SUKUK & ISLAMIC FINANCIAL STRUCTURES IN PROJECT / INFRASTRUCTURE FINANCE

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1 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

2 ISLAMIC FINANCE OVERVIEW The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

3 ISLAMIC FINANCE OVERVIEW Breakdown of Sharia Compliant Assets Worldwide Islamic equity funds 2.5% Sukuk 7.0% Islamic mutual funds 3.5% Takaful 0.1% Sukuk 11.3% Islamic funds 4.6% Takaful 0.8% Islamic banking 86.9% Islamic banking 83.4% Sharia-compliant assets estimated at US$ 500 Bn as at end-2003: Islamic banking: US$ 435 Bn Sukuk: US$ 35 Bn Islamic mutual funds: US$ 17.5 Bn Islamic equity funds: US$ 12.5 Bn Takaful: US$ 0.5 Bn Sharia-compliant assets estimated at US$ 1.0 Tn as at end-2010: Islamic banking: US$ 834 Bn Sukuk: US$113 Bn Islamic funds: US$46 Bn Takaful: US$8 Bn Source: Central banks, IFSB, Zawya, KFHR

4 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

5 GCC CAPITAL MARKET GCC bond and sukuk issuance by country (4Q10) GCC bond and sukuk issuance by sector (4Q10) UAE 42% Saudi Arabia 13% Oman 3% Bahrain 10% Kuwait 5% Oil Services 3% Sovereign 24% Others 18% Banking 16% Telecom 17% Utilities 12% Qatar 27% Real Estate 4% 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

6 E 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 USD mln USD mln 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 Sukuk issuance trend ( ) Quarterly sukuk issuance ( ) Other Mena Source: Central banks, IFSB, Zawya, KFHR

7 SUKUK MARKET 2010 AT A GLANCE Sukuk issued by sector 2010 Sukuk issued by country 2010 Sovereigns Financial services Power & utilities Telecom Transport Real estate Construction Agriculture Services Oil & gas Manufacturing Sovereign issues dominated the primary sukuk market in 2010, led by Malaysia central bank USD Mn UK Gambia Spore Turkey Japan Brunei Bahrain UAE Pakistan Qatar Saudi Indonesia Malaysia Malaysia continued to dominate and lead the primary sukuk market in USD Mn Sukuk issued by currency in 2010 Top country analysis in 2010 MYR IDR SAR USD QAR SGD PKR BHD BND GMD GBP Sukuk deals were mostly Ringgit denominated USD Mn Country No. of deals Amount USD Mn Malaysia ,856 Indonesia 35 3,214 Saudi Arabia 4 3,003 Qatar 2 2,123 UAE 3 1,081 Total ,277 Source: Central banks, IFSB, Zawya, KFHR

8 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 Infrastructure spending plans 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 The GCC region infrastructure pipeline, estimated at US$ 2 Tn, offers attractive opportunities for long-term fundraising via bonds and sukuk Low yields Improving market infrastructure 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 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 Growing demand 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

9 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

10 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

11 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

12 ACCOMMODATING MEGA PROJECT FINANCE The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

13 MEGA PROJECTS IN THE REGION, A GLANCE

14 STRUCTURED / PROJECT FINANCE EQUATE US$ 600 Mn Mobile Telecommunications Company International B.V. Mobile Telecommunications Company International B.V. Conventional and Islamic Facilities 2006 US$ 1.2 Bn Murabaha Facility 2006 US$ 750 Mn Murabaha Facility 2006 Equate Petrochemical Co. US$ 1.2 Bn SEWA US$ 350 Mn Jara Qatar Gas II US$ 8.2 Bn Project Finance Bapco US$ 1.1 Bn Murabaha KPPC US$ 1.4 Bn , 1998,

15 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

16 LANDMARK PROJECTS Project Finance Facility UMM AL-NAR Water and electricity plant for Abu Dhabi Government 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

17 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 Jan Qatar Diar Finance Real Estate US$ 2,500 July 2010 July 2020 Qatar Gov. Sukuk Sovereign QAR 5,000 June 2010 June 2018 Nakilat Inc Gas Distribution US$ 300 Dec Dec Qatar Petroleum Oil US$ 650 May 2006 May 2011 State of Qatar Sovereign US$ 1,400 June 2000 June 2030 Source:, Bloomberg, Economy watch

18 KUWAIT & ISLAMIC FINANCE The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011

19 KD Bn KD Bn % GCC ISLAMIC BANKING A KUWAITI FOCUS GCC Islamic Banking Market Share (as at 3Q10) Saudi Arabia 26.4% Qatar 12.9% UAE 28.1% Bahrain 10.7% Kuwait 21.8% Islamic Banking Assets % of Total Banking Assets (as at 3Q10) GCC Bahrain Kuwait Qatar Saudi Arabia 15.2 UAE Total Islamic Banking Assets ( ) Total Islamic Financing ( ) AUB KIB Boubyan KFH AUB KIB Boubyan KFH Source: Central banks, Zawya, KFHR

20 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 5 th 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

21 KEY QUESTIONS (1) ARE SUKUK & ISLAMIC FINANCIAL INSTRUMENTS 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?

22 Q & A The Euromoney Kuwait Conference Financing Development, Developing Finance Monday 11 April, 2011