EMBARGOED UNTIL 26TH FEBRUARY 2008

International Structured Finance Special Report

Europe, Middle East, Africa & Asia-Pacific

2007 Review and 2008 Outlook:

Islamic Finance: Sukuk Take Centre Stage, Other Shari’ah-Compliant Products Gain
Popularity as Demand Increases

Authors Table of Contents

Faisal Hijazi
Analyst – Business Development − Summary: 2007 Review / 2008 Issuance Outlook
MENA and Islamic Finance − Country Analysis
+44 20 7772 8770
Faisal.Hijazi@moodys.com
• GCC: More Than US$19 Billion in Sukuk Issuance in 2007, with UAE and
Dominique Gribot-Carroz Saudi Arabia Accounting for More Than 87% of Total
Assistant Vice President – • GCC Issuance Outlook
Business Development
• United Arab Emirates
+852 2916 1120
Dominique.Gribot-Carroz@moodys.com • Bahrain
Middle East and Islamic Finance • Saudi Arabia
Additional Contacts • Kuwait
Khalid Howladar • Qatar
Vice President – Senior Credit Officer
• Asia-Pacific: Malaysia Continues to Lead in Global Ringgit Issuance
Asset-Backed & Islamic Finance
+9714 365 0284 • Asia-Pacific Issuance Outlook
Khalid.Howladar@moodys.com
• Malaysia
Philipp Lotter
Vice President – Senior Credit Officer • Pakistan and Indonesia
Corporate Finance Group • New Markets: A Promising Prospect in 2008
+9714 365 0283
Philipp.Lotter@moodys.com
• Africa
Anouar Hassoune • Asia-Pacific
Vice President – Senior Credit Officer • Europe
Financial Institutions Group
+33 1 5330 3340 − Islamic Finance Asset Class Review / 2008 Issuance Outlook
Anouar.Hassoune@moodys.com • Islamic Securitisation
Christine Kuo
• Islamic Funds and Private Equity
Vice President-Senior Analyst
Financial Institutions Group • Takaful
+8862 2757 7125 • Infrastructure and Project Finance
Christine.Kuo@moodys.com
• Islamic Banking
Investor Liaison
• Islamic Real Estate Investment Trusts
New York
Brett Hemmerling − Appendix 1: Islamic Finance Rated Transactions Closed in 2007
Investor Liaison Specialist − Appendix 2: Glossary of Islamic Finance Terms
+1 212 553 4796
Brett.Hemmerling@moodys.com
− Selected Research

Client Service Desk

London: +44 20 7772 5454
Paris: +33 1 5330 1074
Madrid: +34 91 702 6616
Website
www.moodys.com

25 February 2008
 EMBARGOED UNTIL 26TH FEBRUARY 2008

SUMMARY: 2007 REVIEW / 2008 ISSUANCE OUTLOOK

Over US$97 billion issued as
global Sukuk
Record number of deals in 2007
Islamic finance makes up a small part of the world finance industry, estimated to be
1
worth around US$700 billion globally. However, it has grown by around 15% in each of
the past three years, partly as a result of the increased wealth in Islamic countries driven
by high oil prices. This rapid growth shows no signs of slowing. Within a large segment
of Muslim societies and communities, the compliance of financial services with Shari’ah
rules and principles is a primary concern for the users of these services. As such, efforts
to enhance the access of Muslim communities and societies to financial services will
hinge upon, among other factors, the compatibility of these services with Muslims’
religious principles. While catering to such specific needs of society, Shari’ah-compliant
financial services could appeal to other segments of the population so long as the quality
of these services is at least comparable to other alternatives. Islamic finance covers all
financial activity that enables Muslims to invest while conforming with Islamic law, or
Shari’ah. In practice, Islamic finance involves using traditional investment techniques
and structures that comply with Shari’ah to create arrangements that work in ways that
are comparable to modern conventional finance.
An essential feature of an Islamic Shari’ah-complaint product is Shari’ah scholar
approval, or fatwa. Hence, Islamic banks and conventional banks that invest some of
their capital in Islamic finance through an Islamic finance "window" have a religious
board or committee composed of Shari’ah scholars. The Shari’ah committee examines
proposed transactions and, in the case of Islamic banks, reviews the overall activities of
the bank, for compliance with Shari’ah law.
Sukuk (or Islamic bonds) are the fastest-growing segment of the Islamic finance market,
which has seen phenomenal growth in the past six years. Global volume up to 2007
2
reached US$97.3 billion, with the majority coming from Malaysia and the Arabian Gulf.
Even though certain regions such as Europe and Africa3 did not produce any new issues
during 2007, the expectations are high for 2008, including multi-jurisdiction issuances.
However, the Sukuk issuance market in H2 2007 demonstrated that despite its faith-
based nature, it is not immune from the global financial system. A number of issuers
have delayed the issuance of their planned Sukuk, including Ithmar bank and Amlak
Finance; both are planning to issue their sukuk when the market stabilise.
Moody’s has observed the following developments in Islamic Finance in EMEA
and Asia-Pacific in 2007:4
− Overall Sukuk issuance volume increased by 71% to US$32.65 billion compared to
2006 (see Chart 1). The number of Sukuk transactions rose to 119 from 109 in
2006, while the average deal size increased to US$269.8 million from US$175
million.
− Some 88 Sukuk deals were issued by corporates, compared to 31 deals issued by
sovereigns (see Chart 2). This was influenced by buoyant government budgets,
mainly in the Gulf Co-operation Council (GCC), over this period as fiscal and current
account surpluses widened. Moreover, since the 2006 equity market crisis,
corporates have shifted their funding focus more into debt markets. This trend
continued into 2007, albeit the equity markets recovered significantly during the
year.
− Musharaka Sukuk consolidated its position as the size-dominant Sukuk structure,
with US$12.9 billion of issuance, closely followed by Ijarah Sukuk with US$10.13
billion issued. However, Ijarah structures were more frequently issued, with 54 deals
compared to 22 issued for Musharaka structures.

1
Islamic Financial Services Board estimate.
2
Source: Bloomberg.
3
With the exception of Sudan.
4
Sukuk review, based on Zawya.com, the Sukuk monitor.

