009)
Sukuk issuance (Sept. 30, 2009)
Sukuk issuance (2008)
Begining of the 60ies in Egypt and Malaysia
1975
About $800 billion
10-15% (depending on asset class)
60% in the Gulf - 20% in Asia - 20% Other countries
$92 billion compared with $500 million in 2001
$15.3 billion
$14.8 billion
Total assets of Islamic Banks in the GCC
350
300
$. Billion
250
200
150
100
50
0
2003
2004
2005
2006
2007
Total assets of Islamic Banks in the GCC
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4.
2008
Islamic Finance At A Glance
Geographic expansion of Islamic Finance
Islamic Finance is rapidly emerging in new territories!
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5.
Islamic Finance At A Glance
What makes Islamic finance different?
The Five Pillars of Islamic Finance
1- Prohibition of interest
2- Prohibition of speculation
3- Prohibition of the financing of illicit sectors (pork, weapons,
alcohol,…)
4- Profit & Loss sharing principle
5- Asset backing principle
Islamic finance is not restricted to Muslims (the “natural” clients) as
some of its principles may attract non-Muslim clients.
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6.
Impact of the crisis on Islamic Finance and Sukuk market
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7.
Impact of the crisis on Islamic Finance and Sukuk market
• We note that Islamic banks have no exposure to structured investment products
(CDOs, SIVs and ABS…) and have not been directly affected by the decline of the
value of these products.
• We note that Islamic banks are not risk free, however, as one of the principles of
Islamic Finance requires that participants in each transaction share risks and
rewards (profit & loss sharing principle).
• In our view, one of the main sources of risk for Islamic banks in the Gulf stems from
their high exposure to the real estate sector (Dubai, in particular).
• Given the outlook for real estate sector in Dubai, for example, Standard & Poor’s
took rating actions on Dubai-based banks, including the downgrade and the change
of outlook to negative from stable on Dubai Islamic Bank (BBB+/Negative/A-2).
• Some Islamic banks are also under pressure due to:
1- Liquidity drying-up and their reliance on wholesale funding; and
2- Their exposure to the U.S and Europe through private equity, real estate, and
asset-based investments.
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8.
Standard &Poor’s Observations on how the crisis has affected Islamic
Finance and the Sukuk market
S&P’s expectations for rated Islamic banks (2009-2010)
1- Weaker financial performance as the economic environment
has deteriorated (slowdown in business volumes, lower fees and
commissions, higher price competition, higher provisioning
needs…).
2- Weaker asset quality indicators.
3- More conservative approach toward growth, as liquidity is
scarce and more expensive.
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9.
Standard &Poor’s Observations on how the crisis has affected Islamic
Finance and the Sukuk market
• The Sukuk market experienced a sharp slowdown in 2008 compared with 2007.
However, recovery appears to have started in the second half of 2009.
• Total issuance reached $15.3 billion during the first nine months of 2009
compared with $14.9 billion in 2008 and $34.3 billion in 2007.
Main drivers for the slowdown
• Liquidity dry-up on international markets;
• Widening of spreads;
• Investors “wait and see” attitude; and
• Intrinsic challenges (comments on Sharia compliance, the low liquidity of sukuk,
etc…).
A more positive trend in the recent past
Standard & Poor’s believes that the market is picking up again as market
conditions begin to improve and stakeholders are deploying efforts to overcome
the intrinsic challenges related to Sukuk market.
Reported pipeline of more than $50 billion?
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10.
The European Experience
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11.
Islamic Finance At A Glance
Initiatives in European countries
• UK: Five Islamic banks, one Takaful company, more than 15 conventional financial
institutions offering Islamic financial products.
• France: Discussion at the highest level of the state on the strategy and the necessary
steps to introduce Islamic finance. Talks about the licensing of an Islamic bank by the end
of the year.
• Italy: Conference organized by the Osservatorio Del Mediterraneo focusing on the
opportunities for Italy.
• Germany: €100 million Sukuk issued by the State of Saxony-Anhalt rated «AA-» and
matured on Aug. 13, 2009.
• Switzerland: several Swiss banks offering private banking and Sharia compliant wealth
management (local banks and affiliates of Gulf banks).
• A significant number of European banks are active in the structuring of Sharia compliant
transactions In the Gulf Cooperation Council countries and Asia.
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12.
The European Experience of Islamic Banking
Three apparent strategies:
1- Retail and private banking: local Muslims, recycling of
immigration funds, private banking (local and foreign Muslim
customers).
2- Wholesale banking: corporate, project financing, private equity.
3- Access to Islamic capital markets (Sukuk market).
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13.
The European Experience
1- Retail and private banking
- Islamic Bank of Britain
- Launched in 2004 as the first retail Islamic bank in the U.K.
- Main indicators as of Dec. 31, 2008
Total assets: £180.8 million
Total financing: £23.4 million
Total deposits: £153.3 million
Net income: £(5.9) million
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14.
