islamic financial products and services: personal … · islamic banking 28% (target 40% 2020) 7...
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ISLAMICFINANCIALPRODUCTSANDSERVICES:PERSONALREFLECTION
Zulkifli Hasan
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Contents
• Introduc+on• IslamicFinanceUpdates• IslamicFinancialProductsBetweenAspira+onandReality• Challenges• TheWayForward• ConcludingRemarks
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• GlobalIslamicbankingassetsreachUSD2trillion(17%averageannualgrowthandIslamicfinancewillbeabletoMpUSD6.5trillionbytheyear2020).
• Islamicbankinggrowth:1.9MmeshigherthanconvenMonal2009-2013.
• Shari’ahcompliantfundsuffereddifficulMesin4yearsduetolackofinnovaMon(USD584bnin2015/USD2.4bnin2014).(Sukukissuance$50billionin2016($63.5billionin2015).
• DespitethegrowthandtransformaMon,therearenumerouscriMcismsonthecurrentpracMceofIslamicfinance,whichhaveledtoseriesofquesMonsastothedisMncMvenessofIslamicfinancewithitsconvenMonalcounterpartsandthegrowingfrustraMonontheethicalissuesbeyondthelegalrealmofShari’ah-compliance. 3
Introduction
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Islamic Finance Updates
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“EverythingthatlapsesoutfromjusMceintoinjusMce,andfrommercyintoitsopposite,andfrommaslahahtomafsadah,andfromwisdomintothefrivolous,doesnotbelongtoShari’ah,evenifitisinductedintoitbyinterpretaMon”(Ibnal-Qayyim).
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2015
MarketShare Customers TotalAssets
4Marketswith30%MarketShare
Lessthan100millioncustomers(2.5bnnobank’saccount,1bnyouthacrossOIC)
2trillion(GlobalfinancialassetUSD300trillion)
2021
20marketswith40-50%MarketShare
250millioncustomers
9trillion
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Islamic Bank Share of Total Assets & Deposits
Country Assets% Deposits%
SaudiArabia 48.9 N/A
Kuwait 44.6 47.3
Bahrain 27.7 47.8
Qatar 23.6 35.7
UAE 21.4 32.8Pakistan 9.5 11.4Turkey 5.9 7.1
Indonesia 5.5 11.4
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Malaysia
Sectors Achievement
IslamicBanking
28%(Target40%2020)7outofthe8majorbankshaveyettoreach40%.
Thedeclineinannualgrowthratefromadouble-digitin2011(24.2%)to8.2%in2016
Takaful 14.6%(7.5bn)
Sukuk Marketshareof52.6%(USD183.8bn)oftotalGlobalissuances
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• ThetotalnumberofShari’ahscholarsreached952covering652IFIsinmorethan46countries.
• 75%withinthetop10countries(MalaysiaBangladeshIndonesiaKuwaitSaudiArabiaBahrainSudanUAEPakistanOman)
• 41%intheGCCregion.• 26%SouthEastAsia• 16%inSouthAsia• 11%inMENAna+ons• 2%Europe
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PresentNumberofScholars
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Shari’ahScholarsAroundtheWorld
Countries NumberMalaysia 203Bangladesh 173Indonesia 131Kuwait 70SaudiArabia 68Sudan 60Bahrain 60UAE 57Pakistan 43Oman 32Qatar 30
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HighConcentra5ononFewScholars
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• 10Shari’ahscholarsserveinapproximately497IFIsrepresen+ng76%thetotalIFIswithShari’ahboards.• 3scholarswiththehighestnumberofboardmembershipsserveabout40%ofIFIsglobally.• Thenumberofins+tu+onsincreasesandtheamountofworkincreases.• Thereisdeficiencyofabout1700Shari’ahboardmembers,wherebyitisexpectedthattherequirementforShari’ahscholarswillriseto3000innext5yearsif5%growthisassumedinthenumberofIFIs.• SuccessionPlan–Seriousac+onrequired• PerformanceAssessment(Collec+ve&Individually)
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IslamicFinancialProductsandServixes:BetweenAspiraMonandReality
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A study by Beloufi et al (2015) on 40 researchesbetween 1983-2013 found a significant divergencebetweenthetheoryandprac+ceofIslamicfinance.
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• “Iwouldliketotellyou,inallfrankness,thatifIweretostartalloveragain, I would not choose the bank as a framework for theapplica+on of Islamic teachings in the field of economy andinvestment.Iwouldlookforanotherframework,whichisfullyinlinewiththeShari’ahprinciplesregula+nginvestment.Thisisduetothefactthatwehavenotbeensa+sfiedwithtakingonlythenameofthebank but also its basic concept, namely, that it is a financialintermediary. So, we have not been able to find for our financialins+tu+onsaconceptandapadern,whichgoesbeyondtheissueoffinancial intermediary. This has led to the fact that the preferredinvestmentpaiernsof Islamicbankshavebecomeamixofa loanandaninvestment.Itisamix,whichhasmostofthecharacterisMcsofariba-basedloanandtheflawsoftheWesterncapitalistsystem.It fails tohighlightthefeaturesof Islamic investmentbasedonrisk-sharingandreal investment. Itdoesnotrecognizetheguaranteeofthecapitaloritsreturn.”
