An OIC head of the IMF

Over the weekend, I wrote my newsletter about the search for a new IMF head and focused on a suggestion I saw from a Bloomberg reporter, William Pesek, for Zeti Akhtar Aziz as a candidate (she is currently the governor of the Malaysian central bank, Bank Negara, and Chairwoman of the International Islamic Liquidity Management Corporation). I thought she was a good choice except for the void it would create in the Islamic finance industry if she were to depart from her current positions.

Rushdi Siddiqui, the global head of Islamic finance and GCC countries at ThomsonReuters, will offer his own suggestion (Mohamed El-Erian) in an opinion piece in Gulf News this weekend and his candidate is someone I think is eminently qualified for the post, although he is currently comfortably employed elsewhere (like Zeti, he happens to be a Muslim).

This week, I reported in The Islamic Globe that the International Finance Corporation (an organization affiliated with the World Bank) is planning another sukuk once they assemble enough Shari'ah-compliance assets to fill a sukuk. They did not say how large they expected the sukuk to be (their last one in 2009 was $500 million), however, they did indicate they planned on issuing one "every few years".

With the growing involvement by the World Bank in Islamic finance, perhaps it is time for the IMF to become more involved as well. While the Fund does not do as much direct lending as the World Bank, it is focused on the macro policies that can either encourage, be neutral to or discourage Islamic finance. It is not necessary for the head of the IMF to be a Muslim to work with countries trying to put conventional and Islamic financial systems on equal footings, putting someone with a familiarity and comfort level with the industry would send a signal that the rapid growth of Islamic finance is not being overlooked.

The benefit to IMF member countries of a greater involvement with Islamic finance would not be limited to Muslim-majority countries. Non-Muslim countries like the UK, France, Japan, Russia and China are all at various stages of creating conditions for Islamic financial institutions to be able to compete on a level playing field. Further, the changes that most countries have to make to enable Islamic finance are well within the scope of the IMF's mandate. Whoever the candidate, it would be an important signal of change in the IMF if the next head of the IMF came from an OIC country with a vibrant Islamic finance market or from a background in Islamic finance, whether or not that individual is Muslim.

Newsletter
William Pesek, a reporter for Bloomberg wrote an opinion piece with a list of potential Asian candidates who he thinks should be considered for the recently vacated position running the International Monetary Fund. One name on his list should be familiar to anyone with interest in the Islamic finance industry, Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the country's central bank. This is what he had to say about her qualifications for the position.

"She is as internationally respected a central banker as any these days. The Bank Negara Malaysia governor played a key role in turning Kuala Lumpur into the global hub of the $1 trillion Islamic finance industry. Zeti also was part of the team that bet against the IMF and won. In the late 1990s, it seemed inevitable that Malaysia would join Thailand, Indonesia and South Korea in accepting multibillion-dollar IMF bailouts and stringent conditions like raising interest rates and cutting spending. Malaysia said no and Zeti helped it weather the turbulence. And then she watched the United States, in the height of hypocrisy, do all the things it told Asian officials not to do. Zeti would bring a different perspective to the IMF, one much-needed."

I think that he makes a good point on installing someone at the IMF who brings her diverse experience from the financial crises in 1998 as well as her role in adapting as things changed to ensure that the Malaysian Islamic finance industry developed as successfully as it has over the past decade in Malaysia. That being said, I think for the Islamic finance industry, it is better if she remains just a candidate for the top job at the IMF.

It will highlight the growth in Malaysia's Islamic finance industry without depriving the industry of one of its best spokespeople. In addition to her role as governor of BNM, she is chairwoman of the new International Islamic Liquidity Management Corporation, which is developing short-term liquidity management tools for the Islamic finance industry, something which will be beneficial. It would not be the end of the effort should she leave her current posts for the IMF, but she is one of the most recognizable central bank governors among the countries with large Islamic finance presences.

It is good to see the growth of Islamic finance recognized even tangentially, but it would probably be a net negative to have someone as involved with the Islamic finance industry as much as Ms. Zeti is depart to run the IMF. And anyway, old habits die hard, so the next IMF head will most likely come from within Europe, just has it always has.

Malaysian 10-year sukuk

Sukuk in the global markets have been by and large confined to the short end of the yield curve with few issues (particularly if one excludes Malaysian mortgage-backed bonds from Cagamas) more than ten years. One reason for this is that there are no sovereign bonds with maturities of longer than about 5 years. However, if reports are correct, Malaysia is planning a 10-year, US dollar denominated sovereign sukuk later this year for between $500 million and $1.7 billion. Within the last year, Malaysia issued $1.25 billion in 5-year sukuk, its first global sukuk in 8 years.