2 • Moody’s Investors Service 2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Tamweel Residential ABS CI (1)
Ltd is the first GCC globally
rated residential Islamic
securitisation
Local currency-denominated
Sukuk demanded by investors
Growing Islamic real estate
investment trusts issuance in
Malaysia and the GCC
Musharaka Sukuk the biggest
asset structure by volume
5
Moody’s estimate.
2007 Review and 2008 Outlook: Islamic Finance
− Moody's assigned definitive credit ratings, ranging from Aa2 to Ba3, to notes issued
by Tamweel Residential ABS CI (1) Ltd, with a total issue amount of US$220
million. This is the first GCC residential Islamic securitisation rated investment
grade. The assets are Ijarah lease receivables on residential properties located in
Dubai, United Arab Emirates (UAE). This is also the first securitisation originated by
Tamweel PJSC (A3/P-2, stable), one of the major and fastest-growing Shari’ah-
compliant home financing lenders in the UAE.
− Sudan was the first African country to issue a Sukuk in 2007, a US$130 million
transaction to finance a cement project on the River Nile.
5
− Takaful industry premiums reached nearly US$2.5 billion in 2007, and are
expected to reach US$7.4 billion by 2015, representing a growing segment for
Islamic investment opportunities. Nevertheless, Malaysia accounts for 90% of all
Takaful customers worldwide. In the GCC, Saudi Arabia is recognised as the most
active Takaful market. The Capital Market Authority (CMA) is opening up its
insurance market with the issuance of 13 new licences, including five for Takaful
companies.
− The largest proportion of Sukuk was issued in the financial services sector,
accounting for 31% of total volume, followed by real estate with 25% and power and
utilities with 12%.
− Given the declining US dollar, many GCC issuers opted for local currency-
denominated Sukuk, meeting the needs of investors. JAFZ Sukuk Ltd (JSL; A1,
stable), was the first AED-denominated Sukuk to be listed on the Dubai
International Financial Exchange.
− Demand for convertible Sukuk continued. High demand for these issues
demonstrates that investors’ appetite for Sukuk with an equity potential upside
remains strong, given the recent gains in the equity market. The future of
convertible Sukuk looks promising. A number of issues have come to the market
recently, including Tamweel PJSC for US$300 million.
− In September 2007, Al-Aqar KPJ Healthcare Islamic real estate investment trust
(IREIT) obtained approval from the Malaysian Securities Commission (SC) for the
issuance of up to MYR300 million (US$86 million) as a Sukuk Ijarah programme,
combining both Islamic medium-term notes (MTN) and Islamic commercial paper
(CP). Moreover, in the GCC, Dubai Islamic Bank PJSC (DIB; A1/P-1, stable) issued
Shari’ah-compliant four-year capital-protected global IREIT notes in early 2007,
which will invest through several global IREITs in the US, European and Asian
(mainly Japanese) real estate markets.
Chart 1:
EMEA and Asia Pacific 2007 Sukuk Transactions (Volume & Number)
14,000 60
12,000 50
10,000
40
US$ Million
Issue No.
8,000
30
6,000
20
4,000
2,000 10
- 0
Musharaka Ijarah ModarabahMurabaha Manfa'a Istisnaa Al Salam
Size ( US$ Million) Issue No.
Moody’s Investors Service • 3
 EMBARGOED UNTIL 26TH FEBRUARY 2008
More corporate than sovereign
Sukuk issued in 2007
Global Sukuk should continue to
grow at compound annual
growth rate of around 35%
Takaful industry to grow by 13%
per annum
GCC project finance Sukuk to be
issued in 2008
Convertible or subordinated
Sukuk and IREITs will be in
demand by investors
6
Reaching US$200 billion by 2010.
7
Ernst & Young estimate.
8
Source: Qatar Ministry of Finance.
4 • Moody’s Investors Service
Chart 2:
EMEA and Asia Pacific 2007 Sukuk Type
Sovereign
26%
Corporate
74%
In 2008, Moody’s anticipates the following market developments:
− Overall Sukuk issuance should continue to increase by around 30-35% per annum.6
Sovereign Sukuk is likely to gain popularity, with a new precedence for Sukuk out of
Japan, Thailand and the UK. Moreover, given that most GCC currencies will
continue to be pegged to the US dollar in 2008, and due to inflationary pressures
and the need to create a benchmark against which to value corporate sukuk, a
number of GCC governments might be considering issuing Sukuk.
− Islamic funds issuance will flourish, with new funds being raised in the GCC and
7
Asia-Pacific. More than 65% of funds are expected to emanate from the Middle
East and North Africa (MENA) and Asia-Pacific.
− New Sukuk funds will come to the market, albeit the majority of new funds will still
be equity based due to the underdeveloped and still growing Islamic debt markets.
− The Takaful industry will grow by around 13% per annum to 2015, with Takaful
premiums reaching US$7 billion, thereby representing a segment that is witnessing
growing demand for Islamic investment opportunities.
− Project finance Sukuk will be issued in the GCC, mainly in the UAE and Qatar.
8
Qatar plans to issue US$15 billion in conventional bonds and Sukuk in 2008,
mainly in the energy and telecommunications sectors.
− More Sukuk will be issued in local currencies and convertible structures, given the
continued appetite for equity exposure and revaluation considerations, due to
inflationary pressures. The market could also see an increase in subordinated
Sukuk issuance. Unlike senior debt, subordinated Sukuk could be more favorable to
Islamic Banks in terms of capital requirements, and investors may be attracted by
the potentially higher yield of subordinated paper.
− REITs, both in Asia-Pacific and the GCC, are expected to reach new record
issuance. Given the phenomenal property boom in these markets, this makes
IREITs a much needed product and a useful investment tool. Moreover, the
potential for growth is aided by the tremendous concentration of high-net-worth
individuals and family businesses whose collective wealth in the GCC alone is
estimated at over US$1.3 trillion.
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Chart 3:
Global Islamic Sukuk Issued in USD Million
35000

30000

25000

Volume in USD Million

20000

15000

10000

5000

0
2001 2002 2003 2004 2005 2006 2007

Note on Data
− This report aims to capture the volumes of Islamic finance issuance in EMEA and
Asia-Pacific, mainly Shari’ah-compliant securities (Sukuk). The volumes reported
include all publicly rated and un-rated transactions that closed or launched
between 1 January and 31 December 2007.
− For issued Sukuk, a number of resources were used to account for total issued
volume in 2007 and accumulated issued sizes since inception. Sources include
Moody's, the Malaysian Securities Commission, Bloomberg, Zawya.com and
Dealogic.
− Moody’s is aware of other sources of information related to Islamic finance in the
market domain that can be different from those quoted in this report. Every effort
has been made to include and quote the majority of data sources that are
accessible to Moody’s.
− All currencies have been converted into US dollars to facilitate easy comparison.
The exchange rate was taken at the time of the transaction closing.
− Given the nascent nature of Islamic finance, the GCC and Asia-Pacific are
extensively discussed in this review. However, Moody’s is aware of new
developments in other regions such as Africa and Europe, and has highlighted
them in this report.
− Moody’s is aware of the different schools of law – or Fiqh (Islamic jurisprudence)
among different countries across the Middle East and Asia-Pacific. Hence, these
schools differ in the Fiqh methodology and the acceptance of certain Sukuk
structures. Furthermore, Moody’s review of Sukuk transactions has been made
on the basis of their legal binding and contractual features that affect the
creditworthiness of the Sukuk, without opining on their compliance with Shari’ah
law.

2007 Review and 2008 Outlook: Islamic Finance Moody’s Investors Service • 5
 EMBARGOED UNTIL 26TH FEBRUARY 2008

COUNTRY ANALYSIS

Gulf Co-operation Council (GCC): More Than US$19 Billion in

Sukuk Issuance in 2007, with UAE and Saudi Arabia
Accounting for More Than 87% of Total
Chart 4:
Volume of Sukuk Issued in the GCC
12000 30

10000 25

US$ Million 8000 20

Issue No.
6000 15

4000 10

2000 5

0 0
UAE Saudi Arabia Bahrain Kuwait Qatar Oman
Size ( US$ Million) Issue No.
* Oman has not closed any Sukuk issues in 2007

Chart 5:
GCC Sukuk Issuance

Kuwait,
Qatar, 2%
Bahrain, 4%
6%

Saudi Arabia,
30%

UAE, 58%

UAE a leading Sukuk issuer
2007 was a record year for Sukuk issuance in the GCC region. A total of 50 Sukuk
transactions came to the market, comprising 28 in Bahrain, 12 in the UAE, five in Saudi
Arabia, four in Kuwait and one in Qatar, exceeding US$19 billion in issuance. Also during
the year, three UAE Sukuk, amounting to over US$ I billion each, were issued by JSL,
DP World Sukuk Ltd (A1, stable) and Dubai Investments LLC (A1, stable). In addition,
Tamweel’s residential Asset-Backed Securities (ABS) transaction (Tamweel Sukuk Ltd),
which represented the Islamic securitisation of Ijarah “lease” receivables of residential
properties located in Dubai, was issued during the year.
The issuer rating and foreign currency ceiling for the UAE government are currently Aa2.
As such, financing transactions that are “legally” asset backed can achieve the highest
ratings and raise a proportion of their funding at Aa2 levels. In this region, however, it is
important to note that many institutions and industries still have a degree of sovereign
linkage that may constrain the rating to that of the relevant government.