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SheikhSalehKamel
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• STAGE1:FocusonhowtomigrateMuslimfromprac+cingriba.Thefocuswastofindhalalsolu+onbyreplica+ngcertainfeaturesofconven+onalproductwithsomehiyaltoquicklymigratetheprac+cefromriba.
• STAGE2:FocusontobegenuinelybasedonShari’ahbyremovingexcessivehiyalintheirprac+ce.
• STAGE3:ConcernwiththeTAYYIBdimensionofhavinga“goodandresponsiblefinance”.Thepermissibilityofatransac+onwillnotonlydependonthepillarsofavalidcontractbutalsoonthevalues,ethics,outcomeorconsequencesofthetransac+ons.
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StagesofIslamicFinance
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IslamicFinanceisMorethanFinancialContract
Tenet-BoundFundamentalstenetsderivedfromShari’ah
Principles-BoundConceptisgroundedonethicsandvaluesProhibiMonofriba,ghararandmaysirGreatertransparency
Real-economyLinkedAsset-backedtransac+onswithinvestmentsinreal,durableassetsMoneyisnotacommodityProhibi+onofexcessiveleverage
Society-ServiceServingcommuni+es,notmarketsSafetynetmechanismsforthepoor
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KeyDifferences
Iran SudanandKSA SouthAsia GCCandEurope
SouthEastAsia
Mazhab Syiah SunniMaliki(Sudan)Hanbali(KSA)
SunniHanafi SunniHanbali SunniShafii
ShariahGovernance
Centralised Centralised(Sudan)Self-governed(KSA)
Centralisedandself-governed
Self-governedexceptUAE
Centralised
Shariahcontracts
Equityandleasebased
TawarruqrestrictedforliquidityEquityandSalamandnocreditcardandcashline(Sudan)
TawarruqrestrictedforliquidityMMandIjarahRunningMusharakah
TawarruqwidelyappliedLargeIjarahPropertyfinancing
BayalInahandBayalDaynandTawarruqwidelyappliedSmallEquity
DerivaMves - Notacceptable Forhedgingonlybasedonwa’donly
Forhedgingonlybutbasedonwa’d,wakalah,CM.egIPRSandIjarahRentalSwap
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IMFReport2017
• Islamicbanking(IB)conMnuestogrowrapidly,insizeandcomplexity,posingachallengetosupervisoryauthoriMesandcentralbanks.
• ProgresshasbeenslowindevelopingIB’sliquiditymanagementandmoneymarkets.
• hybridfinancialproductsinIBhaveemergedthatreplicateaspectsofconvenMonalfinanceinanIBcontext,raisingfinancialstabilityconcerns.
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PartnershipBasedContracts
• Mudharabah• Musharakah• ThetotalaggregatefinancingofIslamicbankingsysteminMalaysiathroughmusharakahandmudharabahcontributedonly6%ofthetotalaggregatefinancing.
• Highriskofinvestment;difficultyinselec+ngappropriatepartners;demandcomesfromlowcreditworthinesscustomers;andlackofcapitalsecurity
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ExchangebasedContracts
• Murabahah,BayalIs+sna’,BayalSalam,BayalDayn,BayalSarf,Ijarah,BayalIs+jrar,BayalInahandBayalTawarruq
• HeavyrelianceonBayalTawarruqamermigra+ngfromBayalInah.
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OtherContracts• 1.SecurityContracts:Kafalah(guarantee)andAlrahn(mortgage)
• 2.CharitableContracts:HibahandWadiah(Deposit)
• 3.Suppor+ngContracts:Muqasah,IbraandWa’d
• Excessiveusageofwa’dintransac+on.
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Critique on Islamic Finance (1)
ObjecMvesofIslamiclaw.• IslamicinIslamicfinanceshouldrelatetothesocialand
economicendsoffinancialtransacMonsratherthanthecontractmechanicsthroughwhichendsareachieved.
• TheoreMcally,itisexpectedthattheIslamicbanks,relyingoninterest-freebanking,shallnotbeaffectedbytheinterestrates;however,theIslamicbanksarevisiblyinfluencedbyinterestratesandinfactaremoresensiMvewiththeinterestratesmovement.
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Critique on Islamic Finance (2)
Excessivedebt.• ThedisproporMonatepercentageofdebt-basedinstrumentsascomparedtoequity-based.
