EXPANDING ISLAMIC FINANCE HOW REGULATORS ARE CHANGING THE WORLD

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1 HOW REGULATORS ARE CHANGING THE WORLD By implementing reforms and amendments to national financial legislations, many of the world s regulators and government institutions are creating environments for Islamic financial systems to flourish. 27 September 2013 Malaysia's Islamic finance marketplace. Expertise. Innovation. Deal Flow. 1

2 Regulatory Support Drives Global Islamic Finance Expansion A critical role has been played by regulators and monetary authorities in a growing number of jurisdictions to expand Islamic financial services beyond as many as 600 financial institutions across 75 countries 1. The global Islamic finance industry continues its tremendous growth momentum moving into the second half of 2013, with total assets forecast to exceed USD1.8tln as at end-2013, representing a more than 12.5% y-o-y increase in assets. Furthermore the industry is expected to tip USD6.5tln by the year 2020 at current growth rates 2. In spearheading the growth, a critical role has been played by regulators and monetary authorities. By undertaking initiatives to implement reforms/amendments to national legislations, the regulators and government institutions have allowed the Islamic financial system to flourish in their countries. This year, notable forms of regulatory support were witnessed in the following eleven jurisdictions among others: (1) Egypt; (2) Hong Kong SAR; (3) India; (4) Kenya; (5) Malaysia; (6) Nigeria; (7) Oman; (8) Tunisia, (9) Turkey; (10) United Arab Emirates Dubai; and (11) United Kingdom. 1 KFH Research 2 ibid On a global level, the Islamic Financial Services Board (IFSB), as an international standard-setting body, has been instrumental in promoting and enhancing the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. Over the years, IFSB has published standards and guiding principles in various areas including, among others, capital adequacy, risk management and corporate governance. During the 4 th Another milestone development this year has been the USD490mln inaugural sukuk launch quarter 2012, IFSB issued two exposure drafts on Risk Management for Takaful (Islamic Insurance) Undertakings and Revised Capital Adequacy Standard for Institutions Offering Islamic Financial Services. Another milestone development this year has been the USD490mln inaugural sukuk launch on 27th August 2013 by the International Islamic Liquidity Management Corporation (IILM), an international institution established by central banks, monetary authorities and multilateral organisations. IILM aims to enhance crossborder investment flows, international linkages and financial stability by creating more liquid Shariah-compliant financial markets for Islamic financial institutions (IFIs). 1

3 Global Islamic Finance Regulatory Updates (2013) Source: IFIS, Islamic Finance News, Various Central Banks, KFHR UAE - Dubai In January 2013, Dubai Financial Market released draft sukuk standards titled Standard for Issuing, Acquiring and Trading Sukuk, outlining the framework for Sukuk issuance. United Kingdom In March 2013, UK has launched an Islamic Finance Task Force which is mandated to support the development of Islamic finance in UK, increasing inward investment of Shariah-compliant funds and overall strengthening the economy. Oman In January 2013, the Capital Market Authority released draft sukuk regulations, while in December 2012 the Central Bank of Oman released the Islamic Banking Regulatory Framework. Turkey In June 2013, Turkish authorities introduced new legislative changes concerning lease certificates. Also, the Capital Markets Board of Turkey (CMBT) has plans to roll out regulations for five new types of sukuk: Istisna, Murabahah, Mudharabah, Musyarakah and Wakalah. India In August 2013, landmark approval by the Reserve Bank of India to the state of Kerala to establish a non-banking finance company that would offer Shariah-compliant services. Hong Kong In July 2013, tax and stamp duty amendment by the Inland Revenue Department to provide sukuk issuances a comparable tax framework to conventional bonds. Egypt In May 2013, Egyptian Sukuk bill passed into law allowing Egypt to raise funds through sovereign Sukuk issuances. Tunisia In July 2013, the Tunisian National Constituent Assembly overwhelmingly passed a draft sukuk bill which would allow Tunisia to issue sovereign sukuk as a means of raising funds. Nigeria In March 2013, the Securities and Exchange Commission of Nigeria (SECN) had issued new regulations for Nigerian companies to issue sukuk. In May 2013, National Insurance Commission (NAICOM) issued takaful guidelines including provisions for establishing NAICOM Shariah body. Kenya The Capital Markets Authority of Kenya (CMAK) is currently structuring a regulatory and policy framework to govern the trade of Shariah-compliant papers. Earlier, CMAK introduced new regulations providing for the creation of Shariahcompliant REITs. Malaysia In end-june 2013, Islamic Financial Services Act (IFSA) came into effect providing new legal and regulatory framework for Islamic Finance. In January 2013, Securities Commission introduced Business Trust Guidelines which included a chapter on Islamic Business Trust. IFSB During 4th quarter 2012, IFSB issued two exposure drafts on Risk Management for Takāful (Islamic Insurance) Undertakings and Revised Capital Adequacy Standard for Institutions Offering Islamic Financial Services. IILM In August 2013, IILM launched their inaugural sukuk certificates valued at USD490mln. 2

4 Global Islamic Finance Industry Presence and Stages of Development (1H13) Source: KFHR As a result, Islamic finance is rapidly expanding in the global financial system with as many as 600 financial institutions across 75 countries offering Shariah-compliant products and services. The industry is emerging strongly to position itself as an alternative to conventional finance, albeit with products attributed to be more sustainable and equitable. Though still small compared to the conventional finance industry (Islamic finance is about 1.6% of total world financial assets), growth rates averaging 15-20% over the past decade have been nothing but spectacular, promising a strong future potential 3. The interest in incorporating Islamic finance has emerged not only from Organisation of Islamic Cooperation (OIC) markets and jurisdictions, but also from non-oic markets and investors. Countries such as Australia, China, France, Germany, Italy, Japan, Korea, Luxembourg, Singapore and United Kingdom have all undertaken measures to introduce Islamic finance in their financial systems. Moving forward, there remains substantial market potential for Islamic finance suppliers to tap into, given the low penetration rates of the various Islamic finance sectors in most jurisdictions. Investors in today s uncertain economic world seek less risky investments in exchange for satisfying returns. Islamic finance may be able to offer such types of investment opportunities since Islamic financial products are structured on real assets and excessive risk taking is prohibited in Shariah. The significant boost in global sukuk issuances (CAGR of 19.35% during 2007 to 2012) and increase in total Islamic banking assets (CAGR of 20.4% during 2007 to 2012) epitomise to this assertion 4. Overall, on-going support from the various regulatory bodies is essential for ensuring the sustainable growth of Islamic finance assets in the near future. 3 KFH Research 4 ibid 3

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