the Globalisation of islamic finance

Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2012 by Standard & Poor’s Financial Services LLC. All rights reserved.

The Globalisation of Islamic Finance: Connecting the GCC with Asia and Beyond

Exploring the Opportunities and Challenges for Regional Models –a Global Perspective

Tuesday, 25th September 2012


Welcome & Overview

• Dominic CrawleySenior Managing Director, Global Head of Financial Services

• Stuart AndersonManaging Director and Regional Head Middle East


S&P Islamic Finance Conference

Dr. Saleh Jameel MalaikahChairman, RUSD Investment BankSeptember 25,2012

Setting the Scene …

It these moments of doubt and blurred visibility, amplified by the debt crisis in the West, the Asian economy continues to emerge at a phenomenal pace.

It is also anticipated that emerging markets would account for 41% of global GDP by 2015. (The Next Frontier, IFN Oct. 2011)

China, India, Singapore, Hong Kong, Malaysia, UAE, Saudi Arabia and Indonesia are set to grow by at least 4% in terms of GDP in 2012.

All the above markets are or will be hotspots for Islamic Finance.

Comparison between Islamic & Conventional Finance Industry

Despite significant growth over the past decade and achieving a significant milestone of US$ 1 trillion Islamic Finance Industry is virtually insignificant compared to conventional financial industry standards

A conventional bank with total assets about US$ 800 billion would rank around 30th in the list of largest banks in the world

Hence there is no competition in real terms between conventional finance and Islamic Finance Industry

GCC Accounts for two-thirds of global Islamic AssetsMalaysia leads in terms of industry maturity & sophistication

Islamic Finance : A Global View

Potential Target Market

For Islamic Funds

Growth Engine

Awakening

Ripe for Growth

Future markets

Fundamental Statistics of Islamic Finance

Islamic Finance Assets, according to Global Islamic Finance Report of 2011, stand at 1.14 trillion.

Islamic Finance grew at a compounded annual rate of 15-20% over the past decades

Expected to cater to growing Muslim population of 2.5 billion by 2020

# of Islamic Financial InstitutionsCountries of PresenceGlobal Islamic Assets (billion) Expected Growth RatePotential Market Size (billion)

27575US$ 1,000 *15-20%4,000

* Does not include Islamic Funds with Private Banking

Islamic Finance Is Likely To Advance On Firm Growth & Widening Geographic Reach… Standard & Poor Islamic Finance Outlook 2010

Pipeline for upcoming sukuk is robust and interest is increasing from issuers in both Muslim & Non Muslim Countries

Islamic Banks in GCC has achieved Critical Mass & Expansion is Set To Continue

Growth in Islamic Banking is Outstripping Growth in Conventional Banking Assets

Turkey a new entrant in Islamic Finance but with a huge potential….

Although, new to Islamic Finance, Turkey is another market where Islamic Banks are thriving. Asya Bank in fact recently went to the market to raise $300 million in a Murabaha (cost-plus financing) syndicated loan.

Participation Bank, the Turkish subsidiary of Bahrain-based Al Baraka Banking Group, has concluded a record Islamic finance deal in Turkey worth $450 million with the participation of a group of major international banks.

Turkish bank Kuveyt Turk plans to launch Germany’s first full-fledged Islamic bank, aiming to tap into demand for ethical finance in the wider population as well as within Europe’s second-largest Muslim community.

Turkey has recently raised $1.5 billion through its debut sovereign sukuk. The issue was significantly over-subscribed, with the book size closing at over $8bn which reflects the huge demand for US denominated Sukuk in the international market.

Effect of Arab Spring – New Markets Opening Up Tunis, Libya have undergone and witnessed extraordinary changes in the

political arena and new governments in all these countries are actively considering or even promoting Islamic Banking & Finance.

Tunisia has also been a slow starter. Until recently there has been only one Islamic Bank but the situation will not remain the same in the long term since there is a strong demand for Islamic Financial system and products and I can confidently vouchsafe this since I have been acting as a Chairman for a Tunisian Bank for six years. Already, the Central Bank in Tunisia has initiated the homework by making preparations for drafting of rules and regulations pertaining to Islamic Banking.

In Libya, National Transitional Council will soon review a proposal on Islamic Banking Regulations. At the same time Egypt is considering issuance of a Sovereign sukook.

Demand for Islamic finance is not only coming from Muslim countries but also from non-Muslim ones as well.

Interestingly, Indeed, some non-Muslim countries are aiming at becoming the hub for Islamic finance. Hongkong for example aspires to be an Islamic finance gateway to China, while the UK aims to entrench London as a global gateway for Islamic finance. Last but not least, Singapore also aspires to be the main center for Islamic finance in Asia.

