The 2008 guide to

Opportunities & Trends

in Islamic Finance
Published in conjunction with:

January 2008

Abu Dhabi Commercial Bank

Bank Asya
BMB Group
FWU Group
London Stock Exchange
Qatar Islamic Bank
SHAPE Financial Corporation
Trkiye Finans
Unicorn Investment Bank

Contents

Introduction:
2
Expanding the frontiers of Islamic finance
By Abdulkader Thomas

Participation banking:
4
A growing sector in Turkey
Bank Asya

London acts as global gateway for

Islamic finance
London Stock Exchange

Islamic capital markets:

Still breaking records

By Philip Moore

The potential of Bancatakaful

FWU Group

This guide is for the use of professionals only. It states the position of the
market as at the time of going to press and is not a substitute for detailed local
knowledge.
Euromoney Institutional Investor PLC
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Fordham, Jamie Gonzalez, Jane Wilkinson
Editor: Sarah Minns
Director of research guides: Mike Carrodus
Cover illustration: Garrett Fallon
Printed in the United Kingdom by: St Ives, Roche, UK
Euromoney Institutional Investor PLC London 2007
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Kingdom.

14

Expanding the frontiers of

Islamic finance
2007 was a year of achievement for Islamic finance, with growth on all fronts. Yet the sector still
faces great challenges, not least in finding and training enough Islamic bankers
The Islamic finance industry has never enjoyed a year like 2007. In
every market and every aspect, the providers of Islamic financial solutions have surpassed their past achievements. They have grown the
balance sheets of Islamic banks by 40% in 2007; more than quadrupled
the issuance of new sukuk; expanded to new frontiers, and improved
every aspect of their business in established markets.
But the industry faces three great challenges if it is truly to expand its
frontiers: are there sufficient qualified people; are Islamic and regional
banks able to pick up the slack created by retreating global banks, and
will regulators implement the rules that allow a well-ordered business
to compete on a level playing field? Even if 2007 was a great year, the
promise will not be buoyed by high oil prices, rather by elbow grease.

The Sukuk space

Slowly, the Saudi Arabian market is awakening to the opportunity to
use sukuk for corporate finance. Although the Capital Markets Authority has not yet issued sukuk rules, important corporates such as SABIC,
Saudi Consolidated Electricity Company (SCECO), Dar Al Arkan and the
Saad group have issued. More will follow. The large issuances of SABIC
and SCECO were placed domestically, demonstrating the capacity for
funding in the local market: an important omen for the future. Given
the comparison of population and GDP between Saudi Arabia and Ma-

Figure 1: GCC vs Malaysia value of Sukuk issues, 2005-2007

35
GCC
30

Malaysia

25

The sukuk market faces other important challenges, including the

gauntlet thrown down by Muhammad Taqi Usmani at the Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI) conference in November 2007. Not only Saudi Arabia, but other
important Islamic markets require the definition of rules that will allow
efficient special purpose vehicles to be formed, with bankruptcy remoteness, and for the formalization of the Anglo-American concept of
true sale under local law. These rules and other that enable the sukuk
market to its fullest only solve part of the problem. Usmani pointed out
that many sukuk are structured in a way that makes them more like a
loan than an Islamic lease or partnership; and this takes them out of
AAOIFI compliance. As a result, the market faces the new question of
what qualifies as a true Islamic instrument, and whether that instrument is easily traded outside of the explicitly defined Islamic space.
Perhaps GCC and MENA regulators need to contemplate importing the
Malaysian style of integrated Shariaa oversight and regulation.
Because the sukuk market is not yet efficient, despite its dynamic
growth, the syndication market remains hot. Syndicated Islamic
project finance is following the same degree of
experimentation as the sukuk market. In the past
year, large-scale declining balance partnerships,
forward leases, salam (forward sales of commodi160
ties) and tawarruq (an adaptation of murabaha)
deals have been syndicated in the project finance
140
and corporate finance market. This is in addition to
the continuously active syndicated Islamic trade
120
finance market.

Project demand

100
20
80
15
60

40

20

0
2005

2006

0
2007

Source: IFIS, 19 December 2007

10

Number of issues

Total value of issues, $bln

Number of issues

laysia, one can only imagine that the implementation of the right sukuk
rules in Saudi Arabia will turn that key market into the true second
pillar of sukuk activity alongside Malaysia.

The Islamic project finance markets opportunities are beyond imagination, whether they be in
master-planned cities in almost every Middle East
and North African country, modernization of the
hydrocarbon sector on a global basis, or lateral
investment by GCC countries into the downstream
petrochemicals and plastics business around the
world. And, increasingly, many of the business
leaders guiding these projects are seeking partial
or complete financing on a Shariaa-compliant basis. This demand is helping many Islamic investors
place their funds, but it also requires the expertise
of traditional global and investment banks to

New market opportunities

The two great developments of the past seven years include the improvement of economic standards in many Muslim countries as civil order or economic growth have been restored, and the petroleum boom.
Both realities are rapidly expanding the capabilities of Muslim savers in
Africa and Southeast and South Asia, as well as the MENA region. The
increasingly sophisticated Muslim consumer is demanding comparable
services at a fair value from Islamic providers. The result has been the
emergence of a robust takaful sector with both regional and global
players providing robust and innovative solutions.
Takaful is the Islamic alternative to traditional insurance, and its growth
is creating demand for new and better asset management solutions. A
wide variety of new products and adaptations of new products is being
introduced to the market. These range from efforts to execute better
with plain vanilla products to highly debated structured products and
derivatives that some are testing in the Islamic market. On the one

for Islamic bankers and investment bankers. The best way to characterize the four qualifications now available is as a good start. But nothing
yet blends a practical, multilingual approach to providing prospective
and practising Islamic bankers with the correct balance of Shariaa
understanding and banking knowledge. Moreover, many are geared towards people with a certain, relatively high job functionality or higher
education. With the current growth of Islamic banking and finance,
too many tasks from the back office to the CEOs job are performed by
talented people whose understanding of Shariaa ground rules is simplistic. The directors of the leading Islamic institutions need to elevate
the role of comprehensive assessment based training to the forefront
of their agendas.

