العدد الحالي: نيسان/ أبريل 83-2019       اختر عدد :
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The advancement of Islamic banking & Finance in Global Markets

Nafith ALHersh

Researcher - Islamic Banking Specialist

Introduction of Research:

The 7 main players in Islamic finance are Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Bahrain and Turkey . They introduce large contributions to the finance and capital of the Islamic industry in the existing and new markets. Islamic banks are still growing by achieving good financial figures with high potential in the future. Different studies were performed and revealed the advancement of Islamic banking & Finance in the Global Markets. Somestudies expect Islamic banking assets to grow at a Compounded Average Growth Rate of 19.7% over (2013–2018) across the countries to reach US$1.6 trillion by 2018. A lot of challenges facing Islamic banks need to improve new products, limit investment tools, adjust the propositions, operate models, systems, tools. Sharia has complained and processed to understand and fully capitalize the international opportunities provided. Research & Development centers demonstrate that ,the Islamic banks achieved a good progress in all financial figures such as ROE , ROA & Expect that the future success of Islamic banks will be measured less by the growth of assets and more by quality of growth.Islamic banks benefit from Globalization. Many Islamic banks have  already started their business in unexpected markets such as China, Russia (Communist Schools); in addition to the early entrance to old Capitalism Centers such as England & the United States & New capitalism centers like France. The researcher attempts to introduce some important figures according Islamic banking industry.

 

Goal of Research:

This study aimed to:

1-     Deriving useful insights from this report about Islamic Banking & Finance.

2-     Discovering the information provided by other R & D centers in fields of :

-        Global Islamic finance assets.

-        Global Islamic funds sector.

-        Global Islamic Sukuk sector.

3-     Predicting the future growth for Islamic banking & Finance industry using statistical tools.

 

Importance of Research:

This research is an attempt to point out the following points:

-        Reveal the rapid growth & advancement of Islamic banking & Finance in Global Markets.

-        Highlight the financial efficiency figures related to global Islamic finance assets, fund sector & Sukuk sector.

-        Indicate the main playing countries in Islamic finance.

-        Determine the important products acquiring most attention in Islamic finance.

 

Theoretical Aspects of Research:

A -      Exploring the new developments in financial figures for Islamic banking industry cross the world.

Islamic Finance Globally:

·        Opportunities in Islamic finance “are great” – Mark Mobius said: the executive chairman for Franklin Templeton Emerging Markets, they run funds: USD 53 billion in assets.

Global Islamic Finance Assetsworth $ 1.35 trillion at the end of 2012- Thomson Reuters.& $ 1.71 trillion at the end of 2013 – EY.

-        According to Thomson Reuters, the above figures: include Islamic banking, investment funds, Sukuk, Takaful, and other Islamic investment instruments.

-        Despite the fact that this figure represents a very small percentage of the assets of global funding (only 2% of global assets), but it is growing rapidly at the growth rate between (15% - 20%) per year in several major markets.

-        EY suggested the growth rate 17.6% for Islamic banks between 2009-2013 on average and revealed that the growth of assets of Islamic banking sector stopped at 12 percent in 2013.

-        In addition, the profit growth rate and the financial efficiency of Islamic banks reached to 20% on average.

-        Experts estimated that the estimated value of the assets for Islamic banking in the world is in the range of 4.1 trillion dollars.

-        Malaysia’ Islamic finance assets worth is$ 412 billion (30.51%).

-        Saudia Arabia worth is $ 217 billion (16%).

-        Islamic finance assets for United Arab Emirates, Qatar, Indonesia & Turkey worth is $ 424 billion (31.4%).

-        Other countries worth is 22%.

-        Malaysia’& KSA are the main players in Islamic finance industry.

-        The other major centers in Islamic economics are UAE, Turkey, Indonesia & Qatar.

-        These countries have more than 40 million customers in around 20 Islamic banks.

-        With regard to countries that aspire to leadership in the field of Islamic finance industry, there are a lot of countries in this aspect.

-        The UAE occupies a convenient position to take the lead in the stage of development of the next due to the strategies adopted recently under the title "Dubai, the capital of Islamic economy”.

-        In Europe, “UK- London” joined to declare it as the capital of Islamic finance in the West after Cameron, British Prime Minister, had agreed  to issue Islamic bonds worth 500 million Sterling pounds.

Source: Reuters, Ernst Young ,others

B- Global Islamic Funds Sector:

-        Islamic fund sectors are estimated at USD 62 billion around 4.7% of global Islamic assets, while Islamic mutual fund mainly worth totaling USD 46 billion.

-        For Islamic  fund, only 20% of Islamic fund are for institutional investors, 80% came from retail sector.

