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ISLAMIC FINANCE WHAT IS ISLAMIC FINANCE? • Financing that complies with the percepts of ISLAMIC FINANCE WHAT IS ISLAMIC FINANCE? • Financing that complies with the percepts of Islamic Sharia SOURCES OF SHARIA • QURAN- the holy book of Islam SUNNA- the practice and traditions of the Prophet Mohammed (p. b. u. h) • IJMA (consensus), QIYAS (analogy) and IJTIHAD (interpretation) • 1

GENERAL PRINCIPLES RIBA • Riba literally means increase, addition, expansion or growth • In GENERAL PRINCIPLES RIBA • Riba literally means increase, addition, expansion or growth • In Sharia, Riba technically refers to the ‘premium’ that must be paid by the borrower to the lender • In Islam, money is considered only as a unit of exchange. It has to be applied to a commodity to justify an excess return • Causes unequal distribution of wealth- increases the gap between rich and poor • Riba is essentially in conflict with the clear and unequivocal Islamic emphasis on socio-economic justice • Receiving a monetary advantage without giving value in return is forbidden in Islam 2

GENERAL PRINCIPLES GHARAR • Gharar in Islamic transactions has often been used in the GENERAL PRINCIPLES GHARAR • Gharar in Islamic transactions has often been used in the context of risk, uncertainty and speculation • In a contract of sale, Gharar often refers to uncertainty or ignorance of one or both of the parties over the substance or attributes of the object of sale, or of doubt over its existence at the time of the contract • Examples of Gharar transactions include derivatives, gambling and insurance 3

GENERAL PRINCIPLES PROHIBITED ACTIVITIES • Investment should be based on permitted activities only • GENERAL PRINCIPLES PROHIBITED ACTIVITIES • Investment should be based on permitted activities only • Money should not be invested in industries involved in: • Alcohol & related businesses • Pork & related businesses • Conventional Financial Services (Riba-based Banking, Insurance, Investment & Asset Management etc. ) • Adult Entertainment • Defense industries (Weapons of Mass Destruction) • Tobacco & related businesses 4

APPLICATION OF ISLAMIC FINANCE • Capital markets • Project Finance • Structured Finance • APPLICATION OF ISLAMIC FINANCE • Capital markets • Project Finance • Structured Finance • Asset Finance • Acquisition Finance • Trade Finance • Real Estate Finance • Syndications and Corporate Lending • Investment Funds • Islamic Insurance 5

ISLAMIC FINANCE CONTRACTS IN PRACTICE Intermediation Contracts Transactional Contracts Musharaka Asset Based Transactions Miscellaneous ISLAMIC FINANCE CONTRACTS IN PRACTICE Intermediation Contracts Transactional Contracts Musharaka Asset Based Transactions Miscellaneous Mudaraba Qard Hassan Equity Participation Musharaka Wakala Trade Finance Amana Depository/Trust Takaful Collateralised Transactions Ijara Morabahaa Bay Mua’ajal Deferred Payment Istisna Bay Salam Ju’ala (Reward) 6

MAIN CONTRACTS “Morabaha” Islamic bank buys an asset and re-sells the same to client MAIN CONTRACTS “Morabaha” Islamic bank buys an asset and re-sells the same to client at a pre-agreed deferred price covering cost plus an agreed mark-up. “IJARA” Islamic bank buys an existing and/or future asset or a service and leases/sells the same to client at pre-agreed deferred rentals covering cost and returns for bank. “ISTISNA” COMMON CONTRACTS USED IN ISLAMIC BANKING Islamic bank constructs as asset (through a third party) and sales the same to a client at a pre-agreed deferred price covering cost and return for bank “SALAM” Debt based forward sale contract under which a client gets advance payment for a supply of goods/commodities to be delivered by the client at a later date. “MUDARABA” Equity based entrepreneurship (business financing) contract. “MUSHARAKA” Equity based partnership financing contract – usually ending with ownership. 7

Islamic Banking Products p p Financing Products Morabaha - A short-term facility for purchasing Islamic Banking Products p p Financing Products Morabaha - A short-term facility for purchasing raw materials and assets by Bank and its onward sale to the customer on cost plus profit basis usually with deferred payment. This facility also covers Morabaha for imported goods under LCs opened. p Credit Morabaha - A short-term facility for purchasing raw materials and assets by Bank on Credit Payment basis from the suppliers and its onward sale to the customer on cost plus profit basis. This Product is for customers availing Suppliers’ Credit for payment of goods. This product is also applicable where goods from supplier are dispatched after receipt of Post-dated checks from the customer. p Morabaha Spot - A Morabaha facility in which the subject matter is purchased and held by the Bank and is reflected in its inventory. The subject matter is than sold by the Bank to the customer against spot payment, as and when required by the customer. Risk profile of this facility is higher than the normal Morabaha transaction therefore Credit Proposal to seek approval of Management for holding of goods as inventory is necessary. Goods will be kept under the supervision of an appointed Mucaddam 8

Islamic Banking Products p p p Financing Products – continued - Morabaha Pledge - Islamic Banking Products p p p Financing Products – continued - Morabaha Pledge - A Morabaha facility in which the subject matter is sold to the customer and then after delivery the same goods are kept under a pledge arrangement as a security. Morabaha Foreign Currency - A short-term facility say in USD for purchasing raw materials and assets by Bank on advance/credit/cash/import basis and its onward sale to the customer on cost plus profit basis usually with deferred payment. This facility is extended to importers and exporters only to facilitate trade business. Morabaha Financing of Imported Merchandize Pledge- A Morabaha facility in which the subject matter, which is an imported good, is sold to the customer and then after delivery the same goods are kept under a pledge arrangement as a security. Morabaha Financing of Imported Merchandize Spot - A Morabaha facility in which the subject matter, which is an imported good, is kept under a pledge arrangement before selling to the customer and the goods are reflected in the inventory of the Bank. The subject matter is then sold by the Bank to the customer against spot payment, as and when required by the customer. Risk profile of this facility is higher than the normal Morabaha transaction therefore Credit Proposal to seek approval of Management for holding of goods as inventory is necessary. Goods will be kept under the supervision of an appointed Mucaddam. 9

Islamic Banking Products p p Financing Products – continued - Istisna’ Export - A Islamic Banking Products p p Financing Products – continued - Istisna’ Export - A short-term facility extended to exporters in which the Bank orders the exporter to manufacture goods and makes payment for manufacturing the goods as per the specification of export order. The goods are delivered to the Bank. After taking delivery, these goods are exported to the foreign buyer by exporter acting as Bank's agent. p Istisna’ Local - A short-term facility extended to local manufacturer in which the Bank orders the manufacturer to manufacture goods and makes payment for manufacturing the goods as per the specification of order. The goods are delivered to the Bank. After taking the delivery, these goods are sold to the local buyer by customer acting as Bank's agent. p Tijarah Export & Local - A short term financing facility for meeting financing requirement of exporters in which the Bank purchases the finished/manufactured goods of the customer. The goods are delivered to the Bank. After taking the delivery, these goods are then sold & exported to the foreign buyer by exporter acting as Bank's agent. The same facility can be used for sale of goods to local buyers. 10

Islamic Banking Products p p Financing Products – continued – Ijara Plant & Machinery Islamic Banking Products p p Financing Products – continued – Ijara Plant & Machinery - A medium to long-term Islamic leasing facility for plant and machinery. The subject matter of Ijara may be purchased locally or imported by the customer as an agent of the Bank. This facility may also be used for Purchase & Lease-back to the Customer of the Plant and Machinery & Real Estate as well as leasing of commercial and non-commercial vehicles. p Diminishing Musharaka (Plant & Machinery; Real Estate; Commercial & Non. Commercial Vehicles) -A medium to long-term facility for joint purchase of an asset from a third party (local and import) & Ijara of Bank’s share to the customer. This facility is based on Shirkat ul Milk (sharing of capital). p Musharaka/Running Musharaka (Working Capital; Green Start-up; Venture Capital etc. ) - A medium to Long term facility on the basis of Shirkat ul Aqd where the Bank injects equity in the customer’s business and creates a partnership. The profit is shared between the Bank and the customer in an agreed ratio whereas the loss is shared by both the parties in proportion to their investments. 11

