EVE00196 - Session 1 - Ms Baljeet Kaur Grewal

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09/04/2013
KFH Research Ltd
Overview of the Islamic Financial
Landscape: Globally and in Europe
Baljeet Kaur Grewal
Managing Director & Vice Chairman
PRIVATE & CONFIDENTIAL
9 APRIL 2013
TABLE OF CONTENTS
1. Islamic Finance Industry: An Overview
2. Islamic Finance Proposition For Europe
3. Prospects and Challenges
2
1
09/04/2013
1
Islamic Finance Industry: An Overview
3
Global Islamic Finance Industry
 The Islamic financial services industry has evolved in the aftermath of the financial crisis to provide
alternative means of financial intermediation and a more diversified platform for allocating investible
funds.
 Growth drivers include (1) a growing number of industry players, particularly in new jurisdictions, (2) the
introduction of regulatory reforms, (3) incentives and various government-sponsored initiatives to
establish Islamic financial services in various markets, as well as (4) an increase in the range of Shariahcompliant products and services.
 Islamic finance assets were estimated at USD1.6 trillion as at end-2012, a growth rate of 20.4% y-o-y.
Between 2008 and 2012, Islamic finance assets have grown at a CAGR of 19.5% per annum.
 Market consensus is that total Islamic financial assets will reach USD6.5 trillion by 2020.
Islamic Financial Assets by Region and Asset Class, USD billion (2012E)
Assets By Region
Banking Assets
Sukuk Outstanding
Islamic Funds
Assets
Takaful
Contributions
Asia
171.8
160.3
22.6
2.7
GCC
434.5
66.3
28.9
7.2
MENA (excl. GCC)
590.6
1.7
0.2
6.9
Sub-Saharan Africa
16.9
0.1
1.6
0.4
Others
59.8
1.0
10.8
0.0
1,273.6
229.4
64.2
17.2
80.4
14.5
4.1
1.0
Total USDmln
% of total
4
Source: Central banks, Regulatory bodies, Islamic banks, Zawya, IFIS, Bloomberg, KFHR
2
09/04/2013
Global Islamic Banking Industry
 At present, Islamic banking has become the fastest growing segment in the international financial system.
The internationalisation of Islamic finance offers the potential for further means by which cross border
financial flows are intermediated between economies worldwide.
 Islamic banking has been the main driving force of the global Islamic finance industry, with an estimated
asset size of USD1.27 trillion as at end-2012, or 80.4% of Islamic finance assets worldwide. Between
2007 and 2011, Islamic banking assets have grown at a CAGR of 21.1% per annum.
Islamic Banking Key Growth Drivers
Proven
performance over
financial crisis
period
Growth in
microfinancing
products for rural
and under-banked
populations
Key Growth
Drivers of
Islamic Banks
Growth in supply
of banking
products and
services
Increased trade
among Muslim
countries
5
Source: Central banks, Regulatory bodies, Islamic banks, Zawya, IFIS, Bloomberg, KFHR
Global Sukuk Market
 The global sukuk market saw issuance surged to a new record high of USD131.2bln in 2012, an
increase of 54.2% over previous record of USD85.1bln achieved in 2011.
 By country, Malaysia dominated the primary sukuk market at 74.0% of total value of sukuk issued. This was
followed by Saudi Arabia at 8.0%, the UAE at 4.7% and Indonesia at 4.6%.
 By issuer type, sovereign papers accounted for 61.1% of total value of sukuk issued, followed by corporates
(27.8%) and quasi-sovereigns (11.1%).
 By currency, ringgit-denominated sukuk stood at 74.0% of total value of sukuk issued, followed by USD at
13.9% and Saudi riyal at 5.1%.
 Global sukuk outstanding rose to USD229.4bln as at end-2012, or 14.5% of global Islamic finance
assets.
Sukuk Issuance Trend (2003-2012)
140
120
USD bln
100
80
CAGR
67.4%
60
40
Domicile of Sukuk Issued, USDmln (2012)
Turkey BahrainPakistan
1.8% 1.3% 0.8%Others
Qatar
0.8%
4.2%
Indonesia
4.6%
UAE
4.7%
Saudi
Arabia
8.0%
20
0
2003 2004 2005 2006 2007 2008 2009 2011 2012
Malaysia
74.0%
6
Source: Zawya, IFIS, Bloomberg, KFHR
3
09/04/2013
Global Islamic Funds and Takaful
 Islamic assets and wealth management is a niche segment of the Islamic financial services industry,
which saw the number of Islamic funds rising from 285 in 2004 to 1,029 in 2012 (October).
 Assets under management of Islamic funds were estimated at USD64.2 billion in 2012 (2011: USD60
billion), accounting for 4.1% of Islamic finance assets globally.
 Islamic funds asset allocations – equities (46.9%), money market (22.2%), mixed assets (11.8%), real
estate (9.0%).
 Takaful remains the smallest market of the Islamic financial services industry despite notable
developments in recent years.
 Global takaful contributions were estimated at USD17.2 billion in 2012, representing 1.0% of Islamic
finance assets worldwide.
Islamic Funds Assets Under Management
(2005-2012E)
CAGR
5.7%
70
60
Global Takaful Contributions (2005-2012E)
1,000
20,000
40
600
30
400
20
200
10
0
0
2005 2006 2007 2008 2009 2010 2011 2012E
Assets under management
No. of funds
USD bln
50
USD mln
800
CAGR
17.9%
15,000
10,000
5,000
0
2005
2006
2007
2008
2009
2010 2011E 2012E
Number of funds (RHS)
7
Source: Central banks, Regulatory bodies, Zawya, IFIS, Bloomberg, KFHR
Global Islamic Finance Asset Classes
Islamic
Banking

