Islamic Finance Global view by Davis Kallukaran

Transcription

1 Horwath Mak Ghazali llc Member of Crowe Horwath International Islamic Finance Newsletter Vol Islamic Finance Global view by Davis Kallukaran Our world is still reeling from the effects of the economic crash. The conventional Banking system had been very badly affected. However, the Islamic Finance sector has grown despite the downturn. This is not about saying that Islamic finance holds all the answers to the global economy s ills. It s not about making a simple pros and cons comparison with conventional banking. But it is about increasing options, maximising the services we have to offer. And, it is ultimately about making Crowe Horwath the preferred choice for Islamic Finance services. Islamic Finance industry is existent in about 75 countries across the globe providing finance facilities through some 300 Islamic banking institutions. Globally the Islamic Finance market has grown 50 per cent faster than the traditional banking sector. Islamic Finance investments are now worth 1.8 trillion dollars with the industry forecasting this to grow to $2.5 trillion by Malaysia leads in terms of industry maturity and sophistication. The six middleeastern countries - Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman known as the GCC Countries (Gulf Cooperation Council) accounts for two thirds of the global Islamic assets. Opportunities in Islamic Finance Characteristics of Islamic Finance Fundamental tenants are derived from Sharia, the moral code and religious law of Islam Concept is grounded on ethics and values Absence of interest-based transactions Avoidance of any economic activity involving speculation Prohibition on production of goods and services which contradict the values of Islam Income should be derived from shared business risk Asset-backed transactions Credit and debt products are not encouraged Restrains consumer indebtedness Islamic banking is community banking, Serving communities, not markets and is Open to all clients Instruments of poverty-reduction are inherent part of Islamic finance Challenges and issues are opportunities for the Scholars, experts, consultants and accountants. The increasing acceptability of Islamic Banking in Europe and the significant Muslim population are the catalysts to the development of practice in Islamic finance. Islamic Finance Industry is witnessing the structuring of increasing number of complex products to support aviation, shipping, construction projects and structured finance industries. There also exists huge potential to tap the GCC sovereign wealth of US$ 1.4 trillion trapped in conventional products. Takaful, which literally means insurance, is another area to be explored. Takaful Industry is likely to reach $ 12 billion with estimated growth of 31% to double by year Takaful Industry is only 1 % of global insurance market even though Muslims make up to 23% of global population. Going Forward The outlook for the Islamic banking and financing products remains positive, with expanding universe, improved primary and secondary market liquidity and strong institutional and retail investor s demand. Islamic finance can play a more significant role as a source of liquidity for corporate borrowers and plug the liquidity gap and also assist in assessing funding Options for Islamic Issuers 1

2 Challenges and Issues Despite significant growth over the past decade and achieving a significant milestone of USD 1 trillion, Islamic finance industry is virtually insignificant compared to conventional financial industry standards. Key Challenges facing Islamic Banks world over are too many Risk management: With the Basel II implementation, Islamic banks and those undertaking Islamic banking must now develop and fine tune effective internal controls and risk management techniques. Capital adequacy : How to comply with the requirements of the Basel II Accord in Islamic Banks Liquidity Management: Due to limited Sharia compliant avenues. Islamic Banks have an inherent tendency for having very high level of liquidity to meet with the asset liability match and is forced to secure investments in Islamic financial products which results in very low yields. Asset concentration : Risk due to Limited eligible asset class Legal & Islamic law Compliance risk : Islamic Banks and conventional banks are regulated in many countries by the same set of rules. Islamic financial product s development and execution : Sharia compliant products require additional time, greater product complexity, higher subject knowledge and objective skill requirements Limited number of qualified and skilled personnel in capital market issues from Sharia perspective. Non availability of legal and regulatory framework and Shariah interpretations based on prevalent Fiqh Al Islamic. Customer base limited to Primary HNWI s Non availability of uniform reporting and rating standards. Services Crowe Horwath can offer to Islamic Banking Business plan for licensing requirements Policy-procedure manuals Establishing a Sharia Supervisory Board (SSB): Develop Islamic Window Structure Structuring Syndicated Islamic Loan Structuring Sukuk Issues Islamic debt and equity raising Develop Asset liability Management Strategy Market research for Islamic products Feasibility Study for Islamic products Accounting treatment of products under AAOIFI standards Establish Risk Management Practices Structuring Charity Fund Review of Internal controls In Islamic Financial Institutions Audit of Islamic Financial Institutions Tax Advisory Training assignments Funding requirements for Banks to support their entry with Islamic Banking Assess the staffing requirement, and assistwith the recruitment. 2

