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Islamic Finance
Outlook 2014
KFH Research Ltd
KDNPP15024/03/2013 (031903)
January 2014
Contents
1. Islamic Finance 2013 Review: Key Highlights
3-6
2. Islamic Finance 2014 Outlook: Key Highlights
7 - 10
3. 2013 Review
11 - 34
• Global Islamic Banking Industry – “Sustained Growth”
12 - 16
• Global Sukuk Industry – “Surpassed USD100bln Mark Despite Challenging Environment”
17 - 23
• Global Islamic Funds Industry – “Modest Growth but Encouraging Prospects”
24 - 30
• Global Takaful Industry – “Sustained Momentum”
31 - 34
4. 2014 Outlook
35 - 56
• Overall Islamic Finance Outlook & Key Future Trends
o Islamic Banking Outlook
39 - 42
o Sukuk Outlook
43 - 46
o Islamic Funds Outlook
47 - 51
o Takaful Outlook
52 - 56
5. Conclusion and Challenges Ahead
57 - 59
Islamic Finance 2013
Review: Key Highlights
Islamic Finance 2013 Review:
Key highlights
Composition of Islamic Banking Assets (2013E)
• 2013 proved to be another sterling
year for the Islamic finance industry
with assets estimated at USD1.8tln,
representing a 16% y-o-y growth.
• The Islamic banking sector continues
to dominate (80%) the composition
of global Islamic finance assets and
has sustained a double digit growth
momentum. Indonesia, Saudi, Turkey
and Pakistan registered higher annual
growth rates ranging from 20-35% for
2011-2012.
Banking
80%
Sukuk, 15%
Other
20%
Islamic Funds, 4%
Takaful, 1%
Source: Annual reports, Central banks, IFIS, Bloomberg, KFHR
Islamic Banking Assets by Domicile (1H13)
• Saudi Arabia captured 18% of global
Islamic banking assets, with assets
totalling up to USD237.2bln, followed by
Malaysia (13%), UAE (7%), Kuwait (6%),
and Qatar (4%).
Sudan
1%
Indonesia
2%
Bahrain
2%
Turkey
3%
• As at 1H13, Saudi Arabia’s Islamic
banking sector accounted for 48.5% of
the country’s total banking sector assets,
followed by Kuwait (45.3%), Malaysia
(24%), Qatar (23.1%) and UAE (17.9%).
Pakistan
1%
Others
6%
Iran
37%
Qatar
4%
Kuwait
6%
UAE
7%
Saudi Arabia
18%
Malaysia
13%
Source: Annual reports, Central banks, KFHR
• In 2013, the sukuk market, managed to
once again breach the USD100bln mark
in terms of new sukuk issuances to close
the year with a total of USD119.7bln.
However the amount fell 8.77% short of
the recorded amount in year 2012.
Sukuk Issuance by Domicile (2013)
Others
1%
Pakistan
0.37%
• Malaysia once again led the 2013
new sukuk with a 69% share of total
issuances, followed by Saudi Arabia
at 12%, United Arab Emirates (6%),
Indonesia (5%) and Turkey (3%).
Bahrain
2%
Qatar
2%
Turkey
3%
Indonesia
5%
UAE
6%
Saudi Arabia
12%
Malaysia
69%
Source: Bloomberg, IFIS, KFHR
ISLAMIC FINANCE Outlook 2014
4
Islamic Finance 2013 Review:
Key highlights
New Islamic Funds in 2013 by Domicile
• Total assets under management (AuM)
of Islamic funds have grown to reach
USD72.5bln as at 20-Dec-13, registering
on 8.4% increase since end-2012. The
total number of Islamic funds stood at
1,049 as at 20-Dec-13, with 79 new
funds launched. Indonesia
7%
• New Islamic funds launched in 2013
have been domiciled mostly in Malaysia
and Luxembourg.
Luxembourg
26%
Ireland
Oman 4%
4%
Pakistan
4%
Saudi Arabia
3%
Malaysia
52%
Source: Bloomberg, Eurekahedge, KFHR
Gross Takaful Contributions by Domicile (2012)
• As at 1H13, global gross takaful
contributions are estimated to have
reached USD18.3bln with forecasts for
the year end-2013 tipped at USD19.3bln.
• Saudi Arabia and Malaysia continue to
drive the global takaful industry being the
two largest takaful markets in terms of
total gross contributions.
Middle East
(Non Arab)
36.28%
Saudi Arabia
32.82%
Levant
0.79%
Malaysia
11.23%
South Asia
1.32%
Africa
3.06%
GCC (ex-Saudi)
9.90%
Southeast Asia
(ex-Malaysia)
4.59%
Source: World islamic insurance directory, EY, KFHR
• It is reported there are now 255 Islamic
microfinance institutions around the
world, with a total outstanding financing
portfolio amounting to USD628mln.
• An estimated 1.28 million clients now
use Shari’a-compliant microfinance
services, a four-fold increase since 2006.
Institutions Offering Shari’a Compliant Microfinance
Products by Region
Sub Saharan
Africa, 4
MENA, 72
East Asia and
Pacific, 164
Europe and
Central Asia, 3
South Asia, 12
Source: CGAP, KFHR
5
ISLAMIC FINANCE Outlook 2014
Islamic Finance
Outlook 2014:
Key highlights
Islamic Finance Outlook 2014:
Key highlights
Global Islamic finance assets are expected to surpass the USD2tln mark in 2014 and we expect the industry to continue
to chart positive growth in 2014 across all sectors, underpinned by the following factors:
• Governments’ aggressive spending on infrastructure projects.
• Growing interest in Islamic finance & supply side dynamics by financial institutions.
• Active role played government and regulatory agencies; multilateral bodies and industry players to promote the
development of Islamic financial markets in their respective countries and globally.
• The increase of global trade flows in MENA and OIC countries.
The industry will continue to grow driven by both demand and supply factors, and further facilitated by government
agencies and financial regulators. In the next few years, we foresee the industry’s focus into four key spectrums that will
take the industry to greater heights.
i)
ii)
iii)
iv)
Strengthening financial stability and enhancing inter-linkages
Tapping into potential real sector economic activities
Expanding range of product offerings for wider customer base
Enhancing talent, education and research development
2013-2015: Four Key Spectrums of Developmental Focus
Regulatory &
Supervisory
Frameworks
Infrastructure
Projects
Aviation
Financial
Linkages &
Standardisation
Shari’a talent &
Shari’a discourse
Strengthening
financial stability
& enhancing
inter-linkages
Oil, Gas &
Energy
Trade Activities &
Halal Industry
Liquidity
Management
Tapping the
potential real
sector
economics
activities
2014-2015:
Four Key
Sprectrums of
Focus
Shari’a Research
Enhancing talent,
education and
research
development
Practical &
Industry
Associations
Research
Education &
Certification
Small & Medium
Enterprises
Exploring wider
range of product
offerings for wider
consumer base
Agriculture
Mass
Consumers
HNWIs
Associations
Corporates
The expansionary policies in the GCC and Asian countries followed by a massive governmental spending for mega projects
to boost employment and investment opportunities will be of advantage to the Islamic banking sector. Islamic banks will
stand a chance to offer financing support to meet the developmental needs. The expansion is to be further supported by
swift responsiveness of the Islamic financial institutions in developing Shari’a compliant solutions to meet the dynamic needs
of the corporate and individual clients. Growing competition within the industry will encourage Islamic banks to explore
ways to increase revenue through product innovation which includes improvement in processes, better technologies, and
most importantly deeper customer insights. Spill-over effects into ancillary and professional services that were seen in 2012
and 2013 – offering education, training, consultancy, information platforms – will expand further in these coming years. ISLAMIC FINANCE Outlook 2014
8
Islamic Finance Outlook 2014:
Key highlights
Islamic Banking Assets Growth Trend (2008-2014F)
2,000
1,800
Others
1,600
Asia
Sub-Saharan
Africa
MENA (excl.GCC)
1,400
USD bln
1,200
1,000
800
600
400
GCC
200
0
2008
2009
GCC
MENA (excl. GCC)
2010
2011
2012
Sub-Saharan Africa
2013E
Asia
2014F
Others
Source: Central banks, KFHR
• The Islamic banking sector has been the driving force of the global Islamic finance industry and Islamic banking
assets are expected to reach USD1.6tln by end-2014. Advanced Islamic banking markets in the GCC and Asian
regions are expected to evolve in greater sophistication in terms of products offerings, as well as from the aspect of
regulatory advancement by the financial regulators. On the demand side, Shari’a compliant investments and financing
products have been dominantly fuelled by a promising economic outlook in the GCC and abundant liquidity flows.
As for other regions particularly Asia and Africa, there are tremendous opportunities for the Islamic finance industry in
order to support the fast growing economies. Islamic finance is able to support many strategic areas namely financial
inclusion, infrastructure investment needs, as well as to attract greater inflow of funds into the region.
• The global sukuk market is all set to continue its upward trajectory in 2014 as a number of high profile debut sovereign
issuances are expected to take place this year. The sovereign sukuk sector will continue to stoke stakeholders’ interest
in 2014 as sovereigns including the United Kingdom, Ireland, South Africa, Tunisia, Mauritania, Senegal, Luxembourg
and Oman are expected to debut issuances in 2014. Expectations are also build up on a debut sukuk issuance from the
multilateral Asian Development Bank (ADB). Meanwhile, the Islamic Development Bank (IDB) has already announced its
intention to issue a USD10bln sukuk in the Dubai NASDAQ Exchange in 2014 with plans to continue similar listings on
an annual basis.
Selected Sovereign Sukuk Announced for 2014
Issue Size
Issuer Name
Sukuk Name
Structure
Domicile
Currency (USD mln)
Banque Centrale de Tunisie
Tunisia Sovereign Sukuk
Unknown
Tunisia
TND
Unknown
Central Bank of Mauritania
Mauritania Sukuk
Unknown
Mauritania
300
Central Bank of Nigeria
Nigeria Sovereign Sukuk
Unknown
Nigeria
200
Central Bank of Oman
Oman Sukuk
Unknown
Oman
Unknown
Government of Ireland
Ireland Sovereign Sukuk
Unknown
Ireland
19.493
Government of Senegal
Senegal Sovereign Sukuk
Ijarah
Senegal
200
Government of South
South Africa Sovereign Sukuk
Ijarah
South Africa
USD
148.723
Africa
Government of Sudan
Sudan Sovereign Sukuk
Ijarah
Sudan
USD
758
Ministry of Finance - Egypt
Egypt Sovereign Sukuk
Musharakah
Egypt
USD
Unknown
Republic of Tatarstan
Tatarstan Sovereign Sukuk
Unknown Russian Federation
USD
Unknown
UK Sovereign Sukuk
UK Sovereign Sukuk
Unknown
United Kingdom
GBP
328.22
Source: IFIS, Zawya, KFHR
9
ISLAMIC FINANCE Outlook 2014
Islamic Finance Outlook 2014:
Key highlights
• In 2014, the global Islamic funds industry should benefit from steady global economic recovery which will bolster investor
confidence and performance of underlying invested assets. Much of the anticipated recovery will come from the advanced
economies, while the growth trajectory of emerging countries will remain stable. In this light, greater investor focus will be
placed on policy decisions and reforms in individual emerging economies. Hence a positive demand outlook bodes well
for Islamic fund management companies. Attracting institutional investors, therefore, is of the essence for more active
progression of the Islamic funds sector. Of special interest, in this regard, are Islamic pension funds, takaful companies and
Islamic trusts (or awqaf). Islamic funds’ total AuM is now valued at USD72.5bln, compared to only USD200mln in 2000.
There were only 285 funds in 2004, and the number of Islamic funds has grown to 1,049 funds as at 20 December 2013. Historical Islamic AuM and Number of Islamic Funds
80
1200
72.5
70
60
47
66.9
61.7
60.6
56.1
1000
USD bln
600
40
30
400
No. of funds
800
50
20
200
10
0
2008
2009
2010
2011
AuM (LHS)
2012
20-Dec-13
0
Cumulative No. of Funds (RHS)
Source: Bloomberg, Eurekahedge, KFHR
• In 2014, gross contributions of the global takaful industry are expected to surpass the USD20bln mark. The takaful
industry has been growing at an impressive CAGR of 18.1% (2007-2012). Moving forward, the growth opportunities
for the global takaful industry in 2014 and beyond are optimistic on the back of several economic, financial and sociodemographic trends. A number of regulatory developments and government policies that have been put in place are
expected to spearhead the growth of the takaful and insurance sectors in various markets during 2014. Notwithstanding
that, we expect that the global takaful industry to remain as the smallest segment representing a nascent 1-2% share
of the global Islamic finance industry.
Global Gross Takaful Contributions Forecasts – by Region
9,000
8,000
7,000
8199
7153
7229
6388
USD mln
6,000
5,000
4,000
2720
2292
3,000
2,000
1012
1,000
0
2311
1984
Saudi
Arabia
Malaysia
1296
GCC
Southeast
(ex-Saudi)
Asia
(ex-Malaysia)
2013F
Source: World islamic insurance directory, EY, KFHR
ISLAMIC FINANCE Outlook 2014
10
589
658
Africa
2014F
251
239
343
216
South Asia
Levant
Middle East
(Non Arab)
2013 Review
2013 Review
Global Islamic Banking Industry
“Sustained Growth”
Global Islamic banking assets stood at USD1.32tln as at 1H13 and are estimated to have surpassed USD1.4tln as at
end 2013. The Islamic banking industry has posted a strong compounded-annual-growth-rate (CAGR) of 19% during
2007-2012. Several new jurisdictions have announced plans to introduce or expand the share of Shari’a compliant
banking institutions in their financial territories. In recent years, previously untapped markets such as Tanzania, Oman,
Maldives, Azerbaijan, Senegal, Morocco, and Canada have opened doors for Islamic financial institutions to take root in
their respective jurisdictions. Growing number of conventional banks have also started to offer Islamic banking services in
parallel to their conventional financial product offerings. The range of banking products has also evolved in sophistication
in tandem with the overall development of the industry.
Based on our 2013 estimates, Islamic banking assets in the Middle East and North Africa (MENA) (excluding the Gulf
Cooperation Council, GCC) represent approximately 40.3% of total global Islamic banking assets, followed by the GCC
(38%) and Asia (15%). Saudi Arabia, which has made tremendous progress in 2013, held 18% share of the global Islamic
banking assets, with total assets estimated at USD237.2bln as at end 2013. This was followed by Malaysia (13%), UAE
(7%), Kuwait (6%) and Qatar (4%). In terms of Islamic banking market share in domestic markets, Saudi Arabian Islamic
banking sector accounted for 48.5% of the country’s total banking sector assets, followed by Kuwait (45.3%), Malaysia
(24%), Qatar (23.1%), and the UAE (17.9%) as at 1H13. Aside from the GCC and Malaysian markets, an emerging
frontrunner is Turkey, which is the sixth major contributor to the global Islamic banking assets as at 1H13.
