What is International Islamic Financial Market (IIFM) ?

1. What is International Islamic Financial Market (IIFM) ? IIFM is the international Islamic financial market’s organization focused on the Islamic Capital & Money Market (ICMM) segment of the Islamic Financial Services Industry (IFSI). Its primary focus lies in the standardization of Islamic financial products, documentation and related processes at the global level. IIFM was founded with the collective efforts of the Islamic Development Bank, AutoritiMonetari Brunei Darussalam, Bank Indonesia, Central Bank of Bahrain, Central Bank of Sudan and the Labuan Financial Services Authority (Malaysia) as a neutral and non-profit organization. Besides the founding members, IIFM is supported by its permanent member State Bank of Pakistan as well as by a number of regional and international financial institutions and other market participants as its members. The main strength of IIFM is pooling of expertise from banks, legal, accounting and other market participants who work together under the guidance of Shari’ah scholars

2. What IIFM provides to the Industry? • Addressing the standardization needs of the industry & creating awareness • Universal platform to market participants through 'Global Working Groups' for the development of Islamic Capital and Money Market • Shari’ah harmonization in documentation, products and processes

3. Documentation & Product Standardization - Why Standardize? • Reduces cost of evaluation and negotiation of documentation • Provides balance and fairness • Increases efficiency, liquidity and certainty • Benchmark to provide a reference point Example: Use of IIFM MATP documentation in SWIFT Message Standardization • Reduces the price divergence between Islamic transactions and conventional transactions

4. Documentation & Product Standardization – A Market Based Approach • Standardization of existing practices • Review of market practices • Development with Industry consultation • Shari’ah guidance & approval • Legal environment & law reform • Enforceability • Standardization through innovation • Market requirement & research • Consultation by industry experts & development • Shari’ah guidance • applicability/practicality • legal environment & law reform

5. Overview & Trends in the Global Sukuk Market 2011 > PLUS Expressway Berhad, Malaysia $ 9.7 Billion Sukuk Saudi Arabian Civil Aviation Authority $ 7.2 Billion Sukuk KhazanahNasional’s offshore denominated Sukuk (Chinese Yuan) Qatar Central Bank’s $ 9 Billion Domestic IjarahSukuk Malaysia Global Wakalah Sukuk $2 Billion International Sukuk Issuances Bahrain -$750 M ADIB– $500 M HSBC - $500 M ADCB - $500 M 2010 KT Turkey Sukuk Limited $100 Million Sukuk issuance by Japanese corporate First International Sukuk issued in Indonesia Series of Indonesian Sovereign Retail Sukuk IFC Sukuk $ 100 Million GE Sukuk $ 500 Million 2009 2002 > • International Sukuk Issuances in Bahrain, Pakistan, Indonesia, UAE, Germany, Qatar, Saudi Arabia • Sukuk Issuance by IDB • Kumpulan Guthrie $100 Million Malaysian International Sukuk Issue • (Ijarah structure) • Short-term IjarahSukuk by Central Bank of Bahrain 2001 • Shell MDS RM125 Million Sukuk Issue (based on BBA structure) 1990 1988 • Sukuk Ruling (The FiqhAcademy of the OIC ) Sukuk Emergence SOURCE: IIFM SUKUK ISSUANCE DATABASE

6. Overview & Trends in the Global Sukuk Market SOURCE: IIFM SUKUK ISSUANCE DATABASE

7. Overview & Trends in the Global Sukuk Market Country-wise Breakdown of Total Global Sukuk Issuance by Volume Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011) SOURCE: IIFM SUKUK ISSUANCE DATABASE

8. Overview & Trends in the Global Sukuk Market Breakdown of Total Global Sukuk Issuance by Issuer Status Sovereign, Quasi Sovereign & Corporate Issues by Volume – All Currencies (Jan 2001 – Dec 2011) SOURCE: IIFM SUKUK ISSUANCE DATABASE

9. Overview & Trends in the Global Sukuk Market Structural Breakdown of Domestic Sukuk Issuance (% by Volume) Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011) SOURCE: IIFM SUKUK ISSUANCE DATABASE

10. Overview & Trends in the Global Sukuk Market Structural Breakdown of International Sukuk Issuance (% by Volume) Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011) SOURCE: IIFM SUKUK ISSUANCE DATABASE

11. Overview & Trends in the Global Sukuk Market Structural Developments International Corporate Sukuk Issues • 2001 – 2005 • Ijarah (Dominant structure) • 2005 – 2008 • Musharaka, Mudaraba, Exchangeable, Convertible • 2008 – 2010 • Ijarah, Murabaha and Wakalah • 2010 – 2011 • Wakalah Bel Istithmar, Hybrid Structures SOURCE: IIFM SUKUK ISSUANCE DATABASE

12. Overview & Trends in the Global Sukuk Market Sukuk Trends – Impact Due To Downturn International Sukuk Issuance • 2007 - $ 13.8 billion • 2008 - $ 2.15 billion • 2009 - $ 7.5 billion • 2010 - $ 2.7 billion • 2011 - $ 10.3 billion SOURCE: IIFM SUKUK ISSUANCE DATABASE

13. Overview & Trends in the Global Sukuk Market Developments in Sukuk Market (Post Crisis) • Call back of a portion of Sukuk • Dubai Islamic Bank $200million - Cash tender offer @ 88% of face value • Sukuk Issuance based on Reverse Enquiry • Monetary Authority of Singapore • Domestic Retail Sukuk Issuance • Indonesia • Islamic Government Investment Securities Issuances • State Bank of Pakistan • Investment Sukuk Issuance • Islamic Development Bank • Fixed Rate of Profit Issuances • Bahrain, Indonesia and IFC Sukuk • Issuance in International Jurisdictions & Other Currencies • National Bank of Abu Dhabi’s RM 500 million Sukuk & Khazanah Nasional’s SGD 1.5 billion Sukuk

14. Overview & Trends in the Global Sukuk Market Sukuk Defaults and Restructuring – Lessons from Corporate Issuance • Investment Dar (Kuwait) • East Cameron (US) • Golden Belt (Saudi Arabia) • Tabreed (UAE) $463 Million • IIG (Kuwait) • Tamweel (UAE)

15. Overview & Trends in the Global Sukuk Market Asset Based vs Asset Backed • Are Sukuk holders investment pari pasu with other secured or unsecured creditors? • Do Sukuk holders have title transfer? • In case of Real Estate, is property freehold?

