ISLAMIC FINANCE INDUSTRY:
TRENDS, OPPORTUNITIES &
FUTURE DIRECTION
Baljeet Kaur Grewal
Group Chief Economist/ Head, Global Research
8th May 2008
1
ISLAMIC FINANCE: A GLOBAL VIEW
Global Deployment of Islamic Products
Mainstream relevance
Engaging with regulators
Niche presence
Conceptual exploration
Breakdown of Shariah-Compliant Assets Worldwide (2007)
Islamic equity
funds
2.9%
Sukuk
13.9%
Shariah-compliant assets worldwide estimated at
USD700 billion in 2007 vs. USD150bln in the mid-1990s,
with annual growth rate of 23.5% over the past 5 years
There is approx. USD1.5 trillion of GCC funds held in
investment assets worldwide. Of this USD1.5 trillion,
USD250 billion constitutes of High Net Worth Individual
Source: Zawya, IFIS, KFH
2
Islamic mutual
funds
Takaful
4.3%
0.4%
Islamic banking
78.6%
ISLAMIC FINANCE INDUSTRY HAS ADVANCED
FROM NICHE TO CRITICAL MASS
Islamic Banking Assets as % of Total
Banking Assets
Young industry
Mitghamr Savings Associations (1963) & Tabung Haji Malaysia (1967)
45
Islamic Development Bank (1974) & Dubai Islamic Bank (1975)
40
2007
2010F
35
30
25
%
Market-driven proposition
20
Retail customers historically the backbone of the industry
15
Tipping point in retail sector: Saudi Arabia, UAE, Bahrain & Kuwait
Self-regulating organisations, standard bodies and Research &
Training Institutes
10
5
0
GCC
Market size estimated at USD700 billion globally
World Muslim Population Growth Trend
(1980-2025F)
Growing at 23.5% per annum in the past 5 years
Within 8-10 years, industry expected to capture 40%-50% savings
of the 2.5 billion Muslim worldwide
More than 300 Islamic banks worldwide operating in over 75 countries
GCC accounts for two-thirds of global Islamic assets
Malaysia leading industry maturity & sophistication
Islamic Development Bank: largest pan-OIC financial institution
35
30
% of world population
Global scale
25
20
15
10
5
0
1980
3
Malaysia
1990
2007
2025F
Source: Central Banks, Zawya, IFIS, KFH
ISLAMIC FINANCE INDUSTRY HAS ADVANCED
FROM NICHE TO CRITICAL MASS
Each region contributes to Islamic Finance in a unique way
UK:
New legislation for
Islamic mortgages
Potential Sukuk issue in
2008
USA:
Harvard Islamic
workshop with 6
regulators
China:
Active member of Islamic
Financial Services Board
Germany:
Saxony issues
Eur100mln Sukuk
Saudi Arabia:
95% of new consumer
lending is Islamic. Retail
market rapidly
converting to Islamic
Japan:
JBIC exploring
Islamic financing
opportunities
Malaysia:
Islamic product &
industry,
development &
sophistication
leader
Hong Kong:
Target to become
Asia’s Islamic
financial hub
Singapore:
Active in
developing Islamic
finance
4
Source: Central Banks, Zawya, IFIS, KFH
GLOBAL SUKUK MARKET
Global Sukuk Issuance Trend (2000-2008F)
45000
35000
UAE
40000
25000
35000
Msia
30000
Saudi
20000
25000
15000
20000
USDmln
30000
USD mln
Sukuk Issuance (2007)
Bahrain
Kuwait
15000
10000
10000
5000
Qatar
5000
0
Pakistan
0
2000 2001 2002
Corporate Sukuk
2003 2004 2005
Sovereign Sukuk
2006 2007 2008F
Total Sukuk (RHS)
0
2000
4000
6000
8000
USD mln
10000
12000
Global Sukuk Issuance Trend - 2004 : US$7.2 billion, 2005 : US$12.1 billion, 2006 US$26.8bil, 2007:
USD32.65bln, 2008F: USD40bln-USD45bln, 2009F: USD45bln-USD50bln
2007 Sukuk issuances were dominated by the UAE 43%, Malaysia 30%, Saudi Arabia 18%, Bahrain 5.0% and
Kuwait 3.0%
To-date, 2008 announced Sukuk pipeline estimated at USD34.5bln
Global Sukuk outstanding is expected to reach USD200bln by 2010 from current USD97.3bln, an annual growth
rate of 35%
