Diapositive 1

1
Emerging of Islamic Finance Industry
Houda CHERRAK
Tajania KBABRA
Bouchra TOUZANI
Julde MBAYE
2
Table of contents

• I-Overview of islamic finance
• 1/What is Sharia law?
• 2/How does Islamic finance work?
• 3/Whats prohibited?
• II-Presentation of Islamic Financial Markets
• 1/Overview of Islamic Financial Market
• Evolution of the Islamic Finance Industry over
  the Countries
• Islamic Finance Bond Market Size ovec the
  Countries
• 2/Islamic financial Market in Malaysia
• Evolution of Sukuk Market in Malaysia
• Sukuk vs Convencional Bond Market in Malaysia (
  2007)
• 3/Islamic Financial Market in the
  Middle East
• Evolution of Islamic Financial Market in the
  Middle East
• 4/Geographical distribution of Global
  Sukuk in the Market.
• 5/Distribution of Sukuk in Asia,
  Middle East, Europe , USA and supranational.
• 6/Potentiel New Markets

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Table of contents
III-International Islamic finance institutions
and funds 1/Trends in Islamic finance
2/Self regulation and development
institutions 3/Islamic finance
funds IV-Sukuk overview 1/Current
trend in Sukuk 2/Global sukuk
overview 3/Sukuk issuance
4/Market structure of Sukuk 5/Types
of Sukuk 6/Sukuk vs Eurobonds
7/Key issue related to Sukuk
8/Islamic Market Indexes 9/Subprime
crisis and Islamic finance Sources
4
Source International islamic financial market
2006
5
Overview of islamic finance

• ?Islamic Banking refers to a banking activity
  that is consistent with Islamic Law (SHARIA)
  principles and guided by Islamic Economics.
• ?Islamic Finance is an increasing sector of
  International Financial Markets. To understand it
  properly, one may first understand that the rules
  of trade and finance are part of the religion by
  which muslims conduct their lives and businesses.
• ?Local institutions are beginning to notice the
  demand for small and mid size business
• financing products that follow Islamic law
  principles.
• In particular, Islamic law prohibits
• Usury (Collection and payment of interests)
• Investing in business unlawful (Haraam)

6
Overview of islamic finance

• ?However, islamic financial system should be
  restructured in an appropriate way to be adjusted
  with different financial economies in order to
  gain a competitive advantage in the global
  financial industry
• ?In the context of the emerging market
  economy, the financial system is considered as a
  mean to an end.
• Islamic financial system must be designed to
  meet each market requirements, it needs to be in
  a position to support each real sector, it should
  change and evolve with the changing needs of the
  economy.
• ?To be more efficient, effective and
  competitive in the financial industry, Islamic
  financial institutions infrastructure still
  needs to be reinforced by the legal and
  regulatory Sharia framework to ensure that all
  financial transactions are Sharia compliant.

7
Overview of islamic finance
? The number of islamic financial institutions
worldwide has risen from 1 in 1975 to over 300
today in more than 75 countries. ? They are
mainly concentrated in the Middle East and
Southeast Asia, but are also appearing in Europe
and the United States. ? Shari'a-compliant
assets, are estimated to exceed 300 billion
banking assets, 400 billion capital market and
are growing at an estimated 15 percent a year.
?Countries from Bahrain to Malaysia are racing
to create islamic banking hubs to serve the 1.7
billion muslims around the world.
Source http//www.islamicpopulation.com/
8
WHAT IS SHARIA LAW?

