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Member of the IslamicDevelopment Bank Group

ICDBULLETINIssue 01 | Volume 02 | Q1 2013

Islamic Corporation for the Development of the Private Sector Bulletin | Q1 2013

ICD MEMBER COUnTRIES

Albania

Algeria

Azerbaijan

Bahrain

Bangladesh

Benin

Brunei

Burkina Faso

Cameroon

Chad

Comoros

Côte d’Ivoire

Djibouti

Egypt

Gabon

Gambia

Guinea

Guinea Bissau

Indonesia

Iran

Iraq

Jordan

Kazakhstan

Kuwait

Kyrgyzstan

Lebanon

Libya

Malaysia

Maldives

Mali

Mauritania

Morocco

Mozambique

Niger

Nigeria

Pakistan

Palestine

Qatar

Saudi Arabia

Senegal

Sierra Leone

Sudan

Suriname

Syria

Tajikistan

Tunisia

Turkey

Turkmenistan

UAE

Uganda

Uzbekistan

Yemen

TABLE OF COnTEnTS

About the Islamic Development Bank

About the Islamic Corporation for the Development of the Private Sector (ICD)01 01

Foreword02 02

Speech given by Khalid M. Al Aboodi, the CEO, at the World Islamic Banking Conference, Manama, Bahrain, December 2012, October 201203 03

04 06

CEO Interview with Arab News05 11

The Goldman Sachs Sukuk Controversy : Some Lessons for the Future06 14

Sukuk Market Overview: Cautious Optimism in the Air 07 18

Investing in the SME Sector: The Theemar Tunisian SME Fund08 20

Sukuk Terminology: The view from Arabia09 23

ICD Member Development Database10 25

From the editor

Comments , suggestions and contributions are most welcome.Please contact Brian Kettell on [email protected]

The Role of the Islamic International Rating Agency : IIRA


01 02

ABOUT THE ISLAMICDEVELOPMEnT BAnK (IDB)

FOREwORD

BACKGroUNd

The IDB is an international financial institution established in pursuance of the Declaration of Intent is-sued by the Conference of Finance Ministers of Muslim Countries held in Jeddah, KSA, in December 1973. The Bank was formally opened on 20 October 1975.

FUNCtioNS

The purpose of the Bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Sharia’a i.e.Islamic Law.

The functions of the Bank are to participate in equity capital and grant loans for productive projects and enterprises, besides providing financial assistance to member countries in a variety of forms which enhance economic and social development. The Bank is also re-quired to establish and operate special funds for specific purposes, including a fund for assistance to Muslim

communities in non-member countries, in addition to setting up trust funds. The Bank is authorized to accept deposits and to mobilize financial resources through Sharia’a compliant modes of finance. It is also charged with the responsibility of assisting in the promotion of foreign trade especially in capital goods, among member countries; providing technical assistance to member countries; and extending training facilities for personnel engaged in development activities in Muslim countries in line with the Sharia’a.

memBerShiP

The present membership of the Bank consists of 56 ountries. The basic condition for membership is that the prospective member country should be a member of the Organisation of Islamic Cooperation (OIC), pay its contribution to the capital of the Bank and be willing to accept such terms and conditions as may be decided upon by the IDB Board of Governors.

It is my great pleasure to introduce the latest issue of the ICD Bulletin.

The ICD was set up as the private sector arm of the IDB Group to focus primarily on private sector development with a view to poverty alleviation and to raising the general standards of living in its member countries.

The current financial crisis essentially emanated from the operations of the originate-to distribute model , in which large international banks originated loans in the US sub-prime mortgage market, and then securi-tised the loans thus taking the credit exposure off their balance sheets.

In contrast to conventional finance, under the principles of Islamic finance lending on the basis of interest is forbidden by the Sharia’a. The Islamic financial system is driven by trade, production and investment and is intimately linked to the real sector. This is what we call “Main Street” rather than “Wall Street”.

The economic development of our member countries is being achieved through the provision of finance to private sector projects, in accordance with the principles of Sharia’a law. The ICD finances projects that are specifi-cally geared to creating employment opportunities, expanding the role of SME’s and boosting exports.

Please allow me to summarise some of the progress that ICD has made since its inception, some 13 years ago.

• ICD has approved $2.62 billion worth of financing for 238 different projects.

• The cumulative disbursement of the funds of ICD has reached $1.04 billion.

• By the end of 2012, its opera-tions reached 39 member coun-tries, in addition to nine regional projects that incorporate several member countries.

• Despite the negative effect of the financial crisis and social unrest in the region, ICD managed to approve 28 new projects and three capital increases in existing equity projects, totalling $410.52 million, in 2012.

During the last couple of years the ICD has been able to establish a number of Islamic banks and Ijara

companies in its member countries and has ambitious plans, for the near future, to create more Islamic finance channels in other ICD member countries. These countries include Saudi Arabia, Algeria, Kazakhstan, Palestine, Albania, Azerbaijan, Djibouti, Ivory Coast and Senegal.

Under its recently announced strategy, ICD will focus more on the development of what we call “Islamic Finance Channels”, meaning debt investment provision to the private sector, targeted towards SME’s. Our strategy is designed to reach out and

spread Islamic financial products far more widely with the objective of having a greater developmental impact in our member countries. This will be achieved substantially through setting up Islamic banks, Investment and Ijara Companies and Takaful and Re- Takaful companies in our member countries.

ICD is pioneering many aspects of Islamic finance and sees its role as being a powerful driver for economic change.

In this issue we highlight the role played by one of our Tunisian SME Funds. Future issues of the ICD Bulletin will highlight the many other development projects, both now and in the future, that we are planning.

My sincere appreciation is extended to those who have kindly contributed to this issue and I hope you will look forward to reading future issues.

Khalid mohammed Al AboodiCEO, Islamic Corporation for the

Development of the Private Sector (ICD)

Foreword

ABOUT THE ISLAMIC CORPORATIOn FOR THE DEVELOPMEnT OF THE PRIVATE SECTOR (ICD) The Islamic Corporation for the Development of the Private Sector (ICD) is a multilateral developmental organization affiliated with the Islamic Development Bank (IDB) Group.

In this issue we highlight the role played by one of our Tunisian SME Funds. Future issues of the ICD Bulletin will highlight the many other development projects, both now and in the future, that we are planning.

BACKGroUNd

The Islamic Corporation for the Development of the Private Sector (ICD) is a multilateral developmental organization affiliated with the Islamic Development Bank (IDB) Group. Its authorized capital stands at $2.0 billion. Its shareholders consist of the IDB, 52 member countries, and five public financial institutions. Headquartered in Jeddah, KSA, the ICD was established by the IDB Board of Governors during its 24th annual meeting held in Jeddah in November 1999.

The mandate of the ICD is to support the economic development of its member countries through the provi-sion of finance to private sector projects in accordance with the principles of Sharia’a law i.e. Islamic Law.

FUNCtioNS

The ICD finances projects that are specifically geared to creating employment opportunities and boosting exports. Furthermore the ICD mobilizes additional resources for projects and encourages the development of Islamic financing and capital markets. It also attracts co-financiers for its projects and provides advice to governments and private sector groups on policies aimed at encouraging the establishment, expansion and modernization of private enterprises, development of capital markets, best management practices and enhanc-ing the role of the market economy.

ICD IS PIONEERING MANy ASPECTS OF ISLAMIC FINANCE AND SEES ITS ROLE AS BEING APOWERFuL DRIvER FOR ECONOMIC ChANGE


03 04

the conventional system. The introduction of Islamic financial services offers obvious benefits for the global economy, not only as a source of liquidity and finance but also as a springboard for targeted growth and increased diversification.

Let me reiterate here some of the factors that make Islamic finance less prone to contagious banking instabil-ity than conventional means of financing. Islamic finance introduces greater discipline into the financial system by requiring the financier to share in the risk. Islamic finance agents share real business risks and Islamic finan-cial modes – both sale-based and partnership-based – are invariably backed by real physical assets. It is the use of such modes that turns the Islamic system into a robust instrument that maintains a link between the financial sector and the real economy making it less vulnerable to financial crises.

Brothers and Sisters,

The pre-requisites for a sustained growth in Islamic finance are many. Nonetheless, one of the main issues that the industry is facing is the lack of sufficient and sound regulatory framework in some aspects of the industry’s operations. Effective prudential supervision on banks is vital and crucial in the Islamic banking sector. Further-more, a system of proper corporate governance processes which are relevant and particular to Islamic principles must be in place in our financial institutions. In addition, the introduction of liquid, equity-based risk sharing and capital adequacy frameworks will shield Islamic institu-tions from the effects of future shocks and will help build a more sustainable financial system.

In this regards, the Islamic Development Bank (IDB) Group has been instrumental and pro-active in the launch-ing of various related initiatives. These are in addition to The Islamic Financial Services Board (IFSB) and Account-ing and Auditing Organization for Islamic Financial Institution (AAOFI) that address the crucial aspect of safeguarding and regulating the Islamic finance industry. The IDB Group was actively involved in the establishment of the International Islamic Rating Agency (IIRA); the development of internationally acceptable prudential regula-tory standards through the activities of the Islamic Financial Services Board (IFSB) in Kuala Lumpur & developing a Sharia’a compliant avenue for investing in a short-term inter-

bank market through the establishment of the International Islamic Liquidity Management Center in Malaysia.

In general, all collective efforts undertaken by both the regulators and Islamic finance institutions, including the IDB Group, to mobilize a higher level of global cooperation, will help to further propel the prospects of Islamic finance.

Ladies and Gentlemen,

Please allow me to summarise some of the remarkable progress that ICD has made since its inception, some 13 years ago.

• ICD has approved $2.17 billion worth of financing for 219 different projects since its inception.

• The cumulative disbursement of ICD has reached $893 million.

• By the end of 2011, its operations reached 36 member countries, in addition to nine regional projects that incorporate several member countries.

• Despite the negative effect of financial crisis and social unrest in the region, ICD managed to approve 18 new projects and three capital increase in existing equity projects, totaling $372.26 million in 2011.

• During 2011, ICD’s disbursement increased from $76 million in 2010 to $142million, representing an 87% annual growth.

• Breaking down our investments 54% of ICD’s ap-provals have been allocated to projects in the MENA region, followed by 12% in CIS & Central Asia, and 12% in Sub-Saharan Africa.

• The Financial sector (36%) and Industrial sectors (27%) accounted for more than 60% of ICD’s portfolio.

• Equity and Leasing were the most frequently used modes of finance.

During the last couple of years, ICD has been able to establish a number of Islamic banks and Ijara companies in its member countries and has an ambitious plan for the near future to create more Islamic finance channels in other ICD member countries including Saudi Arabia, Algeria, Kazakhstan, Palestine, Albania, Azerbaijan, Djibouti, Ivory Coast and Senegal.

Distinguished Excellency’s,

The Islamic Corporation for the Development of Private Sector (ICD), an affiliate of the IDB Group has also been contributing significantly to the Islamic banking industry all around the world. As a response to the global financial

World Islamic Banking Conference Speech

wORLD ISLAMIC BAnKInGCOnFEREnCE SPEECHOn the Occasion of the 19th Annual World Islamic Banking Conference, Manama, Bahrain, 9-11 December 2012

Khaled Mohammed Al- Aboodi, The CEO,Islamic Corporation for Development of Private Sector (ICD), Member of Islamic Development Bank Group

Assalamu’alaikum wa rahmatullah wa barakatuh

Mr. Chairman, Excellency’s, Distinguished Guests, Delegates, Ladies and Gentlemen,

At the outset, let me convey my sincere appreciation to the organizers of this Conference for inviting me again to this distinguished gathering. It is indeed a pleasure to speak at this Conference on behalf of the Islamic Development Bank (IDB) and its private sector arm, the Islamic Coop-eration for the Development of the Private Sector (ICD).

I must compliment the conference organisers. The theme of the conference “Adapting to the New Dynamics of Global Finance” is very timely suggesting, as it does, that the industry is moving away from early growing pains and can now focus on converting basic principles into hard real economy benefits.

Indeed the conference comes at a time when opportunities within the Islamic banking sector and the horizons of its development during the coming period have never been better, with some recent estimates that the total value of Islamic financial assets is expected to reach $1.6 trillion this year...

Dear Participants,

Let me begin by reminding you that the onset of Islamic finance as an alternative to the conventional financial system has gained traction in the last decade, owing to rapid financial liberalization, enhanced market interme-

diation and a growing awareness of Sharia’a compliant banking. Over the period of the recent financial crisis, the Islamic banking industry has remained relatively intact from the negative consequences of this phenomenon, and

has demonstrated an alternative architecture that should help minimize the severity of this and future crises.

For the benefit of those amongst you who are not com-pletely familiar with the activities of the ICD please allow me to highlight who we are and what our vision is before moving on to highlight our activities throughout our 52 member countries.

The ICD is a multilateral organization affiliated with the Islamic Development Bank (IDB) Group. The role of the IDB is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Sharia’a Law.

