ISLAMIC FINANCE INDUSTRY
& GLOBAL SUKUK MARKET
Baljeet Kaur Grewal
Managing Director & Vice Chairman
KFH Research Ltd
9th Kuala Lumpur
Islamic Finance Forum
16 - 17 October 2012 * InterContinental Kuala Lumpur, MALAYSIA
KLIFF 2012:
“Islamic Finance Industry &
Global Sukuk Market”
Baljeet Kaur Grewal
Managing Director & Vice Chairman
KFH RESEARCH LTD
1
16 OCTOBER 2012
Table of Contents
• Global View of the Islamic Finance Industry
• Global Sukuk Market
• Internationalisation of Islamic Finance and Its Next Growth Trajectory
• Prospects of Inter-Regional Linkages and Cross-Border Investments
2
Global View of the Islamic Finance
Financce Indust
Industry
try
tr
try
3
Global View of the Islamic Finance Industry
Global Islamic Finance Assets, 2011 (USD Billion)
Others (North America and Europe)
•
•
•
•
Banking assets (42.9)
Sukuk Outstanding (1.5)
Islamic funds (14.6)
Takaful assets (0.0)
• Total assets (59.1)
MENA (Ex-GCC)
Asia
•
•
•
•
Banking assets (462.6)
Sukuk Outstanding (0.1)
Islamic funds (0.5)
Takaful assets (6.0)
• Total assets (469.2)
• Banking assets (144.8)
• Sukuk Outstanding
(120.8)
• Islamic funds (16.2)
• Takaful assets (2.4)
GCC
Sub Saharan
Africa
•
•
•
•
Banking assets (14.5)
Sukuk Outstanding (0.2)
Islamic funds (1.5)
Takaful assets (0.4)
•
•
•
•
• Total assets (284.2)
Banking assets (411.1)
Sukuk Outstanding (55.6)
Islamic funds (27.1)
Takaful assets (6.4)
• Total assets (500.3)
• Total assets (16.6)
Global Islamic
Finance Jurisdictions
Mainstream Relevance
Niche Presence
Engaging with regulators
Conceptual exploration
Total global Islamic finance assets = USD1,329.4 billion
4
Source: KFHR GIFF 2012
Global Islamic Banking: Growth Trends
Global Islamic Banking Assets (2007-2020F)
Share of Global Islamic Banking Assets (2011)
Opportunities
•
Although Islamic banking industry currently constitutes
only 1.6% of the total assets of the top 50 largest banks in
the world (totalling USD66.2 trillion at the end-2011), it
has demonstrated strong growth (2007-2011 CAGR of
21.1%), while global financial assets retreated due to the
global economic crisis.
•
Large funding gap in GCC from the retreat of European
banks, due to the recent European sovereign debt crisis.
•
Islamic finance is expected to thrive at a faster rate in
emerging economies given the resilient economic
dynamics and potential of the economies.
GCC: Total Islamic Banking Assets (2011)
5
Source: KFHR GIFF 2012
Global Sukuks: Current Dynamics & Trends
Sukuk Issuance By Issuer Type (2010-1H12)
Sukuk Issuance By Region (2008-1H12)
Sukuk Issuance Trend (2005-1H12)
Sukuk Outstanding Trend (2005-1H12)
Performance Review
ƒ The sukuk market has expanded significantly after the impact
of the global financial crisis abated in 2009, growing at a
CAGR of 86.0% in terms of amount issued between 20092011.
ƒ Sukuks have become a viable alternative to conventional
bonds evidenced by the large number of funds raised by both
corporate and sovereign issuers.
ƒ By region, growth has been mainly driven by the South East
Asia (SEA) segment while the Middle East Northern Africa
(MENA) market has been slowly increasing its market share.
6
Source: KFHR GIFF 2012
Global Islamic Funds: Performance and Growth Drivers
Islamic Funds: AuM and No. of Funds
(2005-2012F)
Growth Drivers of Islamic Funds
Islamic Funds by Asset Class
(2011)
Islamic Funds’ Total Return
Performance by Asset Class (2011)
Performance review
ƒ Estimated weighted average of total returns for Islamic funds in 2011
declined by 2.3% from an estimated weighted average of +11.0% in
2010.
