Islamic finance news

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Vol 7 Issue 23 9 th June 2010 The World’s Global Islamic Finance News Provider ALERTS Register now - It’s free In this issue IFN Rapid ..................................................... 2 Islamic Finance News ................................ 3 Takaful News ................. .............................7 Rating News ................................................ 8 IFN Report: First US fund manager.............................. 9 Eager for Islamic investors..................... 9 Articles: Thai SEC To Permit Sukuk Issuance — First Deals Likely To Follow .............. 10 The Role of Venture Capital Model in an Islamic Economic System .............. 12 Private Equity — Its Relevance for Islamic Finance Today .......................... 14 Ogilvy Noor Targets the New Muslim Consumer ............................................... 16 Musharakah Mutanaqisah Financing Facilities Legal Issues and Challenges (Part I) ..................................................... 18 Takaful Surplus Distribution: A Controversy ......................................... 21 F m ......................................................... 23 Meet the Head .......................................... 24 Yeo Wico, Partner of Allen & Gledhill Termsheet .................................................. 25 MTD Infraperdana Islamic Dual Tranches Medium Term Notes Moves ......................................................... 26 Deal Tracker .............................................. 27 Islamic Funds Tables ................................ 28 S&P Shariah Indexes ............................... 29 Dow Jones Shariah Indexes .................... 30 Islamic League Tables ............................. 31 Thomson Reuters League Tables ........... 34 Events Diary............................................... 37 Company Index ......................................... 38 Subscription Form .................................... 38 The New Muslim Consumer is a new phenomenon that the world is becoming aware of and coming to grips with as a powerful and untapped market audience. In a pioneering research done by communications group Ogilvy & Mather in collaboration with market research specialist TNS, the New Muslim Consumer is dened as young, proud of their religion and with substantial spending power. Their prole debunks the many myths and stereotypes that surround Muslim consumer attitudes towards brands and their marketing communications. More importantly, the study highlights the risks that exist once Muslim consumers are alienated, and provides guidelines for companies on how to avoid a mistaken approach in their marketing communications. The study serves as a platform for the launch of Ogilvy Noor, a joint venture of Ogilvy & Mather and TNS, which aims to be a multidisciplinary global Islamic branding practice that aims to help brands better engage with Muslim consumers worldwide. A mistaken approach is often taken by Takaful marketers when wooing customers. There is a misconception that Takaful is basically insurance with surplus distribution. This image does not do justice to Takaful operators, as surplus distribution overshadows the concept of Tabarru, or risk sharing, which is at the very heart of Takaful. So we put surplus distribution under scrutiny as it applies to the Wakalah and Mudarabah models, and study it for appropriateness and viability. The legal issues and challenges in the contract of Musharakah, and Musharakah Mutanaqisah in particular are explored in a two part series that focuses on the solicitor. It covers an introduction to the facility and the differing expecactions that the banks and the customer expects of the solicitor. Private equity and venture capital have the potential to be key growth engines for the Islamic nance industry. Shariah compliant private equity and seems plausible if the right human capital is deployed, that can combine not only advance nance skills but also solid knowledge of Shariah. The role of venture capital in an Islamic economic system seems likely only if the government facilitates it. The critical issues include an adequate legal framework, and easy entry and exit mechanism and potential entrepreneurs. It seems ideal for Islamic nance through the participatory nancing modes with the Mudarabah concept being the most common. The Thai Securities Commission is currently in the process of issuing a new regulation by July this year that permits both domestic and international issuances of Sukuk certicates. The country’s ministry of nance has also prepared a draft regulation to exempt the originator from land transfer taxes and registration fees, which is up for cabinet approval. In the coming months, there is talk that the Bank of Thailand plans to issue a Baht denominated Sukuk with an issue size of approximately THB5 Billion (US$153 million). Given this situation, Allen & Overy Thailand takes us through the rst few deals likely to follow. The right approach is key oru

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Transcript of Islamic finance news

Vol 7 Issue 23 9th June 2010

T h e W o r l d ’ s G l o b a l I s l a m i c F i n a n c e N e w s P r o v i d e r

ALERTSRegister now - It’s freeIn this issue

IFN Rapid ..................................................... 2

Islamic Finance News ................................ 3

Takaful News ................. .............................7

Rating News ................................................ 8

IFN Report:First US fund manager .............................. 9

Eager for Islamic investors ..................... 9

Articles:Thai SEC To Permit Sukuk Issuance— First Deals Likely To Follow ..............10

The Role of Venture Capital Model inan Islamic Economic System ..............12

Private Equity — Its Relevance for Islamic Finance Today ..........................14

Ogilvy Noor Targets the New Muslim Consumer ...............................................16

Musharakah Mutanaqisah Financing Facilities Legal Issues and Challenges (Part I) .....................................................18

Takaful Surplus Distribution:A Controversy .........................................21

F m .........................................................23

Meet the Head ..........................................24Yeo Wico, Partner of Allen & Gledhill

Termsheet ..................................................25MTD Infraperdana Islamic Dual Tranches Medium Term Notes

Moves .........................................................26

Deal Tracker ..............................................27

Islamic Funds Tables ................................28

S&P Shariah Indexes ...............................29

Dow Jones Shariah Indexes ....................30

Islamic League Tables .............................31

Thomson Reuters League Tables ...........34

Events Diary...............................................37

Company Index .........................................38

Subscription Form ....................................38

The New Muslim Consumer is a new phenomenon that the world is becoming aware of and coming to grips with as a powerful and untapped market audience. In a pioneering research done by communications group Ogilvy & Mather in collaboration with market research specialist TNS, the New Muslim Consumer is defi ned as young, proud of their religion and with substantial spending power.

Their profi le debunks the many myths and stereotypes that surround Muslim consumer attitudes towards brands and their marketing communications.

More importantly, the study highlights the risks that exist once Muslim consumers are alienated, and provides guidelines for companies on how to avoid a mistaken approach in their marketing communications.

The study serves as a platform for the launch of Ogilvy Noor, a joint venture of Ogilvy & Mather and TNS, which aims to be a multidisciplinary global Islamic branding practice that aims to help brands better engage with Muslim consumers worldwide.

A mistaken approach is often taken by Takaful marketers when wooing customers. There is a misconception that Takaful is basically insurance with surplus distribution. This image does not do justice to Takaful operators, as surplus distribution overshadows the concept of Tabarru, or risk sharing, which is at the very heart of Takaful. So we put surplus distribution under scrutiny as it applies to the Wakalah and Mudarabah models, and study it for appropriateness and viability.

The legal issues and challenges in the contract of Musharakah, and Musharakah

Mutanaqisah in particular are explored in a two part series that focuses on the solicitor. It covers an introduction to the facility and the differing expecactions that the banks and the customer expects of the solicitor.

Private equity and venture capital have the potential to be key growth engines for the Islamic fi nance industry. Shariah compliant private equity and seems plausible if the right human capital is deployed, that can combine not only advance fi nance skills but also solid knowledge of Shariah.

The role of venture capital in an Islamic economic system seems likely only if the government facilitates it. The critical issues include an adequate legal framework, and easy entry and exit mechanism and potential entrepreneurs. It seems ideal for Islamic fi nance through the participatory fi nancing modes with the Mudarabah concept being the most common.

The Thai Securities Commission is currently in the process of issuing a new regulation by July this year that permits both domestic and international issuances of Sukuk certifi cates.

The country’s ministry of fi nance has also prepared a draft regulation to exempt the originator from land transfer taxes and registration fees, which is up for cabinet approval.

In the coming months, there is talk that the Bank of Thailand plans to issue a Baht denominated Sukuk with an issue size of approximately THB5 Billion (US$153 million). Given this situation, Allen & Overy Thailand takes us through the fi rst few deals likely to follow.

The right approach is key

oru

www.islamicfi nancenews.comA round-up of all this week’s news IFN RAPID

Page 2© 9th June 2010

• • Gulf African Bank reaps maiden

profi ts after launch in 2008

• Absa Islamic Bank launches new Islamic product

• ApexAfrica Capital is set to launch a Shariah compliant unit trust

• Islamic Finance news hosts roadshow at the American University in Cairo

• The North Jersey Federal Credit Union offers Islamic banking

• Fortis battles Khazanah Nasional in bid for Parkway Healthcare

• Al Rajhi Bank to use Trasset treasury management solution

• The Monetary Authority of Singapore will relax its regulations to expand Islamic fi nance

• Malaysia’s Islamic banking sector close to reaching targeted market share

• The Malaysian International Islamic Financial Centre, Bank Negara and the Securities Commission launch global search for outstanding individual in Islamic fi nance

• The International Sharia Research Academy for Islamic Finance to work on Islamic pricing next year

• Pakistan to double its Islamic banking services in three years

• Bank Negara Malaysia says no to Affi n Holdings’s takeover discussion

• ICB Islamic Bank to change hands

• AmIslamic Bank inks pact to be fi nancier and facility agent

• Islamic fi nance to provide alternative source of funding for Australian banks

• The Kerala High Court adjourns petition against the formation of Al Baraka Financial Services Corporation

• CIMB Standard has been rebranded to CapAsia

• Brunei can build halal sector via Sukuk

• Islamic Finance news to host IFN Roadshow at Grand Hyatt Istanbul in Turkey

• Bank of London and the Middle East sets up Reval software

• Russia and the Commonwealth of Independent States offer room for Islamic fi nance growth

• Kuwait Turkish Participation Bank plans for Islamic bonds

• Islamic fi nance faces a challenge in corporate governance

• Shariah scholars to defi ne application of riba

• Qatar issues local currency-based Sukuk

• Dubai government to keep investors informed on developments

• Gulf Bank to be sales agent for two GCC funds

• Sharjah Islamic Bank unveils ‘Employee Payment’ program

• National Bank of Kuwait unveils Thahabi Ijara Fund VI

• Merger plan to proceed, despite takeover plans by Dubai Islamic Bank

• HSBC Amanah to open Islamic banking branch in Doha

• Ahmed Salem Bugshan Group to raise US$100 million Sukuk

• Capitas Group International releases whitepaper

• Abu Dhabi Islamic Bank unveils new brand identity

TAKAFUL• Metropolitan Life Insurance unveils

insurance for Muslims

• Malaysian consumer group wants motor insurance policy plan to be shelved

• Prudential quits American International Group’s deal due to a price disagreement

• Early purchase for Takaful and insurance vital, says expert

RATINGS• RAM reaffi rms AEON Credit Service’s

enhanced long-term rating of ‘AA1’

• RAM revises Senai-Desaru Expressway’s rating to ‘BBB3’

• RAM reaffi rms Esso’s Islamic papers at ‘P1’

• S&P has affi rmed the ratings of American International Assurance Company

• S&P assigns ‘A-’ on Malaysia’s global Sukuk

• RAM reaffi rms Public Islamic Bank’s long- and short-term fi nancial institution ratings

• RAM affi rms National Bank of Abu Dhabi at ‘AAA’ and ‘P1’

• S&P revises The Saudi Investment Bank’s outlook to stable

• Fitch rates Mumtalakat Holding Company at ‘A’ with a stable outlook

• Moody’s downgrades Dubai Bank to ‘Baa2’/Prime-3 from ‘A3’/’Prime-2’

MOVES• Omar Merican steps down as Bursa

Malaysia’s chief operating offi cer

• Macquarie Capital hires Steve Baldwin as its managing director and head of UK corporate broking.

• GE Capital appoints Alan Austin as regional director

• HSBC appoints Mohammad Al Tuwaijri as new MENA head

• Barclays appoints Aaron Gurwitz as CEO

• Matthew Moran joins BNP Paribas as director in global execution services group

• Hong Kong Monetary Authority appoints Mu Huaipeng as senior advisor

• Trowers & Hamlins recruits four new lawyers

• Vince Niblett is Deloitte Touche Tohmatsu’s new global leader for audit

NEWS

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AFRICARural banking growthKENYA: Gulf African Bank has recorded a gross profi t of KES25 million (US$312,000) in the fi rst quarter of 2010, the fi rst time since its launch in 2008.

During this period, customer deposits have doubled to reach estimated levels of KES16.4 billion (US$204.6 million), which will propel its anticipated fi nancing program at ease.

The Gulf African Bank was launched with an investment of KES1.75 billion (US$21.8 million). It was formed to provide banking services to Muslim communities and those neglected by mainstream fi nancial institutions.

Banking for allSOUTH AFRICA: Absa Islamic Bank and Absa Private Bank have launched an Islamic private banking solution.

The product will provide equal banking opportunity for Muslims in the country.

Absa Islamic Bank and Absa Private Bank are the subsidiaries of Absa Bank.

Pioneer Islamic unit trustKENYA: ApexAfrica Capital is set to launch a Shariah compliant unit trust. It is the fi rst Islamic equity product to make its presence in East Africa.

The unit trust is available with a minimum of KES25, 000 (US$304).

Law fi rm Hamilton Harrison & Mathews will advise ApexAfrica Capital on this issuance.

Staying informedEGYPT: Islamic Finance news will host an IFN Roadshow at the American University in Cairo on the 9th June.

The one-day only roadshow aims to explore and analyze the latest developments in the Egyptian Islamic fi nancial market.

The Egyptian General Authority for Investment chairman Osama Salleh will deliver the key-note luncheon presentation, and 20 key industry practitioners will participate in a series of round-table

discussions. REDmoney Group is the organizer for this roadshow.

AMERICASMeeting Shariah needs US: The North Jersey Federal Credit Union has created an Islamic banking division to cater to the needs of its Muslim members.

According to the credit union, New Jersey is home to the second largest percentage of Muslims in the country.

Founded in 1936, the North Jersey Federal Credit Union is a member-owned, non-profi t

fi nancial cooperative that serves 30,000 members.

ASIAVying for control SINGAPORE: India-based Fortis Healthcare is up against Khazanah Nasional to gain a controlling stake in healthcare group, Parkway Holdings.

Fortis increased its stake in Parkway by 0.03% through the purchase of 350,000 shares on the market just prior to Khazanah’s offer of SG$1.18 billion

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Page 4© 9th June 2010

(US$835 million) through its subsidiary, Integrated Healthcare.

Khazanah may have plans to issue up to SG$500 million (US$ 354 million) in Islamic bonds to fi nance the deal, which would be Khazanah’s fi rst bond issue in Singaporean dollars.

Fortis bought into Parkway in March and currently holds a 25.37% stake, while Khazanah owns 23.2% of the company.

New software MALAYSIA: Al Rajhi Bank will start using the Trasset software solution developed in Hungary for treasury management.

The new software which replaces Thompson Reuters’ Kondor+ has a wide range of solutions including Sukuk management, Mudarabah-based wealth management and Islamic fi nancing.

Room for growthSINGAPORE: The Monetary Authority of Singapore (MAS) will relax regulations on business related or complementary to core fi nancial business.

The new consultation paper issued by MAS has identifi ed the need to adopt a case by case approach in allowing fi nancial institutions to develop new businesses that are related or complementary to the bank’s main functions, which may not be clearly fi nancial. Islamic fi nance is among the key areas covered in these new guidelines.

On the right pathMALAYSIA: The country’s Islamic banking system is well on track to achieve the goal of the Islamic Financial Services Master Plan of 20% of total banking market share by the end of 2010.

Currently, the market share of Islamic bank-ing in the total banking sector is 19.6%.

Global award GLOBAL: The Malaysian International Islamic Financial Centre (MIFC), Bank Negara and the Securities Commission have launched a global search to recognize and honor outstanding contributions of an individual in the Islamic fi nance industry.

The selection process will be based on an independent international jury, chaired by World Islamic Economic Forum chairman Tun Musa Hitam.

Viability studyMALAYSIA: The International Sharia Research Academy for Islamic Finance (ISRA) will complete its study into the viability of an Islamic benchmark pricing rate in 2011.

The study will incorporate industry feedback including the concern on the diffi culty of running two policy rates within one banking system.

ISRA proposed that Malaysian Islamic banks use industry specifi c benchmark pricing rates that are derived from underlying assets.

Doubling servicesPAKISTAN: The country plans to double its Islamic banking services in the next three years to meet rising demand and interest for investments that comply with Muslim tenets, according to the central bank.

State Bank of Pakistan director of Islamic banking Salim Ullah said the growth will be driven by domestic factors, and also by increased global interest in Islamic fi nance.

The central bank has given prior approval to establish two new Islamic banks, bringing the total to eight Islamic banks.

No to takeover talksMALAYSIA: Bank Negara Malaysia has rejected Affi n Holdings’ request to start talks with EON Capital for a possible takeover.

The central bank’s decision now leaves Hong Leong Bank as the sole bidder for EON’s banking assets.

Hong Leong Islamic Bank is a subsidiary of Hong Leong Bank.

New ownersBANGLADESH: ICB Banking Group, the majority shareholder of ICB Islamic Bank has signed an agreement with a local consortium to sell its controlling stake.

The new owners are Summit Industrial and Mercantile Corporation, Cosmopolitan

Traders, Alliance Holdings, Summit Alliance Port and Shore Cap Holdings.

The decision is due to growing concerns on high bad debt provisioning. The change of hands is expected to be completed by September 2010 based on regulatory approval.

ICB Banking Group acquired 50.1% of the issued share capital of Oriental Bank in 2006 when Bank Bangladesh dissolved the latter on grounds of mismanagement. Oriental Bank was subsequently renamed as ICB Islamic Bank.

Double roles MALAYSIA: AmIslamic Bank signed a MoU with state education loan provider Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) to become a fi nancier and facility agent for a 10-year RM1.5

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billion (US$451 million) Bai Al Inah term fi nancing.

The proceeds of the facility will be utilized to provide Shariah compliant education fi nancing for PTPTN.

Bright prospectsAUSTRALIA: The development of Islamic fi nance in the country could provide banks with an alternative source of wholesale funding and draw Islamic banks to set up operations in the country.

In addition, assistant treasurer Nick Sherry said that it would also attract investment in Australian assets from Shariah investors, offer new funding routes through Sukuk and allow the establishment of Shariah compliant investment products.

Sherry attributes this to the excess liquidity generated from oil revenues in the Middle East and the increase in economic growth in countries with huge Muslim populations, such as Indonesia, India and Pakistan.

The government has recently pledged to amend tax laws to win a slice of Islamic fi nance market.

Petition postponedINDIA: The Kerala High Court has adjourned the petition challenging the establishment of Al Baraka Financial Services Corporation under the Islamic banking system in Kerala to the 7th September.

A division bench adjourned the petition on the formation of Al Baraka with 11% stake for Kerala State Industrial Development Corporation (KSIDC), based on a request of Reserve Bank of India seeking more time.

