islamic banking : a journey to the basics
DESCRIPTION
Islamic Banking : A Journey to the Basics. MURAT ÇETİNKAYA Executive Vice President Kuwait Turkish Participation Bank. Istanbul 2011. Agenda. What does “ Islamic banking” stand for ? What relevance does Islamic banking have in the modern financial system? - PowerPoint PPT PresentationTRANSCRIPT
Islamic Banking :
A Journey to the Basics
Istanbul
2011
MURAT ÇETİNKAYAExecutive Vice President Kuwait Turkish Participation Bank
Agenda
1. What does “Islamic banking” stand for?
2. What relevance does Islamic banking have in the modern financial system?
3. What are the current trends and areas of growth?
4. Where does Turkish experience stand in Islamic banking?
5. Kuwait Finance House (KFH) and Kuwait Turkish Participation Bank
Increasing market presence
From niche to critical mass
− Growing at 15 to 20% per annum− Size estimated at USD 900 billion globally
− New markets welcoming Islamic banks and products
Market-driven proposition
− Retail demand has historically the backbone of the industry− Sensitivities to principles more visible on retail deposit − But corporates and even sovereigns showed appetite for the products− Market-driven product development proved to be successful− Self-regulating organisations accompanied global Islamic banking boom
Global scale− More than 250 Islamic banks worldwide operating in over 75 countries
− A wide range of interest varying from U.K. to Singapore− Widening customer base including sovereigns to top global corporates
to tap Islamic finance markets
.
Reach and richness
Niche presence
Mainstream relevance
Conceptual exploration
Engaging with regulators
Reach and richness
Islamic finance industry is developing a global reach…
Singapore: Active in developing Islamic finance
Germany: Kuwait Turk received licence for a branchSaxony issues E100m Sukuk (2004)
UK: Five active IslamicbanksSukuk on its way
Kuwait & UAE: Hub for Islamic banking
Malaysia: Islamic product and industry, development and sophistication leader
China: Active member of IslamicFinancial Services Board (2004)
Bahrain: Leading Islamic financial centre, and housing regulatory bodies
Saudi Arabia: 95%+ of new consumer lending is Islamic (2006)• Retail market rapidly
converting to Islamic (2006)
…with worldwide momentum
Each region is contributing in a unique way
Japan: JBIC exploring Islamic financing opportunities (Dec. 2006)
Turkey: 25 years of Islamic banking experience
Russia: Increasing interest VTB – KFH/LMH partnership
France : Recent declaration of Islamic Banking interest
Industry has developed a comprehensive product offering over its young history
1950s
60s
70s
80s
90s
2000s
− First institutions emerged to test the market
− Development of theoretical framework− First attempts to structure Islamic banking
products
− Islamic Development Bank (1974) and DIB− One country-one bank setup
− Advancement of Islamic products− Turkish market to welcome Islamic banking− Full “Islamization” of banking in some
countries (Pakistan, Sudan etc.)
− Entry of global institutions & Islamic windows− İncreasing global coverage of Islamic banking
− Islamic banks achieving strong and stable growth globally,
− New products in international markets− Sukuk market to boom
1970s
insurance
1980s syndications
structuredand trade financeequity
private equity
projectfinance
structured products
1970s
1980s
Evolving richness in productsDevelopment of industry
Industry has near like-for-like parity with conventional offering
commercialbanking
1990s
2000s
Global Deployment of Islamic Products
Mainstream relevance
Engaging with regulators
Bre
akd
ow
n o
f Is
lam
ic
Ban
kin
g P
rin
cip
les
Com
plian
t A
ssets
W
orl
dw
ide (
20
08
)
Source: KFHR Global Islamic Finance Directory 2008
Islamic banking86.9%
Sukuk7.0%
Islamic equity funds2.5%
Islamic mutual funds3.5%
Takaful0.1%
Bre
akd
ow
n o
f Is
lam
ic B
an
kin
g
Pri
ncip
les
Com
plian
t A
ssets
W
orl
dw
ide (
20
03
)
Niche presence Conceptual exploration
The industry has not yet reached its potential
Still new markets exist that did not yet meet with Islamic banking and finance
The global Islamic insurance (Takaful) market is estimated to reach USD 20 billion
