Making Finance Work for Africa Islamic Capital Markets 12 June 2014
HANI IBRAHIM Head of Debt Capital Markets - QInvest Islamic Finance Market 2
Global Islamic Finance Assets Defined as a financial service principally implemented to comply with the main tenets of Sharia a (or Islamic law) A s s e t c l a s s e s i n c l u d e : I s l a m i c b a n k i n g, S u k u k, Ta k a f u l ( I s l a m i c i n s u r a n c e ) a n d I s l a m i c f u n d s I s l a m i c f i n a n c e i s o n e o f t h e m o s t r a p i d l y g r o w i n g s e g m e n t s o f t h e g l o b a l f i n a n c e i n d u s t r y Islamic banking assets reached US$1.8tn in 2013, a growth of 18% pa between 2009 and 2013 In US$ bn 7,000 6,000 Estimated to surpass the US$ 6.5tn mark 5,000 4,000 3,000 2,000 1,000 Reached US$ 150bn Reached c.us$ 1.8tn 0 Mid 1990s 2013 2020 Source: Kuwait Finance House Research, Global Islamic Finance Forum 3
Asset Class Breakdown Funds Funds that comply with Islamic principles Total assets under management of c.us$ 72bn as at end of 2013 Banking, 80% Banking A system of banking which is consistent with Islamic principles Major driving force of the global Islamic finance industry with an estimated asset size of c.us$ 1.44tn as at end of 2013 Funds, 4% Sukuk Islamic equivalent of bonds Sukuk outstanding stood at c.us$ 270bn as at end of 2013 Sukuk, 15% Takaful, 1% Takaful Form of insurance based on Islamic principles Global Takaful contributions was estimated at c.us$ 20bn in 2013 vs. US $ 17bn in 2012 Source: Kuwait Finance House Research, Global Islamic Finance Forum 4
Global Presence Global Islamic Finance Assets in 2012 (US$ bn) Others 108 MENA (ex. GCC) GCC 720 666 Asia 288 Sub Saharan Africa 18 Source: Kuwait Finance House Research, Global Islamic Finance Forum Total global Islamic finance assets in 2013 = c. US$ 1.8tn 5
Sukuk Market Overview Market Overview Projections for Sukuk Market Sukuk issuances have grown at a CAGR (compounded annual growth rate) of 40.5% from 2008 to 2013 Issuances (US$ bn) 250 Sukuk issuances reached US$140.2bn in 2012, a 64% increase vs. 2011 Volume slowed slightly in 2013 to US$111.1bn The drivers of this continued growth include: increasing demand for Islamic financial assets; global investors increasing familiarity with Sukuk; increased support from governments; and increasing standardisation of Sukuk structures 200 150 100 85.3 140.2 152.4 111.1 176.0 200.0 224.2 Moody s estimates a US$229bn gap between Sukuk supply and demand in 2014. This should create an opportunity for issuers to attract investors at potentially lower rates 50 20.3 34.5 54.0 Market depth is also increasing with the emergence of new structures and instruments as well as longer tenors Source: Zawya; Moody s; QInvest research and analysis 0 2008A 2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P Sukuk issuances are showing a continued rise as Islamic finance gains momentum with investors globally 6
Sukuk vs. Bond Overview Bond Sukuk Accounting Liability Liability Security Assets Unsecured (Can be Secured) û Unsecured (Can be Secured) Required Under Sharia a (asset based instrument) Listing ü ü Regulated ü ü Prospectus ü ü Other Documents Simple Additional Sharia a Documents 7
Sukuk Rationale Sukuk is a structured product that is the Islamic equivalent of a conventional bond, and is structured with a methodology that is in compliance with Sharia a principals The instrument is typically asset based and NOT asset backed (i.e. senior unsecured obligation) Attracts Islamic finance investors Whilst retaining conventional bond investors Also allows for access to the GCC investor base (Islamic and conventional) that may not be familiar with the issuing entity Widen Investor Base Islamic Liquidity Considerable Islamic liquidity Most investors are the liquid GCC banks Significant lack of investable Sukuk available In addition some corporates, funds and insurance companies also invest Open up access to Islamic finance A new source of liquidity, meaning attracting new investors with considerable capital Market Development Conventional Liquidity Bond investors are comfortable with Sukuk format, European investors have taken c. 20-25% of recent Sukuk issues 8
