Middle East and North Africa Trade Forum

Tuesday 25 September, 2012

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This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered including such client’s subsidiaries,

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©2012 JPMorgan Chase & Co. All rights reserved.

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Farrukh Siddiqui

Global Trade Head, Middle East and Africa, J.P. Morgan

W E L C O M E B A C K R E M A R K S

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Agenda

Tuesday September 25

09:15 Welcome Back Remarks

Farrukh Siddiqui, Global Trade Head, Middle East and Africa, J.P. Morgan

09:30 Executing Trade Differently - New Initiatives

Impact of Basel III on Global Trade

Remaining aware of changes to capital rules related to the trading book, securitizations and counterparty credit

risk enables clients to manage risks and liquidity while keeping costs at bay.

Global Network Trade

Leveraging global presence and global relationships creates value added solutions for customers and

suppliers worldwide through the global trade corridors.

Online Trade Finance: Essential and Inevitable

Web-based global platforms help clients simplify and gain visibility into the entire range of their trade activities

lowering costs and optimizing cash flow.

Saadat Khan, Global Trade, Middle East and North Africa, J.P. Morgan

Zeeshan Khan, Global Trade, Middle East and North Africa, J.P. Morgan

10:30 Refreshments

11:00 Accessing Alternative Sources of Liquidity with Islamic Trade Finance

The role and benefits of Islamic Finance within trade continues to evolve as the number of new entrants increases. With

this evolution it is important to remain mindful of regulatory challenges and liquidity limitations whilst simultaneously

expanding reach.

Gohar Bilal, Islamic Product, Middle East and North Africa, J.P. Morgan

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Agenda

11:45 Panel Discussion: Trade Challenges and Opportunities

Analysis of the appetite and primary benefits of banks providing trade finance in the MENA market and developing intra-

regional trade. How transactions undertaken by local banks remove the political and payment risk and confirming banks

can unlock the potential of emerging markets through guarantee provision.

Moderator: Jossan Maalouf, Global Trade, Middle East and North Africa, J.P. Morgan

Panellists: Ekrimeh Mahasneh, CIC

Diaa Abu Hijleh, Manaseer Group

Daho Abidat, Vitol

Darine Sawma, Demco Steel

12:45 Closing Remarks

Asif Raza, Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan

Farrukh Siddiqui, Global Trade Head, Middle East and Africa, J.P. Morgan

13:00 Lunch

Al Saraya Restaurant

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Saadat Khan,

Global Trade, Middle East and North Africa, J.P. Morgan

E X E C U T I N G T R A D E D I F F E R E N T L Y

- N E W I N I T I A T I V E S

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Zeeshan Khan,

Global Trade, Middle East and North Africa, J.P. Morgan

Agenda

Impact of Basel III on Global Trade

Global Network Trade

Online Trade Finance : Essential and Inevitable

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I M P A C T O F B A S E L I I I O N G L O B A L T R A D E

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Basel III: What is it all about?

According to The Basel Committee on Banking Supervision (BCBS), the Basel III proposals have two

main objectives:

Improve banking sector’s ability to absorb shocks – strengthen global capital and liquidity rules in

the event of financial and economic stress

Improve risk management and governance – strengthen banks’ transparency and disclosures

Objectives

Basel III

Mitigate Risk

Strengthen capital requirements

for counterparty credit risk

exposure arising from

derivatives, repos and securities

financing activities

Liquidity

Implement new liquidity standards:

■ Short term – Liquidity Coverage Ratio2 ≥ 100%

■ Long term – Net Stable Funding Ratio3 ≥ 100%

Capital

Raise quality, consistency and transparency

of the risk weighted capital base from 8%1 in

2012 to 10.5%1 in 2019

Cyclicality

Hold additional capital to limit

impact to banks and associated

counterparties in the event of a

crisis

Leverage

Limit leverage ratio to 3% (i.e. total

assets (on & off balance sheet) should

not exceed 33 times bank’s tier 1

capital

≥ 100%

Stock of high quality liquid assets

Net cash outflows over a 30-day period

2.Liquidity Coverage Ratio = Available amount of stable funding

Required amount of stable funding

≥ 100% 3.Net Stable Funding Ratio =

1. Source (www.bis.org) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements). 10.5% includes2.5% capital conversation buffer

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What is Basel III?

Basel III reforms were introduced to strengthen global capital and liquidity rules with the goal of promoting a more

resilient banking sector. The objective of the reform is to improve the banking sector’s ability to absorb shocks

arising from financial and economic stress.

