More and more educational institutions, around the world, are offering degree programs and diplomas in Islamic Finance and banking. This is a good sign as it indicates that the growing global Islamic finance industry has a rising demand for competent and trained talent. Why, therefore, are graduates struggling to find jobs after qualifying? Is Talent Development needed or not?

1. The World’s Leading Islamic Finance News Provider
www.islamicfinancenews.com
As we pass the midpoint of the year we
seem stuck in the doldrums, with Sukuk
issuance slowing right down amid a tense
market girding itself up to face the impact
of a withdrawal of US quantitative easing
measures and a plethora of economic
challenges. As the market drags itself
through the lazy last days of the summer
slowdown and Ramadan draws to a close,
we talk to market leaders around the
world to find out their opinions on the
story so far, and what we can expect from
the Sukuk sector in the second half of the
year.
Market slowdown
Neil Miller, the global head of Islamic
finance for Linklaters, confirms that: “The
issuance market has become much quieter
over the last few weeks.” The reasons
for this might be obvious - including the
combined effect of recent turmoil in global
bond markets after the US federal reserve’s
announcement that quantitative easing
would be tapered down, in addition to
the standard seasonal impact of summer,
exaggerated by the effect of Ramadan –
but they have no less impact for that. As
of last week the market has gone seven
consecutive weeks without an international
issuance, with the last US dollar issuance
placed by the IDB in May, and governments
and state entities appear to have all but
withdrawn from the market. Total issuances
the week of the 23rd
July were US$1.7 billion
according to KFH Research – well below
the year’s weekly average of US$2.2
billion, and bringing total issuance
for 2013 to US$66 billion. In June
the market slumped still further,
recording the lowest monthly
Sukuk issuance in 18 months.
Anzal Mohammed, a partner at
Allen & Overy, warns that we can’t
expect much better for at least another
few months. “Like the conventional
bond markets, the Sukuk market
has been affected by the volatility in the
global capital markets since June and,
with Ramadan and the summer, which
is traditionally a quieter period for new
issuance, we are unlikely to see new
issuance until early September at the
earliest assuming market conditions are
conducive.”
Market volatility
While the current period of Ramadan has
seen no deals being brought to market, Paul
Bateman, the assistant director of Islamic
capital markets at Bank of London and
The Middle East (BLME), points out this
is not unusual or unexpected, based upon
previous market behavior.
However, the run-up to this year’s
Ramadan was differentiated by a period
of market volatility, principally driven
by differing views on the expected pace
of change in monetary policy in the US.
“In addition to the effect this had on the
interest rate swap market, there was a re-
pricing of credit risk which had previously
appeared to exhibit credit spreads which
had become too tight,” explains Bateman.
“When volatility levels subside, debt issuers
will have greater confidence to meet with
investors with new transaction proposals
which are deemed to be priced fairly, and
issuance volume should rise.”
US tapering
However for now, a number of factors
continue to inhibit the market,
the most significant of which is
of course the US withdrawal of
quantitative easing, which has
contributed to the tumbling
yields which have spooked
investors and sparked a Sukuk
sell-off, resulting in heightened
risk aversion and a nervous
Halfway there: Sukuk so far
continued on page 3
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Volume 10 Issue 30
IFN Rapids .........................................................2
Islamic Finance news.........................................6
Shariah Pronouncement.................................12
IFN Reports:
Arcapita continues its steps towards recovery;
Global Sukuk market: Truly resilient?; Up to
US$516 million in real estate projects slated for
the GCC; US asset management firm sets sights
on South Africa.............................................. 13
IFN Research Report:
Mediterranean catapult............................. 15
A new lease of life...........................................16
Special Report:
IT in Islamic banking: Boom imminent...... 17
Case study:
Aerodome Sukuk protects investors with its
bank facility............................................... 20
IFN Country Correspondents:
Turkey; Indonesia; Bahrain ....................... 21
IFN Sector Correspondents:
Asset Management; Microfinance (Africa);
Private Equity & Venture Capital ............ 24
Features:
UAE: Exciting growth opportunities................ 26
UAE: A silver lining in clearing clouds ............ 27
A regulatory perspective on Shariah governance. 28
Talent development in the Islamic finance industry
— is it really necessary?................................ 30
Deal Tracker.....................................................32
REDmoney Indexes ........................................33
Eurekahedge data ...........................................35
Performance League Tables...........................37
Events Diary.....................................................41
Company Index...............................................42
Subscription Form...........................................42

2. 2©
31st
July 2013
IFN RAPIDS
Disclaimer: Islamic Finance news invites leading practitioners and academics to contribute short reports each week. Whilst
we have used our best endeavors and efforts to ensure the accuracy of the contents we do not hold out or represent that the
respective opinions are accurate and therefore shall not be held responsible for any inaccuracies. Contents and copyright
remain with REDmoney.
DEALS
DanaInfra Nasional to pay
out profits on its retail Sukuk
in mid-August
Tamweel to issue US$235 million
Sukuk Ijarah in earlyAugust
Almarai Company appoints
arrangers for hybrid Sukuk
offering
Masraf Al Rayan to issue
US$1 billion Sukuk in August
Government of Senegal to
debut sovereign Sukuk in
August
Genting Plantations to issue
US$468.62 million Sukuk
International Methanol
Company secures US$86.64
million Islamic financing from
Riyad Bank
Zain Saudi’s outstanding
US$2.3 billion Murabahah
facility receives five-year
extension
NEWS
Malaysia offers boost to
Japan’s Islamic finance efforts
NAEEM Holding rolls out the
first real-time Shariah index
for Egyptian stocks
Head of BancABC’s
corporate services encourages
Tanzanian banks to adopt
Islamic banking
Sukuk’s role in the economy
yet to be determined, says
Egypt’s finance minister
Absa Islamic Banking
restructures Shariah
compliant cheque account
US bankruptcy court
approves first Shariah
compliant debtor-in-
possession financing
Deputy prime minister
of Turkey calls for better
performance of participation
banks
Maybank Islamic to expand
across ASEAN nations
EXIM Bank looks to increase
its Shariah financing by 30%
in the next two years
The IDB incorporates
Bangladesh into its Member
Country Partnership Strategy
program
Bank Negara intervenes to
absorb excess liquidity from
the financial system
World’s tallest office building
to be part-funded in a Shariah
compliant manner
The IDB approves US$137
million irrigation project in
Azerbaijan
MCB Bank to open new
branches across the country
iSfin makes ILG its exclusive
partner for Liechtenstein
Masraf Al Rayan’s takeover
deadline for the Islamic Bank
of Britain extended to August
The IDB lends support to
Yemen and Sierra Leone
Sukuk sales in the GCC falls
29% this year
Qatar, Kuwait and Singapore
eye stake in Lloyd’s Bank
Emirates NBD Capital looks
to offer Islamic products to Sri
Lankan corporates
Qatar National Bank sets foot
in Shanghai
Startup Village to benefit from
Shariah compliant financing
Hamdan Bin Mohammed
e-University partners with
Open University of Catalonia
to offer Islamic banking and
finance courses
Abu Dhabi Islamic Bank
provides Dubai Education
Zone with exclusive products
and services
Al Hilal Bank implements
Shariah compliant technology
solution
Bank Nizwa and Al Hilal
Islamic Banking Services
sign agreement towards
enhancing Oman’s Islamic
banking industry
Bank Nizwa procures
investment banking license
Resurgence in Dubai’s
property market offset by lack
of financing for new projects
Industry and commerce
minister reiterates
government’s support
for Bahrain investment
initiatives
ABC Islamic Bank net profit
hits US$6 million in the first
half of 2013
Abu Dhabi Islamic Bank’s
second quarter profit grows to
AED371.4 million (US$101.09
million)
Ahlibank’s net profit up by
6% for the first half
Emirate aims high with the
launch of the Dubai Center for
Excellence in Islamic Banking
& Finance
Al Khaleej Takaful Group
posts lower profits in the first
six months of 2013
Arab Bank’s profit up 7.5% to
reach US$387 million
Impressive 85% hike in half
year profits for Barwa Bank
Commercial Bank of Dubai’s
half year profits up by 2.3%
ASSET
MANAGEMENT
CIMB-Mapletree
Management successfully
closes the nation’s first Islamic
private real estate fund
Shariah compliant private
retirement growth fund
is Hwang Investment
Management’s top performer
Azzad Asset Management
discusses Islamic finance
opportunities with South
African ambassador
Sedco Capital to distribute
Islamic funds via private
banks in Switzerland
TAKAFUL
Malaysian Deposit Insurance
Corporation’s Takaful and
insurance benefits protection
funds accrue by 9% in 2012
Al Baraka Turk looks to
establish an Islamic insurance
company
Prudential BSN Takaful
distributes US$5.9 million in
surplus profits to certificate
holders
Wataniya Insurance
Company commissions
Shariyah Review Bureau as
Shariah advisor
Malaysia’s Khazanah
Nasional buys 90% stake
in Turkey’s second-biggest
health insurer
RATINGS
MARC downgrades KNM
Capital’s Murabahah
program and maintains its
MARCWatch Negative status
Capital Intelligence reaffirms
rating on Sharjah Islamic
Bank
Moody’s affirms its ‘Caa1’
rating on Egypt’s government
bond rating
RAM downgrades Binariang
GSM’s Sukuk program and
places rating on negative
watch’
MOVES
Yakub Bobat appointed as
head of corporate banking at
Emirates Islamic Bank

