Role of Islamic Finance in Supporting the Halal Industry and

its Services

Dr. Asyraf Wajdi DusukiHead of Research Affairs, International ShariahResearch Academy for Islamic Finance (ISRA)

Malaysia

The First Gulf Conference on Halal Industry and its Services24-26 January 2011

Salmiyah, State of Kuwait-Holiday Inn Hotel, Al

دور التمويل ا�س�مي في دعم صناعةالح�ل وخدماته

أشرف وجدي الدسوقي. درئيس شؤون البحث العلمي، ا�كاديمية الدولية للبحوث الشرعية للتمويل

ماليزيا ،ا�س�مي

مؤتمر الخليج ا�ول لصناعة الحل وخدماته2011يناير 24-26

دولة الكويت–السالمية –فندق ھوليدي إن

Is lamic Asset Classes6

Various Forms of Islamic Contracts5

Global Outlook of Islamic Finance

Shariah Compliant Framework3

Salient Features of Islamic Finance4

Role of Islamic Finance in Halal

Industry7

Why Islamic Finance?2

The First Gulf

ConferenceOn Halal Industry and its

Services Conclusion8

Pakistan

Hong Kong

� Aims to become Islamic

finance gateway to China

� Plans to issue sovereign sukuk

� Hang Seng Islamic China Index

Fund in 2007

UK

� Gov’t sets an objective to ‘entrench

London as a global gateway for Islamic

finance

� 5 FSA-approved Islamic banks and

Takaful operators

� Plans to issue sovereign sukuk, amend

tax law on IF

UAE

Japan

Law passed allowing

banks to do Islamic

financeFrance

� Passed rules/regulations to

support Islamic finance

activities

� In process of licensing

Islamic banks

� Made fiscal & legal

adjustment for IF

transaction i.e. taxation

guidelines on sukuk &

murabaha

Singapore

� Established first Islamic bank

� Introduced tax neutrality for Islamic finance

� Aspiring to be centre for Islamic finance

� Launched Islamic ETF

South Korea

Parliament expected to

pass the law related to

offering of tax waiver on

foreign investors’ interest

income from sukuk issued

Thailand

Qatar

Sudan

Indonesia

Kuwait

Germany

� Saxony-Anhalt state issued

government sukuk

� First Islamic bank to operate

in 2010

Emerging interest on Islamic finance as viable alte rnative to the global financial system …

Saudi Arabia

Bahrain

Malta

� Plans to position

as Islamic finance

hub for the

Mediterranean

Jordan

� Plans to tap sukuk market to

finance its deficit

Turkey

� Announced IFC Istanbul in Sep ’09

with focus includes interest-free

financial business

Brunei

Aim to become

Islamic financial

services hub for

Asia

Muslim-majority countries offering Islamic finance (IF)

Non-muslim countries starting to offer IFCourtesy of Bank Negara Malaysia

Malaysia

Iran

Islamic finance… fastest growing segment in global financial system…Islamic Assets under Management USD750 billion & expected to

hit USD1 trillion by 2010

Average growth rate of 15-20% p.a.

Islamic Mutual Funds USD300 billion

Average growth rate of 23% p.a.

Takaful Contributions USD7.2 billion

Growth rate of 13% p.a.

Global Market Capitalization of Dow Jones Islamic Index

USD10 trillion

Shariah Compliant Global Funds 680 funds

Global Outstanding Sukuk USD107 billion

Average growth rate of 22% p.a.

Number of Islamic Financial Institutions (IFIs) > 600 IFIs in the world

Sources: McKinsey, The World Islamic Banking Competitiveness Repor t 2007-08, “Capturing the Trillion Dollar Opportunity”;PriceWaterHouseCoopers, Islamic Finance News, IFSB & Nati onal Authorities; Islamic Banker Research Group; Islamic Finance & Insurance& Investor Offshore Review

Enormous potential in Islamic Finance…

Demographically, Muslims population are huge.. rese arch shows there are ample opportunities in Islamic finance remain u ntapped…

Adapted from: PWC, Wikipedia

Untapped Potential

� Potential customer base: world’s 1.5 billion Muslims

� Bulk of world’s Muslim population is young: 60% of global Muslim population is under 25 years

� Muslim high net worth individuals: USD1.5 –1.8 trillion

� Takaful penetration rate: Below 2% in Middle East Region

� New petrodollar wealth – USD500 billion p.a.Adapted from: OliverWyman report

Rank Country Exports1 Saudi Arabia 8,4852 Russia 6,8903 United Arab Emirates 2,5834 Iran 2,4195 Kuwait 2,4166 Norway 2,2467 Angola 1,9508 Venezuela 1,8839 Nigeria 1,883

Top World Oil Net Exporters, 2008(thousand barrels per day)

Source: www.wtrg.com

As the petrodollar money surge, GCC countries are l ooking for shariah compliant investments….

