Report on

Islamic securitization
Submitted to Sir Allah bakhash Submitted by Aysha javed MAF-10-48 MSc A&F

Date 1/3/2012

Department of Commerce B.Z.U Multan

Table of contents
Introduction Major products offered by Meezan bank Portfolio of Meezan bank Securitization Musharakah securitization Ijarah securitization Sukuk Types of Sukuk Analysis on securitization Conclusions

Introduction of bank
Meezan Bank Limited is a publicly listed company offering Islamic Banking in Pakistan. It was first incorporated on January 27, 1997, starting operations as an Islamic investment bank in August of that year. In January 2002, the Bank was granted Pakistan's first full-fledged commercial banking license dedicated to Islamic Banking, by the State Bank of Pakistan. The Bank has an internationally renowned Shariah Supervisory Board Chaired by Justice (Retd.) Maulana Muhammad Taqi Usmani, an internationally renowned figure in the field of Shariah, particularly Islamic Finance. What Distinguishes Islamic Banking from Conventional Banking? All transactions are asset-based. It is socially responsible banking because it operates under Shariah restrictions. Does not permit financing of prohibited goods/Industries. It starves evil out of the society. Key Misconceptions: Islamic banking looks the same as conventional banking A halal meat and haram meat may look exactly the same but one is permissible while the other is not. Our Vision Establish Islamic banking as banking of first choice to facilitate the implementation of an equitable economic system, providing a strong foundation for establishing a fair and just society for mankind.

Our Mission To be a premier Islamic bank, offering a one-stop shop for innovative value-added products and services to our customers within the bounds of Shariah, while optimizing the stakeholders value through an organizational culture based on learning, fairness, respect for individual enterprise and performance.

HISTORY OF MEEZAN BANK LIMITED 1947 The inception of Pakistan as the first Islamic Republic created in the name of Islam. 1980 CII presents report on the elimination of Interest genuinely considered to be the first major comprehensive work in the world undertaken on Islamic banking and finance. 1985 Commercial banks transformed their nomenclature stating all Rupee Saving Accounts as interest-free. However, foreign currency deposits in Pakistan and foreign loans continued as before. 1997 Al-Meezan Investment Bank is established with a mandate to pursue Islamic Banking. Mr. Irfan Siddiqui appointed as first and founding Chief Executive Officer. 1999 The Shariat Appellate Bench of the Supreme Court of Pakistan rejects the appeals and directs all laws on interest banking to cease. The government sets up a high level commission, task forces and committees to institute and promote Islamic banking on parallel basis with conventional system. 2001 The Shariah Supervisory Board is established at Al-Meezan Investment Bank led by Justice (Retd.) Muhammad Taqi Usmani as chairman. State Bank of Pakistan sets criteria for establishment of Islamic commercial banks in private sector and subsidiaries and stand-alone branches by existing commercial banks to conduct Islamic banking in the country. 2002 Al-Meezan Investment Bank converts itself into a full-fledged Islamic commercial bank. The first Islamic banking license is issued to the Bank and it is renamed Meezan Bank. President General Pervez Musharraf inaugurates the new Islamic Commercial Bank at a formal ceremony in Karachi.

2003 Meezan Bank establishes itself as the pioneer of Islamic Banking in Pakistan and quickly establishes branches in all major cities of the country. A wide range of products are developed and launched consolidating the Banks position as the premier Islamic Bank of the country Al Meezan Investment Management Limited (AMIM), the asset management arm of Meezan Bank, introduces Meezan Islamic Fund (MIF), the countrys first open-end Islamic Mutual Fund 2004 The State Bank establishes a dedicated Islamic Banking Department (IBD) by merging the Islamic Economics Division of the Research Department with the Islamic Banking Division of the Banking Policy Department. A Shariah Board has been appointed to regulate and approves guidelines for the emerging Islamic Banking industry. The Government of Pakistan awards the mandate for debut of international Sukuk (Bond) offering for USD 500 million. The offering is a success and establishes a benchmark for Pakistan. Meezan Bank acts as the Shariah Structuring Advisor for this historic transaction. 2005 Meezan Bank becomes the first customer of Islamic Insurance (Takaful) by signing the first Memorandum of Understanding MoU with Pak-Kuwait Takaful Company Limited (PKTCL). The signing of this MoU has ushered Pakistan into a new era of Islamic Insurance (Takaful). 2006 A number of new dedicated Islamic Banks, namely Bank Islami and Dubai Islamic Bank, commence operations in Pakistan. Meezan continues its leadership position in the industry by more than doubling its branch network to a total of 62 branches in 21 cities, clearly establishing itself as the largest Islamic Bank of the country. Meezan Bank becomes the first Islamic bank to introduce 8 am to 8 pm banking at selected branches in Karachi. 2007 Meezan Bank opens up its 100th branch. Two new dedicated Islamic Banks start operations in Pakistan, namely Emirates Global Islamic Bank and Dawood Islamic Bank. 2008 With 166 Branches (including 35 sub-branches) in 40 cities across Pakistan, Meezan Bank is clearly positioned as the leading Islamic Bank in the country. Work starts on the construction of Meezan Banks new Head Office building. The financing and investment portfolio of local Islamic banks reached Rs. 185 billion in December 2008 compared to Rs. 137.6 billion in December 2007. Market share in the overall banking increased to five per cent at end December