Islamic Banking Assets & Market Share (1H13)
250
60%
50%
USD bln
200
40%
150
30%
100
20%
50
0
10%
Saudi
Arabia
UAE
Qatar
Kuwait
Islamic Banking Assets
Bahrain
Market Share (RHS)
Source: Annual reports, Central banks, KFHR
Islamic Banking Assets by Domicile (1H13)
Indonesia
2%
Sudan Pakistan
1%
1%
Bahrain
2% Turkey
Iran
37%
3%
Qatar
4%
Others
6%
Kuwait
6%
UAE
7%
Malaysia
13%
Saudi Arabia
18%
Source: Annual reports, Central banks, KFHR
ISLAMIC FINANCE Outlook 2014
12
Malaysia
0%
2013 Review
Islamic Banking Snapshot in Key Jurisdictions
Kuwait
Turkey
• Number of Islamic Banks: 6
• CAGR (2008-2012): 12.25%
• Islamic Banking assets (USD bln):
• Number of Islamic Banks: 4
• CAGR (2008-2012): 28.5%
• Islamic Banking assets (USD bln):
19.9
25.2
32.2
2010
2011
2012
2010
2011
70.4
2012
Malaysia
• Number of Islamic Banks: 5
• CAGR (2008-2012): 15%
• Islamic Banking assets (USD bln):
63.1
2011
2010
United Arab Emirates
57.4
66.8
62.1
• Number of Islamic Banks: 10
• CAGR (2008-2012): 18.6%
• Islamic Banking assets (USD bln):
85.2
89.3
111.3
124.8
2010
2011
2012
2012
Saudi Arabia
• Number of Islamic Banks: 4
• CAGR (2008-2012): 23.1%
• Islamic Banking assets (USD bln):
70.8
86.4
107.2
2010
2011
2012
Indonesia
• Number of Islamic Banks: 11
• CAGR (2008-2012): 40.5%
• Islamic Banking assets (USD bln):
10.1
15.0
20.2
2010
2011
2012
*’Number of Islamic Banks’ refers to full-fledged Islamic banking institutions
Source: KFHR
Islamic banks have made a profound impact in the domestic banking sectors of various countries, particularly in the key
Islamic finance jurisdictions where Islamic banking assets growth rates have outpaced their conventional counterparts,
resulting in an increased market share for the Shari’a compliant sector. Between 2008 and 2012, Islamic banking assets
in Saudi Arabia grew at a CAGR of 23.1%, outpacing the conventional banking growth which was only 10.7%. In Asia,
Indonesian Islamic banking assets grew at a CAGR of 40.5% during the same period, which compares with the 15.9%
CAGR in the Indonesian conventional banking assets. Similar growth trajectories were also observed across the other
key Islamic financial jurisdictions. The tremendous growth rates of the Islamic banking sector in these markets are driven
by a number of factors namely: (1) greater awareness and preference for Shari’a compliant financial solutions by the
demographics; (2) an increase in affluence which has led to growing economic participation of the Muslim population; (3)
strong regulatory support spearheading the momentum in the Islamic finance sector in these markets; (4) liquidity crunch
in major Western banking institutions, particularly in Europe, which have allowed Islamic banks to emerge as alternative
sources of funds; and (5) growing global economic importance and trade linkages of the key Islamic finance jurisdictions
which have allowed Islamic banks to expand their outreach by providing necessary Shari’a compliant financial support, for
instance, through Islamic trade financing products.
13
ISLAMIC FINANCE Outlook 2014
2013 Review
Growth of Islamic Banking and Conventional Banking Assets (2008-2012)
40.5%
31.9%
28.5%
23.1%
18.6%
15.9%
17%
19.3%
16.5%
15%
14.4%
12.2%
10.7%
9.3%
4.5%
4.7%
1%
Malaysia
Indonesia
Turkey
Saudi Arabia
UAE
Kuwait
Qatar
Bahrain
Pakistan
-7.3%
Islamic Banking
Conventional Banking
Source: Central banks, CEIC, KFHR
Total deposits of Islamic banks in the GCC region rose by 17.2% y-o-y to USD245.5bln as at end-2012 from USD209bln
in the previous year. The impressive growth of Islamic banking deposits in the GCC region were led by strong deposit
growth rates in individual countries of Qatar (39.8%; end-2012 y-o-y), Saudi Arabia (25.2%), and UAE (12.6%). Meanwhile,
deposits in Islamic banks in Indonesia grew at CAGR of 41.6%, the fastest growth in the Asian region, followed by Pakistan
(36.9%) and Malaysia (18.6%). As at 1H13, Islamic deposits in Indonesia amounted to USD16.9bln, with profit-sharing
based Mudharabah accounts becoming the preferred savings account as compared to Wadiah saving accounts. The
projected growth in the number of Mudharabah saving accounts in 2012 is estimated as 37.2% y-o-y. Furthermore,
financing disbursed to the public by Islamic commercial banks in Indonesia amounted to USD17.8bln as at end-2012.
Growth of Islamic Banking and Conventional Banking Deposits (2008-2012)
41.6%
37.4%
26.3%
18.6%
15.7%
Indonesia
24.8%
17.2%
14.3%
9.7%
Malaysia
36.9%
Turkey
13.1%
13.1%
10.7%
9.9%
10.1%
Saudi Arabia
UAE
Islamic Banking
Kuwait
8.5%
8.0%
Qatar
Bahrain
13.2%
Pakistan
Conventional Banking
Source: Central banks, CEIC, KFHR
Encouraging developments in Africa and other jurisdictions such as the Commonwealth of Independent States (CIS) are
expected to benefit the Islamic finance industry on the back of growing demand for Islamic banking products and services
globally. In support of this, a number of regulatory authorities in various jurisdictions in Africa and CIS have undertaken
proactive measures to amend their respective banking laws to enable greater flexibility for Islamic banks to take stronger
root in the country.
ISLAMIC FINANCE Outlook 2014
14
2013 Review
The following table highlights some of the developments of the Islamic banking sector in various emerging jurisdictions
during 2013.
Country
Morocco
Initiatives
In Morocco, the draft for Islamic banking and insurance regulations could be passed by the parliament
before the end of 2014. The draft law, that contains rules on Islamic banking windows and full-fledged
Takaful operators, has been finalised and submitted to the parliament. Morocco has been seeking to
develop an Islamic finance sector for the past two years, partly as means to attract liquidity funds from
the oil-rich Gulf countries to support its fiscal needs. The passage of the Islamic finance bill would pave
way for Morocco to see its first conventional bank with an Islamic window, as well as sukuk issuance by
private firms in 2014.
Libya
Libya expects to have three full-fledged Islamic banks by 2014, a first for the country which aims to
respond to the growing demand for Shari’a compliant financial services in its domestic banking sector.
Libyan authorities have decided to issue three Islamic banking licenses and the central bank has received
five licensing applications, which are currently being reviewed. As of recent, there are 16 banks operating
in Libya offering mainly conventional banking services, although several provide Islamic banking products
through Shari’a compliant windows.
Kazakhstan Kazakhstan looks to rekindle the development of Islamic finance in the country following the appointment
of a new governor at the country’s Central Bank. Abu Dhabi-based Al Hilal Bank has been the sole Islamic
bank in Kazakhstan since 2010, offering Islamic banking products only to non-retail customers in the
country. A grant from the Islamic Development Bank (IDB) is expected to kick-start drafting of new Islamic
banking laws that could spur the development of the Islamic banking sector in the country. Earlier this
year, the Islamic Corporation for the Development of the Private Sector (ICD) also began the process of
launching an Islamic leasing company in Kazakhstan, with a seed capital of USD36mln.
Djibouti
Djibouti is promoting Islamic finance in order to increase the rate of banking penetration in the country.
Banking penetration in the country has increased from 10% six years ago to approximately between 17%
and 18% at present. The expansion of Islamic banking will help authorities to integrate more business
activities from the informal economy into the formal sector as a number of customers are known to refrain
from utilising the conventional banking system’s services due to misalignment with their religious views.
While foreign investment from Gulf countries has improved Djibouti’s economic outlook over the years,
42% of the population still lives in extreme poverty. Islamic banking assets in the country currently account
for about 15% of the country’s total banking assets and have been growing at an annual rate of 20%.
Philippines
Central bank of Philippines, Bangko Sentral ng Pilipinas (BSP) has submitted request to amend its charter
as an initiative to push the development of Islamic finance in the country and to create an inclusive
financial system. The government has recently announced that the state-owned Development Bank of the
Philippines (DBP) is in preparation to divest itself of the country’s first and only Islamic Bank, Al Amanah
Islamic Investment Bank of the Philippines. The government intends to privatise the Islamic bank and DBP
is now in the process of preparing the package for divestment of its 99.88% stake in Al Amanah.
Source: Various references, KFHR
15
ISLAMIC FINANCE Outlook 2014
2013 Review
The Islamic banking industry is growing strongly to position itself as a viable alternative to conventional finance. In this
regard, a critical role has been played by the regulatory and monetary authorities in a number of jurisdictions where they
have undertaken initiatives and reforms on national legislations with the aim to facilitate further growth. Growing significance
of Islamic banking has also driven the regulatory and supervisory bodies to enhance efforts in regulatory reforms to ensure
the surveillance and stability of the industry. In 2013, the Islamic Financial Services Board (IFSB), the international standardsetting organisation that promotes and enhances the soundness and stability of the industry, has issued one standard and
one exposure draft for the Islamic banking sector. The IFSB-15: Standards on Revised Capital Adequacy for Institutions
Offering Islamic Financial Services, issued in December 2013, aims to assist in the implementation of a capital adequacy
framework that will ensure effective coverage of risk exposures and allocation of appropriate capital to cover these risks,
based predominantly on the Standardised Approach. In order to achieve these objectives, IFSB-15 provides guidance
on the features and criteria for high-quality regulatory capital components, including Additional Tier 1 and Tier 2, which
comply with Shari’a rules and principles. Similarly, IFSB-15 provides new guidance on macro-prudential tools, such as
capital buffers, leverage ratio and domestic systemically important banks, which will help supervisory authorities achieve
the goal of protecting the banking system and the real economy from system-wide shocks. The Exposure Draft-16 (ED-16)
is a revised guidance on key elements in the supervisory review process of institutions offering Islamic financial services
(excluding takaful and Islamic Collective Investment Schemes). The scope of issues addressed by this new guidance
includes: regulatory capital requirements, internal capital adequacy assessment process, risk management, Shari’a
governance, assessment of the rate of return risk in the banking book, Islamic windows operations and transparency, as
well as market discipline.
Overall, having grown from a modest USD150bln worth of assets in mid-1990s, the global Islamic finance industry today
continues its tremendous growth momentum with total assets forecasted to exceed USD2tln as at end-2014. The Islamic
banking sector is likely to witness a surge in demand for its products as the increase in economic participation of Muslim
nations could generate stronger demand from the population, given its growing preferences towards Shari’a compliant
or ethical financing solutions. Thriving interest of key global financial centres in developing Islamic finance, for instance
London, Hong Kong and Dubai, further adds weight to the strong future potential of the Islamic banking sector as markets
globally look for alternative sources of funding and investment avenues. Future driving factors and challenges of the sector
will be covered in the latter parts of this report.
ISLAMIC FINANCE Outlook 2014
16
2013 Review
Global Sukuk Industry
“Surpassed USD100bln Mark Despite Challenging Environment”
Following the year 2012’s record breaking achievement in new sukuk issuances in the primary market which amounted
to USD131.2bln at a 54.2% y-o-y increase, year 2013 managed to once again reached the USD100bln mark in terms of
new issuances to close this year with a total of USD119.7bln, falling 8.8% short of the year 2012 record amount. The drop
in the year 2013 sukuk issuances, in part, are attributable to the announcement in mid-2013 by the US Federal Reserve
(Fed) regarding an intended change in the US monetary policy that would have seen a reduction in its monthly bond buying
stimulus program. This announcement by the Fed had a profound effect on the global bond markets which saw prices of
fixed-income instruments fall sharply fearing that the Fed’s reduction in bond purchases would move investors out of the
safe asset to higher yielding assets on an improving US economy. This in turn led to funds being withdrawn from emerging
markets, reducing demand for both conventional and Islamic bond issuances in these markets. As such, the global sukuk
market witnessed one of the slowest quarters since 2011, with USD21.8bln worth of issuances in 3Q13, in comparison to
the USD26.7bln issued in the 2Q13 and USD36.7bln issued during the 3Q12. The subdued quarter was a direct result of the
investor exit from emerging market assets following the Fed’s announcement of a potential taper in May 2013. By issuer type,
corporate sukuk issuances declined to their lowest quarterly level in two years in 3Q13 with issuances at mere USD2.7bln
before re-emerging in 4Q13 to close the year with total corporate issuances in 2013 of almost USD31.5bln (2012: 36.5bln),
Global Sukuk Issuances Trend*
140
54.2%
300
-8.8%
120
250
100
88.4%
USD bln
USD bln
Global Sukuk Outstanding Trend
80
60
61.1%
80.3%
-55.2%
20
2008
CAG
50
0
2007
150
3)
-201
2007
(
%
9.07
R=1
100
35.9%
40
200
2009
2010
2011
2012
0
2013
2007
2008
2009
2010
2011
2012
*y-o-y growth rates in brackets
Source: IFIS, Zawya, Bloomberg KFHR
Source: IFIS, Zawya, Bloomberg KFHR
Sukuk issuances by issuer type (1Q12 to 4Q13)
30
25
USD bln
20
15
10
5
0
1Q12
2Q12
3Q12
4Q12
Corporate
1Q13
2Q13
3Q13
Sovereign
*Includes all government-related entities
Source: Bloomberg, IFIS, Zawya, KFHR
17
ISLAMIC FINANCE Outlook 2014
4Q13
2013
2013 Review
Nonetheless, the sukuk sector is the fastest growing segment of the global Islamic financial industry with a CAGR of
19.34% in terms of global sukuk outstanding during the years 2007-2012. As at end 2013, the global sukuk sector is
estimated to represent more than 15% of the global Islamic financial assets, continuing to be the second largest Islamic
financial segment after Islamic banking. Global sukuks outstanding rose to USD 270.1bln as at end-2013, a 17.8% y-o-y
growth (2012: 29.9% y-o-y).
In 2013, Malaysia once again led the primary market issuances with a 69% share of total issuances, followed by Saudi
Arabia at 12%, United Arab Emirates (6%), Indonesia (5%), and Turkey (3%). In 2012, the respective shares of top primary
sukuk market issuers were as follows: Malaysia 74%, Saudi Arabia 8%, UAE 4.7%, Indonesia 4.6%, Qatar 4.2% and
Turkey 1.8%. Of the top 10 largest sukuk issuances in terms of issue size for 2013, six of these sukuk were issued
by non-Malaysian issuers domiciled outside Malaysia. As compared to the previous year (2012), the share of Malaysia
declined as a proportion of total issuances while those of others increased. The increases in shares of other jurisdictions in
2013 were supported by some notable sukuk issuances in non-Malaysian domiciles. For example, Saudi Arabia’s General
Authority of Civil Aviation issued 2013’s largest sukuk worth SAR15.2bln (USD4.05bln) in October 2013. Additionally, Saudi
Arabia’s Sadara Basic Services Company and Qatar’s Ooredoo Tamweel Limited issued 2013’s largest corporate sukuk
with USD2bln and USD1.3bln issuances respectively during the same year. Indonesia had the merits of issuing the largest
sovereign sukuk of 2013 with the Perusahaan Penerbit SBSN Indonesia issuing a USD 1.55bln sukuk in February 2013
and then again a USD1.5bln sukuk in September 2013.
Sukuk Issuances by Domicile (2013)
Bahrain
2%
{1.3%}
140
Qatar
2%
{4.2%}
Turkey
3% {1.8%}
Indonesia
5% {4.6%}
UAE
6% {4.7%}
USD bln
Others
1%
Pakistan
0.37%
{0.8%}
Sukuk Issuances by Issuer Type
120
14.54
100
36.47
13.61
31.45
80
60
40
80.16
74.66
20
Saudi Arabia
12% {8%}
0
Malaysia
69% {74%}
2012
Sovereign
2013
Corporate
Government Related Entity
*{ } 2012 figures in brackets
Source: IFIS, Zawya, Bloomberg KFHR
As has been the trend over the past few years, sovereign issuances continue to dominate the global sukuk market in 2013
with USD74.7bln or 62.3% of total issuances for the year. The share of sovereign issuances, while declining in absolute
amounts, however increased in proportion by 1.2% in 2013 on account of a slowdown in corporate sukuk issuances,
particularly in 3Q13, on fears of a change in the US Fed’s monetary policy as discussed earlier. The comparative figures for
sovereign sukuk issuances in 2012 were USD80.16bln and 61.1% of total issuances. Of the top 10 largest sovereign sukuk
issuers of 2013, the Government of Malaysia was represented by six sukuks, followed by two issuances from Indonesia
and one sukuk each from the Government of Turkey and the Islamic Development Bank (IDB). The share of corporate
sukuk issuances to total issuance in 2013 witnessed a fall of 1.4% and this type of sukuk finished with total issuances
worth USD31.45bln or 26.3% share (2012: USD36.5bln or 27.8% share). Finally, the government related entities issued
the remaining USD13.61bln size of sukuk issuances which represented an 11.4% share of total issuances. In 2012, the
comparative figures were USD14.54bln or 11.1% for government related entities.
