Content Introduction & market size

Risk assets with fixed returns

Sukuk/Note with fixed returns

Equities structured within a portfolio

WHAT IS ISLAMIC FINANCE?

Interest is money earned or money received on money itself

Global Islamic Finance PerformanceBanking

Capital Market/Islamic FundsTakaful

2016$1.89 trillion

2017$2.05 trillion

8.3% growth

Sukuk

2016$318 billion

2017$399.9 billion

25.6% growth

% of Islamic to conventional banking asset

As at

Middle East & North Africa 14% June 2013

GCC 25% ($490 billion) June 2013

Bahrain – retail banking 27%

Bahrain – retail & wholesale banking

13%

N30.86Tn

Value of the Niger ian Debt Market (Sukuk Inc lus ive) as at Jan .

2020

N211.4Bn

Sukuk share of the Debt market as at Jan.

2020

0.69%

N925.8Bn

Incremental I ssuance of N711.4Bn worth of

Sukuk (Sovereign, Sub-nat ional and Corporate)

3%

338% Increase

2025 TargetTo achieve 3% of the Debt market

share

N37.207Tn

Tota l Asset va lue of Banks as at

December 2018

N159.1Bn

Contr ibut ion of NIBs to the Total Asset S i ze as

at December 2018

0.43%

N1.1Tn

Incremental c reat ion of N957.1Bn worth of

Assets needs to be created

3%

602% Increase

2025 TargetTo achieve 3% of the

Banking industry Total Assets

5 Year Projection (Provided 2018 Figures are Constant)

*Data Source – CBN,FMDQ, JAIZ Bank and Sterling Bank

PARTNERSHIPMudarabah (investment

partnership)

LEASEIjarah (lease)

Ijarah (forward lease)

JOINT OWNERSHIPMusharaka (joint venture)

SALEMurabaha (mark-up sale)Istisna (construction sale)

Salam (forward sale)

EQUITY DEBT

Basic Islamic finance contracts with emphasis on expected (fixed) returns

SERVICESKafala (guarantee)

Qard (interest-free loan)

SERVICESAgency

Wakala (agency)

SERVICES Are fixed returns allowed under Islamic finance?

What transactions can give such returns?

Can partnership modes guarantee fixed return?

Demand

Guarantee Firm

SPV

Supplier

Investors

ABC CapitalArranger

Other Agents AdviserWarehouse agents

Create

Guarantee

• Logistics• Supplier• Demand• Guarantee

Attract Investors at a low price

Partnership (mudarabah) Arrangement

Co-ownership (musharakah) Arrangement

Fertilizer Trading Sukuk/Syndication/Note

Underwriter

Can there be fixed-income in a partnership contract?

What happens when there is a loss of capital or no profit made?

What happens if takaful/insurance company fails to cover loss/fire accident in the warehouse?

Major Risk: Equity investment risk, business risk, moral hazard

Real Estate Developers

ABC Capital, DubaiCash Collateral

TB Financial Group

TB Real Estate Sukuk Co/SPV

Guarantor

1 2

4

5a

3

8

7

Gives purchase order to

supply houses worth

N25bSeek for Bank Guarantee

Provides USD as a

Mudarabah investment

Ensures DD is completed and

grants BG of 50% @ zero cost

under a kafala arrangement 5b

Gives 50% of

the BG @ 2% flat

Appoints TB Group as

Fund Manager & to get

additional guaranteeProvides funding for

construction of houses

Provide N20b through

forward lease @ 25%

rentals for 2 years

Investors

Gives fixed (expected) return of 12.5% PA to investorsMobilize N20b on

forward lease basis

6

9

Income Generating Forward Lease Sukuk Model(Sukuk Al-Ijarah)

N5b profit is shared in 2 years

Major risk: Performance and repayment risk

ABC Bahrain

Coy 1

XYZ Capital

Metal Trading Note or Private SukukDouble murabaha (mark-up sale) $10m funding structureNo secondary market since receivables cannot be traded. Cannot be refinanced.

1 Gives $10m to buy and sell goods/liquid instruments on its behalf at a mark-up of LIBOR+4 in a revolving pattern for one year

2 Gives a total of $10m to trade at a mark-up of LIBOR+8 in a revolving pattern for one year

Coy 2

Coy 33 Returns a total of $10m plus LIBOR+8 by day 365

4a Returns a total of $10m plus LIBOR+4 by day 365.

4b XYZ Capital makes a spread of 4%

Major risk: Commodity and inventory risk, repayment risk due to COVID

Equities 1 First Level ScreeningQualitative ScreeningExclusion of securities of Companies with primary source of income from alcohol, tobacco, ammunitions, pork, gambling, and interest (all conventional financial

institutions).

2 Second Level ScreeningQuantitative Screening

i Investee Company Debt Capital should not exceed 30% of Market Capitalizationii Interest income plus other non-permissible income divided by total revenue must not

exceed 5% iii Cash + Interest Bearing Securities divided by market capitalization must not exceed 30%

iv Receivables divided by Total Assets must not exceed 30%v Net liquid assets to Market cap - The company’s net liquid assets [cash + trade debtors]

– trade creditors) should not equal nor exceed the market cap of the company.

NB. If this ever happens the Shariah advisor needs to be consulted immediately.3 Third Level Screening

Fundamental Analysis as conducted by Fund ManagersMajor risk: Market volatility. RIETs may be better if well structured. Mix with other asset classes within a portfolio is essential.

Many thanks

Basheer Oshodi Ph.D.basheer.oshodi@trustbancgroup.com