Iqbal Khan: The Evolution, Principles and Aims of Islamic Finance (6.3.13)

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Iqbal Khan is the CEO of Fajr Capital - an ethical investments and advisory firm backed by Abu Dhabi Investment Authority, Government of Brunei, Government of Malaysia, HSBC and others. He was the founding CEO of HSBC Amanah and recently received the Royal Award for Islamic Finance from the King of Malaysia. In this lecture he discusses the history and evolution of Islamic Finance and its current relevance against the backdrop of the global economic crisis.

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  • Iqbal your slide deck is extremely insightful, values which should be universal and fundamental to business.
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  • Iqbal niyat (intent) is paramount in every action we undertake. Without which - honesty is relative and a justification for one’s actions and conscience. Sandeep Sharma – If you recall our shared past.
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  • Bismillahi rahmanir rahim – "In the Name of God, the Most Beneficent, the most Merciful.“ Opening Salutation - Your Royal Highness Raja Nazrin Shah, Crown Prince of Perak and Financial Ambassador to the Malaysian International Islamic Financial Centre (MIFC) - Datuk Ranjit Ajit Singh, Chairman of Securities Commission of Malaysia - Dato’ Dr. Nik Ramlah, Deputy Chief Executive of Securities Commission of Malaysia - (Any other VIPs whom you may notice) The most important part of the verse is “the most merciful” - the Prophet (p.b.u.h.) has been narrated Abu Huraira saying: “When Allah created the Creation, He wrote in His Book–and He wrote (that) about Himself, and it is placed with Him on the Throne–’Verily My Mercy overcomes My Anger.’” When Allah SWT created the world, He created divine, mercy, and compassion in 100 parts, which 99 parts was kept to Himself, and 1% was spread to all living beings. Prophet (p.b.u.h.) mentioned that it is from the 1 part that we show kindness and generosity to each, when the male lift its leg when feeding its foal when feeding it for the fear of hurting it. This session is about our market and our values
  • 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
  • Shari’a scholar perspective: Narrate the story about Sheikh bin Baaz in his role in establishing the first mudharaba contract Entrepreneur perspective: Narrate the story about Sheikh Saleh Kamel and his mother in the founding of Islamic finance industry in KSA Economist perspective: Royal Professor Ungku Aziz Regulator perspective: Narrate the story of Lord Eddie George (1938-2009) and his Muslim family neighbors in the establishment of Islamic finance in the UK Banker/ Practitioner perspective: Narrate the story about Sir John Bond’s commitment on ensuring the Shari’a compliance of HSBC Amanah’s products and services Let me move on to the case study of HSBC Amanah.  As I said earlier, Islamic Finance at its heart, is about community banking, ethical investments, affinity marketing – all of which are part of HSBC’s history, tradition and culture.  When a large organisation such as HSBC start a new global business, such as HSBC Amanah, it goes to its core, to its very being, when it was a small institution and its innovate self comes alive.  Similarly, when a large organisation such as HSBC makes a genuine commitment to a growth industry, like Islamic Finance, it brings with it its history, its management, its technology and know-how which over the years have contributed so much to the Islamic Finance Industry.  From the very beginning, HSBC and Islamic Finance had a strategic and symbiotic fit, that fit was based on HSBC’s long standing tradition of community banking in many of the core Islamic Markets, such as Malaysia, Saudi Arabia, the GCC, parts of other parts of the Islamic world.   HSBC has always regarded itself as a guest in the countries in which it operated.  The Islamic Finance initiative was a natural response to offer the products and services which these markets needed and the manner in which they them.  The timing of the launch of the Global Islamic Finance initiative as it was called in the inception was also opportune because HSBC was going through a major revolution way back in 1998 called Managing for Value under the dynamic leadership of Sir Jon Bond.  This was a time when a group alignment and a new way of thinking were arriving at HSBC and the world’s local bank was positioning itself in the marketplace, besides HSBC had a huge amount of goodwill with its customers in the OIC world.  I experienced this goodwill first-hand, when in joining HSBC from Citigroup, I approached my customers who said to me that when you called on us as Citibank, we opened our minds to you, however when you come to us now as HSBC we open our minds and hearts to you.   In any large organisation, to make a new initiative successful, you need senior level sponsorship.  At HSBC we were fortunate to have the support at the highest level of the organisation, its Group Chairman, Sir Jon Bond and its current Chairman, Stephen Green and important members of the senior management team such as Zarir Cama, Ann Almeida and many others from the very beginning.  