The KSIDC had proposed the fi rst state-aided Islamic Bank in Kochi in 2009, with plans to register the bank as a non-banking fi nance company and later transform it into a Shariah compliant bank.

New nameMALAYSIA: CIMB Standard has been rebranded to CapAsia.

CIMB Standard is a joint venture private equity fund manager between Malaysia-based CIMB

Group and South Africa-based Standard Bank Group. It specializes in middle level capital infrastructure investments in Southeast Asia and Central Asia.

CapAsia currently manages about US$460 million worth of infrastructure investment funds around the region. The bulk of it is in Malaysia and Indonesia.

It currently manages three main funds — the South East Asian Strategic Assets Fund, Islamic Infrastructure Fund, and the Asia Infrastructure Fund.

Industry booster BRUNEI: The country can build the halal sector via Islamic fi nance by raising capital through the issuance of Sukuk.

Thomson Reuters global head of Islamic fi nance and OIC countries Rushdi Siddiqui said that increased investment in the form of Sukuk will develop more Shariah based companies as opposed to Shariah compliant companies.

He said that the investments would create the necessary environment to establish Shariah based companies which need not be screened, enabling Brunei to be a leader in this area.

EUROPEStaying up-to-date TURKEY: Islamic Finance news will host an IFN Roadshow at Grand Hyatt Istanbul on the 11th June.

This one-day only roadshow aims to generate ideas, explore and analyze the latest developments in the Turkish participation fi nancial market.

Central Bank of the Republic of Turkey’s board member Professor Turalay Kenc, will deliver the key-note address, followed by a series of round-table discussions with 21 key industry practitioners from around the region.

REDmoney Group is the organizer for this event.

Hedging technologyUK: Bank of London and the Middle East has deployed Reval in place of its original

in-house software application for fair-value hedging of its large portfolio of Sukuk and for cash-fl ow hedging of its portfolio of deposits.

Reval is a risk management and hedge accounting solutions provider.

Shariah investments to expand RUSSIA: Russia and the Commonwealth of Independent States (CIS) has been identifi ed as a promising destination for the introduction of Shariah compliant banking and fi nance.

According to Dubai-based Amanie Islamic Finance Consultancy and Education executive director Mark Smyth, Russia being the 8th largest economy in the world houses 20 million Muslims.

“Russia has managed to maintain its per capita income levels at US$15,100 despite the global recession and lower oil prices. The untapped markets in the CIS should be the key focus for Shariah compliant investments,” he said.

Sukuk in the pipelineTURKEY: Kuwait Turkish Participation Bank will launch a US$100 million Sukuk in the next two to three months.

The bank plans to raise the funds from GCC investors, as there is a little liquidity in Europe. It also plans to conduct roadshows in Dubai and Saudi Arabia to attract potential investors for the Sukuk.

According to its Dubai’s branch senior executive offi cer Rahim Albayrak, the proceeds will be used to boost the bank’s capital and fuel expansion plans.

GLOBALConfl icting interestGLOBAL: Islamic fi nance faces a challenge in corporate governance in aligning the ideas of the Shariah board with those of the management of institutions, according to a scholar.

According to the University of Bahrain scholar and National Corporate Governance

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Page 6© 9th June 2010

committee member Dr Jasim Al-Ajmi, this challenge involved whom the board reports to, level of transparency and the amount of information disclosed by the Shariah supervisory board.

Al-Ajmi added that confl ict will always arise between Shariah and performance because compliance could be regarded as a cost by the management.

Riba defi ned GLOBAL: Shariah scholars have agreed on the importance of setting up a committee to characterize the defi nition of riba and when it is allowed.

This was concluded during a recent Islamic workshop where different schools of thought highlighted that riba, though prohibited in general in Islamic fi nance, can be allowed in some cases.

MIDDLE EASTGoing local QATAR: The country has issued QAR10 billion (US$2.8 billion) in local bonds made up of conventional and Ijarah-based Sukuk with a 6.5% coupon rate.

The riyal-based bonds provide a channel to pool excess liquidity in the banking sector and diversify its funding away from dollars. To date, government debt issues have been predominantly US dollar-denominated.

The eight-year issue is evenly split with fi ve local conventional banks getting QAR1 billion (US$275 million) each, while four Islamic banks share the rest.

Situation reportUAE: The Dubai government will meet with European investors to update them on current economic developments in the country.

Dubai’s department of fi nance said the meeting will not be used to promote bonds but will be a continuation of the investor update program launched last year.

As part of its debt restructuring plans, the Emirates was successful in raising US$4 bil-lion using Islamic bonds and US$2.5 billion

in Islamic fi nancing. The entire issuance was to raise US$6.5 billion last year.

Deal closed KUWAIT: Global Investment House and Gulf Bank have signed a MoU where the bank will act as a sales agent for selected investment funds managed by the former.

The agreement will see Gulf Bank offering its priority banking clients the opportunity to invest in the Global GCC Large Cap Fund and Global GCC Islamic Fund.

New in the marketUAE: Sharjah Islamic Bank launched a new Shariah-based ‘Employee Payment’ program, targeting companies and employees.

The product provides salary transfer services, which is based on the country’s payment protection laws.

New Shariah fundKUWAIT: The National Bank of Kuwait launched the US dollar-denominated Thahabi Ijara Fund VI.

The fund will invest all of its assets in the purchase of equipment or portfolios of equipment, and lease this equipment to a diverse range of tenants.

This fund comes with a four-week subscription period, which started on the 6th June.

No change UAE: Islamic mortgage fi nance fi rm Tamweel continues to work on a restructuring plan with Amlak Finance, led by a steering committee, which is appointed by the federal government.

Tamweel’s statement comes in response to Dubai Islamic Bank’s announcement last week that it was evaluating a potential increasing in its stake in the mortage company.

The restructuring scenario that had been discussed until recently was the merger of the two fi rms to establish an Islamic bank that would receive the fi nancial support of the government.

According to analysts, the new developments added to the ambiguity surrounding the fate

of the proposed merger between Tamweel and Amlak Finance.

Islamic branch QATAR: HSBC has decided to open a fully fl edged Islamic banking branch in the country. The establishment of more branches is to follow based on an assessment conducted to identify demand in the sector.

The new HSBC Amanah branch will be opened in Doha and will cater to all the Shariah compliant fi nancial requirements of its customers.

Sukuk fi nancingSAUDI ARABIA: Ahmed Salem Bugshan Group (ASB Group) is preparing to raise an Ijarah-based US$100 million through the issuance of Sukuk.

The Sukuk is being structured with a fi ve year-term maturing in 2016 and offering a semi-annual return of 125 basis points over the US dollar, six- month London Interbank Offered Rate.

Proceeds from the Sukuk will be used to fund the expansion of its existing projects including a mega-steel plant and a real estate project.

Whitepaper on mortgage SAUDI ARABIA: Shariah compliant Capitas Group International, an affi liate of the Islamic Corporation for the Development of the Private Sector has released a whitepaper — “Expanding the Saudi Mortgage Market: The Path to Homeownership.”

The whitepaper highlights the key stages of development in the mortgage industry, examines the role that mortgage liquidity centers have played in other emerging markets, and outlines solutions for Saudi Arabia.

New changesUAE: Abu Dhabi Islamic Bank has unveiled its new brand identity and introduced a new slogan.

The new brand identity brings to the fore its core values. These values are — simple and sensible, transparency, mutual benefi t, hospitality and tolerance and Shariah inspired.

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www.islamicfi nancenews.comTAKAFUL NEWS

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AFRICANew kid on the block GHANA: Metropolitan Life Insurance launched a life insurance and investment scheme, Labaika, targeting the Muslim community. It is the fi rst of its kind on the Ghanaian market.

The insurance holders are entitled to receive a fi xed sum should death occur during the term of the insurance.

ASIAMore time needed MALAYSIA: The Consumers Association of Subang and Shah Alam, Selangor has urged the government to order Bank Negara to postpone its proposal to restructure the motor insurance policy.

The central bank had recently proposed to restructure the policy in line with the government’s aim of ensuring access for motorists to the mandatory Third-Party Bodily Injury and Death insurance coverage.

At the end of 2009, there were 10.8 million motor insurance and Takaful policies issued by insurers and Takaful operators.

EUROPEPulling the plugUK: Prudential had decided to abandon an agreement to buy American International Group’s (AIG) Asian business after the latter’s board voted against cutting the purchase price from US$35.5 billion.

The deal came to an end after Prudential’s investors signaled that they would not support the AIA purchase in an impending

vote on the 7th June, unless the price was renegotiated.

Prudential and Bank Simpanan Nasional jointly own the Prudential BSN Takaful fi rm in Malaysia.

GLOBALBe more prudent GLOBAL: The GCC’s real estate and mortgage industries need to consider their Takaful or other insurance-related options at the earliest stage possible as their future survival depends on it.

Solidarity General Takaful Company general manager Gopi Rao said Takaful and insurance-related buying decisions in this region are mostly made as an afterthought, which can expose participants to unnecessary risk.

The Global Islamic Finance Forum (GIFF) 2010, themed “Islamic Finance: Opportunities for Tomorrow”, is a high-level multi-track event that brings together regulators, scholars and fi nancial industry players who are key drivers in shaping Islamic fi nance globally.

The multi-track events of GIFF 2010 includes a Global Business Leaders Dialogue, Public Lecture, Regulators Forum, Media Engagement Programme, the IFN Issuers and Investors Asia Forum 2010 by REDmoney, International Shari’ah Scholars Forum by ISRA, Global Islamic Liquidity Management Workshop by AIBIM and The Takaful Rendezvous by MTA.

Islamic Finance: Opportunities for Tomorrow25th - 28th October 2010, Kuala Lumpur

For further information on GIFF 2010 or to register, please visit www.GIFF2010.com

Sponsors for IFN Asia Forum 2010

Lead Sponsors

Research Partner Technology PartnerAssociate Sponsors UK Pavilion Sponsors

Booth Sponsors Takaful Associate

Page 8© 9th June 2010

www.islamicfi nancenews.comRATING NEWS

ASIATriple strength

MALAYSIA: RAM Rating Services (RAM) has reaffi rmed the enhanced long-term rating of ‘AA1’

for AEON Credit Service’s RM400 million (US$122 million) conventional and Islamic Commercial Papers/Medium-Term Notes (CP/MTN) Program, with a stable outlook.

The rating is attributed to the strength of the guarantee extended by a consortium of three banks — The Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, and Malayan Banking.

Improved rating MALAYSIA: RAM has revised the rating of Senai-Desaru Expressway’s RM1.46 million (US$445,000) Bai Bithaman Ajil Islamic Debt Securities (BaIDS) to

‘BBB3’ (Negative Rating Watch).

At present, Senai-Desaru Expressway is working on restructuring the BaIDS, with its appointed fi nancial advisor, Maybank Investment Bank.

Parental supportMALAYSIA: RAM Rating Services (RAM) has reaffi rmed the ‘P1’ rating of Esso Malaysia’s RM300

million (US$90 million) Islamic Commercial Papers Issuance Facility Program.

The rating is supported by the strong fi nancial fl exibility of its parent company — Exxon Mobil Corporation.

In tip-top conditionHONG KONG: S&P has affi rmed its ‘A+’ local currency counterparty credit and insurer fi nancial

strength ratings on American International Assurance Company (AIA) and American International Assurance Company (Bermuda).

S&P had also removed them from CreditWatch, where they were placed with developing implications. The outlooks are developing.

The ratings were attributed to the announcement that its holding company, American International Group has terminated its agreement with Prudential to acquire the AIA Group.

AIA owns a Takaful subsidiary in Malaysia.

Stellar performanceMALAYSIA: Standard & Poor’s Ratings Services (S&P) has assigned a long-term foreign currency issue rating of ‘A-’ on Malaysia’s US$1.25 billion global

Sukuk trust certifi cates.

The rating is based on the final offering agreement dated the 27th May 2010, and the various agreements, undertakings and the declaration of trust the 31st May 2010.

Brilliant performanceMALAYSIA: RAM has reaffi rmed Public Islamic Bank’s respective long- and short-term fi nancial

institution ratings at ‘AAA’ and ‘P1’. The long-term rating has a stable outlook.

RAM has also reaffi rmed its parent — Public Bank’s long- and short-term fi nancial institution ratings at ‘AAA’ and ‘P1’ respectively.

The Public Islamic Bank ratings are attributed to the bank’s credit profi le, which mirrors that of its parent — Public Bank.

MIDDLE EASTStanding fi rm

UAE: RAM has assigned respective long- and short-term fi nancial institution ratings of ‘AAA’ and ‘P1’ to

National Bank of Abu Dhabi (NBAD).

At the same time, the bank’s proposed US$916 million of Senior Unsecured Islamic/conventional Medium-Term Notes program has been assigned a long-term issue rating of ‘AAA’. All the long-term ratings have a stable outlook.

The ‘AAA’ ratings are attributed to the bank’s solid shareholder support and NBAD’s strong franchise in its domestic fi nancial market.

Good fi nancials SAUDI ARABIA: S&P has revised its outlook on The Saudi Investment Bank to stable from negative.

At the same time, S&P has affi rmed the ‘A-/A-2’ long and short-term counterparty credit ratings on the bank. The outlook is attributed to the bank’s resilient fi nancial profi le.

The Saudi Investment Bank provides Islamic banking products.

Strong bondBAHRAIN: Fitch Ratings (Fitch) has assigned a long-term foreign currency Issuer Default Rating (IDR) of ‘A’

on Mumtalakat Holding Company, with a stable outlook.

Fitch has also assigned Mumtalakat’s senior unsecured ratings of ‘A’ and a short-term IDR of ‘F1’. The fi rm’s ratings are aligned with Bahrain’s (‘A’/Stable/’F1’), refl ecting the strong relationship between the two.

Double slideUAE: Moody’s Investors Services has downgraded the local and foreign currency deposit ratings of Dubai Bank to ‘Baa2’/’Prime-3’ from ‘A3’/’Prime-2’.

At the same time, Moody’s has downgraded Dubai Bank’s bank fi nancial strength rating to ‘E+’ from ‘D’. The ratings carry a negative outlook.

The downgrade hinges on the material weakening in Dubai Bank’s standalone strength as a result of the ongoing credit issues surrounding the Dubai corporate sector.

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Page 9© 9th June 2010

KAZAKHSTAN: The fi nancial crisis that hit Kazakhstan’s banks has made the nation look for alternative models of fi nance and economic growth. Four of the nation’s 38 banks are currently working towards restructuring about US$20 billion of debt. Of its 16.5 million people, 60% are Muslim and are slowly rediscovering their roots after a long period of religious suppression under the Soviet regime.

Kazakhstan is rich with fossil fuel reserves, minerals, metals, a large agricultural sector featuring livestock and grain. Its industrial sector rests on the extraction and processing of these natural resources and the country is now engaged in a drive to woo Shariah compliant investments to develop the agriculture, oil and gas, metallurgy, mining, energy and industrial sectors.

The minister of industry and trade and the deputy prime minister of Kazakhstan Aset Issekeshev told Islamic Finance news that the government has already assured state support for Shariah fi nancial investments. They have identifi ed the urgency to resurrect these dormant industries with fresh investments sourced using ethical fi nancing.

The country began exploring the potential of Islamic fi nance in 2007. The adoption of its maiden laws on Islamic banking and fi nance in April 2009 followed very quickly with the formation of Fattah Finance in March, the country’s fi rst brokerage specializing in Islamic fi nance, and Kausar consulting, the fi rst Islamic fi nance consultancy. This year itself, the much awaited launch of Al Hilal Bank, a joint venture between the government and its UAE counterpart took place. The country’s fi rst Islamic bank opened two branches in Almaty and Astana, with another two in the pipeline by the end of the year.

“Islamic fi nance is crucial for economic development and innovations. It has weathered fi nancial crises and is proven for its quality, reliability and the transparency. Having understood the vital role it can play to attract investments from the Islamic nations, the government has extended the state patronage by amending the laws. We are confi dent that Islamic fi nance will lead the way to attract investments especially from the GCC and the other Muslim countries to develop all these sectors,” said Issekeshev.

IFI Consulting Company deputy general manager Sabry Kozhakhmetov optimistic about Islamic and fi nance how it could help to attract investment said: “People waited a long time for the opening of an Islamic bank in Kazakhstan. Now the Shariah based fi nancial system has started to progress in the country. There are a considerable number of Islamic investors willing to invest here. We have worked closely with the regulators and are confi dent of the fundamentals. However, it will take time to smooth out the differences and minor transitional issues.”

Promoting the available investment opportunities in this 9th largest country in the world, Visor Capital managing director Jose Luiz Gaviao said: “In general terms, the economy has survived diffi cult periods quite well, with most of the debt restructuring of its fi nancial systems already concluded. That was achieved without denting its sovereign ratings or imposing heavy toll on local tax payers. The country is known for its very conservative approach in terms of fi scal policy, which coupled with better than expected oil prices.”

Reports by Arfah Hani Abdullah and Ashwin Hemmathagama

Eager for Islamic investors

MALAYSIA: US fund manager Saturna Capital Corporation was granted an Islamic fund management license by the Securities Commission (SC) in May, setting a precedent in two ways. First, a US fund manager was granted an Islamic fund management license in Malaysia. Secondly, the method entailed an existing asset management company being converted into an Islamic one for the fi rst time.

Saturna in fact bought over Alpha Asset Management which was not Islamic, but it held a conventional fund management license. Saturna then converted Alpha’s conventional assets into Shariah compliant portfolios. The venture was then renamed Saturna.

“Alpha Asset Management held a conventional fund management license at the time Saturna acquired control. Upon acquisition we immediately contacted existing clients to notify them of our intention to operate under an Islamic fund management license, and offered them the option to continue using our services under an Islamic mandate,” said Saturna chief investment offi cer Bryce Fegley.

“The focus of our business going forward will be management of individually structured investment portfolios. To that end, the conversion process for our existing clients entailed the restructuring of their individual portfolios to ensure they were Shariah compliant,” Fegley continued.

Affi n Fund Management CEO Mohamad Ayob Abu Hassan confi rms that it is a cumbersome process to convert conventional investments into Islamic fi nance instruments. “The conversion needs investor’s approval regardless of the status — whether they are private placements or unit trust. Failing such approval, the only available option is to refund the respective conventional investments,” he said.

