Islamic Finance: An overview

Islamic Finance Workshop
Dakar – Senegal
11-13th, November 2013

Islamic Finance : An overview
Mahmoud Sami Nabi
Senior Researcher Economist
Member of

OUTLINE
1. Introduction: Why “finance” is important ?
2. Islamic Finance
2.1. Origin and principles
2.2. Segments and trends
2.3. Islamic Finance Multilateral Institutions
2.4. Modes of Islamic Finance
2.5. Specific Risk to Islamic Finance
2.6. Islamic Finance and inclusive development

3. Islamic Banks
3.1. Origin and Current state
3.2. Business Model of Islamic Banks
3.3. Islamic Banks in practice
3.4. Resilience to the global crisis
3.5. High potential of growth
3.6. Main challenges
4. Successful Islamic Finance Experiences and prospects in Africa
5. Way forward for African countries

2

Dakar – Senegal

1. Introduction:
Why “finance” is important ?

3

1. Introduction > Why “finance” is important ?

• “Financial system influences who can start a business and
who cannot, who can pay for education and who cannot,
who can attempt to realize one's economic aspirations and
who cannot.
Thus, finance can shape the gap between the rich and the
poor and the degree to which that gap persists across
generations.” (Source: Demirgüç-Kunt and Levine, 2009)

4


Monitoring of
investments Corporate
governance

Easing the
exchange of
goods and
services

Mobilization
and pooling
of savings

Quality of institutions,
Government policies,
Geographic conditions,
Income level,
Cultural characteristics

Production
of ex-ante
information
about the
investment
opportunities

Trading,
diversificationManagement
of risk

Functions of the Financial System

Source: Levine (2005)

5


• The recent global financial Crisis has generated new initiatives to
rethink economics and to restore the ethics to finance.
• Freeman (2010): “…Restoring finance to its role as a productive force in
the economy will require new institutions and modes of compensation,
as part of a general overhaul of the relation between finance and the
real economy”. Source: "It’s financialization!", International Labour
Review, Vol. 149, No. 2.
• The tight connection of the financial sphere to the real economic
sphere is one of the main features characterizing Islamic Finance.

6

Dakar – Senegal

2. Islamic Finance
2.1. Origin and principles
2.2. Segments and trends
2.3. Islamic Finance Multilateral Institutions
2.4. Modes of Islamic Finance
2.5. Specific Risk to Islamic Finance
2.6. Islamic Finance and inclusive development
7

2. Islamic Finance > 2.1. Origin and Principles

•

Purposes of the Islamic law (Shari’ah) according to Ghazali are
preserving and enriching :

Faith

Life

Posterity

Socially-agreed
moral
filter
ensuring cooperation and wellbeing of all

Intellect

Wealth

It is not an end in itself – it is a
mean for realizing human wellbeing

Source: Chapra (1992, p.7)

8


• “.. The goals of socio-economic justice and equitable distribution of
income and wealth are an integral part of the moral philosophy of
Islam and are based on its unflinching commitment to human
brotherhood.” Source: Chapra, U. (1983, p2) “Monetary Policy in an
Islamic Economy”
• “.. Pursuit of self-interest demands that one should be conscious of
the interest of others and should avoid hurting them. The
requirement invokes mutual respect and calls for cooperation - not
conflict - for promoting the interest of each other.”
Source: Hasan, Z. (2011, p16) “Scarcity, self-interest, and
maximization from Islamic angle”

9

Many verses of the Holy Quran and Hadiths:

• { And those who, when they spend, are neither prodigal nor grudging;
and there is ever a firm station between the two}
{Ceux qui, pour leurs dépenses, ne sont ni prodigues, ni mesquins, car la
juste mesure se trouve entre les deux} (Al-Tawbah,103)
---------------------------------------------------------------------------------------------------------

• {Allah hath blighted usury and made almsgiving fruitful}
{Dieu anéantit les profits de l'usure et fait fructifier les aumônes}
(Al-Baqara,103)

{ُ ‫}يمْح ُُ َ ُُالرِّ باُويرْ بِيُالصدقا‬
‫َََت‬
‫َ َ ق ّللا‬
ِ
َ
http://www.altafsir.com

10


• “…the Islamic system creates a balanced relationship between the
individual and society. Self-interest and private gains of the individual
are not denied, but they are regulated for betterment of the
collectivity.” Source: Greuning and Iqbal (2008, p.31) "Risk Analysis for Islamic
Banks"

• “Islam proposes a model of social responsibility more extensive than
the models suggested by the classical economic theories”
Source: Forget E. (2009) “Le développement durable dans la finance éthique et la
finance islamique“, Cahier de la finance islamique, n° 1 juin, 2009.