3. 3©
31st
July 2013
COVER STORY
market. Speaking to Islamic Finance
news, Malaysian Rating Corporation
(MARC) notes that in its view the
slowdown is primarily a result of the
rising cost of funds, driven by the US
scaling back bond purchases in view of
the improved macroeconomic outlook.
A source based in the Gulf suggests
that the market may have overreacted
to this, and we might be able to expect
strong issuance once the market comes
back in September after the summer
holiday slowdown and the end of
Ramadan. Mohieddine Kronfol, the chief
investment officer of Franklin Templeton
Investments, confirms that: “We expect
by the time liquidity comes back, the
market should have a more rational
outlook for US federal reserve monetary
policy and emerging markets economic
growth.”
However Malek Khodr Temsah,
the vice-president of treasury and
investments at Al Baraka Banking Group
in Bahrain, warns that investors are not
only concerned by the impact of US
tapering, but are equally worried by the
implications of these actions on emerging
markets, which have been the primary
beneficiaries of capital outflows. “The
recent acute sell-off in emerging market
dollar debt in the second quarter of 2013
sheds light on these pent-up jitters, which
are weighing down on market sentiment
and which in turn is keeping Sukuk
issuers at bay,” he explains.
Price premium
Another reason for the general
slowdown, suggests a source, is that
there has actually been little need
for issuers to tap the market. “With
the premium between Sukuk and
conventional eliminated, there is less
incentive for non-Islamic issuers to
tap the Islamic investors from a price
perspective, and up until May, there
has been no need to tap the
Islamic investors either from a
liquidity perspective, as you
could raise as much as you
wanted from the convention
investors.”
Basel III
Jeroen Thijs, the chief
risk officer at Bank
Islam Malaysia, also
points out that the Basel
III requirements have had a significant
impact. “At least in Malaysia, the
enforcement of Basel III requirements,
especially the mandatory write-off or
conversion requirement, is holding the
market back. Central banks are unwilling
to specify the trigger levels at what point
a Sukuk needs to be written down or
converted into equity.”
Another issue is that the exercise price
of equity conversion cannot be set at the
outset. This becomes even a bigger issue
for banks that are not listed, as there is
no trading benchmark for their equity.
“All this will make issuance of Sukuk a
lot more expensive given these added
uncertainties,” predicts Thijs, warning
that: “Also at the moment there are not
enough Basel III compliant issues in the
market that provide an adequate price
benchmark.”
However, given that banks will have
to issue sooner or later, there is still the
likelihood that market activity will pick
up towards the end of the year.
Malaysia moving ahead
MARC notes that Malaysia’s Sukuk
market has been somewhat
affected with uncertainties
surrounding the 13th
general
elections, and suggests that:
“Slower growth in private
investment in 2013 will also be
another factor for the slowdown
in bond issuance in Malaysia
this year.”
However, it must be
noted that Malaysia’s
Sukuk market has seen little slowdown
compared with the rest of the world.
According to Meor Amri bin Meor Ayob
of the Bond Pricing Agency Malaysia, the
market is “moving along nicely” with
total Sukuk outstanding for the first half
of 2013 (as at the 28th
July) at RM492.6
billion (US$152.5 billion) – up from
RM478.1 billion (US$148.2 billion) at the
end of 2012 and an increase of 40% from
2011.
Malek of Al Baraka also points out that:
“Moreover, as industry-wide bodies
between both regions gradually converge
from a regulatory and Shariah point of
view in light of increased coordination
and cooperation, we do expect additional
cross-border Sukuk sales such as GCC
issuers looking to tap the depth and
breadth of liquidity in the Malaysian
ringgit Sukuk market.”
Bouncing back
Most players still expect that the market
will recover after Ramadan. Miller
predicts that: “We anticipate a pick up
from September onwards,” while Ng
Kit Ho, the head of debt capital markets
in Malaysia for RBS, points out that the
market as a whole has been slow, not just
the Sukuk market. “We expect the market
to rebound in line with the rest of global
liquidity,” he notes.
In fact Bateman believes that it is
happening already. “Arguably, the
US dollar Sukuk market has already
rebounded strongly,” he suggests.
Having peaked in May 2013 at a level of
Halfway there: Sukuk so far
Continued from page 1
continued...
Figure 1: Evolution of Sukuk yields in the GCC January 2012 to mid-February 2013
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
(%)
Jan25,2012
Feb25,2012
Mar25,2012
Apr25,2012
May25,2012
Jun25,2012
Jul25,2012
Aug25,2012
Sep25,2012
Oct25,2012
Nov25,2012
Dec25,2012
Jan25,2013
Sukuk yield

4. 4©
31st
July 2013
COVER STORY
148.822, the HSBC/NASDAQ Dubai US
Dollar Sukuk Index fell to a 10-month
low of 142.144 in June 2013, before
rebounding to a recent level of 146.212,
suggesting that the market is already on
its way back up.
Malek is equally positive. “Sukuk issuance
volumes will really start to pick up steam
again in the first quarter of 2014. With
US$35 billion in GCC bonds and Sukuk
maturing in 2014, the refinancing needs
of regional borrowers will ensure that the
supply-side dynamics remain supportive
of issuance.” Moreover, entering into 2014,
the Sukuk market remains buoyed by
sound fundamentals such as expansionary
fiscal policies by GCC governments and
massive infrastructure spending which
will provide an impetus for state-linked
borrowers to tap the Sukuk market and
mobilize the significant liquidity parked
on the balance sheets of Islamic financial
institutions.
However, Abradat Kamalpour, a partner
at Ashurst in London, is less optimistic:
“I think the market is at least a good
six to 12 months away from starting
to rebound... One issue is that a lot of
the international banks (who take the
lead on many deals) are restructuring
themselves, and this inevitably leads to
delays on transactions.”
A healthy pipeline
This might be true, but according to
most market players the pipeline of
deals coming to market is looking good,
suggesting that all is not as black as it’s
painted. Miller confirms a “reasonably
healthy pipeline,” noting that: “We have
more than half a dozen transactions at
varying stages of progress. It is always
difficult to predict the markets and
unanticipated extraneous events are
always a possibility; but that aside we
think it ought to be quite easy for the
taps to be turned on again once we get
through summer and Ramadan.”
Anzal of Allen & Overy agrees:
“We are advising on a number
of transactions which are in the
execution phase and we expect
the last quarter of this year to
be particularly busy.” Ben
Moylan, a partner in the
Qatar office of Eversheds,
notes that for the Qatar
market too: “There
are deals in the pipeline, with issuers
ranging from financial institutions to
large corporates, and we expect many of
these to come to market in the coming
quarters.”
MARC is also optimistic on the future
for the market, particularly in the Gulf
region. “The long-term prospects of
global Sukuk issuance remain promising
as there is a significant amount of
investment taking place in GCC countries
over the next few years following
government intentions to diversify their
economies away from the oil and gas
sector,” said a spokeperson to Islamic
Finance news.
Overall economic growth looks resilient
in the GCC area and there are reportedly
projects worth more than US$900
billion at various stages of development
throughout the region, including several
mega infrastructure projects that are
being planned or executed, particularly
in the real estate segment. “We believe
that the implementation of these mega
projects would revitalize bond issuances
from these countries,” MARC confirms.
Upcoming sectors
Sukuk activity is also likely to continue
in the Islamic institutional sector and
Miller predicts that it may include
further Tier 1 and Tier 2 issues.
“We also anticipate more regional
sovereign and GRE issuances
which have of course been the
staple for several years. We
may also see the start of
an interesting niche with
some corporate hybrid
issuances in the offing,” he
explains.
Ng of RBS identifies a number of other
key areas to watch: “Some interesting
deals in the pipeline include EXIM
Malaysia, Genting Plantations, Turkish
banks and corporates, Saudi Arabian
banks and utility companies and
Malaysian utility companies.”
New markets
Saudi Arabia is in fact causing
considerable excitement in the market,
as people believe that 2013-14 could
be the year that its Sukuk sector really
takes off. Adulkader Thomas, CEO of
SHAPE Knowledge Services, highlights
that: “Saudi Arabia is a key market to
watch.” Malek agrees: “In light of the
recent successful debut Sukuk by the
Saudi Arabia dairy corporate, Almarai,
we anticipate 2014 to be the year where
Saudi corporates will increasingly
emerge from the shadows and issue
local-currency Sukuk.”
Qatar is another promising market with
impressively strong domestic growth
and expanding domestic credit, which
grew by almost 25% between 2011-12 on
the back of robust public sector lending.
S&P expects credit growth in Qatar to
stay above 20% in 2013, pushing up the
demand for funding by Qatari banks and,
consequently, the level of debt capital
market issuances. Moylan comments
that: “As far as I am concerned, there is
no Sukuk specific slowdown here and
the lack of Sukuk issuances is really part
of a more general ‘wait and see’ attitude
to both debt and equity capital markets
Halfway there: Sukuk so far
Continued from page 3
continued...
Figure 2: Total ringgit Sukuk outstanding, 2005-13
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Islamic

5. 5©
31st
July 2013
COVER STORY
issues over recent months.”
Qatar is embarking upon several major
infrastructure projects over the coming
years and it is accepted that banks in
particular will need to undergo capital
raising in one form or another in order to
fund many of these projects, leading to
an inevitable boost for the Sukuk market.
Moylan however warns that: “As of now,
not all of the contracts associated with
the projects have not been awarded,
and institutions seem to be awaiting
the outcome of these awards and a
consequent clarification of their likely
funding needs, before entering in the
markets, through Islamic instruments or
otherwise.”
Sovereign push
But while these markets are making
strides forward, other new entrants have
a little more work to do. Ng points out
that: “Some of the jurisdictions that have
an interest in issuing Sukuk still have
not or have only just harmonized their
legal framework, e.g. Hong Kong. It
will take time for a first mover to issue a
benchmark and set up a curve. If these
countries are interested and serious
about issuing Sukuk, they will need to set
a curve, which means that the sovereign
or proxy to the sovereign needs to make
the first issuance so that the rest can
follow.”
The coming year is also expected to see
a lot of new markets arriving to tap the
Sukuk sector. Malek notes that: “We’ve
seen a plethora of new sovereigns either
jump on the bandwagon and amend
tax laws and regulatory frameworks
to facilitate the issuance of Sukuk
or indicate a keenness to make their
jurisdictions more Sukuk-friendly.
Oman, Tunisia, Morocco, Kazakhstan,
and Nigeria are amongst a pool of
governments that are expected to explore
Sukuk issuance.”
It is not just in new markets that
sovereigns need to take a stand though.
One other reason for the slowdown in
Sukuk issuance has been the absence of
governments and sovereigns from the
market. Timucin Engen, an associate
director of S&P in Dubai, notes that:
“Looking at the breakdown of global
issuance to date, there was a slowdown
in the sovereign and quasi-sovereign
issuance which drove the overall
relatively lower issuance this year,
whereas the corporate issuance (which
also includes banks) was strong.”
A Dubai-based source agrees that: “We
need to see much more push from
government and government-related
entities to issue Islamic paper. We see
that from Dubai, and we see it in Saudi
Arabia - although Saudi is still very
domestic. I think we will see bonds
moving back towards US dollars as well,
with very little local currency issuance,
and in Saudi, a declining proportion.”
However, the future looks positive and
governments are hoped to move back
into the market towards the end of the
year. Kronfol confirms that: “We expect
sovereigns, quasi-sovereigns and banks
to tap the markets relatively soon.”
Banks drive forward
In fact financial institutions have been a
driving force behind the Sukuk market this
year. Specifically in terms of GCC deals
(both conventional and Sukuk), issuance
over the past 12 months has been very
healthy as banks attempt to capitalize on
the low interest rate environment. “One
particularly interesting development
in the same period was the emergence
of first Tier I issuance structures in the
GCC region by the banks,” notes Engen,
“and these structures were in the form
of Sukuk.” According to S&P, 45% of all
GCC bank debt issued in 2012 was in the
form of Sukuk, and last year GCC banks
issued a total of US$6.7 billion in Sukuk
- representing a year-on-year increase of
136%.
Although long-term interest rates
recently went up which could increase
the cost of funding, this is likely to have
a limited impact on bank activity as
investors continue to search for higher
yields, allowing bond and Sukuk issuers
to secure long-term funds at relatively
low cost. Institutional interest combined
with rapid growth in the GCC banking
sector is expected to continue pushing
this growth forward, and banks will
remain key players in the Sukuk market
in the coming months as they attempt to
replace more expensive issuances with
lower cost Sukuk sources, retiring high-
cost notes.
For example, the National Bank of Abu
Dhabi retired a certain portion of its Tier
2 notes in 2012, while in January this
year the bank used its option to retire its
AED2 billion subordinated convertible
note first issued in February 2008. S&P
confirms that: “Given the need to manage
costs in an environment of limited
revenue growth, UAE banks will likely
maintain their focus on reducing funding
costs. We believe this will keep fueling
issuance in the Gulf.”
A positive end to the year
Despite all this positivity, until there is a
clearer picture of where global economic
growth is heading, investor appetite
is likely to remain remain fragile.
However, the supply-demand imbalance
in the Sukuk market remains, and should
provide something of a cushion from
this global uncertainty and therefore
will continue to underpin appetite from
Sukuk investors.
And there is still hope that 2013 will
finish on a strong note. Although
the year-to-date issuance figures are
relatively lower than last year, S&P still
expects to see a healthy level of issuance
for the remaining period of 2013. Engen
notes that: “We still expect the total
issuance to reach over the US$100 billion
mark this year. We do not see any change
in the positive long-term drivers for the
Sukuk market.”
Halfway there: Sukuk so far
Continued from page 4
Some
interesting
deals in the
pipeline include
EXIM Malaysia,
Genting Plantations,
Turkish banks and
corporates, Saudi
Arabian banks and
utility companies
and Malaysian utility
companies