Conclusion
Will the credit crunch deflate our hopes for 2008? The many achievements of 2007 are built on a deep cooperation between the leading
global financial institutions from the West and the Islamic financial
sector. If the global banks falter due to the credit crunch, one must
ask whether Islamic banks and investment banks have the ability and
the capacity to pick up the slack. In the sukuk market, two important
events are giving contradictory answers. Although the funding for
SABIC I and SCECO was largely from Saudi Arabian investors, the organization of the deals came from HSBC. This causes one to wonder if the
GCC and MENA markets are ready. Important bankers say yes, but we

In every GCC market and Malaysia, every aspect of consumer and corporate
financial services is addressed by an Islamic choice. This growth of alternatives
is giving depth to the market and assuring its long-term stability

hand, the demand for better and more sophisticated investing is being
met by more and more providers in the takaful and asset management
fields. On the other hand, the surplus of cash among Islamic investors is
causing experimentation that is challenging on every frontier.
But the market is enjoying new developments of significance. Countries like Turkey and Egypt, formerly less at the frontier of Islamic
finance, are moving forward. Significant new investments by GCC
Islamic investors into Turkey, Egypt, Pakistan, the UK and Indonesia are
bringing life to these markets and creating new opportunities for the
future of both the inbound monies and the investors themselves.
Although some analysts believe that the volume of new Islamic banks,
finance companies, investment banks and funds is unsustainable, the
reality is that consumer choice is winning. But the real meaning is that
in every GCC market and Malaysia, every aspect of consumer and corporate financial services is addressed by an Islamic choice. This growth
of alternatives is giving depth to the market and assuring its long-term
stability.

The people challenge

Nonetheless, there remains one great challenge. There are not enough
Islamic bankers to go around. And, there is no accepted qualification

havent seen the market in action without the global banks. In contrast,
the robust Malaysian sukuk market enjoys the participation of foreign
banks, but does not rely on them to lead or fund deals. Surely the talent
and funds exist in the global Islamic market, and it can function with
the scaled down role of global banks. Indeed, the initiative, whether in
Pakistan, ASEAN countries or the MENA/GCC region to address takaful,
asset management and consumer needs is almost completely home
grown - which leads to the as yet unfulfilled need for better and more
integrated training.

For further information, please contact

Abdulkader Thomas
President & CEO
SHAPE Financial Corp.
Vienna, Virginia & Kuwait City
Email: info@shapefinancial.com

INTRODUCTION Expanding the frontiers of Islamic finance

structure and manage the project risks and financing. With inflationary pressures and shortages of certain building materials as well as
insufficient engineers, 2008 may see a cooling in this sector. Worse, it is
unclear how much the credit crisis in the West will cause the traditional
players in project finance to retrench and be less active at a time when
the market is demanding their skills.

Participation banking: A
growing sector in Turkey
Since its introduction in 1985, participation (interest free) banking has grown rapidly in Turkey, with
local, Middle East and international institutions all introducing products to meet the demand. In its
11-year history, Bank Asya has firmly established itself as one of the leaders in the field

Participation (interest free) banking was introduced to Turkey in 1985

via the establishment of two finance houses, following the governments special legislation on interest-free banking, issued in December
1983. By the end of 1996, the establishment of Bank Asya took the total
of these finance houses to six.
Similar to other Islamic banks around the world, participation banks in
Turkey offer their customers profit-sharing proceeds instead of interest
and charge borrowers participation-sharing instead of loan interest hence the name participation bank. The holders of accounts share both
the profits and losses that result from investment of their funds. At the
end of the investment activity, profits are shared between the banks
and account holders, and the banks can get a maximum of 20% of the
profits. After deduction of the banks share from the accruing profits,
the balance is paid to the holders prior to maturity.
The participation banks offer their clients a full range of products
just like commercial banks including collection services, credit and
debit cards and personal loans in retail banking; cash management,
production support, POS and other electronic banking services in
SME banking; general corporate finance, project finance in corporate
banking and finally trade finance, structured finance and international
syndications in international banking.
In addition to participation banks, there are a growing number of institutions from the Middle East that have a presence in Turkey, such as
Dubai Islamic Bank, ABC Islamic, and Amlak Finance. International financial institutions such as HSBC, BNP Paribas, Calyon, Citibank, ABN Amro,
Citibank and Deutsche Bank also offer Islamic products alongside their
conventional offerings, highlighting the growing appetite for such
products among Turkish clients.
The Turkish Participation Banks Association (TKBB) estimates that
assets held by participation banks, as an integral part of the Turkish
banking system, have grown by 740%, whereas loans have grown 800%
since 2000. The Turkish participation banking sector, employing just under 10,000 people and with over 400 branches throughout the country,
has grown at a consistent rate of approximately 40% a year since 2001
and at the end of 2006 and the Participation Banks constituted 3.25%
of the banking system in terms of asset size, 5.4% in terms of lending
and 3.9% in terms of deposits. It is estimated that the assets of participation banks in Turkey will exceed $25 billion, up from $8.5 billion, in
the next decade and will account for 10% of the whole banking system.