Islamic Banking Products p p Financing Products – continued – Export Refinance Facility under Islamic Banking Products p p Financing Products – continued – Export Refinance Facility under Morabaha - A Morabaha facility extended to exporters only for purchase of raw material & assets by Bank and its onward sale to the customer. It is not an overdraft facility in which funds are disbursed to the customer regardless of its purchase requirements or for requirements other then purchase of assets. p Export Refinance Facility under Istisna’ - A short-term facility extended to exporters based on Istisna ( for both Local and Export sale). 12

Islamic Banking Products p IMPORT Financing p Sight or Deferred/Usance LC - Sight LC Islamic Banking Products p IMPORT Financing p Sight or Deferred/Usance LC - Sight LC facility to the customer for import of raw material & assets as Bank's agent from the foreign buyer and its Morabaha sale on cost plus profit basis to the customer by the Bank either on deferred or on spot basis. The Bank can also include the profit for deferred/usance period in this case. p LC under Master Agency Agreement (Ijara & Diminishing Musharaka) - Sight LC facility to the customer for import of fixed assets as Bank's agent (Bank is the single owner in case of Ijara whereas Customer and the Bank jointly own the asset in case of DM) from the foreign buyer and its Ijara (Ijara of Bank’s share in the asset) to the customer as per the undertaking to Ijara provided by the customer. p LC Sight & Usance without Master Agency Agreement – Sight or Usance LC facility to the customer for import of raw material & assets in customer's own name. In this case the assets are possessed by the customer and Bank is only providing services to the customer and no Morabaha is involved. 13

Islamic Banking Products p Post-Shipment Export Financing p Bai Salam against export Sight or Islamic Banking Products p Post-Shipment Export Financing p Bai Salam against export Sight or Usance Bills - An Islamic alternative for Sight Bill or Deferred LC Bill Discounting via Bai Salam in which the Bank purchases Foreign Currency from the Exporter, to be delivered on a future date, against immediate payment in Local Currency. This facility is extended with lien over accepted or clean sight bills and any other security may also be taken by the Bank along with the lien over the Export bill. The rate for purchase of FCY must be within the current spot rate range. p Morabaha against Accepted export Usance Bill - An Islamic alternative to Usance Bill Discounting based on Morabaha. In this case the Bank extends a Morabaha facility to the customer and takes the accepted export bill (drawn against approved Bank) as a security under lien. Any other security may also be taken by the Bank along with the lien over the Export bill. Such facility is extended only if the Customer has the genuine need for purchasing raw materials. The facility cannot be extended merely for liquidity generation purposes. Also if the Morabaha Contract is not received in due course the Bank cannot take the export proceeds and they will be returned to the customer. However, only the advance against Morabaha will be recovered from the customer. 14

Islamic Banking Products p p Letter of Guarantees Letter of Guarantee / Standby Letter Islamic Banking Products p p Letter of Guarantees Letter of Guarantee / Standby Letter of Credit - A Bank guarantee to indemnify a third party against default of payment, overdue or non-performance of contract by Bank's customer. As per Sharia’ guarantees are non-compensatory contract and it is not allowed to take any fee/charges against “Act of Guarantee”. However, the Bank can recover its actual cost or expenses for the services rendered in the process of issuance of a guarantee, if any. 15

Islamic Banking Products p p Retail Banking Products Current Account - checking account works Islamic Banking Products p p Retail Banking Products Current Account - checking account works on the basis of 'Qard' and provides the convenience of conducting day-to-day transactions. The minimum investment required for opening an account can be specified to coverhead costs. There is no restriction on withdrawals or numbers of transactions and there is no deduction of service charges if the balance maintained is low. Free Internet Banking & Real-time Online Banking services may also be provided. Savings Account – Mudaraba or Wakala basis - Savings Account provides monthly profit along with a variety of free packaged benefits. Profit is calculated on daily balance and credited into the account on a monthly basis. There is no minimum investment required for opening an account and no deduction of service charges if the balance maintained is low. Free Internet Banking & Real-time Online Banking services may be provided. Profit rates can be tiered and higher rates linked to higher balances maintained in the account. Time Deposits – Mudaraba or Wakala basis - Term deposit certificates available for various tenures of 3 months, 6 months, 1 year, 2 years, 3 years and 5 years etc. Halal competitive profit based on Mudaraba or Wakala based deposit structure. Minimum investment amount may be specified. A variety of profit payment frequencies: monthly, quarterly, and at maturity. Premature withdrawal options, Roll over facility, profit credited into linked saving/current account. 16

Islamic Banking Products p Treasury Products p Spot/Ready FX Transactions – with conventional bid/offer Islamic Banking Products p Treasury Products p Spot/Ready FX Transactions – with conventional bid/offer spreads p Forward FX Transactions – with forward periods approved by respective Shari’a Scholars by different schools of thought p FX Transaction to manage investments – allowing clients to manage excess liquidity through FX operations p Managing Liquidity through Sukuk Morabaha – Investing excess liquidity in Sukuk available in the market using Morabaha contract structure p Managing Liquidity through Commodity Morabaha - Investing excess liquidity via Commodity Morabaha transactions generally carried out through brokers based in London Metal Exchange (LME) using Metal Warrants as the underlying commodity. 17

Islamic Banking Products p Consumer Financing p Debit Card – Based on similar operations Islamic Banking Products p Consumer Financing p Debit Card – Based on similar operations as the conventional Debit Card p Credit Card – Based either on fixed monthly/annual fee charges or Tawarruq transactions as approved by the respective Shari’a Scholars p Home Buying/Renovating/Building – Based on Diminishing Musharaka principles whereby both the customer and the bank share equity value and the customer buys back bank’s equity share plus profit through monthly payments p Car Financing - Car Ijara is Interest Free car financing facility based on the Islamic financing mode of Ijara (Islamic leasing). Car Ijara is a car rental agreement, under which the Bank purchases the car and rents it out to the customer for a period of 3 to 5 years, agreed at the time of the contract. Upon completion of the lease period the customer gets ownership of the car against his initial security deposit. 18

MAIN CONTRACTS “Morabaha. A” Islamic bank buys an asset and re-sells the same to MAIN CONTRACTS “Morabaha. A” Islamic bank buys an asset and re-sells the same to client at a pre-agreed deferred price covering cost plus an agreed mark-up. “IJARA” Islamic bank buys an existing and/or future asset or a service and leases/sells the same to client at pre-agreed deferred rentals covering cost and returns for bank. “ISTISNA” COMMON CONTRACTS USED IN ISLAMIC BANKING Islamic bank constructs as asset (through a third party) and sales the same to a client at a pre-agreed deferred price covering cost and return for bank “SALAM” Debt based forward sale contract under which a client gets advance payment for a supply of goods/commodities to be delivered by the client at a later date. “MUDARABA” Equity based entrepreneurship (business financing) contract. “MUSHARAKA” Equity based partnership financing contract – usually ending with ownership. 19

Islamic Banking Products SUKUK 20 Islamic Banking Products SUKUK 20

THE AAOIFI SUKUK STANDARD p Adopted by the full Sharia Board of AAOIFI (14 THE AAOIFI SUKUK STANDARD p Adopted by the full Sharia Board of AAOIFI (14 members) in May 2003. p Became effective from 1 st January 2004. p Defines Sukuk as: “Certificates of equal value representing undivided shares in the ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or Special investment activity……. . ”. 21