Approving the Saturna’s move, Al Rajhi Bank vice-president for investment banking Mabel Lee said: “Internationally the fund markets are volatile and this could prevail for some time. Fund managers need to be opportunistic in this turbulent market condition. So, they consider the Asian region as room for growth. However, the Malaysian fund market is relatively small in size but stable. This feature attracts new investments as well as market players to Malaysia.”

Explaining the market dynamics instrumental for its new subsidiary, Fegley told Islamic Finance news, that the promising long-term economic fundamentals prevailing in Asia were the deciding factor.

“We source opportunities for making investments both for our clients’ portfolios as well as investing in our own future growth. Malaysia serves us as a regional hub in terms of Islamic fi nance due to its convenient geographical positioning and its relatively liberalized markets and the economy. The country’s strong investor protection mechanisms and state patronage are additional advantages,” said Fegley.

In addition to asset management, Saturna conducts international equity research, investment advisory services, sales and marketing. Through its subsidiary Saturna, Saturna Capital Corporation plans to tap into Malaysia’s Islamic fi nancial growth and to reap benefi ts from the prevailing investment friendly environment.

With a strong track record in managing Shariah compliant portfolios and other international equities, Saturna enjoys 100% market leadership in Islamic fund management in the US.

First US fund manager

www.islamicfi nancenews.comCOUNTRY REPORT

Page 10© 9th June 2010

The Thai Securities and Exchange Commission (SEC) is currently in the process of issuing a new regulation to permit both domestic and international issuances of Sukuk certifi cates in accordance with Islamic fi nancing principles (the Sukuk Regulation). We have been informed that the new regulation is likely to be issued in around July this year. In addition, to facilitate Sukuk issuance, the Thai Ministry of Finance (MOF) has prepared a draft regulation to exempt the originator from land transfer taxes and registration fees which is due to be submitted for cabinet approval shortly.

Previously there had been no laws in place to accommodate Sukuk issu-ance in Thailand and no deals had taken place. However, according to press reports, the Islamic Bank of Thailand plans to issue Thailand’s fi rst Sukuk certifi cates this year once the new regulations are issued. With a Muslim population of approximately nine million, market sentiment per-mitting, there are hopes that the new regulations will enable Thailand to take the fi rst steps towards developing into an Islamic fi nance hub, enabling it to draw capital from the Middle East and elsewhere.

Based on a draft summary of the Sukuk Regulation previously circulated by the SEC in late 2009 and other publicly available information, this article seeks to assess the general legal framework for Sukuk issuance in Thailand by analyzing the likely key provisions of the Sukuk Regulation and related laws. Please note however that the fi nal version of the Sukuk Regulation may well feature certain amendments to the previously circulated draft summary. It is possible that the details summarized below may be subject to change as may the timing of issue of the fi nalized regulation.

Sukuk RegulationThe Sukuk Regulation will essentially seek to set out what Sukuk structures are permitted, together with the applicable SEC approval and fi ling requirements. The latter will essentially dictate which entities can issue Sukuk certifi cates and in what circumstances.

Permissible Sukuk structuresInitially, the SEC will permit the issuance of Sukuk certifi cates under fi ve popular types of structure, namely: Ijarah (leasing), Istisna (custom manufacturing), Mudarabah (cost-plus fi nancing), Musharakah (partnership) and Wakalah (agency). The Sukuk certifi cates must be unsecured, unsubordinated, with a defi nite term such as not perpetual certifi cates and must not be convertible. To ensure that Sukuk certifi cates are issued in accordance with Shariah principles, the SEC requires the structure to be reviewed by a Shariah advisor.

Approval and fi ling requirementsIt is anticipated that the Sukuk Regulation will permit both public offerings and private placements of Sukuk certifi cates. Generally, the applicable approval and fi ling requirements are likely to be similar to those of the SEC for conventional bonds with the key requirements for domestic offerings being as follows:

(a) Public offeringsApproval requirement: To be able to go ahead with an issuance, the issuer and, if they are not the same entity, the originator must jointly

apply for SEC approval by submitting to the SEC an application form, together with the required corporate documents. The SEC will inform the applicant of the result within seven business days of receiving the complete and accurate application form and supporting documents.

This is effectively an application for the approval of the issuer and, once the SEC grants its approval, the issuer will be considered to have been “shelved” as an issuer with the SEC. As a shelved issuer it may issue as many series of Sukuk certifi cates of unlimited value within two years from the date of the SEC approval. However, prior to each issuance, the approved issuer must disclose features of the Sukuk certifi cates and submit certain documentation to the SEC (including transactional documentation and board of directors’ or shareholders’ approval).

Filing requirement: In addition the issuer must fi le a registration statement and draft prospectus with the SEC prior to each issuance. The Issuer and a fi nancial advisor must jointly prepare and certify the accuracy of information in the registration statement and draft prospectus, except where (i) the issuer is a listed company or a legal entity established by special legislation, or (ii) the Sukuk certifi cates are short-term certifi cates. An offer can only be made after the fi ling becomes effective, which is 14 days after the date the SEC receives the complete registration statement and draft prospectus. Except where (i) the issuer is a listed company or a legal entity established by special legislation, or (ii) the Sukuk certifi cates are short-term certifi cates.

Rating requirement: The Sukuk certifi cates must be rated. If the certifi cates are short-term with a maturity period of 270 days or less, the SEC may permit the issuer to use an additional issuer rating.

Trustees: For each issuance of Sukuk certifi cates, the SEC requires the appointment of: (i) an asset trustee, which will hold the underlying assets and issue the Sukuk certifi cates; and (ii) a Sukuk trustee, which will be appointed to represent the investors. The trustees must be separate entities to ensure that there are no confl icts of interest.

• Asset Trustee: The asset trustee may be the originator or a subsidiary of the originator. The asset trustee will be responsible for issuing Sukuk certifi cates, buying, holding and selling the underlying assets. The asset trustee must receive permission from the SEC to act as an asset trustee. The asset trustee may only look after assets relating to the Sukuk certifi cates which it issues.

• Sukuk Trustee: The Sukuk trustee performs a role similar to that of a bondholders trustee and has a fi duciary duty to the investors. The Sukuk trustee must be a licensed trustee pursuant to the Trust Act.

Underwriter: Subject to certain exceptions, the issuer must appoint an underwriter.

Listing requirement: The issuer must list the Sukuk certifi cates with the Thai Bond Market Association.

Thai SEC To Permit Sukuk Issuance— First Deals Likely To Follow

By Stephen Jaggs, Siripen Kaodara and Matthew Waudby

continued...

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Page 11© 9th June 2010

Thai SEC To Permit Sukuk Issuance — First Deals Likely To Follow (continued)

Eligible applicants: Importantly, the issuer and originator must be either a company incorporated in Thailand (which would include a special purpose vehicle (SPV)), a foreign bank with a full branch in Thailand or a legal entity established in Thailand by special legislation. The SEC’s requirement that any SPV issuer be incorporated in Thailand means that foreign investors will be unable to seek to reduce their country exposure through the use of an offshore SPV issuer. Though typically one may expect the issuer to be an SPV, the Sukuk Regulation also contemplates that the issuer may be either the originator or an SPV.

(b) Private PlacementsUnder the Sukuk Regulation it is anticipated that a private placement will be defi ned as:

• an offer to institutional investors or high net worth investors of unlimited value,

• an offer to not more than 10 specifi c investors during any four-month period, or

• an offer for which special waiver is granted by the SEC.

Institutional investors are usually defi ned by the SEC as commercial banks, fi nance companies, securities companies, credit foncier companies, insurance companies, state enterprises, governmental agencies, legal entities incorporated by specifi c legislation, the Bank of Thailand, international fi nancial institutions, the Financial Institution Development Fund, the Government Pension Fund, the Provident Fund, mutual funds and similar types of foreign investors. A high net worth investor is likely to be defi ned as an individual having assets worth THB40 million (US$1.22 million) or more (excluding debts) or a legal entity having assets worth THB200 million (US$6.12 million) or more according to its most recent audited fi nancial statements.

Approval requirement: The issuer and the originator will not be required to submit an application for approval but will instead likely be deemed to have received SEC approval once the issuer: (i) registers the transfer restriction applicable to an issuance with the SEC; and (ii) submits to the SEC the draft terms and conditions and trustee agreement. Note that prior to each issuance, the approved issuer must disclose features of the Sukuk certifi cates and submit certain documents to the SEC.

Filing requirement: There is no fi ling requirement for private placements other than for offerings to institutional investors or high net worth investors, in which case the issuer must fi le with the SEC a certifi ed registration statement and draft prospectus. The fi ling effective date is fi ve business days after the date the SEC receives the complete registration statement and draft prospectus.

Rating requirement: There is no rating requirement for private placements except for offers to institutional investors or high net worth investors, in which case, either the Sukuk certifi cates or the issuer must be rated.

Trustees: The same principles apply in respect of trustees as for public offerings.

Underwriter: An underwriter is not required to be appointed for private placements.

Listing requirement: No listing requirements exist for private placements except for Sukuk certifi cates offered to institutional investors or high net worth investors which must be listed with the Thai Bond Market Association.

Eligible applicants: Eligible applicants for private placements are the same as for public offerings.

International versus Domestic IssuancesThe above summary is drafted from the perspective of domestic issuances. The main difference for an issue to offshore investors is likely to be that there will be no fi ling requirement (the issuer would merely have to apply for SEC approval and the criteria for approval are likely to be less stringent than for domestic issuances). In addition the general approach is likely to be that domestic deals would need to be denominated in Thai Baht, whereas foreign deals would need to be denominated in a foreign currency.

Other Key Thai Laws Proposed tax and registration fee exemptionsPotential market participants have previously commented that the Thai tax code has hindered the development of Islamic fi nance in Thailand, pointing out that: (i) returns from Sukuk investments are classifi ed as rental revenues subject to a property tax; and (ii) transfers of land or property assets to a SPV are taxed as a land transaction. In this regard the exemption from land transfer taxes and registration fees proposed by the MOF may further facilitate transactions.

The Trust ActThe other key Thai law that will combine with the Sukuk Regulation to facilitate Sukuk issuance in Thailand is the Act on Trusts for Capital Market Transactions (the Trust Act). This was enacted in 2007 and crucially allows for the concept of an asset trustee and a Sukuk trustee in a civil law system which previously had no ‘trust’ concept.

ConclusionsThe anticipated SEC permission to issue Sukuk certifi cates, together with the MOF’s proposed exemptions from land transfer taxes and registration fees, are likely to be very encouraging. By removing key impediments, they may well enable Thailand to take its fi rst steps into the vast Islamic fi nance market. Indeed press reports suggest that in the coming months the Islamic Bank of Thailand plans to issue a Baht denominated Sukuk adopting a Wakalah structure with an issue size in the region of THB5 billion (US$153 million).

Stephen JaggsPartnerAllen & Overy (Thailand) Email: [email protected]

Siripen KaodaraSenior associateAllen & Overy (Thailand)Email: [email protected]

Matthew Waudby Senior associate Allen & Overy (Thailand) Email: [email protected]

www.islamicfi nancenews.comSECTOR REPORT

Page 12© 9th June 2010

Since their inception, Islamic banks have been criticized for not using participatory (profi t and loss sharing) modes of fi nancing such as Musharakah and Mudarabah. Generally, scholars argue that participatory fi nancing is the key to achieve the main goal of equitable distribution of wealth in society. There has been little progress in this area and Islamic banks still heavily rely on less risky fi nancing modes such as Murabahah and Ijarah. Hence there is a need to revisit the whole process to fi nd out whether the criticism of Islamic banks is justifi ed and whether the ‘current commercial Islamic banking model’ can alone achieve an equitable distribution of wealth.

Any person would feel reluctant before handing over his life savings and expensive belongings to another individual for safe keeping. The reason for such reluctance is the ‘trust’ factor as it is possible that the person responsible for safekeeping may not return the belongings back to the actual owner. But when we talk about the commercial banking model, the same owner would readily deposit his funds and keep his belongings in lockers with a bank and would feel very secure after doing so. The commercial banking model exists on the basis of ‘trust’. A depositor may have opened an account to avail certain banking services or to earn periodical profi t on his funds. But in either case, he trusts the bank to prudently manage his funds and ensure that his principal funds remain intact. Imagine a depositor entering in an Islamic bank branch to withdraw part of his funds. He is, however, informed at the cash counter that out of the total PKR500,000 (US$6,000) deposited by him only PKR300,000 (US$3,512) were available in the account due to the default of a corporate client, with whom the Islamic bank had entered into a Musharakah transaction.

In spite of signing the Mudarabah contract at the time of account opening and knowing about the possibility of loss in Mudarabah, it is much likely that the depositor may not accept such loss. He may question the prudence and risk management exercised by the Islamic bank while investing his funds. He may even doubt the integrity of that Islamic bank and feel that the bank is deceiving him. Once the trust level is shaken, the existence of that Islamic bank may be in jeopardy as other depositors may also approach the bank for withdrawal of their funds.

Similarly, the shareholders would generally expect the bank to perform better or at least at par with other competitor banks. They would have a certain expected return in mind as they have invested large amounts of funds and may also look towards alternative investment opportunities in case the Islamic banks fail to provide the desired return. So there is a dilemma for the Islamic banks. The fund providers (depositors and equity holders) are generally risk averse, whereas, other stakeholders expect Islamic banks to deploy funds in participatory modes of fi nance which are riskier in nature.

Therefore, the criticism that Islamic banks are not investing the majority of their funds in participatory modes seems unfair. But, as is always the case, any extreme position taken is wrong. On one hand, it is unrealistic to expect an Islamic bank to base the majority of its asset portfolio on participatory modes. On the other hand, it is disappointing to see that, apart from a few players, there have been no visible efforts to utilize these modes even in a gradual manner. Major responsibility

falls on the shoulders of leading Islamic banks to take the lead and promote participatory fi nancing modes wherever possible.

Overall, the combination of the ‘trust’ factor of depositors, ‘return’ expectation from shareholders and strict regulatory control make it diffi cult for the management of an Islamic commercial bank to have a large portfolio based on participatory modes. This is exactly where the venture capital model scores.

Venture capital is a type of private equity capital mainly provided for early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as buy out or initial public offering. In such a model, there is an inherent risk of losing one’s entire investment in a startup company. In other words, the investor in venture capital may accept failure of six out of seven transactions. But the depositors and shareholders of an Islamic bank have a limited risk appetite.

Venture capital can be used as a tool for economic development in developing regions. It contributes to the economy as follows:• Venture capital is most attractive for new companies with limited

operating history that are too small to raise capital in the public markets and have not reached the point where they are able to avail fi nancing from banks;

• Technology advancement;• Increase in job creation and innovation in an economy. We have

examples of highly successful companies originated by Venture capitalists such as Google, Amazon, Apple Computer, Intel, FedEx and Microsoft.

It was initially in the US that venture capital originated as an industry. Accordingly the US venture capital companies have been the major participants in venture investments. Venture capital investments later increased in other regions such as Europe, Canada, China, Malaysia, India, Thailand and such.

The venture capital model works in a region when there are some initial success stories. For example, in the case of China, the venture capital industry started in the 1980s. Initial efforts failed due to lack of

The Role of Venture Capital Model inan Islamic Economic System

By Kashif Nisar

“There is a need to revisit the whole process to fi nd out whether the criticism of Islamic banks is justifi ed and whether the ‘current commercial Islamic banking model’ can alone achieve an equitable distribution of wealth”

continued...

www.islamicfi nancenews.comSECTOR REPORT

Page 13© 9th June 2010

The Role of Venture Capital Model in an Islamic Economic System (continued)

experience in this area. However, due to continuous support from the Chinese government as well as from the private sector, the industry took off from 1999 onwards.

As with China, the venture capital industry in Pakistan has witnessed sluggish development. One of the venture capitals, Pakistan Venture Capital, had to shift from the venture capital model due to portfolio issues and problems created by the local loan recovery procedures. In 2000, the government launched a US$50 million venture capital fund for technology development in Pakistan, but no notable progress was achieved and the initiative soon fi zzled out. Steady support from the government and private sector is required to make the venture capital model a success since many high-potential projects in different sectors such as energy, agricultural and health remain untapped due to lack of funding. The government needs to facilitate the venture capital industry through different measures to ensure its success. The critical issues include development of an adequate legal framework, an easy entry and exit mechanism, necessary relaxations in the regulatory framework and promoting innovative ideas and potential entrepreneurs. The government can also play a major role by creating its own venture capital fund.

Venture capital is a mode of investing that seems ideal for Islamic fi nance through the application of participatory fi nancing modes with the Mudarabah concept being the most common. In the Islamic venture capital model, Mudarabah fi nancing will involve a partnership contract under which the investor (or ‘Rab-ul-maal’) will provide

fi nancing whereas the manager/entrepreneur will propose a business venture and will be responsible for the management and work. As per the Mudarabah principles, the parties will have to agree in the contract on the proportion of the actual profi t arising from the business venture. Loss in the venture will have to be borne by the investors unless the loss is caused due to the negligence or violation of the contract terms by the entrepreneur. In the Islamic venture capital company, a Shariah Advisor should be appointed who will provide guidance on conformance to the Shariah principles in all matters and will ensure that the proposed investment contract and instrument structures are Shariah compliant.

The Malaysian government is playing a major role in this area and is encouraging Islamic venture capital fi rms to establish bases in the country. In this regard, the Securities Commission of Malaysia has already introduced a set of guidelines and best practices to promote the adoption of appropriate standards for the development of the Islamic venture capital industry. It is expected that other regions, specifi cally where Islamic banking is growing rapidly, will follow suit and promote the Islamic venture capital industry. The Islamic venture capital model can provide ideal support to Islamic banks in achieving the vision of equitable distribution of wealth in the economy.

Kashif NisarSection head, product and business development BankIslami Pakistan LimitedEmail: [email protected]

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Page 14© 9th June 2010

A symbiosis between Islamic fi nance and private equity is acknowledged, but not necessarily properly understood, as a natural fi t. Islamic contracts of, principally, Musharakah and Mudarabah that underpin Islamic private equity transactions or relationships between general partnerships and limited partnerships, as well as private equity fi rms and investee companies are well known too.

However, the growth of Shariah compliant private equity is lower than that of Sukuk and Islamic banking assets globally. Given such a strong private equity link with the real economy and productive activities it is somewhat a surprise to see weak private equity markets within the Islamic fi nance realm. In order to properly harness the potential of private equity one needs to understand the evolutionary nature of Islamic fi nance as an industry, the state of local markets as well as the direction that Islamic fi nance needs to take.