The ICD was set up as the private sector arm of the IDB Group to focus primarily on private sector development with a view to poverty alleviation and raising the general standard of living in its member countries.

As mentioned the mandate of ICD is to support the economic development of its member countries through the provision of finance to private sector projects in accordance with the principles of Sharia’a law. ICD finances projects that are specifically geared to creating employment opportunities and boosting exports.

Furthermore, ICD mobilizes additional resources for projects and encourages the development of Islamic financing and capital markets. It also attracts co-financiers for its projects and provides advice to governments and private sector groups on policies aimed at encouraging the establishment, expansion and modernization of private enterprises, development of Islamic capital markets (sukuk in particular), best management practices and mechanisms for enhancing the role of the market economy.

Ladies and Gentlemen,

The rapid growth of Islamic finance is mainly due to some of its inherent features and to its innovative instru-ments that make it attractive to any financial system and institution, as mentioned earlier. Islamic banking is creating a new architecture to redesign the conventional financial markets by eliminating the major weakness of

ICD MOBILIzES ADDITIONAL RESOuRCES FOR PROjECTS & ENCOuRAGES ThE DEvELOPMENT OF ISLAMIC FINANCING AND CAPITAL MARKETS

ICD hAS APPROvED $2.17 BILLION WORTh OF FINANCING FOR219 DIFFERENT PROjECTSSINCE ITS INCEPTION.


05 06

The global ratings industry is going through a new phase in its history, which bodes well for market participants, as rating agencies rework their service offerings and add value to what they are offering out to investors. A number of countries across MENA, South Asia, and Europe are putting forth rules and regulations to enable a rating culture in these markets, which is based on a strong foundation, and adheres to all the right principles from the outset.

The Islamic International Rating Agency (IIRA) has a head start in many respects. Founded on the principle of furthering Islamic finance, it differentiates itself in more ways than one. Its work procedures, its decision-making processes and perhaps most prominently its analytical approach to ratings are amongst its key distinctions.

the FUNdAmeNtAl PriNCiPleS UNderlyiNG the FidUCiAry APProACh

IIRA introduced and applied what we call a Fiduciary Rat-ings concept in October 2011, with its first rating announce-ment under this framework. The conceptual underpinnings of this methodology highlight the key distinction of Islamic finance in that Islamic financial institutions, while practically fulfilling the same economic needs as does conventional finance, are essentially different in how the end objectives are achieved. The methodology views the institution in the very capacity that it operates in, as reflected in the agreement that it executes with its stakeholders, i.e. as a ‘Mudarib’ to investment account holders in an Islamic bank or in a Takaful firm, as a ‘Wakeel’ in some organizational structures and as an ‘Ameen’ in yet others.

The fiduciary rating methodology is conceptually extend-able to all types of Islamic institutions, with its emphasis on the principles of governance (including Sharia’a Govern-ance) in parallel with an evaluation of financial strength.

tAKAFUl APPliCAtioNS

IIRA has more recently also announced its Fiduciary approach to Takaful firms, after testing the application of the framework with Islamic banks’. In Takaful firms, the business structure and principal agreements dictate the distribution of rights and obligations of all parties involved and the methodology addresses these distinctions to arrive at a suitable approach for each organizational form.

The rating framework of Islamic banks is also tailored to appreciate the different sources of funding utilized by the institution and the nature of each obligation.

the iSlAmiC BANKiNG CoNtext

An Islamic bank mobilizes two types of deposits, one being participatory and others treated usually as ‘Qard’ accounts. The former take the form of Investment accounts and entrust the bank with the responsibility of prudent management of these funds and profit sharing with the accountholders. The latter usually take the form of ‘Cur-rent’ accounts. Each of these obligations is different in the sense, that whereas the current accounts are not eligible for markup, the principal amount represents a liability and the bank is assessed in terms of being able to service it as a credit obligation.

On the other hand, profit sharing accounts do not repre-sent a definite liability but impose a business obligation on banks to generate returns which are equitably distributed and are in line with investor expectations. Here the bank serves in the capacity of an asset manager and should be assessed as such.

Fiduciary Ratings therefore reflect the ability of the institution to prudently manage investment pools, as also indicated in returns, quality of the portfolio, liquidity management and systems and risk policies applied.

the tWo PillArS

IIRA’s approach to ratings is tailored to address just this multiplicity in roles played by an Islamic Bank. The Fiduciary Rating System is a two pronged approach and addresses both these forms of obligations, i.e. participatory and non-participatory forms. A fiduciary rating framework assigns both a credit rating as an opinion on all credit type obligations, as well as a Fiduciary Score.

crisis which has had a negative impact on most of its member countries, ICD recently went through a substan-tial shift in its operational strategy to address current market needs. Under its new strategy, ICD is focusing more on the development of what we refer to as Islamic Finance Channels to have a higher developmental impact in our member countries.

The channels of Islamic finance for ICD covers a number of areas such as leasing and Ijara activities, industry and regional funds, equity participation in the capital of Islamic banks, creating Islamic windows within exist-ing conventional banks, encouraging the Takaful and re-Takaful industry, promoting Islamic capital markets and finally asset management activities at both individual and institutional investors. Extending, strengthening, and increasing Lines of Finance to qualified financial institu-tions is a major contribution of the ICD to reach SMEs. Additionally, ICD is promoting a SME Development Fund Program aiming at creating jobs and incomes in the small and medium enterprise sector by providing Sharia’a-compliant financial investment.

As part of its business plan and new strategy, ICD’s advisory services have gathered further momentum too. In the past year, ICD was involved in various advisory activities related to managing Funds, providing techni-cal assistance to member countries on projects such as Special Economic Zones (SEZ), SME Development Funds and initiating exciting activities in the Islamic Mortgage financing industry.

In Conclusion

With the world still navigating its recovery from the finan-cial crash Sharia’a compliant finance is ideally placed to of-fer not only a fairer more responsible and stable alternative to the traditional western model , but also provide access to much –needed pools of funds for a cash-strapped planet.

Islamic banking, rooted as it is, in Sharia’a law provides a socially responsible solution to the crises that have en-gulfed the conventional banking sector. Islamic banks are confident that Sharia’a tenets, which ensure the equitable distribution of wealth and steer clear of excessive financial leverage, have proven to be a hugely popular alternative among Muslims and non-Muslims alike.

diStiNGUiShed deleGAteS,

Finally I would like to express my sincere desire that the distinguished participants in this Conference enjoy fruitful deliberations in their various sessions. I wish the organizers and the distinguished participants a successful outcome, which will guide policies and actions in making Islamic banking more competitive and developed in the global economy and look forward to receiving a report on the Conference’s deliberations.

I pray to Allah the Almighty to guide us in our efforts to overcome the challenges ahead of us and help achieving the welfare and prosperity of the Ummah, Ameen.

THE ISLAMIC InTERnATIOnAL RATInG AGEnCy (IIRA) – A nEw PERSPECTIVE*

The Islamic International Rating Agency (IIRA) – A New Perspective

yes the industry does need its own Rating system

IIRC’S WORK PROCEDuRES, DECISION-MAKING PROCESSES & PERhAPS MOST PROMINENTLy ITS ANALyTICAL APPROACh TO RATINGS IS AMONGST ITS KEy DISTINCTIONS.

ExTENDING, STRENGThENING, AND INCREASING LINES OF FINANCE TO quALIFIED FINANCIAL INSTITuTIONS IS A MAjOR CONTRIBuTION OF ThE ICD TO REACh SMES

Sabeen SaleemCEO, IIFA


07 08

The credit rating assessment is focused on the ability and willingness of an institution to meet its contractual obliga-tions in a timely manner. Credit ratings will be assigned on the issue/issuer scale available on IIRA’s website and is similar to the conventional approach to bank assessment. This includes an analysis of all financial and institutional parameters with the objective of assessing the ability to repay a definite amount at any given time.

The fiduciary score, on the other hand, provides an

evaluation of the bank’s ability as a ‘Mudarib’ and is in turn a three tiered evaluation. It assesses the extent to which the risk management and business selection processes employed is effective in preserving investments of depositors. A fundamental responsibility of an Islamic Financial Institution (IFI) is to conduct the business in an honest, diligent and transparent manner and thereby fulfill the rights and obligations of financial stakeholders.

For example, while it may not be legally binding on the Mudarib to maintain the amount invested by an invest-ment account holder (IAH), the competence with which these amounts are invested and the level of disclosure to IAHs assumes much greater importance in the context of an IFI. There is basically no concept of shareholders absorbing the first loss. Instead, to a certain degree, shareholders have the right to a return similar to PSIA holders, with whom they commingle their investments.

The IIRA looks into the returns given to PSIAs versus the return to shareholders i.e. the ROE, and if there is significant difference, then the reasons for those would be evaluated.

tier oNe - ASSet mANAGer QUAlity

The first tier of the fiduciary score judges the bank’s ability to preserve investment values. With some overlap in parameters employed to judge an institution as a Mudarib and those employed for a bank’s credit assessment, there is greater focus of the fiduciary scoring mechanism on aspects including the principles of governance and an appreciation of the investment account holders as being quasi-equity holders, as mentioned earlier.

The real difference lies in that the Mudarib’s ability is evaluated not in the context of repaying a given amount under an obligation but the processes applied and their effectiveness to serve in the best interest of investors.

The financial strength of the institution reflects the success of the institution in deploying sufficient resources to manage investments and is a fair indicator of the risk to investors who are participants in the bank’s business portfolio. Policies and limits in place, in addition to the track record of management in efficiently managing the institution to the best of the investors’ advantage, are key determinants of assessing the bank as an ‘Asset Manager’.

tier tWo - CorPorAte GoverNANCe

The second tier of the fiduciary score pertains to the overall governance of the institution and the degree of protection that it offers to other stakeholders.

The Corporate & Sharia’a Governance structure is the result of the interaction between the Shareholders, i.e. Rab-ul-Mal, the Board of Directors and the Management, which acts on behalf of the shareholders.

Transparency (absence of ‘Gharar’), is a pillar of Islamic financial transactions, as well as a key principle of good governance. In Islam, a transaction becomes void if it is not transparent in its conduct. The role of an Islamic bank as ‘Mudarib’ has increased the importance of governance and an independent opinion on the same highlights the organizational system in place to safeguard the interest of all concerned.

An evaluation of ‘governance’ includes areas like board oversight, its independence and overall functioning, management organization, effectiveness and track record, transparency, self control and regulation and stakeholder relations management.

tier three - ShAriA’A GoverNANCe

Sharia’a Governance is an aspect that is independently dealt with and a distinct score is assigned to this factor. This is the third element scored as part of the overall fiduciary score. Conceptually, corporate governance in an Islamic Bank cannot be assessed without keeping the institutionalization of Sharia’a precepts in view. However, for the purpose of this methodology, the general corporate governance and Sharia’a best practices in an Islamic institution are scored independently, to fulfill the under-standably common investor need to know more about the ethical standing of an Islamic entity.

Segregation of scores ensures that all stakeholders are provided with an opinion on what they consider more or less relevant to their investment decisions. This may be the financial strength of the institution, its ability to pay back its creditors or the quality of Sharia’a governance framework instituted, as the case may be.

Sharia’a governance primarily focuses on the systems and procedures that ensure Sharia’a conscious business processes and a system of checks and balances embedded to verify compliance with the internal guidance provided by an institution.

Sharia’a governance standards of the bank are evaluated in the light of best practices, as also laid down by the AAOIFI and IFSB – two eminent standard setting bodies in Islamic Finance. These standards include the structure of the Sharia’a governance framework, reporting lines, level of diligence applied, and comprehensiveness of scope of checks and audits, while also covering the insti-tution’s compliance with pronouncements and concerns raised by the Sharia’a supervisory authority, internal to the institution.

Given that IFIs are also accountable to Investment Account Holders (IAHs), the IIRA will specifically review the measures taken for the preservation of rights of IAHs. In cases where the funds of IAHs and shareholders are commingled, there could be some perceived conflicts of interest between shareholders and IAHs. An independent committee established at the Board of Directors level could be assigned the role of monitoring such issues.

If assets funded by a given pool of PSIAs are not identified separately, there is the possibility of adjusting returns within pools. Such practices may not be viewed favorably, as they compromise the basic concepts of fair play.

On a similar note as shareholders are entitled to vote in general meetings, pass resolutions and to access the docu-ments of an Islamic bank, IIRA believes that the IAHs’ right to monitor the performance of their investment should also be recognized.

Under a Mudaraba contract, the Islamic bank has a fiduciary duty to the IAH to acknowledge their interests at par with those of the bank’s own shareholders. Moreover, shareholders and IAH rank pari passu as residual claim-ants in regard to assets financed by funds commingled in the same asset pool. Therefore, an institution which establishes such procedures, in order to accord the IAH their due rights, will be viewed positively.