• Sharia or islamic law is the subset of islamic
  jurisprudence that governs social, political
• and economic institutions. Its a number of
  principles which constitute a legal system
• derived from a series of primary and secondary
  sources.
• The primary sources are
• The Quran (scripture)
• The Sunnah (Practices and tradition of the
  Prophet Muhammad)
• Hadith (Sayings of the Prophet Muhammad)
• The secondary sources are a series of rules that
  allow to extract principles from the primary
• sources and apply them to a modern context.
• Under Sharia, making money from money, such as
  charging interest is usury and therefore
• should not be permitted. The only way to generate
  wealth allowed is through legitimate trade
• and investment in assets.
• Besides its also forbidden to invest in
  companies involved with alcohol, tobacco, arms,

9
HOW DOES ISLAMIC FINANCE WORK?

• The first principle of Islamic finance is that
  all forms of interest are forbidden. The
• model is a profit and loss sharing system (risk
  sharing).
• The main transaction structures used in islamic
  finance are considered below
• Ijara Its a leasing agreement in which the bank
  buys an asset for a customer and then leases it
  back over a specific period. The customer has to
  pay a rent, representing an agreed profit
  typically calculated upon a benchmark, such as
  the libor a margin. The difference between
  Ijara and a conventional finance lease is the
  increased risk that the financier takes in
  relation to the asset.
• Ijara-wa-iqtina Its the same contract but the
  customer is allowed to buy back the item when the
  contract ends. Ijara is the Islamic alternative
  to the loan. In this financing technique, the
  leased asset must have some value and continue to
  exist throughout the term of the lease.

10
HOW DOES ISLAMIC FINANCE WORK?
Mudaraba Its an investment arrangement under
which an investor places funds in a bank or
financial institution (Mudareb) that provides
expertise and manages the fund by investing in
Sharia compliant investment in return for a fee,
typically based on profit sharing. Mudaraba is
a trust financing principle. Here, the
entrepreneur is totally free to manage the
enterprise as he likes. Both the investor and
the entrepreneur are entitled to profit, which
may be a predetermined ratio, but only people who
invest bear the risk of loss. The entrepreneur
may also make capital contributions. This
contract is more flexible than the other as the
entrepreneur may use the capital contributions to
invest in a specific enterprise or to make
discretionary investments.
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HOW DOES ISLAMIC FINANCE WORK?

• Murabaha Its a form of credit which gives the
  holder the ability to make a purchase without
  having to take out an interest bearing loan.
  Banks buy an item and sell it on to a customer on
  a deferred basis. These techniques are often used
  for trade finance and are very close to
  conventional loans. It is similar to an
  investment partnership between an investor and
  another party. The Mudarib (the other party) will
  loose some of the income they were expecting as a
  result.
• Murabaha is a fixed income loan for the purchase
  of a real asset with a profit margin instead of a
  fixed rate of interest. The financier buys an
  asset from a supplier and sells it to the
  customer at a premium. The purchase price is
  usually payable in installments. The premium is
  generally based on a benchmark usually libor plus
  a margin. This technique is close to a
  conventional asset finance facility.

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HOW DOES ISLAMIC FINANCE WORK?

• Musharaka means sharing, its the purest form
  of international financing, because it is based
  on profit and loss sharing. Its an investment
  partnership in which profit sharing terms are
  agreed in advance and losses are fixed to the
  amount invested. Each partner within Musharaka
  contributes to the capital and can make executive
  decisions.
• Musharaka is a form of venture capital. When used
  in home financing, Musharaka is applied as a
  decreasing partnership Any amount paid above the
  rental value increases the share of the customers
  in the property and reduces the share of the
  financial institution.
• Bai el salam It can be used to provide working
  capital. The main difference with Murabaha is
  that, while the financier still buys an asset,
  the delivery is deferred.
• Usually, the financier will receive a discount
  for advance payment typically calculated by
  reference to a benchmark (Libor plus margin)

13
HOW DOES ISLAMIC FINANCE WORK?

• Istinaa or custom manufacturing is a sales
  contract for custom manufactured goods which may
  be used for public and private project financing.
  To produce, the seller uses his own raw
  materials. The nature and quality of the goods is
  specified in the agreement, as the sale price
  which is fixed in advance. Payments can be made
  one shot or by installments and at any time up to
  or after the time of delivery.
• Sukuk They are Islamic bonds. They are medium or
  long term, islamically compatible trust
  certificate backed by certain approved assets,
  usufructs or services .
• Takaful or Islamic insurance is an arrangement
  such as a charitable collection of funds based on
  the idea of mutual assistance.
• Tawaruq is the islamic way of obtaining cash when
  required. It involves buying something on a
  deferred credit and selling the item on to get
  cash. The cash has then been obtained without
  taking out a loan and paying interest.

