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University of Malaya “ Islamic Banking and International Financial Markets”   Andrew Sheng Third Chair  Tun Ismail Mohd Ali Visiting Professor in Money and Banking  16 March 2006
Contents ,[object Object],[object Object],[object Object],[object Object],[object Object]
Islamic Banking in Malaysia ,[object Object],[object Object],[object Object]
Islamic Banking Globally ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Need to Understand International Financial Markets ,[object Object],[object Object],[object Object]
Hierarchy of Domestic Financial Markets ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evolution of International Financial Markets: Four phases ,[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],The Bretton Woods Architecture
[object Object],[object Object],[object Object],[object Object],Post 1998 Architecture
Global Assets Under Management  (US$ trillion end 2003) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Who Accounts for Most Financial Assets?   (US$bn 2003) 53.7 19,251 7,026 5,994 4,833 1,398 United  States 16.0 5,724 493 928 2,969 1,334 Japan 100 - 12.0 18.3 % of total - 35,862 4,320 6,567 Total 25.46 9,129 1,063 547 Investment companies 23.91 8,575 462 1,191 Pension Funds 29.41 10,547 1,009 1,736 Insurance 21.22 7,611 1,786 3,093 Int. Banking assets % of total Total Germany UK
Size of Global Foreign Exchange Market Turnover   – Average Daily   (US$ bn) Source:  BIS, Triennial   Bank Survey 2004 1880 107 944 208 621 2004 218.6 91.1 396.8 670.4 95.9 Growth (%) 100.0 590 Total traditional turnover 5.7 56 Estimated gaps in reporting 50.2 190 Foreign exchange swaps 11.1 27 Outright forwards 33.0 317 Spot transactions % of total 1989
Currency Distribution of FX Turnover  (%) Source:  BIS, Triennial Bank Survey 2004 18.5 1.9 36.9 36.2 Other Currencies 28.0 -10.6 -1.1 -1.8 % of  Changes 200 16.9 20.3 37.2 88.7 2004 100 200 Total 8.5 13.2 Sterling 10.2 22.7 Jap. Yen 18.6 37.6 Euro 44.4 90.3 US$ % of Total 2001 Currency
Stock Market Performance  (end Dec 2004) ,[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],Remark: * Shanghai A-share Index  ** the average index performance is weighted by market capitalization  Sources : World Bank, WFE, CEIC, Bloomberg, various central banks and government websites Market Cap Increase since Increase since Country (US$ bn) Dec 94 (%) Index Dec 94 (%)
Asia – 55% global population, 26% trade weight, but small in equity markets (%  of World, 2001)  MSCI   GDP  Exports  Population  Weighting ASIA 22.8 26.1 55.4 13.15 China 3.7 3.7 21.1 0.26 Japan 13.3 7.0 2.1 9.38 India 1.5 0.8 16.6 0.12 US 32.3 14.2 4.6 55.30 EU 19.6 36.0 6.2 17.14 Others 25.3 23.7 33.8 14.41 World 100.0 100.0 100.0 100.00 Source:  IMF, World Economic Outlook, 2001 and World Bank, World Development Indicators, 2001.
Asia – The Third Zone? ,[object Object],[object Object],[object Object],[object Object]
Asian Stock Markets – Third Time Zone Remark: Global market cap and turnover refer to the total of all member exchanges of the WFE.  Categorization of regions is also based on the WFE.
