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opportunities for Nigeria and Indeed African investment

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  1. 1. WHAT’S IN IT FOR NIGERIAN INVESTORS Jubril Salaudeen Lagos – Nigeria 08034700331
  2. 2. <ul><li>Centers of Islamic Finance </li></ul><ul><ul><ul><li>Malaysia </li></ul></ul></ul><ul><ul><ul><li>Persian Gulf </li></ul></ul></ul><ul><ul><ul><ul><li>United Arab Emirates (Dubai) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bahrain </li></ul></ul></ul></ul><ul><ul><ul><li>England ???? </li></ul></ul></ul>
  3. 3. <ul><li>Local Islamic banks formed in the 1970s in Muslim countries such as Malaysia, Pakistan and Dubai </li></ul><ul><li>Originally emphasized joint-venture structures akin to private equity </li></ul><ul><li>Quickly evolved to provide short-term credit facilities by using the murâbaha structure </li></ul>
  4. 4. <ul><li>With increase in scale, Islamic banks began to branch out to more complex financing schemes, including: </li></ul><ul><ul><li>Retail banking, including, deposit taking and consumer lending </li></ul></ul><ul><ul><li>Bonds ( sukûk ) </li></ul></ul><ul><ul><li>Medium- and Long-term leases (ijâra) </li></ul></ul>
  5. 5. <ul><li>Impact of 9/11 – Reverse Capital Flight </li></ul><ul><ul><li>Perception of hostile climate in many Western jurisdictions, in particular, the United States, led to repatriation of dollars by Arab investors to Middle Eastern banks </li></ul></ul><ul><ul><li>Islamic banks, along with conventional banks in the region, benefited from this reverse flight of capital </li></ul></ul><ul><ul><li>Increase in Oil Prices Led to Dramatic Increase in Liquidity in the Gulf </li></ul></ul>
  6. 6. <ul><li>Conventional Banks Open “Islamic Windows” </li></ul><ul><ul><li>Conventional banks began to respond to requests from Muslim clients to offer products that complied with Islamic law </li></ul></ul><ul><ul><li>As the size of the potential market became clear, conventional banks responded with the creation of divisions dedicated to Islamic banking </li></ul></ul>
  7. 7. <ul><li>Conventional International Banks with Islamic Windows: </li></ul><ul><ul><li>Citigroup </li></ul></ul><ul><ul><li>HSBC </li></ul></ul><ul><ul><li>Deutsche Bank </li></ul></ul><ul><ul><li>UBS </li></ul></ul><ul><ul><li>ABN AMRO </li></ul></ul><ul><ul><li>Standard Chartered Bank </li></ul></ul>
  8. 8. <ul><li>Almost all regional banks have followed the international banks in creating “Islamic” windows and some have converted, or are in the process of converting, to the Islamic banking model </li></ul>
  9. 9. <ul><li>No precise measure of size of deposits held in Islamic banks or Islamic divisions of conventional banks </li></ul><ul><ul><li>Ranges from a low of $250 billion to a high of $750 billion </li></ul></ul><ul><ul><li>As much as $300 billion held in Islamic investment funds awaiting investment opportunities </li></ul></ul><ul><ul><li>Arab investors hold approximately $800 billion of assets in European banks, with a growing trend to invest that money in Islamic products </li></ul></ul>
  10. 10. <ul><li>Demand Side </li></ul><ul><ul><li>Sovereign Debt </li></ul></ul><ul><ul><li>International Agencies </li></ul></ul><ul><ul><li>Corporate Debt </li></ul></ul><ul><ul><li>Project Finance </li></ul></ul><ul><ul><li>Consumer Debt </li></ul></ul>
  11. 11. <ul><li>In recent years, several Islamic Countries and their instrumentalities, as well as non-Islamic countries, have issued sovereign debt in the form of sukûk : </li></ul><ul><ul><li>Department of Civil Aviation, Dubai: $1 billion </li></ul></ul><ul><ul><li>Qatar: $700 million </li></ul></ul><ul><ul><li>Pakistan: $600 million </li></ul></ul><ul><ul><li>Malaysia: $600 million </li></ul></ul><ul><ul><li>German State of Saxony-Anhalt: €100 million </li></ul></ul><ul><ul><li>Bahrain: $79.5 million </li></ul></ul>
  12. 12. <ul><li>International Agencies Have Issued Sukûk in recent years: </li></ul><ul><ul><li>Islamic Development Bank: $400 million </li></ul></ul><ul><ul><li>World Bank: $200 million </li></ul></ul>
  13. 13. <ul><li>Private Issuances of Sukûk : </li></ul><ul><ul><li>DP World: $3.5 billion 7.5% sukûk , convertible into equity at the time of a qualifying initial public offering </li></ul></ul><ul><ul><li>National Central Cooling Company: $200 million, rated BBB- by S&P </li></ul></ul><ul><ul><ul><li>Listed on London Stock Exchange </li></ul></ul></ul><ul><ul><ul><li>Previous issuance by same issuer listed on Luxembourg Stock Exchange </li></ul></ul></ul>
  14. 14. <ul><li>Global issuance of sukûk has exceeded $20 billion </li></ul><ul><li>Dow Jones Citigroup ® Sukûk Index </li></ul><ul><ul><li>Comprised of seven sukûk </li></ul></ul><ul><ul><li>$2.8 billion aggregate principal amount </li></ul></ul><ul><ul><li>Each issue rated at least A by S&P </li></ul></ul><ul><ul><li>Average tenor 3 years </li></ul></ul>
  15. 15. <ul><li>Biggest challenge thus far is limited secondary trading market for sukûk </li></ul><ul><li>Demand for sukûk has far exceeded supply; offerings typically oversubscribed, even after substantial upsizing of the offering at times </li></ul><ul><ul><li>DP World offering originally contemplated for $2.8 billion but was upsized to $3.5 billion to meet excess demand; no road show needed to market the offering </li></ul></ul>