6 • Moody’s Investors Service 2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Strong ratings in GCC issuance,
a function of strong economic
performance
2007a record year for sukuk
issuance More growth in
securitisation and infrastructure
finance expected in 2008
Central Bank of Bahrain a
leading sovereign Sukuk issuer
2007 Review and 2008 Outlook: Islamic Finance
As a sign of the increasing confidence in and desirability of Sukuk in the GCC, NIG
Sukuk Ltd issued its first Sukuk (NIGSL; Baa2, stable). Moreover, Saad Trading
Contracting & Financial Services Co issued the first GCC Manfa’a sukuk (Golden Belt 1
Sukuk Co; Baa1, stable) and Saudi Basic Industries Corporation (SABIC; A1, positive)
issued SAR8.0 billion (US$2.13 billion). The raised proceeds were used to in the
acquisition of GE Plastic from US conglomerate General Electric for US$11.6 billion in
May 2007.
The improving economic situation in the Gulf is illustrated by the A and Aa ratings of the
six GCC governments, much higher than just a few years ago. Despite shared
characteristics across the countries of the GCC, there remains a difference in the relative
ability of Gulf governments to service their debt – between the very wealthy states of
Kuwait, Qatar, and the UAE and the less wealthy states of Bahrain, Oman and Saudi
Arabia. Their ratings will continue to reflect these distinctions, although the size of the
rating differential is expected to narrow over time as the public finances of the less
wealthy states strengthen further while the ratings of the wealthy states are constrained
by political and institutional factors. The outlook on the government bond rating of Saudi
Arabia is still positive, while the outlooks on the government bond ratings of the other
countries are stable.
GCC Issuance Outlook
United Arab Emirates
Overall, the UAE Islamic finance market experienced a record year of growth in Sukuk
transactions, with 12 transactions coming to the market in 2007 compared to seven in
2006. Volume issuance rose by nearly 27% to reach US$11.1 billion. The majority of
issuance came from the financial services and real estate sectors, including Sukuk
transactions from DIB (DIB Sukuk Co Ltd; A1, stable), JSL, Dubai Investments LLC,
Aldar and a residential ABS transaction from Tamweel. For 2008, Moody’s predicts the
number and volume of new issuance of Sukuk to remain buoyant.. More Shari’ah-
complaint securitisation is expected to take off in H1 2008, mainly Shari’ah-complaint
mortgage leases. In addition, Islamic funds are expected to witness noticeable
developments, especially in private equity, which saw the launch of the first Islamic
mezzanine fund by Corecap in 2007. Moreover, Abu Dhabi Ports Company, in the oil-rich
emirate, is planning to develop Khalifa Port and Industrial Zone (KPIZ). The work
includes the creation of a 2.2 square kilometre port island, located five kilometres
offshore, and will take about 18 months to finish. The estimated development cost of
KPIZ, located in Taweelah between the cities of Abu Dhabi and Dubai, is more than
US$10 billion. The Abu Dhabi government hopes a significant portion of investment will
come from the private sector, through the issuance of several capital market instruments
including Sukuk.
Bahrain
The Central Bank of Bahrain (CBB) is among the first of the world’s Islamic financial
regulators and has played a critical role in developing new Shari’ah-compliant products
and approving Islamic banking licences for new Islamic banks, thereby facilitating
investment opportunities for a growing investor base. Some 28 deals closed in 2007,
compared to 24 in 2006. Volume issuance exceeded US$1 billion compared to nearly
US$800 million in 2006. The bulk of the issuance came from the CBB’s money market
operations, including Al Salaam Sukuk and CBB short-term Sukuk. Gulf Finance House
(GFH), a Bahraini Shari’ah-complaint bank, also issued its first Sukuk (Ijarah Sukuk) for
US$200 million to fund its investment operations in the GCC. For 2008, we expect a
similar level of issuance activity, including for CBB’s money market operations.
Furthermore, GFH and Al Baraka Islamic Bank are expected to issue more Sukuk as
they continue to fund their overseas operations in Asia and Africa.
Moody’s Investors Service • 7
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Saudi Arabia a growing Sukuk
issuance market with more
Islamic finance products such as
Takaful and Islamic funds
A market dominated by Sukuk
and IREITs
Infrastructure project finance
Sukuk will make debut in 2008
8 • Moody’s Investors Service
Saudi Arabia
The Saudi Islamic Sukuk finance market witnessed record issuance in 2007, fuelled by
the increasing funding needs of local companies, strong appetite from originators and
investors for Shari’ah-compliant products and the soundness of the Saudi economy,
supported by record oil prices. In 2007, five deals came to the market compared to only
two deals in 2006, resulting in US$5.7 billion being issued, an increase of more than
500%. SABIC issued SAR8.0 billion (US$2.13 billion), which was used to help acquire GE
Plastic from US conglomerate General Electric in May 2007 for US$11.6 billion. The
Takaful and real estate industries saw important developments in 2007, with the CMA
developing its insurance market via the issuance of 13 new licences, including five for
Takaful companies. Furthermore, Riyadh-based Al Bilad Bank unveiled its GCC real
estate fund (Akar), which invests in joint-stock companies of the GCC. Saudi Arabia’s first
Sukuk fund was launched by Jadwa Investment in H2 2007, which targets investment in
the Gulf countries and the Middle East. In light of the forthcoming introduction of the 2008
Mortgage Law, and due to the government’s limited role in financing housing, the private
sector is anticipated to assume a greater role in this respect. Institutions such as National
Commercial Bank (A1, stable), Al-Rajhi Bank (A1, stable), Dar Al-Arkan, Kingdom
Instalment Company and Arab National Bank (A1, stable) are attempting to have the first-
mover advantage in the provision of housing finance products, mainly Islamic mortgage
structures.
Kuwait
2007 was a landmark year for Sukuk in Kuwait, with the issuance of the first Islamic-
compliant security by NIGSL. The US$475 million Sukuk is the first issue of a US$1.5
billion programme. A total of four deals were issued in 2007, with total issuance reaching
US$875 million. Late in 2007, Al-Ahlia Real Estate Projects Company (AREPCO) came to
the market with a convertible Kuwaiti dinar-denominated Sukuk for KWD87.5 million
(US$320.5 million). The two-year Sukuk is an equity investment Sukuk, with an 8% profit
rate payable semi-annually. The Sukuk was issued to acquire up to 49% of the
outstanding equity in AREPCO. Moreover, Munshaat Real Estate Projects Company
(MREP) launched it first Shari’ah-compliant REIT in Kuwait (MREIT). The Al Mahrab Hotel
Tower, which will be the primary income-generating asset of the MREIT, is part of the Al
Safwa Towers project, one of the largest in Mecca in Saudi Arabia. This will give small
and medium-sized investors the opportunity to benefit from the strong performance of
Mecca hotels, which have shown some of the highest occupancy rates in world.
Qatar
The Qatari Islamic finance Sukuk market had a total issuance of US$450 million in 2007,
compared to US$270 million in 2006. Qatar Real Estate Investment Co (S.A.K.) (A2,
stable) issued its first Sukuk, Qatar Alaqaria Sukuk Co Ltd (A2, stable), with the
government of Qatar directly owning a 27% stake. Moody's views the company as a
government-related issuer (GRI), and therefore determines its ratings on the basis of both
the company's fundamental creditworthiness and the credit enhancement that can be
achieved from government support. Qatar’s fortunes in 2008 will in large part be tied up
with those of the energy industry. The minister of finance in a recent address to the
Euromoney conference in Qatar stated that US$70 billion will be needed to finance
projects in the energy and telecoms sectors over the next few years, of which US$15
billion will be financed through long-term fixed-income securities, both conventional and
Islamic bonds.
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Close to 50% growth in domestic
markets since December 2006
Malaysian ringgit-denominated
Sukuk outstanding reaches
US$64.4 billion… or 66% of
global outstanding Sukuk
Cagamas Berhad’s issuance
boosted the market with its
second Islamic RMBS
Combination of conventional and
Islamic CP and MTN
programmes
9
Malaysian ringgit, Pakistan rupee, Indonesian Rupiah, Brunei dollar.
10
Source: Bloomberg.
11
For more details, refer to our Special Comment. “Asian Sukuk: Review and Introduction to Moody’s Rating Approach”.
2007 Review and 2008 Outlook: Islamic Finance
Asia-Pacific: Malaysia Continues to Lead in Global Ringgit
Issuance
Asian currency-denominated Sukuk outstanding9 grew by close to 50% to US$65.3
billion in 2007 from US$43.6 billion in 2006.10 Interestingly, the growth has been even
more sustained since the summer of 2007. Asian currency-denominated Sukuk
outstanding grew by a significant 27% between the end of July 2007 and year-end.
Malaysia continues to lead the way in terms of offering an attractive environment for
Islamic finance.11 The government has been very proactive in encouraging Islamic
finance, implementing measures such as numerous tax benefits that favour Sukuk
funding over conventional methods.
Malaysia also remains the biggest domestic market worldwide. Ringgit-denominated
Sukuk issued in 2007 was equivalent to US$64.4 billion, representing 66% of the global
outstanding as of 31 December 2007.
Chart 6:
Asian Sukuk Issuance
Indonesia
Brunei 1.5%
0.3%
Pakistan 3.0%
Malaysia
95.2%
Sukuk also remain a significant funding avenue in the Malaysian domestic market.
In 2007, Cagamas Berhad, Malaysia's national mortgage agency came to the Sukuk
market several times, thereby boosting domestic issuance. Specifically, in May,
Cagamas launched a Sukuk Musharaka Residential Mortgage-Backed Securities
(RMBS) transaction for more than MYR2 billion (US$0.6 billion), comparable in size to
its first Islamic RMBS launched in 2005.
In June, a MYR60 billion (US$17.3 billion) conventional and Islamic CP and MTN
programme was also proposed by Cagamas. The programme consisted of MYR20
billion of CP and a MYR40 billion MTN programme. The 40-year tenure for the MTN was
also the longest ever established in Malaysia.