Islamic Finance in Africa Islamic banking in Africa is considered underdeveloped in comparison to the Gulf region and South East Asia Three main factors have accounted for the relative underdevelopment of Islamic banking 1. Limited development of retail banking in general 2. Lack of knowledge of Islamic banking 3. Previous absence of government support Ranking by Asset Size (2011) Leading Islamic Banks in North Africa (2011) Rank Country Sharia a Compliant Assets (US$ bn) Total Assets (US$ bn) Rank Islamic Bank Assets (US$ bn) 43 Faisal Islamic Bank of Egypt 5 12 Egypt 7 144 81 Al Baraka Bank, Egypt 2 20 Algeria 1 90 116 Al Baraka Bank, Algeria 1 118 Banque Al Wava, Mauritania 1 23 Tunisia 0.8 36 163 Al Baraka Bank, Tunisia 0.4 Source: African Development Bank Research Report (2011); Bloomberg; Brookings 9
Islamic Finance in Africa In 2013, Nigeria s Security and Exchange Commission approved new rules facilitating the issuance of Sukuk Nigeria The Nigerian State of Osun issued a local currency Sukuk which raised US$62m from domestic pension funds and international investors The South African government has appointed banks and is close to finalizing its debut Sukuk South Africa The regulatory framework for its Sukuk is said to be in place The issue is expected to set a benchmark for state-owned companies to tap Islamic markets Prior to the Nigerian State of Osun, only Gambia, Sudan and Mauritius had issued local-currency domestic Sukuk - Sudan sold local currency Sukuk worth $160 million in 2012 Senegal said to be planning to issue a $200 million Sukuk in 2014 Others The Ugandan Government has approved the introduction of Islamic finance and is expected to soon approve three laws within the Financial Institution Amendment Act Sukuk issuances are likely to emerge in Morocco, Tunisia and Egypt upon the adoption of enabling legislation/regulation The general consensus is that if the likes of Morocco, Tunisia, Egypt, Sudan and South Africa successfully issue Sukuk it will open up the market in Africa as a whole Source: African Development Bank Research Report (2011); Bloomberg; Brookings 10
Debashis Dey Partner Clifford Chance Islamic Finance Principles & Structures 11
Islamic Finance Principles Riba Usury or excessive interest Prohibition of Riba and the exclusion of pure debt-based financing Gharar Uncertainty or Gharar is prohibited in financial dealings Full disclosure of information and removal of any uncertainty in a contract Maysir Gambling and other speculation Prohibition of gambling and speculation in business dealings Haram Forbidden or unlawful Investments in or involvement in activities that are forbidden (e.g. alcohol, weaponry, drugs etc.) 12
Murabaha Structure Murabaha is the most common tool for bank financing / lending under Islamic finance 1. 1 Based on the drawdown request from the Company, the Banks provide the Agent with funding equal to the facility amount Banks 2. 2 The Agent, on behalf of the Banks, uses the funding to buy commodities through Broker 1 at the Cost Price (equal to the facility amount) Funding + Murabaha Profit (Deferred Payment) 1 Funding 3. 3 The Agent will then sell the commodities to the Company under a Murabaha contract with deferred payment terms (reflecting the coupon payments and repayment) Agent 3 Sale of Commodities The Company Purchaser 4. 4 In order to monetise the commodities, the Company would sell the commodities through Broker 2 at the same Cost Price pre-arranged with Broker 2 2 Sale of Commodities Cost Price Cost Price + Profit (Deferred Payments) 5 Cost Price 4 Sale of Commodities 5. 5 The Company would pay the Deferred Payments to the Agent which includes the Cost Price plus the Profit; this in turn would get distributed to the Banks Broker 1 Broker 2 13
Ijara Sukuk Structure 1. 1 The Company incorporates an SPV 1) (the "Issuer") Company as Lessee 2. 2 The Issuer will issue Sukuk certificates to the Investors in exchange for the Sukuk Proceeds The Issuer will hold the Sukuk Proceeds and any assets purchased with the Sukuk Proceeds in trust for and on behalf of the Investors Sukuk Assets 1 4 Lease Agreement Rental Payments Sukuk Assets 3. 3 The Company will sell certain tangible assets (the Sukuk Assets") to the Issuer equal in value to the Sukuk Proceeds Company as Seller 3 Purchase Agreements SPV 1) as Issuer / Trustee 5 Purchase / Sale Undertakings Company as Purchaser 4. 4 The Issuer will lease the Sukuk Assets to the Company for a term equivalent to the term of the Sukuk and will receive rental payments equal to the periodic distribution payments under the Sukuk 5. 5 The Company will grant a Purchase Undertaking in favour of the Issuer pursuant to which the issuer will sell all the Sukuk Assets to the Company upon maturity or the occurrence of an event of default at a predetermined Exercise Price Sukuk Proceeds Sukuk Proceeds 2 Declaration of Trust Investors Exercise Price Periodic Distribution Payments and Dissolution Payment 1) Special Purpose Vehicle 14