Due to rapid growth, Islamic Finance has now been noticed at the Global Financial centers. However, there is a strong demand for Islamic Finance from the developed & emerging markets. We have seen a full fledge Islamic Bank setup in UK in 2004 and an Islamic Bank has been set up in Germany. However, I believe GCC would be playing a major role in removing the road blocks faced by industry.

Singapore – A Case Study of Success and Determination

Also, with the enactment of the Banking Act in 2005, it has better placed the Monetary Authority of Singapore (MAS) in assisting the growth and development of Islamic finance in the country. In addition, MAS has also revisited its tax framework to ensure that Islamic finance and banking products will not be adversely impacted by conventional finance and banking practices in Singapore.

Accommodating this fast-growing industry within its existing regulatory and supervisory frameworks has led to agreeing to the creation of special branches based on the Shari’ah law – namely Islamic windows or Islamic banking units. This is clearly evident since 1998 where a few banks have implemented a dual banking system within their operations by providing Shari’ah- compliant services through Islamic windows.

In 2009 MAS issued guidelines on the application of its banking regulations to Islamic Finance and new regulations permitting banks to conduct Murabaha interbank placements.

Although a relatively new player with a small domestic market, Singapore is nevertheless a regional financial hub. Thus it can leverage on its internationally recognized financial status and strong banking fundamentals to build a niche for itself in the rapidly growing market.

Takaful – An Area yet to be explored to its full potential…

Takaful Industry is likely to reach $12 billion in contributions with estimated growth @ 31.0% to double by year 2025.

Takaful industry is only 1.0% of the global insurance market even though Muslims make up to 20% of global population.

Hence, Takaful still remains a low penetrated, huge potential market.

Lot of Untapped Potential

It is estimated that 80% of Islamic finance assets are in GCC which comprise 6% of the Muslim population.

Increasing acceptability of Islamic Banking in Europe with UK standing out as the main European Hub

With over 5 million muslims in France there is an increasing demand for Islamic products in the region.

Islamic Finance Industry is witnessing structuring of increasingcomplex products to support aviation, shipping, project & structured finance industries

There is a huge potential for tapping GCC sovereign wealth funds(SWF) and bringing them to the fold of Islamic Financial products. These SWF’s are managing funds over US$ 1.4 trillion and their current investments primarily directed towards conventional products and transactions.

Future Prospects…

Islamic Financial Markets have potential to reach several trillion USD.

Customer acceptability – among both Muslims & Non Muslims – is increasing

Increased reach in developed markets – USA & Europe

Exploring potential new markets – China / India / Russia

Development of new and innovative products Tapping into Islamic Funds currently held with

Private Banking

Road Blocks Faced by Islamic Banking Industry

Challenges in liquidity management by Islamic Banks due to limited # of shariah compliant avenues.

Asset concentration risk due to limited eligible asset classes Legal & Islamic Law Compliance Risk as Islamic Banks and conventional

banks in many countries are regulated by similar set of regulations. Evaluation / Comparison with conventional banking products and services Limited number of qualified personnel well versed in capital market issues

both from Shariah and Commercial Perspective Lack of Depth across types of asset classes / products Divergent shariah opinions Not Enough Research & Development Customer Base limited to primarily HNWIs Rapidly Evolving Modern Financial Markets Non availability of uniform Reporting and Rating Standards

Thank You


Islamic Finance Industry Panel

Panellists:• Afaq Kahn, Group CEO of Standard Chartered Islamic Banking• Raphael de Ricaud, Head of Islamic Finance, Rothschild Middle East• Richard O’Callaghan, Partner (Capital Markets), Linklaters

Moderator:• Stuart Anderson, Managing Director and Regional Head Middle East,

Standard & Poor's


4.Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Refreshment Break


Do Islamic banks in the GCC still hold a vantage point over their Asian counterparts?

Paul-Henri PruvostAssociate Chair - S&P Global Focus Team on Islamic Finance



Key Talking Points

1. Islamic finance still climbing the maturity curve: fast-paced growth to remain on the agenda.

2. Malaysia and GCC to remain key engine for growth & innovation… although very differently.

3. Development of Islamic banking/finance in Malaysia: a source of inspiration for a fragmented GCC Islamicbanking system.


Agenda

Key talking points

1. Classic imbalance between offer and demand to sustain growth.

2. GCC Islamic banks retain their hedge in profitability over Malaysiancounterparts.

3. « Critical Mass » in the GCC: Really? For What?