PARITIES TO A SUKUK TRANSACTION p p p p Lead Arranger Lawyers Originators Issuer PARITIES TO A SUKUK TRANSACTION p p p p Lead Arranger Lawyers Originators Issuer (SPV) Primary Investors Service Provider (s) Secondary Investors Credit Enhancers Rating Agency Trustee Auditors Regulators Sharia Scholars 22

SPECIAL PURPOSE VEHICLE (SPV) p Also known as Special Purpose Entity (SPE) or Limited SPECIAL PURPOSE VEHICLE (SPV) p Also known as Special Purpose Entity (SPE) or Limited Purpose Company (LPC) created solely for the purpose of the transaction since it is impossible to transfer such assets to each investor directly. p Is the issuer of the certificates and is formed as a “TRUST” on the basis of a Declaration of Trust through which the Issuer declares that it will hold certain assets upon trust solely for the holders of the certicate(s). p It is a bankruptcy remote entity with the aim of shielding the assets from any risks associated with the originator. p It is highly preferred that the SPV be independent. 23

FUNCTIONS OF SUKUK SPV Sukuk Issuance Ownership of Assets Bankruptcy Remoteness 24 FUNCTIONS OF SUKUK SPV Sukuk Issuance Ownership of Assets Bankruptcy Remoteness 24

SPV…. Continuation p Domicile in ‘offshore’ capital havens; p Have a specified life; its SPV…. Continuation p Domicile in ‘offshore’ capital havens; p Have a specified life; its powers are limited to what might be required to attain its purpose and its life is destined to end when the purpose is attained. p Commonly formed as trusts through the use of Charitable trusts that act as intermediary owners. 25

CONVENTIONAL BONDS vs. SUKUK • DEFINITION OF A BOND- a certificate of debt under CONVENTIONAL BONDS vs. SUKUK • DEFINITION OF A BOND- a certificate of debt under which the issuer agrees to pay interest (if any) and to repay the principal to the bondholder on specified dates. Repayment of principal is usually 3 or more years after the date of issue. • NATURE OF A SUKUK- economic characteristics similar to that of a conventional bond, key difference being that a Sukuk is not a debt instrument. It represents a proportionate beneficial ownership in the underlying asset, giving the holder the right to the benefits of the income stream of the underlying asset. The yield is usually linked to a return on an underlying asset through an Islamic structure e. g. lease. It is priced, listed and rated as a bond, although it is more akin to a participation in a collective investment scheme. 26

EUROBONDS Conventional Issuer Obligator Interest/Principal on the bonds Proceeds Bondholders Common Depository Euroclear Bank/ EUROBONDS Conventional Issuer Obligator Interest/Principal on the bonds Proceeds Bondholders Common Depository Euroclear Bank/ Clearstream, Luxembourg 27

Sukuk Islamic Issuer/Trustee proceeds Periodic Distributions/ Sukuk Redemption Lead Manager Obligor Sukukholders Common Depository Sukuk Islamic Issuer/Trustee proceeds Periodic Distributions/ Sukuk Redemption Lead Manager Obligor Sukukholders Common Depository Euroclear Bank/ Clearstream, Luxembourg 28

WHAT IS SUKUK ? • ‘Sukuk’ (plural of ‘Sakk’) equates to ‘certificate of entitlement’ WHAT IS SUKUK ? • ‘Sukuk’ (plural of ‘Sakk’) equates to ‘certificate of entitlement’ • Generically, viewed as an Islamic equivalent to a conventional bond • Better described as an asset-based investment • Sukuk evidences the holder’s ownership in underlying assets • Underlying assets are typically segregated into a special purpose vehicle (SPV) • Trust declared over the assets, held for the benefit of Sukukholders who are thereby entitled to returns generated from those assets • Sukuk usually rank pari-passu with other senior obligations of the obligor • Pricing can be at fixed or floating rate benchmarked against LIBOR, etc. • Sukuk can be listed or unlisted, rated or unrated • Increasing tendency for obligors to seek rating of Sukuk to widen investor base 29

SUKUK MARKET TRENDS • • • Global and local sovereign and corporate Sukuk market SUKUK MARKET TRENDS • • • Global and local sovereign and corporate Sukuk market currently exceeds issuance value of US$ 60 billion Likely to be at US$100 billion by end 2013 (growth estimated at 25%p. a) Markets witnessing an increasing level of corporate issuers eager to tap the Islamic investor base Corporate issuance exceeded sovereign issuance for the first time in 2005 Nature of Sukuk issuance have become more sophisticated Innovation in Sukuk structuring and documentation Sukuk al Ijara and Sukuk al Musharaka structures very popular with investors and issuers Increasingly popular are equity linked structures Listing of Sukuk on local and international exchanges Larger amount of Sukuk issuance from a single issuance platform (e. g. currently Nakheel largest issue to date- US$3. 52 billion) Wider geographical distribution and competitive pricing and tenors between 2 to 5 years Many issues have been put on hold due to current ‘credit crises’ 30

Recent Sukuk Issues Issuer Issue Date Country Amount Tenor Structure PCFC Sukuk January 2006 Recent Sukuk Issues Issuer Issue Date Country Amount Tenor Structure PCFC Sukuk January 2006 UAE US$3. 5 billion 2 years Musharaka Aabar Petroleum June 2006 UAE US$460 million 4 years Mudaraba Sharjah Islamic Bank October 2006 UAE US$225 million 5 years Shirikat Melk Nakheel December 2006 UAE US$3. 52 billion 3 years Ijara Dubai Islamic Bank March 2007 UAE US$750 million 5 years Shirikat Melk Aldar Properties March 2007 UAE US$2. 53 billion 5 years Mudaraba Dar Al-Arkan March 2007 KSA US$600 million 3 years Ijara Dar Al-Arkan July 2007 KSA US$1 billion 5 years Ijara GFH July 2007 Bahrain US$1 billion 5 years Islamic MTN Alaqaria August 2007 Qatar US$300 million 5 years Mudaraba 31

Shari’a Restrictions • Ideally, there should be an asset transfer against application of the Shari’a Restrictions • Ideally, there should be an asset transfer against application of the Sukuk proceeds • Inherent restrictions on use of Sukuk proceeds i. e. limitations on transactions which are Gharar (uncertain), maisir (speculative) or riba-based • Recently, Sharia scholars have been selective in the use of the Mudaraba structure. This has created structural challenges particularly where an obligor has limited assets to contribute 32

Structuring Sukuk Structures • AAOIFI currently recognises 14 types of Sukuk • Most commonly Structuring Sukuk Structures • AAOIFI currently recognises 14 types of Sukuk • Most commonly adopted structures are: • • Sukuk al-Ijara al-Musharaka Sharikat-Melk al-Mudaraba 33

Structuring Sukuk Choice of structure requires consideration of: • • • Availability of unencumbered Structuring Sukuk Choice of structure requires consideration of: • • • Availability of unencumbered assets and optimal asset utilisation Simplicity- issue should be competitive as against similarly priced conventional paper Shari’a acceptability Cost Target size of issue 34

RATING THE SUKUK Why a Rating? p Determine level of risk inherent in a RATING THE SUKUK Why a Rating? p Determine level of risk inherent in a transaction. p To help in the pricing of the transaction. p To help in the marketability of the Sukuk 35

SUKUK RATING ANALYSIS Overall obligor credit profile and standing Risk analysis prior to Issuance SUKUK RATING ANALYSIS Overall obligor credit profile and standing Risk analysis prior to Issuance of Sukuk Screening of assets to be included in the portfolio Diversification of the portfolio Legal insulation of assets from beneficiary bankruptcy Legal Structure Legal insulation from servicer default Credibility and profile of deal participants Seller/Leesee/Servicer/Administrator Trustee (if other than SPV) Integrity of Cash flow sufficiency and mismatches “Internal” Credit Enhancement Direct recourse to Lessee Over-collateralization Cash reserve account(s) Credit Enhancement “Third party” Credit Enhancement Financial Guareantees Ratings 36