11


12


• Muslim narrated on the authority of Abu Saiid Al-Khudriy; Prophet
Mohammed (pbuh) said:
“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates
for dates, and salt for salt; like for like, hand to hand, in equal amounts;
and any increase is Riba.”
• Muslim narrated on the authority of Abu Saiid Al-Khudriy
{Bilal visited the Messenger of Allah (pbuh) with some high quality dates,
and the Prophet (pbuh) inquired about their source. Bilal explained that
he traded
two volumes of lower quality dates for one volume of higher quality. The
Messenger of Allah (pbuh) said: “this is precisely the forbidden Riba! Do
not do this. Instead, sell the first type of dates, and use the proceeds to
buy the other.”}
13

• “Riba” literally means “excess” and reflects any unjustifiable
increase of capital whether in loans or sales. More precisely, any
positive, fixed, predetermined rate tied to the maturity and the
amount of principal (Greuning and Iqbal, 2008)
 Riba al-fadl : where money is exchanged for money hand-tohand, but in different quantities.

 Riba al-nası’ah: where money is exchanged for money with
deferment.
• In conventional finance: time value of money is reflected in interest
payments.
• In Islamic finance: Money has no intrinsic utility. It is a potential
capital which materialize only if it joins other resources (effort and
labor) to undertake a productive activity
14

•

The remuneration of capital should be the counterpart of risk
inherent to trade and investment activities based on:
 Profit and Loss Sharing when capital finance investment
activities.
 Difference in the price of buying and the price of selling when
financing trade activities.

15


• {…they said: Trade is just like usury; whereas Allah permitteth trading
and forbiddeth usury...}
{…ils disaient : " La vente est semblable à l'usure ". Mais Dieu a permis
la vente et Il a interdit l'usure...} (Al-Baqara,103)

• All financial transactions must be backed by real assets.

• Debt (originated from a trade transaction) cannot be traded,
rescheduled or discounted for interest. However, debt can be
swapped for goods and services.

16

2. Islamic Finance > 2.2. Segments and trends

• The Islamic financial services industry (IFSI) has grown in size and
geographic coverage. More than 600 Islamic Financial Institutions
operating in more than 75 jurisdictions.
Islamic Finance Assets Growth

Source: KFH Research (2012)

17

Islamic funds (680) : assets under the
management of passed from USD
29.2 bln in 2004 to USD 64 bln in Oct.
2012 .

Islamic
Funds
Assets
5%

Cooperative Insurance (Takaful): small
segment but its total gross contributions
Takaful have grown by a CAGR of 23.1% over
Assets 2004-2011 with an estimate of USD 15.2
bln in 2012.
1%

Sukuk
Outstanding

13%
Sukuk : issuances growing at CAGR
of 42.3% over 2004-2011 passing
from USD 7.2 bln to USD 85.1 bln.
Global aggregate sukuk 1996-2012
USD 396.4 bln.

Breakdown of Islamic
Assets by type (2011e)

Banking
Assets
81%
Islamic banks and Islamic banking
windows: central pillar with 40.3% og
CAGR over 2004-2011 and total assets
estimated to USD 1.1 tln.

Sources: KFH, 2012 ; Thomson Reuters, Zawya, 2012.

18


• Islamic Microfinance: emerging market niche and promising segment
for financial inclusion:
 ~ 255 providers around the world
 164 providers in East Asia and Pacific and 72 providers in MENA.
 Poor clients using Sharia-compliant products estimated at 1.28
million
Source: CGAP (2013)

• CGAP (2008): “ Islamic microfinance represents the confluence of the
two rapidly growing industries: Microfinance and Islamic finance. It has
the potential to not only respond to unmet demand but also to combine
the Islamic social principle of caring for the less fortunate with
microfinance’s power to provide financial access to the poor. Unlocking
this potential could be the key to providing financial access to millions
of Muslim poor who currently reject microfinance products that do not
comply with Islamic law.”
19

2. Islamic Finance > 2.2. Segments and trends > Islamic Microfinance

Types of IMFIs

Source: CGAP (2013) “Trends in Sharia-Compliant Financial Inclusion”
20

Global Islamic Finance Industry: Stage of Development

21


Breakdown of Islamic Assets by Region (2011e)


22

Islamic Financial Institutions in Africa

Source: Faye et al. / Review of Development Finance (2013)
23

Islamic Financial Institutions in Africa
Regional distribution of Islamic project finance transactions
(number and value) (2005–2012)

Source: Faye et al. / Review of Development Finance (2013)
24

Sukuk / Global sukuk issuance 1996-2011

Source: Standard & Poor’s (2011)

25

Sukuk / Absolute sukuk issuance by country 1996-2011

Source: Standard & Poor’s (2011) “Analysis of Sharia-compliant cooperative and Takaful insurers in
the middle east focuses primarily on financial strength”

26

Sukuk

Source: Reuters

27

The 10-year framework and strategies

• A document published by IDB and IFSB
in 2007 to mainly provide a platform for
countries in formulating their national
and regional master plans to promote
Islamic financial services industry.