4. GCC Islamic banking model (largely) rests on commercial banks’shoulders (for now).

5. Mixed experience of GCC Islamic banks in Malaysia

6. Malaysia: let’s call it a paradigm, shall we?

7. A more convincing attempt to link GCC and Malaysia: Sukuk

Q&A


1.1. Classic imbalance between offer and demand to sustain growth

• Key features & growth of Islamic finance: size, industry, country… and sukuk !

• Drivers of growth: demand driven, governmentsponsorship, awareness, consensus?, and nascentregionalization/cross border activities.

• Investors: a widening and internationalization of the investor base?

Core drivers: GCC and Malaysia


1.2. Islamic banks: The « great catch up »: Malaysia

Source: Banks annual reports, S&P. Note: Islamic banking authorized in Oman in 2011. Bahrain data exclude wholesale Islamic banks. Kuwait data excl. Islamic. Inv. Cos.

Breakdown of Isl. Banking Assets in Malaysia

C. $ 110 billion (YE C. $ 110 billion (YE ’’11)11)


1.2. Islamic banks: The « great catch up »: GCC

Source: Banks annual reports, S&P. Note: Islamic banking authorized in Oman in 2011. Bahrain data exclude wholesale Islamic banks. Kuwait data excl. Islamic. Inv. Cos.

Market share of Islamic banking in the GCC = 22%-25%

C. $ 385 billionC. $ 385 billion

1 0 %

1 5 %

2 0 %

2 5 %

3 0 %

3 5 %

4 0 %

4 5 %

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1

K S A

K U W

G C C a v g

B A H

Q A T

U A E

Breakdown of Islamic Banking Assets GCC


2.1. GCC Islamic banks retain their hedge in profitability over malaysian peers

Source: Banks annual reports, Standard & Poor's. Note: Islamic commercial banks only, excludes wholesale banks in Bahrain and most of Saudi banks ("mixed model").

GCC vs Malaysian banks: Pre-Prov. NOI / Assets

0.0%

0.3%

0.5%

0.8%

1.0%

1.3%

1.5%

1.8%

2.0%

2009 2010 2011

Avg. all Isl. GCC banks Avg. "Historical banks" (pre-2002) Avg. top 10 Banks in Malaysia

GCC vs Malaysian banks:Pre-Tax ROA

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

2009 2010 2011

Avg. all Isl. GCC banks Avg. "Historical banks" (pre-2002) Avg. top 10 Banks in Malaysia


2.2. Funding profile: How liabilities become « best Asset »Composition of Sample GCC Isl. Banks Deposit base

44% 46%54%

35%46%

38%

19%7% 6%

2% 2%1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

Demand/Current Time Savings Other

Source: Banks’ annual reports, Standard & Poor’s.

NIBDs = c. 20%


2.3. Moving out of retail: the « great equalizer »?

• 5 (soon 6) different markets working in isolation.

• Barriers of entry.

• First-mover advantage and « cannibalization » of conventionalmarket shares.

• No tax (well, not much anyway) ! Malaysian Islamic banks have to cope with (some) taxation.

• Cost to income: a mixed picture.

• Moving out of retail to corporate.


3. Critical mass in the GCC: Really? And for what?

• No unified effort and a mixed and fragmented picture:

– Bahrain/Kuwait/ UAE: Troubled waters.

– Qatar/KSA: Inward-looking.

– Oman: A long- long- long-term prospect.

Size is there, but growth out of inertia. GCC Islamicbanking market needs direction and a plan.


4. GCC Islamic banking model rests on commercial banks’ shoulders

• Islamic investment companies were as affected by the crisis as theirconventional counterparts.

• Uncertain prospects: many still stuck in rounds of restructuring with littlepropects for asset recovery in current environment.

Kuwait -- Isl. Inv. Cos liabilities profile

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2006 2007 2008 2009 2010 2011 Q1 2012

($ M

illio

n)

Domestic Liabilities Foreign Liabilities

Source: Central Bank of Bahrain, Central Bank of Kuwait, Standard & Poor’s.


5. Early Attempts: The Mixed Experience of GCC Banks In Malaysia

?

• A brand name is not all: competing from scratch in an alreadycompetitive market has proved a tough nut to crack.

• Malaysian banks absent from GCC market.

• Expectation: GCC Islamic banks will focus on their own periphery(MENA/Europe incl. Turkey), same for Malaysia (Apac).

• Malaysia continues to score points in the race to create a real regionalIslamic finance hub (and inspire others?).


6. Malaysia: ready to overcome saturation stage

• Islamic banks still favored by authorities and specialized bodies to benefit from the growth of the country.

• Increasing sophistication, supporting the development of an organizedIslamic international capital market.

• Key elements of the Malaysian Islamic banking « paradigm ».

– A story to sell.

– Clearly-defined rules.