RATINGS OF SUKUK Sample of Ratings by S & P Sukuk Beneficiary Issue Amount RATINGS OF SUKUK Sample of Ratings by S & P Sukuk Beneficiary Issue Amount Date Rated Rating Granted Malaysia $ 600 M June 2002 A- IDB $ 400 M August 2003 AAA Qatar $ 700 M September 2003 A+ Bahrain $ 250 M February 2004 A- Saxony – Anhalt Euro 100 M July 2004 AA- Loehmann $ 110 M September 2004 CCC Sarawak $ 350 M November 2004 A- Pakistan $ 600 M December 2004 B+ 37

SUKUK TRADABILITY p AAOIFI Sukuk standard identified 14 types of Sukuk most of them SUKUK TRADABILITY p AAOIFI Sukuk standard identified 14 types of Sukuk most of them can not be traded because underlying assets are debts. p Three (3) of those 14 types of Sukuk are Ijara Sukuk and they can be traded. p Mudaraba and Musharaka Certificates can be traded, but only when majority of underlying assets is tangible assets. p However, these certificates are not desirable by investors because they behave exactly like stocks in terms of RISK and RETURN. 38

GUIDELINES FOR SUKUK ISSUANCE [TRADABILITY] p The security must represent ownership interest in the GUIDELINES FOR SUKUK ISSUANCE [TRADABILITY] p The security must represent ownership interest in the asset being financed. p The level of debt instruments should not exceed 49%. p Tangible assets must at least be 51%. 39

GUIDELINES ON SUKUK ISSUANCE [GUARANTEE] p The security must not be guaranteed by the GUIDELINES ON SUKUK ISSUANCE [GUARANTEE] p The security must not be guaranteed by the underwriter. Similarly the participants (the holders of the security) should not guarantee each other. p Market making to be on best effort basis and subject to prevailing market prices. p It is acceptable for the underwriters to make a general offer to buy back the security but must be subject to mutual agreement and market condition 40

GUIDELINES FOR SUKUK ISSUANCE [GUARANTEE] p p p It is permissible for the underwriters GUIDELINES FOR SUKUK ISSUANCE [GUARANTEE] p p p It is permissible for the underwriters to buy back the security for the nominal value to protect the client from capital loss provided that this has not been a pre-condition or announced at the time of subscription. If the market price is higher than nominal value then the underwriter should buy at market prices. It is acceptable for an independent third party to guarantee the issue but such guarantee must be under a separate agreement. 41

GUIDELINES FOR SUKUK ISSUANCE [OTHER ISSUES] p p p The participant must all share GUIDELINES FOR SUKUK ISSUANCE [OTHER ISSUES] p p p The participant must all share in the risks and rewards equally according to their pro-rata interest in the underlying asset. Expense arising from owing the asset, such as insurance, maintenance cost and taxes should be borne by the participant/owners. Risk of obsolescence/loss of asset must be with the sukuk holders. 42

COMPARISON BETWEEN SUKUK, BONDS AND SHARES SUKUK BONDS SHARES Nature Not a debt but COMPARISON BETWEEN SUKUK, BONDS AND SHARES SUKUK BONDS SHARES Nature Not a debt but undivided ownership share or rights in specific assets/projects/services Debt of Issuer Ownership share in a corporation Asset Backed A minimum of 51% TANGIBLE ASSETS (or their contracts are required back issuance of Sukuk al Ijara) Generally not required Islamic guidelines for shares Claims Ownership claims on the specific underlying assets, project, service……. . Creditors claims on the borrowing entity, and in some cases liens on assets. Ownership claims on the company Security Secured by Ownership rights in the underlying assets or projects in addition to any additional collateral enhancements structured Generally unsecured debentures except in cases such as first mortgage bonds, equipment trust certificates and so on Unsecured Principal and Return Not guaranteed by Issuer Guaranteed by Issuer Not guaranteed by company Purpose Must be issued only for Islamically permissible purposes Can be issued for any purpose Can be offered for any purpose Responsibility of Holders Responsibility for defining duties relating to the underlying assets/projects limited to the extent of participation in the issue. Bondholders have no responsibility for the circumstance of the issuer Responsibility for the affairs of the company limited to the extent of holding in the company. 43

PURCHASE UNDERTAKINGS AND THE AAOIFI GUIDELINES p Early in 2008, the AAOIFI recommended that PURCHASE UNDERTAKINGS AND THE AAOIFI GUIDELINES p Early in 2008, the AAOIFI recommended that Islamic finance market participants should refrain from issuing Sukuk structures that have a purchase undertaking or a guarantee from the Sukuk issuer to repurchase at a specific price at a future date. p AAOIFI believed that this structural mechanism is not compliant with a fundamental principle of Shari'a, namely profit and risksharing. p Guidelines affects Mudaraba, Wakala and Musharaka Sukuk as in these structures the investment manager or issuer cannot provide a purchase undertaking to buy back the Sukuk at par value. p These are investment-driven modes of financing, which are difficult to determine a final valuation (exercise price) figure. 44

SUKUK MARKET ISSUERS INVESTORS Private Institutional Investors Institutions/Companie (FIs) s (including FIs) Governments Fund SUKUK MARKET ISSUERS INVESTORS Private Institutional Investors Institutions/Companie (FIs) s (including FIs) Governments Fund Managers Government Agencies Private Investors Multilateral Development Banks (MDBs) Government Agencies Pension Funds and Insurance Cos. 45

Sukuk al-Ijara Structure Sukuk holders (1) Issue Proceeds (6) Periodic payments/ redemption amount (5) Sukuk al-Ijara Structure Sukuk holders (1) Issue Proceeds (6) Periodic payments/ redemption amount (5) Rentals Issuer SPV (orphan) obligor (4) Lease (3) Sale of asset to issuer SPV (7) Service agency (2) Proceeds (8) Purchase undertakingredemption and acceleration Obligor 46

Sukuk al- Ijara- considerations • • Flexibility- utilisation of existing assets Maturing market- repeat Sukuk al- Ijara- considerations • • Flexibility- utilisation of existing assets Maturing market- repeat structures- symptomatic of a market seeking to create benchmark structures and yield curves Standardisation- legal, regulatory and tax considerations are such that there is no such thing as a repeat deal Due Diligence- Early due diligence for deal viability • • • Whethere any security interests or other third party rights over assets to be sold/leased What regulatory consents, approvals etc. are required for the sale/lease Third party consents Are there any haram components of the assets, e. g. alcohol selling outlets? If so, can they effectively be excluded from the sale? Do documents need to be registered, recorded or filed at any public office or registry? Are any notarial or other fees payable? If significant taxes/fees are chargeable what can be done? Any exemptions available? Can they be mitigated or avoided? Will the issuer agree to pay taxes/fees directly? 47

Sukuk al-Ijara- asset valuation • Valuation of assets: • If the valuation of assets Sukuk al-Ijara- asset valuation • Valuation of assets: • If the valuation of assets has no approximation to the purchase price is the sale legally impaired as a result of creditor protection laws on insolvency • Will the assets match the Sukuk issue amount? • Does the issue have asset ‘versatility’ such that more assets can be brought into the Sukuk asset pool if there is an over-subscription? • Will the sale of real estate (as is usual) require local law to govern the sale transaction • Is the local law creditor friendly 48

