Download - 16th WBD Executive Session IBF
Islamic Finance as an Alternative Banking Business Model Executive Session – 16th World Business Dialogue
Kevin Gilhawley
130314_WBD_IBF_v01.pptx 16th World Business Dialogue
Why should you care about Islamic Finance?
1
1 2 3 Market Size and Growth Rate
Business Opportunities Need for Change in the Financial System
16th World Business Dialogue 130314_WBD_IBF_v01.pptx
Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
2
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Islamic Finance has received positive comments from influential individuals in the last decade
„The rapidly growing Islamic Finance sector contributes
significantly to a broadening of our funding-structure“
Dr. Josef Ackermann, Former CEO Deutsche Bank
„We need to make Britain the global centre for Islamic
finance to participate in the industry’s promising future“
Gordon Brown, Former Prime Minister of the United
Kingdom
“The ethical principles on which Islamic finance is based
may bring banks closer to their clients and to the true
spirit which should mark every financial service”
Benedict XVI
1 Market Overview
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More than one quarter of the world population are Muslims
Share of Muslims in % of Population
<5 5-14 15-49 50-89 90-100
1 Market Overview
Source: Booz & Company Analysis
Global Estimated Muslim Populations – Selective Markets (2010)
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Malaysia
Bank Islam Malaysia Berhad
Bank Muamalat
Asian Finance Bank (January 2007)
KFH Malaysia (February 2006)
Al Rajhi Bank Malaysia (October 2006)
The penetration of Islamic banking is growing on the back of a number of new institutions in traditional markets
Saudi Arabia
Al Rajhi Bank
Bank Al Jazira
Bank Al Bilad (2006)
Bank Al Inma (October 2008)
Bahrain
Bahrain Islamic Bank
Shamil Bank
Khaleeji Commercial Bank
Al Baraka Islamic Bank
Al Salam Bank (April 2006)
Al Masref Bank (March 2006)
Note (*) Conversions of conventional banks to Islamic banks
Source: Central Banks, The Banker, Islamic Business and Finance Network, Islamic Development Bank
UAE
Dubai Islamic Bank
Abu Dhabi Islamic Bank
National Bank of Sharjah
Emirates Islamic Bank
Sharjah Islamic Bank*
Dubai Bank*
Noor Islamic Bank (January 2008)
Al Hilal Bank (June 2008)
Ajman Bank (June 2008)
Syria
Syria International Islamic Bank (September 2007)
Cham Bank (October 2006)
Albaraka Bank Syria (January 2008)
Kuwait
Kuwait Finance House
Kuwait International Bank*
Boubyan Bank (January 2006)
Warba Bank (March 2010)
Qatar
Qatar Islamic Bank
Qatar International Islamic Bank
Masraf Al Rayan (October 2006)
Barwa Bank (June 2007)
Indonesia
Bank Syariah Mandiri
PT Bank Muamalat Indonesia
UUS BNI Syariah
PT Bank Syariah Mega Indonesia
PT BRI Syariah (2008)
PT Bukopin Syariah (2008)
1 Market Overview
Selected Islamic Banks (excluding Banks with Islamic windows)
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We‘ve experienced some Islamic banking activity in Europe, but everybody is still waiting for the major breakthrough
Germany
First institutional transactions
Limited retail offering
United Kingdom
5 Islamic Banks – only one with focus on retail banking (Islamic Bank of Britain)
High Street Banks setting up Islamic Windows
Austria
Islamic Banking-Concepts in development
Switzerland
Numerous Islamic Wealth Management-Offerings On- and Offshore
Luxembourg
Popular location for Islamic investment funds due to regulatory adjustments
France
Expected market entry of several Islamic Banks Turkey
Currently four purely Islamic Banks (Participation Banks), mostly founded by Arab banks
Islamic Banking in Europe
1 Market Overview
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Especially Swiss Banks recognized the potential of Islamic Finance and strengthend their position in the GCC-countries
GCC (Saudi-Arabia, United Arab Emirates Kuwait, Qatar, Bahrain, Oman)
Indonesia, Malaysia, Singapur
Lebanon
1 Market Overview
Source: Booz & Company Analysis
Swiss banks in Muslim countries (Onshore)
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1.00
0.87
0.75
0.55
0.400.370.330.310.280.260.230.160.14
2010E 2008E 2006 2004 2002 2000 1998
105.3101.198.690.8
77.565.563.2
56.047.4
41.541.840.840.1
2010E 2008E 2006 2004 2002 2000 1998
* Estimated based on publicly available data and forecast; years for which no data was available have been extrapolated based on the average growth rate for the period Source: Council for Islamic Banks, Press Releases, Standard & Poor’s, Economist Intelligence Unit; Booz & Company analysis
Worldwide banking assets USD trillion
Worldwide Islamic banking assets* USD trillion
Islamic Banks’ Market Share 2008 vs. 2003