Most Islamic financial institutions are highly liquid, and seek new asset classes and markets to diversify
– New treasury products and investment securities are to emerge
– Capital markets developments: New sukuk issuances expected to tap the market
Islamic finance has also gained popularity in Muslim-minority countries
– Germany issued the first Islamic Eurobond (2004)
– Five Islamic banks in UK
Trends of convergence and conversion– Islamic banks introducing new products and services to compete with the conventional
banks,
– Conventional banks aiming to tap Islamic banking markets and expand their product base
Strong growth of GCC economies
Retail customer commitment
Development ofIslamic capital markets
Liberalisation of capital markets
Innovative product development
Market developments urging countries and customers
to diversification
EXPLOSIVE GROWTH OF ISLAMIC FINANCE
Industry is driven by fundamental factors
Why Islamic financing is flourishing
Islamic framework provides solutions for key limitations of conventional banking system
IFI solutionsConventional banking issues
• Growing consumer indebtedness− Growing and unhedged risks pose systemic
problems
• Speculation leading to crises− 1997 East Asia Crisis− 1998 Russia− 1999 Argentina
• Channeling the funds to “real” investment needs
• Prevention of speculation− Ownership is prerequisite of sale− Excessive risks are prohibited
• Equitable distribution of risk and reward
• Asset/need-based approach to financing
An alternative banking model in development
Liabilities Assets
Investments
Deposits
Equity financing
mudaraba & musharaka
Debt financing
ijarah, murabaha, salam, istisna‘
Profit, not interest, becomes the basis for financial intermediation
Su
pp
liers
of
cap
ital
Productive economic
actors with capital needs
• Reducing debt-based products− Islam permits commercial debt for productive ends− Debt-based consumer products permitted on basis of need
• Building income-sharing products− Musharaka is preferred form of financing
Key internal issues that need addressing…
Tested strength in the financial crisis
Islamic banking, a booming $US1 trillion global industry that prohibits speculation and high levels of debt, has been relatively unscathed by the credit crunch.
Islamic banking model’s basic principles of
– financing “real” trade and economic activities,
– no financing of speculation
– No engagement in debt trading
– Asset backed and project-financing approach to help hedging risks
As a result, the lessons from the crisis;
– Islamic banking is inherently stable
– Islamic banks outperformed the conventional financial institutions
Banking and finance needs
Right positioning and definition of Islamic banking - 1
Principles filter
Islamic banking and finance solutions
• Prohibition on:
– Interest
– Speculation
– Religious basic sources
– Ijma’ (jurist consensus)
– Qiyas (analogy)
– Ijtihad (reasoning)
– Musharaka (Partnership)
– Mudaraba (Fund management)
– Murabaha (Purchase-resale)
– Ijara ( Lease)
– Istisna’ ( Manufacturing contract)
– Salam -(Forward sale)
• Asset-backed transactions with investments in real, durable assets
Standart contractsPrinciples sources
• Prohibition of certain investments:− Sectors (e.g.: alcohol, armaments
etc.)− Instruments (e.g. Leveraged
interest products, toxic assets type of derivatives etc.)
• Credit and debt products are not encouraged
Banking and finance needs
Right positioning and definition of Islamic banking - 2
Principles filter
Islamic banking and finance solutions
– Religious basic sources
– Ijma’ (jurist consensus)
– Qiyas (analogy)
– Ijtihad (reasoning)
– Musharaka (Partnership)
– Mudaraba (Fund management)
– Murabaha (Purchase-resale)
– Ijara ( Lease)
– Istisna’ ( Manufacturing contract)
– Salam -(Forward sale)
Standart contractsPrinciples sources
• With the development and boom of Islamic banking, it became clear that :
− Islamic banking has roots in religion and ethics but it is not a “religion activity” and “not confined to Muslim population”
− Islamic banking is not something “from and for GCC or Muslim world”, it is a global concept− Islamic banking has some limitations and border lines, but it is acknowledged that it can
provide solutions in a wide scope of areas ranging from retail banking to investment banking.
