Islamic Capital Markets and Investment Banking: The Definitive Guide

Table of Contents

 
Executive Summary
Section 1: Market Size and Scope
Chapter 1 Individual private wealth
Chapter 2 Corporate finance
Chapter 3 Islamic financial institutions
Chapter 4 Key sell-side factors for market
Chapter 5 Islamic finance 2.0: No longer a myth
Chapter 6 Is there an alternative to LIBOR?
Section 2: Islamic Debt Capital Markets
Chapter 7 Sukuk market overview
Chapter 8 Future trends in Sukuk
Chapter 9 Syndicated financing: opportunities & challenges
Section 3: Islamic Asset Management
Chapter 10 Islamic asset management - challenges & opportunities
Chapter 11 Viewpoint: Future directions for Islamic asset management
Chapter 12 Alternative investment strategies and hedge funds
Section 4: Islamic Private Equity
Chapter 13 Growth strategies for Islamic private equity
Chapter 14 Islamic structures in private equity: a global reflection
Section 5: Islamic Derivatives
Chapter 15 Shari'a-compliant derivative equivalents
Chapter 16 Balancing Shari'a and commercial law
Chapter 17 Key developments in documentation stardardisation
Chapter 18 Options contracts in Islamic finance
Chapter 19 Credit default protection: the new frontier
Section 6: Islamic Treasury & Interbank Markets
Chapter 20 Islamic treasury and interbank overview
Chapter 21 Murabaha
Chapter 22 Other liquidity management instruments
Chapter 23 Islamic repos: how far have we progressed?
Chapter 24 The ongoing search for liquidity
Section 7: Islamic Banking Data
Section 8: Appendices
List of tables and figures
 
Executive summary
  • The economic crisis and Islamic finance
    • Liquidity and maturity mismatches
    • Causes and effects of the liquidity crunch
  • Investment shift to Islamic finance
  • Market size and growth potential
    • Product development opportunities
    • Supply-side factors
  • Debt capital markets
    • Sukuk
  • Asset management
  • Private equity
  • Islamic derivatives
  • Treasury and interbank operations
  • Dataset and analysis
  • Key research findings
Section 1: Market size and scope
 
Chapter 1 Individual private wealth
  • The high net worth, ultra high net worth and mass affluent segment
  • The mass retail finance segment
  • Islamic banking penetration and growth rates
    • Country potential varies
    • Malaysia and Iran show potential
    • Growth presents sell-side opportunities
  • Awqaf and endowments
Chapter 2 Corporate finance
  • Growth of conventional and Islamic financing
    • The GCC and Malaysia hubs
  • Islamic corporate finance growth predictions
  • Growth of sukuk capital markets
Chapter 3 Islamic financial institutions
  • Treasury requirements
  • The liquidity crisis
    • Market sizing
  • Profit rate mismatches and the need for profit rate derivatives
  • Foreign exchange market potential
  • Takaful/Islamic insurance institutions opportunities
Chapter 4 Key sell-side factors for market development
  • Proactive regulatory infrastructure
    • Central Bank of Bahrain
    • Bank Negara Malaysia
    • The UK
  • Market depth and volume
  • Information exchange and transaction execution platform
  • Cross-border standardization
    • Sukuk (beyond the current AAOIFI standard)
    • Common FX options and swap transactions
Chapter 5 Islamic finance 2.0: no longer a myth
By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters
  • Intelligent information and connectivity
    • Trust and confidence
  • A global information platform
    • The Islamic Indices Gateway
  • Islamic ‘LIBOR’
    • The Money Market Gateway
  • Moving forward with supply opportunities

Chapter 6 Is there an alternative to LIBOR?

