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Islamic banking

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Islamic banking

  1. 1. Islamic Banking – Products & Operations A practical introduction
  2. 2. CONTENT OF PRESENTATION • Understanding the context • Looking at the products • Concluding Remarks
  3. 3. • What is Islamic Banking? • What prompted Islamic Banking? • Origins of Islamic Banking • Islamic Finance Perspectives UNDERSTANDING THE CONTEXT
  4. 4. WHAT IS ISLAMIC BANKING? • Interest free banking? • Profit and loss sharing? • Ethical banking?   
  5. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 15. (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
  16. 16. 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
  17. 17. 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)
  18. 18. (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
  19. 19. (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
  20. 20. 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
  21. 21. ISLAMIC INVESTMENT PRODUCTS – 320 Worldwide; top 93 Islamic Equity Funds 31 Islamic Income Funds 18 Islamic Real Estate Funds 10 Islamic Balanced Funds 7 Islamic Leasing Funds 5 Islamic Commodity Funds 4 Islamic Funds of Funds 3 Islamic Index Funds 3 Islamic Murabaha Funds 3 Islamic Growth Funds 3 Islamic Hedge Funds 2 Islamic Hybrid Funds 1 Islamic Infrastructure Funds 1 Islamic Mutual Funds 1 Non Investment Islamic Fund 1
  22. 22. 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)
  23. 23. AIMAN MUJTABA

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