2007 Review and 2008 Outlook Islamic Finance

EMBARGOED UNTIL 26TH FEBRUARY 2008

25 February 2008

Table of Contents

− Summary: 2007 Review / 2008 Issuance Outlook − Country Analysis

• GCC: More Than US$19 Billion in Sukuk Issuance in 2007, with UAE and Saudi Arabia Accounting for More Than 87% of Total

• GCC Issuance Outlook • United Arab Emirates • Bahrain • Saudi Arabia • Kuwait • Qatar

• Asia-Pacific: Malaysia Continues to Lead in Global Ringgit Issuance • Asia-Pacific Issuance Outlook

• Malaysia • Pakistan and Indonesia

• New Markets: A Promising Prospect in 2008 • Africa • Asia-Pacific • Europe

− Islamic Finance Asset Class Review / 2008 Issuance Outlook • Islamic Securitisation • Islamic Funds and Private Equity • Takaful • Infrastructure and Project Finance • Islamic Banking • Islamic Real Estate Investment Trusts

− Appendix 1: Islamic Finance Rated Transactions Closed in 2007 − Appendix 2: Glossary of Islamic Finance Terms − Selected Research

International Structured Finance Europe, Middle East, Africa & Asia-Pacific

Special Report

2007 Review and 2008 Outlook: Islamic Finance: Sukuk Take Centre Stage, Other Shari’ah-Compliant Products Gain Popularity as Demand Increases

Authors Faisal Hijazi Analyst – Business Development MENA and Islamic Finance +44 20 7772 8770 [email protected] Dominique Gribot-Carroz Assistant Vice President – Business Development +852 2916 1120 [email protected]

Middle East and Islamic Finance Additional Contacts Khalid Howladar Vice President – Senior Credit Officer Asset-Backed & Islamic Finance +9714 365 0284 [email protected] Philipp Lotter Vice President – Senior Credit Officer Corporate Finance Group +9714 365 0283 [email protected] Anouar Hassoune Vice President – Senior Credit Officer Financial Institutions Group +33 1 5330 3340 [email protected] Christine Kuo Vice President-Senior Analyst Financial Institutions Group +8862 2757 7125 [email protected]

Investor Liaison New York Brett Hemmerling Investor Liaison Specialist +1 212 553 4796 [email protected]

Client Service Desk London: +44 20 7772 5454 Paris: +33 1 5330 1074 Madrid: +34 91 702 6616

Website www.moodys.com


2 • Moody’s Investors Service 2007 Review and 2008 Outlook: Islamic Finance

SUMMARY: 2007 REVIEW / 2008 ISSUANCE OUTLOOK

Islamic finance makes up a small part of the world finance industry, estimated to beworth around US$700 billion1 globally. However, it has grown by around 15% in each of the past three years, partly as a result of the increased wealth in Islamic countries drivenby high oil prices. This rapid growth shows no signs of slowing. Within a large segmentof Muslim societies and communities, the compliance of financial services with Shari’ah rules and principles is a primary concern for the users of these services. As such, effortsto enhance the access of Muslim communities and societies to financial services willhinge upon, among other factors, the compatibility of these services with Muslims’ religious principles. While catering to such specific needs of society, Shari’ah-compliant financial services could appeal to other segments of the population so long as the qualityof these services is at least comparable to other alternatives. Islamic finance covers all financial activity that enables Muslims to invest while conforming with Islamic law, orShari’ah. In practice, Islamic finance involves using traditional investment techniquesand structures that comply with Shari’ah to create arrangements that work in ways that are comparable to modern conventional finance.

Over US$97 billion issued as global Sukuk

An essential feature of an Islamic Shari’ah-complaint product is Shari’ah scholar approval, or fatwa. Hence, Islamic banks and conventional banks that invest some of their capital in Islamic finance through an Islamic finance "window" have a religiousboard or committee composed of Shari’ah scholars. The Shari’ah committee examinesproposed transactions and, in the case of Islamic banks, reviews the overall activities of the bank, for compliance with Shari’ah law. Sukuk (or Islamic bonds) are the fastest-growing segment of the Islamic finance market, which has seen phenomenal growth in the past six years. Global volume up to 2007 reached US$97.3 billion,2 with the majority coming from Malaysia and the Arabian Gulf.Even though certain regions such as Europe and Africa3 did not produce any new issues during 2007, the expectations are high for 2008, including multi-jurisdiction issuances. However, the Sukuk issuance market in H2 2007 demonstrated that despite its faith-based nature, it is not immune from the global financial system. A number of issuers have delayed the issuance of their planned Sukuk, including Ithmar bank and AmlakFinance; both are planning to issue their sukuk when the market stabilise.