6. 6©
31st
July 2013
NEWS
DEALS
Profit payment
MALAYSIA: DanaInfra Nasional has
announced that it will be making the first
profit payment to investors of its retail
Sukuk on the 13th
August for the period
from the 8th
February to the 12th
August.
The rate is fixed at 4% a year.
Upcoming Sukuk
SAUDI ARABIA: Tamweel has
announced its plans to issue a corporate
Sukuk Ijarah worth US$235 million on
the 1st
August this year. The issuance
will be made through its SPV, Tamweel
Funding.
Rare structure
SAUDI ARABIA: Dairy company
Almarai has selected the investment
banking arm of Banque Saudi Fransi,
BNP Paribas, HSBC Saudi Arabia and
Standard Chartered to arrange the sale
of its upcoming hybrid Sukuk, reported
Reuters.
Corporate Sukuk
QATAR: Masraf Al Rayan will be
issuing a US$1 billion corporate
Sukuk in August, as announced on the
IdealRatings portal.
Sovereign Sukuk
SENEGAL: The Republic of Senegal will
be issuing a sovereign Sukuk domiciled
in the country, amounting to US$200
million, on the 1st
August, according to
sources.
Sukuk in the pipeline
MALAYSIA: Palm oil producer Genting
Plantations is planning to issue a 15-year
Sukuk program worth RM1.5 billion
(US$468.62 million) via its SPV Benih
Restu, which has been rated ‘AA2(s)’
with a stable outlook by RAM Ratings.
The rating agency also reaffirmed
Genting Plantation’s long and short-term
corporate credit ratings at ‘AA2/stable/
P1’. The deal will be advised by Maybank
and OCBC Bank.
Financing secured
SAUDI ARABIA: International
Methanol Company, an affiliate of Saudi
International Petrochemical Company
(Sipchem), has procured a SAR325
million (US$86.64 million) Islamic facility
from Riyad Bank which will mature in
2023.
Final extension?
SAUDI ARABIA: Telecom operator
Zain Saudi’s outstanding US$2.3 billion
Murabahah facility, which was initially
due in 2011, has been extended by five
years; with 25% of the financing due
in the final two years of the extension
period and the remaining 75% on the 31st
July 2018, according to a bourse filing.
The new facility has an 18% deduction
in profit margin with the possibility of a
further reduction in the future.
Malaysia offers boost to
Japan’s Islamic finance efforts
GLOBAL: Malaysian prime minister
Najib Razak and the Japanese premier
Shinzo Abe met in the political capital
of Malaysia, Putrajaya, on the 25th
July,
to discuss their intentions to renew a
bilateral swap agreement which expired
in October 2007. Also on the agenda was
the topic of Islamic finance, and Najib
commented that Malaysia is looking
forward to receiving inward investment
from Japanese enterprises, financial
institutions and investors to engage in
Islamic finance-related activities. He also
added that Malaysia would like to offer
technical assistance to Japan in relation to
this sector.
On the sidelines of the event, Malaysian
government investment arm 1MDB
signed an agreement with the Japan Bank
for International Cooperation (JBIC) to
open opportunities for both countries to
benefit from Samurai bonds under the
Guarantee and Acquisition toward Tokyo
market Enhancement (GATE) facility.
JBIC has since 2006 expressed its
intention to issue a Sukuk, but has yet
to come to market. Speaking to Islamic
Finance news, a Japan-based lawyer
commented on the latest initiative
between the two governments, saying:
“Although we have not seen significant
activities in the Islamic issuance market
in Japan following the amendments to
the laws on securitization, it is hoped that
such initiatives will increase the chances
of Japan issuing a Sukuk in the country.
We have been considering this, and the
Japanese government has been keen
to accept Islamic money in Japan. The
environment, following the amendments
to the law, has already been primed for
such issuances.”
Although there have not been any
domestic Islamic issuances within the
Japanese market itself, several Japanese
corporations have raised Sukuk outside
of the country, including AEON Credit,
Toyota Corporation and Nomura
Holdings. The Bank of Tokyo Mitsubishi-
UFJ’s Malaysian operations also recently
affirmed that it will be rolling out more
Islamic financing products in the coming
year to satisfy rising demand from
consumers and investors.
DEAL TRACKER Full Deal Tracker on page 32
ISSUER ISSUING
CURRENCY
SIZE (US$) DATE
ANNOUNCED
Genting Plantations RM 465.31 million 26th
July 2013
Republic of Senegal US$ 200 million 25th
July 2013
Masraf Al Rayan US$ 1 billion 25th
July 2013
Tamweel US$ 235 million 25th
July 2013
Bank Asya TRY 519.23 million 23rd
July 2013
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7. 7©
31st
July 2013
NEWS
AFRICA
Debut index
EGYPT: Investment firm NAEEM
Holding and IdealRatings have teamed
up to establish the first real-time Shariah
compliant index for Egyptian stocks,
the NISE25. The index will comprise of
the top 25 Shariah compliant stocks in
the republic that fulfil the criteria set by
NAEEM’s Shariah board.
Shariah banking for all
TANZANIA: Zulfikar Chando, the
head of BancABC Tanzania’s corporate
services, has urged other banks in the
East African country to offer Islamic
banking products, while highlighting
the significance of Islamic finance to the
republic’s economy.
Sukuk hangs in the balance
EGYPT: In his first press conference,
newly-appointed finance minister
Ahmed Galal revealed that US$9 billion
in aid by Saudi Arabia, the UAE and
Kuwait will be used to strengthen the
republic’s foreign currency reserves
while another US$3 billion will be used
to procure strategic commodities. The
minister also said that the role of Sukuk
in the republic’s economy has yet to be
determined.
Product improvement
SOUTH AFRICA: Absa Islamic Banking
has revamped its Shariah compliant
cheque account to include services which
allow customers to recover some of their
monthly bank fees. The bank’s Islamic
cheque value bundle is the first Shariah
compliant product of its kind to be
introduced globally.
AMERICAS
Legal breakthrough
US: The US bankruptcy court for the
southern district of New York has
recently approved the country’s first
Shariah compliant debtor-in-possession
financing and exit financing package
in Arcapita Bank’s bankruptcy cases.
The court’s decision bears testament to
the permissibility of Shariah compliant
financing in the US Bankruptcy Code
as well as the adaptability of the US
bankruptcy system to alternate forms of
financing.
ASIA
Heightened concerns
TURKEY: Ali Babaçan, the deputy
prime minister of Turkey, has expressed
concerns over the low market share
of participation banks in Turkey. “The
participation banks’ share in assets and
funds is 5% and 6%, respectively. These
figures are below our desires,” he said
during an Islamic finance conference in
the republic.
Regional expansion
MALAYSIA: In line with the central
bank’s ambitions to internationalize
Islamic finance, Maybank Islamic intends
to strengthen its presence in neighboring
ASEAN countries after solidifying its
position in Singapore and Indonesia,
according to Muzaffar Hisham, the
bank’s CEO. Maybank Islamic currently
has four million depositors with a
deposit value of RM70 billion (US$21.86
billion).
Seeking improvement
MALAYSIA: EXIM Bank (Export-Import
Bank) of Malaysia intends to boost its
Islamic financing portfolio from its
current 20% share to reach approximately
30% of its total financing disbursements
by 2015, according to Adissadikin Ali,
the bank’s managing director and CEO.
He also said that the bank is anticipating
a lower non-performing financing rate
this year from the current 10%, due to
improved financial vigilance.
Special assistance scheme
BANGLADESH: The IDB has decided
to admit Bangladesh into its four-year
Member Country Partnership Strategy
program in September. Under the
program, the IDB will provide significant
financial assistance of up to US$17.6
billion for the country’s infrastructure,
agriculture, education and import-
export sector, through its subsidiaries
including the International Islamic Trade
Finance Corporation (ITFC) and the
Islamic Corporation for the Insurance of
Investment and Export Credit (ICIEC).
Managing the flood
MALAYSIA: The Malaysian central bank,
Bank Negara Malaysia, has intervened to
absorb excess liquidity from the financial
system. The bank estimated liquidity as
at the 29th
July to stand at RM5.32 billion
World’s tallest office building
to be part-funded in a Shariah
compliant manner
UAE: Standing at an estimated 520
meters high, the upcoming commercial
building project — which will involve
the Dubai Multi Commodities Center
(DMCC) — is expected to draw upon
Shariah compliant funding as part of its
financing package, said the chairman
of the DMCC Ahmed Sulayem in a
recent interview with a Gulf daily.
The construction, which is estimated
to cost US$1 billion, is expected to be
completed by 2018 — five years from the
commencement of the project.
The DMCC was set up as a government
initiative to facilitate the trade flow
of commodities through Dubai, and
runs the Jumeirah Lake Towers Free
Zone, which is a free-zone commercial,
residential and retail space available
for leasing and sale. According to the
DMCC chairman, since the center’s set-
up in 2002, the value of gold traded has
increased from US$6 billion in 2003 to
reach US$70 billion in 2012 — making up
25% of the world’s physical gold trade.
As at June 2013, there were 6,890
companies registered under the
DMCC, with more than 1,200 signing
up in the first half of this year alone —
exceeding the entire total number of new
registrations in 2011.
continued...
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8. 8©
31st
July 2013
NEWS
(US$1.65 billion) for Islamic funds. As
part of its RM6 billion (US$1.86 billion)
range maturity program, it will be
announcing three Wadiah tenders worth
RM900 million (US$280.31 million) for
seven days, RM500 million (US$155.73
million) for 14 days and RM400 million
(US$124.58 million) for 28 days.
Financing approved
AZERBAIJAN: The board of directors
of the IDB has given its preliminary
consent to commence the US$137
million agricultural irrigation project
in the landlocked enclave of the
Nakhchivan Autonomous Republic. The
Azerbaijani government’s next move
would be to complete the development
of the project.
Reaching the masses
PAKISTAN: Speaking to a local daily
Mujeeb Baig, the head of product
development at Karachi-based MCB
Bank, has revealed plans to enhance
its Shariah banking network. The bank
will be opening new branches and sub-
branches in different cities across the
country.
EUROPE
Europe focus
LIECHTENSTEIN: Islamic finance
legal network iSfin has partnered with
business and tax law firm ILG, making
the latter its exclusive representative for
Liechtenstein.
GLOBAL
Delayed takeover
GLOBAL: Due to ongoing negotiations
since late 2012, Masraf Al Rayan has
exceeded the previous deadline to extend
a takeover offer to the Islamic Bank of
Britain. As a result, the time limit for the
buyout has been extended to the end of
August this year.
Socio-economic support
GLOBAL: The IDB has signed an
agreement with the Yemeni government
to provide up to US$18.3 million for
the financing of rural and industrial
projects in Yemen. An amount of US$15
million will be allocated to develop
several infrastructure projects in rural
areas of Yemen, while another US$3.3
million will be given to the Deauville
Partnership’s Transition Fund, to be
invested in comprehensive research for
the development of the Al-Hudaydah
industrial area.
The IDB has also pledged support
towards development projects to be
carried out by Sierra Leone’s Ministry
of State for Finance and Economic
Development, and National Commission
for Social Action.
Sukuk decline
GLOBAL: According to data compiled
by Bloomberg, the number of Sukuk
auctions in the GCC has decreased by
29% in 2013 compared to 17% last year.
The drop in the GCC, the newswire said,
follows the US Federal Reserve’s action
of scaling back on its quantitative easing
program.
British auction
GLOBAL: Sovereign wealth funds
from Qatar, Kuwait and Singapore are
believed to be interested in acquiring a
stake in Lloyd’s Banking Group. In the
coming weeks, the UK government will
be selling 39% of the bank’s holding,
worth approximately GBP20 billion
(US$30.75 billion), in three tranches.
The first tranche will be offered to
existing institutional investors at a 5-10%
discount, followed by the second tranche
in spring, also to institutional investors
and the retail offering to be debuted in
summer 2014.
New territory
GLOBAL: Emirates NBD Capital
intends to provide Sri Lankan banks
with Islamic-structured financing, as it
looks to find its niche in the South Asian
republic’s corporate sector, according
to its CEO, Mohammad Wajid Kamran.
He also highlighted the suitability of
Sukuk to fund Sri Lanka’s upcoming
infrastructure products.
Eastern footing
GLOBAL: Qatar National Bank, which
has an Islamic banking unit, has opened
a representative office in the Shanghai
World Financial Center. The bank aims to
extend intermediary services to Middle
Eastern companies seeking to establish
their business or investments in China
while acting as a liaison for Chinese
continued...
continued...
Startup Village to benefit
from Shariah compliant
financing
INDIA: India’s answer to Silicon
Valley, the Startup Village in Kerala,
will receive INR150 million (US$2.53
million) from Cheraman Financial
Services’Alternative Investment Fund.
The fund, which received approval from
the Securities and Exchange Board of
India in April this year, targets Shariah
compliant investments in the service and
manufacturing sectors.
The Startup Village is India’s first
technology business incubator based on
the model of public-private partnerships.
The initiative is supported by the
government of India, the Department
of Science and Technology, Technopark
Trivandrum and MobME Wireless.
The village, which was launched early
last year, aims to incubate 1,000 product
start-ups over the next 10 years and
will focus primarily on student start-
ups from college campuses. It aims to
provide a platform for start-ups to create
breakthrough technologies for the global
telecommunications industry.
The incentives afforded to new
companies include a three-year tax
exemption from the government
and funding of up to INR10 million
(US$168,782), as well as subsidized fees
for tax consultations, infrastructure and
IP services.
Cheraman Financial Services, which
is also known as Al Barakah Financial
Services, was established under an
equity participation with the Kerala State
Industrial Development Corporation and
private investors; the majority of which
are from the Gulf.
As at the 22nd
April 2013, the fund was
listed under Category II of the Securities
and Exchange Board of India which
includes private equity funds, debt funds
and funds of funds. According to the
regulator’s website, funds registered
under this category are not allowed any
specific incentives or concessions from
the government or regulator.
Cheraman Premium Fund I is the first
scheme from the company which aims
to carry out private equity investments
totaling INR250 million (US$4.21
million).