  • The LIBOR debate
  • Islamic alternatives to LIBOR
    • Enterprise returns
    • Retail deposits
    • Natural yields
  • Correlating benchmarks
  • Incentives and regulation for an independent benchmark
  • Conclusion
Section 2: Islamic debt capital markets
 
Chapter 7 Sukuk market overview
  • Key sukuk structures
    • Salam sukuk
    • Ijarah sukuk
    • Istisna’a sukuk
    • Musharaka sukuk
    • Mudarabah sukuk
  • Debt capital markets overview
  • Sukuk defaults
  • Macro growth projections and correlation to oil prices
  • Growth in issuance
    • Currency issues
  • Growth drivers
    • CMA improves secondary trading options
    • Collapse of regional stock markets
    • Access to capital for corporates and project finance
    • Demand from quasi-sovereign and sovereign entities
    • Pent-up demand from international investors
    • Tightening spreads and easing liquidity
    • Strong issues pipeline
    • European and Asian sovereigns tap Middle East liquidity
  • Short-term and long-term challenges
    • Blacklisting of Kuwaiti credits
    • Real estate downturn and lower hydrocarbon prices
    • The availability of credit in Saudi Arabia
  • Long-term challenges
    • High overhead costs
      • The difference in Malaysia
    • Structuring and documentation standardisation issues
      • Asset-backed vs. project-backed vs. asset-based
      • The role of standard setters
Chapter 8 Future trends in sukuk
  • Sukuk funds and the financial crisis
  • Asset substitution risk and buy-and-hold mentality
  • Short-term sukuk will be the order of the day
  • The effect of the AAOIFI sukuk pronouncement
  • Dubai Inc and corporates require a discriminatory approach
  • Default of the Nakheel sukuk
    • Structure of the Nakheel sukuk
  • The importance of rated issues
  • Understanding sukuk default behaviour
  • Towards synthetic structures and intangibles
    • The future of sukuk structures
  • Case study: Anatomy of a sukuk default: East Cameron Partners
  • Implications of the case
  • Sukuk bookrunner/lead arranger league tables
Chapter 9 Syndicated financing: opportunities and challenges
  • Background
  • Growth of Islamic syndicated financing
  • Sources of liquidity
  • Market outlook
  • Syndicate strategies adopted by banks
  • Long-term growth prospects
  • Is Islamic syndication a value proposition?
  • The key challenge: liquidation of syndicated debt
  • Syndicated financing bookrunner/lead arranger league tables
Section 3: Islamic asset management
 
Chapter 10 Islamic asset management – challenges and opportunities
By Dr. Nikan Firoozye, Director, Shariah Structuring, and Bernardo Vizcaino, Managing Director, Amsar Partners LLP, with Dr. Sayd Farook
  • Introduction
  • Industry landscape
  • The seven bad habits of Islamic funds
    • Comfort zones
    • Beta in a box
    • Headless chickens
    • Re-repackaging
    • One size fits all
    • Off limits to offshore
    • Distribution dreamland
  • Growth and drivers
    • Takaful
    • Sukuk
    • Microfinance
    • Fund of funds
  • Is Islamic finance acyclical or counter-cyclical? 
    • CPPI and variant structures
  • Challenges
    • Distribution networks
    • Industry analysis and research
    • SSB set-up costs
  • Shari’a risk - the elephant in the room
    • A risk grading system?
  • Opportunities
    • The dichotomy of alpha and beta
    • Product range
    • Untapped markets
  • Structured products
    • Products with no specific view
    • CPPI product
    • Weak view structures
  • Conclusion
Chapter 11 Viewpoint: future directions for Islamic asset management
  • Sukuk leads the way
  • Creating a product suite
  • Irrational behaviour of Gulf investors
  • Short-term preferences of Shari’a-sensitive investors
Chapter 12 Alternative investment strategies and hedge funds
  • Shari’a-compliant hedge funds
  • Opportunities in the Islamic hedge fund space
  • A cautious note on short selling
    • Naked short selling
  • Shari’a-compliant shorting structures
    • Salam-based shorting
    • Arboun-based shorting
    • Wa’d-based shorting
Section 4: Islamic private equity
 
Chapter 13 Growth strategies for Islamic private equity
  • Private equity development issues
    • Lack of experience
    • Real estate concentration
    • High cost structure
    • The influence of the Wastah
    • Corporate governance issues
    • Lack of public market exit options
  • Changing investment strategies
    • Portfolio strategy
    • Effect of the financial crisis
    • Securitising investment portfolios
    • Investing in sector-specific asset classes
    • Lack of institutional investors
Chapter 14 Islamic structures in private equity: a global reflection
By Tamar Nazih Makary, Head of Middle East Investment Banking, Business Development Asia LLC
  • Common levels of compliance required
  • China
  • South East Asia
  • India
  • The West
  • Conclusion 
Section 5: Islamic derivatives
 
