SUKUK & ISLAMIC FINANCIAL STRUCTURES IN PROJECT / INFRASTRUCTURE FINANCE

Emad Y. Almonayea Vice Chairman, MD & CEO Liquidity Management House For Investment Kuwait Finance House Group

The Euromoney Kuwait Conference “Financing Development, Developing Finance" Monday 11 April, 2011

ISLAMIC FINANCE OVERVIEW

The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

ISLAMIC FINANCE OVERVIEW Breakdown of Sharia Compliant Assets Worldwide Islamic mutual funds 3.5% Islamic equity funds Takaful 2.5% 0.1%

Islamic funds 4.6% Sukuk 11.3%

Sukuk 7.0% 2003

2010

Islamic banking 86.9%

Sharia-compliant assets estimated at US$ 500 Bn as at end-2003: • • • • •

Islamic banking: Sukuk: Islamic mutual funds: Islamic equity funds: Takaful:

Takaful 0.8%

Islamic banking 83.4% Sharia-compliant assets estimated at US$ 1.0 Tn as at end-2010:

US$ 435 Bn US$ 35 Bn US$ 17.5 Bn US$ 12.5 Bn US$ 0.5 Bn

Source: Central banks, IFSB, Zawya, KFHR

• • • •

Islamic banking: Sukuk: Islamic funds: Takaful:

US$ 834 Bn US$113 Bn US$46 Bn US$8 Bn

GCC CAPITAL MARKET GCC conventional bond issuance, USD Mn

•

GCC and global sukuk issuance, USD Mn

GCC total bond and sukuk issuance stood at US$ 43.8 Bn in 2010 vs. US$ 61.5 Bn in 2009, held back by local debt restructuring concerns and the persistent uncertainty caused by the global economic crisis, most notably the recurrent debt woes in the euro zone

•

More than two-thirds of the new GCC issuance took place in the second half of the year, particularly in 4Q10

•

Total GCC bond and sukuk issuance reached US$19.7 Bn in 4Q10, with US$15.7 Bn or 79.8% being corporate issuance

Source: Zawya, Bloomberg, KFHR

GCC CAPITAL MARKET GCC bond and sukuk issuance by country (4Q10)

GCC bond and sukuk issuance by sector (4Q10)

Saudi Arabia 13%

Others 18% Oman 3%

UAE 42%

Oil Services 3%

Bahrain 10%

Kuwait 5%

Telecom 17% Sovereign 24%

Utilities 12% Real Estate 4%

Qatar 27%

•

Banking 16%

Petrochem icals 6%

A number of landmark issues in 4Q10 did a great deal to boost optimism on future prospects of the GCC capital market

•

Total UAE issuance topped US$ 8.32 Bn (42%) in 4Q10, followed by Qatar at US$ 5.28 Bn (27%) and Saudi Arabia at US$ 2.6 Bn (13%)

•

By sector, banking issues dominated at US$ 6.1 Bn (31%), followed by sovereign issues at US$ 3.9 Bn (20%) and telecommunication at US$ 2.8 Bn (14%)

Source: Zawya, Bloomberg, KFHR

SUKUK MARKET •

In 2010, the primary sukuk market expanded by 50% yoy with new issuances touching an all-time high of US$ 52 Bn, beating 2007’s record of US$ 38 Bn The first quarter of 2011 witnessed new sukuk issues totalling US$ 28 Bn, an increase of 4 times over US$ 7 Bn on the same quarter of 2010 Sukuk issuance in 2010 was boosted by sovereigns/Quasi Sovereign, which captured 51% of total 413 sukuk issuances in 2010 The Sukuk Issuance in 2010 increased by 65% compared by 2009 total number of issuances The leading sovereign issuer was Bank Negara Malaysia as well as the Governments of Indonesia, Qatar, Pakistan and Bahrain Drivers of the primary sukuk market in 2010 were the financing needs of governments, implementation of infrastructure projects to boost economic growth, the need of working capital for businesses in line with global economic recovery as well as financial institutions capital raising activities Quarterly sukuk issuance (2008-2010)

Source: Central banks, IFSB, Zawya, KFHR

4Q10

3Q10

2010E

2009

2008

2007

2006

2005

2004

2003

2002

2001

0

2Q10

10000

1Q10

20000

Mena

4Q09

USD mln

30000

2000

USD mln

40000

Other

3Q09

50000

2Q09

60000

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

1Q09

Sukuk issuance trend (2000-2010)