• AcomparaMvestudyon34IFIsand34convenMonalbanksin16countriesaffirmsthefindingthatnosignificantdifferenceintermsoftheeffectofthefinancialcrisisonthesoundnessofIslamicfinanceandConvenMonalbankingsystem.
• IslamicbankingindustryisnotenMrelycrisis-proofandfinancialcrisisdoeshaveanimpactontheIslamicbankingperformance.
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Critique on Islamic Finance (3)
MereReplicaMonandIdenMcaltoConvenMonal• “The‘appliedbusinessmodel’ofIBsisalmostidenMcaltothe
convenMonalinterest-bearingone.Itisneithera‘two-Mermudharabah’norawakalah(agency)butratheraspecially‘engineered’debtmodel.
• TheframeworkadoptedandproductsarealmostequivalentineconomicandriskcharacterisMcstoconvenMonaldebtinstruments.
• AlthoughtheIslamicbankshavesuccessfullyreplacedthepracMceofinterestwithothermodeslikeBBAandTawarruq,doubtsregardingtheirpermissibilitysMllpersist.ThisisbecauseIslamicbanksinthosecontractsarenotactuallyinterestedinrealsale,butjusttofacilitatecash;
• IndevelopingafiqhmuamalatcauMonmustthereforebeexercisedforitisalltooeasy,whencreaMngandthenrelyingonlegalficMon,tofallintothepitofcomplacencyandinadvertentlydevelopingafiqhhiyal.
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Critiques on Islamic Finance
SocialDimension• LackofcommitmentofIslamicfinance
industrytosupportdevelopmentalagendaandcorporatesocialresponsibility.
• ‘Thedoctrineofshareholders’value,whichisthebedrockofcapitalisMcmarket,hasbeenshowntobethebasisofIslamicfinancepracMces’.
Critique on Islamic Finance (4)
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Critiques on Islamic Finance
LackofauthenMcity• OperateswithinNeo-classicaleconomics.• RatherthanbeingpartoftheIslamicpoliMcal
economy,IslamicfinancehasbeenpursuingpoliciesawayfromthetheoreMcalunderpinningsandsystemicunderstandingofIslamiceconomicsandhaslocatedasurrogatefinancialframeworkinneo-classicaleconomics”.
Critique on Islamic Finance (5)
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OverlegalisMc..
• FromthelegalisMcperspecMve,itisarguedthatinterestisharamforbeingunjustandexploitaMve.Howevertheseconcernsaremerelyrhetorical,asthenewinsMtuMonsinquesMonhavebecometoocozywiththeirownexploitaMveenvironmentaboutwhichtheyaremute.IslamicfinanceisdelinkedfromthebroadergoalsofdevelopmentandpovertyalleviaMon.
• Islamicfinanceisexperiencinga“formalistdeadlock”wheretheindustryismoreconcernedwithformaladherencetoIslamiclawinsteadofpromoMngIslamicethicalvalues.“ThecurrenttrendreducesIslamanditsShari’ahtotheirlegaldimensionratherthanseeingthemwithinagreatercivilizaMonalframework”
Critique on Islamic Finance (6)
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NegaMvepercepMonbythegeneralpublic.• MuslimConsumerAssociaMonofMalaysia(PPIM)
reportedthattheyhavereceivedmorethan4000reportsfromconsumersbetween2003-2012oftheirdissaMsfacMonwithIFIs.ThePPIMclaimedthattheIFIshaveabusedtheword‘Islam’forthepurposeofprofitmaximizaMonwithouttakingintoconsideraMontheethicalaspectsofdoingbusiness.
• TherearemanycaseswherethecustomersneedtopaythewholeamountofsellingpricetoIFIseventheconstrucMonprojectwasclearlyabandoned.
Critique on Islamic Finance (7)
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Islamic Banks 2015
BIMB RM7,768.02
AIBB RM363,945.67
HSBC Amanah RM135,000.00
Maybank Islamic RM65,000.00
OCBC Al Amin RM2,631.00
HLIB 437,833.89
Alliance Islamic RM245,593.30
CIMB Islamic 0
AmIslamic RM113,600
Shari’ah Non-Compliance Income
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ChallengesandRealiMes
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CompeMMveness Equal the conven+onal product inbenefits.
Price Islamicfundingmaycostmore.Benchmarkagainstconven+onal.
Process Processandopera+onslightlylongerandrequireaddi+onaldocument.
Flexibility Interchangeability of Shari’ah conceptsto be at par with the conven+onalproducts.
Non-Compliance To simplify opera+on, some processmaybeomided.E.gexecu+onofblankLederoffer
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Profitability Some charges may not be avail to Islamicproducts e.g commitment fees, lowercompensa+onfee.
MarketDifferences
Differences in Shari’ah concepts in variousmarkets. E.g Bai Al Dayn not acceptable bymanymarketorevenbanksinM’sia.