4.0%
9.0%
14.0%
16.0%
34.5%
38.0%
0.7%
4.0%
9.0%
9.0%
21.0%
16.0%
Indonesia
Bahrain
Malaysia
UAE
KSA
Kuwait
2003
2009
CAGR 9.5%
CAGR 5.1%
CAGR 16.4%
CAGR 22.1%
Islamic Finance grows at a higher pace than conventional finance and continually gains more market share
1 Market Overview
16th World Business Dialogue 130314_WBD_IBF_v01.pptx
Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
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Introducing Islamic Banking and Finance
EXAMPLE
4 Case Studies
http://www.youtube.com/v/M7kiLLlwbuQ
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Islamic Finance describes financial services which are conducted according to Islamic Law
Prohibition of Usury Prohibition of Speculation Prohibition of Gambling Shari’ah Board
2 Islamic Finance Fundamentals
ي “The trade of the petty usurer is hated with most reason: it makes a profit from currency itself, instead of making it from the process which currency was meant to serve.”
Shari’ah-Restrictions for Financial Services
Aristotle
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In Islam activities can be classified as haram (prohibited) or halal (lawful)
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2 Islamic Finance Fundamentals
Haram Halal
Permissibility of Things in Islam
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Islamic principles embrace risk sharing and have a strong focus on productive activities
Overarching principles founded in Shari’ah objectives aiming at the protection of individuals’ personal and religious rights, upholding of high ethical standards and higher equality of wealth distribution
Transaction requirements
ي Underlying activities based in real economy
ي Actual trade or business activities (not pro-forma)
ي No speculative transactions
ي No interest-based deals
ي No business involving illegal or unethical activities not complying with Shari’ah
Risk sharing requirements
ي Earning of legitimate profits requires sharing of risks as well (e.g. in Mudaraba or Musharaka structures)
ي Not only form, but substance of contract have to be honoured at all times
Source: Islamic Finance and Global Financial Stability Report (April 2010), Booz & Company analysis
ي Shari’ah law do not allow the detachment of the financial sector from productive activities, thus Islamic assets can be expected to grow in line with real economy and usage of excessive leverage is avoided
ي Speculation is forbidden and excessive risk taking is discouraged by the risk sharing nature of many contracts
ي Upholding of Shari’ah principles reduces risk of financial unrest and promotes stability
2 Islamic Finance Fundamentals
Key Principles of Islamic Finance
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Fee Based Services Equity
Participatory profit and risk sharing contract structures play a key role for the generation of funds in Islamic banks
Assets Liabilities
Asset-backed Transactions
Current / Demand Deposits
Profit Sharing Transactions
Inventory
Unrestricted Investment Accounts
Restricted Investment Accounts
Profit Equalization Reserves
Similar to conventional loans, however, legal positions of both parties based on different contract forms
Murabaha (cost plus) Ijara (leasing) Istisna’ (manufacture) Salam (forward delivery)
Investor - Entrepreneur relationship between bank and client
Mudaraba (profit sharing, loss bearing)
Musharaka (profit and loss sharing) Building of reserves for
losses on profit and loss sharing accounts as prudential measure
Similar to fixed deposits, but returns to depositors are set as a fixed ratio of returns earned on the asset side, while losses are borne by the client alone
Mudarabah (profit sharing, loss bearing)
Mudarabah (profit sharing, loss bearing)
Wadiah (Safe custody) / Ward (loan)
Real estate Automobiles
Source: Islamic Finance and Global Financial Stability Report (April 2010), Booz & Company analysis
ILLUSTRATIVE
2 Islamic Finance Fundamentals
Financing Structure of Islamic Banks
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Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
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There are significant differences between Islamic Finance and conventional Finance
3 Comparison to Conventional Finance
ي No explicit values associated
ي Strong emphasis on debt financing
ي Sophisticated product offering
ي Making money from money is possible
ي Risk is shifted/transferred to the client
ي Normative banking system
ي Strong emphasis on equity financing
ي Basic banking service offering
ي Transactions must be tied to real assets
ي Risk is shared between bank and client
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Conventional Banking Islamic Banking
