Overview of Existing Islamic Financial Instruments prepared for the 9th Meeting of the COMCEC Financial Cooperation Working Group Dr. Irum Saba Assistant Professor/Program Director Institute of Business Administration (IBA)-CEIF

1 Agenda

• Methodology of the report • Overview of Islamic Finance Sector • Islamic Finance Past and Present • Top 10 Countries by Islamic Finance Assets • Different Modes used by IFI • Existing Islamic Financial Instruments –Deposits and Financing products • Islamic Banking Sector NPF • Issuances • Takaful Models used across globe • Q&A

2 Methodology of the report

•Qualitative Approach •Field visit •Interviews

3 Islamic Finance Past and Present

• Origin of Islamic Banking • Different phases of Islamic Banking • IFI total size USD 1.893- USD 2.1 trillion (IFSB report 2017) • Presence in 90 countries (50 Muslim Countries) • 12 jurisdictions in which IBI had share of 15% in the banking industry • Double digit growth IB (78.9%) Islamic (takaful) ($23.2 billion in size)

4 Top 10 Countries by Islamic Financial Assets

Source: ICD-Thomson Reuters Islamic Finance Development Indicator 2016 5 Islamic Banking Share in Total Banking Assets by Jurisdiction

6 Source: IFSB 2017 Report Different Modes used by the current IFIs • Mudharabah • Musharakah • Diminishing Musharakah • Salam (deferred sale with full payment in advance) • Istisna (order for manufacture) • • Murabahah (cost plus sale) • Wakala (agency) • Qard • Pawn Broking (al-Rahnu)

7 Deposit products in Islamic banking

Deposits products in Middle East North Africa Malaysia and Indonesia PRODUCT/PROCESS MIDDLE EAST NORTH AFRICA MALAYSIA Savings Account Based on : Mudharabah and Qard are Mudharabah and Qard are standard Wadiah is more popular than Wadiah Mudarab, Qard standard offerings offerings Mudharabah

Current Account based on: Qard and Mudharabah are Qard and Mudharabah are standard Qard and Commodity Murabahah Wadiah Mudharabah Qard standard offerings offerings

Fixed Deposit based on: All three are popular products, Mudharabah, Commodity All three are popular products Commidity Murabahah/Tawarruq especially within GCC countries Wakalah

Popular scheme offered to Recurring Deposits/Saving Slow take-up as Takaful unit-linked plan customers as a “forced saving Popular scheme Plan to increase deposits is more attractive to customers plan”

Products are offered to selected Products are offered to selected Products are offered to selected Structured Products customers customers customers

Adopt guideline issued by AAOIFI Adopt guideline issued by AAOIFI on Adopt guideline issued by AAOIFI but Profit Distribution on Mudharabah-based products Mudharabah-based products more refined and complex

8 Financing products present in different areas Financing products PRODUCT/PROCESS MIDDLE EAST NORTH AFRICA MALAYSIA

Monetization Products (Cash finance Salam structure is preferred as Very popular scheme based on Tawarruq Salam structure is preferred based on Tawarruq and Salam) Tawarruq is discouraged by scholars concept

Vehicle Financing (Murabaha and Standard offering Standard offering Standard offering Ijarah) House Financing (Murabaha, Ijarah and Only Ijarah and Diminishing Musharakh Only Ijarah and Diminishing Only Murabaha and Diminishing Musharakh Diminishing Musharakh) are popular Musharakh are popular are popular Popular, as a form of personal financing with Pawn Broking (Al-Rahnu) Prohibited product Prohibited product gold as collateral Equipment/Industrial leasing Operating and financial leases are Operating and financial leases (Operating/Financial) based on Ijarah Mostly financial lease popular are popular concept

Plant/Construction financing using Both structures used but forward Ijarah Forward Ijarah is popular Istisnaq and forward Ijarah are prevalent Istisnaq and forward Ijarah is popular

Project Financing based on Musharakah Popular form of financing Popular form of financing Banks not keen to offer as deemed too risky and Dim Musharakah and Mudharabah

Mudharabah and Musharakah Working capital financing based on Mudharabah and Musharakah offered offered but not Tawarruq as it is Only Tawarruq is being offered by banks Tawarruq , Mudharabah or Musharakah but not Tawarruq as it is prohibited prohibited 9 Islamic Banking Sectorial NPF

Real Estate Manufacturing Household Construction

Bahrain 29% 10% 13% 13%

Bangladesh 6% 30% 1% 3%

Brunei 22% 11% 10% 20%

Indonesia 15% 10% 8% 6%

Jordan 12% 8% 52% 6%

Malaysia 11% 11% 35% 15%

Oman 10% 1% 64% 25%

Saudi Arabia 1% 11% 30% 15%

10 Sovereign Sukuk by Contracts

Source: IIFM 201711 Corporate Sukuk and Sovereign Sukuk by Contracts 2001-2016

12 Global Islamic Fund Assets by Asset Class (2016)

Source: IFSB 13 Different Takaful Models Properties Mudarabah Pure Wakala Mixed Wakala-

Creation of The participants participants’ participants’ There is an initial fund: (Takaful clients)’ contributions contributions donation to create contributions Waqf

Fees: None Up-front fees as Up-front as agreed Up-front as agreed agreed

Underwriting Qard-a-hasan from Qard-a-hasan Qard-a-hasan Waqf to solicit losses: Takaful operator from Takaful from Takaful funds operator operator

Investment None None As per the agreed As per agreed profits: profit-sharing profit-sharing ratio ratio

Investment Borne by participants By participants Borne by Takaful by Takaful losses: operator operator

Operational Borne by Takaful by Takaful by Takaful by Takaful expenses: operator (with some operator operator operator exceptions)

Liquidation Proceeds accrue to Proceeds accrue Proceeds accrue Proceeds accrue participants only to participants to participants to participants only only only

Present in Malaysia, Saudi United Kingdom Bahrain, Malaysia Pakistan & South Jurisdictions: Arabia and some GCC and Sudan Africa members

14 The three main segments of Islamic finance:

Islamic Islamic Capital Banking Market

Takaful / Islamic Insurance

15 Selected Countries in the Study

Established Leaders Arab Asian African Non-OIC Bahrain Malaysia Nigeria United Kingdom Sudan Indonesia Emerging Oman Pakistan Tail Enders Leaders Turkey Bangladesh

Potential Leaders

16 Thank you

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