Interest in Malaysia have come from both the strong recovery in Islamic capital markets in the country as well as the country's strong currency. Several GCC-based issuers have issued sukuk in Malaysia since the sukuk market activity in that region shrunk dramatically following the credit crisis. The added benefit for those issuers is by issuing sukuk denominated in ringgit, they stand to benefit from lower payments if the value of the Malaysian currency falls back towards the average of the past 10 yearsin relation to the US, to which their currencies are pegged.

The sukuk markets in Southeast Asia (Malaysia and Indonesia) have been strong in recent years because of the previously noted swiftness of market recoveries and strong currencies (the rupiah has also strengthened significantly against the US dollar). Indonesia, which has a much less developed sukuk market, had faced difficulty issuing sovereign sukuk at competitive yields to their conventional bonds because of illiquidity, but may see an inflow of capital to both conventional bonds and sukuk if the country has its ratings bumped up to investment grade, which the government expects to occur in 2011.

Returning to the issue at hand, if a 10-year sovereign sukuk were issued, it could encourage corporate issuers to issue longer-term debt. This would fill out the yield curve which is rather stunted currently with most sukuk maturing in five years or less. A Malaysian 10-year would encourage, in particular, longer maturity sukuk in that country, but could also serve as a benchmark to US dollar or dollar-linked global sukuk outside of Malaysia.

This outcome is far from guaranteed, but it could serve as the stepping stone for a politically and economically stable sovereign issuer in the GCC to come out with its own 10-year sukuk (Qatar would probably be the most likely, but Abu Dhabi also comes to mind as a possibility given the stabilization recently in Dubai that limits the potential for future bailouts from the oil-rich emirates).

Now that attention has finally turned towards developing short-term liquidity management tools (e.g. the International Islamic Liquidity Management Corporation), the next important frontier is the long end of the curve and sovereigns will most likely have to take the lead. With its headstart (Islamic banking laws formalized the industry in Malaysia beginning in the mid-1980s) and large market share for Islamic finance overall (more than 20% of total banking assets as of 2010), Malaysia could take a leadership role in expanding the offerings of longer-term sukuk if the reports of a 10-year USD sukuk are correct. With growing harmonization of Shari'ah standards between Malaysia and the GCC, it will take longer than it used to for developments in the former to spill over to the latter.

Differences in sukuk markets within the GCC

As I mentioned in an earlier post, the sukuk market is not a unified market. It is made up of many different markets, each with their own characteristics. In that earlier post, I broke down the sukuk market into 4 separate regional markets for sukuk: GCC, South Asia, Malaysia and primarily non-Muslim countries. However, even within these regions there are stark differences in the factors which impact the sukuk market health and today I saw four different article that demonstrate the differences within half of the GCC countries: Qatar, Bahrain and the UAE.

In the UAE, the sukuk markets could be on the verge of coming back strongly with what is reported to be a heavily oversubscribed $400 million sukuk issued by Sharjah Islamic Bank. The sukuk, which is in the mid-range in terms of size from the expectation is rated BBB+ by S&P and Fitch, at the bottom end of the investment grade rating category. The order book is reported to have attracted $5 for every $1 in sukuk being issued ($2 billion reported order book). Given the overwhelming dominance of sovereign sukuk issuance in the years since the markets froze up, it is a positive development to see corporate issuers, particularly one with a low-investment-grade rating to see strong reception for its sukuk. In part, this could be due to the UAE being viewed as a safe haven having not seen the protests that spread across much of the region, including the financial hub of Bahrain.

In Bahrain, the government's harsh crackdown on protests and assistance from Saudi troops stationed in the country has restored some level of calm in the markets with the yield on the sovereign sukuk from the Central Bank of Bahrain at its lowest yields since the protests began in mid-February. However, there remains a lot of uncertainty about whether the grievances which led to the protests will be dealt with or whether the calm is just a lull created by the government crackdown on protesters. For example, the US government lifted its 'voluntary departure' status for US embassy staff also noted that "potential for spontaneous civil and political unrest continues" and "Clearly, fears have subsided to an extent but given current spreads and CDS levels the market is telling you things are not back to normal" according to a director, Akber Khan, of Al Rayan Investments as quoted by Bloomberg from Qatar. Bahrain, which had become a large hub for finance--including Islamic finance--in the region has lost its status as a stable country, at least for the time being. Still, it will remain at the center of a good deal of Islamic finance in the region due to its accommodative central bank and the presence of international organizations like the International Islamic Financial Market (IIFM) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). However, the reputation for stability has not (and probably cannot entirely) return to the pre-protest levels, which will impact future sukuk issuance coming out of Bahrain.