2012 2013 2014 2015 2016 2017 2018 2019

Ris

k W

eig

hte

d A

sse

ts (

RW

A)

2% 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%

2%

1%

1.5%

1.5% 1.5% 1.5% 1.5% 1.5%

4% 3.5% 2.5% 2% 2% 2% 2% 2%

0.6% 1.2% 1.9% 2.5%

Tier 1 Other Tier 1 Other Capital Capital Conservation Buffer

8%

10.5%

Stock of high quality liquid assets

Net cash outflows over a 30-day period

≥ 100%

Available amount of stable funding

Required amount of stable funding

≥ 100%

Capital Ratio1 Liquidity Coverage Ratio (LCR)

Net Stable Funding Ratio (NSFR)

Promote short term resiliency of a bank’s liquidity

profile by ensuring it has sufficient high quality

assets to survive an acute stress scenario (30 days)

Promote resiliency of a bank’s long term funding

structure by ensuring that it holds stable medium

and long term funding for its asset profile (> 1 year

horizon)

Promote focus on common equity and retained

earnings as the highest quality components of a

bank’s capital

1. Source (www.bis.org) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements)

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Euro Finance Study

Impact of Basel III on your company’s performance

1. 303 European corporate treasury professionals

Source – The impact of Basel III on corporate performance, EuroFinance, Jan 17, 2012

40%

51%

9%

40%

57%

3%

0% 10% 20% 30% 40% 50% 60%

No Impact

Negative Impact

Positive Impact

All European Respondents Western European Corporations1

Corporations should be more prepared for the potential negative impact from the introduction of

Basel III

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Impact of Basel III – Capital and Liquidity Shortfall

Basel III – Impact and Response to the Banking Sector

€1.1

€1.3

€2.3

€0.6

€0.6

€2.2

€1.7

€1.9

€4.5

Europe U.S. Total

Capital

Short Term Liquidity

Long Term Liquidity

Source – Global Insights (McKinsey analysis)

How are banks responding?

Operational balances are now an important component of the ―corporate – bank‖ relationship;

credit will be closely scrutinized and will get more expensive

Need to raise new capital

Business structuring –

Shed unprofitable businesses

Curb lending in markets

Sell business lines

Scale back regional expansion plans

Capital and liquidity efficient products

Financial restructuring – improve quality of

capital and reduce capital needs

Reduce costs – layoffs, reduced capital

expenditure (technology, customer service,

expansion)

Use stock for dividends, salaries, bonuses

In Trillions

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An External View: Impacts of the Proposals

SOURCE: Basel III: Issues and Implications (KPMG Analysis)

• Weaker banks will get crowded out

• Significant pressure on profitability and on ROE

• Change in demand from short-term to long-term funding

• Legal entity reorganization

Impact on Individual Banks

• Reduced risk of a systematic banking crisis

• Reduced lending capacity

• Reduced investor appetite for bank debt and equity

• Inconsistent implementation on the Basel III proposals leading to international arbitrage

Impact on the Financial System

• Basel III would reduce ROE by 4 percentage points for the average bank in Europe and would reduce ROE by 3 percentage points for the average bank in the US.

• To meet capital requirements for 2012, banks must increase lending by 15bps on average.

Causes

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Bank Selection Criteria in the Basel III Environment

III. Capability

and

Resiliency

II. Deposits

What level of deposit should I leave at the

bank to manage wallet share?

Am I managing my counterparty risk?

Am I within my investment guidelines?

Are deposits tied to operational business?

Can my bank hold my non operational

balances (negative impact on LCR)?

Do I need to revise my investment guidelines

to adjust for Basel III?

Does the bank have the capability to serve

my cash management needs?

Can I get good customer service?

Will the bank continue to invest in the

transactions services business?

Will Basel III impact on intraday lines raise

the cost of payment services?

Can the bank maintain a governance

structure to ensure resiliency and continuity

in operations?

Bank Selection – “Traditional” Criteria Bank Selection – “Basel III” Criteria Evaluation

Is the bank a lead provider?

Is the bank in my credit revolver?

Can the bank maintain it’s credit appetite

during times of stress?

I. Credit

Can the bank support my credit needs and

meet higher capital ratios under Basel III?

Can the bank continue to provide credit on to

support my global supply chain (e.g. SCF)?

