Transcript Slide 1

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
AANAFTA
Business
Seminar
1
Global Outlook of Islamic Finance
2
Growth of Islamic Financial Assets
3
The Impact Financial Crisis to Islamic
Finance
4
Salient Features of Islamic Finance
5
Showcase of Malaysian Islamic
Financial Centre
6
The Framework of Islamic Finance
7
Characteristics of Islamic Finance
8
Conclusion
ENDS / ‫الغاية‬
The
Framework
of Islamic
Finance
Maqasid al-Shariah
(The Objectives of Shariah)
Riba
1st Level of
Compliant
(Usury)
Injustices
Gharar
(Uncertainty)
MEANS/ ‫الوسيلة‬
Nominate Contracts
Islamic Contract
Non-Nominate Contracts
Investment Activities
Rectifying & Purifying
2nd Level
of
Compliant
Shariah-Compliant
Operation
Conversion Process
Hedging Instruments
Monitoring & Supervision
Social Responsibility
Asset Classes in Islamic Finance
Sukuk
Islamic
Structured
Instrument
Islamic
Financing
Real Estates (IREITs)
Asset Classes
in Islamic
Finance
Islamic
Equities (unit
trust, index
funds etc.)
Islamic Private
Equity
Takaful
Islamic ETFs
Islamic
Hedge Funds
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
STRUCTURE
OF SUKUK
Issue
Proceeds
Sukuk
Income from
project
Income Generating Project
Sukuk Investors
Comparing SUKUK to BONDS
Sukuk
Bonds
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 in-built 3. Return linked to interest charged out of
in the sale, lease or partnership
the loan contract
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 5. No restriction on the tradability
nature of the underlying asset
6. Investment in Shari`ah-compliant
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
Turkey
 Announced IFC Istanbul in Sep ’09
with focus includes interest-free
 Plans to issue sovereign sukuk, amend
financial business
tax law on IF
Iran Bahrain
Qatar
Pakistan
France
Malta
Saudi Arabia
UAE
Kuwait Thailand
Passed rules/regulations to
 Plans to position
Malaysia
support Islamic finance
as Islamic finance
Sudan

activities
hub for the
Mediterranean
In process of licensing
Indonesia 
Islamic banks

Jordan
Made fiscal & legal
adjustment for IF
 Plans to tap sukuk market to
transaction i.e. taxation
finance its deficit
Singapore
guidelines on sukuk &
 Established first Islamic bank
murabaha
 Introduced tax neutrality for Islamic finance



Gov’t sets an objective to ‘entrench
London as a global gateway for Islamic
finance
Saxony-Anhalt state issued
government sukuk
South Korea
Parliament expected to
pass the law related to
offering of tax waiver on
foreign investors’ interest
income from sukuk issued
5 FSA-approved Islamic banks and
Takaful operators

Aspiring to be centre for Islamic finance

Launched Islamic ETF
Japan
Law passed allowing
banks to do Islamic
finance
Hong Kong
Aims to become Islamic
finance gateway to China
Plans to issue sovereign sukuk
Hang Seng Islamic China Index
Fund in 2007
Brunei
Aim to become
Islamic financial
services hub for
Asia
Muslim-majority countries offering Islamic finance (IF)
Non-muslim countries starting to offer IF
Courtesy of Bank Negara Malaysia
Global developments – Islamic banking
Growth expected to continue
By 2020, estimated to reach
USD4t
Almost 90% of global market share are in
top 6 Islamic financial markets
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 Malaysia
Global sukuk market
Continued to expand in 2009
12
Courtesy of Bank Negara Malaysia
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 Malaysia
Post crisis sukuk market
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 Malaysia
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
2009

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
Source: IFSB-IRTI-IDB Islamic Finance and Global Financial Stability Report,
15
Courtesy of Bank Negara Malaysia
6 April 2010 based on E&Y study
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 Malaysia
Global Islamic finance industry
Largely shielded: reasons why
Avoidance of unethical
activities
•
•
Direct link to real economy
•
Avoidance of maisir (gambling)
& riba (interest) & nonpermissible goods & services
•
Certainty – supported by
underlying activities (prohibition
of gharar - uncertainty)
•
Screening investment
•
Prohibits excessive leveraging
•
Forbearance for customers in
difficulties
•
Money is not commodity
•
Different contractual
relationship
•
Equity-based & risk-sharing
transactions
•
Clearly defined risk &
profit-sharing
characteristics serve as
additional built-in
mechanisms
Ethical
Real Activities
Shariah values
Ethical
consistent with
universal value
Real Activities
•
Greater transparency & disclosure

•
•
additional Shariah
governance
unique risks
Greater fiduciary duties &
accountability
Emphasis on clear documentation
& contract add to soundness &
stability
Governance
Partnership
Governance
│17
Courtesy of Bank Negara Malaysia
Context setting
The Malaysian
Financial Landscape
│18
Malaysia: the world’s most comprehensive Islamic
financial system…
Islamic
Banks & Takaful
Companies
Governance
• Legal & Regulatory
– Islamic Banking Act
– Takaful Act
– Government
Funding Act
– Capital Market
Services Act
• Shariah Advisory
Council
– Central Banking Act
• Dispute Resolution
– Judicial system:
dedicated high
court
– KL Regional Centre
for Arbitration
– Financial Mediation
Bureau
Islamic
Money
Market
Money
market
Professional Service
– Legal firm
– Accounting
– Financial Intermediaries
– Financial Advisors
– Consultancy Service
• Banking
Islamic
Capital
Market
Malaysian
Financial
System
Labuan
IBFC
Diversified Players
Capital
market
Conventional
Banks & Insurance
Companies
Financial Markets
– Capital Market
– Money Market
– Foreign Exchange Market
– Commodity Market
– Bursa Suq Al-Sila
–
–
–
–
17 Islamic banks
10 Islamic windows
3 International Islamic Banks
14 International Currency
Business Units (ICBU)
 Takaful
– 8 takaful operators
– 4 retakaful operators
– 7 ICBUs
• Fund Management
– 9 Islamic fund managers
– 35 Islamic fund management
windows
Infrastructure
– Payment, clearing and
settlement, custodian
– Principal Dealers
– Listing on Bursa with
authorise exchange status
More than 30 years of experiences in developing Islamic
Courtesy of Bank Negara Malaysia
finance…
Malaysia has a well-developed sukuk market
Source: Malaysian ICM Bulletin, June09, SC
• 58% of outstanding corporate bond are sukuk
• Malaysia’s 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
• Active secondary sukuk market
Courtesy of Bank Negara Malaysia
ISRA @ INCEIF
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Menara Tun Razak
Jalan Raja Laut
50350 Kuala Lumpur
MALAYSIA
General Line : +603-2781 4000
Fax : +603-2691 1940
Email
Website
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