Detail study about Islamic Finance, its features, differences with conventional finance, Capital Market in IF, Sukuk, Case sudy

1. Investment Banking in
Islamic Finance
Prepared by:
AARON TEO
GLENN CHAVARRIA
RENATO MITSUHASHI
RUI LIMA
VIPUL SONAVANE
YULIYA MELNIK

2. Agenda
• Fundamentals of Islamic Finance
• Islamic Investment Banking
• Islamic bond - Sukuk
• Case Study

3. Some statistics
Growth of Global Islamic Banking Assets:
1993 - $60 billion
2011 - $1.3 trillion
2015, forecast - $3 trillion*
* Standard
& Poor's forecast, 2011

4. Roots of Islamic Finance
 Shariah - Islamic law
 Prohibitions in Shariah:
“Riba”: usury or rent on money in all forms and intents;
“Haram”: non-permissible activities under Islam;
“Gharar”: uncertainty, ambiguity, gambling.

5. Fundamentals of Islamic Finance
Key principles:
 No Interest based lending;
 Profit-and-loss sharing & risk sharing concept;
 Transaction should be backed by real non-monetary
assets/projects/ventures;
 One “buyer”, one “seller” concept.

6. Pros and Cons
PROS
 One buyer one seller concept;
 Asset backed transactions;
 Investment in non-monetary assets / projects.
CONS
 No central regulation;
 Restricted growth;
 Lack of sophisticated instruments.

7. Islamic Investment Banking
Prohibited elements:
 Trading for speculation;
 Derivatives;
 Conventional bonds.
Accepted elements:
 Capital markets;
 Commodity trading & some other types of trading for hedging purposes only;
 IPO;
 Mergers & Acquisitions;
 Modified version of bond – Sukuk.

8. Islamic Investment Banking

9. Sukuk
Market:
 Asset based financing;
 Equity based finance;
 Asset backed securities.
Structure:
 Islamic equivalent of bond;
 Does not represent receivable or debt;
 Represents ownership in asset/project/business.

10. Conventional bond vs. Sukuk
Criteria
Conventional bond
Islamic Sukuk
Nature of
security
Debt obligation
Share of ownership in asset/project
Nature of
investment
To finance any type of
business if it complies with
local law
Asset/project has to be Shariah compliant
(e.g. investing in weapon producing
company is not allowed)
Issue price
Based on rating of the issuer
Based on market value of asset/project
Return on
investment
Regular interest payments
Share of profits derived from asset/project
Risks
Interest rates fluctuations,
default risk
Risk of sharing a loss, default risk

11. Types of Sukuk
 Ijara (leasing);
 Musharaka (partnership);
 Istisna (financing the production of property
delivered in future);
 Hybrid (combination of 2 or more);
 Others.

12. Sukuk
Risks:
 Legal risk: No uniform regulatory board;
 Shariah compliance risk: Different interpretations;
 Credit risk: Investor bearing the risk of sharing a loss.

13. Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
 SABIC – holding investment corporation
in Saudi Arabia, among the world’s largest
petrochemicals manufacturers;
 Issued Investment Sukuk in 2006;
 Represents an investment in SABIC marketing contracts;
 Matures in 20 years;
 The deal was worth $800 million.

14. Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
Structure:
Option to sell sukuk at year 5, 10, 15
1. SABIC issues sukuk
SABIC,
Issuer
Sukuk
assets
under
custody
SABIC Sukuk LLC,
Custodian
2. Sukukholder pays proceeds
3. Quarterly Net Income payments:
3-month SIBOR + 40 bps
Sukukholders
Trading
4. Reserve payments, every 5 years:
10% of sukuk Face Value
Secondary
Market

15. Case study:
“SABIC Sukuk: The Debut Sukuk in Saudi Arabia”
Option to sell Sukuk to the issuer:
Year 5
90% of
Face Value
Year 10
Year 15
Year 20
60% of
Face Value
30% of
Face Value
0% of
Face Value
Analysis:
 Actual maturity is 5 years, not 20;
 10% of Reserve Net Income distribution does not represent
additional value compared to the conventional bond ->
Conventional bond
SABIC Sukuk
Maturity date
Actual maturity
Year 5
Amount received
@ maturity
100% of par
90% of par
+ 10% of reserve
distribution
= 100%
= 100%
 Yield of Sukuk = 2.76%

16. THANK YOU!
QUESTIONS?