Islamic banking has been the major driving force of the global Islamic finance industry,
with an estimated asset size of USD1.27 trillion as at end-2012

Contributed to 80.4% of Islamic finance assets worldwide

Islamic banking assets expected to reach USD1.5 trillion as at end-2013
Sukuk

Sukuk market is the second largest asset class within the Islamic
finance industry, accounted for 14.5% of global Islamic finance assets

Sukuk outstanding stood at USD229.4 billion as at end-2012, with
record new sukuk issuances of USD131.2 billion during the year

Global sukuk outstanding expected to reach USD275 billion as at end2013
USD1.9tln
by end-2013
Islamic
Funds
Takaful

Total assets under management of the Islamic funds industry
reached USD64.2 billion as at end-2012 vs. USD60 billion in 2011

Contributed to 4.1% of global Islamic finance assets

Total assets under management of Islamic funds expected to reach
USD67.8 billion as at end-2013

Global Takaful contributions estimated at USD17.2 billion in 2012 vs. USD15.2
billion in 2011, with CAGR of 19.1% per annum between 2007 and 2011

Accounted for 1.0% of global Islamic finance assets

Global Takaful contribution projected to reach USD20.3 billion as at end-2013
8
Source: Central banks, Regulatory bodies, Islamic banks, Zawya, IFIS, Bloomberg, KFHR
4
09/04/2013
2
Islamic Finance Proposition for Europe
9
Europe: “Opportunity In A Crisis”
Eurozone GDP Growth Projections:
2012: -0.6%
2013E: -0.2%
2014F: 1.0%
Portugal:
2012: - 3.0%
2013E: -1.0%
2014F: 0.8%
France:
2012: 0.2%
2013E: 0.3%
2014F: 0.9%
Spain:
2012: -1.4%
2013E: -1.5%
2014: 0.8%
Germany:
2012: 0.9%
2013E: 0.6%
2014F: 1.4%
Italy:
2012: -2.1%
2013E: -1.0%
2014F: 0.5%
Greece:
2012: -6.0%
2013E: -4.2%
2014F: 0.0%
 Although progress in national adjustment and a strengthened EU-wide policy response to the Euro-zone crisis
have improved financial conditions for sovereigns in the periphery, the near-term outlook for the Euro-zone
remains fragile and has been revised downward.
 As a result, activity is now expected to contract by 0.2% in 2013 reflecting delays in the transmission of lower
sovereign spreads and still-high uncertainty about the ultimate resolution of the crisis despite recent progress.
10
5
09/04/2013
Europe: Structural Reforms Lay Basis For Return of
Confidence
Euro-zone: Fiscal deficit
Euro-zone: Government Debt Ratio
100
0
95
-1
90
-2
85
% of GDP
% of GDP
2005 2006 2007 2008 2009 2010 2011 2012e 2013f 2014f
-3
-4
80
75
70
-5
65
-6
60
-7
2005 2006 2007 2008 2009 2010 2011 2012e 2013f 2014f
Euro-zone: Contagion Risk is High
As at 2012e
Size of GDP
Budget
Public debt
deficit
% of total euro-
% of GDP
% of GDP
zone
28.4
20.8
6.4
4.2
3.1
1.8
1.8
16
2
11.9
Germany
France
Netherland
Belgium
Austria
Portugal
Ireland
Italy
Greece
Spain
0
-4.6
-3.8
-3
-3
-5
-8.5
-2.9
-7.3
-8
83
90
68.2
99
74.3
119.1
117.7
126.3
170.7
90.7
 Moving forward, 2012’s projected budgetary
improvement stems mainly from a reduction in
the structural deficit, reflecting the implementation
of consolidation packages in a number of
countries.
 As a result of the expected economic slowdown,
with real GDP growth falling below potential
growth in 2012, cyclical conditions would not
contribute to better fiscal outcomes.
 The worsened economic outlook explains most of
the upward revisions of the projections for the
general government debt ratio, which reached
93.6% of GDP in 2012 and forecast to rise to
11
94.9% in 2013.
Source: ECB, KFHR
Islamic Finance: An Alternative Value Proposition
 Proven to be a viable system in the global financial landscape
Financial Inclusion
•
•
•
•
Ethical finance consistent with universal values
Entrenched by fundamentals of Shariah
Diversity of products and services
Meeting financial needs
Commercially Driven
•
•
•
Attractive and competitive financial intermediation
Support growth and promote financial stability
Fast growing segment in the global financial landscape
Internationalisation
•
•
•
Islamic finance becoming mainstream
Viable solution to the global financial system
Emerging interest from key financial centres (London, Hong Kong, France)
 Proven to be a safer alternative in times of financial distress
•
A new IMF study compares the performance of Islamic banks and
conventional banks during the recent financial crisis, and finds that
“Islamic banks, on average, showed stronger resilience during the
global financial crisis.”
•
“…IFIs are forbidden from investing in such derivative instruments and
therefore did not have exposure to such derivatives. Also the holding of
shares or the investment in conventional financial institutions which are
involved in usury or riba’ are not permitted. The combination of these
factors minimised the impact of the financial crisis on IFIs”
IMF
IDB
12
Source: KFHR
6
09/04/2013
Islamic Finance: Safeguarding Financial Stability




