Transcript introduction to philosophy of social sciences 3

Islamic Finance
as a Value Oriented Proposal for
Modern Economy
Presented at the
4th Biennial International Conference on Business, Banking and
Finance on ‘Restoring Business Confidence and Investments in the
Caribbean’ organised by the Department of Management Studies of UWI
with SALIES and CCMF,
June 22-24, 2011, Hilton Trinidad & Conference Centre
Dr Mehmet Asutay
Durham Islamic Finance Programme
School of Government and International Affairs
Durham University
[email protected]
Financial sector acts as a catalyst to growth
Mobilise savings
Real economy
channelling
Productivity
enabler
Global capital
market link
• Provides platform and incentives for savings and investments
− Able to mobilise and allocate national savings and change their term and structure
to finance longer term and relatively riskier investments
• Aid local community and real economy development
− Enable company formation, expansion and competition in the market
− Fund SME and Microfinance opportunities to contribute to employment and wealth
generation
• Raises total factor productivity levels
−Enable shift away from labour to capital intensive and higher value-add
productivity sectors
• Integrates domestic economy into global financial system
− Able to access funds from international capital markets and attract foreign direct
investments
− Reduce intermediation margins and costs by being “close to the market”
However, recent crisis in banking highlights dangers
caused by failures of financial sector
Bank insolvency
Lack of short-term
lending
Corporate liquidity
crisis
Negative spiral
Crisis of confidence
Disruption of
payments
Instability in the banking system
can destroy otherwise healthy economies
Inability to meet
financial obligations
Crisis underscores certain elements that need to be
addressed
Financial Institutions
 Need for savings and
investment orientation to
replace consumption and
credit culture
Policy Implications
Global Markets
Impact points
 Differentiation between
deposit-taking institutions
and investment managers
Real Economy
Material crisis requires moral solutions
 Dangers of opaque sale of
debt now shown to be
evident
 Stronger links needed
between banking and real
economy investment
Islamic Finance: A Value Oriented Proposition
• A financing proposition shaped by the rules (fiqh) but also
moral values of Islam;
• ‘Form’ but also ‘substance’ is expected to be Islamic as well;
• Islamic moral economy, in modern sense, developed since
1970s aiming at development issues; and
• Islamic financing expected to provide an alternative solution
as a financing tool and method;
• Ethicality in this value proposition in the original sense is not
only prohibition of riba (interest) but relating to larger social
and economic development issues;
Islamic Finance: A Value Oriented Proposition
Islamic moral economy assumes certain axioms:
• Social justice and beneficence (adalah and ihsan);
• Growth in harmony (tazkiyah);
• Enabling individual, society and natural environment to reach its
perfection (rubibiyah);
• To overcome the conflict between individual and society,
voluntary action is not perceived to be enough; and hence
certain social oriented financial and economic obligations (fard);
• Individual is perceived to be vicegerent of God on earth to fulfill
the expected duties in their economic and financial behaviour to
make their decision through a financial filter (vicegerent
individual);
• Operational dimensions of these axioms are possible with
Maqasid al-Shari’ah – objective of Shari’ah: human well-being.
Islamic finance principles reinforce the ethos of Islam
 Islamic economics has an explicit value framework
–
Based on justice, equity, human dignity, freedom of enterprise and moderation
Crass materialism
Islam
Aesthetic spiritualism
–
Based on developing and harnessing economic resources to satisfy spiritual, material and
social needs of all members of the community
–
Based on a moral obligation to serve poor and destitute from share of wealth
Islamic finance is based on socially responsible investing
Islamic finance principles consist of core basic tenets
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 specify what he or she is
buying or selling and what price is being paid
Removing speculation and ensuring value-enhancing activity
Islamic finance is the outcome of religion in banking
Banking and finance needs
Fiqh al-Muamalaat contracts
Shariah sources
– Quran
– Sunnah
– Ijma’ (jurist consensus)
Shariah filter
– Qiyas (analogy)
– Ijtihad (reasoning)
– Musharaka
- Partnership
– Mudaraba
- Partnership
– Murabaha
- Purchase-resale
– Ijara
- Lease
– Istisna’
- Manufacturing contract
– Salam
- Forward sale
Islamic banking and finance solutions
•
Prohibition on:
– Interest
– Speculation
– Gambling
•
Prohibition of certain investments:
− Sectors (e.g.: alcohol, armaments,
financial services, gambling, pork,
pornography, tobacco)
− Instruments (e.g. no forward
transactions, limited option use, no
derivatives, short-selling)
•
Asset-backed
transactions with
investments in
real, durable
assets
•
Credit and debt
products are not
encouraged
Aims of Islamic Finance
Islamic banking and finance aims at:
Community banking: Serving communities, not markets;
Responsible Finance, as it builds systematic checks on financial
providers; and restrains consumer indebtedness; ethical investment,
and CSR Initiatives;
Alternative Paradigm in terms of stability from linking financial
services to the productive, real economy; and also it provides moral
compass for capitalism;
Fulfils Aspirations in the sense it widens ownership base of society,
and offers ‘success with authenticity’.