4Q08

•

3Q08

• •

2Q08

•

1Q08

•

SUKUK MARKET 2010 AT A GLANCE Sukuk issued by sector 2010 Sovereigns Financial services Power & utilities Telecom Transport Real estate Construction Agriculture Services Oil & gas Manufacturing

Sukuk issued by country 2010 UK Gambia Spore Turkey Japan Brunei Bahrain UAE Pakistan Qatar Saudi Indonesia Malaysia

Sovereign issues dominated the primary sukuk market in 2010, led by Malaysia central bank

0

5000 10000 15000 20000 25000 30000 35000 USD Mn

Sukuk issued by currency in 2010 MYR IDR SAR USD QAR SGD PKR BHD BND GMD GBP 5000

10000

15000

20000

25000

30000

0

10000

20000

30000

40000

USD Mn

Top country analysis in 2010

Sukuk deals were mostly Ringgit denominated

0

Malaysia continued to dominate and lead the primary sukuk market in 2010

Country

No. of deals

Amount USD Mn

Malaysia

299

40,856

Indonesia

35

3,214

Saudi Arabia

4

3,003

Qatar

2

2,123

UAE

3

1,081

Total

340

50,277

35000

USD Mn

Source: Central banks, IFSB, Zawya, KFHR

GCC BOND AND SUKUK MARKET Factors driving GCC bond and sukuk market in 2011

Restructuring

• The global financial crisis has left a legacy of substantial corporate and Government related entities “GREs” restructuring needs in the GCC region, estimated at US$ 40 Bn – US$ 45 Bn in 2011/ 2012

Government issuance

• Fiscal consolidation has emerged as a theme in the GCC, especially with Dubai expected to cut spending this year to contain its deficit. Governments are expected to restructure their debts • Dubai alone faces debt repayments of US$ 30 Bn over the coming two years

Infrastructure spending plans

Low yields

Improving market infrastructure

Growing demand

• The GCC region infrastructure pipeline, estimated at US$ 2 Tn, offers attractive opportunities for long-term fundraising via bonds and sukuk

• At historical lows, yields are attractive. The refinancing needs of GCC bond and sukuk estimated at US$ 70 Bn in 2011 • Concern on risk premiums and capital-raising costs trending upward later in 2011 may encourage issuers to bring forward issuances

• Qatar Exchange is expected to launch a secondary market for bonds and sukuk in 2011. The Bahrain Financial Exchange intends to set up Bait Al Bursa for Sharia-compliant products • Kuwait has finally established and legalized the Capital Market Authority • Sukuk and bond investments in the GCC region are very low by international standards, yet the number of institutional investors (insurance companies, mutual fund managers (but not sovereign wealth funds) is growing • Their long-term liabilities make bonds and sukuk an attractive and prudent option

Source: Zawya,, KFHR

POTENTIAL FOR ISLAMIC FINANCE The potential for Islamic finance far outstretches the global crisis and has vast opportunities to grow further, given the following factors: •

Strong demand for Sharia compliant products

•

Certain jurisdictions globally are promoting Islamic finance

•

Development of Islamic finance governance

•

Awareness build up in the global market on Islamic finance and growth of its assets

•

Proven track in financing massive infrastructure and construction projects

REGULATORY INITIATIVES •

All over the world countries are accepting Islamic finance and issuing regulations to accommodate the Islamic finance systems Countries started or established roads for Islamic Finance: •

Canada

•

UK

•

Spain

•

Russia

•

France

•

Australia

•

India

•

Thailand

•

Luxembourg

NEED FOR A GCC CAPITAL MARKET 10TH GCC BANKING CONFERENCE – DOHA/QATAR, MARCH 2011 Main deliberation and discussion among the participants was regarding: •

Challenges facing the Gulf finance markets and policies for dealing with these challenges

•

The impact of the international financial crisis on the banking sector in the GCC countries

•

Unanimous agreement on the need for an active and strong capital market in the Region

ACCOMMODATING MEGA PROJECT FINANCE

The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

MEGA PROJECTS IN THE REGION, A GLANCE

STRUCTURED / PROJECT FINANCE

EQUATE US$ 600 Mn Conventional and Islamic Facilities

Mobile Telecommunications Company International B.V.

Mobile Telecommunications Company International B.V.

US$ 1.2 Bn

US$ 750 Mn

Murabaha Facility

Murabaha Facility

2006

2006

2006

Equate Petrochemical Co.