ƒ The largest investment manager of Islamic funds as at end-2011 was
the National Commercial Bank in Saudi Arabia, closely followed by
Public Mutual in Malaysia.
ƒ The rising wealth in Muslim nations, especially in the emerging
economies and oil-rich countries, has helped drive demand for
investible Islamic assets higher.
ƒ The Islamic funds management industry charted a 3.5% growth in
2011 from an AuM of USD58.0 billion in 2010, supported by the
industry’s growth drivers.
7
Source: KFHR GIFF 2012
Global Takaful Performance
Global Gross Takaful Contributions
(2006-2012F)
Regional Takaful Contributions
(2006-2012F)
GCC Takaful Contributions
Global Takaful Gross Contributions
Income by Class (2011)
SEA Takaful Contributions
Performance review
ƒ The global takaful industry continued to demonstrate a strong
growth rate in 2010 at a rate of 22.9% (USD13.7 billion) as
compared to previous years (2009 growth rate stands at
17.7% with total contribution value of USD11.1 billion).
ƒ Amongst the key markets, Malaysia, Indonesia and the UAE
achieved growth rates of over 24.0%, whilst Saudi Arabia saw
its gross contributions increased by USD0.4 billion.
ƒ In terms of takaful models, Wakalah-Mudharabah (hybrid
model) remains one of the most widely applied models with at
least 9 countries adopting it.
8
Source: KFHR GIFF 2012
Global Islamic Finance Asset Classes
The
Industry
ƒ
Islamic finance assets worldwide have expanded from USD150 billion in the mid1990s to USD1.3 trillion as at end-2011
ƒ
One of the growth drivers being increasing demand for Shariah-compliant
financial products and services due to greater awareness
ƒ
Islamic banking has been the major driving force of the global Islamic
finance industry, with an estimated asset size of USD1.1 trillion as at end2011
ƒ
Contributed to 80.9% of Islamic finance assets worldwide
Islamic
banking
ƒ
Sukuk market is the second largest asset class within the Islamic finance
industry, accounted for 13.5% of global Islamic finance assets
ƒ
Sukuk outstanding stood at USD178.2 billion as at end-2011, with record
new sukuk issuances of USD85.1 billion during the year
Sukuk
Islamic
funds
ƒ
Total assets under management of the Islamic funds industry of
USD60 billion as at end-2011, with number of funds at 876
ƒ
Contributed to 4.5% of global Islamic finance assets
ƒ
Global Takaful contributions expanded at a CAGR of 19.1% in 2007-2011 to
reach an estimated USD15.2 billion as at end-2011
ƒ
Accounted for 0.8% of global Islamic finance assets
Takaful
9
Source: KFHR GIFF 2012
Global Sukuk Market
10
Global Sukuks: Primary Market Dynamics
ƒ The market share of Malaysian sukuk issuances has consistently been around 70% of global sukuk issuances over
the past five years and shows no signs of slowing down. The Saudi Arabia was the second largest domicile of sukuk
issuances at USD8.8bln in 1H12, closely followed by Indonesia and UAE with USD4.7bln and USD4.1bln
respectively of sukuk issued.
ƒ Indonesia sukuk issuances have grown significantly of late with the nation launching its “project sukuk” programme
as well as issued an encouraging number of sovereign certificates, mostly via auctions or private placements, for
fiscal financing. Year-on-year Indonesia’s primary sukuk market has grown by 221.1% in 1H 12.
ƒ Murabahah remains a popular sukuk structure in 1H12, 87.6% of which was placed in Malaysia while the remainder
in Saudi Arabia. Malaysia meanwhile has been the sole destination for Musharakah sukuk.