Bumiputera Commerce Holdings Berhad also launched a MYR6 billion (US$1.7 billion)
conventional and Islamic CP/MTN programme.
Moody’s Investors Service • 9
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Malaysia has also become a hub
for cross-border issuance
Maybank certificates represent
first cross-border subordinated
Sukuk
Four Rupiah-denominated Sukuk
transactions in 2007 constituting
0.4% of global outstanding
Sukuk
12
Source: Malaysian Securities Commission, “Sukuk approved-not issued”
13
The upgrade in May 2007 was related to Moody’s application of its refined Joint-Default Analysis and updated Bank Financial Strength Rating
methodologies.
10 • Moody’s Investors Service
Chart 7:
Malaysia: Approved Ringgit-Denominated Private-Debt Securities
Issuances12 Including Approved Issuances by Cagamas Berhad
300
250
200
RM Billion
150
100
50
0
2004 2005 2006 2007
Conventional Sukuk Combination
While the bulk of Malaysia’s issuances remain domestic, there was increasing interest in
the cross-border Islamic market in 2007. The SC approved more than US$8.3 billion US
dollar-denominated Sukuk issued by foreign corporations in 2007, which was much
higher than the total approved foreign currency-denominated Sukuk issuances in the
previous two years (see Chart 7).
There were a number of notable features in the Asian Sukuk issued in 2007. Among
these, Malayan Banking Berhad (Maybank; A3, stable) issued Sukuk in April 2007
(Malayan Banking Berhad Sukuk), raising US$300 million to fund the bank's Islamic
banking operations and representing the first cross-border subordinated Sukuk
issuance. Moody’s assigned a Baa1 foreign currency rating to the subordinated Sukuk
certificates in April and upgraded the rating to A3 in May.13 The A3 rating is constrained
by the country ceiling. Specifically, the bank intends to use the proceeds to refinance
existing conventional US dollar subordinated notes. The transaction will allow Maybank
to raise funds on terms compliant with Shari’ah principles. It will also count as Tier 2
capital under existing capital adequacy regulations. The rating is directly linked to that of
Maybank, the obligor, because it has agreed to provide advances to cover any shortfall
between the profits generated from the portfolio assets and the required periodic
distribution amount to certificate holders. Maybank has also irrevocably undertaken to
purchase the issuer's interest in the portfolio assets at the relevant exercise price
sufficient to pay the certificate holders, either at maturity or on dissolution. Moody’s
noted that Maybank, as the asset manager, will collect profit from the portfolio assets
and pay the issuer an amount sufficient to fund the required periodic distribution to
certificate holders on each distribution date. Any excess profit, after meeting the
required periodic distribution amount from the portfolio assets, will be paid to Maybank
as a fee, while any shortfalls will be covered by Maybank to ensure the required periodic
distribution amount is paid.
Rupiah-denominated Sukuk represented only 0.4% of global outstanding Sukuk at year-
end 2007. A total of 20 Sukuk – or 3.88% of all bond issuance in Indonesia – were
issued between September 2002 – when Indonesia made the market’s first issuance –
and the end of July 2007.
The regulatory authorities issued their first Islamic bond regulation in 2002, and the
Indonesia Capital Market Supervisory Board followed up in November 2006 with a
second set of regulations that represent an attempt to encourage insurers, pension
funds, banks and mutual fund managers to invest in Sukuk.
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Malaysian Islamic banks as
potential issuers
Islamic securitisation activity
anticipated in 2008
Potential for further growth in
Indonesia and Pakistan
Huge market potential, with
Africa home to around 400
million Muslims
14
The only South Asian country to witness Islamic finance activity in 2007.
2007 Review and 2008 Outlook: Islamic Finance
Another challenge for the development of Sukuk in Indonesia lies in the need to boost
understanding of securitisation (be it conventional or Islamic) as well as to improve
accounting and tax treatments as they relate to securitisation.
In the latest example of efforts to clarify the situation, the Indonesian Accounting
Association in H1 2007 issued regulations for the treatment of securitisation, to apply
from 2009. In November 2006, the authorities also introduced Sukuk CIC, a collective
investment contract used for structured finance transactions. But no structured finance
deal – conventional or Sukuk – has debuted using this structure.
Asia-Pacific Issuance Outlook
Malaysia
Malaysia remains the biggest global Sukuk market by far. In particular, banks may use
Sukuk to develop their Islamic banking operations, as Maybank did in 2007.
Malaysia intends for Islamic finance to account for 20% of its banking assets by 2010.
Moody’s considers this target achievable, given the efforts of domestic banks and the
issuance of Islamic banking licences to foreign players. This creates significant growth
potential for Sukuk, which can be used by Islamic banks for long-term funding and
asset-liability management purposes.
The market could also see an increase in subordinated Sukuk issuance. Compared to
senior debt, subordinated Sukuk could be more favourable to Islamic banks in terms of
capital requirements. Furthermore, investors in Islamic finance may be attracted by the
potentially higher yield of subordinated paper. Finally, conventional banks, through their
Islamic windows, may also consider issuing subordinated Sukuk to access a broader
base of investors and attractive funding.
For Asia-Pacific, we expect new Islamic securitisation transactions in 2008, at least in
Malaysia. Menara ABS Berhad has already issued MYR1.0 billion (US$306.1 million) of
Sukuk Ijarah backed by four properties, in January 2008. (The properties are removed
from the balance sheet of the originator, Telecom Malaysia Berhad.)
In November 2007, Bank Negara Malaysia announced its plans to encourage foreign
banks to conduct Islamic banking in multiple currencies. To this end, the Malaysian
regulator may issue more licences to those banks and give them special tax incentives.
This has been viewed as a way to promote Malaysia as an international hub for Islamic
finance.
Pakistan and Indonesia
Pakistan’s14 and Indonesia’s small but growing Sukuk markets are expected to grow
significantly over the coming years. Total assets of Islamic banks in Indonesia may still
only represent a minor portion of the country's total banking assets, but they are
expected to grow significantly. This could also encourage Sukuk issuance.
New Markets: A Promising Prospect in 2008
Africa
Africa is home to an estimated 400 million Muslims. In Sudan, the state has mandated
Islamic finance, and has a number of Islamic banks operating throughout the country
through foreign partnerships, such as Emirates and Sudan Bank, which is backed by
DIB, Shari’ah Islamic Bank and Abu Dhabi Islamic Bank PJSC (ADIB; A2, stable). In
addition, Al Khartoum Bank is now 60%-owned by DIB and Qatar Islamic Bank is
planning to set up a commercial and investment bank. In 2007, Sudan was the first
African country to issue a Sukuk, for US$130 million, to finance a cement project on the
River Nile. Egypt, which is the biggest Muslim country in the MENA region, has nearly
66 million Muslims. Many new Islamic banks, mainly from the GCC, have started
branching out into Egypt. Amlak Finance, which is offering medium- to long-term
Shari’ah-compliant refinancing solutions for residential and commercial properties, has
opened a new office in Cairo. ADIB and Bahrain Islamic Bank have also started similar
ventures.
Moody’s Investors Service • 11
 EMBARGOED UNTIL 26TH FEBRUARY 2008
South Africa is leading Islamic
product hub in Africa
Singapore and Hong Kong
stepping up their Islamic finance
efforts
Hong Kong to serves as an
Islamic funding platform for
mainland China
Europe might see its first
sovereign Sukuk issued
15
Speech by Ng Nam Sin, executive director of Monetary Authority of Singapore, 13 February 2007 at Islamic Finance Asia 2007.
16
Seminar on Islamic Finance, 15-16 January 2008, jointly organised by the Hong Kong Money Authority and the Islamic Financial Services
Board.
12 • Moody’s Investors Service
Given that only 20% of the population has a bank account, this offers major
opportunities for growth in both conventional and Islamic products. The drive by the
government to reform the financial services sector and privatise several state-owned
banks is expected to help drive competition and spur development. It will also increase
the number of foreign institutions offering Islamic products. In the Maghreb region, we
are beginning to see some Islamic investors from the Gulf planning real estate projects
in Morocco. Islamic financial institutions are not on the agenda at the moment, but this
might be about to change as the central bank of Morocco (Bank Al-Maghrib) has for the
first time allowed the use of Islamic finance structures such as Murabaha and Ijarah for
banks. It is very likely that North Africa will form a stronger bloc in the Islamic finance
industry in future. Furthermore, South Africa is considered one of the leading countries
in developing Islamic products, meeting the needs of nearly two million Muslims. ABSA
Bank Ltd (Baa1, stable), a subsidiary of Barclays, and Al-Barka Group are among the
biggest banks providing products approved by their Shari’ah supervisory board, which
has overseen the development of a range of products for the local market. These
include chequering accounts, contractual and discretionary savings with transactional
capability and Shari’ah wills for the personal market. Vehicle and asset finance are
offered to both business and personal clients.
Asia-Pacific
Japan is the most recent major developed economy to tap into the Sukuk market, the
government will issue its first sovereign Islamic Sukuk, valued at between US$300
million and US$500 million, through Japan International Bank for Corporation, this
issuance is expected to come to the market by the end of Q1 2008. Moreover, Thailand
and Singapore are contemplating issuing their first Sukuk in 2008.
Singapore’s authorities have made evident their interest and enthusiasm for Islamic
products.15 The Monetary Authority of Singapore (MAS) constantly works with the
industry to ensure both Islamic and conventional financing have comparable supervision
