The Principles, Aims and Evolution of Islamic Finance Iqbal Khan 5 March 2013

1. The Principles, Aims and Evolution of Islamic Finance Iqbal Khan 5 March 2013 Twitter: @IqbalKhanCEO

2. The importance of ethical finance is underpinned in the monotheistic scriptures CHRISTIANITY • Being in debt is equivalent to servitude because of the immense burden to repay. Hence, “The rich rule over the poor and the borrower is slave of the lender” (Proverbs 22:7). JUDAISM • "The first question an individual is asked in the afterlife at the final judgment is: “Did you conduct your business affairs honestly?” (Babylonian Talmud, Shabbos 31a) ISLAM • “However plentiful usury may look from the outside, its end is want and ignominy” (Hadith) Islamic Finance is a continuation of the principles of CSR, ethics and fairness in the Abrahamic faith

3. Islamic Finance principles consist of core basic tenants • If something is immoral, one cannot profit from it 1 • To share reward, one must also share risk 2 • One cannot sell what one does not own 3 • In any transaction, one must clearly stipulate what he or she is buying or selling and what price is being paid 4 Removing speculation and creating value-enhancing and sustainable activity

4. Islamic Finance is the outcome of CSR derived from religion and applied to banking Corporate Social Responsibility Accountability to God Corporate governance “More-than-profit” mentality Ethical profits (rather than “profits-at-any-costs”) Business ethics Shari`a “code of ethics” Islamic Finance is capitalism with a moral compass

5. structured products insurance 2000s 2000s 1970s 1970s private equity 1980s 1980s 1990s 1990s project finance equity The industry has developed a comprehensive product offering over its young history Development of industry Evolving richness in products • Development of theoretical framework • Muslim-majority nation independence 1950s Debt issues • Egypt and Malaysia pioneering institutions • Establishment of OIC (1969) 60s • Islamic Development Bank (1974) and DIB • One country-one bank setup 70s • Advancement of Islamic products • Full “Islamization” of Iran, Pakistan and Sudan 80s syndications 90s • Entry of global institutions e.g. HSBC Amanah structured and trade finance • Tipping point reached in some markets • Development of industry-building institutions 00s Industry has near like-for-like parity with conventional offering

6. In all, the Islamic finance industry is developing a global reach… • Growth Engine • Awakening • Ripe for Growth • Future Markets Source: Standard and Poor’s “The Globalization of Islamic Finance”

7. The development of the Islamic finance industry has been fuelled by pioneering institutions and industry building organisations

8. Growth and drive is being led by customer demand Government driven • Islamic Finance was not established by a royal decree or a presidential announcement, but it was the will of the people which created the industry. • Growth in the GCC Islamic banking markets are primarily driven by customer demand • Malaysia presents a near ideal regulatory and market-driven model for Islamic business Iran Sudan Malaysia Bahrain Pakistan Brunei UK UAE Singapore Kuwait Qatar Bangladesh Saudi Arabia USA Sri Lanka Japan Indonesia China Turkey Egypt Key: Bubbles indicate illustrative size of Islamic banking assets Source: Central Bank, Reports, industry estimates Market driven

9. The Islamic finance ecosystem is growing: Total Islamic finance assets may surpass $1.8 trillion in 2013 Top 20 Islamic banks make up 55% of the total Islamic banking assets and are concentrated in 7 countries, including GCC, Malaysia and Turkey. 13 Islamic banks have an equity base of more than $1 billion. Building regional institutions and participating in larger transactions requires the industry to scale up. Islamic finance continues to grow at an exponential pace. Higher growth in personal financing assets is made up from a number of factors: pricing differential has been reduced or eliminated, customers are more accepting of Islamic finance, and the industry’s distribution capability has improved immensely. Source: Ernst and Young – The World Islamic Banking Competitiveness Report

10. Some of the pioneers of the Islamic finance industry REGULATOR PRACTITIONER SHARI’A SCHOLAR ENTREPRENEUR ACADEMIC Lord Eddie George (1938 – 2009 ) Sir John Bond (1941 – ) Sheikh Saleh Kamel (1941 – ) Royal Professor Ungku Abdul Aziz (1922 – ) Sheikh Ibn Baaz (1910 – 1999)

11. Mountaineering Analogy: The Islamic Finance industry has come a long way since the days of its pioneers, but it still has a long way to go… • Creating role model institutions which facilitate the demonstration effect. • Democratizing wealth and ensuring stability. • Fortifying and strengthening the industry’s foundations. Beacon House • A globally recognised one trillion dollar + industry. • 150% increase over the last five years. • Exponential growth in core markets i.e. Middle East and Malaysia. Laying the Foundations The evolving political and economic paradigm will drive our industry forward

12. Today’s interconnected and dynamic world is presenting a unique opportunity for Islamic finance to prosper THE GREAT RECESSION OCCUPY MOVEMENTS ARAB AWAKENING • The Arab Awakening was driven by the young people facing dire socio-economic conditions, with access to social media and a hunger for change. The uprisings led to regime changes in Tunisia, Egypt, Libya – and protests in Bahrain and Syria, amongst others. • The global economic crisis – sparked by the bursting of the U.S. housing bubble and fuelled by various systemic imbalances. The effects of the crisis is now being felt by those at the grassroots, and is leading to a political and economic paradigm shift. The “Occupy Movements” have highlighted grassroots support for concrete reforms in the financial services sector. The movement led to protests and occupations in over 80 countries and across every continent except Antractica.

13. The current global economic crises highlight the need for a value-based approach to financial services • Need for savings and investment orientation to replace consumption and credit culture 1 Financial Institutions Impact points 2 4 Policy Implications Global Markets • Differentiation between deposit-taking institutions and investment managers • Dangers of opaque sale of debt now shown to be evident • Stronger links needed between banking and real economy investment 3 Real Economy Material crisis requires moral solutions

14. How Scotland can capture the Islamic finance opportunity POLITICAL ENABLEMENT • Regulatory and public sector support to make Scotland a ‘hub’ for the Islamic finance industry. 1 ATTRACTING ISLAMIC FUNDS • Trade and Investment engagement with high-growth OIC markets to attract funding for projects i.e. Sukuk model. 2 RESEARCH AND INNOVATION • Creation of a Centre of Excellence to provide much-needed research and analysis to support the industry’s growth. 3 THE PEOPLE PARADIGM CREATING SUSTAINABLE GROWTH • Islamic finance academic programmes at Scottish universities to attract domestic and international students. • Boosting job creation and economic prosperity by enabling Scottish companies to expand in Muslim-majority markets. 4 5

15. Martin Luther King, Jr. (1929-1968) “Through our scientific genius we have made of the world a neighborhood; now through our moral and spiritual genius we must make of it a brotherhood.”