  16. 16. <ul><li>Infrastructure projects in the Gulf region largely financed on a corporate basis until the mid-1990s </li></ul><ul><ul><li>Sadaf, a joint venture between Shell Oil and Saudi Arabian Basic Industries Corporation (SABIC), first important project finance transaction in Gulf region, closed in 1995 </li></ul></ul><ul><ul><li>Project Finance now preferred structure for infrastructure investment </li></ul></ul>
  17. 17. <ul><li>Islamic sources of capital traditionally played minor role in project finance in Gulf </li></ul><ul><ul><li>In recent years, however, no deal gets done without a substantial Islamic tranche </li></ul></ul><ul><ul><ul><li>Financing needs exceed capacity of commercial banks and export credit agencies </li></ul></ul></ul><ul><ul><ul><li>Desire of project hosts to diversify sources of capital and take advantage of local capital to the extent feasible </li></ul></ul></ul>
  18. 18. <ul><li>Rabigh Refinery and Petrochemicals Project, Kingdom of Saudi Arabia </li></ul><ul><ul><li>$9.9 billion total cost, of which $5.8 billion was debt </li></ul></ul><ul><ul><li>$4.1 billion equity split 50-50 between Saudi Aramco and Sumitomo Chemical </li></ul></ul><ul><ul><li>$2.5 billion loan provided by Japan Bank for International Cooperation </li></ul></ul><ul><ul><li>$1 billion loan from Saudi Public Investment Fund </li></ul></ul><ul><ul><li>$1.7 billion commercial loan </li></ul></ul><ul><ul><li>$600 million Islamic tranche </li></ul></ul>
  19. 19. <ul><li>YANSAB Project </li></ul><ul><ul><li>$5 billion greenfield petrochemical project </li></ul></ul><ul><ul><li>$3.5 billion debt: </li></ul></ul><ul><ul><ul><li>$1.067 billion, 13-year tranche from Saudi Public Investment Fund </li></ul></ul></ul><ul><ul><ul><li>$850 million, 12-year Islamic tranche </li></ul></ul></ul><ul><ul><ul><li>$700 million export credit agencies tranche </li></ul></ul></ul><ul><ul><ul><li>$533 million 12-year commercial bank tranche </li></ul></ul></ul><ul><ul><ul><li>$350 million working capital facility </li></ul></ul></ul><ul><ul><li>ABN AMRO was sole arranger, underwriter and bookrunner on deal </li></ul></ul>
  20. 20. <ul><li>Future Demand for Project Finance </li></ul><ul><ul><li>Last two years saw $40 billion of project finance in gulf region </li></ul></ul><ul><ul><li>Saudi Arabia estimates it will invest $90 billion in domestic power generation over the next fifteen years </li></ul></ul><ul><ul><li>Other states in the gulf also investing heavily in infrastructure projects, particular petrochemical </li></ul></ul><ul><ul><li>There will be a continuing demand in the region for capital to invest further expansion of the region’s infrastructure </li></ul></ul>
  21. 21. <ul><li>Deal flow shows no sign of abating </li></ul><ul><li>International banks have shown an ability to compete successfully </li></ul><ul><li>Because of the size of new deals, Islamic banks need to partner with international banks to take advantage of their larger distribution networks </li></ul><ul><li>Success of sukûk issues means that conventional market investors have grown comfortable with their structure and will invest in them so long as credit profile meets investors’ needs </li></ul>
  22. 22. <ul><li>Success in penetrating markets for arranging credit could lead to mandates in upcoming equity offerings </li></ul><ul><li>Future opportunities to advise in connection with an inevitable consolidation of banks in the Gulf region </li></ul><ul><li>Opportunities for wealth management of wealthy Islamic investors </li></ul><ul><ul><li>Merrill Lynch identified 300,000 U.S. dollar millionaires in the Middle East </li></ul></ul>
  23. 23. <ul><li>Nigeria Issuers, public and private, may consider tapping the Islamic capital markets </li></ul><ul><ul><li>Because of Islamic finance is asset-based, Nigerian’s agric and mining industry is a natural fit with the structures so far developed in Islamic finance </li></ul></ul><ul><ul><li>Because of high-liquidity of Islamic banks and Islamic investment funds, issuers who tap this market may be able to obtain relatively favorable pricing relative to the conventional market </li></ul></ul>
  24. 24. <ul><li>Because of infrastructure boom in Gulf region, large premiums have been paid on Engineering, Procurement and Construction contracts </li></ul><ul><li>Successful competition for infrastructure projects inevitably requires support of export credit agency </li></ul><ul><li>Export Development Nigeria would have an important role to play in promoting Nigeria firms’ expertise in the region </li></ul>
  25. 25. <ul><li>Islamic finance and conventional finance have quickly converged in the Gulf region </li></ul><ul><li>As conventional investors gain more comfort with Islamic structures, cost differential between Islamic products and conventional products have almost disappeared </li></ul><ul><li>As a result, Islamic products may be more practical because they appeal to both Islamic and conventional investors </li></ul>
  26. 26. <ul><li>It is not too late for Nigerian banks, investors and entrepreneurs to compete for business in the Islamic finance arena </li></ul><ul><li>To do so successfully, they will need to establish a presence in the region, as have their competitors </li></ul>
  27. 27. <ul><li>End of Presentation </li></ul>