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Assessing the Implication of Basel III on Your Entity

Banking partners will value operational balances

Deposits tied to operating business are valuable

(i.e. custody, clearing and core cash)

Yields on non operational balances will be under pressure and

of less value to your banking partner due to higher leverage

cost

Corporate - Cash Surplus Entity

Bank funding will be an important component to the overall

relationship (higher liquidity and capital requirements)

Funding will increase for committed / uncommitted liquidity

lines, specialized financing with high risk weights, etc.

Trade finance projected to be more as a risk mitigation tool.

Additional capital and liquidity requirements will increase the

cost to banks (i.e. leading to an increase in financing costs)

30-day commercial paper market is expected to shrink

Corporate - Cash Deficit Entity

Basel III

Ready

Basel III Readiness – Action Steps

Re-evaluate your funding

needs

Get visibility to your

corporate liquidity

Evaluate your banking

partners liquidity offerings

based on the regulatory

changes

Identify counterparty

exposure

Banking partner

Customers

Suppliers

Quantify exposure & risk

Ensure compliance with

internal policies

Identify top banking

partners

Ensure liquidity and

transactional support

Develop contingency and

business continuity plan

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Trade Business models are driven by the transfer of assets from corporate balance sheets to bank balance

sheets

Growing bank balance sheets and increasing leverage leading up to 2008 made these businesses attractive with

strong margins

Post crisis, the old model has been discredited and banks will not be able to rely solely on their balance sheet to

meet corporate demands

The new regulatory regime will also play a fundamental role in reshaping how banking including trade finance is

implemented going forward

Distribution strategies will become increasingly important

Partnerships between banks will become increasingly important

New Approach to Trade Business J . P

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In addition to asset quality, U.S. banks’

capital position has significantly improved

Strong capital is allowing banks to ease

lending standards and make more loans

Improving asset quality is allowing for

organic earnings generation to flow directly

into retained earnings as banks hoard cash

and supply less credit into a deleveraging

economy

Capital hoarding and gradually improving

asset trends have led to significant balance

sheet improvement in the U.S. banking

industry

As an example, the major U.S. banks have

basically doubled their Tier 1 common

equity ratio (under Basel I) over the past

two years

Capital Positions of U.S. Banks Significantly Improved

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G L O B A L N E T W O R K T R A D E

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Importing Regions Exporting Regions

SOURCE: ICC Global Trade & Finance Survey 2012

Volume and Value of Average Letters of Credit Issued J . P

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Key Trends in Commodity and Trade Finance

As western demands stall, trade between developing countries (APAC) is growing

According to SWIFT, nearly 2/3 of the total LCs issued were in the APAC region

After the financial crisis, international banks looked more carefully at their risks, and withdrew from, or

limited their exposure to trade finance

As a result, a funding gap estimated $250 billion per annum opened up, creating an opportunity for

new players to fill the gap

Stressed by competitive and regulatory pressures, global banks have a few changes:

First, by investing in technology, banks allow their clients to initiate and conclude transactions

electronically and combine trade products with cutting edge automated cash and liquidity solutions

– Giving banks valuable cross-selling opportunities that enable them to price more competitively

Secondly, banks are increasingly offering services on the ground in key local markets, providing an

attractive mix of international reach and local understandings

Trend 1: Geographic – The Rise of the East & South-South Axis (APAC)

Trend 2: New players – Filling the Void

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Trade Finance Innovation

Post Import Finance supported by Precautionary Guarantee:

• It is a bank’s unique expertise to tap Trade flows which are on open account terms and do not involve Documentary Credit, a growing case with Middle East based importers. Banks’ Sales, Product and Legal experts customize financing of such trade transactions by involving Avalizing banks to issue Precautionary Guarantees. This is simple and time efficient and results in cost advantages to importers.

• Example: Import of US made cars

Network Trade:

• Banks take advantage of our unrivalled global relationships with exporters, importers and banks to bring the benefits of risk mitigation to Trade transactions, reducing financing costs and providing end-to-end structuring for all parties.

• Example: Import of Automobiles from Asia, Electronics, Infrastructure

Post/Pre Import/Export Swift Finance:

• This unique offering is designed to finance the Trade payables of our partner banks, helping them better serve their clients’ Trade needs. Banks may work on individual large transactions such as payment under an SBLC / Open Account or for a group of Trade transactions for well- known corporate names. The repayment of this finance is tied to the cash conversion cycle of the underlying Trade.

