International Cooperation has a Key Role for Islamic Finance Industry

Author Name: 
Hüseyin Erkan, Istanbul Stock Exchange Chairman & CEO

Islamic finance industry has registered a tremendous growth during the last decade in both Islamic and non-Islamic countries. While the asset size of Islamic finance reached USD 1.2 trillion in 2010 over 80 countries, the banking industry takes the largest share of 80 %. The recent financial crisis in 2008-2009 emphasizedmore the importance of Islamic finance as the conventional banking system encountered serious problems. This increased the widespread use and acceptance of asset based/backed Islamic financial instruments in non-Islamic countries like UK, France, USA, either through Islamic financial institutions or Islamic windows of the conventional banks. 

While London and Luxemburg have made good progress with their flexible treatment for Islamic finance business, Malaysia continues to keep playing the leader position in the world on this business with its well-established organizational structure, diverse asset types and high sukuk issuance size. Moreover, the regulatory authorities in the non-Islamic countries provide a level playing field for Islamic financial institutions with their rivals, namely conventional banks, bringing tax neutrality for the same type of products, i.e. sukuk vs. corporate bonds. 

The progress in Islamic Finance did not only maintain rigorous growth in the asset size and the number of Islamic financial institutions, but also new international standards setting bodies began playing a vital role in regulating the industry. In this respect, three bodies are worth mentioning, namely

  • Islamic Financial Services Board (IFSB),
  • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and
  • International Islamic Financial Market (IIFM).

While the former two institutions work out issuing standards for different structural types of Islamic financial instruments and for accounting and auditing of these instruments for financial institutions, the IIFM deals heavily with creating liquidity for Islamic financial products in the secondary market by jointly working with other international institutions like International Swaps and Derivatives Association (ISDA). 

A fourth institution, called International Islamic Liquidity Management (IILM), is recently added to these institutions. IILM is mainly established by central banks from different countries and aims to stimulate the issuance of sukuk or sukuk-like instruments in the financial markets by offering new ways for creating liquidity and higher rating opportunities through a well-functioning market making mechanism. This necessitates collaboration between regulatory bodies, stock exchanges, intermediary institutions and issuers. 

I believe that Islamic countries have huge potential to create wealth in the economy given their rich resources and are capable of achieving more by improving and developing their capital market structure. 

Since 2005, under the activities of Standing Committee for Economic and Commercial Cooperation of the Organization of the Islamic Cooperation (COMCEC), we have been working on creating this awareness and developing the exchange industry in Islamic countries by acting as the coordinator of the Organization of Islamic Cooperation (OIC) Member States’ Stock Exchanges Forum. 

Currently, the Forum has 57 members, of which 42 are stock exchanges, 7 are clearing, settlement, central depository and registry institutions from 37 different countries and 8 are other organizations such as IFSB, AAOIFI, IIFM. 

In the Forum meetings, issues raised by the OIC Member States’ Stock Exchanges are discussed and we try to bring practical solutions to the problems. The IFSB, AAOIFI and IIFM are also our natural partners and they provide valuable contributions to the Forum by sharing the outcomes of their efforts. 

The Forum also interacts with these institutions and take part in their working committees to share our solutions. A very recent concrete example is the joint work that we carry out with the IIFM on developing an appropriate structure for Islamic repo transactions to create a solution for the liquidity of sukuk type instruments which take a considerable share, i.e. USD 200 billion, in Islamic capital market instruments. 

This joint effort is important, since currently only 120-130 sukuk out of many are listed on the stock exchanges, most of them being in the form of shelf quotations. In the future, this trend should be reversed by encouraging regular issuance of sukuk and creating new means of continuous liquidity such as market making mechanism for these products. 

Through the OIC Forum activities, we also created task forces to develop solutions for introducing new Islamic financial instruments and benchmarks for the OIC Member States’ Stock Exchanges. We initiated the creation of a series of OIC indices with S&P. We are still working on the project and expect to launch a tradable index by the end of 2011. We hope it will create interest among institutional investors for creating new instruments like ETFs.

 The Forum also plans to launch a benchmark index in the near future.In addition, another task force is dedicated to develop solutions for capital market linkages among the stock exchanges. Creating a linkage among the OIC Member States’ Stock Exchanges would create synergy and cost efficiency, making Shariah-compliant exchange-traded instruments available to more diverse investors in both Islamic and non-Islamic countries. As a part of this effort, we will organize a seminar on the capital market linkages and technology at the 5th OIC Forum Meeting this year on September 17, 2011 in Istanbul, bringing the representatives of different exchanges and institutions that have experience on this issue. 

Last but not least, a task force is established to follow up and develop activities of post-trade institutions as their role is highly important in risk management. Needless to say, all these efforts aim to promote and increase awareness on Islamic Finance in the OIC Member States. 

To conclude, it is worth to say that the Islamic Finance industry is still in its early stage and has a very high growth potential for the future. In this process, the role of the stock exchanges is vital and they should involve more in attracting Islamic capital instruments to their marketplaces by creating new trading opportunities. These efforts may not ony increase the asset size of the industry, but also bring new individual and institutional investors that are keen to trade faith-based instruments in every continent of the world.

About Huseyin Erkan

Prior to his recent appointment as the Chairman and Chief Executive Officer of the Istanbul Stock Exchange by the Turkish Government, Mr. Erkan was the Chief Advisor to the Board of Konya Sugar Company; largest private sector group of companies in sugar refining and agricultural products; to restructure the group’s activities.

Mr. Erkan served as the General Manager of Ticaret Securities for a short period following his departure from the Istanbul Stock Exchange as Executive Vice Chairman in 2006. He was responsible for the International Market, International Relations and Human Resources among other responsibilities at the Istanbul Stock Exchange (ISE) for twelve years, and was also a Board Member of Takasbank (Central Securities Depository, Settlement and Clearing Bank of ISE).

Mr. Erkan had additional responsibilities during his term at the ISE as a member of the Executive Board of Turkish-Japanese Business Counsel; Co-Director of projects with the OECD in SME financing and best practices for developing stock exchanges; representative of ISE at FEAS and other organizations such as the International Organization of Securities Commissioners (IOSCO), the World Federation of Exchanges (WFE), as well as being the Joint Project Coordinator of South East European Cooperative Initiative (SECI) to implement a cooperation Project for the securities markets in the Balkans. He also initiated a project for the cooperation of securities markets of the Islamic countries in COMSEC Subcommittee under the Organization of Islamic Conference (OIC).