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Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013.

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Presentation on theme: "Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013."— Presentation transcript:

1 Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013

2 Agenda I. Global Outlook of Shariah-Compliant Finance  Global Shariah-Compliant Financial Assets  Global Shariah-Compliant Banking Assets  Global Shariah-Compliant Capital Markets II. Shariah-Compliant Finance: Challenges  Lack of Standardization  Conflicts among the opinions of Shariah Boards  Lack of enough Expertise and Human Capital III. Shariah-Compliant Finance: Opportunities  Asset-based Structure  Reduction in Systematic Risk  Sukuk: Opportunity for Long-term Funding

3 Agenda I. Global Outlook of Shariah-Compliant Finance  Global Shariah-Compliant Financial Assets  Global Shariah-Compliant Banking Assets  Global Shariah-Compliant Capital Markets II. Shariah-Compliant Finance: Challenges  Lack of Standardization  Conflicts among the opinions of Shariah Boards  Lack of enough Expertise and Human Capital III. Shariah-Compliant Finance: Opportunities  Asset-based Structure  Reduction in Systematic Risk  Sukuk: Opportunity for Long-term Funding

4 Global Outlook of Shariah-Compliant Finance Source: Bloomberg and KFH Research Total Shariah-compliant assets consist less than 1% of global assets (USD tr) CAGR ( ): 18.4% 4 Growth forecast in global Shariah-Compliant financial assets in 2013: 11% The size of Shariah-Compliant financial assets are expected to reach USD 4 trillion by Source: Bloomberg and KFH Research

5 Global Outlook of Shariah-Compliant Finance Source: Bloomberg, KFH Research Shariah-Compliant Financial Assets

6 Global Outlook of Shariah-Compliant Finance Source: Bloomberg, KFH Research CAGR ( ): 17.7% Source: Bloomberg, KFH Research Shariah-Compliant Banking Assets

7 Global Outlook of Shariah-Compliant Finance Source: IIFM Database Based on current growth forecast, Shariah-Compliant financial institutions will require at least US$ 400 billion of short term, credible, liquid securities for liquidity and capital management purposes, by Shariah-Compliant Capital Markets

8 Global Outlook of Shariah-Compliant Finance Structural Breakdown of Domestic Sukuk Issuance Globally - ( ) Structural Breakdown of International Sukuk Issuance Globally - ( ) Source: IIFM Database Shariah-Compliant Capital Markets Source: IIFM Database

9 Source: IFIS, Zawya Global Outlook of Shariah-Compliant Finance Shariah-Compliant Capital Markets

10 10 Agenda I. Global Outlook of Shariah-Compliant Finance  Global Shariah-Compliant Financial Assets  Global Shariah-Compliant Banking Assets  Global Shariah-Compliant Capital Markets II. Shariah-Compliant Finance: Challenges  Lack of Standardization  Conflicts among the opinions of Shariah Boards  Lack of enough Expertise and Human Capital III. Shariah-Compliant Finance: Opportunities  Asset-based Structure  Reduction in Systematic Risk  Sukuk: Opportunity for Long-term Funding

11 Shariah-Compliant Finance: Challenges A) Lack of Standardization Lack of harmonization in regulations (Different terminologies, procedures and applications) Does time value of money in Islam exist? Non-standardization of products Market centered (Conventional) vs. Bank centered (Shariah-Compliant) Financial Intermediation in Shariah-Compliant Finance is restricted

12 Shariah-Compliant Finance: Challenges Latent Organized Exchange for Sukuk: 17% of Total Global Sukuk Issued in Stock Exchanges. 65% of Sukuk (issued in organized exchanges) located on outside of Islamic countries. Source: Zawya A) Lack of Standardization

13 Shariah-Compliant Finance: Challenges B) Conflicts among the opinions of Shariah Boards Lack of consensus among scholars (various Shariah boards)  Number of Shariah Boards around the World is more than 400  Total number of board membership around the World is 1,141 Diversification in the interpretation of Shariah-compliance. Source:

