Need for a global unified Sukuk market Key challenges & role of Islamic Financial Institutions

Ijlal A. Alvi

5th September 2007

2

Contents

1.1. Sukuk Overview & Present StateSukuk Overview & Present State

2.2. Future ProspectsFuture Prospects

�� new issuesnew issues

�� secondary marketsecondary market

3.3. Types of Sukuk (Islamic Bonds)Types of Sukuk (Islamic Bonds)

�� issuance in key jurisdictionsissuance in key jurisdictions

4.4. Key Issues & ChallengesKey Issues & Challenges

�� role of IFIrole of IFI’’s in Industry developments in Industry development

5.5. IIFM & its development initiativesIIFM & its development initiatives

3

Global Sukuk Overview

Source: IIFM analysis, IFIS and various sources

Total Global Sukuk Issuance(Domestic & International Sukuk - Best Estimate including both

Sovereign & Corporate issues)

85,754

26,789

12,0345,717

9807807,211

336

31,908

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

2000 2001 2002 2003 2004 2005 2006 2007 Total

issuedYears

Million US$

4

Global Sukuk Overview

Year 2000 2001 2002 2003 2004 2005 2006 2007 Total Issued Total Outstanding

Bahrain 200 480 454 691 798 588 3212 1866

Kuwait 200 1010 735 1945 1945

Saudi Arabia 400 418 500 818 4350 6486 6458

Qatar 700 270 300 1270 1270

UAE 100 1165 950 8295 7950 18460 18360

Pakistan 600 134 165 899 899

Malaysia 336 680 761 4072 4949 8747 14785 17639 51969 50621

Indonesia 19 65 101 59 245 245

Brunei 513 80 593 377

Germany 123 123 123

UK 287 287 287

USA 166 166 166

Cayman Islands 100 100 100

Total 436 680 980 5717 7211 12034 26789 31908 85754 82716

Percentage Yearly

Increase 56% 44% 483% 26% 67% 123% 19%

Country-wise Breakdown

Source: IIFM analysis and various sources

5

Global Sukuk Overview-Outstanding

Different Jurisdictions

Malaysia

UAE

PakistanKuwait

QatarOthers

Saudi Arabia

Bahrain

2%Others

1%Pakistan

2%Qatar

2%Kuwait

2%Bahrain

5%Saudi Arabia

23%UAE

63%Malaysia

Percentage of

Global

OutstandingCountry

Source: IIFM analysis and various sources

6

Global Sukuk Overview

Future Issuance

Source: IIFM analysis and various sources

Bahrain 1950

Kuwait 3661

Saudi Arabia 3101

Qatar 975

UAE 32446

Pakistan 1468

Malaysia 5002

Indonesia 1378

Brunei 346

Japan 400

Oman 200

Sudan 330

China 200

UK(est) 500

Total 51957

Sukuk in the pipeline - expected to be issued 2007/08

19503318

2506975

32446

1435

5002

1378346 400 200 330 200 500

0

5000

10000

15000

20000

25000

30000

35000

Bahrain

Kuwait

Saud

i Arabia

Qatar

UAE

Pakistan

Malaysia

Indone

sia

Brun

ei

Japan

Oman

Sudan

China

UK

Country

USD Millions

7

Total International Sukuk

Issuance (Sovereign & Corporate)

250800 600

1350

3950

9130

1180 1000

2781

9923

8260

22386

4001021

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

2000 2001 2002 2003 2004 2005 2006 2007 Total

Year

Size in Million US$

Sovereign Issued Corporate IssuedSource: IIFM analysis and

Various sources

8

Total Domestic Sukuk Issuance

(Sovereign & Corporate)

Source: IIFM analysis and

various sources

479.35 106.501209.98 2134.00

3929.83

336 530 180

4137 4709

8545

1430616699

49443

0.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

2000 2001 2002 2003 2004 2005 2006 2007 Total

Year

Size in Million US$

Sovereign Issued Corporate Issued

9

International Sukuk

(Sovereign & Corporate)

Projections� Current Int’l Sukuk Issued = USD32 billion

� Int’l Sukuk in the Pipeline = USD40 billion

� Mid year 2008 Outstanding Est. = USD70 billion

� Year 2010 estimates:� Conservative – USD125 billion

� Pessimistic – USD180 billion

� Optimistic – USD225 billion

� Reasoning:� GCC & other countries infrastructure projects

� New Sovereign issuers

� New Corporate issuers

� Real economic value and ethical aspect

� Industry’s improving view on global unification objective i.e. Standardization

10

International SukukSecondary Market

Trading & Potential

� Sukuk market issuance direction towards critical mass

� Present international Sukuk trading range:

USD100 million - USD200 million per month

� Buy & hold strategy of IFI’s shifting towards trading

11

Total Value of Islamic Corporate Bonds Issued and Rated by Instrument Type

As of December 2006

Murabahah

26.1%

Mudharabah

0.1%

Bai Bithaman Ajli

52.9%

Istisna

9.7%

Ijarah

1.9%

Qard Hassan

0.7%

Musyarakah

2.7%

Bai Inah

0.7%

Bai Al-Dayn

3.9%

Bai Bi Al-Taqsit

1.3%

Source: BNM/FAST,RAM,MARC,KFH

25 USD BILLION

Types of Sukuk (Islamic bonds)

12

Types of Sukuk

(key jurisdictions)

U.A.E.

Islamic Exchangeable

Bond

14%

Short Term Ijara Sukuk

36%

Sukuk Wakal Bel

Istimar

0%Sukuk Al Musharakah

21%

Sukuk

13%

Sukuk Al Istisna and

Sukuk Al Ijara

1%Murabahah

15%

Sukuk Al Musharakah

Sukuk

Sukuk Al Istisna and

Sukuk Al Ijara

Murabahah

Islamic Exchangeable

Bond

Short Term Ijara

Sukuk

sukuk wakal bel

istimar

Source: IIFM analysis and various sources

13

Types of Sukuk

(key jurisdictions)

Bahrain

Short Term Al

Salam Sukuk

23%

Sukuk Al

Musharakah

18%Sukuk

34%

Sukuk Al Istisna

and Sukuk Al Ijara

25%

Short Term Al Salam

Sukuk

Sukuk Al Musharakah

Sukuk

Sukuk Al Istisna and

Sukuk Al Ijara

Source: IIFM analysis and various sources

14

Key Issues & Challenges

Unified Market

Key development contributors

� Jurisdictions & Regulators

� Islamic Financial Institutions

� Development institutions (AAOIFI, CIBAFI, IFSB, IIFM, IRTI & others)

Present innovation, growth driver

� Islamic Financial Institutions

Present state

� Bilateral or proprietary basis

� limited industry development mindset

15

Key Issues & Challenges

Unified MarketWhat is required from IFI’s to achieve a global

unified Islamic Industrya) Involvement and Support to unification initiatives

b) Knowledge sharing on Legal, Shari’a, Operational and other non-commercial issues

c) Research & Data Collection (development initiatives)

d) Adoption of common global standards (mandatory + self regulation)

e) Transparency & Disclosure

f) Open mindedness towards standardization - will not effect innovation and growth

16

Key Issues & Challenges

Unified Market

Identification and benchmarking of certain:

a) Products and Structures

b) Documentation

c) Industry common practices

→ alternative to conventional Repo

→ risk management alternatives

→ unified documents e.g. Murabaha

→ mature structures e.g. Sukuk Al Ijarah

17

International Islamic Financial Market (IIFM)

IIFM is a non-profit international development

institution founded due to the collective efforts of

several regulatory bodies and Islamic Development

Bank (IDB), to take part in the development of

Islamic Capital and Money Market (ICMM)

IIFM’s primary focus lies in the advancement and

standardization of Islamic financial instrument

structures, contracts, product development and

recommendations for the enhancement of ICMM

18

IIFM – benefits to the IFSI

� Market Body

� Wider Shari’a Acceptance

� Self Regulation

� Uniformity & Standardization

� Knowledge Sharing

� Systems Development

19

IIFM Projects and Approach

� Initiatives in progress

- Islamic Hedging Master Agreement

- Treasury Murabaha Master Agreement

- Alternative to conventional Repo

� Initiatives under consideration

- Sukuk Primary Market

- Specific Research and Database

- Coordination in training for professionals

- Islamic Capital Market System

20

IIFM Projects and Approach

� Global Working Groups Structure

Industry driven – bringing IFI’s and other participants together to achieve

uniformity on

- Documentation

- Products

- Best practices

- Infrastructure and systems

� Existing IIFM Working Groups

- Islamic Finance Working Group (ISDA/IIFM)

- Documentary Convergence Working Group

- Islamic Repo Working Group (ICMA/IIFM)

21

Conclusion

The objectives of IIFM and other development

institutions can be achieved through collective

efforts. The regulators, IFI’s and all related

organizations must work towards unification

while developing the local markets

Thank You

www.iifm.net

Disclaimer: The information herein has been obtained from sources believed to be reliable but cannot be guaranteed. The views or opinions expressed are subjected to change at any time. Neither the information nor any opinion expressed can be construed as a solicitation for the purchase or sale of any securities. International Islamic Financial Market disclaims liability in this respect.