Conceptually, Islamic finance is more than financial
contracts
Tenet-bound
Principles-based
 Fundamental tenants are derived from Shariah
 Concept is grounded in ethics and values
–
Absence of interest-based transactions
–
Principles akin to ethical investing
–
Avoidance of economic activity involving
speculation
–
Emphasis on risk-sharing and partnership contracts
–
Prohibition on production of goods and services
which contradict the values of Islam
–
Credit and debt products are not encouraged
Real economy-linked
Society-service
 Islamic finance offers an alternative financing
paradigm
 Islamic banking is community banking
–
Asset-backed transactions with investments in real,
durable assets
–
Stability from linking financial services to the
productive, real economy
–
Restrains consumer indebtedness as credit is linked
to real assets
A holistic approach to financing a society
–
Serving communities, not markets
–
Open to all-faith clients
–
Instruments of poverty-reduction are inherent part
of Islamic finance (zakat & qard hasan)
Islamic finance aims and positive impact
1
•
Engagement of an under-served and previously un-banked market
−
2
•
Promoting the investment mindset rather than the banking mindset
−
3
•
•
Investing in real assets rather than promoting speculation and leverage
Making meaningful real economy impact
−
4
Providing an ethical banking solution to local communities to deepen the banking market
Investing in asset-backed instruments and real economy ventures
Attracting foreign investment and cross-border partnerships from
Islamic financial institutions
−
Attractive source of cross-market ventures and cross-border lines from Islamic countries
A growing industry promising benefits
Industry presents an alternative banking paradigm to
create ethical profits
Accountability to God
Ethical
profits
(rather than
“profits-at-any-costs”)
Business Ethics
Shari’a
“Code of Ethics”
Banking with morals
“More-than-profit”
mentality
Several practices from the Islamic banking sector are
relevant to the conventional sector following the crisis
1  Increased emphasis on asset-based financing
2  Limits on the sale of debt and preference for equity financing
3  Greater transparency in transfer of debt and linking to origin
4  Introduction of “Ethical Supervisory Boards”
5
Evolving financial architecture to be based on separation of risk-free and riskbearing accounts
6  Prioritizing research and development with two-way transfer of best practices
Source: Relevance of Islamic Finance Principles to the Global Financial Crisis, Aamir A. Rehman, March 2009
Development of Paradigm and Industry
Development of industry
−
−
Development of theoretical framework
Muslim-majority nation independence
60s
−
−
Egypt and Malaysia pioneering institutions
Establishment of the OIC
70s
−
−
Islamic Development Bank 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
2000s
private
equity
1990s
debt
issues
insurance
1970s
1980s
project
finance
equity
Industry has near like-for-like parity with conventional offering
syndications
Industry has advanced from niche to critical mass
 Islamic finance is a 40 year old industry
−
−
−
Mitghamr Savings Associations (1963) – Shaikh Ahmad Al-Najjar
Tabung Hajji Malaysia (1967) – Royal Professor Tunku Abdul Aziz
Islamic Development Bank (1974) – Dr. Ahmed Mohamed Ali
& Dubai Islamic Bank (1975) – Sh. Saeed Lootah
Islamic banking assets
as proportion of total
(%) *
 Industry is a market-driven proposition
−
−
−
Retail customers historically the backbone of the industry
Tipping point in retail sector: Saudi Arabia, UAE, Bahrain and Kuwait
Self-regulating organisations, Standards bodies and Training Institutes
 Market size estimated at about USD 950 billion globally
−
−
−
Growing at 15 to 20% per annum
Within 8-10 years, industry estimated to capture half the savings of the
1.6 billion Muslim world2
Estimated to grow to USD 1.3 trillion by 2012
 Industry has global scale
−
−
−
−
More than 500 Islamic banks worldwide operating in over 75 countries1
GCC accounts for two-thirds of global Islamic assets4
Malaysia leading industry maturity and sophistication
Islamic Development Bank: largest pan-OIC financial institution
45%
40%
35%
30%
25%
40%
33%
growth
30%
20%
20%
66%
growth
15%
10%
12%
5%
0%
2005
GCC
2010e
Malaysia
Industry is fragmented and is gradually evolving and internationalising
Multinational banks have gradually increased their