Mid-Term Review of 10Y Framework &
Strategies:

• Identify the progress, gaps and also to
examine the need to have a
reorientation of priorities and initiatives
in light of the 10Y document

http://www.ifsb.org/docs/10_yr_framework.pdf

28

2. Islamic Finance > 2.3. Islamic International Financial Institutions
• Islamic Development Bank (IDB): is a multilateral financial
institution established in October 1975 to foster economic
development and social progress in its member countries (56 which
are member of the Organization of Islamic Cooperation OIC) and in
Muslim communities in nonmember countries.
• IDB has channeled more than $20 billion to the infrastructure
sector, since its inception in 1975. At the end of 2011, the Bank’s
infrastructure portfolio comprised 219 active projects.
• IDB financing modes: equity, lease financing (ijarah), installment
sale financing (murabahah), istisnah (construction and
manufacturing) contracts, …
• IDB played a leading role in establishing several institutions
supporting the Islamic financial services industry which includes
29

2. Islamic Finance > 2.3. Islamic International Financial Institutions
Accounting
and
Auditing
Organization for the Islamic Financial
Institutions: created in 1993.
General Council for Islamic Banks and
Financial Institutions: established in
1999.

Liquidity
Management
established in 2002.

Centre:

Islamic Financial Services Board :
started operations in 2003.

Islamic International Rating Agency :
started operations in 2005.

International
Islamic
Financial
Market : established in 2012.

AAOIFI

Adopting international standards to suit
Islamic financial institutions.

CIBAFI

represents the Islamic Finance Industry
globally and support its expansion and
cooperation between its institutions

LMC

Develop Sharia compliant instruments
allowing Islamic financial institutions to
overcome
liquidity
management
problems.

IFSB

serve as an international standard-setting
to ensure the soundness and stability of
the Islamic financial services industry.

IIRA

facilitate development of the regional and
national financial markets by providing an
assessment of the risk profile of entities
and instruments.

IIFM

standard setting organization focusing on
Islamic financial products, documentation
and related processes at the global level.

2. Islamic Finance > 2.4. Modes of Islamic Finance
Exchange-based
Trading contracts

Leasing
•Lease (Ijarah)
•Lease-purchase (Ijara wa
iqtina)
Sale
• Cost-plus sale
(Murabahah)
• Deferred-payment sale
(bay‘ bi-thaman ’ajil)

Equity-based– Partnership
contracts

•Profit sharing & loss
bearing (Mudharabah)
•Profit and loss sharing
(Musharakah)

Cooperative–Insurance
Takaful contracts

Mutual insurance where
each
participant
Forewards
contributes to fund which
•Salam: paiment at t=0 and is used to support the
delivery at t = T
group. Premiums are
•Istisna (Manufacture)
invested
in
Islamic
paiement at t=0,1,2.. and
financial
products.
delivry at t = T.
Surpluses are shared.

Social well-being
Gratuitous contracts

•Loan without charge
(Qard Al-Hasn )
•Donation (Hiba)
• Endowment (waqf)
Islamic Investment
Certificates - Sukuks

Certificates of ownership
of underlying assets,
issued with the aim of
using the mobilized
funds for establishing a
new project, developing
an existing project, or
financing a business
31
activity.

Profit sharing & loss bearing - Mudharabah

Financier

Entrepreneur
Capital

Profit

Y%
Labor
X%

Outcome
Loss

Invest in
Business

32

Profit & loss sharing - Musharakah

Financier

Y%

Entrepreneur

Capital

Investment

X%

Labor

Profit
Loss
33

Example: Musharakah agreement to finance a residential development project


An Islamic Bank (“AFFIN ISLAMIC”) and Company A, a
subsidiary of a Public Listed Company (PLC) entered into
a Musharakah joint venture agreement.



They created a joint venture company (“SPV”) as the
Special Purpose Vehicle to undertake a residential
development project in Pulau Pinang.



The Musharakah Agreement outlines the objective of the
partnership as well as the terms and regulation of the
relationship, namely responsibilities of both Musharakah
partners.

Source: Kamarul Ariffin Mohd Jamil (2013), "Musharakah Project Financing" 3rd ISRA – IRTI – Durham University Strategic Roundtable
Discussion“Risk Sharing in Theory and Practice: Fiqhi Evidence vis-a-vis Current Reality”

34

Example: Musharakah agreement to finance a residential development project
•

The authorized and paid-up capital of SPV stands at
RM5,000,000 and RM1,000,000 respectively which was
subscribed equally by both AFFIN ISLAMIC and
Company A.

•

Additional
requirements
Shareholder’s Advances.

