Neil D Miller

Global Head of Islamic finance

16 November 2012

Islamic FinanceCreating an enabling framework for Azerbaijan

2

Islamic Finance – Why?

Global Islamic banking assets are growing…

Source:: Deutsche Bank, company data, Central Banks, The Banker, Reuters 

2007 2008 2009 2010 2011$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Islamic Banking Assets

% of global banking assets

$bn

%

… and forecast to continue growing.

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   

2010 2011 2012 2013 2014 2015 2016$0

$200$400$600$800

$1,000$1,200$1,400$1,600$1,800$2,000

26.0

27.0

28.0

29.0

30.0

31.0

32.0

Islamic AssetsAs percentage of GDP

$bn

%

Islamic finance is spreading across the Islamic world…

189

138

32 29 22 18 80

40

80

120

160

200Re

st of

Wor

ld

GCC

Suda

n

Pakis

tan

Iran

Mala

ysia

Bang

lades

h

Number of institutions offering Islamic finance products

Source: Deutsche Bank, CIBAFI, IFSL.

22

9

4 3 3 31 1 1 1 1 1

05

10152025

UK US

Aust

ralia

Fran

ce

Sout

h Afri

ca

Switz

erlan

d

Cana

da

Caym

an Is

lands

Germ

any

Irelan

d

Luxe

mbo

urg

Russ

ia

…and across the secular world.

Number of institutions offering Islamic finance products

Source: Deutsche Bank, CIBAFI, IFSL.

Islamic finance activity centres

Major activity centres:• Bahrain• Dubai• Malaysia• United Kingdom

Developing / interested centres:• Australia• Azerbaijan• Canada• France• Germany• Hong Kong• Indonesia• Ireland• Kazakhstan• Nigeria• Pakistan• Singapore• South Africa• United States

100 – 70% 29– 10%69 – 50% 9 – 2%49– 30% Less than 2%

Muslims are approximately 25% of the worlds population…

Several Muslim states are investing immense wealth across borders…

1,126

719572

478 405296

143 85 70 570

200400600800

1,0001,200

China UAE

Norw

ay KSA

Singa

pore

Kuwa

it

Russ

ia

Qatar

Libya

Alge

ria

$bn

MENA-based SWF account for approximately 43%of the top 10 or $1.7 trillion

Source: Deutsche Bank, Sovereign Wealth Fund Institute.

…and financing through the use of Sukuk

Source: Deutsche Bank, Bloomberg Finance LP, Zawya, IIFM, KFH Global Sukuk Report 

2005 2006 2007 2008 2009 2010 2011 2012 (to date) -

10

20

30

40

50

60

70

80

90

100

11

22

37

20

31

50

90 93

Global Sukuk issuances (USD)

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?

The commercial case for Islamic finance

11

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

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).

13

Creating an enabling framework for Islamic finance

Legal and

supervisory framework

Structure of Islamic banking

institutions

Shari’a governance

and oversight

Financial accounting

and reporting

Liquidity management

for Islamic banks

Evaluate whether new laws are needed or whether existing framework can be adapted. Learn from others’ experience, including Kazakhstan. In addition to banking, the framework should also facilitate Sukuk transactions

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 to be similarly enabled for Islamic financial products.

Over time, enabling framework can be created to facilitate all segments of Islamic finance sector

Takaful Microfinance Others

Phase 1

Phase 2

Islamic fund management

Identify and make legal changes to facilitate the establishment of a robust and well regulated Islamic banking sector.

Identify and make changes required to facilitate other segments of the Islamic finance sector

Islamic Capital

markets and Sukuk

Learning from others’ experience

15

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; ando Law On State Registration of Rights to Immovable Property and Transactions Therewith dated 26

July 2007.

16

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).

17

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.

18

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 operationso Development Financial Institutions Act of 2002 to facilitate Islamic DFIso 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

Next steps for Azerbaijan? – The Market/Industry readiness matrix

Encourage and facilitate

Initiate and germinate

Investigate and regulate

Identify road blocks and reformCreate supporting regulations and rules

Actively invite and solicit market entrantsHelp them navigate the system

Consider creating opportunities – Pension/Sukuk?Location incentives/training subsidies

Government

Private sector

Evaluate feasibility

Develop and execute

Innovate and grow

Encourage and facilitate

Initiate and germinate

Investigate and regulate

Government

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

Deliver local demand, learn,

innovate, develop overseas demand,

attract capital, become specialist, develop leadership and dominate the

region

Next steps for Azerbaijan? – The Market/Industry readiness matrix

Evaluate feasibility

Develop and execute

Innovate and grow

Encourage and facilitate

Initiate and germinate

Investigate and regulate

Government

Private sector

PRESENT STATE

POTENTIAL

Next steps for Azerbaijan? – The Market/Industry readiness matrix

Thank You

Neil D. Miller

Global Head of Islamic Finance

Email: neilmiller@kpmg.com

Questions?