Bank Asya: a key player

One of the key players in the market is Bank Asya. Established on 10 October 1996 as a Turkish private finance house, Bank Asya ranks among
the top 15 banks in Turkey by asset size, with total assets reaching USD
3.1 billion as of year-end 2006, and market share of approximately 1.2%
of the total banking market in Turkey. The bank is the largest among
the four participation banks in Turkey, with a 30% market share.
Asya is subject to the Turkish Banking Act and the regulations of the
Banking Regulation and Supervision Agency and Savings Deposit
Insurance Fund. The latter institution was established to, among other
things, insure deposits and manage and/or liquidate distressed or
insolvent banks. Bank Asya was the first special finance house to be
awarded the ISO 9001 Quality Management System Certificate.
Participation banks are authorized by the Banking Act to collect
deposit funds from the public under the profit-and-loss participation
accounts and special current accounts. The profit-and-loss accounts
are a version of the Islamic finance instrument, where the bank utilizes the funds deposited by account holders as an accumulated pool
for specific business activities. Any profits or losses (typically 80%)
are shared between the account holder and the bank, in an agreed
proportion.
As the leading participation bank in Turkey, Asyas assets grew from
USD 1.9 billion at the end of 2005 to USD 3.1 billion at the end of 2006.
This continuous expansion is an indicator of the demand for interestfree financial products and services in Turkey.
Bank Asya has been assigned long and short-term foreign currency
ratings of B with a positive outlook by Fitch Ratings. Asya was the first
participation bank in Turkey to receive a rating from Fitch as part of its
effort for full transparency. Asya also holds a Ba1 rating from Moodys.
Bank Asya has been the fastest-growing indigenous bank since 2001,
enjoying a return on equity employed of 31%, the highest in the sector.
It operates with 120 branches situated across Turkey. The bank also has
joint agreements with other Turkish Banks and serves the individual
client base through more than 4500 ATM machines. Asya serves more
than 1 million retail clients with Housing and Car loans, installment plans,
credit and debit cards and insurance services. Currently the bank has
700,000 credit card holders with a target of 1 million which would be
easily surpassed with the first quarter of 2008.


Profitability Ratios
Return on Average Equity
Return on Average Assets
Capital Adequacy
Capital Adequacy Ratio
Other Information
Employees
Branches

2004

2005

2006

25.84%
2.11%

40.6%
4%

31.1%
3.9%

10.78%

13.06%

18.6%

1.333
62

1.797
72

2.328
92

Source: International Financial Reporting Standard Chartered Bank

Record-breaking IPO
Bank Asya completed its initial public offering of 20% of its shares on
the Istanbul Stock Exchange (ISE) in May 2006. A further 3% green shoe
option was later exercised, bringing the total to 23%. Currently, 43% of
Asyas shares are publicly traded on the ISE. Bank Asya is the first participation bank to be listed on the exchange and its IPO was one of the
most sought-after offers since the establishment of the stock market
in Turkey: the most successful IPO to date with 52 times oversubscription of the allotment of shares, valuing the bank at $800 million. The
offering was for $180 million with the green shoe option and strong
demand came from Europe, US and Middle East, besides domestic
investors, totalling a massive $7.5 billion. Six months after the IPO, Bank
Asyas shares became part of the prestigious ISE-30 Index. The initiation
price of Bank Asya shares was YTL 3.5 in May 2006 and the current price
is YTL 11 valuing the bank at US $2.7 billion.
Asyas overall strategy is to continue to compete in the Turkish banking
sector as a whole, rather than just with other participation banks. To
do this, Asya aims to introduce interest-free banking products to the
broadest possible customer base.
In anticipation of the present interest rate environment, Asyas
strategy has been, and will continue to be, to expand the business in
the more profitable segments such as commercial banking and to increase fee and commission income to offset lower mark-up margins.
Other areas for particular focus include project and trade financing.
Regarding the latter, economic growth in Turkey has led to significant
increases in international trade activity. While Asyas current market
share in Turkeys international trade stands at approximately 2.1%,
it is seeking to expand it over the next few years. As far as project
financing is concerned, Asya aims to establish itself as the leading
provider for energy infrastructure projects.

foreign trade. Of total enterprises in Turkey, 99.8% are SMEs, and it is

anticipated that this sector will increase leverage going forward.
Bank Asya also provides a broad range of leasing products to support
its commercial clients needs. Since conventional banks are not allowed under Turkish law to engage directly in leasing activities, Asya,
as a participation bank, can conduct leasing activities more efficiently
than conventional banks operating through their subsidiaries. Asya
enjoys a strong place among top 5 banks in terms of off-balance
sheet risk in the Turkish Banking system and generates 45% of its
commission earnings from non-cash loans. Asya also enters into
certain financial instruments with off-balance sheet risk to meet the
needs of customers. These include letters of guarantee, acceptance
credit and import letters of credit, along with other commitments and
liabilities.

International relationships
International activities consist principally of establishing and maintaining business relationships with correspondent banks in foreign
countries. In recent years there has been a focus on international operations designed to increase domestic market share, expand product
and risk differentiation, gain a greater presence in global financial
markets and meet the changing needs of existing and potential customers. Asya maintains active business relationships with more than
850 correspondent banks in nearly 100 countries.
In April 2007, Bank Asya tapped into the syndication market for the
fisrt time with a murabaha financing facility. 3 MLAs were mandated
for US $50 million and after achieving a significant oversubscription
from correspondents all over the world, the facility was increased to
US $175 million. The deal was two tranches with a maximum tenor
of 2 years. 40 banks participated to support Bank Asya with many
of them entering such an islamic deal for the first time from US and
Europe.
Since 2002, Asya has placed a great deal of emphasis on its international trade activities, with special attention being paid to the
contracting sector and its foreign projects. With its strong presence in
the finance sector and this large correspondent base, Bank Asya has
secured its place as one of the leaders in international trade finance
among all banks and financial institutions in Turkey.