9. 9©
31st
July 2013
NEWS
companies looking to expand into the
Middle East.
University tie-up
GLOBAL: Hamdan Bin Mohammed
e-University entered into a cooperation
agreement with the Open University
of Catalonia for the development of
customized Islamic banking and finance
courses for the Spanish university.
MIDDLE EAST
Tailored services
UAE: Abu Dhabi Islamic Bank has
partnered with the Dubai Education
Zone to provide customized banking
services and products — including
discounts to the latter’s employees,
while also designing Islamic banking
educational courses for its working
professionals.
Successful deployment
UAE: Al Hilal Bank has integrated
ETHIX-Profit Computation and
Distribution Islamic banking system from
International Turnkey Systems.
Mutual cooperation
OMAN: Shariah compliant Bank Nizwa
and Ahlibank’s Al Hilal Islamic Banking
Services have signed into a Wakalah
agreement to facilitate the banks’
interbank placement.
License approved
OMAN: Shariah compliant Bank Nizwa
has obtained an investment banking
license after six months in operation,
allowing the bank to manage funds and
issue Islamic financial instruments.
Lack of financing for new
projects
UAE: Improved sentiment in the UAE
property market, which has been pegged
to an overall improvement in the Dubai
economy, and a return to the market by
major developers, has spurred demand
for residential property across Abu
Dhabi, Dubai and Sharjah. In the first
half of the year rental prices continued
to grow at an upward trend, and while
prices are not expected to fall due to
strong demand, a lack of financing for
new development projects is expected to
stall growth to some extent.
A recent report by property consultants
Asteco expects the Dubai residential
market to continue to see new project
launches, recommencements of stalled
projects and handovers. However, it said
that although a number of previously
stalled projects have recommenced
construction, other developments have
been put on hold due to lack of available
finance.
Government backing
BAHRAIN: The minister for industry
and commerce in Bahrain, Dr Hassan
Fakhro, has said that the government
will support all Bahraini investment
initiatives undertaken in the kingdom
and overseas in a bid to enhance its
economy. Bahraini businesses were hit
hard following the 2009 credit crisis and
are still struggling to find their footing
four years on.
RESULTS
ABC Islamic Bank
BAHRAIN: ABC Islamic Bank reported
a net profit of US$6 million for the first
six months of 2013, recording an increase
of 49% compared to the same period last
year.
The bank’s total operating income rose to
US$8.3 million in the first half, compared
to US$7.4 million in the corresponding
period last year, while its operating
expenses decreased to US$2.2 million
compared to US$2.7 million in the same
period last year.
Abu Dhabi Islamic Bank
UAE: Abu Dhabi Islamic Bank has
recorded a net profit of AED371.4 million
(US$101.09 million) in the second quarter
compared to AED322.6 million (US$87.8
million) in the corresponding period last
year.
Ahlibank
OMAN: Ahlibank, which operates Al
Hilal Islamic Banking, announced a
6% increase in net profit for the first
half of the year to OMR12.5 million
(US$32.37 million) against OMR11.8
million (US$30.56 million) from the
corresponding period last year; while
its operating income grew by 7% to
OMR24.3 million (US$62.93 million).
The bank’s total assets stood at OMR1.3
billion (US$3.37 billion) as of the 30th
June, marking a 23% accretion.
Emirate aims high with the
launch of the Dubai Center for
Excellence in Islamic Banking
& Finance
UAE: The 24th
July saw the launch of a
groundbreaking initiative by Hamdan
Bin Mohammed e-University (HBMeU),
in line with the Dubai government’s
aspirations of becoming the world’s
leading Islamic economy. Sheikh Hamdan
Mohammed Rashid Al Maktoum, the
crown prince of Dubai and the chairman
of the Dubai Executive Council and
president of HBMeU, launched the
Dubai Center for Excellence in Islamic
Banking & Finance, which aims to
support human capital development in
the Islamic banking and finance sector in
the emirate and on a global scale through
the implementation of a comprehensive
curriculum encompassing human capital
development, research and community
service.
The research aspect of the center
will include the advancement of the
professional and theoretical foundation
for Islamic banking and finance, while on
the community side, the center will aim
to provide Islamic banking and finance
education to a wider audience within
the Middle East and overseas. Adopting
a four-tier approach in its academic
system, the learning center seeks to
enhance human capital development in
stages subject to a learner’s commitment
and competency level.
The initiative is part of the Dubai
government’s plan, unveiled in February
this year, to become the world’s premier
Islamic economy. According to officials,
the center represents an integral part of
this plan which includes the creation
of an arbitration center for dispute
resolution in Islamic finance, as well
as the creation of a Shariah council to
oversee standards on Islamic finance.
The center’s advisory board consists
of an impressive lineup of industry
stalwarts, including Dr Yusuf DeLorenzo,
the chief Shariah officer and board
member at Shariah Capital; Professor
Dr Syed Othman Al Habshi, the chief
academic officer of INCEIF; Rodney
Wilson, Emeritus Professor at Durham
University UK & INCEIF; Neil Miller,
the global head of Islamic finance at
Linklaters; Dr Fahim Khan, the chairman
of Riphah Center of Islamic Business; and
Dr Khaled Al Fakih, the secretary-general
of AAOIFI.
continued...

