Islamic Financial Services Group trends and future direction Noor Ur Rahman Abid International Islamic Financial Market Board Meeting 4 February 2008 Revisiting the Fundamentals Investment avenues in conventional finance focus on risk adjusted optimal returns but in Islamic finance financial transactions have to meet the following additional criteria Asset backed Prohibition of interest Prohibited activities Speculation (gambling) Profit/loss sharing Shari a Compliant Transaction 2 1
History of Islamic Finance 1960s 1970s 1980s 1990s & 2000s 2007 2010? Governments, scholars, economists and businessmen realise the need for a parallel Shari a compliant banking system Pioneers enter the market offering Islamic commercial banking services Application increases, enabling the provision of other services, such as insurance (Takaful) Establishment of facilitating organisations (such as AAOIFI, IFSB and IIFM) Entry of conventional players Explosive growth stirring increased international awareness Islamic institutions providing a range of banking services Total Islamic industry assets are estimated at USD 900 billion* growing at an excess of 20% per annum Islamic assets expected to grow at a minimum of 20% and exceed USD 1.5 trillion Source: GR Research, AAOIFI, IFSB, IDB, Islamic Finance News and Ernst & Young estimates 3 *Including banking assets and assets under management Customer Segments Low Degree of Islamic Finance Orientation High Segment Only Conventional Finance Value-Seekers Islamic Finance Over Conventional Finance Given the Same Returns Only Islamic Finance Estimated Share of Market Wealth 10% 30% 40% 20% Implement effective marketing strategies to develop awareness Improve product performance / service quality Potential GCC Shari a sensitive liquid wealth Customer Perception Future? Future? Present Past Source: Ernst & Young Analysis 4 2
Increasing Geographic Penetration Azerbaijan UK Bahrain s International Investment Bank buys Azerbaijan's London aspiring to become a global gateway Amrahbank for Islamic with finance plans to convert it into an Islamic institution Regulatory initiatives facilitating the introduction of Islamic products Government exploring Sukuk issuance Hong Kong Interested in becoming an Islamic finance hub Luxemburg Islamic bond market expected in second quarter of 2008 Interested in the provision of Islamic wealth management services Singapore Germany Wants to position itself as an Islamic wealth management center Saxony-Anhalt Sukuk issued in Germany Japan Becomes an observer of the IFSB Studying the issuance of a Sukuk valued at USD 300-500 million 5 Retail Banking Trends Several commercial banks in the GCC have converted to become Shari a compliant Conventional banks have launched Islamic windows or dedicated subsidiaries GCC banks are diversifying outside their home markets Dubai Islamic Bank DIB Pakistan Kuwait Finance House KFH Malaysia Al Baraka Banking Group Setting up in Syria Al Rajhi Banking Group Al Rajhi Malaysia National Commercial Bank (NCB) Turkiye Finans 6 3
Corporate & Investment Banking Trends Regional liquidity finding its way mainly into real estate and infrastructure Increased liquidity channeled to overseas acquisitions Future activity to be driven by regulatory initiatives, privatisation and IPOs By 2009, USD 1.5 trillion of the world s HNWI wealth to come from the Middle East Concentration of Mega Projects Oman 2% Kuwait 4% Bahrain 1% Qatar 16% 33% UAE KSA 44% USD 1 trillion worth of Mega Real Estate projects are under development Source: Cap Gemini, Zawya, and Ernst & Young estimates 7 Trends in International Sukuk Issuance Primary Sukuk issuance has shown strong growth Increasing international interest Recently Sukuk issuance dominated by corporates Much of Sukuk issuance in the GCC has been real estate related 51,545 Growth in International Sukuk Issuance (USD million) Rest of the World Middle East CAGR =121% 27,165 40% 60% 980 80% 20% Source: IFIS, Ernst & Young Analysis 8 5,717 85% 15% 7,210 72% 28% 12,066 2002 2003 2004 2005 2006 2007 81% 19% 40% 60% 4
