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THE EMERGENCE OF ISLAMIC FINANCE I N MALAY S I A
AMIR ALFATAKH YUSOF
ISLAMIC BANKING
SPEAKER PROFILE
1. Started in Conventional Banking Sales for OCBC Bank Retail, Business Banking and Corporate Banking, Kuala Lumpur Main Branch (1997-2003)
2. Grabbed opportunity to become OCBC Bank Islamic Banking Windows (IBW) Product Developer (2003-2005)
3. Led the Islamic Banking Personal Financial Services to build business (2005-2006)
4. Jumped : Kuwait Finance House (2007), ABN AMRO for IBW (2007-2009), Al-Khaliji Commercial Bank Qatar (2009-2011), AmIslamic Bank (2011-2012), Standard Chartered Saadiq (2012-2015)
5. Now Acting Country Head for IBW UOB Malaysia (2016-Present), recently launched IBW business (July 2016)
6. Committee Member of AIBIM’s Qard WG, Investment Account WG, Tawarruq WG. Industry awareness task-force with BNM. IBFIM trainer (Deposits & Financing products).
7. Maintains a free-to-use website Islamic Bankers Resource Centre (https://islamicbankers.me/)
AMIR ALFATAKH
UITM, HULL (UK), IIUM
INTRODUCTION TO ISLAMIC BANKING INDUSTRY
OUTLOOK BEYOND 2017
INTRODUCTION
On Par
Recent developments on Shariah views or
Business Practices = on par with conventional
features & global standards
Islamic Banking to the Forefront
For some time now, Islamic Banking has been the focus of the Banking world, arising from greater acceptance and faster
growth in the industry than the conventional space. There is also greater awareness on the structures being offered
Ethical Banking
Desire to include Islamic Banking as “Ethical Banking” in practice puts responsibility to
Shariah Committee to re-look at banking rules more carefully
Segment Banking, Not Religion
Better understanding that Islamic Banking is NOT religion banking, especially for non-Muslim customers. It is an alternative model or infrastructure, that follows certain rules which complies with the
requirements of the Shariah
THE GLOBAL ARENA
Islamic Assets in 6 core markets (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey) set to show double digit growth in 2016. The YOY growth is expected to sustain at 16%-17% growth until 2020.
Malaysia is expected to sustain the 2015 growth of 11% for 2016-2017
Source: World Islamic Banking Competitiveness Report (EY2016)
The Global Profit of Islamic Banks set to TRIPLE and is in line to reach USD$1.6 trillion in Assets by 2020.
OPPORTUNITIES ABOUND • Middle East
• North Africa
• South East Asia (+Malaysia)
Highest Growth
• Eastern Europe / Turkey
• Hong Kong / Singapore
• United Kingdom
Emerging Markets
• China
• Western Europe
• Russia
Untapped Potential
Overseas work opportunities for Islamic Banking
Specialists (4-6 years background)
Active hiring of experienced individuals esp for
short-term contracts in Middle East
Consultancy work / start-ups
Support Areas – Legal / Advisory / Shariah
Consultancy / Operations / IT
Growth in Islamic Financial Institutions:
Local Islamic Banks
Locally Incorporated Foreign Islamic Banks
Islamic Subsidiaries of Local / Foreign Banks
Development Financial Institutions (DFI)
Islamic Banking Windows of Conventional Banks
Islamic Investment Banks
Takaful Companies
GROWTH OF ISLAMIC BANKING
BECOMING AN ISLAMIC BANKING HUB
There is an on-going push by BNM to position Malaysia as the foremost leader in Islamic Banking products and services:
Clear Guidelines
Business-Friendly
Close Supervision
SAC Oversight
BNM target for the industry : 40% of all Banking Assets to be booked under Islamic Banking by 2020
ISLAMIC BANKING FINANCIAL INSTITUTIONS (MALAYSIA) excluding DFI & IBW
1. Affin Islamic Bank
2. Al Rajhi Banking & Investment Corp
3. Alliance Islamic Bank
4. AmIslamic Bank
5. Asian Finance Bank
6. Bank Islam
7. Bank Muamalat
8. CIMB Islamic
9. HSBC Amanah
10. Hong Leong Islamic Bank
11. Kuwait Finance House
12. Maybank Islamic
13. OCBC Al Amin
14. Public Islamic Bank
15. RHB Islamic Bank
16. Standard Chartered Saadiq
BUT WHY IS ISLAMIC BANKING GROWING?
