Islamic Bank Product Feasibility by qrx15656

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									THE ISLAMIC DEVELOPMENT BANK
AND PPP FINANCING OPPORTUNITIES
          http://www.isdb.org


        CASA ÁRABE, MADRID
          24 NOVEMBER 2010

                                         Abderrahman El Glaoui
                          Director, IDB Regional Office of Rabat
       THE IDB
A QUICK PRESENTATION




 ___________ ______   ______   _____   2
                                           2
        ISLAMIC DEVELOPMENT BANK

 Established in 1975 to foster socio-economic
  development in member countries.
 Authorized capital of US$ 45 billion.
 Subscribed capital of US$ 22 billion.
 Paid-up capital of US$ 5.3 billion.
 AAA rating by Moody’s Investors Service, Fitch
  Ratings, Standard & Poor’s.
 Zero-Risk Rating by the European Parliament.


                                                 3
                    MEMBERSHIP


               Europe: 2                              Asia: 26


       Africa: 27



Latin America: 1




          A UNIQUE MODEL OF SOUTH-SOUTH COOPERATION
             56 MEMBERS SPREADING OVER 4 CONTINENTS

                                                                 4
                 SHAREHOLDERS IN IDB
                          (% OF SUBSCRIBED CAPITAL)




      Indonesia: 2.7      Others: 10.07
                                                    Saudi Arabia:
Pakistan: 3.05                                         24.44
Algeria: 3.05
Kuwait: 6.54

                                                                     Libya: 9.81
UAE: 6.94



  Turkey: 7.73
                                                              Iran: 8.58
                       Egypt: 8.48
                                          Qatar: 8.61


                                                                           5
              PRIORITY AREAS


 Human Development (Gender, Health,
  Education)
 Agriculture Development and Food Security
 Infrastructure Development
 Intra-trade Among Member Countries &
  Economic Integration
 Private Sector Development
 Research and Development in Islamic
  Economics, Banking & Finance
                                              6
      IDB GROUP PRODUCTS & SERVICES

 Financing of Projects (Public and Private)
 Promoting the Islamic Financial Industry
 Trade Finance & Promotion
 Capacity Building and Technical Cooperation
 Risk Insurance
 Research and Training
 Fund/ Assets Management



                                                7
ORGANIZATIONAL STRUCTURE




                           8
NET APPROVED FINANCING IDB GROUP
     SINCE INCEPTION TO END 2009 : US$63.90 BILLION

                                 Special
                            Assistance, $0.7
                                               Projects, $28.14
                                 bn, (1%)
                                                  bn, (44%)




  Trade, $34.78 bn,
       (54%)




                                                     Technical
                                                    Assistance,
                                                   $0.29 bn, (1%)

                                                                  9
CUMULATIVE SECTORAL DISTRIBUTION




                               10
                        NET YEARLY APPROVALS
8,000
                                             Cumulative
                                            $ 63.9 billion
7,000




6,000




5,000




4,000




3,000




2,000




1,000




   0
                      ___________ ______   ______   _____                        11
        1975   1980     1985             1990               1995   2000   2005        2009
INFRASTRUCTURE FINANCING (1975-2010)

                               Net Approvals
                                 USD 15.52 billions
                                                 Investment,
                                                 USD 200m, 1%
                             ICT, USD 287m, 2%

        SMEs, USD 309m, 2%                              Others,
                                                      USD 108m, 1%
                                                                          Transport, USD
 Water, Sanitation &                                                        5.431m, 35%
 Waste Mngt. USD
    1.963m, 13%




 Manuf. & Mining,
 USD 2.218m, 14%
                                                            Energy, USD 5.003m,
                                                                    32%
                                                                                           12
INFRASTRUCTURE FINANCING (1975-2010)
                          Geographical distribution


                                         Autres, 2%
                   Asie Sud & Est, 12%

                                                        Moyen-Orient et
                                                      Afrique du Nord, 51%
  Afrique Sub-
 Saharienne, 16%




 Asie Centrale, 20%




                                                                             13
                OPERATIONS PLAN
                OPERATIONS COMPLEX - YEAR 2010




Total Operations Plan : US$ 3.72 billion:
     US$ 39 million grant financing
     US$ 381 million concessional loans
     US$ 3.30 billion ordinary financing