Chapter 15 Shari’a-compliant derivative equivalents
  • Underlying rationale
  • Conventional derivatives and Shari’a compliance
  • Development of derivative equivalents
    • Wa’d and its application in forward contracts
    • Wa’d in structured notes
    • Profit rate swaps
Chapter 16 Balancing Shari’a and commercial law
By Gohar Bilal, executive director, Head of Islamic finance, BNP Paribas Najmah and Alumni-Visiting Scholar of the Harvard Law School, Islamic Legal Studies Program
  • Acceptability to Shari’a scholars
    • The role of Shari’a advisory boards
  • Development of standardised documentation and transparency
    • The role of the ISDA
    • Force majeure
    • Set-off and netting payments
    • Calculating early termination payments
  • Legal systems and enforceability
  • Internal procedures and processes
  • Purpose and motivation
  • Conclusion 
Chapter 17 Key developments in documentation standardisation
  • The IIFM-ISDA Tahawut Master Agreement
    • Achieving Shari’a compliance
    • Certainty of governing law
    • Transparent netting arrangements
    • Defined early termination provisions
  • The context of reducing ambiguity
  • Opportunities for further standardisation
Chapter 18 Options contracts in Islamic finance
  • Arboun contracts
  • Case study: Exchange traded arboun
  • Shari’a-compliant put options
  • Commodity futures in a regulated exchange environment
 
Chapter 19 Credit default protection: the next frontier
 
  • CDP contract parameters
  • First degree of separation from assets
  • Sale of a financial right
  • Fee for guarantee
  • Why CDP is more legitimate than the profit rate swap
  • Proposed CDP structure
  • Limited applications of CDP
  • Bilateral arrangements: an immediate solution for CDP
  • Limitations on the growth of the CDP product market
 
Section 6: Islamic treasury and interbank markets
 
Chapter 20 Islamic treasury and interbank overview
  • Background
  • Challenges
  • Liquidity issues
  • Lack of Shari’a-compliant assets
  • Solutions and opportunities
Chapter 21 Murabaha
  • Overview
  • Murabaha and the International Council of Figh Academy
  • Growth of commodity murabaha
    • The role of novation
  • Salam-based liquidity management
  • The AAOIFI Shari’a Standard No. 30 on Monetisation
Chapter 22 Other liquidity management instruments
  • Wakala
    • Seniority status and default
  • Mudaraba certificates
  • Ijarah or leased asset-backed liquidity programmes
    • The use of REITs
    • Real estate-based liquidity fund
    • Equity investment with the security of a purchase undertaking
  • Sukuk /Islamic certificates
Chapter 23 Islamic repos: how far have we progressed?
  • Overview
    • Malaysia’s repo arrangement
    • Other repo equivalents
  • The CBB ILSI – a real Islamic repo?
  • Collateralised murabaha – an alternative to the classic repo?
  • The IIFM collateralised murabaha liquidity facility
Chapter 24 The ongoing search for liquidity
  • Central Bank of Bahrain’s ijarah and salam sukuk programme
  • Shari’a-compliant Overnight Fund
  • LMC’s Short-term Sukuk Programme
  • ABC Islamic Bank’s product
  • Credit Suisse Prime Shari’ah Solution
  • The Gate from Global Commodity Finance Ltd
Section 7: Islamic banking data
 
Table 1: All banks summary data
Table 2: Top 50 banks by total assets, 2008 (US$m)
Table 3: Investment banks by ROAE, 2008, 2007 (%)
Table 4: Private equity banks by ROAE, 2008, 2007 (%)
Table 5: Universal banks by ROAA, 2008, 2007  (%)
Table 6: Top 20 commercial banks by ROAA, 2008, 2007 (%)
Table 7: Top 5 Bahrain banks ranked by assets, 2008
Table 8: Top 5 Kuwait banks ranked by assets, 2008
Table 9: Top 3 Saudi banks ranked by assets, 2008
Table 10: Top 5 Qatar banks ranked by assets, 2008
Table 11: Top 5 UAE banks ranked by assets, 2008
Table 12: Top 5 Malaysia banks ranked by assets, 2008
Table 13: All CI rated banks, 2009
Table 14: Islamic syndicated loans, 2004-09
Table 15: Islamic sukuk, 2004-09
 
