••• a global think tank for the Islamic

finance industry

UK & European Real Estate Investment & Finance Forum, London, November 22, 2006

Dr Adnan Aziz

Product Manager, Dar Al Istithmar

An Overview of Sukuk: Size, Basics and the Role of Sharia Advisors

2

Plan

A brief look at the existing market (5 minutes)

Basics of Sukuk and how to structure them? (7 minutes)

Role of Sharia Advisors in structuring of Sukuk (1 minute)

Sukuk in the context of UK and Europe (1 minute)

3

Overview of the market (1/6)

Size of Sukuk Issued (2000 - 2006) in bil $

5.95, 14%

37.49, 86%

Sovereign

Corporate

4

Overview of the market (2/6)

Total Number of Sukuk Issues (2000 - 2006)

28, 11%

235, 89%

Sovereign

Corporate

5

Overview of the market (3/6)

Sukuk Issues: Year and Issuer Breakdown

0

2

4

6

8

10

12

14

16

18

2000 2001 2002 2003 2004 2005 2006

Years

Billion $

Sovereign

Corporate

Total

Sovereign 0 0.25 0.8 1.2 1.5 0.7 1.5

Corporate 0.34 0.53 0.02 4.5 5.5 11.1 15.5

Total 0.34 0.78 0.82 5.7 7 11.8 17

2000 2001 2002 2003 2004 2005 2006

6

Overview of the market (4/6)

Leading Sovereign Issuers

0

2

4

6

8

10

12

14

16

18

Bahrain Malaysia Brunei Pakistan UAE Qatar Germany

7

Overview of the market (5/6)

Leading Corporate Issuers

197

189 7 6 5 2 1 1 1

0

50

100

150

200

250

Malaysia Indonesia UAE SaudiArabia

Kuwait Bahrain UK Qatar Brunei USA

8

Overview of the market (6/6)

Some of the leading Lead Managers are:

Commerce International Merchant Bank Berhard (CIMB)

HSBC Amanah

Dubai Islamic Bank

AmMerchant Bank Berhard

Aseambankers Malaysia

Central Bank of Bahrain

Citigroup

Bahrain Monetary Agency

9

Basics of Sukuk (1/4)

Sukuk is popularly known as an Islamic or Sharia compliant ‘Bond’ whilst

in actual fact, it is an asset-backed trust certificate.

In its simplest form Sukuk is a certificate evidencing ownership of an

asset or its usufruct.

The Sukuk structures rely on the creation of a Special Purpose Vehicle

(SPV).

SPV would issue Sukuk certificates which represent for example the

ownership of an asset, entitlement to a debt or to rental incomes or even

accumulation of returns from various Sukuk (a hybrid Sukuk).

The return provided to Sukuk holders therefore come in the form of profit

from a sale, rental or a combination of both.

Sukuk could be based on Mudaraba, Musharaka, Murabaha, Salam,

Istisna, Ijara or hybrid of these.

10

Basics of Sukuk (2/4) Difference between conventional bond and Sukuk

– In its simplest form, a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal.

– In comparison, under Sukuk structure the Sukuk holders each hold an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.

Similarities between conventional bond and Sukuk

– Marketability: Sukuk are monetised real assets that are liquid, easily transferred and traded in the financial markets

– Rateability: Sukuk can be easily rated

– Enhanceability: Different Sukuk structures may allow for credit enhancements

– Versatility: the variety of Sukuk structures (as many as over 27 possibilities) allow for: structuring across legal and fiscal domains, fixed and variable income options etc.

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Issuing of Sukuk involves a number of steps like;

– Preparing a detailed feasibility study (stating clear objectives to be achieved from the proposed Sharia-compliant business) and setting up of general framework and organisational structure to support the issuance process;

– Working out an appropriate Sharia structure to achieve the set objectives in compliance with Sharia;

– Arranging lead manager (s) to underwrite the Sukuk issue;

– Arranging legal documentation around the agreed Sharia structure (both from the Issuer’s as well as arranger’s perspective);

– Setting up the SPV to represent the investors (Sukuk holders); and

– Putting the Sukuk into circulation.

Basics of Sukuk (3/4)

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Basics of Sukuk (4/4)

SPV

Sharia-compliant underlying business

Sharia Agreement

(e.g., Musharaka)

Sukuk Holders

(Investors)

Party requiring finances

(1)

Investments

(1)

Sukuk issued

Returns (as agreed in Sharia

Agreement)

Returns (as agreed in Sharia Agreement)

(2) (2)

(3)(4) (4)

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Sharia advisor (Sharia scholars or Sharia advisory firms with

recourse to Sharia scholars) have a significant role to play.

Amongst others, following may be listed as examples:

– Advising on proposed Sukuk structure and suggest a Sharia structure which otherwise fulfils the set economic aims;

– Working closely with legal counsel of the issuer to ensure that the legal documents are in line with Sharia requirements;

– Working closely with legal counsel of the arranger to ensure that the legal documents are in line with Sharia requirements;

– Issuing Fatwa on the whole Sukuk deal before the same can be put into circulation.

Role of Sharia Advisors in Sukuk

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UK is all set to introduce new framework to support the issuance

of Sukuk, through parliamentary legislation. Treasury minister, Ed

Balls, has been quoted in media recently:

“We are looking to place domestic Sukuk on the same footing as

conventional products”

It is indeed an encouraging step by the UK. But it is important that

such a framework is designed involving industry practitioners with

experience in Sukuk issues.

In sum, future of Islamic finance (including Sukuk) is becoming

more and more viable in the UK and wider europe.

Sukuk in the context of UK and Europe

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Thank You!