The Landscape of Shariah-compliant Finance:

Identifying the Key Players and Opportunity

Prepared by: Manny Peralta July 25, 2012

Prepared for: Company XYZ

Defining the Opportunity with Key Players

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Landscape

• Demand for more Shariah-compliant financial products and services is on the rise. Financial institutions are positioning themselves to meet this surge in demand. This form of finance is carrying over into the development finance world.

Key Players • While not the only player in this market, Islamic Development Bank is the

leading the multilateral development organization in terms of funding.

Opportunity

• Company XYZ should position itself to play in the Shariah-compliant finance market by targeting sectors that receive the most investment by the ISDB and similar multilateral development banks.

Prepared by Manny Peralta on 7/25/12

A. This surge in demand is occuring everywhere in the Islamic world, and there are stark regional differences in terms of the Islamic financing solutions that can be provided.

•  Malaysia has a well-developed sukuk infrastructure, while the Gulf States are still struggling to meet short-term maturity needs.

•  The governments of Bahrain, UAE, and Qatar are testing out new short-term products with increased success.

•  Saudi Arabia is more adept at handling short-term liquidity needs due to the depth of its investment sector.

Landscape: Demand for Islamic finance products is on the rise.

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B. Changes in the regulatory environment are producing an increased supply of capital.

Landscape: Demand for Islamic finance products is on the rise.

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•  Saudi Arabia is recognizing that housing has become a national priority, hence the Council of Ministers have passed a mortgage law to boost real-estate development that is Shariah-compliant.  

•  in Bahrain, Islamic banks are being asked to join forces in order to be better capitalized and be better prepared to weather global economic crises

According to the IFC, mortgage

finance is not only a high priority, but

also one of the fastest growing

investment areas.

Prepared by Manny Peralta on 7/25/12

C. Increased economic prowess in Asia and the Middle East.

Landscape: Demand for Islamic finance products is on the rise.

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•  Islamic finance assets total $1.3 trillion globally and are growing at an average annual rate of 15%.*

•  The IMF estimates economies in developing Asian countries will expand 7.3% this year and 7.9% in 2013.**

•  The number of millionaires in the Middle East rose 2.7% to 450,000 last year.***

*according to the Malaysia’s Securities Commission **according to its World Economic Outlook Update issued in April ***according to World Wealth Report 2012 from Capgemini and RBC Wealth Management

Prepared by Manny Peralta on 7/25/12

Muslim customers are low-hanging fruit for new Shariah-finance solutions.

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Private sector is catering more to

Muslim customers’

financing needs

Surge in demand and regional differences

Regulatory environment growing more

favorable Number of

affluent Muslims in Asia and the Middle East on

the rise

Prepared by Manny Peralta on 7/25/12

•  Global consumer banks, such as Standard Chartered Private Bank, have introduced a host of new Islamic finance solutions to target rich Muslims in parts of Asia (e.g. Malaysia) who lack investment options in the region

•  SCPB and similar institutions have portfolios where 60% of profits or more come from Africa, the Middle East, and Asia.

Some financial institutions are trying to step up to match that demand.

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•  A leading Singapore-based wealth management firm interviewed in the New York Times states that while demand is on the rise:

“few understand the needs of the Islamic ultrahigh net worth individual or take a ‘holistic view’ of wealth management services”

However, private banks are still lagging in terms of solutions that they can offer.

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The Islamic Development Bank (ISDB) is the front-ronner in this market

•  A week ago the ISDB made its largest approval for funding development projects since its inception in 1975

•  Other major players include the Asian Development Bank, the World Bank, and some national governments. •  Many examples of these include co-financing agreements with the

ISDB, who have actively looked for partnerships in Islamic financing. •  The ISDB and the WB have co-financed over 60 projects in 26

countries in Africa, Asia, and the Middle East worth $3.2 billion.

Still, Shariah-compliant finance is also growing in the development world.

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Where does ISDB focus its investments?

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Key Players: Islamic Development Bank

59% 24%

13%

4%

Key Sectors*

Utilities and Infrastructure Agriculture

Human development SME Finance + Other

*Based on funding allocation for 2012 Prepared by Manny Peralta on 7/25/12

The details of ISDB's recent $1+ billion deal

Key Players: Islamic Development Bank

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0 100 200 300 400 500 600 700 800

Utilities and Infrastructure

Agriculture Education SME Finance

Allocation by sector (in millions)

*The list of countries receiving funding can be found in Appendix A.

Other recent deals •  In June 2012, the ISDB signed a co-financing agreement

with the Korea Development Bank for $2 billion, aimed at building public-private partnerships in the ISDB’s 4 key sectors

•  In July 2012, the ISDB signed a $1 billion agreement with the Egyptian government to finance their energy sector and food imports.

•  The timing of this deal is key, because Egypt’s outgoing military government had a difficult time securing funding from multilateral institutions, hence why President Morsi is keen to fill the gap in funding.

Key Players: Islamic Development Bank

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The ADB is following ISDB's lead. •  The ADB has 13 common member countries with the

Islamic Development Bank. •  They signed a co-financing agreement in September

2008 calling on both institutions to provide up to $2 billion each over a three-year period. •  The co-financing agreement mainly targets infrastructure

and public utilities, with some funding for education and health.

•  The ADB has piloted Islamic financing in an infrastructure project in Pakistan. Though Islamic financing hasn’t been its first choice originally, the decision was based on client needs.

Key Players: Asian Development Bank

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DFI should identify Multinational Companies who have large operations in the Middle East and Islamic parts of Asia with business in key sectors that receive ISDB funding. •  One leading example is General Electric, and

specifically, their GE Energy division. –  GE is the first American company to have launched

Islamic bonds (2009). –  Middle East and Africa accounted for 6.1% of GE’s total

revenues in FY2010. –  GE Energy signed a $2 billion contract with the

government of Kuwait in 2009.

Opportunity

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•  Please don’t hesitate to contact me (manuel.i.peralta@gmail.com) with any questions.

•  I addressed a few potential questions in the appendices.

•  Thank you for your time!

Questions?

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•  $683 million for power generation and power transmission projects in five IDB Member Countries:  Morocco, Tunisia, Iran, Uzbekistan and Tajikistan;

•  $274.8 million for food security and rural development activities in African countries:  Cameroon, Chad, Uganda, Benin, Burkina Faso, Mali, Niger, Mauritania and Togo;

•  $146.2 million for educational projects in Indonesia, Yemen and Bangladesh;

•  $45 million to Indonesia Exim Bank for the financing of export-oriented small and medium size industries;

Appendix A: Details of ISDB’s recent $1Bn deal

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•  This trend toward Shariah-compliant finance is indicative of future growth in an industry that is rapidly developing.

•  As more capital is channeled to Islamic finance solutions, the cheaper the products will become.

Appendix B: Is Shariah-compliant finance cost-effective?

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•  Yes. There have been some cases where political and legal resistance to this form of financing are apparent. –  E.g., in Kazakhstan, which has a Muslim-majority (70% of

population) and is a member country of the ISDB, regulations have been passed to secularize state institutions (e.g. banning prayer in those institutions).

Appendix C: Are there any non-monetary downsides to using Islamic finance solutions?

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