SPEECH: Keynote Address by Mr Jaseem Ahmed, Secretary-General of the IFSB at the Islamic Banking Summit Africa
Date posted: 6 November 2012
Date: 6 November 2012
Event / Venue : Islamic Banking Summit Africa | Republic of Djibouti
Speaker: Mr Jaseem Ahmed, Secretary General, IFSB
Assalamu’alaikum warahmatullahi wabarakatuh and a very good morning to all of you.
It is indeed a great pleasure for me to speak at this inaugural “Islamic Banking Summit Africa”. My thanks and appreciation go to the organisers of the event for this opportunity. I would especially like to acknowledge the strong support that the Government and Central Bank of Djibouti have provided to the IFSB, where the central bank is an honoured member of the IFSB’s Council.
I am going to begin with a few words about the global economy, before going on to address how Islamic finance can support Africa’s need for greater trade and investment. In my remarks today, I am going to suggest that Islamic finance offers a major opportunity for diversifying the investor base, and raising investor interest in Africa. At the same time, there are important prior actions that need to be taken in terms of strengthening risk management capabilities and the legal and regulatory framework for financial sector supervision. This will be essential to ensure that the growth of the real economy, which is the ultimate goal of policy, is sustainable.
Excellencies, Ladies and Gentlemen,
The recently retired President of the World Bank observed, just before leaving office that, and I paraphrase: emerging economies are today the engines of their own growth, and the stewards of their choices.
He was referring to the fact that global economic growth is increasingly driven by the growth of emerging economies, and that emerging economies are demonstrating strengthened capabilities for policy development and implementation. Against this context, however, recent global economic projections are sobering in view of slow growth in the US and Europe. There is the likelihood of spill-over effects for emerging economies in terms of lower growth prospects, and in terms of heightened cross-border financial volatility.
In its recent report, the IMF suggests that “there is now a 1 in 6 chance of global growth falling below 2%, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies”1.The IMF projected the GDP of US and Euro area to reach 2.1% and 0.2%, respectively, in 2013. Even in the US, where the recovery continues, the Congressional Budget Office projects that GDP will recover to its pre-crisis peak only in 2018 – a full decade after the onset of the global crisis. These figures suggest that US and Europe are already well into what could become a lost decade – a period of economic stagnation, wasted human potential, heightened social turbulence and inequality, and lost opportunities in terms of growth and development.
Lower growth in the US and Europe is likely to impact on emerging economies, including Africa, through reduced levels of FDI, tourism revenues, financing for infrastructure, and the provision of concessional aid flows from traditional sources. But there are also grounds for optimism.
The challenge, and opportunity, in Africa is to diversify funding sources and the investor base, as markets look for new investment opportunities to maximise returns on capital. Islamic finance has a potentially major role to play in this context. Djibouti represents a promising example of the diversification I am talking about – through the innovative financing mechanisms it has drawn upon for its port and tourism infrastructure.
Excellencies, Ladies and Gentlemen
Expansion of Islamic finance
The global IFSI continues to experience double digit growth, with the Sharī`ah-compliant assets now exceeding the USD1 trillion mark2. The range of products and services offered has also widened from primarily retail banking products to more sophisticated capital market instruments, underpinned by the innovative and dynamic nature of the industry and the desire by Islamic financial institutions to meet the needs of customers’ and requirements for Sharī`ah-compliant products and services. Indeed, there is an expanding interest in participating in Islamic finance, and recognition that it can contribute strongly to promoting financial inclusion, and economic growth and development.
The strong growth of Islamic finance has been exemplified by the emergence of Sukūk as an attractive Sharī`ah-compliant asset. In the first half of 2012, Sukūk issuances grew by 40.1% y-o-y to USD66.4 billion3, with strong performances by sovereign and quasi-sovereign issuances in Malaysia and the GCC for the financing of infrastructure. This underscores the enormous prospects for Islamic finance to play a mainstream role in financing the development of economies in both emerging and developed markets.
Let me take this point a little further by highlighting two related aspects. First, as I have already mentioned, there is the financing of public expenditures on physical and social infrastructure through Islamic finance solutions. In Asia and in the GCC we are seeing increasing recourse to Islamic finance for public expenditures on roads and communications, mass transit systems, as well as on energy projects and on health.