under the country’s tax and regulatory framework. Concessionary tax treatment for
Sukuk is similar to that for conventional bonds, while Singapore has also waived the
double imposition of stamp duties on real estate financing structured under Shari’ah law.
Several banks in Singapore are also looking at specialist subsidiaries. DBS Bank Ltd
(Aa1, stable) has taken the lead with its launch of the Islamic Bank of Asia (IB Asia)
after approval from MAS for a full bank licence in May 2007. IB Asia will focus on
corporate, capital market and private banking services. The Singapore financial
community is also actively looking at Islamic funds management.
In Hong Kong, the authorities are fully supportive of the development of Islamic finance.
In November 2007, the Securities and Futures Commission approved the first Islamic
fund (Hang Seng Islamic China Index Fund), available to retail investors.
Furthermore, the Hong Kong Monetary Authority announced in January 200816 that it
will apply for associate membership of the Islamic Financial Services Board. As such,
Hong Kong could position itself as an international platform for Islamic funding for
mainland China needs, particularly in the domain of infrastructure projects.
In the medium term, there could be a significant potential for cross-border and
Residential Mortgage-Backed Sukuk issuance. The authorities are currently looking at
improving the fiscal environment. By focusing on Sukuk, Hong Kong could also become
a platform for the development of Islamic securitisation.
Europe
The UK has made concrete steps forwards, given London’s appeal as a centre for
Islamic finance. Over the past three years, the UK has made significant changes to its
tax legislation to facilitate Islamic finance transactions. Moreover, the City of London is
home to a sizeable number of professionals and expertise that enable London to claim
the title of “Islamic finance centre of Europe”. For 2008, the UK treasury is
contemplating issuing its first sterling Sukuk.
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
UAE and Malaysia to lead…
followed by Saudi Arabia and
Qatar
17
For more details on the credit risk consideration of purchase undertakings, refer to our See Special Comment: Shariah and Sukuk: A Moody’s
Primer, published in May 2006.
18
See Credit Analysis: Tamweel PJSC.
2007 Review and 2008 Outlook: Islamic Finance
ISLAMIC FINANCE ASSET CLASS REVIEW / 2008 ISSUANCE
OUTLOOK
Islamic Securitisation
To date, the majority of Sukuk has been of an asset-based nature. In these transactions
the assets in place do not legally belong to the Sukuk investors, and the financing raised
is not backed by assets. In the event that the “borrower” defaults or becomes insolvent,
the Sukuk investors rely on purchase undertakings for the repayment of funds. This type
of structure has drawn much attention in recent months due to the lack of asset-risk
sharing of such structures and the perception that such undertakings are “guaranteeing”
the asset price.17
Securitisation or asset-backed finance is inherently more complex for issuers as it
requires legal isolation and sale of the assets from the borrower to create a structure
whose cash flows and risk profile are driven primarily by the assets. These risk-sharing
characteristics make securitisation closer to the Shari’ah ideals of participating in the
collective legal or beneficial ownership of an asset and its “value”.
In the GCC, Moody’s believes that real estate (residential and commercial) will drive the
majority of corporate Islamic securitisations in the short term. This is mostly due to the
sizeable financing needs of the sector, and the market’s familiarity with and interest in
the underlying assets. All GCC economies are largely dependent on the oil and
petrochemical industry; these industry assets too hold significant potential for project
finance asset-backed Sukuk. The ongoing preparation for Basel II is also driving a focus
on balance sheets as regional banks reach their risk limits on real estate and project
lending and are hence looking to free up capital through securitisation.
In July 2007, Tamweel issued the first GCC globally rated Islamic securitisation, a
structured Sukuk that passed legal ownership of residential property located in Dubai
and the associated finance contracts to investors (Tamweel Sukuk Ltd). Comparable to
conventional RMBS, the ongoing boom in the region (from a very low base) means that
deals are performing well, with zero defaults in the underlying pool.
A number of GCC countries’ foreign currency ceilings are currently Aa2, including UAE.
As such, transactions that are “legally” asset backed can achieve these high ratings.
Tamweel’s timing was fortuitous and it raised a significant proportion of its funding at
Aa2 levels while Tamweel itself has an issuer rating of A3 (Ba3 when excluding the
external support element captured by Moody’s GRI methodology).18
In 2008, we expect more Islamic securitisation transactions from issuers across the GCC
as the structuring and legal complexities and expertise required become more
commonplace. In addition, the genuine asset-backed, risk-sharing nature may drive
further Islamic investment demand and thereby help pricing. Moreover, in Malaysia,
Menara ABS Berhad issued MYR1.0 billion (US$306.1 million) of Sukuk Ijarah backed
by four properties in January 2008. The properties are removed from the balance sheet
of the originator, Telecom Malaysia Berhad.
Moody’s Investors Service • 13
 EMBARGOED UNTIL 26TH FEBRUARY 2008
MENA and Asia-Pacific account
for 65% of global funds
Private equity is an ideal Islamic-
compliant investment
structure… but with conservative
borrowing
Malaysia and Saudi Arabia to
play a significant role in the
Takaful market in the coming
years
19
Source: Ernst &Young numbers and analysis.
20
Source: Moody’s estimates.
14 • Moody’s Investors Service
Islamic Funds and Private Equity
Islamic funds have expanded significantly in the past five years, growing at a
compound annual growth rate of 22%.19 By the end of 2007, the number of global funds
exceeded 700. Given the nascent nature of this industry, nearly 50% of the total number
of funds has less than US$50 million in assets under management. MENA and Asia-
Pacific account for 65% of global Islamic funds, largely due to the nature and
development of equity markets in the past three years. However, penetration of these
funds in the GCC is still minimal, only accounting for over 1% of GCC GDP. Saudi
Arabia is considered one of the biggest markets for Shari’ah-compliant funds. NCB
Capital issued one of the biggest GCC funds, targeting US$1 billion, through investing in
GCC equity markets and Murabaha funds as approved by the NCB’s Shari’ah board.
Real estate funds have also grown significantly in the rest of the GCC, benefiting from
booming economies and real estate project expansion. The average fund size of IREITs
rose by nearly 36% between 2002 and 2006 to reach nearly US$200 million. In the UK,
Barclays Capital has launched its first Shari’ah-complaint exchange-traded fund.
Moreover, Arab Banking Corporation B.S.C. (A3, stable), Islamic Asset Management UK
and Kuwait-based Global Securities House issued a UK Islamic commercial real estate
fund, Al Bait UK Real Estate Fund, for a total of £58 million (US$115 million), which
includes a balance of office, mixed-use and industrial assets in diversified locations in
the UK. Also given the increasing global Sukuk issuance, a number of Sukuk funds,
similar to Jadwa’s Sukuk Fund, are to be introduced in the GCC region in 2008. Moody’s
is aware of a number of issuers planning to launch Sukuk structured funds in H1 2008.
Private equity is also gaining momentum. Venture capital and private equity funds that
do not utilise conventional leverage instruments are ideal tools for making investments in
an Islamic-compliant manner. Another appropriate tool is early-stage investments in
start-up companies because investors have considerable scope to negotiate the
structure and conditions of their investment to ensure Shari’ah compliancy. An indication
of the acceptance of these vehicles for making Islamic-compliant investments is the
number of conventional private equity and venture capital funds that have passed
Shari’ah compliance tests with only minor adjustments made to the investment policies
of the funds themselves. A Shari’ah supervisory board is appointed and detailed
Shari’ah compliance criteria are incorporated into the offering and operational
documents. Despite this, Shari’ah-compliant institutional private equity remains limited to
the likes of Corecap, which launched its Islamic Private Equity Fund I (CIPEF I) in 2007.
However, this limited issuance activity does not accurately reflect the fact growth in
MENA private equity issuance is considered the fastest globally. The main factor
constraining Islamic finance private equity issuance has been the reliance of many
transactions on leverage. The general consensus among most Shari’ah scholars is that
a transaction's debt-to-equity ratio must be less than 33%. Many of the transactions
made recently, especially in the merger and acquisition fields, have a much higher
dependency on borrowing.
Takaful
Takaful industry premiums reached nearly US$2.5 billion in 2007,20 and are expected to
reach US$7.4 billion by 2015, representing a growing segment for Islamic investment
opportunities. Malaysia accounts for 90% of all Takaful customers worldwide. In the
GCC, Saudi Arabia is recognised as the most active Takaful market. The CMA is
opening up its insurance market with the issuance of 13 new licences, including five for
Takaful companies. The economic boom in the GCC has created a substantial
investment in infrastructure projects, as has the growth in retail Islamic banking solutions
including Islamic mortgages, which creates opportunities for Takaful operators due to the
increased demand for mortgage protection products and home owners’ comprehensive
Takaful plans. Moody’s approach to analysing a Takaful company is very similar to that
for a conventional mutual insurance company, given that the distribution between a
“premium” and a “donation” is, in Moody’s view, more cultural than economic. However,
there are several additional considerations relating to corporate governance, asset
allocation, structural features, capitalisation strategies and the regulatory environment
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
that must be taken into account when rating a Takaful company.