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WHAT IS PROBITED?
? Its the main principle of Islamic law. Riba,
which means excess , interpreted as any
unjustifiable increase of capital whether in
loans or sales is the central tenet of the
system. Indeed, any positive, fixed,
predetermined rate tied to the maturity and the
amount of principal is considered Riba and
therefore totally forbidden. ? Riba also covers
the charging of interest. Because interest is
prohibited, fund suppliers are considered as
investors and not creditors. ? Investors share
business risk as they share the profit. Money is
considered as a medium of exchange. Thus,
charging interest on loans is considered unjust
since money is viewed as an intermediary between
goods.

• Usury

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WHAT IS PROBITED?

• Uncertainty (Gharar)
• Excessive uncertainty and speculative behavior
  are totally prohibited. An islamic financial
  system discourages hoarding and prohibits
  transactions that involve extreme uncertainty,
  gambling and risk. Gambling (Maysir) invokes
  enmity among the parties.
• Gharar involves a sense of legal trepidation.
  Commercial gain itself is not prohibited but
  uncertainty is forbidden. Therefore, taking
  economic initiatives that do not involve
  uncertainty is not that easy.
• Investing in business unlawful (Haraam)
• Only Sharia approved activities are allowed. They
  do not violate the rules of Sharia qualify for
  investment, which means that investing in
  unethical sectors such as casinos, tobacco
  companies, wine, alcohol and sex-business is
  totally prohibited.

16
Islamic Financial Market Today

• The number of the industry has reachead 300
  islamic financial institutions and more than 80
  Takaful operators around the world.
• The global Islamic insurance (Takaful) market is
  estimated to reach USD 14.4 billion by 2010.
• Islamic assets of islamic banks and window-based
  conventional banks represent more than USD560
  billion.
• Global market capitalization of Dow Jones Islamic
  Indexes estimated to be more than USD10 trillion.
• 350 Shariah-compliant funds have been established
  globally.
• Increase in liquidity in particular from Golf
  countries by USD500 billion from high oil prices
• There is a great potential demand for Sukuk
  market over the world.

17
More than 240 providers of islamic finance
services across Muslim countries
18
And Non Muslim Countries
sources Counsil for islamic banks
19
Evolution of the Islamic Finance Industry over
the countries
(source HSBC)
20
Islamic financial Market in Malaysia

• ?Malaysia dominates the pool of top 40
  islamic banks in Asia Pacific with 17 banks with
  73 of the top 40s total assets
• ?Islamic banking assets in Malaysia is
  increasing at an average rate of 19 since 2000.
• ?Today, islamic banking assets exceeds
  USD33.63 billion
• ?Malaysia targets a 20 market share by
  2010.
• ?Sukuk are expected to be a major
  contributor to this growth.

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Evolution of Sukuk Market in Malaysia

• ?Malaysia has the largest Sukuk market in
  the world.
• ?Malaysia Global Sukuk issued has reached
  USD600 million .
• ?Sukuk issues have soared to US12.1
  billion in the Middle East and Malaysia by the
  end of the year 2007.
• ?However Malaysia remains the leader,
  closing US6.9 billion dollars of islamic debt
  deals during the first half, in 28 separate
  transactions.
• ?The Malysian bond market has grown by 220
  since Asian financial crisis of 2007 to USD 132
  bln.
• ?Sukuk comprised 34 of outstanding bonds .