Record number of deals in 2007 Moody’s has observed the following developments in Islamic Finance in EMEAand Asia-Pacific in 2007:4 − Overall Sukuk issuance volume increased by 71% to US$32.65 billion compared to

2006 (see Chart 1). The number of Sukuk transactions rose to 119 from 109 in2006, while the average deal size increased to US$269.8 million from US$175million.

− Some 88 Sukuk deals were issued by corporates, compared to 31 deals issued by sovereigns (see Chart 2). This was influenced by buoyant government budgets,mainly in the Gulf Co-operation Council (GCC), over this period as fiscal and currentaccount surpluses widened. Moreover, since the 2006 equity market crisis, corporates have shifted their funding focus more into debt markets. This trendcontinued into 2007, albeit the equity markets recovered significantly during theyear.

− Musharaka Sukuk consolidated its position as the size-dominant Sukuk structure, with US$12.9 billion of issuance, closely followed by Ijarah Sukuk with US$10.13billion issued. However, Ijarah structures were more frequently issued, with 54 dealscompared to 22 issued for Musharaka structures.

1 Islamic Financial Services Board estimate. 2 Source: Bloomberg. 3 With the exception of Sudan. 4 Sukuk review, based on Zawya.com, the Sukuk monitor.


2007 Review and 2008 Outlook: Islamic Finance Moody’s Investors Service • 3

Tamweel Residential ABS CI (1) Ltd is the first GCC globally rated residential Islamic securitisation

− Moody's assigned definitive credit ratings, ranging from Aa2 to Ba3, to notes issued by Tamweel Residential ABS CI (1) Ltd, with a total issue amount of US$220 million. This is the first GCC residential Islamic securitisation rated investment grade. The assets are Ijarah lease receivables on residential properties located inDubai, United Arab Emirates (UAE). This is also the first securitisation originated byTamweel PJSC (A3/P-2, stable), one of the major and fastest-growing Shari’ah-compliant home financing lenders in the UAE.

− Sudan was the first African country to issue a Sukuk in 2007, a US$130 milliontransaction to finance a cement project on the River Nile.

− Takaful industry premiums reached nearly US$2.5 billion in 2007,5 and are expected to reach US$7.4 billion by 2015, representing a growing segment forIslamic investment opportunities. Nevertheless, Malaysia accounts for 90% of all Takaful customers worldwide. In the GCC, Saudi Arabia is recognised as the most active Takaful market. The Capital Market Authority (CMA) is opening up its insurance market with the issuance of 13 new licences, including five for Takafulcompanies.

− The largest proportion of Sukuk was issued in the financial services sector, accounting for 31% of total volume, followed by real estate with 25% and power andutilities with 12%.

Local currency-denominated Sukuk demanded by investors

− Given the declining US dollar, many GCC issuers opted for local currency-denominated Sukuk, meeting the needs of investors. JAFZ Sukuk Ltd (JSL; A1, stable), was the first AED-denominated Sukuk to be listed on the Dubai International Financial Exchange.

− Demand for convertible Sukuk continued. High demand for these issuesdemonstrates that investors’ appetite for Sukuk with an equity potential upsideremains strong, given the recent gains in the equity market. The future ofconvertible Sukuk looks promising. A number of issues have come to the marketrecently, including Tamweel PJSC for US$300 million.

Growing Islamic real estate investment trusts issuance in Malaysia and the GCC

− In September 2007, Al-Aqar KPJ Healthcare Islamic real estate investment trust (IREIT) obtained approval from the Malaysian Securities Commission (SC) for theissuance of up to MYR300 million (US$86 million) as a Sukuk Ijarah programme,combining both Islamic medium-term notes (MTN) and Islamic commercial paper (CP). Moreover, in the GCC, Dubai Islamic Bank PJSC (DIB; A1/P-1, stable) issued Shari’ah-compliant four-year capital-protected global IREIT notes in early 2007, which will invest through several global IREITs in the US, European and Asian(mainly Japanese) real estate markets.