– Liquidity management.

– An ambition.

A real momentum and a track record of providing tools and solutions.


7. A More Convincing Attempt: Cross border Sukuk

• August 2010: Malaysian state-owned Khazanah Nasional Berhad marketed $1 billion but raised $1.5 billion.• Proceeds raised in one country and channeled to productive projects in another, promoting greater regional eco.

integration• Traded on secondary market, facilitating pricing discovery and benchmark for future Sukuk issuances

ASIAMalaysia

ASIASingapore

• 2011 and 2012: Several issues by Kuwait-based Gulf Investment Corp. (GIC) under a $1.2 billion program. • Entity owned by a consortium of GCC states: promotion of trade links between GCC and Asia.• No domestic Sukuk market: Kuwait has not formally passed a law on Sukuk and no sovereign issuance to set

benchmark.

GCCKuwait

ASIAMalaysia

• August 2010: Japan-based Nomura Holdings Inc. issued 2-year $100 million Ijara sukuk in Malaysia.• First Sukuk issued by a Japanese multinational corporation.• Tested effectiveness of Malaysian framework on issuing foreign currency Sukuk by non-domestic companies.

ASIAJapan

ASIAMalaysia

More to follow on the above in upcomingpresentation


Q&A


Focus On Saudia Arabian Insurance 2012Takaful and TawuniDavid AnthonyDirectorStandard & Poor’s Financial Institutions (Insurance) Ratings, London



Agenda (15 minutes)

• A Very Brief Statistical Overview of Sharia Compliant Cooperative and Takaful Insurance In The Middle East

• Overview of Insurance In The Kingdom of Saudi Arabia

• The Islamic Cooperative (Tawuni) – Takaful Dynamic in the KSA


SOME STATISTICS CONCERNING SHARIA COMPLIANT

CO-OPERATIVE & TAKAFUL INSURANCE IN THE GCC


Standard & Poor’s GCC Insurance Ratings Coverage (as of September2012)

A-/StableSALAMA / Islamic Arab Insurance Co. (P.S.C.)A/StableQ-Life & Medical LLC

BBB/StableWeqaya Takaful Insurance & Reinsurance Co.BBB+/StableAl-Ahleia Insurance Co. S.A.K.

BBB/StableTakaful Re Ltd.A/StableQ-Re LLC

BBB+/StableOman Insurance Co. (PSC)A/StableQIC International LLC

BB+/StableNoor Takaful General PJSCA/StableQatar Insurance Co. S.A.Q.

BB+/StableNoor Takaful Family PJSCBBB+/StableDoha Insurance Co. Q.S.C.

BBB+/StableNational General Insurance Co. (PSC)BBB/StableDoha Bank Assurance Co. LLC

BBB-/StableDubai Islamic Insurance & Reinsurance Co. (Aman)QATAR

A-/StableBEST RE Family (L.) Limited

A-/StableBEST RE (L.) LimitedBBB-/PositiveOman United Insurance Co. S.A.O.G.

A/Stable(Arab) Orient Insurance Co. (PSC)OMAN

BB+/StableAl Buhaira National Insurance Co. (PSC)BB/StableWethaq Takaful Insurance Co. K.S.C. (Closed)A-/PositiveAbu Dhabi National Insurance Co. (PSC)BBB+/StableKuwait Reinsurance Co. K.S.C.

A-/StableGulf Insurance Co. K.S.C.UNITED ARAB EMIRATES (UAE)AA/StableArab Investment & Export Credit G’tee. Corp.

BBB/StableWataniya Insurance Co.KUWAIT

A/StableTAWUNIYA / Company for Co-operative InsuranceBBB+/StableInternational General Insurance Co Ltd

AA-/StableStellar Insurance Ltd. (Bermuda)BB/NegativeEuro Arab Insurance Group P.S.C

BBB+/StableSaudi Re for Co-operative Reinsurance Co.HASHEMITE KINGDOM of JORDAN

A-/StableMediterranean & Gulf Co-op. Insurance & Reins. Co.BBB/NegativeTakaful International Co. BSC

BBB/PositiveMalath Co-operative Insurance & Reinsurance Co.BBB/StableSaudi National Insurance Co.

BBB/StableAl Sagr Co-operative Insurance Co.A/StableHannover ReTakaful B.S.C.