Embedded within the concept of Sharia’a governance is the area of compliance with internal Sharia’a guidance. A relevant point in this regard is that the IIRA does not impose its own interpretation of Sharia’a compli-ance but rather focuses on determining the gap if any between the guidance provided by the institution’s own

Sharia’a authority and the rules and regulations in the relevant jurisdiction.

the SCoriNG meChANiSm

The above three elements are scored independently and then a weighted score is computed as the final Fiduciary Score. This rating methodology is expected to ensure a much higher degree of transparency, through enhanced disclosures, thereby giving a higher degree of value addition to investors. In contrast to conventional rating offerings that focus either on credit or governance aspects, the Fiduciary Rating System developed by IIRA recognizes the mutually dependent nature of credit & fiduciary risks in an IFI, effectively.

Fiduciary ratings have been conducted for institutions in a number of Islamic countries and appeal to a wide variety of stakeholders. With governance and improved risk management in Islamic banks gaining greater attention amongst Islamic market participants, the fiduciary rating approach serves multiple investor needs, while also in itself becoming a benchmark of transparency amongst Islamic Financial Institutions.

iirA iN PrACtiCe - the BANK oF KhArtoUm

IIRA recently assigned fiduciary ratings for the Bank of Khartoum (BOK), which is the largest commercial bank in Sudan and the first financial institution to have been rated in the country.

AA-/A-1 rAtiNG

For the purpose of development of the local capital mar-ket and national level benchmarking, BOK was assigned a rating on the national scale. The assigned rating was AA-/A-1 (Double A Minus/ Single A One) while the fiduciary score had been assessed in the range of ‘70-75’, reflecting adequate fiduciary standards wherein the rights of various fund providers are adequately defined and protected.

IIRA’S APPROACh TO RATINGS IS TAILORED TO ADDRESS juST ThIS MuLTIPLICITy IN ROLES PLAyED By AN ISLAMIC BANK


ThE FIRST TIER OF ThE FIDuCIARy SCORE juDGES ThE BANK’S ABILITy TO PRESERvE INvESTMENT vALuES

ShARIA’A GOvERNANCE IS AN ASPECT ThAT IS INDEPENDENTLy DEALT WITh AND A DISTINCT SCORE IS ASSIGNED TO ThIS FACTOR

ThIS RATING METhODOLOGy IS ExPECTED TO ENSuRE A MuCh hIGhER DEGREE OF TRANSPARENCy, ThROuGh ENhANCED DISCLOSuRES, ThEREBy GIvING A hIGhER DEGREE OF vALuE ADDITION TO INvESTORS.


09 10


The credit rating incorporates the strong profile of its sponsors. These include Dubai Islamic Bank P.J.S.C. Islamic Development Bank, Abu Dhabi Islamic Bank and Sharjah Islamic Bank, as well as Sudanese and Arab businessmen.

BOK has grown rapidly since the present management team assumed control after its privatization in 2005 and is now the most significant bank in Sudan in terms of deposit base as well as distribution network. While the bank’s activities are mainly concentrated in urban areas, in line with other industry players, it has plans to expand its coverage through enhanced use of technology in delivery channels.

The composition and profile of directors allow the Board to provide meaningful contribution in the affairs of the bank and safeguard the rights of shareholders. The Senior management team of the bank comprises professionals having significant prior experience in the banking industry. There is room for improvement in financial and govern-ance related disclosures and the timeliness of providing information to stakeholders.

Given that the entire financial system in Sudan is based on Islamic Sharia’a principles, Sharia’a supervision is also governed by the Central Bank of Sudan (CBOS). The bank has its own Fatwa & Sharia’a Board comprising eminent scholars that report directly to the Higher Sharia’a Control Commission formed by the CBOS.

The Sharia’a compliance function is led by the internal audit department, which relies on the Sharia’a department for relevant expertise. Further strengthening the staffing of these control functions to ensure adequate segregation of responsibil-ities, and improved disclosures for investment account holders will enhance Sharia’a governance standards at the bank.

Although asset quality indicators depict some non-performance, half of this pertains to the pre-acquisition portfolio, repayment of which has been guaranteed by the Central Bank of Sudan (CBOS). Furthermore, Treasury & Investment Banking has been growing and playing a significant role in managing the liquidity and enhancing the return on assets. The Bank of Khartoum’s credibility is also manifested in a growing base of correspondent banks,

reflecting a consistent and growing trust in the bank as a committed and transparent institution.

Capitalization indicators of the bank are considered sound with a regulatory capital adequacy ratio of 17.6% at year-end 2011. However, volatility in trading volumes of government securities may build pressure on the bank’s liquidity at times, while simultaneously increasing the importance of effectively managing the maturity profile of assets and liabilities.

iirA rAtiNG SCAleS & deFiNitioNS

rAtiNGS oN iNterNAtioNAl SCAle

The three types of ratings assigned by Islamic International Rating Agency (IIRA) on international scale are detailed below:

• ForeiGN CUrreNCy rAtiNGSThe foreign currency ratings by IIRA measure the abil-ity of the rated entities to service their foreign currency obligations. These ratings incorporate all the sovereign risks of a country, including the risk of converting local currency to foreign currency. • loCAl CUrreNCy rAtiNGSThe local currency ratings by IIRA measure the ability of the rated entities to service their local currency obliga-tions. These ratings incorporate all the sovereign risks of a country, except the risk of converting local currency to foreign currency.

rAtiNGS oN NAtioNAl SCAle

The national scale local currency ratings assigned by IIRA are tiered against an assumed local government rating of ‘AAA’ and, therefore, do not incorporate all the sovereign risks of a country.

CAPITALIzATION INDICATORS OF ThE BANK ARE CONSIDERED SOuND WITh A REGuLATORy CAPITAL ADEquACy RATIO OF 17.6% AT yEAR-END 2011

iSSUe/iSSUer rAtiNG SCAle & deFiNitioNS

• loNG term

The obligations having an original maturity exceeding one year are considered long term. IIRA uses a scale of AAA to C to rate credit worthiness of the banks’ long term obligations, with AAA being the highest possible rating and C being the lowest possible rating.

AAA : Obligations rated AAA are considered the best quality. They present the least investment risk. While changes can be anticipated in business and economic conditions such changes as can be assessed are not likely to impact the fundamentally strong position of such obligors.

AA : Obligations rated AA are considered high quality in all respects. Combined with the AAA obligations they constitute the high grade group. The differentiation is in the magnitude and range of fluctuations in elements that assure safety. Such elements in this category will not be as stable or predictable as for AAA category.

A : Obligations rated as A are considered upper medium grade obligations possessing sound credit characteristics and reflect safe margins of protection at this time but may be susceptible to changes in future due to industry or product characteristics.

BBB : Obligations rated BBB normally posses sound credit characteristics. The safety elements are adequate at present but hostile business factors may bring about a change in the credit characteristics.

BB : Obligations rated BB reflect significant speculative char-acteristics and volatility in protection factors. The obligation is not well assured even in positive economic environment.

B : Obligations rated B do not typically reflect characteris-tics of desirable investment. There is significant doubt that obligation can be met over any period of time.

CCC : Obligations rated CCC are high risk and unpredict-able with very poor protective elements.

CC : Obligations rated CC are highly speculative. Such obligations are often in default or reflect limitations on repayment capacity.

C : Obligations rated C have extremely high level of risk and they are unlikely to meet their commitments.

D : ‘D’ rated Obligors are in default with respect to their obligations.

• Short term

The obligations having an original maturity not exceeding

one year are considered short term. IIRA uses a scale of

A1+ to C to rate credit worthiness of the banks’ short term

obligations, with A1+ being the highest possible rating and

C being the lowest possible rating.

A1+ : Obligations rated A1+ have a superior ability for

repayment of obligations and is evidenced by extremely

strong liquidity conditions.

A1 : Obligations rated A1 have a strong ability for repay-ment and reflect very good liquidity conditions.

A2 : Obligations rated A2 have a sound capacity of repay-

ment but could be effected by external market conditions.

A3 : Obligations rated A3 have an acceptable ability to

repay the obligations. However, they are more susceptible to

adverse market conditions and require careful management.

B : The obligations rated B have weak capacity for repayment

and economic changes can harm the liquidity conditions.

C : Obligations rated C shows considerable uncertainty

towards timely payments of obligations. The liquidity

conditions appear very weak.

FidUCiAry rAtiNG SCore

(91-100) – Very Strong Fiduciary Standards

(91-93), (94-97), (98-100)*

Rights of various stakeholders are well protected and the

overall governance framework is strong.

(76-90) – Strong Fiduciary Standards

(76-80), (81-85), (86-90)*

Rights of various stakeholders are protected. Minor weakness-

es have been identified in the overall governance framework.

(61-75) – Adequate Fiduciary Standards

(61-65), (66-70), (71-75)*

Rights of various stakeholders are adequately protected.

Certain weaknesses have been identified in a few govern-

ance related areas.

(40-60) – Basic Fiduciary Standards

(40-46), (47-56), (54-60)*

Rights of various stakeholders are relatively vulnerable.

Significant weaknesses have been identified in the overall

governance framework.

(Less than 40) – Low Fiduciary standards

Rights of various stakeholders are at high risk and the

overall governance framework is weak.

*Apart from the lowest score range, all score ranges have been split

into three sub-divisions for further clarity

* The Editor would like to thank Sabeen Saleem, CEO of the Islamic International Rating Agency (IIRA), for contributing this article.

Fiduciary Score (70-75)

Asset manager Quality (50%)BoK Score: (66-70)

Sharia’a Governance (25%)BoK Score: (76-80)

Corporate Governance (25%)BoK Score: (66-70)

1. Risk Management Framework2. Financing/Investment Quality Risk3. Market Risk4. Liquidity Risk5. Ability to preserve capital & return to PSIAs

1. Sharia’a Supervisory Board2. Sharia’a Supervision Department3. Product Profile4. Transparency & Disclosure5. Profit Purification

1. Board effectiveness2. Management Profile & Operations3. Self Regulation4. Disclosure Standards5. Stakeholder Relations

BANK oF KhArtoUm

As discussed earlier in this article, the fiduciary score is an aggregation of scores assigned to its three sub-sections, namely Corporate and Sharia’a Governance, and Asset Manager Quality. Summary of scores received by BOK and areas covered during the assessment in each of the three areas is shown in the table below:


11 12

CEO Interview with Arab News

CEO InTERVIEw wITH ARAB nEwSKhaled Al-Aboodi upbeat on Saudi private sector’s dominant role.

of a number of factors, including member-countries’ cred-itworthiness, strategic priorities and development agendas, and financial sustainability of the projects. In 1433H/2012, ICD approved 19 new investment projects and 6 capital increases totaling $ 375 million.

As a result, total approvals since inception amounted to $ 2.582 billion. Region-wise, around 38 percent of ICD’s approved projects during 1433H were allocated to Eastern Europe and Central Asia, 15 percent to MENA, followed by Asia and Sub-Saharan Africa 14 percent and 7 percent respectively. The regional projects covering multiple regions accounted for 25 percent of total approvals. As part of its new strategy, ICD’s advisory services also gathered further momentum in 1433H. In the past year, ICD successfully closed the fund-raising for Tunisia and Saudi Arabia SME funds, and also for the Central Asia Renewable Energy Fund. Furthermore, ICD has approvedestablishment of a Food & Agriculture Fund and Fixed Income Fund, and successfully secured some mandates in Tunisia and Cameroon for capacity building and creation of Islamic windows within conventional banks.

In what projects/companies have you invested in the past 12 months?

ICD approved 19 new projects and six capital increases in existing equity projects. In line with its new strategy of promoting Islamic financial channels, ICD approved $ 167 million worth of projects in the Islamic financial sector in 1433H/2012, which accounts for 40 percent of its total ap-provals. The share of products in the approval of financial sector projects were also well-balanced and included equity stakes of $ 47 million in financial institutions, and line of financing extended to qualified financial institutionsat an amount of $ 120 million. At the same time, the busi-ness plan of 1433H/2012 envisioned continuation of ICD’s direct investment in real estate sector with a more focused and balanced allocation of its resources to priority sectors. In the past year, ICD achieved its target for approval in the real estate sector. The amount of approval and disburse-

ment stood at $ 202 million and $ 50 million respectively in the real sector of membercountries.

What was ICD’s contribution to the developmentof member-countries in 2011?

The Islamic Corporation for the Development of the Pri-vate Sector (ICD) was established to support the economic development of its membercountries by providing Shariah-compliant financing to private sector projects. The ICD offers advice to governments and private organizations to encourage the establishment, expansion and moderniza-tion of private enterprises, the development of capital markets, the adoption of best management practices, and enhancement of the role of the market economy. The ICD focuses on developmental projects, which contribute to the creation of employment opportunities, poverty reduction, raising the general standard of living, improved health and education, and the encouragement of exports. Generally speaking, ICD’s role is to try to enhance the role of the private sector in these countries by providing not just finance but know-how as well to facilitate their growth.

How popular is Islamic finance in the region and how are you promoting it? Has the economic downturn increased its popularity?