Islamic bond market is becoming more global, attracting non-Muslim issuers. The overall market for Islamic
banking and finance stood at USD700bln in 2007, and growing at 23.5% annually over the past 5 years
5
14000
Source: Bloomberg, IFIS, Central Banks, KFH
SUBPRIME IMPACTS THE SUKUK MARKET
Several companies were forced to delay or withdraw planned debt offerings in 2H07 due to
heightened debt market volatility:
Dana Gas, the first victim of the subprime turmoil, postponed its USD1bln issue from July 07 to Oct 07
Pricing of Ithmaar Bank’s USD300mln sukuk was delayed
National Bank of Abu Dhabi delayed its USD1.7bln bond programme until conditions improve in global debt
markets
Amlak Finance, an Islamic mortgage company in Dubai, delayed its plan to issue USD260mln mortgage-backed
Sukuk scheduled for end-07
In Aug 07, Malaysia’s MISC deferred the sale of its planned USD750mln 10-year dollar-denominated bond issue
Saudi Basic Industries Corp was forced to lower the senior unsecured bond portion of its financing to buy GE
Plastics from around USD2.76bln to USD1.5bln and raise the bank loan portion from USD5.4bln to around
USD6.6bln
Libor Month-on-Month Yield Change
(Jul 07- Apr 08)
Libor Month-on-Month Yield Change
(Jul 07-Dec 07)
Subprime concerns peaked,
& prior to the US interest rate
cuts
6.00
5.50
40
20
5.00
0
4.50
Bps
%
4.00
3.50
-20
-40
3.00
-60
2.50
2.00
-80
07:J
F
M
A
M
J
J
1m
A
S
3m
O
6m
N
D 08:J
1yr
F
M
A
Jul-07
6
Aug-07
Sep-07
1m 3m
Oct-07
6m 1y
Nov-07
Dec-07
Source: BMA, BNM, KFH
CREDIT SPREADS & SUKUK PRICING
Dar Al Arkan Sukuk Maturing in 2012:
Change in Credit Spread
HSBC-DIFX Islamic Bond Index Trend
(Jun 07-Dec 07)
400
Libor+375bps
350
200
+145bps
Libor+spread (bps)
Spread over Libor (bps)
250
150
100
50
300
250
Libor+270bps
Libor+250bps
+105bps
200
150
100
50
0
0
Jun-07
Jul-07
Oct-07
Dec-07
Issued
2007
Korea Development Bank Dollar Debt Maturing in
2012: Spread over US Treasury (Jul 07-Apr 08)
+145bps
7
Pre subprime
Jul 07
Current
Apr 08
3m Libor peaked at 5.7283% on 6th Sept 07, an
increase of 36bps within a month due to subprime
concerns
The HSBC-DIFX index of Sukuk average spreads over
Libor jumped from 65bps in Jun 07 to 210.6bps in Dec
07
Concurrently, the yield on dollar-denominated Sukuk
(e.g Dar Al Arkan) rose by 105bps between Jul 07 to
Apr 08
To
compare,
yields
on
dollar-denominated
conventional bonds of comparable maturity widened
by 145bps over the same corresponding period
Source: Bloomberg, KFH
IMPACT OF SUBPRIME ON GCC ECONOMIES
The US subprime is unlikely to trigger a contagion liquidity crunch in GCC given the following
reasons:
1.
GCC’s huge pool of liquidity with current account and fiscal surpluses estimated at
USD226.1bln and USD127.6bln respectively in 2007 will cushion the region from the
subprime crisis
2.
GCC markets have proven their low correlation or immunity to developments in global
capital markets given domination of local retail investors in the region’s markets
3.
The direct exposure of GCC corporations and banks to the US subprime is almost
negligible. Total assets of GCC banks stood at USD287bln as at end-07. Only three GCC
banks reported a combined lost of USD1.5bln (~0.5%) from the subprime
4.
Banking institutions keep diversified portfolios in high-grade investments to mitigate risk
and ensure positive return. The financial profile of GCC banks is strong, with good asset
quality, high profitability and robust capitalisation
5.
Overtime, GCC has gradually diversify its export markets, from traditional US market to
the EU, Japan and rest of Asia
6.
