1. Islamic Financial Services
Industry: Its evolution, journey,
evolution journey
growth, trends and future direction
- a discussion of constitutional
issues -
Bank Muscat /IIFM Workshop
Islamic Liquidity Management & Capital
Markets May 5 – 6, 2012
By Abdulkader Thomas
B Abd lk d Th

2. Today s
Today’s Agenda
• Where is Islamic Finance Today?
• Where have we been?
• What
Wh are the k trends?
h key d ?
• Where are we going?

3. The Geographic Spread
Emerging in North America London is a Key Service
and Capital Market Center
South Asia is
Key Target Market
Primary Capital
Source is GCC
Kuala Lumpur is the
p
Largest Capital
Market Center
Africa is an
Emerging Market

4. Customers putting themselves first
• Transformation from the old market
situation: Bankers and the Affluent
directing the business
•DDemand i i
d is increasingly b tt
i l bottom – up:
– Demand for consumer products
– Insistence on custom tailored business products
• The questions are not always deep, but
q y p,
the growing preference is to be free from
riba - ‫.ربا‬
‫.رب‬

5. Customers not fully convinced
• Mind your language:
– The press reports “Islamic loans”, “Islamic
lenders”,…
– The teller offers you more “interest” on your
mudaraba
– The murabaha desk officer tells you your
interest rate and calls your car purchase a “loan”
• Should you really fund a duty free business?
• Why did so many people get upset about the
perpetually delayed Goldman Sachs sukuk?
p p y y

6. An interesting alternative
• The nature of Islamic finance is different:
– In lieu of a cost of funds:
• Cost of Goods
• Cost of Capital/profit sharing
If adhered to, there i practical and l l meaning f risk
dh d h is i l d legal i for i k
• The character if derivatives is different and
limited:
– Reduces the scope of some risk taking
– Changes the industry risk profile
Does not reduce the risks of specific businesses or banks!
• No insulation from irrational exuberance!

7. Not yet serving the mass needy
• Islamic Microfinance only beginning to take
form
• SME finance is well behind microfinance in
p
its development
For both to become meaningful, we require a
change in the direction of investment from
“prestigious” landmark western deals to
invisible southern deals
Whose blessings are we invoking Basel or ….

8. Where have we been?
• Strongly associated with the
hydrocarbon
h drocarbon price c cle
cycle
• Biased towards traders and the
affluent
• Somewhat short on creativity
• Struggling between the choice of
cutting a new path and copying the
established financial sector

9. Impact of the Hydrocarbon Cycle
• Struggling with definition before 1973
• Foundation of the big five post 1973
ou d o o e b g ve pos 973
– IDB, DIB, KFH, Albaraka and DMI
• Expansion post 1979
• Slow growth 1986 through 2000
• Booming since 2003
Link will break when growth of the
sector takes off in meaningful way
outside of the hydrocarbon producers

10. Traders & Affluent Demands
• Traders:
– Short term financing
– High demand for funds in a short cycle
– Attractive margins in a short cycle
• Th Affluent:
The Affl
– Safety abroad
– Familiarity – “show me what I know”
– Money at home must be mobile

11. Somewhat short on creativity
• Creativity entails risk taking
– Hi
Historical thought process: “ need to avoid
i l h h “we d id
losing”
• C
Creativity requires R&D within a proper
i i i i hi
framework:
– Central bank and securities regulators buy-in to
the industry
–S h l
Scholars receiving the correct training
i i h i i
– Business people being aware of the rules

12. Innovators or Copycats?
• Issues which come to mind in our
Issues which come to mind in our
struggling between the choice of cutting
a new path and copying the established
a new path and copying the established
financial sector:
– Credit cards
– Organized tawarruq
– Interbank wakala without disclosure, without
disclosure
risk
– Promises which can be broken for a price

13. Key Trends
Key Trends
• Sukuk
• New markets (mostly), and
• M
More products
d

14. 1
What is happening with sukuk?
Gross Sukuk Issuance (US$m)
$90,000
$85,575
$80,000
$80 000
$70,000
$60,000
$53 077
$53,077
$46,794
$50,000
$40,000
$27,179
$27 179
$30,000
$32,160
$20,000
$10,798 $20,540
$10,000
$10 000 $5,817
$30 $336 $813 $986
$7,217
$-
1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Zawya This Chart cannot accommodate 2012!

15. Slide 14
1 Insert Sukuk table
Abdulkader Thomas, 5/1/2012

16. Who is new? And, who might leave?
• Ahlan wa sahlan ‫ال‬
‫ال وسھال‬
‫اھال‬
– Libya
– Morocco
– Turkey
– Nigeria
– Russia
– France
• Gone – South Sudan
• One foot out the door - USA

17. Broadening product base
Broadening product base
• More banks, more styles
banks
• More organic demand, more innovation
• Mi
Migration of the fi
i f h financial engineers
i l i

18. Expanding service mandate
Expanding service mandate
• Sophisticated capital markets
• Broader management of risk
• Some h
S happier customers
i
• Less resistance from “conventional”
customers
– Why: Because the sector is better?
– Or: Is the conventional sector temporarily
impaired?

19. Increased regulatory cooperation
and dialogue
d di l
• GCC regulators appear to talk more together
• Global regulators slowly paying attention
• IFSB
• Indirect collaboration by the imposition of
AAOIFI
• Need to address legal issues in commercial
g
laws, banking laws, and
• Probably need to push back against Basel

20. Migration of global banking
Migration of global banking
methodology to the Islamic sphere
The l
Th loss of j b i N h A
f jobs in North America i
and Europe has led senior
bankers, regulators
bankers regulators, and their pupils
to come to work in the GCC, East
Asia and other markets. They bring
what they know, and they may be
the very same people who g
y p p gave us
2008. Be wary of what you ask for:
!‫ال تبغي قرد اخر، انجك اقرد‬
‫ي‬

21. The question of whither Islamic
finance?
• Will this be a demand driven market with
well informed consumers?
• Will this be a copy cat industry?
py y
• Will this business expand its mandates to
serve the needy as well as the affluent?
y
Can we innovate to our needs?
The problem of one size fits all global
regulation:
Basel is bad for you and me
me.

22. A word on standards
AAOIFI, ti
AAOIFI national law, national
ll ti l
Sharia’a, and various objectives
Beware of red herrings,…
herrings
We live in a world with multiple
legal systems, highly negotiated
contracts, consider the US:
English law, two variants of civil
law, and several forms of hybrid
English/civil law
E li h/ i il l – and many think
d hi k
that it sets a high standard of judicial
clarity and ease to do banking!
y g

23. Conclusions
• How do these issues touch on our topics:
– More demand
– More tools to work with
– More problems with structure
– More serious headaches relating to the choice
d
of what to import and how
– Bigger questions about how we frame our
market, who do we truly serve
– And, these p
, point to the character and g
guidance
of our ALM policies and their meaning for our
banks’ risks