Islamic Financial Services Industry: Its evolution journeyIndustry: Its evolution, journey,

growth, trends and future direction- a discussion of constitutional

issues -issues Bank Muscat /IIFM Workshop

Islamic Liquidity Management & Capital Markets May 5 – 6, 2012B Abd lk d ThBy Abdulkader Thomas

Today’s AgendaToday s Agenda

• Where is Islamic Finance Today?Where is Islamic Finance Today?

• Where have we been?

Wh h k d ?• What are the key trends?

• Where are we going?

The Geographic SpreadThe Geographic Spread

Emerging in North America London is a Key Service and Capital Market Center

South Asia isKey Target Market

Primary Capital

Kuala Lumpur is the

Primary Capital Source is GCC

pLargest Capital Market Center

Africa is an Emerging MarketEmerging Market

Customersputtingthemselvesfirst• Transformation from the old market

situation: Bankers and the Affluent directing the business

• D d i i i l b tt• Demand is increasingly bottom – up:– Demand for consumer products

– Insistence on custom tailored business products

• The questions are not always deep, but q y p,the growing preference is to be free from riba - riba.ربا .رب

Customersnotfullyconvinced• Mind your language:

– The press reports “Islamic loans”, “Islamic lenders”,…

– The teller offers you more “interest” on your mudaraba

– The murabaha desk officer tells you your interest rate and calls your car purchase a “loan”

• Should you really fund a duty free business?

• Why did so many people get upset about the perpetually delayed Goldman Sachs sukuk?p p y y

Aninterestingalternative• The nature of Islamic finance is different:

– In lieu of a cost of funds:• Cost of Goods

• Cost of Capital/profit sharing

If dh d h i i l d l l i f i kIf adhered to, there is practical and legal meaning for risk

• The character if derivatives is different and limited:limited:– Reduces the scope of some risk taking

Changes the industry risk profile– Changes the industry risk profileDoes not reduce the risks of specific businesses or banks!

• No insulation from irrational exuberance!• No insulation from irrational exuberance!

Notyetservingthemassneedy• Islamic Microfinance only beginning to take

form

• SME finance is well behind microfinance in its developmentp

For both to become meaningful, we require a change in the direction of investment fromchange in the direction of investment from “prestigious” landmark western deals to invisible southern dealsinvisible southern deals

Whose blessings are we invoking Basel or ….

Wherehavewebeen?• Strongly associated with theh drocarbon price c clehydrocarbon price cycle

• Biased towards traders and theaffluent

• Somewhat short on creativity• Somewhat short on creativity• Struggling between the choice ofcutting a new path and copying theestablished financial sector

Impact of the Hydrocarbon Cycle• Struggling with definition before 1973• Foundation of the big five post 1973ou d o o e b g ve pos 973

– IDB, DIB, KFH, Albaraka and DMI

• Expansion post 1979• Expansion post 1979• Slow growth 1986 through 2000• Booming since 2003Link will break when growth of theLink will break when growth of the

sector takes off in meaningful wayoutside of the hydrocarbon producersoutside of the hydrocarbon producers

Traders & Affluent DemandsTraders & Affluent Demands

• Traders:Traders:– Short term financing

High demand for funds in a short cycle– High demand for funds in a short cycle

– Attractive margins in a short cycle

Th Affl• The Affluent:– Safety abroad

– Familiarity – “show me what I know”

– Money at home must be mobile

Somewhatshortoncreativity• Creativity entails risk taking

Hi i l h h “ d id– Historical thought process: “we need to avoid losing”

C i i i R&D i hi• Creativity requires R&D within a proper framework:– Central bank and securities regulators buy-in to

the industry

S h l i i h i i– Scholars receiving the correct training

– Business people being aware of the rules

Innovators or Copycats?Innovators or Copycats?

• Issues which come to mind in ourIssueswhichcometomindinourstrugglingbetweenthechoiceofcuttinga new path and copying the establishedanewpathandcopyingtheestablishedfinancialsector:– Credit cards– Credit cards

– Organized tawarruqInterbank wakala without disclosure without– Interbank wakala without disclosure, without risk

– Promises which can be broken for a price– Promises which can be broken for a price

Key TrendsKeyTrends

• SukukSukuk• New markets (mostly), and

M d• More products

What is happening with sukuk?

$85,575 $80 000

$90,000 Gross Sukuk Issuance (US$m)

$53 077$60,000

$70,000

$80,000

$27 179

$46,794 $53,077

$40,000

$50,000

$5,817 $10,798

$27,179

$20,540

$32,160

$10 000

$20,000

$30,000

$30 $336 $813 $986 $7,217 $-

$10,000

1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

This Chart cannot accommodate 2012!Source: Zawya

1

Slide 14

1 Insert Sukuk tableAbdulkader Thomas, 5/1/2012

Who is new? And, who might leave?ال •ال Ahlan wa sahlan اھال وسھال

– Libya

– Morocco

– Turkey

– Nigeria

– Russia

– France

• Gone – South SudanGone South Sudan

• One foot out the door - USA

Broadening product baseBroadeningproductbase

• More banks more stylesMore banks, more styles

• More organic demand, more innovation

Mi i f h fi i l i• Migration of the financial engineers

Expanding service mandateExpandingservicemandate

• Sophisticated capital marketsSophisticated capital markets

• Broader management of risk

S h i• Some happier customers

• Less resistance from “conventional” customers– Why: Because the sector is better?

– Or: Is the conventional sector temporarily impaired?

Increasedregulatorycooperationd di landdialogue

• GCC regulators appear to talk more togetherGCC regulators appear to talk more together

• Global regulators slowly paying attention

IFSB• IFSB

• Indirect collaboration by the imposition of AAOIFI

• Need to address legal issues in commercial glaws, banking laws, and

• Probably need to push back against BaselProbably need to push back against Basel

Migration of global bankingMigrationofglobalbankingmethodologytotheIslamicsphere

Th l f j b i N h A iThe loss of jobs in North America and Europe has led senior

bankers regulators and their pupilsbankers, regulators, and their pupils to come to work in the GCC, East

Asia and other markets. They bringAsia and other markets. They bring what they know, and they may be the very same people who gave us y p p g2008. Be wary of what you ask for:

!ال تبغي قرد اخر، انجك اقرد ي

ThequestionofwhitherIslamicfinance?finance?

• Will this be a demand driven market with well informed consumers?

• Will this be a copy cat industry?py y• Will this business expand its mandates to

serve the needy as well as the affluent?yCan we innovate to our needs?The problem of one size fits all globalThe problem of one size fits all global

regulation: Basel is bad for you and meBasel is bad for you and me.

A word on standardsAAOIFI ti l l ti lAAOIFI, national law, national Sharia’a, and various objectives

Beware of red herringsBeware of red herrings,…

We live in a world with multiple legal systems, highly negotiated

contracts, consider the US:

English law, two variants of civil law, and several forms of hybrid

E li h/ i il l d hi kEnglish/civil law – and many think that it sets a high standard of judicial

clarity and ease to do banking!y g

Conclusions• How do these issues touch on our topics:

– More demand– More tools to work with– More problems with structure

d– More serious headaches relating to the choice of what to import and howBigger questions about how we frame our– Bigger questions about how we frame our market, who do we truly serve

– And, these point to the character and guidance , p gof our ALM policies and their meaning for our banks’ risks