Musharaka Sukuk the biggest asset structure by volume

Chart 1: EMEA and Asia Pacific 2007 Sukuk Transactions (Volume & Number)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Musharaka Ijarah ModarabahMurabaha Manfa'a Istisnaa Al Salam

US$

Mill

ion

0

10

20

30

40

50

60Iss

ue N

o.

Size ( US$ Million) Issue No.

5 Moody’s estimate.



More corporate than sovereign Sukuk issued in 2007

Chart 2: EMEA and Asia Pacific 2007 Sukuk Type

Sovereign26%

Corporate74%

In 2008, Moody’s anticipates the following market developments: Global Sukuk should continue to grow at compound annual growth rate of around 35%

− Overall Sukuk issuance should continue to increase by around 30-35% per annum.6

Sovereign Sukuk is likely to gain popularity, with a new precedence for Sukuk out ofJapan, Thailand and the UK. Moreover, given that most GCC currencies will continue to be pegged to the US dollar in 2008, and due to inflationary pressuresand the need to create a benchmark against which to value corporate sukuk, a number of GCC governments might be considering issuing Sukuk.

− Islamic funds issuance will flourish, with new funds being raised in the GCC andAsia-Pacific.7 More than 65% of funds are expected to emanate from the MiddleEast and North Africa (MENA) and Asia-Pacific.

− New Sukuk funds will come to the market, albeit the majority of new funds will still be equity based due to the underdeveloped and still growing Islamic debt markets.

Takaful industry to grow by 13% per annum

− The Takaful industry will grow by around 13% per annum to 2015, with Takafulpremiums reaching US$7 billion, thereby representing a segment that is witnessinggrowing demand for Islamic investment opportunities.

GCC project finance Sukuk to be issued in 2008

− Project finance Sukuk will be issued in the GCC, mainly in the UAE and Qatar.Qatar plans to issue US$15 billion in conventional bonds and Sukuk in 2008,8

mainly in the energy and telecommunications sectors. − More Sukuk will be issued in local currencies and convertible structures, given the

continued appetite for equity exposure and revaluation considerations, due to inflationary pressures. The market could also see an increase in subordinated Sukuk issuance. Unlike senior debt, subordinated Sukuk could be more favorable to Islamic Banks in terms of capital requirements, and investors may be attracted by the potentially higher yield of subordinated paper.

Convertible or subordinated Sukuk and IREITs will be in demand by investors

− REITs, both in Asia-Pacific and the GCC, are expected to reach new recordissuance. Given the phenomenal property boom in these markets, this makes IREITs a much needed product and a useful investment tool. Moreover, thepotential for growth is aided by the tremendous concentration of high-net-worth individuals and family businesses whose collective wealth in the GCC alone is estimated at over US$1.3 trillion.

6 Reaching US$200 billion by 2010. 7 Ernst & Young estimate. 8 Source: Qatar Ministry of Finance.



Chart 3: Global Islamic Sukuk Issued in USD Million

0

5000

10000

15000

20000

25000

30000

35000

2001 2002 2003 2004 2005 2006 2007

Volu

me

in U

SD M

illio

n

Note on Data − This report aims to capture the volumes of Islamic finance issuance in EMEA and

Asia-Pacific, mainly Shari’ah-compliant securities (Sukuk). The volumes reported include all publicly rated and un-rated transactions that closed or launched between 1 January and 31 December 2007.

− For issued Sukuk, a number of resources were used to account for total issued volume in 2007 and accumulated issued sizes since inception. Sources include Moody's, the Malaysian Securities Commission, Bloomberg, Zawya.com and Dealogic.

− Moody’s is aware of other sources of information related to Islamic finance in the market domain that can be different from those quoted in this report. Every effort has been made to include and quote the majority of data sources that are accessible to Moody’s.

− All currencies have been converted into US dollars to facilitate easy comparison. The exchange rate was taken at the time of the transaction closing.