Qatar is much closer to the UAE in terms of having seen continued stability but having some 'baggage' like the UAE does with Dubai World (although not nearly to the same impact). Its central bank surprised bankers in the country by requiring conventional banks to shut their Islamic 'windows' by the end of 2011 and thus handing that market over to banks that are fully Shari'ah-compliant. The conventional banks being forced to abandon their Islamic windows have asked the central bank to allow them to hold their Islamic assets through to maturity instead of being forced to divest them entirely by the end of 2011. Qatar Islamic Bank, one of the country's Islamic banks, is reported by Gulf Times to be planning a five-year sukuk in the third quarter. This is not surprising given the boost that Qatari Islamic banks are expected to receive by having the competition in the country dramatically reduced by the central bank's order, although there could end up being a way for the conventional banks to continue to compete in the Islamic banking by launching separately licensed Islamic subsidiaries that are regulated alongside the wholly Islamic banks and separately from the conventional parent banks. However, there remains a lot of uncertainty about what the central bank will (and will not) allow.

Just as there is significant differences between the markets for sukuk--and other areas of Islamic finance--between the regions in which it is growing, there is significant heterogeneity within the regions based on the different political, regulatory and financial climates for Islamic banks and for issuers of sukuk. The protests which spread across the region and the Qatari Central Bank order relating to Islamic windows both demonstrated the uncertainty of anticipating future developments, there is likely to be continued activity in the primary market for sukuk in the UAE as well as among Islamic banks in Qatar (and Islamic subsidiaries of conventional banks if the central bank allows that possibility). There will also likely to be stiff competition between Qatar, the UAE and Saudi Arabia for the financial firms that decide to relocate from Bahrain.

A microcosm of the sukuk market

The sukuk market is often characterized as one marketplace with a number of companies tapping it for funding. However, in reality, the sukuk markets around the world are incredibly diverse and there are many local factors which affect issuance and many reasons for companies to decide to issue sukuk. Today, when reviewing the various news around the Islamic finance industry, several companies and government announced plans for sukuk (conditional on favorable market conditions). However, the diversity of the geographical spread and issuer type provide a microcosm of the "sukuk market".

The announcement that received the most attention was not a sukuk announcement at all, but the announcement at the IFSB summit in Luxembourg that the government there had put on hold their plans for a sukuk. In part, the reason why Luxembourg would be interested in a sukuk (although this was not ever announced formally) was to establish the Duchy as a gateway into Europe, primarily for funds, many of which are domiciled in Luxembourg as a way to enter the EU market. Luxembourg has also become more involved in the Islamic finance industry globally, being the only European country that is a member of the IFSB and the central bank governor Yves Mersch was appointed as the Deputy Chairman of the International Islamic Liquidity Management Corporation, which is working on liquidity management products for Islamic financial institutions. The official reason given for the delay was that with tax receipts improving, the government did not need the funds, but this announcement follows the indefinite postponement of a UK sovereign sukuk, which suggests that European governments may be cooling on the idea of being directly involved in the sukuk markets (as issuers).

In contrast, Qatar Islamic Bank and Sharjah Islamic Bank announced plans for sukuk in the remainder of the year. QIB said it planned on the sukuk issuance to reduce debt payments, while Sharjah Islamic Bank said the sukuk was <a href="planned to continue its growth. These two issues represent a different theme than the (perhaps temporarily) waning desire to enter the sukuk market on the part of European sovereigns. In contrast, they are more opportunistic, reflecting renewed confidence in the sukuk market in the stable countries in the GCC. Qatar has remained stable and is taking a lead in aiding the rebels in Libya in their continuing fight against Ghaddafi and has thus far avoided facing widespread protests in other Middle Eastern countries. Sharjah, one of the emirates in the UAE, has also seen stability so far and is likely benefiting from a reduction of the stigma on the UAE in the wake of the Dubai debt crisis in 2009 (which can indirectly be gauged by the fall in the yield on Dubai government sukuk and the upgrade on DP World's sukuk).