• Example: Import of Oil against SBLCs confirmed by a Bank and finance provided directly to the issuing bank for onward payment

ECA Backed Financing:

• The year 2009 proved strong relationships and structuring abilities with US Ex-Im, as banks helped regional aviation players raise financing for their purchase of Boeings. The ECA finance capability is also being enhanced in the region through inclusion of ECGD-backed financing for Airbus

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Trade Finance Deals

Deal Type Situation Solution

Import Finance Large MENA company which purchases Soft

Commodities regularly from US Suppliers on

LCs requires payment terms up to 180 days

while suppliers asks sight payment

An International Bank facilitates the

purchase of commodities from the US

producer through LC

Confirmation/Refinance.

Risk Distribution A large Oil Company procuring Oil from World

Majors requires confirmed LCs for its large LC

Values

An International Bank confirms the

Credit and distributes the risk in

regional/ international markets to

provide the best pricing to the applicant.

Open Account Finance Large MENA Auto distributor purchases

Autos/Spares from Asian Manufacturer on

open account at CAD basis

An International Bank facilitates the

purchase of through Avalized

Promissory Note Financing.

Syndicated Trade

Facility

A Telecom Company with many overseas

subsidiaries which have import requirements

dealing with several banks

An International Bank’s Trade Finance

leads the Syndicate for consolidation of

the trade finance facilities which will

enable the parent to finance its imports

Arranger of SBLC

Syndication

A Holding Company with many overseas

subsidiaries has SBLC requirements dealing

with several banks, several security packages,

differing pricing levels

An International Bank’s Trade Finance

leads the Syndicate finance facilities

with a panel of fronting banks, issuing

banks and participating investor banks

Financing Under Direct

Pay SBLC

Large Auto Accessory Company wished to

offer solution for its 100s of millions worth of

sale through regional distributors against an

SBLC cover

An International Bank proposed a

financing under Standby Letter of Credit

(―SBLC‖) partnering with a bank which

provided the SBLC allowing drawdown

under the SBLC

ECA Covered Financing An Airline in the region sought to raise

financing for its aircraft purchase

An International Bank arranged and

raised Long term financing backed by

US Exim Bank support

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O N L I N E T R A D E F I N A N C E :

E S S E N T I A L A N D I N E V I T A B L E

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A web-based global platform that helps clients gain visibility into the entire range of their trade activities — from

purchase order to payment. The net effect is improved efficiency, accelerated payments, reduced expenses, less

risk, a more streamlined trade-related payables and receivables process, and provides unparalleled visibility and

control of the financial supply chain.

Easy to use, implement and is highly scalable, processing more than $9 billion in global transactions per year.

They also, automate the creation and delivery of trade documentation, improve and accelerate the accuracy of

international trade documentation, accelerates payment and reduces days sales outstanding (DSO), cuts direct

documentation and payment processing costs, integrates seamlessly with your existing inventory management or

ERP systems, increases operational efficiencies and collaboration among all users, including remote employees,

financial institutions and third-party service providers and provides an immediate ROI.

Web-based platforms have also embraced the mobile world, providing businesses with a secure portal for

receiving notifications and authorizing payments.

Web-based platforms make the corporate processing of LCs much more efficient by eliminating all manual

activities previously associated with such transactions.

Acknowledged as a "green" solution, it eliminates costs associated with the creation of LCs and guarantees and

enhances the paperless office concept.

Another web-based platform is an innovative document imaging and workflow application specifically developed

for processing trade finance transactions, offering banks a cost-effective solution to implement strategic,

paperless operating models.

Online Technology in Trade Finance J . P

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Modules suiting both Corporates or

Financial Institutions

Letter of Credit, LC Reimbursement and

Export Collections Modules - Gain access

to all your transactions on a single platform

for greater transparency and convenience

Internet access eliminates geographical

and time barriers, contributing to

improved workflow management

On-line real-time access to status and

information on your transactions – this

allows you to closely track the progress of

your transactions as well as documents, and

in turn use this as a value-added service for

your customers

Easy export of data to applications to

facilitate customised reporting – Statistical

and text downloads are easily exported to

Crystal Reports, Microsoft Word and Excel

applications for quick and easy reconciliation

Ability to view SWIFT-related transaction

messages

Secured e-mail capability to communicate

with J.P. Morgan

Wide selection of management reports

Online reporting enquiry with filter criteria and

refresh function. Trade Channel offers over

100 reports that enable you to monitor

transaction status, manage risk profile,

measure performance and project cash flow

and funding needs. Letter’s of Credit: Import & Export

Status and Monitoring of transactions:

Issuance of import LC’s

Receipt of export LC advises

Issuance and receipt of

amendments

Payment advice, credit / debit

advices

For your Letter of Credit Reimbursement

Monitor status of your L/C reimbursements:

Your reference number

Available balance under each

reimbursement authority

Reimbursement authority Acknowledgement

Credit/ debit advice

Pre-debit notification For your Export Collections

Monitor status of your export

collections:

Days outstanding for each item

Date of last tracer sent

Collecting bank

Courier pick-up And delivery details

Credit/ debit advice

Benefits of Using a Web-Based Platform J . P

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Client is one of the world's largest manufacturers of float glass and fabricated glass products that also manufacture and

supply the automotive industry with a variety of exterior products. The client has become a significant player in the

building materials distribution business as they are amongst the world's largest producers of mirrors.