Islamic finance is growing in popularity and already a majority of retail and corporate banking clients prefer the option of Islamic banking over conventional banking when available. Our operations and dealings are on the basis of Islamic banking principles and also support the establishment and finance of Islamic financial institutions not only in the region but also in the wider Asian and African spheres. ICD’s mandate is to promote, in accord-ance with Shariah principles, the economic development of its member-countries by encouraging the establishment, ex-pansion and modernization of private enterprises. To fulfill our mandate, we support the private sector through the following ways: First, we assist them alone or in collabora-tion with other financing institutions the establishment and expansion of enterprises. Second, we can make direct investment, through Islamic instruments, in the subscrip-tion and purchase of their share capital. We also promote with participation of other sources of financing,including the structuring of syndication deals, underwrit-ing of securities, joint ventures and other forms of associa-tion. Moreover, we can get involved in issuing mudharba,

ICD APPROvED $167 MILLION WORTh OF PROjECTS IN ThE ISLAMIC FINANCIAL SECTOR IN 1433h/2012

iSlAmiC FiNANCe SUCCeSS oFFSettiNG

GloBAl Gloom

The private sector in the Kingdom has been spurred intoaction, giving a major boost particularly to real estate,construction, health care, education, financial services anda host of other activities, thus offsetting some of the globaleconomic gloom, according to Khaled Al-Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank (IDB) Group.

“However, financing for small and medium enterprises (SMEs) is not yet developed in most of the member-countries,” Al-Aboodi told Khalil Hanware of ArabNews in an exclusive interview.

“Even in GCC countries, there is lack of access to financ-ing for SMEs,” Al-Aboodi pointed out.

The following are excerpts from the interview:

How has ICD’s performance been in 2011 and what are its major achievements in 2012?

The persistence of uncertainty in the global financial arena coupled with continued global economic downturn has increased both perceived market risks as well as cautious approach to business operations. While lack of access to finance by the private sector has opened new opportunitiesfor ICD to support private sector development in a num-ber of member-countries, a combination of factors such as social unrest in some membercountries, increased cost of funding and lingering effects of financial crisis has made it very difficult for ICD to operate as planned. However, recognizing the role of a strong private sector in inclusivegrowth, ICD strived to utilize and apply a package of targeted investments and wide advisory services to accomplish its mandate. Despite the negative effect of financial crisis and social unrest in the region, ICD managed to approve 18 new projects and capital incease for three existing equity projects totaling $ 372.26 million in 1432H/2011. This was 58 percent higher than the previous year (2010), which reflects ICD’s continuing robust support to private sector development in the member-countries. Equity investments accounted for the bulk of ICD’s 1432H/2011 approvals, representing 38 percent of the total, followed by the line of finance (35 percent), long-term financing (22 percent), and short-term murabaha (5 percent).

In terms of sectoral distribution, the three main beneficiary sectors were finance, industry and real estate, jointly attracting 85 percent of the total approvals. The financial sector accounted for the biggest allocation, totaling $ 201.26 million, or 54 percent of the 1432H/2011 approvals. In terms of regional composition, 31 percent of ICD’s approved projects during 1432H were allocated to the Middle East North Africa (MENA) region, followed by South Asia (23

percent), Sub-Saharan Africa (16 percent), East Asia and Pacific (14 percent),

and Europe and Central Asia (10 percent).

In terms of recipient countries, ICD approvals were extended to 13-mem-ber countries, including

three new countries — Algeria, Gabon

and Turkmenistan. Overall, country- and region-wise allocation was made on the basis

5.3%

4.3%

2011 2012

6.8%6.0%

4.1%

2011 2012 2013

SAUdi eCoNomiC GroWth

The Economist Intelligence Unit expects 4.3 percent growth of the Saudi economy in 2013, compared to 5.3 percent growth in 2012.

Source: The Economist

The International Monetary Fund has forecast Saudi growth at...

Source: IMF


13 14

The Goldman Sachs Sukuk Controversy: Some Lessons for the Future

leasing and istisna’a bonds and other financial instruments. At the top of these, private sector firms may benefit from our advisory services and technical assistance programs. Yes, the downturn has certainly increased the popularity of Islamic finance without a doubt.

How did you secure funding last year and what are your plans in the coming years to ensure you have adequate funds to achieve your objectives?

Normally, we secure funding via partnership and syndica-tion. In fact, ICD actively engaged in building strong relationships with major international development institutions. ICD established new partnerships through the execution of memorandum of understanding (MoU) with a number of institutions, including Exim banks in Indonesia and Malaysia, Eurasian Development Bank in Kazakhstan, Kenyan Company for Habitat and Housing in Africa, and National Innovation Fund in Kazakhstan. For example, ICD became a signatory to the International Finance Corporation’s (IFC’s) Master Cooperation Agreement, which makes it easier for both institutions to collaborate on private sector investments in MENA and in emerging markets worldwide. All these MoUs aim at transferring knowledge, especially in Islamic finance, syndicating and co-financing activities, originating and structuring activi-ties, and establishing new products.

What role does ICD play in promoting SMEs in member-countries?

The small and medium enterprises (SMEs) have a crucial role to play in a country’s growth and development, and ICD has big plans for them. It is an important sector in all the member-countries, even the higher income ones. Yet, financing for SMEs is not developed in most of the membercountries. Even in GCC countries, there is lack of access to financing for SMEs. Now we are focusing on this sector by establishing ijara companies. We are also looking at direct financing of SMEs, and are now working to establish the first SME Fund with a capital of SR 1 billion. Also, during this year, ICD and the Caisse Des Depots Et Consignations (CDC) with support from KIPCO group and Albaraka Bank structured and launched the largest CMF regulated and first Tunisian SME Shariah Complaint Fund with the principal purpose to address the SMEs’ funding gap by providing financial assistance in the form of growth capital to suitable SMEs that are poised for exponential growth. ICD has been working for a long time in developing special programs for development of the SME sector in IDB member-countries.

It is clear that job creation has become a big issue that needs to be addressed. Recent events in the Middle East confirm that lack of jobs and unemployment cause people sometimes to be unhappy to the extent of almost overthrowing regimes. ICD has been developing SME programs to support governments’ efforts in member-countries by providing ingredients for establishing a very good SME authority in each country because in many countries such an authority is either absent, with the result

that there is no authority to take care of SMEs’ affairs in terms of regulations and creating an environment ensuring their development or sometimes the authorities exist but they are not very well equipped or are bureaucratic.

How many projects has ICD financed so far and what is the total value of the projects?

ICD’s accumulated approvals since it began operation reached $ 2.17 billion by the end of 1432H/2011, which has been allocated to 218 projects. The corporation approved about 60 percent of its investments through two main modes of finance — equity and murabaha. The cumulative gross approvals of ICD by mode of finance include $ 766.07 million of equity, $ 535.77 million of murabaha, $ 526.5 million of ijara, $ 223.13 million of installment sale, and $ 119.14 million of istisna’a.

What are ICD’s investments in key sector projects in member-countries?

The sectoral composition of ICD’s accumulated approvals underscores diversity and is spread over 16 sectors. The financial sector accounted for the largest share, amount-ing to $ 783.7 million, or 36 percent of the accumulated gross approvals since inception. The industrial sector had the second largest share with a total approved amount of $596.1 million, representing 27 percent of the gross approvals. This was followed by real estate, with a total approval of $ 276.2 million (13 percent). The remaining $514.6 million (24 percent) of the accumulated approvals was allocated to 13 different sectors.

Where do you see the Saudi economy heading in 2013, and with so many projects under way is Saudi Arabia on the threshold of another boom?

The Economist Intelligence Unit expects 4.3 percent growth of the Saudi economy in 2013, compared to 5.3 percent growth in 2012. The International Monetary Fund has forecast Saudi growth at 4.1 percent in 2013, compared to 6 percent in 2012 and 6.8 percent in 2011. The Saudi private sector has been spurred into action and a number of sectors such as real estate, construction, health care, education and financial services have received a major boost, offsetting some of the global economic gloom. According to the official records, more than 200 projects with a combined value of $ 1.23 trillion are expected to be completed by the end of 2013. This reflects the massive development under way in the Kingdom.

How important is the Kingdom’s role in G20?

The Kingdom assumes a leadership position in both the Arab and broader Muslim worlds, representing a very diverse political constituency, and like other G20 countries it has been increasingly exposed to the challenges of globalization. In fact, the Saudi leadership will look to the G20 process to help make the international finance, the food commodities, and the oil and gas markets less volatile and easier to navigate. Moreover, the Kingdom will continue playing a systemic role in an ever-changing multi-polar world where the G20 is at its core.

In October 2011, Goldman Sachs a US investment bank filed a base prospectus for a $2 billion multi-currency sukuk program with the Irish Stock Exchange. The initial reaction to this focused on whether there would be any demand from Islamic institutional investors with one unnamed Islamic banker telling Reuters that “Islamic investors are generally not comfortable providing funding for conventional banks unless it has a very large and dedicated Islamic business”.1

Goldman Sachs is an investment bank without a significant Islamic finance business. This may have accounted for the initial unease at the sukuk offering. This unease, however, turned into a much louder condemnation in the following months. The structure of the sukuk and the intention on the part of Goldman Sachs was questioned, as was the degree of diligence performed by Dar Al-Istithmar (Goldman’s Sharia’a advisor).

Further controversy ensued regarding the listing of the sukuk on the Irish Stock Exchange where no regulation would prevent the sukuk from hypothetically being traded at prices not reflective of the sukuk’s par value. The level of public criticism was unusual for the Islamic finance market and prompted a rare public defense of the sukuk by former Dar Al-Istithmar’s Managing Director Asim Khan, who wrote in an article, published by Reuters in January 2012, stating that “the market reception in certain quarters has been somewhat skeptical, mainly due to the misunderstand-ing surrounding the nature of the sukuk structure adopted and how this relates to Goldman Sachs’ operations”.2

dAr Al iStithmAr CloSeS doWN

In June 2012 the Sharia’a advisory firm, who worked on the sukuk, Dar al Istithmar closed down with most of the management—and some clients—moving to Khalij Islamic, another advisory firm. Among the management moving to Khalij Islamic was Managing Director Asim Khan, who was CEO of Khalij prior to joining Dar al-Istithmar and Dar’s for-mer CEO, Geert Bossuyt, who previously worked at Deutsche Bank. Deutsche Bank was one of the founder members of the joint venture which launched Dar al-Istithmar, along with

Oxford Islamic Finance Ltd and Russell Wood. Deutsche Bank subsequently pulled out of the joint venture.3

The sukuk Sharia’a approval process concluded in March 2012 although, to date, no sukuk have been issued under the program.4 It is impossible to say whether this is due to lack of investor demand as a result of the controversy, or simply that Goldman Sachs found other sources of financ-ing. However, for the market as a whole, it is well worth looking back at the sukuk itself and revisiting the issues that were at the center of the controversy.

role oF the SPeCiAl PUrPoSe vehiCle

As with most sukuk, a special purpose vehicle (SPV), Global Sukuk Company Limited (GSCL) was set up for the transaction, domiciled in the Cayman Islands. The prospectus indicated that GSCL would issue sukuk to investors and use the proceeds of the sukuk to buy commodities in the spot market. It would then sell those commodities to Goldman Sachs International (GSI) in exchange for deferred payment. Goldman Sachs Group (GSG), the parent company of GSI, would provide a guarantee for the deferred payment obligation of GSI. (GSI is a part of the GSG, a bank hold-ing company based in the US).

WAS it A mUrABAhA or A tAWArrUQ trANSACtioN?

Once the Murabaha transaction was finished, the Of-fering Documents state that “The Purchaser [GSI] may keep or on-sell any Commodities which are the subject of a Murabaha Contract to a third party (other than the original Supplier).” This was an area of particular conten-tion with the sukuk program because, as some critics of the structure alleged, this type of on-selling of commodities made the sukuk not a Murabaha but a tawarruq. One critic described the issue:

THE GOLDMAn SACHS SUKUK COnTROVERSy: SOME LESSOnS FOR THE FUTURE*

Blake GoudPrincipal, Sharing Risk

1 Reuters. 2011. “UPDATE 1-Goldman sets up $2 bln Islamic bond programme,” http://www.reuters.com/article/2011/10/19/goldmansachs-sukuk-idUSL5E7LJ20V20111019 (Accessed 23/1/13)2 Reuters. 2012. “Goldman’s sukuk: Is the criticism fair? – Asim Khan,” http://in.reuters.com/article/2012/01/02/goldman-sukuk-idINDEE80106620120102 (Accessed 23/1/13)3 Reuters. 2013. “High-profile Islamic finance firm Dar al Istithmar closes,” http://www.reuters.com/article/2013/01/29/islamic-finance-dar-idUSL5N0AYD5C20130129 (Accessed 2/2/13)4 Reuters. 2012. “Goldman advisor says completed work on sukuk,” Special http://www.reuters.com/article/2012/03/29/goldman-sukuk-idUSL6E8EJ5R320120329 (Accessed 23/113)

Goldman Sachs does not have a significant Islamic finance business. This may have accounted for the initial unease at the sukuk offering.