Section 8: Appendices

Appendix 1 Market practice in Shari’a compliance

  • General guidelines for Shari’a-compliant equities selection
  • Financial ratios
    • Impermissible leverage or lending ratios
    • Tradability ratios
    • Impermissible income ratio
Appendix 2 Sukuk types and risk
 
Appendix 3 Milestones in the rise of Islamic finance
 
Appendix 4 Glossary
 
List of tables and figures

Table ES1: Average asset growth and penetration, 2001–07 (%)
Table ES2: Average deposit growth and penetration, 2001–07 (%)
Table 1.1: Individual market values and market potential ratings, 2007, 2013 (e) (US$bn)
Table 2.1: Total actual and projected sukuk issuance, 2005–13 e) (US$m)
Table 6.1:  Correlation between benchmark deposit rates and ROIAH for Islamic banks, 1995–2005
Table 6.2: Mean asset spread (difference between ROIAH and ROA) for Islamic banks, 1995–2005
Table 7.1: Typical risks associated with different types of sukuk classification
Table 8.1: Confirmed sukuk defaults, 2008–09
Table 8.2: Sukuk structures and their potential for originators
Table 8.3: Top 20 global sukuk bookrunners, 2002–09 (US$m)
Table 8.4: Top 20 global sukuk lead arrangers, 2002–09 (US$m)
Table 9.1: GCC syndicated financing, 2009
Table 9.2: Top syndicated lending bookrunners, 2002–09 (US$m)
Table 9.3: Top syndicated lending deal arrangers, 2002–09 (US$m)
Table 15.1: Development of conventional vs. Islamic derivatives
Table 16.1: Summary of Islamic jurisprudence and prevailing law
Table 24.1: Islamic liquidity instruments (excluding Malaysia)

