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Islamic Finance: An Industry Overview

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A brief history and evolution of Islamic finance and where we expect the industry to go from here.

Published in: Economy & Finance, Business

Islamic Finance: An Industry Overview

  1. 1. Islamic FinanceIndustry Overview<br />Junaid Mirzajunaid@islamicfinanceboard.com<br />
  2. 2. Outline<br />Size of the Industry<br />Overview of History and Development<br />Islamic Finance and the Economic Crash of 2008<br />Islamic Finance vs. Conventional Finance<br />2<br />
  3. 3. Industry Size & Composition<br />Size: <br />Current: 300+ institutions - US $700 billion<br />Expected: $1.4 trillion industry by 2010<br />Composition:<br />Islamic financial institutions $178.5 B<br />Conventional banks’ Islamic window $200 B<br />Islamic capital markets $300 B<br />Takaful assets $20 B <br />Non-banking financial institutions $ 9-12 B<br />Source: The Islamic Financial Services Industry - Ten Year Master Plan (2006-2015) by IFSB, IRTI and IsDB<br />IFSB: Islamic Financial Services Board, IRTI: Islamic Research & Training Institute, IsDB: Islamic Development Bank<br />
  4. 4. Snapshot of Global Islamic Finance<br />
  5. 5. Is Islamic Finance new?<br />Based on the Quran and Sunnah<br />An important branch of mu’amalat<br />Impact of colonialism<br />Post-colonial era and the need to provide halal alternatives<br />1.08<br />
  6. 6. Is Islamic Finance new?<br />
  7. 7. Is Islamic Finance new?<br />1.09<br />Primary motive: prohibition of Riba<br />First experiments in Malaysia and Indonesia in 1960s<br />Impact of oil wealth of the 1970s<br />Key Question: How does an Islamic financial institution operate in a society where other Islamic systems are not in place?<br />
  8. 8. June 1, 1975 Sunday<br />
  9. 9. Early Western criticisms<br />1.10<br />Infinite demand and zero supply for loanable funds<br />Incapable of equilibrating demand for and supply of loanable funds<br />No incentive to save<br />No investment and no growth<br />Monetary policy would not be feasible since instruments for managing liquidity would not exist<br />Islamic finance would result in one-way capital flight<br />
  10. 10. Response to criticisms<br />1.11<br />A modern financial system can be designed without the need for an ex ante positive nominal fixed interest rate and no satisfactory theory could explain the need for an ex ante positive nominal interest rate<br />The failure to assume an ex ante positive nominal interest rate does not necessarily mean zero return on capital<br />The return on capital is determined ex post, and the magnitude of the return is determined on the basis of the return to the economic activity in which the funds are employed<br />The expected return is what determines investment<br />
  11. 11. Response to criticisms<br />The expected rate of return and income are determinants of savings<br />Positive growth is possible in such a system<br />Monetary policy would function as in the conventional system, its efficacy depending on the availability of instruments designed to manage liquidity<br />In an open-economy macroeconomic model without an ex ante fixed interest rate, but with returns to investment determined ex post, the assumption of a one-way flight of capital is not justified<br />
  12. 12. Response to criticisms<br />In fact, the researchers and scholars argued, an Islamic financial system is superior to the conventional system because:<br />It promotes symmetry of risks and rewards<br />It is more stable<br />Source: “Risk Analysis for Islamic Banks” by Hennie van Greuning and Zamir Iqbal (World Bank)<br />1.12<br />
  13. 13. History of Islamic Banking (1)<br />1960s:<br />1961-64 Mitghamr Saving Associations Egypt<br />1967 Tabung Haji (Pilgrimage Fund) Malaysia<br />1970s:<br />1975 Islamic Development Bank (IsDB) Saudi Arabia<br /> Dubai Islamic Bank UAE<br />1976 1st Islamic Economics Conference Saudi Arabia<br />1977 Kuwait Finance House (KFH) Kuwait<br />Source: The Islamic Financial Services Industry - Ten Year Master Plan (2006-2015) by IFSB, IRTI and IsDB<br />IFSB: Islamic Financial Services Board, IRTI: Islamic Research & Training Institute, IsDB: Islamic Development Bank<br />
