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Shariah - Compliant Markets: Challenges & Opportunities İbrahim M . TURHAN , Ph.D. Chairman & CEO September 2

Shariah - Compliant Markets: Challenges & Opportunities İbrahim M . TURHAN , Ph.D. Chairman & CEO September 20 , 2013. Agenda. I. Global Outlook of Shariah-Compliant Finance Global Shariah-Compliant Financial Assets Global Shariah-Compliant Banking Assets

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Shariah - Compliant Markets: Challenges & Opportunities İbrahim M . TURHAN , Ph.D. Chairman & CEO September 2

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  1. Shariah-Compliant Markets: Challenges & Opportunities İbrahim M. TURHAN, Ph.D. Chairman & CEO September 20, 2013

  2. Agenda • I. Global Outlook of Shariah-Compliant Finance • Global Shariah-Compliant Financial Assets • Global Shariah-Compliant Banking Assets • Global Shariah-Compliant Capital Markets • II. Shariah-Compliant Finance: Challenges • Lack of Standardization • Conflicts among the opinions of Shariah Boards • Lack of enough Expertise and Human Capital • III . Shariah-Compliant Finance: Opportunities • Asset-based Structure • Reduction in Systematic Risk • Sukuk: Opportunity for Long-term Funding 2 20.09.2013

  3. Agenda • I. Global Outlook of Shariah-Compliant Finance • Global Shariah-Compliant Financial Assets • Global Shariah-Compliant Banking Assets • Global Shariah-Compliant Capital Markets • II. Shariah-Compliant Finance: Challenges • Lack of Standardization • Conflicts among the opinions of Shariah Boards • Lack of enough Expertise and Human Capital • III . Shariah-Compliant Finance: Opportunities • Asset-based Structure • Reduction in Systematic Risk • Sukuk: Opportunity for Long-term Funding 3 20.09.2013

  4. Global Outlook of Shariah-CompliantFinance Total Shariah-compliantassets consist less than 1% of global assets (USD 332.6 tr) CAGR (2008-2013): 18.4% • Growth forecast in global Shariah-Compliant financial assets in 2013: 11% • The size of Shariah-Compliant financial assets are expected to reach USD 4 trillion by 2020. Source: Bloomberg and KFH Research Source: Bloomberg and KFH Research 4 20.09.2013

  5. Global Outlook of Shariah-Compliant Finance Shariah-Compliant Financial Assets Source: Bloomberg, KFH Research 5 20.09.2013

  6. Global Outlook of Shariah-Compliant Finance Shariah-Compliant Banking Assets CAGR (2007-2013): 17.7% Source: Bloomberg, KFH Research Source: Bloomberg, KFH Research 6 20.09.2013

  7. Global Outlook of Shariah-Compliant Finance Shariah-Compliant Capital Markets • Based on current growth forecast, Shariah-Compliant financial institutions will require at least US$ 400billionof shortterm, credible, liquid securities for liquidity and capital management purposes, by 2015. Source: IIFM Database 7 20.09.2013

  8. Global Outlook of Shariah-Compliant Finance Shariah-Compliant Capital Markets Structural Breakdown ofDomestic Sukuk Issuance Globally-(2001-2013) Source: IIFM Database Source: IIFM Database 8 20.09.2013

  9. Global Outlook of Shariah-Compliant Finance Shariah-Compliant Capital Markets Source:www.cmalert.com, IFIS, Zawya 9 20.09.2013

  10. Agenda • I. Global Outlook of Shariah-Compliant Finance • Global Shariah-Compliant Financial Assets • Global Shariah-Compliant Banking Assets • Global Shariah-Compliant Capital Markets • II. Shariah-Compliant Finance: Challenges • Lack of Standardization • Conflicts among the opinions of Shariah Boards • Lack of enough Expertise and Human Capital • III . Shariah-Compliant Finance: Opportunities • Asset-based Structure • Reduction in Systematic Risk • Sukuk: Opportunity for Long-term Funding 10 20.09.2013

  11. Shariah-Compliant Finance: Challenges A) Lack of Standardization • Lack of harmonization in regulations (Different terminologies, procedures and applications) • Does time value of money in Islam exist? • Non-standardization of products • Market centered (Conventional) vs. Bank centered (Shariah-Compliant) • Financial Intermediation in Shariah-CompliantFinanceis restricted. 11 20.09.2013

