Settingup of a banking activity in Algeria second line title

1
HSBC SECURITIES SERVICES
Islamic Finance and Islamic Funds
Germain Birgen, Managing Director HSBC
Securities Services (Luxembourg) S.A. And Global
Head of Fund Solutions HSS
October 2009
2
Agenda

• Chronology of modern Islamic finance
• Islamic Finance growth factors
• Islamic Finance principles
• Overview of Islamic Finance instruments
  services
• Equivalence between conventional and Islamic
  financial products
• Important worldwide potential for Islamic Finance
• Size of the market
• Key on-shore centres for Islamic Finance
• Europe - Leading financial centres position
  themselves
• Operational challenges for Islamic investment
  funds
• HSBC Amanah Securities Services
• Questions Answers

3
Chronology of modern Islamic finance

• Modern Islamic finance has existed for over 40
  years

Islamic assets expected to grow at 15 and exceed
US 2 trillion by 2017
Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI) established.
AAOIFI acts as a nodal body advising on standards
to be followed by Islamic institutions worldwide
First Islamic Bank Established in Egypt
Iran introduces 100 Islamic Banking System
Dubai Islamic Bank established under special law
pioneering Islamic Banking in the Middle East
region
Fiqh Council of OIC declares Takaful as fully
Islamic paving the way for Islamic Insurance to
flourish
IFSB introduces Standards on Basel ll
compliance for Islamic institutions
Sudan launches Islamic Banking
Islamic Financial Services Board (IFSB)
established in Malaysia. The organisation
enhances stability of the industry by issuing
standards
Islamic Development Bank (IDB) established to
foster the economic development and social
progress of member countries and Muslim
communities. IDB participates in equity capital
and grant loans for projects in member countries
Total Islamic assets aggregate to US 500
billion, growing at the rate of 15-20 over the
past 10 years
Sudans banking system becomes 100 Islamic
Malaysia passes comprehensive legislation on
Islamic Finance
Source Maris Strategies The Banker, Media
Reports, Ernst Young Analysis
4
Islamic Finance growth factors
5
Islamic Finance principles
Quran
Rules setting the principles
Shariah
Governing Rules
Schools of thought
Largest community is Sunni 4 major schools of
thought out of 7
Scholars
Religious authority in the fund
Purification
Unauthorized revenues are purified
6
Islamic Finance principles
Asset Backed
Transactions must be backed by tangible assets
Prohibition on Riba
Prohibition of payment/receipt of riba
(interest)
Prohibited Activities
Considered harmful to the society (e.g. alcohol,
pork, weapons, drugs or pornography business)
Prohibition of Gharar (speculation)
Subject of a contract must exist, must be
specifiable and measurable. Excessive
speculative trading in financial instruments is
prohibited (gambling)
Profit/Loss Sharing
The Bank acts as an agent/partner with the
depositor who is entitled to share the
gains/loss of the investment
7
Overview of Islamic Finance instruments
services in a nutshell
Debt-like instruments
Equity-like instruments
Monetary instruments
Services
Hybrid instruments
8
Equivalence between conventional and Islamic
financial products
Conventional Finance
Islamic Finance
Retail Banking
Asset Mgt Insurance
Wholesale Banking Cap. Mts
Treasury
9
Important worldwide potential for Islamic Finance
Potential Opportunities
10
Size of the market

• No established figures on size of investment
  market estimates reach from 100 bn (Cerulli)
  to 1 trillion (McKinsey)
• Recent reports - show conservative stance with
  assets estimated at 110 bn to grow to 160 bn
  in the three years to come (CAGR 15).
• Mutual funds - constitute the largest part of
  investment market with 29 bn in assets.
  Projected to almost double to 50 bn by 2012.
• SWF for the time being performance oriented
  rather than Shariah oriented (except
  Khazanah/Malaysia)
• Investment market defined as mutual funds,
  pension funds, takaful and private equity funds

11
Key on-shore centres for Islamic Finance

• Saudi Arabia the Kingdom is by far the largest
  market in terms of assets with an estimated
  investment market size of /- 40 bn. The market
  is mainly retail focussed. 77 of funds follow
  Shariah
• Malaysia dominant South-East Asian Islamic
  market. Largest domicile in terms of number of
  funds (23 of all funds worldwide). Well
  regulated, home of IFSB
• Kuwait with 9 of market share in terms of
  number of funds, Key centre in the Middle-East
• Indonesia interesting and developing market.
  Well regulated, but still quite small, mainly
  retail. Investment culture not well developed
  among retail public
• Bahrain largest international domicile for
  Islamic funds with 6 of all funds domiciled.
  Well regulated. Currently home to 100 funds ,
  expected to grow to 9 bn by 2012