                                                 14
  THE BASICS OF
ISLAMIC FINANCE



                  15
                       15
  BASIC PRINCIPLES OF ISLAMIC FINANCE                                 (1)


The rules regarding Islamic finance can be summed up in the following
points:
 1. In a loan transaction (qard hassan), any predetermined payment
    over and above the actual amount of principal is prohibited. Making
    money from money is not acceptable: money is only a medium of
    exchange, a way of defining the value of a thing. It has no value in
    itself, and therefore should not be allowed to give rise to more
    money.
 2. For other transactions, the lender must share in some risks or in the
    profits or losses arising out of the enterprise for which the money
    was lent.
 3. In debt finance instruments other than loans (such as Ijara or
    leasing) a markup is charged in representation of the service
    delivered to the client.



                                                                     16
BASIC PRINCIPLES OF ISLAMIC FINANCE                                 (2)




4. Uncertainty or speculation (gharar) is also prohibited: the rationale
   behind the prohibition is the wish to protect the weak from
   exploitation. Therefore, options and futures are considered as un-
   Islamic and so are forward foreign exchange transactions because
   rates are determined by interest differentials.
5. Investments should only support practices or products that are not
   forbidden - or even discouraged - by Islam: trade in weapons, for
   example would not be financed by an Islamic bank.
6. Shari’a does not prohibit to use interest as a benchmark (what
   counts for the Muslim scholars is not the method of calculation of
   the remuneration but the generating element of the
   remuneration).




                                                                   17
              TECHNIQUES OF THE TRADE
Most used techniques used in modern Islamic banking include:
  Musharaka : joint venture (typically for a specific undertaking)
   wherein both parties contribute capital and share profits and losses.
   Mudaraba : partnership whereby an investor agrees to entrust an
    Islamic finance institution, for a specified fee, with the responsibility
    of managing a transaction.
   Ijara : analogous to equipment leasing but the lessor has to retain
    some obligations and risks associated with ownership.
   Murabaha : transaction involving the sale of an asset for a price
    which includes a stated mark up.
   Istisna’a : it is a “build-to-suit contract” in which the IFI agrees to or
    to build an asset pursuant to the purchaser’s specifications.
   Salam : similar to a forward sale contract.
   Sukuk Al Ijara : lease participation trust certificates or bonds; the
    investor acquires assets pursuant to Ijara leases for a stated period
    with an obligation by the lessee to purchase these assets at the end
               18
               ___________ ______ ______ _____                          18
    of the term.
       ISLAMIC FINANCING INSTRUMENTS
                 FOR PROJECTS
 Debt Finance
      Ijara, Leasing (equipment, plant, machinery)  about 15% of IDB financing
      Istisna‘a, construction finance (civil works)  about 55% of IDB financing
      Installment Sale  about 30% of IDB t financing

Sukuk (Islamic bonds)
      Sovereign Sukuk (by Governments for general budget use)
      Corporate Sukuk (by corporations using their balance sheets)
      Project Sukuk (by project companies, SPV, to finance specific projects)


Equity Finance
     Direct equity participation (Musharaka, profit sharing)
     Infrastructure Equity Funds
         Global, e.g., IDB Infrastructure Funds, I and II
         Regional, e.g., IDB-ADB Islamic Infrastructure Fund
         Sectoral, e.g., Energy Fund, Telecom Fund

                                                                                    19
PUBLIC-PRIVATE-PARTNERSHIP
     FINANCING IN IDB



    ___________ ______   ______   _____   20
                                               20
                        IDB’s PPP (1)
Key elements of PPP in IDB:
   Started in June 2006.
   Objective: to use PPPs as a major tool for poverty
    alleviation in MCs.
   PPPs are a project-based, or contract-based financing
    alternatives for both economic and social infrastructure
    (transport, utilities, schools, hospitals etc.).
   IDB created new products to position itself as a catalyst
    providing financing and risk mitigation and credit
    enhancement tools/instruments as well as syndication and
    advisory services.
   Objective: to become a major financing vehicle of IDB’s
    lending business, with up to 30% of the total financing
    target.                                                 21
                        IDB’s PPP (2)

   No loan to Government.
   Borrower is a single purpose business.
   Separate legal entity with ring-fenced cash flows.
   Sponsor guarantees don’t cover all the risks.
   High leverage and long repayment terms.
   Contracts with major project parties are a key credit
    support mechanism.
   Sukuk resources available to fund PPPs.
   Working closely with other Islamic Finance Institutions and
    Commercial Banks.