  12. Shariah-Compliant Finance: Challenges A) Lack of Standardization • Latent Organized Exchange for Sukuk: 17% of Total Global Sukuk Issued in Stock Exchanges. • 65% of Sukuk (issued in organized exchanges) located on outside of Islamic countries. Source: Zawya 12 20.09.2013

  13. Shariah-Compliant Finance: Challenges B) Conflicts among the opinions of Shariah Boards • Lack of consensus among scholars (various Shariah boards) • Number of Shariah Boards around the World is more than 400 • Total number of board membership around the World is 1,141 • Diversification in the interpretation of Shariah-compliance. Source: Funds@Work 13 20.09.2013

  14. Shariah-Compliant Finance: Challenges C) Lack of enough Expertise and Human Capital • Shortage of human capital • A group of 20 prominent Shariah scholars sit on 55% of total Shariah board memberships. • Top 2 Scholars hold 85 board memberships. • With scholars holding dozens of portfolios, it is impossible for them to have good performance. Source: Funds@Work 14 20.09.2013

  15. Shariah-Compliant Finance: Challenges C) Lack of enough Expertise and Human Capital • There are only 123 Shariah-Compliantprograms that cover five continents and are distributed over 26 countries. Source: Belouafi, A., Belabes, A., & Daoudi, M. (2012). Geo-education of Islamic finance in the global space. Procedia-Social and Behavioral Sciences, 46, 5335-5339. 15 20.09.2013

  16. Agenda • I. Global Outlook of Shariah-Compliant Finance • Global Shariah-Compliant Financial Assets • Global Shariah-Compliant Banking Assets • Global Shariah-Compliant Capital Markets • II. Shariah-Compliant Finance: Challenges • Lack of Standardization • Conflicts among the opinions of Shariah Boards • Lack of enough Expertise and Human Capital • III . Shariah-Compliant Finance: Opportunities • Asset-based Structure • Reduction in Systematic Risk • Sukuk: Opportunity for Long-term Funding 16 20.09.2013

  17. Shariah-Compliant Finance: Opportunities • A) Asset-based Structure Ratios on Balance Sheets: Shariah-Compliant vs. Conventional Banks (Bankscope Data for 2956 banks around the world) Source: Beck, T., A. Demirguç-Kunt, and O. Merrouche.(2010). Islamic vs. Conventional Banking: Business Model, Efficiency and Stability.World Bank Policy Research Working Paper 5446. 17 20.09.2013

  18. Shariah-Compliant Finance: Opportunities • B) Reduction in Systematic Risk Source: IFSB 18 20.09.2013

  19. Shariah-Compliant Finance: Opportunities • B) Reduction in Systematic Risk Source: Ernst & Young 19 20.09.2013

  20. Shariah-Compliant Finance: Opportunities • C) Sukuk: Opportunity for Long-term Funding Source: IFIS, Zawya 20 20.09.2013

  21. Shariah-Compliant Finance: Opportunities • C) Sukuk: Opportunity for Long-term Funding Source: IFIS, Zawya, Bloomberg, KFHR 21 20.09.2013

  22. Shariah-Compliant Finance: Opportunities • C) Sukuk: Opportunity for Long-term Funding Sukuk Issued by Shariah Principles (2001-2012) Source: IFIS, KFHR Source: IFIS, KFHR 22 20.09.2013

  23. Shariah-Compliant Finance: Opportunities Special Case: Turkey • Total housing loans in Turkey equal to TL104 billion, by August 2013. • Urbanization process of Turkey props the increasing housing loans. Source: CBRT, UN 23 20.09.2013

  24. Shariah-Compliant Finance: Opportunities Special Case: Turkey • Under the urban transformation plan, approximately 8 million dwellings are expected to be rebuilt in 20 years. • Urban transformation requires approximatelyUSD 800 billion. • For liquidity, Turkey needs secondary loan market for housing credits. • Shariah-Compliant Finance tools such as Sukuk Issuance would be a solution. Source: Yildirim, Y. (2012). Urban Transformation. SabahattinZaim Islam and Economy Symposium. 24 20.09.2013

  25. Shariah-Compliant Finance: Opportunities Special Case: Turkey Source: IFIS 25 20.09.2013

  26. Recent Developments on Islamic Finance Source: IFIS 26 20.09.2013

  27. S&P/OIC COMCEC 50 Shariah vs. DJIM Index Source: Bloomberg 27 20.09.2013

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