10. 10©
31st
July 2013
NEWS
Al Khaleej Takaful Group
QATAR: Al Khaleej Takaful Group has
registered a decrease in first half net
profits to QAR28.3 million (US$7.76
million) from QAR59 million (US$16.19
million) in the same period last year.
Arab Bank
JORDAN: Amman-based Arab Bank,
which provides Islamic banking services,
reported a 7.5% increase in profits to
US$387 million for the first six months
of 2013. The bank also foresees a
double-digit growth this year based on
the steady growth in its net operating
income.
Barwa Bank
QATAR: Barwa Bank has witnessed an
increase of 85% in half-year profits to
QAR303.6 million (US$83.3 million),
compared to QAR162.9 million (US$44.7
million) in the corresponding period last
year. The bank saw a 10% increase in
total assets to QAR27.8 billion (US$7.62
billion) while its earnings per share rose
from QAR0.55 (US$0.15) to QAR1.01
(US$0.27).
Commercial Bank of Dubai
UAE: Commercial Bank of Dubai, which
operates Shariah compliant Attijari Al
Islami, reported a 2.3% increase in net
profit to AED497 million (US$135.28
million) in the first half of the year
from the same period in 2012; while
its operating income grew by 4.6% to
AED983 million (US$267.57 million).
The bank’s total assets stood at AED42.4
billion (US$11.54 billion) as at the 30th
June, marking a 7.7% growth from the
corresponding period last year.
Finance House
UAE: Independent financial and
investment firm Finance House
recorded a consolidated net profit of
AED56.5 million (US$15.38 million)
for the first half of the year while its
net interest income increased by 7.5%
to AED64 million (US$17.42 million),
compared to the first six months of
2012. The company’s Islamic financing
and investing assets stood at AED100
million (US$27.22 million) as of the 30th
June, marking a 54% growth against the
corresponding period last year.
First Gulf Bank
UAE: First Gulf Bank, which has an
Islamic window, reported an increase
of 15% in profits to AED1.17 billion
(US$318.45 million) in the second quarter
of this year.
Jordan Islamic Bank
JORDAN: Jordan Islamic Bank recorded
a profit of JOD14.7 million (US$20.68
million) in the second quarter, marking
a 21% growth from the corresponding
period last year.
National Bank of Kuwait
KUWAIT: National Bank of Kuwait
registered a 6.4% year-on-year increase
in net profits to US$450.3 million for
the first six months of 2013 and a 25.3%
growth in total assets totaling to US$62.8
billion as of the 30th
June 2013. The bank’s
operating income grew by 18.3%, due
in part to the bank’s increased stake in
Shariah compliant Boubyan Bank.
Masraf Al Rayan
QATAR: Masraf Al Rayan recorded a
13% accretion in net income for the three
months ended the 30th
June totaling
to QAR421 million (US$115.6 million)
from the last quarter. The bank’s shares
reached QAR28.1 (US$7.7), marking a
1.3% increase on the 23rd
July. The bank
is Qatar’s largest Shariah compliant bank
by market value.
Mashreq Bank
UAE: Mashreq Bank, the parent company
of Mashreq Al Islami, announced a
40.1% rise in net profit for the first
half of the year totaling to AED828
million (US$225.38 million) against the
corresponding period in 2012 while
second quarter earnings grew by 24.7%
to AED402.6 million (US$109.59 million)
from the same period last year.
National Bank of Abu Dhabi’s
second quarter profit up by
16%
UAE: As the UAE’s real estate market
sees a gradual recovery in average
property prices in Abu Dhabi and Dubai,
as well as an improvement in liquidity in
the banking system, the National Bank
of Abu Dhabi (NBAD) has recorded an
increase of 16% in second quarter profits.
The bank’s net income rose to AED1.21
billion (US$329.34 million) from AED1.05
billion (US$285.79 million) in the same
period last year, while its net income
from Islamic financing contracts as at
the 30th
June stood at AED149.09 million
(US$40.58 million). Its net interest and
Islamic financing income grew by 7.5%
from the corresponding period last year
to AED3.2 billion (US$870.99 million).
NBAD also reported a 21.8% rise in
operating profits to AED3.3 billion
(US$898.21 million) from the first half
of 2012, with a 3% growth in its Islamic
banking business. With regards to its
Egyptian operations, the bank, which is
rated ‘Aa3’ by Moody’s, said that it will
continue to closely monitor the situation
in the republic, and does not anticipate
any material impact to its overall
business.
Overall growth in the UAE is expected to
dampen this year, mainly due to slower
growth in hydrocarbon production.
However, analysts at NBAD believe
that this will be mitigated by increased
non-oil activity in the region. Net loan to
deposit ratios in the UAE are currently at
their lowest levels of the last few years,
contributing to improved liquidity, while
lending growth, although so far modest,
is seen to be picking up.
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11. 11©
31st
July 2013
NEWS
Public Bank
MALAYSIA: According to Kenanga
Research, Public Bank’s Islamic banking
business saw a small increase of 1.3%
quarter-on-quarter and a slight decline
of 0.5% year-on-year. The bank’s
total income, however, grew 6.5% in
the second quarter compared to the
corresponding period last year.
ASSET
MANAGEMENT
Inaugural closing
MALAYSIA: CIMB-Mapletree
Management, a joint venture between
Malaysia’s CIMB Group and Singapore-
based Mapletree Investments, recently
closed its Islamic private real estate
fund, the CMREF 2 Shariah Fund, said
to be the first of its kind in Malaysia. The
Malaysia-domiciled fund has a size of
approximately RM450 million (US$141.57
million) and invests in Shariah compliant
core assets.
Top of the table
MALAYSIA: Hwang AIIMAN PRS
Shariah Growth Fund, managed by
Hwang Investment Management, has
recorded a 19% growth to become the
fund manager’s number one performing
fund. The local Islamic private retirement
scheme fund, along with Hwang
Investment’s other three funds, declared
a 2-4% interim income distribution for
the nine-month period ended the 31st
July.
Opening doors
GLOBAL: US-based Azzad Asset
Management has approached the South
African ambassador to the US to discuss
potential Halal investment opportunities
in the African republic, under the
former’s Shariah compliant Azzad Wise
Capital Fund.
Widening reach
SAUDI ARABIA: With a plan to source
two-thirds of its assets under management
from outside Saudi Arabia within four
to five years in order to widen its client
base outside traditional Islamic regions
of the Middle East and Southeast Asia,
investment firm Sedco Capital intends
to register its Shariah compliant funds
— which are also environmental, social
and governance (ESG) compliant funds
— in Switzerland and create distribution
channels via private banks. The firm will
be entering into two strategic agreements
with established private banks by the end
of the year, according to its CEO Hasan Al
Jabri.
TAKAFUL
Takaful protection
MALAYSIA: Malaysian Deposit
Insurance Corporation, also known as
Perbadanan Insurans Deposit Malaysia
(PIDM), has reported an increase of 9%
in its Takaful and insurance benefits
protection funds to RM1.08 billion
(US$339.75 million) from RM991.2
million (US$311.82 million) at the
end of 2011. The fund proceeds are
collected from levies paid by Takaful and
insurance operators.
Legislative will
TURKEY: Subject to legislative
endorsements, Al Baraka Turk has
notified Turkish authorities of its
intention to found an Islamic insurance
company in the republic. Turkey
currently lacks the legal basis for the
formation of Takaful firms.
Profit distribution
MALAYSIA: Almost 300,000 certificate
holders of Prudential BSN Takaful’s
Ordinary Family Takaful Plan will
receive a proportionate rate of the
surplus from the plan’s Tabarru’ funds
amounting to RM7.5 million (US$2.35
million). At the same time, the company
will also distribute RM11.3 million
(US$3.54 million) in investment profits to
486,000 eligible participants.
Outsourcing service
SAUDI ARABIA: Cooperative insurance
operator Wataniya Insurance Company
has engaged Shariyah Review Bureau to
act as the firm’s Shariah advisor, whereby
the latter will oversee the Shariah
compliance needs of the operator.
Turkish venture
GLOBAL: Khazanah Nasional’s
insurance arm, Avicennia Capital, has
purchased a 90% stake in Acibadem
Sigorta, Turkey’s second-largest health
insurance provider. Avicenna Capital’s
portfolio includes CIMB Aviva Takaful,
CIMB Aviva Assurance and Singapore’s
Takaful reinsurer, ACR Capital
Holdings.
RATINGS
Negative outlook
MALAYSIA: KNM Capital’s RM300
million (US$94.15 million) Murabahah
underwritten notes issuance facility/
Islamic medium-term notes program has
been downgraded by MARC to ‘MARC-
2ID/A-ID’ from ‘MARC-1ID/A+ID’ while
its outlook remains on MARCWatch
Negative. KNM Capital is the SPV of
investment holding company KNM.
Ratings assigned
UAE: Sharjah Islamic Bank’s financial
strength rating has been reaffirmed at
‘BBB+’ by Capital Intelligence while its
long and short-term foreign currency
ratings have been rated ‘A-’ and ‘A2’,
respectively. All ratings carry a stable
outlook.
Egypt affirmed negative
EGYPT: Moody’s has affirmed the
government bond rating of Egypt at
‘Caa1’, with a negative outlook.
Weak ratings
MALAYSIA: Binariang GSM (BGSM)’s
RM2 billion (US$622.92 million) Islamic
commercial papers program, RM19
billion (US$5.92 billion) Islamic medium-
term notes program and US$900 million
junior Sukuk have been downgraded
by RAM from ‘P1’, ‘AA3’ and ‘A2’,
respectively, to ‘P2’, ‘A2’ and ‘BB1’.
The downgrades reflect the weak
performance of Aircel, a subsidiary of
Maxis Communications, of which BGSM
is the immediate holding company. The
ratings have also been placed on negative
watch.
MOVES
Emirates Islamic Bank
UAE: Yakub Bobat has been appointed
as the head of corporate banking at
Emirates Islamic Bank. He brings with
him 25 years of experience in both
Islamic and conventional finance, and
was previously the global head of HSBC
Amanah Commercial Banking.

12. 12©
31st
July 2013
SHARIAH
PRONOUNCEMENT
Query:
A customer has approached an Islamic bank seeking finance to purchase a property which is mortgaged to a
conventional bank against conventional loan payable by the owner of the property.
Shariah guidance is sought on how the Islamic bank can finance the purchase of the mortgaged property for its
customer.
Pronouncement:
The property may be financed through various modes such as Ijarah, Murabahah or Musharakah. However, we
shall discuss the Murabahah mode of financing as a solution, whereby the bank will purchase the property from the
existing owner and will sell the same to its customer on deferred price, after adding agreed profit to the cost.
As explained in the query, the owner of the property is not in a position to pay the bank’s debt from his own sources
to get the mortgage released so that he could sell it to the Islamic bank. The sale price of the property is higher than
the outstanding mortgage amount. On the other hand, the conventional bank will not agree to release the mortgage
before full settlement of its outstanding loan.
In the above scenario, Shariah permits the Islamic bank to purchase the mortgaged property from the owner
by entering into purchase agreement with him, subject to the seller first obtaining written confirmation from
the conventional bank addressed to the Islamic bank that it will release the mortgage upon full payment of the
outstanding mortgage amount.
The seller will request the Islamic bank to disburse the sale proceeds in two parts: with the first payment to be made
to his account with the conventional bank so that he can use it to settle his liability with the conventional bank, and
the balance released to the seller by way of manager’s cheque.
For avoidance of doubt, in the given scenario the Islamic bank will not pay to the mortgagee bank any interest-
bearing loan payable by the seller. Rather it will simply pay part of the purchase price to the seller’s account with
the conventional bank, which shall then be used by the conventional bank to settle the seller’s outstanding mortgage
amount, while the balance purchase price of the property will be paid directly to the seller.
Once the clear title and constructive possession has passed to the Islamic bank pursuant to the release of the
mortgage by the conventional bank, the Islamic bank will sell the property to its customer on a Murabahah basis.
The Islamic bank will have the right to get the property mortgaged to it until full payment of the Murabahah amount
by the customer.
Dr Hussain Hamed Hassan
Chairman of the DIB Shariah Board
Managing director, Dar Al Sharia Legal & Financial Consultancy
Dubai, UAE
This Fatwa is brought to you exclusively by IFN in collaboration with Dar Al Sharia Legal & Financial Consultancy-Dubai. The Fatwa appearing in this space are
those which were obtained by Dar Al Sharia for their client institutions and depict issues faced. This Fatwa was compiled by Dr Muhiuddin Ghazi.
www.daralsharia.com
SHARIAH PRONOUNCEMENT