12
Europe - Leading financial centres position
themselves

• United Kingdom granted first banking licences
  and amended legislation to attract Islamic
  finance
• France in process of granting banking licences
  to Islamic banking institutions and amended
  legislation and tax to attract Islamic Finance
• Italy promotes itself as attractive country to
  develop Islamic Finance
• Luxembourg already major hub for setting-up and
  servicing Islamic Investment funds with /- 40
  investment funds launched and a large number in
  process of being authorized. Largest non-Muslim
  domicile with 7 of all funds domiciled. The
  Government has created a task force to analyze
  opportunities covering private banking, fund
  services, insurance, stock exchange listing and
  sukuk issuance
• Ireland - positions itself as a major hub for
  setting-up and servicing Islamic Investment
  funds. The regulator set up a dedicated team to
  look at these funds
• Malta ????

13
Operational challenges for Islamic investment
funds

• Shariah compliant funds under Luxembourg law have
  to comply with law of domicile (based on EU
  directives for UCITS III) and the Shariah
  principles, which make it particularly difficult
  to assess what type of securities are eligible
  while respecting all criteria
• Shariah principles follow different schools of
  thought and as such leave room for
  interpretation, i.e. not all funds may be managed
  the same way
• The governance structure of a conventional fund
  has to co-exist with a Shariah board, the latter
  having very specific duties and responsibilities
  although not foreseen in any legislation
• The cash of the funds may not be managed by the
  custodian banks in a conventional way, but have
  to follow the Shariah principles (may not be
  co-mingled with the banks treasury and generate
  interest)
• The purification process, under which prohibited
  portions of revenue are paid out to charities in
  Muslim countries, is not regulated under UCITS
  laws
• For funds with daily subscriptions/redemptions,
  the difference between western and Muslim
  calendars is a challenge

14
HSBC Amanah Securities Services

• Currently 15 HSS offices offer Islamic
  services to funds and managers in Asia, Middle
  East, Europe and the Americas
• Key centres are Malaysia, Indonesia and Saudi
  Arabia (on-shore) and Bahrain, Luxembourg,
  Ireland and Singapore (off-shore)
• This totals 66 funds/accounts with AUA of 3.8bn
  over 10 of global industry total (estimated at
  600 funds)
• Funds are mostly long only equity, two sukuk
  funds, one private equity fund, one commodity
  fund, one index fund and one FOHF
• Services include accounting valuation, custody,
  transfer agency, corporate secretariat, financial
  reporting and banking
• Banking and cash management products are offered
  through HSBC Amanah

15
Questions Answers
Thank you for your attention
16
Germain Birgen Global Head of Fund Solutions HSBC
Securities Services 352 404646
517 germainbirgen_at_lu.hsbc.com
17
Disclaimer
This document is issued by HSBC Bank plc
(HSBC). HSBC is authorised and regulated by
the Financial Services Authority (FSA) and is a
member of the HSBC Group of companies (HSBC
Group). HSBC has based this document on
information obtained from sources it believes to
be reliable but which have not been independently
verified. Any charts and graphs included are
from publicly available sources or proprietary
data. Except in the case of fraudulent
misrepresentation, no liability is accepted
whatsoever for any direct, indirect or
consequential loss arising from the use of this
document. HSBC is under no obligation to keep
current the information in this document. You
are solely responsible for making your own
independent appraisal of and investigations into
the products, investments and transactions
referred to in this document and you should not
rely on any information in this document as
constituting investment advice. Neither HSBC nor
any of its affiliates are responsible for
providing you with legal, tax or other specialist
advice and you should make your own arrangements
in respect of this accordingly. The issuance of
and details contained in this document, which is
not for public circulation, does not constitute
an offer or solicitation for, or advice that you
should enter into, the purchase or sale of any
security, commodity or other investment product
or investment agreement, or any other contract,
agreement or structure whatsoever. This document
is intended for the use of clients who are
professional clients or eligible counterparties
under the rules of the FSA only and is not
intended for retail clients. This document is
intended to be distributed in its entirety.
Reproduction of this document, in whole or in
part, or disclosure of any of its contents,
without prior consent of HSBC or any associate,
is prohibited. Unless governing law permits
otherwise, you must contact a HSBC Group member
in your home jurisdiction if you wish to use HSBC
Group services in effecting a transaction in any
investment mentioned in this document. Nothing
herein excludes or restricts any duty or
liability of HSBC to a customer under the
Financial Services and Markets Act 2000 or the
rules of the FSA. This presentation is a
financial promotion within the scope of the
rules of the FSA. HSBC Bank plcAuthorised and
regulated by the Financial Services
AuthorityRegistered in England No.
14259Registered Office 8 Canada Square, London,
E14 5HQ, United KingdomMember HSBC
GroupDISCPRES011107