2007 Review and 2008 Outlook: Islamic Finance Moody’s Investors Service • 15
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Shari’ah-compliant project
finance MTN, likely to be
followed by Sukuk in 2008
21
Source: Project Finance International.
22
Source: Ministry of Finance.
23
Source: Moody’s
16 • Moody’s Investors Service
Infrastructure and Project Finance
Islamic financing structures are increasingly used in the project finance domain,
particularly in projects in the MENA region. In a recent survey,21 prospective MENA
dollar volume projects were to be estimated to be over US$167 billion, of which nearly
half of the potential market is in Saudi Arabia (US$87.5 billion). The Kingdom has the full
mix of projects – petrochemicals, independent water and power projects (IWPPs),
telecoms and infrastructure finance. The UAE and Egypt rank second and third in terms
of project diversity, expecting a mix of industrial, IWPP and infrastructure deals. Qatar22
has stated that US$70 billion will be needed in the coming years to finance projects in
the energy and telecoms sectors, of which, US$15 billion is lined up to be financed by
long-term fixed-income securities, both conventional and Islamic bonds. In the past
several years, commercial banks have led the syndication project finance market. Driven
by an improved perception of the region’s risk, spreads below 100 basis points are
common, reducing the need for agency lending. Most recently, CALYON acted as lead
arranger and bookrunner for a US$2.9 billion medium-term Islamic financing by Etisalat,
the UAE telecoms operator, and Mobily, its Saudi Arabian subsidiary. A few years ago,
conventional views regarding the GCC region’s risk level would not have supported the
current pricing and volumes from commercial lenders. Changes in risk perception or
pressure from further growth in volume may lead to a swing back to greater reliance on
agency sources of financing and potentially on Shari’ah-compliant Sukuk.
Moody’s will continue to review its approach to analysing infrastructure and project
finance Sukuk, which is currently based on a transaction’s specific contracts and
individual creditworthiness and does not opine on market value or compliance with
Shari’ah law.
Islamic Banking
The outlook for the Islamic banking industry remains positive. In the GCC, Islamic banks
have hardly suffered from the regional stock market crash that started in the second
quarter of 2006, the effects of which were still being felt in early 2007. With limited direct
exposures to the region’s equity markets, no appetite for margin lending and a structural
ban on riba-based structured investment products, Islamic banks’ resilience amid current
global credit woes is expected to remain strong. With a few exceptions, most GCC-
based Islamic banks will continue to focus on their domestic markets, where Shari’ah-
compliant lending opportunities are widening, both in the retail segment (with a nascent
mortgage market emerging) and on the corporate side (where Islamic tranches have
become increasingly common). Islamic banks’ market share in the GCC is currently
close to 15%23, and increasing, reflecting their solid entrenchment in servicing
households. In Asia-Pacific, Malaysia remains the core market for Islamic bankers,
holding a market share currently close to 14% and expected to reach the 20% line by
2010, as per the regulator’s roadmap. In 2008 and beyond, diversification is expected to
be high on Islamic banks’ agendas. First, geographic diversification is expected to
intensify for the largest players: a handful of leading GCC-based Islamic banks have
started exploring new horizons in Asia, but also beyond the natural borders of the
Islamic universe. Second, operating diversification will probably continue to pick up:
although Shari’ah-compliant commercial banking will still dominate, alternative business
lines are emerging as powerful forces to enhance disintermediation, and Islamic
investment banking – including private equity as well as asset and fund management –
is playing a critical role in this field.
2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
Malaysia a leading IREIT
issuance market
New IREIT transactions in the
UAE and Kuwait driven by a
property boom
2007 Review and 2008 Outlook: Islamic Finance
Third, diversification of funding continuums is expected to address the natural
constraints faced by Islamic financiers in terms of balance-sheet management: provided
that market conditions become more attractive, Islamic banks are expected to be both
heavy buyers and active issuers of Sukuk, especially to cope with widening maturity
mismatches between Shari’ah-compliant assets with longer tenors and funding sources
still heavily reliant on short-term customer deposits. Fourth, diversification of asset
allocation and further portfolio granularity have become critical, especially in view of
Islamic banks’ natural appetite for property-related exposures, at a time when, in several
countries where Islamic banks are operating, real estate markets are showing signs of
growing tension. In this context, Moody’s expects to assign ratings to a few more
Shari’ah-compliant banks, in addition to the eight fully fledged Islamic financial
institutions that have already been rated so far.
Islamic Real Estate Investment Trusts
Since Malaysia issued its guidelines for IREITs in 2005, two IREITs have been issued.
The first was the Al-Aqar KPJ Healthcare IREIT, which was issued and listed on Bursa
Malaysia in 2006. In September 2007, Al-Aqar KPJ Healthcare IREIT obtained approval
from the SC for the issuance of up to MYR300 million nominal value (US$86 million)
Sukuk Ijarah CP and/or MTN.
Al-Aqar KPJ Healthcare IREIT intends to use the proceeds to partly fund its proposed
acquisitions of new hospitals, and potentially to finance future acquisitions, refinance
existing bank borrowings and for working capital.
In February 2007, Al-Hadharah Boustead IREIT was listed on Bursa Malaysia. In August
2007, eight oil palm estates and two palm oil mills, all located within the Malaysian
Peninsula Malaysia, were to be sold to the trust for MYR472 million (US$135 million).
Moody’s sees potential for new Asian IREITs to be brought to the market in the coming
years, particularly in the jurisdictions that have developed an environment favourable
both to IREITs and Islamic finance. Malaysia has already established its track record,
while IREITs could also debut in Singapore. We also expect new IREITs to have assets
in other Asian jurisdictions, such as China or India, where the real estate markets are
booming and where IREITs are not yet in existence. However, this may change, as the
Securities and Exchange Board of India issued draft IREIT guidelines in December
2007.
In the GCC, DIB launched Shari’ah-compliant four-year capital-protected global IREITs
in early 2007, which will invest through several global REITs in the US, European and
Asian (mainly Japanese) real estate markets. Both Dubai-based DIFC and the CBB
have issued new regulations related to the issuance and listing of REITs, including
Islamic trusts. Going into 2008, we anticipate growing IREIT issuance in the GCC,
mainly the UAE and Kuwait. The property boom in the Middle East makes IREITs a
much needed product and a useful investment tool, given the existing favourable
investment and regulation environment. Moreover, there has been a growing appetite for
the real estate asset class among regional institutional investors as the region boasts the
world's highest concentration of high-net-worth individuals and family businesses, which
in the GCC alone is estimated at over US$1.3 trillion.
Moody’s Investors Service • 17
 EMBARGOED UNTIL 26TH FEBRUARY 2008