BNM Push
Strong support and incentives given by government to support the BNM vision and desired infrastructure
Market Demand
There is a sizeable demand for Islamic
products, based on a more ethical & fair adoption of
banking practice
Shariah Compliance
Shariah requirements allow for “compliant” activites which allows for a bigger access to investors.
Asset Backed transactions – Not overly-geared as deals are based on real assets
Prudent products – the limited range of “sophisticated” products limits the risks
Financing of stable activities – real economies
Growing Confidence – removal of many contentious conventional and “old skool” Islamic Banking practices
Demand by Customers
DEMAND BY CUSTOMERS
MUSLIM CUSTOMERS
i. Greater awareness of Shariah requirements in Banking
ii. Comfort of being involved in Shariah-compliant businesses only
iii. Good measure of fairness
iv. Prefers “simple to use” products
NON-MUSLIM CUSTOMERS
i. Attractive features of Islamic Products (at par)
ii. Reasonable treatment for penalties on their financing
iii. Fair terms and conditions = maximise financial benefits
iv. No inclination to religion, just on features and benefits
FUN FACT : ON AVERAGE, NON-MUSLIMS MAKES UP TO 80% OF CUSTOMERS-BASE FOR ISLAMIC BANKING Excluding the top 6 local banks such as Maybank, Public Bank, CIMB, Hong Leong, Bank Islam & AmBank
11%
54%
35%
Non-Muslims
BANK NEGARA MALAYSIA AS THE DRIVER
ISLAMIC FINANCIAL SERVICES ACT 2013 (IFSA)
i. The Islamic Financial Services Act 2013 (IFSA) was introduced to re-align all the existing Acts governing Islamic Banking into a single Act.
ii. The scope of business has been re-defined to encompass all entities offering Islamic products and services
iii. Some contractual nature was also re-defined
iv. The responsibilities of all the stakeholders in an Islamic Banking business is emphasized, especially Shariah Committee
BNM POLICY DOCUMENTS & GUIDELINES
i. Since 2013 when IFSA was introduced, BNM had released multiple Guidelines and Concept Papers to be discussed with the industry players
ii. Comments and feedback on the intended guidelines were received from the various industry players
iii. Shariah Advisory Council (SAC) of BNM is also consulted before the paper is finalised.
iv. The final version : Policy Documents are introduced to Banks to comply
SHARIAH AS THE ULTIMATE LINE OF DEFENSE
WITH GREAT POWERS COMES GREAT RESPONSIBILITIES
i. IFSA 2013 outlined the roles and responsibilities of bank’s Shariah Committee
ii. Shariah Committee are required to discuss, deliberate and decide on all matters pertaining Islamic Banking in the bank
iii. Responsibility is on the Shariah Committee to make quality decisions, backed by proper research and robust deliberations
iv. Stiff penalties for negligence : RM25 million fine and/or 8 years jail
SHARIAH GOVERNANCE FRAMEWORK (SGF)
i. One of the important requirements by BNM on the operations of Islamic Banking business is the establishment of the Shariah Governance Framework (SGF)
ii. SGF governs the operations of the Islamic Banking business including all review and oversight functions in the bank
iii. SGF outlines the roles and responsibilities of Shariah Committee and all other internal committees for Islamic Banking
iv. Detailed requirements to be set by bank.
MISCONCEPTIONS ABOUT ISLAMIC BANKING
More Expensive
Name Change
Back Door
1. Is Islamic Finance more expensive
due to Selling Price?
2. Additional Documents = More
Legal Fees?
1. Is Islamic Finance just a change in
terminologies?
2. At the back end, is it still the
same processes used?
1. Are the products really Islamic in
nature?
2. Are the end result all the same
as a conventional Product?
1. No. Rebate (Ibra’) guidelines
bring us to par as conventional
2. No. Additional legal fees will be
a small nominal stamping costs
1. It is a revamp of documents and
clauses consistent with Shariah
2. No. 80% are same processes,
additional Shariah process exists
1. The tenets of each contract,
Maqasid and intention are met
2. End Result is the same, with
operationalising Shariah rules
EXAMPLES OF KEY DIFFERENCES (BANKING MODEL)
A conventional bank is designed to have 2 main functions i.e. 1) Collect
Deposits and 2) Give Loans. As such, income and pricing becomes
important when introducing their products.
In Islamic Banks, while income and pricing remains important, there is also
consideration on why a product is launched and the impact it has on customers.
Not all fees can be charged, and not all features can be used in Islamic
Banking. The Islamic Banking Model itself is not a standalone arrangement.