The European Experience
Sharia compliant private banking, wealth management
Price
+
 Specialized private
bank
Niche operational strategy
in less competitive markets
Niche player in competitive
markets
-
 Specialized retail
bank
-
 Diversified private
bank
Diversified offering in less
competitive markets
Diversified player in
competitive markets
 Diversified retail
bank
+
Operational diversification
Sharia compliant retail banking products (home and auto financing)
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15.
The European Experience
Target Market: Muslim population in Selected European Countries
Total population Mil. (2008)
% of Muslim population (Est.)
Total Muslim population Mil. (Est.)
GDP Per capita $ Est. (2009)
Belgium
10.7
3.6
0.4
42,965
France
62.0
10.0
6.2
42,091
Germany
82.2
3.7
3.0
39,442
Netherland
16.4
5.4
0.9
47,042
Switzerland
7.6
3.1
0.2
66,127
Italy
59.9
2.4
1.4
34,955
Spain
46.5
1.2
0.6
31,142
United Kingdom
61.3
2.8
1.7
35,728
- More than 14 million potential customers in the selected
countries sample.
- Average GDP per capita of $42 K in 2009.
- Islamic Finance is not restricted to Muslims!
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16.
The European Experience
2- Wholesale banking: corporate and project financing
- SMEs financing, large corporate financing, foreign direct
investment in Europe, private equity. Example: Viridian PLC
acquired by Arcapita in the U.K. ($4.2 billion); CEPL acquisition in
France by Arcapita ($450 million), etc.
3- Access to Islamic capital markets
U.K. government plan to issue Sukuk, “rumors” on Sukuk
issuance out of France, Switzerland…
Investor base diversification and attraction of institutional
investors (incl. Sovereign Wealth Funds).
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17.
The European Experience
• Major hurdles/unanswered questions
• Observations
1- Demand quantification: in the GCC, the
offer created its own demand, is it
replicable in Europe?
1- IFOP : 47% of the sample are interested in
Sharia compliant saving products; 55% in
Sharia compliant financing.
2- Regulatory environment: tax neutrality of
Sharia compliant transactions, regulation
of Islamic banks...
2- Efforts deployed by U.K. and French
regulators to render the environment more
friendly.
3- Political environment: launch of Sharia
compliant operations in secular countries
for example; necessity of political
stakeholders’ support.
3- France and U.K. communication from the
top level of the state in favor of the
development of Islamic Finance.
4- A common strategy for the E.U.?
5- Efforts being deployed by stakeholders to
overcome these hurdles.
5- Specific weaknesses of Islamic finance:
standardization of products, Sharia
interpretation, lack of qualified human
resources, lack of liquidity instrument
management, small size of the Sukuk
market...
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18.
The European Experience
• Our opinions
1- Islamic finance development is expected to be gradual starting
with wholesale activities and possibly retail offering in a second
step (including the recycling of immigrants deposits and funds
transfers as Islamic finance begins to emerge in home
countries, mainly in Africa).
2- More private equity and FDI transactions from the Gulf states
and other Muslim countries to Europe (mature economies,
strong legal environment, still untapped opportunities...).
3- European banks to continue playing an important role in
complex financial transactions and Sukuk structuring.
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19.
Sukuk Market At A Glance
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20.
Sukuk Market At A Glance
• A sukuk is a Sharia compliant debt instrument that allows an
entity to raise funds.
• Main reasons for Sukuk issuance:
- Size: limited access to bank financing (regulation limiting
concentration, loan to deposit ratio limits).
- Cost of funding: desintermediated financing.
- Maturity: longer than bank loans.
- Sharia compliance: Sharia-compliant financing (if the structure
is approved by Sharia board).
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21.
Sukuk Market At A Glance
Sukuk Market (2001-2009*)
100
90
80
$ billion
70
60
Cumulative Total Sukuk
50
Total Sukuk Issued
40
30
20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009*
• Significant slowdown of Sukuk issuance in 2008 because of market conditions.
• Apparent recovery in the recent past
• Reportedly healthy pipeline
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22.
Sukuk Market At A Glance
Sukuk Issuance by Country 2009*
2.6%
9.2%
0.4%
0.1%
19.1%
9.8%
Bahrain
Brunei Darussalam
Gambia
2.4%
Indonesia
Malaysia
Pakistan
Saudi Arabia
United Arab Emirates
56.4%
• Malaysia has taken the lead but GCC is still contributing significantly.
• No Sukuk issued out of Europe in 2009*.
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23.
Sukuk Market At A Glance
4.3%
Suk uk Is s uance by Curre ncy In 2009*
0.4%
0.1%
5.6%
27.1%
USD
SAR
PKR
MYR
IDR
GMD
46.6%
13.5%
BND
BHD
2.4%
• The US$ is slowly recovering its position as the currency of choice for Sukuk.
• More than 70% of issuance where done in local currencies in 2009*.
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24.
