Islamic Finance Socio-Economic Accountability

Islamic Finance Socio-Economic Accountability Oman Arab Bank SAOC January 2012 Investment Management Group 1 Islamic Banking: - What makes Islamic banking differ from conventional - Banking? Islamic banking/finance bans : Riba = Interest - Gharar = Avoidable uncertainty, and delusion - MiMaysir = GbliGambling, specultilation - Haram goods and services - Oman Arab Bank SAOC January 2012 Investment Management Group 2 What are the vehicles of Islamic finance? Profit-and-loss sharing arrangements Murabaha = mark-upp, sale, usually including a credit sale, bai’muajjal Ijara = lease Ijara wa iqtina is a lease-purchase contract, whereby the client has the option of purchasing the item. sukuk = Islamic certificates or bonds often: sale - lease-back or headleas sublease Istisnaa is a contract to manufacture Istijrar refers to a sale in which an asset is supplied on a continuing bibasis at an agreed price payable at a future date. Oman Arab Bank SAOC January 2012 Investment Management Group 3 Soci al Responsibility ibilit Social Responsible Investing is “a relative” of Islamic Finance. A Muslim has to consider himself as a trustee of supreme ownership and act accordingly. In his usage of private and public ownership he is bound by ethical and social considerations to avoid harmful goods and activities which are not permissible such as alcoholics, gambling, pork, pornography to name a few. Wasteful use (or not making use of resources) and extravagance is undesirable. Any usage which injures or harm public interest has to be avoided. Wealth creates an obligation to support needy family members and the duty of obligatory social tax (Zakat) to support the needy of the society. Oman Arab Bank SAOC January 2012 Investment Management Group 4 Ethics & Respons ibilities : NO 1. Alcoholic drinks 2. Pork-related products 3. Entertainment: ggg,pgpy,,,ambling, pornography, movies, music, hotels 4. Tobacco 5. Defence and weapons companies 6. Riba: bonds, conventional financial services Islamic bankinggp also prohibits transactions related to alcohol and p p,ork, in deference to common Islamic doctrine. Ethics and morality are at its pedestal; thus, gambling and other games of chance are also restricted. Oman Arab Bank SAOC January 2012 Investment Management Group 5 Islamic Finance & Real Economy Islamic finance ensures a closer linkage between real economy and finance .The linkaggge is obvious in sharing-based modes of investment and financial services. When two parties, the financier and the entrepreneur, agree that an opportunity for creating additional value exists, they come together to realize the gain and share it. The main difference between traditional and Islamic banking lies in their concepts of profit. The maximization goal of traditional banks targets the shareholders; on the contrary, Islamic banks hurdle the interest of all economic agents. Oman Arab Bank SAOC January 2012 Investment Management Group 6 How the linkage works? This linkage with real economic activity directed toward creation of additional wealth and financial transactions such as murabaha (cost-plus) and istisna (prepaid orders) and ijara ((g)leasing). There have to be some g oods and services to be objects of murabaha, istisna and ijara. The demand and supply of these goods and services whose exchange is "financed" through the above mentioned contracts ensures that financial activity is the booster of real economic activity and reforms Oman Arab Bank SAOC January 2012 Investment Management Group 7 Financing Real Economy Projects and Contributing to Economic Reforms Islamic Corporate Debt Biggest challenge thus far is limited secondary trading market for SUKUK Demand for SUKUK has far exceeded supply; offerings typically oversubscribed, even after substantial upsizing of the offering at times Islamic Finance and Project Finance Infrastructure projects in the Gulf region largely financed on a corporate basis until the mid-1990s Islamic sources of capital traditionally played minor role in project finance in Gulf In recent years, however, no deal gets done without a subst anti al Isl ami c tranc he Financing needs exceed capacity of commercial banks and export credit agencies Desire of project hosts to diversify sources of capital and take advantage of local capital to the extent feasible Oman Arab Bank SAOC January 2012 Investment Management Group 8 Then how & when we can translate Islamic Ban king to be an addddded value to the existi ng Banking industry as well as to Oman Economy? 1. SME’s. 2. Trade Finance 3. Infra Structure Projects. 4. Sukuk funding 5. Asset Backed financing 6. Real-estate Development. Oman Arab Bank SAOC January 2012 Investment Management Group 9 Oman Economy Vis ion -2020 Oman is actively pursuing a development plan that focuses on diversification,,,p,jg industrialization, and privatization, with the objective of reducing the oil sector's contribution to GDP to 9% by 2020. Vision 2020, outlined the country's economic and social goals over the 25 years of the second phase of the development process (1996- 2020). 