(source BNM)
22
Sukuk VS Convenional Bond market in Malaysia in
2007 (Source Securities Commission, Malaysia)

• ?Malaysia is one of the biggest financial
  hubs for Islamic banking and through Budget 2007,
  it will strengthen and accelerate Malaysias
  position to make Malaysia the leading Islamic
  Financial Center.
• ?Sukuk comprise 46.76 of the Malaysian bond
  market.
• ?Sukuk grew at of 28.3 compared to 14.5 of
  total bond issues.
• ?Malaysian domestic Sukuk totals
  USD27,797.3 million, with Sukuk representing
  46.76 of the Malaysian bond market

23
Islamic Financial Market in the Middle East
24
Evolution of Islamic Financial Market in the
Middle East

• ?More then two third of Islamic funds are from
  the Middle East.
• ?Sukuk outstanding in the Middle East reached US
  25 billion by 2006, approximately US 50 billion
  Sukuk will be outstanding in 2008.
• ?Bahrain is emerging a financial center for
  islamic finance, and attracts international
  banks.
• ?Bahrain was among the first sovereign to issue a
  Sukuk in the world, opening doors to whole new
  asset class for the global financial community.
• ?Bahrain Monetary Agency International Sukuk
  issues USD 250 million.
• ?Today, they issue about 24 sukuk a year which
  include the Ijarah Sukuk as well as the short
  term-Al Salam Sukuk.
• ?Qatar gobal sukuk issues soar to USD700 million.
• ?The Takaful market in the Middle East is growing
  at 15-20 per year.

25
Evolution of Islamic Financial Market in the
Middle East (source The Wall Street Journal
Asia).

• ?Dubai , as one of the biggest markets, has
  issued USD3.5 billion Sukuk in 2007.
• ?Almost half was taken up by non-islamic
  investors, 11 went to European investors.
• ?2001, a program of short-term Sukuks Al Salam
  and Ijarah was launched in Bahrain.
• ?Short-term Sukuk complimented by regular
  issuance of medium to long-term Sukuk Al Ijarah
• ?Central Bank of Bahrain offered 65 issues of
  Sukuk Al Salam , value of each issued raised to
  USD 40 million (USD 25 million in 2006).
• ?By October 2007, CBB offered 14 issues of Sukuk
  Al Ijarah each value at USD 37 million
• ?CBB first short-term Sukuk over subscribed by
  200
• ?Bahrains total mutual funds surged 70 to
  USD9.3bln in 2007, with an asset growth of 300
  over the last 4 years

26
Geographical distribution of global sukuk in the
market
( sourceIIFM)
27
Distribution of Sukuk in Asia, Middle East,
Europe , USA and supranational

• The recent geographic distribution of Islamic
  Development Bank USD1.0 bln Sukuk reflects a move
  away reliance on Europe Middle East
• For the first time for a Gulf Council Comissions
  promoted Sukuk, Asian investors outstripped
  investors from Europe Middle East to Asia 35,
  Middle East 32, Europe 26.and supranational 7.

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Potentiel New Markets

• China is the largest population they are 38
  million of Muslims which reprensent 3.
• Brunei had issued its first short term government
  Sukuk Ijarah to pave the ways for the development
  of Islamic capital market though the government
  doesnt really need the money.
• Indonesia which is the highest population of
  Muslims in S.E.A. Before the Sukuk is issued, the
  Government will need to change the law on state
  debt securities or the law on state treasury.
  Indonesias current capital market is not deep
  enough to support infrastructure investment
  needs. Indonesia would have to access external
  sources of financing
• Russia has a strong tendance towards islamic
  banks.
• USA is now allowing islamic banks to operate in
  the country.
• Europe Successful closure of the 1st Islamic
  Euro-dominated German Sukuk will be the catalyst
  for development of Sukuk in Europe. (German is
  the 2nd largest Muslim population country in
  Europe after France)

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TRENDS IN ISLAMIC FINANCE
2007s
2000s
1990s
1980s
1970s
30
SELF REGULATION AND DEVELOPMENT INSTITUTIONS
?Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) ?Islamic
Financial Services Board (IFSB) ?International
Islamic Financial Market (IIFM) ?Islamic Research
Training Institute (IRTI) OTHER DEVELOPMENT
INSTITUTIONS ?Islamic International Rating
Agency ?General Council for Islamic Banks
Financial Institutions ?Liquidity Management
Centre ?Arbitration Centre ?Islamic Indexes (Dow
Jones, SPs, FTSE/DIFC)
31
International Islamic Financial Markets (IIFM)