There is a new dichotomy in the GCC (in particular the smaller countries on the Persian Gulf) between those like the UAE and Qatar, which have remained stable and largely isolated from the Arab Spring, and those like Bahrain (where Saudi Arabia has sent troops) that are still facing protests. Kuwait, where sukuk issuance has picked up some is still dealing with several investment bank defaults on sukuk and so represents a third group. Despite the protest and violence in Bahrain, that country has not entirely withdrawn from the sukuk market, having recently issued a 5-year ijara sukuk in addition to the short-term ijara and salam sukuk. In addition, within the GCC region, the Islamic Development Bank remains a fairly regular issuer and is reported to be planning US Dollar sukuk (supported by its AAA credit rating).

Elsewhere, the sukuk market continues to move along its previous trajectory. Pakistan's government issued another sukuk to cover a portion of its large budget deficit and to provide an investment for the growing Islamic banking market in the country. This sukuk had the added twist of coming at a time when the government fears losing its military aid from the United States following the killing of Osama bin Laden in Abbottabad. Pakistan's government has issued sukuk fairly regularly, but has remained largely focused on its domestic market.

Malaysia, which along with Indonesia, have become countries of interest for global investors, have both been active or plan to be active in sukuk issuance. The latest sukuk from Malaysia is a corporate issuer, Ranhill, raising MYR 710 million ($236 million). The Malaysian sukuk market, in contrast to the GCC and most of the rest of the world has an active market with a much more regular issuance by corporates and government-related companies like Petronas (the government issued its last large sukuk form $1.25 billion in 2010 after close to a decade without a global sukuk). Malaysia has attracted investors because of its growing economy and strengthening Ringgit, which are somewhat exogenous to the sukuk market (Indonesia has seen inflows for similar reasons).

As this brief tour of recent sukuk announcements demonstrates, the sukuk market is largely determined by factors outside of the Islamic finance industry and is also influenced by regional factors that create divergence in terms of issuance. Just like the conventional financial markets (e.g. bond markets), the reasons why sukuk are issued has much more to do with the issuer, the country where the issuer and investors are located and historical factors around the stage of development of the country's Islamic finance industry than it does to with the growth in the global sukuk market as a whole.

Islamic finance: think global, act local

Kazakhstan is one of the recent entrants into the Islamic finance market. The country, which is 47% Muslim according to the CIA World Factbook, has only saw the opening of the first Islamic bank in the country, Al Hilal Islamic Bank, owned by the UAE government owned Al Hilal Bank. Since then there are a number of other Islamic banks including Amana Raya from Malaysia and Qatar Islamic Bank, which has a number of subsidiaries outside the GCC, most notably being QIB (UK) plc, its UK subsidiary formerly known as the European Finance House.

The latest development in Kazakhstan is the announcement (or more appropriately restatement) of a desire to launch a $500 million sukuk, which was announced at an Islamic finance conference in the country. According to a recent release by the Kazakh embassy in the US, the country plans on bringing $10 billion in Islamic financial transactions to market in the next 5 to 7 years.

At the conference, Prime Minister Asset Issekeshev said that "We are confident that Islamic finance will lead the way to attract funds, especially from the Gulf countries and other Muslim countries to develop all these sectors". In my opinion, this signals a problem in some of the expansion of Islamic finance. According to the World Bank, Kazakhstan is largely dependent on natural resources (oil, gas and minerals), which represent 39% of its GDP and 73% of exports, compared to agriculture and manufacturing, which generate 5% and 11% of GDP.

This is problematic if the government sees the sukuk as a way to tap funds from the GCC. The GCC itself is trying to diversify itself away from dependence on natural resources as well and therefore the economic cycles of the GCC and Kazakhstan are likely to be relatively synchronized. If the government is seeking funds from a region whose economic cycles are aligned with its own, it is likely that the funds it is tapping will not be there when it most needs it. If natural resource prices fall significantly, the region it is tapping for funds in sukuk will be facing their own troubles and will not be available to roll over maturing sukuk.

For the GCC and the investors from that region who subscribe to any Kazakh sukuk, they will face an equal problem. Their investment in the sukuk of Kazakh will be viewed as "troubled" if resource prices fall significantly at the point where the local economies in the GCC will be struggling from the lower revenues from natural resources. Expansion of sukuk with a focus on the GCC will be highly cyclical with issuance (and uptake from investors) highest in the economic peaks and problems emerging if resource prices falter.