That senior level commitment was exemplified in a discussion with Sir Jon Bond when he said: “I want to look at every Muslim customer in the eye and say to them that when HSBC offers a product which is Shari’a compliant, it is so.”  These words were part of a long standing tradition of authenticity at HSBC, which along with its commitment to the highest Shari’a standards, laid the foundation for the successful launch of the HSBC Amanah brand.   So every action at HSBC Amanah was based and measured on the principle of Shari’a authenticity from where we will hound in the most remote area in the Corporate Finance Advisory services of the Merchant Banking division of the HSBC investment bank, to product specifications, the ward worlds for the HSBC Amanah was Shari’a authenticity, which meant full transparency and disclosure to our Shari’a Board playing a leadership role in helping to write the rule book for the growing Islamic Finance Industry and to be an enabler of the shift from Shari’a-compliant to Shari’a-based.  These efforts built the prodigious under the guidance of leading Shari’a scholars such as Sheikh Taqi Usmani, Sheikh Musam Jacobi, Dr Mohammed Algufri - it helped HSBC Amanah track and build the best possible management team and above all, service the growing list of HSBC Amanah clients with integrity - all of whom believed in the promise of HSBC Amanah.   The growing trust radius of HSBC Amanah, build leadership in markets such as Saudi Arabia and Malaysia – it helped to open up new markets, such as the UK, Indonesia, Bangladesh and the USA.   Finally, new areas such as building the Islamic Debt Capital Markets, Treasury and Risk Management and Takaful industry.  The success of HSBC Amanah was recognised through numerous Islamic Finance Awards and leadership position in the industry.  More important was the confidence of its growing customers across the world that is being looked after by one of the finest management teams in the Islamic Finance Industry.  These successes gave visibility to the HSBS Amanah brand and build its brand equity as a leading Islamic Finance provider.  When we look at the future of HSBC Amanah, we have to acknowledge that the global economy’s in an unprecedented market condition and in unchartered territories.
  • The Arab Spring is a delayed response to the pro-democratic and anti-Communist Revolutions of 1989 (in the ex-Russian blocs), and is backed by social media. It highlights the needs to remove excess in the system and to create opportunities to the younger generation
  • Iqbal Khan: The Evolution, Principles and Aims of Islamic Finance (6.3.13)

    1. 1. Sponsored by o Sustainable Business Initiative The Principles, Aims and Evolution of Islamic Finance Iqbal Khan 5 March 2013 Twitter: @IqbalKhanCEO Fajr Capital | 1
    2. 2. The importance of ethical finance is underpinned in the monotheisticscriptures • Being in debt is equivalent to servitude because of the immense burden CHRISTIANITY to repay. Hence, “The rich rule over the poor and the borrower is slave of the lender” (Proverbs 22:7). • "The first question an individual is asked in the afterlife at the final JUDAISM judgment is: “Did you conduct your business affairs honestly?” (Babylonian Talmud, Shabbos 31a) • “However plentiful usury may look from the outside, its end is want and ISLAM ignominy” (Hadith) Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith Fajr Capital | 2
    3. 3. Islamic Finance principles consist of core basic tenants 1 If something is immoral, one cannot profit from it 2 To share reward, one must also share risk 3 One cannot sell what one does not own In any transaction, one must clearly stipulate what he or she is 4 buying or selling and what price is being paid Removing speculation and creating value-enhancing and sustainable activity Fajr Capital | 3
    4. 4. Islamic Finance is the outcome of CSR derived from religion andapplied to banking Co esp rp on te R or s Accountability to God ra nce at ibi po a e lit or ern “More-than-profit” So y C v Ethical cia mentality go l profits (rather than “profits-at- any-costs”) Business ethics Shari`a “code of ethics” Islamic Finance is capitalism with a moral compass Fajr Capital | 4
    5. 5. The industry has developed a comprehensive product offering overits young history Development of industry Evolving richness in products − Development of theoretical framework 1950s − Muslim-majority nation independence structured products Debt issues − Egypt and Malaysia pioneering institutions 60s − Establishment of OIC (1969) insurance − Islamic Development Bank (1974) and DIB 2000s 1970s 70s − One country-one bank setup private − Advancement of Islamic products equity 80s − 1990s 1980s Full “Islamization” of Iran, Pakistan and Sudan syndications 90s − Entry of global institutions e.g. HSBC Amanah project − Tipping point reached in some markets finance structured 00s − Development of industry-building institutions equity and trade finance Industry has near like-for-like parity with conventional offering Fajr Capital | 5
    6. 6. In all, the Islamic finance industry is developing a global reach… Growth Engine Awakening Ripe for Growth Future Markets Source: Standard and Poor’s “The Globalization of Islamic Finance” Fajr Capital | 6