13. 13©
31st
July 2013
IFN REPORTS
Last week a New York bankruptcy
judge approved the sale of 3PD, a
subsidiary of the bankrupt Arcapita,
to Atlanta-based XPO Logistics
for a reported US$365 million, in
its continued progress back from
bankruptcy with a new multi-million
loan package from Goldman Sachs.
Arcapita, a leading Islamic investment
company with widespread private equity
holdings and investments in the US,
filed for Chapter 11 bankruptcy in March
2012 after it failed to obtain the 100%
lender consent it needed to restructure
a US$1.1 billion syndicated facility set
to mature the same month. At the start
of its bankruptcy the firm had interests
in 39 companies and US$7 billion in
assets under management, with minority
interests in 80% of its investments.
However, it commenced proceedings
with just US$120.1 million in available
funds, which primarily went to fund
existing deals in order to preserve its
portfolio’s asset value.
In order to complete its restructuring
Arcapita entered into a US$150 million
Murabahah financing agreement with
Fortress Credit, a New York-based
investment management firm. Only
around 40% of this debtor-in-possession
(DIP) package, which accrued profit at
a rate equal to one-month LIBOR plus
a 10% margin per year on the unpaid
principal as well as a 3% upfront fee, was
repaid; with an outstanding amount of
around US$105 million maturing on the
14th
June.
In May this year, therefore, Arcapita
negotiated a new US$150 million
Murabahah bankruptcy loan with
Goldman Sachs in order to meet its
obligations to Fortress, along with a
US$350 million exit financing package
to steer it out of bankruptcy. The
replacement DIP facility is reportedly
almost identical to the original Fortress
structure, with an annual profit rate of
8% in cash plus 1.75% payable in kind.
In fact Fortress also made Arcapita a
loan offer of US$350 million, which
the company decided to reject in favor
of Goldman Sachs, despite claims
by Fortress that its offer would fund
Arcapita’s exit at a better price, as well as
excluding administrative fees. Fortress
also would allow Arcapita keep up to
US$30 million in sale proceeds in order
to protect its portfolio investments,
according to papers filed at the US
Bankruptcy Court in New York. In
comparison, Goldman Sachs’ loan was
thought to be less generous, including
placing restrictions on collateral sales,
forcing Arcapita to rely heavily on lender
funds and giving it less control.
“Fortress’s initial disappointment
regarding the debtors’ selection of GSI as
exit lender soon gave way to confusion,”
the firm said in its filing. “Fortress’
proposal is objectively more favorable to
the debtors in nearly every respect ... so it
is unclear why both the debtors and the
committee have lent their support to the
Goldman Sachs proposal.”
In April this year Arcapita filed a new
restructuring plan aimed to steer it out
of bankruptcy, including the sale of a
number of portfolio investments and the
setting up of new firms to be managed
by a Cayman Islands holding company.
This most recent 3PD sale is the latest in
a series of divestments which have been
notable for their orderly pace and focus
on maximizing the recovery of funds for
Arcapita creditors and investors. Despite
the in-fighting and scandal that have
dogged the firm since its filing last year,
it looks as though a way out of the woods
might finally be in sight. — LM
Arcapita continues its steps towards recovery
This past year has seen a rather
capricious international capital market
due in part to optimistic economic
growth prospects worldwide coupled
with concerns over monetary policy in
the US, which has inevitably caused
cross-border effects. However, from an
Islamic finance perspective, the global
Sukuk market has been relatively
shielded from such volatility with the
continued momentum in issuances
amounting to US$26.6 billion in the
second quarter of 2013, according
to a report released by the Malaysia
International Islamic Financial Center
(MIFC).
In the primary market, three main
players dominate the Sukuk issuance
arena commanding a collective market
share of 91% — Malaysia at US$18.4
billion, Saudi Arabia at US$4.5 billion
and the UAE at US$1.4 billion, according
to KFH Research. Issuances of Islamic
bonds in the Southeast Asian nation
have outperformed the previous year
every month since January, with the
exception of a considerable decline in
June. Nonetheless, Malaysian ringgit
issuances continue to outperform US
dollar-denominated offerings at a volume
of US$17.8 billion against the latter’s
US$14.4 billion, as revealed by data
from Dealogic for the past 12 months
(rolling). The first half slump in US dollar
issuances in most domiciles, except the
UAE, is attributed to lower sovereign
issuances.
In the secondary market, Malaysia still
accounts as the largest Sukuk market
with a 60.4% share at US$148.2 billion
in the first half of 2013 while global
outstanding Sukuk stands at US$245.3
billion, marking a 7% accretion from the
end of last year. While it may seem that
the overall Islamic debt market is set for
continued expansion, it is nonetheless
anticipated that following its 25-month
high in yields, which was in tandem
with the rise in overall emerging market
debt, Sukuk issuances will slow down in
the coming months taking into account
the US Federal Reserve’s move to scale
down its quantitative easing program,
according to MIFC. — VT
Global Sukuk market: Truly resilient?
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14. 14©
31st
July 2013
IFN REPORTS
Azzad Asset Management is a
Shariah compliant investment
firm incorporated in the US where
the American Muslim community
represents more than US$200 billion
in spending power. Last week, the
firm approached Ebrahim Rasool,
the South African ambassador to the
US to discuss potential investments
in republic through the Azzad Wise
Capital Fund. The fund primarily
invests in notes and certificates issued
for payment by international financial
institutions, foreign governments,
and agencies of foreign governments
in transactions tailored to the fund’s
ethical investment guidelines.
South Africa has one fully-fledged
Islamic bank and four conventional
banks that offer Islamic financial
products such as vehicle and asset
financing as well as pension funds.
Azzad is reportedly in the initial stages
of research for possible investments
in profit and loss sharing accounts at
these banks, and similar to the fund’s
investment schemes in Turkish banks,
the firm is looking to diversify the
Islamic banking portion of its Azzad
Wise Capital Fund portfolio.
According to Joshua Brockwell, the
firm’s investment communications
director, in his conversation with the
South African ambassador, he noted
that the country has made significant
progress in Islamic finance in the recent
years. The growth is mainly attributed
to the partnership between the local
Muslim community and their business
interests. Apart from South Africa, the
firm has also visited several Islamic
institutions in Indonesia with an eye to
venture into microfinancing projects in
rural areas of the republic. — NA
US asset management firm sets sights on South Africa
A recent report by the Kuwait
Financial Center (Markaz) states that
currently more than US$900 billion
in construction projects are at various
stages of development throughout the
GCC, with real estate accounting for
over half of that, with US$516 million in
deals in the pipeline.
The main contributing factor to this real
estate boom is urbanization, an influx
of expatriate labor and the relaxation
of foreign ownership rules on GCC real
estate. There has also been a shift in focus
from high income groups to lower and
middle income groups, while there are
still many untapped opportunities in
the public-private partnership projects
avenue.
It seems, through recent ongoing
initiatives, that the GCC is striving
— rather successfully — to diversify
its economy away from the oil and
gas sector. Efforts include increasing
government surpluses, enhanced
spending measures and higher
budgetary allocations to infrastructure
development, Markaz wrote.
Despite the abundant opportunities in
the construction sector, there are still
lingering challenges within the GCC
region, with lower growth forecasts
attributed to the slow recovery of the EU
region which could result in fluctuating
oil prices on a global level. Luring in
foreign investments could also be a
challenge due to the weak regulatory
environment in terms of dissemination
and availability of information, shaky
investor protection and poor enforcement
of legal contracts.
Stricter lending requirements that have
been enforced by regulators in the GCC
towards banks however have not put a
dent on their balance sheets, with the
chairman of the Arab Banks Union,
Adnan Yousuf, expecting GCC banks
to record an increase of 20-25% in net
earnings for the first half of this year, on
the back of a 12% growth in credit in the
first quarter, to reach AED2.18 trillion
(US$594 billion). Qatari banks ranked
highest in terms of credit growth at 25%,
followed by Saudi Arabian banks at
12.7%. — NH
Up to US$516 million in real estate projects slated for the GCC
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15. 15©
31st
July 2013
IFN RESEARCH REPORT
LEBANON
Legal and regulatory: Lebanon has
a highly regulated and streamlined
banking sector. With its long-standing
secrecy and fiduciary laws, the country
has witnessed tremendous growth in the
banking sector. Laws relating to Islamic
banking were introduced in 2004. The
absence of controls on the movement
of capital and foreign exchange has
attracted many foreign financial
institutions to Lebanon. Islamic banks
in Lebanon can undertake all banking
services and transactions including
without limitation, forming companies
and participating in projects, as well as
acquiring real property for the purposes
of investment projects.
Banque Du Liban (BDL), the central
bank, requires half of all Islamic
banks’ assets be invested in Lebanon.
They also must have a three-member
Shariah consultative body to approve
and monitor Shariah compliance. With
the formation of the Capital Markets
Authority, there is also a possibility
of Sukuk and other Islamic liquidity
management instruments being
introduced which will in turn help
develop the Islamic banking and Takaful
industries.
Business environment: Lebanon was
a banking hub in the pre-civil war era.
Even with the current challenging
political scenario, it has managed to
keep its economy on track. It has been
successful in significantly reducing its
debt-to-GDP ratio from 175.05% in 2007
to 139.5% in 2013. The human capital
element is also well equipped to further
promote the economy given the average
adult literacy rate of more than 85%.
Controls on the movement of capital and
foreign exchange are fairly relaxed and
the country follows a relatively laissez-
faire economic model.
Products and services: BDL has
promulgated laws under various Shariah
principles that allow investment and
financing to the customers. Lebanese
Islamic banks have developed a wide
range of retail, corporate, SME, private
banking and investment products. These
product lines reflect the breadth in the
already well-developed conventional
banking market. Most products are
based on the Murabahah model but
Musharakah, Mudarabah and Ijarah
models are also applied.
Education and awareness: The Lebanese
education sector has recognized
the need for developing the human
capital for the growing Islamic finance
industry in the country. An Islamic
finance qualification is offered by
École Supérieure des Affaires (ESA)
in collaboration with the Chartered
Institute for Securities and Investment
(CISI), London. Lebanese American
University (LAU) has also formulated
a fully-fledged Islamic banking
curriculum in its MBA program.
Opportunities: Lebanon’s close business
ties with other regional Islamic finance
markets such as Saudi Arabia and
Bahrain could prove supportive in
developing its domestic Islamic finance
market. The partially dollarized economy
can help attract foreign investment, as
is the case with conventional markets.
Lebanese fiduciary and banking
secrecy laws can also play a major role
in attracting Islamic wealth and fund
managers. There is also a strong demand
for Islamic financial products from the
Muslim population, which represents
over 60% of the total population of the
country.
Challenges: The laws and regulations
supporting the Islamic finance regime
need to be made more welcoming to
allow more penetration and depth
required by the players in the industry.
BDL’s restriction on allowing Islamic
window operations by conventional
banks may hinder the growth of Islamic
finance in the country.
A lack of awareness among the people
with regard to Islamic financial products
and services is also a clear challenge. The
call for of Shariah compliant liquidity
management instruments also needs to
be addressed.
Initiatives: BDL has promulgated laws
and issued various circulars to regulate
the Islamic finance industry in Lebanon.
It has jointly organized the Beirut Islamic
Financial Institutions Forum that brought
together various stakeholders of the
Islamic finance industry including the
IDB, AAOIFI, central banks and other
industry players.
Outlook: The Lebanese Islamic financial
industry is well positioned to play a
major role in the Islamic finance industry
in the Middle East. With abundant
liquidity, cash resources and robust
banking regulations it can leverage its
position to consolidate its Islamic finance
infrastructure. The Islamic subsidiary
of one of the largest banks in Lebanon,
Blom Development Bank, saw growth of
42% as at December 2012 over the same
period the previous year.
Notwithstanding the political turmoil in
2006 which resulted in a huge financial
setback, with an estimated fall in growth
from 6% to 2% and US$5 billion (22%
of GDP), Lebanon has attempted to
recover. The influx of large numbers of
refugees from Syria due to the ongoing
conflict is also a matter of concern for
the economy. However, with its strategic
location Lebanon, which was once a
banking hub, has all it takes to regain
its past glory and become a regional
Islamic finance hub.
Mediterranean catapult
This secular Middle Eastern country has the potential to become one of the most sought-after destinations for
Islamic finance in the region, SYED SIDDIQ AHMED explores..
Chart 2: Islamic finance industry
No. of Islamic banks 5
No. of Takaful operators 1
No. of Islamic funds 0
Islamic banking assets US$452 million*
*estimated data for top three Islamic banks for 2013
128.27
140
120
100
80
60
40
20
0
53.67 64.78
90.31
2009
2010
2011
2012
US$million
Chart 1: Total assets of Blom Development
Bank