For further information, please contact

SME focus
As at the end 2006, the total amount of outstanding cash loans to commercial customers, consisting of corporate and SME customers, represented approximately 88% of the total cash loan portfolio. This compares
with approximately 90% at the end of December 2005.The bank enjoys a
corporate client base of more than 90,000 of which 88% are SMEs.
The SME sector in Turkey is under-banked, with an estimated 68 %
stake in the total sector loans. Bank Asyas strategic focus since its
establishment has been the SME sector, together with retail clients and

Mr. Unsal SOZBIR

Executive Vice President
Kucuksu Cad. Akcakoca Sokak
No:6 Umraniye 34768 Istanbul
Turkey
Tel: +90 216 633 5120
Usozbir@bankasya.com.tr

BANK ASYA Paticipation banking: a growing sector in Turkey

Figure 1: Bank Asya Key financial ratios and other information

London acts as global

gateway for Islamic finance
As a global financial centre, London could be expected to play a part in the development of Islamic
investment products. The London Stock Exchanges markets are increasingly attractive to those
wishing to invest or raise funds in a Shariah-compliant way

Given Londons place at the heart of the international financial markets

it is not surprising that a significant part of the recent, rapid growth in
Islamic finance has taken place there. The London Stock Exchange plays
a key part in the Citys development as a global gateway for Islamic finance and now offers Islamic investors from Britain and beyond access
to a growing range of Shariah-compliant products.
Since the start of 2006 the exchange has admitted14 sukuk to trading
on its markets, raising in excess of 5 billion. This year it welcomed
the UKs first Shariah-compliant exchange-traded funds (ETFs). The
exchanges capital markets are also playing an important role in financing the development of companies from around the world, including
the Middle East.

Capital pool
Islamic issuers are drawn to London for a variety of reasons. While the
desire to access the worlds most international pool of capital is crucial,
the Citys principles-based approach to regulation and the wide range
of expertise offered by London-based professionals are also important
attractions.
The exchanges markets offer flexibility: international companies can
choose to issue a wide variety of different security types in London,
including shares, depositary receipts, sukuk and debt. International
issuers also have a choice from a number of markets, including the
exchanges flagship main market; the Professional Securities Market,
which is designed for the needs of professional investors; or the Alternative Investment Market (AIM), for smaller growing companies.
Nearly 40 companies from the Middle East have opted to raise capital
on the London Stock Exchanges markets, including a number of banks
and financial services companies.

The prospects for the future development of the Islamic financial

industry in the UK are good. Londons deep and liquid markets, excellent skills base and single financial services regulator, which is regarded
internationally as responding flexibly and pragmatically to new ideas,
all help to create an environment sympathetic to the needs of Islamic
finance. This is being recognized by a number of international banks,
such as Citibank, UBS and HSBC, which have chosen to set up their
Islamic banking and advisory activities in London.

Government support
In addition, with Muslims accounting for 3% of the UKs population, the
government has since 2000 introduced a series of tax and legislative
changes designed to remove obstacles to the development of Islamic
finance, in a bid to create an inclusive financial system. In 2004 the UK
became the first country to authorize a wholly Islamic retail bank in a
country where most of the population is non-Muslim. That bank, the Islamic Bank of Britain, along with the European Islamic Investment Bank,
is now quoted on AIM. The governments tax and legislative framework
has also established a level playing field for a variety of other Islamic
products, including mortgages, bonds and insurance.
The London Stock Exchange is part of HM Treasurys Islamic Finance Experts Group, which was established in April 2007 to advise the government on opportunities to support the development of Islamic finance
in the UK. The group is examining the feasibility of the UK government
becoming the first national government in Europe to issue a sovereign
sukuk. With the government and the City actively promoting Islamic
finance, the foundations for the further development of the industry in
the UK have been firmly laid.

For further information, please contact

Good news for investors

The growth of Islamic finance in London is not just good for the City. It
is also excellent news for the growing number of Muslim investors from
around the world now accessing the exchanges markets. In December,
iShares chose to issue its first Shariah-compliant ETFs on the London
Stock Exchanges main market, for the first time allowing these investors to benefit from the low-cost, instant diversification offered by a
range of ETFs while investing in a way that is consistent with Shariah
principles. With a typical total expense ratio of 0.85%, the iShares MSCI
World Islamic; the iShares MSCI Emerging Markets Islamic and the
iShares MSCI USA Islamic ETFs offer a cost-effective way to build an
Islamic investment portfolio.

Darko Hajdukovic
Product Manager Main Market and Professional Securities
Market
The London Stock Exchange
Tel: + 44 (0) 20 7797 3306
Email: dhajdukovic@londonstockexchange.com

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Islamic capital markets: still

breaking records
The slowdown in the global capital market has yet to dent the Islamic sector, with the value of
sukuk deals doubling in 2007. Indications are that the vast infrastructure investments planned for
the Middle East and South Asia will help keep the trend on an upward path

For the Islamic market, 2007 was another year of impressive growth,
despite the sharp slowdown at the primary level of the global capital
market. By mid-December, total issuance in the sukuk market had
reached a record $43 billion in 177 deals, according to data published by
IFIS. Although this represented a decrease on the total number of transactions completed the previous year (199), it represented an increase
of 80% on the amount raised in the global sukuk market in 2006, when
deals worth $27 billion were completed. That total compares with $12
billion in 2005 and just $7 billion in 2004.
Chart 1: Global sukuk issuance (US$ mn)
50,000
43,139

45,000
40,000
35,000
30,000

27,166

25,000
20,000
15,000
10,000
5,000

2003

7,211

2004

2005

2006

Within the Middle East, the most striking development in 2007 was the
very clear emergence of the United Arab Emirates (UAE) as the centre
of gravity for issuance of sukuk. In 2006, six UAE-based borrowers raised
$21.435 billion in the sukuk market, with issuance driven by a small
handful of very large transactions. Those included the highly successful
$3.5 billion Dubai Ports deal at the start of 2006, led by Barclays Capital
and Dubai Islamic Bank, and the $3.52 billion transaction for Nakheel at
the end of the year, led by the same banks. In 2007, however, volumes
in the UAE market for sukuk transactions exploded to $22.276 billion in
26 transactions.
Elsewhere in the GCC, issuance in Saudi Arabia posted a healthy rate of
growth from $818 million in 2006 to over $5 billion in 2007, although
by December. Foremost among those transactions is the $4.1 billion
transaction for the fast-growing National Air Services (NAS), which in
2007 placed orders for 98 new aircraft as part of a growth strategy that
will see its total fleet expand to 142 planes by 2012.