APPENDIX 1:

Islamic Finance Rated Transactions Closed in 2007

Country Deal Name Originator Name Issuance Size (US$ Million) Issue Rating/Rating of Senior Notes
UAE DP World Sukuk Ltd DP World 1,500 A1
UAE DIB Sukuk Co Ltd Dubai Islamic Bank PJSC 750 A1
UAE Dubai Investments LLC DIFC Investments LLC-DIFCA 1,250 A1
UAE JAFZ Sukuk Ltd Jebel Ali Free Zone FZE 2,043.5* A1
UAE Tamweel Residential ABS C1 (1) Ltd Tamweel PJSC 220 Aa2
UAE EIB Sukuk Co Ltd Emirates Islamic Bank PJSC 350 A1
Saudi Arabia Golden Belt 1 Sukuk Co Saad Trading Contracting & Financial Services Co 650 Baa1
Qatar Qatar Alaqaria Sukuk Co Qatar Real Estate Investment Co 300 A2
Kuwait NIG Sukuk Ltd National Industries Group Holding S.A.K. 475 Baa2
Malaysia Malayan Banking Berhad Sukuk Maybank 300 A3
7,838.5
Equivalent to AED7.5 billion.

2007 Review and 2008 Outlook: Islamic Finance Moody’s Investors Service • 18
 EMBARGOED UNTIL 26TH FEBRUARY 2008

APPENDIX 2:

Glossary of Islamic Finance Terms

al Maqasid al Shari’ah: the objective of Shari’ah.
al adl: a trusted and honourable person, selected by both parties to a transaction.
Somewhat analogous to a trustee.
amana/amanah: literally means reliability, trustworthiness, loyalty and honesty, and is
an important value of Islamic society in mutual dealings. It also refers to deposits in trust,
sometimes on a contractual basis.
bai/bay: contract of sale, sale and purchase.
bai al-salam: advance payment for goods. While normally the goods need to exist
before a sale can be completed, in this case the goods are defined (such as quantity,
quality, workmanship) and the date of delivery fixed. Usually applied in the agricultural
sector where money is advanced for inputs to receive a share in the crop.
fatwa (pl. al fatawa): an authoritative legal opinion based on the Shari’ah.
fiqh: practical Islamic jurisprudence. Can be regarded as the jurists’ understanding of
the Shari’ah. There are four Islamic jurisprudence, including al-Shaifi, al-Hanifi, al-Maliki
and al-Hanbali.
gharar: uncertainty in a contract or sale in which the goods may or may not be available
or exist (e.g. the bird in the air or the fish in the water). Also, ambiguity in the
consideration or terms of a contract – as such, the contract would not be valid.
hadith: the narrative record of the sayings, doings and implicit approval or disapproval of
the Prophet.
halal: permissible, allowed, lawful. In Islam, there are activities, professions, contracts
and transactions that are explicitly prohibited (haram) by the Qur’an or the Sunnah.
Barring these, all others are halal. An activity may be economically sound but may not
be allowed in Islamic society if it is not permitted by the Shari’ah.
haram: unlawful, forbidden (see halal). Describes activities, professions, contracts and
transactions that are explicitly prohibited by the Qur’an or the Sunnah.
hawala: bill of exchange, promissory note, cheque or draft. A debtor passes on the
responsibility of payment of his debt to a third party who owes the former a debt. Thus,
the responsibility of payment is ultimately shifted to a third party. Hawala is used in
developing countries as a mechanism for settling international transactions by book
transfers.
ijarah/ijara: lease, hire or the transfer of ownership of a service for a specified period for
an agreed lawful consideration. This is an arrangement under which an Islamic bank
leases equipment, a building or other facility to a client for an agreed rental.
ijarah wa iqtina/ijarah muntahla bittamleek: a leasing contract used by Islamic
financial institutions that includes a promise by the lessor to transfer the ownership of the
leased property to the lessee, either at the end of the lease or by stages during the term
of the contract.
ijtihad: literally effort, exertion, industry, diligence. As a legal term, it means the effort of
a qualified Islamic jurist to interpret or reinterpret sources of Islamic law in cases where
no clear directives exist.
istisna’a/istisna: a contract of sale of specified goods to be manufactured with an
obligation on the manufacturer to deliver them on completion. It is a condition in istisna
that the seller provides either the raw material or the cost of manufacturing the goods.
maisir/maysir: the forbidden act of gambling or playing games of chance with the
intention of making an easy or unearned profit.
manfa’a: a form of contract in which one party gains the right to use or benefit from the
use of an asset.