16. 16©
31st
July 2013
One of the cornerstones of Islamic
finance is the presence of assets in its
transactions. Leasing provides just
that, making it a readily adoptable
proposition for Shariah compliant
businesses.
Market developments: While the global
leasing market leaders are the US, China,
Japan and several European countries,
other Asian and MENA jurisdictions are
yet to catch up to compete with these
industry giants. In the list of 50 countries
that top annual leasing volumes, only
four countries appear that have Islamic
financial markets.
Turkey, which has been at the forefront in
facilitating Shariah compliant business,
last year enacted a new law on financial
leasing which gives benefits in terms of
withholding tax, stamp tax and other
duties for leasing transactions. The new
law, besides spelling clarity in leasing
transactions, also has specific incentives
for cross-border aircraft vessels and
related lease transactions.
With Shariah compliant leasing being
offered by an increasing number of
financial institutions in Sri Lanka,
the Islamic leasing market is poised
for further growth; due in part to the
budgetary concessions and depreciation
benefits afforded to this sector.
The leasing industry in Sri Lanka is
however dependent on short-term
financing sources for funding its long-
term obligations. This might raise an
opportunity to make available medium to
long-term Shariah compliant instruments
for the industry to develop further.
In the Islamic Republic of Iran, the
leasing market has shown considerable
growth: with the two largest sectors,
transport and construction, accounting
for 67% and 11% of new business,
respectively.
Although there are standalone leasing
companies in the MENA region, the
majority of leasing operations are carried
out by banks and related entities. This
is due to their easier access to funding,
while standalone leasing companies have
to rely on other less accessible sources of
funds for their operations. There are also
certain issues that need to be tackled such
as inefficient repossession procedures
that affect the quality of Islamic leasing
portfolios and the income of the leasing
companies at large. At present, there
are an estimated 19 Islamic leasing
companies in the Middle East.
Regulations: The current international
accounting standards for leasing, under
the Financial Accounting Standards
Board (FASB) and International
Accounting Standards Board (IASB),
have issued an Exposure Draft (ED)
calling for public comments on the
proposed new accounting standards for
leasing. The deadline for the comments is
the 13th
September 2013.
It may be too early to conclude the
repercussions but if these changes are
made as explained in the ED, it may
prove favorable to the real estate lessees
but may not be so for the equipment
counterparts.
New regulatory standards under Basel
III which impact conventional and
Islamic financial institutions alike can
have an indirect effect on the leasing
market and may increase the cost of
obtaining funding from bank-regulated
entities and may reduce the volume of
assets deployed by banks to the leasing
industry. Consequently, there might be an
opportunity for non-bank players when
the banks increase their rates to reduce
their exposure to leasing activities.
AAOIFI standards require both operating
Ijarah and Ijarah Muntahia Bittamleek
(lease ending with ownership) to be
treated similar to operating leases.
AAOIFI has issued a standard (FAS 8) to
regulate these transactions.
Opportunities for players: Since leasing
plays an important role in sustainable
private-sector, small and medium-sized
enterprises (SMEs) make substantial
use of leasing to support, develop and
make finance available to the industry.
In countries such as Malaysia and
Indonesia where SMEs play a significant
role in the economy, and coupled with
governmental assistance to Islamic
finance, Shariah compliant leasing holds
much growth potential.
Here, Ijarah leasing remains one of most
popular means of financing for Islamic
financial institutions for automobiles,
equipment and machinery among
others; especially in Malaysia where
SMEs account for more than 90% of all
establishments in the manufacturing,
services and agricultural sectors.
The fact that leased assets require
insurance means that the development
of leasing industry should be concurrent
with growth in the insurance and Takaful
industries, both quantitatively and
qualitatively.
Overall the Islamic leasing industry
holds great potential as it ties in closely
with other growing markets such as
trade finance, asset management and
Takaful.
IFN RESEARCH REPORT
LEASING
Significant deals:
• Novus Aviation Capital, which has
a Shariah compliant aircraft leasing
business in its product range, held
that more than US$5 billion worth
of Shariah compliant leasing and
financing transactions have taken
place globally as of February this
year.
• Bahrain-based Ithmaar Bank in
February 2013 merged with its
associate First Leasing Bank to
consolidate its position as one of
the leading banks offering Islamic
leasing products in the country.
• Japanese Orix Group, which
has a major presence in the
leasing industry, offers Islamic
leasing facilities through local
collaborations in Sri Lanka and
Pakistan.
• Shuaa Capital set up a subsidiary,
Gulf Installments, to provide
Shariah compliant installment and
lease financing mainly to focus on
SME financing.
A new lease of life
With huge investments in infrastructure and construction lined up in the emerging markets there is little doubt
that Islamic leasing will be one of the fastest-growing segments in the Islamic finance industry, SYED SIDDIQ
AHMED discusses.

17. 17©
31st
July 2013
SPECIAL REPORT
Islamic banking is gaining momentum
in traditional as well as in non-
traditional markets and the industry
is likely to maintain the current
trajectory in the foreseeable future.
In many regions, Islamic banking has
evolved from being an emerging ethical
niche market into being a part of the
mainstream financial services landscape.
According to a 2012 survey, there are
more than 716 institutions across the
world that are registered as Shariah
compliant. Of these, 511 are fully-fledged
and 205 operate Shariah compliant
windows within a conventional
institution or are partially separated from
their conventional counterpart.
While Islamic banks have managed to
maintain good revenue levels in recent
years, mostly due to a strong focus on
retail banking, they have struggled with
profitability due to rising costs and
operational inefficiencies.
A recent analysis by Ernst & Young
(E&Y) indicates that Islamic banks have
experienced a decline in profitability
and their average return on equity
(ROE) lags behind that of conventional
banks by 20%. ROE for both Islamic and
conventional banks has deteriorated
since 2008 in the wake of the financial
crisis, but this has dropped to 12% in
2011 for Islamic banks, compared with
15% for conventional banks. The return
on assets (ROA) for Islamic banks
dropped to 1.3% in 2011 from 1.7% in
2008, while it has risen for conventional
banks to 1.7% in 2011 from 1.5% in 2008.
Struggling for profitability
According to ‘The Future of Islamic
Banking’ report by AT Kearney, while
there are a number of factors that
contribute towards this struggle for
profitability, achieving operational
efficiency is a major problem. A more
sophisticated leveraging of the Islamic
banking potential — much of which has
not yet been tapped — is required.
E&Y’s report states that operating
expenses are 50% higher for Islamic
banks. The report shows that wide-
ranging transformation programs
could potentially increase the profit
pool of Islamic banks by 25% by 2015.
The effective use of modern, flexible
technology is key to achieving this.
To compete successfully in an industry
known for its IT aptitude, Islamic banks
are expected to make appropriate
investments in best-in-class core banking
software systems with components
covering business process modeling,
compliance and risk management tools,
and multi-channel delivery gateways
that would enhance banks’ profitability,
performance and ability to innovate.
Winning in a highly promising
industry
In an attempt to meet the demands
of a growing Islamic financial sector,
the industry needs to effectively
implement conventional banks’ use of
IT in Islamic banking: Boom imminent
Technology developments are profoundly influencing the distribution of retail financial services. Day after day,
reformatted branches and alternative channels such as online banking, mobile banking and social media are
gaining widespread adoption. ROSIE KMEID discusses the current situation and looks at what we can expect for
the future.
continued...
400
1,000
800
600
400
200
0
221
280
302 348
345
317 372
391 426 429 457
2007
2008
2009
2010
2011
2012
800
600
400
200
0
2007
2008
2009
2010
2011
2012
163
194 191 199
205205
362 420 435 456 470 511
Source: the banker database.com/Maris strategies
Figure 1: Institutions registered for Shariah
compliant products
Institutions reporting Shariah
compliant assets
Institutions reporting assets
Number of conventional banks with
Shariah windows
Number of Shariah compliant institutions
proportion of their overall income, lower range leverage and are behind the curve technology
enablement
Equity vs. ROE
Islamic Conventional
Indonesia
Turkey
Saudi
Arabia
UAE
Malaysia
Pakistan
Qatar
Malaysia
Qatar
Saudi
Arabia
UAE
Bahrain
Bahrain
Kuwait
Kuwait
Jordan Jordan
Egypt
Bangladesh
Indonesia
Turkey
Pakistan
25%
20%
15%
10%
5%
0%
0 5,000 10,000 15,000 20,000 25,000 30,000 35,00 40,000
Equity US$ million (2011)
AverageROE(2008–11)
Source: Company reports. Ernst & Young Analysis, EY Universe
Figure 2: Average banking ROE/equity by country, 2011