• The IIFM is an institution created to participate
  in the establishment, development,
  self-regulation and promotion of Islamic Capital
  and Money Market through the
• Standardisation of Islamic financial instrument
  structures and contracts.
• Issuance of guidelines and recommendations
  related to the Islamic Capital and Money Market.
• IIFM founding members in 2002
• Islamic Development Bank, Saudi Arabia
• Central Bank of Bahrain
• Labuan Offshore Financial Services Authority
  (LOFSA), Malaysia
• Bank of Sudan and Bank of Indonesia
• Ministry of Finance, Brunei Darussalam
• State Bank of Pakistan

32
International Islamic Financial Markets (IIFM)

• Roles of IIFM

• Forming a link between islamic financial market
  participants and regulatory bodies on the islamic
  capital and money market .
• Advising on the integrity and compliance of a
  variety of islamic financial infrastructures.
• Producing unified documentation frameworks for
  the islamic financial institutions and improving
  transactions security.
• Promoting participation of both islamic and
  islamically-interested institutions, and industry
  professionals, for the exchange of knowledge and
  expertise on a global basis on islamic capital
  and money market.
• Facilitating access to other neutral Sharia
  boards.

www.iifm.net
33
Islamic Financial Services Board (IFSB)
An international standard-setting body based in
Kuala Lumpur created in 2002 in order to promote
the stability and the development of a prudent
and transparent Islamic financial services
industry through
?Introducing new or adapting existing
international standards consistent with Islamic
Sharia principles ?Issuing global prudential
standards and guiding principles for the
industry banking, capital markets and insurance
sectors.
The work of the IFSB complements that of the
Basel Committee on Banking Supervision,
International Organization of Securities
Commissions and the International Association of
Insurance Supervisors
www.ifsb.org
34
Islamic Financial Services Board (IFSB)
In December 2005, the IFSB adopted two standards,
the Guiding Principles of Risk Management and
Capital Adequacy Standard for Institutions (other
than Insurance Institutions) offering only
Islamic Financial Services (IIFS) The IFSB is
currently preparing standards on supervisory
review process, transparency and market
discipline, special issues in capital adequacy
and governance of investment funds. It is
constituted by 137 members including 35
regulatory and supervisory authorities as well as
IMF, World Bank, BIS, Islamic Development Bank,
Asian Development Bank, and 97 market players and
professional firms from 22 countries.
www.ifsb.org
35
Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI)

• AAOIFI was established in accordance with the
  Agreement of Association signed by Islamic
  financial institutions on 26 Feb, 1990 in
  Algiers. Then, it was registered on 27 March,
  1991 in the State of Bahrain.
• 155 institutional members from 40 countries,
  support AAOIFI organization, including central
  banks, Islamic financial institutions, and other
  participants from the international Islamic
  banking and finance industry, worldwide.
• 
  Objectives
• ?Preparing accounting, auditing, governance,
  ethics and Sharia standards for IFI and the
  industry.
• ?Professional qualification programs (Sharia
  Adviser and Auditor "CSAA") in order to develop
  the industrys human resources base and
  governance structures.

36
ISLAMC DEVELOPEMNT GROUP

• IDB Group is a multilateral development financing
  institution. It includes the Islamic Development
  Bank (IDB), Islamic Research and Training
  Institute (IRTI), Islamic Corporation for the
  Development of the Private Sector (ICD), Islamic
  Corporation for the Insurance of Investment and
  Export Credit (ICIEC), and International Islamic
  Trade Finance Corporation (ITFC).
• The Islamic Development Bank is an international
  financial institution established in December
  1973 but was formally opened on October 20,
  1975.
•  The purpose of the Bank is to foster the
  economic development and social progress of
  member countries and Muslim communities in
  accordance with the principles of Islamic Law.
• One of the banks functions  is to participate in
  equity capital and grant loans for productive
  projects and enterprises besides providing
  financial assistance to member countries .

http//www.isdb.org
37
EQUITY FUND BAI Al DAIN
?Given the enormous capital and liquidity held
around the world by individuals seeking for
Islamic investment opportunities, a large number
of equity and real estate fund has been created.
?In Islamic Finance, equity funds can only hold
long positions in the underlying asset which is
the main difference with conventional funds that
can also be short. ?Shorting an asset means
selling something which is not owned and owning
an asset is a necessary condition for sale in
Sharia.

