1. Islamic Finance – before and after the market disturbances
Date
Islamic Finance – before and after the market disturbances
Madhukar Shenoy
Global Islamic Finance Team
PricewaterhouseCoopers
3 March 2010
PwC

2. Agenda The Islamic finance business model
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Agenda
The Islamic finance business model
The evolution of Islamic finance
Impact of financial crisis on Islamic finance
Consequences
What do we need, 2010 and beyond?

3. The Islamic finance business model
Date
The Islamic finance business model
Business modelled around the real economy
Avoidance of riba 1
Business models devoid of derivative/synthetic structures
Avoidance of gharar 2
Greed eliminated
Avoidance of maisir 3

4. The evolution of Islamic finance
Date
The evolution of Islamic finance
Several new banks emerged in the region and across the globe.
Western banks such as HSBC, Citi, UBS etc. entered the fray
Egypt, Dubai and Bahrain established contemporary style Islamic banks
1970s s s New millennium
We witnessed the birth of contemporary Islamic banking in Cairo and in Dubai in the mid 70s. Bank Misr and Dubai Islamic Bank were pioneers. Soon thereafter several banks were established in the GCC and Bahrain led the pack.
Retail to corporate focus
Birth of private equity and real estate focused firms
Corporate Sukuk issues
Government interest
Conversions from conventional
Takaful growth
Bahrain, Malaysia emerged as key centres of Islamic finance

5. Impact of financial crisis on Islamic finance
Date
Impact of financial crisis on Islamic finance
Housing bubble
Subprime
Lehman's collapse
Contagion effect
Loss of confidence
Liquidity crisis
Subprime
Islamic banks had no significant exposure
Housing bubble
Shari’a compliant investment banks with global exposures impacted most
Lehman's collapse
Contagion effect
Liquidity, asset quality and impairment problems impacted regional banks
Loss of confidence
Liquidity crisis
Funding and capital raising under pressure
Dubai events

6. Financial crisis and impact on Islamic finance
Date
Consequences
Financial crisis and impact on Islamic finance
Impact
Investment Banking
Commercial Banking
Private equity
Real estate
Lack of exits
Loss of investors
Profit and liquidity pressure
Risk (breadth and depth)
Interbank liquidity
Margins under pressure
Capital adequacy
Asset valuations
Retail
Margins under pressure
Asset valuations

7. Financial crisis and impact on Islamic finance
Date
Consequences
Financial crisis and impact on Islamic finance
Impact
Profitability
Liquidity
Impairment
Lack of exits
Margins under pressure
Fee earning activities
Asset growth
Interbank liquidity
Mistrust
Transparency
Fear
Capital
Credit squeeze
Lack of confidence
Leverage
Regulatory capital decline
Increased risk

8. What do we need, 2010 and beyond?
Date
What do we need, 2010 and beyond?
Robust
infrastructure
Greater
levels of
transparency
Robust
business
models
A number of initiatives would need to be considered – starting at the grass root level from investor education, to regulatory regimes. The banking system, the regulatory infrastructure should consider the business models that allow Sharia compliant banking in its true spirit keeping in mind the underpinning ethical and social values that Shari’a stands for.
One must at all costs consider avoid the system of shadow banking that was witnessed in the recent crisis – investment firms had introduced a parallel banking system. Innovation had resulted in Citi carrying more than double its on balance sheet exposures in Qualifying Special Purpose Entities (QSPEs). At the end of 2007, its on balance sheet mortgages were $313 bn versus $601 bn off balance sheet mortgages as per the 10K filings – an almost 1/3rd 2/3rd split!. Avoiding greed from the system requires much attention.
The

9. From survival to sustainability*
Thank you
Date
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