1. To deve lop and upgrade Oman i human resources in order to cope with technological progress and attain international competitiveness. 2. To developpp a private sector cap able of op timum use Oman Future Vision – Year 2020 of human and natural resources in an efficient and Sector 2000 ecologically- sound way, in close collaboration with 2020 the government. Oil 47.5 9.0 3. To utilize the geo-strategic locat ion of the Gas 1.3 10.0 Sultanate, optimize the use of its natural resources Agriculture/Fish 2.0 5.1 and promote economic diversification. Manufacturing 5.4 15.0 Trade 10.6 15.0 4. To distribute the fruits of development among all Tourism 0.7 5.0 regions and all citizens. Others 22.5 5. To preserve, safeguard and develop the achievements 40.9 accomplished in the past twenty-five years. Oman Arab Bank SAOC January 2012 Investment Management Group 10 Oman Economy Vis ion 2020 As per its plan ‘Vision 2020’, the Government of Oman is committed to reduce the dependency on oil revenues to around 19% by 2020 and diversify the economy to sustain beyond depletion of oil reserves. The ppypgplan is focus more on various sectors by developing competitive business and investing heavily in efficient manpower and sound infrastructure. Quantitative indicators of GDP structure in 2020: 2008 Other 2020 Other Services Services, Oil & 13.5% 14.9% Gas, 19.0% Public Agriculture & Services 5.6% Fishing, Financial Public 5.1% Services 3.0% Services Transportation 10.0% Mining & & Quarrying, Communicatio Financial 2.0% n, 5.7% Services, Oil & Gas, 8.0% Trade & 51.3% Tourism, 9.5% Manufacturing Transportation 15.0% & Manufacturing, Communicatio 10.2% Agriculture & Trade & Mining & Fishing, 1.0% n 8.0% Quarrying, Tourism, 0.2% 18.0% Oman Arab Bank SAOC January 2012 Investment Management Group 11 Right Demography is key to Consumer Sector growth Oman Economy • Omanis are yygoung and g rowing at 3,500 3,000 around 2% 2,500 820 900 666 693 • Nearly 74% of the Omani 2,000 613 '000 1,500 nn I populdlation is under 30 years – an 1,000 1,803 1,843 1,884 1,923 1,967 500 important factor determining - 2004 2005 2006 2007 2008 consumer demand and consumption Omani pattern. Estimated Population of Oman: 2.87 million Oman Arab Bank SAOC January 2012 Investment Management Group 12 Oman Economy Sust ai ne d Oil Capex Bullish indicators that can boost overall government expenditure in coming years. Oman's average oil production was 807,300 barrels per day (June09). average crude oil exports as a percentage of total oil production increased to 82% compared to 80% in H1’08 (and 78.3% in FY08). discovery of three new oil fields and continuation of planned projects . In 2008 the contribution of oil sector in GDP peaked to 51% mainly due to higher oil production and record oil prices, reaching $126.8 per barrel (in Q3’08). Oman Arab Bank SAOC January 2012 Investment Management Group 13 Vision 2020 – Key Strategies Oman Economy Creating Cohesive Business Environment Various incentives are offered to attract domestic and international investors: . Policy of no minimum capital requirements . 100% foreign ownership . Free repatriation of capital and profits . Relaxed corporate tax holiday . Competitive land lease tariffs . Duty exemptions on imports and exports Recent changes in income tax law (effective from Jan 1, 2010) clearly reflect government’s initiative to attract more foreign direct investments in the economy. The most important amendment is removal of disparity in tax rates between foreign and local companies. Oman Arab Bank SAOC January 2012 Investment Management Group 14 Oman Economy Vis ion 2020 – Key SttiStrategies Implementation of Free Trade Agreement (FTA) Oman has implemented US-Oman FTA and GCC-Singapore FTA, which provides tariff elimination eventually, to make each party’s goods more competitive compared to other foreignimports. Upon entry into force of the United States-Oman Free Trade Agreement (FTA) on January 1, 2009, Oman provided immediate duty-free access on virtually all industrial and consumer products in its tariff schedule duty-free access for U.S. agricultural products in 87 percent of agricultural tariff lines. Oman will phase out tariffs on the remaining products within 10 years. The agreement also provides for substantial market access across Oman's entire services regime, a secure, predictable legal framework for U.S. investors operating in Oman, an effective enforcement of labor and environmental laws, and enhanced protection of intellectual property. Process underway for 2 more FTA between EU-GCC and India-GCC, which will further bolster trade and create business opportunities between Oman and other regions. Oman Arab Bank SAOC January 2012 Investment Management Group 15 Vis ion 2020 – Key SttiStrategies Oman Economy Infrastructure development . Expansion of port facilities at Sohar ($450mn) and Duqm ($900mn) . Expansion plan of existing Muscat International Airport from the current capacity of 4mn passengers to 12mn passengers by 2011.

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