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www.islamicfi nancenews.com Islamic Finance news Guide 2007 Note from the publisher As we enter 2007 Islamic fi nance will continue to develop and reach out to the world’s issuers and investors regardless of their faith, religion and location. We will continue to see major advancements in innovation and product development and new players will amaze us with bigger and better offerings. New markets will emerge following the likes of China, Japan and Kenya in 2006. However, the focus will again be on the current dominant players and this is where we’re likely to see the major growth. Malaysia, currently boasting the world’s largest Islamic bond market, will continue to set the pace but the United Arab Emirates, Saudi Arabia and Kuwait are all expected to reduce the gap if not reverse it. The UAE is a bustling haven for Islamic fi nance with Abu Dhabi, Dubai and Sharjah claiming almost every major fi nancial institution with Islamic capabilities between them. Malaysia may have the upper hand on the quantity of Shariah compliant issuances, but the UAE can certainly claim the biggest with the likes of PCFC and Nakheel amounting to a combined US$7.02 billion. These are the deals which raise eyebrows in Europe and the US. Indonesia will witness a major transformation with the proposed new regulations and standards for issuing Islamic paper in the world’s most populous Muslim country. Up to US$10 billion needs to be raised over the next ten years for necessary infrastructure projects. The Islamic Development Bank has already announced US$1.5 billion of investment this year. Singapore, which is yet to issue a Sukuk but continues to vigorously promote its Islamic banking capabilities, may fi nd its niche in the Islamic funds and wealth management sectors. With the usual array of nations claiming to be the global centre for Islamic fi nance we will surely witness an abundance of sovereign paper hitting the market. Or perhaps it will be yet another case of not walking the walk. London, Dubai, Singapore, Qatar, Kuwait and Saudi Arabia take note. Islamic REIT’s will almost certainly be an interesting market to watch in 2007 with Al-`Aqar KPJ REIT being the world’s fi rst last year and winning numerous plaudits including one in Islamic Finance news’ Deals of the Year Awards. We’re probably not too far away from seeing the fi rst fund of Islamic funds entering the market now we have Islamic hedge funds. And it’s also likely we’ll witness the fi rst true Islamic securitization this year. Will 2007 be the year we see the secondary market pick up, increasing the attractability of Islamic paper in yet the relatively untapped markets? Although, with 40% of the recent Nakheel Sukuk (US$3.52 billion) investor base coming from Europe we’re on the way. As mentioned we’ve recently witnessed some large deals, but what would a Hutchison, Temasek, Boeing or US sovereign issuance do for the industry? Well perhaps we’ll fi nd out this year. We’ve seen a number of traditionally local banks launch operations in new markets. A trend likely to continue! However, would more joint ventures like that of CIMB-Kanoo be more enticing? Ultimately though, with the necessity for greater capitalization amongst the majority of today’s Islamic banks true consolidation will win the day. In this the second edition of the Islamic Finance news Guide, we provide you with the industry’s most comprehensive and authoritative review of 2006 and preview of 2007. With 32 exclusively authored industry sector and market reports you can be assured there’s plenty to read. We also have the full results of the Islamic Finance news Deals of the Year and Best Islamic Banks Poll for 2006, both of which were carried out during December. League tables, a full review of the stories from 2006, the industry’s largest terminology glossary and much more are all contained within these pages. I would like to thank Professor Rodney Wilson who has again kindly authored the introductory industry overview and all the other contributors from around the world for sharing their insights and predictions. My thanks also goes to the editorial, marketing and production teams here at Redmoney who have worked endlessly to ensure this reaches you. Finally, thank you, our readers for your continued support. On behalf of the entire team at Islamic Finance news and Redmoney, I’d like to wish you a very happy and prosperous 2007. Very best regards, Andrew Morgan Managing Director & Publisher www.islamicfi nancenews.com Page 1 CONTENTS INTRODUCTION Global Islamic Capital Markets 13 Professor Rodney Wilson of the University of Durham gives a complete review on the global Islamic capital markets and a preview for 2007 ISLAMIC CAPITAL MARKETS Islamic Debt as the Global Propeller 21 Badlisyah Abdul Ghani and Shamsun A. Hussain of CIMB Islamic analyze the importance of Islamic debt as the