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The global financial crisis has its roots in a dangerous mixture of developments in the conventional banking system
Origins of Financial Crisis
Misaligned Incentive Structures
Uncontrolled Financial
Innovations
Erosion of Prudency
Source: Islamic Finance and Global Financial Stability Report (April 2010), Booz & Company analysis
ي Looser underwriting and risk management standards allowed in exchange for short-term gains
ي Uncritical and passive regulators interfering too late too little to prevent crisis
ي Short-term profits as sole rewarded goal
ي No consideration for other stakeholders’ objectives build into compensation schemes
ي No regard for system stability encouraged
ي Increasingly complex financial engineering techniques employed
ي Risks separated from actual underlyings
ي Encouraged excessive lending and risk taking
ي Development was not accompanied by similar advances in governance processes and risk management
3 Comparison to Conventional Finance
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Islamic banks have proven more resilient during the financial crisis than conventional banks..
24%36%
-136%
-43%
36%55%
9%
-9%
Change in market
capitalization
Change in net profits
Change in assets
Change in equity
Islamic
Conventional
18.2x16.6x
6.6x5.8x
2008 2006
Key Financial Indicators Performance of Top10 Conventional vs. Top10 Islamic Banks during Crisis
Leverage Ratio
Top10 Conventional vs. Top10 Islamic Banks
Explanations for Superior Performance
Shari’ah principles as outlined above require, among other things, prudency due to risk sharing, prohibit speculation and limit risks through close links to real economy
Particularly, conventional derivative instruments, a main facilitator for the emergence of the crisis, are banned entirely
Significantly lower leverage ratios reflect this lower risk appetite and more conservative business practices of Islamic banks
3 Comparison to Conventional Finance
Source: Booz & Company Analysis
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..Islamic equity markets have also survived the financial crisis better than conventional indexes
Shari’ah Restrictions
Capital investment and financing restrictions
ي General prohibition of interest (riba), gambling (maisir) and uncertainty (gharar)
ي Restrictions for capital investments in and financing of certain industries, e.g.:
ي Alcohol fabrication and distribution
ي Casinos and hotels (if alcohol is served)
ي Banks and insurance companies
ي Tobacco industry, etc.
Compliance with key financial ratios
ي Investments in businesses that have bonded capital or cash + interest bearing bonded capital of more than 33% of the market value of the equity are prohibited
ي Accounts payable are not allowed to cross 49% of the market value of the equity
ي Revenues from prohibited industries have to be less than 5%
Performance-Comparison Total Market vs. Shari‘ah-Compliant Index
Source: S&P, Dow Jones, Bloomberg, Booz & Company Analysis
Shari‘ah compliant investments significantly outperformed
conventional ones due to Shari‘ah restrictions
Beginning of Financial Crisis Performance
(indexed)
3 Comparison to Conventional Finance
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Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
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A typical example for an Islamic financial product is a car financing according to the so-called Murabahah concept
Islamic Bank
Purchaser
Transfer of Ownership Purchasing price
Purchasing price plus profit margin
1 2
Vendor
EXAMPLE
4 Case Studies
Source: Gassner/Wackerbeck, Islamic Finance 2007
Murabahah-Structure
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Islamic Mortgage Financing via co-ownership has been copied by conventional financial instituitions
EXAMPLE
4 Case Studies
http://www.youtube.com/v/SmROuXO4lD0
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Many companies in the GCC countries finance themselves increasingly Shari‘ah-compliant Islamic bonds
Transaction Details Rationale
ي 265 Mio. USD for financing two new Boeing 777-300 ER airplanes
ي Shari’ah-compliant Leasing over 12 years
Financing Objects
ي The Emirates-Management decided to use Islamic Finance as a strategic source of financing to help finance the company‘s growth plan
ي In total Emirates have already taken over 1.3bn USD in Shari‘ah-compliant loans
ي In 2005 Emirates took a 550 Mio. USD loan for the construction of their new headquarters
ي Financing via Islamic bond (Sukuk) based on a Musharakah-Structure
EXAMPLE
Nice to know: The German Federal Land Sachsen-Anhalt was 2005 the first western issuer of an Islamic bond (Sukuk)