• ?Bai-al dain means selling debt A person has a
  debt receivable from a person and wants to sell
  it at discount, as normally happens in the bill
  of exchange.
• Muslim jurists agree that Bai-al-dain is not
  allowed in Sharia. However, some scholars of
  Malaysia have allowed this kind of sale only in a
  case where a debt is sold on its par value.
• In fact, the prohibition of Bai-al-dain is a
  logical consequence of the prohibition of riba
  or interest.

38
COMMODITY FUND
The funds collected for the subscription are used
to purchase different commodities in order to
resale them. The profits generated by the sale
are distributed prorated among the subscribers.
All the rules governing the transactions of an
islamic commodity fund should comply with Sharia
requirement for example The commodity must be
owned by the seller at the time of sale,
therefore, short sale is not allowed. Forward
sales are not allowed except in the case of salam
and istisna The price of the commodity must be
fixed and known to the parties etc.. The
transaction in conventional commodity markets,
specially in the futures commodity markets do not
comply with these conditions.
39
IJARAH FUND

• Ijarah fund means leasing, the subsription funds
  collected are used to purchase assets and
  delivering them to the users.
• The ownership of these assets remains with the
  fund and the rentals are paid by users. These
  rentals are distributed prorated to the
  subscribers who should have a certificate to
  evidence their subscriptions (sukuk).
• ?However, the contracts of leasing should comply
  with principles of Sharia which are different
  from those of conventional financial leases.
• 1. The leased assets must have some usufruct,
  and the rental must be charged when the asset is
  handed over to the lessee.
• 2 The leased assets must be permissible.
• 3. The lessor undertakes all the responsibilities
  consequent to the ownership of the assets.
• 4.A fixed rental is fixed and known to the
  parties right at the beginning of the contract.
• ?The management in Ijarah fund acts as an agent
  an receive a fee that could be a fixed amount or
  a proportion of the rentals received.

40
MIXED FUND
?The core activities of a mixed fund are
permitted by Sharia, although there are some
other activities that may contain some prohibited
elements. ?A mixed fund can invest in equities,
commodities, leasing etc. ?The tangible asset
should exceed the quantity of the liquidity and
debt.
?Several aspects should be considered in a mixed
fund 1/ Its not permissible to acquire the
shares of the companies providing financial
services on interest, like conventional banks,
insurance companies or companies involved in some
other business not approved by the Sharia (pork,
gambling, night club, pornography etc.) 2/ If
the main business of the companies is halal
(permitted) like automobiles, textile, but they
deposit their surplus amounts in an interest
bearing account, the shareholders must express
their disapproval against such dealing.
41
Current trend in Sukuk (Islamic bonds)

• Sukuk is an Islamic investment certificate even
  if most of the time it is defined as being a bond
• Sukuk market growth from 2000 to 2007

Source International Islamic Financial Market,
september 2007
42
Global Sukuk overview
Source IIFM analysis, IFIS and various sources ,
september 2007
43
ISSUE OF SUKUK
SourceIMF Working Paper 07/237 Sukuk vs.
Eurobonds Is There a Difference in
Value-at-Risk?
44
Market structure of Sukuk

• AAOIFI Standard 17 defines Investment Sukuk as
  being Certificates of equal value representing
  after closing subscription, receipt of the value
  of the certificates and putting it to use as
  planned, common title to shares and rights in
  tangible assets, usufructs and services, or
  equity of a given project or equity of a special
  investment activity.
• Debts cannot be traded at an other price that his
  face value. So, as interests are prohibited by
  Islamic law, returns from Sukuk have the form of
  a profit from sale, a rental or a mixture of
  both.
• One major characteristic of Sukuk is that the
  majority are held until maturity, they can not be
  traded on the secondary market.
• There are 14 different types of sukuk
• Example of a project specific Sukuk
  construction of Hamad Medical City
• In 2003, the Government of Qatar issued a Sukuk
  which aim was to collect funds for the
  construction of Hamad Medical City. It has bought
  a land parcel to build it in and issued a 700
  million Sukuk with a maturity date of October
  2010. Ijara with a floating rate of Libor 0.45

