ISLAMIC BANKING beyond boundaries Mohamed Jamil Berro 1
agenda 1 2 3 the journey.. state of business the opportunities.. growth frontiers al hilal experience.. overcoming challenges 2
state of business Islamic banking evolution progressive and innovative significant strides made from retail beginnings enabling Islamic banks to compete with conventional peers prior to 1970 s 1970 s 1980 s 1990 s today Retail banking Commercial banking Project finance and syndication Equity funds and Ijara Treasury products (PRS and subordinated Sukuk) 3
state of business weathering the financial crisis islamic banking safe haven of banking safety through fundamentals non speculative framework prohibitive of speculation non derivative providing shield from exotic financial assets asset based mitigating value at risk in financings and safe guarding deposits 4
state of business a story of growth Islamic assets 26% annual growth over the last 7 years growth.. even during the financial crisis USD bn 709 603 486 395 281 200 819 988 p41% p41% p23% p24% p18% p16% p21% 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bankscope, Allianz; PEW Research Centre, AHB analysis 5
state of business increasing presence niche to mainstream 238 growth of Islamic Institutions over the last 3 years despite tough economic conditions growth of Islamic financial institutions Other institutions Islamic Banking Windows Islamic Financial Institutions 538 13 163 362 p21% 652 38 p6% 693 65 194 192 p12% 776 121 199 420 436 456 2007 2008 2009 2010 Source: The Banker 6
state of business however, we remain embryonic Muslim world GDP ~10% share of global GDP, whilst Islamic financial assets represent only ~ 1% of global financial assets Muslim world GDP ~10% Islamic financial assets ~1% Global GDP Muslim World GDP 100% 10% USD tn 130 1 SOURCE: IMF, PEW Research SOURCE: Bankscope, Allianz, IMF 7
agenda 1 2 3 the journey.. state of business the opportunities.. growth frontiers al hilal experience.. overcoming challenges 8
growth frontiers expansion by Islamic banks opportunities established markets emerging markets 9
growth frontiers established markets growth potential despite regulatory and consumer affinity towards Islamic principles, established markets are weakly penetrated, presenting significant growth opportunities Islamic banking market share % Morocco 1% Algeria 1% Tunisia 1% Lebanon 2% Indonesia 3% Syria 4% Turkey 4% Egypt 5% Pakistan 9% Bahrain 9% Jordan 12% UAE 17% Malaysia 20% SA 21% Qatar 22% Iraq 25% Yemen 28% Kuwait Source: Bankscope 32% 10
growth frontiers established markets quantifying potential potential growth USD 400 billion o banking asset growth in line with GDP o 2% incremental penetration per annum reaching 10% combined GDP (USD trillion) Jordan Malaysia Qatar Yemen UAE KSA Iraq Kuwait combined banking assets (USD trillion) combined Islamic banking assets (USD trillion) 1.8 1.9 2.0 2.1 2.3 2012 2013 2014 2015 2016 2.8 3.0 3.2 3.4 3.6 2012 2013 2014 2015 2016 0.4 0.3 0.2 0.06 0.12 2012 2013 2014 2015 2016 Source: WMM Global Insights; EIU; IMF; AHB analysis 11
growth frontiers expansion by Islamic banks opportunities established markets emerging markets 12
growth frontiers emerging markets filtering process to identify potential growth markets 13
growth frontiers emerging markets muslim population filter 1 Muslim population in excess of 20 million or 50% of total population Source: PEW Research Centre 14
growth frontiers emerging markets penetration filter 2 Islamic banking penetration below 10% Source: Bankscope 15
growth frontiers emerging markets GDP growth filter 3 projected GDP growth in excess of 4.0% over the next 3 years Source: IMF 16
growth frontiers emerging markets accessibility filter 4 regulatory accessibility determined by ability to obtain licences or acquisitions Egypt Turkey ` Indonesia 17