ISLAMIC FINANCE Outlook 2014
18
2013 Review
Top 10 Sovereign Sukuk Issuances by Issuance Size (2013)
Issuer
Perusahaan Penerbit SBSN
Indonesia
Perusahaan Penerbit SBSN
Indonesia
Government of Malaysia
Government of Malaysia
Government of Malaysia
Government of Turkey
Government of Malaysia
Government of Malaysia
IDB Trust Services Limited
Government of Malaysia
Structure
Domicile
Currency
Ijarah
Indonesia
IDR
Ijarah
Indonesia
Bai’ Inah
Malaysia
Bai’ Inah
Malaysia
Bai’ Bithaman Ajil Malaysia
Ijarah
Turkey
Bai’ Inah
Malaysia
Murabahah
Malaysia
Wakalah
Saudi Arabia
Bai’ Bithaman Ajil Malaysia
USD
MYR
MYR
MYR
USD
MYR
MYR
USD
MYR
Issue
Date
1-Feb13
1-Sep13
1-Apr-13
1-May-13
1-Jul-13
1-Oct-13
1-Nov-13
1-Sep-13
1-May-13
1-Feb-13
Issue
Size
Tenor
Issuance
Type
1547.88
3
Sovereign
1500
1317.99
1299.33
1250.95
1250
1247.58
1104.84
1000
968.5
5.5
10.5
5.5
3
5
5.5
7.5
5
5.5
Sovereign
Sovereign
Sovereign
Sovereign
Sovereign
Sovereign
Sovereign
Sovereign
Sovereign
Source: IFIS, Zawya, Bloomberg KFHR
Top 10 Corporate Sukuk Issuances by Issuance Size (2013)
Domicile
Saudi
Arabia
Qatar
Currency
SAR
Issue
Date
2-Apr-13
Issue
Size
2000
Tenor
16
Issuance
Type
Corporate
USD
3-Dec-13
1250
5
Corporate
SAR
7-Nov-13
1066.87
7
Corporate
Mudharabah
Saudi
Arabia
UAE
USD
20-Mar-13
1000
6
Corporate
Ijarah
UAE
USD
3-Dec-13
750
5
Corporate
Wakalah
SAR
666.67
20
Corporate
SAR
28-May13
15-Dec-13
666.46
10
Corporate
Murabahah
Saudi
Arabia
Saudi
Arabia
Malaysia
MYR
18-Jan-13
558.89
15
Corporate
Murabahah
Malaysia
MYR
12-Dec-13
510.23
10
Corporate
Issuer
Sadara Basic Services
Company
Ooredoo Tamweel Limited
Structure
Musharakah
Riyad Bank
Combination
DIB Tier 1 Sukuk Ltd.
Sukuk Funding (No.3)
Limited
Power & Water Utility
Company
Saudi Hollandi Bank
Murabahah
Combination
Segari Energy Ventures
Sdn Bhd (SEV)
Bank Islam Malaysia
Berhad
SIB Sukuk Company III
Limited
TF Varlik Kiralama
Wakalah
UAE
USD
16-Apr-13
500
5
Corporate
Murabahah
Turkey
USD
2-May-13
500
5
Corporate
AHB Sukuk Company Ltd
Combination
UAE
USD
8-Oct-13
500
5
Corporate
Source: IFIS, Zawya, Bloomberg KFHR
19
ISLAMIC FINANCE Outlook 2014
2013 Review
Despite many challenges in the global economic environment, 2013 saw maiden sukuk issuances originating from the
domiciles of Luxembourg, Mauritius, Nigeria and Oman, taking the total number of jurisdictions that have tapped into sukuk
markets to date to 27 (excluding offshore domiciles) and with more jurisdictions set to debut in 2014. With the exception of
Nigeria, the remaining markets witnessed the issuances of corporate sukuk bearing medium-term maturities ranging from
3 to 5 years, while the issuance size varied between USD70mln and USD154mln. The Nigerian sukuk was a sovereign
issuance by the State of Osun having a maturity of 7 years and with an issuance size worth USD70.6mln.
Domiciles with Debut Sukuk Issuances (2013)
Issuer
Golden Assets
International Finance
Golden Assets
International Finance
Salam III Limited
Osun Sukuk Company Plc
Modern Sukuk SAOC
Structure
Domicile
Currency
Issue
Date
Issue
Size
Tenor
Issuance
Type
Murabahah
Mauritius
MYR
1-Mar-13
80.45
3
Corporate
Murabahah
Wakalah
Ijarah
Ijarah
Mauritius
Luxembourg
Nigeria
Oman
MYR
USD
NGN
OMR
1-Aug-13
1-Oct-13
1-Oct-13
1-Nov-13
153.89
20.00
70.62
130.00
5
5
7
5
Corporate
Corporate
Sovereign
Corporate
Source: IFIS, Zawya, Bloomberg KFHR
Corresponding to the issuances by domicile, in terms of currency, Malaysian Ringgit denominated sukuk represented
67% of total sukuk issuances for the year 2013 totalling USD80.38bln, followed by US Dollars with a 15% share worth
USD17.98bln. The remaining USD21.35bln issuances comprised of several currencies notably Saudi Arabian Riyals,
Indonesian Rupiah, Turkish Lira, Singaporean Dollars, Bahraini Dinars, United Arab Emirates Dirhams and others.
Compared to 2012, the Malaysian Ringgit sukuk issuances declined in proportion in 2013 as the respective figure for 2012
was 74.0%. This decline corresponds to the relatively greater proportion of sukuk issuances by non-Malaysian issuers in
2013 including Saudi Arabia, United Arab Emirates, Turkey and Indonesia which issued in non-MYR currencies as has been
highlighted earlier. In addition, 2013 saw the inaugural entry of sukuk denominated in Omani Riyals (OMR) and Nigerian
Naira (NGN) as both domiciles debuted in the global sukuk market in the same year.
Sukuk Issuances by Currency (2013)
BHD
1%
140
TRY
2%
IDR
3%
SAR
9%
15.86
120
USD bln
Others
0.82%
SGD QAR
1% 1%
Sukuk Issuances MYR vs USD vs Others
80
60
40
USD
15%
20
-
MYR
67%
17.98
17.73
8.42
97.06
ISLAMIC FINANCE Outlook 2014
20
80.38
58.92
2011
2012
MYR
Source: IFIS, Zawya, Bloomberg KFHR
21.35
18.26
100
USD
2013
Others
2013 Review
Sukuk Issuances by Maturity (2013)
2013
2012
2011
2010
2009
2008
0%
< 1 year
20%
40%
1-3 years
60%
80%
3-5 years
5-10 years
100%
> 10 years
Source: IFIS, Zawya, Bloomberg KFHR
In terms of sukuk issuances by maturity, there is a more than 40% decline in long-term maturity sukuk issuances exceeding
10 years and above in 2013. In contrast, there is a notable increase in shorter-term maturities sukuk issuances, particularly
for the 1-3 years maturity, on account of a number of debt re-financing sukuk issuances by corporate entities.
Sukuk Issuances by Structure (2013)
Salam Bai' Istijrar Bai' Bithaman
1%
Istithmar 0.81%
Ajil 2%
Mudharabah
0.37%
2%
Bai' Inah
4%
Wakalah
5%
Combination
5%
Musharakah
7%
Murabahah
58%
Ijarah
15%
Source: IFIS, Zawya, Bloomberg KFHR
By structure, Murabahah and Ijarah remain popular choices among issuers in 2013 with 58% and 15% respective shares
for each structure in total sukuk issuances. The comparative figures in 2012 for each were 55.4% and 16.5% respectively.
However, between the two major sukuk markets of Malaysia and GCC, Murabahah has a much larger share in Malaysia
representing 75% of total sukuk issuances. In comparison, GCC has a more balanced distribution between various
structures with Murabahah having a 23% share of total issuances while other prominent structures include Ijarah 21%,
Hybrid/Combination 13%, Musharakah 8% and Mudharabah 8%.
21
ISLAMIC FINANCE Outlook 2014
2013 Review
Sukuk Issuances by Structure - Malaysia (2013)
Bai' Bithaman
Ajil
Bai' Inah
2.69%
5.42%
Wakalah
2%
Musharakah
7%
Sukuk Issuances by Structure - GCC (2013)
Salam
3%
Wakalah
15%
Combination
3%
Ijarah
4%
Bai' Istijrar
7.67%
Istithmar
1.70%
Combination
13%
Musharakah
8%
Mudharabah
0%
Ijarah
21%
Murabahah
75%
Murabahah
23%
Mudharabah
8%
Source: IFIS, Zawya, Bloomberg KFHR
In terms of returns performance, 2013 has been a volatile year for the fixed-income instruments market as a whole.
The HSBC/Nasdaq SKBI Total Return Index, which tracks returns on an emerging markets sukuk portfolio, witnessed
a three year record loss due to the potential Fed taper in the second quarter of 2013. The returns have recovered since
then as in September 2013, the Fed announced against tapering its monthly bond purchases until further improvements
were witnessed in the US economic fundamentals. The SKBI generated total returns of 0.65% during 2013, much lower
compared to the returns of 9.69% during 2012 and 7.13% returns in 2011.
In terms of yields, following Fed’s tapering indication in May, the benchmark HSBC/NASDAQ Dubai US Dollar Sukuk Index
(SKBI) spiked by 30.9% to peak at a yield of 4.174% as at 25 June 2013. The yields eventually lowered slightly during
the month of July before once again climbing up on the expectations of a Fed tapering decision in September. The yields
reached 4.238% as at 10 September 2013, the highest over the past few years, before experiencing a drop of 3.45% on a
single day on 18 September. The HSBC/NASDAQ SKBI Yield Index closed at 3.921% as at end-2013, 39.5% higher than
the end-2012 yield of 2.81%.
HSBC/Nasdaq SKBI Total Return Index
155
150
Points
145
140
135
Source: HSBC/Nasdaq, KFHR
ISLAMIC FINANCE Outlook 2014
22
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
May-12
Mar-12
Jan-12
125
Feb-12
130
2013 Review
Overall, the global sukuk market once again surpassed the USD100bln mark in terms of new issuances during 2013,
although the amount fell by 8.77% y-o-y compared to the record sukuk issuances in 2012. The momentum in sukuk
issuances fell particularly in 3Q13 following the announcement in mid-2013 by the US Federal Reserve (Fed) regarding
an intended change in US monetary policy that resulted in an investor exit from emerging market assets in anticipation
of higher yielding assets in an improved US economy. Most notably, there was stagnation in corporate sukuk issuances
which fell to their lowest level since 2011 during 3Q13. However, the issuances momentum regained in 4Q13 as some of
the largest sukuk issuances for the year were witnessed in this quarter, for example, Saudi Arabia’s General Authority of
Civil Aviation issued 2013’s largest sukuk worth SAR15.2bln (USD4.05bln) in October 2013. Additionally, Qatar’s Ooredoo
Tamweel Limited issued 2013’s second largest corporate sukuk worth USD1.25bln in December. In 2013, the global
sukuk industry also witnessed the debut of four new domiciles for sukuk issuances namely Mauritius, Nigeria, Oman and
Luxembourg, reflecting the growing popularity of this Islamic instrument among global capital markets.
In 2014, more jurisdictions are expected to debut in the global sukuk market including sovereign issuances from
governments of United Kingdom, South Africa, Oman and Senegal. A number of sukuk have already been announced
and are in the pipeline for 2014, thus presenting promising prospects for the fastest growing segment of the global Islamic
financial industry. An outlook for the global sukuk industry for the year 2014 is provided in the outlook section of this report.
HSBC/Nasdaq SKBI Total Return Index
6%
5.5%
5%
4.5%
4%
3.5%
3%
SKBI
SUSI
SUCI
Source: HSBC/Nasdaq, KFHR
Note: SKBI – Overall Sukuk Benchmark Index; SUSI – Sovereign Benchmark; SUCI – Corporate Benchmark;
23
ISLAMIC FINANCE Outlook 2014
3-Dec-13
3-Nov-13
3-Oct-13
3-Sep-13
3-Jul-13
3-Aug-13
3-Jun-13
3-May-13
3-Apr-13
3-Mar-13
3-Jan-13
3-Feb-13
3-Dec-12
3-Nov-12
3-Oct-12
3-Sep-12
3-Jul-12
3-Aug-12
3-Jun-12
3-May-12
3-Apr-12
3-Mar-12
3-Feb-12
3-Jan-12
2.5%
2013 Review
Global Islamic Funds Industry
“Modest Growth but Encouraging Prospects”
The Islamic funds sector is still in the early stages of development but has illustrated steady growth rates in 2013, although
at a much slower rate as compared to the other sectors of the Islamic finance system. The total AuM of Islamic funds
have grown at a steady CAGR of 7.33% from 2007 to 2012, to reach USD72.5bln as at 20-Dec-13 (8.4% y-o-y growth).
Notably, the growth of the sector’s AuM has been driven largely by net new asset flows into the sector rather than by the
rise in value of existing securities underlying Islamic funds’ assets. The total number of Islamic funds stood at 1,049 as at
20-Dec-13, with 79 new funds launched in 2013. Historical Islamic AuM and Number of Islamic Funds
80
72.5
70
56.1
60
61.7
66.9
1000
800
47
600
40
30
400
No. of funds
USD bln
50
60.6
1200
20
200
10
0
2008
2009
AuM (LHS)
2010
2011
2012
20-Dec-13
0
Cumulative No. of Funds (RHS)
Source: Bloomberg, Eurekahedge, KFHR
Relative to the other sectors of the global Islamic finance industry, the Islamic funds sector posted a more modest y-o-y
growth rate. Greater sensitivity of the Islamic funds sector to global economic conditions and its plunge during the financial
crisis are among the factors that have contributed to the sector’s moderate growth rates in recent years. Nonetheless,
despite obvious scale differentials (in terms of net assets), Islamic funds weathered the crisis slightly better than conventional
funds, whose AuM grew at a CAGR of 1.8% for the period from 2007 to 2012. Historical Conventional AuM
63
CAGR 2007-2012, 1.8%
y-o-y growth 2011-2012, 9%
62
62.4
61
USD tln
60
59
58
57.2
57.0
2007
2011
57
56
55
54
Source: BCG, KFHR
ISLAMIC FINANCE Outlook 2014
24
2012
2013 Review
Islamic AuM of Newly Launched Funds by Domicile
(20-Dec-13)
Oman
4%
Pakistan
4%
Ireland
4%
The Islamic funds launched in 2013 have been
domiciled mostly in Malaysia and Luxembourg.
Indonesia earns a notable mention and is
clearly an up-coming domicile location of
choice for Islamic fund managers who are keen
to tap the country’s government-sponsored
economic projects planned for year 2014
onwards and the growing interest for Shari’a
compliant investment.
Saudi Arabia
3%
Indonesia
7%
Luxembourg
26%
Malaysia
52%
Source: Bloomberg, Eurekahedge, KFHR
Islamic AuM of Newly Launched Funds by Geographical Focus
(20-Dec-13)
Pakistan
4%
Indonesia
7%
GCC
4%
Asia-Pacific
9%
Saudi Arabia
1%
Global
40%
About 40% of Islamic funds launched in 2013
have a global geographical focus; Malaysia
received 35% of the total global AuM (in terms
of geographical focus); meanwhile, all new
Islamic funds from Indonesia and Pakistan
invested locally in their respective countries. Malaysia
35%
Source: Bloomberg, Eurekahedge, KFHR
As at end 2013, on a cumulative basis, 59% of total Islamic AuM have been domiciled in Saudi Arabia and Malaysia. The
attractiveness of these two jurisdictions as fund domiciles stem from the numerous efforts and initiatives from the local
authorities’ in providing solid regulatory frameworks for the Islamic finance industry as well as to ensure good investment
climate in general across their financial markets. Another appeal of Saudi Arabia and Malaysia lies in the strong domestic
demand for Shari’a compliant investments from retail and institutional investors alike.
Alongside traditional Islamic finance hubs, a number of offshore financial centres have also risen to prominence as
destinations for Islamic funds. Presently, Jersey, the Cayman Islands and Luxembourg cumulatively accounted for 17% of
total Islamic fund assets. In the light of uncertain economic conditions during the past few years, Islamic fund managers
have moved to capitalise on business benefits offered by offshore locations, the most significant of which are facilitative
structures that minimise exposure to tax and considerably lighter regulatory requirements.