2008 compared with four per cent at end December 2007. Total assets of Islamic banking reached Rs. 271.1 billion in December 2008 compared to Rs.205.2 billion in December 2007.

2009 Branch network of six dedicated Islamic banks increases to 480 Branches (Including SubBranches) with Meezan Bank having a 42% share of the Islamic Banking branch network in the country with 201 branches in 54 cities across the country. Islamic Banking's share grows to over 5.5% of the total Banking industry. 2010 Meezan Bank developed a number of new deposit products to cater to the unique needs of different market segments In 2010 banks deposits are increases by 13% and investments by 61%. The bank has opened 25 new branches, now there are 226 branches in more than 63 cities and it became the 11th largest bank in Pakistan in terms of branch network. Bank has started new scheme Laptop Ease, in which they provides laptops in lower rates. Total assets and share capital are also increases from last year. The Bank demonstrated robust business growth in 2010, closing the year with a deposit figure of Rs. 131 billion and Import/Export business of Rs. 143 billion. Products offered by Meezan Bank Types of products offered by: Riba Free - Dollar Saving Account Riba Free - Rupee Saving Account Riba Free - Current Account Riba Free - Meezan Business Plus Riba Free Meezan Bachat Account Car Ijarah - Islamic Car Financing Riba Free - Certificates of Islamic Investment Riba Free - Monthly Musharakah Certificate Riba Free Meezan Providence certificate

Riba Free Meezan Mudarbah Certificate

Portfolio of Meezan bank

(Rupees in millions) Total financing net Total Assets Total Deposits Share Capital Total Shareholders Equity Market Capitalization Number of Staff Number of Branches 27,031 46,439 34,449 3,780 4,763 34,576 67,179 54,580 3,780 5,720 39,528 85,276 70,234 4,926 6,341 44,188 124,182 100,333 6,650 9,091

7,465 1,389 62

14,572 2,205 100

10,581 3,170 166

10,467 3,669 201

Securitization
Islamic institutions are growing in the global market. They also participate in global securitization in Islamic perspective. Securitization is recent invention in conventional banks. Islamic banks also involved in this dynamic line of business. Basically securitization means issuing of certificate of ownership against an investment pool or business enterprises. In defining securitization we focus on processes 1. The process of pooling interest 2. The process of packaging them into securities 3. The process of distributing securities to investor An Islamic institution focus on package not process of package. They focused that package should be interest free. Securitization is the invention of Americans but no longer remain to be used only by Americans. It grew into significant business in 1990s. Today securitization is not only for mortgaging on properties but also credit card receivables, computer lease, equipment leases, auto loan sand notes financing etc. The growth of securitization is basically driven by four factors. Imposition of capital adequacy ratios and Reserve requirement on financial institutions by regulatory agencies guide safer place to invest When global cost increases secr helps securitization helps financial institutions to raise cheaper capital for their businesses at the asset level instead of the enterprise level. there is a growing convergence of many capital markets into one, as the barriers between them were removed. As all segments of the economy now compete for the same capital, efficient, low cost of financing have become more necessary. Fourth, increased ability to generate and utilise information through popular use of rapidly improving computer technology has resulted in significant gains for the securitization business. MUSHARAKAH SECURITIZATION Some people claim that the conventional bonds and Musharakah certificate appear similar. It must be understood that a bond is issued to evidence a loan and has nothing to do with the actual business undertaken with the borrowed money while the Musharakah certificate represents direct pro rata ownership of the holder in the assets of the Project.

