Islamic Finance & Capital Market Activities 24 January 2012 Oman First Islamic Finance &...

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Islamic Finance & Capital Market Activities24 January 2012Oman First Islamic Finance & Banking ConferenceEmad Al Monayea

Vice Chairman, MD & CEOLiquidity Management HouseA KFH Subsidiary

AgendaResilience of Islamic Finance to CrisesDevelopments of Sukuk Market and the Potential for growthCredentials

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Resilience of Islamic Finance to Crises

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Impact of Crises4Source: IMF Working Paper 2010. Based on a study of the banking sector in the GCC (excluding Oman), Jordan, Malaysia and TurkeyBefore the CrisesThe Islamic Banks were relatively more profitable than their conventional peers. Source: IMF Working Paper 2010Initial Crises EffectInitial crises effect on Islamic Finance was largely subdued as they were not exposed to complex instruments that were affecting conventional finance industryPre-Crises Levels of ROA and ROEChange in Profits, Credit and Assets from 2007 to 2008

Impact of Crises5Source: IMF Working Paper 2010Deepening CrisesChange in Profits, Credit and Assets (average 2007- 2009)The effect of financial crises was no longer limited to the westIts effects were being felt across economies which had led to global economic slow downIslamic banks average profitability decline for the period 2007-09 was only marginally higher than their conventional counterpartsHowever, despite this decline, Islamic Banks expanded credit and saw an increase in its assets relative to conventional banks

What makes Islamic Finance Resilient?Prohibition of Shariah on excessive leverage: In many cases there is a clear leverage threshold of 33% of equity defined. Islamic investors or companies who broke this rule had to suffer major losses and in some case are on verge of bankruptcies

Prohibition on Certain Sectors: By having strict definitions on the sectors that it should not invest and by having guiding moral principles that needs to be considered while investing, Islamic finance forms a good blend of socially responsible investing

Prohibition on excessive risk taking: By avoiding credit derivative instruments like CDOs, CDS, Islamic Finance has largely stayed away from the destructive effects of complex conventional financial instruments

6Conventional FinanceNGOs(Non Governmental Organizations)Islamic Finance

Developments of Sukuk Market and the Potential for growth7

Position of the Sukuk Market8EquityTrade financeRE

Private equityIslamic wealth managementCommodityMurabahatradesLeasingThe global Islamic landscape by asset value depicts potential growth for Islamic structured products, in particular Sukuk, to cater for huge demand from the Middle East and Asian investors

The total size of the Islamic Finance Industry is in excess of $ 1 trillionSukukIslamic structured productsSize of market as % of total assetsIndustry demand

Development of Sukuk MarketThe year 2011 was a record year with Global Sukuk issuance jumping to USD84bn, a 61% year on year increaseThe Sukuk Issuance has grown at the rate of 56% annually since 2001The trend has now shifted to sovereigns tapping the market. Total share of sovereign in 2011 was 78% of the Sukuk issuanceA total of more than USD180bn Sukuks are outstanding9Global Sukuk Issuance (USD Billion)Effect of Financial CrisesCAGR: 56%Source: ZawyaIssuer Type (2011)Market Type (2011)Source: ZawyaSource: Zawya

Sukuk Issuance by Domicile, Currency and StructureA number of new countries opened to the Sukuk Market, among them Saudi Arabia, Kuwait, Jordan, Iran, Gambia and YemenMalaysia is still dominating the Sukuk landscape with its Sovereign issues in its local currency RinggitAlthough Murabah seems to be the dominant structure, a careful analysis reveal that excluding Malaysia, Ijarah remains the preferred choice among issuers comprising 70% of the issuanceThe Wakalah structure received strong attention this year, being the choice for many international issuances due to its acceptability and ability to securitize untradeable assets

10Issuance by Domicile (2011)Issuance by Currency (2011)Issuance by Structure (2011)Source: ZawyaSource: ZawyaSource: Zawya

USD MillionsCountryTypeTenor (years)QatarSovereignMalaysiaSovereignUAEQuasi-SovereignIndonesiaSovereignSaudi ArabiaCorporatePakistanSovereignSaudi ArabiaQuasi-SovereignBahrainSovereignUAECorporateBahrainSovereignNotable Sukuk Issuance 201111Sovereign and Quasi Sovereign has dominated the top 10 issuers as well the overall global issuances. Only 2 corporate issuers in the top 10Qatar Central Banks Sukuk issuance of QAR 33bn (USD 9bn) was the single largest Sukuk issuance till dateThis year started off with a the issuance of USD 4bn by the Civil Aviation Authority of Saudi Arabia

Source: Zawya

Dow Jones Citigroup Sukuk Index12Performance in 2011The DJ Sukuk Index has performed consistently well post 2009A joint product of Dow Jones Indexes and Citigroup, provides a benchmark for investors seeking exposure to Sharia-compliant fixed-income investments.To be eligible for inclusion, bonds must comply with Sharia law, the Bahrain-based AAOIFI, and meet minimum requirements for maturity, issue size and rating.DJ Citigroup Sukuk IndexIndex Value: 132.532011 Change: 5.5%Source: Bloomberg