4 Case Studies
Islamic Finance-Strategie Emirates Airlines
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Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
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The Islamic Finance Industry still has many obstacles to overcome
25
5 Islamic Finance as an Alternative System
ي Lack of Standardization
ي Lack of Human Capital
ي Lack of Money Market Instruments
ي Lack of Awareness and Trust
ي Lack of Economies of Scale
ي Lack of Shari‘ah Scholars
Growth Constraints in Islamic Finance
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The availability of Shari’ah scholars is one of the most significant bottlenecks in Islamic Finance
Informal Standardization of Shari’ah Standards
Rank Scholar Board
Memberships
1 Shaikh Nizam Mohammed Saleh Yaquby 77
2 Shaikh Dr. Abdul Satar Abdul Karim Abu Ghuddah 72
3 Dr. Mohammed Eid Elgari 64
4 Sheikh AbdullahSulaiman Al Manee’a 37
4 Dr. Abdulaziz Khalifa Al Qassar 37
Board Memberships of Top 5 Scholars GCC Network Analysis of Top 15 Scholars’ Board Memberships
ي Top 5 out of 176 scholars in the GCC are members in almost a third (30.1%) of entire universe of ~956 GCC Board positions
ي Top 6 scholars in Kuwait (out of 45) make 48.3% of all (226) Board positions - local Boards dominated by local scholars
Source: Funds@work, Booz & Company analysis
5 Islamic Finance as an Alternative System
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I believe a number of factors are likely to fuel the growth of Islamic banking going forward
5 Islamic Finance as an Alternative System
Financial Inclusion
Demand/ Wealth Islamic
Movements LOHA
Innovation Demografic
Change
Key Drivers for Growth in Islamic Finance
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A great example for innovative business models in Islamic Finance is the Kuwait Finance House (1/2)
5 Islamic Finance as an Alternative System
Car Sale in the Kuwait Finance House
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A great example for innovative business models in Islamic Finance is the Kuwait Finance House (2/2)
Positioning of Car Sale Islamic Banking and Takaful-Services
Advisory Offices Murabahah-Boxes and Sales Offices
Insurance Counter Cash Register
5 Islamic Finance as an Alternative System
16th World Business Dialogue 130314_WBD_IBF_v01.pptx
Market Overview
Islamic Finance Fundamentals
Comparison to Conventional Finance
Case Studies
Islamic Finance as an Alternative System
Discussion
30
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Do you think Religion and Finance should be strictly separated?
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+
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Which is the right approach: Trying to prevent financial crises with regulatory measures or by promoting ethical behavior?
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vs.
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What do you think about Dr. Tomáš Sedláček’s argument? Is Islamic Finance a possible solution?
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„Our problem is not lack of growth but too much of it “
Dr. Tomáš Sedláček, Chief Macroeconomic Strategist
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Could Islamic Banking be the next generation of Socially Responsible Investments?
34
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What role does sustainable economic growth in the MENA region play for the future of Islamic Finance?
35
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Islamic Banking – Backward Banking or Next Generation Business Strategy?
36
or
16th World Business Dialogue 130314_WBD_IBF_v01.pptx
Wrap-Up
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Kevin Gilhawley about.me/kevingilhawley Private: [email protected] Aiducation: [email protected] zig: [email protected]
About : Kevin Gilhawley is currently interning at the strategy consulting firm Booz & Co. He holds a Bachelor‘s degree in banking and finance from the University of Zurich. After having worked in the wealth management division of UBS for a few years, he held different part-time positions in the financial industry. Kevin is also active as a volunteer in sales development in the for-impact organization Aiducation. In addition, he co-founded the time-sharing platform ZIG in 2012. Kevin’s research focus is on responsibility in finance and Islamic Finance. He gained first practical experience in Islamic Banking while working with clients from the GCC countries at UBS. Going forward he is going to intern at Credit Suisse’s IBD and complete his Master‘s degree in Finance at the London School of Economics thereafter.
Contact Information