Islamic finance is embedded within values
Synthesis of Islamic law and contemporary finance
Islamic finance is more than financial contracts
Client affinity
Fulfils aspirations
Integrates a wider range of customer base with certain sensitivities
Alternative paradigm
– Stability from linking financial services to the productive, real economy
– Moral compass for capitalism
Responsible finance
Builds systematic checks on financial providers
Inclusive proposition
– Open to all-faith clients
– Available to Islamic and conventional issuers
Parallel trends
Ethical investment
prohibited sectors
NGOsnot-for-profits
SOCIALIMPERATIVE
ZONE OFSUSTAINABILITY
Islamicbusinesses
ECONOMICIMPERATIVE
• Market-driven yet values-based
• Gradualist and evolutionary nature
• Symbiotic and synergistic relationship with mainstream finance
Islamic Financial Institutions are positioned in a “zone of sustainability”
Islamic finance characteristics:
GCIBFI (2001)Bahrain
Promoting industry in theory and practice− Disseminating Shariah concepts & multilateral understanding between IFIs and public− Improving IFI practices, cooperation, professionalism and transparency
IIFM (2001)Bahrain
Development of global Islamic capital and money market− Promoting active and regulated trading and capital flows− Catalyzing trading infrastructure, product innovation and information flows
Self-regulatory organizations bring credibility through standardization of practices
AAO-IFI (1991)Bahrain
Benchmark of Islamic accounting standards− 56 accounting, auditing, governance and Shariah standards− Enhancing clarity, transparency and harmonisation
IIRA (2005)Bahrain
Reference point for IFI ratings− Issuing sovereign, credit, Shariah quality and corporate governance ratings− Providing effective tool for informed investment decision-making
IFSB (2002)
Malaysia
Standard-setting body of regulatory and supervisory agencies− Complementing Basel II Capital Accord − Key standards: risk management, capital adequacy & corporate governance
LMC (2002)Bahrain
Creation of active Islamic inter-bank market− Creating secondary market for short-term Shariah-compliant treasury products− Enabling IFI management of liquidity mismatch
Industry is reaching mainstream relevance in global financial system
Relevance to new-comersRelevance in countries with already developed Islamic banking
• Reaching a broader market • Alternative source of funding
− Debt issuance with the widest acceptance− Attract “new-to-industry” investors
• Gateway to OIC markets− Regional preference of Islamic investors− Infrastructure investment opportunities
• Widens the bankable population and customer base
− Increases bankable population of economy− Increases product base in the system− Attracts more deposits/funds from the
customers
• Enhances stability of financial model− Asset-based framework links financial services
to real economy
Need for co-ordination to enable further development
A number of factors need to be engaged to bring success
Key enablers
• Dedicated people− Greatest intangible to enable Islamic finance and build its future− Human capital development: bankers and scholars
• Committed sponsorship− Academic input to formulate visionary framework and development− Capital sponsorship to bring plans to life
• Proactive engagement− Regulators, practitioners and scholars to set a common agenda
We must preserve what is distinctive about Islamic finance
– Industry regulations and governance heading towards mainstream globalization
– Balancing different elements of Shariah credibility
The way ahead …..
Current expanding reach and richness of Islamic finance
– Despite the absence of an enabling framework
– But at a cost: culture of exceptions, Shariah credibility, competitive disadvantages
To build an enabling framework requires concerted efforts
– Collaboration between IFIs, endowed industry institutions and regulators
– Exploration of narrow banking principles
Overview of Kuwait Finance House
Key
Facts
• Kuwait Finance House K.S.C. (KFH) was established in the State of Kuwait in 1977, as the first bank operating in accordance with the Islamic Banking principles.
• KFH is listed with the Kuwait Stock Exchange (KSE), with a market capitalization of US$ 9.55 Billion as of 22 June 2009. Assets total US$ 37 Billion and deposits amount to US$ 24 Billion as at Q1 2009.
• In the global Islamic arena, KFH is in the forefront of the industry in terms of international presence, spectrum of activities, strategic alliances, networking and innovation.
• KFH has been awarded by the Banker Magazine as the World’s Best Islamic Financial Institution, and for third successive year it has been awarded by Euromoney magazine as the best Islamic Bank in the Middle East.
• KFH is engaged in providing Islamic banking services, and its spectrum includes consumer banking, corporate finance, Islamic capital markets, real estate finance, structured finance, investment portfolios, and other products and services.
