UNTAPPED POTENTIAL

Sukuk value and volume have consistently grown in the last five years… but plunged in 2013

2 1 04

47 4056 49

115

183

150

183

231

257

429

531

713

552

0

100

200

300

400

500

600

700

800

0

20

40

60

80

100

120

140

160

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD Q3

2013

# Issues$ billionGlobal AGGREGATE SUKUK HISTORICAL TREND (1996 - Q3 2013)

Amount Issued Number of Issues

This collapse was mostly driven by U.S. Fed idea of tapering its stimulus package in May 2013 sending bond yields up around the world, and making it less attractive to issue debt..

0

1

2

3

4

5

6

1-Jan 16-Jan 31-Jan 15-Feb 2-Mar 17-Mar 1-Apr 16-Apr 1-May 16-May31-May 15-Jun 30-Jun 15-Jul 30-Jul 14-Aug 29-Aug 13-Sep 28-Sep 13-Oct

YTD (OCT 2013) JPMORGAN GLOBAL AGGREGATE BOND INDEX VS HSBC/NASDAQ DUBAI US DOLLAR SUKUK INDEX

JPM GABI SKBI

16-May: First Hint of tapering by the FED

September US Jobs data below forecasts

MENA issuance stood at 51% of global in 2006 & was at 23% in 2013…

22,561

37,039

20,316

33,790

50,368

79,180

133,231

114,280

11,42119,061

8,298 8,162 7,776

19,73425,106 26,442

51% 51%

15%

19%

23%

0%

10%

20%

30%

40%

50%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2006 2007 2008 2009 2010 2011 2012 2013

Global (Mn$) MENA (Mn$) MENA%

Sukuk issuance grew from $22bn in 2006 to $133bn in 2012, MENA’s share

of total issuance declined over the years..

Outstanding Sukuk globally currently stands at $270bn of which $80 are in MENA!

80.8230%

189.9370%

Outstanding Sukuk Market (Bn$)

MENA Other

37,648

24,196

13,565

4,074

869 130 130 1200

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Saudi Arabia

UAE Qatar Bahrain Kuwait Sudan Oman Jordan

Distribution of Outstanding Sukuk in MENA (Mn$)

Mn$

Saudi Arabia managed to become the

world’s second largest issuer of Sukuk

MENA/GCC accounts for 30% of

outstanding global Sukuk market

In 2013, only MENA’s GCC states sold sukuk, Saudi Arabia led, Oman joined…

15,215

7,116

2,3491,589

130 44

20

13

9

24

12

0

5

10

15

20

25

30

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Saudi Arabia UAE Qatar Bahrain Oman Kuwait

Mn$ No of Issues

Absence of non-GCC issuers in 2013..

Yet, historically, UAE is still the largest issuer in MENA, followed by Saudi Arabia

49,463

46,525

23,792

14,413

2,984251 221 130 120

7670

24

279

22

2 2 1 1 0

50

100

150

200

250

300

0

10,000

20,000

30,000

40,000

50,000

60,000

UAE Saudi Arabia

Qatar Bahrain Kuwait Yemen Sudan Oman Jordan

All-time MENA Sukuk Issuance (Mn$)

Mn$ No

Financial services and real estate top charts after governments.. Oil and gas lag behind

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Governmental Institutions

Financial Services

Real Estate

Transport

Power and Utilities

Oil and Gas

Construction

Food and Beverages

Telecommunications

Leisure and Tourism

Conglomerates

Education

Mining and Metals

MENA Sukuk Issuance by Sector – All to date

Mn$

Oil and gas sukuk issuance is not proportional to the size of the sector

in the region…

At 48%, MENA international sukuk is well above the world’s average of 15% out of total (2013 figures)

114,280

26,442

17,58812,750

15%

48%

0%

10%

20%

30%

40%

50%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

Global (Mn$) MENA (Mn$)

Total (Mn$) International (Mn$) % of Int'l

GCC issuers more often look into international markets while Asian

sell more domestically >> domestic sukuk market

underdeveloped/underserved in the MENA..

In 2013, MENA Stock Exchanges grabbed 12 listings out of 53 listings globally.. mostly by Nasdaq Dubai.. Irish SE grabbed most globally

15

98

5

0

2

4

6

8

10

12

14

16

0

2,000

4,000

6,000

8,000

10,000

12,000

Mn$ No

Most of the Sukuk listed on Nasdaq Dubai are by UAE issuers, will

the trend change with IDB, and other issuers listing on Nasdaq

Dubai

Most of the listed MNEA issuers list on international stock exchanges such as ISE & LSE, but Nasdaq Dubai managed to attract some… (2013 figures)

12

9

3

1

2

11 1

0

2

4

6

8

10

12

14

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Irish SE Nasdaq Dubai

London SE Saudi SE Bursa Malaysia

Dubai FM Bahrain SE Muscat SM

Mn$ No

The Saudi Model

From a dormant issuer to a key player in the

market – GACA set the pace

Second largest issuer of sukuk in 2013 worldwide n

after Malaysia!

Diversity in issuers profiles: banks, oil & gas, real

estate and construction, agriculture and food..