− Given the nascent nature of Islamic finance, the GCC and Asia-Pacific are extensively discussed in this review. However, Moody’s is aware of new developments in other regions such as Africa and Europe, and has highlighted them in this report.

− Moody’s is aware of the different schools of law – or Fiqh (Islamic jurisprudence) among different countries across the Middle East and Asia-Pacific. Hence, these schools differ in the Fiqh methodology and the acceptance of certain Sukuk structures. Furthermore, Moody’s review of Sukuk transactions has been made on the basis of their legal binding and contractual features that affect the creditworthiness of the Sukuk, without opining on their compliance with Shari’ah law.



COUNTRY ANALYSIS

Gulf Co-operation Council (GCC): More Than US$19 Billion in Sukuk Issuance in 2007, with UAE and Saudi Arabia Accounting for More Than 87% of Total

Chart 4: Volume of Sukuk Issued in the GCC

0

2000

4000

6000

8000

10000

12000

UAE Saudi Arabia Bahrain Kuwait Qatar Oman

US$

Mill

ion

0

5

10

15

20

25

30

Issue

No.

Size ( US$ Million) Issue No.

* Oman has not closed any Sukuk issues in 2007

Chart 5: GCC Sukuk Issuance

Kuwait, 4% Qatar, 2%Bahrain,

6%

UAE, 58%

Saudi Arabia, 30%

UAE a leading Sukuk issuer 2007 was a record year for Sukuk issuance in the GCC region. A total of 50 Sukuk

transactions came to the market, comprising 28 in Bahrain, 12 in the UAE, five in Saudi Arabia, four in Kuwait and one in Qatar, exceeding US$19 billion in issuance. Also during the year, three UAE Sukuk, amounting to over US$ I billion each, were issued by JSL,DP World Sukuk Ltd (A1, stable) and Dubai Investments LLC (A1, stable). In addition, Tamweel’s residential Asset-Backed Securities (ABS) transaction (Tamweel Sukuk Ltd), which represented the Islamic securitisation of Ijarah “lease” receivables of residential properties located in Dubai, was issued during the year. The issuer rating and foreign currency ceiling for the UAE government are currently Aa2. As such, financing transactions that are “legally” asset backed can achieve the highest ratings and raise a proportion of their funding at Aa2 levels. In this region, however, it is important to note that many institutions and industries still have a degree of sovereign linkage that may constrain the rating to that of the relevant government.



As a sign of the increasing confidence in and desirability of Sukuk in the GCC, NIGSukuk Ltd issued its first Sukuk (NIGSL; Baa2, stable). Moreover, Saad Trading Contracting & Financial Services Co issued the first GCC Manfa’a sukuk (Golden Belt 1Sukuk Co; Baa1, stable) and Saudi Basic Industries Corporation (SABIC; A1, positive) issued SAR8.0 billion (US$2.13 billion). The raised proceeds were used to in the acquisition of GE Plastic from US conglomerate General Electric for US$11.6 billion in May 2007.

Strong ratings in GCC issuance, a function of strong economic performance

The improving economic situation in the Gulf is illustrated by the A and Aa ratings of the six GCC governments, much higher than just a few years ago. Despite sharedcharacteristics across the countries of the GCC, there remains a difference in the relativeability of Gulf governments to service their debt – between the very wealthy states ofKuwait, Qatar, and the UAE and the less wealthy states of Bahrain, Oman and SaudiArabia. Their ratings will continue to reflect these distinctions, although the size of the rating differential is expected to narrow over time as the public finances of the less wealthy states strengthen further while the ratings of the wealthy states are constrainedby political and institutional factors. The outlook on the government bond rating of SaudiArabia is still positive, while the outlooks on the government bond ratings of the othercountries are stable.