45
Types of Sukuk

• Sukuk al ijara
• Sukuk al Ijara consists in buying a land or an
  equipment and then rent it implying the payment
  of a fee. The two parties agree in advance on the
  duration of the contract and the amount of the
  fee ? Leasing
• There are two types of risks default of the
  lessee and changes in asset pricing or costs
  related to the asset (maintenance, insurance)
• Sukuk Al salam
• Purchase of a commodity perfectly defined in
  terms of quality and quantity. The good has to be
  delivered at an agreed date in the future and the
  payment has to be fully done at the beginning and
  cant be sold between the possession and the
  maturity. ? Illiquid so kind of less attractive
  for investors.

46
Types of Sukuk (continued)

• Sukuk al murabaha
• Murabaha is the sale of a good to the client at a
  higher price than the spot price. The margin that
  is done is justified by the fact that the seller
  takes the risk of a diferred payment.
• Its very popular in Malaysia.
• Sukuk al musharaka
• Its a form of business that is concluded between
  two or several parties through a joint venture.
  Consequently, profits and losses are shared
  between the actors that have the right to
  participate in the management of their business.
• The parties can agree to a special repartition of
  profits (taking into account the efforts of each
  one like the management of the company) but
  losses are proportional to the capital invested
  on each one.

47
Sukuk expected to be issued 2007/2008
Source IIFM analysis, IFIS and various sources ,
september 2007
48
Sukuk vs Eurobonds

• Sovereign governments and corporations have
  access, through Sukuk, to a huge Islamic
  liquidity pool.
• Malaysia and the Gulf region are the main hubs
  for Sukuk issuance.
• -Sukuk issuance is not limited to Islamic
  countries. Many issuers are from the United
  States, Europe, and Asia.
• -There are certain differences between
  conventional bonds and Sukuk. A bond represents
  the issuers pure debt, while Sukuk represent
  ownership stake in an underlying asset. An Ijarah
  contract that is often used to structure
  sovereign Sukuk creates a lessee/lessor
  relationship which is different from a
  lender/borrower relationship.
• Because of the segmented market structure, Sukuk
  offer lower returns compared to conventional
  bonds.
• -Sukuk are also illiquid instruments compared to
  conventional bonds due to the lack of secondary
  market activity.

49
Key issues related to Islamic Sukuk
Challenges facing Sukuk market
The sustainability in the Sukuk market in recent
years was driven by Standardization , liquidity
in the secondary market, a developed legal
framework product diversification and rating.
?Standardization The initiative
between the International Capital Market
Association (ICMA) and the International
Financial Market (IIFM) to develop standardized
practices for the Sukuk industry is underway
according to IIFM report on july 2007.
?Establishment of standardized contract,
language, practices for secondary market
transactions and practices in trading Sukuk for
more clarity and transparency to Islamic
Institutions. Therefore, it will be easier for
agencies to rate Sukuk and Islamic products.
50
Key issues related to Islamic Sukuk
?Secondary market
liquidity The first Sukuk issue in 2000 was
privately placed with Islamic banks. With the
recent evolution in Sukuk market, those banks and
other high worth investors are diversifying their
holdings and going to the market for liquidity.
Major international banks are now market makers
in Sukuk trading as much as US20 million a day.
Sukuk market is estimated now at about
80billion. ?Legal and
regulatory issues The uncertainty regarding the
issue of Sukuk is reflected by the different
Sharia schools of jurisprudence and the ambiguity
between the governing law of the jurisdictions in
which Sukuk are issued and Sharia law. Several
regulatory institutions have been established to
unify the various opinions of religious scholars
acting on behalf of individual institutions, with
AAOIFI and IFSB being the most widely accepted.
?Rating Only third of
internationally issued Sukuk has been rated, due
essentially to their complexity and the governing
law.
51
Dow Jones Islamic Market Indexes

