“growth & innovation in islamic finance · islamic, pt bank mandiri etc companies i.e....

“GROWTH & INNOVATION “GROWTH & INNOVATION

IN ISLAMIC FINANCEIN ISLAMIC FINANCE””

STRICTLY PRIVATE & CONFIDENTIAL

IN ISLAMIC FINANCEIN ISLAMIC FINANCE””Dato’ Sri Zukri SamatDato’ Sri Zukri Samat

Managing Director, Bank Islam Malaysia Managing Director, Bank Islam Malaysia BerhadBerhad

TRANSFORMATION OF THE ISLAMIC TRANSFORMATION OF THE ISLAMIC

FINANCIAL LANDSCAPEFINANCIAL LANDSCAPE

Page 1

FINANCIAL LANDSCAPEFINANCIAL LANDSCAPE

Bahrain

Dubai Malaysia

Saudi

Arabia

London

Hong Kong

TokyoCalifornia

Sudan

Pakistan

France

Hong Kong

� Aims to become an Islamic finance hub

� Hang Seng Islamic China Index Fund in

2007

� Shariah Advisory Council formed

UK

� Govt sets an objective to ‘entrench’ London as a global

gateway for Islamic finance

� 5 FSA-approved Islamic banks and 2 Takaful operators

Japan

� New law allowing banks to

offer Islamic finance

France

TRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPETRANSFORMATION OF THE ISLAMIC FINANCIAL LANDSCAPE

-- TODAY : MOVING INTO UNCHARTERED TERRRITORIESTODAY : MOVING INTO UNCHARTERED TERRRITORIES

Brunei

Page 2

Singapore

Australia

Sudan

… rapid expansion is reflected in more than 600 Islamic financial institutions operating in more than 75 countries, even beyond so-called Muslim nations. Total assets > USD1trillion

Indonesia

Australia

� Islamic co-operative finance

& mortgage established

� Consider to establish Islamic

bank

Dubai, UAE

� Fast emerging as a financial centre through

DIFC’s aggressive promotion efforts

� Passed rules/regulations to support

Islamic finance activities

� Considering licensing first Islamic

bank

Singapore

� Established first Islamic bank

� Introduced tax neutrality for

Islamic finance

� Aspiring to be centre for Islamic

finance

� Issued sukuk

Brunei


-- ISLAMIC BANKING JOURNEY : MALAYSIA EXPERIENCEISLAMIC BANKING JOURNEY : MALAYSIA EXPERIENCE

Instituting Foundation

• 1970 – 1992 (Establishment of Enabling Infrastructure)

• Merely as an alternative to conventional banking

Institutional Building, Activity Generation & Market Vibrancy

• 1993-2005 (Deepening, Creating Critical Mass &

Page 3

• 1993-2005 (Deepening, Creating Critical Mass & Liberalization)

• Ensuring greater access to Islamic finance

Strategic Positioning & International Integration with Global Financial System

• 2006 onwards

• Becoming an international hub of Islamic finance

… a step-by-step approach. 1st Phase – Discovery & Familiarization; 2nd Phase – Mainstream Acceptance; 3rd Phase – Integration & International linkages.


-- ISLAMIC BANKING MODALITYISLAMIC BANKING MODALITY

Standalone Full-Fledged Islamic

Banks

• Independent financial institutions

• Independent infrastructure (IT, Risk Management, Human Talent, etc)

• High cost-to-income ratio

• Offer full range of Islamic compliant products &

Islamic Windows

• Specialized set-ups within conventional banks

• Different balance sheet but common operations /infrastructure

• Dominated by global players with limited presents in the country

Subsidiaries of Conventional Banks

• Subsidiaries of domestic conventional banks

• Dedicated governance structure

• Shared infrastructure (branch networks, IT, Risk Management, etc)

• Transfer Pricing - cost

• Minimal staffing

Specialized Institutions

• Takaful & Re-Takaful Players i.e. Syarikat Takaful Malaysia Bhd

• Islamic Mortgage Companies i.e. AmeenHousing Co-operative of USA

• Islamic Investment Fund Management

Page 4

compliant products & services

• Retail banking, Wealth/Asset Mgmt/ Corporate Banking, Advisory & Capital Markets