ICR/OutlookKINGDOM of SAUDI ARABIA (KSA)ICR/OutlookBAHRAIN


Conventional Insurance by Country

• Largest non-explicitly Islamic insurance market is in the UAE

• Bahrain and Kuwait are next with more or less similar sizes, though Bahrain is flat while Kuwait is growing

• Kuwait experienced higher growth rates in 2010 and 2011 as opposed to no growth in Bahrain

• Compared to the other 3 markets, Qatar and Oman are smallest in term of premiums written

Conventional Gross Written Premiums (US$)

(excluding cooperative & takaful premiums)

0

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

UAE Bahrain Kuw ait Qatar Oman

2008 2009 2010 2011


Explicitly Sharia Compliant Cooperative / Takaful Insurance by Country

• Largest market by far is the KSA, where gross premiums have doubled between 2008 – 2011

• Next in size comes UAE where takaful insurance has experienced a growth rate of about 50% between 2008 – 2011

• ‘Rest’ consist of Bahrain, Kuwait, and Qatar

Islamic Cooperative & Takaful Gross Written Premiums (US$)

(excluding Conventional insurance premiums)

0

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

KSA UAE Rest

2008 2009 2010 2011


Islamic Cooperative Insurance v. Takaful

• Both Cooperative and Takaful markets are dominated by big players

• Large insurers have grown faster than smaller players in both markets making them highly concentrated

Arithmetic Average

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

500,000,000

Cooperative Takaful

2008 2009 2010 2011

Weighted Average

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

800,000,000

900,000,000

1,000,000,000

Cooperative Takaful

2008 2009 2010 2011


Islamic Cooperative Insurance v. Takaful

• Cooperative insurers are more profitable than Takaful insurers

• Apart from year 2008, Net Combined Ratios have been fairly consistent and not volatile in both markets for the past 4 years

Net Combined Ratio - Weighted Average

75.00

80.00

85.00

90.00

95.00

100.00

105.00

2008 2009 2010 2011

Cooperative Takaful

Net Combined Ratio - Arithmetic

75.00

80.00

85.00

90.00

95.00

100.00

105.00

110.00

2008 2009 2010 2011

Cooperative Takaful


Focus on Some of the More Unusual Features of the Saudi Arabian Insurance Sector


Insurers / Reinsurers In Saudi Arabia as of September 2012 (SAR Millions)

(54.4)159.6930.0Saudi Re Co-op.(2.2)168.419.1ACIG Co-op.

363.717,531.08,284.7TOTAL INS.2.3218.785.0Salama Co-op.

-under formation-Saudi Enaya Co-op.(5.8)188.0135.6Al Ahli TAKAFUL

-under formation-Al Jazira TAKAFUL4.6278.6154.5Wala’a Co-op.

-under formation-ANB-AIG(30.1)231.3107.1Sanad Co-op.

-under formation-Alinma-Tokio Marine(32.9)493.3109.3Al Rajhi Co-op.

(10.3)322.683.4Wataniya Ins. Co.11.2274.2230.6(Arabian) Shield

(84.3)0.1470.7Solidarity TAKAFUL32.0234.7254.9Al Sagr Co-op.

(61.0)289.8254.5Amana Co-op.(5.8)257.732.7Al Ahlia Co-op.

(18.3)104.385.1Buruj Co-op.(24.8)427.8170.5AXA Co-op.

(63.7)-133.6Khaleeji/Gulf Gen.5.5267.9326.2SABB TAKAFUL

(42.1)110.1116.8Weqaya TAKAFUL(63.0)328.8149.1Gulf Union Co-op.

(3.3)-136.3Al Alamiya Co-op.1.6683.7158.0Allianz S.F. Co-op.

42.81,069.0317.6United Co-op.(UCA)(7.8)548.464.4SAICO Co-op.

(4.3)-140.9ACE Arabia14.1600.9280.5Malath Co-op.

21.0538.1294.5Trade Union Co-op.29.61,993.3526.5BUPA Arabia

17.3565.1173.8Arabia Co-op.206.82,811.11,173.5MedGulf Co-op.

(4.5)93.951.1Waf’a (S. Indian)439.14,431.22,048.9Tawuniya/CCI

2011 Net Inc.

2011 GWP(estimated)

Shareholders’Funds 2011COMPANY2011

Net Inc.2011 GWP (estimated)

Shareholders’Funds 2011COMPANY


Some Positive Features of the KSA Insurance Sector

• BIG MARKET: Already US$5bn. premiums in 2011; + 10% p.a. expected

• LOTS of PEOPLE: 19.5 million Saudis; some 8 million Foreigners

• EFFECTIVE REGULATION: SAMA (insurance); CCHI (medical); CMA (capital markets)

• COMPULSORY BAD & DOUBTFUL DEBT PROVISIONS, & RESERVE REVIEWS: All

premiums >90 days from contract inception must be fully reserved as B&DD. All

health accounts must be externally reviewed for pricing adequacy.

