3. • What is Islamic Banking?
• What prompted Islamic Banking?
• Origins of Islamic Banking
• Islamic Finance Perspectives
UNDERSTANDING THE CONTEXT
4. WHAT IS ISLAMIC BANKING?
• Interest free banking?
• Profit and loss sharing?
• Ethical banking?
5. WHAT PROMPTED ISLAMIC BANKING?
• Emergence of Arab nationalism and the search for identity
• Oil shocks and petrodollars
• Privatization and the individual’s right to choose
6. Quran Hadith & Sunna Interpretation
by
Shariaa Scholars
Sayings of the
Prophet
Teachings &
Life style of
the Prophet
i) Sahih Al-Bokhari
ii) Sahih Muslim
1) Hanbaly
2) Shafei
3) Hanafi
4) Maliki
Two Sects of Islam
Sunnah Shia’h
5) Ithna-Ashriah
Qiyas - Ijtehad – Ijma’a
Surah Verse(s)
Al-BAQARRAH (#2) 275-279
AN-NESSA (#4)
AL-EMRAN (#3)
AR-RUM (#30)
130
161
39
ORIGINS OF ISLAMIC BANKING
7. ISLAMIC FINANCE PERSPECTIVES
• 1.5 billion Muslims (20% of population)
• Fastest growing and one of most active religions
• Modern Islamic Banking started in the mid-70s, although
financing principles pre-date Islam
• Financial assets now around US$ 700 billion
• Liquid Funds in the Islamic Markets looking for quality
assets are around US$ 100 – 200 billion
• Market is growing at 15% pa
8. LOOKING AT THE PRODUCTS
• Islamic Finance Principles
• Short Term Working Capital
• Medium Term Sales Financing
• Syndication
• Islamic Securitization
• Islamic ABS
• Islamic Mortgages
• Islamic Funds
9. ISLAMIC FINANCE PRINCIPLES
• Financiers are linked to the underlying transaction
• Not permitted finance of activity related to:
- alcohol, pork, drugs, gambling, etc
- speculation or unjustified enrichment
• Money is not a “Commodity” in itself, merely reflecting
“Time Value” for a return
• Hence, no receipt or payment of Interest (Riba)
• Transactions must be transparent with all details agreed in
advance and ownership undisputed
10. (1) WORKING CAPITAL –
COMMODITIES MURABAHA FOR SAUDI
CORPORATE
• Saudi Corporate (SC) requires US$ 20 million from Islamic
Bank (IB) for 3 months under Master Agreement which sets
out procedures and means of fixing pricing
• SC contracts to buy via IB an amount of a commodity with
a cash price of US$ 20 million on deferred term of 3 months
• IB contracts to sell the commodity on behalf of SC for US$
20 million cash and passes cash to SC
• SC contracts to pay IB for the commodity after 3 months at
the cash price plus an agreed mark up
11. Saudi
Corporate
Islamic
Bank
Commodity
Broker
Deferred obligation of $ 20 million
+ mark up (3 months)
Buys commodity on
deferred terms
Sells commodity for
cash
Cash price ($ 20 million)
Commodity for cash
Commodity for cash
(1) WORKING CAPITAL –
COMMODITIES MURABAHA FOR SAUDI
CORPORATE
12. (2) LIBYAN CONSTRUCTION EQUIPMENT FINANCE
TRANSACTION
• A $ 40 million facility to finance equipment for a project in
Libya
• LC’s issued initially to finance the purchase and import of
construction equipment from Italy and elsewhere used on the
project
• LC’s converted into Murabaha leverage financing during 2007
• Was initially to be an Islamic lease/Ijara contract but there
were tax and legal uncertainties surrounding this
• Facility amortization over 5 years commenced July 2007
13. (2) LIBYAN CONSTRUCTION EQUIPMENT FINANCE
TRANSACTION
ABCIB
Suppliers
ClientContractor
Equipment
Contract payments
Opens Letters of Credit
$ payments
Makes payments against documents
Supply goods /
equipment
14. (3) SYNDICATED FINANCING –
REVOLVING MURABAHA FOR KUWAITI
CORPORATE
• 3 year revolving facility
• $ 100 million with ABC Islamic Bank as Investment Agent
(underwriter and arranger)
• Series of individual murabaha transactions with payment of
profit only on individual transactions; conventionally a
“bullet” payment of principal at maturity
15.