                                                            22
                    IDB’s PPP (3)
Appetite for:
 Strategically important projects
 Strong experienced sponsors
 Experienced and reputable project management
  company and contractors
 Very competitive cost advantage situations
 Demand/supply gap in target markets
 Robust cash flows and operating projections
 Overall risk low – medium –



                                                 23
IDB’s PPP: AMOUNTS & DISTRIBUTION

               PPP Projects - Regional Analysis      GCC
                                                     Middle East
                         3% 1% 3%                    South Asia
                   11%
                                      29%            South East Asia
              5%                                     East Africa
                                                     North Africa
             11%                                     West Africa
                                    34%
              3%                                     Central Asia
                                                     Regional


                                                     Infrastructure
               PPP Projects - Sector Analysis
                15%        3%                        Health Care

              5%                          33%        Industrial

                                                     Power
             13%
                              28%                    Water
                                                3%
                                                     Petrochemicals

                                                             24
                      PROJECT CYCLE
   Financial Advisor introduces the Project.
   IDB reviews conformity with strategies and policies.
   Confidentiality Agreement signed.
   Provision of necessary information and documents (briefs,
    feasibility studies etc.).
   Upon initial concept clearance, IDB appoints Consultants as
    needed.
   Coordination with other lenders.
   Due diligence.
   Credit assessment.
   Negotiation of Project Documents and provisional Term Sheet.
   Discussion in internal Credit Committees.
   Report to/Approval of the Board of Executive Directors.
   Finalization of project Documents and Security Documents.
   Signing.
   Satisfaction of Conditions Precedent.
   Disbursements.
   Monitoring and supervision (Consultants).                   25
                  CONTACT
Dr. Walid Abdelwahab
Director, Infrastructure Department
waw@isdb.org
+966 2 646 68 14
Mr. Irfan Bukhari
Manager, PPP Division
ibukhari@isdb.org
+966 2 646 68 30
Islamic Development Bank
http://www.isdb.org
P.O. Box 5925
Jeddah, 21432
Saudi Arabia
                                      26
SOME APPROVED PROJECTS




 ___________ ______   ______   _____   27
                                            27
     DORALEH CONTAINER TERMINAL (1)

 Country: Djibouti
 USD 397 million greenfield container terminal
  Project
 Joint venture between the Djibouti Government (Port
  Autonome International de Djibouti) and DP World
 First ever PPP financing in Djibouti
 30-year concession
 Djibouti port has a monopoly position for
  Ethiopian imports and exports + also strategically
  situated for transhipment traffic
 Syndication: Islamic and conventional financing
                                                       28
   DORALEH CONTAINER TERMINAL (2)
 Project financing of USD263 million
 7 financing institutions have committed to support the
  project (commercial lenders, multilateral financing
  institutions and development finance institutions)
 Islamic Tranche: USD 160million (Islamic Development
  Bank, Bank of London & The Middle East, Dubai Islamic
  Bank, Standard Chartered Bank, WestLB AG)
 Conventional Tranche: USD103 million (African
  Development Bank, Proparco)
 IDB : USD 67 million (USD15 m. sold down to OFID)
 Tenure: 10-year term including a 2-year construction
  phase                                               29
   DORALEH CONTAINER TERMINAL (3)

                                       Government
             DP World
                                        of Djibouti


                   100%                 100%


                                      Port Autonome
             DP World         JV      International de
              Djibouti    Agreement
                                       Djibouti (PAID)


                  33.3%                 66.7%            Concession
Management
                                                         Agreement
Agreement