• POTENTIAL for GROWTH

– Only 38% of cars in Saudi Arabia are Insured: 62% uninsured (or insured once every 3-years!)

– New Sharia Mortgage Law: 2nd. July, 2012 – creating need for term life and fire cover?

– Access to Aramco / Sabic: good business if you can get it!

– Domestic Workers’ Medical: Possible requirement for compulsory medical cover

– Medical for Saudi Nationals: Not yet compulsory but already a reality for many Saudis!

– Manafeth: Currently restricted to Tawuniya but could eventually be pooled !


Some Less Positive Features of the KSA Insurance Sector…

• START-UP COSTS: With 1- 2 years before commencing underwriting, fixed costs and early operational expenses can be crippling, and can easily consume 50% of shareholders’ funds for those companies at the regulatory minimum of SAR100mm., while even a capital increase can take time…

• ZAKAT: Fixed rate zakat at 2.5% on ‘zakatable’ assets can prove punitive when levied before profits are being made, and while cash yields remain low

• STAFFING: Insurance is booming in the region – but this has led to skilled staff shortages, and instability. >30% ‘Saudisation’ ratio is a further complication

• TOO MANY INSURERS / TOO LITTLE CONSOLIDATION: Expensive insurance stock listed on Tadawul is a disincentive to would-be consolidators (although new merger law is coming!)


The Co-operative – Takaful Dynamic in Saudi Arabia


The Co-operative – Takaful Insurance Dynamic in Saudi Arabia

What Does ‘Islamic Co-operative’ Mean In Terms of Insurance in the KSA?

• SHARIA-COMPLIANCE: Lack of insurance usage more because compulsory insurance seen as similar to a tax, and less because Saudi nationals have religious doubts about Islamic Co-operative cover, at least not for non-life cover – though Family Takaful (Protection & Savings) may be different

• PROFIT-SHARING WITH POLICYHOLDERS: At least 10% of Operating Profits must go to policyholders (but losses are 100% for shareholders)

• CLEAR, STANDARDISED ACCOUNTING: But without the complication of wakala and/or mudharaba fees, etc. - nor the potential difficulties surrounding reimbursement of any qard hasan…


The Co-operative – Takaful Insurance Dynamic in Saudi Arabia

What Does ‘Takaful’ Mean In Terms of Insurance in the KSA?

• A SHARIA BOARD: May only comprise one person but can nonetheless be a potent differentiating factor

• BRANDING: Not only the company name but also the literature, the publicity, and the products can all use the word ‘takaful’

• A COMPETITIVE ADVANTAGE: The word ‘Takaful’ has a resonance in the retail sector, particularly on the life (family takaful…) side


The Curious Case of Solidarity Saudi Takaful Co., RiyadhUniquely, Solidarity has been given a waiver by SAMA to operate in a slightly

different way to the Islamic Co-operative insurance norm:

• As with all other KSA insurers, at least 10% of any Operating Profit must be returned to policyholders, either as cash or as a discount on policy renewal

Of the residual balance of 90%:

• Shareholders can deduct a fee up to the equivalent of 5% of GWP

If some undistributed balance still remains:

• 10% of the residual amount can be credited to shareholders as a ‘Performance Incentive’

If there is still some undistributed balance:

• A further amount not exceeding the equivalent of 5% of Gross Premiums can be credited to shareholders as a further fee for managing the operations and investments on behalf of policyholders


Some Conclusions

1. GROWTH: Much of The Growth In Sharia-compliant Insurance In The GCC Region Relates To Cooperative Insurance In Saudi Arabia, Mainly Medical

2. PROFITABILITY: Profitability In The Region Is More A Function of Size And Maturity Than Mode of Operation – But Access to Captive Business Can Help Too!

3. KSA: There Is Still A Lot of Change Going On Within The KSA Insurance Sector But It Is An Attractive - Or Potentially Attractive! - Market For At Least HALF The Companies Already There…

4. TAKAFUL: ALL Insurers In The KSA Are Deemed Sharia Compliant - But Some Half Dozen Would Prefer To Be Explicitly Takaful, If This Were Made Possible…

5. KSA TAKAFUL: The Curious Case of Solidarity Saudi Takaful Shows That The Door Remains Ajar To Takaful Insurance In The KSA, With SAMA Prepared To Use The Language of Takaful Even If Islamic Co-operative Concepts Continue To Dominate


Beyond Borders: The GCC and Asia Could Rev Up Their Economies –And The Islamic Finance Market

Karim NassifAssociate Director, Corporate and Infrastructure Ratings

Allan RedimerioDirector, Corporate and Infrastructure Ratings



Key Discussion Points

• The Sukuk Market in the GCC and Asia

• Standard & Poor’s experience (Infrastructure Sukuk)

• The GCC-Asia Connection

• Islamic Finance and Infrastructure

• Conclusions & Q&A


The Sukuk market in the GCC and Asia


The Sukuk Market May Be At Inflection Point

• The Sukuk market globally is dominated by 2 regions; Asia and the GCC.