The United States has recently emerged as a sizable market for Islamic fund assets due to the entry of a growing number
of US-based conventional fund managers in the Islamic funds industry. These conventional fund managers have a strong
preference for onshore structures domiciled in US owing to investors’ familiarity with the systems and structures. 25
ISLAMIC FINANCE Outlook 2014
2013 Review
In terms of geographical focus, as at 20th Dec-13, 27% of Islamic AuM have been invested globally (2012: 28%). 18%
of total Islamic AuM were invested in Malaysia and 14% in Saudi Arabia, with a large portion of funds from the latter
also invested regionally within MENA and/or the GCC. All US-domiciled Islamic funds are channelled toward domestic
investments. The same trend of domestic investments are also witnessed in Indonesia, Kuwait and Pakistan.
Islamic AuM by Geographical Focus
(20-Dec-13)
Indonesia
2%
Kuwait
1%
Asia-Pacific
3%
Pakistan
1%
Other
2%
United States
5%
Global
27%
GCC
10%
Saudi Arabia
14%
Malaysia
18%
MENA
17%
Source: Bloomberg, Eurekahedge, KFHR
Islamic AuM by Domicile
(20-Dec-13)
Indonesia
Luxembourg
2%
2% Bahrain
2%
South Africa
3%
Kuwait
4%
Cayman Islands
5%
Other
6%
Saudi Arabia
37%
United States
6%
Jersey
10%
Malaysia
22%
Source: Bloomberg, Eurekahedge, KFHR
In terms of asset allocations, equities and money markets continue to be favoured by Islamic fund managers, with 36%
of total global Islamic AuM invested in Shari’a compliant equities and 21% in Islamic money market instruments as at 20Dec-13. Money market and fixed income securities still suit the needs of a large group of Islamic investors that prefer low
risk exposures: together the two asset classes hold 28% of Islamic AuM. Commodities, known for their inflation-hedge and
real economy linked characteristics, have attracted 16% of Islamic fund assets. Specialty assets and alternative products
– currently mainstream in the conventional funds industry – are also drawing interest from Islamic fund managers, in part
due to their expansionary efforts to attract clients from non-Muslim territories. ISLAMIC FINANCE Outlook 2014
26
2013 Review
Islamic AuM by Asset Class (20-Dec-13)
Other
10%
Real Estate
5%
Mixed Allocation
5%
Equities
36%
Fixed Income
7%
Commodities
16%
Money Market
21%
Source: Bloomberg, Eurekahedge, KFHR
By fund type, as at 20-Dec-13, 83% of total Islamic AuM are concentrated in mutual funds. Exchange traded funds hold
a 13% share of Islamic fund assets and will likely grow in prominence, in particular among retail investors, owing to its
tax-efficient and transparent nature. Closed-ended funds, which account for about 2% of total Islamic AuM, are gaining
wider recognition among both conventional and Islamic investors who have turned to these funds primarily by virtue of their
distinctive features of lean asset management and equity-like trading flexibility that have been especially beneficial during
the prevailing low interest rate environment of the last few years. 70
938
60
USD bln
50
40
30
20
74
10
37
0
Mutual
Exchange Traded
AuM (USD bln)
1,000
900
800
700
600
500
400
300
200
100
0
No. of funds
Islamic AuM and Number of Islamic Funds by Fund Type (20-Dec-13)
Closed-Ended
Number of Islamic funds
*Category ‘Mutual’ contains all open-end funds including unit trust and alternative funds
Source: Bloomberg, Eurekahedge, KFHR
27
ISLAMIC FINANCE Outlook 2014
2013 Review
Islamic AuM by Currency (20-Dec-13)
3%
3%
1% 1%
2% 1%
USD
SAR
MYR
KWD
ZAR
IDR
AED
PKR
Other
34%
22%
33%
Source: Bloomberg, Eurekahedge, KFHR
As of 20-Dec-13, USD-denominated funds made up 34% of total Islamic AuM, which is in line with the proportion of
Islamic funds invested with a global geographical focus. The next two major currencies for funds are SAR- (33%) and MYR
(22%), which also reflects the popularity of these two jurisdictions as fund domiciles. Other major markets, such as Kuwait,
Indonesia, and Pakistan, are also home to funds that are denominated in a local/geo-focus currency. Historical Returns of Islamic Funds by Asset Type
20-Dec-13 YTD
2012
2011
2010
2009
2008
-50
-40
-30
-20
-10
0
10
20
Commodities
Equities
Fixed Income
Mixed Assets
Money Market
Real Estate
30
40
Source: Bloomberg, Eurekahedge, KFHR
The historical performance of Islamic funds in terms of returns has varied over time. Leaving aside variations in performance
among different fund managers and regions, commodity funds on average surpassed funds specialising in other asset
classes for the period from 2008 to 2012 on account of rallying commodity prices. Equities – the largest asset class by
allocation – has generated decent return figures of over 10% during post-crisis years, except in 2011 when major stock
markets dropped over European debt worries. After an array of negative returns across a number of asset classes in 2011,
the performance has in general stabilised on the back of gradual economic improvements in the global markets.
ISLAMIC FINANCE Outlook 2014
28
2013 Review
Historical Returns of S&P 500 Shariah Index and of Islamic Equity Funds
100%
80%
60%
40%
20%
0%
-20%
2009
2008
2010
2011
2012
20 - Dec - 13
YTD
-40%
-60%
DJIM Titans 100 Returns
S&P 500 Shariah Returns
Equity Fund Returns
Source: Bloomberg, Eurekahedge, KFHR
In 2013, commodity funds posted negative returns of -9.29% as commodity prices in the world markets (for precious metals
in particular) tumbled. Equity funds, in contrast, delivered a high average return of 13.62% on the back of sentiments that
have bolstered up indices in both developed and emerging markets. The returns of money market funds have remained
largely consistent across years and ended with 2.66% as at 20-Dec-13. Fixed income funds, meanwhile, returned a
positive but comparatively lower return of 2.69% – a noticeable dip in comparison to previous periods. Mixed assets funds
yielded a moderate 9.38% average return. Finally, real estate funds have begun recovering with a 6.75% average return
in 2013, mainly as a result of rising consumer confidence and government infrastructure expenditure in the GCC region. YTD Returns of Islamic Funds by Asset Type (20-Dec-13)
Commodities
Equities
Fixed Income
Mixed Assets
Money Market
Real Estate
-15%
-10%
-5%
0%
5%
10%
Source: Bloomberg, Eurekahedge, KFHR
29
ISLAMIC FINANCE Outlook 2014
15%
2013 Review
Top 10 Islamic Funds by YTD Returns (20-Dec-13)
Fund Name
Al Dar Money Market Fund
Global Consumer Loyalty Fund
HSBC GCC Equity Fund
HSBC Amanah Saudi Freestyle Equity Fund
JS Islamic Fund
JS Islamic Pension Savings Fund
NBAD UAE Islamic Fund
NBAD UAE Trading Fund
Oasis Crescent International Feeder Fund
UBL Shariah Stock Fund
Asset Class
Domicile
Money Market
Kuwait
Alternative
Cayman Islands
Equity
Saudi Arabia
Equity
Saudi Arabia
Mixed Allocation
Pakistan
Equity
Pakistan
Equity
UAE
Equity
UAE
Equity
South Africa
Mixed Allocation
Pakistan
AuM
(USD bln)
254.4
5.1
39.7
130.9
3.2
0.7
43.7
102.4
87.0
8.7
Return
(%)
68.40
47.65
48.77
48.03
53.06
56.48
73.15
50.90
47.09
50.65
Source: Bloomberg, Eurekahedge, KFHR
Overall, Islamic funds have evolved into wealth management vehicles that cater to investors who are looking for exposure
in capital markets within a Shari’a framework. Moving forward, both the demand for and supply of Islamic investment
avenues are expected to increase given the growing wealth and preference for Shari’a compliant solutions. Furthermore,
the rising wealth in Muslim nations, especially in the emerging economies and oil rich countries, has helped drive investable
assets to new heights. The upward trend in the number of managers offering Shari’a compliant investments worldwide
demonstrates the increasing diversity in the industry in terms of asset classes and geographies. The rising wealth in the
GCC and Asia, following the regions’ resilient economic performance, has also anchored the popularity of Islamic funds.
ISLAMIC FINANCE Outlook 2014
30
2013 Review
Global Takaful Industry
“Sustained Momentum”
The global takaful industry has experienced strong double-digit growth rates in recent years with worldwide gross takaful
contributions estimated to have amounted to almost USD20bln as at end-2013, reflecting a more than 15% y-o-y growth
while recording an impressive 18.1% CAGR during the last 5 years (2007-2012). Moving forward, it is forecasted that the
global takaful industry will surpass the USD25bln mark by the year 2015, although the CAGR is expected to slow down to
12.8% during the period 2010-2015F on account of increasing competition and tighter regulatory requirements for takaful
operations in key markets such as Malaysia and GCC. Nonetheless, in spite of the impressive double digit growth rates, the
global takaful industry remains a small segment representing a nascent 1.1% share of the global Islamic financial industry
as estimated at end-2013. The stagnancy in the share of the takaful segment in the global Islamic finance industry during
the last few years is a result of comparatively faster growth rates in other Islamic financial sectors such as Islamic banking
(19.1% CAGR 2007-2012) and sukuk (19.3% CAGR in sukuk outstanding 2007-2012).
Global Gross Takaful Contributions
Share of Assets Segment as to the Total Global
Islamic Finance Assets
25
USD bln
13.4
14%
20
15.18
15.15
16%
12%
10%
15
8%
6%
10
4.37
4.26
4.24
4%
5
2011
Sukuk
Source: World islamic insurance directory, EY, KFHR
1.13
2012
2015F
2013F
2012
2011
2010
2009
2008
2007
1H13E
0%
0
1.14
1.12
2%
Funds
2013E
Takaful
Source: IFIS, Zawya, Bloomberg KFHR
Global Gross Takaful Contributions by Region
20,000
18,000
Saudi Arabia
and Malaysia
are estimated to
have accounted
for nearly 44%
of total gross
takaful
contributions
in 2013
16,000
USD mln
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2007
2008
Middle East (Non Arab)
GCC (ex-Saudi)
South Asia
2009
2010
2011
Saudi Arabia
Southeast Asia (ex-Malaysia)
Levant
2012E
Malaysia
Africa
Source: World islamic insurance directory, EY, KFHR
31
ISLAMIC FINANCE Outlook 2014
2013F
2013 Review
Global Gross Takaful Contributions
by Region 2013F
Africa
-2.96%
South Asia
1.20%
Number of Full-fledged Takaful Operators by Region
(2011)
Levant
1.09%
Southeast
Asia (ex Malaysia)
5.09%
Others, 7
Levant, 9
GCC, 77
South Asia,12
Middle East
(Non Arab)
36.00%
GCC
(ex-Saudi)
9.98%
Middle East
(Non Arab),18
Africa, 36
Malaysia
11.53%
South-East
Asia, 40
Saudi Arabia
32.14%
Source: World islamic insurance directory, EY, KFHR
Among the various markets, Saudi Arabia and Malaysia continue to drive the global takaful industry in 2013 being the two
largest takaful markets in terms of total gross contributions (excluding Iran). Based on end-2013 estimates, the total gross
takaful contributions in Saudi Arabia amounted to USD6.4bln, marking a CAGR of 19.8% during the years 2007-2012. The
growth in the Saudi takaful market has moderate in recent years (CAGR 2009-2013F 13.16%) on account of increasing
competition between a large number of insurance and takaful operators in the domestic market. It is estimated that
there are currently 34 takaful operators operating in Saudi Arabia. Meanwhile, the Malaysian takaful market is estimated
to have generated gross contributions amounting to USD2.3bln as at end-2013 at a CAGR of 18.1% during the years
2007-2012. The takaful market in Malaysia, which is served by 11 takaful operators, is estimated to have maintained its
growth momentum in 2013 at a rate of 18.7% y-o-y basis, mainly on account of an increasing awareness among the
demographics regarding the benefits of insurance products that has helped boost the demand for the sector’s products
in the country. Collectively, the takaful markets in Saudi Arabia and Malaysia generated approximately 43.7% of the global
gross takaful contributions during the year 2013.
Global Gross Takaful Contributions – CAGR by Region (2007-2012 and 2009-2012)
Levant
Southeast Asia (ex-Malay)
GCC (ex-Saudi)
South Asia
Saudi Arabia
Malaysia
CAGR:
2007-2012, Global = 18.06%
2009-2012, Global = 15.19%
Africa
Middle East (Non Arab)
0%
10%
20%
30%
2009-2012
50%
2007-2012
Source: World islamic insurance directory, EY, KFHR
ISLAMIC FINANCE Outlook 2014
40%
32
60%
70%
2013 Review
Among other markets, impressive growth rates were witnessed in countries within the regions of Levant, Southeast Asia
(ex-Malaysia), the GCC (ex-Saudi) and South Asia where Islamic finance as a whole has been rapidly gaining tract in
domestic markets. The Levant market, comprising of Jordan, Lebanon, Syria and Palestine, is expected to contribute
USD216mln in gross takaful contributions by end-2013. Jordan is the main driver of the takaful sector in Levant, as
the country has recently witnessed greater momentum in its Islamic finance industry with the government introducing
a number of regulatory amendments and legislations in the year 2012 to support growth of a holistic Islamic finance
sector in the country. Meanwhile, the Southeast Asian region (ex-Malaysia) is forecasted to surpass the USD1bln mark
for gross takaful contributions in 2013, being led by impressive takaful sector growth in Indonesia. Indonesia is a rapidly
developing as an Islamic finance hub for various Islamic financial sectors including takaful. The Indonesian takaful market is
expanding at phenomenal rates on account of a very large untapped insurance market, as estimates indicate that currently
takaful products constitute only 2% of the Indonesian insurance market, with nearly 80% of Indonesians uninsured in
2012. This factor, combined with increasing awareness about insurance/takaful products among the population, has been
instrumental in driving Indonesian gross takaful contributions to over USD800mln as forecasted for year end-2013.
In the GCC (ex-Saudi), the takaful sector is estimated to account for over USD1.9bln in gross contributions as at end-2013,
spearheaded by healthy performances of the family takaful sector in the United Arab Emirates (UAE) and Qatar markets
where compulsory medical schemes by the governments for its citizens (and expatriate residents in the case of Dubai) have
enabled family takaful operators to expand their market shares. The UAE is the third largest takaful market globally in terms
of gross contributions (excluding Iran) and as at end-2013 is forecasted to have generated contributions of over USD1.3bln,
up from USD369mln figure as at end-2007. In Qatar, the takaful sector grew from USD53mln market in 2007 to a forecasted
USD355mln share in end-2013. The growth for Qatar’s takaful industry, in part, is also supported by large infrastructural
development plans in Qatar which are expected to involve over USD100bln of investments during the course of next decade,
providing avenues for takaful operators to expand on their underwriting operations in support of these projects.
Among the other regions, South Asia is estimated to have generated takaful contributions worth USD239mln in 2013,
driven largely by takaful market expansions in Pakistan and Bangladesh where consumer preferences for Islamic financial
solutions are rapidly gaining momentum. The growth overall in this region has witnessed a slowdown in recent years in
US Dollar terms and this can be attributed to the material declines in the exchange rates values of the currencies of the
two main markets of Pakistan and Bangladesh. Meanwhile, below industry average growth rates were witnessed in the
regions of Africa and Middle East (Non-Arab). Despite Africa having a significant number of takaful operators (36 full-fledged
operators in 2011) and comparatively higher insurance-to-GDP penetration rates at 3.6% in 20111 (the GCC averaged
below 2% in 2011), the growth of takaful contributions in the continent have been modest as there exist widespread
challenges in the region including lack of awareness and understanding of Islamic insurance products by the population.
In the case of Middle East (Non-Arab), the slowdown in growth has largely been caused by Iran where gross takaful
contributions in USD terms have taken a hit following depreciation of the Iranian Rials while economic growth is regarded to
have significantly slowed in recent years. As at end-2013, gross takaful contributions originating from Africa are estimated
at USD589mln, while for the Middle East (Non-Arab) at USD7.2bln.
Analysing takaful operations as per key business lines, there is considerable heterogeneity among various regions regarding
the type of products subscribed by the population. Takaful products are offered segregated into two main business lines:
family takaful which includes various life, medical and investment products; and general takaful products which provide
home, motor, personal accidents, marine and aviation protection products. In some jurisdictions, takaful operators are
allowed to operate as composites which may offer products for both business lines under one legal entity while in others,
its licensing structure requires separate licence for each offering either general or family takaful products. Based on a
sample2 of takaful operators’ performances in the three key markets of Malaysia, Saudi Arabia and GCC (ex-Saudi), it is
observed that the family/medical takaful segment dominates the sector in Malaysia and Saudi Arabia, while the general
takaful segment is more important in the GCC (ex-Saudi) region.
