ISLAMIC FINANCE: A GLOBAL VIEW

ISLAMIC FINANCE INDUSTRY: TRENDS, OPPORTUNITIES & FUTURE DIRECTION Baljeet Kaur Grewal Group Chief Economist/ Head, Global Research 8 th May 28 1

ISLAMIC FINANCE: A GLOBAL VIEW Global Deployment of Islamic Products Mainstream relevance Niche presence Engaging with regulators Conceptual exploration Shariah-compliant assets worldwide estimated at USD7 billion in 27 vs. USD15bln in the mid-199s, with annual growth rate of 23.5% over the past 5 years There is approx. USD1.5 trillion of GCC funds held in investment assets worldwide. Of this USD1.5 trillion, USD25 billion constitutes of High Net Worth Individual Breakdown of Shariah-Compliant Assets Worldwide (27) Islamic equity funds 2.9% Sukuk 13.9% Islamic mutual funds 4.3% Takaful.4% Source: Zawya, IFIS, KFH 2 Islamic banking 78.6%

ISLAMIC FINANCE INDUSTRY HAS ADVANCED FROM NICHE TO CRITICAL MASS Young industry Mitghamr Savings Associations (1963) & Tabung Haji Malaysia (1967) Islamic Development Bank (1974) & Dubai Islamic Bank (1975) Market-driven proposition Retail customers historically the backbone of the industry Tipping point in retail sector: Saudi Arabia, UAE, Bahrain & Kuwait Self-regulating organisations, standard bodies and Research & Training Institutes % 45 4 35 3 25 2 15 1 5 Islamic Banking Assets as % of Total Banking Assets GCC 27 21F Malaysia Market size estimated at USD7 billion globally Growing at 23.5% per annum in the past 5 years Within 8-1 years, industry expected to capture 4%-5% savings of the 2.5 billion Muslim worldwide World Muslim Population Growth Trend (198-225F) 35 3 Global scale More than 3 Islamic banks worldwide operating in over 75 countries GCC accounts for two-thirds of global Islamic assets Malaysia leading industry maturity & sophistication Islamic Development Bank: largest pan-oic financial institution % of world population 25 2 15 1 5 198 199 27 225F 3 Source: Central Banks, Zawya, IFIS, KFH

ISLAMIC FINANCE INDUSTRY HAS ADVANCED FROM NICHE TO CRITICAL MASS Each region contributes to Islamic Finance in a unique way UK: New legislation for Islamic mortgages Potential Sukuk issue in 28 Germany: Saxony issues Eur1mln Sukuk China: Active member of Islamic Financial Services Board USA: Harvard Islamic workshop with 6 regulators Saudi Arabia: 95% of new consumer lending is Islamic. Retail market rapidly converting to Islamic Malaysia: Islamic product & industry, development & sophistication leader Japan: JBIC exploring Islamic financing opportunities Hong Kong: Target to become Asia s Islamic financial hub Singapore: Active in developing Islamic finance 4 Source: Central Banks, Zawya, IFIS, KFH

GLOBAL SUKUK MARKET Global Sukuk Issuance Trend (2-28F) Sukuk Issuance (27) USD mln 35 3 25 2 15 1 5 2 21 22 23 24 25 26 27 28F Corporate Sukuk Sovereign Sukuk Total Sukuk (RHS) 45 4 35 3 25 2 15 1 5 USDmln UAE Msia Saudi Bahrain Kuwait Qatar Pakistan 2 4 6 8 1 12 14 USD mln Global Sukuk Issuance Trend - 24 : US$7.2 billion, 25 : US$12.1 billion, 26 US$26.8bil, 27: USD32.65bln, 28F: USD4bln-USD45bln, 29F: USD45bln-USD5bln 27 Sukuk issuances were dominated by the UAE 43%, Malaysia 3%, Saudi Arabia 18%, Bahrain 5.% and Kuwait 3.% To-date, 28 announced Sukuk pipeline estimated at USD34.5bln Global Sukuk outstanding is expected to reach USD2bln by 21 from current USD97.3bln, an annual growth rate of 35% Islamic bond market is becoming more global, attracting non-muslim issuers. The overall market for Islamic banking and finance stood at USD7bln in 27, and growing at 23.5% annually over the past 5 years 5 Source: Bloomberg, IFIS, Central Banks, KFH