Overview

The client opted to centralize its financial operations in Europe whilst looking for an established Trade Services provider.

The Commercial Bank received an RFP emphasising the centralization yet being able to service continental Europe.

Further conversations with the client identified a need for uniform processing, an opportunity for cost reduction and a

need for a reporting tool.

Challenge

Primary challenge was to take the standard Trade information a step further and beyond the standard solutions

proposition. Where can we assist, alleviate, support and at times even take over part of the documentary trade process?

Smaller challenges were encountered during the implementation period due to local legislation.

Solution

Consolidation of Trade Export Receivables enabling Guardian to focus on core competencies

Timely payment due to combination of activities helps to ensure correct documentation (i.e. < DSO)

Reduction of costs (operational and banking) for Guardian

Export Letters of Credit

Advising / Amendment / Negotiation / Confirmation

Screening vs. Guardian templates and J.P. Morgan to ensure workability

Document Preparation

Creation & monitoring of documentation applicable to Export LC’s

Liaising with 3rd parties (freight forwarders, legal counsel, etc.)

Export Documentary Collections

Creation / Remittance / Amendment / Settlement

Monitoring

Document Preparation

Creation & monitoring of documentation

Liaising with 3rd parties (freight forwarders, legal counsel, etc.)

+

+

=

Case Study: Corporate Trade Export Receivable Consolidation J . P

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Gohar Bilal

Islamic Product, Middle East and North Africa, J.P. Morgan

A C C E S S I N G A L T E R N A T I V E S O U R C E S

O F L I Q U I D I T Y W I T H I S L A M I C T R A D E

F I N A N C E

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Agenda J . P

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Liquidity

How Islamic Finance fits into all this

Islamic Finance – The Big Picture

Trade Finance

Gulf Corporation Council Fundamentals

Trade Finance Growth in Gulf Corporation Council

Growth of Trade Finance Products for Islamic Finance

Appendix 1: Trade Products

There has been a fundamental shift in the

approach for checking the financial health of

banks and corporations.

―Liquidity‖ is one of the main focuses for all market

practitioners including regulators, central banks,

financial institutions and corporations.

For example: in 2010, the cash accumulation

by the corporates in the US was circa $2

trillion, the highest in 40 years with 7 cents of

every $ of corporate assets invested in liquid

assets.

―Liquidity‖ has emerged as the core focus as a result of recent global crises

Bank Corporates

Use of Liquidity Use of Liquidity

Maintain cash Working Capital

Loans with less than one year

maturity

Inventories

Placements with Central Bank

/Financial Institutions

Source of Liquidity Source of Liquidity

Deposits Cash from its business

Borrowing from Banks

Equity – Buffer for loss Equity Buffer for loss

Liquidity is a quick conversion of asset into cash - which is the most liquid asset for banks and corporates

―How easily cash is accessible and how quickly cash equivalent assets can be sold to get money‖

Liquidity for banks and corporates is like water to humans i.e. “a must to survive”

What is Liquidity?

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Banks play the critical role of financial intermediaries between money providers (depositors) and borrowers,

allowing a smooth flow of money and meeting the needs of each side.

Liquidity - Banks - Corporates

Banks are Intermediaries between Source and Use of Liquidity

Confidence of the depositors result in a stable funding source

Stable funding allows the banks to provide loans

To maintain their reputation, Banks must provide confidence to depositors that they will lend to entities with low default risk

Source of Liquidity

Depositors are the main source

of cash / liquidity for the banks

Depositors want to have the

confidence in the bank that

they will not lose their money

If they feel otherwise, it would

result in a ―run on the bank‖

Banks Banks

Depositors Corporates

Central Bank

Bank and Corporate Regulators

Basel Requirements

Users of Liquidity

Banks lend to corporates based

on their sound business

performance and low default risk

One of the key determinant of

this is having ―sound cash flows‖

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Policemen for companies are government bodies that impose guidelines and provide a

policy book for each sector

Like the Banking sector, there is no “generic health check” that must be maintained by all

companies ―irrespective of their sector‖

Regulators and Central Banks are the policemen for Banks

The ―Global Policy Book‖ for Banks are the Basel requirements.