1
2
Source: Swiss Re
Source: Swiss Re, sample takaful operators
33
ISLAMIC FINANCE Outlook 2014
2013 Review
The countries in the GCC (ex-Saudi) are characterised by generous state-sponsored welfare, pension and medical
schemes for citizens that potentially reduce motivation for the population to subscribe to family, medical and retirement
takaful products. As a result, the general takaful sector comprising of motor, fire, property, accident, marine and aviation
and other miscellaneous insurance coverage products are more prominent in the region. The family takaful segment has
been gradually picking up pace in recent years, particularly in United Arab Emirates and Qatar for the medical sector where
the government introduced compulsory medical schemes for residents in the country. Comparatively, there is greater
awareness and need for family takaful products in Malaysia and Saudi Arabia and hence the family/medical takaful segment
dominates the takaful sector in these two markets. Particularly in Malaysia, the family takaful sector among the sample
operators generated nearly 80% of the gross takaful contributions in the year 2012. In terms of investment composition of funds by ta kaful operators, once again there are differences in investment strategies
between the sample markets. The Malaysian takaful operators have the bulk of their funds invested in Islamic debt markets
involving sukuk and Islamic money market instruments. This reflects the well-developed and liquid nature of Malaysia’s
Islamic debt market that holds the merit of being the largest domicile for sukuk issuances and sukuk amount outstanding
year-on-year while having a wide variety of Islamic money market instruments in the world’s first liquid and well-functioning
Islamic interbank money market. Similarly, Saudi Arabia also holds a large proportion of investments in the form of sukuk,
money market instruments and cash and deposits with direct equity investments having a minor share of less than 8%
of total investments. In contrast, the GCC (ex-Saudi) markets have a much higher exposure to direct equity investments
having almost 27% of investments in this category. Interestingly, cash and deposits form the bulk of investment funds in
this region, and this could be due to unavailability of liquid Islamic money market instruments as well as limited number of
sukuk issuances in the domestic markets.
Comparison of Features between Insurance and Takaful
Concept
Contract
Responsibility of
policyholders/
participants
Liability of the
insurer/ operator
Investment of fund
Insurance
Takaful
• A risk-transfer mechanism.
• A socially more responsible task of risk-sharing.
• An exchange contract (sale and • A combination of Tabarru’ contract (donation)
purchase) between insurer and insured.
and agency or profit-sharing contract.
• Policyholders pay premium to the • Participants make contributions to the scheme.
insurer.
• Insurer is liable to pay the insurance • Takaful operator acts as the administrator of the
scheme and pay the takaful benefits from the
benefits as promised from its assets
takaful funds.
(insurance funds and shareholders’
• In the event of deficiency in the takaful funds,
fund).
takaful operator will provide Qard Hassan
to rectify the deficiency. This loan is to be
recovered from future underwriting surpluses.
• There is no restriction apart from those • Assets of the takaful funds are invested in
imposed for prudential reasons.
Shari’a compliant instruments.
Source: BNM, KFHR
ISLAMIC FINANCE Outlook 2014
34
2014 Outlook
2014 Outlook
Global Islamic finance assets are expected to surpass the USD2tln mark in 2014. The proposition for Islamic finance
manifests itself in the robust growth of assets from USD150.0bln in the mid-1990s to approximately USD1.8tln as at
end 2013. The industry’s strong performance over the years will be further augmented by the growing participation of
the international financial community, particularly in the Islamic banking sector, as well as by the support of various key
multilateral development entities in the efforts to spur the growth of the industry. We expect the industry will continue to
chart positive growth in 2014 for all sectors, underpinned by the following factors:
• Governments’ aggressive spending on infrastructure projects.
• Growing interest in Islamic finance & supply side dynamics by financial institutions.
• Active role played government and regulatory agencies; multilateral bodies and industry players to promote the
development of Islamic financial markets in their respective countries and globally.
• The increase of global trade flows in MENA and OIC countries.
In the next few years, we foresee the industry’s focus to be directed into key four spectrums (as illustrated in the diagram
below) which will bring the industry to greater heights.
2013-2015: Four Key Spectrums of Developmental Focus
Regulatory &
Supervisory
Frameworks
Infrastructure
Projects
Aviation
Financial
Linkages &
Standardisation
Shari’a talent &
Shari’a discourse
Strengthening
financial stability
& enhancing
inter-linkages
Oil, Gas &
Energy
Trade Activities &
Halal Industry
Liquidity
Management
Shari’a Research
Tapping the
potential real
sector
economics
activities
2014-2015:
Four Key
Sprectrums of
Focus
Enhancing talent,
education and
research
development
Practical &
Industry
Associations
Research
Education &
Certification
Small & Medium
Enterprises
Exploring wider
range of product
offerings for wider
consumer base
Agriculture
Mass
Consumers
HNWIs
Source: KFHR
ISLAMIC FINANCE Outlook 2014
36
Associations
Corporates
2014 Outlook
The industry will continue to grow driven by both demand and supply factors, and further facilitated by government
agencies and financial regulators. In part, governmental and economic policies have also become the key drivers that
influence the optimistic outlook of Islamic finance. The expansionary policies in the GCC and Asian countries followed by a
massive governmental spending for mega projects to boost employment and investment opportunities will be of advantage
to the Islamic banking sector. Islamic financial institutions will stand a chance to offer financing support to meet respective
countries’ developmental needs. In addition, Islamic banks are well-placed to take advantage of the sizeable trade flows in
the OIC countries and MENA where Islamic finance is making strides. Trade flows in MENA and OIC countries represents
a promising opportunity for Islamic trade finance to become an alternative to conventional trade financing. 2014 will also
be another exciting year for sukuk market. This year, more jurisdictions are expected to debut in the global sukuk market
including sovereign issuances from the United Kingdom, Luxembourg, South Africa, Oman and Senegal. A number of
sukuks have already been announced and are in the pipeline for 2014, thus presenting promising prospects for the fastest
growing segment of the global Islamic financial industry. Expectations are also build up on a debut sukuk issuance from the
multilateral Asian Development Bank (ADB).
In parallel with growth and participation of various entities in the Islamic finance industry, catalyst institutions like research
and advisory houses that promote innovation, business advancements and sharing of resources are also emerging to
complete the value chain of the overall industry. Spill-over effects into ancillary and professional services that were seen
in 2012 and 2013 – offering education, training, consultancy, information platforms – will expand further in these coming
years.
At global level, multilateral organisations, regional development banks and other international organisations have been
supporting the development of the global Islamic financial industry. Global linkages and cooperation are vital for creation of a
comprehensive ecosystem given the nascent stage of Islamic finance and its small share domestically in most jurisdictions.
Over the years, these entities have been strengthening cooperation and enhancing their synergy to fulfil their common
agenda. Among others, below are several cooperation and agreements that have been initiated to support the Islamic
finance industry, and more joint initiatives of these kinds will further propel the growth of the industry. • The World Bank and Islamic Development Bank (IDB) signed a Memorandum of Understanding (MoU) in October
2012 to set out a framework for collaboration between the two parties and to lend support to global efforts in the
development of Islamic finance.
• The African Development Bank (AfDB) and the International Islamic Liquidity Management Corporation (IILM) inked
an MoU build robust partnership to promote liquidity management. This MoU will offer benefits to the AfDB and its
Regional Member Countries.
• The IILM entered into an MoU with the Asian Development Bank to strengthen cooperation between the two
organisations in promoting global cross-border Shari’a compliant liquidity management.
The pursuit to develop a robust regulatory framework and setting up an enabling environment for Islamic finance to propel
are the other important components towards greater success of the industry. Apart from the regulatory developments in the
GCC and Malaysia, emerging jurisdictions such as North African countries and the Commonwealth of Independent States
(CIS) have also expressed their intentions to introduce legislations that will provide better foundation for the establishment
of Islamic banking in the country. These, in addition to the aim to preserve financial stability, will remain as key directions
ahead. Islamic banks are likely to re-examine their portfolio against Basel III capital requirements and other strategic
priorities. In 2014, the merger and acquisition activities are likely to intensify as mid-sized banks will seek asset growth,
while smaller banks will look for scale. Regulation and compliance will dominate the attention of banks’ strategic planning
units. The banks will have to strategise through a wave of new rules covering capital, liquidity, consumer protection and
risk management. Basel II rules and various other governmental regulations in certain countries will further complicate the
regulatory landscape. Overall, we expect 2014 will be directed to both industry’s performances and building the necessary
frameworks and synergies for long term success of the Islamic finance industry. 37
ISLAMIC FINANCE Outlook 2014
2014 Outlook
GLOBAL ECONOMIC OUTLOOK 2014: SNAPSHOT
Global economic growth: The global economy is expected to expand moderately at 2.9% in 2013, and improve gradually
at 3.6% in 2014. Much of the pickup in growth is expected to be driven by advanced economies where output for this
region is expected to expand at a pace of 2.0% in 2014, about 0.8% more than in 2013. Drivers of the projected uptick
are a stronger US economy, an appreciable reduction in fiscal tightening (except in Japan), and highly accommodative
monetary conditions. On the flip side, the euro-zone is still crawling out of a recession, while economic activity is forecast
to stay tepid in the near to medium term. Meanwhile, growth in emerging markets and developing economies is expected
to moderate to 4.5% in 2013 from 4.9% in 2012, before improving to 5.1% in 2014. Growth would be supported by solid
domestic demand, recovering exports, and supportive fiscal, monetary and financial conditions. Over the medium term,
the adjustment in exchange rates should foster growth in emerging markets, as economies rebalance towards net exports
in light of lower exchange rates.
Global: Real GDP Growth amd Outlook (2011-2014F)
5
4
3.9
3.6
3.2
2.9
y-o-y %
3
2
1
0
2011
2012
2013
2014F
Source: IMF, Bloomberg, KFHR
Banking: The banking systems of the GCC and Asia have fared better than that of their western counterparts. In the GCC,
credit growth remains robust in Qatar and Saudi Arabia, and positive in the Bahrain, Kuwait and the UAE, underpinned by
aggressive government spending on infrastructure projects and domestic consumption following increases in public salaries
and state pensions. Earnings of banks operating in selected countries (Qatar and Saudi Arabia) have rebounded to almost
the levels seen prior to the global financial crisis. For others, balance sheets are on the mend gradually, with significant
improvement in asset quality. In general, GCC banks have also raised capital in recent years to further strengthen balance
sheet positions. In Asia, banking systems remain stable, characterised by high capital buffers and relatively low delinquency
levels. Asset quality has been strongly underpinned by prudent provisioning practices by most Asian banks. For most Asian
countries, consumer lending remains a substantial portion of their lending books elevated by consumer appetite for credit
amidst a positive economic environment. Meanwhile, funding has been healthy in most banking jurisdictions supported
by current and saving (CASA) deposits. In view of this, most Asian banking sectors remain liquid, which should support
lending momentum going forward.
Infrastructure: The drivers for infrastructure investment may vary from country to country but demand continues to
rise. While the world’s developed economies are facing the need for significant investment to upgrade or replace ageing
infrastructure, emerging economies such as India and China are aggressively focused on building new infrastructure
to facilitate economic growth and prosperity. The OECD estimates that the required investment in road, rail, telecoms,
electricity and water infrastructure will reach USD53tln by 2030, without even taking into account seaports, airports
and social infrastructure; this represents approximately 2.5% of global GDP to 2030. Overall, we believe investment in
infrastructure will continue to flourish.
ISLAMIC FINANCE Outlook 2014
38
2014 Outlook
Islamic Banking Outlook
The Islamic banking sector has been the driving force of the global Islamic finance industry. Based on the CAGR between
2008 and 2012, Islamic banking assets grew at 17.1% and expected to reach USD1.6tln by end-2014. Despite global
economic uncertainties, 2013 also proved to be a resilient year for the industry, with Islamic banking assets estimated to
have surpassed USD1.4tln. The Islamic banking assets has registered a double digit compounded-annual-growth-rate
(CAGR) of 19% (2007-2012).
Islamic Banking Assets Growth Trend by Region (2008-2014F)
2,000
1,800
Others
1,600
Asia
Sub-Saharan Africa
1,400
USD bln
1,200
1,000
MENA (excl. GCC)
800
600
GCC
400
200
0
2008
2009
GCC
2010
MENA (excl. GCC)
2011
2012
2013E
Sub-Saharan Africa
Asia
2014F
Others
Source: Central banks, KFHR
Moving forward, advanced Islamic banking markets in the GCC and Asian regions are expected to evolve in greater
sophistication in terms of products offerings, as well as from the aspect of regulatory advancement by the financial
regulators. On the demand side, Shari’a compliant investments and financing products have been dominantly fuelled by a
promising economic outlook in the GCC region and abundant liquidity flows in the region. The rise in the wealth of Muslim
nations from the oil-rich countries such as Saudi Arabia, Kuwait, United Arab Emirates, etc. has been critical in pushing the
drive for Shariah compliant solutions.
Islamic Banking Assets by Region (2013E)
MENA
(excl. GCC)
41%
Asia
15%
Others
5%
Sub-Saharan
Africa
2%
GCC
37%
Source: Central banks, KFHR
39
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Islamic banks’ financing growth remains robust and positive, supported by aggressive government spending on
infrastructure projects and domestic consumption. Mega infrastructure projects in GCC countries and Asia are poised for
Islamic banks to tap into these investment opportunities. Sukuk market will also benefit from these trends. Islamic finance
in the United Arab Emirates (UAE), in 2013, has firmly thrown its support in developing the emirate as a global capital of
Islamic economics. Under this ambition, UAE plans to uplift not only its Islamic banking and capital markets sector, but
also develop its Islamic insurance sector, halal food industry as well as upgrade Islamic trade and quality management
standards. Dubai’s successful bid to host the World Expo 2020 is expected to positively boost Dubai’s economy for
the next six years. The impact will primarily through large scale of infrastructure investments, growth in tourism, positive
consumer and investor sentiment, and high levels of job creation. The increase in economic activities in the UAE will lead to
spill over economic benefits to the rest of the region and opens a big opportunity for Islamic banks to fulfil the role to provide
alternative funding for the projects. In Kuwait, the outlook for Islamic finance in Kuwait is expected to remain strong given
the country’s economic fundamentals. The country’s strong hydrocarbon sector is expected to bolster investment in the
economy. Growth will also be supported by the government’s various plans to diversify its economy away from its near total
dependence on oil revenues and maintain long-term economic growth momentum. This will create growth opportunities for
Islamic banks to further expand their project financing portfolios. In Qatar, Islamic banks are expected to benefit from faster
investment spending, an expansionary fiscal stance and a continuing influx of workers will underpin demand. Similarly,
in Saudi Arabia, there is considerable construction activities for social infrastructure, real estate and industrial projects.
Industrial projects, mostly related to the hydrocarbons sector, are a major source of construction output growth in Saudi
Arabia. A growing number of petrochemicals projects are also boosting construction activity, as the country attempts to
diversify its industrial sector away from oil and gas.
Country
Abu Dhabi
Saudi Arabia
Qatar
Kuwait
Oman
Total GCC
GCC Development Plans
Development Amount (USD bln)
170
385
226
125
31
927
Plan Period
2008-13
2010-14
2011-16
2010-14
2011-15
Source: MEED, KFHR
In addition, Islamic banks in Gulf are likely to play a bigger role for aviation finance in 2014. Gulf banks are set to increase
funding to the region’s airlines, which have placed a record number of plane orders as part of their expansion plans. There
is no doubt that airlines will be a strong driver for financing this year as the industry tap financial market to cover their large
capital expenditure requirements. Finance leases, syndication, and sukuks will be among the popular debt instruments for
the aviation industry. In 2013, Emirates airline has indicated that the Dubai-based carrier is considering the sale of sukuks
starting April 2014 as it seeks to raise USD4.5bln to finance the purchase of new aircrafts.
As for Asia, there are tremendous opportunities for Asia to expand the Islamic finance industry in order to support the
fast growing economies of the region. Between 2010 and 2020, Asia needs to invest a total of around USD8tln in overall
national infrastructure projects and an additional USD287bln in specific regional infrastructure projects. Islamic finance
is able to support many strategic areas namely financial inclusion, infrastructure investment needs, as well as to attract
greater inflow of funds into the region. Asian markets are home to a large Muslim population, which facilitates a ready
market for the introduction and distribution of Shari’a compliant products and services, particularly for retail banking.