The Recent Financial Crisis presents opportunity to Islamic Finance…

'There has been much questioning of the values

underpinning the conventional financial system &

the search for alternatives means that Islamic

banks are likely to receive more attention,

especially as their raison d'être is morality in

financial transactions, based on religious

teachings” – Professor Rodney Wilson

Shariahvalues

consistent with

universal values

KEY ELEMENTS OF ISLAMIC FINANCE (IF)

Sources: Bloomberg, London School of Economics (LSE)

Source: Bank Negara Malaysia

Source: LSE website

Islamic Contract

GhararGharar

RibaRibaAl-Zulm

(Qimar)

Al-Zulm

(Qimar)

Shariah-Compliant

Operation

1st Level of

Compliant

2nd Level

of

Compliant

Uqud Musamma

(Nominate Contracts)

Uqud Ghair Musamma

(Non-Nominate Contracts)

Investment Activities

Rectifying & Purifying

Conversion Process

Hedging Instruments

Monitoring & Supervision

Social Responsibility

Maqasid al-Shariah(The Objectives of Shariah)

The

Framework

of Islamic

Finance

EN

DS

/ة

غايال

ME

AN

S/

لةسي

لوا

RIBA PROFITS

What’s The

Difference?

NO COUNTER-VALUE

WITHCOUNTER-VALUE

(`IWAD)

Effort (Al-Kasb)

Risk (Al-Ghurm)

Liability (Al-Dhaman)

What’s The Difference Between Riba & Ribh

با م الر! واحل# & البيع وحر#“Allah permits trading but

prohibits Riba” (2:275)

با ما البيع مثل الر! قالوا ان#“They said that indeed trading

is just like riba” (2:275)

9

Qaidah Fiqhiyyah:ا بالمال وإما بالعمل وإما بح◌ إم# يستحق. الر!

بالضمان(Jamharatul al-Qawaid al-

Fiqhiyyah Vol.1 P.332 )

General Classification of Contract in Islam

Charitable Contracts(تبرعات)

Exchange Contracts(معاوضات)

10

Cooperation Contracts(معاوناات)

Profit-making Contracts

Various forms of Islamic Contracts used in Banking Sales-based Contracts

Lease-based Contracts

Equity-based Contracts

Fee-based Contracts

Hybrid Contracts

BBA – deferred sale; Murabahah – cost-plus sale; Bai al-Inah, Bai al-Tawarruq

Ijarah Wa Iqtina; Ijarah Thumma Al-Bai’, Ijarah Muntahia Bitamleek

Mudarabah, Musyarakah

Kafalah/Dhaman (Guarantee); Wakalah (agency)

Musyarakah Mutanaqisah (Dimishing Partnership), AITAB etc.

Deposit-taking ContractsWadi’ah Yad Amanah; WadiahYad Dhamanah, Mudarabah; al-Qard

Promise/UndertakingWa`ad

11

Major Components of Islamic Financial Services

ISLAMIC

BANKING

ISLAMIC

CAPITAL

MARKET

TAKAFUL/

ISLAMIC

INSURANCE

Equity

Islamic Securities

Funds & Unit Trust

I-REITs

Venture Capital/

Private Equity

Derivatives

Takaful

Retakaful

Financing

Deposit

Investment

Islamic Asset

Classes

Sukuk

Real Estates (I-

REITs)

Islamic Financing Facilities

Islamic Private Equity

Islamic Hedge Funds

FOREX

Islamic Stock

broking

Commodities

Islamic Structured Instrument

Potential areas in each value chain (e.g.)

Secure deal to purchase stocks from Suppliers

Provide financing facilityto Companies during growing & expansion stage

Provide financing facility to ready end-customers

Enter into equity partnership with Halal-based Companies

Joint venture may yield potential attractiveReturn

Financial musclemay enable IFI to enjoy economies of scale& bulk buying

Various financingTools in form of Equity/Debtmay yield potentialhandsome return

Financing via Shariah contracts eg – sales-, lease-,Equity-, hybrid-Based Shariah Ct.

Value Chain

Value Proposition

…Islamic finance offers value proposition that enabl e Halal industry to grow and

escalate to another stage for the benefit the Umma h as a whole......

• Islamic-based Instruments financing :

�Unique Features of each Islamic Financing and Inves tment tools offer various opportunities for innovation in business.

�Ensuring Halal processes from A-Z

�Provides opportunities for different business segments to grow and prosper

Unveil the potential of Islamic finance to Support Halal Industry…

با م الر! وأحل# & البيع وحر#

Allah has permitted trade & has prohibited riba’ -Al Baqarah 275-

Assoc. Prof .Dr Asyraf Wajdi DusukiHead of Research AffairsISRA @ INCEIF2nd Floor, Annexe BlockMenara Tun RazakJalan Raja Laut50350 Kuala LumpurMALAYSIAGeneral Line : +603-2781 4000Fax : +603-2691 1940

Email : asyraf@isra.myWebsite : www.isra.my