                           Doraleh
                          Container
                           Terminal


                                                              30
  QUEEN ALIA INTERNATIONAL AIRPORT
 Country: Jordan
 USD 681 million expansion project for the construction of
  a new terminal and improvement of airport operations
 Sponsors: Airport International Group led by Abu Dhabi
  Investment Company (ADIC) and Aéroports de Paris
  (ADP)
 IDB : USD 100 million
 Tenure: 18 years
 IFC : USD 120 million
 Commercial banks: USD 160 million
                                                      31
TUNISIAN-INDIAN FERTILIZERS –TIFERT– (1)
 Country: Tunisia
 USD 348 million greenfield project for the construction of a facility
  with a capacity of 360.000 tpa of phosphoric acid and 3600
  tons/day of sulfuric acid
 Sponsors: Groupe Chimique Tunisien (GCT), Coromandel Fertilizers
  Ltd. (CFL) and Gujarat State Fertilizers Ltd. (GSFL)
 The plant will use the local phosphate rock and imported solid
  sulfur as raw materials
 Production will be sold totally to CFL and GSFC under separate 30-
  year off-take contracts for 50% of the production each.
 Financing Plan: 35% equity and 65% debt
 IDB : USD 150 million through Istisna'a
  (construction financing) and Leasing
 Tenure: 15 years
 European Investment bank (EIB):
  USD 130 million
                                                                  32
 TUNISIAN-INDIAN FERTILIZERS – TIFERT– (2)
 Security package: typical in project finance (mortgage, pledge over
  bank accounts, pledge over shares of the project company, direct
  agreements with the sponsors dealing, inter alia, with step-
  in/substitution rights)
 Presence of some "common security", notably over the cash flow of
  the Project, whilst some is for the benefit of EIB only (over the assets
  financed by the EIB facility): it is the quid pro quo of the fact that IDB
  has full title over the assets it finances)
 This difference between the status of the two Banks, inherent to the
  nature of this co-financing, was addressed in the intercreditor
  agreement
 Under the Istisna'a arrangement, IDB acts as employer and Tifert as
  contractor to develop and construct certain assets and deliver title to
  these to IDB
 These assets will, after delivery, be the subject of Lease operation
                                                                       33
SOCIÉTE NATIONALE INDUSTRIELLE ET MINIÈRE

 Country: Mauritania       (SNIM)
 USD 840 million expansion
 Project description:
  (1) expansion of iron ore mining capacity in the Guelb region
  (2) maintenance and modernization of railways
  (3) building a new Iron Ore Terminal

 Sponsor: SNIM
 IDB Participation: USD 108 million/Tenure: 15 years
 Other lenders: EIB, AfDB, FDA, IDB, KfW, BNP Paribas,
  BHF, Fortis


                                                                  34
                  RAS LAFFAN IWPP

 Country: Qatar
 Independent Water and Power Production Project
  (IWPP)
 Description: development, construction and
  operation of 2,730 MW of electricity generation and
  63 million imperial gallons per day of water
  desalination in the industrial area of Qatar
 Sponsors: Qatar petroleum (QP), Qatar Electricity &
  Water Company (QWEC), Suez Energy International,
  Mitsui, Shikoku Electric Power Cy. and Chubu Electric
  Power Cy
 Project Cost: USD 3.7 billion
                                                        35
                RAS LAFFAN IWPP

 A total of USD 3.32 billion was raised,
  making it one of the largest non-recourse
  funding for a Middle Eastern utility
 Japan International Bank for
  Cooperation provided for USD 1.37 billion
 20 Mandated Lead Arrangers (MLAs) provided for
  USD 1.39 billion
 USD 250 million Islamic tranche
 IDB Participation: USD 150 million/ Tenure: 25 years
 Other lenders: Qatar Islamic Bank


                                                         36
   PROJECT AGREEMENTS STRUCTURE


                                       Gas Supply QP
O&M Contract       Shareholders




  Financing    Joint Venture Project   Sea Water QP
   Lenders            Owners




Construction   Off Taker KAHRAMAA       Government
    EPC                                  Guarantee

                                              37




                                         37
               PROJECT AGREEMENTS
Project Agreements:

    Power & Water Purchase       EPC Contract
     Agreement - 20 Appendices
                                  Project Founders Agreement
    Connection Equipment
     Transfer Agreement           Joint Venture Agreement