 
Funding Sources to Corporate Sector  (US$bn, 2003) *Hong Kong, China, Australia, Korea, Singapore, Taiwan, Thailand, Malaysia and India Source: International Financial Statistics, World Federation of Exchanges, BIS, IMF, CEIC, various central banks and government websites   Bank Credit to Corporate Sector (A) Total Capitalisation of Equity Market (B) Outstanding Amount of Corporate Bond (C) (A) + (B) + (C)   US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP 9 Asian Regions* 3,345.3 86.1 3,171.7 81.6 392.9 10.1 6,909.9 177.8 Japan 3,770.3 87.8 2,953.1 68.7 769.7 17.9 7,493.1 174.4 US 4,975.4 45.2 14173.1 128.8 2,484.0 22.6 21632.6 196.6 UK 1,228.3 68.3 2,460.1 136.8 382.0 21.3 4,070.3 226.4 Germany 1,581.5 65.7 1,079.0 44.8 958.2 39.8 3,618.8 150.4
Corporate Crude Leverage Ratio ,[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]
Demographics – around 300 million Asians earn US$5,000 or more annually; by 2020, discretionary spenders will grow to 1.4 billion.  Huge demand for asset management and consumer banking needs Wealth management -  private banking spreading from those with US$1 million or more to middle income professionals Mutual Funds  -  in US already US$7.5 trillion market, but becoming more leveraged – no longer just long-only funds; line between mutual funds and hedge funds blurred Market makers -  Asian investment banks still small by any standard Outsourcing -  over 100,000 jobs moved to India from US, worth US$136 bn in wages – trends will continue Key Capital Market Trends *
Deposit-taking Institutions – demographics changing customer pattern – growth of consumer banking, credit cards, demand for structured products Risk-pooling Institutions -  still foreign dominated, but demand growing Contractual Savings Institutions -  huge liquidity pools, but shortage of professional fund management skills Market Makers -  key investment banking skills still dominated by large foreign players, with foreign fund managers as key clients Specialized Sectoral Financiers -  policy-based banks shrinking in market size; venture capital and private equity becoming more important Financial Service Providers – exchanges demutualizing Recent Key Market Trends in Asia
8,000 hedge funds with US$1 trillion in assets under management – leveraged around 2-3 times Trading velocity much higher than mutual funds -  currently account for 40-50% of turnover in US and EU Fees around 1-2% of AUM + 20% of profits  Larger funds around US$10-15 bn in AUM Depend upon prime brokerage for transactions and funding  -  if we do not allow in prime brokers, how can emerging markets benefit from hedge fund activities? Highly skilled business -  talents drawn from fund managers and investment banks (ie difficult to home grow) Hedge Funds are driving the business *
3,000 private equity funds with unknown total assets under management – leveraged levels also unknown More involved in direct equity investments rather than trading Fees around 1-2% of AUM + 20% of profits  Longer lock-ups Larger funds of around US$5-10 bn in AUM In 1H2004, Asia raised US$5 bn, compared with US$3.3 for 2003 and US$3 bn for 2002 (compared with US$17.9 bn in 2000 and US$9 bn in 2001) – overall private equity investments in Asia estimated at US$8.6 bn Roughly 10% of UK pension funds invested in private equity -  still early days for Asian pension funds * Private Equity Funds are reborn merchant banks sans regulation
Positioning of Islamic Finance in global markets ,[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object]

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Islamic Banking Int Fin Mkts

  • 1. University of Malaya “ Islamic Banking and International Financial Markets” Andrew Sheng Third Chair Tun Ismail Mohd Ali Visiting Professor in Money and Banking 16 March 2006
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  • 11. Who Accounts for Most Financial Assets? (US$bn 2003) 53.7 19,251 7,026 5,994 4,833 1,398 United States 16.0 5,724 493 928 2,969 1,334 Japan 100 - 12.0 18.3 % of total - 35,862 4,320 6,567 Total 25.46 9,129 1,063 547 Investment companies 23.91 8,575 462 1,191 Pension Funds 29.41 10,547 1,009 1,736 Insurance 21.22 7,611 1,786 3,093 Int. Banking assets % of total Total Germany UK
  • 12. Size of Global Foreign Exchange Market Turnover – Average Daily (US$ bn) Source: BIS, Triennial Bank Survey 2004 1880 107 944 208 621 2004 218.6 91.1 396.8 670.4 95.9 Growth (%) 100.0 590 Total traditional turnover 5.7 56 Estimated gaps in reporting 50.2 190 Foreign exchange swaps 11.1 27 Outright forwards 33.0 317 Spot transactions % of total 1989
  • 13. Currency Distribution of FX Turnover (%) Source: BIS, Triennial Bank Survey 2004 18.5 1.9 36.9 36.2 Other Currencies 28.0 -10.6 -1.1 -1.8 % of Changes 200 16.9 20.3 37.2 88.7 2004 100 200 Total 8.5 13.2 Sterling 10.2 22.7 Jap. Yen 18.6 37.6 Euro 44.4 90.3 US$ % of Total 2001 Currency
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  • 15. Asia – 55% global population, 26% trade weight, but small in equity markets (% of World, 2001) MSCI GDP Exports Population Weighting ASIA 22.8 26.1 55.4 13.15 China 3.7 3.7 21.1 0.26 Japan 13.3 7.0 2.1 9.38 India 1.5 0.8 16.6 0.12 US 32.3 14.2 4.6 55.30 EU 19.6 36.0 6.2 17.14 Others 25.3 23.7 33.8 14.41 World 100.0 100.0 100.0 100.00 Source: IMF, World Economic Outlook, 2001 and World Bank, World Development Indicators, 2001.
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  • 17. Asian Stock Markets – Third Time Zone Remark: Global market cap and turnover refer to the total of all member exchanges of the WFE. Categorization of regions is also based on the WFE.