Core focus of Basel is on:

Liquidity

Capital

Credit Risk Weighting

Liquidity J . P

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Most people argue that Islamic finance is important and will grow because

―it is an ―alternative source of funding‖ but

the fundamental reason why Islamic finance is important and will grow is that the

“core values of Islamic Finance addresses what regulators, banks, corporations and individuals are

currently questioning”

DEBT and LIQUIDITY !!

The recent crises is making practitioners re-think the model – For example:

Public perception of debt is changing – same is true for governments, banks and regulators

People are looking at debt from a grass root level and so is everyone one else

There is more focus on saving, liquidity, staying within means, low leverage

All are “Going Back To Basics” – focusing on basic commercial transactions and the simplest form of

basic commercial transaction are ―Trade Transactions‖

Trade is at the heart of Islamic finance!

How does Islamic Finance fit into all this? J . P

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Global Islamic Finance Market – By Assets

Globally Islamic Finance is estimated to be $1.1 trillion which has grown at an average of 15% in the last

5 years

As per Deutsche Bank Nov 2011 estimates, Islamic finance industry will grow to $ 2 trillion by 2016

Growth is mainly driven by:

Middle East - Bahrain, Kuwait, Qatar, Saudi Arabia, UAE and now emerging in Oman

Asia – Malaysia, Brunei and now emerging in Indonesia

While existing in Europe in the UK and Luxembourg, countries like France and Ireland have reformed

their laws to attract Islamic Finance

Other countries like Australia, India, Hong Kong are reviewing their regulatory, legal and tax regimes

to make them Islamic finance friendly

2007 2008 2009 2010 2011 2012

Total Assets ($ million) 500 639 822 895 939 1,100**

y-o-y growth (%) 23% 22% 22% 8% 4% 17%

Source: US Congress Research Service, Maybank Islamic Malaysia, The Banker , NCB and PWC

Islamic Finance – The Big Picture J . P

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The Big Picture

There were 614 registered Islamic Financial

Institutions globally in 2010 of which 245 (40%)

were in the Gulf Corporation Council* (GCC)

GCC holds 42% i.e. the largest share of Islamic

$1.1 trillion assets

Globally, KSA (Kingdom of Saudi Arabia) is the

largest Islamic market (15%) followed by

Malaysia (12%) excluding Iran

Other countries that dominate the Islamic market

include UAE, Bahrain and Qatar

Oman is now also focusing on Islamic finance

* Per NCB Dec 2011 report ―The Competitiveness Review‖

Islamic Finance – The Big Picture

Other, 1%

America, Europe,

Australia, 5%

Asia 15%

Non GCC MENA,

37%

GCC 42%

Asset by Region - Islamic Finance – 2010

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Islamic Finance – The Big Picture

Islamic Finance – Geographic Breakdown 2010

Commercial Banks 74%

Investment Banks 10%

Sukuk

(Islamic Bonds),

10%

Takaful (Islamic

Insurance) 1%

Islamic Asset Mgmt

Funds 5%

Islamic Assets by Type – 2010

Iran 35%

Saudi Arabia 15%

Malaysia 12%

UAE 10%

Kuwait 8%

Qatar 4%

Bahrain 5%

UK, 2%

Turkey 3%

Others 6%

Saudi Arabia is the main hub for Islamic finance followed by Malaysia, UAE, Kuwait, Bahrain and Qatar. Although Iran

may have the highest proportion, according to the November 30 2010 report by US Congress Research Services its growth

will be limited by International sanctions and increased scrutiny from a compliance perspective.

Commercial banks are the drivers of Islamic finance

Assets are mainly cash, interbank and corporate loans that are based on commodity murabaha

Source: National Commercial Bank and Saudi Arabia General Investment Authority: ―The Competitiveness Review‖; December 2011

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The core Islamic Finance principles are build around Trade which is the simplest form of

commercial transaction

Trade is fundamentally based on the following:

Sound economic environment

Sound Financial Sector for Credit availability

How does the Gulf Corporation Council (GCC) environment fare for Trade Finance?

