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Islamic Finance: Relevance and Growth in the Modern Financial Age London School of Economics 1 February 2007 Iqbal Khan  Founding ex-CEO, HSBC Amanah
Agenda ,[object Object],[object Object],[object Object],[object Object]
Banking and finance needs Islamic finance is the outcome of religion in banking Islamic banking and finance solutions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Fiqh al-Muamalaat contracts Shariah sources ,[object Object],[object Object],[object Object],[object Object],Shariah filter
[object Object],[object Object],Islamic finance is embedded within values Islamic finance is more than financial contracts Client affinity Fulfils aspirations ,[object Object],[object Object],Alternative paradigm ,[object Object],[object Object],Responsible finance ,[object Object],[object Object],Inclusive proposition ,[object Object],[object Object],Parallel trends ,[object Object],[object Object]
Values of good governance are central to Islam Accountability to God raises level of awareness Quranic code of ethics Best practices of  corporate governance ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],“ O ye who believe! Be ye staunch in justice, witnesses for Allah, even though it be against yourselves or (your) parents or (your) kindred…” (4:135)
prohibited sectors ECONOMIC IMPERATIVE ,[object Object],[object Object],[object Object],Islamic Financial Institutions are positioned in a “zone of sustainability” Islamic finance characteristics: NGOs not-for-profits SOCIAL IMPERATIVE ZONE OF SUSTAINABILITY Islamic businesses
[object Object],[object Object],Industry has advanced from niche to critical mass ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Industry is fragmented, with slowly internationalising players Source:1: S&P Report ( 31 Aug 2006); 2: IIR Middle East (Apr 2006);  3 Bursa Malaysia “The Islamic Capital Market” 2005; *  HSBC analysis Islamic banking assets as proportion of total (%)  * 40% 20% 12% 30% 66% growth 33% growth
Industry has developed a comprehensive product offering over its young history 1950s 60s 70s 80s 90s 00s ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],syndications  structured and trade finance Evolving richness in products Development of industry Industry has near like-for-like parity with conventional offering 1970s commercial banking insurance 1980s 1990s equity private  equity project finance debt issues 2000s structured products 1970s 1980s 1990s 2000s
Source: HSBC Amanah Islamic finance industry is developing a global reach…
… with worldwide momentum from retail to regulator involvement  . Singapore:   Active in developing Islamic finance UK:   New legislation for Islamic mortgages (2003) ,[object Object],[object Object],[object Object],[object Object],Malaysia:   Islamic product and industry, development and sophistication leader USA: Harvard workshop with six regulators (1995) China:   Active member of Islamic Financial Services Board (2004) Bahrain:   Leading Islamic  financial centre, and housing regulatory bodies ,[object Object],[object Object],[object Object],[object Object],Source: HSBC Amanah, Press Reviews Each region is contributing in a unique way Japan:   JBIC exploring Islamic financing opportunities (Dec. 2006) Germany:   Saxony issues  E100m Sukuk (2004)
Self-regulatory organizations bring credibility through standardization of practices GCIBFI   (2001) Bahrain ,[object Object],[object Object],[object Object],IIFM   (2001) Bahrain ,[object Object],[object Object],[object Object],AAO-IFI  (1991) Bahrain ,[object Object],[object Object],[object Object],IIRA   (2005) Bahrain ,[object Object],[object Object],[object Object],IFSB  (2002) Malaysia ,[object Object],[object Object],[object Object],LMC   (2002) Bahrain ,[object Object],[object Object],[object Object]
Strong growth of  OIC economies Retail customer  commitment Institutional capital Liberalisation of  capital markets Innovative product  development Resurgence of  Muslim cultural values EXPLOSIVE GROWTH  OF ISLAMIC FINANCE Industry is driven by fundamental factors Why Islamic financing is flourishing
Multinational banks have gradually increased their focus on Islamic finance Mainstream institutions are embracing Islamic banking Ad hoc participation ,[object Object],[object Object],Islamic client services ,[object Object],[object Object],Islamic window model ,[object Object],[object Object],Dedicated Islamic subsidiary ,[object Object],[object Object],Market entry strategy Defensive strategy Proactive strategy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Evolving commitment
Industry is reaching mainstream relevance in global financial system Relevance to non-OIC countries Relevance to OIC countries ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Islamic finance benefits are not exclusive to Muslims
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],The industry has not yet reached its potential Source: 1: IIR Middle East (Apr 2006); 2 Banker ME (June 2006); 3 RAM Islamic Ratings Services (2006)
Islamic framework provides solutions for key limitations of conventional banking system An ethical grounding prevents a wide set of problems IFI solutions Conventional banking issues ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
An alternative banking model in development Liabilities Assets Investments Deposits Profit, not interest, becomes the basis for financial intermediation Suppliers of capital Productive economic actors with capital needs Equity financing mudaraba & musharaka Debt financing  ijarah, murabaha,  salam, istisna‘ ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Key internal issues that need addressing…
Shariah-based mindset is crucial direction for product development Shariah-based industry is the new vision Shariah-compliant products Shariah-based solutions Savings & Investments Indebtedness x  ,[object Object],[object Object],[object Object],[object Object]
A number of factors need to be engaged to bring success Need for co-ordination to enable further development Key enablers ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],Concluding remarks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Imperative is for moving to Shariah-based services Japanese proverb: “ Vision without action is a daydream. Action without vision is a nightmare.”
Thank you Iqbal Khan  Founding ex-CEO, HSBC Amanah