    Government Guarantee         Long-Term O&M Contract

    Direct Agreement             Grant of Rights Agreement

    Land Lease Agreement         Shared Facilities Agreement

    Fuel Supply Agreement
    Seawater Supply
     Agreement

                                                                 38
                           PHOSCO (1)


 Country: Saudi Arabia
 Saudi Fransi Bank approached IDB for participation as a Mandated
  Lead Arranger in the Ma’aden Phosphate Fertilizer Project (PhosCo) in
  KSA in March 2008
 Development of a world class fully integrated complex in KSA to
  produce 2.9 million tpa of
  diammonium phosphate fertilizer
 Estimated Cost US$5.526 billion
 Equity 30%/Debt 70 %
 Sponsors:
                                          70%                    30%
 - MA’ADEN, Involved in mining in KSA               Ma’aden
                                                   Phosphate
 - SABIC, one of the world’s 10 largest             Company
 petrochemical companies                              MPC
                                                   (PHOSCO)         39
PHOSCO (2)
  FINANCING




  Debt
 $3,868m
   70%




 Equity
 $1,658m
   30%
      PHOSCO (3)
PROJECT CONSULTANTS & IMLAS




                              41
     PHOSCO (4)
THE CONTRACTUAL STRUCTURE




                            42
                          PHOSCO (5)
               PROJECT RISKS AND MITIGANTS (a)

   RISKS                               MITIGANTS
                Experienced sponsors with quality Project Management
                 Consultant Worley Parsons.
                18 month completion (cost overrun + debt service undertaking)
CONSTRUCTION     support from sponsors.
& COMPLETION
                70% of capital costs under LSTK/EPC contracts.
                Comfortable Project scheduling + adequate contingencies in
                 contracts.
                Port and railroad construction being undertaken by
                 Government entities.
                Completion tests for Sponsor support to fall away include
                 Port and Railway completion.
EXTERNAL
                Jubail Port available as an alternative.
INTERFACE
                Feasible temporary back up plan for railway (trucking).
                Sponsor support durations allows for a float time of 28
                 months for the railway from its scheduled completion date to
                 the long stop date.                                     43
                       PHOSCO (6)
            PROJECT RISKS AND MITIGANTS (b)

   RISKS                           MITIGANTS
             Favorable demand/supply scenario for Phosco’s target markets
              during the life of the Project.
             Competitive Cost Structure – Phosco will be able to withstand
              downturns in product prices on account of its strong cash cost
              competitiveness (expected to be at the bottom of the industry
MARKET        cost curve as a low cost producer) and advantageous logistics
              to its target markets.
             Phosco has executed marketing agreements with SABIC and
              Ma’aden.


             Operational and technical expertise of leading companies
              including SABIC, Ma’aden, Saudi Comedat, YARA, Uhde,
              Outotec, Litwin, Incro, Hongfu and Dragados.
OPERATING
             SABIC and SAFCO, a SABIC affiliate, have entered into a
              Technical and Training Services agreement with Phosco
              respectively.

                                                                         44
                           PHOSCO (7)
                PROJECT RISKS AND MITIGANTS (c)

    RISKS                              MITIGANTS
                 Separate Environmental Impact Assessments (EIAs) were
                  prepared for the Al Jalamid and Ras Az Zawr Sites.
                 Phosco required that the EIAs conform to the highest possible
                  standards.
                 The EIAs were prepared to comply with the Islamic Principles
ENVIRONMENTAL     for Conservation of the Natural Environment, complying with
                  applicable KSA regulations, Phosco’s environmental policy, the
                  Equator Principles, the World Bank Group Standards and World
                  Health Organisation guidelines.


                 Novation of all contracts has been carried out with the newly
                  formed Phosco (MPC).
                 Saudi Aramco will provide with new allocation letter six
LEGAL             months prior to the start of operations.
                 Applicable Law : English law.
                 Arbitration : SAMA Committee.

                                                                            45
                                  PHOSCO (8)
                               OVERALL LEVEL OF RISK


  SUMMARY OF OVERALL MAIN RISK                    ASSESSED LEVEL OF RISK

Country Risk                               Low

Transfer Convertibility                    Low
Expropriation and Creeping Expropriation   Low
Civil Commotion and Terrorism              Low- Medium
War                                        Low- Medium

Market Risks

   Demand/Supply                          Low-Medium
   Price                                  Low - Medium
Construction Risk                          Medium - High
Operations & Technology Risk               Low
Legal Risk/Documentation Risk              Low
OVERALL RISK RATING                        Low-Medium
PROJECT RATING AS PER IDB RISK
                                           “A”
MANAGEMENT GUIDELINES