•

The Capital Contribution Ratio (CCR), Profit Ratio (PR)
and Loss Ratio (LR) was pre-agreed as follows:

was

made

through

Musharakah Partner

Capital Contribution Ratio

Profit Ratio Loss Ratio

AFFIN ISLAMIC

50%

50%

50%

Company A

50%

50%

50%

Source: Kamarul Ariffin Mohd Jamil (2013), "Musharakah Project Financing" 3rd ISRA – IRTI – Durham University Strategic Roundtable
Discussion“Risk Sharing in Theory and Practice: Fiqhi Evidence vis-a-vis Current Reality”

35

Example of Sukuk Al-Ijarah
Asset Backed
Securitisation

4. Delivery of completed assets. Progress
payments against progress deliveries

Equipment
Suppliers
Assets
1.(a) Order for
assets by SPV.
Istisna’
Contract

Originator
1. Negotiations for
lease of assets to be
procured

6. Ijarah
Rental
Payment
s$

5. Ijarah of assets to Originator; now assuming
role as Obligor

SPV for
Sukuk Al Ijarah
3. $

Sukuk
Sukuk
Sukuk

Assets

8. Upon termination of Ijarah, asset sold to Originator

Sukuk al Ijarah Rental s
Admin. Account

2. Issuance of
Sukuk to raise
fund for
procurement of
asset

3. Subscriptions $

7. Distribution of Profits and final settlement to
Investors

Source: "Sukuk Al IJarah: Whether Asset Backed or Asset Based?" ,Wan Abdul Rahim Kamil,
Islamic Capital Market Securities Commission Malaysia

QUALIFIED
INVESTORS

36

2. Islamic Finance > 2.5. Specific Risk to Islamic Finance
• In addition to the types of risks (Credit risk, Market risk, Liquidity risk,
Operational risk, …) faced by conventional financial institutions, Islamic
Financial Institutions are exposed to a specific risk: Sharia NonCompliance Risk.
• Sharia Non-Compliance Risk: is the potential loss to the institution
arising from lawsuits by partner(s) due to Sharia non-compliance.
 Importance of Sharia advisors and Sharia boards.
• The Shariah framework in Islamic finance refers to the overall scope
that governs the process of product development and approval.
It comprises the Sharia sources, Maqasid al Shariah, legal maxims,
AAOIFI and IFSB guidelines (Source: Lahsasna and Hassan (2010) "The Shariah
Process in Product Development and Approval", in Islamic Capital Markets)
37

Example: Sharia compliance of sukuk

• In November 2007 the President of the Shariah Council of AAOIFI
estimated that 85% of all Sukuk in issuance were not Shariahcompliant due to the existence of guaranteed returns and/or
repurchase obligations from the issuer.
• “In late 2007 and early 2008, sukuk issuance slowed after Sheikh
Muhammad Taqi Usmani, chairman of the board of scholars at
AAOIFI, suggested that about 85 percent of sukuk might not
comply with Islamic law.” (Source: Davies and Sleiman (2012) "
Insight: "Rock star" scholars a risk for Islamic finance",
http://www.reuters.com/)

38

Example: Sharia compliance of sukuk

39

Example: Non-compliant application of Tawarruq
• (Individual) Tawarruq: to purchase a commodity from one party on credit then
sell it immediately to another for cash.
• Non-complinant (Institutional) Tawarruq :
1) IB purchases some commodity from the market, like metal form London
Metal Exchange (LME).
2) IB sells it to the customer on Murabaha basis for deferred payment.
3) IB , acts as the customer’s agent, and sells the metal on LME for
immediate cash.
 IBs gains Murabaha profit and agency fees,
 The customer obtains immediate cash and remains committed to repay the
outstanding debt that he has incurred when acquiring the commodity from
the bank on Murabaha basis
Source: Abdulazeem ABOZAID (2010), «Contemporary Islamic Financing Modes between Contract Technicalities and
Shari[ah Objectives», Islamic Economic Studies, Vol.17, No. 2. Janvier 2010 and Etudes en Economie Islamique, Vol., No.1. 40
December 2011.

1. Introduction > 2.6- Islamic Finance and Inclusive development

• Economic Inclusiveness: “the degree to which economic
opportunities are shaped by individual skill, ideas, and initiative
rather than by familial wealth, political influence, and social
connections” (R. Levine, 2011)

• Financial development: “factors, policies, and institutions that lead to
effective financial intermediation and markets, as well as deep and
broad access to capital and financial services” (WEF, Financial
Development Report,2012)

41

2. Islamic Finance > 2.6- Islamic Finance and Inclusive development

Innovation,
entrepreneurship
and SMEs
financing

Risk
sharingEquity
based
contracts

Transport,
Housing

Health,
Education,
Transport,
Housing

Connection
to the real
economy

Financial
inclusion of
poor and
Social
cohesion

Solidarity
(obligatory
alms,
endowments
solidarity)
Insulation from
excessive
leverage and
speculative
financial
activities

Moral Filter
– Social
ResponsibilitySustainability

Food security,
Renewable
energy, Green
economy,

42


Role of Zaqat in reducing poverty
• {Establish worship, pay the poor-due, and bow your heads with those
who bow (in worship).}
{Acquittez-vous de la prière, faites l'aumône ; inclinez-vous avec ceux
qui s'inclinent. (Al-Baqara,43)
• “20 out of 39 OIC countries can actually alleviate the poorest living
with income under $1.25 per day of the poverty line simply with
domestic and remittances Zaqah (obligatory alms) collection”
Source: Mohieldin, M., Z. Iqbal, A, Rostom, and X. Fu (2011) "The Role of Islamic
Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation
(OIC) Countries", Policy Research Working Paper 5920, World Bank, Washington
DC.