12,034
5,717

issuance from Africa and (predominantly) the Middle East in 2007. In

2006, borrowers in the Africa and Middle East region raised a over $10
billion in the global sukuk market; in 2007, this rose to almost $20 billion.
In Malaysia, by contrast which is comfortably the main source of Asian
sukuk issuance total volumes rose around 40% from $15 billion in 2006
to $21 billion in 2007.

2007

Source: IFIS 19 Dec 2007

Behind the aggregate totals, however, were a number of highly significant trends. The most striking of these was the conspicuous increase in

Another fast-growing market is Qatar, where total issuance was less

than $270 million in 2006. In 2007, announced or issued volume

Chart 2: Sukuk issuance by country

Other 2%
1%
tan
kis i 2%
Pa

Bru

Ba

ne

2007

3
in

bia
Ara

hra

i
ud
Sa

Other 2%
Brunei 1%

3%

2%
tan
kis n 2%
Pa
i
hra
%
it 3
wa
Ku
Ba

2006

Kuwait 4%
Saudi Arabia 13%

Malaysia
50%

UAE 27%

Source: IFIS 19 Dec 2007

UAE 31%

Malaysia
54%

Table 1: to
Largest
Sukuks
in 2007buoyed chiefly by a $2.5 billion deal
expanded
more than
$5 billion,

That was most graphically illustrated in June, when Malaysias state

ISSUER
COUNTRY

TYPE aMOUNT (US$ MN)

Aldar Properties
DP World
Dubai International Financial Center
Dana Gas
Dar Al Arkan
Khazanah Nasional
Nakheel
Dubai Islamic Bank
Dar Al Arkan
National Industries Group

Islamic Exchangeable Bond

Mudharabah
Mudharabah
Mudharabah
Sukuk Al Ijara
Islamic Exchangeable Bond
Islamic Exchangeable Bond
Sukuk Al Musharakah
Sukuk Al Ijara
Mudharabah

United Arab Emirates

United Arab Emirates
United Arab Emirates
United Arab Emirates
Saudi Arabia
Malaysia
United Arab Emirates
United Arab Emirates
Saudi Arabia
Kuwait

2,530
1,500
1,250
1,000
1,000
850
750
750
600
475

Source: IFIS, 19 December 2007

announced in the summer by the Qatar Gas Transportation Company

(Nakilat), to support the companys acquisition of 54 new tankers for
delivery in 2010. With other borrowers such as Barwa Real Estate also
announcing plans to sell $800 million of Islamic bonds this year, Qatar
is likely to be one of the pivotal markets in the continued evolution of
the sukuk market in 2008.
Among other GCC economies, issuance of sukuk has remained modest
in comparison with the recent explosion in the UAE. In Bahrain, for example, which since the 1980s has been a key location for the evolution
of the Islamic financial services industry, issuance in 2007 reached $973
million, compared with $798 million in 2006. In Kuwait, meanwhile,
volume in 2007 rose to $1.3 billion, up from a little over $1 billion the
previous year.

Borrowers diversify
A number of other key trends emerged from the striking expansion
in the sukuk market in 2007, led by issuance from the UAE. One of
these was the continued diversification of the market, giving investors exposure to a much broader range of the GCCs fastest-growing
corporate names. Many of those corporate borrowers are categorized
by the ratings agencies as so-called government-related enterprises,
giving investors exposure to credits that some regard as offering quasigovernment risk. Prominent examples include borrowers such as DIFC
Investments and the UAE utility, Taqa.
Wholly privately-owned companies coming to the market for the first
time in 2007, meanwhile, included those such as the Saudi Arabian
conglomerate, the Saad Group, which generated demand of more than
$900 million for its debut transaction led in May by BNP Paribas. That
strong demand allowed for the five-year deal, originally planned as a
$350 million-500 million issue, to be upsized to $650 million.
Another important trend that was especially conspicuous in the first
half of 2007 was the continued diversification of the investor base for
sukuk. In the early stages of the market, the lions share of sukuk was
generally placed with domestic or regional investors. While the Malaysian market has remained predominantly a domestic one, its borrowers
have enjoyed notable success in tapping an increasingly international
market.

investment holding company, Khazanah Nasional, launched its

groundbreaking $850 million sukuk exchangeable into a 15% stake
in the toll road operator, PLUS Expressways. Led by CIMB Investment
Bank, Deutsche Bank and JP Morgan, the Khazanah transaction was
increased from its originally planned $600 million when it generated
orders of more than $7.8 billion. Much of that demand was accounted
for by convertible funds from Europe.

Global investors targeted

Sukuk issuance from the Middle East has also increasingly been
targeted at a global investor community. For example, an important
landmark for the market was passed in June 2007, when Barclays
Capital, Citigroup, Deutsche Bank and Dubai Islamic Bank led a highly
successful $1.5 billlion sukuk Al Mudabarah transaction for DP World.
This was an integral part of a $3 billion funding programme allowing
DP World to refinance its existing debt, and broke new ground for being the first sukuk to be documented to ensure compliance with Reg
S and US 144A standards. According to a deal analysis published by
Dubai Islamic Bank, that made the DP World issue the first of its kind to
give US accounts the opportunity to invest in UAE corporate securities.
In total, according to the same analysis, 33% of the transaction was
placed in the US, with a further 15% in Europe, 8% in Asia and 8% in the
UK, with only 36% distributed in the Middle East.

