KPMG Screen template

Report
Islamic Finance
Creating an enabling framework for
Azerbaijan
Neil D Miller
Global Head of Islamic finance
16 November 2012
Islamic Finance – Why?
2
$bn
Global Islamic banking assets are growing…
1.20
$1,000.00
1.00
$800.00
0.80
$600.00
0.60
$400.00
0.40
$200.00
0.20
$0.00
0.00
2007
2008
2009
2010
%
$1,200.00
2011
Islamic Banking Assets
Source:: Deutsche Bank, company data, Central Banks, The Banker, Reuters
% of global banking assets
$bn
… and forecast to continue growing.
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
32.0
31.0
30.0
%
29.0
28.0
27.0
26.0
2010 2011 2012 2013 2014 2015 2016
Islamic Assets
As percentage of GDP
Source: Deutsche Bank, company data, IMF, Central Banks (The sample group of countries includes Iran, Saudi Arabia, Malaysia, UAE, Kuwait, UAE, Qatar, Bahrain, Turkey,
Indonesia, Jordan, Bangladesh and Pakistan), Reuters
Islamic finance is spreading across the Islamic world…
Number of institutions offering Islamic finance products
200
189
160
138
120
80
32
40
29
22
18
8
Source: Deutsche Bank, CIBAFI, IFSL.
Bangladesh
Malaysia
Iran
Pakistan
Sudan
GCC
Rest of
World
0
…and across the secular world.
Number of institutions offering Islamic finance products
25
22
20
15
9
1
1
1
1
1
1
Luxembourg
Russia
3
Ireland
3
Germany
3
Cayman Islands
4
5
Canada
10
Source: Deutsche Bank, CIBAFI, IFSL.
Sw it zerland
Sout h Af rica
France
Aust ralia
US
UK
0
Islamic finance activity centres
Developing / interested centres:
• Australia
• Azerbaijan
• Canada
• France
• Germany
• Hong Kong
• Indonesia
• Ireland
• Kazakhstan
• Nigeria
• Pakistan
• Singapore
• South Africa
• United States
Major activity centres:
• Bahrain
• Dubai
• Malaysia
• United Kingdom
100 – 70%
69 – 50%
49– 30%
29– 10%
9 – 2%
Muslims are approximately 25% of the worlds population…
Less than 2%
Several Muslim states are investing immense wealth across borders…
1,126
MENA-based SWF account for approximately 43%
of the top 10 or $1.7 trillion
1,000
719
572
600
478
405
143
200
85
70
57
Algeria
296
400
Libya
$bn
800
Qatar
1,200
Source: Deutsche Bank, Sovereign Wealth Fund Institute.
Russia
Kuw ait
Singapore
KSA
Norw ay
UAE
China
0
…and financing through the use of Sukuk
Global Sukuk issuances (USD)
100
90
93
90
80
70
60
50
50
37
40
31
30
22
20
20
11
10
2005
2006
2007
2008
Source: Deutsche Bank, Bloomberg Finance LP, Zawya, IIFM, KFH Global Sukuk Report
2009
2010
2011
2012 (to date)
The commercial case for Islamic finance
Is it worth it?
Could it attract capital and funding?
Would it makes us internationally competitive?
Does it force innovation and up skilling?
Is it inclusive for our citizens?
Will it create employment?
Will it enhance our global reputation?
Does it support the vision for our country?
Is it ethical and morally right?
Does the cost benefit balance work?
Is it profitable?
It is inevitable in the long term?
Azerbaijan
Total Population:
c. 9.3 million (with c. 93% Muslims)
Mode of governance
Constitutional Secular Republic
Legal system
Civil Law
GDP *
US$ 64.78 billion (AZN 51.16 billion) in 2011
GDP growth rate *
c. 20% in 2011
GDP per capita *
US$ 7,155.7 (AZN 5,650.8) in 2011
GDP by sector *
Production: 68%; Services: 26%; Net taxes on products and
import 6%
Labour force by occupation *
Agriculture 37,9%, Trade; repair of transport means 14,5%;
Education 8%; Construction 7,1%; Other 32,5%
Unemployment rate *
5.4 %
Population below poverty line *
7.6%
Major exports
Oil & gas (90%)
Enabling framework for Islamic finance
Development Stage
Source: http://www.stat.gov.az/menu/6/statistical_yearbooks/SYA2012
11
Islamic finance in Azerbaijan
 International Bank of Azerbaijan is leading Islamic Banking in Azerbaijan and opened Islamic
Window.
 International Bank of Azerbaijan provides various Islamic Banking Products, such as wadiah,
wakala, mudaraba, etc.
 Amrah Bank conducted market analysis of Takaful (Islamic Insurance).
Creating an enabling framework for Islamic finance
Phase 1
 Evaluate whether new laws are needed or whether existing framework can be adapted.