Islamic fi nance todayThe recent and ongoing global fi nancial crisis of tectonic proportions has forced academicians and practitioners alike to start re-thinking the global economic order. Coincidentally, the global fi nancial crisis was preceded by issues surrounding Sukuk structures and the level of its adherence to the spirit of Shariah principles. Hence, Islamic fi nance as we know it today is subject to many debates at the practical and conceptual levels. In relation to the global fi nancial crisis, there are, however, some attempts to look into the causes of the crisis to identify policy responses offered by Islamic fi nance and Islamic economics.

One such effort is led by the Islamic Development Bank (IDB) and its Global Task Force on Islamic Finance and Global Financial Stability. The current debate, nonetheless, is whether Islamic banks should progress from being Shariah compliant to being Shariah based institutions. While the issue may appear to be more of semantics, the real implication is whether Islamic fi nancial institutions (IFIs) as we know them today are Shariah compliant and based on Shariah principles or, Shariah compliant but actually based on conventional

practices. The reason for this debate lies in the fact that Islamic banking looks and feels very much like conventional banking.

An analysis of the impact of the global crisis on Islamic banks shows that unlike their conventional counterparts, Islamic banks were not affected outright by the issues of toxic debt instruments. The reason being that culprit CDOs (Collateralized Debt Obligations) are confl icting with the fundamentals prescribed by Shariah principles, and hence no Islamic bank was allowed to have direct exposure. While this is certainly a testimony that IFIs are Shariah based, this aspect alone may not be suffi cient to move to the next phase of development. Abstaining from obvious prohibitions is needed but not suffi cient enough to leap to the next phase of growth and harness the upside potential of Islamic fi nance.

Islamic fi nance and private equityPrivate equity structures promote strong alignment of interest of all stakeholders. It appeals to those who want to make a difference in the economies they operate in. Hence, private equity is one of the major contributors to the number of new jobs created in any economy. The intricacies of corporate governance mechanisms and profi t sharing structures may not be that intuitive, as they have evolved in response to complex transactions. But it is clear that private equity is the riskiest asset class, and also the one reaping the greatest rewards.

When discussing Islamic private equity one must not disassociate it from the conventional private equity and factors affecting its growth. The successful and growing private equity industry is underpinned by a vibrant economy and robust SME sector providing ample investment opportunities. Furthermore, there needs to be in place a rule of law with strong company and commercial legislation that contains multiple exit mechanisms as well as supporting infrastructure in terms of various professional advisers and consultants. Clearly, with the exception of a few notable markets, OIC countries cannot take pride as being the ideal destination for private equity.

Private Equity — Its Relevance for Islamic Finance Today

continued...

By Harun Kapetanovic

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

US$214.4 US$83.2 US$61.5 US$21.9 US$5.5 US$2.2

World European Union North America Emerging Asia Latin America Middle East

Bank Asset Total Debt Securities Stock Market Capitalization

Source: IMF Global Financial Stability Report, Oct 2009

Financial depth across regions

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Page 15© 9th June 2010

Private Equity — Its Relevance for Islamic Finance Today (continued)

The chart below comprehensively depicts the state of fi nancial markets by region. It indicates that the Middle East and emerging Asia still have a long way to go to catch up with developed markets, in terms of total size as well as composition of the markets. This also may refl ect the level of market sophistication. Private equity requires high degrees of sophistication not only at the pre-investment stage but also subsequently at the investment management as well as exit stages. It comes as no surprise that private equity as a recent phenomena in our markets still needs to wait until this level strongly picks up.

A look into the futurePrivate equity prospects are bright. Take for example, the GCC which is increasingly becoming not only a source of funds but also a target destination for private equity acquisitions. The table below portrays such growth and importance of emerging equity markets in relation to global and developed markets. The last couple of years have also witnessed an emergence of a number of private equity players, either dedicated institutions or asset management arms of existing fi nancial institutions, who have made their mark both locally and globally. Growing economies, the emergence of new players and improvements in an enabling environment, all set a good background for the creation of a viable industry.

Private equity will be a key growth engine for the Islamic fi nance industry. Factors contributing to the growth of Islamic private equity, and a wider acceptance of Islamic fi nance, are directly linked to the macro aspect of local economies and the advancements in local fi nancial markets.

Among the key factors that contribute toward stronger private equity including Islamic private equity are:

• IFIs increasing in size and sophistication. They will work on their internal diversifi cation and natural consequence is diversifi cation to private equity.

• Local markets are fast developing and with the trend of bank disintermediation, private equity will play a more prominent role.

• GCC wealth and SWF are adding to excess liquidity that will look to private equity fi rms for returns and diversifi cation.

• Following challenging times, existing private equity fi rms are emerging as stronger and smarter players.

• Local, regional and global investors’ attention and focus on Commonwealth of Independent States, the Middle East and North Africa, South Africa, South East Asia (principally OIC countries) is stronger. Cross-border investments are less of an exception and prospects for regional integrations is on the increase.

However, Islamic fi nancial institutions should lead this growth and not lag behind. Hence, the question is why has Islamic private

equity lagged behind their conventional counterparts in tapping into available opportunities. While the same macro factors apply, among the key limiting factors that restrict the growth of Islamic private equity in particular is the shortage of qualifi ed people.

The right human capital, ideally, would be able to combine not only advanced fi nance skills but also solid knowledge of Shariah. Moreover, the importance of the character of the Islamic banker/fi nancier must not be neglected. After all, we are discussing an industry that is faith based and hence decision makers need to make sure that authenticity is never compromised. There are obviously other factors, but the shortage of human capital is probably the single most important and overarching issue.

Acknowledging the factors above, the Islamic fi nance industry, including regulators and planners, need to make a conscientious effort to invest in human capital while developing their asset/fund management capabilities. This also will require sovereigns to look to developing a scope for private equity fi rms in terms of creating and nurturing investment opportunities.

Leadership in Islamic fi nanceAn overriding feature of Islamic fi nance is lack of leadership. Clearly, the leadership is closely related to human capital issues.

Investing in human capital to develop the right set of fi nancial skills and knowledge of Islamic fi nance principles and practice is the industry’s top priority. Simultaneously, pursuing private equity as a mechanism will certainly go a long way in closing the gap between a Shariah compliant and a Shariah based fi nancial system.

Today Islamic fi nance needs a commitment in the form of bold and decisive steps or even leaps forward. Challenges are certainly different today. Boldness in the fi nancial world always comes down to simply putting your money at risk. Similarly, a way forward for Islamic fi nance is to prudently put its own money at risk utilizing private equity practices. Where conducive environment and supporting infrastructure are not developed, immediate action needs to be taken.

Private equity resting on Shariah principles will ensure not only that its investors are earning halal returns, but will contribute to the development of the Islamic fi nancial industry and more sustainable economies.

Harun KapetanovicEconomic AdvisorDepartment of Economic Development, Government of DubaiEmail: [email protected]

Source: S&P

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (E)

World Market Cap 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

US 46% 47% 50% 47% 45% 43% 39% 36% 31% 33% 28%

Rest of Development 46% 45% 41% 42% 44% 44% 44% 44% 41% 41% 41%

Emerging Markets 8% 8% 9% 11% 12% 13% 16% 20% 28% 26% 32%

BRIC 2% 3% 3% 3% 4% 4% 6% 9% 17% 15% 19%

Rest of Emerging 6% 5% 6% 7% 7% 9% 11% 10% 11% 11% 13%

of which GCC 0.30% 0.30% 0.40% 0.90% 0.90% 1.30% 2.50% 1.30% 1.70% 1.60% 1.20%

www.islamicfi nancenews.comCASE STUDY

Page 16© 9th June 2010

It’s not surprising that many brands believe the area of marketing to Muslim consumers is fraught with risk. Brands that get it wrong are commonly boycotted. Brands that engage effectively, though, are able to develop long-lasting relationships with a global Muslim community that is almost 1.8 billion-strong and are some of the most loyal consumers in the world today.

“We didn’t really have much thought of Denmark, until they started the photos that depict Prophet Mohammed when we started to boycott them”. (Respondent, Egypt)

According to estimates, Danish exports of about US$2.6 billion a year disappeared with that particular boycott.

A pioneering research study by Ogilvy & Mather, in partnership with TNS, has revealed the emergence of the ‘New Muslim Consumer’. They are young, proud of their religion and symbolic of the remarkable spending power embodied by the world’s fastest-growing religion.

The ‘Brands, Islam and the New Muslim Consumers’ Report serves as the launch pad for Ogilvy Noor (www.ogilvynoor.com), a multidisciplinary global Islamic branding practice that aims to help brands better engage with Muslim consumers worldwide. The Muslim market is viewed as a critically important playground for marketers, with the halal segment alone worth US$2.1 trillion and growing by US$500 billion annually.

Polling consumers in four key Muslim markets – Malaysia, Egypt, Saudi Arabia and Pakistan – the research study has identifi ed the new Muslim consumer as a critically important development for brands hoping to build successful relationships with the Islamic world. In doing so, the report debunks many of the stereotypes that surround Muslim consumer attitudes towards brands and their marketing communications. For example, halal stickers, while important to showcase certifi cation, are no longer suffi cient to persuade the new Muslim consumer of a brand’s belief in Islamic values.

The study highlights the risks that exist once Muslim consumers are alienated. Despite the evident economic potential, for example, Muslims are often neglected or misunderstood by global brands. The report cites examples of brands that have deployed a mistaken approach, and provides guidelines on how to avoid the same fate. It also explains how brands should react when affected by forces outside of their hands.

The new Muslim consumerBy 2050, more than half of the world’s population will be Muslim. Signifi cantly, 52% of the Muslim community is under 24 years old, pointing to the enormous cultural infl uence that Muslims will wield in the years to come. Young Muslims are already starting to stamp their infl uence on the consumption habits of the wider global Muslim community - the Ummah.

The portrait of the new Muslim consumer explodes the common lazy stereotypes of the Muslim. Modern Muslims are undergoing a major reassessment of their relationships with religious structures, cultural assumptions, authority, consumption and technology. This can be quite confusing for observers who are not familiar with these trends.

The Ogilvy Noor report reveals that the new Muslim consumer is fundamentally different because of a strong reliance on faith. A very high proportion of these respondents, for example, agreed with the statement: ‘I am proud to be a Muslim’.

A large percentage of this new generation believe that ‘religion should be adapted to suit individual lifestyles’ – but crucially, they’re fi nding their own ways of doing so, with many agreeing that ‘protecting Islamic values from Western lifestyle and media infl uence’ is important to them. They feel that Muslims have been misrepresented by the global media, by politicians and by educators, and they are keen to redress that balance.

The move towards conservatism should not be mistaken for a rejection of high-tech lifestyle products. Instead, new Muslim consumers are often highly technically literate. At the same time, they do not believe in an automatic acceptance of Western technology, particularly if they reject the underlying ideas and values. They believe in crafting ways forward out of their own faith, believing that religion and progress, far from being mutually exclusive, are practically inseparable. They want to stand up, be heard and make an impact – ‘I want to be a useful person for my society and prove my presence’, said a Saudi Arabian female respondent.

The new Muslim consumer is highly interested in the authority and origin of brands and the companies behind them. They are more educated, more questioning, more challenging and more discerning. “We need to look at the halal logo, yes, but also at the ingredients”, said a young respondent in Malaysia. “And we need to know where the profi ts go,” agreed her friend.

While their trust is diffi cult to win, once achieved it is deeper and longer-lasting.

The new Muslim consumer and Islamic banking Despite the massive sums spent by fi nancial services brands on Shariah compliant banking services – the Ogilvy Noor study reveals that the vast majority of new Muslim consumers view this category as the least effective in terms of Shariah-compliance. There remains deep-rooted doubt and skepticism that anything in the world of banking and fi nance can ever be fully Shariah-compliant, due to the nature of the category itself. “How can a bank survive if it doesn’t make profi t? And if it makes profi t it is haram.” (respondent, Malaysia).

There is a great deal of confusion and mistrust around insurance and loans. It is sometimes seen as relating to gambling one’s own life, and one is not supposed to pay for anything one cannot see, which is what insurance is. The perception that global brands have of Shariah banking is possibly one of tokenism. This may be dangerous as the credibility of the brand comes into question if the bank is not run entirely on Shariah principles. There is a fear that the money paid into the pool of a bank’s overall brand will be tainted with the overall practice of charging interest.

Noor Brand IndexThe groundbreaking Noor Brand Index benchmarks the appeal of specifi c brands to Muslim consumers, by ranking consumer

Ogilvy Noor Targets the New Muslim ConsumerBy Zayn Khan

continued...

www.islamicfi nancenews.comCASE STUDY

Page 17© 9th June 2010

perceptions of their Shariah-compliance. Chief among its fi ndings are that global brands can forge highly successful relationships with Muslim consumers if they approach the task in a sensitive, honest fashion that is consistent with the core values of Islamic branding.

The fi rst Noor Global Brand Index throws up some fascinating questions. Why do Nestlé, Lipton and Kraft all appear among the top fi ve ranked brands? And why is Emirates, the fl agship airline and pride and joy of the United Arab Emirates, in the bottom ten?

The Noor Global Brand Index 2010

Brand Noor Index Score*

Lipton 131

Nestle 130

Nescafe 122

Nido 118

Kraft 117

Maggi 117

Mirinda 110

Pringles 110

Lay’s 110

7 Up 109

Colgate 108

Lux 108

Sunsilk 105

Close Up 103

Dove 103

Pantene 102

Rexona 102

Head & Shoulders 101

Heinz 101

Nivea 98

Fair & Lovely 97

Pepsi 95

Coca Cola 94

Air Arabia 91

Loreal 90

Axe 88

Emirates 85

Red Bull 78

Etihad Airways 77

Singapore Airlines 63

Cathay Pacifi c 62

Citibank 59

Standard Chartered 54

HSBC 51

RBS 47

The study also provides the Noor Brand Index of multinational and local brands operating in Malaysia, Egypt, Saudi Arabia and Pakistan.

The report reveals that branding success is less about origin or provenance, and is instead based on whether brands can fundamentally empathize with the needs of the new Muslim consumer, through tailored offerings and communications.

Good business practiceThe Ogilvy Noor Report has enabled Ogilvy Noor to formulate an effective defi nition for Islamic branding: ‘Branding that is empathetic to Shariah values in order to appeal to the Muslim consumer, ranging from basic Shariah friendliness to full Shariah compliance in all aspects of the brand’s identity, behavior and communications.’

The ‘Brand, Islam and the New Muslim Consumer’ report provides invaluable insight into Shariah values, from the perspective of consumers and marketers, clearly explaining how businesses should navigate this area. Signifi cantly, it fi nds that Shariah practices are closely aligned with the existing universal ideals of good business practice.

This has become particularly important for global business given the massive erosion of trust in bodies of authority, including corporations, in recent years. Shariah values can offer brands a roadmap back to the kind of practices that build credibility with all consumers. Many Muslim consumers agree that ‘respect’ and ‘responsibility’ are still the fundamentals of a good brand.

Islamic values, in fact, can champion the cause of corporate social responsibility in both the Muslim and Western worlds. Values such as transparency, discipline, humility and purity are universal in their appeal.

The report has further distilled its research on Shariah values, and how consumers want to see them lived by brands, into a toolkit for branding success. The toolkit focuses on the following eight factors, and provides an invaluable list of do’s and don’ts.

(1) A brand’s role in the community: including all aspects of a company’s corporate citizenship

(2) Product: including the range of offering, ingredients and manufacturing processes

(3) The brand story and its PR strategy: focusing on the tactics brands can employ when talking about themselves, to better appeal to the New Muslin Consumer

(4) Corporate business practice: every aspect of how the business is run internally

(5) Visual Identity: the specifi c needs of the Muslim consumer when it comes to visual information and appeal

(6) Brand communication: a success guide built on decades of Ogilvy experience in Muslim markets

(7) External endorsement: who to partner with and who to avoid(8) Customer service and delivery: why getting this right is so

important and how to do so.

Zayn KhanRegional Business Strategy Director, South & SE AsiaOgilvy & MatherEmail: [email protected]

Ogilvy Noor Targets the New Muslim Consumer (continued)

www.islamicfi nancenews.comFOCUS

Page 18© 9th June 2010

This paper takes a look at Musharakah, in particular Musharakah Mutanaqisah (MM) or diminishing partnership, and the challenges facing the facility today. It covers an introduction to MM, the bank’s and customer’s expectations of the solicitor, the process of MM from inception to completion and other issues of the MM facility.

1. Musharakah Musharakah (partnership) is when two or more partners join in capital to carry out a Musharakah business venture with the view to earn profi t. The Musharakah could be through the formation of a special purpose vehicle (SPV) or an unincorporated partnership. It gains recognition from all Islamic scholars, though they may differ in their opinion as to the operational mechanisms of Musharakah. In terms of capital contribution in the Musharakah, it is required that each partner must contribute. The contribution is not necessarily equal like 90:10, 75:25, 50:50 or such.

If any partner does not contribute capital, it could no longer be regarded as Musharakah, instead it would be Mudarabah (contract of entrepreneurship). It is however not the case for the management of the Musharakah business, as it may be undertaken by all, or some or any one. In other words, in a Musharakah, sleeping partners are allowed. Most importantly, the Musharakah business must be permissible by Shariah.

In terms of the distribution of profi ts, a majority of Shariah scholars agree that profi ts must be distributed according to a pre-agreed ratio between the partners. As for the bearing of losses, all scholars agree that losses are to be borne according to the ratio of capital contribution, that is, the holding of shares at that time. However, there is a proviso to this general rule: if such a loss is due to the negligence of the managing partner, he will bear the loss solely.

1.1 Example of Musharakah

2. Musharakah Mutanaqisah Musharakah Mutanaqisah (MM) consists of two words, bearing the meaning ‘partnership that diminishes’. For the avoidance of doubt, it does not mean that the partnership itself diminishes, instead, the shareholding of one of the partners will diminish as the partnership goes on. ‘Diminish’ here means that the shares is gradually transferred

to the other partner(s) throughout the agreed period. At the end of the agreed period, the shareholding of that earlier partner will be zeroed, and the shareholding of the latter partner will be 100%.

According to the terms of the MM fi nancing, the bank and the customer participates in the partnership to carry out a specifi ed Musharakah business venture (acquisition of specifi ed asset, carrying out of specifi ed project and such) In consideration of the bank agreeing to enter into the MM with the customer, the customer promises to gradually acquire the bank’s shares in the partnership (constitutes the amount of fi nancing) throughout the fi nancing tenor for 20 or 25 years

In addition, the bank leases its portion in the asset to the customer, and in turn, the customer pays a periodic rental to the bank under the Islamic contract of Ijarah (constitutes the Bank’s profi ts).

