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Constraints on Growth in Islamic Finance

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Mohamad Ghandour

on 14 May 2014

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Transcript of Constraints on Growth in Islamic Finance

The Islamic finance has drawn attention
Due to the growing financial liberalism and the increased awareness of the Sharia
Considered one of the main components in the revolution of the financial market
Rise in profits from $150 B in the 90’s to $1 T in 2010 because of Sukuk and Takaful
Which contributed greatly in the growth of profits of the financial sector (83.4% of Islamic assets)
Expectations were placed by 2012 for the Islamic finance assets to reach up to $1.6 T

Islamic finance industry overview
Islamic finance’s ability to cover up financial crisis
Efforts in order to develop this concept through:
new markets
financial structure
researches and development
These will provide stability and prosper the economy.
Consequently efforts are made to achieve higher level of cooperation to project the effect of enhancing the understanding of Islamic finance.
Islamic finance is working on achieving greater international integration
Through attaining higher levels of cooperation by regulators and Islamic institutions to boost the concept furthermore
Due to the effectiveness and importance of Islamic finance concept
Several countries are striving to adopt this model and convert to a financial hub
ex. London, Hong Kong and Singapore
potential candidates such as Luxemburg, South Korea and Australia
Islamic finance industry overview
To reach mass awareness microfinance concept should be adopted
Focuses on approaching new unexploited markets
Concept was founded in 1963 in Egypt
But still under developed since is provided by non-governmental institutions
To solve this issue
microfinance should bind to Islamic Banking
to reach full scale potential by creating awareness
encouraging product innovation
improving access to microfinance
widen the distribution channels and transparency.

Reaching Critical Mass
Emerging markets 37% of the global economy now account for 46%,
US banking assets $13.3 T by 2010
Expected to reach $85 T by 2011
Islamic finance growth is considered minimal when compared to conventional institutions

The Global Financial System
Constraints on Growth in Islamic Finance
Presented by Mohamad Ghandour & Sharief Abdelgadier
Competition: Islamic banks and conventional banks
Although Islamic Banks lies unaffected by the financial crisis
Islamic banks generates a profit of $4.74 B in 2010
Conventional banks incurred a loss of $4.2 B
These outcomes challenged conventional banks to unite to become a larger entity
This led in 2010 to recover from the crisis and increase their net profit by 139 % compared to a decline in Islamic Banks to 55 % loss in net profit
Bloomberg: after the financial crisis big banks bought smaller institutions thus increasing their market cap
Bank of America, that’s why Islamic institutions will continue to be categorized as small institutions with respect to the largest institution present in America which makes up to 58% of the total US Bank assets.

Facing the Challenge
Reaching Critical Mass
Approach new market segments
Unite grounds in order to achieve a greater impact on current and potential market segments
Through acquiring expertise and capital.
Essential funding sources should be available in order to penetrate the market and influence investors.
GCC countries (potential candidates) for this expansion
Medium and small enterprises (potential partners) in order to provide capital in return.
To manage liquidity issues the Shariah should be enhanced by:
Acquiring highly skilled workforce
Recruiting qualified stakeholders
Performing the needed trainings by educational institutions.
Adopting new concepts and harmonizing those with the Shariah
Undertaking researches in specialized areas
Exchange of ideas will lead to the development of Islamic financial services and attracting potential clients

Financial Crisis failure of certain regulations (uncredit worthy customers)
Reevaluate the concept and work on a new regulation to avoid such failure
New regulation focused on:
ethics, fairness and accountability
Will lead to economic, social and environmental sustainability
Islamic Finance has become an essential component for the completeness of the financial system
Will impact the global financial regulation and thus improve the regulations

The Regulatory challenge
To guarantee an integrated Islamic financial service that could absorb and is able to recover from such crisis
a set of rules and standards should be applied through merging with the governance process
In order to build a more sustainable financial institution liquid,
equity-based risk sharing should be implemented this would shield economies from financial crisis.
In 2005 the second standard was introduced by IFSB
It covered capital adequacy,
Ensures that sufficient capital is provided to cover the risk of Islamic institutions operations

The Regulatory challenge
Malaysia wasn’t affected by the financial crisis
Due to the limitation of the outflow of foreign investment
And strict compliance with the Islamic principle
Considered one of the developers of the Islamic finance concept
Capital market
In parallel with the conventional system
Malaysia GDP will grow from 4.6 to 5, 6 times by 2020
Development of a comprehensive and vibrant Islamic financial industry lead to such results
To maintain this growth standards have been set to be met for
market discipline
risk management
customer protection
Malaysia ranked the 10th most competitive nation in the world economic report by IMD

Case Study: Malaysia
The implementation of the Shariah will:
build consumer confidence
provide flexibility to be innovative
The SGF (Shariah Governance Framework) was introduced by Bank Negara to Shariah compliant
A great step to move to an Islamic financial economy
Malaysia implemented the international Islamic Financial center
It focuses on providing awareness
Encouraging taking initiatives
This will attract new customers to Malaysian economy and strengthen its position as an International Islamic finance hub
These initiatives will:
Maintain the confidence of the public
Promote competitive financial system
Ensure the development of a stable financial system
Prevent risk
Promotes good market practice
Standard ensuring IFI’s are managed by capable management teams and protecting customer’s interest.

Case Study: Malaysia
It is important to adopt these standards in our economy
to strengthen our stability and ability to absorb financial crisis
or at least to be able to recover with the least damages possible through joining forces
expanding Islamic finance concept
creating more hubs that will enable them to compete with conventional banks through:
large scale institution
microfinance and
sound regulations

Full transcript