Future of Islamic Banking in Tanzania and - PowerPoint Presentation

Slide1

Future of Islamic Banking in Tanzania and Opportunities

Bill Kiwia

Head Banking and Financial Services

Institute of Finance Management

Director Islamic Finance Propagation

Centre for Islamic Finance and ComplianceSlide2

Introduction: Concept and Principles

Islamic Finance is a rapidly growing part of the financial sector in the world.

Islamic Finance is not restricted to Islamic Countries and is spreading where ever there is a sizeable Muslim community or community that wishes to use an interest free banking services.

It is estimated that there are more than 400 sharia compliant financial institutions in over 45 countries practicing Islamic Finance and it is estimated that the industry grows at a rate of 20 p.a. for the past five years.Slide3

Cont…

The market annual turnover for Islamic banking is estimated to be $350 Billion compared to $5 Billion 2 to 3 decades ago.

The size of the assets for Islamic Financial Institutions is in excess of US $ 500 Billion and $20 Billion in Islamic bonds.

Dow Jones introduced Dow Jones Islamic Market Index (DJIM) that construe of 600 sharia compliant firms.Slide4

Brief History of Islamic Finance

1970s-Oil revenues (Petro dollars) create a demand for banking without interest.

1975- The first Islamic Bank in Dubai is established known as Islamic Development Bank (IDBs).

The World Bank organisation have been using Islamic banking products for a while before even these products started to be used in the capital market.

Both IBRD and IFC have used sukuk as a way of financing their development projects. Slide5

Financial Markets

Financial Market is an institutional arrangement that enables the interaction between surplus entity and deficit entity.

These are markets in which funds are transferred from

people with an excess funds to people with shortage of funds (Mishkin, 2007).

Financial markets such as bonds and stocks are crucial in promoting greater economic efficiency and growth.

Financial system is the combination of both financial markets that perform direct funding between economic entities and indirect funding through the use of an intermediary.Slide6

Cont…

In the world there are different kinds of financial systems.

Most notable known are

Financial institution based financial system

and

Market based financial system.

Financial institution based financial system or known

as Bank-based

is a financial system that banks or financial institutions provide the major funding to the Deficit Spending Unit (DSU) (e.g. Corporation).Slide7

Cont…

Example of the bank-based financial system is Japan (known as

Keiretsu

) and Germany (known as

Hausbank).

The bank participates in:-

Corporate ownership and lending.

Participates in decision making (Corporate board).

Hostile takeover in the bank-based financial system is very rare.Slide8

Market-Based Financial System

This is a financial system that involves wide-held funding to the Deficit Spending Unit (DSU) (e.g. corporation).

Corporations or any other DSU get their funding from the public bond and equity markets.

Financial Institutions facilitate financing more than investing into those securities.

Companies are running in the interest of shareholders and corporate governance mechanism are essential to ensure that shareholders obtained their return on investment (

Schleifer

and

Vishny

, 1997)Slide9

Cont…

Market-based financial system is characterised:-

Presence of Hostile Takeover.

Market for Corporate Control.

United Kingdom and United States of America are examples of market-based financial system.Slide10

ARE THESE SYSTEMS OPERATING IN ISOLATION?

The answer is no.

The bank based financial system also has some elements of market based financial system that complement each other.

The Tanzania financial system is composed mainly by banks lending to corporations but they are restricted to invest in equity. Further, the size of market activities in Tanzania is still at developing stage.Slide11

Development of Islamic Banking SystemSlide12

Banking is a weird world

Country sizes are adjusted to reflect the volume of financial sector assets in the jurisdiction, measured

in U.S

. dollars at the end of 2010

Source: World Bank’s Global Financial Development Report (2013) Fig 1.6, p35 Slide13

Banking systems are big relative to country size (%)GDP…………

Source:

Liikanen

Report (2012) High-level Expert Group on reforming the structure of the EU banking sector Chaired by

Erkki

Liikanen

, FINAL REPORT Brussels, 2 October 2012

, pSlide14

…………and biggest banks are typically getting bigger!

Source:

Liikanen

Report (2012) High-level Expert Group on reforming the structure of the EU banking sector Chaired by

Erkki

Liikanen

, FINAL REPORT Brussels, 2 October 2012 , p 18.Slide15

Big banks in Europe & U.S are roughly the same size € billion (2011) ………..