SEWA

Qatar Gas II

US$ 350 Mn

US$ 8.2 Bn

US$ 1.2 Bn

Jara

Project Finance

1996, 1998, 2002

2006

2004

KPPC Bapco US$ 1.4 Bn US$ 1.1 Bn 2007 Murabaha 2004

LANDMARK PROJECTS Project Finance Facility

KUWAIT PARAXYLENE PRODUCTION COMPANY

To design, procure, construct and operate an Aromatic project at Shuaiba, Kuwait Tenor: 14 year Facility size: US$ 1.4 Bn - Islamic tranche US$ 347 Mn

Ijara Sukuk Issuce DUBAI CIVIL AVIATION SUKUK

To develop Dubai International Airport Terminal III

Tenor: 5 year Sukuk size: US$ 1 Bn

LANDMARK PROJECTS Project Finance Facility

Water and electricity plant for Abu Dhabi Government UMM AL-NAR Tenor: 20 year Facility size: US$ 2 Bn - Islamic tranche US$ 250 Mn

Ijarah and Project Finance Facility SHARJAH ELECTRICITY AND WATER AUTHORITY

Water and electricity distribution centers for Sharjah Government Tenor: 9 year Facility size: US$ 350 Mn

QATAR - A CASE STUDY •

Qatar Government borrowing during 2010 was QAR 55 Bn compared with QAR 52 Bn in 2009

• •

Gross Debts for Qatar in 2010 was QAR 125 Bn compared with QAR 131 Bn in 2009 For 2011, Gross Debt for Qatar expected to be QAR 129 Bn, which is 3% higher than the 2010 Qatar Bonds & Sukuk Issuances Issuer

Industry

Amount in Mn

Issue date

Maturity

Qatar Gov. Sukuk

Sovereign

QAR 33,000

Jan. 2011

Jan. 2014

Qatar Diar Finance

Real Estate

US$ 2,500

July 2010

July 2020

Qatar Gov. Sukuk

Sovereign

QAR 5,000

June 2010

June 2018

Gas Distribution

US$ 300

Dec. 2006

Dec. 2033

Oil

US$ 650

May 2006

May 2011

Sovereign

US$ 1,400

June 2000

June 2030

Nakilat Inc Qatar Petroleum State of Qatar

Source:, Bloomberg, Economy watch

KUWAIT & ISLAMIC FINANCE

The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

GCC ISLAMIC BANKING – A KUWAITI FOCUS GCC Islamic Banking Market Share (as at 3Q10)

Islamic Banking Assets % of Total Banking Assets (as at 3Q10)

UAE 28.1%

Saudi Arabia 26.4%

33.2

35 30

%

25

21.0 17.8

20 15

Bahrain 10.7%

16.8

15.2

Saudi Arabia

UAE

11.5

10 5

Qatar 12.9%

0

Kuwait 21.8%

GCC

Total Islamic Banking Assets (2006-2010)

Qatar

Total Islamic Financing (2006-2010)

20.0

10.0

15.0

8.0 KD Bn

KD Bn

Bahrain Kuwait

10.0

6.0 4.0

5.0

2.0

0.0

0.0 2007 AUB

2008 KIB

2009 Boubyan

2010

2007

KFH

Source: Central banks, Zawya, KFHR

AUB

2008 KIB

2009 Boubyan

2010 KFH

KUWAITI ECONOMY •

In 2010, Kuwaiti Government announced a US$ 130 Bn Development Plan

•

Development Plan focus is on pivotal infrastructure projects – increased port capacities, a fourth refinery, aviation, roads and private sector stimulation

•

Development Plan essentially calls for improving non oil sectors; last development plan was in 1986

•

Private sector (Islamic and conventional alike) has already voiced its need to safely employ resources and liquidity into the said plan

•

Research indicates that Sharia compliant actors accounted for 30% of all assets in the financial services sector in Kuwait in 2008, making it the 5th largest market for Islamic banking worldwide

behind Iran, UAE, Malaysia and Saudi Arabia •

Although National economic growth is projected at 4.3%, Kuwait remains underperformer in the long run

•

Some Legislation have been passed but specific laws need to be fine tuned for sukuk

Source: The Oxford Group 2011 Report on Kuwait

(1) ARE SUKUK & ISLAMIC FINANCIAL INSTRUMENTS

KEY QUESTIONS ----------------------

SUITABLE FOR LONG TERM FINANCING ?

---------------------(2) WHAT’S REQUIRED FOR KUWAIT TO UTILIZE

INTERNAL & ATTRACT EXTERNAL FINANCING RESOURCES? ----------------------

(3) SHOULD WE CONSIDER KUWAIT AS A FRIENDLY

INVESTMENT ENVIRONMENT?

Q&A

The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011