Identify and make
 Learn from others’ experience, including Kazakhstan.
legal changes to
 In addition to banking, the framework should also facilitate Sukuk transactions
facilitate the
establishment of a
Financial
Shari’a
Liquidity
Islamic
Legal
Structure of
robust and well
accounting
governance
management
Capital
and
Islamic
regulated Islamic
and
and
for Islamic
markets
supervisory
banking
banking sector.
reporting
oversight
banks
and Sukuk
framework
institutions
Phase 2
Identify and make  Once an enabling environment for Islamic banking industry is created and the Islamic
banking industry establishes itself it will create demand for other sectors of the economy
changes required
to be similarly enabled for Islamic financial products.
to facilitate other
 Over time, enabling framework can be created to facilitate all segments of Islamic finance
segments of the
sector
Islamic finance
sector
Islamic fund management
Microfinance
Others
Takaful
13
Learning from others’ experience
Kazakhstan experience
 Amendments made to the following laws:
o
Civil Code of Kazakhstan (General Part) dated 27 December 1994 (the “Civil Code - GP”);
o
Civil Code of Kazakhstan (Special Part) dated 1 July 1999 (the “Civil Code - SP” and, together with
the Civil Code – GP, the “Civil Code”);
o
Tax Code of Kazakhstan dated 10 December 2008 (the “Tax Code”);
o
Law On Banks and Banking Activity in the Republic of Kazakhstan dated 31 August 1995 (the
“Banking Law”);
o
Law On Partnerships with Limited and Additional Liability dated 22 April 1998;
o
Law On the Securities Market dated 2 July 2003 (the “Securities Market Law”);
o
Law On Investment Funds dated 7 July 2004;
o
Law On Mandatory Guaranteeing of Deposits in the Second-Tier Banks of the Republic of
Kazakhstan dated 7 July 2006;
o
Law On Licensing dated 11 January 2007; and
o
Law On State Registration of Rights to Immovable Property and Transactions Therewith dated 26
July 2007.
15
Kazakhstan experience (continued)
 On 14 March 2009 the Prime Minister issued an order (No. 40-r) directing that 11 sets of implementing
normative legal acts be adopted including the following:
• amendments and changes to certain resolutions on bookkeeping and financial reporting by Islamic
special finance companies (the “ISFC” ) (National Bank of Kazakhstan (the “NBK”) Resolution No.
24 dated 20 March 2009);
• instruction on bookkeeping by Islamic special finance companies (NBK Resolution No. 25 dated 20
March 2009);
• rules governing transfer of property and liabilities under investment deposits of liquidated Islamic
banks to another selected Islamic bank (FMSA Resolution No. 51 dated 27 March 2009);
• extension of rules for issuance of bank establishment permits and for licensing of banking and
other operations to cover Islamic banks (FMSA Resolution No. 53 dated27 March 2009);
• requirements for the establishment and operation of ISFCs (FMSA Resolution No. 54 dated 27
March 2009);
• rules on voluntary reorganization or liquidation of Islamic special finance companies (FMSA
Resolution No. 55 dated 27 March 2009);
• requirements for content of an agreement between the issuer and the representative of holders of
Islamic securities and the functions and duties of the representative (FMSA Resolution No. 56
dated 27 March 2009); and
• instruction on prudential standards for Islamic banks (FMSA Resolution No. 66 dated 27 March
2009).
16
The UK experience
 Commodity Murabaha transactions executed through the London Metal Exchange since 1980
 Islamic finance formally acknowledged in 2003 with changes to stamp duty legislation
 Changes made to tax laws in almost every Finance Act since 2003 to accommodate additional products
 The term “Islamic” or “Shari’a” does not appear in any UK statute. However, these terms are used in
the guidance notes issued by the regulatory authorities
 No major change in the regulatory framework – Islamic finance accommodated within the existing
framework
 The FSA is a financial regulator and does not have the mandate to regulate on matters of Shari’a
compliance
 The UK does not mandate the application of AAOIFI or IFSB.
17
Malaysian experience
 Islamic Banking Act enacted in 1983
 Takaful Act introduced in 1984
 Amendments made to Government Funding Act of 1983 to facilitate Sukuk issuances by the Malaysian
government
 Between 1983 to 2000, various amendments made to the Banking and Financial Institutions Act of
1989
 Between 2001 to 2010, various amendments made to several laws, including:
o The Central Bank of Malaysia Act of 1958 to facilitate window operations
o Development Financial Institutions Act of 2002 to facilitate Islamic DFIs
o Capital Market Services Act 2007
 Several amendments made to tax laws to remove tax anomalies and to provide incentives for IFIs
 Shari’a governance framework and guidelines on corporate governance for Islamic banks issued by the
regulator
 A dedicated high court to facilitate dispute resolution in Islamic finance
18
Next steps for Azerbaijan? – The Market/Industry readiness matrix
Government
Initiate and
germinate
Consider creating opportunities – Pension/Sukuk?
Location incentives/training subsidies
Encourage
and facilitate
Actively invite and solicit market entrants
Help them navigate the system
Investigate and
regulate
Identify road blocks and reform
Create supporting regulations and rules
Private sector
Next steps for Azerbaijan? – The Market/Industry readiness matrix
Government
Initiate and
germinate
Encourage
and facilitate
Investigate and
regulate
Private sector
Evaluate feasibility
given potential
demand, no
roadblocks, clear
regulations and
facilitative
environment and
develop strategy
Develop products
to meet demand
given clear tax and
legal treatment and
supportive
regulators, invest in
systems, people,
training and
marketing
Evaluate
feasibility
Develop and
execute
Deliver local
demand, learn,
innovate, develop
overseas demand,
attract capital,
become specialist,
develop leadership
and dominate the
region
Innovate and grow
Next steps for Azerbaijan? – The Market/Industry readiness matrix
Government
Initiate and
germinate
POTENTIAL
Encourage
and facilitate
Investigate and
regulate
Private sector
PRESENT
STATE
Evaluate
feasibility
Develop and
execute
Innovate and grow
Thank You
Neil D. Miller
Global Head of Islamic Finance
Email: [email protected]
Questions?

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