Sukuk al-Ijara- Case Study Issuer: Nakheel Development Limited Co-Obligors: Nakheel Holdings 1 LLC, Nakheel Sukuk al-Ijara- Case Study Issuer: Nakheel Development Limited Co-Obligors: Nakheel Holdings 1 LLC, Nakheel Holdings 2 LLC, Nakheel Holdings 3 LLC Guarantor: Dubai World Size: US$3. 52 billion Structure: Sukuk al-Ijara Closing Date: December 2006 Tenor: 3 years QPO Yield: 6. 345% (LIBOR + 120 bps at launch) Non-QPO Yield: 6. 345% + up to 2. 00% p. a QPO Discount: 5% Arrangers Barclays Capital and Dubai Islamic Bank • Innovative US$3. 52 billion pre-IPO convertible Sukuk al-Ijara structure • Largest Sukuk and one of the largest convertible offerings ever executed globally • Listed on NASDAQ Dubai Financial Exchange • Deal was upsized from US$2. 5 bn to US$3. 52 bn, and was priced at 120 bps • Investors not participating in PCFC Sukuk accounted for 33% of the demand 25% of the allocation of this issue demonstrating increased investor demand in Sukuk 49

Sukuk al-Ijara- Case Study • Nakheel Development Limited Structure (Issuer) issues trust certificates to Sukuk al-Ijara- Case Study • Nakheel Development Limited Structure (Issuer) issues trust certificates to a diverse investor base Sukuk Investors • Proceeds of the issue used to purchase a long leasehold interest in property at Dubai Waterfront (Sukuk Assets) from Nakheel Holding 1 LLC Sukuk Proceeds Sukuk • Nakheel 1 then passes capital into Nakheel Co- the corporate vehicle of the Nakheel Group Nakheel Development Limited ‘Issuer’ Payment of Purchase Price Transfer of Sukuk assets Nakheel Holdings 1 LLC (Seller) Funds Nakheel Co. Nakheel Holdings 2 LLC (Lessee • Nakheel Development Limited leases Sukuk assets to Nakheel Holdings 2 LLC under a 3 year lease agreement • Rental from this lease agreement is up-streamed as returns to Sukuk holders • Under the terms of the Servicing Agency Agreement Nakheel 2 is responsible for managing the Sukuk assets on behalf of Nakheel Development • Sukuk Assets held on trust for investors 50

Sukuk al-Ijara- Case Study Structure • SHORT QPO YIELD: Up to 2% per annum Sukuk al-Ijara- Case Study Structure • SHORT QPO YIELD: Up to 2% per annum depending on the value of the subscription rights attributed to the Sukuk holders prior and up to redemption Pre-IPO rights Sukuk Investors Sukuk certificate incorporating Subscription Rights • QPO SUBSCRIPTION RIGHTS ALLOCATION: Upon each QPO launched by any entity of Nakheel Group prior to redemption of the Sukuk, holders of the Sukuk are attributed rights to subscribe for up to 30% of the shares offered in QPO at a price equal to 95% of the QPO price Nakheel Development ‘Issuer’ Subscription Rights Sale Undertaking Look-Back Option • Such rights are limited to an aggregate of 25% of the Sukuk Issue Amount plus 12 months Look Back Right Nakheel Holdings 2 LLC 51

CASE STUDY ONE Your client, UJENZI LIMITED is one of your corporate clients headquartered CASE STUDY ONE Your client, UJENZI LIMITED is one of your corporate clients headquartered in its own multi-storey property. The CFO of the corporation approaches you for business discussions and mentions to you that the company is expanding its activities and that they currently require US$ 50, 000 which the company can repay at the end of 5 years. The corporation’s past financing transactions with the bank have all been done at a pricing of LIBOR+1. 5% p. a. rate which you believe the company would be happy to pay on semi-annual basis in arrears. You are concerned that the bank may not be able to help the corporation as the amount required is beyond its current limit availability with the bank. REQUIRED: Do you think Sukuk could be a solution to the corporation’s requirement? If so please proceed with the deal execution showing the deal structure and taking into consideration all necessary matters including repayment cashflows. NB: As for the transaction pricing, assume that we are entering a globally upward regime and LIBOR will be 5% on closing the deal and will continue to rise semi-annually thereafter 25 bp. 52

Sukuk al-Musharaka Structure Obligor’s Purchase Undertaking Exercise Price Obligor’s capital contribution Sale of ‘units’ Sukuk al-Musharaka Structure Obligor’s Purchase Undertaking Exercise Price Obligor’s capital contribution Sale of ‘units’ Musharaka Issuer/Trustee Periodic Distribution Amounts Dissolution Distribution Amount proceeds Obligor proceeds Sukuk holders 53

Sukuk al-Musharaka- introduction • Musharaka represents a joint enterprise involving 2 or more parties Sukuk al-Musharaka- introduction • Musharaka represents a joint enterprise involving 2 or more parties • Obligor contributes assets into the Musharaka • Issuer contributes Sukuk proceeds into the Musharaka • Musharaka assets are used in accordance with a predetermined business plan • Profit payments are made to the partners in accordance with pre-agreed ratios • Periodic payments made to Sukuk holders through Musharaka profit distributions • Redemption achieved either periodically or bullet by obligor purchasing the issuer’s interest in the Musharaka 54

Sukuk al-Musharaka- considerations • An option where obligor has limited assets • Asset value Sukuk al-Musharaka- considerations • An option where obligor has limited assets • Asset value to issue amount need not equate • 33 -51% of Musharaka assets should be tangible to permit tradability (variation due to Shari’a Scholars’ acceptability criteria) • Allows obligor flexibility to utilize issue proceeds in accordance with business plan 55

Sukuk al-Musharaka – Case Study Issuer: PCFC Development (SPV) Obligor: Ports, Customs and Free Sukuk al-Musharaka – Case Study Issuer: PCFC Development (SPV) Obligor: Ports, Customs and Free Zone Corporation Size: US$ 3. 5 Billion Structure: Sukuk al-Musharaka Type: Floating Rate Note Closing Date: January 2006 Tenor: 2 years QPO Yield: 7. 125% (LIBOR + 200 bps at launch) Non-QPO Yield: 10. 125% QPO Discount: None Arrangers Barclays Capital and Dubai Islamic Bank • First innovative and ground breaking structure of its kind. It is the first Sukuk to be convertible into equity upon an IPO. The Sukuk was targeted in particular at Islamic investors interested in the booming IPO market in the Middle East. • Listed on the NASDAQ Dubai Exchange • Funds used for PCFC’s takeover of UK port operator P&O, though its Dubai Ports World Subsidiary. • Sukuk was oversubscribed more than four times, receiving a total of $11. 4 billion in bids. Issuance increased from $2. 8 billion to $3. 5 billion. • Convertibility – structured it as a convertible Sukuk in anticipation of an Initial Public Offering (IPO). • Up to 30% of the Sukuk can be redeemed into PCFC shares if an IPO goes ahead in the next two years – otherwise, the Sukuk produces a higher yield at redemption, 10. 125% a year rather than 7. 125% • The two partners in the Musharaka structure were PCFC, which contributed $1. 5 billion in kind, and a special 56 purpose vehicle (SPV), PCFC Development FZCO, which contributed the $3. 5 billion raised by the Sukuk.