Domicile of Sukuk Issuances (1H12, % and USD bln by Quarter)
Q1, 0.8
Q2, 2.4
Structure of Primary Market Sukuk Issuances (1H12)
Q2, 1.2
Q1, 1.7
Combination
2.1%
BBA
5.3%
Q2, 1.3
Q1, 3.4
Q2, 2.4
3.0%
6.2%
Q1, 28.3
Q1, 6.4
13.3%
Ijarah
14.7%
Musharakah
20.1%
Malaysia
7.0%
Wakalah
7.9%
Bai' Inah
0.1%
Saudi Arabia
Mudharabah
0.5%
Indonesia
70.5%
UAE
Salam
0.7%
Others
Q2, 18.5
Murabahah
48.6%
Note: Others includes Pakistan (1.5%, USD1.0bln), Bahrain (0.9%, USD597.2mln),
Yemen (0.4%, USD233.3mln), Brunei Darussalam (0.2%, USD156.3mln) and Gambia
(0.03%, USD21.0mln)
11
Source: Bloomberg, IFIS, Zawya, KFHR
Global Sukuks: Secondary Market Dynamics
Sukuk Outstanding Trend
250000
200000
USD million
ƒ Global sukuk outstanding reached USD210.8bln as at end1H12. The amount represented a year-to-date growth of
18.3% since the end-2011.
ƒ The two main factors driving growth in the secondary
market are:
9 The rapid growth in new issuances gives an immediate
impact to outstanding figures
9 The trend to more short-term maturities means growth
has accelerated over recent years
ƒ Sukuk yields dropped by an average 24 basis points in
1H12 to 3.391%.
ƒ Slowing global growth and the ongoing European sovereign
debt crisis sent investors toward safe-haven investments
which in turn pushed up sukuk prices.
150000
100000
50000
0
HSBC/Nasdaq SKBI Yield Index
Sukuk by Maturity Trend
5.5
5.0
4.5
%
< 1 year
1-3 years
3-5 years
5-10 years
> 10 years
1H12
2011
2010
4.0
2009
3.5
2008
3.0
0%
20%
40%
60%
80%
100%
12
Source: Bloomberg, IFIS, Zawya, KFHR
Sukuks For Long-term Infrastructure Financing
ƒ More than 800 sukuks worth USD64.4billion have been issued between 2001 and 1H12 for infrastructure projects in
Malaysia (76.3%), the UAE (11.4%), Saudi Arabia (10.3%) and other countries (2.0%) E.g. building roads,
maintaining key utility infrastructure, and lofting large telecommunication towers.
ƒ Sukuks are equity-based, asset-backed and have huge economic beneficial factors for societies.
ƒ Among the more recent infrastructure projects financed via sukuks include:
9 PLUS Berhad (Malaysia) – USD9.7billion, highway construction.
9 PT Indosat Tbk (Indonesia)- USD31.4million, telecommunication tower.
9 Foundation Wind Energy (Pakistan)- USD20.5million, renewable energy
Sukuks for Infrastructure Projects by Country
Infrastructure Sukuk Issued by Shariah Principles
(2001-1H12)
USD million
25,000
Bai'
Combinations
Bithaman Ajil
4%
Istisna'
6%
Wakala
10%
2%
20,000
15,000
Mudharabah
2%
Murabahah
15%
10,000
5,000
Musharakah
42%
Ijarah
19%
0
2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12
Brunei
Pakistan
Malaysia
Saudi Arabia
UAE
Kuwait
Indonesia
Other
13
Source: Bloomberg, IFIS, Zawya, KFHR
Future Growth Of Sukuk Market
ƒ The value of global sukuk issuances soared by 40.1% y-o-y to USD66.4 billion in 1H12 from USD47.14billion in
1H11. The current global sukuk issuance momentum translates into an annualised growth rate of 25.0%-30.0% for
2012, underpinned by the following factors:
9 A number of new jurisdictions have shown interest in issuing sukuks, such as Egypt, Senegal and Nigeria while
France, Japan and Hong Kong continue to make regulatory inroads for future issuances.
9 Increasing demand and popularity for Shariah-compliant products and structures post the global financial crisis
form a strong demand base for sukuks.