Table 2: 2007 Sukuk Bookrunners

RANKING
1
2
3
4
5
6
7
8
9
10

BOOKRUNNER
AMOUNT (US$ MN)
CIMB Islamic
5,323
HSBC Amanah
3,808
Barclays Capital
2,479
JP Morgan
2,033
Deutsche Bank
1,980
Citigroup
1,762
Dubai Islamic Bank
1,102
Riyad Bank
1,050
Standard Chartered Bank
1,001
Credit Suisse
960

Source: IFIS, 19 December 2007

ISSUES
27
14
6
3
6
5
7
1
16
2

The growing diversification of the investor base for Islamic securities in

2006, which gathered momentum in the early months of 2007, turned
out to be something of a double-edged sword. International investors became increasingly nervous about committing funds to new
corporate issuance as the credit crunch tightened its global grip in the
second half of 2007, which had an inevitable knock-on impact on the
sukuk sector at both the primary and secondary level. Issuance of new
sukuk slowed in the second half of the year, while spreads of those
instruments that had been widely placed among international investors widened. That widening, bankers in the Middle East rightly insisted,
was purely a reflection of global liquidity flows, rather than of any shifts
in the underlying credit quality of issuers in the sukuk space. After all,
buoyed by high oil prices and economic diversification, growth in the

Infrastructure prospects
Looking to 2008 and beyond, there is a growing belief that one of the
most exciting areas for Islamic finance will be as a means of financing the
gigantic infrastructure investments that are now either being implemented or are on the drawing board throughout the Middle East. Estimates of
the total investment that will be channelled by public and private sector
investors into infrastructure in the Islamic world vary, but a recent report
published by the Dubai-based Abraaj Capital describes the requirement in the Middle East, North Africa and South Asia as nothing short
of spectacular. The Abraaj report says that in the first half of 2006, the
Middle East, for the first time in its history, became the largest source of
infrastructure related project finance in the world, accounting for $33 billion, or one dollar for every three that was raised in the industry globally.

One of the most exciting areas for Islamic finance will be as a means of
financing the gigantic infrastructure investments that are now either being
implemented or are on the drawing board throughout the Middle East

One notable positive by-product of the growing risk averseness of

global investors in the second half of 2007 was the increased flexibility
of borrowers in the sukuk market. In the case of a transaction launched
in November by the Jebel Ali Free Zone (JAFZ), led by Barclays Capital,
Deutsche Bank, Dubai Islamic Bank and Lehman Brothers, the anticipation of weak international demand did not lead to a cancellation of the
deal. Instead, it led to its denomination in dirham rather than dollars,
with the transaction eventually offered as a very successful Dh7.5
billion ($2 billion equivalent) floating-rate note (FRN), which made the
JAFZ deal the largest ever non-convertible sukuk, with local investors
accounting for 62% of distribution.

Over the coming decade, adds the Abraaj analysis, the MENSA region
will call for infrastructure investment of more than $630 billion across
a number of key economic sectors. Power and utilities will account for
$155 billion of this huge total, with the other areas identified as having
substantial investment requirements including water ($133 billion),
healthcare ($49 billion), education ($18 billion), transportation ($188
billion) and petrochemicals ($87 billion).
Much of the focus for investment will inevitably be concentrated on
the Middle East, but the populous and fast-growing Indian economy
also has a massive infrastructure requirement. The government has
recently put the size of that requirement at $500 billion between 2007
and 2012, meaning that some 9% of GDP will need to be invested in
infrastructure over the next five years.

Table 3: Key project financing transactions in 2007

Project

Country

Sector

Indian Economic Zone

Energy City China
Tunisian Financial Harbour
Deyaar Park
Saudi Telecoms
Al Raha Beach Project
Leisure & real estate projects
Royal Metropolis Jordon Gate
Durrat Al Bahrain
Barwa Real Estate expansions
Dubai Business Park
Low Sulphur Diesel Production Facility
Queen Alia Intl Airport Expansion
Ethylene-Glycol Plant
Marafiq IWPP

India
China
Tunisia
UAE
Saudi Arabia
UAE
UAE
Jordan
Bahrain
Qatar
UAE
Bahrain
Jordan
Saudi Arabia
Saudi Arabia

Infrastructure
Power
Real Estate - Commercial
Real Estate
Telecommunications
Real Estate
Real Estate
Real Estate - Residential
Real Estate - Residential
Real Estate
Real Estate - Commercial
Oil & Gas
Infrastructure - Airports
Petrochemical
Water & Power Plants

Source: IFIS, 19 December 2007

AMOUNT (US$ mn)

10,000
5,000
3,000
3,000
2,500
2,100
1,850
1,000
1,000
800
700
685
680
650
600

Type of Financing
Islamic Financing Facility
Istisnaa
Islamic Financing Facility
Istisnaa
Murabaha Facility
Ijarah
Ijarah
Islamic Financing Facility
Islamic Fund
Murabaha Facility
Islamic Financing Facility
Ijarah
Islamic Financing Facility
Istisnaa
Islamic Financing Facility

Islamic capital markets still breaking records

Middle East in general and the GCC in particular continues to outpace

most of the rest of the world.

11

Table 4: Main real estate project financing transactions signed during 2007

Project

Obligor

Capital Injection
Nakheel Group
Park Corner Development
Test Contracting Company
Growth Opportunity Plans
Tamweel PJSC
Glomac Tower
Glomac Al Batha
Leisure & real estate projects
Nakheel Group
Properties in the Holy Haram area Munshaat Real Estate Company
in Makkah & Madinah

Country

Amount (USD$ Mn)

UAE
UAE
UAE
Malaysia
UAE
Saudi Arabia

350
22
463
23
1,850
100

Type of Financing
Ijarah
Islamic Financing Facility
Islamic Financing Facility
Istisnaa
Ijarah
Revolving Murabaha