3 Growth of Islamic finance in the UK Courtesy: article published by the UK trade and investment in last October The UK has provided Islamic financial services for over 30 years, and is a leader amongst Western countries in this field. At the end of 2012/13 the global market for Islamic finance was worth around US$1.3 trillion, with US$19 billion of reported assets in the UK. There are 716 Islamic financial institutions spread over 61 countries. As the Islamic finance industry has developed the UK has created a market where Islamic banks and their clients are not treated any differently to their conventional counterparties. Initiatives include: Removing double tax on Islamic mortgages Extending tax relief on Islamic mortgages to companies as well as to individuals Reforming arrangements for issues of debt. In 2012 the UK was ranked the 9th largest country by Sharia compliant assets with more than 20 institutions offering Islamic finance and six wholly Sharia compliant banks. The UK already offers great growth potential to Islamic financial services: More than 20 international banks operating in the UK are working in Islamic finance, 6 of which are fully Sharia compliant British banks are increasingly active in the international Sukuk market UK domestic banks are expanding their Islamic finance Investment opportunities in the UK Islamic finance education in the UK The UK is one of the most desirable places to study in the world with around 100,000 international students studying at UK universities. A range of specialist courses and qualifications in Islamic finance are taught in the UK at a number of universities, business schools and professional bodies. offering to meet demand Islamic finance has helped transform London s skyline by financing in whole or in part developments such as The Shard, Chelsea Barracks, Harrods and the Olympic Village. The UK has the largest legal services market in Europe and over 25 law firms with offices in the UK are supplying Islamic legal services There are 9 fund managers offering Islamic asset management services to their clients All of the UK s largest accountants, consultants and professional service firms have Islamic finance departments New standards and qualifications in Islamic finance are being offered by professional institutes, universities and business schools across the UK The London Stock Exchange has raised a total of US$34 billion through 49 issues of Sukuk The London Metal Exchange (LME) is an important avenue for the growth of Islamic finance globally - a significant volume of liquidity management transactions concluded by Islamic finance institutions and other Sharia compliant firms are supported by metals on LME warrant. The UK proudly hosted the World Islamic Economic Forum (WIEF) in October It is the first time the Forum has been held outside of the Muslim world The key projects in the UK which currently need investment and development partners include: offshore wind: a potential investment programme in excess of 100 billion nuclear: up to eight individual sites with capital value per project of 8-9 billion offshore transmission: an investment programme of 15 billion to support offshore wind projects High Speed 2: a high speed rail line from London to the North with potential investment value estimate of c. 32 billionports: opportunities for turbine manufacturing investment in support of offshore wind programme and opportunities to support post-panamax container facilities Thames Tideway: new waste water tunnel with a capital value 4.2 billion Atlantic Gateway: a 75 billion regeneration and infrastructure development in North West England Olympic Park: 9 billion redevelopment following the 2012 London Olympics urban regeneration: a pipeline of over 100 billion of significant urban regeneration and development opportunities across the UK World over 113 universities and 420 institutions are offering IF degrees and certifications of which UK leads with 22 universities and 60 institutions 3

4 Islamic Banking The next frontier in Finance by Abdel Hak El Kafsi There are 25 rapid growth markets (RGM) which will account for 80% of the world s GDP, 38% of global consumer spending and 55% of fixed capital investment by Their share of global contribution to GDP has doubled over the past 10 years and continues to outgrow developed markets. 10 out of the 25 RGM have a large Muslim population. 6 of the RGM, and Bahrain, have been identified as the driving factors behind the next big wave of growth in Islamic Finance: Qatar, Indonesia, Saudi Arabia, Malaysia, U.A.E. and Turkey. These countries commanded 78% of International Islamic Banking Assets in 2012 growing at a 5 years 16.4% CAGR (Compound Annual Growth Rate) according to E&Y. This growth poses challenges to existing Islamic Banks; entering new markets, optimizing cross borders operations, seeking skills and funding from the global pools of talent and capital. These challenges continue to constitute huge demand on the key reference centers i.e. Bahrain and Malaysia in particular to provide leadership for the next phase of the industry s development. The notion of Halal economy, inclusive growth and differentiation through responsible banking could be the game changers that Islamic Banking has been looking for. Hence the rise of Dubai, London and Istanbul at this hour is definitely a positive development that will help to raise the performance bar for all. Crowe Horwath, as a global player and as a Financial Institution specialist has definitely a role to play especially that it is present in QISMUT (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey). Is it positioned to play it? Outside the Islamic world, Islamic banking has attracted the attention of all major Financial Centers: London s ambition is to become the world s capital of Islamic Banking and has legislation in place and a regulatory framework to achieve this goal. Singapore is working hard on having a friendly environment for Islamic Banking and has even one Islamic bank operations. It is aiming at attracting part of the two International Islamic banking businesses from Kuala Lumpur and at servicing the off-shore requirements of Indonesia and Brunei Hongkong is also actively positioning itself as a gateway to China for Islamic banking and is planning a large Sukuk issue. In Europe, Ireland, Malta and Luxemburg are competing to attract Islamic Asset Managers and have in place the required legislation to accommodate Islamic Banking. Brussels has been working discretely but diligently on a strategy to become Europe s center for Islamic banking. Can Crowe Horwath afford to continue not to offer specialized services in the area of Islamic banking? Other than the Audit, tax advice is very important in Islamic Banking and Finance because of the nature of transactions. Other areas are Advisory services on Sukuk issuance, project finance, I.T., Fund raising, private equity. It is for Crowe Horwath, as a group, important to develop a niche in this industry. Let us over the next 12 months position ourselves within this industry both geographically as well as product wise. The Islamic Banking Unit will be at your disposal to discuss and define with you how best you can position your unit in this growth industry. How does Islamic Finance differ? Financing and investment is effected through the purchase and sale of physical assets Income must be generated through ownership or use of the asset Levels of risk and return should be clearly defined and balanced accordingly There must be no uncertainty in the terms of the financial transaction for any involved party Typical financing structure: Murabaha Financing - Deferred Payment Buyer signs an agreement unilaterally promising to purchase goods from a Bank Buyer is appointed as Agent for Bank and orders goods required Bank sells these to the Buyer under a Murabaha contract mark-up agreed for deferred payment term debt created by this financing is not discountable and can only be sold at face value 4