ThE LEvEL OF PuBLIC CRITICISM WAS uNuSuAL FOR ThE ISLAMIC FINANCE MARKET

“Indeed, if the ownership of the underly-ing assets (commodities) is retained by GSI as a buyer, the Murabaha structure will be maintained. On the other hand, if the com-modities are sold to a third party, then....


15 16

The Goldman Sachs Sukuk Controversy: Some Lessons for the Future

While there has been industry criticism of both Murabaha and tawarruq, the criticism towards the latter has been more strident, in part based on a fatwa issued by the Or-ganization for Islamic Cooperation Islamic Fiqh Academy in 2009. However, even within their fatwa prohibiting the form of tawarruq used by many Islamic financial institu-tions, they leave room for some forms of tawarruq :

Under this standard, the Goldman Sachs sukuk would not be an organized tawarruq of the type prohibited by the OIC Fiqh Academy. Asim Khan, the then Managing Director of Dar Al-Istithmar, the Shari’ah advisory firm which advised Gold-man Sachs International on the sukuk went one step further arguing that the transaction was not a tawarruq at all :

As the transaction documents stipulate commodities purchased by GSI from GSCL are not necessarily being purchased with deferred payment with the stated intention to sell them into the market, and Khan notes that “[t]here is no indication or expression whatsoever of GSI’s intention of immediately selling the commodities to a third party to generate cash.” As far as a literal statement of what is laid down in the offering documents this is clearly true, although combining the structure of the murabaha transaction in the documents with the stated “Use of Pro-ceeds”—suggesting that the sukuk proceeds will be used for general corporate purposes and to meet its financing needs—provides some support for an alternative interpre-tation regarding GSI’s desire to hold the commodities.

SAUdi BiNlAdiN GroUP

However, when trying to unscramble the language in the of-fering documents to discern the underlying intent, it is useful to consider whether this structure is unique to GSI’s sukuk or whether other sukuk use similar murabaha structures. For example, many Saudi Arabian companies use sukuk al-mu-rabaha and one of these sukuk—issued by the Saudi Binladin

Group—describes the final step in the sukuk structure:In this structure, the documents are even more specific about the use of the commodity (it will be sold in the spot market to generate cash proceeds for the issuer) than the GSI sukuk. That sukuk, which raised SAR1 billion, was issued in 2010 and matured in 2011.

Al rAjhi BANK ANd CAGAmAS Bhd SUKUK

Another example of a sukuk that included a murabaha component was the Sukuk ALIm program jointly devel-oped by Al Rajhi Bank and Cagamas Bhd, Malaysia’s national housing agency. This sukuk is slightly different because it was a sukuk al-istithmar comprising both Ijara and Murabaha in order to enable it to be tradable, but the Murabaha structure was the same.

An article from the International Shari’ah Research Academy professor and a Senior Vice President at Al Rajhi describes the Murabaha structure:

The authors further explain that “while prima facie [the transaction] appears to be tawarruq munazzam (predeter-mined transaction amongst multiple parties [also called

... the structure will be classified asTawarruq.5”

“The cash balance in the Sukuk Trust is injected into the Asset Trust. The Asset Trustee appoints a commodity agent to acquire commodities from Party A on a spot basis. The Asset Trustee then sells the commodities to the issuer on a deferred basis. The issuer then appoints a com-modity agent to dispose of the commodi-ties to Party B on a spot basis.8”

“Usually, [the mustariq] sells the mer-chandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay’).6”

“Upon completion of the sale of the Com-modity from the Issuer to the Purchaser, the Purchaser shall sell the Commodity either directly or through a selling agent to an Approved Broker for cash consid-eration on spot basis.7”

“An institution has no religion and therefore cannot be judged on religious grounds. Our judgment is always on the structure of the transaction, and whether it is permissible or not and had the neces-sary sharia requirements.11”

“For this to be a tawarruq transaction, it would require the presence of additional el-ements: a) GSI (not GSCL, as above) buying the commodities solely with the intention of immediately selling the commodities to a third party to generate cash, and/or b) GSI must sell the commodities back to the original supplier or its nominee.”

5 Badri Ahmed. 2011. “Goldman’s sukuk induces ownership and liquidity risks,” http://www.zawya.com/story/ZAWYA20111206151217/ (Accessed 30/1/13)6 International Shari’ah Research Academy for Islamic Finance. 2009. “OIC Fiqh Academy Rules Organized Tawarruq Impermissible in 2009,” http://www.isra.my/fatwas/topics/treasury/inter-bank/tawarruq/item/262-oic-fiqh-academy-ruled-organised-tawarruq-impermissible-in-2009.html (Accessed 30/1/13)7 Alsaeed, Khalid, Sulaiman. 2012. Sukuk Issuance in Saudi Arabia: Recent Trends &Positive Expectations. Durham theses, Durham University. Available at Durham E-Theses : http://etheses.dur.ac.uk/3502/8 Hashim, Ashraf bin Md and Eqhwan Mokhzanee bin Muhammad. 2010. “Sukuk ALIm – Innovation in Simplicity,” ISRA Bulletin, Volume 6 (October): 6-9.

9 Reuters. 2011. “Bahrain’s Arcapita to raise capital as $1.1bln loan looms,” http://www.reuters.com/article/2011/01/18/arcapita-capital-idUSLDE70H03420110118 (Accessed 31/1/13)10 Reuters. 2012. “REFILE-Debate rages over Western role in Islamic finance,” http://www.reuters.com/article/2012/02/23/islamicfinance-west-idUSL5E8DN45E20120223 (Accessed 31/1/13)

11 Ibid.

organized tawarruq]), [it] is not tantamount to tawarruq munazzam due to the discrete and independent nature of each leg to the transaction.”

Each of these sukuk used the same Murabaha structure as the GSI sukuk, but without being subject to the same level of criticism. Perhaps, then, the issue is not with the Murabaha structure itself, but with other factors.

other CritiCiSmS oF the StrUCtUre

Two areas where the GSI sukuk attracted criticism, besides the structure, were that it was listed on an exchange (the

Irish Stock Exchange) and that it was issued by a company with scant Islamic finance business. This latter view led to the perception that the proceeds of the sukuk would be used in non-Sharia’a-compliant business activities.

The listing of the sukuk criticism is certainly one where there was a significant misconception of the role that listing sukuk plays in the issuance process and the mechanisms by which sukuk are traded. First, the primary reason for the sukuk to be listed is to broaden the types of investors who can buy them in the primary market. Many institutional investors are limited in the types of securities they can buy with a low threshold for unlisted securities, and some institutions cannot buy unlisted securities at all. Any issuer weighs the costs and benefits associated with listing.

For European institutional investors, the listing on an exchange, within the European Union, allows for the securities to be sold to institutions in other European Union countries more easily. In addition, there is an exemption from withholding taxes for investors who are non-residents as long as the sukuk is listed.

But does not listing the sukuk on an exchange suggest that it is likely to be traded? Not really. Most of the sukuk trading does not occur through an exchange. Most trading is over-the-counter (OTC), and unless the parties to those trades are Islamic financial institutions or Sharia’a-sensitive investors themselves, there is no restriction on at what price the trades are conducted.

This holds true whether or not a sukuk is listed. For example the $1.1 billion syndicated Murabaha issued by Arcapita in 2007 traded at 76 cents on the dollar in 20119. The restriction around the trading prices for sukuk will de-pend on the parties transacting the sukuk and, whether or not it is listed on an exchange, it is for the trading parties

to determine whether to be bound by Sharia’a restrictions on trading prices for Murabaha sukuk.

GSi hAS No iSlAmiC FiNANCe ACtivitieS

Finally, the use of the proceeds by GSI, a conventional investment bank with limited activities in Islamic finance leaves some room for debate about whether it is beneficial for a sukuk be issued by a company whose equity base is not Sharia’a-compliant. It is perhaps a starker example since GSI has few Islamic finance activities, but the same issue would arise with a number of other issuers (recent examples including HSBC Amanah) that do have more meaningful Islamic finance businesses.

Some within the industry agree with Badlisyah Abdul Ghani, CEO of CIMB Islamic, who told a conference in London in February 2012 that “A conventional bank, with the excep-tion of multilateral development banks like the World Bank and the Asian Development Bank, should not be allowed to issue sukuk”.10 However, others including prominent Sharia’a scholars argue that for a sukuk the issue is not the business of the originator but the structure of the offering.

mohAmed elGAri

Mohamed Elgari, a prominent Sharia’a scholar speaking at the same conference said :

There is certainly a difference of opinion within the Islamic finance industry about the permissibility of a conventional bank issuing sukuk, but perhaps the greater risk for issuers, in the future, is more on the grounds of percep-tion. With all of the facets of the controversy around the GSI sukuk there are contrary examples of similar sukuk that have used a similar structure without attracting a similar level of outcry within both the industry and the popular opinion. There are cases where products attract public criticism, and criticism within the industry. Future issuers will face the risk factor that a structure may attract criticism. However when considering the frequency of con-troversy such as that faced by GSI there are few examples.

This case may have attracted more attention by both the use of a relatively rare structure (for sukuk) as well as broader public perceptions of Goldman Sachs, the parent company of GSI.\

The Editor would like to thank Blake Goud for contribut-ing this article. Blake is is the Principal, Sharing Risk and can be contacted on blake@sharingrisk

EACh OF ThESE SuKuK uSED ThE SAME MuRABAhA STRuCTuRE AS ThE GSI SuKuK, BuT WIThOuT BEING SuBjECT TO ThE SAME LEvEL OF CRITICISM.


17 18

riSe, FAll ANd riSe AGAiN

The sukuk market has seen a dramatic rise, fall and rise again over the past decade. From its humble beginnings in 1990 with the first ringgit sukuk issuance by Shell for $33 million (125 million ringgit), it has grown to become a market worth $110 billion in annual issuances. This is, of course, marginal relative to conventional fixed income markets, which saw approximately $2.12 trillion worth of Eurobonds* alone in 2011. While the sukuk market has come some way, the road to even matching the magnitude of conventional issuances is a long one.

A bit of historical perspective will shine a light on where we currently stand. Eurobonds only took off in the 1980s when a number of factors, both macroeconomic and infrastructural, converged to create the Eurobond market. The current level of the sukuk market looks similar to the Eurobond market of the mid 1970s, and it is at least 15 years away from reaching the tremendous volumes of Eurobonds. But with the speed at which it is growing catch up is likely to come sooner rather than later. This speed has been fuelled by wealth that is ever increasingly moving east to rapidly growing markets such as the Middle East and Asia. Here, sukuk presents the optimal vehicle to tap a quarter of the world’s population.

the BeAUty oF SUKUK

The beauty of sukuk, when issued within the framework of conventional bonds infrastructure, such as independent clearing and settlement and rating agencies, is that it becomes the ultimate vehicle to tap both conventional and Islamic investors. To appeal to this wider base of investors, the sukuk has had to become more malleable. Structural innovations aside, sukuk can be issued as a Bulldog, or in Renminbi, not just as Regulation S Eurobonds, the platform of choice for international issuers. The lattermost is not likely to disappear and hence, for all intents and purposes the appeal of sukuk in

reaching the widest base of investors will persist well into the future. However, economics favours the large and asset-rich issuers, so the sukuk market may well remain the cottage industry it is, for a while yet.

the ProBlem With SUKKUK iSSUANCe

By its very nature, sukuk are more cumbersome to issue than conventional bonds. Securing assets to back the sukuk issue value, while becoming easier, is still a significant challenge. If you lighten the asset-backing requirement by employing asset-based structures such as a Murabaha or a usufruct-based Ijara, you might be compromising Sharia’a authentic-ity and therefore be exposed to the potential of Sharia’a non-compliance risk. Structuring innovation has nevertheless advanced quite substantially to the extent that issuances are achieving a good compromise between sharia authenticity and issuers’ needs.

Additionally, issuance costs are still high, thereby pricing out smaller issues. Legal costs associated with structuring/ docu-mentation combined with additional registration or valuation costs could add anything between $50,000 to $199,000 on top of the costs of issuing a conventional bond, according to our survey of lead arrangers. Hence issuers would have to raise at least $100 million for the issue to make financial sense. In this regard, Malaysia has done a fantastic job incentivizing issuance out of the country. Besides the captive investor community ben-efiting from exemption on withholding taxes, the Malaysian government has made it simple and straightforward to issue, from Malaysia, including a 14 working day turnaround for approval by the Securities Commission of ringgit-denominated sukuk by multinational companies.

CAveAt emPtor, BUyerS (Still) BeWAre

On the buy side of the equation (demand for sukuk), sukuk investors are exposed to considerable systemic risks. These include :

1. Liquidity Risk: Investors are disproportionately con-centrated in financial institutions in the Middle East (particularly those with a Sharia’-sensitive mandate), and they tend to hold the instruments to maturity.

2. Profit Rate Risk: The majority of international sukuk are issued with a fixed rate coupon, hence exposing investors to significant losses in the event that the current period of monetary easing dissipates and rates increase beyond today’s negative numbers.

SUKUK MARKET OVERVIEw : CAUTIOUS OPTIMISM In THE AIR*The sukuk market has seen a dramatic rise, fall and rise again over the past decade.