Trends in Sukuk Issuance (continued) Notable Issues (USD million) 06 3,520 Largest Sukuk issue (to date) convertible into equity upon an IPO 06 Dubai Ports Authority 3,500 First convertible Sukuk 06 800 20 year maturity - one of the longest in GCC 06 750 World s first Shari a compliant exchangeable bond 04 Department of Civil Aviation (Dubai) 1,000 The largest Sukuk issue in its day The Sukuk market is in its growth phase and has recently seen several first of a kind issues Source: Zawya, IFIS, Press Releases 9 *Excluding Japan Private Banking Trends Historically Existing players evolving to offer complete range of private banking products and services Limited products tailored for HNWIs Islamic players offering usually takes the form of Shari a compliant funds Real estate in the GCC region evolving into a core asset class Development of leasing, Islamic fixed income and Shari a compliant hedge funds International banks entering the market The Future? Islamic players to expand their premier banking product suite (e.g. Zakah advisory services for Muslim HNWIs) Source: Merrill Lynch/Cap Gemini; Ernst & Young Analysis 10 5
Trends in Islamic Funds Market Number of Islamic funds has grown by an approximate CAGR of 18% between 2000-2006 Geographical mandates dominated by the Middle East/Africa and Asia Pacific regions The distribution of Islamic funds is skewed towards smaller sizes Islamic funds concentrated on equities with gaps across other asset classes Number of Islamic Funds CAGR =18% 300 400 150 2000 2005 2006 Source: IFIS, Eurekahedge, Ernst & Young Analysis 11 Will the liquidity crunch affect Islamic finance? Conservative estimates indicate deals worth USD 10 billion (including Islamic) have been affected Impact of credit crunch some illustrations Amlak Finance Dana Gas Company Qatar Steel Company Qatar Fertiliser Company Dubai Electricity & Water Authority Ras Al Khaimah Investment Authority Emirates Aluminium Islamic transaction Raises USD 1.6 billion in project debt but bond tranche is dropped Plans to raise USD 2.5 billion GBP 325 million Sukuk prices higher at 150 basis points USD 2 billion bond sale USD 250 million Sukuk Description USD 1.3 billion re-financing deal USD 1 billion Sukuk issue experiences tighter pricing and Dana Gas revises issue size to USD 875 million Status Revised Deals have been delayed or priced higher than planned by issuers Source: MEED, December 2007 12 6
Future is Bright Regional liquidity will be channelled into regional opportunities USD 10 billion worth of Sukuk have been announced for 2008 mostly from the GCC Source: Zawya 13 RAK Properties Doha Bank Selection of Announced Issues (2008) Abyaar Real Estate Development Company ETA Star Property Developers Kingdom Instalment Company Zamil Holdings Qatar Islamic Bank Issuer Barwa Real Estate Company Al Baraka Banking Group Bahrain Financial Harbour Effects on Islamic Financial Institutions will be limited and they have an opportunity to channel regional liquidity in affected markets as assets lose value UAE Qatar Kuwait Qatar UAE Saudi Arabia Bahrain Saudi Arabia Bahrain Qatar Country Issue Size (USD Million) 2,000 1,000 800 700 501 501 250 250 250 250 Opportunities Where is the Potential in Islamic Banking Industry? High Potential opportunities exist here Retail Banking No. of Institutions Corporate Banking Project Finance Investment Banking Low Underdeveloped Private Banking State of Development Highly Developed 14 7
Future Potential Future Conquests MAINSTREAM Retail Banking Innovative complex products Liquidity management Corporate tools Banking Structured alternative assets Project finance and syndications Uniform and standardised products & documentation Project Finance Plus Increasing use of Sukuk Array of dedicated private banking institutions Sector/region specific Funds In addition to More customer oriented and innovative Commercial Banking Increasing complexity 15 Questions? Contacts: Tel: +973 1754 2415 Fax: +973 1753 5405 For more information, please visit http://www.ey.com/me/islamicfinan ce 16 8