Hence, the following constitutes the payment by the customer to the bank throughout the fi nancing tenor:

Financing amount (Gradual purchase of the Bank’s shares in the MM)

+ Bank’s profi ts (Rental payments for the Bank’s portion in the asset)

Payment by the Customer

At the end of the tenor, the bank’s shares will be zeroed while the customer will own 100% shares in the asset and becomes sole owner.

2.2 MM and other fi nancial productsIn MM, the underlying contract is Musharakah Mutanaqisah, where the bank and the customer joins their capital (as partners) to invest in the business with the view of getting profi t. The relationship between the bank and the customer is as partners. The ‘repayment’ (as termed in the contemporary fi nancial system) by the customer is the gradual purchase of the bank’s shares + periodic rental payments.

Under conventional loans, the underlying contract is a loan, where the bank (as creditor) extends a loan to the customer and the customer (as debtor) borrows from the bank. The relationship between the bank and the customer is creditor-debtor. The repayment by the customer to the bank is then: principal loan + interest.

BBA is the most popular Islamic fi nancing product in Malaysia, despite negative feedbacks and issues concerning its legality and compliance. At the Kuala Lumpur High Court alone, 90% of the 3,200 Muamalat cases registered between 2003 to 2009 concerns BBA. Now, BBA consists of two tiers of transaction. At the 1st tier, the bank purchases the property from the seller/customer (via the property purchase agreement) and at the 2nd tier, the bank sells the property to the customer (via the property sale agreement). The relationship between the bank at both tiers is seller-buyer. The ‘repayment’ by the customer to the bank is in the form of payment of sale price (in installments).

Musharakah Mutanaqisah Financing FacilitiesLegal Issues and Challenges (Part I)

By Mohd Zakhiri Md Nor

continued...

Musharakah100%

Partner A70%

Partner B30%

Musharakah business

www.islamicfi nancenews.comFOCUS

Page 19© 9th June 2010

Another popular Islamic product is Ijarah, which also consists of two tiers of transaction. At the 1st tier, the bank purchases the property from the seller/customer (via a Property Purchase Agreement, or by appointing the customer as its agent to purchase from the seller). At the 2nd tier, the bank leases out the property to the customer (via a Ijarah lease agreement). The relationship between the bank and the customer is landlord-tenant. The ‘repayment’ by the customer to the bank is in the form of periodic rental payments.

3. Bank’s expectations of the solicitor The following are expected by the bank:

1. The solicitor is expected to know the basic structure of MM. Obviously, one should not begin drafting unless he/she is clear of what to draft in the fi rst place.

2. The solicitor is expected to know how MM works such as what is required, consideration legality of capital, asset and business

3. Most importantly, the solicitor is expected to know the bank’s product inside out. There are many banks offering MM fi nancing today such as Kuwait Finance House Malaysia (KFH), Maybank, HSBC and such. Now, different banks may have different operational mechanisms. For example, KFH requires the property to be registered in the bank’s name as trustee to the MM pursuant to the Trust Deed between the bank and the customer. This is actually how it gets registered onto the issue document of titles, such as in the bank’s name as trustee. Hence, there is no issue of registering a fi xed legal charge on the property, as it is already in the bank’s name. On the contrary, Maybank requires the property to be registered in the name of the customer, and to secure its interest, the bank requires the registration of a fi xed legal charge on the property. There are other instances of differences of operational mechanisms, and the drafting solicitor acting for the bank is expected to know the same.

4. The solicitor is also expected to know which MM document to be executed (different document for properties with and without title, landed property and strata, completed and uncompleted, individual customer or company), what kind of security is required (such as lodgment of Trust Deed or fi xed legal charge), how to enforce the security and such.

5. Obviously, the solicitor is expected to transpire the bank’s intentions into legal documentation. The bank will issue instructions to the solicitor and such. “We hereby appoint you as the solicitor for this MM fi nancing for so and so (customer) for the amount of …. Kindly get the customer to execute the security documents within seven working days.”

Hence, it is the duty of the solicitor to transpire the bank’s intentions into legal documentation, especially on the terms and conditions of MM plus boilerplate clauses plus other terms and conditions required by the bank.

It is advisable to adhere to what is instructed by the bank, follow the term sheet given to you by the bank and also the product development as approved by BNM, incorporate all terms and agreements into the legal documentation and such.

6. The solicitor is expected to liaise with third parties on behalf of the bank, for instance the customer, the Land Offi ce, the CCM, the FIC (if applicable), the developer, the seller and such.

7. The solicitor is also expected to perfect the securities required by the bank, and this will be evidenced in the advise letter for disbursement, as the solicitor is required to confi rm that all the securities have been perfected and all conditions precedent have been met, in addition that all the legal documents are in order and fully enforceable as against the customer in favor of the bank.

Musharakah Mutanaqisah Financing Facilities

Legal Issues and Challenges (Part I) (continued)

Musharakah100%

Bank 70% Customer 30%

Customer purchases Bank’s shares and

ends up100%

Bank sells its shares to the

Customer and end up 0%

Musharakah business (e.g. acquisition of asset,

rental by Customer)

2.1 Example of MM Financing

continued...

www.islamicfi nancenews.comFOCUS

Page 20© 9th June 2010

What happens if there is non-compliance by the solicitor in meeting the expectations of the bank? It may lead to legal liability for breach of duty on part of the solicitor.

4. Customer’s expectations of the solicitor The following are expected by the customer:

1. The solicitor is expected to explain the bank’s product briefl y. Essentially, the customer does not expect to know the entire process and procedure, because all he/she wishes is to get the fi nancing amount disbursed soonest possible. However, it is your duty to explain to the customer, and since MM is relatively a new product, the customer might not be familiar with it, as opposed to BBA and Ijarah.

2. The solicitor is expected to provide a copy of the bill as early as possible. This is because he/she will make the payment of fees and disbursements. Following the fact that MM bills might be quite different from other fi nancing products, it is always advisable and practical for you to provide a copy of the bill soonest possible so that you get the funds before you actually begin the process.

3. The solicitor is also expected to guide him/her throughout the documentation process up to full release of the MM Facility amount.

4. Last but not least, the solicitor is expected to be truthful when reporting the progress of the fi le to the customer, whether it is pending payment of fees, pending submission to the land offi ce, pending registration of charge and such.

If there is non-compliance, it may lead to legal liability for misrepresentation, misstatement and such. Most importantly, you would need to differentiate between your duty to inform the customer and the customer’s right to know. After all, you are solicitors of the bank, acting for the bank and not the customers (this is assumed as you would be the solicitors drafting the fi nancing documents). If you ever get a fussy customer who demands to know every detail of the progress of the matter, you may wish to advise him/her to appoint their own lawyer, because it is outside of your duty.

5. The process – Inception of the MM Well, now we come to the stage that you’ve been waiting for. The process for preparing legal documentation starts from your receipt of instructions from the bank. It is usually in form of a letter of appointment as solicitors for a specifi ed fi nancing facility approved to a specifi ed customer. As soon as you get instructions from the bank, you may proceed to open a new fi le and read through the instructions. Normally, the bank would also enclose a copy of the Letter of Offer duly accepted by the customer. Note the date of the acceptance by the customer, and prepare for its nominal stamping (RM10 (US$3) if within 30 days of acceptance by the customer).

Banks normally have their standard documents and guidelines when it comes to MM fi nancing, so you would need to be careful to choose which one of the standard documents apply to that particular fi nancing facility, and familiarize yourself with them. You would need to

pay attention to the type of customer (individual and/or company), the type of property (completed or uncompleted, with or without title) and the purpose of the fi nancing (acquisition of assets or project fi nancing) as the bank might have different sets for different situations.

If the bank does not have standard forms and documents, you would need to start drafting from scratch. Most importantly, you would need to incorporate all the bank’s intentions into the legal documents. You may want to be careful to avoid usage of terms not allowed in Islamic fi nance interest for default payment, penalty interest., and also be careful to use terms specifi c for MM bank’s shares, customer’s shares, MM business venture, and such.

It is appreciated that you familiarize yourself with the bank’s products, and then follow accordingly the guidelines set by the bank, searches at CCM, Land offi ce, Offi cial Assignee’s offi ce, FIC and such. Try to meet the timelines set by the bank if any, while at the same time set an appointment for the execution of the legal documents at the customer’s convenience.

The fi nal part (Part II) will appear next week, in Issue 24 of Islamic Finance news.

Mohd Zakhiri Md NorPhD ResearcherInternational Center for Education in Islamic Finance (INCEIF)Email: [email protected]

Musharakah Mutanaqisah Financing Facilities

Legal Issues and Challenges (Part I) (continued)

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EX A DING THA HE REALMS OH REAALMD THEXXPAANAN OF ISLAMIC FINANCEA EINANOF CEX D G THE RD REALMS OF ISR ALMM OING TG TXPPANDDDID SLAMIC FINANCEM F ASL CEXEX ANANDING THEDING THENDND E REALMS OF ISE REALMS OF ISHE RHE RREAREAALMALMMSMSDING TDING TG THG THG TG TEXEXXPANXPANANANNDNDNDND OF ISLAMIC FINANCEOF ISLAMIC FINANCEAMAM EEF ISLAMIC FIISLAMIC FIFINAFINAANANOF IOFOF ISOF IS CC

THAILANDGrand Millennium Sukhumvit Hotel

22 June 2010nd

Keynote Speaker: Kesara Manchusree – Group Head Markets, Stock Exchange of Thailand

Our panel of key speakers include:Dheerasak Suwannayos – President, Islamic bank of ThailandDr. Subhak Siwaraksa – President & CEO, CIMB Thai BankMadzlan Hussain – Partner, Zaid Ibrahim & CoRaja Teh Maimunah – Global head Islamic Markets, Bursa MalaysiaSulaiman Alireza HSBC

Key topics for discussion:

measure up against the standards of other regional centers Discussing local and regional developments in Islamic markets, including

the regional markets

investments and market trends in Thailand and the region

Financial markets

www.islamicfi nancenews.comTAKAFUL REPORT

Page 21© 9th June 2010

Takaful is an alternative risk management tool offered by Islamic fi qh to replace unacceptable conventional insurance. It is based on risk sharing and sincere acts of helping fellow human beings. However the holy concept is clouded by short term tactics of surplus distribution.

Conventional insurance operates on a platform of risk transfer, where an insured simply transfers a part or all of their risk to an insurance company (insurer) and pays a certain amount of money, called a premium. It is basically a contract of buying and selling. The insured buys insurance protection sold by the insurer, and pays a premium as the price. By doing so, the insured is replacing his ‘uncertainty’ to an amount of ‘certainty’ as much as the premium paid.

Unfortunately, the risk transfer mechanism of conventional insurance is not acceptable to most Islamic scholars. Transferring risk (uncertainty) to other parties in return for a premium is challenged because it brings at least two forbidden elements to the contract, namely gharar (uncertainty) and maisir (speculation).

Under Islamic law, any contract of sale involving gharar is prohibited. Risk itself is a kind of gharar in nature, so managing it under a contract of sale is prohibited. Furthermore, the insurance company who receives the premium and agrees to bear the risk is committing a maisir (speculation), as its fortune depends on the chance that a loss may or may not occur. On the other hand, riba (usury) especially in investment activities, is the other element that makes conventional insurance unacceptable.

Hence, Takaful has emerged as an alternative mechanism to replace the prohibited conventional insurance.

Under Takaful mechanism, risk is not transferred to the insurance company, but shared among all owners of a similar risk. First of all, someone who has a risk joins with others who have similar risks and they all form a group, community or pool. The members then agree to make a contribution that must be commensurate to each risk brought into the pool. The contribution/fund is pooled and used to indemnify certain members who suffer a predefi ned loss.

Under the Takaful concept, the company is not a risk taker, but merely acts as a third party who is employed by members to manage the pool and to ensure the scheme of ‘helping each other’ runs effectively and fairly. That is why insurance companies now call themselves ‘Operator’, instead of ‘Insurer’ and members are called ‘Participant’, not ‘Insured’.

Certainly, as a commercial entity, an insurance company is not going to do all those things for free. They deserve a certain amount of fee for the expertise, competence and resources deployed in managing the portfolio. How this fee would be calculated or when the operator receives it is very much determined by type of Aqad (contract) between operator and participants. Mudarabah and Wakalah are the two most popular contracts used to operate Takaful.

Surplus distribution under Mudarabah modelIn the earlier days of Takaful, when the fi rst Malaysian Takaful operator introduced their product, Mudarabah was the fi rst operational model.

Mudarabah is an ancient form of fi nancing practised by the Arabs since long before the advent of Islam. When Muhammad (peace be upon him) began his prophetic mission, he did not interfere and the let Arabs continue practicing it. This was because Mudarabah does not involve the denial of the existence or the uniqueness of the one God (Allah) or associate anything or anyone with Him or was against any command of God.

Mudarabah is defi ned as a contract between two parties, where one party gives money to another for investing it in a commercial enterprise. The fi rst party is called ‘rab-ul-maal’, while the management and work is an exclusive responsibility of the other, who is called ‘Mudarib’. When it applies to Takaful, participants are ‘rab-ul-maal’ and Takaful operator acts as ‘Mudharib’.

Mudarabah is a commercial contract, so the provision or condition on profi t is a main pillar. It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a defi nite proportion of the actual profi t to which each one of them is entitled. There is no Mudarabah without profi t sharing. If a business incurs loss in some transactions and gains profi t in others, the profi t will be used to offset the loss at the fi rst instance. The remainder, if any, shall be distributed between the parties according to the agreed ratio.

When Mudarabah is deployed in a Takaful contract, profi t sharing has to be embedded; otherwise the contract will be invalid. However, the non-profi t nature of the Takaful concept has brought hesitation on the use of the word ‘profi t’. Hence, the word ‘surplus’ is used. And surplus distribution is introduced to replace profi t sharing.

Surplus distribution under Wakalah modelAs the Takaful concept became more advanced, many raised objections on the application of Mudarabah to the Takaful contract. Most people view that running a Tabarru’ (non-profi t) scheme with a commercial contract is a contradiction. Some further challenge that distributing a surplus is against the very basic aim of pooling the fund. Participants contribute to the fund at the outset with the pure intention to help fellow participants when a predefi ned misfortune occurs, not expecting any return. No economic motive is involved.

At the same time, a new model of Wakalah emerged and rapidly gained its popularity. Wakalah is an Arabic word for delegation or representation. Wakalah is a contract when a person appoints a representative to undertake transactions on his/her behalf.

Similar to Mudarabah, the relationship among participants remains under Tabarru’ (donation/non-profi t) principle. The difference lies on the relationship between participants and the Takaful operator. Under the Wakalah model, the Takaful operator acts as an agent of participants to conduct certain tasks for a certain fee.

It is important to note that in its original form under Islamic fi qh of Muamalat, the Wakalah contract does not have any element of profi t sharing or surplus distribution.

Interestingly however, surplus distribution does not suddenly disappear when Takaful operators migrate from Mudarabah to Wakalah. It

Takaful Surplus Distribution: A ControversyBy Delil Khairat

continued...

www.islamicfi nancenews.comTAKAFUL REPORT

Page 22© 9th June 2010

remains as part of many Takaful products. The Takaful industry has obtained legitimacy for surplus distribution under the Wakalah model. The argument behind it is that funds in the pool are collectively owned by participants (although this thesis can be challenged too), so it is their right to decide how to treat any surplus, should it exist. A statement in the proposal form or policy schedule that state participants give their permission to the operator to distribute surplus is as good as authorization.

Furthermore, Takaful operators also found justifi cation for them to receive a portion of surplus distribution by treating it as performance fee for excellent management of risk portfolio. This makes surplus distribution identical in both Wakalah and Mudarabah.

Takaful is Insurance with Surplus distributionSince it was fi rst introduced under Mudarabah, surplus distribution has become a major selling point of Takaful, irrespective of the operational model used. Marketers began to tell their customers that Takaful is better than conventional insurance because at the end of the period, they will get their money back. Slowly but surely, misunderstanding developed among the general public that Takaful is basically insurance with surplus distribution. Surplus distribution simply overshadows the holy concept of Tabarru’ or risk sharing which should be at the very centre of Takaful.

The incorrect idea that Takaful must have surplus distribution has forced Takaful operators to attach it to all products. Otherwise they will feel unable to compete in the market. This less than ideal situation of having surplus distribution under a Wakalah contract is not because Takaful operators do not understand the principle of Islamic fi qh of Muamalat. Let’s not forget that each and every Takaful entity must have scholars sitting on their Shariah supervisory board.

Is Surplus distribution technically viable?From a technical point of view, surplus distribution may not be appropriate for a majority of Takaful products.

If we are talking about family Takaful products with a saving element, profi t sharing under Mudarabah will perfectly fi t, but only the saving/investment part. However, when we turn to a range of general Takaful products, none has such a saving or investment element. The only pool managed by a Takaful operator is the risk pool, to anticipate any misfortune that may bring monetary loss to the eligible participants.

If the product is a mass product with relatively homogeneous nature of risk and value within the portfolio, there may be a relatively fair to high potential of the pool resulting in surplus, mainly because it is less volatile and easier to predict and manage. But, again, it is not a suffi cient reason to distribute surplus to participants and/or operators.

Unfortunately, the business of insurance or Takaful is not as simple as running a local store where profi t can be defi ned with minimum uncertainty as turnover less purchasing cost and other expenses.

In insurance or Takaful, the ‘commodity’ managed in the pool is risk, the certainty itself. Obtaining good results in any particular year is not a guarantee for the same in the next year. In fact it can be very different. This volatility forces Takaful operators to build reserves during good times to anticipate bad ones in the future. In other words,

not all surpluses are declared, part or even all of it must stay in the pool. It is not unusual if a risk portfolio is running in defi cit the fi rst few years of its establishment simply because of the necessity of building high reserves, not because the claim exceeds the premium.

Only after a certain period of time, when reserves in the pool is actuarially considered as abundant (more than enough), it can be released and declared as surplus. In many cases, this abundance of reserve may never come true due to the volatility of results from time to time. Imposing a mechanism of surplus distribution into this kind of portfolio is certainly an unsustainable measure.

Another important aspect to consider is pressure from the regulators that is becoming more rigorous in order to protect the interest of insureds/participants and the national/regional economy in general. Regulators recently tend to review their solvency requirements and put more pressure on capital.