Sukuk Market At A Glance
Total Issuance by Issuer Type 2009*
19%
2%
Governments and
related entities
Corporates
Financials
79%
• Government and related entities are driving the growth of the market compared with
FI and corporates in the past.
• This trend should help the construction of a yield curve against which issuers can
benchmark themselves.
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25.
S&P’s Views of the Sukuk Market
• Main developments/Hurdles
• Efforts deployed/Conclusions
1- Sukuk default (The Investment Dar,
East Cameron Gas, Golden Belt…).
1- Default is providing the market with
interesting information on Sukuk
resolution (access to the underlying
assets; guarantee enforcement, etc.)
2- Comments made by AAOIFI
regarding the Sharia compliance of
sukuk issued so far and lack of
standardization.
3- Low liquidity of the sukuk market
(mostly OTC instruments)
2- AAOIFI will screen products for
Sharia compliance and the National
Sharia Advisory Council of Bank
Negara Malaysia have the status of
final arbiter for Sharia compliance.
3- Creation of Saudi Sukuk and bond
market (might help improving the
liquidity of sukuk listed there).
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26.
S&P’s Views of the Sukuk Market
• Our expectations for 2009-2010
- The Sukuk market is slowly reviving but issuance volume will continue to
depend on market conditions (market are reopening at least for good names).
- Sovereign issuers are expected to continue driving the market upward. From
2010, more corporate issuers and FI to re-enter the market. The construction of a
yield curve will be helpful.
- Our expectations in the longer-term
- Prospects remain positive in our view (more than $50 billion of Sukuk were
either announced or talked about in the market)
- Investors are increasingly seeking to invest in products that are compliant with
their beliefs.
- Infrastructure projects in the GCC require a huge amount of financing.
- Asset and liability mismatch management for financial institutions.
- Non-Muslim countries/issuers looking to diversify their investors base.
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27.
Standard & Poor’s approach to rating Islamic Financial
Institutions and Sukuk
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28.
Standard & Poor’s approach to rating Islamic Financial Institutions and Sukuk
Standard & Poor’s has covered Islamic Finance for more than a decade and has developed a
recognized expertise in this field.
Standard & Poor’s is active in:
1- Rating Islamic banks, Takaful companies, Sukuk issued by corporates and sovereigns; and
2- Launching Sharia compliant indices.
Standard & Poor’s does not:
1- Comment on the Sharia compliance of a specific issue or issuer; or
2- Provide consultancy or advisory services (ex. structuring sukuk.)
• The need for independent research is high in Islamic Finance! Standard & Poor’s has
published numerous articles on Islamic Finance and frequently participates in seminars to
communicate its views.
• Standard & Poor’s is in regular contact with different market participants (issuers, investors,
regulators, press...)
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29.
Standard & Poor’s approach to rating Islamic Financial Institutions and Sukuk
Islamic Bank Balance Sheet
Assets
Banking Assets
Liabilities
Current accounts
Interbank deposits ST
Interbank deposits LT
PSIA
Sukuk
PER and IRR
Capital and reserves
Classic liabilities
1
Specific liabilities
2
Equity
1
Classic Rating Methodology
2
Specific Rating Methodology
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30.
Standard & Poor’s approach to rating Islamic Financial Institutions and Sukuk
• In rating Sharia compliant issuers, Standard & Poor’s applies
the same methodology as for conventional issuers but takes
into consideration the specificities related to operating in
compliance with Sharia.
• Standard & Poor’s has developed a specific methodology for
rating Sukuk.
• For some instruments, Standard & Poor’s has developed a
specific methodology (Stability ratings for Islamic Financial
Institutions offering Profit Sharing Investment Accounts) that
takes into account the differences between these instruments
and their equivalent in conventional finance.
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31.
Selected publications
1- The Sukuk market has continued to progress in 2009 despite
some roadblocks - Sept. 2009.
2- Rated Gulf Islamic financial institutions and takaful companies
have shown resilience to global market dislocations but they
are not immune – Feb 2009
3- Sukuk Market Declined Sharply In 2008, But Long-Term
Prospects Remain Strong – Jan 2009.
4- The Sukuk market continues to grow despite global gloomy
market conditions - Sept. 2008.
5- The Sukuk market continues to soar and diversify, held aloft by
huge financing needs - March 2008
6- Risk management for Islamic Financial institutions: A rating
perspective – Jan. 2008
7- S&P’s Approach to Rating Sukuk - Sept. 2007
8- S&P Launches Stability Ratings For Islamic Banks Offering
Profit-Sharing Investment Accounts - Sept. 2007
9- Islamic finance in France: Paris tries to reduce the gap with
London - July 2007
10- Key Business Drivers Of Global Islamic Finance - April 2007
11- Islamic Finance Expands Slowly But Surely In The Maghreb,
April 2007
12- Takaful: A New And Viable Insurance Business Model Or Just A
Marketing Opportunity? April 2007
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32.
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33.