Overview of Kuwait Finance House
Key
Facts
• One of the largest Islamic banks in the world• Listed on the Kuwait Stock Exchange:
• Government of Kuwait - 43.0%• General Public - 57.0%
• Specializing in Corporate, Investment, Private, Commercial and Retail banking • Direct investment portfolio of approximately US$ 800 million• Through the direct investment portfolio, KFH has interest in aviation, shipping,
takaful insurance, information technology, real estate construction and development, logistics, oil and gas and healthcare
• Co- Lead arranged first Euro denominated Sukuk for the German State of Saxony Anhalt.
• Lead managed first local Kuwaiti sukuk issue for The Commercial Real Estate Company
Overview of Kuwait Finance House
Ratings (JAN ‘09)Key Facts
• Headquartered in Kuwait with 175 branches locally and worldwide
• Market Capitalization of US$ 9.55 Bn (June ‘09)
• Asset Size of US$ 37 Bn (31 March ‘09)
• Deposits of US$ 24 Bn (31 March ‘09)
• Total shareholders’ equity of US$ 4.10 Bn (31 March ’09)
Agency Short Term Rating
Long Term Rating
Capital Intelligence
A-1 A+
Fitch F-1 A+
Moody’s P-1 Aa3
S&P A-2 A-
Overview of Kuwait Finance House
Competitive Strengths
• Ability to structure and close transactions rapidly due to bank’s seasoned expertise, network, strategic partnerships, financial strength and sound liquidity position.
• A deeply entrenched brand franchise with subsidiaries in Bahrain, Turkey, Malaysia, Singapore, Australia, Jordan and Saudi Arabia and affiliates in UAE and Oman
• Strong underwriting ability: unrivalled access to Islamic deposits in the domestic & regional market.
• Formation of Liquidity House as an investment house fully dedicated to Sukuk issuances.
• Strong links with regional and international financial institutions• presence in the domestic and regional real estate market and proven
transactional expertise in the international arena.
• Recognized and respectable Advisory Board and structuring expertise; KFH Advisory Board clearances and approvals on structures are in most, if not all, cases taken for granted by other fellow participants in deals and transactions.
Overview of Kuwait Finance House
One-Stop Islamic Financial Solution Provider
Overview of Kuwait Finance House
Collectively KFH has the expertise and value-added services, capable of delivering the objectives of the client
STRENGTH & EXPERTISE DISTRIBUTION CAPABILITIES WEALTH OF EXPERIENCE
• Specialist in ICM
• Strength in the Middle East
• Strong and experienced leadership team
• Expertise in Islamic banking principles compliant products
• Strong distribution team
• Extensive distribution network including GCC, Europe and Asia
• Middle East distribution advantage
• Strong relationships with other Islamic and International banks and
investment houses for placements
• 30 years of experience including global sukuk issuance
and placements
• Client-centric approach for every deal/issuance
• Ability to innovate and structure Islamic financing solutions for
clients
Our ClientOur Client
KFH RESEARCH LIMITED
KFH Research Ltd is the world's first Islamic investment research arm to be established by an Islamic Bank. A direct subsidiary of Kuwait Finance House, KFH Research was established in 2007,
comprising industry professionals and 'star' research analysts with broad experience in Islamic finance & global markets. Below is a sample of their reports:
KFH GROUP: A SAMPLE
Next Steps
SOVERIEGN SUKUK ISSUANCES ARRANGED BY KFH
Saxony Anhalt
EUR100 Mn Sukuk
Co-Lead Arranger 2004
Dubai Civil Aviation UAE
US$ 1 Bn Sukuk
Joint Lead Manager2004
Government of Qatar
US$700 MnSukuk
Co-Lead Manager2003
Bahrain Monetary Agency
US$ 250 MnSukuk
Lead manager 2003
KHAZANAH NASIONAL
US$ 750 MnSukuk
Co-Lead Manager2006
Overview of Kuwait Finance House
Ratings (JAN ‘09)Key Facts
• Headquartered in Kuwait with 175 branches locally and worldwide
• Market Capitalization of US$ 9.55 Bn (June ‘09)
• Asset Size of US$ 37 Bn (31 March ‘09)
• Deposits of US$ 24 Bn (31 March ‘09)
• Total shareholders’ equity of US$ 4.10 Bn (31 March ’09)
Agency Short Term Rating
Long Term Rating
Capital Intelligence
A-1 A+
Fitch F-1 A+
Moody’s P-1 Aa3
S&P A-2 A-
Overview of KT
Shareholder structure
62.23%18.72%
9.00%9%
1.05%
Kuwait Finance House (62.2%)
General Directorate of Foundations, Turkey (18.7%)
Social Security Institution Kuwait (9.0%)
Islamic Development Bank (9.0%)
Others (1.1%)
• Kuveyt Turk began operations in 1989 .
