Shariah-Compliant Markets: Challenges & Opportunities
İbrahim M. TURHAN, Ph.D.Chairman & CEOSeptember 20, 2013
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
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
Global Outlook of Shariah-Compliant Finance
Source: Bloomberg and KFH Research
1 2 3 4 5 6 7 8 9 10 11 12 130
10
20
30
40
50
60
70
80 72.0
50.5 49.0 43.0
29.0 28.0 27.3
19.5
5.0 4.0 2.0 1.7 1.6
Composition of Global Financial Assets in 2012
(USD trillion)
1 Bank Assets2 Stock Market Capitalization3 World GDP4 Private Debt Securities5 Pension Funds6 Mutual Funds7 Public Debt Securities
8 Insurance Companies9 Reserves ex Gold10 Sovereign Wealth Funds11 Hedge Funds12 Private Equity Funds13 Shariah-Compliant Finance
Total Shariah-compliant assets consist less than 1% of global assets (USD 332.6 tr)
CAGR (2008-2013): 18.4%
4
• Growth forecast in global Shariah-Compliant financial assets in 2013: 11%
• The size of Shariah-Compliant financial assets are expected to reach USD 4 trillion by 2020.
Source: Bloomberg and KFH Research
20.09.2013
mid-1990s 2008 2009 2010 2011 20122013E
0200400600800
100012001400160018002000
180
690
9851188
1340
1600
1900
Trends in Global Islamic Financial Assets (USD billion)
Global Outlook of Shariah-Compliant Finance
Source: Bloomberg, KFH Research
Shariah-Compliant Banking, 80.3%
Takaful, 1.1%
Sukuk, 14.6%
Shariah-Compliant Funds, 4.0%
Composition of Global Shariah-Compliant Financial Assets in 2012
Shariah-Compliant Financial Assets
520.09.2013
Global Outlook of Shariah-Compliant Finance
Source: Bloomberg, KFH Research
2007 2008 2009 2010 2011 20122013E
0
200
400
600
800
1000
1200
1400
1600 1530
Trend in Global Shariah-Compliant Banking Assets
(USD billion)
Iran; 42.7%
Others; 8.7%Indonesia; 1.4%
Bahrain; 2.0%Turkey; 3.1%
Qatar; 4.0%
Kuwait; 7.9%
UAE; 8.0%
Malaysia; 10.0%
Saudi Arabia; 12.2%
Country Share of Global Shariah-Compliant Banking Assets in 2012
CAGR (2007-2013): 17.7%
Source: Bloomberg, KFH Research
Shariah-Compliant Banking Assets
620.09.2013
Global Outlook of Shariah-Compliant Finance
20012002
20032004
20052006
20072008
20092010
20112012
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1.2 1.47.1 9.5 13.7
33.8
50.0
24.3
37.9
53.0
92.4
137.5Global Sukuk Issuance (USD billion)
Source: IIFM Database
• 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.
Shariah-Compliant Capital Markets
720.09.2013
Global Outlook of Shariah-Compliant Finance
Structural Breakdown of Domestic Sukuk Issuance Globally - (2001-2013)
Structural Breakdown of International Sukuk Issuance Globally - (2001-2013)
Source: IIFM Database
Musharakah; 14.0%
Ijarah; 45.0%
Ex-changable;
8.0%
Murabahah; 3.0%
Mudharabah; 6.0%
Hybrid; 8.0%
Wakalah; 14.0%
Salam; 2.0%
Musharaka
h; 16.0%
Ijarah; 17.0%
Murabahah; 50.0%
Mudharabah; 3.0%
Hy-brid; 4.0%
Salam;
1.0%
Is-tisna
; 1.0%
Bai Bithaman Ajil; 8.0%
Shariah-Compliant Capital Markets
Source: IIFM Database820.09.2013
Source: www.cmalert.com, IFIS, Zawya
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
50
100
150
200
250
300
350
1.4 7.1 9.5 13.733.8
50.024.3
37.953.0
92.4
137.5
80.898.7
127.8
236.3252.6
314.0
18.9 7.3 14.634.1
52.6
Comparison of Issuances: Sukuk vs. CMBS
SUKUK CMBS
USD
bln
.
Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Capital Markets
920.09.2013
20.09.2013 10
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
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.
1120.09.2013
Shariah-Compliant Finance: Challenges
• 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.
Source: Zawya
1220.09.2013
A) Lack of Standardization
London SEIrish SE
Indonesia SEDubai FM
Singapore SENasdaq Dubai
Bursa MalaysiaBahrain SE
Hong Kong SELFX (Labuan)
Kazakhstan SESaudi SE
0 2000 4000 6000 8000 10000 12000
Global Sukuk Issuances by Stock Exchange Location in 2012 (USD million)
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
1320.09.2013
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
1420.09.2013
Shariah-Compliant Finance: Challenges
C) Lack of enough Expertise and Human Capital
UK
Malaysi
aUAE
Pakista
nJord
an
Bahrei
nFra
nce
Indonesia
KuwaitSyr
iaSu
danBru
neiQata
r
Algeria India
Suau
di arab
iaYam
en
Leban
onEgy
pt
Tunisia
Morocco
Senega
lIta
lia
Switze
rland
Belgium
Australia
0
5
10
15
20
25
30 28
21
11 107 6 5 5
3 3 3 3 2 2 2 1 1 1 1 1 1 1 1 1 1 1
Shariah-Compliant Finance Programs Around the World(Total of Undergraduate and Graduate Level Programs)
• There are only 123 Shariah-Compliant programs that cover five continents and are distributed over 26 countries.