• Bank Islam Malaysia Bhd, Bank Muamalat Bhd, Al Rahji, Al-Baraka Banking Group, Kuwait Finance House, PT Bank Syariah Muamalat, etc

presents in the country that they are operating

• Similar offerings to standalone Islamic banks

• Generally targeted at affluent market segments and institutional investors

• Private banking, structured deposits, and corporate banking

• CitiIslamic, Bank Simpanan Nasional, PT Bank Rakyat Indonesia etc

• Minimal staffing

• Low cost-to-income ratio and high productivity index.

• Similar offerings to standalone Islamic banks

• Retail banking, Corporate Banking, and Capital Market.

• Offered Wealth/Asset Mgmt/ Advisory via sister company, another subsidiary of conventional bank.

• Maybank Islamic, CIMB Islamic, PT Bank Mandirietc

Fund Management Companies i.e. Aberdeen Islamic Asset Management Sdn Bhd

• Islamic Trustee Companies i.e. AmanahRaya Berhad

• Ar Rahnu or Islamic Pawnbroking – i.e. ArRahnu Bank Islam

• Islamic REIT Companies

• Shariah Advisory –i.e. Amanie Advisor SdnBhd


-- STANDSTAND--ALONE VS WINDOWALONE VS WINDOW

Page 5

Source: Boston Consulting

• Dedicated vs sharing of resources & infrastructure –

balancing act between group synergy & autonomy of IS

•Lack of autonomy: Timely to review structure

•Same board members of IS and parent banks – does

governance being compromised?

•Diversity of Board composition – comprising board

members with Islamic finance knowledge?

•Sharing of expertise based on conventional mind-set

Philosophy of IS - autonomy & strategic focus of IS to harness potential of Islamic finance

Sister Co.Commercial/

investment bank

Islamic subsidiary

Timely to review?

Financial Holding Company

Raising concerns


-- ISLAMIC SUBSIDIARY (“IS”)ISLAMIC SUBSIDIARY (“IS”)

Page 6

•Lack of capacity building initiatives: Invest for long-

term benefit (Talent, product developments)

• IT system - based on conventional product parameters

•Cross-selling & branding of Islamic products/ entities

at parent’s branches - How effective branches are

pushing for Islamic products?

•Visibility of Islamic finance – ‘bricks & mortars’ –

Foreign players are more visible

•Service Level Agreement – cost sharing must reflect

cost-benefit

• Issue of cannibalization?

Financial Holding Company

Commercial/

investment bank

Islamic subsidiary

Foreign

PartnerSynergy

through

partnership

with foreign

Timely to review?

‘It is envisaged that greater strategic focus & resources as well as higher

autonomy & governance will be accorded to the Islamic Banking business’

-Governor, Bank Negara Malaysia, March 2005Source: Bank Negara Malaysia


-- SHARIAH CONTRACT DEVELOPMENT MILESTONESSHARIAH CONTRACT DEVELOPMENT MILESTONES

1983 - 1990 1991 - 2000 2001 - 2005 2006 - 2008 2009 Onwards

� Wadiah Current a/c

� Wadiah Savings a/c

� Mudharabah

Investment a/c

� Mudharabah

Financing

� Sarf Forex

� Mudharabah

Interbank

Investment

� Musharakah

Financing

� Bai Dayn,

Musharakah ,

Mudharabah ICDO

� Wadiah Debit Card

� Bai Inah Overdraft

� Bai Inah

� Commodity

Murabahah Profit

Rate Swap

� Commodity

Murabahah Forward

Rate Agreement

� Tawarruq Business

Financing

� Tawarruq Personal

Financing

� Murabahah with

Novation

Simple structure to cater for basic needs

Simple structure to cater for basic needs

Customer-driven structure/productsCustomer-driven structure/productsCost effective structure to

compete in the competitive marketplace

Cost effective structure to compete in the competitive

marketplace

Page 7

Financing

� Ijarah Financing

� BBA Financing

� Murabahah LC

� Musharakah LC

� Wakalah LC

� Bai’ Dayn Trade

Finance

� Murabahah

Working Capital

Financing

Financing

� Bai Inah Credit

Card

� Ar Rahn

� Bai Inah

Commercial Credit

Card

� Bai Inah Personal

Financing

� Bai Inah

Negotiable

Instrument of

Deposit (NID)