• First Islamic index created in 1999
• Examples of Indexes
• Global Indexes
• Dow Jones Islamic Market Developed Index
• Global Industry Indexes
• Dow Jones Islamic Market Oil Gas Index
• Regional/Country Indexes
• Dow Jones Islamic Market Canada Index
• Specialty Indexes
• Dow Jones Islamic Market Sustainability Index

52
The Dow Jones Citigroup Sukuk Index

• Different criteria to satisfy
• Comply with both Sharia Law and the standards of
  the Bahrain-based Accounting and Auditing
  Organization for Islamic Financial Institutions
  (AAOIFI) for tradable sukuk.
• Must have a minimum maturity of one year
• Minimum issue size of US250 million
• Minimum rating of at least BBB-/Baa3 by leading
  rating agencies.

53
Components of the Index

• Constituted by 11 bonds that account for a value
  of 7.74 billion dollars
• Average coupon of 5.75
• Average life of 4.67

54
SP Islamic Indexes

• SP has launched five Shariah country indexes and
  three shariah indexes.
• Shariah indexes The Global Infrastructure, SP
  Global Healthcare, SP.IFCI Large-MidCap
• Country indexes Egypt, Jordan, Lebanon, Morocco
  and Tunisia.
• They are part of the SP/IFCG emerging market
  series
• The global Infrastructure Shariah Index
• Three ranges of activity energy,
  transportation and utilities
• 20 companies picked up from the SP Global
  Infrastructure Index
• The SP Global Healthcare Shariah Index
• 72 companies from SP 500, SP Europe 350, SP
  Japan 500
• Adjusted market capitalisation 2.1 trillion
• The SP/IFCI Large-MidCap Shariah Index
• Stocks from emerging market countries as
  Brazil, Mexico, Poland, Thailand, Turkey
• 90 of the market capitalisation of the
  SP/IFCI Composite Index

55
FTSE Shariah Global Equity Index Series

• FTSE created a range of Shariah compliant
  indices
• FTSE Shariah All-World Index
• E.g. Australia, Greece, Hong Kong
• FTSE Shariah Developed Index Series
• E.g. Australia, France, UK
• FTSE Shariah Emerging Index Series
• E.g. China, Brazil, Argentina
• FTSE Shariah Multinational 150 Index
• FTSE Shariah Japan 100 Index

56
Subprime Crisis and Islamic Finance

• As investing in banks and other companies that
  charge interests is prohibited by the Islamic
  law, Islamic funds have paid off this year.
  Indeed, they havent suffered from the
  mortgage-related crisis hitting the markets since
  the summer.
• Example of Amana Fund that registered a return of
  13 which ranks it in the top 2 of its category.
  
• Two other Islamic funds have performed better
  than the SP 500.
• As far as the Dow Jones Islamic Fund is
  concerned, it realized a performance of 13.3
  when the average income of mortgage-related
  securities was up to 3.6.

57
Sources
News paper  European Lawyer magazine (March
2007) Wall street journal 09 August
2007 Financial Times May 23 ,2007 (Islamic
finance report)   Articles Principles of Shariah
Governing Islamic Investment Funds Al-Balagh
Webzine By Justice Mufti Taqi Usmani Shariah
Supervision of Islamic Mutual Funds Yusuf Talal
DeLorenzo 30/09/2007 Principles Of Shariah
Governing Islamic Investment Funds By Maulana
Taqi Usmani online publication by accountancy
.com.pk Rulings on Debt Trading in Shariah
21/06/2006 By UST HJ ZAHARUDDIN HJ ABD RAHMAN
International Journal Of Islamic Financial
Services, vol 1, no 2, Saiful Azhar.   Websites ww
w.islamic-finance.com Islamic Financial Services
Board (IFSB) http//www.ifsb.org/ Accounting and
Auditing Organization for Islamic Financial
Institutions http//www.aaoifi.com/ ISLAMIC
DEVELOPMENT BANK http//www.isdb.org Reuters
Thursday June 7