Investment Banking in
Islamic Finance

Prepared by:
AARON TEO
GLENN CHAVARRIA
RENATO MITSUHASHI
RUI LIMA
VIPUL SONAVANE
YU...
Agenda
• Fundamentals of Islamic Finance
• Islamic Investment Banking
• Islamic bond - Sukuk
• Case Study
Some statistics
Growth of Global Islamic Banking Assets:
1993 - $60 billion
2011 - $1.3 trillion
2015, forecast - $3 trill...
Roots of Islamic Finance
 Shariah - Islamic law

 Prohibitions in Shariah:
“Riba”: usury or rent on money in all forms ...
Fundamentals of Islamic Finance
Key principles:
 No Interest based lending;

 Profit-and-loss sharing & risk sharing con...
Pros and Cons
PROS
 One buyer one seller concept;
 Asset backed transactions;
 Investment in non-monetary assets / proj...
Islamic Investment Banking
Prohibited elements:
 Trading for speculation;
 Derivatives;
 Conventional bonds.

Accepted ...
Islamic Investment Banking
Sukuk
Market:
 Asset based financing;
 Equity based finance;
 Asset backed securities.

Structure:
 Islamic equivalent...
Conventional bond vs. Sukuk
Criteria

Conventional bond

Islamic Sukuk

Nature of
security

Debt obligation

Share of owne...
Types of Sukuk
 Ijara (leasing);
 Musharaka (partnership);

 Istisna (financing the production of property
delivered in...
Sukuk
Risks:
 Legal risk: No uniform regulatory board;
 Shariah compliance risk: Different interpretations;
 Credit ris...
Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
 SABIC – holding investment corporation
in Saudi Arabia, among...
Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
Structure:
Option to sell sukuk at year 5, 10, 15

1. SABIC iss...
Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
Option to sell Sukuk to the issuer:
Year 5
90% of
Face Value

Y...
THANK YOU!
QUESTIONS?
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Islamic Finance - Capital Market

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Detail study about Islamic Finance, its features, differences with conventional finance, Capital Market in IF, Sukuk, Case sudy

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  • The value of the Islamic Finance market is valued at approximately USD $1.3 trillion. Though this value is small when compared to global market capitalisation (Islamic assets represent approximately 1 - 2% of global assets), the growth rate is impressive and expected to continue.
  • 2003: 6.1b USD of Sukuk 2010: 47.8b USD
  • Islamic Finance - Capital Market

    1. 1. Investment Banking in Islamic Finance Prepared by: AARON TEO GLENN CHAVARRIA RENATO MITSUHASHI RUI LIMA VIPUL SONAVANE YULIYA MELNIK
    2. 2. Agenda • Fundamentals of Islamic Finance • Islamic Investment Banking • Islamic bond - Sukuk • Case Study
    3. 3. Some statistics Growth of Global Islamic Banking Assets: 1993 - $60 billion 2011 - $1.3 trillion 2015, forecast - $3 trillion* * Standard & Poor's forecast, 2011
    4. 4. Roots of Islamic Finance  Shariah - Islamic law  Prohibitions in Shariah: “Riba”: usury or rent on money in all forms and intents; “Haram”: non-permissible activities under Islam; “Gharar”: uncertainty, ambiguity, gambling.
    5. 5. Fundamentals of Islamic Finance Key principles:  No Interest based lending;  Profit-and-loss sharing & risk sharing concept;  Transaction should be backed by real non-monetary assets/projects/ventures;  One “buyer”, one “seller” concept.
    6. 6. Pros and Cons PROS  One buyer one seller concept;  Asset backed transactions;  Investment in non-monetary assets / projects. CONS  No central regulation;  Restricted growth;  Lack of sophisticated instruments.
    7. 7. Islamic Investment Banking Prohibited elements:  Trading for speculation;  Derivatives;  Conventional bonds. Accepted elements:  Capital markets;  Commodity trading & some other types of trading for hedging purposes only;  IPO;  Mergers & Acquisitions;  Modified version of bond – Sukuk.
    8. 8. Islamic Investment Banking
    9. 9. Sukuk Market:  Asset based financing;  Equity based finance;  Asset backed securities. Structure:  Islamic equivalent of bond;  Does not represent receivable or debt;  Represents ownership in asset/project/business.
    10. 10. Conventional bond vs. Sukuk Criteria Conventional bond Islamic Sukuk Nature of security Debt obligation Share of ownership in asset/project Nature of investment To finance any type of business if it complies with local law Asset/project has to be Shariah compliant (e.g. investing in weapon producing company is not allowed) Issue price Based on rating of the issuer Based on market value of asset/project Return on investment Regular interest payments Share of profits derived from asset/project Risks Interest rates fluctuations, default risk Risk of sharing a loss, default risk
    11. 11. Types of Sukuk  Ijara (leasing);  Musharaka (partnership);  Istisna (financing the production of property delivered in future);  Hybrid (combination of 2 or more);  Others.
    12. 12. Sukuk Risks:  Legal risk: No uniform regulatory board;  Shariah compliance risk: Different interpretations;  Credit risk: Investor bearing the risk of sharing a loss.
    13. 13. Case study: “SABIC Sukuk: The Debut Sukuk in Saudi Arabia”  SABIC – holding investment corporation in Saudi Arabia, among the world’s largest petrochemicals manufacturers;  Issued Investment Sukuk in 2006;  Represents an investment in SABIC marketing contracts;  Matures in 20 years;  The deal was worth $800 million.
    14. 14. Case study: “SABIC Sukuk: The Debut Sukuk in Saudi Arabia” Structure: Option to sell sukuk at year 5, 10, 15 1. SABIC issues sukuk SABIC, Issuer Sukuk assets under custody SABIC Sukuk LLC, Custodian 2. Sukukholder pays proceeds 3. Quarterly Net Income payments: 3-month SIBOR + 40 bps Sukukholders Trading 4. Reserve payments, every 5 years: 10% of sukuk Face Value Secondary Market
    15. 15. Case study: “SABIC Sukuk: The Debut Sukuk in Saudi Arabia” Option to sell Sukuk to the issuer: Year 5 90% of Face Value Year 10 Year 15 Year 20 60% of Face Value 30% of Face Value 0% of Face Value Analysis:  Actual maturity is 5 years, not 20;  10% of Reserve Net Income distribution does not represent additional value compared to the conventional bond -> Conventional bond SABIC Sukuk Maturity date Actual maturity Year 5 Amount received @ maturity 100% of par 90% of par + 10% of reserve distribution = 100% = 100%  Yield of Sukuk = 2.76%
    16. 16. THANK YOU! QUESTIONS?

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