Trade Finance: Simplest form of basic commercial transaction are ―Trade

Transactions‖ J . P

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GCC Fundamentals: Total 57 Organization of Islamic Corporation Countries with

Middle East and North Africa and GCC subset

AFRICA 42% 24

ASIA 25% 14

EUROPE 2% 1

SOUTH AMERICA 3% 2

GCC 28%

6

MENA excl GCC 28% 10

MENA 28% 16

The Organization of Islamic Cooperation (OIC) is an international organization comprising of 57 countries across 4

continents of the world from South America to Far-East Asia

In 2010, the OIC countries formed 23% of the world population and contributed 11% to world output

The total GDP of the OIC countries has grown constantly over the period 2006-2010 from $6.3 trillion in 2006 to $8

trillion in 2010

In 2010, the top 10 OIC countries by the volume of GDP accounted for as much as 71% of the OIC total output

Of the 57 countries, 16 countries are from the MENA region, including 6 countries from the GCC

Source: Annual Economic Report on the OIC Countries 2011; The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC)

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GCC Fundamentals: Economic Environment is fundamentally sound for Islamic

Trade Finance

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

GDP 2008 27.2 138.6 70.7 117 585 242.3

GDP 2009 28.3 132.6 72.1 128.3 593.9 236.8

GDP 2010 29.7 136.5 75.8 150.6 622 246.8

2010 GDP as % of Total GCC 2.35% 10.82% 6.01% 11.94% 49.31% 19.57%

2010 GDP as % of OIC 0.37% 1.71% 0.95% 1.89% 7.79% 3.09%

0

100

200

300

400

500

600

700

USD

Bill

ion

s

2008 - 2010 GCC GDP

GCC economies have largely been resilient to the global economic crisis, led by Saudi Arabia, UAE and Qatar

GCC fiscal position is robust. Total 2012 budget surpluses is estimated to range between 10% in the UAE, 15% in Saudi Arabia and

25% in Kuwait

IMF recently projected Saudi Arabia will grow at 6% in 2012

Qatar’s overall real GDP growth to remain in the vicinity of 8% for 2012

Kuwait is estimated to realize a 6% growth rate in 2012

UAE, Oman and Bahrain will likely realize more moderate economic growth rates at 5%, 5% and 3% respectively in 2012

Source: The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) : Annual Economic Report on the OIC Countries 2011;

Gulf Investment Corporation: GCC Monthly Article; September 2012;

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GCC Fundamentals: Economic Environment is fundamentally sound for Islamic

Trade Finance

695,876

431,618

571,952

-404,098

-313,769 -347,064

-600,000

-400,000

-200,000

-

200,000

400,000

600,000

800,000

2008 2009 2010 US

D M

illio

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2008 - 2010: GCC Trade Imports and Exports

GCC Total Exports GCC Total Imports

2010 world trade was $30.5 trillion vs. $25.1 trillion in 2009

In 2010, along with the global trends, total trade of OIC countries

rebounded to $3.2 trillion, increasing the trade share from 9% in 2006 to

10%

In 2010 Malaysia and Saudi Arabia combined accounted for over 25% of

the total exports from OIC countries

In 2010, 76% of the intra-OIC exports were done by only 10 OIC countries

Saudi Arabia led with $35 billion (14%) of the total intra-OIC exports,

followed closely by United Arab Emirates with $35 billion

In 2010 GCC aggregated trade balance (exports less imports) was the

largest in the world

In 2011, massive trade surplus in the GCC was estimated to be $520billion

Saudi Arabia was responsible for almost half of the total surplus ($245

billion) followed by the UAE ($94 billion) and Qatar ($79 billion)

The GCC trade surplus is forecasted at average $493bn in 2012-13

Reserves

The world total reserves –excluding gold– amounted were $9 trillion in 2010

compared to $5 trillion in 2006

10 countries accounted for 83% of the total reserves of OIC group in 2010

Of this, Saudi Arabia alone, with $445 billion of reserves, accounted for

32% of the total reserves of all OIC countries

2008 2009 2010

Intra-OIC Exports (bln USD) GCC Ttl 101 69 90

Intra-OIC Imports (bln USD) GCC Total 74 51 63

Exports (bln USD) GCC Total 696 432 572

Imports (bln USD) GCC Total -404 -314 -347

Net Surplus 292 118 225

GCC as % 2008 2009 2010

Total Exports (mln USD) OIC 37% 34% 34%

WORLD 4% 4% 4%

Total Imports (mln USD) OIC 27% 26% 23%

WORLD 2% 3% 2%

Total Reserves minus Gold (End of Period, mln USD)

OIC 41% 39% 40%

WORLD 7% 6% 6%

Source: The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) : Annual Economic Report on the OIC Countries 2011;