The draft of IFSB on Takaful solvency has shown this phenomenon. Once this draft is a published standard and is adopted by regulators, the Takaful industry shall feel the impact of a stricter solvency regulation. Always bear in mind that to ensure the same level of security, Takaful undertakings have to be subject to the same vigilant solvency requirements and other aspects of regulation as its conventional counterpart.

All these factors will force Takaful operators to put aside more reserves on their pool. They also have to have high capital to support the pool and prepare to inject Qard Hasan into the pool. Furthermore, competition among operators in the market will never relax. And, last but not least, the Takaful industry is still struggling with limited scale and lack of availability of Shariah compliant investments. With all this pressure, it is hard to see any insurance or Takaful company producing high profi t or surplus from their operations. Hence, surplus distribution will not be a viable and sustainable proposition.

It is interesting to see that surplus distribution is spread to re-Takaful, even though surplus distribution is even more implausible under it. Re-Takaful mainly deals with high risk in terms of value and volatility. One of the main purposes of any Takaful or insurance company to take out re-Takaful is to transfer a large part of the volatility within their portfolio to retakaful or reinsurers and leaving them with more homogeneous and stable retained portfolios to manage. Unfortunately, we have seen some re-Takaful contracts contain the clause to accommodate surplus distribution, although no information so far suggests whether any company has successfully done it.

It is now time for the whole industry to review this misconception and begin efforts to re-educate the market and the public, especially to promote the real value of Takaful such as pooling resources to help each other without expecting any profi t in return. It is very important to clarify that surplus distribution is not an integral part of the Takaful scheme. Absence of it will not make Takaful invalid as far as Shariah compliance is concerned. Even schemes without surplus distribution should be technically more sensible, robust and provide better security to the participants and economy in general.

Delil KhairatRe-Takaful practitioner of a global reinsurance groupEmail: [email protected]

Takaful Surplus Distribution: A Controversy (continued)

www.islamicfi nancenews.comFORUM

Page 23© 9th June 2010

Corporate governance has always met with strong resistance from shareholders,what is the best way to slowly introduce it without compromising its effectiveness?

Sound corporate governance should be welcomed rather than resisted by shareholders of Islamic fi nancial institutions as it ensures their rights are protected. In particular the board of directors is directly accountable to the shareholders, and not to the management. Having non-executive directors on the board of directors provides assurance to shareholders.

In Islamic banks the investment Mudarabah depositors and the Shariah board are also important stakeholder groups. Again it is the responsibility of the board of directors to ensure that the Mudarabah depositors receive full information about how their profi t shares are calculated, and that there is disclosure of the funds within the profi t equalization reserve. The board also has a responsibility for the contracts governing Shariah board members and to ensure that there are adequate resources available for the Shariah board to undertake their work.

The IFSB Guiding Principles on Corporate Governance for Islamic banks, collective investment schemes and Takaful are an obvious starting point for any Islamic fi nancial institution seeking to improve its corporate governance arrangements. These can be freely downloaded from the IFSB website.

PROFESSOR RODNEY WILSON: Director of postgraduate studies, Durham University

Corporate governance has become increasingly important as businesses grow and management and ownership become increasingly separated. Management acts as an agent to run the corporation on behalf of its owners (the shareholders), which leads to what is known as the ‘principal-agent’ problem that occurs due to the fact that the interests of these parties are not necessarily aligned. There are multiple ways to incentivize

the agent to act in the best interest of the owner such as contracts, monetary compensation and, most importantly, good corporate governance.

The Organisation for Economic Co-operation and Development (OECD) has recognized that integrity of business and markets is vital to the stability of economies, and provides the following defi nition of corporate governance (2004):

“...the rules and practices that govern the relationship between managers and shareholders of corporations, as well as stakeholders like employees and creditors.”

This defi nition is accompanied by a set of principles that are regarded to be the international benchmark for corporate governance. These principles cover, among others, the rights of shareholders and key ownership functions, equitable treatment of shareholders, the responsibilities of the board and how these parties cooperate and disseminate information. Hence, good corporate governance is certainly advantageous for both managers and shareholders and they would do well to remember that these rules are in place to protect their interests.

DR NATALIE SCHOON: Head of product research, Bank of London and the Middle East

BANK OF LONDONAND THE MIDDLE EAST

The maiden Shariah compliant unit trust issuance in Kenya is poised for launch. Do you think this is timelyand what sort of impact do you forsee for the African region?

If you would like to air your views on the next Islamic Finance Forum Question, please email your response of between 50 and 300words to Christina Morgan, Forum Editor, at: [email protected] before Monday, 21st June 2010.

Next Forum Question

NEW SERVICE

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www.islamicfi nancenews.comMEET THE HEAD

Page 24© 9th June 2010

Could you provide a brief journey of how you arrived where you are today?

My practice in Islamic fi nance started in 2001 when I worked on the fi rst Sukuk transaction in Singapore. In those early days, we did not have, as we do now, laws or regulations in Singapore designed to facilitate Islamic fi nance. It was a challenge putting together a Sukuk issue which complies with both Shariah principles and conventional laws and regulations. And when we succeeded, it was exhilarating. After that experience, I developed a keen interest in developing and promoting Islamic fi nance in Singapore.

What does your role involve?In our fi rm, we are fortunate to have Eugene, Teong Sit and Suhaimi who have a deep passion for Islamic fi nance. My role is to join hands with my colleagues and work as a team.

What is your greatest achievement to date?It is heartening to see the Sukuk market growing roots in Singapore. Currently, this market centers around two pioneering Sukuk programs that we had structured and documented. Since their establishment, we have seen continuing issues of Sukuk and we are hopeful that more will follow.

These two programs have also won awards from and gained honorable mention in leading legal publications, including the fi rst ever Singapore Deal of the Year award by Islamic Finance news.

Which of your products/services deliver the best results?

At this early stage of growth of Islamic fi nance in Singapore, we are focusing on building up our core practice in Murabahah and Sukuk transactions, while developing emerging areas such as Shariah compliant funds, Tahawwut Master Agreement and Istisna transactions.

What are the strengths of your business?Our key strength is harnessing the breadth and depth of specialized expertise available in Allen & Gledhill to carve out sectors of leadership. We possess the resources and more importantly, the mindset to navigate uncharted territory.

What are the factors contributing to the success of your company?

The most important factor is our clients. We value their trust above all. This governs what we do and how we act.

The current stage of our Islamic fi nance practice would not have been possible without the legislative and regulatory changes in Singapore since 2005 that were introduced to facilitate Islamic fi nance. For instance, before the tax changes, corporations had to bear the onerous tax burden of double or triple stamp duty for Islamic fi nance transactions involving sale and buyback of real estate. This burden was lifted by changes to the tax regime to equalize tax treatment of certain Islamic fi nancing structures with their conventional fi nancing equivalents. New laws and regulations were also put in place to allow banks to carry on Islamic fi nancing activities.

What are the obstacles faced in running your business today?

Our primary obstacle is the relative small size of Islamic fi nance which at the same time represents, to us, a reservoir of untapped opportunities.

Where do you see the Islamic fi nance industry in, say, the next fi ve years or so?

I see Islamic fi nance becoming more accepted and growing in stature. Our world is getting more inter-connected. Islamic fi nance is far too important.

Name one thing you would like to see change in the world of Islamic fi nance.

In time to come, I hope to see Islamic fi nance structures or products which are not benchmarked to conventional equivalents. This will lead to the next stage of development when Islamic fi nance creates its own unique structures and products and value proposition.

Islamic Finance news talks to leading players in the industry

Name:

Position:

Company:

Based:

Age:

Nationality:

Yeo Wico

Partner

Allen & Gledhill

Singapore

43

Singaporean

“I see Islamic fi nance becoming more accepted and growing in stature”

Structuring and Documenting Commodity Murabahah Transactions

29th June 2010, Kuala Lumpur

Featured Workshop

This 1-day only “Structuring & Documenting Commodity Murabahah transactions” will be led by key industry practitioners such as Dato Sri’ Zukri Samat, Raja Teh Maimunah, and Megat Hizaini Hassan to name a few. Key topics featured in this conference are key transactions in Commodity Murabahah & Tawarruq; Salient Features of Commodity Murabahah; Legal and Documentary Issues Facing Commodity Murabahah; Commodity Murabahah Concerns, Challenges and Market Appetite; and a Case-Study by Bursa Malaysia

Tel: +603 2162 7800

Contact details:

Email : [email protected] www.islamicfinancetraining.com

www.islamicfi nancenews.comTERMSHEET

Page 25© 9th June 2010

The Q&A was conducted with MTD Group:

1. Why did you use this particular Islamic structure? What other structures were considered? We were attracted by attractive pricing and to diversify from conventional bank borrowing

2. What will this capital be used for? Not for capital raising

3. What were the challenges faced and how were they resolved? The lengthy process with the rating agency. We were assisted by the arranger and solicitor to explain the business model and process.

4. Geographically speaking, where did the investors come from? It was underwritten

SUMMARY OF TERMS & CONDITIONS

MTD Infraperdana Islamic Dual Tranches Medium Term Notes

RM100 million (US$30.3 million)

26th April 2010

Obligor/Issuer MTD Infraperdana

Tenor1) 7.5 years2) 8 years

Return1) 5.5 % p.a.2) 5.6% p.a.

Payment Installment

Maturity Date1) 26th October 20172) 26th April 2018

Arranger/Dealer CIMB Investment Bank

Trustee AmTrustee

Legal Counsel Lee Hishammuddin Allen & Gledhill

Governing Law Laws of Malaysia

Purpose of issuance Working capital requirements

Principal activities Investment holding

Rating AAID

Shariah Advisors CIMB Investment Bank

Contact [email protected] or call +603 2162 7800

Are you using your subscription to its full ability?

What are you missing out on?

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www.islamicfi nancenews.comMOVES

Page 26© 9th June 2010

BURSA MALAYSIA MALAYSIA: Omar Merican has resigned as Bursa Malaysia’s chief operating offi cer, a post he has held since the 16th November 2005.

He was the founder and CEO of Merican and Partners Asset Management from 1997 to 2004.

Prior to that, he was attached to several fi nancial service institutions, including Solomon Brothers, James Capel and O’Connor Associates.

MACQUARIE CAPITAL UK: Macquarie Capital has appointed Steve Baldwin as its managing director and head of UK corporate broking.

Baldwin joins the fi rm from JP Morgan Cazenove, where he spent 10 years as a corporate broker and advisor.

Macquarie Capital is a subsidiary of the Australia-based Macquarie Group, which is involved in Islamic fi nance.

GE CAPITALUK: GE Capital has appointed Alan Austin as a regional director for London and the South. He will be responsible for the fi rm’s asset based fi nancing business.

Austin previously worked at KBC Business Capital, Landbanki, Enterprise Finance Europe and Lloyds TSB.

HSBC SAUDI ARABIA: HSBC has appointed Mohammad Al Tuwaijri as the new global banking head for the Middle East and North Africa region.

Al Tuwaijri was previously managing director and head of Saudi Arabia for JP Morgan. Prior to that, he was treasurer at Saudi British Bank, HSBC’s affi liate in the kingdom.

BARCLAYS UK: Wealth manager Barclays has appointed Aaron Gurwitz as its new CEO and head of research, economics and strategy and Kevin

Gardiner as its head of global investment strategy.

Gurwitz joined the fi rm in 2008 and was previously from PIM fi nancial services and Goldman Sachs.

Gardiner joined last year as head of EMEA investment strategy, and was previously HSBC global head of equity strategy.

BNP PARIBASFRANCE: BNP Paribas has recently appointed Matthew Moran as the new director and senior equities sales-trader for its global execution services group.

He will be covering institutional and hedge fund clients while working closely with the derivatives and prime brokerage groups.

Moran has worked for ICAP, looking after the asset managers and hedge funds in the US and international equities. Before that he was with Morgan Stanley for 20 years.

HONG KONG MONETARY AUTHORITYHONG KONG: The Hong Kong Monetary Authority (HKMA) has appointed Mu Huaipeng as senior advisor.

Mu will provide advice and assistance in the areas of fi nancial cooperation between Hong Kong and China, further expansion of the renminbi business in Hong Kong, and the development of opportunities for Hong Kong’s fi nancial services industry in China. He was previously the director general of the fi nancial market department at the People’s Bank of China, prior to being seconded to the HKMA.

TROWERS & HAMLINS BAHRAIN: Trowers & Hamlins has hired Rizal Mansor, Timothy Goh, Niall McMorrow and Peter Hawkes for its offi ce in Bahrain.

Rizal and Goh joins the corporate division, McMorrow in the banking group while Hawkes is in the real estate team.

Trowers & Hamlins has been involved in Islamic fi nance since the 1990s.

DELOITTE TOUCHE TOHMATSU UK: Vince Niblett has been appointed the new global leader of business advisory group Deloitte Touche Tohmatsu’s audit and enterprise risk services practice.

His current position as Deloitte UK’s head of audit will not be affected. Niblett replaces Alain Pons, who will become CEO of Deloitte France.

Deloitte has an Islamic fi nance practice in the UK.

LONDON STOCK EXCHANGE UK: The London Stock Exchange has appointed Gay Huey Evans and Paul Heiden as non-executive directors and Raffaele Jerusalmi as executive director.

Evans is the vice-chairman of investment banking and investment management at Barclays.

Heiden is executive chairman of Talaris Topco and a non-executive at United Utilities, while Jerusalmi is director of capital markets at the LSE and CEO of Borsa Italiana.

MORGAN STANLEY UAE: Morgan Stanley has appointed Gabriel Aractingi to its private wealth management division as managing director and head of sales for the Middle East, based in Dubai.

Aractingi was previously executive vice-president and head of Middle East at Lombard Odier, and the chief executive of asset management at Ernst & Young.

HSBCUAE: HSBC has named Nicholas Levitt as its new head of commercial banking.

Levitt succeeds James Binns, who will become head of commercial banking in Taiwan.

He has been with the bank since March 1993. He joined the UAE offi ce in December 2009 as regional head of business banking.

HSBC Amanah is the subsidiary of HSBC.

www.islamicfi nancenews.comDEAL TRACKER

Page 27© 9th June 2010

Mr Daud Abdullah (David Vicary)Global Leader

Global Islamic Finance Group, Deloitte

Prof Dr Mohd Masum BillahGroup Executive ChairmanMiddle Eastern Business

World Group of Companies

Dr Humayon DarChief Executive Offi cer

BMB Islamic

Mr Badlisyah Abdul GhaniChief Executive Offi cer

CIMB Islamic

Ms Baljeet Kaur GrewalManaging Director/Vice Chairman

Head, Global ResearchKFH Research Limited

Mr Sohail JafferPartner

International Business Development FWU International

Dr Monzer Kahf Consultant/Trainer/Lecturer

Private Practice

Mr Mohamed Ridza AbdullahManaging Partner

Mohamed Ridza & Co

Prof Bala ShanmugamDirector of Banking & Finance Monash University Malaysia

Mr Muhammad Nejatullah SiddiqiAuthor, Scholar, Speaker, Trainer

Mr Rushdi SiddiquiHead of Islamic Finance

Thomson Reuters

Mr Dawood TaylorRegional Senior Executive-Middle East

Prudential PLC

Mr Abdulkader ThomasPresident & CEO

SHAPE – Financial Corp

Mr Paul WoutersPartnerBener

Prof Rodney WilsonDirector of Postgraduate Studies

Durham University

Mr Sohail ZubairiChief Executive Offi cer

Dar Al Sharia Legal & Financial Consultancy

Islamic Finance newsAdvisory Board:

Another Islamic Finance news exclusive

ISSUER SIZE INSTRUMENT

Finance ministry, Indonesia TBA Global Sukuk

Bank Negara Malaysia RM2.5 billion Sukuk

Ahmed Salem Bugshan Group US$100 million Sukuk

Kuwait Turkish Participation Bank (Kuwait Turk)

US$100 million Sukuk

Finance Ministry of Qatar QAR5 billion Sovereign Sukuk

Khazanah Nasional, Malaysia Between SG$300 million and SG$500 million

Sukuk

Saudi Electricity Company TBA Global Sukuk

Cagamas US$3 billion Sukuk

Bahrain TBA Sukuk

Malaysia Airports Holdings US$301 million Sukuk

Qatar Islamic Bank US$750 million Sukuk

Standard Chartered, UAE US$4 billion Sukuk

US Firm US$250 million Sukuk

GE Capital, US TBA Sukuk

Qatari Diar Real Estate, Qatar US$1.5 billion Sukuk

Swedish Export Credit Corporation

TBA Sukuk

Asian Development Bank, Philippines

TBA Sukuk

Central Bank of Kenya TBA Sukuk

Government of UK TBA London Olympic Sukuk

Kencana Petroleum, Malaysia RM250 million Sukuk

First Investment Company, Kuwait

KWD45 million Sukuk

VTB Bank, Russia RUB5.8 billion Sukuk

Sudan, Africa TBA Sukuk

Bank Muamalat, Indonesia TBA Sukuk

Saudi Electricity Company SAR5 billion Sukuk

Qatar Islamic Bank US$500 million Sukuk

Bank Asya, Turkey US$250 million Sukuk

Pakistan PKR100 billion Sukuk

Nakheel, UAE TBA Sukuk

Waha Capital, UAE US$272 million Sukuk and conventional bonds

Nakheel, UAE TBA Sukuk

Waha Capital, UAE US$272 million Sukuk

For more details and the full list of deals visit www.islamicfi nancenews.com

Keeping you abreast of the world’s upcoming Shariah compliant deals

www.islamicfi nancenews.comISLAMIC FUNDS TABLES

Page 28© 9th June 2010

DisclaimerCopyright Eurekahedge 2007, All Rights Reserved. You, the user, may freely use the data for internal purposes and may reproduce the index data provided that reference to Eurekahedge is provided in your dissemination and/or reproduction. The information is provided on an “as is” basis and you assume and will bear all risk or associated costs in its use, and neither Islamic Finance news, Eurekahedge nor its affi liates provide any express or implied warranty or representations as to originality, accuracy, completeness, timeliness, non-infringement, merchantability and fi tness for any

Contact EurekahedgeTo list your fund or update your fund information: [email protected]

For further details on Eurekahedge: [email protected] Tel: +65 6212 0900

Annualized Standard Deviation for ALL funds (as of the 8th June 2010)

FUND FUND MANAGER PERFORMANCE MEASURE FUND DOMICILE

1 CIMB Islamic Money Market CIMB-Principal Asset Management 0.17 Malaysia

2 Watani USD Money Market National Bank of Kuwait 0.39 Cayman Islands

3 Watani KD Money Market National Bank of Kuwait 0.51 Cayman Islands

4 Al Dar Money Market ADAM 0.73 Kuwait

5 CIMB Islamic Commodities Structured 1 CIMB-Principal Asset Management 1.56 Malaysia

6 CIMB Islamic Sukuk CIMB-Principal Asset Management 2.31 Malaysia

7 CIMB Islamic Structured Growth CIMB-Principal Asset Management 2.84 Malaysia

8BLME Umbrella Fund Sicav - SIF - Sharia'a $Income - Class B

Bank of London and The Middle East 4.12 Luxembourg

9 CIMB Islamic Enhanced Sukuk CIMB-Principal Asset Management 5.77 Malaysia

10 AMB Dana Arif Amanah Mutual 6.07 Malaysia

Eurekahedge Islamic Fund Index* 9.30

Eurekahedge North America Islamic Fund Index

Annualized returns for ALL funds (as of the 8th June 2010)

FUND FUND MANAGER PERFORMANCE MEASURE FUND DOMICILE

1 Mega Dana Syariah Mega Capital Indonesia 14.83 Indonesia

2 Amana Growth Saturna Capital 9.85 US

3 Mega Dana Obligasi Syariah Mega Capital Indonesia 9.74 Indonesia

4 SWIP Islamic Global Equity - Class A Scottish Widows Investment Partnership 8.74 UK

5 Intrinsic Crescent Ethical MDA Intrinsic Investment Management 8.61 Australia

6 CIMB Islamic Equity CIMB-Principal Asset Management 7.58 Malaysia

7 Amana Income Saturna Capital 6.74 US

8 Al Dar Money Market ADAM 5.90 Kuwait

9 DWS Noor Precious Metals Securities - Class A DWS Noor Islamic 5.17 Ireland

10 CIMB Islamic Global Emerging Markets Equity CIMB-Principal Asset Management 4.07 Malaysia

Eurekahedge Islamic Fund Index* 1.77

50

60

70

80

90

100

110

120

12/1

/99

4/1

/00

8/1

/00

12/1

/00

4/1

/01

8/1

/01

12/1

/01

4/1

/02

8/1

/02

12/1

/02

4/1

/03

8/1

/03

12/1

/03

4/1

/04

8/1

/04

12/1

/04

4/1

/05

8/1

/05

12/1

/05

4/1

/06

8/1

/06

12/1

/06

4/1

/07

8/1

/07

12/1

/07

4/1

/08

8/1

/08

12/1

/08

4/1

/09

8/1

/09

12/1

/09

4/1

/10

Index

Value

s

www.islamicfi nancenews.com

SHARIAH INDEXES

Page 29© 9th June 2010

The S&P Shariah Indices. Creating opportunity for Islamic investors.To learn more, contact [email protected].