focus on Islamic finance
Market entry strategy
Evolving commitment
Ad hoc participation
Defensive strategy
Proactive strategy
• Service and retain
existing Muslim clients
• Acquire new customers,
especially wealthy locals
• Refine current
proposition to reflect
local needs
• Build a sustainable
community banking
proposition
– Particularly
important as
economic clout of
locals increased
• Protect and embed the
brand
• Benefit from higher
growth rates of
emerging markets
– Crucial as
developed market
growth slows
−
−
Correspondent banking for IFIs
Tailored Private Banking services for HNWIs
Islamic client services
−
−
Dedicated Relationship Managers for IFIs
Dedicated Private bankers for HNWIs
Islamic window model
−
−
Committed unit for Islamic financial services
Citi Islamic (1996), HSBC Amanah (1998)
Dedicated Islamic subsidiary
−
−
Islamic subsidiaries of conventional banks
Joint ventures and partnerships
Mainstream institutions have embraced Islamic banking
Product Development Over the Years
Product Areas
1970s
1980s
Murabaha
Ijara
Takaful
Equities
Sukuk al-Ijara
Structured Alternate Assets
1990s
2000+
Developing nature of the client base
1970s
1980s
1990s
2000+
Retail
High Net-Worth
Islamic Financials
Non-Bank Financials
Institutions
• Endowments
• Ministries
• Pension Funds
Governments
• Local Govt
• Central Banks
• Investment Agents
Biggest industry customers still waiting in the wings
• Retail sector has been
the historic backbone
to the industry’s
recent development
• Increasing trend of
regional corporations
tapping into Islamic
markets for
fundraising
• Public sector and
pension funds are key
to next phase of
industry development
Development areas and products
Mature
Maturing
Emerging
– Achieving depth across range
would enable industry to capture
NBFI, Institutional and
government assets
Real estate
Equity
Structured
products
Challenges to overcome
Fixed
income
Sophisticated client
investment product
depth needs
Cash
management
• Achieving Shariah-compliance
while building out asset range
and depth
• Achieving scale and capital
efficiency
• Attracting experienced and
dedicated human capital
Hedging
products
Private
equity
• Real estate: REIT laws in OIC
countries
• Lack of Islamic private equity
managers
Industry is Reaching Mainstream Relevance in Global
Financial System
Relevance to OIC Countries
Relevance to non-OIC Countries
• Fulfilment of financial needs of
Muslims
− Islamic finance is the
equilibrium choice
• Widens stakeholder base of
society
− Increases bankable
population of economy
− Increases economic
efficiency as a result of
society’s increased
engagement
• Enhances stability of financial
model
− Asset-based framework links
financial services to real
economy
• Reaching a broader market
− Muslim-minority populations
become inclusive, economic,
productive agents
• Alternative source of funding
− Debt issuance with the
widest acceptance
− Attract “new-to-industry”
investors with Shariahcompliant funds and
transactions
• Gateway to OIC markets
− Regional preference of
Islamic investors
− Infrastructure investment
opportunities
Overview of the Islamic Financial Service Industry
Phases of Expansion
1970-1980
BIRTH
•Commercial Islamic Banks
1980-2000
2000-2010
EMERGENCE
EXPANSION
•Commercial Islamic Banks
•Commercial Islamic banks
•Islamic investment companies
•Islamic investment companies
•Islamic Insurance companies
•Islamic insurance companies
•Islamic investment banks
EUROPE
•Islamic asset management
•Islamic retail banks
N. AMERICA
•Islamic brokers
ME
GULF
AFRICA
ASIA •Islamic internet companies
•Islamic capital and financial
markets
S. AMERICA
OCEANIA
Overview of the Islamic Financial Service Industry
Offering Evolution
AREAS
1970-1980
1980-2000
BASIC CONVENTIONAL
STRUCTURED
2000-2010
FULL ADDED VALUE
•Trade finance
•Project finance
•Debt capital market
•Working capital Finance
•Leasing
•Asset management
•Capital markets
•Insurance products
•Funds
•Islamic Indices
•Retail products and services
•Engineering capabilities
METHOD
•Replicate conventional basic
banking PS
•Sharia compliant substitute
TARGET
•Muslims to meet their
religious obligations
•Structuring Sharia
compliant products and
services in both Banking
and Insurance
•Wide range of P/S
•More sophisticated offering
•Return to investors become
comparable to conventional
benchmarks
•//
•//
•Non Muslims who subscribe
