WHAT’S IN IT FOR NIGERIAN INVESTORS

Jubril SalaudeenLagos – Nigeria

08034700331

Centers of Islamic Finance

Malaysia

Persian Gulf

United Arab Emirates (Dubai)

Bahrain

England ????

Local Islamic banks formed in the 1970s in Muslim countries such as Malaysia, Pakistan and Dubai

Originally emphasized joint-venture structures akin to private equity

Quickly evolved to provide short-term credit facilities by using the murâbaha structure

With increase in scale, Islamic banks began to branch out to more complex financing schemes, including:

◦ Retail banking, including, deposit taking and consumer lending

◦ Bonds (sukûk)

◦ Medium- and Long-term leases (ijâra)

Impact of 9/11 – Reverse Capital Flight

◦ Perception of hostile climate in many Western jurisdictions, in particular, the United States, led to repatriation of dollars by Arab investors to Middle Eastern banks

◦ Islamic banks, along with conventional banks in the region, benefited from this reverse flight of capital

◦ Increase in Oil Prices Led to Dramatic Increase in Liquidity in the Gulf

Conventional Banks Open “Islamic Windows”

◦ Conventional banks began to respond to requests from Muslim clients to offer products that complied with Islamic law

◦ As the size of the potential market became clear, conventional banks responded with the creation of divisions dedicated to Islamic banking

Conventional International Banks with Islamic Windows:

◦ Citigroup◦ HSBC◦ Deutsche Bank◦ UBS◦ ABN AMRO◦ Standard Chartered Bank

Almost all regional banks have followed the international banks in creating “Islamic” windows and some have converted, or are in the process of converting, to the Islamic banking model

No precise measure of size of deposits held in Islamic banks or Islamic divisions of conventional banks

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

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

◦ Arab investors hold approximately $800 billion of assets in European banks, with a growing trend to invest that money in Islamic products

Demand Side

◦ Sovereign Debt

◦ International Agencies

◦ Corporate Debt

◦ Project Finance

◦ Consumer Debt

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

◦ Department of Civil Aviation, Dubai: $1 billion◦ Qatar: $700 million◦ Pakistan: $600 million◦ Malaysia: $600 million◦ German State of Saxony-Anhalt: €100 million◦ Bahrain: $79.5 million

International Agencies Have Issued Sukûk in recent years:

◦ Islamic Development Bank: $400 million◦ World Bank: $200 million

Private Issuances of Sukûk:

◦ DP World: $3.5 billion 7.5% sukûk, convertible into equity at the time of a qualifying initial public offering

◦ National Central Cooling Company: $200 million, rated BBB- by S&P Listed on London Stock Exchange Previous issuance by same issuer listed on Luxembourg Stock

Exchange

Global issuance of sukûk has exceeded $20 billion

Dow Jones Citigroup® Sukûk Index◦ Comprised of seven sukûk◦ $2.8 billion aggregate principal amount◦ Each issue rated at least A by S&P◦ Average tenor 3 years

Biggest challenge thus far is limited secondary trading market for sukûk

Demand for sukûk has far exceeded supply; offerings typically oversubscribed, even after substantial upsizing of the offering at times

◦ DP World offering originally contemplated for $2.8 billion but was upsized to $3.5 billion to meet excess demand; no road show needed to market the offering

Infrastructure projects in the Gulf region largely financed on a corporate basis until the mid-1990s

◦ Sadaf, a joint venture between Shell Oil and Saudi Arabian Basic Industries Corporation (SABIC), first important project finance transaction in Gulf region, closed in 1995

◦ Project Finance now preferred structure for infrastructure investment

Islamic sources of capital traditionally played minor role in project finance in Gulf

◦ In recent years, however, no deal gets done without a substantial Islamic tranche

Financing needs exceed capacity of commercial banks and export credit agencies

Desire of project hosts to diversify sources of capital and take advantage of local capital to the extent feasible

Rabigh Refinery and Petrochemicals Project, Kingdom of Saudi Arabia◦ $9.9 billion total cost, of which $5.8 billion was debt◦ $4.1 billion equity split 50-50 between Saudi Aramco

and Sumitomo Chemical◦ $2.5 billion loan provided by Japan Bank for

International Cooperation◦ $1 billion loan from Saudi Public Investment Fund◦ $1.7 billion commercial loan◦ $600 million Islamic tranche

YANSAB Project◦ $5 billion greenfield petrochemical project◦ $3.5 billion debt:

$1.067 billion, 13-year tranche from Saudi Public Investment Fund

$850 million, 12-year Islamic tranche $700 million export credit agencies tranche $533 million 12-year commercial bank tranche $350 million working capital facility

◦ ABN AMRO was sole arranger, underwriter and bookrunner on deal

Future Demand for Project Finance◦ Last two years saw $40 billion of project finance in gulf

region◦ Saudi Arabia estimates it will invest $90 billion in

domestic power generation over the next fifteen years◦ Other states in the gulf also investing heavily in

infrastructure projects, particular petrochemical◦ There will be a continuing demand in the region for

capital to invest further expansion of the region’s infrastructure

Deal flow shows no sign of abating International banks have shown an ability to

compete successfully Because of the size of new deals, Islamic banks

need to partner with international banks to take advantage of their larger distribution networks

Success of sukûk issues means that conventional market investors have grown comfortable with their structure and will invest in them so long as credit profile meets investors’ needs

Success in penetrating markets for arranging credit could lead to mandates in upcoming equity offerings

Future opportunities to advise in connection with an inevitable consolidation of banks in the Gulf region

Opportunities for wealth management of wealthy Islamic investors◦ Merrill Lynch identified 300,000 U.S. dollar millionaires

in the Middle East

Nigeria Issuers, public and private, may consider tapping the Islamic capital markets

◦ Because of Islamic finance is asset-based, Nigerian’s agric and mining industry is a natural fit with the structures so far developed in Islamic finance

◦ Because of high-liquidity of Islamic banks and Islamic investment funds, issuers who tap this market may be able to obtain relatively favorable pricing relative to the conventional market

Because of infrastructure boom in Gulf region, large premiums have been paid on Engineering, Procurement and Construction contracts

Successful competition for infrastructure projects inevitably requires support of export credit agency

Export Development Nigeria would have an important role to play in promoting Nigeria firms’ expertise in the region

Islamic finance and conventional finance have quickly converged in the Gulf region

As conventional investors gain more comfort with Islamic structures, cost differential between Islamic products and conventional products have almost disappeared

As a result, Islamic products may be more practical because they appeal to both Islamic and conventional investors

It is not too late for Nigerian banks, investors and entrepreneurs to compete for business in the Islamic finance arena

To do so successfully, they will need to establish a presence in the region, as have their competitors

End of Presentation