Avoidance of unethical
activities
Avoidance of maisir
(gambling) & riba (interest)
& non-permissible goods &
services
Screening investment
Forbearance for customers
in difficulties



Ethical
Real



Greater transparency &
disclosure
Additional Shariah
governance

Unique risks
Greater fiduciary duties &
accountability
Emphasis on clear
documentation & contract add
to soundness & stability
Real Activities
Shariah values
Ethical
consistent with
universal values

Direct link to real economy
Certainty – supported by
underlying activities
(prohibition of gharar uncertainty)
Prohibits excessive
leveraging
Money is not commodity
Activities
Governance
Partnership
Governance



Different contractual
relationship
Equity-based & risksharing transactions
Clearly defined risk &
profit-sharing
characteristics serve as
additional built-in
mechanisms
13
Source: BNM, KFHR
European Islamic Finance: Incentivising Growth
 A number of initiatives have been taken to streamline regulations and prepare for future Shariah-compliant
transactions and institutions
 These steps bode well for the industry and are expected to attract Middle Eastern funds looking for exposure
in European markets
UK
 2010 – The Financial Services and Markets Act
2000 Order 2010 was introduced by Treasury to
support Islamic finance and the issuance of
corporate sukuk within the UK
 2012- The UK Government has launched an
Islamic Finance Task Force with the aim of
securing London’s status as the western hub for
Islamic finance.
France
 2009- The amendment of Article 2011 of the French
Civil Code relating to the formation of trusts was
interpreted as an important step towards permitting
the issuance of sukuk out of France.
 2010- Revision of specific regulations addressing
tax which cover instrument Sukuk, ijarah, istisna
and Murabaha with the view to remove the tax
discrepancies.
Germany
 2012- German banking regulator has hosted
Islamic finance conference in Frankfurt and the tax
treatment of different Islamic finance products was
discussed.
Luxembourg
 2010– The Luxembourg Tax Authority has
published a circular to clarify the tax treatment of
Murabahah and sukuk transactions, to ensure that
they benefit from the same tax treatment as
conventional products

2011- Luxembourg’s CSSF published a note that
clarified that no specific legislation was required for
Shariah compliant investment funds, since
Luxembourg’s current law contains no obstacles to
it.
14
Source: IFSL, The Banker, Bloomberg, KFHR
7
09/04/2013
Islamic Finance In The EU: Standing Out In A Crowd
 Currently there is a significant number of banks offering Islamic mortgages in the UK which includes HSBC
Amanah, Lloyds TSB and the Islamic Bank of Britain to name a few.
 There are also a large number of Islamic funds which have been domiciled in Europe and have achieved
significant returns
Islamic Funds by Country (October 2012)
Country
Total Assets (USDmln)
Number of Funds
4,847.9
1,340.9
804.5
69.2
25.0
87
30
52
7
10
Ireland
Jersey
Luxembourg
France
Guernsey
Islamic Banks in the UK
Window
Fully-fledged

