1. GLOBAL TRENDS IN ISLAMIC BANKING The MIM Mediterranean Economic Forum BY: Jassim Mahadik Project Manager, Al Maali Consulting Group

2. WHAT IS ISLAMIC BANKING? WHAT IS ISLAMIC BANKING

3. WHAT IS ISLAMIC BANKING? Islamic banking is a banking system which is operated in compliance and conformity with Sharia. Prohibited activities are not undertaken.  Riba  Gharar  Maysir  Other elements Linked with the real economy.

4. HISTORICAL OVERVIEW OF ISLAMIC BANKING & FINANCE: A CLASSICAL PERSPECTIVE Arabs conducted business and trade during the pre-Islamic era. Some of the pre-Islamic practices were in direct conflict with Islamic principles. The beginning of Islamic Finance can be traced to the Prophet’s (peace be upon him) times. Examples:  The Prophet (peace be upon him) used to trade using Khadija’s (may Allah be pleased with her) capital.  The Prophet (peace be upon him) permitted credit sales

5. DAWN OF THE MODERN ISLAMIC BANKING Egypt In 1963, a bank was established in Mit Ghamr which was based on the German concept of savings bank. No interest was paid or received. Based on profit and loss sharing. In 1968, the bank was closed due to government’s hostility towards private initiatives. In 1972, the Mit Ghamr Savings Bank was revived as Nasser Social Bank. Establishment of other Islamic Banks More Islamic Banks established in 1970s other countries. Examples:  Islamic Development Bank in 1973.  Dubai Islamic Bank in 1975.

6. SIZE OF THE ISLAMIC BANKING INDUSTRY 20082009201020112012 Banks72077794311051326 Funds5154586274 Takaful813212631 Other1332628 Total781847102512191460 Global Islamic Finance Assets by Sector US$bn It is estimated that the size of the Islamic banking industry at the global level is close to $1.6 trillion and it is expected to reach $3.4 trillion by 2018 (Ernst & Young)

7. ISLAMIC BANKING STANDARDS SETTING BODIES Established in Bahrain on 27 th March 1991 Non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry. 200 members from 40 countries, including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide. Officially inaugurated on 3rd November 2002 Dedicated at introducing new, or adapting existing, international standards consistent with Sharia principles, and recommending these for adoption 184 members of the IFSB comprise 59 regulatory and supervisory authorities, eight international inter-governmental organisations, 111 financial institutions and professional firms as well as six self- regulatory organisations (Industry Associations and Stock Exchanges) operating in 45 jurisdictions.

8. ISLAMIC BANKING STANDARDS SETTING BODIES Till date, AAOIFI has issued a total 88 standards

9. ISLAMIC BANKING STANDARDS SETTING BODIES Till date, IFSB has issued 21 standards, guiding principles & technical note on different topics related to Islamic finance Risk management Corporate governance Sharia issues Capital adequacy, etc.

10. ISLAMIC BANKING SYSTEMS Three types of Islamic banking systems Full-fledged Islamic banking system IranSudanPakistan Dual system “Conventional plus” system Malaysia Pakistan UAE UK Thailand Bangladesh

11. ISLAMIC BANKING SYSTEMS Pakistan Jan 2014: Mufti Taqi Usmani named as the Chairman of the State Bank of Pakistan His major role: To Islamise the banking sector of Pakistan Strategic Plan: Islamic Banking Industry of Pakistan 2014 – 2018  Enabling policy environment: Enabling legal, regulatory, supervisory, liquidity management framework, taxation regime and financial accounting & reporting framework  Sharia governance and compliance: standardization and harmonization of Shariah practices, as well as on creating distinct Islamic banking products and services.  Awareness and capacity building: Enhancing awareness about Islamic finance, and building capacity of the stakeholders  Market development: Initiatives will be undertaken for product diversification and financial inclusion with the collaboration of stakeholders

12. ISLAMIC BANKING SYSTEMS Dual System Islamic financial system in parallel with conventional system – Malaysian case Conventional Financial SystemIslamic Financial System Conventional banks Conventional money market Conventional capital market Insurance companies Islamic banks Islamic windows Islamic subsidiaries Islamic money market Islamic capital market Takaful operators Leveraging on operating infrastructure of conventional banks Level playing field Minimise regulatory arbitrage Comprehensive components of IFIs important to facilitate an effective intermediation process Source: Dusuki, 2011 Malaysia