to ethical investment
philosophy
•//
•Non Muslims who find
Risk/Return Features attractive(
90% of HSBC’s corporate
customers of its Islamic banking
services are not Islamic
companies)
Overview of the Islamic Financial Service Industry
Worldwide Acceptability
1970-1990
1990-1997
1997-2010
A Folly System
in the modern
Economy
Theoretically
viable in the
Modern
Economy
Globally accepted
as a genuine
alternative of
Modern Finance
•The challenge came from
western analysts who
suggested the folly of a
system based on 0%
interest rate on investment
•The BBC and The Wall
street journal qualified
Islamic finance:
• As a ‘voodoo’ economy
•A system which prohibited a •There is a clear recognition of the
viability of the Islamic system and
fixed ex-ante interest rate
it’s firm significance in today’s
• Allowing the capital rate of
finance worldwide
return to be determined expost (based on the return to •Islamic finance is an efficient and
productive way of financial
the economic activity)
intermediation
•Is theoretically viable
•Is Globally accepted
Mainstream Relevance
Sovereigns, MNC’s and International Companies are tapping the growing
IFI
5
Islamic Banking and Finance - Regional and Global
Growth
• Source: Maris Strategies & The Banker
Top 25 IBF Institutions by Shari’ah Compliant Assets
Top 25 Countries by Shari’ah Compliant Assets
Geographical Distribution of Reported Shari’ah Assets,
GCC, 2009 (% Distribution)
Geographical Distribution of Reported Shari’ah Assets,
Non-GCC MENA, 2009 (% Distribution)
Geographical Distribution of Reported Shari’ah Assets,
Non-MENA Global, 2009 (% Distribution)
Institutions Registered for Shari’ah Compliant
Products
Trends in the Number of Islamic Banks and Windows
Top 25 Fastest Growing IBF Institutions
New Entrants IBF Institutions
Global Islamic Fund Management Industry
As the figure indicates, there has been a shift away from traditional asset classes
such as equities and real estate funds with a number of new asset classes being
introduced including Shari’ah compliant ETFs and hedge funds.
Global Islamic Fund Management Industry
Assets Under Management of Islamic Funds by Categories (Q1 2010)
As the figure depicts, however, overall Islamic funds still remains concentrated in
traditional asset classes such as equities and fixed income.
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The Dow Jones Islamic Market 100 Index- Performance,
2005 -2010
8000
7000
6000
5000
4000
3000
2000
1000
0
RETURN CLOSE
PRICE CLOSE
The Dow Jones Islamic Market 100 Index- Performance,
2008-2010
4000
3500
3000
2500
2000
1500
1000
500
0
PRICE CLOSE
RETURN CLOSE
Developments in Sukuk
Global Sukuk Issuance
FOCUS ON ISLAMIC POTENTIAL MARKETS
Islamic Financial Service Industry: A Huge Potential
 About 20-25% of the total population worldwide are Muslims,
their global wealth is estimated at $3 trillions, the penetration of
the Islamic financial service industry is still embryonic (less than
10%)
 Within 8 to 10 years, as much as half the savings of the world’s
then 1.6 billion Muslims would be in Islamic banks
• The global Islamic insurance (Takaful) market is estimated to
reach USD 14.4 billion by 2010
• Islamic finance has also gained popularity in Muslim-minority
countries
– Germany issued the first Islamic Eurobond (2004)
– UK’s first standalone Islamic bank (2004)
• Trends of convergence and conversion
– Ethical investing, community banking
– Conversion of banks: e.g. National Bank of Sharjah, Bank al
Jazira, Dubai Bank
Focus On Islamic Potential Markets
Islamic Financial Service Industry: A Huge Potential
CONCLUSION
 Islamic consumers are a niche market; but Islamic finance
is no longer a niche market;
 It is a market with huge growth potential;
 Established institutions with a large consumer base are in
a unique position to enhance “share of wallet” through
Islamic products;
 Reputed financial institutions providing competitive Islamic
product will experience increased market share and
bottom line success.
Thank you…
“Through our scientific genius we have made this world a
neighborhood; now through our moral and spiritual
development, we must make it a brotherhood.”
– Martin Luther King
“If there is to be a human future, we must bring ourselves
into balanced relationship with one another and the earth.
This requires building economies with heart.”
(David Korten, Author of “When Corporations Rule the
World”)