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Overview of Islamic Finance Hanifah Hashim Head of Fixed Income (Malaysia) Franklin Templeton Investments September 26, 2012 should not be reproduced or distributed to persons other than the invited guests.
3 Overview of Islamic Finance Islamic Financing: financial products and services that comply with Shariah/Islamic law. According to Shariah law, these products and services must add value to the real economy. Islamic Finance has grown 20% annually in the last 5 years, with an outstanding of USD1.3 trillion in 2011. 1 Islamic Banking has grown a strong presence in MENA and South East Asia. Shariah compliant AUM for Islamic funds globally stood at circa USD60 billion as at end 2011. 2 IMF s Islamic Banks: More Resilient to Crisis, found that Islamic financial institutions have experienced credit and asset growth at least twice as high as that of conventional banks since the crisis hit, with asset value increasing by 21%. The Financial Times reported that Islamic banks were providing the best returns on cash deposited for two, three, four and five years, noting the Bank of London and the Middle East (BLME) has seen a four-fold increase in customer deposits mostly from non-muslim investors. 1 Source: Opening address by Mr. Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the 3rd Annual World Islamic Banking Conference: Asia Summit (WIBC Asia 2011), Singapore, 5 June 2012. 2 Source: Islamic Finance News, 1 August 2012.
4 Key Elements of Islamic Finance ELEMENTS OF ISLAMIC FINANCE Direct link to real economy Money is not a commodity, just a medium of exchange Certainty-supported by underlying activities (prohibition of gharar, i.e., uncertainty/ ambiguity/ misinformation or deceit/fraud) Prohibition of excessive leverage Different contractual relationships Equity-based Risk and reward sharing which help ensure greater market discipline Real economic activities Partnerships Shariah values consistent with universal values Ethics Governance Prohibition of unethical elements, practices and activities (e.g., hoarding) Prohibition of maisir (gambling), riba (usury) and zulm (oppression) Emphasis on fairness and justice Greater transparency and disclosure: Additional Shariah governance Unique risks specific to Islamic finance Greater fiduciary duties and accountability Source: Bank Islam Malaysia
5 Translating Key Elements in Islamic Finance Into Good Business Practice Good Business Practices in Islamic Financing Prohibits interest/usury Prohibits ambiguity and uncertainty Prohibition of speculation Prohibition in profit without effort or risk taking Prohibition in unethical investment Prohibition in excessive leveraging Asset-backed securitization Better transparency No shortselling, derivatives or futures trading Risk-sharing and not risk shifting Promotes businesses that benefit society More likely to withstand adverse economic environment
Overview of Sukuk Market
67 Global Sukuk Issuance: Exponential Growth As of May 2012 Global Sukuk: Key Growth Factors Large pools of Muslim wealth and abundant liquidity Demand still exceeds supply Thriving Islamic funds industry Alternative source of funding Diverge from risky equity Safe haven, asset-backed/based Huge financing and refinancing requirements Drying up of syndicated loans market Adoption of Islamic finance and banking by post Arab Spring regimes Eurozone debt crisis pushing investors and borrowers to other regions Islamic banks are less connected to problems in Europe Islamic banks are relatively liquid compared to their conventional counterparts Source: Zawya Sukuk Monitor, London Sukuk Summit, June 2012 (Pg. 2 & 3)
78 Outstanding Sukuk Market By Region ($M) As of May 2012 2,240, 1% Global Sukuk Issuance Forecast ($M) As of June 2012 62,919, 29% 148,761, 70% South East Asia GCC Other Source: London Sukuk Summit, June 2012, (Pg. 6) Note: GCC is Gulf Co-operation Council & includes 6 countries (the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait) Source: Zawya, MENA Sukuk Quarterly Bulletin 2Q12 (Pg. 2) The current outstanding global sukuk market is estimated at USD 214 billion as of May 2012 South-East Asia accounts for 70% of the total with Malaysia alone USD132 billion (62%) followed by Indonesia Saudi Arabia and UAE top GCC, followed by Qatar and Bahrain
9 Global Sukuk Issue by Country 2Q2012 ($M) As of June 2012 Global Sukuk Issue by Structure 2Q2012 ($M) As of June 2012 1Q2012 Source: Zawya, MENA Sukuk Quarterly Bulletin 2Q2012 (June 2012)
10 9 Global Sukuk Issues By Market Type & By Issuer Type ($M) 2Q2012 As of June 2012 International 3,950 (16%) Corporate 3,139 (13%) Quasi Sovereign 3,094 (12%) Domestic 20,935 (84%) Sovereign 18,652 (75%) Source: Zawya, MENA Sukuk Quarterly Bulletin 2Q2012 (Pg. 2)
11 Benefits of Islamic Fixed Income to Investors 1. Screening of companies lead to portfolio diversification for conventional investors 2. Comparable investment returns to investors with lesser volatility in asset pricing 3. Enhanced security via collateralization of assets 4. Promotion of real economic activity that filter out complex derivatives structures 5. Better transparency and certainty - obligation of full disclosure to investors
Malaysia Sukuk Market Case Study: The Appeal of Sukuk to Conventional Investors
12 13 Malaysia Sukuk Issuance by Type As of July 2012 $70,000 USD Millions $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $58,027 $48,010 $40,360 $21,639 $17,826 $7,777 $10,292 $10,202 $2,426 $2,897 $3,489 $2,995 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2Q2012 Corporate Sovereign & Quasi Sovereign All Sukuk Source: http://www.zawya.com/sukuk/
14 1. Better Liquidity in Islamic MYR Corporate Bond Source: Bond Pricing Agency Malaysia Past performance is not an indicator or a guarantee of future performance.
15 2. Higher Yield For MYR Islamic Government Bonds Source: Bloomberg Past performance is not an indicator or a guarantee of future performance.
16 3. Comparable Returns, If Not Better Malaysia Liquid Corporate Bond Index Islamic vs. Conventional Source: Bond Pricing Agency Malaysia Past performance is not an indicator or a guarantee of future performance.
17 Important Information This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. Any research and analysis contained in this presentation has been procured by Franklin Templeton Investments for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of this commentary or any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author s at publication date and they are subject to change without prior notice. Given the rapidly changing market environment, we disclaim responsibility for updating this document.
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