Rate Agreement

� Ijarah Rental Swaps-I

� BBA Floating Rate

� Murabahah Floating

Rate

� Istisna’ Floating Rate

� Mudharabah Capital

Protected Structured

Investment

� Bai Inah Floating

Rate NID

� Mudharabah Savings

Multiplier Deposit

� Tawarruq

Commodity

Undertaking

Novation

Agreement

� Istisna’ convertible

to Ijarah

� Bai and Ijarah (Sale

& Lease Back)

� Musharakah

Mutanaqisah

� Istisna’ with

Parallel Istisna’

� Wakalah Deposit

� Waqf

� Tawarruq

Revolving Credit-I

� etc

Note – This listing is far from being

exhaustive. Although they have been

developed and/or approved, some products

have yet to be rolled out at the time of

drafting of this presentation.


-- CONDUCIVE REGULATORY FRAMEWORKCONDUCIVE REGULATORY FRAMEWORK

Tax Neutrality

ShariahAdvisory Council & Shariah

International Best Practices

Page 8

Comprehensive Legislation

Dispute Resolution (Dedicated Shariah

Commercial Court,

Financial Mediation

Bereau & Arbitration

Centre)

Tax Neutrality Policy

ShariahGovernance Framework

… essentials to stimulate product development & innovation


-- COMPREHENSIVE OFFERINGSCOMPREHENSIVE OFFERINGS

Islamic

Banking

Money Market

Debt Capital Market

Venture Capital/ Private Equity

Ancillary Services

… robust development

of these components

will enhance

sustainability and

resilience of the

Islamic financial

services industry

Page 9

Islamic Finance

Equity Capital Market

Takaful

REITS

Asset Mgmt

Wealth Mgmt


-- BRAND POSITIONINGBRAND POSITIONING

“Banking for “Banking for All”

Page 10

“Banking for Muslims”

“Banking for All”

… growing recognition that the inherent tenets of Islamic finance are aligned to sustainable dimensions of ethical banking and responsible financing.

TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELLIN A NUTSHELL

BankingBankingComprehensive Financial

SystemComprehensive Financial

System

MonopolyMonopoly Diversity of PlayersDiversity of Players

WindowsWindows Full-Fledged Islamic BanksFull-Fledged Islamic Banks

Page 11

WindowsWindows Full-Fledged Islamic BanksFull-Fledged Islamic Banks

Alternative Banking & Specific Agenda

Alternative Banking & Specific Agenda

National AgendaNational Agenda

Traditional Markets Traditional Markets Non-Traditional MarketNon-Traditional Market

… changing financial landscape has accelerated expansion of Islamic finance industry

Basic Shariah Principles

(i.e. BBA & Murabaha)

Basic Shariah Principles

(i.e. BBA & Murabaha)

Variety of Shariah Principles

(i.e. Tawarruq, Ujrah, etc)

Variety of Shariah Principles

(i.e. Tawarruq, Ujrah, etc)

Basic InfrastructureBasic InfrastructureComprehensive Infrastructure

Comprehensive Infrastructure

Limited Tax NeutralityLimited Tax Neutrality Universal Tax NeutralityUniversal Tax Neutrality

TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELL…contIN A NUTSHELL…cont

Page 12

Limited Tax NeutralityLimited Tax Neutrality Universal Tax NeutralityUniversal Tax Neutrality

“Plain Vanilla” Products “Plain Vanilla” Products Hybrid & Structured

ProductsHybrid & Structured

Products

Domestic/Local PlayersDomestic/Local PlayersCross-Border

/Regional/Global PlayersCross-Border

/Regional/Global Players

… wide spectrum of financial products and services to cater to needs of all customers from small businesses to conglomerates, from common households to high net-worth individuals