S&P Shariah Indices Price Index Levels

100

220

340

460

580

700

820

940

1060

1180

1300

7/06/10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09May-10

S&P 500 ShariahS&P Europe 350 Shariah S&P Japan 500 Shariah

0

120

240

360

480

600

720

840

960

1080

1200

S&P Global Property ShariahS&P Global Infrastructure Shariah

7/06/10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09May-10

Index Code Index Name 7/06/10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09

SPSHX S&P 500 Shariah 931.589 962.089 1053.05 1041.681 995.08 968.978 1011.317

SPSHEU S&P Europe 350 Shariah 1011.875 1042.504 1185.474 1222.354 1156.441 1174.161 1223.984

SPSHJU S&P Japan 500 Shariah 926.659 942.416 1035.333 1041.497 983.363 993.055 989.581

Index Code Index Name 7/06/10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09

SPSHAS S&P Pan Asia Shariah 895.328 921.335 1010.90 979.563 919.609 918.391 967.112

SPSHG S&P GCC Composite Shariah 667.054 672.795 750.159 753.479 712.179 670.074 676.445

SPSHPA S&P Pan Arab Shariah 114.182 115.358 128.364 128.302 121.503 115.703 116.267

SPSHBR S&P BRIC Shariah 1041.529 1069.475 1183.561 1182.207 1117.929 1087.775 1173.998

Index Code Index Name 7/06/10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09

SPSHGU S&P Global Property Shariah 588.019 608.951 667.560 684.290 646.637 612.470 670.976

SPSHIF S&P Global Infrastructure Shariah 76.570 77.86 86.827 85.743 82.828 95.596 98.914

100

220

340

460

580

700

820

940

1060

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1300

S&P Pan Asia ShariahS&P GCC CompositeS&P Pan Arab ShariahS&P BRIC Shariah

7/06/10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09May-10

www.islamicfi nancenews.comSHARIAH INDEXES

Page 30© 9th June 2010

Tariq al-Rifai DirectorIslamic Market IndexesTel: +971 4374 [email protected]

Anthony YeungRegional Director Hong Kong, China, Taiwan, Korea, Japan, Australia & New ZealandTel: +852 2831 2580 [email protected]

Ariff SultanBusiness Development DirectorMalaysia, Singapore, Indonesia, India, Thailand, Pakistan, Sri Lanka & BangladeshTel: +65 6415 4262 [email protected]

For more information, please visit www.djislamicmarkets.com or contact

INDEX 1 Week 2 Week 3 Week 1 Month 3 Month 6 Month 1 Year YTD

DJIM World -3.29 -1.50 -6.59 -5.18 -10.23 -8.85 7.37 -9.99

DJIM US -3.22 -2.13 -7.45 -5.30 -9.07 -6.61 9.13 -7.87

DJIM Europe -3.42 -0.95 -5.53 -4.56 -16.28 -17.36 0.23 -17.80

DJIM GCC -1.20 -3.09 -7.08 -10.22 -8.68 -3.26 -2.82 -2.34

DJIM ASEAN -2.39 0.99 -5.59 -4.53 -2.79 -0.53 15.93 -2.38

PERFORMANCE OF DJ INDEXES

Data as of the 7th June 2010

DESCRIPTIVE STATISTICS Market Capitalization (US$ billion) Component Weight (%)

INDEXComponent

numberFull

Float adjusted

Mean Median Largest Smallest Large Small

DJIM World 2397 13686.93 10777.01 4.50 0.93 281.51 0.01 2.61 0.00

DJIM US 586 6026.65 5657.88 9.66 2.48 281.51 0.17 4.98 0.00

DJIM Europe 272 2403.39 1922.99 7.07 1.68 117.06 0.12 6.09 0.01

DJIM GCC 116 201.56 85.33 0.74 0.28 10.64 0.03 12.46 0.03

DJIM MENA 161 343.38 96.33 0.60 0.17 12.58 0.02 13.06 0.02

DJIM ASEAN 195 361.25 145.71 0.75 0.17 13.77 0.00 9.45 0.00

DJIM Titans 100 100 5982.66 5291.53 52.92 34.80 281.51 11.45 5.32 0.22

DJIM Asia/Pacifi c Titans 25 25 912.33 589.13 23.57 17.81 62.05 11.45 10.53 1.94

*all performance is cumulative, based on price return and US$

PRIC

E R

ETU

RN

(%)

DJIM EuropeDJIM World DJIM GCCDJIM US DJIM ASEAN

-20

-15

-10

-5

0

5

10

15

20

1 Week 2 Week 3 Week 1 Month 3 Month 6 Month 1 Year YTD

www.islamicfi nancenews.comISLAMIC LEAGUE TABLES

Page 31© 9th June 2010

TOP 30 ISSUERS OF ISLAMIC BONDS 12 Months

Issuer Nationality Instrument Market Amt US$ Iss % Managers

1 Saudi Electricity Saudi Arabia Sukuk Istithmar Domestic market public issue

3,733,000,000 2 20.6 HSBC, Samba Financial Group

2 Government of Dubai UAE Sukuk Euro market public issue

1,931,000,000 1 10.7 Standard Chartered, UBS, National Bank of Abu Dhabi, Dubai Islamic Bank, Bahrain Islamic Bank, Mitsubishi UFJ Financial Group, Emirates NBD, Al Hilal Bank

3 Petronas Global Sukuk Malaysia Sukuk Ijarah Euro market public issue

1,498,000,000 1 8.3 Morgan Stanley, CIMB, Citigroup

4 Malaysia Malaysia Sukuk Ijarah Euro market public issue

1,250,000,000 1 6.9 HSBC, Barclays Capital, CIMB

5 TDIC Sukuk UAE Sukuk Ijarah Euro market public issue

1,000,000,000 1 5.5 Standard Chartered, HSBC, Abu Dhabi Commercial Bank

6 Cagamas Malaysia Sukuk Domestic market public issue; Domestic market private placement

969,000,000 8 5.4 HSBC, CIMB, RHB Capital, Maybank Investment Bank, Cagamas, AmInvestment

7 Islamic Development Bank Saudi Arabia Sukuk Wakalah Euro market public issue

850,000,000 1 4.7 Deutsche Bank, BNP Paribas, HSBC, CIMB

8 Kingdom of Bahrain Bahrain Sukuk Ijarah Euro market public issue

750,000,000 1 4.2 Deutsche Bank, HSBC, Credit Agricole CIB

9 Danga Capital Malaysia Sukuk Musharakah Domestic market public issue

612,000,000 1 3.4 Standard Chartered, HSBC, OCBC, RHB Capital, CIMB

10 Sime Darby Malaysia Sukuk Musharakah Domestic market public issue

590,000,000 1 3.3 Public Bank, CIMB, Maybank Investment Bank

11 Syarikat Prasarana Negara Malaysia Sukuk Ijarah Domestic market private placement

573,000,000 1 3.2 CIMB, Maybank Investment Bank

12 GE Capital Sukuk US Sukuk Euro market public issue

498,000,000 1 2.8 Goldman Sachs, KFH National Bank of Abu Dhabi, Citigroup

13 Dar Al-Arkan International Sukuk

Saudi Arabia Sukuk Euro market public issue

446,000,000 1 2.5 Goldman Sachs, Deutsche Bank, Unicorn Investment Bank

14 Khazanah Nasional Malaysia Sukuk Musharakah Domestic market private placement

442,000,000 2 2.4 CIMB, Standard Charterered

15 Government of Ras Al Khaimah

UAE Sukuk Euro market public issue

407,000,000 1 2.3 Standard Chartered, BNP Paribas

16 MISC Malaysia Sukuk Domestic market public issue

368,000,000 2 2.0 HSBC, CIMB, AmInvestment

17 Pengurusan Aset Air Malaysia Sukuk Ijarah Domestic market private placement

341,000,000 1 1.9 CIMB

18 Projek Lebuhraya Utara Selatan

Malaysia Sukuk Musharakah Domestic market private placement

301,000,000 1 1.7 CIMB

19 Saudi Hollandi Bank Saudi Arabia Sukuk Domestic market public issue

193,000,000 1 1.1 Saudi Hollandi Bank Riyad Bank

20 Islamic Republic of Pakistan

Pakistan Sukuk Domestic government debt

174,000,000 1 1.0 Standard Chartered

21 Penerbangan Malaysia Malaysia Sukuk Domestic market public issue

148,000,000 2 0.8 Bank Muamalat Malaysia, CIMB, HSBC, AmInvestment

22 UMW Holdings Malaysia Sukuk Musharakah Domestic market private placement

141,000,000 1 0.8 Maybank Investment Bank

23 International Finance US Sukuk Euro market public issue

100,000,000 1 0.6 HSBC, KFH Dubai Islamic Bank, Liquidity Management Centre

24 Gamuda Malaysia Sukuk Musharakah Domestic market private placement

97,000,000 1 0.5 CIMB

25 CIMB Islamic Bank Malaysia Sukuk Musharakah Domestic market public issue

86,000,000 1 0.5 CIMB

26 Citydev Nahdah Singapore Sukuk Ijarah Domestic market private placement

72,000,000 2 0.4 CIMB

27 Syarikat Borcos Shipping Malaysia Sukuk Ijarah Domestic market private placement

48,000,000 1 0.3 Bank Muamalat Malaysia

28 Talam Malaysia Sukuk Domestic market public issue

38,000,000 1 0.2 RHB Capital

29 Projek Lintasan Shah Alam Malaysia Sukuk Ijarah Domestic market private placement

37,000,000 1 0.2 RHB Capital

30 Toyota Capital Malaysia Japan Sukuk Musharakah Domestic market private placement

36,000,000 1 0.2 Mitsubishi UFJ Financial Group, CIMB

Total 18,088,000,000 65 100

www.islamicfi nancenews.comISLAMIC LEAGUE TABLES

Page 32© 9th June 2010

GLOBAL ISLAMIC BOND VOLUME BY QUARTER

20 MOST RECENT GLOBAL ISLAMIC BONDS

Priced Issuer Nationality Instrument Market Value US$ Managers

27th May 2010 Malaysia Malaysia Sukuk Ijarah Euro market public issue 1,250,000,000 HSBC, Barclays Capital, CIMB

24th May 2010 Projek Lebuhraya Utara Selatan

Malaysia Sukuk Musharakah Domestic market private placement 301,000,000 CIMB

10th May 2010 Saudi Electricity Saudi Arabia Sukuk Domestic market public issue 1,866,000,000 HSBC, Samba Financial Group

22nd Apr 2010 Cagamas Malaysia Sukuk Domestic market private placement 156,000,000 Cagamas, HSBC, CIMB, Maybank Investment Bank

31st Mar 2010 Danga Capital Malaysia Sukuk Musharakah Domestic market public issue 612,000,000 Standard Chartered, HSBC, OCBC, RHB Capital, CIMB

10th Mar 2010 Khazanah Nasional Malaysia Sukuk Musharakah Domestic market private placement 359,000,000 Standard Chartered, CIMB

11th Feb 2010 Dar Al-Arkan International Sukuk

Saudi Arabia Sukuk Euro market public issue 450,000,000 Goldman Sachs Deutsche Bank, Unicorn Investment Bank

6th Jan 2010 Saudi Hollandi Bank Saudi Arabia Sukuk Domestic market public issue 193,000,000 Saudi Hollandi Bank Riyad Bank

21st Dec 2009 Cagamas Malaysia Sukuk Domestic market private placement 148,000,000 Cagamas

19th Nov 2009 GE Capital Sukuk US Sukuk Euro market public issue 500,000,000 Goldman Sachs, KFH National Bank of Abu Dhabi, Citigroup

16th Nov 2009 Cagamas Malaysia Sukuk Domestic market private placement 142,000,000 CIMB, Maybank Investment Bank

28th Oct 2009 Government of Dubai UAE Sukuk Euro market public issue 1,931,000,000 Standard Chartered, UBS, National Bank of Abu Dhabi, Dubai Islamic Bank, Bahrain Islamic Bank, Mitsubishi UFJ Financial Group, Emirates, Al Hilal Bank

22nd Oct 2009 Pengurusan Aset Air Malaysia Sukuk Domestic market private placement 741,000,000 CIMB

14th Oct 2009 Sime Darby Malaysia Sukuk Musharakah Domestic market public issue 590,000,000 Public Bank, CIMB, Group Maybank Investment Bank

13th Oct 2009 TDIC Sukuk UAE Sukuk Ijarah Euro market public issue 1,000,000,000 Standard Chartered, HSBC, Abu Dhabi Commercial Bank

16th Sep 2009 Islamic Republic of Pakistan Pakistan Sukuk Domestic government debt 174,000,000 Standard Chartered

11th Sep 2009 UMW Holdings Malaysia Sukuk Musharakah Domestic market private placement 141,000,000 Maybank Investment Bank

11th Sep 2009 Syarikat Prasarana Negara Malaysia Sukuk Ijarah Domestic market private placement 573,000,000 CIMB, Maybank Investment Bank

11th Sep 2009 MISC Malaysia Suku Murabahah Domestic market public issue 286,000,000 HSBC, CIMB

9th Sep 2009 Islamic Development Bank Saudi Arabia Sukuk Wakalah Euro market public issue 850,000,000 Deutsche Bank, BNP Paribas, HSBC, CIMB

GLOBAL ISLAMIC BOND VOLUME BY MONTH

www.islamicfi nancenews.comISLAMIC LEAGUE TABLES

Page 33© 9th June 2010

TOP 30 MANAGERS OF ISLAMIC BONDS 12 Months

Manager Amt US$ Iss %

1 CIMB 3,612,000,000 32 20.0

2 HSBC 3,568,000,000 15 19.7

3 Samba Financial Group 1,866,000,000 2 10.3

4 Standard Chartered 1,274,000,000 9 7.0

5 Maybank Investment Bank 795,000,000 7 4.4

6 Deutsche Bank 611,000,000 3 3.4

7 Citigroup 599,000,000 2 3.3

8 Morgan Stanley 499,000,000 1 2.8

9 Barclays Capital 417,000,000 1 2.3

10 BNP Paribas 416,000,000 2 2.3

11 Abu Dhabi Commercial Bank 333,000,000 1 1.8

12 Dubai Islamic Bank 331,000,000 2 1.8

13 Mitsubishi UFJ Financial Group 324,000,000 2 1.8

14 UBS 306,000,000 1 1.7

14 Emirates NBD 306,000,000 1 1.7

16 RHB Capital 262,000,000 4 1.5

17 Credit Agricole CIB 250,000,000 1 1.4

18 Goldman Sachs 248,000,000 2 1.4

19 Cagamas 231,000,000 3 1.3

20 KFH 224,000,000 2 1.2

21 Bahrain Islamic Bank 208,000,000 1 1.2

22 National Bank of Abu Dhabi 197,000,000 2 1.1

23 Public Bank 197,000,000 1 1.1

24 Unicorn Investment Bank 149,000,000 1 0.8

25 AmInvestment 144,000,000 5 0.8

26 OCBC 137,000,000 2 0.8

27 Al Hilal Bank 97,000,000 1 0.5

28 Saudi Hollandi Bank 97,000,000 1 0.5

28 Riyad Bank 97,000,000 1 0.5

30 Bank Muamalat Malaysia 85,000,000 2 0.5

Total 18,088,000,000 65 100

GLOBAL ISLAMIC BOND VOLUME - US$ ANALYSIS

ISLAMIC BOND VOLUME BY CURRENCY US$ (BILLION)

ISLAMIC BOND VOLUME BY ISSUER NATION US$ (BILLION) - 12 Months

GLOBAL ISLAMIC BOND VOLUME BY SECTOR - 12 Months

GLOBAL ISLAMIC LOANS - YEARS TO MATURITY (YTD Comparison)