Nevertheless, the indirect effect of the subprime crisis may be that it increases the cost of
raising capital for banks, corporates and investment bodies. In the medium to longer-term,
as deals get bigger in size and more complex, access to cheap international capital is
becoming more important
8
Source: Company announcements, KFH
ROBUST 2008 SUKUK PIPELINE
Total Value of Announced 2008 Sukuk Pipeline by
Sector (USD34.5bln)
Shipping
0.2%
Cement
2.2%
Auto
0.2%
Conglo
3.7%
Oil & gas
0.1%
Pow er
19.5%
Total Value of Announced 2008 Sukuk Pipeline by
Country (USD34.5bln)
Const'n
0.1% Sovereign
11.9%
IDB
0.8%
M'sia
21.3%
HK
0.9%
Thai
2.0%
UAE
35.1%
Sw itz
0.2%
Indon
4.3%
France
1.3%
Financial
services
35.6%
Real estate
26.4%
Qatar
Kuw ait
6.0% Kazakhstan
10.4%
5.8%
Saudi
6.3%
Bahrain
3.0%
Pakistan
2.4%
Notable Sukuks Announced in 2008
Issuer
Amt (USD mln)
Sector
Country
Abu Dhabi National
Energy Co (Taqa)
1,500
Power
UAE
Doha Bank
1,000
Financial services
Qatar
Khabary Fahaleel
Future City
1,842*
Real Estate
Kuwait
Islamic Bank of
Thailand
175
Financial services
Thailand
National Central Cooling
Co (Tabreed)
570
Industrial products
UAE
Govt of Kazakhstan
Govt of Thailand
2,000
Sovereign
Kazakhstan
500
Sovereign
Thailand
To-date, 2008 announced Sukuk pipeline estimated at
USD34.5bln
Real estate, financial services and infrastructure
(power/ oil & gas/ roads) sectors are expected to
dominate the primary Sukuk market in 2008
The UAE is anticipated to lead at 35.1%, followed by
the Malaysia at 21.3% and Kuwait at 12.2%
2008 will see Sukuk debuts from new markets such as
Thailand, Indonesia, Hong Kong and Kazakhstan
*Kuwaiti Dinar- denominated Sukuk
**Statistics above include both local & dollar-denominated
Sukuks
9
Source: Zawya, Bloomberg, IFIS, Central Banks, KFH
EXPANSION OF GCC LOCAL CURRENCY SUKUK
MARKET
Increasing Popularity of Local Currency Sukuk Papers in GCC
Issuer
Size in local currency
USD mln
equivalent
Issued Year
Sector
Country
Sabic
SAR3,000 mln
800
2006
Basic industries
Saudi Arabia
JAFZ Sukuk
AED7,500 mln
1,995
2007
Ports
UAE
Sabic
SAR8,000 mln
2,133
2007
Basic industries
Saudi Arabia
Saudi Electric
SAR5,000 mln
1,333
2007
Power
Saudi Arabia
BD95 mln
250
2007
Sovereign
Bahrain
AED3,600 mln
957
2008
Real Estate
UAE
Iskan Sukuk
KWD14.9 mln
55
2008
Real Estate
Kuwait
Khabary Fahaleel Future City Sukuk
KWD497 mln
1,842
2008
Real Estate
Kuwait
ETA Star Holding
AED1,880 mln
501
2008
Real Estate
UAE
AED64 mln
17
2008
Financial Services
UAE
Issued
Ijara Sukuk
Nakheel Development 3 Ltd
2008 Announced Pipeline
The National INvestor
GCC Planned/ Under Construction Infrastructure Projects
Water & w aste Petrochemicals
2%
7%
Industry
3%
Pow er
7%
Oil & gas
21%
Construction
60%
GCC local currency-denominated Sukuk issued in 2006,
2007 & 2008YTD combined stood at USD7.2bln, led by
Saudi Arabia and the UAE
GCC local currency Sukuk deals announced in 1Q08
amounted to USD2.36bln, mostly dominated by the
real estate sector
GCC planned/ under construction infrastructure
projects to-date estimated at USD2 trillion
Expect more local Sukuk issuances moving forward,
mostly from real estate, infra/ construction (power,
water, utilities, roads) and oil & gas
10
Source: Bloomberg, Zawya, KFH
LOCAL CURRENCY SUKUKS: CHARTING THE
NUMBERS
Local Currency Sukuk Issuance Trend in GCC &
Pakistan (2006-2008F)
Local Currency Sukuks Issued in GCC & Pakistan by
Economic Sector (2006-2008YTD)
9000
USD mln equivalent
8000
Construction
0.3%
7000
Real estate
32.0%
6000
Shipping
0.5%
Oil & gas
0.3%
Financial
services
0.2%
Basic industries
28.0%
5000
4000
3000
Water
2.5%
2000
1000
Sovereign
2.7%
0
2006
2007
Pow er
14.6%
2008F
Ports
19.0%
Statistics above include Sukuk deals announced in 2008
Country Breakdown of Local Currency Sukuk
Issuances (2006-2008YTD)
Pakistan
5.7%
GCC & Pakistan local currency-denominated Sukuks
issued in 2007 amounted to USD5.84bln, expected to
trend higher to USD8bln in 2008
GCC & Pakistan local currency Sukuks issued in 06, 07
& 08YTD combined stood at USD10.5bln, led by real
estate (32%), basic industries (28%) and ports (19%)
Country breakdown of local currency Sukuk issued &
announced: Saudi (40.7%), the UAE (33.1%) and Kuwait
(18.1%)
UAE
33.1%
Kuw ait
18.1%
Bahrain
2.4%
Saudi
40.7%
Statistics above include Sukuk deals announced in 2008
*All statistics include local currency-denominated
11
Sukuks from GCC & Pakistan
Source: Zawya, Bloomberg, IFIS, Central Banks, KFH
GROWING SIZE OF ISLAMIC EQUITY FUNDS