• Market share of Kuveyt Turk among participation banking sector is currently 22.5%
• Asset size of Kuveyt Türk is TRL 5.72bn as of 31/12/2008
• Shareholder Equity:TRL689m
Fitch Ratings
Foreign Currency
Long Term BB
Short Term B
Outlook Stable
Local Currency
Long Term BBB-
Short Term F3
Outlook Stable
National
Long Term AAA(tur)
Outlook Stable
Individual D
Support 3
Sovereign Risk
Foreign Long Term BB-
Local Long Term BB
Outlook Stable
Supportive anchor shareholder
Funding
Know-how
International banking
Corporate governance
• Supportive shareholder through difficult times
• Access to and superior understanding of the Middle East market (instruments and customers)
• Access to Middle East institutions and liquidity
• Rating agencies look favourably on support
• Better asset-liability mismatch management
• Coordination between KFH group treasuries enables better hedging of FX exposure at lower costs
• Product innovation
• Investment in product development
• Provision of commercial guidance
• Beneficiary of strengthening ties between Turkey and the rest of the world, especially with Middle East
• Foreign trade services
• Turkey as a destination of oil-driven capital
• Professional reporting systems at international standards
• Global expertise at board level
• Best-in-class management techniques
KFH network
Total assets : US$38.3bnShareholder equity: US$5.8bnGross Profit: US$1.39bnNet Profit to Shareholders US$ 633mBranches: 46
Supportive anchor shareholder (2008)Kuwait Finance House (“KFH”)
KFH Subsidiaries
• 16 subsidiaries
Kuwait
• 1 subsidiary: Kuveyt Turk• Total assets: US$3.8bn
Turkey
• 1 subsidiary: Kuwait Finance House (Bahrain) B.S.C.
• Total assets: US$3.4bn
Bahrain• 1 subsidiary:
Kuwait Finance House (Malaysia) Berhad
• Total assets: US$2.7bn
Malaysia
Pop.: 74mGDP1 (US$): 659bn
Turkey
Pop.: 3mGDP1 (US$): 111bn
Kuwait
Pop.: 27mGDP1 (US$): 186bn
Malaysia
Pop.: 1mGDP1 (US$): 17bn
Bahrain
Strategic benefit
Source: EIU, Central Bank of Kuwait(1) Nominal GDP
Source: KFH Annual report
Financial overview - profit and loss (IFRS1)
Operating income (TRLm) Net income (TRLm)
18.1
40.0
67.0
91.2
0
10
20
30
40
50
60
70
80
90
2005 2006 2007 2008
(1) Income includes foreign exchange gains / loss
CAGR: 47.8%
CAGR: 71.4%
Cash loans by segment – 2008 (%)
Kuveyt Turk overview
International & Investment Banking
• Project finance
• Corporate finance
• Capital markets
• Syndicated Murabaha
• First international Murabaha syndication of US$200m raised for Kuveyt Turk in 2006
• Operating in 96 countries with more than 1,000 correspondent banks
Retail
• Deposits (current / participation acc’s)
• Loans
• Card business
• Moneygram
• 800,000 retail customers
• 59,000 retail SME customers
Total: TRL 4.0 bn
Corporate
• Murabaha / Istisna’as
• Financial leasing
• Letters of Guarantee
• Foreign trade finance (Letters of Credit)
• Foreign trade services
• 39,000 corporate customers
• 13,000 active credit customers
Products
Highlights
Breakdown of total cash
loans
120 branches: 119 in branches in Turkey, 1 in Bahrain and 1 Financial Services Branch in GermanyDistribution
Financial overview – balance sheet (IFRS1)
RoAA and RoAE Capital adequacy ratios (TRYm) - CAR
Total assets (TLm) Total liabilities (TLm)
2,361
2,951
3,860
5,718
71%76%
75%69%%29
24%
25%
31%
0
1,000
2,000
3,000
4,000
5,000
6,000
2005 2006 2007 2008
Net loans Other assets
2,951
3,860
5,718
82% 81%80%
77%13%10%
9%
9%
9%
11%
5%
14%
2,363
0
1,000
2,000
3,000
4,000
5,000
6,000
2005 2006 2007 2008
Deposits Equity Other liabilities
(1) Audited IFRS accounts for 2004-2006-2007 and draft accounts for 2008
CAGR: 34.3%
Leading platform and innovator
Retail
• First mover advantage in the retail sector1
• Innovative product development
• First participation bank to segment its client base
• High customer service levels
• Focus on building long-term client relationships
• Strong brand name and sticky retail base