The progress that Asian countries have made is reflective of more opportunities for the region to benefit from this rapidly
growing Shari’a compliant industry.
ISLAMIC FINANCE Outlook 2014
40
2014 Outlook
The increase of trade flows in MENA, Asia and OIC countries represents a promising opportunity for Islamic trade finance
to become an alternative to conventional trade financing. Islamic trade financing offers a great opportunity for market
players as globally, trade finance is facing funding pressures as European banks continue to deleverage and adjust to the
requirements of Basel III. Given Islamic finance’s emphasis on supporting tangible, real economic activities, trade finance
is a business segment which fits well with Shari’a principles and business model. Therefore, Islamic banks are well-placed
to take advantage of the sizeable trade flows in the OIC, MENA, and the GCC where Islamic finance is making strides.
Total OIC Exports and Imports (2003-2012)
3,000
USD mln
2,500
2,000
1,500
1,000
500
0
2003
2004
2005
2006
2007
OIC Export
2008
2009
2010
2011
2012
OIC Import
Source: WTO, KFHR
Top 10 Intra-OIC Trading Countries (2012)
110
100
90
80
USD bln
70
60
50
40
30
20
10
0
United
Arab
Emirates
Turkey
Saudi
Arabia
Iran
Indonesia
Malaysia
Pakistan
Egypt
Iraq
Syria
Source: ICDT-OIC 2013, KFHR
In the MENA and Asian regions, the current scenario of financing access to SMEs indicates substantial business opportunities
for Islamic finance suppliers to introduce Islamic trade financing products to cater to SMEs needs in the region. As per
market consensus in 2012, it is estimated there are more than 10 million SMEs across the MENA region. However, only
about 50% of these SMEs have access to adequate financial resources from banks and other lending agencies to meet
their business needs. A study by World Bank suggests SMEs access to finance is severely constrained in MENA with only
about 20% of SMEs having a loan or line of credit. Based on these statistics, it is compelling to assume that lack of access
to capital limits the ability of SMEs in the region to operate on full potential. As a result, economic growth and job creation
in the region is not on the efficient frontier.
41
ISLAMIC FINANCE Outlook 2014
2014 Outlook
The rate of SME lending penetration is particularly low in the GCC countries with statistics from 2010 indicating the
penetration rates for individual countries being less than 4%: UAE (4%), Oman (3%), Saudi Arabia (2%), Kuwait (2%),
Bahrain (1%) and Qatar (0.5%). Some of the better penetration rates were in other MENA countries: Morocco (34%),
Lebanon (16%), Tunisia (15%) and Jordan (13%).
SME Lending Penetration in the MENA/GCC Region (2010)
Morocco
Lebanon
Tunisia
Jordan
Egypt
Syria
UAE
Oman
Saudi Arabia
Kuwait
Bahrain
Qatar
0%
5%
10%
15%
20%
25%
30%
35%
40%
Source: World Bank, Union of Arab Banks, KFHR
Overall, Islamic banking industry is poised for further growth, in particular Islamic banks are expected to play greater role
in meeting infrastructure needs, support trade & SMEs activities as well as to achieve greater financial inclusion objective. Apart from continued momentum by the more advanced Islamic banking markets, moving forward, small Islamic banking
markets stand to benefit from the synergies established driven by various entities at global and regional levels. Partnerships
and equity participations of bigger Islamic banks into small and emerging markets are also expected to create scale and
promote transfer of expertise.
Key Growth Drivers of the Global Islamic Banking Industry
• Supported by
growing preference
for Shari'a
compliant products
in these
jurisdictions.
Increasing
global
economic
participation
of Muslim
nations
Financial
crisis
adversely
affecting the
conventional
banking
systems
Business
potential for
countries
aiming to be
Islamic finance
hub
Liquidity
abundance in
key Islamic
finance
jurisdictions
• Opportunities for
enhancing financial
inclusion through
individual / SME microfinance
• Alternative sources
of funding for
various projects in
global markets.jurisdictions
Source: KFHR
ISLAMIC FINANCE Outlook 2014
• Regulatory support
and initiatives in
many jurisdictions
for Islamic banking.
42
2014 Outlook
Sukuk Outlook
In the backdrop of global macroeconomic challenges and financial pressures in major markets, the fast expanding pool
of global Shari’a compliant funds over the years have become an attractive source for various sovereigns, governmentrelated entities and corporates to tap into in order to meet their financing needs. Faced with scarcity of funds in international
markets, a growing number of new and emerging jurisdictions in Asia, Africa and Europe are seeking to attract Islamic
finance investors, particularly from the oil-rich GCC countries, by issuing sukuks to fund their infrastructural development
projects and other budgetary and corporate financial needs. In recent years, jurisdictions that have tap the global sukuk
market include Azerbaijan, Turkey and United Kingdom in 2010; Hong Kong, Jordan and Yemen in 2011; France, Germany
and Kazakhstan in 2012; and Luxembourg, Mauritius, Nigeria and Oman in 2013.
The global sukuk industry is all set to continue its upward trajectory in 2014 as a number of high profile debut sovereign
issuances are expected to take place this year. The sovereign sukuk sector will continue to stoke stakeholders’ interest in
2014 as sovereigns including the United Kingdom, Ireland, South Africa, Tunisia, Mauritania, Senegal and Oman are expected
to debut sovereign issuances in 2014. It is further anticipated that sovereign issuance by the United Kingdom is likely to spur
interest of other non-OIC jurisdictions to tap into the sukuk market. Jurisdictions such as Hong Kong, Kenya, Luxembourg
and France are already exploring options to issue sovereign sukuk as means to raise necessary financing required to support
the budget and infrastructure development plans of these countries. Expectations are also build up on a debut sukuk issuance
from the multilateral Asian Development Bank (ADB) that is reported considering issuing sukuk in 2014, plans which could
evolve into a regular issuance programme. A proposal for sukuk issuance is anticipated to be presented to ADB management
in 1Q14. Meanwhile, the Islamic Development Bank (IDB) has already announced its intention to issue USD10bln sukuk in the
Dubai NASDAQ Exchange in 2014 with plans to continue similar listings on an annual basis.
Selected Sovereign Sukuks Announced for 2014
Issuer Name
Banque Centrale de Tunisie
Central Bank of Mauritania
Central Bank of Nigeria
Central Bank of Oman
Government of Ireland
Government of Senegal
Government of South Africa
Government of Sudan
Ministry of Finance - Egypt
Republic of Tatarstan
UK Sovereign Sukuk
Sukuk Name
Tunisia Sovereign Sukuk
Mauritania Sukuk
Nigeria Sovereign Sukuk
Oman Sukuk
Ireland Sovereign Sukuk
Senegal Sovereign Sukuk
South Africa Sovereign Sukuk
Sudan Sovereign Sukuk
Egypt Sovereign Sukuk
Tatarstan Sovereign Sukuk
Structure
Unknown
Unknown
Unknown
Unknown
Unknown
Ijarah
Ijarah
Ijarah
Musharaka
Unknown
UK Sovereign Sukuk
Unknown
Domicile
Tunisia
Mauritania
Nigeria
Oman
Ireland
Senegal
South Africa
Sudan
Egypt
Russian
Federation
United
Kingdom
Currency
TND
USD
USD
USD
USD
Issue Size
(USD mln)
Unknown
300
200
Unknown
19.493
200
148.723
758
Unknown
Unknown
GBP
328.22
Source: IFIS, Zawya, KFHR
Among the existing jurisdictions, the GCC region will be a critical driver for sukuk issuances on the back of vast infrastructure
and capital expenditure plans in the region over the next ten years. Key Islamic finance markets in the likes of Kuwait and
Qatar alone already have in place infrastructural development projects worth more than USD100bln. The UAE continues
to improve its profile as the regional centre of the GCC with various ambitious development plans involving infrastructure,
tourism and other monumental development projects. The successful bid by Dubai for the Expo 2020 alone is estimated to
see the Dubai government investing USD9bln to prepare for the event. In addition, government related entities in the GCC,
such as Emirates Airlines and Kuwait Airways have also announced fleet expansion plans and the financing for such would
be partly covered by sukuks to be issued in 2014.
43
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Selected GCC Sukuks Announced for 2014
Issuer Name
Arcapita Bank
Al Baraka Sukuk Al Wakala Co.
Alghanim Industries
QIIB Sukuk Funding Ltd (QSF)
Masraf Al Rayan
Al Aqeeq Real Estate Development
Company
National Commercial Bank
ACWA Power International
DB Sukuk Company (DBSC)
Etisalat Sukuk Company
Dubai Investments Park
Tamweel Residential RMBS (Cayman) IV
Sukuk Name
Arcapita Bank Sukuk
Al Baraka Sukuk Al Wakala
Alghanim Industries Sukuk
QIIB Sukuk
Masraf Al Rayan Sukuk
Al Aqeeq Sukuk
Domicile
Bahrain
Bahrain
Kuwait
Qatar
Qatar
Saudi Arabia
Currency
USD
USD
USD
USD
USD
SAR
Issue Size
(USD mln)
550
200
50
2,000
1,000
186.657
NCB Sukuk
Acwa Power Sukuk
Dubai Bank Sukuk(Tranche 1)
Etisalat Sukuk
Dubai Investments Sukuk
Tamweel Residential RMBS
Sukuk IV
Saudi Arabia
Saudi Arabia
UAE
UAE
UAE
UAE
SAR
USD
USD
USD
USD
1,066.61
800
500
1,000
300
235
Source: IFIS, Zawya, KFHR
Malaysia is expected to continue to be the global leader for sukuk issuances in 2014 as a number of infrastructural development
projects stream in under the Malaysian government’s economic transformation programme. The domestic debt capital market
in Malaysia has witnessed the Islamic issuances outnumbered the conventional bond issuances as more than 60% of debt
instrument issuances, on average, have been in the form of sukuk during the last few years. The trend is expected to continue
in 2014 as the Malaysian sukuk market is also a popular domicile for foreign sukuk issuers originating from regional ASEAN
neighbours, the Middle East, parts of Asia and Africa. As at end Dec-2013, Malaysian sukuk market already had a healthy
pipeline of more than 20 issuances lined up for 2014, worth over USD3bln in indicative issuance size.
Selected Malaysian Sukuks Announced for 2014
Issuer Name
Unique Wealth Management
Telepal SPV Sdn Bhd
HP Multimedia
Emery Oleochemicals
Inverfin Sukuk Berhad
Inverfin Sukuk Berhad
Kencana Petroleum
Pengurusan Air SPV Berhad (PASB)
Konsortium Lebuhraya Utara-Timur Sdn
Berhad
Konsortium Lebuhraya Utara-Timur Sdn
Berhad
Sukuk Name
Unique Wealth Management
Sukuk
Telepal Sukuk
HP Sukuk
Emery Oleochemicals Sukuk
Inverfin IMTN Sukuk(Tranche A)
Inverfin IMTN Sukuk(Tranche B)
Kencana Petroleum Sukuk
Pengurusan Air IMTN Sukuk
Konsortium Lebuhraya Junior
Sukuk
Konsortium Lebuhraya Senior
Sukuk
Domicile
Malaysia
Currency
MYR
Issue Size
(USD mln)
304.136
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
MYR
MYR
MYR
MYR
MYR
MYR
MYR
MYR
45.62
39.538
145.985
56.265
4.562
106.448
6082.73
15.207
Malaysia
MYR
237.226
Source: IFIS, Zawya, KFHR
Among other regions, debut non-sovereign sukuk issuances are also expected in Australia, Ireland, Russia and Thailand
which will expand the total number of jurisdictions tapping into sukuk markets to over 30 issuances in 2014. Based on the
announced pipelines, 2014 will also witness the return of France into the corporate sukuk sector after its inaugural and only
issuance in 2012. Meanwhile, more emerging sukuk markets in the likes of Indonesia, Pakistan, Turkey and Singapore have
also announced sukuk issuances for 2014.
ISLAMIC FINANCE Outlook 2014
44
2014 Outlook
Selected Corporate and Government Related Sukuks Announced for 2014 (ex-Malaysia, ex-GCC)
Issuer Name
SGI-Mitabu
Legendre Patrimoine
Société Générale
WOM Finance
PT Multi Nitrotama Kimia (MNK)
PT Bank Syariah Muamalat Indonesia
PT Aneka Gas Industri
PT Multi Nitrotama Kimia (MNK)
PT Citra Marga Nusaphala Persada
Electricity Supply Board
Meezan Bank Limited
Engro Fertilizers Limited (EFL)
B&N Bank
Sabana Sukuk
Islamic Bank of Thailand
Agaoglu Group
Bereket Varlik Kiralama Anonim Sirketi
Bank Asya Sukuk Limited
Global Sukuk Company Limited
Central Bank of Yemen
Sukuk Name
SGI - Matibu Sukuk
Orasis Sukuk
Societe Generale Sukuk
WOM Finance Sukuk
Multi Nitrotama Kimia
Sukuk(Series B)
Bank Muamalat Global Sukuk
Aneka Gas Sukuk (2017)
Multi Nitrotama Kimia
Sukuk(Series A)
Citra Marga Nusaphala
Persada
ESB Sukuk
Meezan Bank Sukuk
Engro Fertilizers Sukuk II
B&N Bank
Sabana REIT Sukuk
Islamic Bank of Thailand Sukuk
Agaoglu Group Sukuk
Albaraka Turk Katilim Bankasi
Sukuk
Bank Asya Lira Sukuk
Goldman Sachs Sukuk
Yemen Salam Sukuk II
Domicile
Australia
France
France
Indonesia
Indonesia
Currency
MYR
EUR
MYR
IDR
IDR
Issue Size
(USD mln)
148.723
0.014
24.775
-
Indonesia
Indonesia
Indonesia
USD
IDR
IDR
50 - 100
-
Indonesia
IDR
41.292
Ireland
Pakistan
Pakistan
Russian
Federation
Singapore
Thailand
Turkey
Turkey
PKR
PKR
USD
19.493
25
USD
THB
USD
USD
159.974
200
TRY
-
57.495
-
YER
232.775
Turkey
United
States
Yemen
Source: IFIS, Zawya, KFHR
Overall, 2014 is likely to witness another exciting year for sukuk issuances with the commitments from new and emerging
jurisdictions to tap into the global pool of Shari’a compliant funds. Underpinning factors that would be driving the momentum
in the global sukuk segment can be summarised as follows:
• Huge Infrastructure Spending Projects
Massive infrastructure and other development projects, particularly in the key markets of GCC and Malaysia, will
drive the sukuk issuances in these key regions where sukuks have become a popular fund raising option among
investors and issuers alike. Sukuks have played a crucial role in funding the infrastructure sector over the past decade,
with proceeds raised from issuances being utilised for both low and high profile projects. The very nature of sukuks,
combined with their flexibility, allow them to be structured in various ways. This has attracted corporate and sovereign
entities to choose Islamic bonds as a viable alternative financing instrument. The infrastructure sector has seen a large
portion of the raised sukuks funds directed to development projects around the globe, largely driven by infrastructure
projects from both the GCC and Southeast Asian regions.
Using infrastructure sukuks, Asian economies can partly support the huge infrastructure investment needs in Asia. It is
reported that in ten-year period from 2010-2020, the 32 ADB developing member countries are expected in need of
USD8.22tln for infrastructure investment. With this estimation, the amount needed for investment annually will reach
up to USD747bln over 2010-2020. About 68% of the total investment is needed for new capacity investments in
infrastructure while the remaining 32% is allocated for replacement of existing assets. East and Southeast Asia will
45
ISLAMIC FINANCE Outlook 2014
2014 Outlook
need the most funds by the end-2020 as both countries require about 66.55% of total Asia infrastructure investment
needs. According to a World Bank report, Africa faces an infrastructure financing gap of USD35bln per year. Overall,
there is a growing need for investment funds in the infrastructure sector and in order to meet the financing gaps, Islamic
instruments such as Sukuk have strong opportunities to penetrate the market.
