The Principles, Aims and
Evolution of Islamic Finance
Iqbal Khan
5 March 2013
Twitter: @IqbalKhanCEO
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The importance of ethical finance is underpinned in the monotheistic
scriptures
•
Being in debt is equivalent to servitude because of the immense burden
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
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
ignominy” (Hadith)
CHRISTIANITY
JUDAISM
ISLAM
Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith
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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
4
In any transaction, one must clearly stipulate what he or she is
buying or selling and what price is being paid
Removing speculation and creating value-enhancing and sustainable activity
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Islamic Finance is the outcome of CSR derived from religion and
applied to banking
Accountability to God
Ethical
profits
“More-than-profit”
mentality
(rather than “profits-atany-costs”)
Business ethics
Shari`a “code of ethics”
Islamic Finance is capitalism with a moral compass
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The industry has developed a comprehensive product offering over
its young history
Development of industry
−
−
Development of theoretical framework
Muslim-majority nation independence
60s
−
−
Egypt and Malaysia pioneering institutions
Establishment of OIC (1969)
70s
−
−
Islamic Development Bank (1974) and DIB
One country-one bank setup
80s
−
−
Advancement of Islamic products
Full “Islamization” of Iran, Pakistan and Sudan
90s
−
Entry of global institutions e.g. HSBC Amanah
00s
−
−
Tipping point reached in some markets
Development of industry-building institutions
1950s
Evolving richness in products
structured
products
Debt issues
insurance
private
equity
2000s
1970s
1990s
1980s
project
finance
equity
syndications
structured
and trade finance
Industry has near like-for-like parity with conventional offering
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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”
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The development of the Islamic finance industry has been fuelled
by pioneering institutions and industry building organisations
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Growth and drive is being led by customer demand
Government driven
Sudan
 Islamic Finance was not established by a
royal decree or a presidential
announcement, but it was the will of
the people which created the industry.
Iran
Malaysia
 Growth in the GCC Islamic banking
markets are primarily driven by
customer demand
Bahrain
Pakistan
Brunei
UK
Singapore
 Malaysia presents a near ideal
regulatory and market-driven model for
Islamic business
Kuwait UAE
USA
Japan
China
Bangladesh
Qatar
Sri Lanka
Indonesia
Saudi Arabia
Egypt
Source: Central Bank, Reports, industry estimates
Turkey
Key: Bubbles indicate illustrative size of Islamic banking assets
Market driven
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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
banking assets and are concentrated in 7 countries, including
GCC, Malaysia and Turkey. 13 Islamic banks have an equity
base of more than $1 billion. Building regional institutions
and participating in larger transactions requires the industry
to scale up.
Financing Growth - CAGR, 2008-11 (%)
Saudi Arabia
Kuwait
Saudi Arabia
Qatar
UAE
UAE
Qatar
Bahrain
Qatar
Malaysia
Saudi Arabia
Turkey
UAE
Kuwait
Saudi Arabia
Turkey
Malaysia
Kuwait
Kuwait
UAE
Bank's Home Market
Islamic finance continues to grow at an exponential pace.
Higher growth in personal financing assets is made up
from a number of factors: pricing differential has been
reduced or eliminated, customers are more accepting of
Islamic finance, and the industry’s distribution capability
has improved immensely.
35
30
25
20
15
10
5
0
Corporate
0
1000
2000
3000
4000
5000
6000
Equity US $m
Source: Ernst and Young – The World Islamic Banking Competitiveness Report
7000
8000
9000
Government
Personal
Conventional
Real Estate
Services
Islamic
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Some of the pioneers of the Islamic finance industry
SHARI’A SCHOLAR
Sheikh Ibn Baaz
(1910 – 1999)
ENTREPRENEUR
ACADEMIC
REGULATOR
Sheikh Saleh Kamel Royal Professor Lord Eddie George
Ungku Abdul Aziz (1938 – 2009 )
(1941 – )
(1922 – )
PRACTITIONER
Sir John Bond
(1941 – )
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Mountaineering Analogy: The Islamic Finance industry has come a long
way 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.
Beacon
House
 Fortifying and
strengthening the
industry’s foundations.
 A globally recognised
one trillion dollar +
industry.
Laying the Foundations
 150% increase over the
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
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Today’s interconnected and dynamic world is presenting a unique
opportunity for Islamic finance to prosper
THE GREAT RECESSION
The global economic crisis – sparked
by the bursting of the U.S. housing
bubble and fuelled by various systemic
imbalances. The effects of the crisis is
now being felt by those at the
grassroots, and is leading to a political
and economic paradigm shift.
OCCUPY MOVEMENTS
ARAB AWAKENING
The “Occupy Movements” have
highlighted grassroots support for
concrete reforms in the financial
services sector. The movement led to
protests and occupations in over 80
countries and across every continent
except Antractica.
The Arab Awakening was driven by
the young people facing dire socioeconomic conditions, with access to
social media and a hunger for change.
The uprisings led to regime changes in
Tunisia, Egypt, Libya – and protests in
Bahrain and Syria, amongst others.
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The current global economic crises highlight the need for a valuebased approach to financial services
1
Financial Institutions
 Need for savings and
investment orientation to
replace consumption and
credit culture
2
4
Policy Implications
Global Markets
Impact points
 Differentiation between
deposit-taking institutions
and investment managers
 Dangers of opaque sale of
debt now shown to be
evident
3
Real Economy
 Stronger links needed
between banking and real
economy investment
Material crisis requires moral solutions
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How Scotland can capture the Islamic finance opportunity
1
POLITICAL ENABLEMENT
2
ATTRACTING ISLAMIC FUNDS
3
RESEARCH AND INNOVATION
4
THE PEOPLE PARADIGM
5
CREATING SUSTAINABLE GROWTH
•
Regulatory and public sector support to make Scotland a
‘hub’ for the Islamic finance industry.
•
Trade and Investment engagement with high-growth OIC
markets to attract funding for projects i.e. Sukuk model.
•
Creation of a Centre of Excellence to provide much-needed
research and analysis to support the industry’s growth.
•
Islamic finance academic programmes at Scottish
universities to attract domestic and international students.
•
Boosting job creation and economic prosperity by enabling
Scottish companies to expand in Muslim-majority markets.
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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.”
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