GCC Issuance Outlook United Arab Emirates 2007a record year for sukuk issuance More growth in securitisation and infrastructure finance expected in 2008

Overall, the UAE Islamic finance market experienced a record year of growth in Sukuk transactions, with 12 transactions coming to the market in 2007 compared to seven in 2006. Volume issuance rose by nearly 27% to reach US$11.1 billion. The majority of issuance came from the financial services and real estate sectors, including Sukuk transactions from DIB (DIB Sukuk Co Ltd; A1, stable), JSL, Dubai Investments LLC,Aldar and a residential ABS transaction from Tamweel. For 2008, Moody’s predicts the number and volume of new issuance of Sukuk to remain buoyant.. More Shari’ah-complaint securitisation is expected to take off in H1 2008, mainly Shari’ah-complaint mortgage leases. In addition, Islamic funds are expected to witness noticeable developments, especially in private equity, which saw the launch of the first Islamic mezzanine fund by Corecap in 2007. Moreover, Abu Dhabi Ports Company, in the oil-rich emirate, is planning to develop Khalifa Port and Industrial Zone (KPIZ). The work includes the creation of a 2.2 square kilometre port island, located five kilometres offshore, and will take about 18 months to finish. The estimated development cost ofKPIZ, located in Taweelah between the cities of Abu Dhabi and Dubai, is more thanUS$10 billion. The Abu Dhabi government hopes a significant portion of investment will come from the private sector, through the issuance of several capital market instrumentsincluding Sukuk.

Bahrain Central Bank of Bahrain a leading sovereign Sukuk issuer

The Central Bank of Bahrain (CBB) is among the first of the world’s Islamic financial regulators and has played a critical role in developing new Shari’ah-compliant products and approving Islamic banking licences for new Islamic banks, thereby facilitating investment opportunities for a growing investor base. Some 28 deals closed in 2007, compared to 24 in 2006. Volume issuance exceeded US$1 billion compared to nearly US$800 million in 2006. The bulk of the issuance came from the CBB’s money market operations, including Al Salaam Sukuk and CBB short-term Sukuk. Gulf Finance House(GFH), a Bahraini Shari’ah-complaint bank, also issued its first Sukuk (Ijarah Sukuk) for US$200 million to fund its investment operations in the GCC. For 2008, we expect asimilar level of issuance activity, including for CBB’s money market operations. Furthermore, GFH and Al Baraka Islamic Bank are expected to issue more Sukuk as they continue to fund their overseas operations in Asia and Africa.



Saudi Arabia Saudi Arabia a growing Sukuk issuance market with more Islamic finance products such as Takaful and Islamic funds

The Saudi Islamic Sukuk finance market witnessed record issuance in 2007, fuelled bythe increasing funding needs of local companies, strong appetite from originators andinvestors for Shari’ah-compliant products and the soundness of the Saudi economy, supported by record oil prices. In 2007, five deals came to the market compared to onlytwo deals in 2006, resulting in US$5.7 billion being issued, an increase of more than500%. SABIC issued SAR8.0 billion (US$2.13 billion), which was used to help acquire GE Plastic from US conglomerate General Electric in May 2007 for US$11.6 billion. TheTakaful and real estate industries saw important developments in 2007, with the CMAdeveloping its insurance market via the issuance of 13 new licences, including five for Takaful companies. Furthermore, Riyadh-based Al Bilad Bank unveiled its GCC real estate fund (Akar), which invests in joint-stock companies of the GCC. Saudi Arabia’s first Sukuk fund was launched by Jadwa Investment in H2 2007, which targets investment in the Gulf countries and the Middle East. In light of the forthcoming introduction of the 2008Mortgage Law, and due to the government’s limited role in financing housing, the privatesector is anticipated to assume a greater role in this respect. Institutions such as NationalCommercial Bank (A1, stable), Al-Rajhi Bank (A1, stable), Dar Al-Arkan, Kingdom Instalment Company and Arab National Bank (A1, stable) are attempting to have the first-mover advantage in the provision of housing finance products, mainly Islamic mortgagestructures.