Sukuk al-Mudaraba OBLIGOR (as Mudarib) Purchase Undertaking OBLIGOR Mudaraba Assets Mudaraba Agreement Proceeds Periodic Sukuk al-Mudaraba OBLIGOR (as Mudarib) Purchase Undertaking OBLIGOR Mudaraba Assets Mudaraba Agreement Proceeds Periodic Distribution Amounts Issuer/Trustee/Rab al-Maal Periodic Distribution Amounts Dissolution Distribution Amount Proceeds Sukukholders Sukuk 57

Sukuk al-Mudaraba - Introduction p Based on “fund” management arrangement p Issuer (as “rab Sukuk al-Mudaraba - Introduction p Based on “fund” management arrangement p Issuer (as “rab al-maal”) invests proceeds of Sukuk with Obligor (as “Mudarib”). p Investment plan in Mudaraba Agreement identifies scope of investments from which returns are generated p Profits from the Mudaraba split between Mudarib and Rab al-Maal. p Mudarib “warrants” an anticipated return from Mudaraba assets; separate and independent purchase undertaking from obligor. 58

Sukuk al-Mudaraba - Considerations p Tax implication on returns generated from invetment and purchase Sukuk al-Mudaraba - Considerations p Tax implication on returns generated from invetment and purchase of Mudaraba. p No “guarantees” can be provided by Mudarib. p Mudaraba accounting and segregation of books. p Shari’a differences. p Now limited use 59

Sukuk al-Mudaraba – Case Study Issuer: Aldar Funding Limited (Jersey incorporated SPV) Obligor: Aldar Sukuk al-Mudaraba – Case Study Issuer: Aldar Funding Limited (Jersey incorporated SPV) Obligor: Aldar Properties PJSC Size: US$ 2. 53 Billion Listing: London Stock Exchange Structure: Sukuk al-Mudaraba Type: Floating rate note Ranking: At least pari passu with any other senior unsecured obligation of Aldar Tenor: 4 years Profit: 5. 767% per annum Premium: 37% Arrangers Barclays Capital, Credit Suisse and National Bank of Abu Dhabi • Aldar’s first capital market transaction since its IPO in April 2005. Third largest equity issue out of the GCC to date. • Deal upsized from US$ 1. 3 billion to US$ 2. 53 billion • Sukuk redeemable into shares of Aldar Properties- 100% or value of underlying shares (paid in share of cash equivalent). Redemption at the issuer’s option from 2. 5 years, subject to a 140% share price trigger. • Proceeds to be used to fund Aldar real estate project developments in Abu Dhabi, UAE. • Legal challenges in restriction of foreign ownership of a UAE corporate. 60 • Broad distribution, and range of investor types subscribing for this issue.

Sukuk al-Mudaraba – Case Study Aldar Prop. PJSC “Mortgagor” 4 Periodic Dist and Sukuk Sukuk al-Mudaraba – Case Study Aldar Prop. PJSC “Mortgagor” 4 Periodic Dist and Sukuk Investors Red Amount 3 Aldar Funding Ltd. “Issuer” 7 Proceeds Mudaraba Profit Distribution Mortgage (1) Proceeds 1 Sukuk (“Certificates”) Purchase and Sale Undertaking Aldar Prop. PJSC “Mudarib” 5 Relevant Exercise Price Mudaraba Assets 6 2 Mudaraba Aldar Prop. PJSC “Obligor” (1) Benefit of mortgage held by local security agent on behalf of issuer • At inception, the proceeds of the sukuk provide the capital of the Mudaraba which are invested according to a Sharia compliant investment plan. Please note that under the Mudaraba the Mudarib is allowed to commingle its own assets with the Mudaravah Assets. • In respect of each quarterly period , 99% of the Mudaraba profit will be distributed to the issuer and 1% to the Mudarib. If the distributable profit payable to the issuer on a Periodic Distribution date is greater than the Periodic Distribution Amount payable to the Sukukholders on that date, the Mudarib is entitled to such excess profit for its own account by way of an incentive payment. • Aldar, acting in its corporate capacity, and not as Mudarib, has agreed to give an undertaking to purchase from the issuer the Mudaraba Assets. Aldar provides the Purchase Undertaking having evaluated the nature of, and anticipated return on, the Mudaraba Assets and the commercial benefit it will receive in acquiring the Mudaraba Assets at the relevant redemption amount. The redemption amount is either paid in cash or share. • The mortgage secures Aldar’s obligations under the Purchase Undertaking and has a minimum value of 120% of the 61 aggregate principal amount of the Sukuk.

Islamic Securitisation p p p Turning a certain cashflow (receivable) into a security which Islamic Securitisation p p p Turning a certain cashflow (receivable) into a security which can be traded Sale by “originator” of cash flow to issuer (SPV) Issuer funds purchase of cash flow with proceeds of bond issue True sale takes assets off-balance sheet originator Originator realizes entire cash-flow immediately Assets sold have better rating than originator Bonds are sold in separate tranches Bankruptcy remote issuer Limited recourse Insolvency risk Primary Shari'a concern – ability to “purchase” and trade in assets which represent debt (i. e. future receivables) Shari'a-compliant alternative is for the issuer to purchase the underlying assets generating receivables (e. g. Shariket Melk/Mudaraba) 62

Islamic Securitisation Structure Security Trustee Holds on trust for Bondholders All Assets Secured A Islamic Securitisation Structure Security Trustee Holds on trust for Bondholders All Assets Secured A Bonds Loan Pool True sale of loans Bondholders B Bonds Issuer Plc SPV C Bonds Originator Borrowers Purchase price for loans Cash Service Liquidity Agreement Liquidity provider Addresses timing Mis-match 63

CASE STUDY TWO You are a bank based in Saudi Arabia and you are CASE STUDY TWO You are a bank based in Saudi Arabia and you are approached by the MD of FATASCO which is a company based in another GCC country and is engaged in automobile rental business. The company owns hundreds of thousands of different motor vehicle types leased out to different clients. All the company’s bank lines are full and, in fact, the company currently needs an urgent financing of about US$ 30 million to settle banking obligations which will be due shortly and also to acquire new vehicles. The management does not also wish to call on its shareholders for additional capital injection. You are of the opinion that the company could float a Sukuk offering which you believe will easily be bought /underwritten by foreign investors. REQUIRED: What additional information may you need and how will you structure the proposed Sukuk? What considerations will you need to take into account? 64

ISLAMIC FINANCE ADVANCED SUKUK DISCUSSION 65 ISLAMIC FINANCE ADVANCED SUKUK DISCUSSION 65

Why? Who? Why Issue Sukuk? p Advantages: - Access to cheaper funding * wider Why? Who? Why Issue Sukuk? p Advantages: - Access to cheaper funding * wider investor base * Higher liquidity -Increase Profile - Flexibility in currency and maturity - Benchmark funding level - Limited Financial covenants - Unsecured p Disadvantages: - If listed and/or offered to the public – disclosure - difficulty in amending terms Parties to a Sukuk Transaction * Obligor * Issuer (SPV)/Trustee * Lead Managers and Co-managers * Sukuk holders * Paying Agents * Clearing Systems * Stock Exchanges 66

Legal Documentation A Sukuk Issuance requires the same basic documentation as a conventional bond Legal Documentation A Sukuk Issuance requires the same basic documentation as a conventional bond issue, but additionally required further documentation for the Shari'a specific transaction from which the Sukuk return is generated. In addition to this a Fatwa (Islamic Pronouncement is also necessary. Capital Market Documents Ijara Structure Islamic Documents Musharaka Structure Islamic Documents Mudaraba Structure Islamic Documents Mandate Letter Purchase Agreement Musharaka Agreement Mudaraba Agreement Prospectus (Preliminary & Final) Lease Agreement Management Agreement Purcahse Undertaking Global Certificate Servicing Agency Agreement Purchase Undertaking Subscription Agreement Purchase and Sale Undertaking Declaration of Trust Paying Agency Agreement Roadshow Presentation Legal Opinion of Issuer’s Counsel Legal Opinion of Underwriter’s Counsel Auditor’s Comfort Letters 67

Listing Considerations Factors to Consider p Pros: - Access to capital - Higher Public Listing Considerations Factors to Consider p Pros: - Access to capital - Higher Public Profile -reassurance for investors - Greater Efficiency p Cons: - Disclosure requirements - Ongoing reporting - Loss or Privacy/Flexibility - Costs and fees - Management time p Primary Exchanges: - NASDAQ Dubai (ex-DIFX) - London - Luxembourg Commercial Consideration - Rating - Costs - Timing (delay/speed) - Market appetite and clear market - Credit - Risk Profile 68

