Download - Emerging Islamic Housing Finance Markets
Emerging Islamic Housing Finance Markets
“The Irreversible(?) Growth of Private Housing Finance”March 15, 2006
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UIB Overview
The only full service Islamic investment bank in Gulf Cooperation Council (“GCC) – Bahrain, KSA, Kuwait, Oman, UAE & Qatar
Regulated by the central bank in Bahrain - Bahrain Monetary Agency (BMA)
Paid Up Capital: USD120 million
UIB recognizes the needs of under-served markets with pent-up demand for Islamic products
Increasing global awareness of Islamic financing
A solid business model with competitive products and services which attract investors even from conventional markets
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Five Business Lines
Unicorn offers diversified products across an integrated range of financial products and services
CorporateFinance and Capital Markets
PrivateEquity
Mergers and Acquisitions
Takaful
(Insurance)
AssetManagement
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Offices
Unicorn’s Global Reach
USA (Chicago)
GCC- Bahrain (Corporate), Dubai and Kuwait (Planned: KSA)
Asia-Pacific – Malaysia (Kuala Lumpur)
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Why Islamic Finance?
Approximately 20% of the world’s population is Muslim
Unicorn aims to focus its operations across a majority of these
countries
78 million US, UK, Germany, France & Turkey
96 million GCC, Egypt & Jordan
215 million Malaysia, Singapore & Indonesia
414 million Bangladesh, Pakistan & India
62 million Algeria & Morocco
Muslim Population
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Global Demand for Islamic Financial Products growing @ 17% annually
Oil revenues to produce current account surplus of $400 Billion in 2006 in ME & GCC
Demand likely to be fueled to levels not seen before due to increasing oil revenues
ME & GCC economies to grow at 5.5% in 2006
More than 300 Islamic Financial Institutions operating globally
Islamic Financial Markets
General Observations
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Key Objective
Become a major player in developing the Islamic capital markets through the growth of primary housing finance markets and filling the gap for fixed-income investment
instruments via Sukuk (bond) issuances
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Model
Own and operate housing finance companies with strategic partners in Islamic markets offering world class mortgage origination, underwriting and servicing technology
Islamic housing finance products and operations
Utilize warehouse lines and bond issuances (Sukuks) as main source of funding
Securitize and issue Sukuks (MBS) on a flow basis
Develop GCC and other emerging Islamic capital markets
Correspondent program to enforce origination, underwriting and servicing standards
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Islamic Housing Finance - GCC and Beyond(Turkey, Jordan, Lebanon)
Attractive demographics and population size
Key reforms at the sovereign level relating to housing finance and capital markets
Stable political and legal/regulatory environments
Growing middle class and consumer markets
Decent sovereign ratings
Mortgage to GDP Ratios – much below the more developed mortgage markets
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Uniquely Positioned to Build and Capture Islamic Primary/Secondary Housing Finance Markets
A strategic alliance with UIB provides the following advantages:
Renowned capabilities in developing Islamic structures/products
Strong expertise in housing finance relating to the primary, as well as the secondary market
Qualified staff with extensive Western experience
Clear vision & strategy to become the “major player” in the Islamic housing finance markets
Willingness to form strategic alliances to gain from international and local expertise of respective partners
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Demystifying Islamic Primary Mortgage Market Principles
Making money from money is not Islamically acceptable – Thus, Islam prohibits interest and usury (“Riba”)
Key Islamic mortgage principle – the financier must share in the ‘risks and rewards’ relating to an underlying asset rather than receiving a fixed and guaranteed ‘interest’ income
2 common Islamic mortgage structures:
Ijara (akin to a finance lease) a financer purchases an asset and leases it to a client through a leasing contract for a specified rent and term. The owner of the asset (the financier) bears all ‘risks and rewards’ associated with ownership and sells it to the client upon payment of the last installment
Musharaka (akin to a declining-balance mortgage) an equity participation contract under which a financier and its client contribute jointly to purchase a home (e.g. financier (80%) and client (20%). Ownership is distributed according to each party's share in the financing (co-ownership). The title deed is held in the name of the financier and transferred to the client’s name upon payment of the last installment
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Demystifying Islamic Secondary Mortgage Market Principles
Islamic bond (certificate) is known as a ‘Sukuk’
Key mortgage-backed Sukuk principle: the certificate must be asset and not just debt based
Must sell the underlying asset (i.e. real estate property) into the secondary market and not just the receivables(i.e. transfer of ‘risks and rewards’ in the real estate asset)
Tradable mortgage-backed Sukuks are backed by ijara and musharaka structures
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Housing Finance and Bond Markets
Housing Finance and bonds (MBS) are the backbone of any economy and capital markets, respectively
USD7 trillion of mortgages (residential/commercial) originated in the U.S. annually; whereas the U.S. corporate market stands at USD4 trillion annually
Approximately 40 industries linked to housing finance (e.g. insurance, appraisal and construction)
Housing finance key to development of SME market
MBS a key tool for the development of the bond markets (e.g. In 1970, first U.S. MBS issuance; by 1995 USD20 trillion of MBS)
MBS allows for lower interest rates due to increased competition and long-term tenors
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Source of Funding - Debt Capital Markets
Trends in conventional Capital (Bond) Markets will be repeated in the Islamic (underdeveloped) financial markets.
Conventional
1980’s and 1990’s 2000 2006
Islamic
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Total MBS issuance
$548.2 $597.1
$860.4 $777.9
$549.3
$1,362.1
$1,837.9
$488.3 $513.2
1994 1995 1996 1997 1998 1999 2000 2001 2002
2002 MBS market share US$ billions
Total MBS issuance $1,838
Total originations $2,526
Total MBS outstanding $3,157
Annual MBS issuance
Source:Inside MBS and ABS, January 10, 2003
Evolution of U.S. Mortgage Securitization - Market Sizing
73%of mortgage originations
funded through MBS
U.S. Securitized Assets
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Case Study: Kingdom of Saudi Arabia (“KSA”)
Largest GCC market
Total GDP: USD400 billion
Mortgage to GDP Ratio: 1.9%
Demand for 300,000 housing units annually
Housing finance potential: USD45 billion annually(Est: 1/4 of the housing units are built and financed)
Total Population: 22 million
Growing middle class (Annual Income Level: USD1600 – USD3200)
Baby Boomers - 65% of the Population under age 35
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GCC Demographics
Percentage of Population < 20
0%
5%
10%
15%
20%
25%
30%
35%
40%
Malaysia Thailand China India Indonesia GCC
Countries
Perc
enta
ge
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KSA Gap Analysis
Gap Analysis-Type of Financing
50%
30%
20%
8%
18%13%
0%
10%
20%
30%
40%
50%
60%
Islamic Finance Commercial Finance Government Finance
Type of Financing
Perc
enta
ge Demand (%)
Supply (%)
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UIB’s KSA Experience
o Engaged to set up a licensed housing finance institution for Kingdom Instalment Company out of KSA
o Develop the strategy and business plan
o Technical/equity partnershipso CEO and COO searcho Interact with legal/regulatory
authorities relating to housing finance reforms
o Assist with the development of systems and policies and procedures
RMBS Issuance
o Unicorn arranging, structuring and placing the very first RMBS out of the GCC region (landmark transaction)
o Rated by a recognized rating agency
o Solid credit enhancement from the International Finance Corporation (IFC)
Housing Finance