National Infrastructure Investment Needs in Asia: 2010-2020
Sub-Region
Central Asia
East and Southeast Asia
South Asia
The Pacific
Total
% of Total Asian
Investment Needs
4.5%
66.6%
28.8%
0.07%
Estimated Investment Need
(USD mln)
373,657
5,472,327
2,370,497
6,023
8,222,503
Total Investment per
Year
33,969
497,484
215,500
548
747,500
Source: ADB/ADBI
• Re-financing and Maturing Sukuks
It is estimated that more than USD8bln of international corporate sukuks will mature in 2014, and these would spearhead
fresh sukuk issuances to help re-finance existing debts and corporate financial needs.
• Entry of New Jurisdictions to the Sukuk Market
An expanding range of countries are issuing sukuks to meet their increasing funding needs. In 2014, a number of
debuts are to be made in both the sovereign and non-sovereign sukuk sectors. Within the sovereign sukuk sector,
United Kingdom, Ireland, South Africa, Tunisia, Mauritania, Senegal. Egypt and Oman are expected to debut sovereign
sukuks while countries such as Hong Kong, Kenya and France are said to be exploring possibilities of an issuance. For
the non-sovereign sector, Australia, Ireland, Russia and Thailand are expected to debut in 2014.
• Role of Multilateral Developmental Institutions
Multilateral bodies such as the Islamic Development Bank (IDB) and its affiliated groups continue to play their pivotal
role in promoting Islamic finance. The IDB has itself been active in the sukuk market with issuances. In 2014, IDB plans
to issue USD10bln to be listed in NASDAQ Dubai. The International Islamic Liquidity Management Corporation (IILM),
another multilateral body, established for to create solutions for liquidity management instruments for Islamic financial
institutions, is expected to expand and continue its short-term sukuk issuances. In the third week of January 2014, IILM
has announced to expand its short-term sukuk programme to USD860mln. Furthermore, the Asian Development Bank
(ADB) is also tipped to join the sukuk sector with a maiden issuance in 2014.
• Growing Demand for Islamic Financial Instruments
Growing demand for Islamic financial solutions have helped the Islamic financial industry’s assets to expand at double digit
growth rates over the years. The trend are likely to boost the greater volume of sukuk issuances as Islamic banks need to
hold sukuk for liquidity and capitalisation purpose, Islamic funds industry need sukuk to make fixed-income investments
and the takaful sector, particularly in the family takaful segment, also demand sukuk for their investment management. The
Islamic banking sector is also in need of sukuk that are in compliance with the new Basel III standards, and hence, a new
category of perpetual sukuk is likely to witness an increase in issuances in the near future. As a result, the overall growth
between Islamic finance sectors is expected to grow in tandem, mutually reinforcing each other.
• Improved Knowledge and Enhanced Regulations
In general, increasing awareness and familiarity of sukuks as viable financial instruments among stakeholders have
improved over time across many jurisdictions, including in non-Islamic financial markets. As a result, existing issuers
as well as new entrants have become increasingly at ease with tapping into the Islamic liquidity market through sukuk
issuances. These have been supported also by structural improvements in the sukuk market in the past decade as well
the increasing standardisation of sukuk structures.
ISLAMIC FINANCE Outlook 2014
46
2014 Outlook
Islamic Funds Outlook
Islamic funds’ total asset under management (AuM) as at 20 December 2013 stood at USD72.5bln, compared to only
USD200mln in 2000. While there were only 285 funds in 2004, the number of Islamic funds has grown up to 1,049 funds
as at 20 December 2013. Significant factors driving the Islamic funds industry include a steady increase in the number of
high net worth individuals (HNWIs), rising wealth in the GCC and Asia, anchored by their resilient economic performance
and rising popularity of Islamic funds in recent years. Notwithstanding these factors, due to the greater sensitivity of Islamic
funds to global economic conditions and its modest growth in comparison to other Islamic finance sectors in the past few
years, we expect the Islamic funds industry to expand in the near term with moderate growth and return trends.
Moving forward, the industry will be driven by several key characteristics:
• Consolidation
A number of developments trending in the conventional funds industry are expected to take off among Islamic funds.
In 2013, some of the top conventional fund managers have announced mergers of their funds – a move which to
achieve scale and provide better investment options for shareholders. Within the Islamic funds sector, a more focused
channelling of investments would enable Islamic funds in amassing critical scale – one of the priorities for the sector – by
reducing operational redundancy and engaging a wider pool of investors. Number of Islamic Funds by Asset Size (20-Dec-13)
500
469
450
400
No. of funds
350
300
241
250
203
200
136
150
100
50
0
<USD5mln
USD5mln-USD24mln
USD25-94mln
>USD95mln
Source: Bloomberg, Eurekahedge, KFHR
• Growing Interest of High-Net-Worth Investors
The growing wealth of HNWIs presents a lucrative opportunity for expansion for Islamic fund managers, despite their
religious background. In addition to targeting Muslims HNWIs, Islamic funds could also aim to tap and capitalise on the
larger group of non-Muslim private investors by providing financial services driven by ethical aspects and underpinned
by real economy based nature of Islamic finance. Region wise, US-domiciled Islamic funds are strategically positioned
to tap into assets of HNWIs in North America – a long-time leader on the global private wealth arena. Islamic funds in
Asia are also poised for greater expansion as HNWIs in the Asia-Pacific region is anticipated to become the largest
HNWI wealth market overtaking North America as early as 2014. HNWIs in the Europe is also another class of potential
investor group for Islamic funds in their search for alternative socially responsible investments. 47
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Historical HNWI Wealth Distribution by Region
100%
90%
12.7
80%
11.7
USD tln
11.4
10.8
10.7
10.7
70%
9.1
60%
9.5
50%
11.6
9.7
10.7
30%
9.5
8.3
10.2
10.1
7.3
7.1
10%
1.7
0%
2007
1.4
2008
Middle East
Africa
6.7
5.8
1.0
Latin America
10.9
20%
6.2
Asia-Pacific
Europe
7.4
40%
North America
12.0
0.8
1.5
1.0
2009
1.7
2010
1.2
1.7
2011
7.5
1.1
1.8
1.3
2012
Source: Capgemini, KFHR
In the more traditional Muslim territories too, private wealth – along with the demand for professional and Shari’a compliant
wealth management services – is on the rise. Qatar, for example, has held the title of the world’s wealthiest country by per
capita income since 2010. Other countries in the GCC also have sizeable number of HNWIs whose wealth has been fuelled
mainly by consequential soaring of oil prices and gas exports. Among Asian countries, Brunei, Indonesia and Malaysia are
home to the region’s richest Muslim investors. Top 10 Muslim-Majority Countries by GDP per Capita (2012)
Global Ranking
1
11
25
44
49
51
52
79
84
91
Country
Qatar
Brunei
Kuwait
Saudi Arabia
United Arab Emirates
Oman
Bahrain
Malaysia
Lebanon
Turkey
GDP per Capita (USD)
100,900
54,100
39,900
30,500
29,200
28,800
28,700
16,800
15,600
14,800
Source: CIA World Factbook, KFHR
ISLAMIC FINANCE Outlook 2014
48
2014 Outlook
Key snapshots of HNWIs’ funds in key Islamic finance jurisdictions: - It is reported that the Gulf region has over 100,000 millionaires, with more than 3,000 holding more than USD30mln
in investable assets. Saudi Arabia is home to 23,200 HNWIs and 1,225 ultra-rich residents; the UAE – to 53,800
rich and 775 ultra-rich individuals. There 4,160 HNWIs in Qatar, 13,600 – in Kuwait; the two countries also account
for 290 and 720 super-rich individuals, respectively.
- Indonesia has consistently posted impressive statistics with regard to HNWI population and wealth growth over
the past five years. In 2012, its 16.8% increase in HNWI population was third only after Hong Kong and India. The
total number of HNWIs in Indonesia is forecasted to grow by 123%, to reach just over 83,500 individuals by 2016
– a substantially higher growth rate than in other emerging markets, such as China (83%) and India (103%). As of
2011, there were over 37,400 HNWIs in Indonesia, with a combined wealth of USD241bln.
- Malaysia’s number of HNWIs is forecasted to be more than double from its current 32,000 to 68,000 persons by
2015, with their net worth increasing from USD140.0bln (RM434.2bln) to USD330bln (RM1.0tln). The number of
Malaysian HNWIs with net assets of USD30mln each or more is expected to increase by 51% to 1,294 over the next
10 years from 828 currently. The GDP growth in much of developing Asia will create entrepreneurial opportunities
that will facilitate wealth creation in the region, including Malaysia.
- In Turkey, as of 2012, there are over 94,000 millionaires in Turkey holding USD500bln in wealth, 43% of the total
individual wealth held in the country. This proportion is well above the worldwide average of 29%, indicating a
relatively uneven spread of wealth in the country. The Turkish HNWIs outgrew the worldwide HNWI average during
2007-2012: the worldwide HNWI volumes decreased by 0.3%, whilst the number of Turkish HNWI rose by 7.4%
• Geographical Expansion
A number of regulatory authorities have stepped up measures in creating a more conducive environment for investors
and fund managers. In the Europe, the UK government announced the removal of a stamp duty levied on the redemption
of units in UK domiciled funds and several related reforms in the areas of taxation, regulation and marketing. In the
third quarter 2013, the country unveiled plans of launching an Islamic index to be made available at the London Stock
Exchange. These twin initiatives are expected to spur greater interest from Islamic fund managers in the UK as both a
domicile and geo-focus destination.
The Undertakings for Collective Investment in Transferable Securities (UCITS) directive in the Eurozone area is another
window of opportunity for Islamic fund managers to sell to European investors and add scale. At present, only a handful
of Islamic fund managers have domiciled UCITS funds in European jurisdictions. The local populace largely unaware of
Islamic fund propositions makes a UCITS status certainly worth the effort. In Asia, the proposed mutual recognition programme between Hong Kong and mainland China will permit qualifying
Hong Kong domiciled funds to sell in the mainland and vice versa. Islamic funds, therefore, if they choose to be
domiciled in Hong Kong, will stand a chance to enter the Chinese investment market and take advantage of its
increasing demand for investment products (of retirement type, in particular).
Renewed economic growth in the US bodes well for US-domiciled Islamic fund managers who will now have a bigger
home ground investor market and better performing underlying assets. In Latin America, Islamic fund managers might
look into Brazil in the medium- to long-term as a passage to reach the continent’s wealthy institutional and private
investors and to share in its economic gains. Being one of the largest halal produce exporters in the world, Brazil has
cemented a reputation as one of the most promising markets for Islamic finance on the continent. Islamic funds could,
hence, capitalise on the growing awareness of and interest in Islamic finance in the country by offering investors Islamic
asset management services under the guise of socially responsible investments.
49
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Islamic Infrastructure Funds
Infrastructure in the context of Islamic finance is an area of definite interest, for investment opportunities in infrastructure
are vast. The pipeline of construction related projects across Muslim territories across Africa, Asia and the Middle East is
witnessing significant investment inflows from global infrastructure players.
For example, infrastructure projects planned for the next five years in Indonesia, valued at around USD250bln, have
attracted public-private partnership (PPP) investors from Japan, India, South Korea, and the United States; in addition, the
local government has increased its budgetary allocation to infrastructure by as much as 15% in 2013. The government
in Turkey is encouraging capital investments through PPP structures focusing on privatising ports and airports. China is
continuing its partnership with African countries such as Nigeria and Kenya, building new roads, rails and port facilities
mainly in view of future export shipments. Foreign financing will also be needed for implementation of South Africa’s
USD430bln 15-year National Infrastructure Plan with 18 integrated programs for transport, energy, water, and sanitation.
Global Infrastructure Demand (2013-2030P)
70
57.3
60
USD tln
50
40
30
20
16.6
10
4.5
0
Roads
Rail
11.7
Power
Water
9.5
2
0.7
Ports
12.2
Airports
Telecom
Total
Source: McKinsey, KFHR
In the Middle East, most of the planned infrastructure projects are government-sponsored and aimed at economic
modernisation and diversification. Led by Saudi Arabia and the UAE, priority projects include desalinisation plants, solar
power generators, roads, and rail systems. A pan-Gulf rail network worth USD25bln should be completed by 2017; tourism
and events led infrastructure book is expected in Dubai.
Against this backdrop and widespread optimism about the global economic recovery, it is easy to understand why Islamic
fund managers are excited about infrastructure. We, therefore, expect launching of new infrastructure focused Islamic
funds in 2014 and beyond and anticipate good performance from them. The prominence of inflation-hedge infrastructure
funds in on the rise among conventional fund managers too, with infrastructure funds now holding USD4.7bln in assets. An Islamic infrastructure fund of developmental type was set up in 2009 by the Islamic Development Bank and the Asian
Development Bank with focus on infrastructure investments in borrowing members common to the two multilateral
institutions. Islamic infrastructure funds set by private players, however, will most likely invest in master limited partnerships
(MLPs) and other companies that own and operate a variety of infrastructure assets.
ISLAMIC FINANCE Outlook 2014
50
2014 Outlook
In 2014, the Islamic funds sector should benefit from steady global economic recovery which will bolster investor confidence
and performance of underlying invested assets. Much of the anticipated recovery will come from advanced economies,
while the growth trajectory of emerging countries is expected to remain stable. In this light, greater investor focus will be
placed on policy decisions and reforms in individual emerging economies. Hence a positive demand outlook bodes well
for fund management companies.
Attracting institutional investors, therefore, is of the essence for a more active progression of the Islamic funds sector. Of
special interest, in this regard, are Islamic pension funds, takaful companies and Islamic trusts (awqaf). Islamic pension
funds’ channelling of investments into Islamic funds is a definite route to growth for Islamic funds. The assets of Islamic
pension funds are concentrated mostly inside state-run schemes, while private systems have only recently made inroads
into the markets. According to an estimate, if state-owned pensions in major Islamic markets shifted a portion of their
money into sharia-compliant schemes that could add between $160 billion and $190 billion to the sector. Inroads of private
Islamic pension funds in majority-Muslim countries or even in the western country with sizable Muslim population would
definitely further spur the growth of the global Islamic funds and asset management industry.
The Islamic funds sector can also be supported by investments from takaful companies who are allowed to outsource a
certain portion of their investment management activities. The growth in family takaful contributions will have a positive spill
over for Islamic fund managers, especially in such key markets as Malaysia, Saudi Arabia and the UAE, as well as in rapidly
developing Indonesia and Turkey.
Islamic trusts and foundations exist in almost every Muslim jurisdiction and have an important role to play in the development
of Islamic funds and overall Islamic finance. Their potential is impressive: the waqf sector in Malaysia, for example, is
estimated at around USD325bln, USD267bln in Saudi Arabia, and USD82bln in Egypt. With regulatory reforms, gradual
liberalisation of revenue models and diversification of investment options (of cash awqaf, in particular), Islamic trusts could
be expected to start buying into Islamic funds with an objective to fulfil their mandates by earning stable returns at regular
payout intervals. Potential Demand Drivers for Islamic Fund Services
Islamic
Pension
Funds
Islamic
Trusts
(Awqaf)
Takaful
Operators
Potential Demand
for Shari’a compliant
investments from
various investors
classes
Retail
Investors
Islamic
Banks
HNWIs
Source: KFHR
51
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Takaful Outlook
In 2014, gross takaful contributions of the global takaful industry is expected to surpass the USD20bln mark. The growth
in the gross takaful contributions are expected to remain in the double digits (forecasted to be more than 15% y-o-y in
2014). Moving forward, the growth opportunities for the global takaful industry in 2014 and beyond are bright on the backs
of several economic, financial and socio-demographic trends in MENA and Asia regions.
Global Gross Takaful Contributions Forecasts – by Region (USD mln)
10747
9209
8199
7229
7153
6388
2720
2292
Saudi Arabia
Malaysia
2311
1984
1296
1012
589 658
GCC
Southeast Asia
(ex-Saudi) (ex-Malaysia)
Africa
2013E
239 251
216 343
South Asia
Levant
Middle East
(Non Arab)
Total
2014F
Source: World islamic insurance directory, EY, KFHR
Growth drivers of the global takaful industry in 2014 and beyond:
• Low Insurance-to-GDP Penetration Rates in Key Islamic Financial Jurisdictions
There are ample opportunities for insurance and takaful providers together as a whole to expand on their market shares
given that the top 10 Islamic financial jurisdictions (excluding Iran) have very low insurance-to-GDP penetration rates
averaging below 2% as per latest statistics available. As a comparative measure, jurisdictions such as Hong Kong and
Japan had insurance-to-GDP rates of 11.5% and 10.1% respectively during the same year. Hence, key Islamic financial
markets that are characterised by large untapped insurance sectors present vast opportunities for takaful operators
to penetrate into in order to expand their market share. Moreover, with growing affluence of the Muslim economies,
particularly in the oil-rich GCC, coupled with growing awareness among the population on the benefits of takaful
protection, the demand for takaful products are also expected to increase significantly boosting the takaful sector as a
whole.
