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An Introduction
New Emerging System

Centers of Islamic Finance

Malaysia, Pakistan, Iran, Jordan, Saudi Arabia

United Arab Emirates, Bahrain, Kuwait, Qatar,
Oman, England, Sudan, Egypt, Syria,
Philippines, Sri Lanka, India, USA, Denmark,
Switzerland, Luxembourg, Australia, Indonesia,
Singapore, Hong Kong, Maldives,
History of Islamic Banking
 Islamic Banking movement started 1958 in the city of
 2nd attempt was made in the City of Karachi in
Pakistan when Interest Free Bank Launched in 1963
 Islamic Development Bank was established in 1966
base at Jeddah, Saudi Arabia
 From 1970 in International Association of Islamic
Bank was formed and first commercial bank Dubai
Islamic Bank was establish in 19712 at Muslim
countries such as Egypt, Malaysia, Pakistan and Dubai
 In the Year 1982 a Pan Islamic Financial Group
establish in the City of Geneva, Switzerland The
DMI Group (Dar-Al-Maal-Al- Islami)
 This group followed by 2nd largest Financial &
Commercial Group Dhallah Group from
Geneva, Switzerland by the name Al-Barka
 Both the Financial Group were registered in the
City of Nassau, Bahamas
 Originally emphasized joint-venture
structures similar to private equity
through Musharaka form of
 Quickly evolved to provide short-term
credit facilities by using the
Morabaha structure for Trade
 Started accepting the deposit under
Modaraba form of financing
History of Islamic Banking (II)
 With increase in scale, Islamic banks
began to branch out to more complex
financing schemes, including:

 Retail banking, including, deposit taking and

consumer lending

 Bonds (Sukûk)

 Medium- and Long-term leases (Ijara)

History of Islamic Banking (III)
 Impact of 9/11 – Reverse Capital Flight

 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

 Islamic banks, along with conventional banks in the

region, benefited from this reverse flight of capital

 Increase in Oil Prices Led to Dramatic Increase in

Liquidity in the Gulf
History of Islamic Banking (IV)
 Conventional Banks Open “Islamic Windows”

 Conventional banks began to respond to

requests from Muslim clients to offer
products that complied with Islamic law
 As the size of the potential market became
clear, conventional banks responded with the
creation of divisions dedicated to Islamic
History of Islamic Banking (V)
 Conventional International Banks with
Islamic Windows:

 Citigroup
 Deutsche Bank
 Standard Chartered Bank
History of Islamic Banking (VI)
 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
Size of Islamic Banking Sector
 No precise measure of size of deposits held in
Islamic banks or Islamic divisions of conventional

 Ranges from a low of $250 billion to a high of $750

billion. As much as $300 billion held in Islamic
investment funds awaiting investment

Arab investors hold approximately $800 billion of
assets in European banks, with a growing trend to
invest that money in Islamic products
Role of Islamic Finance in World
Credit Markets
 Demand Side

 Sovereign Debt

 International Agencies

 Corporate Debt

 Project Finance

 Consumer Debt
Sovereign Islamic Debt
 In recent years, several Islamic Countries and their
instrumentalities, as well as non-Islamic countries,
have issued sovereign debt in the form of Sukûk:

 Department of Civil Aviation, Dubai: $1

 Qatar: $700 million
 Pakistan: $600 million
 Malaysia: $600 million
 German State of Saxony-Anhalt: €100
 Bahrain: $79.5 million
International Agencies
 International Agencies Have Issued Sukûk
in recent years:

 Islamic Development Bank: $400

 World Bank: $200 million
Islamic Corporate Debt
 Private Issuances of Sukûk:

 DP World: $3.5 billion 7.5% Sukûk,

convertible into equity at the time of a
qualifying initial public offering

 National Central Cooling Company: $200

million, rated BBB- by S&P
 Listed on London Stock Exchange
 Previous issuance by same issuer listed on
Luxembourg Stock Exchange
Islamic Corporate Debt (II)
 Global issuance of Sukûk has exceeded $20
 Dow Jones Citigroup® Sukûk Index
 Comprised of seven Sukûk