9 Strong demand means that the costs associated with raising funds through sukuk has declined significantly,
sukuk yields have trended downward in the secondary trading market.
9 High liquidity from oil and commodity-producing nations create demand sukuk investments. Islamic banks in
Asia have solid financing-to-deposit ratio which allow them to take up local currency issuances.
Notable Sukuk Issuances in 2012
Issuer
Country
Structure
Issue Size
(USD million)
Sector
IDB Global Sukuk (2017) Tranche 2
Saudi Arabia
Al-Wakala Bel
Istithmar
500
Multilateral
organisation
Turkey Sovereign Sukuk
Turkey
Ijarah
1,500
Sovereign
Qatar Global Sukuk II (2018, 2023)
Qatar
Ijarah
4,000
Sovereign
Qatar Islamic Bank Sukuk II
Qatar
Wakala
750
Financial services
Kazakhstan
(MYR-denominated)
Murabahah
76.2
Financial services
Development Bank of Kazakhstan
IMTN Sukuk (Tranche 1)
14
14
Source: Bloomberg, IFIS, Zawya, KFHR
Internationalisation of Islamic Finance
Fin
nance and
d
Its Next Growth Trajectory
15
Internationalisation of Islamic Finance:
Key Challenges
Internationalisation of Islamic Finance: Challenges
Capital Mobilisation
¾
Limited range of
instruments
¾
Concentrations in
short-term maturities
¾
Limited breadth and
depth of market to
support the
intermediation of funds
Familiarity
¾ Familiarising with
Islamic finance will take
time (the current
financial sector has
been on the
conventional model for
3 centuries)
¾ Once Islamic finance
gains traction and
becomes assimilated to
various jurisdictions it
can pave the way for
further growth
Governance and Control
¾ A financial system that
should facilitate
transparent governance
and promote discipline
through external
pressures or threats,
such as takeovers, so
that any risks leading to
misallocation are
minimised
Unified Talent Development
Programmes
¾ The availability of
qualified manpower and
management talent in
various jurisdictions
¾ Talent development have
only begun in the past
years and yet to reach
desired volume
¾ It may take longer for the
industry to produce
unified growth as
demand and innovation
of products are rapid
Internationalisation
16
Source: KFHR GIFF 2012
Internationalisation of Islamic Finance:
Opportunities
Internationalisation of Islamic Finance: Opportunities
International Standards
Fiscal Financing
Market Liquidity
• International
cooperation among
regulatory bodies and
multilateral
organisations
• Mutual recognition of
financial standards and
products across
jurisdictions,
underpinned by greater
engagement among
regulators, practitioners
and scholars
Implementing tax system
to (a) address egregious
income and wealth
disparities and (b) support
government finances
Enhancing liquidity and
risk management capacity
of Islamic finance industry
players
Fostering Development
Business Environment
Improve business
environment to encourage
cross-border activities
Further development of
Islamic financial
infrastructures in underdeveloped markets
17
Source: KFHR GIFF 2012
Islamic Finance: The Next Growth Trajectory
•
For Islamic finance to continue thriving, the industry has to overcome some key challenges which requires financial
institutions, regulators, and international standard setting agencies to work closely together.
Challenges: Islamic finance is
closely intertwined with the
global economy, thus will be
affected by any slower global
growth
Opportunities: Islamic finance
to diversify into trade,
infrastructure and
microfinancing where demand is
still strong, especially in
emerging economies
Challenges: Islamic Finance to
meet the new international
standards
Islamic
finance in the
era of
deleveraging
Islamic
finance and
global
regulatory
reforms
Opportunities: Islamic finance is
also well placed to meet the
increased “return-to-basic”
investor demand, when investors
are now more averse to the
unknown risks embedded in
complex financial instruments.
Integrating Islamic
finance with global
finance
Challenges: Different Shariah interpretation and isolated pool of Islamic liquidity in
each Islamic finance market restrict opportunities for more efficient allocation of
capital across consumers, industries and jurisdictions.
