This document summarizes global trends in Islamic banking. It discusses the growth of the Islamic banking industry from $781 billion in 2008 to an estimated $1.6 trillion in assets currently. The three main types of Islamic banking systems - full-fledged, dual, and conventional plus - are described. Recent developments include mergers and acquisitions of Islamic banks as well as moves toward centralized Sharia boards and standardization. Challenges facing the industry include a lack of risk management techniques and the need for more education and research.

1. GLOBAL TRENDS IN ISLAMIC BANKING
The MIM Mediterranean Economic Forum 2014
24 October 2014
BY:
Jassim Mahadik
Project Manager, Al Maali Consulting Group

2. WHAT IS ISLAMIC BANKING?
WHAT IS ISLAMIC BANKING

3. WHAT IS ISLAMIC BANKING?
• Islamic banking is a banking system which is operated in compliance and conformity with Sharia.
• Prohibited activities are not undertaken.
 Riba
 Gharar
 Maysir
 Other elements
• Linked with the real economy.

4. HISTORICAL OVERVIEW OF ISLAMIC BANKING & FINANCE: A CLASSICAL PERSPECTIVE
• Arabs conducted business and trade during the pre-Islamic era.
• Some of the pre-Islamic practices were in direct conflict with Islamic principles.
• The beginning of Islamic Finance can be traced to the Prophet’s (peace be upon
him) times.
• Examples:
The Prophet (peace be upon him) used to trade using Khadija’s (may Allah be
pleased with her) capital.
The Prophet (peace be upon him) permitted credit sales

5. DAWN OF THE MODERN ISLAMIC BANKING
Egypt
• In 1963, a bank was established in Mit Ghamr which was based on the German concept of
savings bank.
• No interest was paid or received.
• Based on profit and loss sharing.
• In 1968, the bank was closed due to government’s hostility towards private initiatives.
• In 1972, the Mit Ghamr Savings Bank was revived as Nasser Social Bank.
Establishment of other Islamic Banks
• More Islamic Banks established in 1970s other countries.
• Examples:
 Islamic Development Bank in 1973.
 Dubai Islamic Bank in 1975.

6. SIZE OF THE ISLAMIC BANKING INDUSTRY
Global Islamic Finance Assets by Sector US$bn
2008 2009 2010 2011 2012
Banks 720 777 943 1105 1326
Funds 51 54 58 62 74
Takaful 8 13 21 26 31
Other 1 3 3 26 28
Total 781 847 1025 1219 1460
777
720
943
1105
1326
28
31
74
26
26
62
3
21
58
3
13
54
51
1
8
0 200 400 600 800 1000 1200 1400
2012
2011
2010
2009
2008
US$bn
Global Islamic Finance Assets by
Sector
Other
Takaful
Funds
Banks
Source: The Banker, Ernst & Young
It is estimated that the size of the Islamic banking industry at the global level is close
to $1.6 trillion and it is expected to reach $3.4 trillion by 2018 (Ernst & Young)

7. ISLAMIC BANKING STANDARDS SETTING BODIES
• Established in Bahrain on 27th March 1991
• Non-for-profit corporate body that prepares
accounting, auditing, governance, ethics and
Sharia standards for Islamic financial
institutions and the industry.
• 200 members from 40 countries, including
central banks, Islamic financial institutions,
and other participants from the international
Islamic banking and finance industry,
worldwide.
• Officially inaugurated on 3rd November
2002
• Dedicated at introducing new, or adapting
existing, international standards consistent
with Sharia principles, and recommending
these for adoption
• 184 members of the IFSB comprise 59
regulatory and supervisory authorities,
eight international inter-governmental
organisations, 111 financial institutions
and professional firms as well as six self-regulatory
organisations (Industry
Associations and Stock Exchanges)
operating in 45 jurisdictions.

8. ISLAMIC BANKING STANDARDS SETTING BODIES
Till date, AAOIFI has issued a total 88 standards

9. ISLAMIC BANKING STANDARDS SETTING BODIES
Till date, IFSB has issued 21 standards, guiding principles & technical note on different topics related to Islamic finance
• Risk management
• Corporate governance
• Sharia issues
• Capital adequacy, etc.