• 40% participation bank consumer loan market share
• Retail loans2 account for 25% of portfolio compared to participation banks average of 17%
• Offers one of the widest range of products amongst participation banks
Corporate
• Increased focus on small to mid sized corporates
• Development of portfolio management system
• Increased focus on letters of guarantee
• Higher margin business and reduced risk profile
• Increased quantity and quality of clients and improved profit per client
• Enhanced quality control delivering better returns
• Larger proportion of non-cash loans
International & Investment
Banking
• First and most advanced investment banking propositions
• Most dynamic participation bank funding structure
• Development of international network (branches & correspondent banks)
• Funding origination through Bahrain branch
• Executed the first and largest ever international Murabaha syndication among participation banks in Turkey (US$200m)
• International network to increase access to Gulf investors and funding opportunities for clients
• Facilitates increasing share of overseas trade flows
Key Achievements Results
(1) Amongst participation banks(2) Excluding retail SMEs
Performance drive and future upside
Category Actions taken Future upsidePerformance
2007 2008
• Target 25 new branches p.a.
• Target non-cash vs cash of 2:1 by
end 2010
• Diversify funding further
• Business partnerships
• Enhanced cross-sell
• Disposal of non-core assets
• Benefits from training
• Gulf market expansion
• Correspondent banking network
• Branch roll-out (Turkey)
• Bahrain branch
• Non-cash lending (↑)
• Retail loans (↑)
• Employee incentives
Growth
• Retail / SME loans (↑)
• Non-cash loans (↑)
• Centralised commission
• Risk management focus
Asset / income quality
Fee income3 %
NPL ratio4
79% 88%
4.2% 4.8%
Total cash loans1
(1yr)
Non-cash loans/Cash Loans1
29% 37%
61% %80
Loans / deposits2 108% 106%
Long-term target RoAE of 25%
Performance - RoAE 19.9% 16.7%• Focus on competitive
advantages
(1) Gross loans – Annual increase rates(2) Interbank Loans and Deposits not included.
(3) Fee & commission income (% of Financing income )(4) Total impaired receivables / total gross loans
Capitalise on advanced retail / SME franchise
Grow local customer base through branch roll-out
Leverage existing customer base through enhanced product range / offering
Enhance non-cash business
Improve operational efficiency through cost
control initiatives
Capture trade flows from overseas locations
Strategy
Become Turkey’s leading participation bank and one of Turkey’s top 10 banks
Strategy in International Banking
Key highlights
Key strategic goal
Means of achieving strategic goals
• Raised US$200m through a syndicated commodity Murabaha transaction for Kuveyt Turk in 2006
• Arranged US$240m of international syndications since 2006
• Correspondent banking relationship with around 1,000 financial institutions in 96 countries
• Increase market share in international syndicated facilities
• Leverage off KFH relationship and Bahrain branch to drive growth through increased access to Gulf investors
• Expand German representative office into full branch operation
• Focus on increasing quality and size of international syndications
• Expand treasury function
• Increase international services to retail and corporate customers
Products
• Dubai branch expected to be operational
• Germany representative office awarded Financial Services branch license in 2009• Expected to add value on fund mobilisation from
Turkish and Muslim population.
• Further expand correspondent bank network in line with demand for trade finance activities
International expansion
International expansion and access to Gulf investors key to growing ahead of the market
Thank you
Murat ÇetinkayaEVP, Kuwait Turkish Participation Bank
Let’s move together further ahead to explore new peaks and horizons of Islamic banking