driving force in the Islamic fi nance industry Islamic Capital Market: Growth & Trends 29 Baljeet Kaur Grewal of Kuwait Finance House Malaysia outlines the key trends and the future of the industry in 2007 SECTOR REPORTS The Next Generation in Islamic Financing 35 Arul Kandasamy of Barclays Capital gives a crystal ball view of the future in pre-IPO Sukuk Saudi Islamic Project Financing 39 Robin Abraham, Mohamed Hamra-Krouha and Qudeer Latif of Clifford Chance review the project fi nancing deals in Saudi Arabia for 2006 Raffl esia Capital’s Exchangeable Trust Certifi cates 43 UBS Islamic Finance Group provides a case study on the world’s fi rst Shariah compliant exchangeable bonds Islamic Project Finance Returns to the Spotlight 46 Neil D. Miller and Paul McViety of Norton Rose give a detailed outline of the fi rst fully Islamically fi nanced project fi nance transaction in Saudi Arabia The Evolution of Products in Islamic Finance 50 Safdar Alam of Calyon provides his views on the development of products and usage in the global Islamic fi nance industry Cross Border Deals of the Year 55 Dubai Financial & Citigroup highlights on their winning deal Islamic Collateralized Debt Obligations 57 Dr Humayon Dar of Dar Al Istithmar considers whether Islamic CDOs are Shariah compliant or not The Evolution of Islamic Hedging Solutions 60 Azrulnizam Abdul Aziz of Standard Chartered explains how a commodity Murabahah product evolved into an Islamic hedging product Trading Potential in Sukuk and Equities 62 Ijlal Alvi & Dr. Azmir Agel of the International Islamic Financial Market argue that the issuance of short-term dated Sukuk has enabled the increased potential of Islamic cross-border equities trading www.islamicfi nancenews.com Page 4 A landmark year This announcement is neither an offer to sell nor an offer of a solicitation to buy these securities. This announcement appears as a matter of record only. For more information, kindly visit our website at www.citigroup.com 103726-IslamicFinanceAd.DPS.indd1 1 2/8/07 10:22:07 AM October 2006 September 2006 June 2006 April 2006 US$230,000,000 US$41,500,000 US$846,000,000 US$260,000,000 Islamic Acquisition Syndicated Murabaha Project Financing Facility Project Financing Facility Financing Facility and Facility Islamic Tranche Islamic Tranche Islamic Cross-Currency Swap Islamic Structuring Agent Mandated Lead Arranger Mandated Lead Arranger Mandated Lead Arranger Mandated Lead Arranger and Bookrunner and Bookrunner and Joint Bookrunner WAPDA March 2006 March 2006 March 2006 January 2006 US$600,000,000 US$1,900,000,000 US$850,000,000 PKR8,000,000,000 PETRORabigh Islamic Bridge Revolving Murabaha Facility Debut Local Currency Sukuk Project Financing Facility Financing Facility Islamic Tranche Mandated Lead Arranger Joint Underwriter Mandated Lead Arranger Structuring Agent and and Joint Bookrunner and Joint Bookrunner Joint Lead Manager Islamic Banking There are good reasons our clients entrust us with their largest, most important transactions. They have confidence in our time-proven track record, and in our ability to deliver creative new cross border solutions, that are fully compliant with the tenets of Sharia. Put the global reach of Citigroup to work for you. Global Banking Global Capital Markets Global Transaction Services © 2007 Citigroup Global Markets Inc. Member SIPC. All rights reserved. CITIGROUP and the Umbrella Device are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. 103726-IslamicFinanceAd.DPS.indd1 1 2/8/07 10:22:07 AM CONTENTS Shariah Products - The Road Ahead 65 Sonia Borg of SHUAA Asset Management discovers the potential of the Islamic fi nance industry in the GCC and MENA region Islamic Wealth Management 67 The potential of the Islamic wealth management industry is uncovered by Yousif A. Juma of Gulf Finance House Scope of Islamic Investment in Indian Equities 69 “India is becoming extremely important for investors’ portfolios and long-term Shariah investors,” says Shyam Kumar of Kotak Mahindra Islamic Banking Technology & Solutions 71 Dourria Mehyo of Path Solutions unravels the specifi cations and characteristics needed in an IT solution to support such a growing industry MIDDLE EAST Bahrain 73 The world’s Islamic fi nancial Market; By Jane Dellar, Bahrain Financial Services Development Bureau Kuwait 75 Islamic fi nance industry in Kuwait; By Global Investment House Syria 78 Great demand ahead for Syria; By Raed Karawani, Karawani Law Firm Jordan 80 Islamic banking in Jordan; By Professor Said Al Hallaq, Yarmouk University Lebanon 82 Islamic banking in Lebanon; By Saed Matraji, Matraji Law Firm EUROPE Turkey 85 Turkey 2006 – Looking ahead with confi dence; By Paul Wouters, Bener Law AFRICA South Africa 88 Islamic banking in South Africa; By Ahmed Moola, Absa Islamic Bank ASSUMPTION :: Meet your business needs exactly One product fi ts all with Business Banking solutions from RHB ISLAMIC.