                                                                           46
EXAMPLES OF TERMS & CONDITIONS (1)
                    PROJECT XXX
IDB AMOUNT           USD 100 MILLION
TENURE               12 YEARS DOOR TO DOOR
MODE OF FINANCING    LEASING
COMMITMENT FEES      N.A.
ONE-OFF MANAGEMENT USD 100,000
FEE
SPREAD             120 bp OVER LIBOR
SECURITY             PARI-PASU WITH OTHER LENDERS
                     (CORP. GUARANTEE ON DISB. UNTIL PCD/
                     PROJECT ASSETS/BANK
                     ACCOUNTS/RECEIVABLES/PERMITS, LICENSES
                     ETC./ALL SHARES OF SPONSORS IN
                     PROJECT/LOSS PAYEE/DEBT SERVICE
                     ACCOUNT 6 MONTHS WITH MARKUP …)


                                                              47
EXAMPLES OF TERMS & CONDITIONS (2)

                    PROJECT YYY
 IDB AMOUNT                    USD 100 MILLION
 TENURE                        16 YEARS DOOR TO DOOR
 MODE OF FINANCING             LEASING
 UPFRONT FEES                  85 bp
 UP TO COMPLETION DATE         80 bp
 FROM COMPLETION DATE TO       90 bp
 DATE FALLING 8½ YEARS AFTER
 SIGNING
 FROM DATE FALLING 8½ YEARS    105 bp
 TO
 11½ YEARS AFTER SIGNING
 THEREAFTER                    115 bp
 SECURITY                      PARI-PASU WITH OTHER
                               LENDERS

                                                       48
SOME INTERNATIONAL PARTNERS




                              49
THE ISLAMIC DEVELOPMENT BANK
AND PPP FINANCING OPPORTUNITIES
          http://www.isdb.org


  THANK YOU FOR YOUR ATTENTION
    APPENDIX 1

    MEMBERS
OF THE IDB GROUP


                   51
                        51
         ISLAMIC DEVELOPMENT BANK


   Established in 1975 to foster socio-economic
    development in member countries in compliance with
    Shari’ah
   Authorized capital of US$ 45 billion
   Subscribed capital of US$ 22 billion
   Paid-up capital of US$ 5.3 billion
   AAA rating by Moody’s Investors Service, Fitch Ratings,
    Standard & Poor’s
   Zero-Risk Rating by the European Parliament




                                                       52
   ISLAMIC RESEARCH & TRAINING
          INSTITUTE (IRTI)


Established in 1981 to undertake applied and basic research
in Islamic economics and finance.

Activities include:
   Research Seminars & Conferences
   Training Courses
   Publications
   IDB Prize in Islamic Economics, Banking & Finance
   IRTI Scholarship for PhD in Islamic Banking



                                                       53
 ISLAMIC CORP. FOR THE INSURANCE
   OF INVESTMENT & EXPORT CREDIT
                (ICIEC)
 Established in 1994 to provide Shari’a-compatible export
  credit insurance, political risk insurance, technical
  assistance
 Capital structure (66.7% IDB, 33.3% MCs) : total
  authorized capital US$ 231 million, subscribed capital US$
  228 million
 Business insured cumulatively, as of November 2009 :
  around US$ 6.35 billion, in more than 37 member
  countries
 Insurance financial strength rating of Aa3 by Moody’s
  Investors Service


                                                         54
    ISLAMIC CORP. FOR THE DEV. OF THE
            PRIVATE SECTOR (ICD)

    Commenced its operation in July 2000
    Mandated to promote private sector development and
     to offer advisory services to the private sector entities
     in member countries
    An authorized capital of US$ 2 billion, paid up capital of
     US$ 470 million (50% IDB, 30% MCs, 20% Financial
     Institutions)
    As of December 2009, cumulative approvals : 185
     Projects amounting to US$ 1.59 billion, in more than 32
     member countries



