Mobilizing Islamic Finance for Long-Term Investment Financing MAJID KERMANI, DIRECTOR OF STRATEGY AND POLICY, ICD NOVEMBER 18-19, 2015 ISTANBUL TURKEY
Introduction Addressing long-term investment challenges is very critical in boosting economic growth, creating sustainable jobs, lifting productivity and eradicating poverty in the world. Only in infrastructure, there exist an annual demand of $4 trillion a year for investment and we face a persistent shortfall of $1 trillion every year Major impediments, among many, to close this financing gap include: Underdeveloped infrastructure asset class Lack of transparency Inadequate risk profiles of investors Policy uncertainties Bank sector adjustments Underdeveloped capital markets etc. Providing practical solutions would definitely aid policymakers in developing policy frameworks and strategies that promote long-term investment.
G20 Context The importance of challenges of long-term investments has been recognized within the auspices of the G20 too. For example, in April this year, the G20 Finance Ministers and Central Bank Governors clearly highlighted their collective economic growth objective that pass through the sound investment strategies and policies. Today, G20 Leaders are working on concrete strategies to aim at improving the investment ecosystem, fostering efficient infrastructure investment and supporting long-term financing opportunities tailored for various needs of businesses.
G20 Context Major Observations Looking at historical evidences and prevailing discussions at G20 level enables us to draw three major observations on vision and strategies of G20 leaders for the long-term investment financing. 1. Vital need for global cooperation and multiparty involvement. 2. Investment strategies are not stand alone mechanisms 3. Necessity of emphasizing alternative ways and means of investments
Islamic Finance - Introduction The remarkable growth of Islamic assets to approximately USD 2.1 trillion at the end of 2014, with an estimated compounded annual growth rate (CAGR) of 17.3% between 2009 and 2014 is a testimony to the industry s resilient performance. This solid growth rate of the Islamic finance industry is driven by a number of fundamental factors such as, growing Muslim population, a global search for the ethical financing, regulatory advancements, growing interest of financial institutions and financial innovations. The growth in Islamic finance is also visible in the expanding range of services and products that comply with the basic precepts of Sharia law. Global issuance of Sukukhas grown significantly in the past few years, as annual issuances almost tripled from USD 45 billion in 2011 to USD 118.8 billion in 2014.
Islamic Finance - Challenges Unfortunately, the Islamic finance industry is currently facing a number of challenges for maintaining upswing momentum to meet rising demand for long-term investment needs. 1. The lack of the innovation in Islamic finance industry is mainly felt when it comes to financing tenor. The industry is suffering especially from the lack of new products for long-term financing. 2. The secondary market in Islamic financial markets are shallow and relatively under-developed Lack of efficient secondary markets and liquidity in the Islamic financial markets has indirectly limited the range of maturity structures available to investors. 3. Risk management products are also immature in the Islamic financial markets The market needs to see more products of handling and transferring risks particularly risks associated with cross border investments and cross-currency swaps
Islamic Finance - Challenges Focusing only on the lack of innovation aspect: Mostly related to the tenor For the short-term financing instruments, a limited number of products such as murabahaand ijaraare already available and have been used and accepted widely. For longer-term financing instruments, the industry is suffering from the lack of new products. Today, despite the existence of a number of products in the market, the demand for medium-to long-term financing is met mainly by profit-sharing agreements (mudaraba) and equity partnership (musharaka) instruments. Even when such choices are available, investors exhibit less enthusiasm, and are hesitant to commit funds and resources due to difficulties and cost associated with liquidating the asset at times of need.
Islamic Finance - Challenges The secondary market in Islamic financial markets are shallow and relatively under-developed. Lack of efficient secondary markets and liquidity in the Islamic financial markets has indirectly limited the range of maturity structures available to investors. Although Sukuk provides a secondary market opportunities for banks as well as institutions, its scale and spread is still very minimal and limited compared to the demand in the market. Therefore, due to the absence of liquidity, Islamic bankers cannot easily expand portfolios across capital markets and are restricted only to limited opportunities for portfolio diversification. This poses a challenge to develop more liquid instruments to satisfy demands of the investors and the users of funds seeking medium-and long-term maturity structure with the flexibility of adjusting portfolios at the lowest cost.
Islamic Finance - Challenges Risk management products are also immature in the Islamic financial markets. This is not because Islam does not recognize the need for risk management, but is due mainly to the lack of research and innovation in this area. In reality, Islam imposes greater responsibility of prudent identification and sharing of risks. Nevertheless, the market needs to see more products of handling and transferring risks particularly risks associated with cross border investments and cross-currency swaps.
Thank You