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 2

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 3

4. Global Outlook of Shariah-Compliant Finance
Total Shariah-compliant assets consist less than 1% of global assets (USD tr)
CAGR ( ): 18.4%
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 2020.
Source: Bloomberg and KFH Research
Source: Bloomberg and KFH Research 4

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

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

7. Global Outlook of Shariah-Compliant Finance
Shariah-Compliant Capital Markets
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 2015.
Source: IIFM Database 7

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

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

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 10

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. 11

12. Shariah-Compliant Finance: Challenges
A) Lack of Standardization
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 12

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: 13

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: 14

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, 15

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 16

17. Shariah-Compliant Finance: Opportunities
A) Asset-based Structure
Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks
(Bankscope Data for 2956 banks around the world)
Ratio
Scaled by
Shariah-Compliant Banks(%)
Conventional Banks(%)
Business Model
Non-deposit funding
Total funding
3.9
5.5
Gross Loans
Total deposits
77.4
71.6
Efficiency
Overheads
Total assets
2.7
3.5
Cost income ratio
54.1
62.1
Stability
Return on assets
1.4
1.1
Equity assets ratio
13.5
10.7
Controls
Non-loan earning assets
Total earnings assets
41.7
44.5
Fixed assets
2.3
1.9
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 5446. 17

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

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

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

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

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

23. Shariah-Compliant Finance: Opportunities
Special Case: Turkey
Total housing loans in Turkey equal to TL104 billion, by August 2013.
Urbanization process of Turkey props the increasing housing loans.
Source: CBRT, UN 23

24. Shariah-Compliant Finance: Opportunities
Special Case: Turkey
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. 24

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

26. Recent Developments on Islamic Finance
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
Source: IFIS 26

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