43

Role of Zaqat in reducing poverty

(1)

(2)

Country

Zak ah
(% of
GDP)

(3)

(4)

(1)

res ource
Does
s hortfall Zak ah
under
cover
$1.25 per
(3)?
annum as
% of GDP

(2)

(3)

(4)

Country

Zak ah (%
of GDP)

res ource
s hortfall
under
$1.25 per
annum as
% of GDP

Does
Zak ah
cover (3)?

Albania

1.44

0.01

y

Banglades h

1.62

5.58

n

Algeria

1.77

0.14

y

Benin

0.44

5.78

n

Azerbaijan

1.82

0.01

y

Burkina Fas o

1.06

9.83

n

Cameroon

0.32

0.26

y

Comoros

1.77

8.89

n

Djibouti

1.75

1.49

y

Cote d'Ivoire

0.66

2.05

n

1.9

0.04

y

Gambia

1.72

5.42

n

Gabon

0.17

0.03

y

Guinea

1.52

6.71

n

Indones ia

0.89

0.39

y

Guinea-Bis s au

0.76

8.21

n

Iran

1.79

0.02

y

Guyana

0.13

0.88

n

Iraq

1.78

0.09

y

Mali

1.67

8.2

n

Jordan

1.77

0.01

y

Mozambique

0.41

13.62

n

Kazakhs tan

1.02

0

y

Niger

1.77

8.31

n

Kyrgyz Republic

1.55

0.02

y

Nigeria

0.91

8.26

n

Malays ia

1.09

0

y

Senegal

1.74

3.05

n

Maldives

1.77

0.02

y

Sierra Leone

1.28

16.1

n

Morocco

1.81

0.06

y

Suriname

0.29

0.61

n

Pakis tan

1.55

0.91

y

Tajikis tan

1.51

1.7

n

Syrian Arab

1.39

0.02

y

Togo

0.22

6.42

n

Turkey

1.86

0.04

y

Uganda

0.22

3.1

n

Yemen

1.78

0.87

y

Egypt

44

Dakar – Senegal

3. Islamic Banking
3.1. Origin and Current state
3.2. Business Model of Islamic Banks
3.3. Islamic Banks in practice
3.4. Resilience to the global crisis
3.5. High potential of growth
3.6. Main challenges

45

3. Islamic Banking > 3.1. Origin and current state
• In 1950s in a rural area in Pakistan: a small experimental Interest-Free Bank
founded by a small number of landowners to finance poorer landowners for
agricultural improvements. Failure due to shortage of funds and problems of
specialized staff.
• In 1963, in Mit-Ghamr in Egypt: Mit-Ghamr Islamic Savings Bank (MGISB),
started following the business model of German savings banks adapted to
Sharia rules. Within three and a half years, MFISB counted 251,000 depositors
and the deposits grew at unprecedented higher rates than expected.
• MGISB financed a variety of purposes : house building and repairs, purchase of
simple machinery for handicraft industries, purchase of farm animals, basic
improvement to the irrigation.
• Stopped in 1967: the success of the bank began in the development of the
local area, created conflicts with the local social authorities who saw it as
interfering in their own area of authority...
• IDB in 1975
• Dubai Islamic Bank in Dubai (UAE) in 1975 the first major Islamic commercial
bank.
Source: A. Chachi (2005) "Origin and Development of Commercial and Islamic Banking Operations" J.KAU: 46
Islamic Economics Vol. 18, No. 2.

3. Islamic Banking > 3.1. Origin and current state

Islamic Banking Asset Growth (US$bn)

Source: E&Y - World Islamic Banking Competitive Report 2011-2012

47

3. Islamic Banking > 3.2. Business Model of Islamic Banks
• Chapra (2008) : In order for the financial system to promote justice, it
should satisfies at least two conditions, in addition to being strong
and stable :
1.

Financier must share in the risk so as not to shift the entire
burden of losses on the entrepreneur.