For Kazakhstan, it should focus on sukuk with an eye to the local market and towards investors whose economic fate is less tied up by the price of natural resources. As the World Bank report notes, the country has been working to reduce the salinity of the Aral Sea, which has created fishing jobs, and on "drylands management", which has increased the agricultural sector (cattle and hay are mentioned specifically).

My knowledge of the Kazakh economy is limited, so I cannot offer much on that front, but from the perspective of Islamic finance, there should be a different focus (not only in Kazakhstan). Kazakhstan and other non-GCC countries aspiring to tap the Islamic finance market (particularly those with natural resource biases in their economies) should welcome investment in the sukuk from the GCC, but should focus on raising funds domestically and from countries with different economies whose investors may be more willing to continuing investment if resource prices fall.

They should also focus on the use of the funds from the sukuk into areas of government services that help to diversify the economy away from the natural resource sector to reduce their own reliance on resources to both create employment as well as de-link their economies from the same resource prices that provide the funding to their investors (if those investors are primarily located in the GCC).

Islamic finance in general, and sukuk in particular, are fashionable ways to attract money from the GCC because of its large wealth and also large Muslim population, but Islamic finance should not be viewed as just a way to get at the oil money in the region. It should be viewed as an alternative structure of finance (and bonds) and with nearly half of the population in Kazakhstan being Muslim, there should also be some focus on the local market. A domestic, local currency sukuk alongside the global sukuk would benefit the domestic market more than a sukuk focused on the GCC market.

Indonesia may issue infrastructure-backed sukuk

In my last post, I wrote about some of the details of Islamic banking in Indonesia, which has been growing rapidly. One other area of the Islamic finance industry in Indonesia that is growing rapidly is government sukuk issuance. Sovereign sukuk in Indonesia grew 45 percent in 2010 to Rp 27.76 trillion ($3.2 billion) and has reached Rp 17.94 trillion ($2.1 billion) so far this year with a number of sukuk planned later in the year.

The growth in Indonesian sovereign sukuk has been helped by the economy weathering the financial crisis well, in addition to a strengthening of the Rupiah. The sukuk also pay a relatively high return (in local currency due to the country's 6.2% inflation rate in April) at the same time as the country's sovereign rating is improving, having been upgraded to BB+ by S&P in April, one notch below investment grade.

The growth in sukuk has come despite difficulties last year in successfully auctioning off some sukuk. Investors bid at yields higher than conventional bonds with similar maturities (up to 50 basis points higher), which were rejected by the Finance Ministry over concerns that higher rates on sukuk would lead to bond investors also demanding higher yields. However, from the perspective of the investors, it made sense to ask for higher yields on sukuk given their relative illiquidity compared with conventional government bonds. In response, the government considered using a book-building method to negotiate rates rather than the auctions, some of which failed to attract any winning bids.

One of the unique aspects of sukuk compared to conventional bonds is the use of an asset in structuring the sukuk. Most sukuk are asset-based, which means the investors are unsecured creditors and do not have legal recourse to the underlying assets (they hold only beneficial ownership over the underlying asset). With the rapid growth in government sukuk issuance, the Indonesian government has run out of assets to use for new sukuk. The director of Islamic finance at the Finance Ministry's Debt Management Office is quoted by Bloomberg saying "We've run out of existing buildings and land that's been approved". In response, the government has asked the House of Representatives to add Rp 30 trillion ($3.5 billion) of state-owned land and office buildings to the list of approved assets.

Bloomberg reports that if they are not successful in receiving approval for the additional assets, they will instead use cash flows from transport projects under construction to back a sukuk planned for issuance on May 31. This would replace the structure of the ijara (lease-based) sukuk that has been used almost exclusively. In an ijara sukuk, the building or land is sold (or beneficial ownership) is sold to the sukuk trust, which issues sukuk to pay for the acquisition. The trust then leases the asset back to the government and distributes the rental payments to sukuk investors. At maturity, the government repurchases the asset, providing funds to redeem the sukuk.

A sukuk that is based on cash flows from a project under construction would generally not be able to use the ijara structure because it is (generally) not allowable to lease an asset that does not exist yet. Usually, when financing is raised for construction of a project under construction, it would be done using a combination of istisna'a and ijara. Istisna'a financing is flexible in the payment terms so they can be structured to replicate the cash flow bond investors are looking for. However, istisna'a is considered a debt (i.e. if you provide financing under istisna'a, you have the right to future cash flows, not either legal or beneficial ownership of an asset until it is completed). That makes trading problematic because it can only be traded at par.