                                                            55
      INTERNATIONAL ISLAMIC
    TRADE FINANCING CORP. (ITFC)

 Commenced business activities in January 2008
 Promotes and enhances intra-trade and            trade
  cooperation among 57 member countries of the
  Organization of Islamic Conference (OIC) through trade
  financing and promotion programs
 Authorized Capital : US$ 3.0 billion
 Subscribed Capital : US$ 750 million
 Managing Funds for other institutions : US$ 1.0 billion
 Year 2009 Trade Finance Approvals : US$ 2.1 billion
 Cumulatively Trade Financing, end 2009 : US$ 4.6 billion

                                                        56
       APPENDIX 2

ADDITIONAL ELEMENTS ON
    ISLAMIC FINANCE


                         57
                              57
              OBJECTIVES OF THE SHARI’A
  ‫مقصىد انشرع مه انخهق خمسة، وهى أن يحفظ عهيهم ديىهم ووفسهم‬
    ‫وعقههم و وسههم ومانهم. فكم ما يتضمه حفظ هذي األصىل انخمسة‬
 .‫فهى مصهحة، وكم ما يفىت هذي األصىل فهى مفسذة، ودفعها مصهحة‬
 The Shari’a (i.e. legal principles derived from the Quran, the Sunna and
  the jurisprudence) encourages thrift, cooperation, responsibility and
  social and economic justice.
 According to Al-Ghazali (Algazel, 450503H /10581111G), the
  objectives (maqasid) of the Shari’a lie in safeguarding the faith, the
  self, the intellect, the posterity and the wealth of the people.
 “Whatever ensures the safeguard of these five principles serves public
  interest and is desirable, and whatever hurts them is against public
  interest and its removal is desirable.”
 Ibn Maymun (Maimonides, d. 1286) of Cordova used Al-Ghazali ‘s
  maqasid. Thomas Aquinas (1225-1274G) studied Algazel in the
  University of Naples.

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               HISTORICAL DEVELOPMENT
 The 1960s: In this stage the first step towards Islamic banking system was
  taken with the establishment of Mit Ghamr, first Islamic bank, in Egypt in
  1963 and Muslim Pilgrims Saving Corporation (Tabung Haji), a saving
  corporation, in Malaysia in 1963. However, both institutions came into
  being without projecting their image as Islamic banking institutions.
 The 1970s: The pioneers of modern Islamic banking came into being
  during the 1970s. They included the Islamic Development Bank in 1975,
  Dubai Islamic Bank in 1975, Faisal Islamic Bank of Sudan in 1977, Faisal
  Islamic Bank of Egypt in 1979, and Bahrain Islamic Bank in 1979. All these
  institutions focused on building the image of Islamic banks and brought
  untapped Islamic capital into the banking system.
 The 1980s: During the decade, some Muslim countries attempted to
  convert their conventional banking system to an Islamic one (e.g. Iran
  and Sudan) or to introduce a dual banking system (e.g. Pakistan, Malaysia
  and Bahrain).
 The 1990s and up to now: The 1990s saw the spreading of Islamic banks
  from Muslim countries to western shores such as London, Luxembourg,
  Geneva, etc. These conventional banks also tried to channel the Arab oil
  revenues via a variety of Islamic banking instruments alongside
  conventional products.
                                                                         59
   ISLAMIC FINANCE: A SIZEABLE REALITY (1)

 There are more than 300 Islamic banks and financial institutions
  worldwide.
 Estimates of total size of Islamic finance market internationally range
  between US$500 and US$900 billion growing at a rate believed to be
  between 10 and 20% p.a.
 Islamic financial products attract not only Muslim savings, but also
  other conventional and ethical based investors as well.
 Islamic capital markets have taken off quite strongly. Total sukuk
  (Islamic bonds) issuance is estimated to be over US$50 billion.
 There has also been an increase in the amount of Islamic project
  financing particularly in the Middle East. The Ettihad Etisalat's
  (telecommunication provider from the UAE) deal in 2007 of US$2.35
  billion is just one example.



               60
               ___________ ______   ______   _____                     60
  ISLAMIC FINANCE: A SIZEABLE REALITY (2)

 The world’s first Islamic bond, issued by a Government
  took place in Malaysia in July 2002. HSBC was the lead
  arranger for this US$ 600 million issue.
 In July 2004, the central German state of Saxony-Anhalt
  issued the first European-based and backed sukuk. The 5-
  year 100-million-euro transaction was listed on the
  Luxembourg Stock Exchange.
 Similarly, a growing mergers and acquisition,
  management buyout and venture capital activity is taking
  place in Islamic banking sector.
 In 2009, France has put in place Islamic finance regulation
  with a view to attracting Islamic funds and to working
  with Islamic funds on international finance markets.