In the case of large projects where huge amounts are required which a limited number of people cannot afford to subscribe, the prescribed securitization mode of financing can be used under Musharakah. A Musharakah certificate is given to every subscriber and represents their proportionate ownership in the assets of the Musharakah, and when the project commences business by acquiring substantial non-liquid assets, these Musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market. Nevertheless, trading in these certificates is not allowed when all the assets of the Musharakah are still in liquid form. Here importance must be given to the distribution of profit earned by the Musharakah which must be shared according to an agreed ratio and loss must be shared on pro rata basis IJARAH SECURITIZATION The well-established Islamic Financing structure of Ijarah is considered acceptable by Islamic scholars. On basis of Ijarah Sukuk, a secondary market of Islamic bonds or Sukuk can be created. The owner/lessor purchases a proportion of the leased asset and as evidence; a certificate is given to the lessor which may be called 'Ijarah certificate'. This certificate will represent the holder's proportionate ownership (undivided part of the asset) in the leased asset and they will assume the rights and obligations of the owner/lessor to that extent. Each holder of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly the investors will also assume the obligations of the lessor to the extent of their ownership. Therefore, in the case of total destruction of the asset, they will suffer the loss to the extent of his ownership. These certificates can be negotiated and traded freely in the market and can serve as an instrument that is easily convertible into cash.

Sukuk
Sukuk is a recently-developed Islamic investment product that first appeared in 2002, when Malaysia issued a government-backed Sukuk, the first of its kind. Sukuk (the plural of the word Sak, or Sanadat, meaning certificate of investment or simply certificates) are certificates that represent the holders proportionate ownership in an undivided part of an underlying asset where the holder assumes all rights and obligations to such asset. 187 The Accounting and Auditing Organization for Islamic Financial Institutions ("AAOIFI") has issued the Standard for Investment Sukuk. Under the AAOIFI Sukuk Standard, Sukuk are defined as certificates of equal value put to use as common shares and rights in tangible assets, usufructs, and services or as equity in a project or investment activity. The AAOIFI Sukuk Standard carefully distinguishes Sukuk from equity, notes, and bonds. It emphasizes that Sukuk are not debts of the issuer; they are fractional or proportional interests in underlying assets, usufructs, services, projects, or investment activities. Sukuk may not be issued on a pool of receivables. Further, the underlying business or activity, and the underlying transactional structures (such as the underlying leases), must be Sharia-compliant (for example, the business or activity cannot engage in prohibited business activities). 191 To sum up, the AAOIFI standard stipulates that Sukuk must demonstrate.

Types of Sukuk
Ijarah Sukuk
Ijarah (lease) is a contract according to which a party purchases and leases out equipment required by the client for periodic rental payment. The duration of the rental and the amount payable are agreed in advance, and ownership of the asset remains with the lessor. If a lessor, after executing an Ijarah contract, wishes to recover his cost of purchase of the asset to get liquidity or for the purpose of profit, he can sell the leased asset wholly or partly, either to one party or to a number of individuals. The purchase of proportion of the asset can be evidenced by issuing certificates, which may be called Ijarah certificates or Sukuk. The certificates must represent ownership of the pro rata undivided parts of the asset with all related rights and obligations.

Mudaraba (or Muqarada) Sukuk

Mudaraba means an agreement between two parties according to which one of the two parties provides the capital (capital provider) for the other (mudarib) to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio. These types of Sukuk play a vital role in the process of development financing, because these are related to the profitability of the projects. Mudaraba or Muqarada (Muqarada has the same meaning as that of Mudaraba) Sukuk or deeds can be instrumental in enhancing public participation in investment activities in any economy. These are certificates that represent projects or activities managed on the Mudaraba principle by appointing any of the partners or any other person as Mudarib for management of the business.

Musharaka Sukuk
In a Musharaka transaction, partners contribute capital to a project and share its risks and rewards. Profits are shared between partners on a pre-agreed ratio, but losses are shared in exact proportion to the capital invested by each party. Thus a financial institution provides a percentage of the capital needed by its customer with the understanding that the financial institution and customer will proportionately share in profits and losses in accordance with a formula agreed upon before the transaction is consummated. In securitizing a Musharaka arrangement, every subscriber can be given a participation certificate, which represents his proportionate ownership in the assets of the venture or project for which financing is being raised. Subsequent to the acquisition of substantial non-liquid assets, these Musharaka

certificates can be treated as negotiable instruments and can be bought and sold in the secondary market.