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Iqbal Khan Presentation20070201

  • 1. Islamic Finance: Relevance and Growth in the Modern Financial Age London School of Economics 1 February 2007 Iqbal Khan Founding ex-CEO, HSBC Amanah
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  • 9. Source: HSBC Amanah Islamic finance industry is developing a global reach…
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  • 12. Strong growth of OIC economies Retail customer commitment Institutional capital Liberalisation of capital markets Innovative product development Resurgence of Muslim cultural values EXPLOSIVE GROWTH OF ISLAMIC FINANCE Industry is driven by fundamental factors Why Islamic financing is flourishing
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  • 21. Thank you Iqbal Khan Founding ex-CEO, HSBC Amanah

Editor's Notes

  1. Commonly accepted principles of corporate governance include: Rights and equitable treatment of shareholders : Organisations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders : Organisations should recognise that they have legal and other obligations to all legitimate stakeholders. Role and responsibilities of the board : The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person. Integrity and ethical behaviour : Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure. Disclosure and transparency : Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information.
  2. The Islamic “Zone of Sustainability” is at the intersection of the economic and social imperatives. This is depicted by the shaded area in this graph. An organization that is to the far left on this chart would be unacceptable in Islamic Society, as would a for-profit organization that operates in the far right corner. It is worth mentioning that non-profit organizations such as NGOs are expected to operate in the right corner as they are not held under the rules of a commercial corporation. But they would be subject to all the prohibitions and guidelines mentioned earlier.
  3. Beginning of Muslim-majority nation independence Pakistan 1947 Indonesia 1949 Malaysia 1956 Algeria 1963 GCC 1971 OIC establishment 1969 Consolidate economic cooperation among members Evolution of framework and strategic initiatives 1974: Islamic Development Bank 1977: Statistical, Economic and Social Research and Training Centre for the Islamic countries 1977: International Association of Islamic Banks 1981: Islamic Research and Training Institute 1983: Islamic Fiqh Academy IFI: laying country foundations 1971 Nasser Social Bank 1974 Islamic Development Bank 1975 Dubai Islamic Bank 1977 Faisal Islamic Bank of Egypt, and Sudan 1978 Al Rajhi 1978 Jordan Islamic Bank 1979 Bahrain Islamic Bank 1979 Kuwait Finance House
  4. Tapping Muslim majority and minority markets 1. There are about 1.6 billion Muslims in the world today. In the next 8 to 10 yrs, it has been estimated tht half of the them will invest their savings in the Islamic finance sector 2. The growing Muslim population in G10 countries will increase for demand Islamic financial products 3. By 2015, it has been projected that 1 in every 4 graduates in London will be Muslim A source of funding 1. Islamic finance has gained acceptability in Muslim minority countrie 2. Issuance of first Islamic Eurosukuk by Saxony, Germany A source of liquidity 1. Islamic finance will allow OECD world to tap excess liquidity in the OIC world 2. Investment opportunities: Islamic finance institutions and projects can offer high risk-rated return for OECD investors Joint venture and market entry opportunities 1. bringing global expertise to attractive markets 2. This is particularly relevant as WTO takes effect in key Muslim markets
  5. Islamic finance has grown considerably in the past few decades. It was already a promising industry when HSBC Amanah was established in 1998, but it has been gathering tremendous momentum since then. In key Muslim markets, the numbers speak for themselves. [CLICK] In Saudi Arabia, 95% of new consumer lending is now Islamic. [CLICK] In UAE, 30% of retail banking has turned Islamic in a few years. [CLICK] Bahrain has emerged as a hub of this industry. [CLICK] In Malaysia, more than half the Ringitt bonds that were issued last year were structured Islamically. Key markets outside the Muslim world are also taking notice. [CLICK] A Harvard workshop on Islamic finance just brought together the Fed, a number of state regulators and local Islamic banks to address the regulation of Islamic finance in the country. [CLICK] The UK, as you know, has already passed legislation to lower the barriers for Islamic banks to provide competitive mortgages. [CLICK] On of the German states, Saxony, has even issued the first sovereign Sukuk by a non-Muslim country. [CLICK] China has quickly become the most active member of the Islamic Financial Services Board, a consultative group that includes the IMF, World Bank and a number of Muslim regulators. [CLICK] Singapore, also a member of the IFSB, has just decided to go after Islamic finance in a big way by announcing friendly regulation.
  6. World GDP 2006e growth = 4% GCC growth 06e = 7-10% Capital markets development: - Growing pool of liquidity with rising equity markets and growing debt markets - Saudi Arabia: implementing its Capital Market Law promulgated in 2005 - Malaysia: 42% of debt securities issued during 2004 were Islamic - UAE: expanding aggressively through listing in DIFX - Bahrain: leads the Islamic finance industry and actively promoting development of secondary market – Liquidity Management Centre (LMC), IIFM - Turkey: launched Shariah compliant exchange traded securities (ETS)