    7. 7. The development of the Islamic finance industry has been fuelledby pioneering institutions and industry building organisations Fajr Capital | 7
    8. 8. Growth and drive is being led by customer demandGovernment driven Sudan • Islamic Finance was not established by a Iran Malaysia royal decree or a presidential announcement, but it was the will of the people which created the industry. Pakistan Bahrain • Growth in the GCC Islamic banking Brunei markets are primarily driven by UK customer demand Singapore Kuwait UAE • Malaysia presents a near ideal Bangladesh regulatory and market-driven model for Qatar Islamic business USA Sri Lanka Japan China Indonesia Saudi Arabia Egypt Turkey Key: Bubbles indicate illustrative size of Islamic banking assets Source: Central Bank, Reports, industry estimates Market driven Fajr Capital | 8
    9. 9. The Islamic finance ecosystem is growing: Total Islamic finance assets may surpass $1.8 trillion in 2013 Top 20 Islamic banks make up 55% of the total Islamic Islamic finance continues to grow at an exponential pace. banking assets and are concentrated in 7 countries, Higher growth in personal financing assets is made up including GCC, Malaysia and Turkey. 13 Islamic banks have from a number of factors: pricing differential has been an equity base of more than $1 billion. Building regional reduced or eliminated, customers are more accepting of institutions and participating in larger transactions requires Islamic finance, and the industry’s distribution capability the industry to scale up. has improved immensely. Fajr Capital | 9Source: Ernst and Young – The World Islamic Banking Competitiveness Report
    10. 10. Some of the pioneers of the Islamic finance industrySHARI’A SCHOLAR ENTREPRENEUR ACADEMIC REGULATOR PRACTITIONER Sheikh Ibn Baaz Sheikh Saleh Kamel Royal Professor Lord Eddie George Sir John Bond (1910 – 1999) (1941 – ) Ungku Abdul Aziz (1938 – 2009 ) (1941 – ) (1922 – ) Fajr Capital | 10
    11. 11. Mountaineering Analogy: The Islamic Finance industry has come a longway since the days of its pioneers, but it still has a long way to go…  Creating role model institutions which facilitate the demonstration effect.  Democratizing wealth and ensuring stability.  Fortifying and Beacon strengthening the House industry’s foundations.  A globally recognised one trillion dollar + industry. 150% increase over the Laying the Foundations  last five years.  Exponential growth in core markets i.e. Middle East and Malaysia. The evolving political and economic paradigm will drive our industry forward Fajr Capital | 11
    12. 12. Today’s interconnected and dynamic world is presenting a unique opportunity for Islamic finance to prosper THE GREAT RECESSION OCCUPY MOVEMENTS ARAB AWAKENINGThe global economic crisis – sparked by The “Occupy Movements” have The Arab Awakening was driven by the the bursting of the U.S. housing highlighted grassroots support for young people facing dire socio- bubble and fuelled by various concrete reforms in the financial economic conditions, with access systemic imbalances. The effects services sector. The movement led to to social media and a hunger for of the crisis is now being felt by protests and occupations in over 80 change. The uprisings led to those at the grassroots, and is countries and across every continent regime changes in Tunisia, Egypt, leading to a political and economic except Antractica. Libya – and protests in Bahrain paradigm shift. and Syria, amongst others. Fajr Capital | 12
    13. 13. The current global economic crises highlight the need for a value-based approach to financial services 1 • Need for savings and investment orientation to Financial Institutions replace consumption and credit culture 4 2 Policy Implications Global Markets Impact points • Differentiation between • Dangers of opaque sale of deposit-taking institutions debt now shown to be and investment managers evident 3 • Stronger links needed Real Economy between banking and real economy investment Material crisis requires moral solutions Fajr Capital | 13
    14. 14. How Scotland can capture the Islamic finance opportunity • Regulatory and public sector support to make Scotland a1 POLITICAL ENABLEMENT ‘hub’ for the Islamic finance industry. • Trade and Investment engagement with high-growth OIC2 ATTRACTING ISLAMIC FUNDS markets to attract funding for projects i.e. Sukuk model. • Creation of a Centre of Excellence to provide much-needed3 RESEARCH AND INNOVATION research and analysis to support the industry’s growth. • Islamic finance academic programmes at Scottish4 THE PEOPLE PARADIGM universities to attract domestic and international students. • Boosting job creation and economic prosperity by enabling5 CREATING SUSTAINABLE GROWTH Scottish companies to expand in Muslim-majority markets. Fajr Capital | 14
    15. 15. Martin Luther King, Jr. (1929-1968)“Through our scientific genius we have made of the world a neighborhood; now through our moral and spiritual genius we must make of it a brotherhood.” Fajr Capital | 15
    16. 16. Sponsored by o Sustainable Business Initiative http://www.businessschool.ed.ac.uk/sbi Fajr Capital | 16

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