Murabaha Sukuk
Murabaha Sukuk are issued on the basis of murabaha sale for short-term and medium-term financing. As mentioned earlier, the term murabaha refers to sale of goods at a price covering the purchase price plus a margin of profit agreed upon by both parties concerned. The advantage of this mode of financing is that, if the required commodity in the murabaha is too expensive for an individual or a banking institution to buy from its own resources, it is possible in this mode to seek additional financiers.

Salam Sukuk
Salam Sukuk are certificates of equal value issued for the sake of mobilizing capital that is paid in advance in the shape of the price of the commodity to be delivered later. The seller of the Salam commodity issues the certificates, while the subscribers are the buyers of that commodity, i.e. they are the owners of the commodity when delivered. Salam sale is attractive to the seller, whose cash flow is enhanced in advance, and to the buyer, as the Salam price is normally lower than the prevailing spot price. Salam-based securities may be created and sold by an SPV under which the funds mobilized from investors are paid as an advance to the company SPV in lieu of a promise to deliver a commodity at a future date. All standard Sharia requirements that apply to Salam contract also.

Istisna Sukuk
Istisna contracts can be securitized to raise funds on the basis of the rental income that the asset (for example, a building or bridge) will generate. In that case it will generate fixed return securities, or it can be securitized on the basis of variable income (such as a toll tax on the bridge), generating variable-return securities. Under such a scheme the SPV representing investors becomes seller-contractor-manufacturer of an asset to a buyer (say, the government) and uses back-to-back istisna for creation of the facility. In other words, the SPV takes upon itself the legal responsibility of getting the facilities constructed, and sub-contracts the work to manufacturers/contractors.

Hybrid sukuk
Considering the fact that Sukuk issuance and trading are important means of investment and taking into account the various demands of investors, a more diversified Sukuk - hybrid or mixed asset Sukuk - emerged in the market. In a hybrid Sukuk, the underlying pool of assets can

comprise of Istisna, Murabaha receivables as well as Ijara. Having a portfolio of assets comprising of different classes allows for a greater mobilization of funds.

Analysis
The Bank values its investments as follows: - Quoted securities, excluding investments categorized as held to maturity securities and investments in subsidiaries and associates, are stated at revalued amounts. - Investments in quoted associates are stated at cost less impairment, if any - Unquoted securities including investments in associates and subsidiaries are stated at cost less provision for impairment, if any. - Investments in securities categorized as held to maturity are carried at amortized cost less impairment. - Held for trading These are investments acquired principally for the purpose of generating profit from short-term fluctuations in price. year 2006 428505
600000 500000 400000 300000 200000 100000 0 1 2 3 4 years

2007 517172

2008 174110

2009 -

held for trading

Analysis
In 2006 and 2007 it is increasing but in 2008 it decrseased a lot. In 2009 it come to zero Such securities are issued to oil and gas or fertilizers companies whose trading in the secondary market. It is a negotiable instrument. These securities are not at maturity date.

Held to maturity These are investments with fixed or determinable payments and fixed maturity and the Bank has positive intent and ability to hold to maturity. year 2006 2007 2008 2009 1320548 1621200 1735329 1168483

2000000 1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 1 2 3 4

years held to maturity

Analysis
In 2006 to2008 it is increasing but in 200 it start decreasing. Such securities are issued to Qatar global, wapda first sukuk and dubai sukuk whose trading in the secondary market. It is a negotiable instrument. These securities are near to their maturity date. Available for sale These are investments, other than those in subsidiaries and associates, which do not fall under the held for trading or held to maturity year 2006 2007 2008 2009 233358 6547189 10743499 20026241

25000000 20000000 15000000 10000000 5000000 0 1 2 3 4 years avail for sale

Analysis
In 2006 its very low but in 2007 to 2009 it start continuously increasing. Such securities are issued in which all kind of sukuk, investing certificates and shares whose trading in the secondary market. It is a negotiable instrument. These securities are selling every year with increased amounts.

