1. Future of Islamic Finance
Sami Al-Suwailem
Islamic Development Bank Group
Raie I, 1431H – March, 2010

2. Lessons from the Crisis
Risk can be exogenous (earthquakes, tsunamis, etc.)
It also can be endogenous, arising from the actions of banks and traders
Financial crises are largely endogenous
We need to build the Islamic financial industry to be resilient to both types

3. Financial Industry Before the crisis it was practically homogenous
Most are trading the same securities and follow same strategies
When a shock hits, the entire industry moves in lockstep
Liquidity evaporates when every one wants to sell at the same time

4. Diversity A stable system must be sufficiently diverse
Diversity makes the system resilient to external shocks
Diversity creates complementarity and thus improves productivity
Diversity = Liquidity

5. Islamic Finance Integrated with real economy
Since real economy is diverse by nature, IF becomes diverse as well
IF encourages specialization which improves productivity creativity
IF is also diverse in terms of modes of finance: musharakah, ijarah, salam, deferred sale

6. Islamic Financial Industry
Commercial banks 74%
Investment banks 12%
Sukuk 11%
Investment funds 2%
Takaful accounts for 1% (IFSL, 2009)

7. IFI Landscape IF industry has to be diversified and integrated
The industry should be organized according to the ability to absorb risk
At one end is equity-based institutions: maximum shock absorber with maximum value created
At the other is short-term debt: the least absorber with lowest value created

8. Integrated Value Line Equity markets Venture capital Investment funds
Leasing companies
Long-term debt-financing institutions
Medium-term & short-term— commercial banks
Money markets

9. Transformation of Risk
Lowest risk and value
Commercial banks
Investment and leasing companies
Equity market and institutions
Money markets
Maximum risk and value

10. Strategy for Building Islamic Financial Industry
Emphasize first equity and leasing segments, then move to commercial banks and money market
Banks need to be supplemented by other specialized finance to function productively
Misplaced order results in unfair demands and unrealistic expectations

11. Legal Framework Diversity requires boundaries
Boundaries must be economically viable and not ad hoc
Boundaries might be based on:
Area of specialization (manufacturing, trade, etc.)
Type of contract (equity, leasing, debt, etc.)
Time-horizon (long-term, medium-term, short-term)

12. Time Horizon The most important dimension is time- horizon
Reason: maturity mismatch creates endogenous fragility of the financial system
Aligning assets and liabilities is essential for avoiding systemic risks
Time-horizon induces the choice of specialization and type of contracts

13. Conclusion
By preserving boundaries between financial institutions, diversity is protected
By choosing boundaries based on asset-liabilities harmony, systemic fragility is minimized
Together, both endogenous risk and exogenous risk are better neutralized

14. والحمد لله رب العالمين