ProductAwareness
PublicawarenessonIslamicfinanceiss+lllacking.Indifferenceaotude
PosiMveValues
Islamic principles advocates fairness and just.Ideally, genuine defaulters to be givenconcessions,butnotbeingdoneinsomeIFIs.
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ProductRisk Riskinsomeconceptsarehigherthantheconven+onalproduct.E.gMurabahah(riskofnonacceptanceofgoods by customer) Is+sna’ (non-comple+onofprojects).All possible risk to be iden+fied andproperlymi+gated.
LegaldocumentaMon
An extended version of conven+onaldocument. Too much influence on theprevious prac+ce. Market wants simpledocumenta+on
ModifiedConcepts
Investmentproductse.gpureMusharakahcannotbedonewithoutmodifica+on.
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Shari’ahRisk Product development and opera+on requiresShari’ahCommidee’s endorsement and requires indepth study. Conven+onal banking can transact onanything.Non-Shari’ah compliant may lead to “haram”income whichrequiresthebanktoforgotheprofitearned.
BalancingofBusinessandShari’ah
Some business areas are out of bound in Islamicfinance.
People Changesinincep+onofIslamicfinanceknowledgeandvaluesamongststaff.
TechnologicalAdvancement
EfficientdigitalbankingsystemthatcomplywiththeShari’ahprinciples
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DifferentRequirementofStandard-SeDngAgencies
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Areas of Standards Key Agency(s) in the International Financial Architecture
Corresponding Agency(s) in Islamic Finance
1. Accounting International Accounting Standards Board (IASB), International Federation of Accountants (IFAC), Committee on Banking Supervision (BCBS)
AAOIFI
2. Anti-Money Laundering / Combating the Financing of Terrorism
Financial Action Task Force (FATF) Common
Auditing International Federation of Accountants (IFAC)
AAOIFI 3. Banking Committee IFSB 4. Corporate Governance OECD, Basel Committee, World Bank AAOIFI and IFSB 5. Data Dissemination IMF Common 6. Fiscal Transparency IMF Common 7. Insolvency and Creditor Rights Systems
World Bank, United Nations Commission on International Trade Law (UNCITRAL), International Bar Association (IBA)
Not yet addressed but especially critical for Islamic financing as it is based on risk sharing
8. Insurance Regulation International Association of Insurance Supervisors (IAIS)
Not yet addressed but within the mandate of IFSB
9. Monetary & Financial Transparency Policies
IMF Common 10. Payments Systems Committee on Payment and Settlements
Systems (CPSS) Common
11. Securities Market Regulation International Organization of Securities Commissions (IOSCO)
Not yet addressed but within the mandate of IFSB
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The Way Forward
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TowardsValue-BasedIntermedia+on
• ParadigmShip• FromFinancialIntermediariestowardsInvestmentIntermediaries
• UNSustainableDevelopmentGoals
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Innova+oninIslamicFinance
• CrowdfundingandEquityCrowdFunding’,‘EquityFinance’,‘BusinessAngelInvestment’,‘InvestorsNewParadigm’,‘RiskSharingFinanceFacility’,“RiskSharingSecuriMes’,dan‘Customer-OwnedBanking’.
• Eg.Al-WaqfHomeFinancing-ibyBankIslamresultedintheconstruc+onof76residen+aland9commerciallotsona9-acreplotinPenang.Thisproject(RM24mil)wasinpartnershipwithJabatanAgamaIslamPulauPinangandapropertydevelopmentcompany.
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Standardisa+onandHarmonisa+on
• Forthepurposeofharmonisa+onandconsistency,thestandardseongagenciesandregulatorshaveissuedseveralShari’ahparametersandguidelinestoIFIsasguidanceandreferencetopromoteharmoniza+onandstandardiza+onofIslamicfinanceprac+ces.
• Thesestandardsputcertainrequirementstoensureeachfinancialtransac+onisgenuineandvalid.
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Concluding Remarks
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• Therearesomevalidandlegi+mateconcernsonthecurrentprac+cesandtrendsofIslamicfinance.Insimplewords,‘askourheart’,whethertherecentIslamicfinanceprac+ceshavefulfilledtherealhigherobjec+vesofShari’ah.
• Itisimportanttocri+callyevaluatetheperformanceofIFIsagainsttheirfounda+onalbaseandatthesame+metomaintainitsposi+vedevelopment.
• Moreimportantly,withthecurrentprac+ces,Islamicfinanceissurelynotimmunefromthecrisis.Asthecrisisisnottheoutcomeofsuddenprac+ces,Islamicfinancemustlearnfromthehistoryandtakelessonfrompreviousfinancialcrisis.
• WedonotwanttohearthattheonlylessonthatIslamicfinancehaslearnedisthatitneverlearns.
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Ask our Heart