Number of Global Islamic Equity Funds (1996-2008F)
140
Islamic equity funds market is
one of the fastest growing sectors
within the Islamic financial
industry
Prior to 1995, there were
approximately 10 equity funds on
the market. Since 1996, the
number of equity funds has
doubled every year to over 120
funds as of today, estimated at
USD14.5 billion and is growing by
12%-15% per annum
Much of the money flowing into
equity funds has come from
founding institutions or high
profile investors
Global distribution of mutual
funds: Equity (84%), Balanced
(14%) and Bonds (2%)
Total value of Islamic equity
funds estimated at USD20bln in
2007,
projected
to
reach
USD26bln in 2008
No. of funds
120
100
80
60
40
20
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F
Total Value of Global Islamic Equity Funds (1996-2008F)
30000
USD mln
25000
20000
15000
10000
5000
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F
12
Source: Failaka International, IOSCO Report, KFH
ISLAMIC TAKAFUL CONTRIBUTIONS WORLDWIDE
Factors fuelling the growth of Takaful worldwide:
Growing demand for Shariah compliant products. Existing Islamic banking customers are looking for an everbroader range of Islamic financial instruments
Reduction of state-sponsored welfare benefits. There is a growing trend towards the gradual reduction of
state welfare benefits. This encourages Takaful operators to start analysing and targeting the respective needs
of the different customer segments
Abundant liquidity. Sustained high oil prices are contributing to the growing class of affluent individuals, thus
encouraging this new class to give more thought to other aspects such as savings, investment and protection in
the form of insurance
Increasing levels of FDI. Higher levels of FDI in the infrastructure & real estate sectors are expected to
contribute to higher premiums written in GCC
Growing government & regulatory support. Supportive authorities create a conducive environment for
takaful to grow and thrive
Growth of retakaful capacity. International re-insurers are allowed to operate in local markets
New distribution channels. Takaful operators offer product lines via internet or hooking up with a bank
Global Takaful Contribution Trend (2000-2015F)
Global Takaful Contribution by Region (2007)
8
7
Asia-Pacific
9%
USD bln
6
Europe/US
1%
5
4
Malaysia
27%
3
2
1
0
2000
2004
2010F
GCC
63%
2015F
13
Source: IFN, KFH
DEVELOP THE COMPETITIVENESS OF ISLAMIC
WEALTH MANAGEMENT
Islamic wealth management industry In 2008 is forecast at 5% or USD2.1tln of the total HNWI
wealth vs. 4.8% or USD1.9tln expected in 2007.
Supply Landscape
regulatory environment
Proliferation of GCC wealth
Entrance of foreign players
Awareness of Islamic
products
Drivers
Critical Success Factors for New Entrants
Product development
Distribution
networks
Private
Players
Brand credibility
Research
Improved returns
Increased competitiveness with
multinationals
Drivers
Demand Segments
High net worth individuals
Affluent investors
Institutions
Source: EY, KFH
14
THE SUCCESS OF ISLAMIC FINANCIAL MARKETS
Market & Product
Development
Development of innovative,competitive and wider range of Islamic
funds
Tax and Legal
Framework
Facilitate tax and legal framework to promote the development of
Islamic funds
Mobilization of
Islamic Asset
Mobilize dormant Islamic asset held by Islamic Institutions through
Islamic funds to enhance liquidity and provide new sources of
income
International
Practice
Promote international harmonization and standard setting to
enhance cross-border linkages and accelerate the region as
investment destination
Awareness &
Education
Enhance awareness at domestic and international level. Increase
pool of Islamic capital market expertise through training and
education
Foreign
Participation
Encourage foreign participation in domestic market. Supranational
and multinational corporations are allowed to issue local currencydenominated Islamic debt/Sukuk
15
Source: KFH
CONCLUSION
Providing depth & breadth of
Islamic products and
participants
Large number
of players
Meeting various needs of
market & providing depth
and breadth to Islamic
interbank market
Providing clear operating
environment, dual
banking system
Islamic Finance
Industry
Promoting market liquidity
and providing two-way
quotations for trading of
Islamic papers
Enhanced
secondary market
Improving efficiency and
attracting more
participants into the
primary and secondary
markets
Enable market marking activities
16
Source: KFH
KFH GLOBAL INVESTMENT RESEARCH
THANK YOU
17