 $2.8 billion aggregate principal amount

 Each issue rated at least A by S&P

 Average tenor 3 years

Islamic Corporate Debt (III)
 Biggest challenge thus far is limited secondary
trading market for Sukûk
 Demand for Sukûk has far exceeded supply;
offerings typically oversubscribed, even after
substantial upsizing of the offering at times
 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
Islamic Finance In Project
 Infrastructure projects in the Gulf region
largely financed on a corporate basis until the

 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
 Project Finance now preferred structure for
infrastructure investment
Islamic Finance and Project
Finance (II)
 Islamic sources of capital traditionally played
minor role in project finance in Gulf
 In recent years, no deal gets done without
a substantial Islamic trenches
 Financing needs exceed capacity of commercial
banks and export credit agencies
 Desire of project hosts to diversify sources of
capital and take advantage of local capital to the
extent feasible
Islamic Finance and Project
Finance (III)
 Rabigh Refinery and Petrochemicals Project,
Kingdom of Saudi Arabia
 $9.9 billion total cost, of which $5.8 billion was debt
 $4.1 billion equity split 50-50 between Saudi Armco
and Sumitomo Chemical
 $2.5 billion loan provided by Japan Bank for
International Cooperation
 $1 billion loan from Saudi Public Investment Fund

 $1.7 billion commercial loan

 $600 million Islamic trenches

Islamic Finance and Project
Finance (IV)
 YANSAB Project
 $5 billion Greenfield petrochemical project
 $3.5 billion debt:
 $1.067 billion, 13-year trenches from Saudi Public
Investment Fund
 $850 million, 12-year Islamic trenches

 $700 million export credit agencies trenches

 $533 million 12-year commercial bank trenches

 $350 million working capital facility

 ABN AMRO was sole arranger, underwriter and

book runner on deal
Islamic Finance & Project Finance (V)

 Future Demand for Project Finance

 Last two years saw $40 billion of project finance in
gulf region
 Saudi Arabia estimates it will invest $90 billion in
domestic power generation over the next fifteen
 Other states in the gulf also investing heavily in
infrastructure projects, particular petrochemical
 There will be a continuing demand in the region for
capital to invest further expansion of the region’s
Opportunities for Banks
 Deal flow shows no sign of abating
 International banks have shown an ability to compete
 Because of the size of new deals, Islamic banks need to
partner with international banks to take advantage of
their larger distribution networks
 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
Opportunities for Banks (II)
 Success in penetrating markets for arranging
credit could lead to mandates in upcoming
equity offerings
 Future opportunities to advise in connection
with an inevitable consolidation of banks in the
Gulf region
 Opportunities for wealth management of
wealthy Islamic investors
 Merrill Lynch identified 300,000 U.S. dollar
millionaires in the Middle East
Opportunities for Issuers

 Issuers, public and private, may consider tapping the

Islamic capital markets

 Because of Islamic finance is asset-based, industry

is a natural fit with the structures so far developed
in Islamic finance
 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
Opportunities for Infrastructure Firms

 Because of infrastructure boom in Gulf region,

large premiums have been paid on Engineering,
Procurement and Construction contracts
 Successful competition for infrastructure
projects inevitably requires support of export
credit agency
 Export Development Canada would have an
important role to play in promoting Canadian
firms’ expertise in the region
 Islamic finance and conventional finance are
quickly converging in the Gulf region
 As conventional investors gain more comfort
with Islamic structures, cost differential
between Islamic products and conventional
products have almost disappeared
 As a result, Islamic products may be more
practical because they appeal to both Islamic
and conventional investors
Conclusion (II)
 It is not too late for banks to compete
for business in the Islamic finance
 To do so successfully, they will need
to establish a presence in the region,
as have their competitors