14 Shariah-Compliant Finance: Challenges C) Lack of enough Expertise and Human Capital Shortage of human capital A group of 20 prominent Shariah scholars sit on 55% of total Shariah board memberships. Top 2 Scholars hold 85 board memberships. With scholars holding dozens of portfolios, it is impossible for them to have good performance. Source:

15 Shariah-Compliant Finance: Challenges C) Lack of enough Expertise and Human Capital There are only 123 Shariah-Compliant programs that cover five continents and are distributed over 26 countries. Source: Belouafi, A., Belabes, A., & Daoudi, M. (2012). Geo-education of Islamic finance in the global space. Procedia-Social and Behavioral Sciences, 46,

16 Agenda I. Global Outlook of Shariah-Compliant Finance  Global Shariah-Compliant Financial Assets  Global Shariah-Compliant Banking Assets  Global Shariah-Compliant Capital Markets II. Shariah-Compliant Finance: Challenges  Lack of Standardization  Conflicts among the opinions of Shariah Boards  Lack of enough Expertise and Human Capital III. Shariah-Compliant Finance: Opportunities  Asset-based Structure  Reduction in Systematic Risk  Sukuk: Opportunity for Long-term Funding

17 Shariah-Compliant Finance: Opportunities RatioScaled by Shariah-Compliant Banks(%) Conventional Banks(%) Business Model Non-deposit fundingTotal funding Gross LoansTotal deposits Efficiency OverheadsTotal assets Cost income ratio Stability Return on assets Equity assets ratio Controls Non-loan earning assetsTotal earnings assets Fixed assetsTotal assets Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks (Bankscope Data for 2956 banks around the world) Source: Beck, T., A. Demirguç-Kunt, and O. Merrouche. (2010). Islamic vs. Conventional Banking: Business Model, Efficiency and Stability. World Bank Policy Research Working Paper A) Asset-based Structure

18 Shariah-Compliant Finance: Opportunities B) Reduction in Systematic Risk Source: IFSB

19 Shariah-Compliant Finance: Opportunities B) Reduction in Systematic Risk Source: Ernst & Young

20 Shariah-Compliant Finance: Opportunities C) Sukuk: Opportunity for Long-term Funding Source: IFIS, Zawya

21 Shariah-Compliant Finance: Opportunities Source: IFIS, Zawya, Bloomberg, KFHR C) Sukuk: Opportunity for Long-term Funding

22 Shariah-Compliant Finance: Opportunities Sukuk Issued by Shariah Principles ( ) Infrastructure Sukuk Issued by Country ( ) Source: IFIS, KFHR C) Sukuk: Opportunity for Long-term Funding

23 Shariah-Compliant Finance: Opportunities Total housing loans in Turkey equal to TL104 billion, by August Urbanization process of Turkey props the increasing housing loans. Source: CBRT, UN Special Case: Turkey

24 Shariah-Compliant Finance: Opportunities Under the urban transformation plan, approximately 8 million dwellings are expected to be rebuilt in 20 years. Urban transformation requires approximately USD 800 billion. For liquidity, Turkey needs secondary loan market for housing credits. Shariah-Compliant Finance tools such as Sukuk Issuance would be a solution. Source: Yildirim, Y. (2012). Urban Transformation. Sabahattin Zaim Islam and Economy Symposium. Special Case: Turkey

25 Shariah-Compliant Finance: Opportunities Source: IFIS Special Case: Turkey

26 Recent Developments on Islamic Finance Source: IFIS Introduction of Sukuk and Equity Repo Market World Bank Islamic Finance Research Center Organization of Islamic Cooperation Member States’ Stock Exchanges Forum S&P/OIC COMCEC 50 Shariah Index

27 S&P/OIC COMCEC 50 Shariah vs. DJIM Index Source: Bloomberg

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