That is where the ijara aspect comes into play. As the construction reaches a point where the asset is usable, the asset is owned by the investor, who can lease it to the government (making the sukuk tradable at values besides par). However, if this type of sukuk is used, it could be problematic because investors would demand higher yields for the illiquidity in the istisna'a phase.

There may be other structures they could use besides the istisna'a-ijara sukuk that would avoid these problems, but it is not possible to say for sure what structure they are using. The debate will likely become moot (at least temporarily) if the House of Representatives expands the assets approved to back ijara sukuk.

Product mix in Islamic banks in Indonesia

The Islamic finance market in Indonesia has been growing rapidly, albeit from a small base, and remains far behind Malaysia in significance in the financial system overall. Malaysia has over 20% of the financial system in Islamic financial institutions, while Indonesia has just under 3.5% market share. A recent report by Rifki Ismal (from the Directorate of Islamic Banking at Bank Indonesia), "Islamic Banking in Indonesia: Lessons Learned," which was presented at the UNCTAD Multi-Year Expert Meeting on Services, Development and Trade: The Regulatory and Institutional Dimension held April 6-8, 2011 provides an interesting overview of the banking market in Indonesia, and specifically on the differences between the product mix between equity- and debt-based products.

The Islamic banking market is different in Indonesia than in many markets because there are far fewer products used compared to the GCC and Malaysia. According to Mr. Ismal, this limited product development is due to restricting contracts to those that are "all confirmed with Sharia". He notes that "Indonesia does not implement debatable contracts such as bay al dayn, bay al innah, tawarruq, bay al arbun and bay al wafa". Of these contracts deemed debatable, bay al dayn and bay al innah are nearly exclusively used in Malaysia. The product that has attracted the most attention is tawarruq, which was deemed non-Shari'ah-compliant by the OIC Fiqh Academy in the way it is currently practiced.

According to the report, the contracts used in Indonesia are mudaraba and musharaka (equity-based products) and murabaha, salam and istisna'a (debt-based products). These products are useful in many aspects of Islamic finance, but limit the variety of products that can be offered by banks. This is not necessarily always detrimental because it can check the growth of controversial products (e.g. Shari'ah-compliant credit cards). However, there are limitations by imposing limitations on the products because they will have a more difficult time competing with conventional financial institutions. The conventional banks--with a wider variety of products--can address customers needs in more different economic situations than Islamic banks.

The one bit of data in the product mix in Indonesia compared to other countries is the relative shares in equity-based and debt-based products. According to the report, roughly 1/3rd of the financing is equity-based means (mudaraba and musharaka). I don't know how to explain this difference. One thing that really is striking is the lack of Islamic investment banks:

"However, almost all of Islamic banks in Indonesia are retail banks which extend financing directly to real sector. The Islamic banking industry from other countries contains some investment banks which seek profit from trading Islamic securities in Islamic money market, Islamic capital market and Islamic stock market. The ideal practices of Islamic banks should directly extend funds to the real sector and seek profit directly from the robust performance of the real sector."

On the one hand, shifting the focus away from investment banks should lower the share of debt-based products because most Islamic investment banking (e.g. sukuk) creates Shari'ah-compliant alternatives to debt. However, the focus on retail banking seems out of line with a high rate of equity-based financing because it would appear to be even more costly to monitor these products (to limit losses from the well documented problems aligning incentives between the customer and the bank).

Just as the product breakdown differs between Indonesia and the rest of the world, so does the institutional setting. Most Islamic financial institutions around the world are (relatively) large institutions. Even the numerous smaller players are small mostly in comparison to other commercial banks. Indonesia, however, has commercial banks (11 full Islamic banks and 23 Islamic banking windows, according to the report) in addition to many more (151) Islamic rural banks, which are much smaller institutions than the commercial banks and, in addition to providing localized banking services in rural areas also provide Islamic microfinance. They are much different than the typical Islamic financial institution worldwide, which may provide some explanation for the differences in product types used in Indonesia.

There were many other interesting ideas presented in the paper presented at the UNCTAD conference, but the difference in breadown of product mix was the most stark to me. There are no firm estimates for product mix in other countries, but the general rule of thumb is that between 90 and 95% of the products used elsewhere are debt-based, with the remainder being equity-based (and possibly a few non-financial products like qard).