Source:

Liikanen

Report (2012) High-level Expert Group on reforming the structure of the EU banking sector Chaired by

Erkki

Liikanen

, FINAL REPORT Brussels, 2 October 2012 , p 40.Slide16

….but much bigger relative to the size of individual European economies

Source:

Liikanen

Report (2012) High-level Expert Group on reforming the structure of the EU banking sector Chaired by

Erkki

Liikanen

, FINAL REPORT Brussels, 2 October 2012 , p 41.Slide17

Islamic Financial System

This is an area that is rapidly growing fast in the international financial system.

It is a financial system that is compliant to sharia law (

fiqh

muamalat

).

The search for an alternative financing system started early 1900 (

Iqbal

, 2012).

The major concern was on the interest charge on securities (

Iqbal

, 2012). The early researchers in 1950s suggest that there was a problem in the conventional system and Islamic principles of economics offers an alternative solution.Slide18

Cont…

Some notable economic challenges exacerbated the demand for banking without interest.

1970s Petro dollar created a demand for a banking without interest which led to the establishment of first full fledged Islamic Bank in Dubai.

The expansion of global commercial banking in 1980s also raised the demand for the establishment of Islamic based financial productSlide19

Cont..

The emergence of Islamic investment funds and investment banking in 1990s also increased the awareness of Islamic financial system.

The expansion of capital markets in 2000 also pave way to the introduction of capital market securities that are adhering to the Islamic sharia .Slide20

Cont..

Islamic banking is one of the fastest growing industry segment in the financial sector.

The momentum of growth level in Islamic banking is estimated to be 20% p.a.

It is estimated now there are around 400 Islamic financial institutions globally with assets of $500 Billion.

There are around $20 Billion Islamic bonds in the financial market.

Islamic Financial System has developed rapidly in Asia, US and Europe. Slide21

EXPANSION OF ISLAMIC FINANCIAL SYSTEM GLOBAL

Initial development of Islamic financial services focused around the gulf region.

However since after 1975 these services have expanded all-over the Asian continent.

In Britain the Islamic Bank of Britain was the first sharia- compliant bank to be opened in the United Kingdom.

Also the Dow Jones introduced Dow Jones Islamic Market Index (DJIM) for 600 sharia compliant firms.

In the UK there are about 21 conventional institutions that offers Islamic windows in their portfolio.Slide22

Cont..

Britain launch the first sukuk sovereign bond worth £200 Million to attract investors with appetite to buy Islamic bonds on 1

st

September, 2013.

LSE have sukuk bonds value at $34 Billion.

Thompson Reuters reported that Sukuk market is expected to grow globally up to $421 Billion by 2016.

UK and Germany are the leading capital markets that offers Islamic financing products in Europe.Slide23

Brief background of Islamic banking in Tanzania

Banking sector has witness three stages of transformation. Pre-colonial, Arusha Declaration, Post Liberalization.

Pre-colonial, Post independence, banking were mostly private, trade finance institutions and more specialize in providing financing options to private sectors. Most trading activities were circulated around colonial based companies. Deutsche

Ostafrican

Bank, Barclays bank, Bank of India, Bank of Baroda, Standard Bank and National

Grindlay

Bank.

Most colonial based companies and traders were benefiting mostly to funding from these banks. This forced locals to establish their own local financial institutions such as Peoples Bank of Zanzibar, National Cooperative Bank and National Bank of Commerce.Slide24

Arusha Declaration

More government control and control.

Downsize of banking sector and adoption of socialist economic model

Lackluster banking performance, stagnated economic activities were among the factors forced to abolish government control banking sectors to a more private and competitive banking environment.

Number of banking incidences, collapse of several banks led to the formation of a team lead by Hon Judge Nyirabu.Slide25

Liberalisation of Banking Sector

The findings of

Nyirabu

Commission (1988) indicated that banking needs to be

liberalised

and allow private banks into the financial system.

Meridien

Biao Bank, Standard Chartered and others were among early banks to begin operations in Tanzania.Slide26

Some banks also collapsed

Meridian Biao Bank, Greenland, First

Adili

Bancorp,

Delphis

Bank.Slide27

Tanzania at Glance

Economic performance is strong and stable over the past decade. GDP growth was estimated between 6% and 7%.

Much of the growth is aggravated by improvement in education system, stability in economic activities, inflation and exchange rate as well as foreign direct investment.

Recently growth is strongly associated with lagged effect of structural transformation that occurred previous especially 2010 and before.