Sukuk certificate
The Bank purchased 22,000 certificates (12,000 on June 24, 2009 and 10,000 on June 29, 2009) of WAPDA I Sukuk through a market based transaction for a cash consideration of Rs.110.346 million (Rs. 60.53 million and Rs. 49.815 million) having face value of Rs. 110 million. These Certificates were available in the sellers CDC account and on completion of the transaction were transferred to MBLs CDC account. A periodic Ijarah Rental was due on 22 October 2009, which was not paid to MBL on the plea, that certain discrepancy in the Central Depository Register was the reason for non payment. The Bank through a legal notice has clarified the position that the Bank has purchased the aforesaid Sukuk Certificates from the market for a valuable consideration when these Sukuks were already entered in the Central Depository Register of seller's account. The Meezan bank issued government of Pakistan in which four sukuk issued Ijarah sukuk first Ijarah sukuk second Ijarah sukuk third Ijarah sukuk fourth

Sukuk certificate
year 2006 6000000 5000000 4000000 3000000 2000000 1000000 0 1 2 3 4 year sukuk

2007 3598000

2008 4075750

2009 4831840

Analysis
In 2006 its very zero but in 2007 to 2009 it start continuously increasing. Such securities are issued in which all kind of ijarah sukuk, WAPDA second sukuk and global sukuk traded in the secondary market. It is a negotiable instrument. These securities are selling every year with increased amounts.

Certificates issued against companies

Investments in subsidiary and associates except Meezan Islamic Income Fund form part of strategic investment of the Bank and cannot be sold for five years from the last date of purchase of such securities, unless stated otherwise.

Subsidiary (unlisted)
The nominal value of these shares is Rs. 100 each. These shares are placed in custody account with the Central Depository Company of Pakistan Limited. These shares cannot be sold without the prior approval of SECP in accordance with SECP's circular No. 9 of 2006 dated June 15, 2006, in addition to mandatory holding period of 5 years from the last date of purchase of such shares. year 2006 2007 2008 2009 63050 63050 63050 63050

70000 60000 50000 40000 30000 20000 10000 0 1 2 3 4 year subsidiary

Analysis
From 2006 to 2009 it remain constant. Such securities are issued in which all kind of Al Meezan Investment management Limited (which is subsidiary unlisted) shares are traded in the secondary market. It is a negotiable instrument.

Associate listed
The Bank holds investments in ordinary shares / units / certificates of Rs. 10 each, unless stated otherwise in the following listed investee entities year 2006 2007 2008 2009 595068 1568794 2020161 2020161
2500000 2000000 1500000 year 1000000 500000 0 1 2 3 4 listed associate

Analysis
In 2006 its low but in 2007 to 2009 it start increasing and last two year it remain constant. Such securities are issued in which all kind of mutual fund, open and close end fund traded in the secondary market. It is a negotiable instrument.

These securities are selling every year with increased and last two years constant amounts.

Associate unlisted
The Bank holds investments in ordinary shares of Rs. 10 each, unless stated otherwise and preference shares of 100 each, in the following unlisted investee companies: year 2006 271280
300000 250000 200000 150000 100000 50000 0 1 2 3 4 year unlisted associate

2007 274280

2008 274280

2009 274280

Analysis
In 2006 its low a little bit but in 2007 to 2009 it start increasing and remain constant. Such securities are issued in which all kind of shares, certificate and investment shares traded in the secondary market. It is a negotiable instrument. These securities are selling every year almost constant amounts.

Conclusions After 2006 bank is not issuing musharakah certificates which is musharakah term finance certificate and 1n 2006 bank issued 10,404 because they focus on other sukuk and certificates but issued ijarah certificate for investments. These achievements, in a short span of eight years, reflect the dedication, commitment and hard work of the entire Meezan Bank team for which they need to be congratulated. Above all, these achievements have been made possible due to the support of the customers of the Bank who have gone the extra mile in demonstrating their desire to use Islamic banking products and services. Conventional banking also moving to Islamic banking because Islamic modes of financing scope in all over the world. The Bank now commands approximately 45% market share of the Islamic commercial banks in Pakistan and has, by far, the largest network of branches in the country. The Bank has a proven track record of consistent profitability over eight years as a full-fledged Islamic bank. The Investment banking department was setup in 2006 and consists of highly qualified and experienced professionals who are young, energetic and possess efficient delivery capabilities. The department is currently providing the following services to its clients: 1. Syndicated and Structured finance 2. Project Finance 3. Corporate and Financial Advisory Service Even though 2009 was a difficult year, Investment banking continued its positive trend and closed a number of high value and prestigious transactions for the Bank. These included mandates for lead/joint-lead roles for multi-billion Rupee financing deals, a few of which are highlighted below - including the Rs. 6.8 billion Sukuk issue by Pakistan International Airlines Corporation (PIA).