  14. 14. 1980s:<br />Pakistan, Iran, and Sudan announced to transform their overall financial systems to be in compliance with the Shariah<br />1981 - Islamic Research and Training Institute (IRTI) Saudi Arabia<br />1983 - 1st Islamic Bank in Malaysia established Malaysia<br />1984 – 1st Takaful (Islamic insurance) Operator Malaysia<br />1990s:<br />Major financial institutions offer Islamic Finance (ie Citigroup, HSBC)<br />Formation of AAOIFI, the 1st Islamic accounting body Bahrain<br />Harvard Islamic Finance Forum established USA<br />Launch of Islamic indices like Dow Jones Islamic USA<br />History of Islamic Banking (2)<br />Source: The Islamic Financial Services Industry - Ten Year Master Plan (2006-2015) by IFSB, IRTI and IsDB<br />IFSB: Islamic Financial Services Board, IRTI: Islamic Research & Training Institute, IsDB: Islamic Development Bank<br />
  15. 15. Year 2000 and beyond:<br />Issuance of 1st Global Sukuk Bonds Malaysia<br />Islamic Infrastructure institutions established:<br />Islamic Financial Services Board (IFSB) in Malaysia<br />International Islamic Financial Market (IIFM)<br />International Islamic Rating Agency (IIRA)<br />(General) Council of Islamic Banks and Financial Institutions (CIBAFI)<br />Arbitration and Reconciliation Centre for Islamic Financial Institutions (ARCIFI)<br />History of Islamic Banking (3)<br />Source: The Islamic Financial Services Industry - Ten Year Master Plan (2006-2015) by IFSB, IRTI and IsDB<br />IFSB: Islamic Financial Services Board, IRTI: Islamic Research & Training Institute, IsDB: Islamic Development Bank<br />
  16. 16. Rise in popularity<br />1940s and 50s: development of theory<br />1960s: first Islamic banking efforts<br />1970s and 80s: more organized commercial banking, trade finance, syndication, Islamic conglomerates<br />1990s: Concentrations of Islamic banks growing in selected countries, hard asset private equity fund management<br />2000s: Structured sukuk and capital market development, mega project finance, large commercial banks, Islamic derivatives<br />16<br />
  17. 17. Rise in popularity1992 Survey in the U.K<br />
  18. 18. Rise in popularity1994 Study of Malaysian Customers<br />
  19. 19. Historical Growth Factors<br />1975 – 1990<br />Resource boom<br />Theoretical musings and experimentation<br />Response to challenges<br />1991 – 2000<br />Regulatory recognition and encouragement<br />Growth of tiger economies<br />Development of infrastructure<br />2001 – 2007<br />Resource wealth and surplus liquidity<br />Sukuk market development<br />Islamization and religiosity<br />Real estate boom<br />Further infrastructure development<br />19<br />
  20. 20. But what happened in 2008?<br />11/18/2009<br />20<br />
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  24. 24. Did Islamic Finance really fare better in this economy?<br />
  25. 25. A decline nonetheless<br />
  26. 26. Why did it fare better?<br />Conventional Finance<br />Interest creates an artificial money supply<br />Sell money when you have none<br />Sell assets before they exist<br />Push all the risk to the borrower<br />Islamic Finance<br />Interest free system that forces risk sharing<br />No profit without risk<br />Money advanced is always backed by real assets and services<br />Contractual certainty<br />
  27. 27. Where do we go from here?<br />Strong rebound in the Islamic finance market<br />No signs on interest in Islamic finance abating – in fact, it is growing<br />Growth rate forecasts of 20 to 30 percent per annum for the near term future<br />Western world increasingly looking at Islamic finance<br />Western governments<br />Financial institutions<br />Corporations<br />27<br />
  28. 28. Why in the West?<br />Better business model?<br />More fair and equitable?<br />A growing Muslim population?<br />Dollars and cents?<br />Capital in the Middle East?<br />
  29. 29. Islamic Financial Institutions in the Western Countries<br />
  30. 30. Providers of Islamic financial education?<br />
  31. 31.
  32. 32. Where do we go from here?<br />32<br />
  33. 33. End of Session 1<br />33<br />

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