Agriculture still employs 75% of the population and contributes just 26% of the GDP.Slide28

Cont…

Inflation fell from double digit to single digit. The current rate of inflation is estimated around 5.6%.

Poverty level has declined from 34% to 28% now. People living with extreme poverty is estimated to reach 12 Million.

There are estimated around 54 banks servicing just 14% of possible consumers in the market.Slide29

Key issues to note

Estimated around 12 Million Tanzania are living below national poverty line or 20.6 Million Tanzanian living below poverty line.

The competitive edge favors more mainstream banks with just a market of 13.9 (

Finscope

, 2013).

Growth of informal financial sector such VICOBA and others with an estimated capital of more 50 Billion.

What will Islamic bank has to offer on the table.Slide30

Islamic Banking In East Africa

Kenya is thought to be first country in East Africa to begin offering Islamic banking products in their banking system.

Kenya’s Barclays Bank started to offer Islamic banking product through Islamic window known as Lariba current account in 2005 closely followed by KCB Amana Account.

In 2007 the first fully compliant

sharia

bank began its business operation in Kenya. This bank is known as First Community Bank .

Tanzania is not left behind in this transformation as like Kenya, they all witness the introduction of Islamic financial services in their financial markets.

Tanzania is still lagging behind as Kenya witnessed in 2012 the establishment of Islamic bond trading in the capital market.

Tanzania began accepting Islamic financial products in 2008 following the launch of Amana account by the Kenya Commercial Bank (KCB) through Islamic windows.

In November, 2011 Tanzania witnessed the establishment of the first fully sharia compliant bank known as Amana Bank with capital base of 100 Billion in which 21.5 Billion was fully subscribed

Slide31

Cont…

Recent survey by Ernst and Young (2012) suggest that Amana Bank is the fastest growing commercial bank in Tanzania.

The survey showed that asset growth of Amana is 96% higher compared to the last year, the highest compared to the rest of the financial institutions.

Also Amana Bank began with a single branch at Tandamti Kariakoo

in 2011. The bank has now expanded to 5 more branches in the country (City Centre, Lumumba and Kariakoo

Sokoni

,

Arusha

at Hugo Centre and

Mwanza

Kenyatta Road) Slide32

Is it enough?Slide33

Loan Market (Bank of Tanzania , 2014)Slide34

Access to Financial Services

(

FinScope

,

2013)Slide35

Islamic banking and Finance in Tanzania

Financial inclusion.

Wealth distribution and asset ownership

Capital market untapped opportunities.

Insurance and Pension fundsSlide36

Constraints

Regulatory hurdle

Human capital constraints and low labor productivity.

Financial literacy.

Weak inter-

sectoral

coordination to smoothen operation activities of

islamic

banking and finance.Slide37

The Board of Directors of every bank and financial institution shall ensure that its

risk

management

policies address the

identification, measurement

,

monitoring

and

management

of its risk

concentration in accordance to risk management guidelines issued by the Central Bank in 2005.

There shall be a limit to the single borrower from the financial institutions:-

Regulation on Concentration of CreditSlide38

For a loan that occupies 25% of the core capital should fully secured with collateral value of more than 125%.

For a loan that occupies 10% of the core capital should be partially secured with a collateral of less than 125%.

Unsecured loans to single borrower should not exceed 5% of the core capital.

A bank or any financial institution may exceed such limit if it has obtain a guarantee from the government, or supported a security of cash, irrevocable guarantee by an international borrower with securities issued by the government, or guarantee from Central Bank.

Such limit is exclusive of the foreign branch bank

Cont..Slide39

A bank of financial institutions shall

not engage

in equity investment, without

obtaining

prior approval of the

BOT.

The total equity investments and credit accommodation any single company

shall

not exceed twenty five per cent of the core capital of the investing bank or

financial institution.

The aggregate equity investments in all companies shall not exceed twenty five

per

cent of the core capital of the

bank

or financial

institution

Regulation on assets for financial institutionsSlide40

The total investment of the bank or financial institution such fixed assets at depreciated

net book value, shall not exceed seventy

per cent

of its core

capital.

Every bank or financial institution shall report its

investment

fixed assets to the

BOT in

the form and frequency

prescribed by Bank of Tanzania (BOT).

Every bank or financial institutions shall maintain minimum liquid assets of 20% on demand liabilities

Cont

…Slide41

The End

Thank You