Timetable Mandate Awarded Pricing & Launch Roadshows 4 -8 weeks Approx 1 week Signing Timetable Mandate Awarded Pricing & Launch Roadshows 4 -8 weeks Approx 1 week Signing 2 -3 days Closing 2 -3 days Due Diligence Documentation Negotiated Red herring Prospectus produced Invitation to Prospective underwriters Subscription Agreement signed. Final Prospectus produced Issue of Sukuk and payment to issuer. Execution of all other Documentation. 69

Distributor’s Perspective Bookbuilding - Book building process is usually in the best interests of Distributor’s Perspective Bookbuilding - Book building process is usually in the best interests of issuers - Objective is to bring new investors and regions to funding base - Education of investors interested in Sukuk Distribution - Geographic scope largely on whether or not issue is rated - Rated issue can be taken to multiple international financial centers to ensure wider distribution - Non-rated issue should be primarily marketed in the region of the issuer’s origin to attain right pricing 70

Road shows Considerations p Venues to be agreed with the Issuer p Widest market Road shows Considerations p Venues to be agreed with the Issuer p Widest market coverage with number of sales calls in less than 10 days. p Approvals from regulatory authorities for road shows. p Arranging one-on-one meetings and group meeting. p Keep investors engaged to attain initial order and firm hold positions. 71

Settlement & Financial Close p p p p p Successful road show leading to Settlement & Financial Close p p p p p Successful road show leading to opening the books Taking initial orders and price indication Converting initial orders into firm orders Closing the books Deciding on roles and allocation of Sukuk Closing due diligence call Signing Subscription Agreement Settlement mechanics – “DVP” / “free of payment” Allocations and instructions to clearing systems Issuing Sukuk to investors via clearing systems 72

CARAVAN I IJARA SUKUK Caravan – I Limited – Sukuk Transaction Lease Rent Payment CARAVAN I IJARA SUKUK Caravan – I Limited – Sukuk Transaction Lease Rent Payment True Sale of Assets Originator Pay for Purchase of Assets Lease Assets Purchases Issue Sukuk SPC Onshore SPV Offshore Funds Lease Assets Payments Obligors Notes Payment of Issue Funds for purchasing Sukuk Kingdom of Saudi Arabia Offshore Investor 73

TAMWEEL PJSC IJARA SUKUK Purchase Price USD Tamweel PJSC (Originator) Rent of Property Collections TAMWEEL PJSC IJARA SUKUK Purchase Price USD Tamweel PJSC (Originator) Rent of Property Collections AED Rental payments AED Tamweel Properties (1) Limited Sale of properties and leases Sale of certain assets acquired and beneficial interest in the properties owned by TPL Lessee USD Purchase Price Class A USD Interest and principal USD Drawings Reserve Fund Class B Reserve Fund USD Issuance Proceeds Class C Class D USD Release Deferred Purchase Price Escrow Account AED Liquidity Facility USD Liquidity Facility Standard Chartered Bank Morgan Stanley & Co. International Limited 74

JAFZA MUSHARAKA SUKUK 4 Sale Undertaking Purchase Undertaking JAFZA JAFZ Sukuk Limited Musharaka Agreement JAFZA MUSHARAKA SUKUK 4 Sale Undertaking Purchase Undertaking JAFZA JAFZ Sukuk Limited Musharaka Agreement (Obligor/Managing Partner) Management Agreement (Trustee/Issuer) Asset Contribution 4 2 Periodic Profit Payments + Sukuk Redemption SUKUK 1 Sukukholders (Investors) Cash Proceeds Cash Contribution 2 (b) (a) 4 MUSHARAKA Share of Musharaka Profit Periodic Returns 4 3 Investment as per Business Plan MUSHARAKA Business Asset/ Cash flows Agreements/Undertakings 75

SUN FINANCE MUDARABA SUKUK Transaction Structure Infrastructure Fund AED {1. 585} m + {150} SUN FINANCE MUDARABA SUKUK Transaction Structure Infrastructure Fund AED {1. 585} m + {150} m Liquidity Reserve AED {84. 30} m Senior Expenses Reserve AED {6. 85} m HEDGE COUNTERPARTY Cumulative EIBOR Cap Transfer of title of Plots and assignment of benefit of PSPAs as Mudared Assets PROPCO (Sorouh Abu Dhabi Real Estate LLC) as Mudareb SOROUH (Sorough Real Estate PJSC) Consideration for acquisition of Use of part of Mudared Profit Mudaraba Assets Entry into Plot Sales & Purchase Agreements (PSPA) Obligation to develop Infrastructure Investment of Sukuk Certificate proceeds (Sun Finance Limited) as Rabb-ul-Maal and Trustee for Certificate holders Issuance proceeds of Sukuk Certificates AED amounts due if cumulative EIBOR amounts exceeds AED {330} m Distribution of Rabb-ul-Maa Profitl TRUSTEE/ISSUER OBLIGORS/REDs/ Sub-Developers Hedge Premium Profit Payments and Amortization Payments CERTIFICATE HOLDERS Sale of Beneficial interest in Mudaraba assets Purchase price under Purchase Undertaking which will match Profit Payments and Amortization Payments due on Sukuk Certificates PROPCO (Sorouh Abu Dhabi Real Estate LLC) in its own capacity 76

Synthetic Securitization SUKUK MAY BE STRUCTURED AS True Sale Securitization ASSET BASED ASSET BACKED Synthetic Securitization SUKUK MAY BE STRUCTURED AS True Sale Securitization ASSET BASED ASSET BACKED UNSECURED Have no legal asset ownership by Sukukholders SECURED Have a legal asset ownership by Sukukholders DEPENDENT ON ORIGINATOR’S ANALYSIS IN VIEW OF REPURCHASE UNDERTAKING DEPENDENT ON ASSET ANALYSIS IN VIEW OF THE RELIANCE ON THE ASSETS IN THE EVENT OF ORIGINATOR LIQUIDATION SUKUK OBLIGATION WILL BE PLACED IN PARI PASSU WITH OTHER SENIOR UNSECURED DEBT OBLIGATIONS OD COMPANY IN THE EVENT OF ORIGINATOR LIQUIDATION SUKUK OBLIGATION WILL RELY ON THE ASSETS WHICH ARE TRULY SUPPOSED TO BE HELD BY SPV IN BANKRUPTCY REMOTENESS 77

ASSET BASED SUKUK • Almost all of Sukuk issued so far are of asset ASSET BASED SUKUK • Almost all of Sukuk issued so far are of asset based (unsecured) type and the risk the investors take is that of the Borrower. • Almost all of these Sukuk issuances are “asset based” purely for the purposes of enabling Shari'a compatibility. However, transactions risks rely on borrower standing and performance. • Thus, risk is more borrower driven and not on real legal asset ownership by Sukuk holders. • Accordingly, most Sukuk structures so far issued are unlikely to survive insolvency of Borrower. • Investors in these instruments are fully aware of the facts and appear to be comfortable with taking borrower risk. 78

Sukuk Documentation Counterparties in Sukuk The Sukuk Assets SUKUK ISSUANCE PERSPECTIVE SPV Details Dealing Sukuk Documentation Counterparties in Sukuk The Sukuk Assets SUKUK ISSUANCE PERSPECTIVE SPV Details Dealing with the Risks in Sukuk Rating Sukuk Tradability Launching a Sukuk product 79