Second, following the pioneering efforts of countries such as Sudan, Bahrain and Malaysia governments are integrating Islamic finance instruments into their public finance and expenditure frameworks through sovereign Sukūk issuance programmes. In the process, these countries are developing parallel capacities for the issuance of both long and short-term government Islamic securities that can sustain developmental and project financing, and meet the need for liquidity management instruments by IFSI.
It is thus significant that both sovereign and quasi-sovereign entities are now planning for the future not through one-off Islamic financing solutions, but through medium term Sukūk issuance programmes. This suggests that these economies have made significant progress towards developing a capacity to establish and deepen Islamic capital, money and inter-bank markets. These markets represent the critical missing link towards a fuller development of capacities for liquidity risk management within Islamic financial institutions. At the same time, they enhance the capacity of the authorities to strengthen the stability of the Islamic financial system through the provision of instruments and markets for monetary control. This is of critical importance in those economies in which there are significant prospects for expansion of Islamic banks, and of the wider IFSI.
In short, what we are seeing is the transformation of the Islamic finance industry through the implementation of phased public policies for market development, and the strengthening of institutional and human capabilities. From this perspective, the issuance of Turkey’s first sovereign Sukūk, for example, should lead us to recognize the deeper significance. Namely, that this issuance comes against the back of a significant process of legal, tax and other reforms – all of which have been guided by a public policy commitment, framed over the medium to longer term.
I mention Turkey as the most recent example, but there are other sovereigns in Asia, Africa, and Europe, where such policy and institutional preparation is likely to lead to the growth and sustainable expansion of Islamic finance, despite the global economic headwinds that we all face together.
Opportunities for Islamic Finance in Africa
Let me now turn to prospects for Islamic finance in Africa. Over the long term, economic and demographic projections indicate expanding prospects for Islamic finance in the continent
Africa’s GDP grew by an annual average of 5.6% in 2002–2008, making it the second-fastest growing region in the world, just behind East Asia4. Since then, growth continues to pick up well. Of the world’s 15 fastest-growing economies in 2010, 10 were African. With the exception of South Africa which has close financial and trading ties with Europe, Africa has so far been relatively unscathed by the euro zone crisis. The IMF projected Africa’s GDP to increase from a 5% growth rate in 2012 to 5.7% in 2013, underpinned mainly by increased receipts from commodity exports and rising demand for commodities, particularly from emerging markets in Asia. Besides the agricultural and services sectors which remain as the catalyst of growth for the continent, growth is also being supported by other services such as trade, transport, financial services and real estate.
Given the uncertainty in the global economic outlook and Africa’s positive outlook, Africa is now in the spotlight as markets look for new investment opportunities. The continent’s trade ties with the GCC, which continues to strengthen in recent times serves as a promising foundation for sustained trade and investment flows into Africa. But Asia is also increasing in importance as a trade and investment partner. Opportunities for Islamic finance in the African countries stem from the need to fund long term growth strategies and infrastructure spending, as well as to spur private sector investment.
Let us look at some of the other ways in which Islamic finance can contribute towards the growth and development of the African countries. First of all is the provision of financial solutions for cross-border trade and investment. Over the last 10 years, trade levels between Africa and the GCC increased by 170%. This presents an opportunity for greater collaboration in Africa between Islamic banks from the two regions.
At the multi-lateral level, the Islamic Development Bank has recently pledged its commitment to growing trade finance and funding agricultural projects in Africa, in particular countries in the north and west of the continent.
In terms of retail financing, the growing number of middle-class Africans, which tripled over the last 30 years to contribute more than 34% of the continent’s population5, will boost the demand for housing, auto vehicles and insurance products, and herein lies an opportunity for broad based expansion of Islamic banking systems in Africa.
Next, as recounted earlier, a country’s infrastructure requirements and project finance can also be met by the issuance of Islamic capital market instruments such as Sukūk and Islamic funds, tapping funds from Asia and Middle Eastern investors – taking advantage of the existing channels for the allocation of funds across borders and the diversification of risks.
Egypt and Sudan and Gambia are already on the Sukūk map, and other countries such as South Africa and Morocco are expected to develop their capabilities in the near future. While the range of investment products is currently limited, South Africa, Egypt, Mauritania, Nigeria and Tunisia have already witnessed a number of Islamic funds launched over the years. Factors that would buoy the Islamic funds industry in Africa include the continent’s various commodities, namely agricultural products and vast natural resources such as metals and mining, and oil and gas.
