Mainstreaming Islamic Finance into Global Initiatives
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A Side Event to the IMF-World Bank Annual Meetings 2018 Bali, Indonesia October 2018
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Mainstreaming Islamic Finance into Global Initiatives
- 1. @wbg2030 worldbank.org/sdgs October 14, 2018 Mahmoud Mohieldin Senior Vice President World Bank Group
- 2. 1 I. Investing in inclusive growth to meet the SDGs
- 3. The SDGs present a major opportunity for transformation Global development agendas serve as a guide for countries to determine their national development path MDGs (2000-2015) SDGs (2016-2030) Goals/ Targets/Indicators 8/21/60 17/169/~230 Priority Areas Human Development Holistic: Economic, Social, Environmental Scope Developing Countries Universal
- 4. Investing in inclusive growth: The Common Characteristics of High, Sustained Growth Source: The Growth Report, 2008
- 5. Investing in human capital Three main indicators, reflecting building blocks of the human capital: • Survival – Will kids born today survive to school age? • School – How much school will they complete and how much will they learn? • Health – Will kids leave school in good health and be ready for further learning and/or work? “How much human capital will a child born today acquire by the end of secondary school, given the risks to health, education and social protection that prevail in the country where she was born?” 4 4 Source: World Bank
- 6. Source: Global Infrastructure Hub, 2018 1E+11 1.5E+11 2E+11 2.5E+11 3E+11 3.5E+11 4E+11 Infrastructure Outlook: Africa Current trends Investment need Investment need inc. SDGs 1.3E+12 1.5E+12 1.7E+12 1.9E+12 2.1E+12 2.3E+12 Infrastructure Outlook: Asia Current trends Investment need Investment need inc. SDGs
- 7. Social protection and labor regulation can help manage labor market challenges Investing in resilience Source: WDR 2019
- 8. How will we enable these investments? Data Finance STI
- 9. Data is a problem, even in Canada 0 10 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Seventy-eight of 169 SDG targets describe potentially assessable outcomes for Canada Quantified SDG target Canadian national target Proxy target Not able to assess
- 11. 10 Financing sustainable development: “Digitization” is disrupting every part of financial services Source: World Bank Group, 2017
- 13. 12 II. The role of the financial sector
- 14. Components of a sound financial sector Consumer/ Investor Protection Effective Regulations Financial Literacy Financial Innovation Mobilize Savings and Allocate Investments Legal framework to enhance trust, confidence in financial contracts and transactions 13
- 15. Higher levels of financial development cause: a faster decline in the fraction of population living below the poverty line. a lower incidence of poverty compared to other countries at the same income level Empirical evidence shows: a 10 percentage point increase in private credit to GDP ratio reduces the share of the population in poverty by 2.5 to 3 percentage points a 1 percentage point increase in private credit to GDP reduces malnourishment by 0.2 to 2.5 percentage points Romania -2 -1 0 1 2 -4 -2 0 2 4 Slovenia Jamaica Malaysia Thailand Mali Zambia Uganda Ghana El Salvador LAO PDR ● Residuals − Fitted Values Cluster Representing Most Countries Change in poverty headcount Sources: Beck, Demirgüç-Kunt, and Levine (2007); Honohan (2004), Claessens and Private credit as a share of GDP Research has shown that financial sector development reduces poverty levels
- 16. In countries with more developed financial intermediaries: Income inequality falls more rapidly (declining Gini coefficient) Income of the poorest 20% grows faster Credit constraints on the poor are less severe, helping capital allocation and improving growth Vertical axis: Income Inequality –changes in Gini coefficient (1960-2005); Horizontal axis: Financial Sector Development – logarithm of private sector credit to GDP ratio (period average). Source: Beck, Demirgüç-Kunt, and Levine (2007). There is also evidence that financial sector development reduces income inequality
- 17. 16 II. Islamic finance, economic growth & development
- 18. Total Islamic financial assets now exceed US$ 2 trillion Global Islamic Finance Assets (US$ Billion)
- 19. Islamic finance can support sustainable development objectives Financial Stability Financial Inclusion Social Impact Infra Development Source: On the Sustainable Development Goals and the Role of Islamic Finance, Mohieldin et al, 2015
- 20. Partnership- and equity style financing Profit and loss sharing Socially responsible investments Emphasis on tangibility Specific features of Islamic finance give it the potential to significantly enhance growth and reduce poverty
- 21. Financing business enterprises, including SMEs and innovative entrepreneurs Financing infrastructure projects Improving the poor’s access to financial services Supporting social investments in education and health Supporting “green” investments to address climate change Islamic finance can contribute directly to boosting growth, reducing inequalities and enhancing the sustainability of growth
- 22. Islamic Capital Markets can be viable sources of long-term development finance Shariah- Compliant Activities Money as Potential Capital Sanctity of Contract Prohibition on Speculative Transactions Risk-Sharing Asset-Backed Instruments Prohibition of Interest Islamic Capital Markets 21 Islamic Banking Islamic Capital Markets Takaful
- 23. Can sukuk be used for infrastructure investment? Source: Naveed, Sukuk: asset securitization based on shari’a principles, 2015
- 24. Enhance corporate governance and risk management Strengthen the regulatory and supervisory framework Promote standardization of products and documentation Improve bankruptcy and insolvency regimes Raise public awareness (financial literacy) Increase the number of skilled professionals Policy interventions to unlock the potential of Islamic finance for sustainable development 23
- 25. • First green sukuk, in 2017 in Malaysia for $59M • Issuance of various IF instruments, incl sukuk, which raised $700M in 2015 • Doraleh Container Terminal Project, Djibouti • Technical Assistance to various governments Examples of WBG work in Islamic finance • Financing package for Iraqi power company for $375 million • Establishment of IFC Sukuk Company; issued $100M in trust certificates in 2015 • Queen Alia Airport Project, Jordan • Hajj terminal and Madinah airport in Saudi Arabia • Provision of a $427M Sharia-compliant investment guarantee for infrastructure projects • Political risk insurance worth $450M in 2015 Different parts of the WBG support Islamic finance 24
- 26. Conventional instruments can be Islamic Sources: World Bank Group Treasury, Press Release from 03/09/2017 Some instruments are structured in a manner that may be compliant with Islamic finance. World Bank Group examples include: The SDG Bonds: Equity-linked bonds that link returns to the performance of companies advancing global development priorities IFC’s Social Bond Program
- 27. Collaborating for CHANGE We share a common goal: eliminating extreme poverty by 2030 and boosting shared prosperity. We must work in partnership to be successful.