Sukuk Market Overview : Cautious Optimism in the Air

the AFterShoCK oF the GoldmAN

SUKUK deBACle*

Some commentators have suggested that there is a dire need to reform the industry and restore the credibility of what is being called an *Islamic* product. The Goldman sukuk experience has led many people within the industry to rethink what are our true values. It has arguably done the market a big favour.

When my research note12 on the deconstructing of the sophisticated structure of Goldman sukuk was written, my intention was merely to warn the Islamic finance industry that we were about to lose track of our core principles.

Looking back now, we are gradually hearing voices that call for institutional reform and closer scrutiny of sukuk issuance.

Some scholars are calling for a robust framework of Sharia’a governance for the betterment of the industry.

Sukuk Arrangers, on the other hand, are taking seriously the “reputational risk” into consideration before accepting any man-date from a conventional lender. This highlights the “cautious” approach from the industry towards the “use of proceeds”. For the first time we also see increasing level of awareness from the regulatory level when Sukuk Standards are being set.

For instance the Dubai Financial Market (DFM) authority now say that they would exclude sukuk based on tawarruq from its new standards.13

Scholars now are under greater pressure from the public than ever before to “scrutinize” the transaction. All these are steps in the right direction. This is something which arguably would not have been achieved if it was not for the “Goldman debate”.

In just four months, we have heard of two initiatives that aim to introduce Sharia’a board accreditation processes. The first one was by Kuala Lumpur’s Association of Islamic Scholars (ASAS) and the second one was by ISRA and IRTI.

We need to ask ourselves what has suddenly prompted such initiatives? Are these two initiatives attempting to address concerns over the integrity of Sharia’a scholars? What has happened this year to create this “Sharia’a Debate”?

CoNFUSiNG SiGNAlS From the SCholArS

Clearly, we are living in the aftershock of the “Goldman sukuk” debate in which many have overlooked the correla-tion between the two, the sukuk issuance structure and the role of Sharia’a boards.

When we see that one renowned scholar approved the structure of Goldman Sachs’ proposed sukuk then, on another Sharia’a board, the same scholar declared it non-compliant with Sharia’a principles, then we know that there is something clearly not right in our industry. This is a clear example of how a conflict of interest can damage the reputa-tion of the scholars and can backfire on the issuer and the Sharia’a Advisor. As a result, Goldman has put his proposed

sukuk issuance on the shelf for almost 16 months and Dar Al Istithmar has “officially ceased its operations”14.

Reforming the sukuk industry starts with one step and that “small step” was the Goldman sukuk controversy. Prob-ably one of the key repercussions we came across after the debacle was the reported fatwa from ADIB scholars who sanctioned the impending issuance as non-Islamic, re-confirming ,at the same time, two of the “three flaws” that were mentioned first in December 2011.

Ever since Islamic finance came into existence a combina-tion of sukuk potentially based on Reverse Tawarruq (RT) were unheard of. The Accounting and Auditing Organisa-tion for Islamic Financial Institutions (AAOIFI) does not recognize RT sukuk with the nomenclature applied being that of “plain vanilla” Murabaha. AAOIFI urgently needs to update its sukuk standards in order to keep up with the pace of financial engineering in our industry.

It has been reported that the Irish Stock Exchange was un-able to stabilize the tradability of Goldman sukuk at par, which thereby sanction this sukuk as non-Islamic. Further-more, there will be no control over any OTC transactions which means the sukuk could be traded at market value.

“CoNveNtioNAl” SUKUK mArKet

Questions remain as to whether the scholars, who have signed off the fatwa, would react to such a revelation. If our industry does not react, then a “Dichotomy” of the sukuk market would be in the making. That being so then a Sub-Islamic debt market, called a “Conventional” Sukuk market, would have been created.

*The Editor would like to thank Mohammed Khnifer for contributing this article. Mohammed Khnifer is an IFTDP, Fellow Associate at ICD.

Disclaimer: Any public opinion is an independent personal opinion of Mohammed Khnifer and should not be construed to represent any institution with whom he is affiliated.

12 Khnifer, Mohammed 2011: “Three likely flaws in Goldman Sach’s milestone sukuk”, Zawya, online 2013, http://www.zawya.com/story/ZAWYA20111130033000/ 13 Torchia, Andrew 2013. INTERVIEW-Dubai hopes sukuk standards to make it global player, Reuters, online, http://www.reuters.com/article/2013/02/03/emirates-dubai-sukuk-

idUSL5N0AZH4I20130203

14 MaAughtry, Lauren 2013. Dar Al Istithmar ceases operations, IFN, online, http://www.academia.edu/2492043/Shariah_adviser_of_ill-fated_Goldman_Sachs_sukuk_closes_down

dr. Sayd FarookGlobal Head of Islamic Capital Markets

AAOIFI uRGENTLy NEEDS TO uPDATE ITS SuKuK STANDARDS IN ORDER TO KEEP uP WITh ThE PACE OF FINANCIAL ENGINEERING IN OuR INDuSTRy

SuKuK PRESENTS ThE OPTIMAL vEhICLE TO TAP A quARTER OF ThE WORLD’S POPuLATION

SuKuK CAN BE ISSuED AS A BuLLDOG, OR IN RENMINBI, NOT juST AS REGuLATION S EuROBONDS

ADIB SChOLARS SANCTIONED ThE IMPENDING ISSuANCE AS NON-ISLAMIC


19 20

Investing in the SME Sector. The ThEEMAR Tunisian SME Investment Fund

DESPITE SOLID ADvANCEMENT, SuKuK CAN ONLy GRADuATE TO A vIABLE ISSuANCE PROPOSITION IF A COORDINATED APPROACh IS IMPLEMENTED

Many social and economic challenges are facing both the people and the governments of ICD’s Member Countries (MC’s). According to the latest statistics nearly half of the population is under the age of 30. Combined with inadequate educational and employment opportunities and provoked with the latest social networking channels, this large youth population has generated revolutions that swept away long standing autocratic governments in Egypt, Libya and Tunisia. Other national governments are taking notice and are dramatically changing their attitudes to the challenges created by these youthful populations. Governments looking to generate employment opportunities for their populations are refocusing their efforts to better understanding and develop-ing the small and medium enterprises (SMEs) sector.

PoWerFUl role PlAyed By Sme’S

However, due to their increasing importance in contribut-ing to the Gross Domestic Product (GDP) and critical role in society at large, small and medium enterprises (SMEs) have come under a barrage of social and economic pres-sures. This sector’s role in achieving national objectives, in most industrial and developing countries, has become ever more important in helping governments sustain their growth aspirations.

In most markets around the world, the small & medium enterprise (SME) segment drives a major portion of economic activity, in its respective country, with a combination of primary players as well as the downstream allied industry affecting the major principal industrial sectors.

As such, the issue of developing the SMEs sector remains one of the most important challenges facing our member coun-tries. One of these governments is the Government of Tunisia (GoT), which has made it a priority to tackle this challenge.

SMEs in Tunisia represent the largest share of the productive units of the Tunisian economy. According to data from the National Institute of Statistics of Tunisia, as of 2011, micro, small and medium size Enterprises (M/SMEs) played a crucial role in the Tunisian economy, accounting for over 97.8% of all non-agricultural firms and almost 70% of private sector employment (See Figure 1).

Need For joB CreAtioN

One of the most compelling challenge for Tunisia and its government is employment creation. Coupled with a young population of over 48% under the age of 25 years old, the government needs to create over 400,000 jobs over the next 5 years and this is just to maintain the already high current levels of unemployment.

The revolution has significantly slowed down the recovery that began in 2010, and has thwarted opportunities for job creation. Indeed, the on-going economic crisis has had repercussions on growth and the level of an already structur-ally high unemployment, especially among the youth.

The number of unemployed, currently estimated at 520,000 is likely to reach 700,000 in 2012 (with the massive return of Tunisians from Libya and with the new graduates). However, according to the Minister of Investment and International Cooperation, Mr. Riadh Bettaieb, the current number of unemployed has reached a staggering 800,000 of which 200,000 are those with higher education credentials.

Unemployment, it can be argued, is at the heart of the social and political problems, and a major issue for the youth, especially among university graduates.

InVESTInG In THE SME SECTOR: THE THEEMAR TUnISIAn SME InVESTMEnT FUnDIn most markets around the world, the small & medium enterprise (SME) segment drives a major portion of economic activity.

talal Karim Althefery

ICD SME Program

Manager

mohamed maher mannai

ICD IFI Program Manager

Figure 1. Size Distribution of firms in Tunisia according to number of employees (2011)

79.8%

<6 6-9 10-49 50-99 100+

7.0% 9.3%1.8% 2.2%

3. Structure Risk: We saw this in 2008 when Mufti Taqi Usmani’s statement prompted AAOIFI to tighten regulation, leaving many investors to trade with fewer buyers and lower liquidity. This could potentially recur if the Islamic Fiqh Academy or some other regu-latory body decides, for example, that Ijara leaseback structures in their current form are not permissible, despite their notional usufruct based asset backing.

4. Default risk: Despite a significant decline in name-based financing after the global financial crisis, default risk still lurks and could potentially harm the industry in the event that a big name defaults with little recourse to the underlying assets backing the instrument.

iNFrAStrUCtUre: UrGeNt revieW Needed

Despite solid advancement, sukuk can only graduate to a viable issuance proposition if a coordinated approach, both unilaterally within jurisdictions and multilaterally across jurisdictions, is implemented. The momentum appeared to be picking up with the establishment of the International Islamic Financial Market and the International Islamic Liquidity Management Corporation.

Despite substantial progress on one of the foundational require-ments for cross-border sukuk – the profit rate swap, the IIFM has yet to make its mark on easing the costs and inefficiencies of issuing the paper. Similarly, the IILM had, at best, a false start and after almost two years, still struggles to issue a sukuk. The appointment of a new CEO may change the picture.

iSSUeS thAt Still Need to Be AddreSSed

Several issues still need to be addressed if the market is to enhance its development. We recognize that some of these are not within the control of the Islamic finance infrastructure bodies let alone regulators. In some instances, we need trailblazers to take up the mantle.

1. eNForCemeNt oF riGhtS ANd oBliGAtioNS UNder SUKUK trANSACtioN doCUmeNtS

The risk of major defaults has abated since the aftermath of the global financial crisis and most issuers coming to market are fiscally sound. However for the sukuk market to grow outside of the sovereign and quasi-sovereign space, regulators urgently need to address the rights and obligations vested in sukuk certificate holders by law, in the event of a default.

2. StrUCtUred APProACh to ShAriA’A rAtiNGS

Everyone discusses Sharia’a governance and non-compliance risk but the industry only felt its real impact with the Goldman

Sachs sukuk debacle (discussed elsewhere in this Bulletin).More importantly, no regulatory or standard setting body quite understands how to manage it. In the context of sukuk, these risks can be addressed either in a tactical manner, or via a holistic approach.

Tactically, a body with sufficient credibility develops a unified perspective on what is or is not considered acceptable for the vast majority of investors. Bold as it sounds, the market has developed a sufficiently broad understanding of what is and is not considered acceptable. It is now up to a proactive sharia standard setter or an infrastructure institution with a sufficiently credible sharia board to establish a structured approach to rating sukuk ex-ante.

At a strategic level, it is critical that infrastructure institu-tions such as AAOIFI, IIFM, IILM, IIRA and the IFSB work together to create a unified set of standards and guidance notes that cover four aspects:

i. Permissible master contracts/structures

ii. Associated underlying contracts and documentation required to complete each master contract/structure

iii. Guidance note on key principles associated with sukuk in general and with each master contract/structure

iv. Specific impermissible provisions

2. mANdAtory rAtiNGS reGime

For corporates to enter the international sukuk market in force, regulators should require issuers selling securities into their market to procure a credit rating. The GCC countries have yet to realize the importance of external credit assessment to the development of the corporate bond market. The success of the Malaysian corporate sukuk market is a case in point.

We put forward these and other issues stemming from this sukuk study to the Islamic finance industry and all our partners, with the hope that our many hands and heads will make light work of the challenges on the road ahead.

*A Eurobond is an international bond that is denominated in a currency not native to a country where it is issued.These include Eurodollar (non-US entity issues in USD dollar), Bulldog (non British entity issues in Pound sterling), Samurai (Non-Japanese entity issues in Japan) etc.

*The Editor would like to thank Dr. Sayd Farook, the Global Head of Islamic Capital Markets, Thomson Reuters for contributing this article.

ThE NuMBER OF uNEMPLOyED, CuRRENTLy ESTIMATED AT 520,000 IS LIKELy TO REACh 700,000 IN 2012


21 22

It is a particular problem for the interior regions. While the national unemployment rate is 16% and some estimates at 18%, it is 29% in Kasserine (Centre-West), 25.8% in Gafsa (South-West), 21.9% in Jendouba (North-West) and 19% in Siliana (North-West). Although the majority of the job-less are unskilled, unemployment among graduates grew tenfold during the past two decades, to 23% in 2010.