• The GCC and Asia have reached an inflection point in terms of Sukukissuance.

• The Sukuk market is showing increased innovation by way of the first examples of Cross Border Sukuk, as well as the first greenfieldproject finance Sukuk bond (SATORP).


Total Sukuk Issued In The GCC And Asia

Total Sukuk Issued In GCC & Asia

-

20.0

40.0

60.0

80.0

2007 2008 2009 2010 2011 2012

Bil.

US$

GCC AsiaSources: Zawya, Standard & Poor’s


Infrastructure Sukuk Issued In The GCC And Asia


Supportive Trends

• Lower yields

• Robust oil and gas prices

• Supportive Regulation

• Lack of bank financing* The HSBC NASDAQ Dubai Corporate Sukuk Index has the

HSBC NASDAQ Dubai GCC Corporate US Dollar Sukuk Index (GSKC)*

3

4

5

6

7

8

Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Sukuk YieldSource: HSBC NASDAQ Dubai


Malaysia And Saudi Arabia Take The Lead

• Malaysia has taken the lead in Asia, with about 40% of corporatedebt issuances by way of Sukuk

• Saudi Arabia is now the leading GCC issuer, with a landmark project finance Sukuk (first greenfield project Sukuk bond).

Sukuk Issued In the GCC by Country

0.0

4.0

8.0

12.0

16.0

2007 2008 2009 2010 2011 2012

Bahrain Saudi Arabia UAE Qatar KuwaitSources: Zawya, Standard & Poor’s


Standard & Poor’s experience (Infrastructure Sukuk)


S&P’s Experience Of Rating Different Sukuk

• We apply our criteria (S&P’s approach to rating Sukuk) for rating infrastructure Sukuk.

• To date most have fallen in the category Sukuk with ‘full credit enhancement’. (exception being Sun Finance). These have included in the past DP World’s Sukuk (N/R), Tabreed’s Sukuk (N/R), and Sun Finance’s Sukuk. The current list includes Saudi Electricity Co and TAQA’s Sukuk.

• We would consider Project Finance Sukuk that is non recourse to fall under ‘Sukuk with no or partial credit enhancement’ under our criteria. These would be rated based on underlying fundamentals (liquidity, cash flow, and debt coverage ratios).


Sukuks Rated by Standard And Poor’s

BBB-Axiata Group Berhad

BBB+Nomura Aircraft Leasing Sukuk

A-PETRONAS Global Sukuk Ltd.

A-Abu Dhabi National Energy Co. PJSC ‘TAQA’ Sukuk

AA-Saudi Electricity Global Sukuk Co.

RatingsSukuks


The GCC-Asia Connection


The GCC Asia Connection

• The GCC is net exporter and Asia is a net importer

• GCC Asia Trade Relations have grown (reaching 30% of total trade)


Recent Examples Of GCC Ringgit Denominated Sukuk

• TAQA (A/Stable) based in Abu Dhabi issuing in Ringgit, Gulf Investment Corp (N/R) based in Kuwait issuing in Ringgit, and Mumtalakat based in Bahrain announcing a plan to issue in Ringgit (as at July 2012)

Advantages to issuing in Ringgit have included;

• A wider pool of liquidity

• Investor and Issuer Diversification

• Possibility to issue different Islamic structures


All GCC Sukuk Issaunce By Currency Over The Past 5 Years


All Asian Sukuk Issaunce By Currency Over The Past 5 Years


Yields On Corporate Bonds In The GCC And Asia- opportunity for inward investment into GCC Sukuk

Sources: Bloomberg, Standard & Poor’s


Islamic Finance and Infrastructure


Islamic Finance And Infrastructure• We see islamic finance as being a vehicle through which both the GCC and Asia can

meet what are substantial capex needs.• The Sukuk market is well adapted for IFR financing – there are c. $1.9 trillion of

projects planned and under way in the GCC according to MEED.

Total Value of Projects planned or underway

3.41%9.55%

6.08%

11.65%

41.49%

27.82%

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Source: MEED Sep 2012


GCC And Asia Sukuk Tenors supportive of Infrastructure Funding


Infrastructure Increasing relative to other Sukuk in the GCC


Infrastructure Versus Other Sukuk In Asia


Transport takes the lead by Asset class in the GCC


Transport takes the lead by Asset Class in Asia


Conclusions

• GCC and Asian capex needs are high and expected to remain so over next 10 years or so

• Sukuk (especially infrastructure Sukuk, including project finance) is expected to act as an important vehicle to support these capex needs

• We expect to see increased cross border interlinkages between the GCC and Asia. We also expect continued innovation in Sukuk types going forward.