Mostly domestic and in SAR, yet some

international sukuk

Way to go in terms of liquidity and trading

The UAE Model

• UAE maintained a spot among world’s top issuers

despite the credit crunch and global financial crisis

• Mostly skewed towards financial services (banks) –

followed by real estate, power and oil & gas

• Quasi-sovereign but not federal or sovereign or

government sukuk! >> area to develop

• Private-sector credit growth in the UAE is expected

to accelerate between 2014 and 2020

DUBAI – THE HUB

• HH Sheikh Mohammed’s initiatives to give big push

to the Sukuk market: more issuance, better

regulatory framework, more facilities, encourage

listing and boost trading!

• Dubai Expo 2020 is expected to leave a positive

impact

• Innovative structures

• DFM and Nasdaq Dubai initiatives supportive

The Omani/Kuwaiti Models

KUWAIT – Defaults Hurt

Kuwaiti companies started well, witnessed few

defaults and now rarely sell sukuk

We have not seen any new initiatives from the

regulators

OMAN – Cautious Approach

Started by regulating the industry -

First corporate sukuk in 2013

Oman sovereign sukuk anticipated

The Qatari Model

In March 2013, central bank began quarterly issues

of riyal-denominated government bonds and sukuk,

with maturities of three and five years

In June 2013, Qatar started trading government

bonds & sukuk – a step expected to deepen debt

market

Maintaining a spot with huge issuances from either

the government or the private sector once a year

QSE announced few initiatives, any follow up?

Will World Cup 2022 drive growth?

The Bahrain Model

One of the oldest issuers in the region and the world

Constantly selling the Short-term Ijara Sukuk and Al Salam

sukuk (24+ issues a year)

Occasionally selling 6-months or 12-months paper

Corporate issuance declined

In December, the central bank formally combined existing

rules for issuing and listing financial securities, including

sukuk, in an effort to make the process more efficient The

incorporation of an issuing agent or special purpose vehicle

for sukuk will not take more than 48 hours from the time

offering documents are approved, whether for local or for

international sukuk issuance

Other MENA countries’ baby steps…

Morocco: The government adopted in January

2014 a bill regulating Islamic banks and sukuk, law

yet to be approved

Egypt: Egypt's financial regulator is expected to

submit new rules to the government in 2014 to

facilitate issuance of sukuk as part of a capital

market law – political hurdles preventing

development

Tunisia: huge potential – untapped potential

If current trends continue, demand-supply gap for sukuk will taper of by 2018 to reach $187 billion

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$ bln SUKUK DEMAND & SUPPLY LEVELS (2013 - 2016)

Total Global Sukuk Matured Total Global Sukuk Issued Total Outstanding Global Sukuk Total Sukuk Demand

Supply & Demand Gap: Despite the huge

sukuk issuance growth in 2012, the market was

still undersupplied. However, despite the plunge

in 2013, sukuk market growth rates are

expected to return to a steady growth

Many emerging and frontier markets are paving the way for sukuk market development by first establishing suitable regulations…

2.89

3.00

3.31

3.00

2.88

3.42

4.46

2.22

2.76

2.84

2.91

3.17

3.19

4.07

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Nigeria

Egypt

Tunisia

Libya

Azerbaijan

Morocco

Oman

BUY SIDE - Preference SELL SIDE - Expectation

Which of the following emerging markets is the most attractive for sukuk

investment/issuance?

Lead arrangers and issuers believe the main reason for issuing sukuk is to diversify their sources of funding as investors mostly invest in sukuk due to Shariah requirements

54.0%

11.1%

20.6%

14.3%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%

Religious mandate to only invest in Islamic instruments

Opportunistic

Diversification

Yield

BUY SIDE: what is your primary reason for investing in sukuk?

3.7%

14.8%

14.8%

22.2%

44.4%

0% 10% 20% 30% 40% 50%

Restructuring

Refinancing

Cheaper funding and better pricing

Business Expansion

Diversify source of funding

SELL SIDE: What is your most common reason for sukuk issuance?

Lead arrangers and investors agree that global market interest rates are the most important factor affecting sukuk pricing

2.7

3.1

2.7

2.7

2.3

2.4

3.1

3.7

4.1

2.6

2.6

2.8

2.8

2.8

2.9

3.0

3.2

4.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Size of sukuk

Type of market (international or domestic)

Purpose of sukuk issuance

Type of sukuk - asset-based or asset-backed

Investor business structure/diversity

Type of currency

Type of issuer

Sukuk rating

Global market interest rates

The most important factors based on their significance to sukuk pricing

BUY SIDE SELL SIDE

While liquidity and tradability are still considered the main issues causing the price gap between sukuk and bonds

8.7%

8.7%

13.0%

69.6%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

Sukuk paper scarcity

Sukuk structure

Sharia non compliance risk

Liquidity & Tradability

SELL SIDE: What drives the price gap between sukuk and bond?

Things to watch

• Are we going to see more synergy between SEA

and GCC standards?

• More cross-border sukuk? Will non-MENA issuers

tap MENA markets?

• Malaysian or Turkish issuers list on Nasdaq Dubai?

• Oman to emerge as new hub?

• Will Egypt, Libya, Morocco, Tunisia and other

states join the club anytime soon?

• Will Dubai initiatives work out?

Things to watch

• How will Expo 2020 and FIFA 2022 affect the

market?

• How will QE2 affect sukuk issuance in the region?

• Are we going to see retail Sukuk anytime soon in

the MENA?