13. ISLAMIC BANKING SYSTEMS Conventional plus system – A Case of United Kingdom A conventional financial system with a few Islamic financial institutions operating under the conventional regulatory regime UK “No obstacles, but no special favors” Islamic banking has to be conducted within the existing banking laws of the land But there have been cases where Islamic banking has been given exceptions  Example: Murabaha case Only one Islamic retail bank Bulk of the work in Islamic finance  Investment banking  Sukuks  Listing of sukuks, etc.

14. ISLAMIC BANKING MODELS Full-FledgedSubsidiaryWindow Drivers Demand Experience & expertise Independence Regulations Capital

15. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS Meezan Bank buys HSBC Pakistan – October 2014 Meezan Bank has already stated that it intends to make the operations of HSBC Shariah-compliant, while ensuring that the existing customer base continues to receive uninterrupted banking services. Meezan Bank had acquired Societe Generale in Pakistan through a similar transaction in 2002 Source: The Express Tribune

16. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS Abu Dhabi Islamic buys UAE business of Barclays: April 2014 Dh726.4m (£119 million) ADIB to take on about 110,000 extra customers from the purchase. Source: The National Business

17. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS Zaman Bank JSC, Kazakhstan: May 2014 Islamic Development Bank’s (IDB) plan of acquiring 35% stake in this bank. As part of the plan, IDB already bought 5%. However, the bank had to be converted from conventional to Islamic. Al Maali was appointed to convert it to a full-fledged Islamic bank More banks in Kazakhstan are keen on converting their operations into Islamic We have a roadmap for development of Islamic finance until 2020, adopted by the government. We have a number of Kazakh banks seeking to convert to Islamic banks - Kairat Kelimbetov, governor of the central bank of Kazakhstan. ZAMAN BANK

18. We have a roadmap for development of Islamic finance until 2020, adopted by the government. We have a number of Kazakh banks seeking to convert to Islamic banks - Kairat Kelimbetov, governor of the central bank of Kazakhstan. Source: Bloomberg

19. RECENT DEVEOPMENTS IN ISLAMIC BANKING: MERGERS & ACQUISITIONS CIMB, RHB Capital Bhd, and Malaysia Building Society Bhd plan a merger to create a Mega Islamic Bank with a market value of more than $20 billion Source: The Reuters

20. RECENT DEVEOPMENTS IN ISLAMIC BANKING Russian banks lobby the central bank for Islamic banking legislation: August 2014 The Association of Russian Banks (ARB) said in a letter sent to the central bank late last week that promoting Islamic finance could give a boost to the economy and draw significant investment from the Middle East and Southeast Asia, regions where Islamic finance is flourishing. Source: The Reuters

21. RECENT DEVEOPMENTS IN ISLAMIC BANKING US scholar body AMJA (Assembly of Muslim Jusrists of America) issues fatwa on Islamic home finance companies in US: September 2014  Amine Housing  LaRiba Bank, etc. Source: The Reuters

22. RECENT DEVEOPMENTS IN ISLAMIC BANKING Sharia Governance Centralized Sharia board  Malaysia has a central Sharia board at Bank Negara Malaysia  Oman has recently announced their central Sharia board  UAE also has plans to have a central Sharia central Sharia board at bank level  Saudi Arabia: Sharia b  Qatar Bahrain  Sharia board of the Central Bank of Bahrain  Individual Sharia boards  AAOFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standards Source: The Reuters

23. CHALLENGES & PROSPECTS Islamic finance in its infancy stage Regulatory obstacles  No Islamic finance  Accommodative but no special favours  Full support Customer Service Standardisation & harmonisation Lack of risk management techniques Education and research  Conventional mindset  Preference for conventional professionals

24. www.almaaligroup.co m Consulting | Training |Sharia Advisory Contact : Al Maali Consulting Group Dubai – UAE Tel: +971 4 2942242 Fax:+971 4 2942228 Email: j.mahadik@almaaligroup.comj.mahadik@almaaligroup.com