“why islamic finance?” by daud vicary abdullah, president & chief executive officer
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“Why Islamic Finance?” by
Daud Vicary Abdullah, President & Chief Executive Officer
Agenda
2
111
1. What is Islamic Finance
2. Why is it growing
3. Good for business?
4. EPL
5. What you can do?
1
What is Islamic finance?
1
No conflict with
Principle of Islam
& Assertion of Religious Law
Risk & profit sharing
Real Economic
Transactions & Asset Backed
Ethical Value &
Social Justice (Objectives of
Shariah)
Prohibited Activities &
Elements
Islamic Finance
2
Islamic Finance – Global Development & Progress of Islamic Finance
2
• •
•
• •
•
• •
•
3
It is good for business!
Alternative for Investors to mobilise capital effectively
More Resilient in the current financial crisis
Ethical values & Social Responsibility
(Maqasid Al-Shariah)
IF value proposition
Backed by real economic transaction & underlying
asset
Risk management benefits
3
4
The Future
4
Education
• Enhance Shar iah expert ise and Human Capi ta l
• Increase knowledge in Is lamic F inance
Encourage right and comprehensive understanding Provide sufficient cross-border Liquidity
Perception Liquidity
5
The Future
Thank You
D Tube
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Daud Vicary Abdullah President & Chief Executive Officer Tel: +603 7651 4141 E m a i l : dvicary@incei f.o rg
We b s i t e : w w w. i nc e i f. o rg
9-47 0:44! rCh L17
INCEIF 2014.
14
Islamic Finance in the UK
15
• Use established Islamic products
• Ensure competitive terms with conventional finance
• Comparable market documentation
Introduction
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Ijara (Lease equivalent)Murabaha (Loan equivalent)Sukuk (Bond / Securitisation)
• Well established across GCC and UK• Tax and accounting treatment understood
Products
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Leasing• Finance and Operating Leases• Hire PurchaseProperty Finance• Term Facilities• Development FacilitiesABL• Revolving Facilities for stock/receivables• Property Finance
Trade Finance• Commodity Finance• Letters of CreditAcquisition Finance• Amortising Term Loans• Revolving FacilitiesBond Markets• Fixed rate fixed term• UK Gilt • Ring fenced asset funding
UK Market Financing
Sale of Asset Lease of Asset
Rent (purchase price plus premium)
Payment of purchase Price
CUSTOMERFINANCIERSUPPLIER
Ijara
• Lease contains virtually the same provisions as a conventional lease
• Sharia’a requires ownership risk in leased asset to be retained by Lessor• Major maintenance – responsibility of Lessor• Loss or major damage i.e. insurable risks – responsibility of Lessor
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Service Agreement – • Lessor appoints Lessee as agent to undertaken major maintenance, insurance etc
on behalf of Lessor• Service Fee payable to Lessee for being agent and costs incurred but Lease has
Additional Rent provision for an equal amount• Must be separate agreement to Lease – segregation of roles allowing termination
of Service Agreement at any time whilst Lease continues
Termination Values – • Instead of NPV of future rental asset can be sold to Lessee at pre agreed prices
depending on timeframe• Asset sold for that price whatever its condition of location – “as is where is”
Ijara Documentation
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Purchase and Sale of MetalsSharia’a finance requires each party to carry risk in the transactionFor Murabaha that is evidenced by the metal trade
• Risk is associated with the risks of asset ownership i.e. the metals
2. Payment (spot)
6. Deferred payment plus
margin at maturity
3. Metal sold on deferred
payment basis
4. Sells metal as agent on behalf of client
1. Buy Metal (spot)
5. Payment Spot
ISLAMIC BANK
THIRD PARTYCLIENT
BROKER
Murabaha Structure
20
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Familiar Provisions 80-90%• Purpose• Facility Limits• Conditions Precedent• Representations – capacity; authority, compliance etc.• Covenants – financial, negative pledges etc.• Events of Default – non payment, non performance, insolvency etc.
Security Documents – Virtually the same • Debenture• Legal Charges• Assignments
21
Murabaha Documentation
1. Utilisation Mechanism• Utilisation Notice – date money required, cost price (nominal amount),
promise to purchase metals
• Offer Notice (from BLME) – offer to sell metals for the Deferred Sale Price for payment on the Deferred Payment Date: includes pricing economics –
• Acceptance Notice – Accept the offer to purchase metals and in consequence accept the obligation to pay the Deferred Sale Price on the Deferred Payment Date
2. Voluntary Early Repayment• The Deferred Sale Price is a debt due on a specified date – it is not an accrual.
• Following receipt Bank makes a voluntary rebate of part of Deferred Sale
Price
• No formula for discounting, e.g. NPV as this equates to a recognition of “time value of money” which is prohibited under the Sharia’a
Murabaha Sharia’a Clauses
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3. Sharia’a Representation• “Borrower” will not challenge the transaction on the basis of it being non Sharia’a
compliant
4. Late Payment• Instead of Default Interest for late payment a Late Payment Charge can be levied
calculated on basis of default rate, time and unpaid amount
• But Bank can only retain direct costs of late receipt and any surplus amount collected as Late Payment Charge is donated to charity
5. No Interest Allowed• “The Parties recognise and agree that the principle of the payment of interest in
relation to any Facility Document or otherwise is repugnant to Sharia‘a and accordingly, to the extent that any legal system would impose (whether by contract or by statute) any obligation to pay interest under this Agreement or any Facility Document, the Parties hereby irrevocably and unconditionally expressly waive and reject any entitlement to recover interest from each other.”