-        In a comparative point of view, for conventional fund, 70% contributions were institutional investors while the rest (30%) were from retail investor.

-        Chart (1) below illustrates the differences as follows:

-        The three major markets dominating Islamic funds are: Saudia Arabia Malaysia’,& Luxemburg reaching around 70% of global Islamic funds.

-        The year 2013 saw the highest number of funds which launched (94) new funds (22 are liquid funds).

-        Islamic funds significantly increased over the last 5 year, but still a fraction of the total Islamic finance assets.

 

-        Chart (2) The Growth of Global Islamic fund during last 7 years

In September 2013, the total number of global Islamic fund reached to /1065/ funds. It nearly doubled ( 85% growth)in comparison with numberof funds issued in 2007 (576 fund). The total value of Islamic assets fund reached to /62/ billion .We can observe that the total numberof Islamic mutual funds in 2013 is (786) funds with the value of $ 46 billion. While it was /338/ mutual funds in 2007 (growth rate 132.5%), most of Islamic fund was directed toward Money market funds (Short term investment – less than 1 year rather than long term investment or capital market).

C- Global Islamic Sukuk Sector:

-        Sukuk is the bellwether of the Islamic finance industry and umbrella for Islamic capital market: long term instruments .

-        In addition to sukuk, capital market instrument includes: Stocks, Mutual Fund, Syndications, … etc.

-        Best Definitions: The sukuk, loosely defined as ‘participation certificates linked to assets from the real economy’, may just be the capital market instrument that acts both as a locomotive that pushes Islamic finance to 2.0 ($2 trillion).

-        Sukuk deployed at the headquarters of  both Western capitalism &  Communist : new countries start dealing with Sukuk like: China, Russia, South Africa, and others.

-        Different studies revealed the major role for Sukuk in financing needs, fundraising opportunities under various Islamic finance structure such as: Ijara, Isstisna’, Salam, Musharaka, Murabaha, etc.

-        Jordan was the first country to introduce special law to recognize sukuk .That law was issued in 1982 named “Muqarada  Bond  Law “ and considered as the basis stone in sukuk building. Slow action taken prevented its development there.

-        Malaysia , in comparison worked hard on these laws and organized multiple sukuk issuances.Researcher Article IFN: Islamic Finance News: 13 March 2012.

-        Malaysia becoming a leading global player in field of sukuk industry with 68.8% of the issuance. Rasameel: 2013 Annual Global Sukuk Report .

-        Sukuk also can finance emerging markets: 57 Muslim countries which needs billions of dollars directed toward infrastructure particularly build roads, hospitals, bridges, airports, housing and so on .

-        Sukuk have a lot of advantages such as: Finance Assets, promoting development, contributing to the Real Economy and Financing Diversification.

Table (1) below shows the development phases of Sukuk Market as follows :

Table (1): Development phases of Sukuk Market

Phases

Phase Characteristics

Number of

Issuances

Value of Issuances  ($ Billion)

1982

 

Muqarada  Bond  Law by Jordanian .

-

-

1990-2001

·        Started in 1990 with Shell MdS corporate sukuk in Malaysia

·        Small issue by Malaysian government.

95

5.89

2002-2007

·        Started with the Malaysian government issuing the first rated international sukuk .

·        Many local & Int issuances.

 

 

726

 

 

87.71

2008-2010

·        Global financial crisis .

·        AAIOFI issued Sharia compliance Issues .

909

108.0

2011-2013

·        Still spreading into different markets.

·        New countries entered the race.

1060

194.78

 

 

-        ZAWYA estimated the current outstanding sukuk market at $230 billion in 2013 and expected to grow reaching $ 421 in 2017.

-        Key interesting findings in Zawya Survey 2013 “regarding sukuk highlight the following findings :

-        In sukuk structure investors (buy side) prefer Ijara Structure by 63.3% .While arrangers (Sell Side) prefer Ijara & Wakala by 29.6% for each .

-        Average investors expect (35% - 40%) of their portfolios to be allocated to sukuk.

-        Most investorsprefer to invest in sovereign issuance, then quasi-sovereigns, followed by state-linked issuance. While arrangers expect quasi sovereign Sukuk, sovereign sukuk  and finally financial services sector sukuk .

-        For tenor, the majority of investors prefer tenors of (3-5) years by 52.5%, while arrangers expected tenor between (5-10) years by 66.7%, only 25.9% of arrangers prefer tenor (3-5) years.

-        In coupon type , 50% of investors prefer fixed coupon (50% for floating rate), while 70.4% of arrangers choose fixed rate coupon & 29.36% for  floating rate).

-        Investors looking for USD issuance by 77.8% and about 50% of arrangers prefer USD .

-        For emerging markets, investors & arrangers  looking for countries such as Oman  and Egypt .