19 • Moody’s Investors Service 2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
mudaraba/mudarabah: a form of contract in which one party (the rab-al-maal) brings
capital and the other (the mudarib) personal effort. The proportionate share in profit is
determined by mutual consent, but the loss, if any, is borne by the owner of the capital,
unless the loss has been caused by negligence or violation of the terms of the contract
by the mudarib. A mudaraba is typically conducted between an Islamic financial
institution or fund as mudarib and investment account holders as providers of funds.
mudarib: the managing partner or entrepreneur in a mudaraba contract (see above),
see also rab almal.
murabaha: a contract of sale with an agreed profit mark-up on the cost. There are two
types of murabaha sale: in the first type, the Islamic bank purchases the goods and
makes them available for sale without any prior promise from a customer to purchase
them, and this is termed a normal or spot murabaha; the second type involves a promise
from a customer to purchase the item from the bank, and this is called murabaha to the
purchase order. In this latter case, there is a pre-agreed selling price that includes the
pre-agreed profit mark-up. Normally, it involves the bank granting the customer a
murabaha credit facility with deferred payment terms, but this is not an essential
element.
musharaka/musharakah: an agreement under which the Islamic bank provides funds
that are mingled with the funds of the business enterprise and possibly others. All
providers of capital are entitled to participate in management, but are not necessarily
obliged to do so. The profit is distributed among the partners in a pre-determined
manner, but the losses, if any, are borne by the partners in proportion to their capital
contribution. It is not permitted to stipulate otherwise.
qard al hasan/qard hassan: a virtuous loan in which there is no interest or mark-up.
The borrower must return the principal sum in the future without any increase.
rab-al-maal: the investor or owner of capital in a mudaraba contract (see above).
rahn: a mortgage or pledge.
riba: interest. Sometimes equated with usury, but its meaning is broader. The literal
meaning is an excess or increase, and its prohibition is meant to distinguish between an
unlawful exchange in which there is a clear advantage to one party in contrast to a
mutually beneficial and lawful exchange.
riba al-buyu: a sale transaction in which a commodity is exchanged for the same
commodity but unequal in amount or quality, or the excess over what is justified by the
counter-value in an exchange/business transaction.
sadaqa: voluntary charity.
salam: a contract for the purchase of a commodity for deferred delivery in exchange for
immediate payment.
shari’a/Shariah/Shari’ah: in legal terms, the law as extracted from the sources of law
(the Qur’an and the Sunnah). However, Shari’ah rules do not always function as rules of
law as they incorporate “obligations, duties and moral considerations that serve to foster
obedience to the Almighty”.
shirkat al-aqad: a joint-venture partnership.
shirkat al-milk: a co-ownership partnership.
Saak: participation securities, coupons, investment certificates. Plural Sukuk.
Sunnah: the way of the Prophet Mohammed including his sayings, deeds, approvals
and disapprovals as preserved in the hadith literature. It is the second source of
revelation after the Qur’an.
Takaful: a Shari’ah-compliant system of insurance based on the principle of mutual
support. The company’s role is limited to managing the operations and investing the
contributions.
tawarruq: literally monetisation. The term is used to describe a mode of financing,
where the commodity sold is not required by the borrower but is bought on deferred
terms and then sold to a third party for a lower amount of cash, so becoming
“monetised”. The reverse of murabaha.

20 • Moody’s Investors Service 2007 Review and 2008 Outlook: Islamic Finance
 EMBARGOED UNTIL 26TH FEBRUARY 2008
ummah: the community or nation. Used to refer to the worldwide community of Muslims.
urf: the customs of a community.
wa’d: a promise or unilateral undertaking.
wadiah: a deposit.
wakala: agency, an agency contract that generally includes in its terms a fee for the
agent.
wakeel al-Istithamr: an investment agent.
waqf: a charitable endowment.
zakah/zakat: a tax that is prescribed by Islam on all persons having wealth above an
exemption limit at a rate fixed by the Shari’ah. Its objective is to collect a portion of the
wealth of the well-to-do and distribute it to the needy. The way it is distributed is set out
in the Qur’an. It may be collected by the state, but otherwise it is down to each individual
to distribute the zakat.

2005 Review and 2006 Issuance Outlook: EMEA RMBS Moody’s Investors Service • 21
 SELECTED RESEARCH
For a more detailed explanation of Moody’s approach to this type of transaction, as well
as similar transactions, please refer to the following reports:
Rating Methodologies:
− Securitisation in New Markets: Moody’s Perspective, September 2006 (SF74362)
− Moody’s Approach to Rating RMBS in Emerging Securitisation Markets – EMEA,
June 2007 (SF97186)
Special Comments:
− Asian Sukuk: Review and Introduction to Moody's Rating Approach, August 2007
(104446)
− Risk Issues at Islamic Financial Institutions, January 2008 (107175)
− Understanding Moody’s Approach to Unsecured Corporate Sukuk, August 2007
(103919)
− Shari’ah and Sukuk: A Moody’s Primer, May 2006 (SF74488)
− A Guide to Rating Islamic Financial Institutions, April 2006 (97226)
− Moody’s Involvement in Rating Islamic Financial Institutions, April 2006 (97113)
Transaction Reports:
− Tamweel Residential ABS CI (1) Ltd, June 2007 (SF101479)
− Tamweel PJSC, November 2007 (105926)
− UAE CMBS Vehicle No. 1 Limited, June 2007 (SF101325)
− Dubai Electricity and Water Authority, November 2007 (105503)
− Jebel Ali Free Zone FZE, November 2007 (105696)
− Qatar Real Estate Investment Company, July 2007 (103653)
− DP World, June 2007 (102891)
− Saad Trading Contracting & Financial Services Company, May 2007 (102659)
− DIFC Investments LLC, May 2007 (103068)
− National Industries Group Holding NIG, April 2007 (102600)
− Malaysia Global Sukuk Inc. US$ 600,000,000 Trust Certificates Due 2007, July 2002
(SF15069)
To access any of these reports, click on the entry above. Note that these references are current as of the date of
publication of this report and that more recent reports may be available. All research may not be available to all
clients.

SF104427isf

© Copyright 2007, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights
reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR
OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED
FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY
PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate
and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any
kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness
for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in
whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of
MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication,
publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without
limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information.
The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as,
statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO
THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR
OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be
weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly
make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider
purchasing, holding or selling.
MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and
preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging
from USD1,500 to approximately USD2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service
(MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may
exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest
in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance —
Director and Shareholder Affiliation Policy.”

22 • Moody’s Investors Service 2007 Review & 2008 Outlook: Islamic Finance EMEA and Asia-Pacific
 EMBARGOED UNTIL 26TH FEBRUARY 2008

2005 Review and 2006 Issuance Outlook: EMEA RMBS Moody’s Investors Service • 23