            ___________ ______   ______   _____            61
 REGULATORY AND INDUSTRY FRAMEWORKS

As IFIs gain critical mass, a number of initiatives have emerged to
develop a body of standards. Several institutions have been
established such as:
-   Accounting & Auditing Organisation for Islamic Financial Institutions
    (AAOFI), established in Bahrain in 1990 to develop accounting and auditing
    standards.
-   Islamic Financial Service Board (IFSB), established in Malaysia in 2002, by the
    IDB and several central Banks, to harmonize the standards, regulations and
    best practices.
-   International Islamic Financial Market (IIFM), jointly established by Bahrain
    and Malaysia to develop new Islamic instruments and build the Islamic debt
    market.
-   Islamic International Rating Agency (IIRA), established in 2000 in Bahrain by
    the IDB and other sponsors.
-   General Council for Islamic Banks and Financial Institutions (CIBAFI),
    established 3 years ago in Bahrain to promote Islamic banking.

                                                                              62
TAKAFUL, THE ISLAMIC FORM OF INSURANCE

Conventional insurance is considered by many scholars not to be in line with
Shari’a. As Prof. Mahmoud Amin El-Gamal put it:
-   “First, the high-quality debt instruments in which insurance companies
    normally invest their premiums (e.g. bonds, mortgage backed securities, etc.)
    are deemed forbidden based on riba.
-   Second, the insurance contract itself is deemed by those jurists to be a form
    of gambling (since the insured pays a premium, but knows not whether he
    will ever file a claim), and hence forbidden based on the canonical prohibition
    of gharar.
-   To solve both problems, providers of a cooperative insurance or takaful have
    emerged.
-   To solve the first problem, premiums are invested in Islamic variations on
    bonds, asset-backed securities, etc., like the ones discussed earlier.
-   To solve the second problem, the relationship between insurer and insured is
    not viewed as a commutative financial contract (in which the uncertainty
    associated with claims would deem the contract impermissible). Instead, the
    takaful company is said to pay claims based on voluntary contribution
    tabarru’, as a form of social cooperation”.
                                                                            63
                         RECENT TRENDS

 The Islamic market, is witnessing an increasing level of competition. As
  a result, product offering has become much more sophisticated. New
  and innovative products are being developed. Structures have
  become much more complicated.
 Structures are getting sophisticated and complex to accommodate
  fiscal and monetary regulations in different countries and to better
  manage risks or enhance them or change their maturity profiles.
 Islamic investment banking is making a major in-road into project
  financing providing both equity and debt to major projects inside and
  outside the Islamic world.
 Some western regulators have started to align the local rules with a
  view to accommodate for the specificities of Islamic Finance: this is
  the case for the Financial Services Authority (FSA) and the Bank of England,
 the US Treasury and US regulatory bodies, the Banque de France etc.



                                                                          64
                     IMPORTANT PLAYERS (1)
Private IFIs
      Al Rajhi Banking & Investment Corp., KSA
      Kuwait Finance House, KSC, Kuwait
      Dubai Islamic Bank, UAE
      Shamil Bank of Bahrain, Bahrain
      Bankislam, Malaysia
      Qatar Islamic Bank, Qatar
      Faisal Islamic bank, Egypt
      Jordan Islamic Bank, Jordan
      Gulf Finance House, Bahrain

Public Sector IFIs
      Islamic Development Bank
      Islamic Corp. for the Development of the Private Sector
      Bank Melli, Iran
      Bank Saderat, Iran
                                                                 65
                    IMPORTANT PLAYERS (2)
Some Conventional Banks in the ME with IF Windows
     Arab National Bank
     Banque Misr, Egypt
     Bank Muscat International, Bahrain
     Saudi American Bank, KSA
Some Western Banks having IF Windows or IF Subsidiaries
     UBS (Noriba Bank)
     HSBC
     Bank of America
     BNP Paribas
     Citigroup
     Crédit Suisse
     Deutsche Bank
     Goldman Sachs
     Standard Chartered
     CALYON
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