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  • 19. Funding Sources to Corporate Sector (US$bn, 2003) *Hong Kong, China, Australia, Korea, Singapore, Taiwan, Thailand, Malaysia and India Source: International Financial Statistics, World Federation of Exchanges, BIS, IMF, CEIC, various central banks and government websites   Bank Credit to Corporate Sector (A) Total Capitalisation of Equity Market (B) Outstanding Amount of Corporate Bond (C) (A) + (B) + (C)   US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP US$ bn % of GDP 9 Asian Regions* 3,345.3 86.1 3,171.7 81.6 392.9 10.1 6,909.9 177.8 Japan 3,770.3 87.8 2,953.1 68.7 769.7 17.9 7,493.1 174.4 US 4,975.4 45.2 14173.1 128.8 2,484.0 22.6 21632.6 196.6 UK 1,228.3 68.3 2,460.1 136.8 382.0 21.3 4,070.3 226.4 Germany 1,581.5 65.7 1,079.0 44.8 958.2 39.8 3,618.8 150.4
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  • 21. Demographics – around 300 million Asians earn US$5,000 or more annually; by 2020, discretionary spenders will grow to 1.4 billion. Huge demand for asset management and consumer banking needs Wealth management - private banking spreading from those with US$1 million or more to middle income professionals Mutual Funds - in US already US$7.5 trillion market, but becoming more leveraged – no longer just long-only funds; line between mutual funds and hedge funds blurred Market makers - Asian investment banks still small by any standard Outsourcing - over 100,000 jobs moved to India from US, worth US$136 bn in wages – trends will continue Key Capital Market Trends *
  • 22. Deposit-taking Institutions – demographics changing customer pattern – growth of consumer banking, credit cards, demand for structured products Risk-pooling Institutions - still foreign dominated, but demand growing Contractual Savings Institutions - huge liquidity pools, but shortage of professional fund management skills Market Makers - key investment banking skills still dominated by large foreign players, with foreign fund managers as key clients Specialized Sectoral Financiers - policy-based banks shrinking in market size; venture capital and private equity becoming more important Financial Service Providers – exchanges demutualizing Recent Key Market Trends in Asia
  • 23. 8,000 hedge funds with US$1 trillion in assets under management – leveraged around 2-3 times Trading velocity much higher than mutual funds - currently account for 40-50% of turnover in US and EU Fees around 1-2% of AUM + 20% of profits Larger funds around US$10-15 bn in AUM Depend upon prime brokerage for transactions and funding - if we do not allow in prime brokers, how can emerging markets benefit from hedge fund activities? Highly skilled business - talents drawn from fund managers and investment banks (ie difficult to home grow) Hedge Funds are driving the business *
  • 24. 3,000 private equity funds with unknown total assets under management – leveraged levels also unknown More involved in direct equity investments rather than trading Fees around 1-2% of AUM + 20% of profits Longer lock-ups Larger funds of around US$5-10 bn in AUM In 1H2004, Asia raised US$5 bn, compared with US$3.3 for 2003 and US$3 bn for 2002 (compared with US$17.9 bn in 2000 and US$9 bn in 2001) – overall private equity investments in Asia estimated at US$8.6 bn Roughly 10% of UK pension funds invested in private equity - still early days for Asian pension funds * Private Equity Funds are reborn merchant banks sans regulation
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Editor's Notes

  1. In index terms, Asian markets performed poorly on the whole, with index declines in 5 out of 11 markets. Weak NJA stock market performance contrasted with overall decade of strong economic growth, interrupted by the Asian crisis. What accounts for this divergence in performance?
  2. The debt/equity ratio reveals the extent of leverage the firm assumes in its financing decision and thus is indicative of its ability to withstand shocks to its future cash flow. Generally speaking, a highly-leveraged corporate sector is expected to suffer from more business failures in an economic downturn. The leverage ratio of emerging Asian economies was, on average, higher than US and UK, but lower than Japan and Germany. The leverage ratio of Mainland China stood at 409% in 2003, the highest among all Asian economies. Hong Kong companies rely less on debt than on equity financing. The debt to equity ratio of Hong Kong corporations in particular, was 21% in 2003, the lowest among all Asian economies. State-owned enterprises (SOEs) in China are highly-leveraged, and as long as this remains so, it would be difficult for monetary policy to operate. Increases in interest rates would hurt SOEs more than private sector firms. Restoring the debt equity leverage ratio of SOEs to a more sustainable and prudent level is a technical question of effectiveness of macro-policy, as well as a risk-management question at the micro-level. The high domestic savings in China could be used by securities markets to de-leverage Chinese enterprises, improve corporate governance, and enhance competitiveness. The de-leveraging has taken place in most Asian economies since the Asian Financial Crisis. In Hong Kong, the leverage ratio declined from 55% in 1998 to 21% in 2003. And the ratio dropped from 410% to 101% in Thailand, from 198% to 122% in Korea, and from 205% to 154% in Japan. While the leverage ratio has been declining in Asia, it is still higher than the level in 1993. The corporate sectors in Japan and Germany are traditionally highly-leveraged. The leverage ratio of US and UK firms increased modestly during the past five years.