Opportunities: Islamic finance to diversify into trade, infrastructure and
microfinancing where demand is still strong, specially in emerging economies
18
Source: KFHR
Prospects of Inter-Regional Linkages
Linka
ages and
Cross-Border Investments
19
Jurisdictions with the Potential for Globalising Islamic
Finance
Jurisdictions with Islamic Finance Potential Based on KFHR GIFF 2012 Survey
The survey was conducted based on six key areas to gauge
the level of competitiveness of Islamic finance jurisdictions
Regulatory Environment
Infrastructure
Products and Services
• To assess the current regulatory
environment, which includes the
regulatory framework and related
legislations
• To gauge the extent of ancillary
areas i.e. Shariah Advisory Board,
arbitrative system and rating agency
catering to Islamic finance
• To determine the extensiveness of
products and services offered,
which is also a proxy for the level of
demand from customers
Ease of Doing Islamic Finance
Business
Statistics, Marketing and Education
Risk Management and Audit
• To gauge the initiatives and efforts
to further drive the development of
Islamic finance through marketing,
education and reliability of collected
data for study
• To highlight the presence of risk
management framework for the
Islamic finance industry in addition
to Shariah-compliant instruments to
facilitate liquidity management
• To identify initiatives provided by
governments to facilitate the
development of and encourage
Islamic
finance
business
opportunities
• The six key areas above supports the wide-ranged
assessments done on the participants of the
survey.
• Based on the results of the survey, developed
markets of Islamic finance had on the whole a
well-developed environment to operate and
promote Islamic finance business globally based
on the six key areas.
• The emerging markets showed initiatives to
develop
their
Islamic
finance
regulatory
environment and infrastructure. Some jurisdictions
have also showed strong growth in the products
and services area.
• Niche markets are still in the nascent stage of
Islamic finance development although promising
interest has been shown by these jurisdictions.
Note: The jurisdictions were ranked based on scores obtained from the survey from highest to lowest
The countries were then clustered according to “Developed”, “Emerging” and “Niche” markets.
20
Source: KFHR GIFF 2012
Islamic Finance: Prospects for Inter-Regional Linkages and
Cross Border Investments
Flow of inter-regional funds and investments in Islamic financial markets
Islamic Financial/ Debt
Capital Markets
Economic Developments
• Vast
economic
development plans in
Africa
particularly
for
infrastructure projects
• Sukuks have spearheaded
growth in the Islamic
finance industry
EUROPE
• GCC economies have
specific
development
targets
i.e.
Kuwait
Development Plan and
Saudi Arabia Five-Year
Development Plan
GCC
• Economic
development
targeted toward increased
productivity
and
competitiveness
for
example Pakistan’s Vision
2030 and Sri Lanka’s
Development
Policy
Framework
ASIA
AFRICA
• New/
emerging
jurisdictions tapping the
sukuk market for the first
time
for
financing
economic developments &
infrastructure projects as
well as deficit financing
• 2012 likely to be another
bumper year for the global
sukuk market, matching
2011 record issuances of
USD85.1bln
• Countries
with
rapid
Islamic
finance
development provides an
avenue for investment by
foreign investors
FDI
Islamic financial market investments
21
Countries with Islamic finance presence
Countries that are yet to have any Islamic finance activities
Source: KFHR GIFF 2012
Conclusion
The growth and sustainability of Islamic finance in the next phase:
The profile of
Islamic finance
as a global
industry
The expanding
range of products
within the Islamic
finance industry
– banking,
sukuks, wealth
management,
takaful, liquidity
management
The growing
Islamic finance
jurisdictions –
from the rise in
emerging and
niche market
countries
Sukuk for
financing of
economic
developments,
infrastructure
projects & fiscal
deficits
Challenges and
opportunities
faced by the
Islamic finance
industry
A manifest of
the growing
interest for
Islamic finance
globally
Current state of
internationalisation
of Islamic finance
Expansion and sustainability of Islamic finance as a viable alternative
within the global international financial architecture
22
Source: KFHR GIFF 2012
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