Q&A


www.gcc.standardandpoors.com


Light Buffet Lunch & Networking


Takaful in Asia and GCC - a common need (or language) but very different application (or understanding)Diverging Models Shape the Growth Prospect for Takaful

Connie WongManaging Director, Analytical Manager, Insurance Ratings, Asia-Pacific

Kevin WillisDirector, Dubai

2012 September 25


Agenda

• Rating Methodology for Takaful Operators

• Standard & Poor’s Overview on Takaful Industry

– with comparison between GCC and South East Asia Takaful Markets

• Summary


Rating Methodology for Takaful Operators


Rating Methodology – Takaful Operators

Corporate & Management

Strategy

ERM

Competitive Position

Investment

Operating Performance

Capitalization

Liquidity

Financial Flexibility

Industry & Economic Risks


Standard & Poor’s Overview on Takaful Industry with Comparison between GCC and South East Asia Takaful Markets


Standard & Poor’s Overview on Takaful Industry• Expect strong growth momentum but slowing down

• Competitive market place

• Operating performance under pressure

• Investment choices improved but still a constrain. Investment has significant risk assets (e.g. equitites and properties) exposure esp in GCC region

• Strong capitalization but subject to volatile investment market and continued growth.

• Regulatory requirement – tightening but still inconsistent among regions

• Improving but still less sophisticated risks management and governance

• Cross border activities remains limited

• Lack of global standard – different Takaful models

• Different business models offer different growth prospects

• Rating range: from BBB to A category (mostly in BBB range)


Comparison between GCC and SE Asia Takaful Markets

More developed. Launched operational guidelines in 2012 and coming RBC

Saudi Arabia – changed to cooperatives model. Compulsory motor and medical.

Key Regulatory Development

Mainly modified or hybrid Wakala model. Mudaraba model still exist in Malaysia

Saudi Arabia – Cooperative; Rest: mainly Wakala or modified Wakala

Model used

Strong but subject to be slow down

Strong Growth prospect

Less competitive. 14 operators, larger sized than in GCC. With more developed family Takaful. Malaysia: 17% of total global contributions

Competitive. Over 75 operators, with small and new operators. Mainly general Takaful, although family Takaful is growing. Saudi Arabia: 50% of global Takaful sector contributions. Rest of GCC: about 16% of global contribution

Market landscape

SE Asia (Mainly Malaysia)GCC

Note: some of the data source from EY Takaful Report 2012


Comparison between GCC and SE Asia Takaful Markets

Evolving ERM development

Mostly adequate. Simple risks, less developed ERM

ERM

With more stable result, with over 50% in Sukuk

Performance showed volatility, with significant risky assets, reflecting less developed Sukukmarket

Investment

Strong, with solvency requirement in Takaful and operators’ funds

Strong although could be deficit in Takaful funds

Capitalization

More stable performance. Underwriting margin pressured due to fierce competitions. Relatively higher expense ratio reflecting smaller scale.

Operating Performance

SE Asia (Mainly Malaysia)GCC


Summary

• Potential growth remain strong over longer term although slowing down currently

• Operating performance under pressure

– Lowered investment yield

– Pressure on underwriting margin due to fierce competition

• Regulatory development – tightening oversight but still not consistent

• Supported by strong capitalization

• Ratings on rated insurers remain relatively stable


S&P’s Research & Articles

• 24 Sep 2012 Artricle: “Diverging Models Shape The Growth Prospects For Takaful”• 11-Aug-2011 Article: “Takaful Insurance Markets Continue To Grow Despite

Operational Differences”• 03-Oct-2011 Article: “S&P's Analysis Of Sharia-Compliant Cooperative And Takaful

Insurers In Middle East Mostly Focuses On Financial Strength”

• 30-Mar-2009 Criteria: “Standard & Poor's Approach To Rating Takaful And Retakaful(Islamic Re/Insurance) Companies”

• 20-Feb-2009 Article: “Rated Gulf Islamic Financial Institutions And Takaful Companies Have Shown Resilience To Global Market Dislocation, But They Are Not Risk Immune”

• 05-Apr-2007 Article: “Takaful: A New And Viable Insurance Business Model Or Just A Marketing Opportunity”

• 04-Jun-2007 Article: “Established Regulatory & Legal Environment Gives Malaysian Takaful Market The Edge Over Gulf Cooperation Council, But Competition Will Hit Earlier”


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