Ahli United Bank

Europe Arab Bank
•
Bank of London and Middle East

ABC International Bank

HSBC Amanah
•
QIB UK

Bank of Ireland

IBJ International London
•
European Islamic Investment Bank

Barclays

J Aron & Co
•
Gatehouse Bank

BNP Paribas

Lloyds Banking Group
•
Islamic Bank of Britain

Bristol & West

Royal Bank of Scotland

Citi Group

Standard Chartered

Deutsche Bank

UBS

United National Bank
15
Source: IFSL, The Banker, Bloomberg, KFHR
Growing Funds, Growing Alternative Options
Global HNWIs Wealth by Region (2006-2013F)
Annual growth rate
2008-2013F
50
At 8.1% global CAGR

Global HNWIs wealth is
projected to grow at a
CAGR of 8.1% for
2008-2013F,
from
USD32.8tln in 2008 to
USD48.5tln in 2013

Asia Pacific seeing the
biggest increase in
wealth
30
20
10
0
5.7%
Africa
North America
Europe
4.1%
7.0%
6.5%
Asia Pacific
12.8%
2013F
Number of Islamic Funds By Country (October 2012)
Qatar
Thailand
Mauritius
US
 Total assets under management of Islamic funds are expected to reach USD67.8bln as at end-2013
France
Guernsey
Egypt
Singapore
South Africa
UAE
Cayman Island
2013F
Jersey
2012E
Bahrain
2011
Kuwait
2010
Pakistan
2009
350
300
250
200
150
100
50
0
Luxembourg
Number of Funds
At 5.5% CAGR
Ireland
Global Islamic Funds (2009-2012)
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Indonesia
2008
6.8%
Middle East
Malaysia
2007
Latin America
Saudi Arabia
2006
USDbln
USD tln
40
16
Source: Bloomberg, KFHR
8
09/04/2013
Unique Opportunities: International Islamic Trade Finance
 Trade finance trends follow overall trends in international trade. IMF projects global international
trade volume growth to be more sustainable at 3.8% in 2013 vs. 2.8% in 2012 (2011: 5.8%)
 Huge opportunity for Islamic trade finance globally, riding on global economic recovery and higher
international trade
 Europe remains the largest exporter in the world with approximately one fifth of total exports. Despite two
thirds of EU trade being intraocular, OIC countries make up a significant portion
 Based on OIC global trade statistics, Member States’ Trade increased by 22%, from USD3.2tln in 2010 to
USD3.9tln in 2011. Trade of the OIC Member States accounted for 10.8% of world trade in 2011 which
shows a vast potential market for Islamic trade finance.
OIC Trade by Country (2011)
500
450
400
USD bln
350
300
250
200
150
100
50
Algeria
Kuwait
Qatar
Nigeria
Turkey
Indonesia
Malaysia
UAE
Saudi Arabia
0
17
Source: The Islamic Centre of Development of Trade 2012.2013 Annual Report, KFHR
3
Prospects and Challenges
18
9
09/04/2013
Key Growth Drivers of Islamic Finance in Europe
Abundance of liquidity
from oil-producing
nations that have
affluent individuals
with vested interest in
Europe.
Growing demand of
Shariah-compliant
products
After the Global
Financial Crisis and
the Euro-zone
Sovereign Debt Crisis,
more people are
looking into Islamic
finance as a safer
alternative.
Government and
regulatory support
Regulatory support,
which includes tax and
legislative changes to
accommodate the
growth in Islamic
finance.
Rapid growth of global
sukuk market
The increasing
awareness of Islamic
finance as another
form of investment
that is more ethical
The expected decline in
cost due to economies
of scale will push for a
comprehensive sukuk
market in Europe.
19
European Islamic Finance Proposition
 With the current fiscal woes and potential risks to the global economy, consumers are increasingly switching
from conventional to Islamic finance as the latter is perceived to be safer and ethical, given the absence of
interest excessive speculation.
 This, coupled with the region’s 43mln strong Muslim population base sees EU countries with a unique
opportunity to develop and integrate Islamic finance into the existing financial framework
 Opportunities include in the areas of Islamic banking, sukuk (sovereigns and corporates), Islamic funds and
takaful (Islamic insurance)
 For potential to be realised, the following measures need to be intensified:
 Continue to expand incentives in order to compete with developed Islamic financial centres which will
attract new fixed-income issuers to place or list instruments in European markets
 Remove all persistent legislative hurdles impeding the implementation of Islamic finance in each
European state
 Promote awareness of Islamic financial instruments amongst European corporates and investors alike in
order to increase the attraction and demand for Islamic alternative investments/ financing
 Encourage more cross-border knowledge sharing between existing Islamic financial players, regulators
and European governments and corporations
20
Source: KFHR
10
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KFH GLOBAL INVESTMENT RESEARCH
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