“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

Follow us on -Twitter/INCEIF@inceif

Check out university's corporate profile on -

Linkedln/INCEIF See the latest INCEIF videos -

Youtube/INCEIF201 1

Read the latest blogs on Islamic finance -

www.inceiforg/blog Follow us on - Facebook/INCEIF

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

16

Ijara (Lease equivalent)Murabaha (Loan equivalent)Sukuk (Bond / Securitisation)

• Well established across GCC and UK• Tax and accounting treatment understood

Products

17

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

18

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

19

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

21

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

22

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

23

24

• “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

24

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

25

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