16. Sukuk Standardization • To encourage and increase market share of Asset Backed Sukuk through standardization • Development of the Concept Paper to establish market requirements

17. Hedging Requirements in Sukuk • Islamic Banks retail portfolio mostly consist of fixed profit rate assets on a Murabaha basis while liabilities to corporate customers are on floating rate benchmarks • Rate of Return mismatch in Assets & Liabilities require protection against steep rise or fall in reference rates of return • Islamic Banks’ foreign currency exposures such as deposits, import & export L/C’s, Sukuk etc., • The foreign currency exposures need to be managed to avoid loss due to volatility in the international currency markets

18. Sukuk - Rate of Return Hedging SOURCE: IIFM SUKUK ISSUANCE DATABASE

19. Sukuk - Rate of Return Hedging Dar Al-Arkan – Sukuk Issuance & Profit Swap Facts • Dar Al Arkan US$ 450 million Sukuk • Largest Saudi Real Estate Developer • Fixed Profit Rate of 10.75% p.a. • Tenor 5 years (Feb 2010 to Feb 2015) • US$ 225 million Profit Swap (fixed to floating) • Cost saving of 280 bp (3 month floating rate 7.95%) Source: www.arabianbusiness.com/dar-al-arkan-issues-450m-sukuk-at-11-source-27731.htm

20. Collateralization & Sukuk • IIFM Reference Paper on I’aadat Al Shira’a (Repo Alternative) and Collateralization published on 28th July 2010 • Purpose • The Reference Paper aims to provide general information on the concept, operational mechanism and uses of conventional repurchase agreements (known as Repo or Sale and Repurchase agreements) and explore the possibilities for I’aadat Al Shira’a (repurchase) as an alternative to Repo • The aim is to provide for the Islamic financial institutions, another tool to effectively manage its liquidity as well as to help it finance its inventory of Asset, Sukuk and equities

21. Collateralization & Sukuk Collateralization Prospects in Islamic Finance Institutions may initiate this concept which will give similar results as those achieved by a repo. Moreover, this concept will allow Islamic financial institutions to raise cash to fund the inventory while providing the cash investor a return which is further comforted in form of collateral Further efforts are being initiated by IIFM and several bilateral trades between banks are being done to test the product

22. Collateralization & Sukuk Collateralized Product – Utilization of Sukuk In order to make use of parties Sukuk portfolios and to initiate the process while further research and deliberation on finding an ideal ‘IS’ structure may continue, the working team is of the view that a collateralized structure is one of the options which perhaps can be initiated now given the industry’s urgent requirement for a workable liquidity management tool. The proposal is to make use of Sukuk, which are currently not utilized in a bank’s portfolio, through either a Murabaha or Wakalah arrangement. Since Murabaha is more developed and widely used, the working team is of the view that the following proposed structure may be initiated in various jurisdictions so that not only do funds remain within the Islamic system but the required legal procedures can be managed at the jurisdiction level (the suggestion is to seek required legal changes in OIC countries to facilitate the process). Sukuk collateralization through a Wakalaharrangement is another option which, if required, can be further developed by the IIFM working team if requested by the industry.

23. Collateralization & Sukuk Issues for Consideration Taking Security: For this structure to be practical, it would need to be possible to take security over the securities quickly, effectively and robustly. In addition it needs to be possible for Party A to re-hypothecate the securities over which Party B has granted security. Securities used as security for the obligation to pay Deferred Purchase Price: It is presumed that the securities used as security will be limited to Shari’ah compliant securities. Margin Maintenance: The margin maintenance methodology also needs to be resolved and again needs to be quick, effective and robust. Easiest form would be to add or return Sukuk depending on collateral level agreement Continued…

24. Collateralization & Sukuk Issues for Consideration (Continued…) Broker Credit Risk: The parties will be taking a credit risk on the commodity broker in respect of its obligations. However, this is similar to standard commodity Murabaha documentation. Re-hypothecation: In conventional repo, the buyer has an ability to make use of the repo’d securities in its own business, which adds to the economic value of the repo to the buyer. How to replicate this in Shari’ah complaint way needs to be determined. Potentially Title Transfer Agreement may achieve the desired result. Accounting Treatment: The applicable accounting treatment would need to be clarified.

25. Collateralization & Sukuk IIFM may put together standard product guidelines and required documentation for Collateralized Murabaha where Islamic Custodian Bank or Clearing Company may provide the required services for local market. Based on findings and as recommended in the reference paper, institutions are using this structure. Recently ADIB and NBAD made an announcement on entering into Islamic repo using this structure. The standard documentation for this product will be: Guidelines on Product & Document Collateralized Murabaha Agreement Pledge Agreement “IS” Global Master Agreement Collateral Management Document & Client Service Documents

26. Collateralization & Sukuk Next Steps • Collateralized Product Consultative meeting Q1 2012

27. Thank You www.iifm.net