SUMMARY OF A TYPICAL SUKUK LAUNCHING PROCESS DEAL ORIGINATION, STRUCTURING, VIABILITY, SALABILITY (Through Market SUMMARY OF A TYPICAL SUKUK LAUNCHING PROCESS DEAL ORIGINATION, STRUCTURING, VIABILITY, SALABILITY (Through Market Appetite soft testing APPOINTMENT OF THE LEGAL FIRMS FOR THE TRANSACTION, MANDATES SIGN OFF MLA APPOINTMENTS INFORMATION MEMORANDUM AND DOCUMENTATION PREPARATION PERFECTION OF SHARIA REQUIREMENTS TRANSACTION LAUNCHING, BOOK BUILDING, PRICE DETERMINATION AND DEAL CLOSING FULFILLMENT OF ANY CONDITIONS PRECEDENT AND FUNDING OF DEAL PERFORMANCE MONITORING AND FINAL REDEMPTION 80

MAIN DOCUMENTS TO AN ASSET-BASED IJARA SUKUK TRANSACTIONS p p p p Declaration of MAIN DOCUMENTS TO AN ASSET-BASED IJARA SUKUK TRANSACTIONS p p p p Declaration of Trust Purchase Agreement Master Ijara Agreement Sale Undertaking Purchase Undertaking Service Agency Agreement Sharia Pronouncement (Fatwa) Prospectus 81

DEALING WITH RISKS IN SUKUK “Risk has no Religion” 82 DEALING WITH RISKS IN SUKUK “Risk has no Religion” 82

DEALING WITH RISKS IN SUKUK Secured (asset backed) Sukuk are largely dependent on the DEALING WITH RISKS IN SUKUK Secured (asset backed) Sukuk are largely dependent on the risk analysis of the assets while unsecured (asset based) Sukuk ratings are dependent on the credit standing of the borrower. p Accordingly, the majority of current Sukuk issuances are not true securitizations as they are not asset-backed. p Hence, the credit risk of most Sukuk issuances is comparable to conventional bonds and , therefore, conventional methods of credit analysis are applied to Sukuk. p However, no Sukuk financing structure have (so far) been tested in a stress of default scenario. p 83

DEALING WITH RISKS IN SUKUK ASSET RISK COUNTRY RISK CREDIT RISKS IN SUKUK LEGAL DEALING WITH RISKS IN SUKUK ASSET RISK COUNTRY RISK CREDIT RISKS IN SUKUK LEGAL RISK CURRENCY RISK THIRD PARTY RISK 84

FORMS OF CREDIT ENHANCEMENT p A credit wrap by a third party which undertakes FORMS OF CREDIT ENHANCEMENT p A credit wrap by a third party which undertakes to step in to meet the obligations of the SPV to investors if the SPV is unable to do so. p A third party, such as a well rated bank may provide a letter of credit that promises to cover losses of the SPV upto a maximum amount. p Insurance cover may be taken out on the underlying assets of the Sukuk transaction. 85

FORMS OF CREDIT ENHANCEMENT - 2 p A cash reserve (Cash Collateral) may be FORMS OF CREDIT ENHANCEMENT - 2 p A cash reserve (Cash Collateral) may be created where part of the Sukuk proceeds are maintained to absorb losses which may arise as a result of cashflow delays and/or defaults. p Over-collateralization where the value of the underlying pool of assets may exceed the value of the issued Sukuk. 86

COSTS ASSOCIATED WITH SUKUK ISSUANCE Pre-issuance costs: p Structuring /Arrangement Fees p Legal, Accounting COSTS ASSOCIATED WITH SUKUK ISSUANCE Pre-issuance costs: p Structuring /Arrangement Fees p Legal, Accounting and Tax advice fees p Rating agencies’ fees p SPV establishment costs p Credit enhancement expenses Post-issuance costs: p Cost of Financing p Annual Audit costs p Insurance expenses p SPV maintenance expenses p Annual audit costs 87

CASE STUDY THREE Your Client, NEPKEN REALTY LIMITED approaches you for a discussion about CASE STUDY THREE Your Client, NEPKEN REALTY LIMITED approaches you for a discussion about financing a shopping mall and you agree with the following terms for the transaction: Total Construction Cost : US$ 100, 000 Customer Contribution : The project land 30% of construction cost Required Financing : 70% funding for the construction Financing Margin on first : 6 month LIBOR + 1. 5% p. a. (Assume that LIBOR will be 5. 00% PPC payment date and will increase 10 bps on every PPC payment date Construction Grace Period days) and semi-annually thereafter) : 18 months (Payments to the contractor will be made every 60 Grace Period : Customer shall not make any financing repayments during the construction period. Repayment Period : 5 years Repayment Structure : Equal semi-annual repayments in arrears. REQUIRED: Discuss how a Sukuk financing may be completed for the transaction including the repayment structure. 88

CASE STUDY FOUR p The treasurer of a local municipality approaches you with a CASE STUDY FOUR p The treasurer of a local municipality approaches you with a financing proposal for constructing a major bridge. p The only asset available from the council is the land on which the bridge is to be constructed. How may you assist the client through a Sukuk offering? 89

CASE STUDY FIVE p p p HALATEL is a start up company which has CASE STUDY FIVE p p p HALATEL is a start up company which has recently been licensed to provide GSM mobile services. The company intends to go for an IPO in two years’ time but would like to start its activities immediately because of the high demand for such services in the country. As the proprietor of VENTURE INVESTMENTS LIMITED (VIL), you are approached by the MD of the company to discuss his requirement for 30 M (local currency) Islamic financing mainly as working capital to start off the company. Your assistant is of the opinion that this could be a perfect case for convertible Sukuk issuance. REQUIRED: Do you agree assistant’s view? If so how would you proceed? 90

CASE STUDY SIX Rolla Airways in Nepal is undergoing a huge growth phase particularly CASE STUDY SIX Rolla Airways in Nepal is undergoing a huge growth phase particularly as the company continues to serve the large Nepalese expatriate community in the GCC countries. The company currently needs about US$ 100, 000 as part of its expansion plans but its local credit lines are full. The financial director of the company approaches you as an institution based in the GCC for advice. REQUIRED: Do you think a Sukuk issue would be helpful for the company? If so how may you proceed and what may be done to mitigate any inherent risks? 91

CASE STUDY SEVEN The government of Azerbaijan is planning to tap foreign funding to CASE STUDY SEVEN The government of Azerbaijan is planning to tap foreign funding to finance crude oil sales against confirmed reputable overseas off-take agreements. REQUIRED: How could Sukuk be structured to assist the country? 92

CASE STUDY EIGHT Muslims who are a minority in a foreign country are in CASE STUDY EIGHT Muslims who are a minority in a foreign country are in dire need of Shari'a compliant funding for mortgage financing. A new Islamic Finance institution formed there recently by some entrepreneurs approaches you for a discussion as to how they may raise funding for their mortgage activities. REQUIRED: Do you think a Sukuk offering could help the situation? 93

CASE STUDY NINE The CFO of an Islamic Bank approaches your bank for discussions CASE STUDY NINE The CFO of an Islamic Bank approaches your bank for discussions about raising long term funding on the basis of their balance sheet even though the bank does not have tangible (fixed) assets sufficient enough to cover the amount of financing required. REQUIRED: What advice could you offer the bank? 94

THE GLOBAL ISLAMIC INVESTMENTS LANDSCAPE Infrastructure Investments Venture/Capital Private Equity SUKUK Leasing Property Trade THE GLOBAL ISLAMIC INVESTMENTS LANDSCAPE Infrastructure Investments Venture/Capital Private Equity SUKUK Leasing Property Trade Finance Commodity Morabahas 95

CONCLUSION p Sukuk has witnessed a large growth rate in issuances in past few CONCLUSION p Sukuk has witnessed a large growth rate in issuances in past few years. p Many governments, corporate and financial institutions are tapping into this investor pool. p Current ‘Credit Crunch’ affecting marketability of Sukuk. p Variety of Sukuk structures being developed. p Development of Project Finance Sukuk. p Islamic securitizations and associated structured products are an area of potential growth. 96