- 28. Mahmoud Mohieldin Senior VP Thank You worldbankgroup.org/sdgs Follow us on twitter @WBG2030 Mahmoud-Mohieldin on
- 29. Annex: Role of Sukuk in financing economic development Usage Example Fiscal support Sudan: Over $100 million of Sukuk issued in 2012 to raise funds for the government Liquidity management Bahrain, Gambia and Brunei: Short-term Sukuk as tools of liquidity management Education Osun State, Nigeria: Local currency, sub-sovereign Sukuk issue ($62 million equivalent) for the construction and rehabilitation of 24 schools in 2013 Health World Bank: Global Sukuk for $500 million raised by International Financial Facility for Immunization to fund the supply of vaccines to some of the world’s poorest nations in 2014 Infrastructure Saudi Arabia: Global Sukuk for $1.7 billion to finance electricity projects in 2010. Malaysia: Global Sukuk for $300 million to finance the Klang Valley Rapid Mass Transit Project Environment Malaysia: TheWorld’s first green sukuk launched in 2017 to finance sustainable, climate-resilient growth 28
Hinweis der Redaktion
- “Trickle-down theory - the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.” -John Kenneth Galbraith
- Higher levels of financial development cause: a faster decline in the fraction of population living below the poverty line. a lower incidence of poverty compared to other countries at the same income level Empirical evidence shows: a 10 percentage point increase in private credit to GDP ratio reduces the share of the population in poverty by 2.5 to 3 percentage points a 1 percentage point increase in private credit to GDP reduces malnourishment by 0.2 to 2.5 percentage points
- In countries with more developed financial intermediaries: Income inequality falls more rapidly (declining Gini coefficient) Income of the poorest 20% grows faster Credit constraints on the poor are less severe, helping capital allocation and improving growth
- Financial stability: Helps Islamic financial institutions to be more resilient to particular shocks May help to diffuse risk in the financial system Financial inclusion: Helps widening the range of products and services available to businesses and households Helps improving access of the underserved to financial services Social impact: Helps achieve empowerment of marginalized groups Helps access funds used for nutrition, healthcare and education Infrastructure development: Helps attract investment in infrastructure Can be leveraged to attract private funding and form private public partnerships (PPPs)
- The asset-backed nature of Islamic finance makes sukuk ideal for infrastructure financing in some ways, but until now the sector has been confined mostly to handling mid-sized deals with shorter tenors. Traditionally, conventional bonds, often designed and marketed by Western banks, have been the default option for infrastructure-related debt deals. The balance sheets of Islamic banks have generally been too small to cope with very large sukuk issues with long tenors. So far, the lion’s share of Islamic infrastructure financing has been handled by the Islamic Development Bank. However, a growing and much deeper pool of capital is in the hand of private-sector Islamic investors, and the IDB is trying along with the G20 to help unlock such capital. In addition to the traditional benefits of sukuk, such as diversifying an investor base and accessing investors who do not invest in interest based bonds, a less discussed value add of sukuk is its structure, particularly the Ijara structure which to a greater deal over conventional bonds prevents the wastage of funds through corruption and theft. Taking the example of the sukuk issued by the Government of Luxembourg in 2014, three government properties – two towers of the Gate of Europe in Kirchberg and the Gutenberg building in Strassen were sold to a Luxembourg SPV for which the Luxembourg Government was the single shareholder. The SPV was securitised by means of the sukuk holders investing €200 million who whilst receiving this value back at maturity (when the Government buys back the properties from the SPV), would receive a benchmark linked profit rate of 0.436% to be generated from the rental income received by the SPV from the tenants of the three properties securitised. This asset linked profit generation means investors get to understand the underlying asset and are more involved in the project. All money raised has to be accounted for as it is used by the SPV to purchase the properties, the funds cannot go missing, or be wasted. In developing domestic sukuk markets, policy makers should use a framework similar to that of the development of conventional bond markets, that is, by establishing (1) well-functioning money markets, (2) efficient primary markets and securities-offering regimes, (3) a robust and diversified investor base, (4) a market infrastructure that facilitates trading, price transparency, and efficient clearing and settlement of transactions, (5) derivatives market and hedging tools to support risk management by issuers and investors, and (6) a credible legal and regulatory framework. In accessing the international market, the issues policy makers or potential sukuk issuers should consider include awareness of and knowledge of sukuk, legal foundation, taxation, governance, and obligors’ credit rating.
- How to meet development objectives, in short Avoid bad ideas Implement the list of policies adopted by countries with sustained high growth Adopt one or more of the global development paths: SDGs OECD Accession World Bank twin goals Data, finance, and implementation are the key Data: strengthen capacity; support data revolution Finance: maximize impact of each type of finance: public; private; domestic; international. Ensure private sector participation. Establish a SWF Expand financial inclusion, in particular savings Implementation: Invest in people Invest in inclusive growth Invest in resilience Development happens at the local level: ensure that