1 2 3 Identification of Assets Sukuk Structure SPV Incorporation Identify and agree on the assets Develop the Sukuk structure Obtain Sharia a Board approval Incorporate Special Purpose Vehicle Sukuk Process Overview 4 5 6 Due Diligence & Disclosure Documentation Launch, Bookbuild & Price Due diligence on the Obligor Disclosure for the offering circular Auditor s comfort letter Documents and Offering Circular submit to listing authority Rating agency review Investor Presentation Roadshow / investor meetings Investor orders Settlement procedures 15
1 Quantum Ijarah structure, 100% tangible assets Wakala structure, 51% tangible assets Asset Identification Process 2 3 4 5 6 Type Ownership Tax Efficiency Jurisdiction Term Tangible assets (e.g. land, buildings and equipment) have the widest Sharia'a acceptance New assets (e.g. mobile airtime vouchers) have been used in some recent transactions Financial and any other non-sharia'a compliant assets will need to be excluded Assets must be owned, either directly or through beneficial ownership Assets must not be encumbered / mortgaged Assets to which transfer and other taxes will apply to be excluded Real estate assets may fall in to this category Favorable to select a jurisdiction with previous Sukuk issuances to avoid a lengthy process with the authorities The value of the tangible assets must be maintained throughout the Sukuk term Substitution mechanism may be used to substitute the initial assets with replacement assets 16
Sukuk and Bond Comparison Assets Identification of Sukuk Assets and Tax Structuring û P Corporate Approvals P P Approvals Regulatory Approvals (Listing Authority, etc.) P P Approval from Sharia a Scholars û P Business Description P P Industry and Regulatory Overview P P Risk Factors P P Offering Financial Statements P P Circular Summary of Terms & Conditions P P Summary of Transaction Documents P P Sharia a Structure û P Summary of Islamic Documents û P Documentation Capital Markets Documents P P Islamic Documents û P Bond Sukuk 17
EGYPT: OBJECTIVES, STRATEGIES & CHOICES 18
Egypt Sukuk Model Objectives To diversify the source of funding To broaden our investor base To raise funds for development & infrastructure projects, social services, and PPP as well. Strategies & choices Egypt follows a Top Down approach, reflecting a serious government commitment to develop sukuk market. Segregate among Sovereign & Corporate sukuk governing rules, due to different dynamics of each type. Promulgated the sukuk law regulating sovereign & corporate process in May 2013. 19
Egypt strategies & choices Egypt is targeting both international and domestic markets, however, it concentrates on developing domestic markets infrastructure. Egypt sukuk law is based on all kinds of Shariah contracts and allows all kind of contracts innovation according to Shariah principals. Sovereign sukuk law is based on Asset Based model not asset backed model. Sovereign sukuk can be issued by central government, municipalities and all government entities A sovereign Supreme Asset Valuation Committee is to be established from high officials to evaluate sovereign assets (land, roads, buildings etc.). 20
Egypt strategies & choices Sovereign sukuk are mainly issued to create new assets. Egypt preferred to have a Sovereign Central SPV for all domestic sovereign sukuk issuances ensuring a regular sukuk issuance calendar. The sovereign SPV is composed from the domestic market stakeholders such as MOF, CBE..etc. Egypt has a Central Shariah Committee, it is composed of 7-11 members according to standards stated in law. Non Egyptian & well known shariah scholars are allowed to join it. Ijarah or hybrid Ijarah are the most appealing structures for international & local investors, however, a huge demand is emerging for short term sukuk from local banking sector. Sukuk certificates are tax exempted. Sukuk law complies with foreign ownership of lands law and does not conflict with it. 21
Panel Discussion: Moderator: Michael Grifferty Gulf Bond & Sukuk Association Panelists: Hani Ibrahim QInvest Debashis Dey Clifford Chance Farid Masmoudi Islamic Development Bank Nouran Yousef Egyptian Ministry of Finance 22