2. An equitable shares of bank lending should become available to
the poor to help eliminate poverty, expand employment and selfemployment opportunities and, thus, help reduce inequalities of
income and wealth.
Source: "Innovation and Authenticity in Islamic Finance", paper
presented in the "Eighth Harvard University Forum on Islamic
Finance: Innovation and Authenticity", April 19-20, 2008.
48


Islamic banks’ balance sheet
Assets

Capital & Liabilities
Equity

PLS modes of financing

Investment deposits

Trade modes of financing

• Neither the principle nor the return
are guaranteed
• Depositors share the bank’s net
profit according the PLS ratio stipulated
in the contract

• Can be withdrawn only on maturity

Demand deposits
• Yield no return and repayable on

demand at par value

STRENGTHS
• Separation of the investment funds from the demand deposits +
100% reserve on the demand deposits  removes the risk of bank
runs à la Diamond and Dybvig (Khan, 1987)
•PLS principle: neither the principal nor the return of the investment
deposits are guaranteed, any loss occurred on the asset side is totally
absorbed on the liability side  IBs maintain their net worths under
difficult economic situations. (Khan, 1987; Ahmed, 2002; Syed, 2007;
Cihak and Hesse, 2008).
• Prohibition of Riba and derivatives, the linkage with the real economy
principle  prevent the financial crises (Ahmed, 2002)

3. Islamic Banking > 3.3. Islamic Banks in practice

•

The empirical studies revealed that the current practices of IBs
deviate from their theoretical model.

•

Zainol and Kassim (2010) and Cevik and Charap (2011): CB deposit
rates Granger cause returns on PLS accounts in Malaysia and
Turkey.

•

Chong and Liu (2009): in Malaysia showing the retail Islamic
deposit rates mimic the behavior of conventional interest rates.

51

•Beck, Demirgüç-Kunt and Merrouche (2013) "Islamic vs. conventional
banking: Business model, efficiency and stability", Journal of Banking
and Finance carried an empirical investigation on a broad cross-country
sample and reached the following:
 few significant differences in business orientation.
 IBs less cost-effective, have higher intermediation ratio, higher asset
quality and better capitalized.
 large cross-country variation in the differences between conventional
and Islamic banks as well as across Islamic banks of different sizes.

52

Islamic banks assets’ breakdown by type

53

• Cihak and Hesse (2010) “Islamic banks and financial stability: An
empirical analysis,” Journal of Financial Services Research, analyses
the stability of IBs relatively to CBs in a cross-country analysis during
the period 1993-2004 and show that:
(i) small Islamic banks tend to be financially stronger than small
conventional banks
(ii) large conventional banks tend to be financially stronger than
large Islamic banks;
(iii) small Islamic banks tend to be financially stronger than large
Islamic banks.

© 2012 INCEIF


• Empirical finding: superior efficiency of Islamic banks suggesting
that Islamic banking could be beneficial for Africa.

© 2012 INCEIF


Islamic Modes of Finance for 63 Banks: 2012 (Billion US Dollar)

Source: Islamic Banking and Finance Information System (IBFIS) - IRTI
56




One of the explanations of the low use by Islamic banks of the
“Profit and Loss Sharing” modes of finance relatively to “markup” modes is the difficulty to deal with the agency problems
(moral hazard and adverse selection) (Siddiqui, 2006).



According to Ul Haque and Mirakhor (1987, p161) “bankers ascribe
the problem of moral hazard or asymmetric information to be an
important explanation for individual preference for short-term
liquidity.”

57

WEAKNESSES
• Deviations of the current practices from the theoretical model
 IBs distribute profits to the investment depositors even when they accrue loss, so
the profits are paid out of equity (Displaced Commercial Risk) (El- Hawary, 2007;
Greuning and Iqbal, 2008).
 Example: Ihlas Finance House, the Turkish Islamic financial institution was closed
during the financial crisis of 2000-2001 due to liquidity problems and financial distress
that originated from its strategic error to allow withdrawals from Investment
Accounts. “On the contrary other SFHs (Islamic financial institutions) which survived
the crisis did not en-cash the investment deposits and advised their clients to hold
them to maturity.” (source: Syed A.S. (2007) Financial Distress and Bank Failure:
Lessons from Closure from Ihlas Finans in Turkey. Islamic Economic Studies, 14 (1-2), 152. )

 In some cases IBs may not fully respect Sharia principles in their activities. Such
behaviour makes them vulnerable to risks normally born by the peers. (Chong and
Liu, 2009).
 IBs may lose their comparative advantages against the CBs.

• Dominance of less risky, low return assets  deprives IBs of the benefits of the portfolio
diversification, as PLS contracts are more profitable (El- Hawary, 2007; Greuning and
Iqbal, 2008)

3. Islamic Banking > 3.4. Resilience to the global crisis

• “…Although IBs have illustrated a degree of resilience and
stability, they have been impacted by the crisis because of
their higher exposure to real estate and their limited reliance
on risk sharing or equity based transactions…”
Source: Shamshad Akhtar (2009), Speech during the “Symposium
on Islamic Finance in Roma: Developments in MENA region”, Bank
Italia, Rome, Italy, November, 11th, 2009)

59

• Hasan and Dridi (2010) “The effects of the global crisis on Islamic and
conventional banks: A comparative study, “ IMF WP 10/201 analyse the
effects of the crisis on profitability, credit growth, asset growth and external
ratings of 120 Islamic and conventional banks in 8 countries.
 IBs’ showed stronger resilience in the early stages of the crisis. However,
as the crisis moved to the real economy in 2009, IBs’ profitability has
steeply declined relatively to the CBs.
 IBs contributed to financial and economic stability during the crisis, given
that their credit and asset growth was at least twice as high as that of CBs.