SUBPRIME IMPACTS THE SUKUK MARKET Several companies were forced to delay or withdraw planned debt offerings in 2H7 due to heightened debt market volatility: Dana Gas, the first victim of the subprime turmoil, postponed its USD1bln issue from July 7 to Oct 7 Pricing of Ithmaar Bank s USD3mln sukuk was delayed National Bank of Abu Dhabi delayed its USD1.7bln bond programme until conditions improve in global debt markets Amlak Finance, an Islamic mortgage company in Dubai, delayed its plan to issue USD26mln mortgage-backed Sukuk scheduled for end-7 In Aug 7, Malaysia s MISC deferred the sale of its planned USD75mln 1-year dollar-denominated bond issue Saudi Basic Industries Corp was forced to lower the senior unsecured bond portion of its financing to buy GE Plastics from around USD2.76bln to USD1.5bln and raise the bank loan portion from USD5.4bln to around USD6.6bln % 6. 5.5 5. 4.5 4. 3.5 3. 2.5 2. Libor Month-on-Month Yield Change (Jul 7- Apr 8) Subprime concerns peaked, & prior to the US interest rate cuts 7:J F M A M J J A S O N D 8:J F M A 1m 3m 6m 1yr Bps 4 2-2 -4-6 -8 Libor Month-on-Month Yield Change (Jul 7-Dec 7) Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 1m 3m 6m 1y 6 Source: BMA, BNM, KFH

CREDIT SPREADS & SUKUK PRICING 25 HSBC-DIFX Islamic Bond Index Trend (Jun 7-Dec 7) 4 Dar Al Arkan Sukuk Maturing in 212: Change in Credit Spread Libor+375bps Spread over Libor (bps) 2 15 1 5 +145bps Libor+spread (bps) 35 3 25 2 15 1 5 Libor+25bps Libor+27bps +15bps Jun-7 Jul-7 Oct-7 Dec-7 Issued Pre subprime Current 27 Jul 7 Apr 8 Korea Development Bank Dollar Debt Maturing in 212: Spread over US Treasury (Jul 7-Apr 8) +145bps 3m Libor peaked at 5.7283% on 6 th Sept 7, an increase of 36bps within a month due to subprime concerns The HSBC-DIFX index of Sukuk average spreads over Libor jumped from 65bps in Jun 7 to 21.6bps in Dec 7 Concurrently, the yield on dollar-denominated Sukuk (e.g Dar Al Arkan) rose by 15bps between Jul 7 to Apr 8 To compare, yields on dollar-denominated conventional bonds of comparable maturity widened by 145bps over the same corresponding period 7 Source: Bloomberg, KFH

IMPACT OF SUBPRIME ON GCC ECONOMIES The US subprime is unlikely to trigger a contagion liquidity crunch in GCC given the following reasons: 1. GCC s huge pool of liquidity with current account and fiscal surpluses estimated at USD226.1bln and USD127.6bln respectively in 27 will cushion the region from the subprime crisis 2. GCC markets have proven their low correlation or immunity to developments in global capital markets given domination of local retail investors in the region s markets 3. The direct exposure of GCC corporations and banks to the US subprime is almost negligible. Total assets of GCC banks stood at USD287bln as at end-7. Only three GCC banks reported a combined lost of USD1.5bln (~.5%) from the subprime 4. Banking institutions keep diversified portfolios in high-grade investments to mitigate risk and ensure positive return. The financial profile of GCC banks is strong, with good asset quality, high profitability and robust capitalisation 5. Overtime, GCC has gradually diversify its export markets, from traditional US market to the EU, Japan and rest of Asia 6. Nevertheless, the indirect effect of the subprime crisis may be that it increases the cost of raising capital for banks, corporates and investment bodies. In the medium to longer-term, as deals get bigger in size and more complex, access to cheap international capital is becoming more important 8 Source: Company announcements, KFH