Source: IFIS, 19 December 2007

Quantifying how much of the worlds infrastructure investment will

be financed through Islamic instruments or Islamic project finance is
hazardous, but IFIS puts the potential into perspective in its analysis
of completed or announced deals in 2007. In the project and infrastructure financing category, these indicate that transactions worth
almost $56 billion had been issued or announced by mid-December
2007, through a variety of instruments ranging from sukuks to Ijara
(leasing), Istisnaa (contracts of exchange) and morabaha (trade-based)
structures and more straightforward syndicated or bilateral Islamic
financing facilities.
Those transactions were also spread across a very diversified range of
geographical regions. For example, the IFIS inventory of projects signed
or under construction by December 2007 include the $10 billion Indian
Economic Zone initiative, a 1,600-acre zone to be developed near
Mumbai and supported by an Islamic financing facility for which the
Bahrain-based Gulf Finance House (GFH) has been appointed as mandated lead arranger. Another project outside the Gulf being supported
by an Istisnaa facility is the $5 billion Energy City China development.
It is, however, the GCC that accounts for the bulk of ambitious projects
under development that are being financed in some shape or form
with structures compliant with Shariah law. The largest of these, according to the IFIS data, include projects such as the Al Raha Beach
project in Abu Dhabi, a major mixed-use development being build
alongside 8.5km of natural beach-front that will house over 120,000
residents. In June 2007, Dubai Islamic Bank and Morgan Stanley were
appointed mandated lead arrangers on a $2.1 billion facility for Aldar
Properties, which is developing the Al Raha project. In common with a

number of the regions big-ticket project-related financings, this was

divided into a $1.267 billion conventional tranche and an $833 million
Islamic facility both of which were healthily over-subscribed, with the
entire package generating commitments of $2.84 billion.

Real estate potential

In data analyzing the growth of the Islamic capital market, real estate
finance is often bundled together with the broader infrastructure market, and general consensus among bankers is that residential and commercial mortgage-backed structures are likely to develop into a very
promising area for Islamic finance. Throughout much of the Middle
East, in particular, residential mortgage markets remain very immature
relative to Europe and the US, and fast-rising demand for home ownership across all segments of society in a number of countries is expected
to lead to rapid development in regional mortgage markets.
A handful of Islamic securitizations have already been structured, both
in the Middle East and Malaysia, where the Cagamas MBS Berhard
MYR2.11 billion Islamic residential mortgage-backed securitisation was
seen as an important prototype for the market.
As Standard & Poors (S&P) observes in a recent report on the sukuk
market, both conventional and Islamic financial institutions might
increasingly turn to this category of sukuk in the future, especially if
portfolios are built on a larger scale; credit information pertaining to
them is collected, stored and documented; and the underlying legal
framework is supportive, particularly of the legal isolation of assets for
the benefit of investors.

Table 5: Mandated Arrangers for real estate financing during 2007

Ranking

Mandated Arranger

1
2
3
4
4
4
5
5
6
7

Source: IFIS, 19 December 2007

Dubai Islamic Bank

National Bank of Abu Dhabi
Standard Chartered Bank
Morgan Stanley
First Gulf Bank
Abu Dhabi Commercial Bank (ADCB)
Emirates Bank Group
Barclays Capital
ABC Islamic Bank
Unicorn Investment Bank

Amount (US$ mn)

Projects

1,020
790
471
420
420
420
370
370
363
276

4
2
3
1
1
1
1
1
3
3

TF Ingilizce 18,6x25,9 12/14/07 10:39 AM Page 1

C

Composite

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MY

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The potential of
Bancatakaful
With conventional insurance increasingly regarded as being incompatible with Sharia law, takaful
is finding favour among Muslims across the globe and becoming an important product for banks
seeking to provide for all their clients financial needs

Takaful, or insurance based on the principle of mutual assistance, is one

of the most dynamic areas of the broader market for Islamic financial
services. As Moodys noted in a recent report, Takaful has shown very
impressive premium growth rates of about 20% in recent years. The first
takaful company was established in 1979 and now there are over 250
globally. Total takaful premiums exceeded $2 billion in 2005, and are
expected to reach $7.5 billion by 2105.
A more recent analysis published by Fitch puts the total global takaful
contributions at about $2.6 billion in 2006, which the agency describes
as very small compared with the worlds insurance sector as a whole.
However, Fitch adds that takafuls influence and importance extends
well beyond its current size, and there is substantial potential for growth
both in Muslim communities in the Middle East and Asia as well as in
some more mature markets (eg, in France, Germany and the UK), which
have significant Muslim minorities.
Among other ratings agencies, a bullish report on the prognosis for takaful in the Gulf Cooperation Council (GCC) countries published in April
2007 by Standard & Poors (S&P) notes that the market in the Gulf alone
is growing at about 40% a year. That, says S&P, means the GCC market
has the potential to reach $4 billion at the current level of development
(currently $170 million). Much of this growth in the GCC will be driven by
changes in legislative frameworks which have, for example, introduced
compulsory health insurance for expatriates in the UAE and mandatory
third-party motor insurance in Saudi Arabia.
Globally, growth will be underpinned by a range of other key influences.
Powerful economic growth and reform in the financial sector throughout the Islamic world is driving a conspicuous increase in the market for
insurance policies arising from trends such as the surge in demand for
Sharia-compliant mortgages. That surge is visible not just in markets
such as Malaysia and in the Gulf, but also in some areas of western
Europe. Datamonitor has forecast that in the UK, for example, gross
advances in the Islamic mortgage market will shoot up from 164 million
in 2004 to almost 1.6 billion by 2009.
Hand-in-hand with this skyrocketing demand, however, will be the increasingly widespread recognition that conventional insurance is in conflict
with Sharia law for at least two key reasons. The first is that traditional
insurance is perceived to be founded on principles associated with gharar
(uncertainty or ambiguity), while the second is that the investment policies
of conventional insurance companies are based on fixed-interest products
proscribed because of their reliance on riba (interest).