growth frontiers emerging markets potential potential growth USD 250 billion o banking asset growth in line with GDP o 3% incremental penetration per annum reaching 15% combined GDP (USD trillion) Oman Nigeria Indonesia Egypt Turkey combined banking assets (USD trillion) combined Islamic banking assets (USD trillion) 3.3 2.3 2.5 2.8 3.0 2012 2013 2014 2015 2016 1.8 1.9 2.1 2.3 2.5 2012 2013 2014 2015 2016 0.25 0.2 0.10 0.04 0.06 2012 2013 2014 2015 2016 Source: WMM Global Insights; EIU; IMF; AHB analysis 18
growth frontiers emerging markets snapshot country market Turkey Egypt Indonesia Nigeria o Population of 79 million of which 99.8% are Muslims o GDP of USD 961 billion, per capita of USD 12,300 o Islamic banking penetration at 4% o Population of 82 million of which 90% are Muslims o GDP of USD 498 billion, per capita of USD 6,200 o Islamic banking penetration at 5% o Population of 246 million of which 86% are Muslims o GDP of USD 1 trillion, per capita of USD 4,200 o Islamic banking penetration at 3% o Population of 155 million of which 50% are Muslims o GDP of USD 338 billion, per capita of USD 2,500 o Islamic banking penetration at 0% (first license recently granted) Source: WMM Global Insights; EIU; IMF; CB Oman, AHB analysis 19
growth frontiers emerging markets oman economy GDP 2011 USD ~66 billion population 2011 3.08 million GDP per capita 2011 USD 21,681 Real GDP Growth Annual growth in pop Real GDP Growth per Capita 12.9% 3.2% 3.5% 3.4% 10.5% 2.2% 2.2% 6.7% 4.5% 4.1% 4.4% 3.6% 0.7% 0.9% 0.5% 1.1% 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011-2.3% 2007 2008 2009 2010 2011 2012 The Omani economy is primarily driven by Petro activities (50%). The overall economy is expected to deliver reasonable growth over the next few years. Approximately two thirds of the ~ 3 million strong Omani population comprise the 15-64 years category indicating an earning and consuming nation. The Sultanate of Oman is ranked at number 37 by global GDP per capita indicating that Oman comprises a wealthy nation. growing economy earning population bankable population Source, IMF Sep 2011 20
growth frontiers emerging markets oman banking sector assets 2011* USD ~46 billion loans 2011* USD ~31 billion deposits 2011* USD ~32 billion p3% p10% p13% p6% p9% p13% p6% p14% p16% 36.8 40.5 45.6 25.5 27.8 31.4 23.8 27.2 31.6 2009 2010 2011 Despite subdued global economic condition the sultanates banking sector grew at a compounded average growth rate of 7.4% during the period 2009 to 2011. Furthermore a banking penetration ratio of 70% indicates sufficient scope for growth. Bank assets to GDP 70% 2009 2010 2011 The Sultanates credit sector grew at a compounded average growth rate of 7.2% from 2009 to 2011. The bulk of financings have been extended to the Private sector. Loans to Assets 67% 2009 2010 2011 The growth in Oman s deposit base is fairly commensurate with the growth of assets and loans. Approximately two thirds of deposits are represented by the Private sector, whilst the remaining third is represented by Government and PSE s. Loans to Deposits 97% Source, CB Oman Oct 2011 21
growth frontiers emerging markets oman potential potential growth Islamic assets USD ~11 billion GDP (USD billion) 67.0 69.0 72.0 75.0 82.0 2012 2013 2014 2015 2016 o banking asset growth in line with GDP o 4% incremental penetration per annum reaching 20% banking assets (USD billion) Islamic banking assets and net revenues (USD billion) 0.25 0.20 0.15 0.10 0.05-46.7 48.1 50.2 52.3 57.2 2012 2013 2014 2015 2016 1.87 3.85 6.02 8.36 11.43 2012 2013 2014 2015 2016 14.00 12.00 10.00 8.00 6.00 4.00 2.00 - Source: Oman CB; IMF; AHB analysis 22
agenda 1 2 3 the journey.. state of business the opportunities.. growth frontiers al hilal bank s experience overcoming challenges 23
overcoming challenges al hilal experience introduction initial challenges human capital Al Hilal Bank commenced operations in June of 2008, a mere three and a half years ago, and hence can relate to the challenges that new Islamic Banks will face during the initial founding and operating stages. In this section we share our experiences in dealing with some of the key challenges. marketing service excellence Channels challenges products Identity IT infrastructure 24