ROBUST 28 SUKUK PIPELINE Total Value of Announced 28 Sukuk Pipeline by Sector (USD34.5bln) Shipping.2% Oil & gas.1% Pow er 19.5% Cement 2.2% Auto.2% Conglo 3.7% Const'n.1% Sovereign 11.9% Total Value of Announced 28 Sukuk Pipeline by Country (USD34.5bln) Sw itz.2% IDB.8% M'sia 21.3% HK.9% Thai 2.% UAE 35.1% Indon 4.3% Real estate 26.4% Financial services 35.6% France 1.3% Qatar 6.% Kazakhstan 5.8% Kuw ait 1.4% Saudi 6.3% Bahrain 3.% Pakistan 2.4% Issuer Amt (USD mln) Sector Country Abu Dhabi National Energy Co (Taqa) 1,5 Power UAE Doha Bank 1, Financial services Qatar Khabary Fahaleel Future City Islamic Bank of Thailand National Central Cooling Co (Tabreed) Notable Sukuks Announced in 28 1,842* Real Estate Kuwait 175 Financial services Thailand 57 Industrial products UAE Govt of Kazakhstan 2, Sovereign Kazakhstan Govt of Thailand 5 Sovereign Thailand *Kuwaiti Dinar- denominated Sukuk To-date, 28 announced Sukuk pipeline estimated at USD34.5bln Real estate, financial services and infrastructure (power/ oil & gas/ roads) sectors are expected to dominate the primary Sukuk market in 28 The UAE is anticipated to lead at 35.1%, followed by the Malaysia at 21.3% and Kuwait at 12.2% 28 will see Sukuk debuts from new markets such as Thailand, Indonesia, Hong Kong and Kazakhstan **Statistics above include both local & dollar-denominated 9 Sukuks Source: Zawya, Bloomberg, IFIS, Central Banks, KFH

Issued EXPANSION OF GCC LOCAL CURRENCY SUKUK MARKET Increasing Popularity of Local Currency Sukuk Papers in GCC Issuer Size in local currency USD mln equivalent Issued Year Sector Country Sabic SAR3, mln 8 26 Basic industries Saudi Arabia JAFZ Sukuk AED7,5 mln 1,995 27 Ports UAE Sabic SAR8, mln 2,133 27 Basic industries Saudi Arabia Saudi Electric SAR5, mln 1,333 27 Power Saudi Arabia Ijara Sukuk BD95 mln 25 27 Sovereign Bahrain Nakheel Development 3 Ltd AED3,6 mln 957 28 Real Estate UAE 28 Announced Pipeline Iskan Sukuk KWD14.9 mln 55 28 Real Estate Kuwait Khabary Fahaleel Future City Sukuk KWD497 mln 1,842 28 Real Estate Kuwait ETA Star Holding AED1,88 mln 51 28 Real Estate UAE The National INvestor AED64 mln 17 28 Financial Services UAE GCC Planned/ Under Construction Infrastructure Projects Water & w aste 2% Industry 3% Pow er 7% Oil & gas 21% Petrochemicals 7% Construction 6% GCC local currency-denominated Sukuk issued in 26, 27 & 28YTD combined stood at USD7.2bln, led by Saudi Arabia and the UAE 1 GCC local currency Sukuk deals announced in 1Q8 amounted to USD2.36bln, mostly dominated by the real estate sector GCC planned/ under construction infrastructure projects to-date estimated at USD2 trillion Expect more local Sukuk issuances moving forward, mostly from real estate, infra/ construction (power, water, utilities, roads) and oil & gas Source: Bloomberg, Zawya, KFH

LOCAL CURRENCY SUKUKS: CHARTING THE NUMBERS USD mln equivalent 9 8 7 6 5 4 3 2 1 Local Currency Sukuk Issuance Trend in GCC & Pakistan (26-28F) Bahrain 2.4% Country Breakdown of Local Currency Sukuk Issuances (26-28YTD) Kuw ait 18.1% 26 27 28F Pakistan 5.7% Saudi 4.7% Statistics above include Sukuk deals announced in 28 UAE 33.1% *All statistics include local currency-denominated Sukuks from GCC & Pakistan Local Currency Sukuks Issued in GCC & Pakistan by Economic Sector (26-28YTD) Real estate 32.% Sovereign 2.7% Construction.3% Pow er 14.6% Shipping.5% Oil & gas.3% Financial services.2% Statistics above include Sukuk deals announced in 28 Ports 19.% Basic industries 28.% Water 2.5% GCC & Pakistan local currency-denominated Sukuks issued in 27 amounted to USD5.84bln, expected to trend higher to USD8bln in 28 GCC & Pakistan local currency Sukuks issued in 6, 7 & 8YTD combined stood at USD1.5bln, led by real estate (32%), basic industries (28%) and ports (19%) Country breakdown of local currency Sukuk issued & announced: Saudi (4.7%), the UAE (33.1%) and Kuwait (18.1%) 11 Source: Zawya, Bloomberg, IFIS, Central Banks, KFH