What is even more worrying are the latest unemploy-ment rates of 2011 which, according to several Tunisian institutions, such as the Agency for the Promotion of Industry and Innovation and the Foreign Investment Promotion Agency (FIPA), the rate of unemployment for those between 18-24 years old was 29.8% and reached a startling 44.9% for new higher education graduates.

The unemployment situation is particularly severe for young women. Although women are becoming more engaged in the economy as a whole, more Tunisian women end up unemployed. The rate for unemployed young women (18-24) compared to men is almost 25% greater. This could stem from a relatively low share of women in the labor force. According to a World Bank study, cited by Lois Stevenson, an average of only 26% of women in the age group 15-64 are working or looking for work, compared to about 74% of men.

Given the growing need for an employment creation mechanism that can absorb the high unemployment rates, in addition to the various challenges posed by global economic pressures, there is an urgent need to create a strong competi-tive SMEs sector that is able to play a leading role in the development process. Employment policy in Tunisia is based on the creation of micro, small and medium-sized enterprises.

For the past few decades, the Government of Tunisia (GoT) has been supporting a large array of strategies, programs and mechanisms aimed at encouraging the development of the SME sector. These efforts have yielded noticeable results

although progress remains insufficient to stimulate strong growth of sustainable SMEs, particularly at the regional level.

theemAr Sme iNveStmeNt FUNd

International experience has shown the difficulty of boosting SMEs’ growth in emerging economies. These lessons gener-ally conclude that long term efforts are needed to address limitations in the cultural, professional, financial and market environments. To this end, a blend of public and private efforts generally provides the best results. The development of a sustainable SME sector in Tunisia necessarily entails a collaboration of both the public and private sectors.

TO THIS END THE THEEMAR SME INVESTMENT FUND

ILLUSTRATES THIS TYPE OF SUCCESSFUL INTERVENTION.

role oF iCd

The Year 1440 Vision of the Islamic Corporation for the Development of the Private Sector (ICD), a subsidiary of the Islamic Development Bank (IDB), is to generate over 1 million new jobs in member countries and to partner with 1-2 chan-nels in each member country in order to generate over 3,000 enterprises per channel. This can be coupled with the latest call, on April 13, 2011, from the IDB to urge member nations to act in tackling the unemployment challenges faced by Arab youth.

The belief is that the opportunity for developmental finance institutions, particularly the Islamic Development Bank (IDB) with its subsidiary the Islamic Corporation for the Development of the Private Sector (ICD), in entering Tunisia and help it develop the SMEs sector can be both financially and socially rewarding.

In a region with one of the world’s highest unemployment rates and social problems, action is required to help sustain development in Tunisia. This help could positively spillover to neighboring nations and help increase peace and national security and thereby avoid further turmoil.

Why the theemAr Sme FUNd?

The rationale behind the launch of THEEMAR can be summed up as follows:

• The important demand for employment in the Tuni-sian job market aggravated by the recent revolution has pushed the Tunisian government and multilateral institutions to allocate consequent efforts in tackling the high rate of unemployment, especially of fresh graduates and to diversify its tourism-based economy,

• SMEs promotion represents one of the most efficient tools to combat unemployment by converting job seekers into job providers and stimulate the economy development and diversification,

• Despite their dominant numbers, and importance in job creation and growth stimulation, SMEs in Tunisia have been facing difficulties in obtaining loans or equity funding due mainly, as is the case in all ICD member countries, to their specific risk profile, absence of a track record, high transaction and

compliance cost, asymmetry of information, lack of collateral and finally the high mortality ratio,

• Loans to SMEs account for only 15% of the total loan portfolio of Tunisian banks. In addition to that the maturities of commercial bank loans, extended to those SMEs, are often limited to a period too short to allow a pay off of any sizeable investment. Mean-while, access to competitive interest rates is reserved for only a few selected corporations, while loan interest rates offered to SMEs remain high.

theemAr FUNd to Fill the GAP

THEEMAR will therefore fill this gap by providing SMEs with better access to finance and to financial products that are better tailored to their needs. It will consequently directly address the needs of socio-economic development and problems relating to unemployment in Tunisia.

Taking the lead initiative by creating an integrated full solu-tion to the problems of SMEs financing, Caisse Des Depots Et Consignations of Tunisia (CDC) and (ICD), and with support from KIPCO group, Albaraka Bank and the Bank of Financing SMEs (BFPME),have launched the largest officially regulated fund.

This is also the first ever Tunisian SME Shari’ah Compliant Fund and has the principal purpose of addressing the small and medium enterprises’ (SMEs) funding gap by providing financial assistance in the form of growth capital to suitable SMEs that are poised for exponential growth. In turn these SMEs can be expected to contribute to Tunisia’s economic development and diversification by way of employment.

This fund will generate roughly 1,000 employment opportu-nities with another 3,000 indirect employment opportunities.

AN iNNovAtive iNteGrAted SolUtioN For SmeS

THEEMAR is an innovative integrated solution for SMEs as it addresses the entire financing issues that face most SMEs from equity to technical assistance needs.

It tackles the equity needs by way of direct investment and mezzanine finance.

It solves the issue of debt financing by way of partnership with Albaraka Bank and the Bank of Financing SMEs (BFPME). THEEMAR also addresses the working capital problems through the line of finance from the International Trade Finance Corporation (ITFC), a member of the Islamic Development Bank Group. At the same time the technical assistance grant will be used to complement THEEMAR by assisting those SMEs to better enhance their capabilities and growth strategies.

THEEMAR will target an aggregate fund size of 50 million TND (≈ 32 M USD) and has already completed the first closure of 25 million TND (≈ 16 M USD) with considerable investor interest in the remaining tranche.

THEEMAR will invest in SMEs in various industry sectors in Tunisia with special attention given to promising sectors and to inner regions. THEEMAR will aim to provide accessible finance for growth and expansion to Tunisian SMEs via Islamic modes of finance, as well as create a source of long-term high-yielding returns at the time of exit.

By concentrating on growth capital for relatively new businesses – of which there is a growing abundance in Tunisia - THEEMAR will reduce the volatility normally character-ized with SME or early stage investments. Effectively, this approach will also leverage from experience, and complement the strategy, of traditional financing programs of banks. The use of the Islamic financing structure allows for the Fund to provide complementary funding with the senior debt of banks. In fact, by its nature, it will open the way for increased bank lines at potentially better lending rates.

theemAr Will Provide riSK CAPitAl

Hence THEEMAR will not be a broad based program aimed at providing a substitute for debt financing. Instead, it will provide initial and/or supplementary risk capital for companies that, while having the highest risk profile, also have the highest growth potential to deliver both financial and developmental targets. Alongside funding, non-financial resources through other existing technical and business support programs will be deployed to increase the chances for further success to help SMEs reach their full potential.

Figure 3 illustrates the Theemar Structure.

Moreover, by positioning THEEMAR in a manner that complements the debt programs of commercial banks, additional support by way of banking products may also be made available to the investee SMEs.

In continuance with the strategic mission of the ICD, we at ICD, believe that the THEEMAR SME Fund is a much needed resource to the budding entrepreneurs of our member country, Tunisia, and has the potential to solidify the ICD’s role as a caring, innovative and socially concerned organization.

Figure 2. SMEs contribution to GDP/Employment

45%

65%

47%

65%

48%

68%

48%

68%

46%

67%

2007 2008 2009 2010 2011

GDP Employment

*The Editor would like to thank the authors Talal Karim Althefery, ICD SME Program Manager and Mohamed Maher Mannai, ICD IFI Program Manager for contributing this Article.

ManagementAgreement

TrusteeCommittee

BusinessAdvisor

CDC(Sponsor)

ICD(Sponsor)

OtherInvestors

FundManager

TunisSME Fund

Shari’ahBoard

InvestmentCommittee

CustodianBank

ExternalAuditors

ThE uNEMPLOyMENT SITuATION IS PARTICuLARLy SEvERE FOR yOuNG WOMEN.

Investing in the SME Sector. The ThEEMAR Tunisian SME Investment Fund


23 24

ICD Guide to Sukuk Market Terminology

ICD GUIDE TO SUKUK MARKET TERMInOLOGy : PART 1*

دليل المؤسسة لمصطلحات قطاع الصكوك : الجزء األول*

iCd Guide to Sukuk market terminology دليل المؤسسة لمصطلحات قطاع الصكوك

term definition التعريف المصطلح

SukukA document or certificate, which evidences the undivided pro-rata ownership of underlying assets. The Sak (singular of Sukuk) is freely tradable at par, premium or discount, depending on which Sharia’a contract is being applied.

هي جمع )صك( وتعني شهادة أو وثيقة تثبت حق ملكية أصول معينة. والصكوك وثائق متساوية القيمة عند إصدارها، وال تقبل التجزئة على أساس تناسبي. والصكوك قابلة للتداول بسعر التعادل، أوالعالوة أو الخصم، اعتمادا على الشريعة المطبقة. الصكوك

Asset backed sukukSukuk which are characteristically non-recourse Sukuk with the underlying assets forming the sole source of profit and capital payments. Sukuk owners generally do not have recourse to the originator.

صكوك ال يتم اللجوء إليها عادة وتشكل األصول األساسية المصدر الوحيد لمدفوعات األرباح ورأس المال. ال يلجأ أصحاب الصكوك عادة إلى المنشئ. الصكوك المدعومة باألصول

Asset based sukukSukuk in which the asset is present for the purpose of Sharia’a requirements rather than to serve as the source of profit and capital payments. Sukuk owners generally do have recourse to the originator.

صكوك يحضر فيها األصل لموافقة متطلبات الشريعة بدال من أن تستخدم كمصدر وحيد لمدفوعات األرباح ورأس المال. يلجأ أصحاب الصكوك عادة إلى المنشئ. الصكوك القائمة على األصول

ijaraA manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or equipment to its client at an agreed rental fee and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hands of the lessor.

عقد منفعة )حق انتفاع( حيث يؤجر المؤجر )المالك( بموجبه أصال أو معدات لزبونه مقابل رسم إيجار متفق عليه وفترة إيجار محددة عند توقيع العقد. وتظل المعدات المؤجرة في ملكية المؤجر. اإلجارة

ijara Sukuk

These certificates are issued on stand-alone assets identified on the balance sheet. The assets can be parcels of land to be leased or leased equipment such as aircraft and ships.

The rental rates of returns on these Sukuk can be both fixed and floating depending on the particular originator. The income generated under an Ijara Sukuk comes from the underlying rent receivables.

تصدر هذه الشهادات استنادا على أصول مستقلة محددة في القوائم المالية. وتأتي هذه األصول على شكل قطع أرضية يتم تأجيرها أو معدات مؤجرة مثل الطائرات والسفن.

أما معدالت العائد من اإليجار فقد تكون ثابتة أو عائمة وذلك حسب المنشئ. ويحقق الدخل المتولد من صكوك اإلجارة من مستحقات اإليجار األساسية.

صكوك اإلجارة

mudaraba

A contract, which is made between two parties to finance a business venture. The parties are a rabb al-mal or an investor who solely provides the capital and a mudarib or an entrepreneur who solely man-ages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a business loss, the loss wiII be borne solely by the provider of the capital.

عقد بين طرفين لتمويل مشروع تجاري. يتشكل الطرفان من رب المال أو المستثمر الذي يقوم فقط بتوفير رأس المال و المضارب أو المقاول الذي يدير المشروع. إذا كان المشروع مجد اقتصاديا، يتم توزيع األرباح على أساس نسبة متفق عليها مسبقا. في حالة

الخسارة، يتحمل رب المال الخسارة لوحده.المضاربة

mudaraba Sukuk Sukuk which apply the Sharia’a rules for the Mudaraba Sharia’a contract هي وثائق مشاركة مطابقة للشريعة تمثل مشروعات تدار على أساس المضاربة بتعيين مضارب من الشركاء إلدارتها. صكوك المضاربة

Wakalah

A contract, which gives power to a person to nominate another person to act on his behalf, as long as he is alive, based on the agreed terms and conditions.

Wakala is an agency relationship between the Wakeel (agent) and Muwakil (principal) whereby the Wakeel will invest the Muwakil’s funds in certain Shari’a-compliant assets.

The Wakeel is entitled to a fee for his services and, in addition, any profit made above an agreed profit rate may be paid to the Wakeel as an incentive fee pursuant to the term of a Wakala agreement.

عقد يمنح الصالحية لشخص لترشيح شخص آخر للعمل نيابة عنه، طالما كان على قيد الحياة، على أساس شروط وأحكام متفق عليها. حيث يقوم الوكيل )العامل( باستثمار أموال الموكل )األصيل( في األصول المتوافقة مع الشريعة اإلسالمية.

يحق للوكيل الحصول على رسوم مقابل خدماته، كما يحصل على رسوم إضافية إذا حقق أرباحا أعلى من األرباح المتفق على تحقيقها.

الوكالة

Wakalah istithmar Sukuk

This is a hybrid sukuk which may combine both asset-backed and asset-based features, as well as tan-gible and intangible underlying assets. This combination allows it to be traded in the secondary market. These sukuk are commonly issued by the Islamic Development Bank based in Saudi Arabia.