overcoming challenges al hilal experience human capital challenge skills shortage The global Islamic Banking and Finance industry suffers from a shortage of skilled and experienced Islamic Banking professionals. The challenge is further compounded in Oman as the industry is brand new to the Sultanate. al hilal s experience conversion Hired 400 personnel in 95 days Sourced employees from Conventional and Islamic Banks Conducted extensive in-house and external training programs Continuous training and development initiatives for all employees with mandatory examinations Al Hilal Bank employees writing an examination 25
overcoming challenges al hilal experience identity challenge image There is a global perception that Islamic Banks are inherently old fashioned and boring institutions that do not relate to the modern and sophisticated customer of the current age. al hilal s experience look and feel Selected a young and fresh image Chose orange as our brand colour Utilize relaxed and engaging slogans Applied modern and trendy branch designs Al Hilal Bank branches 26
overcoming challenges al hilal experience IT infrastructure challenge technology In addition to the complex requirements to setup an IT infrastructure, Islamic Banks are further challenged in that off the shelf Islamic Core Banking systems do not exist. Differences include: - Profit Computations -Early Settlements -Profit Suspension -IFRS compliance Al Hilal Bank IServe,Tablet and mobile banking applications al hilal s experience methodical Selected a customized Core banking system tailored for Islamic Banks Prepared a scalable Infrastructure to address latest trends in technology Capitalized on fresh start to ensure data quality (no legacy systems) Innovative technologies such as CRM and mobile applications 27
overcoming challenges al hilal experience products challenge perception Many customers believe that Islamic Banks provide a very basic product suite unlike their conventional peers. al hilal s experience offer value Created unique value proposition for target segments in both retail and corporate banking Offer a comprehensive product suite Structure products for corporate customers Launched a Shari a compliant equity fund Al Hilal Auto interactive experience 28
overcoming challenges al hilal experience channels challenge perception There is a common perception that Islamic Banks do not utilize sophisticated channels to reach and serve their customers. al hilal s experience offer value Al Hilal Bank utilizes multiple innovative channels such as fully fledged Mall Branch Drive through money station Interactive vending solutions Electronic channels including latest Mobile and tablet applications Al Hilal Mall branch and Al Hilal drive through money station 29
overcoming challenges al hilal experience marketing challenge perception Many Islamic Bankers believe that we are at a competitive disadvantage in relation to conventional peers, as Shari a principles limit our options and initiatives in advertising and marketing efforts. Education programs, Golf tournament, Al Hilal Auto Festival al hilal s experience disagree Al Hilal s initiatives: Hosted Islamic Banking workshops Education initiatives at various schools Sports sponsorships Innovation and economic development sponsorships Social media applications such as Facebook and Twitter 30
overcoming challenges al hilal experience service excellence challenge perception There is a global perception that transacting with Islamic Banks is inefficient and burdensome as the transactions require several iterations which compromise service delivery. SKEA 2011 Sheikh Khalifa Excellence Appreciation award al hilal s experience applications Use of automation Streamlining processes Identifying operational bottlenecks and implementing solutions Implement Service excellence programs such as customer surveys customer call back Complaint management program 31