© 2012 INCEIF

• Bourkhis and Nabi (2013) "Islamic and conventional banks' soundness
during the 2007–2008 financial crisis," Review of Financial Economics.
analyse the effects of the crisis on a set of financial soundness indicators
(FSIs) related to banks‘ earnings and profitability, capitalization, asset quality,
efficiency, liquidity and financial stability using a matched sample of 34 IBs
and 34 CBs from the 16 countries covered on the period 1998–2009.
 IBs outperformed CBs in regards to the return on average assets (ROAA)
during and after the financial crisis. ..partially due to differences in the
provisioning strategies during the crisis : CBs increased their Loan Loss
Provision (LLPs) during 2007–2008 in response to the increase of their Non
Profit Loans (NPLs). However, IBs increased their LLPs only in 2009
although their NPLs increased in 2007–2008 similarly to their conventional
peers.
 Considering the impact of the financial crisis on the banking soundness
(measured by the Z-score and capital to asset ratio) we find no significant
difference between IBs and CBs. However, there is some evidence that IBs
were in average more sound (in regards of the Z-score).
© 2012 INCEIF


Source: Bourkhis and Nabi (2013)
62

2006-2008



•Beck, Demirgüç-Kunt and Merrouche (2013) "Islamic vs. conventional banking:
Business model, efficiency and stability", Journal of Banking and Finance
 Less likely to disintermediate during crises.

 Better stock performance of listed Islamic banks during the recent crisis due to
their higher capitalization and better asset quality.
63

3. Islamic Banking > 3.5. High potential of growth - Case of Indonesia
Banking Asset Penetration (% of Nominal GDP) and
Islamic Banking Market Share of Total Assets (%) in 2010

64

3. Islamic Banking > 3.5. High potential of growth - Case of Tunisia

65

3. Islamic Banking > 3.5. High potential of growth - Case of Tunisia

66

3. Islamic Banking > 3.5. High potential of growth - Case of Turkey

67

3. Islamic Banking > 3.5. High potential of growth - Case of Morocco

Source: IFAAS Survey 2012

68

3. Islamic Banking > 3.5. High potential of growth - Europe

WSBI/ESBG (World Savings Banks
Institute/European Savings Banks Group)

69

3. Islamic Banking > 3.6. Main challenges
 Misconception against Islamic Banking
• Islamic Banking is only for Muslims, is not profitable because no interest is charged, is
only offered in the Middle East, etc.
 Increase financial inclusiveness (retail and corporate levels)
 Moving towards equity-based financing
• New set of technical and risk management capabilities i.e. industry experts, knowhow.
• Institutional development (Supervisory and prudential regulatory framework,
Accounting and auditing standards, credit bureau, judicial procedure, etc.)
• Balance sheet size and economies of scale.
 Innovating in products and services to meet the customer needs and expectations in
presence of fierce Competition.

70

Dakar – Senegal

4. Successful Islamic Finance Experiences
and prospects in Africa

71

Malaysian experience
• Over the last decade, Malaysia has implemented important reforms
in the Islamic finance industry to favor its development

• Dr. Mohamad Akram Laldin: The Malaysian
Islamic financial sector is seen as one of the
most progressive and attractive in the world
given the numerous incentives planned and
further liberation in the coming years.”

Source: Mohamad Akram Laldin (2013) "Proposed Suitable Islamic Financial
Instruments for Central Asia Countries", Presentation during the Annual Meeting of
IDB, May 2013 - Dushanbe - Tajikistan
72


73


74

• Sovereign Sukuk for infrastructure development
Sukuk / Example of recent project finance Sukuk issued and announced
Country
Australia - SGI-Mitabu
(pipeline)
Saudi - GACA

Sector

Structure

Solar energy
Airport

Malaysia - Syarikat Prasarana Transportation &
Negara Bhd

Railways

Ijara (first 20 years) then
Musharaka
Murabaha
Possibly Istisnaa

Size
A$ 550
SAR 15 billion
RM 1 billion

Source: Zawya

75

The Microfinance Development Program (MDP) of IDB
 The MDP aims to increase outreach of microfinance to reduce poverty
through the development of Islamic Microfinance industry:
o Financial and Technical interventions designed to address the wide
ranging microfinance needs in member countries.
o Leverages resources and partners with established Microfinance
organizations – such as Grameen, BRAC, AGFUND and agencies such
as DFID (UK), and GIZ.
 Example of initiatives of the MDP:
o Rice growing, harvesting and local marketing: Indonesia, Pakistan
o Cotton and Livestock (Cows and goats): Pakistan
o Herbal tea growing, exotic vegetables and fruits growing in
greenhouses harvesting, packaging and marketing, local marketing
and export: Sudan
o Olive orchards to oil mill: Palestine
76

IDB role in fostering and Developing Islamic Banks in Africa

USD 33m

60%

50.5%

68.8%

40%

50.0%

100.0%

• ICD in partnership with Bank Asya has created Tamweel Africa a
holding company that invests in and manages a portfolio of four
Islamic banks: Senegal, Niger, Mauritania and Guinea.