There is linkage between Sources and Application of Funds
Sources of Funds
Pool of Funds
Application of Funds
Islamic Banking Contracts
Income from Activities
Distribution of Income (less Expenses)
TREASURY
• Manage liquidity end to end
• Invest in compliant instruments
• Manage cost of funds
OPERATIONS
• Detailed workstream
• Commodity Desk
• Sequencing & Aqad Completion
LEGAL
• Contractual Relationships
• Aqad & Transactional Documents
• Islamic Terms & Conditions
SHARIAH REVIEW & AUDIT
• Execution of documents
• Completion of Aqad
• Shariah Non-Compliant Events
SHARIAH COMMITTEE
• Deliberation of New Products & Issues
• Decisions on SNC Events
• Approval of Products, Processes, Structures
EXAMPLES OF KEY DIFFERENCES (PRODUCT)
While most of the features between Islamic Banking and
Conventional Banking products are the same, there are
differences arising from Shariah requirements that provides
better justice and fairness to the customers.
Shariah Committee plays an Important role to regulate the rules
against business requirements. Consideration of fair-play and
justifiable charges forms part of the decisions made by Shariah
Committee
For each product, Shariah Committee is responsible to assess
the features, conditions, operations, and fees & charges.
Calculation of Installment and Profit
Calculation based on Base Rate + Margin Calculation based on Base Rate + Margin,
capped to the Maximum Ceiling Rate
Facility Amount Over Financing Period
Increases as amount is compounded and
capitalised as new Principal Amount
Capped at the Maximum Selling Price
agreed in the Aqad
Early Settlement Charges
Based on Lock-in period, ES charges =
1.0% of the Amount Settled
Not Allowed (unless to recover actual
costs incurred)
Penalty Rate (Punitive) on Non Performing Accounts
Pre-Judg: Up to BR+3.5% x new Principal
Post-Judg: Up to 8.0% x new Principal
In-Ten: Up to BR+3.5% or CR x O/S Princ
Off-Ten : IIMM Rate x O/S Balance
Late Payment Charges
1.0% on the amount in arrears
compounding into new Principal
1.0% on the amount in arrears non-
compounding into new Principal
EXAMPLES OF KEY DIFFERENCES (STRUCTURE)
The way a Conventional Banking Product
is designed and launched is as follows:
1. There is a market demand
2. There is a competitor product
3. The same structure is copied
4. Main document : Loan Agreement or
Deposit Application
5. Submission to Senior Management
6. Submission to BNM
7. Launch Product
8. Review Product
9. Amend if necessary
The way an Islamic Banking Product is
designed and launched is as follows:
1. There is a market demand
2. There is a competitor product
3. The structure is researched by Shariah
team for suitability and issues
4. The structure is deliberated by Shariah
Committee for a decision and resolution of
issues
5. Main Documents : Depending on the
approved structure (Murabahah,
Wakalah, Ijarah, BBA, Tawarruq, etc)
6. The structure is assessed internally to
ensure ability to meet Shariah
requirements, including operations
7. Submission to Senior Management
8. Submission to BNM (including Shariah JPIT)
9. Launch Product
10. Review Product, including Shariah Review
11. Amend if necessary, with Shariah
Committee approvals
CHALLENGES AND ISSUES MAKING THINGS WORK
WITHOUT COMPROMISE
EVOLUTION OF ISLAMIC BANKING
Since the introduction of Islamic Banking Act
in 1983, the industry has slowly evolved in
terms of the following:
Guiding principles of Islamic contracts
by BNM
Suitability of products towards
customers needs
Operational efficiency of Islamic
products and services
Shariah increased depth and quality of
decision making
Principles discussed with industry
Draft Robust discussion on structure
Concept Detailed and specific instructions
Policy
Looking at Market Needs for design
Idea Based on principles and competition
Develop Catering for specific needs via new design
Enhance
Shariah looks at existing regulations
Guided Questions the status quo and directs compliance
Discuss Provides solutions based on specific research
Research
OPPORTUNITIES Becoming • SHARIAH COUNTER
Development • ISLAMIC REGULATIONS
New Channels • FINTECH
Islamic Banking & Finance is Expanding at Rapid Rate
11% growth in 2015
Companies wants to access Islamic Investors (30%) by
becoming Shariah Compliant Counters on Bursa
Demand for “fairer” product terms and machanism
Clear Guidelines by BNM
Development of Investment Account Platform (IAP)
Close Collaboration with Middle East
Fintech for Islamic is being developed
OPERATIONALISING REQUIREMENTS
EXTERNAL
• BNM Policy Documents
• IFSA
• Laws of Malaysia
• Best Practices
INTERNAL
• Shariah Rules
• Internal Guidelines
• Custom (Urf)
• Customer Needs
UN
DER
STA
ND
ING
REQ
UIR
EM
EN
TS
Policy & SOP
Product Design
Processes & Controls
Documents
Operations
System
Accounting & Finance
Ensuring the requirements are captured into the products and processes
BUSINESS CHALLENGES IN ISLAMIC BANKING
The key challenge in Islamic Banking is the BALANCE between Shariah Requirements & Business Needs
Additional Shariah Requirements becomes a RISK for the Bank if fail to be observed
Inadequate Controls, Human Error and Wrong Understanding of Requirements often leads to SHARIAH NON COMPLIANT EVENTS (SNCE)
With IFSA 2013, Banks do not have a choice but to comply
Shariah Business
THE ISLAMIC BANKING CAREER WHY CHOOSE SUCH A
CAREER?