هي وثائق مشاركة تمثل مشروعات تدار على أساس الوكالة باالستثمار ويعين وكيل من حملة الصكوك إلدارتها. وهي صكوك هجينة قد تجمع بين ميزات كل من الصكوك المدعومة باألصول والصكوك القائمة على األصول، إضافة إلى األصول األساسية

الملموسة وغير الملموسة. ويسمح لها هذا المزيج بالتداول في السوق الثانوية. وتصدر هذه الصكوك عادة من قبل البنك اإلسالمي للتنمية ومقره في المملكة العربية السعودية.

صكوك الوكالة باالستثمار

*The Editor would like to thank Abderrahim Khairate , the ICD Translator for contributing this translation.

Abderrahim Khairate ICD Translator


25 26

ICD Member Development Database A-B

ICD MEMBER DEVELOPMEnT DATABASE (52 Countries) ICD MEMBER DEVELOPMEnT DATABASE (52 Countries)

AlBANiA

Demographics

Total Population 3,002,859

Foreign Currency Credit Ratings

Moody’s

Lon

g-t

erm

B1

Sh

ort

-ter

m

NR

Muslim Population 2,102,001 Standard & Poor’s B+ B

Muslim % 70% Fitch NR NR

development indicators

Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 76 76.2 76.3 76.5 76.6 76.8 76.9

Adult literacy 98.7 95.9

Poverty rate (at $1.25 poverty line) 0.6 0.5 0.9 0.6

GDP per capita current US $ 1,322.6 1,433.7 1,847.2 2,350.9 2,613.8 2,860.5 3,384.1 4,086.6 3,809.2 3,704.5 4,020.0

Population growth (annual %) 0.180 0.402 0.546 0.583 0.541 0.470 0.413 0.369 0.355 0.361 0.365

BAhrAiN

Demographics



Moody’s

Lon

g-t

erm

Baa1

Sh

ort

-ter

m

NR

Muslim Population 1,013,659 Standard & Poor’s BBB A-2

Muslim % 81% Fitch BBB F3


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 74.3 74.4 74.5 74.7 74.8 74.9 75.1


Poverty rate (at $1.25 poverty line)


Population growth (annual %) 0.674 (0.069) 0.790 3.730 7.600 11.287 13.181 12.820 10.561 7.592 4.774

AlGeriA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR

Muslim Population 36,993,554 Standard & Poor’s NR NR


BANGlAdeSh

Demographics



Moody’s

Lon

g-t

erm

Ba3

Sh

ort

-ter

m

NR

Muslim Population 144,170,005 Standard & Poor’s BB- B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 71.7 72 72.2 72.4 72.7 72.9 73.1






Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 66.9 67.3 67.7 68 68.3 68.6 68.9


Poverty rate (at $1.25 poverty line) 43.3

GDP per capita current US $ 362.1 373.6 403.9 431.7 440.1 463.7 520.1 587.7 653.2 723.1 766.9


AZerBAijAN

Demographics



Moody’s

Lon

g-t

erm

Baa3

Sh

ort

-ter

m

NR

Muslim Population 8,867,022 Standard & Poor’s BBB- A-3

Muslim % 93% Fitch BBB- F3

BeNiN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR

Muslim Population 2,342,104 Standard & Poor’s B B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 99.5

Poverty rate (at $1.25 poverty line) 6.3 0.4

GDP per capita current US $ 693.2 748.8 863.8 1,019.2 1,537.9 2,414.9 3,759.3 5,212.8 4,933.4 5,847.3 7,106.0



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011







27 28

ICD Member Development Database B-C


BrUNei

Demographics

Total Population 408,786


Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR

Muslim Population 273,887 Standard & Poor’s NR NR



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 77.2 77.3 77.5 77.6 77.7 77.9 78





ChAd

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






BUrKiNA FASo

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 52.5 53 53.6 54.1 54.5 55 55.4

Adult literacy 21.8 23.6 28.7




CAmerooN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR


Muslim % 20% Fitch B B


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 70.7


GDP per capita current US $ 602.8 663.0 807.3 909.4 930.0 979.0 1,083.7 1,224.4 1,113.9 1,100.1 1,225.2



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 51.5 52.1 52.7 53.3 54 54.7 55.4

Adult literacy 55.3


GDP per capita current US $ 619.0 664.9 781.9 837.9 862.7 888.3 983.5 1,132.2 1,052.0 1,042.6 1,062.1


Côte d’ivoire

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 74.2




ComoroS

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




29 30

ICD Member Development Database D-G


eGyPt

Demographics



Moody’s

Lon

g-t

erm

B2

Sh

ort

-ter

m

NR


Muslim % 90% Fitch B+ B


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 71.6 71.9 72.2 72.5 72.8 73 73.2





GABoN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR

Muslim Population 16,083 Standard & Poor’s BB- B

Muslim % 1% Fitch BB- B


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






GUiNeA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






GUiNeA BiSSAU

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 45.1 45.4 45.6 45.9 46.1 46.4 46.6 47.0 47.3 47.7 48.1

Adult literacy 54.2





Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy


GDP per capita current US $ 849.1 859.7 889.5 931.1 972.9 1,029.5 1,108.0 1,252.6 1,304.9 1,369.5 1,467.0


djiBoUti

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR



GAmBiA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 46.5





31 32

ICD Member Development Database I-K


irAQ

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 68.4 68 67.8 67.8 68.1 68.5 69

Adult literacy 78.1


GDP per capita current US $ 917.2 1,224.8 1,610.1 2,016.6 2,947.1 2,215.2 2,623.7 3,477.6


jordAN

Demographics



Moody’s

Lon

g-t

erm

Ba2

Sh

ort

-ter

m

NR

Muslim Population 5,988,176 Standard & Poor’s BB B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






KUWAit

Demographics



Moody’s

Lon

g-t

erm

Aa2

Sh

ort

-ter

m

NR

Muslim Population 2,249,367 Standard & Poor’s AA A-1+

Muslim % 85% Fitch AA F1+


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 93.3 93.3 94.5 93.9




irAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 77.0 82.4 82.3 85.0




KAZAKhStAN

Demographics



Moody’s

Lon

g-t

erm

Baa2

Sh

ort

-ter

m

NR

Muslim Population 8,235,344 Standard & Poor’s BBB+ A-2

Muslim % 47% Fitch BBB F3


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 65.2 65.4 65.7 66 66.3 66.7 67

Adult literacy 99.7

Poverty rate (at $1.25 poverty line) 13.6 5.2 3.1 1.7 0.4 0.2 0.1 0.1


Population growth (annual %) (0.170) 0.004 0.336 0.695 0.889 1.058 1.144 1.218 2.641 1.418 1.430

iNdoNeSiA

Demographics



Moody’s

Lon

g-t

erm

Baa3

Sh

ort

-ter

m

NR

Muslim Population 214,083,351 Standard & Poor’s BB+ B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Poverty rate (at $1.25 poverty line) 29.3 21.4 28.6 24.2 22.6 20.4 18.1

GDP per capita current US $ 766.9 922.1 1,091.3 1,177.3 1,290.8 1,622.6 1,897.5 2,209.1 2,299.5 2,980.8 3,511.8



33 34

ICD Member Development Database K-M


liByA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






mAlAySiA

Demographics



Moody’s

Lon

g-t

erm

A3

Sh

ort

-ter

m

NR

Muslim Population 17,624,691 Standard & Poor’s A- A-2

Muslim % 60% Fitch A- F2


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 92.5




mAli

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 49 49.4 49.8 50.2 50.6 51 51.4


Poverty rate (at $1.25 poverty line) 61.2 51.4 50.4



leBANoN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 89.6




mAldiveS

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 98.4




KyrGyZStAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 99.2

Poverty rate (at $1.25 poverty line) 34.0 14.2 22.9 5.9 1.9 6.4 6.2

GDP per capita current US $ 307.0 320.4 378.3 431.2 474.1 540.6 719.8 959.4 864.3 875.1 1,070.0



35 36

ICD Member Development Database M-P


moZAmBiQUe

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






NiGer

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






PAKiStAN

Demographics



Moody’s

Lon

g-t

erm

Caa1

Sh

ort

-ter

m

NR

Muslim Population 180,776,572 Standard & Poor’s B- B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011




GDP per capita current US $ 514.9 507.7 569.0 655.5 718.5 820.5 905.4 1,018.2 962.2 1,027.7 1,199.1


moroCCo

Demographics



Moody’s

Lon

g-t

erm

Ba1

Sh

ort

-ter

m

NR

Muslim Population 31,986,146 Standard & Poor’s BBB- A-3



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 70.4 70.7 71 71.3 71.6 71.9 72.2





NiGeriA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 49 49.5 50 50.5 51 51.4 51.9



GDP per capita current US $ 361.1 470.7 524.3 662.5 823.8 1,038.8 1,153.4 1,401.2 1,110.0 1,465.2 1,522.1


mAUritANiA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR

Muslim Population 3, 359,185 Standard & Poor’s NR NR



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 57.5


GDP per capita current US $ 412.3 410.5 445.9 504.2 609.5 862.6 878.3 1,073.3 897.6 1,065.5 1,184.9



37 38

ICD Member Development Database P-S


SeNeGAl

Demographics



Moody’s

Lon

g-t

erm

B1

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 57.4 57.7 58 58.3 58.7 59 59.3





SAUdi ArABiA

Demographics



Moody’s

Lon

g-t

erm

Aa3

Sh

ort

-ter

m

NR

Muslim Population 26,534,504 Standard & Poor’s AA- A-1+

Muslim % 100% Fitch AA- F1+


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Life expectancy (yrs) 72.5 72.8 73 73.3 73.5 73.7 73.9





SUdAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy


GDP per capita current US $ 413.3 452.7 525.2 622.4 751.4 981.4 1,235.2 1,418.5 1,350.8 1,615.8 1,959.4


QAtAr

Demographics



Moody’s

Lon

g-t

erm

Aa2

Sh

ort

-ter

m

NR

Muslim Population 1,512,483 Standard & Poor’s AA A-1+



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 89.0 93.1 94.0 94.7




SierrA leoNe

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011






PAleStiNe

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 92.3 93.4 93.9 94.1 94.6


GDP per capita current US $

Population growth (annual %) 3.478 3.478 3.478 3.478 3.478 3.478 3.478 2.706 (0.445) (0.370) 2.879


39 40

ICD Member Development Database S-T


tAjiKiStAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 99.7




tUrKmeNiStAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 99.6




tUrKey

Demographics



Moody’s

Lon

g-t

erm

Ba1

Sh

ort

-ter

m

NR

Muslim Population 79,589,962 Standard & Poor’s BB B

Muslim % 100% Fitch BB+ B


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 87.4 88.2 88.1 88.7 90.8

Poverty rate (at $1.25 poverty line) 2.0 2.5 2.4 2.0 1.5 1.1



SyriA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011




GDP per capita current US $ 1,236.9 1,305.1 1,208.9 1,361.5 1,510.4 1,704.6 2,013.6 2,554.4 2,557.3 2,802.7 n/a


tUNiSiA

Demographics

Total Population 10732900


Moody’s

Lon

g-t

erm

Baa3

Sh

ort

-ter

m

NR

Muslim Population 10518242 Standard & Poor’s BB B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011





Population growth (annual %) 1.145 1.113 0.590 0.937 0.968 0.981 0.955 1.010 1.066 1.043

SUriNAme

Demographics



Moody’s

Lon

g-t

erm

Ba3

Sh

ort

-ter

m

NR

Muslim Population 109,790 Standard & Poor’s BB- B



Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011







41 42


nOTES

UZBeKiStAN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 99.3




yemeN

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR




Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011







Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Poverty rate (at $1.25 poverty line) 57.4 51.5 38.0



UGANdA

Demographics



Moody’s

Lon

g-t

erm

NR

Sh

ort

-ter

m

NR



ICD Member Development Database u-z

UAe

Demographics



Moody’s

Lon

g-t

erm

Aa2

Sh

ort

-ter

m

NR

Muslim Population 5,101,744 Standard & Poor’s AA * A-1+ *

Muslim % 96% Fitch AA * F1+ *


Indicators 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Adult literacy 90.0





43 44

nOTES nOTES

VISIONTo be a major player in the development and promotion of the private sector as a

vehicle for economic and social growth and prosperity in its member countries.

ACTIVITIESThe overall objectives of ICD are:

To identify opportunities in the private sector that could function as engines of growth and providing them with a wide range of productive financial products and services.

To encourage the development of Islamic financing and capital markets.

MISSIONComplement the role played by the Islamic Development Bank through:

Providing Islamic financial services and products.

Promoting competition and entrepreneurship in member countries.

Advising governments and businesses.

Encouraging cross country investments.

Islamic Corporation for the Development of the Private Sector

P.O. Box 54069, Jeddah 21514Kingdom of Saudi Arabia

Tel: +966 2 644 1644Fax: +966 2 644 4427

www.icd-idb.org