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KFHR may also act as market maker, underwriter, placement agent, investment banker or other advisor to any issuer (or party related to the issuer) of the Investments referred to herein; and any member of the KFH Group may have received or may expect to receive remuneration or other benefits for such services or Investments. The views or opinions expressed herein reflect KFHR’s view as of the date of this publication and may not necessarily represent those of the KFH Group. KFHR accepts no obligation to correct or update the information, opinions or statements in this publication. Copyright protection exists in this publication and it may not be reproduced, distributed or published in whole or in part by any person for any purpose. If you are not the intended recipient you must not use, disclose or distribute the information in this publication in any way. KFHR and the KFH Group accepts no liability whatsoever for any direct, indirect, consequential, special, incidental, punitive, exemplary or other damages and loss (including loss of profits) arising from any use of this publication and/or further communication, disclosure, or other use of this publication. © 2014 KFH Research Ltd. All rights reserved. KFH Research Ltd (LL06161) Suite 17.05 & 17.07, Level 17, GTower, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia. General Line: (+603) 2303 5011 Fax: (+603) 2300 2815 Website: www.kfhresearch.com 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. 59 ISLAMIC FINANCE Outlook 2014 This page has been intentionally left blank This page has been intentionally left blank This page has been intentionally left blank Disclaimer & Disclosure By accepting this publication you agree to be bound by the foregoing terms and conditions. You acknowledge that KFH Research Limited (“KFHR”) is part of the worldwide Kuwait Finance House Group of subsidiaries and affiliates (KFH Group), each of which is a separate legal entity. KFHR alone is responsible for this publication and for the performance of related services and/or other obligations. 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