5 Salam Financing - Deferred Delivery This sales contract already provides a means of finance. Banks and investors can make a return by: Paying funds to a Trader under Salam for future delivery of commodities knowing there is a third-party buyer A Parallel sale secured by L/C for example Appointing the Trader as Agent to sell the goods to a third party at higher price on a cash or deferred basis Advantages to Trader No impact on company s leverage as this is an advance payment not a debt Turnover can therefore be increased indefinitely No risk on receivables, paid by a bank Gets profit in advance Minimises capital requirements Working Capital Finance (Istisna a) Pre-payment for manufacture of goods or construction of property or equipment Bank will not enter into an Istisna a agreement unless the goods being manufactured on their behalf have identified Purchaser(s) Use of Parallel Istisna a, Lease Finance, L/C, etc. Price for goods sold under the parallel sale is higher than cost to reflect trading profit of the bank No Debt is created by this instrument as the obligation is for the delivery of manufactured goods Istisna a - Advantages to Manufacturer no impact on company s leverage as this is an advance payment turnover can be increased to full capacity of plant no risk on receivables, paid by a bank gets profit in advance potentially avoids withholding tax, further improving profit margin How can Crowe Horwath assist its clients in the area of Islamic Finance? I. Tap the Islamic funding market by: Helping clients structure their requirements in accordance with the Islamic Finance mode. Introduce them to the various Islamic Finance players in Europe, the Middle East and Malaysia /Singapore. Structure some debt as per some Islamic product to improve company s debt /equity ratio. Introduce clients to the Islamic Investment Market in the areas of Private Equity or Private Placement. II. Introduce clients to the Islamic Investment Market in the areas of Private Equity or Private Placement. Horwath Mak Ghazali llc has a strategic alliance with Islamic Finance Consultants (IFC) Islamic Finance Consultants B.S.C is a Financial Consultancy/ Advisory and Brokerage firm specialized in Islamic Finance, based in the Kingdom of Bahrain. IFC was established in 1999 by AbuDhabi Investment Company, the Investment Banking arm of the AbuDhabi Government and Mr. Abdelhak El Kafsi, the Managing Director. Since 2011, Mr. El Kafsi has become the sole owner of the Company. IFC is licensed and supervised by the Central Bank of Bahrain. Islamic Finance Consultants is highly experienced in advising on the creation of new Banks and Islamic windows. Mr. Davis Kallukaran, Managing Partner of Horwath Mak Ghazali llc Oman, said that the firm has a strategic alliance with IFC. Both the firms will work together to develop the Islamic Banking practice within the Crowe Horwath network. 5

6 Some of the assignments executed by IFC are given below: Howarth Mak Ghazali llc Auditors & Business Advisors 8th Floor, Trade Center, MBD East, Ruwi P.O. Box 971, P.C. 131, Muscat Sultanate of Oman Ph: /87/83 Mob: Fax: Horwath Mak Ghazali llc is a member of Crowe Horwath International, a Swiss verein (Crowe Horwath). Each member firm of Crowe Horwath is a separate and independent legal entity. Horwath Mak Ghazali llc and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath or any other member of Crowe Horwath and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath or any other Crowe Horwath member. 6