Figure 1.1:  HNW and UHNW: Islamic fund distribution by  size of funds, end-2008 (%) 
Figure 1.2:  Mass affluent: Islamic fund distribution by number and size of funds, end-2008 (%) 
Figure 1.3: Financial assets held by HNW, UHNW and mass affluent segments, 2005–13 (f) (US$bn)
Figure 1.4: Global Muslim population distribution by country (m)
Figure 1.5: Relative average asset growth by country, 2001–07 (%)
Figure 1.6: Islamic banking penetration by country, 2008 (%)
Figure 1.7: Current and forecast market penetration rates for Islamic banking
Figure 2.1:  Islamic and conventional syndicated financing totals, 2002–09 (US$bn)
Figure 2.2: Cumulative Islamic and conventional syndicated financing by country, 2002–09 (US$bn)
Figure 2.3: Cumulative Islamic syndicated financing distribution by country, 2002–09 (%)
Figure 2.4:  Average oil prices, 2001–11 (e) (US$/bbl)
Figure 2.5: Syndicated financing volumes for countries with Islamic finance presence, 2002–12 (e) (US$m)
Figure 2.6: Sukuk issuance growth, 2005–13 (e) (US$m)
Figure 3.1: Interbank ratio for Islamic and conventional banks in countries with Islamic finance presence and comparative sample of banks in the UK, 2001–08
Figure 3.2: Net financing/depositor and short-term funding, 2001–08
Figure 3.3: Liquid assets/deposits and short-term funding, 2001–08
Figure 3.4: Growth rates of external positions (assets) of banks, 1999–2008 (%)
Figure 3.5: Growth rates of external positions (liabilities) of banks, 1999–2008 (%)
Figure 3.6: External positions of banks in countries with Islamic finance presence, 1977–2008 (US$bn)
Figure 3.7: Forecast of external positions of banks in countries with Islamic finance presence to 2013 (US$bn)
Figure 3.8: Corporate sukuk, actual and desired levels, GCC and Malaysia, 2008 (%)
Figure 3.9: One year or less instruments, actual and desired levels, 2008 (%)
Figure 4.1: Key factors in easing sell-side bottlenecks
Figure 6.1:  Balance sheet structure of an aggregate of 92 Islamic banks, 2008
Figure 6.2:  Balance sheet structure of 267 conventional banks in countries where Islamic banks operate, 2009
Figure 7.1: Total sukuk issuance by country, Q3 2009 (%)
Figure 7.2: Total sukuk issuance and concentration by country, 2005–Q309 (US$m)
Figure 7.3: Total issuance by type of entity, Q309 (%)
Figure 7.4: Total issuance by currency (US$ and local), 2006–Q309 (US$m)
Figure 7.5: Total number of issuances by region, 2006–Q309
Figure 7.6: Illustration of a typical asset-based ijarah structure
Figure 7.7: Illustration of a typical project- backed musharaka structure
Figure 8.1: Nakheel sukuk asset transfer structure
Figure 8.2: Nakheel sukuk asset security package
Figure 8.3: Nakheel sukuk main transaction agreements
Figure 8.4: East Cameron gas sukuk structure summarised
Figure 9.1: Typical arrangement of an Islamic syndicated financing deal
Figure 9.2:  Islamic and conventional syndicated financing, 2002-H109 (US$bn) 
Figure 9.3: GCC syndicated financing market, 2004–08 (US$m)
Figure 9.4: Sources of liquidity by region, 2005–08 (US$m)
Figure 9.5: Islamic syndicated financing by country, 2002–H109 (US$m)
Figure 10.1: Islamic funds by domicile, Jan 2009 (%)
Figure 10.2: Islamic funds by geographic mandate, Jan 2009 (%) 
Figure 10.3: Islamic funds by asset size, Jan 2009 (US$m)
Figure 10.4: All Islamic funds new launches and total universe, 2000–08
Figure 10.5: Product evolution
Figure 10.6: Islamic funds asset class mix, end-2008 (%)
Figure 11.1: Investor risk/return profiles and investment objectives
Figure 12.1: Islamic hedge fund and fund of funds market, 2005¬–10 (US$bn)
Figure 12.2: Salam-based shorting structure
Figure 12.3: Arboun-based shorting structure
Figure 13.1: Average non-interest expense/operating income for Middle East investment banks, 2004–07 (% of total assets)
Figure 13.2: Average non-interest expense/total assets for Middle East investment banks, 2004–08 (% of total assets)
Figure 13.3: Creating investment funds for specific asset classes
Figure 13.4: Average ROAA, 2004–08, Islamic and conventional investment banks (%)
Figure 13.5: Average ROAE, 2004–08,  Islamic and conventional investment banks (%)
Figure 13.6: Average cost to income ratio, 2004–08 (%)
Figure 13.7: Average recurring earning power, 2004–08 (%)
Figure 13.8: Non-interest expense/average assets, 2004–08 (%)
Figure 15.1: Value of conventional derivatives, 1987–H208 (US$trn)
Figure 15.2:  Shari'a-compliant derivative equivalents
Figure 15.3:  Bilateral wa'd based FX option
Figure 15.4: The Deutsche Bank Al Miyar structure
Figure 15.5: Murabaha-based Islamic profit rate swap structure
Figure 15.6: Wa'd-based Islamic profit rate swap structure
Figure 18.1: Shari’a-compliant mechanisms for forward price fixing
Figure 18.2: Structure of an exchange traded arboun
Figure 18.3: Structure of a Shari’s-compliant put option
Figure 18.4: Structure of a Shari’a-compliant commodity futures transaction
Figure 19.1: Structure of a takaful offering CDP
Figure 20.1:  Development of Islamic treasury products
Figure 21.1: Structure of permissible organised murabaha/tawarruq
Figure 21.2: Structure of impermissible organised murabaha/tawarruq
Figure 21.3: Salam interbank financing alternative
Figure 22.1: Ijarah-based liquidity management programme structure
Figure 23.1: ISLI structure
Figure 23.2: Structure of the IIFM collateralised murabaha liquidity facility
Figure 24.1: Oversubscription levels of CBB liquidity treasury bills and sukuk
Figure 24.2: Structure of the LMC STS