overcoming challenges al hilal experience building the group Initial set-up 11 Nov 2008 Launch of Al Hilal Takaful 16 Feb 2009 Launch of Al Hilal Auto 17 Mar 2010 Launch of AHB Kazakhstan 18 June 2007 Issuance of formation decree 19 June 2008 Al Hilal Bank commences operations Dec 2009 5 branches Dec 2009 14 branches Dec 2010 19 branches Dec 2011 21 branches In 95 working days: Develop and refine strategy Develop organisational structure and job descriptions Develop HR policies (recruitment, payroll, etc) Develop credit policies and procedures Develop bank operating policies and procedures Develop financial reporting framework Develop products (accounts, finance, etc) Develop corporate branding Launch a call centre, a web site and sms alerts system Install core banking system Recruit over 500 staff Renovate the branches (standardised identify) 32
overcoming challenges al hilal outcome assets UAE Islamic Bank rank 3rd In a mere three and a half year of operations, Al Hilal Bank has positioned itself in 3 rd place amongst Islamic Banks, capturing a 10.46% share of the UAE Islamic banking market assets AED 27.9b 5.6 UAE benchmarking 1.67% market share 0.39% 17.5 1.15% 25.9 27.9 2008 2009 2010 2011 1.61% 1.67% rank 3 rd Islamic 10 th UAE 7 Islamic benchmarking 10.46% market share 2.42% 5 20 18 7.17% 9.21% Islamic rank UAE rank 4 3 11 10 2008 2009 2010 2011 10.46% 2008 2009 2010 2011 2008 2009 2010 2011 Source: UAE CB, Banks financial statements, AHB analysis * Excludes Islamic Banking offerings of Conventional Banks 33
overcoming challenges al hilal outcome financings UAE Islamic market share 10.79% Despite subdued economic conditions and initial challenges, Al Hilal Bank has captured a 10.79% share of the UAE Islamic Financings market financings AED 19.2b 1.9 11.0 15.3 19.2 2008 2009 2010 2011 UAE benchmarking 1.79% market share 0.20% 1.08% 1.48% 1.79% 2008 2009 2010 2011 rank 3 rd Islamic 10 th UAE Islamic rank UAE rank 7 5 20 4 18 3 12 10 2008 2009 2010 2011 Islamic benchmarking 10.79% market share 1.10% 5.91% 8.26% 10.79% 2008 2009 2010 2011 Source: UAE CB, Banks financial statements, AHB analysis * Excludes Islamic Banking offerings of Conventional Banks 34
overcoming challenges al hilal outcome deposits customers AED 19.7b In three and a half years, Al Hilal Bank has built a 48,260 strong customer base contributing AED 19.7b deposits of which 20% represent casa deposits deposits AED 19.7b 4.5 11.9 18.2 19.7 2008 2009 2010 2011 UAE benchmarking 1.87% market share rank 3 rd Islamic 10 th UAE Islamic rank UAE rank 7 5 20 4 3 15 11 10 2008 2009 2010 2011 Islamic benchmarking 9.62% market share 1.73% 1.87% 0.49% 1.21% 1.01% 5.39% 8.99% 9.62% 2008 2009 2010 2011 2008 2009 2010 2011 Source: UAE CB, Banks financial statements, AHB analysis * Excludes Islamic Banking offerings of Conventional Banks 35
overcoming challenges al hilal outcome performance ROE 9.24% In three and a half years, Al Hilal Bank has recorded a return on equity of 9.24%, built a 48,260 strong customer base and looks forward to continue to contribute to Islamic banking revenue AED 1,730m 106 685 ROE 9.24% 1,372 1,730 2008 2009 2010 2011 7.55% 9.24% CTI 54.46% 368% 104% 61% 54% 2008 2009 2010 2011 customers 48,260 9,069 23,767 35,144 48,260-5.51% 2009 2010 2011 2008 2009 2010 2011 Source: AHB data 36
conclusion islamic banking is just taking off With 10% Muslim GDP and only 1% global Islamic asset penetration, the global Islamic Banking and finance industry presents significant opportunities for growth Several established territories and emerging jurisdictions, including Oman, have been identified as prime locations for expansion Collaborative efforts such as this conference can provide platforms to discuss and overcome challenges We wish Oman all the success in establishing their Islamic Banking and Finance industry thank you.. 37