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.
1520.09.2013
Agenda
1620.09.2013
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
Shariah-Compliant Finance: Opportunities
Ratio Scaled byShariah-Compliant
Banks(%)Conventional
Banks(%)Business Model
Non-deposit funding Total funding 3.9 5.5Gross Loans Total deposits 77.4 71.6EfficiencyOverheads Total assets 2.7 3.5
Cost income ratio 54.1 62.1Stability
Return on assets 1.4 1.1Equity assets ratio 13.5 10.7
ControlsNon-loan earning assets Total earnings assets 41.7 44.5
Fixed assets Total assets 2.3 1.9
Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks(Bankscope Data for 2956 banks around the world)
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.
1720.09.2013
A) Asset-based Structure
Shariah-Compliant Finance: Opportunities
B) Reduction in Systematic Risk
Source: IFSB
1820.09.2013
Change in total assets
Change in equity
-150
-100
-50
0
50
100
Changes in Banking Sector (pre and post crisis)
Top 10 Conventional Banks
Top 10 Shariah-Compliant Banks
(%)
Change in mar-ket capitalization
Change in net profit
Shariah-Compliant Finance: Opportunities
B) Reduction in Systematic Risk
Source: Ernst & Young
1920.09.2013
Corporate Government Personal Real Estate Services0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
4.2
12.9
8.510.2
12.88.3
10.0
30.4
12.8
23.5
Growth in Personal Financing Assets (CAGR, 2008-2011)
ConventionalShariah-Compliant
(%)
Shariah-Compliant Finance: Opportunities
C) Sukuk: Opportunity for Long-term Funding
Source: IFIS, Zawya
Government66.0%
Transport Sector 11.3%
Financial Services
10.8%
Others11.9%
Global Sukuk Issuers by Sectors in 2012
2020.09.2013
Shariah-Compliant Finance: Opportunities
2003 2004 2005 2006 2007 2008 2009 2010 2011Aug 2012
0
5000
10000
15000
20000
25000
~25000Global Sukuk Issued for Infrastructure Projects (USD million)
Source: IFIS, Zawya, Bloomberg, KFHR
C) Sukuk: Opportunity for Long-term Funding
2120.09.2013
Shariah-Compliant Finance: Opportunities
Sukuk Issued by Shariah Principles (2001-2012)
Malaysia; 78.7%
Iran; 0.2%
In-done-sia;
0.2%
Cay-man Is-lands; 8.8%
Brunei; 0.2%
UAE; 4.3%
Saudi Arabia; 7.1%Pakistan; 0.5%
Infrastructure Sukuk Issued by Country (2001-2012)
Musharakah; 33.4%
Ijarah; 26.0%
Murabahah, 20.7%
Mudharabah; 1.8%
Istisna; 7.1%
Combinations; 5.1%
Bai Bithaman Ajil; 4.2% Wakalah; 1.7%
Source: IFIS, KFHRSource: IFIS, KFHR
C) Sukuk: Opportunity for Long-term Funding
2220.09.2013
Shariah-Compliant Finance: Opportunities
• Total housing loans in Turkey equal to TL104 billion, by August 2013.
• Urbanization process of Turkey props the increasing housing loans.
Source: CBRT, UN
Special Case: Turkey
2320.09.2013
19801985
19901995
20002005
20102015F
01020304050607080
43.852.4
59.2 62.1 64.7 66.8 70.5 75.1
Urbanization in Turkey (urban population, % of total)
(%)
Shariah-Compliant Finance: Opportunities
• 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.
Special Case: Turkey
2420.09.2013
Shariah-Compliant Finance: Opportunities
Source: IFIS
Special Case: Turkey
2520.09.2013
2010 2011 2012 2013 Aug0
500
1000
1500
2000
2500
3000
3500
0
1
2
3
4
5
6
Turkish Sukuk Market
Sukuk Issuance (Left) No. of Issues
USD
mln
.
Recent Developments on Islamic Finance
Source: IFIS
2620.09.2013
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
S&P/OIC COMCEC 50 Shariah vs. DJIM Index
Source: Bloomberg
2720.09.2013
05/07
/2012
21/07
/2012
06/08
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22/08
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07/09
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23/09
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09/10
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25/10
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10/11
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26/11
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12/12
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28/12
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13/01
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29/01
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14/02
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08/07
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24/07
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09/08
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25/08
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90
95
100
105
110
115
120
DJIM Index SPOIC50P Index