Murabaha Sharia’a Clauses
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• “Bond Equivalent”
• Ring fenced assets
• However a number of different structures have been used:Sukuk Al IjaraSukuk Al MusharakaSukuk Al MudarabaSukuk Al MurabahaSukuk Al SalamSukuk Al Wakala
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Sukuk
Originator
Capital Structure
Granular Portfolio
Portfolio Performance
Yousef A. Al-Ghanim & Sons Co. (“YAAS”) is the largest company in the consumer electronics and furnishing in Kuwait with 65% market share
A leading player in the Kuwaiti consumer finance sector Manage a large portfolio of >300 brands that include GM, BP, Hitachi
Dual tranche issue with Class B subordination Fully-funded default and liquidity reserves Cash sweep of all receivables
53,328 installment sale agreements - an average outstanding balance of KD 285.5
Short-weighted average remaining term of the portfolio of 15.0 months Strict eligibility criteria maintain portfolio quality during the revolving
warehousing period
Historical marginal loss rates below 2.00% since Jan 2007 The maximum monthly origination cumulative default rate since Jan 2007
is 1.96%
Sukuk: YAAS
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Amount (KD mn) Size (%) Credit
Enhancement Profit Rate (%) WAL (months)
Expected Maturity
Class A10.0 80% 50% 6% p,a, (fixed) [11]
months18 months
Class B2.5 20% 25% 8% p.a. (fixed) [11]
months18 months
Default Reserve [0.625] 5%*
Transaction Overview
Issuance of two classes of fixed rate Certificates (Sukuk) backed by a portfolio of installment sale receivables
The installment sale are murabaha contracts granted to retail customers in Kuwait
Lead Arranger Lead Manager
Sole Asset OriginatorDelegate Trustee, Issuing / Paying & Calculation Agent,
Cash Manager
Placement Agent
Transaction Summary
26
YAAS SUKUK I ltd.(Issuer / Purchaser)
Offshore Trust
Class ACertificates
(Sukuk)
Class BCertificates
(Sukuk)
YAAS Warehouse ltd.(Warehouse Funder)
Offshore SPV
YAAS Installments W.L.L.
(Originator / Seller)Obligors
Sukuk Proceeds
Sukuk Proceeds
Principal & Profit
Warehouse Funding
Installment Collections
Assignment of Receivables
(Wakala Assets)
InstallmentCollections
Assignment of Receivables
(Wakala Assets)
Sukuk Cashflows
27
YAAS YAAS SUKUK I Ltd.(Issuer / Purchaser)
Class ACertificates
(Sukuk)
Class BCertificates
(Sukuk)
MaplesFS Limited(Shareholder)
YAAS Installments(Originator /
Seller)
100% ownership
Investment Agency (Wakala)
Agreement
Master Supply &
Operations Agreement
Sub-Servicing
Agreement
Citibank (Delegate Trustee)
MaplesFS Limited(Issuer Administrator)
Terms & Conditions of
Global Certificate Agreement
Investment Agency (Wakala)
Agreement
Legal and Sharia’a
28
29
Development finance facility for student
accommodation in Surrey
£9 million
June 2012
Site development for research and business
park in Cambridgeshire
£4 million
August 2012
Acquisition and development facility for a warehouse conversion to
68 units
£17 million
December 2012
Property Transactions
30
Finance lease facility for marine containers
Finance lease facility for Marubeni – Komatsu
equipment
February 2013
Funding of a specialist vessel to
install subsea power cables at offshore wind farms
June 2012 December 2012
£5 million £14 million $7 million
Leasing Transactions
31
Letter of credit facility for UK corporate importer &
wholesaler of garden leisure equipment
Funding line for specialist global commodity trade
finance company
May 2012
Promissory note facility for
the export of Ford vehicles to the GCC
September 2012 October 2012
$30 million $15 million $6 million
Trade Finance Transactions
32
£10 million
August 2013
Structured Borrowing Base style facility funding
international multi-currency trade receivables, inventories
held under tolling arrangements, commercial property and documentary
credit issuance
£12 million
June 2012
Integrated facility comprising receivables
financing facility, property facility, revolving stock
facility and cash flow lend
£12 million
January 2013
Receivables and trade finance wholesale finance facility for working capital
purposes
£12 million
January 2013
ABL Finance Transactions
33
February 2013August 2013June 2013
£7 million £9.25 million £3.25 million
Refinancing of working capital facility for MMC Ventures and FF&P Private Equity portfolio
company
Facility for the acquisition of Hunters Moor and for the
rollout of further care homes. Equity provided by Sovereign
Capital
Management buyout and rollout facility. Equity provided by Connection Capital
Acquisition Finance Transactions
34
Syndicated facility for the acquisition of dry container
boxes
December 2012 February 2013
$17 million club deal$2 million BLME
£120 million club deal£20 million BLME
July 2012
£20 million club deal£10 million BLME
Revolving credit facility sharing security with existing M&G bond
Facility for the acquisition of oil storage
units
Syndications / Shared Security
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