16.
17. (4) SUKUK ISSUE –
“ISLAMIC ABS”; SAUDI HOUSEBUILDER
• Dar Al-Arkan is a major Saudi builder
• Requirement for raising finance to develop houses to meet
underserved Saudi market
• In 2007 raised $ 1.6 billion in two sukuk issue
• Complexity because of Saudi law on property ownership
• Total market of approx $ 100 billion of sukuk in issue end
2007
18. Issuer
Dar Al-Arkan International Sukuk Company (a limited liability
company incorporated in the Cayman Islands)
Guarantor Dar Al-Arkan Real Estate Development Company (Dar Al-Arkan)
Issue 5 Year US$[*] Trust Certificates due 2012
Maturity 5 years, bullet
Floating Rate 3-month US$ LIBOR
Coupon US$ LIBOR plus 225bps
Public Listing
Application made to Dubai International Financial Exchange (DIFX)
and Labuan International Financial Exchange (LFX)
Issue Type Sukuk Al-Ijara
Governing Law
Saudi law for property-related documents
English law for Trust Deed and Certificates
Joint Lead Managers
and Joint Bookruners
ABC Islamic Bank (E.C.); Arab National Bank; Deutsche Bank AG;
Dubai Islamic Bank PJSC; Gulf International Bank B.S.C.; Kuwait
Finance House (Malaysia) Berhad; Unicorn Investment Bank,
B.S.C. (c)
(4) SUKUK SUMMARY
19. Sale
Proceeds
(US$)
Sale of Real
Estate Assets
(Transfer of
Title Deeds)
Issue
Proceeds
(US$)
Guarantee
5 Year Lease
(Use of Real Estate Assets)
Lease Payments
On-shoreOffshore
Certificates
Payment for
Real Estate
Rights (US$)
Transfer of
Real Estate
Rights
SAUDI SPV
Dar Al-Arkan
ISSUER
(Dar Al-Arkan International
Sukuk Co.)
SUKUK HOLDERS
(4) TRANSACTION STRUCTURE (SUKUK AL IJARA)
20. (5) CONTAINER SUKUK ISSUE
• Al Hamila is an ABC – established SPV which owns
shipping containers
• Al Hamila finances its purchases through the issue of
floating rate and fixed rate sukuk. The sukuk “coupons”
match the profit of underlying leases
• Client (shipping company) gets lease finance with funds
raised from Arab and International markets
21.
22. (6) ISLAMIC MORTGAGES –
DIMINISHING MUSHARAKA
• Requirement for British Muslims to buy their own houses
without borrowing at interest
• Approximately 2 million Muslims in UK with potential
“mortgage” market size of £ 6 billion
• Marketed under the “alburaq” brand
• Bank and customer buy the property jointly and over
period Bank sells its share to customer; Bank charges rent
on the share that it owns
• Rent re-fixed semi-annually vs. Libor benchmark
23. Property / Asset
Customer (20% share)
(“Customer Share”)
Bank (80% share)
(“Bank’s Share”)
(6) DIMINISHING MUSHARAKAH / IJARAH
STRUCTURE
Customer Bank
Customer
(as tenant)
Bank’s Share
Increasing ownership
Acquisition cost
instalments to purchase
80% share
Joint Purchase
Based on Shirkat-
al-milk.
Bank takes title
Customer agrees to
repay principal by
the buying over
time, the Bank’s
share.
Consequently the
customer’s
ownership interest
in the property
increases and the
Bank’s decreases
The Customer
leases the Bank’s
share, with periodic
adjustments made
to rental to reflect
the fact that a
reducing bank
share is being
leased
Rental
Lease of reducing Bank’s
share
25. CONCLUDING REMARKS
• Matching needs of surplus with shortage
• Oil price, available Sharia technology, volatility in home
markets create supply
• Credit crunch (possibly short tem), desire for
diversification as a strategy, more familiarity with Sharia
compliance create appetite
• Potentially more benign regulatory treatment
• Potential for investment products and serving local market
needs (10 million-plus Muslims in Western Europe)