Other opportunities include the small- and medium-sized enterprise (SME) sector as well as Islamic microfinance which are crucial to create jobs and help to support economic growth and eradicate poverty through greater financial inclusion. This calls for Islamic banks to play a bigger role in the real sector development.
To take advantage of the looming opportunities offered by Islamic finance, it is crucial for the African countries to put in place the relevant policies and financial infrastructure. This means that enabling environments must be improved and regulatory and supervisory frameworks strengthened. It will also be important to start the work on capacity and human resources development as soon as possible, as these typically have long gestation periods. These efforts will benefit from the participation and cooperation of the private sector, so that its energy and innovation is directed towards generating sustainable growth and a prosperity that is broadly shared across society.
Excellencies, Ladies and Gentlemen,
The IFSB: Recent Initiatives
Before closing, I would like to bring to your attention the following IFSB initiative. This is the IFSB Medium Term Strategic Performance Plan 2012-2015, which was approved by the IFSB Council in March of this year. The Plan lays out a roadmap for the IFSB over the medium term (i) to develop a range of new standards and guiding principles corresponding to the fundamental changes in the global regulatory environment arising from the Basel III capital and liquidity frameworks and related measures, (ii) to broaden the range of cross-sectoral prudential and supervision standards and guiding principles to include Takāful and capital markets, and (iii) to intensify efforts in support of implementation of prudential standards amongst IFSB member jurisdictions.
In this context, and in relation to standards preparation, earlier this month, the IFSB issued two new Exposure Drafts, namely (i) ED-14: Standard on Risk Management for Takāful (Islamic Insurance) Undertakings, and (ii) ED-15: Standard on Revised Capital Adequacy for Institutions offering Islamic Financial Services.
- ED-14 identifies certain key features which a Takāful Operator should consider when observing Sharī`ah rules and principles in its activities. The document calls for appropriate attention be given to the risks arising from the segregation of funds between the Participants’ Risk Fund (PRF), Participants’ Investment Fund (PIF) and the Shareholders’ Fund (SHF).
- Meanwhile, ED-15 is a revision of the previous IFSB Standard on Capital Adequacy and provides additional guidance on capital adequacy requirements which correspond to the global regulatory developments after the recent financial crisis, including Basel III. The ED aims to provide a comprehensive guidance to supervisory authorities and institutions offering IIFS on the application of capital adequacy regulations and macroprudential tools.
We rely on, and benefit greatly, from the scrutiny and viewpoints of our members and stakeholders in the global and IFSI community. I would like to invite your comments to these standards, which are now on our website.
Finally, I would like to draw your attention to the 10th IFSB Global Summit which will be held in May 2013, in Kuala Lumpur, Malaysia. The Summit takes place on 16-17 May, 2013, and will be preceded by pre-Summit Country-Showcases and other events on 15 May. Please mark those dates on your calendar and join us!
In closing, I would like to reiterate that the key strength of the IFSI is the close link between financial transactions and economic activity which has allowed Islamic finance to continue to serve the real economy. This, coupled with the system’s internal checks and balances through profit- and risk-sharing, transparency and disclosure requirements, and ethical values of fairness, will help to increase the prospects for sustainable economic prosperity and financial stability in the Islamic finance jurisdictions.
For Africa, as with other emerging economies, its economic prosperity through sustained, inclusive growth and poverty reduction faces the challenge of global economic headwinds. In this context it will be of benefit, and indeed it is essential, that growth strategies be founded on strong forward looking principles. I will suggest three today for your consideration, and am assured that each will be familiar to you, especially here in Djibouti which has taken important steps towards developing its prospects as an economic hub. First, is the need for policies that spur private sector development through support for trade and investment. Second, is the diversification of funding sources and the investor base, through increased reliance on Islamic finance as a key component of a broader economic system. Finally, there is the need to put in place the legal and regulatory policies that will strengthen the resilience and soundness of the financial sector. I have suggested some of the key aspects of market and institutional development which will strengthen the capacity for risk management in the IFSI. This is likely to be a long term exercise, on which it is best to begin work as early as possible.
On that note, let me thank you for your attention.
1World Economic Outlook October 2012, International Monetary Fund
2The Banker's 2011 Top 500 Islamic Financial Institutions report
3KFH Research Global Sukuk Report 2Q 2012
4Economic Report on Africa 2012: Unleashing Africa’s Potential as a Pole of Global Growth, Economic Commission for Africa
5Middle of the Pyramid: Dynamics of the Middle Class in Africa, African Development Bank, 20 April 2011
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