Islamic Capital Markets and Products

Managing Capital and Liquidity Requirements Under Basel III

Simon Archer, Rifaat Ahmed Abdel Karim

• Publisher: Wiley
• Year: 2017
• Print ISBN: 9781119218807
• eBook ISBN: 9781119218814
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Banca y finanzas islámicas

Ensure Basel III compliance with expert analysis specific to Islamic Finance

Islamic Capital Markets and Products provides a thorough examination of Islamic capital markets (ICM), with particular attention to the products that they offer and the legal and regulatory infrastructure within which they operate. Since Islamic banks act as asset managers, attention is paid to the regulatory challenges which they face in the light of Basel III, as regards both eligible capital and liquidity risk management. The authors of the chapters are professionals and practitioners, and write from experience. The editors also contributed to some of the chapters.

The markets and products covered include Islamic equities, Islamic investment certificates (Sukūk) which are Shari'ah compliant alternatives to conventional bonds, and Islamic Collective Investment Schemes. The coverage of legal and regulatory issues includes an examination of the implications for ICM of securities laws and regulations and of Basel III, as well as collateralisation issues. Shari'ah compliance aspects, in terms both of the selection criteria for Islamic equities and of the 'purification' of impermissible components of income, are also examined in some detail, as are the implications of Basel III for eligible capital in general and for Shari'ah compliant capital instruments in particular. A similar analysis is also made of the implications of the Basel III requirements for liquidity risk management and high quality liquid assets (HQLA), including Shari'ah compliant HQLA.

The book concludes with three case studies, two describing the ICM in Malaysia and Bahrain and a third which describes Sukūk issued as Shari'ah compliant capital instruments, followed by brief concluding remarks by the editors.

CHAPTER 1
Overview of the Islamic Capital Market

By Simon Archer, Brandon Davies and Rifaat Ahmed Abdel Karim

This chapter provides an extensive overview of the Islamic capital market (ICM), or more broadly the Shari'ah-compliant finance industry, and its various segments, including equities, sukuk (Islamic investment certificates), investment funds and Islamic banks. This overview is presented in the context of the international capital markets of which the ICM forms a growing part. Later chapters in this volume deal in more detail with various aspects of the ICM, including Islamic equities, sukuk, Islamic investment funds and legal, Shari'ah and regulatory issues.

HISTORY OF THE ICM

The beginning of the modern Islamic financial industry can be dated to the mid-1970s. Fundamentally different in some important respects from the conventional financial model, Islamic finance has its religious identity and is based on the principles of Shari'ah (Islamic law) and the rules of Fiqh al Muamalat (Shari'ah commercial jurisprudence).

Total assets of Shari'ah-compliant financial institutions have grown by an average of 15–20 percent per annum over the past five years, suggesting strong demand for Islamic investing. It is expected that Islamic finance will continue to grow at this rate for the next few years. The figure for total assets in Islamic finance was around USD2.0 trillion at the end of 2015.

The growth in Shari'ah-compliant finance has also been mirrored in the growth of Shari'ah-compliant investment funds. It is estimated that currently there are more than USD75 billion under management in Shari'ah-compliant investment funds, while sukuk outstanding now amount to around USD300m (Table 1.1).

TABLE 1.1 Breakdown of Islamic finance segments by region (USD billion, 2015 YTD)

Source: IFSB Secretariat Workings

Region	Banking Assets	Sukuk Outstanding	Islamic Funds' Assets	Takaful Contributions
Asia	209.3	174.7	23.2	5.2
Gulf Cooperation Council countries	598.8	103.7	31.2	10.4
The Middle East and North Africa (MENA) region (exc. GCC)	607.5	9.4	0.3	7.1
Sub-Saharan Africa	24.0	0.7	1.4	0.5
Others	56.9	2.1	15.2	-
Total	1,496.5	290.6	71.3	23.2

Note: Data for banking and takaful as of 1H2015, while for sukuk and funds as of 11M15.

The majority of Shari'ah-based assets are, however, still banking assets which comprise around 75 percent of the total Shari'ah assets, but this represents a significant opportunity for sukuk (Shari'ah-compliant investment certificates which take the place of bonds) issuance. If we contrast major companies in the GCC area with major international companies the funding differences are stark. Major GCC companies average less than 50 percent bond versus bank funding, whereas major international companies average over 90 percent bond funding. This indicates that there is a significant opportunity for growth in the corporate sukuk market in GCC countries in particular.

GEOGRAPHIC SPREAD

Overall, Shari'ah-compliant finance assets are heavily concentrated in the Middle East and Asia, although the number of new markets is expanding, especially in Malaysia and other parts of South East Asia. The GCC region, with around 38 percent of total Shari'ah-compliant assets, accounts for the largest proportion of Islamic financial assets, as the sector sets to gain mainstream relevance in most of its jurisdictions. The Middle East and North Africa (MENA) region (excluding GCC) ranks a close second, with around a 35 percent share. Asia ranks third, representing around a 22 percent share in the global total, largely due to the size of the Malaysian Shari'ah-compliant finance marketplace (Table 1.2).

TABLE 1.2 Shari'ah banking assets

Country	% total
Saudi Arabia	51%
Brunei	41%
Kuwait	38%
Yemen	27%
Qatar	25%
Malaysia	22%
UAE	17%
Bangladesh	17%

The Shari'ah-compliant finance industry is deepening its significance in key traditional markets, mainly concentrated in the GCC and select countries in Asia. Aside from Iran and Sudan, which operate fully Shari'ah-compliant banking systems, Shari'ah-compliant banking has also now achieved systemic importance in seven other countries: Brunei, Kuwait, Malaysia, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Yemen. These markets operate a Shari'ah-compliant finance sector alongside the conventional finance sector within a dual financial system. They have each achieved at least 15 percent market share of total banking assets for their Shari'ah-compliant banking systems and/or hold more than 5 percent of the total global Shari...

Table of contents

• Cover
• Title Page
• Table of Contents
• Foreword
• Acknowledgements
• About the Editors
• CHAPTER 1: Overview of the Islamic Capital Market
• CHAPTER 2: Islamic Capital Markets and Islamic Equities
• CHAPTER 3: Sukuk – Unlocking the Potential for Economic Development
• CHAPTER 4: Islamic Collective Investment Schemes
• CHAPTER 5: Legal and Regulatory Considerations Pertaining to Islamic Capital Markets
• CHAPTER 6: Regulatory Aspects of the Islamic Capital Market and Basel III Requirements
• CHAPTER 7: Shari'ah Foundations of Islamic Equity Investment Criteria and Purification of Investments
• CHAPTER 8: Collateralisation in Islamic Capital Markets
• CHAPTER 9: Eligible Capital and Capital Instruments
• CHAPTER 10: Regulatory Aspects of the Islamic Capital Market and Basel III Requirements – Shari'ah-Compliant Bank Capital Instruments
• CHAPTER 11: Liquidity Risk Management and High Quality Liquid Assets
• CHAPTER 12: Malaysia's Islamic Capital Markets – A Case Study
• CHAPTER 13: Bahrain's Islamic Capital Markets – A Case Study
• CHAPTER 14: Sukuk Issued as Regulatory Capital Instruments for Basel III Compliance – A Case Study
• CHAPTER 15: Concluding Remarks
• APPENDIX A: Nominate Contracts Employed as a Basis for Shari'ah-Compliant Financial Transactions
• APPENDIX B: A Note on Market Index Providers
• Index
• End User License Agreement