Potential for GrowthThe Sukuk market is still dominated by Sovereigns and Quasi Sovereigns. A large number of corporate are yet to explore the primary Sukuk market for their funding requirementsImplementation of the financial master plans and government initiatives which will act as the backbone of growth throughout the coming yearsThe cumulative infrastructure projects and funding needs in both the GCC and Asian regions are expected to support the Sukuk market in 2012. Infrastructure spending has been one of the key drivers of economic growth in the GCC over the past decadeNew emerging market players as well as new non-Islamic issuers are expected to tap the Sukuk market to tap in huge liquidity chasing the marketA significant potential exist in the western financial institutions and corporate in the US, UK, the EU and Central Europe who are likely to becoming more actively involved in this industry, and are interested to issue Sukuk to refinance existing corporate debt or to finance working capital and expansion activities, including acquisitionsDeeper secondary market activities are emerging with new players and appetites

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Credentials

Overview15

Sukuk Origination, Structuring & TradingStructured Finance Corporate Finance and Project FinanceAsset Management Investment Funds & Portfolio ManagementInvestment Treasury ServicesLiquidity Houses leverages on the strategic strength derived from KFHs brand name, distribution capability, and geographic coverage while offering its products and services to its clientsLiquidity House is a wholly owned by Kuwait Finance House K.S.C. (KFH) and is a result of the spin-off of its International corporate finance activities. The companys paid up capital is KD 100 Mn (approx US$ 380 Mn)Liquidity Houses objective is to be a principal player in the international Sukuk market and the Sharia compliant structured finance arena. It seeks to deliver exceptional values to its clients, stakeholders and the industry through focused and shared values driven by its parent entity, KFH. Liquidity House is licensed and regulated by both the Central Bank of Kuwait and the Capital Markets Authority.

Liquidity House Sukuk Achievements16

FIC SukukKD 92 MnRestructuring advisor 2011

SIB SukukUS$ 400 MnJLM2011

KTPBUS$ 100 MnJLM and Bookrunner2010

GE CapitalUS$ 500 MnJLM and Bookrunner2009

Ras Al KhaimahUS$ 400 MnBookrunner2009

IFCUS$ 100 MnJLM and Bookrunner2009

KTPBUS$ 350 MnJLM and Bookrunner2011

HBME SukukUS$ 500 MnCo-Manager2011

ADIB SukukUS$ 750 MnCo-Manager2010

Indonesia Sukuk IIUS$ 1 BnCo-Manager2011

Other Achievements17

Aref Investment GroupKWD 290 MnRestructuring advisor 2011

Burgan CompanyUS$ 125MnSyndicated Ijara2009

CRCUS$ 155 MnSyndicated Murabaha2008

ALAFCO Murabaha on behalf of KFHUS$ 10 Mn2011

Ozon Giyim Sanayi Ve Ticaret A.. Syndicated MurabahaUS$ 65MnMandated Lead arranger2011

GIH restructuringKWD 49.5 MnRestructuring advisor 2011

MALC Aviation FundLead SponsorUS$800 Mn2003

KFH Oceanic PortfolioUS$ 250 MnSole Arranger & Lead Sponsor2008

Awards & Recognitions18

Deal of the YearKTPB Sukuk2010

Deal of the Year- TurkeyKTPB Sukuk2010

Sukuk Deal of the YearKTPB Sukuk 2010

Best sukuk arranger2011

The best Sukuk Structuring House in KuwaitIREF ME Award2010

Deal of the Year- KuwaitAref Investment Group2010

Restructuring Deal of the YearAref Investment Group2010

Best Sukuk DealWorld Finance Islamic Finance Awards2011

Most Innovative DealKTPB Sukuk 2009

Sukuk Deal of the YearGE Capital Sukuk2009

Best Sukuk DealGE Capital Sukuk

The best Sukuk Structuring House in KuwaitIREF ME Award2009

Wakalah Deal of the year IFC Hilal Sukuk2009

Deal of the year KuwaitBurgan Company2009

Contact Information19Senior OversightIqbal Mohammed Executive Vice Presidentiqbal@liquidityhouse.comTel: (+965) 2225 7606Ahmed Al-Kharji Senior Vice Presidentahmed@liquidityhouse.comTel: (+965) 2225 7604Masroor Ahmed SiddiquiSenior Vice Presidentmasroor@liquidityhouse.comTel: (+965) 2225 7607Nawaf Al MenayekhSenior Vice Presidentnawaf@liquidityhouse.comTel: (+965) 2225 7617Liquidity Management House for Investment Co. K.S.C.C.Level 23, Baitak Tower, Safat SquareAhmed Al Jaber Street, Kuwait CityP.O.Box : 2650 Mishref, 40177 KuwaitTelephone: (+965) 2225 7600 Facsimile: (+965) 2225 7618

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