Commercial Islamic BanksCommercial Islamic Banks Mega Islamic BanksMega Islamic Banks

Shariah Compliant Products Shariah Compliant Products Shariah Based ProductsShariah Based Products

TRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPETRANSFORMATION OF ISLAMIC FINANCIAL LANSCAPE-- IN A NUTSHELL…contIN A NUTSHELL…cont

… increased focus on financial stability… increased focus on financial stability

Page 13

(…strengthened prudential standards with a focus on building capital and capital buffers, increased transparency in financial transactions and exposures)

(…strengthened prudential standards with a focus on building capital and capital buffers, increased transparency in financial transactions and exposures)

… evolves to become more diversified and more comprehensive to meet the changing requirements of the real economy

… evolves to become more diversified and more comprehensive to meet the changing requirements of the real economy

… increased pace of international connectivity

… accompanied by development of ancillary support services

“SUSTAINABLE GROWTH PARADIGM “SUSTAINABLE GROWTH PARADIGM

FOR ISLAMIC FINANCE”FOR ISLAMIC FINANCE”

Page 14

FOR ISLAMIC FINANCE”FOR ISLAMIC FINANCE”

Measure or

success or

profitability

HighEmerging

� Large number

of new

entrants

� Rapid growth

in value of the

Fast Growth� Stiff Competition

� Focus on market

share &

innovation

Saturation� Consolidation

� Demand for

greater

differentiation

Maturity� Removal of

incentives

SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE

-- MATURITY CURVEMATURITY CURVE

Page 15

Early Start� Focus on

product design

and

positioning

� Customer

Awareness

1960 1970 2000 20xx

Islamic finance probably

stands here; best time in

terms of business

development BUT most

damaging when a crisis hits

Medium

Low

in value of the

industry

� Increased

recognition

and awareness

Islamic finance as national agenda

Attractive tax & non-tax incentives

Robust & comprehensive

regulatory, legal, corporate governance & Shariah framework


-- KEY INGREDIENTSKEY INGREDIENTS

Page 16

Wide & knowledgeable investor base

Adequate pool of talents & capabilities

Continuous product

innovation

Liberal foreign exchange rules

… a defined strategic plan and initiatives under the Financial Sector Master Plan

SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE SUSTAINABLE GROWTH PARADIGM FOR ISLAMIC FINANCE MALAYSIA MALAYSIA -- ISLAMIC FINANCIAL SYSTEM AS AT DEC 2010ISLAMIC FINANCIAL SYSTEM AS AT DEC 2010

Assets

� 20.8% of total banking system

� Total IB asset : RM351 bil (USD116.2 bil)

Page 17

Financing

� Market share – 22.7%

� Total financings: RM222.3 bil (USD73.6 bil)

Deposits

� Market share – 22.6%

� Total deposits : RM277.5 bil

(USD91.9 bil) Capital Market

� 57% of the

outstanding PDS


-- DIVERSITY OF PLAYERS : MALAYSIA’S ISLAMIC BANKING LANDSCAPEDIVERSITY OF PLAYERS : MALAYSIA’S ISLAMIC BANKING LANDSCAPE

Mega Islamic

Banks (Paid Up

Capital of US$1 bil)

Page 18

STAND-ALONE

SUBSIDIARIES OF CONVENTIONAL BANKS

ISLAMIC WINDOWS & DFIs

INTERNATIONAL ISLAMIC BANKS

17 commercial

Islamic Banks, 6 FB

windows, 6 DFIs &

4 IIBs.


-- CHALLENGING MACRO ENVIRONMENTCHALLENGING MACRO ENVIRONMENT

� Global Environment

� Sovereign debt woes and geo-political uncertainties

� Financial market volatility and potential spillover effects on the

real economy

� Weak international trade conditions

� Policy Environment

� Limited policy levers especially in developed economies to tackle

Page 19

� Limited policy levers especially in developed economies to tackle

macroeconomic challenges

� Increased regulatory scrutiny

� Domestic Operating Environment

� Saturating domestic market and intensifying competition

� Margin squeeze due to stiff competition and rising costs

� Potential economic downturn due to contagion effect from a

potential global recession which could lead to rising delinquencies


-- SUSTAINABLE GROWTH PLAN : BANK ISLAM’S PERSPECTIVESUSTAINABLE GROWTH PLAN : BANK ISLAM’S PERSPECTIVE

• To continuously develop new financial solutions and product offerings that suit the ever-evolving customer needs (comprehensive, competitively priced and innovatively packaged) and benchmarked to international standards.