GROWING SIZE OF ISLAMIC EQUITY FUNDS Number of Global Islamic Equity Funds (1996-28F) USD mln No. of funds 14 12 1 8 6 4 2 3 25 2 15 1 5 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28F Total Value of Global Islamic Equity Funds (1996-28F) 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28F Islamic equity funds market is one of the fastest growing sectors within the Islamic financial industry Prior to 1995, there were approximately 1 equity funds on the market. Since 1996, the number of equity funds has doubled every year to over 12 funds as of today, estimated at USD14.5 billion and is growing by 12%-15% per annum Much of the money flowing into equity funds has come from founding institutions or high profile investors Global distribution of mutual funds: Equity (84%), Balanced (14%) and Bonds (2%) Total value of Islamic equity funds estimated at USD2bln in 27, projected to reach USD26bln in 28 12 Source: Failaka International, IOSCO Report, KFH

ISLAMIC TAKAFUL CONTRIBUTIONS WORLDWIDE Factors fuelling the growth of Takaful worldwide: Growing demand for Shariah compliant products. Existing Islamic banking customers are looking for an everbroader range of Islamic financial instruments Reduction of state-sponsored welfare benefits. There is a growing trend towards the gradual reduction of state welfare benefits. This encourages Takaful operators to start analysing and targeting the respective needs of the different customer segments Abundant liquidity. Sustained high oil prices are contributing to the growing class of affluent individuals, thus encouraging this new class to give more thought to other aspects such as savings, investment and protection in the form of insurance Increasing levels of FDI. Higher levels of FDI in the infrastructure & real estate sectors are expected to contribute to higher premiums written in GCC Growing government & regulatory support. Supportive authorities create a conducive environment for takaful to grow and thrive Growth of retakaful capacity. International re-insurers are allowed to operate in local markets New distribution channels. Takaful operators offer product lines via internet or hooking up with a bank USD bln 8 7 6 5 4 3 2 1 Global Takaful Contribution Trend (2-215F) 2 24 21F 215F 13 Malaysia 27% Global Takaful Contribution by Region (27) Asia-Pacific 9% Europe/US 1% GCC 63% Source: IFN, KFH

DEVELOP THE COMPETITIVENESS OF ISLAMIC WEALTH MANAGEMENT Islamic wealth management industry In 28 is forecast at 5% or USD2.1tln of the total HNWI wealth vs. 4.8% or USD1.9tln expected in 27. regulatory environment Supply Landscape Proliferation of GCC wealth Entrance of foreign players Awareness of Islamic products Drivers Critical Success Factors for New Entrants Product development Research Distribution Private networks Players Improved returns Brand credibility Increased competitiveness with multinationals Drivers Demand Segments High net worth individuals Affluent investors Institutions 14 Source: EY, KFH

THE SUCCESS OF ISLAMIC FINANCIAL MARKETS Market & Product Development Development of innovative,competitive and wider range of Islamic funds Tax and Legal Framework Facilitate tax and legal framework to promote the development of Islamic funds Mobilization of Islamic Asset International Practice Awareness & Education Foreign Participation Mobilize dormant Islamic asset held by Islamic Institutions through Islamic funds to enhance liquidity and provide new sources of income Promote international harmonization and standard setting to enhance cross-border linkages and accelerate the region as investment destination Enhance awareness at domestic and international level. Increase pool of Islamic capital market expertise through training and education Encourage foreign participation in domestic market. Supranational and multinational corporations are allowed to issue local currencydenominated Islamic debt/sukuk 15 Source: KFH

CONCLUSION Providing depth & breadth of Islamic products and participants Providing clear operating environment, dual banking system Large number of players Meeting various needs of market & providing depth and breadth to Islamic interbank market Islamic Finance Industry Promoting market liquidity and providing two-way quotations for trading of Islamic papers Enhanced secondary market Improving efficiency and attracting more participants into the primary and secondary markets Enable market marking activities 16 Source: KFH

KFH GLOBAL INVESTMENT RESEARCH THANK YOU 17