Bancatakafal defined
Historically, the growth of the takaful industry has been driven by the
distribution of products through a number of channels owned and
managed by dedicated takaful companies. Today, however, the industry
is gravitating increasingly towards bancatakaful Islamic financial
services equivalent of bancassurance and the distribution of family
takaful-linked investment plans. Bancatakaful is defined as the delivery
and distribution of a suitable range of tailored, bankable protection
and long-term savings and pension products designed to meet the lifecycle needs of the individual customer base of a bank or other financial
institution.
The reasons underpinning that trend are easy to identify. Banks are
increasingly committed to meeting the overall financial planning needs
of their customers on one hand, and generating stable, fee-based income
for their own business on the other. Self-evidently, the capacity to tailor
suitably diversified risk/reward investment portfolios, select top quartile
performing funds from major international brands and control defined
portfolio risk levels are all powerful drivers for the retail value proposition. That proposition can only be further strengthened by product
certification by an independent Sharia board of experts and ongoing
monitoring of the products compliance with Sharia law.

White-labelling
It is equally self-evident, however, that the number of product providers
with the necessary expertise to provide this comprehensive service is
limited. That is why one increasingly important driver of growth in the
market will be the evolution of white-labelling the creation of products
by one company and their rebranding and distribution by another.
There are a number of persuasive reasons why banks are likely to favour
the white-labelling option. Long-standing customers will inevitably feel
more comfortable with their banks own brand than with that of a newcomer, while banks themselves are able to use white-labelling to blend
their own Islamic mutual funds with high-quality and top-performing
third party Sharia-compliant funds. Additionally, white-labelling means
that all customer assets of the family takaful-linked investment business
remain within the banks custody, which may also gain the corporate
bank account of the life insurance company supplying the product.
Other advantages for banks in pursuing the white-labelling model are
that the life cycle nature of the product will allow them to enhance customer relationships and therefore underpin client retention rates. Banks
exploring white-labelling of takaful products will also gain access to the

fast-growing web-based point of sale (POS) and online administration

systems without having to incur the costs of integrating new systems or
building new interfaces.
The expansion of white-labelling in the takaful industry has been supported by the growth of call centres and mobile phone services, which
are helping to promote broader distribution and enhanced transparency across the sector, with many Islamic financial institutions having
invested very substantially in the roll-out of 24/7 virtual channels in
recent years.

help to further build the retakaful segment of the Islamic insurance

industry.
Another challenge that stands in the way of rapid growth in the takaful
industry arises from the interpretation of Sharia law. Although progress has
been made in the development of non-life savings-related products, there is
still a widespread belief across the Muslim world that life insurance is forbidden under Islamic law. Gradually, products are being developed that are
being tailored in a way that is acceptable to Sharia experts, suggesting that
the longer-term prospects for takaful life insurance products are promising.

Powerful economic growth and reform in the financial sector throughout the
Islamic world is driving a conspicuous increase in the market for insurance
policies arising from trends such as the surge in demand for Sharia-compliant
mortgages

Challenges to be overcome
While the general consensus is that the outlook for the global growth
of takaful is bright, a number of challenges still need to be addressed
if its potential is to be realized. For example, one growth area that has
yet to be developed is the market for pure retakaful solutions, or Islamic
reinsurance, allowing for the immunization of originally insured risks.
Progress has been made with, for example, the launch at the end of
2005 of the Dubai-based Takaful Re, which is rated BBB by S&P and
reported a net profit of $1.263 million in its first full year of operations
in 2006. Others that have entered the global retakaful sector recently
include international companies such as Tokio Marine, Swiss Re, Converium Munich Re and Hanover Re.
Nevertheless, more retakaful solutions would clearly make a very positive contribution to the evolution of the global takaful industry. As
a recent report published by Fitch explains, this kind of capital and
pricing support is especially valuable in the case of takaful because such
businesses currently tend to be relatively small niche operations ands in
some cases have expertise in Sharia compliance rather than in insurance
underwriting and pricing. Fitch says that it expects a developing retakaful sector may well lead to greater takaful capacity which will, in turn,

A further stumbling block to the development of the takaful sector has

traditionally been the fragmented regulatory environment for the industry. The Islamic Financial Services Board (IFSB) and the International
Association of Insurance Supervisors (IAIS) have addressed this issue by
drawing up a global, uniform set of regulations, which will enhance the
transparency and global marketability of takaful products.

Continued internationalization
In spite of these challenges, one very encouraging pointer to the future
growth of the market has been the commitment that a number of the
largest multinational insurance companies are now making to its development. AIG Takaful, a subsidiary of the worlds largest insurer, American Insurance Group (AIG), was awarded a licence by the Central Bank
of Bahrain in July 2006, and has focused largely on accident and health,
motor, personal contents, property and casualty insurance. European
heavyweights such as Allianz and AXA are also becoming increasingly
active in the market. Leading UK insurers have also underscored their
confidence in the Malaysian market through the establishment of joint
ventures such as CIMB Aviva Takaful and Prudential BSN Takaful.

For further information, please contact

Dr. Manfred J. Dirrheimer

Chairman, FWU Group
Boschetsrieder Strae 67
D-81379 Munich
Tel: +49 (0) 89 7485880
Fax: +49 (0) 89 74858881

Sohail Jaffer
Partner, FWU Group
4a Rue Albert Borschette
L-1246 Luxembourg
Tel: +352 26197701
Fax: +352 26197801

FWU GROUP The potential of Bancatakaful

Although the distribution of takaful life and savings products through

bank channels is a relatively new phenomenon, a number of initiatives
are already demonstrating that the advent of POS and online administrative systems are supporting the sales process through branch
networks. An example is the Meethaq Takaful and Savings Programme
under which the Abu Dhabi Commercial Bank (ADCB) is offering investment-oriented life takaful products to UAE residents in a joint venture
with the Dubai Islamic Insurance and Reinsurance Company and FWU
Group. For regular contributions starting at as little as AED500 ($136) a
month, ADCBs customers can make their own choice from three Shariacompliant savings strategies which according to ADCB allows savers
to combine a lifestyle savings plan with personal takaful protection for
complete peace of mind.

15

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