77

• IDB is a shareholder of Jaiz Bank Plc. the first Non-Interest Bank in
Nigeria which begun full operations as the first Non-Interest Bank in
Nigeria on the 6th of January, 2012 with 3 branches located in Abuja
FCT, Kaduna and Kano.
--------------------------------------------------------------------------------------------------------• Gulf African Bank (GAB) one of only two fully fledged Islamic banks
in Kenya. registered 154% after-tax profit growth to Sh242 million for
the year ended December 31 compared to Sh95 million registered in
similar period in 2011. ROE increased from 7.2% in 2011 to 15.5% in 2012
while ROA rose to 1.8% compared to 0.7% in 2011. (Source: "Islamic
banks break even and post growth in profit," nation.co.ke).
• GAB obtained US$5million equity investment from IFC to favor the
growth of its SME and Corporate lending business. Further US$3
million trade line will be made available by IFC to the Bank…
(Source: IFC website).
78

Dakar – Senegal

5. Way forward for African countries

79

5. Way forward for the African countries
• Establishing a ten-years national strategy for the development of the
Islamic Financial Services Industry (Tax regime and regulatory
framework, capacity building, awareness, international
cooperation,…)
• Establishing a short/medium term strategy focusing on the
development of voluntary sector (Zaqat/ Awqaf/ Islamic
Microfinance)
• Further Enhancement of the Business Environment to stimulate FDI in
the Islamic financial services

• Develop infrastructure (Transport, energy, telecoms, health and
sanitation) and use sukuk as one of the financing instruments
80

Example: Developing the enabling environment for Mobile-banking (which
will serve also the expansion of Islamic financial services)

…This Brief discusses the increasing importance of mobile
money services, associated regulation of the sector and the
actions needed to create an enabling environment for these
services to continue growing in Africa as mechanisms for
social inclusion and poverty reduction.

81

Example: Developing the enabling environment for Mobile-banking (which
will serve also the expansion of Islamic Microfinance financial services)

82

Thank you
msnabi@isdb.org
msaminabi@gmail.com

83

Disclaimers
©2013 Islamic Research and Training Institute - www.irti.org

All rights reserved.
This work is a product of his author (staff of IDB Group). The findings, interpretations, and conclusions
expressed in this work do not necessarily reflect the views of IRTI-IDB.
IRTI and IDB do not guarantee the accuracy of the data included in this work. The boundaries, colors,
denominations, and other information shown on any map in this work do not imply any judgment on the
part of IRTI-IDB concerning the legal status of any territory or the endorsement or acceptance of such
boundaries.
Rights and Permissions
The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work
without permission of the author may be a violation of applicable law. IRTI-IDB encourages dissemination
of its work and will normally grant permission to reproduce portions of the work promptly.
For permission to photocopy or reprint any part of this work, please contact the author.

84

Islamic Development Bank Group www.isdb.org
Snapshot
• Head Quarter: Jeddah, Kingdom of Saudi Arabia
• Regional Offices: Kazakhstan, Malaysia, Morocco and Senegal

• Field Representatives in several Member Countries
• AAA Rating by Moody’s, Fitch, and S&P. Zero-Risk Rating by the European
Commission

IDB Scorecard
Total Assets : US$ 13.79 bn

Mission Statement
“To promote comprehensive human development, with a focus on the priority
areas of alleviating poverty, improving health, promoting education, improving
governance and prospering the people.”

Authorised Capital : US$ 150 bn
Paid-up Capital : US$ 6.10 bn
Rated : Aaa/AAA/AAA

Priority Areas
• Human Development

• Private Sector Development

• Agricultural Development & Food Security • Intra-Trade among Member Countries

• Infrastructure Development

• R&D in Islamic Banking & Finance

Member Countries : 56
Africa – 22
Middle-East & North-Africa – 19
South & South-East Asia – 8
Central Asia –7
Total Employees : 1,014

85

Islamic Research and Training Institute www.irti.org
•

Islamic Research and Training Institute (IRTI) was established in 1981.

•

The purpose of the organization is to develop and advance the Islamic
Financial Industry through Research, Training, Advisory and Information

•

The name IRTI is now synonym with Islamic Finance, Islamic Economics and
Islamic Banking.

Functions
Undertake research for enabling the economic, financial and banking activities
in Member countries to conform to Islamic Shariah
Provide advice, consultancy and technical assistance in Islamic Banking and Finance to
IDB Group Members, to the Bank’s Member Countries and to third parties
Develop curricula and course material to disseminate research and policy findings in
different fields, and organize seminars, workshops and training programmes for IDB
member ‎ ountries
c
Develop, update and maintain information systems and databases in Islamic Banking
and Finance, and disseminate them through all modern media

86

Islamic Finance: An overview

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