18. 18©
31st
July 2013
SPECIAL REPORT
modern day technology. According to
Muath Mubarak, the head of finance
and corporate strategy at First Global
Academy: “The emerging and niche
Islamic finance market has to stay highly
technology driven in order to maintain
a competitive edge over others and
deliver fast and quality customer service
within Shariah parameters.
“Advanced technology will reduce
cost significantly, as well as manual
workload, inefficiencies, transaction
processing time and so on while
enhancing customer satisfaction with
sophisticated facilities,” he added.
In a recent financial services survey
conducted jointly by the CBI and PwC,
the authors noted that technology
can play a huge role in helping
any organization to transform and
modernize itself.
The quest for operational efficiency and
cost reduction becomes a key focal point
for Islamic banks worldwide. Indeed,
in line with the trend, IDC Financial
Insights spoke about Islamic banks’
willingness to capitalize on technology
innovations and adopt cutting-edge
software to improve business agility
and remain competitive, and to ensure
proper risk management and regulatory
compliance.
Financial experts believe that the
latest technological developments, if
incorporated into Islamic banking, will
be able to provide the convenience
offered by conventional banking.
For example, the development of
internet and mobile banking has proved
to be a dramatic shift in the way people
conduct their banking needs in the
conventional banking system. Thus,
Islamic banks will have to incorporate
these ideas into their product portfolio
to attract additional interest in the
system and to offer convenience to the
various customers.
An interesting finding of E&Y’s ‘Time
for Bold Action’ survey, and one that
may deserve further study, is that
as banking becomes more reliant
on technology, the implications of
failure are magnified. E&Y explains
that tinkering with existing systems
or merging multiple legacy platforms
will not satisfy increasingly vigilant
regulators, and that approach is not
likely to deliver what the financial
institution needs. The multitude of
Continued
Source: Company reports. Ernst & Young Analysis, EY Universe
higher for Islamic banks. For mid to smaller-sized banks, this proportion would be higher still
Islamic banks Conventional banks
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
2.9% 1.4% 1.3%
2.6%
1.4% 1%
2.7% 2.7% 2.9%
-2.1% -1.8% -1.8%
-0.3% -0.9% -0.8%
2007 2010 2011
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
2.2% 1.8% 1.7%
1.4% 1.2% 1.1%
2.1% 2.4% 2.5%
-0.8% -1% -1.2%
-0.2%
-0.7% -0.6%
2007 2010 2011
Other
income
Net
income
Operating
Provisions
Returns on assets
E&Y World Islamic Banking Competitiveness Report 2012/13
Figure 3: ROA for Islamic and conventional banks, 2007-11
will need to become more data intensive. The quality and
the level of risk assessment and the speed of delivery will
prompt organization-wide change programs.
collection, management and mining customer data.
Although some security concerns remain, technology will play
an increasing role in the interaction between bank and customer
via multiple channels. Increasing importance of smartphones
in Islamic banking markets can no longer be ignored.
Technology to
comply
Technology to
understand
Technology to
deliver
Figure 4: Relevance of technology to Islamic banking
continued...
In an attempt
to meet the
demands of a
growing Islamic
financial sector,
the industry needs
to effectively
implement
conventional banks’
use of modern day
technology

19. 19©
31st
July 2013
SPECIAL REPORT
new regulations is already placing
considerable stress on banks’ data and
reporting platforms.
The Basel Committee’s recent guidance
on data aggregation and reporting
will require conventional and Islamic
banks to fundamentally upgrade their
capabilities in this area by early 2016.
While the competitive financial
landscape is being redrawn by the
evolving international regulatory
reforms, financial innovation continues
at breathtaking pace. With much
achievement behind it, the industry is
now looking forward to a crucial and
challenging stage in its development.
Ensuring that new technology is flexible
enough to support more sophisticated
requests from regulators will benefit both
the bank and its customers.
Shariah compliance, IT
modernization and product
innovation top the industry’s
priority list
Growth over the past several years
continues to generate optimism for the
future of Islamic banking. The industry
stands out on its own demonstrating
remarkable development, expansion, and
growing demand. Nonetheless, financial
institutions are facing vastly different
market conditions and need to develop
new sources of differentiation to compete
and remain successful in the long-run.
Indeed, as a new industry predicated on
originality and creativity, it must explore
potential sources of differentiation for
sustained competitive advantage. These
ambitious yet realistic targets can only
be achieved through partnering with
a leading Islamic banking software
provider with the expertise to help them
transform their business quickly, safely
and cost effectively.
There are more than 35 global and
regional information technology vendors
that offer Islamic banking systems and
services for banks and Islamic financial
institutions, but there is just one vendor
out there that is truly Shariah compliant,
certified by a global standard-setting
body AAOIFI.
The time has come for financial
institutions to consider strategic choices
and address operational fundamentals
and regulatory and Shariah compliance
to capture untapped market
opportunities and master the changing
dynamics of the massive industry that is
Islamic banking.
Rosie Kmeid is the global head of corporate
communications & marketing at PATH
Solutions. She can be contacted at rmunim@
path-solutions.com
Continued
Optimizing the value of digital channels
Understand the real
needs of your target
customers and keep
as possible
Partner with innovative
companies to fuel
creative channel design
Use champion
challenger
testing to improve
channel performance
Build online capabilities once, for use by all
products and brandsservices, to understand full costs and operating implications
Instigate fast
track approval
& changes
processes to
Develop joint
sales & marketing
strategy optimizing
sales capture
Reassure customers
with robust but
simple security
measures
Develop integrated
channel development
plan with cost –
Mass market HNW SME
Retail marketing
Branches Contact centers RMs Intermediarie
Internet Direct sales forces ATM/self Joint venture
Consumer products
and propositions
HNW products &
prepositions
SME products &
prepositions
Strategy &
planning
Change
Operational Credit policy
& risk
Shariah
support
Prod service Customer
servicing
Technology
Credit
operation
Payment
HR Legal
Risk &
compliance
Credit
Key segment
Marketing
Sales & distribution
management
Customer & product
management
Divisional supports
Group manufacturing
Group supports
Figure 5: Winning in a highly promising industry
Tinkering
with existing
systems or merging
multiple legacy
platforms will not
satisfy increasingly
vigilant regulators,
and that approach is
not likely to deliver
what the financial
institution
needs

20. 20©
31st
July 2013
CASE STUDY
Saudi Binladin Group recently issued
a SAR1 billion (US$266.59 million)
Sukuk Murabahah which was listed on
the Tadawul via its SPV, SBG Sukuk.
The issuance represents a phase of the
company’s SAR12 billion (US$3.19
billion) program for the ongoing
construction and development of the
King Abdulaziz International Airport.
Issued in Saudi riyals and backed by
the commodities, the papers hold a
short tenor of 364 days, due for maturity
on the 9th
July 2014.
Based on a well-known structure to
its investors in the Saudi market, the
Murabahah structure constructed did
not come without its challenges. The key
difficulty faced by the arrangers was to
ensure that the certificates would have
the benefit of a shared security with the
SAR12 billion (US$3.19 billion) financing
provided. This feature serves as a unique
facet of the deal as it is fairly rare for
a Saudi Arabian issuance to have an
exclusive benefit of a shared security
with the bank facility. The commitment
of the bank facility in comparison to
the size of Sukuk issuance was resolved
through inter-creditor arrangements.
According to Stuart Ure, a partner at
Clifford Chance, although the financing
was readily procured, due to an upsize
and a pre-approved draft inter-creditor
arrangement, the papers needed to
be commented on and negotiated
to maintain adequate protection for
the certificate holders. One of the
arrangements to ensure the protection of
the Sukukholders included sophisticated
valuation mechanisms incorporated
into the transaction documentation to
ensure that the land cannot be sold at
an undervalue. On the issuer’s side,
the facility provides the Saudi Binladin
Group with the flexibility of developing
the prime land bank, to allow the group
to develop and sell the land, which
is the underlying asset of the Sukuk,
throughout its lifetime.
In comparison to the SAR1.3 billion
(US$346.57 million) Sukuk Al Ijarah due
2015 the company previously issued,
the primary cashflows from the papers
are derived from lease rental payments.
Unlike classic Ijarah structures, this
structure is quasi-asset-backed, with
Sukukholders having recourse to both
the credit of the company as well as a
prime landmark located in Jeddah.
Payment for the Sukuk Murabahah is
done through bank transfer and carries
a return of 2.5% per annum. The lead
managers and bookrunners are BNP
Paribas Investment Company and Gulf
International Bank Capital whilst the
advisors are Walkers, Baker & McKenzie,
Clifford Chance LLP and Al-Jadaan &
Partners Law Firm. Governed by the
laws of the Kingdom of Saudi Arabia,
the Sukuk are in theory tradable but may
suffer from lack of liquidity if traded.
Nevertheless, the papers were indeed
structured with comprehensive precision
and creativity. — NA
Aerodome Sukuk protects investors with its bank
facility
Summary of Terms and Conditions
Issuer SBG Sukuk
Obligor Saudi Binladin Group
Limited (SBLG)
Issuance Price SAR1 billion
Purpose of
issuance
SAR12 billion of one of
the phases of construction
and development of
the King Abdulaziz
International Airport
Trustee N/A
Tenor 364 days
Coupon rate /
return
2.5 % per annum
Payment Bank Transfer
Currency Saudi riyals
Maturity date 9th
July 2014
Lead
manager(s)
BNP Paribas Investment
Company KSA; Gulf
International Bank Capital
Principal
advisor(s)
Clifford Chance, Al-
Jadaan & Partners, Bakers
& McKenzie
Bookrunner(s) BNP Paribas Investment
Company KSA; Gulf
International Bank Capital
Governing
Law
Kingdom of Saudi Arabia
Legal
Advisor(s) /
Counsel
Walkers (to the Issuer);
Baker & McKenzie
Limited (to the obligor);
Clifford Chance and Al-
Jadaan & Partners (to the
joint lead managers)
Listing Cleared and settled
through Tadawul.
Underlying
Assets
The commodities
Rating No rating
Shariah
Advisor(s)
BNP Paribas Shariah
Supervisory Committee;
Gulf International
Bank Global Shariah
Supervisory Board
Structure Issuance of Sukuk under
the Shariah principle of
Murabahah.
Tradability The Sukuk are tradable,
but in practice may suffer
from a lack of liquidity.
Investor
breakdown
Currently undetermined
Face value
/ minimum
investment
SAR1 billion / SAR1
million
The papers
were
structured with
comprehensive
precision and
creativity