CAREERS IN ISLAMIC BANKING
Regulatory Changes
New Shariah
Structure
New Markets
Innovation
Alternative Career
Market Demand
1. CHANGING REGULATORY ENVIRONMENT
New development in the way Islamic Banking is being operationalised
2. SHARIAH STRUCTURE & REQUIREMENTS
Constructive development of new requirements based on new opinions
3. NEW MARKETS & GLOBAL INCLUSION
Regional opportunities, global growth and demand for expansion
4. INNOVATIVE TECHNICAL PRODUCTS
Adapting to new challenges and requirements for innovation
5. ALTERNATIVE CAREER DEVELOPMENT
Shift from Conventional Banking into Islamic Banking
6. MARKET DEMAND
Customers seeking Shariah Compliant products
YOUR FUTURE AHEAD OF YOU What happens
after I graduate?
Which interest should I go for?
Is there a long-term future?
TOP 10 ISLAMIC BANKING POSTS (IN ORDER)
• Operationally aware of the structures Trade Financing
• Research and solutions provider Shariah Dept
• Knowledge of civil law and Shariah requirements
Legal Dept
• Sophisticated solutions for treasury & money market
Financial Markets
• Syndication structuring & Sukuk structures
Corporate Financing
• Deposits solutions for retail and corporates
Wealth Management
• Understanding intrinsic Shariah risks Risk (Ops /
Market)
• In-depth understanding of products and services
Sales
• Detailed understanding to comply with rules
Audit & Review
Product Development
The Product Development remains a
key component in an organisation. It
remains highly specialised and in
demand. Small pool of talent.
However there are also other areas
where candidates may consider, and
equally in demand.
GETTING INTO PRODUCT DEVELOPMENT
The Perception that Product Development role is difficult, with limited growth prospects.
However, personnel in the role often experience:
1. Understanding of impact of products on Sales & performance
2. Increased technical abilities
3. Appreciation of compliance to regulations
4. Improved strategic thinking
EYE OF THE STORM : PRODUCT DEVELOPMENT
Originate Design & Develop
Governance Implement Comply
Sales
Customer
Legal
IT / System
Finance
Accounting
Business
Shariah
Risk
BNM / S-C
Branches
Channels
Operations
Audit
Compliance
Review Competitor
Research
A Product Development role allows for invaluable access to almost ALL functional areas in a financial institution, as well as industry regulators.
WHAT WE LOOK FOR IN A CANDIDATE?
Banking Experience
Energy
Solve
Explore
Learn
PDT INNOVATORS – Adapt to the fast pace
RESEARCHERS – Learn & Explore possibilities
NEGOTIATIORS – Understand resource limitation & improvise
PROBLEM SOLVERS – Analysis of feedback & rectification / enhancements
CRITICAL THINKERS – Fastest / Most Efficient solutions
DAMAGE CONTROLLERS – Ability to dissect problem & identify root cause
STRATEGY ENABLERS – Close relationship with all levels of management and support units
WHAT IF I CANNOT GET IN?
Graduate as Qualified student then Intern in Islamic Banking
Department
Get Involved / Recognised in Industry Events, Seminars and
build strong network
Gain Banking Experience is key areas, even if with Conventional Bank, but with intention to move
to Islamic Banking
Difficult to enter into a Product Development position directly, as it is a senior position (with relevant experience). Existing talents “circulate” within the industry with little exits.