Government

Finance

Utility & Energy

Oil & Gas

Real Estate/Property

Other

9%

8%

34%

16%

21%12%

0% 10% 30% 50%20% 40% 60% 70% 90%80% 100%

2004

2005

2006

2007

2008

2009

2010

0 to 3 years 3 to 5 years 5 to 7 years 7 to 10 years 10+years

8.0

5.0

3.9

0.7

0.2

US dollar

Malaysian ringgit

Saudi riyal

UAE dirham

Pakistan rupee

5.2

7.7

3.3

0.8

0.6

Malaysia

UAE

Saudi Arabia

Bahrain

US

www.islamicfi nancenews.comLEAGUE TABLES

Page 34© 9th June 2010

SUKUK MANAGERS MAY 2009 – MAY 2010

ManagerManager Commitment

(in US$)Issues

Market Share %

1 Malaysia (Government) 20,412,148,600 91 49.8

2 CIMB 4,774,595,274 77 11.6

3 HSBC Banking Group 2,192,003,002 48 5.3

4 Malayan Banking 1,324,477,188 93 3.2

5 Citigroup 1,276,560,949 7 3.1

6 Morgan Stanley 1,215,000,000 5 3.0

7 RHB Banking Group 1,062,809,121 33 2.6

8 Malaysian Industrial Development Finance

987,951,510 234 2.4

9 Samba Financial Group 933,261,000 1 2.3

10 AMMB Holdings 894,732,227 67 2.2

11 Standard Chartered 740,695,346 15 1.8

12 Dubai Islamic Bank 602,646,875 3 1.5

13= Mitsubishi UFJ Financial Group 482,646,875 2 1.2

13= UBS 482,646,875 2 1.2

15 Cagamas 432,887,481 36 1.1

16 Barclays Bank 412,500,000 1 1.0

17 Indonesia (Government) 244,383,617 14 0.6

18 Affi n Holdings 215,967,680 21 0.5

19 OCBC Bank 186,581,940 27 0.5

20 OSK Holdings 180,818,654 26 0.4

SUKUK MANAGERS FEB 2010 - MAY 2010

ManagerManager Commitment

(in US$)Issues

Market Share %

1 Malaysia (Government) 5,635,749,900 27 57.1

2 CIMB 1,658,004,817 17 16.8

3 HSBC Banking Group 552,718,100 6 5.6

4 AMMB Holdings 439,466,718 13 4.5

5 Barclays Bank 412,500,000 1 4.2

6 Malayan Banking 237,047,963 20 2.4

7= RHB Banking Group 234,907,485 5 2.4

7= Malaysian Industrial Development Finance

233,261,147 48 2.4

9 Cagamas 140,218,100 5 1.4

10 Affi n Holdings 72,027,955 6 0.7

11 EON Capital 49,963,711 16 0.5

12 Bukhary Capital 48,062,090 3 0.5

13 OCBC Bank 45,136,560 4 0.5

14 OSK Holdings 40,213,959 5 0.4

15 United Overseas Bank 28,753,072 5 0.3

16 Standard Chartered 14,586,988 2 0.1

17 Hong Leong Financial Group 10,911,915 1 0.1

18 Indo Premier Securities 10,822,500 1 0.1

19 Public Bank 7,758,210 2 0.1

SUKUK ISSUERS MAY 2009 – MAY 2010

IssuerIssuer Commitment

(in US$)Issues

Market Share %

1 BNM Sukuk 10,506,578,100 52 23.6

2 Malaysia (Government) 7,820,788,300 26 17.6

3 Bank Indonesia 3,772,448,630 49 8.5

4 Petronas Global Sukuk 3,000,000,000 2 6.7

5 Perusahaan Penerbit SBSN Indonesia 2,027,529,170 11 4.6

6 Dubai DOF Sukuk 1,930,587,500 2 4.3

7 Saudi Electricity 1,866,522,000 1 4.2

8 Cagamas 1,572,719,680 36 3.5

9 Khazanah Nasional 1,073,562,800 3 2.4

10 TDIC Sukuk 1,000,000,000 1 2.2

11 Pengurusan Air SPV 950,718,040 4 2.1

12 ESSO Malaysia 792,908,700 11 1.8

13 Sime Darby 636,963,100 4 1.4

14 Danga Capital 621,408,000 1 1.4

15 Syarikat Prasarana Negara 577,872,000 2 1.3

16 MISC 572,905,000 6 1.3

17 Bank Negara Malaysia 566,262,000 10 1.3

18 Dar Al-Arkan International Sukuk 450,000,000 1 1.0

19 Malakoff 331,466,000 2 0.7

20 Projek Lebuhraya Utara-Selatan 303,767,000 1 0.7

SUKUK ISSUERS FEB 2010 - MAY 2010

IssuerIssuer Commitment

(in US$)Issues

Market Share %

1 BNM Sukuk 3,877,653,900 19 39.4

2 Malaysia (Government) 1,490,354,200 8 15.1

3 Danga Capital 621,408,000 1 6.3

4 Cagamas 558,743,400 5 5.7

5 Perusahaan Penerbit SBSN Indonesia

512,148,570 3 5.2

6 Bank Indonesia 502,688,588 9 5.1

7 Khazanah Nasional 367,252,800 1 3.7

8 Projek Lebuhraya Utara-Selatan 303,767,000 1 3.1

9 ESSO Malaysia 230,390,100 4 2.3

10 Pengurusan Air SPV 210,853,040 1 2.1

11 Malakoff 155,642,000 1 1.6

12 Gamuda 99,324,800 1 1.0

13 Hytex Integrated 82,921,503 9 0.8

14 Toyota Capital Malaysia 82,646,655 2 0.8

15 Hubline 72,027,955 6 0.7

16 Haluan Gigih 55,870,200 5 0.6

17 Syarikat Borcos Shipping 48,062,090 3 0.5

18 MM Vitaoils 41,479,852 15 0.4

19 Muhibbah Engineering (M) 40,466,920 2 0.4

20 Citydev Nahdah 35,971,600 1 0.4

(12 months) (3 months)

(12 months) (3 months)

Islamic Sukuk league tables refl ect Shariah compliant bonds showing evidence of ownership of assets or their earnings. These results include (but are not limited to) the following securities/assets: Sukuk Salam, Sukuk Mudarabah, Sukuk Ijarah, Sukuk Murabahah, Sukuk Istisna and Sukuk Musharakah.

For more information please contact:

Aimee Webster Telephone: +1-646-223-6816 Email: [email protected]

ALL DATA AS OF THE 7th JUNE 2010

www.islamicfi nancenews.comLEAGUE TABLES

Page 35© 9th June 2010

ISLAMIC LOANS RAISED MAY 2009 – MAY 2010

Borrower Country Islamic Loan Amount (US$)

1 Zain Saudi Arabia 2,499,800,000

2 Rabigh Independent Power Project

Saudi Arabia 1,503,000,000

3 Qatari Diar Real Estate Investment

Qatar 1,500,000,000

4 Saudi Binladen Group Saudi Arabia 1,266,632,890

5 Qatari Diar Real Estate Investment

Qatar 1,098,538,943

6 Etihad Etisalat Saudi Arabia 399,989,334

7 International Petroleum Investment

UAE 317,741,233

8 Al Dur Power & Water Bahrain 300,000,000

9 Asya Katilim Bankasi Turkey 253,944,570

10 Dubai International Capital UAE 225,000,000

11 Dolphin Energy UAE 218,000,000

12 Qatar Airways Qatar 160,000,000

13 Bahrain Mumtalakat Holding Bahrain 140,000,000

14 Burgan Co for Well Drilling Trading & Maintenance

Kuwait 125,000,000

15 Emirates Trading Agency UAE 100,000,000

16 Gulf Finance House Bahrain 100,000,000

17 Olam International Singapore 100,000,000

18 Global Investment House Kuwait 91,161,570

LOAN BOOKRUNNERS MAY 2009 – MAY 2010

LenderPro Rata

(US$)Full Credit

(US$) DealsMarket

Share %

1= Al Rajhi Banking & Investment

1,249,900,000.00 2,499,800,000.00 1 27.0

1= Credit Agricole Corporate & Investment Bank

1,249,900,000.00 2,499,800,000.00 1 27.0

3 Qatar Islamic Bank 1,098,538,943.20 1,098,538,943.20 1 23.8

4 WestLB 291,161,570.19 291,161,570.19 3 6.3

5= Standard Chartered 159,648,190.00 478,944,570.00 2 3.5

5= Noor Islamic Bank 159,648,190.00 478,944,570.00 2 3.5

7 Citigroup 130,500,000.00 130,500,000.00 3 2.8

8 Arab Banking 84,648,190.00 253,944,570.00 1 1.8

9 Royal Bank of Scotland

75,000,000.00 225,000,000.00 1 1.6

10= BNP Paribas 41,666,666.67 125,000,000.00 1 0.9

10= Gatehouse Bank 41,666,666.67 125,000,000.00 1 0.9

10= Liquidity Management House for Investment

41,666,666.67 125,000,000.00 1 0.9

(12 Months) (12 Months)

(12 Months)

ALL DATA AS OF THE 7th JUNE 2010

LOAN MANDATED LEAD ARRANGERS MAY 2009 – MAY 2010

Lender Pro Rata (US$) Full Credit (US$) Deals Market Share %

1 HSBC 1,530,319,392.23 5,645,789,333.62 6 14.5

2 Standard Chartered

1,203,669,229.53 4,251,106,140.19 8 11.4

3 Qatar Islamic Bank

1,098,538,943.20 1,098,538,943.20 1 10.4

4 Samba Financial Group

921,188,778.30 3,169,622,223.41 3 8.7

5 Credit Agricole Corporate & Investment Bank

835,322,058.82 4,520,800,000.00 4 7.9

6 National Commercial Bank

821,191,444.89 2,769,632,889.79 2 7.8

7 Al Rajhi Banking & Investment

791,722,058.82 4,302,800,000.00 3 7.5

8 Arab Bank 492,447,058.82 2,242,800,000.00 3 4.7

9 Noor Islamic Bank 318,518,806.42 796,685,802.85 3 3.0

10 WestLB 235,879,372.86 591,161,570.19 4 2.2

11= Alinma Bank 187,875,000.00 1,503,000,000.00 1 1.8

11= Bank of China 187,875,000.00 1,503,000,000.00 1 1.8

13 Al Hilal Bank 172,870,616.42 359,741,232.85 2 1.6

14= Standard Bank 155,000,000.00 775,000,000.00 1 1.5

14= National Bank of Kuwait

155,000,000.00 775,000,000.00 1 1.5

14= Gulf Bank of Kuwait

155,000,000.00 775,000,000.00 1 1.5

17 Citigroup 130,500,000.00 130,500,000.00 3 1.2

18 Riyad Bank 117,644,392.23 699,989,333.62 2 1.1

19 National Bank 99,997,333.40 399,989,333.62 1 0.9

20 Arab Banking 84,648,190.00 253,944,570.00 1 0.8

21 Royal Bank of Scotland

75,000,000.00 225,000,000.00 1 0.7

22 Development Bank of Singapore

67,222,222.22 400,000,000.00 3 0.6

23 Societe Generale 61,247,058.82 518,000,000.00 2 0.6

24 BNP Paribas 56,647,058.82 467,000,000.00 3 0.5

25 Mitsubishi UFJ Financial

42,647,058.82 400,000,000.00 2 0.4

26 Liquidity Management House for Investment

40,555,555.56 265,000,000.00 2 0.4

27 Kuwait Finance House

33,787,869.59 231,161,570.19 2 0.3

28= Bank Islam Malaysia

26,666,666.67 160,000,000.00 1 0.3

28= Malayan Banking 26,666,666.67 160,000,000.00 1 0.3

28= Masraf Al Rayan 26,666,666.67 160,000,000.00 1 0.3

28= Sumitomo Mitsui Financial Group

26,666,666.67 160,000,000.00 1 0.3

32= Ahli United Bank 25,000,000.00 125,000,000.00 1 0.2

32= Gatehouse Bank 25,000,000.00 125,000,000.00 1 0.2

32= Bumiputra-Commerce Holdings

25,000,000.00 100,000,000.00 1 0.2

32= Boubyan Bank 25,000,000.00 125,000,000.00 1 0.2

www.islamicfi nancenews.comLEAGUE TABLES

Page 36© 9th June 2010

SUKUK BY COUNTRY MAY 2009 – MAY 2010

Country Volume Issued Volume Outstanding

Malaysia 29,447,388,946 19,452,188,027

Indonesia 5,965,116,539 2,278,648,239

Eurobond 4,555,587,500 4,555,587,500

Saudi Arabia 2,059,850,500 2,059,850,500

US 2,075,000,000 2,075,000,000

Pakistan 174,265,020 174,265,020

Singapore 92,728,884 92,728,884

Bahrain 76,622,780 26,521,700

Cayman Islands - -

UAE - -

Jersey - -

LOANS BY COUNTRY MAY 2009 – MAY 2010

Country Volume (US$) Market Share (%)

Saudi Arabia 5,669,422,223 53.6

Qatar 2,758,538,943 26.1

UAE 902,741,233 8.5

Bahrain 540,000,000 5.1

Turkey 306,944,570 2.9

Kuwait 293,661,570 2.8

Singapore 100,000,000 0.9

SUKUK BY INDUSTRY MAY 2009 – MAY 2010

Industry Volume Issued Volume Outstanding

Other fi nancial 21,554,971,455 14,152,621,117

Sovereign 12,333,763,949 8,163,260,695

Agency 3,220,902,950 3,084,328,245

Electric power 2,230,183,097 2,054,359,097

Manufacturing 2,064,158,024 1,286,862,214

Transportation 1,448,700,290 1,281,712,820

Energy company 864,879,035 123,501,170

Service company 310,963,558 158,550,202

Banks 280,009,300 280,009,300

Consumer goods 116,830,910 108,387,410

Telephone 21,197,600 21,197,600

LOANS BY INDUSTRY MAY 2009 – MAY 2010

Industry Volume (US$) Market Share(%)

Telecommunications 2,977,289,334 28.2

Real estate 2,598,538,943 24.6

Utilities 1,803,000,000 17.1

Construction 1,366,632,890 12.9

Financial services 810,106,140 7.7

Oil and gas 343,000,000 3.2

Chemicals, plastics and rubber 330,741,233 3.1

Transportation 160,000,000 1.5

Wholesale 100,000,000 0.9

GLOBAL ISLAMIC VOLUME SUKUK/LOANS (US$ IN MILLIONS)

For more information please contact: Aimee WebsterTelephone: +1-646-223-6816 Email: [email protected]

(12 Months) (12 Months)

(12 Months) (12 Months)

ALL DATA AS OF THE 7th JUNE 2010

1Q - '07 2Q - '07 4Q - '07 1Q - '083Q - '07 2Q - '08 3Q - '08 1Q - '09 2Q - '09 3Q - '09 TD 4Q - '09 TD 1Q - '10 TD4Q - '08

Sukuk

Loan

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

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Absa Bank 3Absa Islamic Bank 3Absa Private Bank 3Abu Dhabi Islamic Bank 6AEON Credit Service 8Affi n Holdings 4Ahmed Salem Bugshan Group 6Al Baraka Financial Services Corporation 5Al Hilal Bank 9Al Rajhi Bank 4Allen & Gledhill 24Allen & Overy (Thailand) 11Alliance Holdings 4Alpha Asset Management 9Amanie Islamic Finance Consultancy and Education 5American International Assurance Company 8American International Assurance Company (Bermuda) 8American International Group 7, 8American University in Cairo 3AmIslamic Bank 4Amlak Finance 6AmTrustee 25ApexAfrica Capital 3Bank Negara Malaysia 4, 7Bank of Bangladesh 4Bank of London and the Middle East 5, 23Bank Simpanan Nasional 7BankIslami Pakistan 15Barclays 26BNP Paribas 26Bursa Malaysia 26CapAsia 5Capitas Group International 6Central Bank of the Republic of Turkey 5CIMB Group 5CIMB Investment Bank 25CIMB Standard 5Cosmopolitan Traders 4Deloitte Touche Tohmatsu 26Dubai Bank 8Dubai Islamic Bank 6Durham University 23Egyptian General Authority for Investment 3

Emirates 17EON Capital 4Esso Malaysia 8Exxon Mobil Corporation 8Fattah Finance 9Fitch 8Fortis Healthcare 3GE Capital 26Global Investment House 6Gulf African Bank 3Gulf Bank 6Hamilton Harrison & Mathews 3Hong Kong Monetary Authority 26Hong Leong Bank 4Hong Leong Islamic Bank 4HSBC 6, 26HSBC Amanah 6ICB Banking Group 4ICB Islamic Bank 4ICD 6IDB 14IFI Consulting Company 9INCEIF 20Integrated Healthcare 4Islamic Bank of Thailand 10, 11ISRA 4Kausar Consulting 9Kerala State Industrial Development Corporation 5Khazanah Nasional 3Kuwait Turkish Participation Bank 5Lee Hishammuddin Allen & Gledhill 25London Stock Exchange 26Macquarie Group 26Maybank 8Maybank Investment Bank 8Metropolitan Life Insurance 7MIFC 4Mizuho Corporate Bank 8 Monetary Authority of Singapore 4Moody’s 8Morgan Stanley 26MTD Group 25MTD Infraperdana 25Mumtalakat Holding Company 8National Bank of Abu Dhabi 8

National Bank of Kuwait 6Nestle 17North Jersey Federal Credit Union 3Ogilvy & Mather 16, 17Ogilvy Noor 16OIC 5, 14Oriental Bank 4Pakistan Venture Capital 13Parkway Holdings 3Perbadanan Tabung Pendidikan Tinggi Nasional 4Prudential 7, 8Prudential BSN Takaful 7Public Bank 8Public Islamic Bank 8RAM 8REDmoney Group 3, 5Reserve Bank of India 5Reval 5S&P 8Saturna 9Saturna Capital Corporation 9Securities Commission of Malaysia 4,13Senai-Desaru Expressway 8Shore Cap Holdings 4Solidarity General Takaful Company 7Standard Bank Group 5State Bank of Pakistan 4Summit Alliance Port 4Summit Industrial and Mercantile Corporation 4Tamweel 6Thai Bond Market Association 10, 11Thai Securities and Exchange Commission 10The Bank of Thailand 11The Bank of Tokyo-Mitsubishi UFJ 8The Consumers Association of Subang and Shah Alam 7The Saudi Investment Bank 8Thompson Reuters 4TNS 16Trowers & Hamlin 26University of Bahrain 5Visor Capital 9World Islamic Economic Forum 4

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