Business Innovation

• To build a solid foundation for sustainable revenue generation and resilient asset portfolio as well as efficient capital management.

Robust Risk Management

• To provide an infrastructure that would improve operational efficiency, increase productivity and reduce transaction costs.

Strengthening Enabling Infrastructure

Page 20

• To attract, retain and build future human capital capabilities: to capture and retain best talents in Islamic finance

• To ensure that employees are fully equipped with the right knowledge, capability and skills to excel and steer the Bank.

Building Capability & Capacity

• To establish an extensive network of branches and to expand electronic delivery channels that would enhance our reach to customers.

• To enhance brand positioning that would drive business growth and sustain its competitive edges.

Franchise Development

• To strengthen our market presence and stay ahead in an environment of heightened competition.

• To tap the vast opportunities available in the South East Asian region.

Inorganic growth & Corporate Expansion

“CAPACITY BUILDING TO ENHANCE “CAPACITY BUILDING TO ENHANCE

FINANCIAL CAPABILITY”FINANCIAL CAPABILITY”

Page 21

FINANCIAL CAPABILITY”FINANCIAL CAPABILITY”

Centre of Product Innovation

Centre of Fund Flows� Domestic players with extensive

Diversity of players

Centre of Shariah Reference

Centre of Capital & Money Markets

� Fund management and equity, Sukuk & money

markets

CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY CAPACITY BUILDING TO ENHANCE FINANCIAL CAPABILITY

-- MALAYSIA AS A REGIONAL ISLAMIC FINANCIAL CENTREMALAYSIA AS A REGIONAL ISLAMIC FINANCIAL CENTRE

Page 22

Centre of Fund Flows� Domestic players with extensive

global linkages

� International players

… Malaysia has the competitive advantages to be a global Islamic financial hub

Centre of Talent Development Centre of Int’l Currency Business

Centre of Ancillary Services

� Legal, Shariah Advisory, Accounting & Processing services/Outsourcing services


-- CENTRE OF TALENT DEVELOPMENTCENTRE OF TALENT DEVELOPMENT

.

.

.

Page 23

.

.

.

… Malaysia has put in place a comprehensive talent development infrastructure


-- ENHANCING ISLAMIC FINANCIAL STABILITY ENHANCING ISLAMIC FINANCIAL STABILITY

.

.

.

Page 24

.

.)

.

Source: GTNEWS, Association of Financial Professionals


-- NEW DRIVER FOR ISLAMIC BANKINGNEW DRIVER FOR ISLAMIC BANKING

“In today’s context, the growth in Islamic finance coincides

with the current account surpluses of oil-exporting

countries , dominated by Muslim countries. The new era

of these countries desires for socio-political and economic

systems based on Islamic principles and stronger Islamic

identities.

In addition, the introduction of broad macroeconomic and

Page 25

In addition, the introduction of broad macroeconomic and

structural reforms – in financial systems, the liberalization

of capital movements, mega infrastructure projects in the

Muslim world, privatization and the global integration of

financial markets, have paved the way for a rapid

expansion of Islamic finance.

Islamic finance is not restricted to Islamic countries, but is

spreading wherever there is a sizeable Muslim population

and demand for ethical banking”

��ا ��ا

“MAY ALLAH BLESS OUR EFFORTS TO STEER “MAY ALLAH BLESS OUR EFFORTS TO STEER

ISLAMIC FINANCE TO GREATER HEIGHTS”ISLAMIC FINANCE TO GREATER HEIGHTS”

Page 26

��ا ��ا ��وا��موا��م��

“growth & innovation in islamic finance · islamic, pt bank mandiri etc companies i.e....

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