TRY TO DIFFERENTIATE YOURSELF AND CREATE A VALUE
BREAKING THE BARRIER ALTERNATIVE STRATEGIES
ENTERING INTO THE INDUSTRY
ISLAMIC SALESMAN
VITAL SKILLS LEARNED VIA A SALES
FUNCTION:
1. Proper Communications
2. Understanding Product Details
3. Learn Customer Behaviour
4. Teaches Analytical Skills
5. Build Strong Character
6. Provide actual Operational Skills &
Experience
There’s a perception that sales is a lower
ranking job that do not provide prestige to
the personnel. But that is the opposite of the
truth.
ISLAMIC FINANCIAL TRADER
VITAL SKILLS LEARNED VIA A FINANCIAL
MARKET ISLAMIC TRADER FUNCTION:
1. Enhanced Analytical Skiils
2. Learn about Risk and Returns
3. Discipline when trading
4. Quick Decision Making
5. Performance Based Incentives
6. Understand Shariah principles for
Compliant trades
In Islamic Financial Markets, an Islamic Trader
or Dealer is a rare species. That explains
why their salaries are the best in the market!
SHARIAH DEPARTMENT/ COMMITTEE
VITAL SKILLS LEARNED VIA A SHARIAH
COMMITTEE FUNCTION:
1. Understanding Product Details
2. Learn Industry Behaviour
3. Enhance Analytical Skills
4. Inquisitive Frame of Mind
5. Engaged Discussion amongst Peers
6. Improved Research for Understanding
There’s high expectations for Shariah
Committee to ensure their decisions are
based on the right facts and considerations
ISLAMIC LEGAL
VITAL SKILLS LEARNED VIA A LEGAL
DEPARTMENT FUNCTION:
1. Understanding Product Details
2. Understand Current Decisions on Islamic
Banking
3. Continuous improvement of Islamic Legal
Documents
4. Incorporation of Shariah requirements into
Legal documents
The role of the Legal Department of an
Islamic Bank cannot be underestimated. It
builds up the backbone of a valid Aqad.
ISLAMIC COMPUTERS
VITAL SKILLS LEARNED VIA AN ISLAMIC IT
SPECIALIST FUNCTION:
1. Understanding Product Details
2. Unique & Robust Design for Islamic
Products
3. Control Mechanism in System complying
with Shariah
4. Alternative calculation method such as
Ibra, Tawidh
5. Additional Processes to cater for Aqad
requirements
6. Islamic Fintech
One of the cornerstone of Islamic Banking is
the reliance on evidence for the transactions
completed. With Computers retaining these
trails and evidences, job of Shariah is simpler
OTHER OPTIONS TO CONSIDER
Consultancy
Academic Regulator
FOCUS PLAN YOUR APPROACH AND
STICK TO IT
KEEP EYES ON THE PRIZE
1. BUILD YOUR PERSONAL BRAND
2. LEARN UP & READ
3. KEEP IN TOUCH WITH THE INDUSTRY
4. HAVE MEANINGFUL DISCUSSIONS
5. HAVE YOUR OWN OPINION BUT LISTEN TO
OTHERS
6. TAKE A JOB AND MOVE WHEN SUITABLE
7. TAKE AN INTEREST IN CURRENT ISSUES
Many graduates coming into Islamic
Financing and Banking lack the
understanding of what is required in terms of
approach and knowledge. They gave up.
OUR WISHLIST Robust Alignment between BNM SAC & BNM Policy Makers
Increased Exposure of Malaysia's Shariah Committee to International Standards
More "Ethical Banking" & "Value Based" Banking model, not purely profit driven
More Constructive discussions between Academia & Practitioners
More Entrants from Academia & Shariah Background into Banking & Finance (and vice versa)
Islamic Banking Journey is a long journey yet.
100+ years of conventional
banking
vs
40+ years of Islamic Banking
We need your support from all levels.
Everyone plays a role in Islamic Banking
1
5
2
4
3
SUMMARY
1. There are huge opportunities in Islamic Banking as it is growing globally
2. Strong support from regulators and Shariah community
3. There are challenges that needs to be addressed and resolved
4. Make a career in Islamic Banking, be part of the SOLUTION
5. Position yourselves for the job before entering the job market
6. Identify which areas that interest you the most and focus
7. Most of all, SUPPORT ISLAMIC BANKING
THANK YOU FOR LISTENING L E T ’ S W O R K T O G E T H E R T O B U I L D I S L A M I C B A N K I N G
QUESTIONS AND ANSWERS
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