Insurance Penetration Rates as Percentage of GDP in Selected Asian and GCC Countries (2011)
Name of Country
Kuwait*
Pakistan*
Qatar*
Saudi Arabia*
Bangladesh*
Oman
Turkey*
Indonesia*
Insurance Penetration
0.5%
0.7%
0.8%
0.8%
0.9%
1.1%
1.3%
1.5%
Name of Country
United Arab Emirates*
China
Thailand
India
Malaysia*
Singapore
Japan
Hong Kong
*Represent the top 10 Islamic financial jurisdictions in terms of assets (excluding Iran)
Source: Arab Insurance Market Review, E&Y, KFHR
ISLAMIC FINANCE Outlook 2014
52
Insurance Penetration
2.0%
3.8%
4.3%
5.1%
5.1%
6.2%
10.1%
11.5%
2014 Outlook
• Development of the Takaful Sector in New and Existing Markets
The global takaful industry is bound to witness a spur in gross takaful contributions with the entry of new operators
in both exisiting and previously untapped markets. In the first week of 2014, the GCC region witnessed the inaugral
entry of Oman in the takaful business as Oman’s first takaful company Al-Madina Takaful commenced operation on 1st
January 2014. Oman’s entry in the takaful market is expected to drive the growth in gross takaful contributions of the
GCC region particularly with Oman’s low insurance-to-GDP penetration rate of 1.10% that offers abudant opportunities
to expand underwriting and family takaful operators in the country. In Asia, it is anticipated that Philippines will become
the sixth country in ASEAN to enter the takaful industry as the Insurance Commission of the Philippines is working to
introduce takaful regulations. The commission aims to provide takaful products to the Filipino Muslims affected in the
calamity-hit island of Mindanao and to realise this, is consulting with experts in Islamic banking and insurance. However,
to what extent will takaful gain market share in Philippines remains to be seen as Islamic finance in Philippines is virtually
in an introductory and conceptualisation stage of development in the country.
The number of full-fledged takaful operators has reached 200 as at year-end 2013 with four new operators joining the
industry from the North African region. Countries in Africa exploring and expanding on Islamic finance (including takaful)
include Morocco, Tunisia, South Africa, Senegal, Kenya, Nigeria and Djibouti and the takaful sector is expected to be
part and parcel of this expansion. In Asia, countries such as Afghanistan, Azerbaijan, Kazakhstan, Thailand, Singapore,
Maldives, Sri Lanka and others where Islamic finance remains as a niche are also promising markets which could
witness expansion in the number of takaful operators during 2014 and beyond, thus contributing towards an expansion
of the takaful industry.
• Regulatory Developments in the Takaful Industry
Takaful regulations over the years have been very instrumental role in shaping the growth trajectory of the global takaful
industry and the year 2014 is no exception. A number of regulatory developments and government policies have been
put in place that will spearhead the growth of the takaful and insurance sectors in various markets during 2014. For
instance in GCC’s second largest market, United Arab Emirates, a new regulatory law which makes it mandatory for
all UAE employers to provide health insurance to employees is bound to boost family and medical takaful segment in
the country. Furthermore, a new law by the emirate of Dubai which makes it mandatory for every citizen to have health
insurance coverage (citizens and expatriates alike) is also promising opportunity for family takaful operators to expand
on market share in a domestic industry traditionally dominated by general takaful business.
In South Asia, based on a regulatory amendment introduced in 2012, Pakistan, the largest Islamic financial market in
the region, had allowed introduction of takaful windows by conventional insurance companies as a measure that was
likely to spur the takaful market share in the country. However, a group of five existing takaful operators in Pakistan had
earlier challenged this ruling in court citing such a measure would distort the Islamic insurance industry in Pakistan. In
November 2013, the group reached a ground breaking agreement out-of-court with the plaintiffs agreeing to withdraw
their petition challenging the Takaful Rules 2012, while leaving the provision about window operations fully intact.
As such, the biggest players of conventional insurance in Pakistan have announced to launch their Islamic window
operations in 2014 which is expected to result in tremendous expansion of the Islamic insurance segment in Pakistan,
a country with a very low insurance-to-GDP penetration rate of 0.7%.
53
ISLAMIC FINANCE Outlook 2014
2014 Outlook
Expansion Opportunities for Takaful Operators in Family Takaful Products in Asia
Takaful operators
have strong
oportunities to
expend on family and
medical business
lines particularly in
South-Eastern Asia
and Eastern Asia
region.
Studies have
indicated the health
protection gap in the
Asia Pacific region
could reach
USD197bln by 2020.
The biggest health
protection gaps by
2020 will be in
China, India, Japan
and South Korea.
Source: KFHR
Among the remaining regions, Middle East (Non-Arab) is expected to perform better in the year 2014 as a milestone
agreement between world super powers and Iran, that could potentially pave way for lifting of sanctions on Iran, is likely to
improve the battering Iranian economy and takaful operators are likely to share in the success of an overall improvement
in the economy.
• Economic and Infrastructure Development Projects in Islamic Finance Jurisdictions
Economic growth and infrastructure development have a crucial link with the insurance segment as growing wealth
accummulation, in part, drives demand for family and medical takaful products while infrastructure and real estate
development projects provide avenues for insurance providers to provide necessary coverage and expand on
underwriting operations. A number of Islamic financial markets with ambitious infrastrucutural development plans in
place are likely to boost the growth of the global takaful contributions. Qatar is one of the best examples here as the
country has been one of the best performing takaful markets in GCC in terms of growth in contributions given its
ambitious over USD100bln infrastructure spending program on road to the 2022 World Cup to be held in the country.
The general takaful operators have abundant opportunities in 2014 and beyond to expand on their underwriting
operations by providing for these various infrastructure and development projects. Such a trend is already visible as
based on a sample of takaful operators in Qatar, it is observed that the most valuable business line in Qatar during 2012
was for the Fire and Property takaful segment generating 41.53% of sample gross contributions.
• Socio-Economic and Demographic Profiles of Key Markets
The socioeconomic and demographic profiles of key Islamic finance markets are ideal from a market segmentation
and penetration point of view for the takaful industry, particularly for family takaful operators. For example, the gross
takaful contributions in the two largest takaful markets, Saudi Arabia and Malaysia, are expected to continue growing at sustainable levels during the year 2014 as the economic and demographic profiles of both countries are supportive of
an expansion in the domestic takaful industry during 2014 and beyond. The GDP growth of Saudi Arabia is forecasted
to average over 4% during the years 2013-2015 while the country has over 90% of the population under the age of
55 which reflects opportunities for family takaful operators to expand on market share particularly with the expatriate
population which may not be covered by the government facilities available for citizens. Similarly, in the case of Malaysia,
the GDP growth is estimated to average over 4.5% during the years 2013-2015 while the country has an over 87% of
the population under the age of 55. Given that Malaysia is the world’s largest family takaful market, these statistics are
supportive of a resilient growth in the family takaful as well as overall takaful sector in the country.
Other countries such as Indonesia also provide tremendous potential for takaful operators to expand on market share
as estimates indicate that currently takaful products only constitute 2% of the Indonesian insurance market while nearly
80% of Indonesians were uninsured in 2012. This factor, combined with increasing awareness about insurance/takaful
products among the population indicates a sizeable untapped market for the takaful operators to target in the year
2014.
ISLAMIC FINANCE Outlook 2014
54
2014 Outlook
Islamic finance is the fastest growing segment of the global financial industry and the takaful sector is bound to share the
success of this growth as a holistic Shari’a compliant system entails use of Islamic financial products including takaful.
Therefore, with the double digit growth rates of Islamic financing of various projects through Islamic banking and capital
markets, takaful sector also has potentials to expand by providing the necessary coverage for the projects utilising Islamic
financing. For example, in countries like Maldives and Sri Lanka, were takaful operates as a niche segment, as Islamic
finance gains momentum in the global markets, the growth for Islamic financial services in these countries has also made
gains. Sharing in these gains are also takaful operators. For instance, the sole takaful company in Maldives, Amana Takaful,
generated gross takaful contributions worth USD4.65mln in 2012, reflecting a 66% y-o-y growth while the sole Sri Lankan
takaful operator generated USD16.5mln in gross takaful premiums in 2012, reflecting a 33% y-o-y growth rate.
The global takaful industry is expected to continue growing at double digit growth rates over 15% in the year 2014.
However, the growth would mainly stem from emerging regions such as Southeast Asia (ex-Malaysia) and GCC (ex-Saudi)
where fast expanding markets including Indonesia, United Arab Emirates and Qatar drive the Islamic financial sector to new
growth trajectories. Furthermore, the entry of new jurisdictions like Oman and the expected entry of Philippines are also
bound to boost the gross takaful contributions in these regions. The South Asian region will be mainly driven by Pakistan
and Bangladesh, and in particular Pakistan, where 2014 will see the introduction of Islamic insurance window operations
by conventional insurance companies in the country. The progress made in negotiations between world superpowers and
Iran that may lead to lifting of sanctions on the world’s largest Islamic finance market, Iran, is also positive development for
the growth of the global Islamic financial assets including takaful. Saudi Arabia and Malaysia will continue to lead the global
takaful segment being the two largest and most developed takaful markets, although the growth in Saudi is anticipated
to fall below average global takaful industry growth rates as the domestic insurance market gets very competitive with a
large number of players. As per estimates, there are more than 30 takaful operators in Saudi Arabia in 2013. Despite the
positive growth forecasts for the Levant and African regions, it is yet to be seen how the markets would take shape in 2014
as various internal problems in key markets of Egypt, Syria and spill over effects on Lebanon would have an impact on the
economic and financial activities of these countries, which will possibly affect the takaful sector in particular and Islamic
finance in general in these countries.
55
ISLAMIC FINANCE Outlook 2014
Conclusion and
Challenges Ahead
Conclusion and Challenges Ahead
The Islamic finance industry is at its relative infancy with just about four decades of experience since its inception in the
1970s. Yet, the progress and developments in these four decades have been phenomenal having grown from a modest
USD150bln worth of assets during mid-1990s to a forecasted USD1.8tln as at end-2013. The industry’s double digit
growth rates over the past decade promising of a strong future potential. The industry has also sustained and remained
resilient to the global financial crisis of 2008/09 which depleted the assets of major conventional finance institutions.
There remains substantial market potential for Islamic finance suppliers to tap into given the following factors among others:
• Infrastructure and government developmental plans in OIC jurisdictions
• Increasing participation of western financial centres to tap the industry and this will create healthy competition and
encourage greater innovation
• Greater partnership among the regulatory and supervisory bodies to enhance regulatory frameworks for Islamic
financial institutions
• Low penetration rates of the various Islamic finance sectors in most jurisdictions
• Strong support from various multilateral and international organisations
• Increasing trends of cross-jurisdictions partnership and financial linkages to facilitate cross border financial activities
of Islamic finance
• Increasing awareness and familiarity among stakeholders on the value propositions of Islamic finance
As per KFHR report entitled “Global Islamic Finance and Emerging Markets”, eight out of top nine Islamic finance jurisdictions
in terms of assets (excluding Iran) are classified as emerging markets by the major financial index suppliers such as DowJones, MSCI, FTSE, etc. with the only exception being Saudi Arabia. Collectively, these eight Islamic finance jurisdictions
contribute approximately 87% of sukuk outstanding globally, 32% of global Islamic banking assets, and as much as 40% of
total Islamic assets under management. This lead to another possible concern - Islamic finance’s fragility and vulnerabilities
due to the industry’s infancy and dependency on advanced economies. The industry is operating within the current
liberalised and globalised financial environment and various economic and financial characteristics of emerging markets
are important and worth the attention of the Islamic finance industry players. Recent impact of conventional emerging
market equity and bond indices to Islamic finance from indications of tapering in US quantitative easing programme were
felt by Islamic equity and sukuk indices. The interest of conventional financial institutions investing in Islamic finance papers
is a positive sign for the Islamic finance industry as it indicates the general acceptance of Islamic finance instruments and
that sukuk can appeal wider investor base. However, conventional financial institutions are not constrained to hold Shari’a
compliant papers alone. As a result, they are able to divert funds across sectors in search of higher returns. Advanced risk
management and diversification strategies must be pursued to enhance resilience.
Islamic finance offers alternative financing mechanisms to emerging markets to support their economic development drive
in several areas such as infrastructure needs, enhancing trade relationships amongst OIC member countries, supporting
capital expenditure needs of governments as well as to improve the financial inclusion ratios of various jurisdictions.
However, emerging markets have its own sets of challenges, despite its robust potentials, many emerging markets have
issues of underdeveloped capital markets, politically stability (more apparent in MENA) and less developed regulatory and
financial infrastructures. As such, development of facilitative environment for Islamic finance to take off progressively would
require surmountable of investment in setting up the building blocks of the Islamic finance ecosystem. MENA for example,
despite its Islamic finance growth opportunities, the financial sector in MENA countries are less developed (particularly the
capital market) and for Islamic capital market to have stronger footing in the region, it requires greater level of efforts to
penetrate this market.
ISLAMIC FINANCE Outlook 2014
58
Conclusion and Challenges Ahead
As highlighted in this report, trade financing is one of the ready opportunities available for Islamic banks to tap. However, one
of the challenges to Islamic trade financing sector is the readiness of Islamic financial institutions in proactively developing
products to meet the changing needs of the market players involved in global trade. It appears the concepts of Islamic
trade financing are yet to be fully explored by stakeholders in major Islamic finance jurisdictions. The general preference of
the Islamic banks is attributed to be direct lending over trade financing, keeping transactions straightforward and simple.
Yet, the changing global trade flows open up windows for Islamic banks to expand in trade finance. By expanding this part
of Islamic financial product, it will open up to wider sets of opportunities to Islamic finance e.g. halal industry. Importantly,
Islamic financial institutions need to demonstrate how Shari’a compliant products are economically feasible and competitive
as per the conventional finance in order to generate further growth and acceptance of the industry’s offerings.
Islamic microfinance is another important area as financial objective could be pursued via Shari’a-based finance solutions. Five Asian countries among the top 10 nations with largest Muslim population and these 5 countries are home to 1bln
Muslims. By 2020, more than 60% of Muslims would be residents in Asia. The opportunities for Islamic microfinance
are vast, underpinned by strong economic growth in emerging markets. Government ambition to reduce poverty levels
and enrich the standard of living, the growing preference for Shariah-compliant products, and a large bourgeoning
Muslim population are among the factors propelling growth in Islamic microfinance. However, challenges that need to
be overcome include 1) Lack of education and awareness campaigns, as well as product reach 2) Formulating products
with low operating costs 3) Lack of knowledge and expertise of Islamic banks to undertake microfinance activities without
compromising their institutional viability, competitiveness and sustainability 4) Absence of regulations as well as effective
policies to support the microfinance industry. For the industry to develop further, Islamic microfinance should be integrated
into a country’s mainstream banking and financial system. This will help to create greater awareness of products, encourage
product innovation, improve access to microfinance, widen and strengthen the distribution channels, as well as result in
standardisation of regulation and improved transparency.
Overall, Islamic finance in 2014, is set to experience another increased momentum, particularly in the sukuk market with
the issuances by few sovereigns e.g. UK and Luxembourg. The Islamic banking sector is likely to witness a surge in
demand underpinned by greater economic participation of Muslim nations as well as driven by stronger demand from the
population towards Shari’a compliant or ethical financing solutions. Instrumental roles played by multilateral organisations
and regulatory bodies are expected to further benefit the Islamic banking and takaful industry especially to low-to-medium
income customers as financial inclusion objective has been strongly emphasised moving forward. Thriving interest of key
global/regional financial centres in developing Islamic finance, for instance London, Hong Kong, Singapore Luxembourg,
further adds weight to the strong prospects of Islamic finance as markets globally look for alternative sources of funding
and investment avenues.
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ISLAMIC FINANCE Outlook 2014
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Islamic Finance
Outlook 2014
KFH Research Ltd
KDNPP15024/03/2013 (031903)
January 2014