10. ISLAMIC BANKING SYSTEMS
Three types of Islamic banking systems
Full-fledged Islamic banking system
Iran Sudan Pakistan
Dual system
“Conventional plus” system
Malaysia Pakistan UAE
UK Thailand Bangladesh

11. ISLAMIC BANKING SYSTEMS
Pakistan
• Jan 2014: Mufti Taqi Usmani named as the Chairman of the State Bank of Pakistan
• His major role: To Islamise the banking sector of Pakistan
• Strategic Plan: Islamic Banking Industry of Pakistan 2014 – 2018
 Enabling policy environment: Enabling legal, regulatory, supervisory, liquidity management
framework, taxation regime and financial accounting & reporting framework
 Sharia governance and compliance: standardization and harmonization of Shariah practices, as well
as on creating distinct Islamic banking products and services.
 Awareness and capacity building: Enhancing awareness about Islamic finance, and building capacity
of the stakeholders
 Market development: Initiatives will be undertaken for product diversification and financial inclusion
with the collaboration of stakeholders

12. ISLAMIC BANKING SYSTEMS
Dual System
Islamic financial system in parallel with conventional system –Malaysian case
Conventional Financial System Islamic Financial System
Conventional banks
Conventional banks
Conventional money market
Conventional capital market
Insurance companies
Islamic banks
Islamic windows
Islamic subsidiaries
Islamic money market
Islamic capital market
Takaful operators
• Leveraging on operating
infrastructure of
conventional banks
• Level playing field
• Minimise regulatory
arbitrage
• Comprehensive
components of IFIs
important to facilitate an
effective intermediation
process
Source: Dusuki, 2011
Malaysia

13. ISLAMIC BANKING SYSTEMS
Conventional plus system – A Case of
United Kingdom
A conventional financial system with a few Islamic financial institutions operating under the conventional regulatory regime
UK
• “No obstacles, but no special favors”
• Islamic banking has to be conducted within the existing banking laws of the land
• But there have been cases where Islamic banking has been given exceptions
Example: Murabaha case
• Only one Islamic retail bank
• Bulk of the work in Islamic finance
 Investment banking
Sukuks
 Listing of sukuks, etc.

14. ISLAMIC BANKING MODELS
Full-Fledged Subsidiary Window
Drivers
• Demand
• Experience & expertise
• Independence
• Regulations
• Capital

15. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Meezan Bank buys HSBC Pakistan – October 2014
• Meezan Bank has already stated that it intends to
make the operations of HSBC Shariah-compliant,
while ensuring that the existing customer base
continues to receive uninterrupted banking
services.
• Meezan Bank had acquired Societe Generale in
Pakistan through a similar transaction in 2002
Source: The Express Tribune

16. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Abu Dhabi Islamic buys UAE business of Barclays: April 2014
• Dh726.4m (£119 million)
• ADIB to take on about 110,000 extra customers from the
purchase.
Source: The National Business

17. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• Zaman Bank JSC, Kazakhstan: May 2014
• Islamic Development Bank’s (IDB) plan of acquiring 35%
stake in this bank.
• As part of the plan, IDB already bought 5%.
• However, the bank had to be converted from conventional
to Islamic.
• Al Maali was appointed to convert it to a full-fledged Islamic
bank
• More banks in Kazakhstan are keen on converting their
operations into Islamic
ZAMAN BANK

18. We have a roadmap for development of Islamic finance until
2020, adopted by the government. We have a number of
Kazakh banks seeking to convert to Islamic banks - Kairat
Kelimbetov, governor of the central bank of Kazakhstan.
Source: Bloomberg

19. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS
• CIMB, RHB Capital Bhd, and Malaysia Building Society Bhd
plan a merger to create a Mega Islamic Bank with a market
value of more than $20 billion
Source: The Reuters

20. RECENT DEVEOPMENTS IN ISLAMIC BANKING
• Russian banks lobby the central bank for Islamic banking legislation: August 2014
• The Association of Russian Banks (ARB) said in a letter sent to the central bank late last week
that promoting Islamic finance could give a boost to the economy and draw significant
investment from the Middle East and Southeast Asia, regions where Islamic finance is
flourishing.
Source: The Reuters

21. RECENT DEVEOPMENTS IN ISLAMIC BANKING
• US scholar body AMJA (Assembly of Muslim Jusrists of
America) issues fatwa on Islamic home finance companies in
US: September 2014
 Amine Housing
 LaRiba Bank, etc.
Source: The Reuters

22. RECENT DEVEOPMENTS IN ISLAMIC BANKING
Sharia Governance
• Centralized Sharia board
 Malaysia has a central Sharia board at Bank Negara Malaysia
 Oman has recently announced their central Sharia board
 UAE also has plans to have a central Sharia central
• Sharia board at bank level
 Saudi Arabia
 Qatar
• Bahrain
 Sharia board of the Central Bank of Bahrain
 Individual Sharia boards
 AAOFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standards
Source: The Reuters

23. CHALLENGES & PROSPECTS
• Islamic finance in its infancy stage
• Regulatory obstacles
No Islamic finance
Accommodative but no special favours
Full support
• Customer Service
• Standardisation & harmonisation
• Lack of risk management techniques
• Education and research
Conventional mindset
Preference for conventional professionals

24. www.almaaligroup.com
Consulting | Training |Sharia Advisory
Contact : Al Maali Consulting Group
Dubai – UAE
Tel: +971 4 2942242
Fax:+971 4 2942228
Email: j.mahadik@almaaligroup.com