Gulf Investment Corporation: GCC Monthly Article; September 2012; J . P

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GCC Robust Economic Environment

Collective assets of the largest 50 banks in the GCC region increased by 8% reaching $1.28 trillion

Average profit growth for these 50 banks is 13%

Key drivers for the GCC: High oil prices, high levels of government spending

Avoidance of problematic financial instruments, such as peripheral Eurozone debt and mortgage-backed securities, that

have been weighing heavily on banks’ performance in Europe and the US

Banking sector is driven by strongest economies Saudi Arabia, UAE and Qatar that represent 33%, 28% and 14% of the

total assets

Per S&P, Capital Adequacy Ratios (CARs) for GCC Banks are on average 12% to 13%

Non Performing Loans (NPLS) are low at average of 5% of the total loans

Variability in NPLs: Ranging from 1.0% in Qatar to 8.0% in the UAE. The UAE figure reflects the impact of recent regulatory

changes in accounting for NPLs and exposure to the real estate sector in Dubai

Corporate banking continues to be strongest asset segment for foreign and local banks

Of the top 50 banks in the GCC, 15 are Islamic and represent 20% of the total assets

A growing demand for Shariah finance across the region which has resulted in a surge of 19% in Islamic banking

profits

NB. All figures on this slide are for YTD 2012

GCC Fundamentals: Financial Environment continues to be robust

Source: QNB Report ;GCC Banking sector shows first half results ; Sept ember 2012

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The core reason is because Trade Finance transactions are low risk transactions

A 2005 to 2010 global survey conducted for 11 million trade transactions for 14 major banks showed that

even in the difficult market period between 2008 to 2010, Trade Finance products experienced the lowest

default rate:

For LC’s (export and Import): default rate = 0.09% with loss = 0.03%

For Loans (export and Import): default rate = 0.29% with loss = 0.02%

Standby and guarantees: default rate = 0.013% with loss = 0.0007%

This is largely because 85% of global trade transactions are settled on an ―open account‖ basis

J.P. Morgan offers Islamic Open Account Financing (for Buyers) in the Saudi branch and is in the process of

rolling this out for other GCC countries.

Trade Finance Growth in GCC

Source: Cash and Trade Magazine: ICC Global Survey on Trade Finance, 2012 Report

Cash and Trade Magazine: Issue 13: Basle III: What is more to come for trade finance?

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Demand for Islamic Trade products are following a similar evolution as that of conventional trade

products

Islamic Trade Payable Financing (Open Account) will be the preferred product, more so than LC

financing

We anticipate that Receivables Financing will be the next growth area in Islamic finance

There are more Islamic structures being developed for Trade Finance that will allow access

to liquidity from the capital markets

This approach is primarily being driven by

Basel requirements

Capital risk weighting

Need to access to alternative sources of liquidity

Growth of Trade Finance Products for Islamic Finance J . P

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Appendix 1: Trade Products

Products

Client

(Entry

Point)

Obligor

(Credit

Risk)

How is this product

known in ME Markets? Key Client Benefit / Objective

Supplier

Finance (SF) Buyer Buyer

Supply Chain Finance

Reverse Factoring

Confirming

Payables Financing (Supplier

centric)

Optimize working capital and

strengthen supplier

relationships

Post-Import

Finance (PMF) Buyer Buyer

Supplier Finance

Trade Loans

Import Loans

Payables Financing (Buyer

centric)

Access to alternate source of

liquidity on B/S

Receivables

Purchase (RP) Supplier Buyer Factoring

Monetize quality receivables to

generate working capital

Receivables

Finance (RF) Supplier Supplier Sales Finance

Immediate funding to improve

cash flow

Pre-Export

(PXF) Supplier Supplier Trade Loans

Financing early in the supply

chain

Silent

Payment

Guarantee

(SPG)

Supplier Buyer

Bank Insurance

Risk Mitigant Solutions

Receivables Put

To mitigate financial payment

and political risk on key buyers

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Moderator:

Jossan Maalouf, Global Trade, Middle East and North Africa, J.P. Morgan

Panellists:

Ekrimeh Mahasneh, CIC

Diaa Abu Hijleh, Manaseer Group

Daho Abidat, Vitol

Darine Sawma, Demco Steel

P A N E L D I S C U S S I O N : T R A D E C H A L L E N G E S

A N D O P P O R T U N I T I E S

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Asif Raza,

Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan

Farrukh Siddiqui,

Global Trade Head, Middle East and Africa, J.P. Morgan

C L O S I N G R E M A R K S

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