-        For credit quality, the majority prefer investment Grade (BBB-/Baa3 and above ) sukuk certificates. The same is for arrangers (Sell Side).

-        For country dimension , most investor  prefer Saudi Arabia to invest in, followed by UAE & Malaysia, while Arrangers expect to see most investors came from UAE , Saudia Arabia & Malaysia.

Practical Aspects of Research:

 

The researcher used Time series & forecasting to predict the trend of Islamic assets in billions USD. Upon data analysis, the graph shows that the expected Islamic assets in 2020 will be around $ 3,034.19 million. The graph is as follows:

Foreseeing the future growth for Islamic banking & Finance industry.

Experts  & Study centers  expected Global Islamic Assets Growth to reach around 4 trillion dollar in 2020.This number is expected to double four times in 2020 (4 trillion) from 1 trillion in 2010. Source:Zawya , IFIS , Bloomberg , KFHR.

Ernst & Young counted Global Islamic banking Assets Growth to reach 1.811 trillion dollars in 2013 from 1.334 trillion in 2011 with growth rate 35.75% .GCC Countries acquired /131/ billion dollars.Total outstanding sukuk maturity was /179/ billion dollars in 2011 & expected to reach /400/ billion in 2015 with the growth rate of 123.46%. This figure illustrates the attitude toward sukuk over the world.

Also Experts estimated that the growth rate for Islamic banks on average 17-20% exceeds the growth rate for conventional banks (10%). 

- Islamic finance may be growing at approximately twice as the conventional; there is still no visible race since Sharia-compliant funding represents a measly 1% of global banking assets.

According to Standard & Poor’s, the growing economies of several Islamic countries, especially those in the GCC, are building up momentum in Islamic finance, which is expected to reach USD 2 trillion globally by 2015.

- Dubai diversifies its economy. It is not only Islamic finance, Dubai aims to "become the Islamic economy hub" to a greater level. It also seeks to capture a bigger slice of the halal food industry, encourage family friendly tourism, develop sectors such as digital economy, fashion, arts and design, and economic education, as well as promote standards and certification.

- From Nasdaq Dubai's sukuk listing offering to the availability of Shariah-compliant hotels for conservative tourists, Dubai continuously hones its reputation in the Islamic finance space.

 

Conclusions :

The research highlight major key findings:

First: the study expects Islamic banking assets to grow at a Compounded Average Growth Rate of 20% over (2013–2020) across the countries to reach US$3.034t by 2020. Second: Global Islamic finance assets worth $ 1.35 trillion at the end of 2012 and $ 1.71 trillion at the end of 2013. Third: Malaysia’ Islamic finance assets worth $ 412 billion (30.51%). Saudi Arabia came second - worth $ 217 billion (16%). Next, United Arab Emirates, Qatar, Indonesia and Turkey are worth $ 424 billion (31.4%). Finally, Other countries are worth 22%.

The three major markets dominating Islamic funds are, Saudia Arabia Malaysia’, & Luxemburg reaching around 70% of global Islamic funds. In September 2013, the total number of global Islamic fund reached to 1065 fund. It nearly doubled ( 85% growth).

Sukuk are the most interesting investment instrument in Islamic finance Sukuk deployed at the headquarters of both Western capitalism &  Communist: new countries start dealing with sukuk like: China, Russia, South Africa, etc. Malaysia becomes a leading global player in field of Sukuk industry with 68.8% of the issuance. Total outstanding Sukuk maturity was /179/ billion dollars in 2011 and it is expected to reach 400 billion in 2015 with growth rate 123.46%. This figure illustrates the attitude toward Sukuk over the world.

In Islamic finance industry, experts expect Dubai to "become the Islamic economy hub" in the east & London to be in the West .

 

·        References

1.    Rasameel : 2013 Annual Global Sukuk Report. Issued Jan 2014.

2.    “Sukuk issues & advancement in global markets “ , 19 Dec 2012 page (22) : Researcher Article IFN :Islamic Finance News .

3.    “Jordanian contributions to Islamic finance industry “:  13 March 2013  :Researcher Article IFN :Islamic Finance News.

4.    Islamic Finance Gateway : Thomson Reuters Zawya Sukuk : Perceptions & Forecast Study 2013.

5.    Global Islamic Assets Management Report 2014.Thomson Reuters.

6.    “Islamic banking & Finance “ , Addustour newspaper , 22 April 2014 , page 20.

7.    Zawya Islamic sukuk – Quarterly bulletin issues 17-20 : Zawya Islamic website .

8.    World Islamic banking competitiveness report 2013- 2014 ErnstYoung 2013.

9.    Global Islamic Economics Magazine Vol24 , May 2014.