Kuwait A market dominated by Sukuk and IREITs

2007 was a landmark year for Sukuk in Kuwait, with the issuance of the first Islamic-compliant security by NIGSL. The US$475 million Sukuk is the first issue of a US$1.5 billion programme. A total of four deals were issued in 2007, with total issuance reaching US$875 million. Late in 2007, Al-Ahlia Real Estate Projects Company (AREPCO) came to the market with a convertible Kuwaiti dinar-denominated Sukuk for KWD87.5 million (US$320.5 million). The two-year Sukuk is an equity investment Sukuk, with an 8% profit rate payable semi-annually. The Sukuk was issued to acquire up to 49% of the outstanding equity in AREPCO. Moreover, Munshaat Real Estate Projects Company (MREP) launched it first Shari’ah-compliant REIT in Kuwait (MREIT). The Al Mahrab Hotel Tower, which will be the primary income-generating asset of the MREIT, is part of the Al Safwa Towers project, one of the largest in Mecca in Saudi Arabia. This will give small and medium-sized investors the opportunity to benefit from the strong performance ofMecca hotels, which have shown some of the highest occupancy rates in world.

Qatar Infrastructure project finance Sukuk will make debut in 2008

The Qatari Islamic finance Sukuk market had a total issuance of US$450 million in 2007, compared to US$270 million in 2006. Qatar Real Estate Investment Co (S.A.K.) (A2, stable) issued its first Sukuk, Qatar Alaqaria Sukuk Co Ltd (A2, stable), with the government of Qatar directly owning a 27% stake. Moody's views the company as a government-related issuer (GRI), and therefore determines its ratings on the basis of boththe company's fundamental creditworthiness and the credit enhancement that can be achieved from government support. Qatar’s fortunes in 2008 will in large part be tied up with those of the energy industry. The minister of finance in a recent address to theEuromoney conference in Qatar stated that US$70 billion will be needed to finance projects in the energy and telecoms sectors over the next few years, of which US$15 billion will be financed through long-term fixed-income securities, both conventional and Islamic bonds.



Asia-Pacific: Malaysia Continues to Lead in Global Ringgit Issuance

Close to 50% growth in domestic markets since December 2006

Asian currency-denominated Sukuk outstanding9 grew by close to 50% to US$65.3 billion in 2007 from US$43.6 billion in 2006.10 Interestingly, the growth has been even more sustained since the summer of 2007. Asian currency-denominated Sukuk outstanding grew by a significant 27% between the end of July 2007 and year-end. Malaysia continues to lead the way in terms of offering an attractive environment forIslamic finance.11 The government has been very proactive in encouraging Islamicfinance, implementing measures such as numerous tax benefits that favour Sukukfunding over conventional methods.

Malaysian ringgit-denominated Sukuk outstanding reaches US$64.4 billion… or 66% of global outstanding Sukuk

Malaysia also remains the biggest domestic market worldwide. Ringgit-denominated Sukuk issued in 2007 was equivalent to US$64.4 billion, representing 66% of the globaloutstanding as of 31 December 2007.

Chart 6: Asian Sukuk Issuance

Malaysia 95.2%

Indonesia 0.3%

Pakistan 3.0%Brunei 1.5%

Cagamas Berhad’s issuance boosted the market with its second Islamic RMBS

Sukuk also remain a significant funding avenue in the Malaysian domestic market. In 2007, Cagamas Berhad, Malaysia's national mortgage agency came to the Sukukmarket several times, thereby boosting domestic issuance. Specifically, in May,Cagamas launched a Sukuk Musharaka Residential Mortgage-Backed Securities (RMBS) transaction for more than MYR2 billion (US$0.6 billion), comparable in size toits first Islamic RMBS launched in 2005.

Combination of conventional and Islamic CP and MTN programmes

In June, a MYR60 billion (US$17.3 billion) conventional and Islamic CP and MTNprogramme was also proposed by Cagamas. The programme consisted of MYR20billion of CP and a MYR40 billion MTN programme. The 40-year tenure for the MTN was also the longest ever established in Malaysia. Bumiputera Commerce Holdings Berhad also launched a MYR6 billion (US$1.7 billion)conventional and Islamic CP/MTN programme.

9 Malaysian ringgit, Pakistan rupee, Indonesian Rupiah, Brunei dollar. 10 Source: Bloomberg. 11 For more details, refer to our Special Comment. “Asian Sukuk: Review and Introduction to Moody’s Rating Approach”.



Chart 7: Malaysia: Approved Ringgit-Denominated Private-Debt Securities Issuances12 Including Approved Issuances by Cagamas Berhad

0

50

100

150

200

250

300

2004 2005 2006 2007

RM B

illio

n

Conventional Sukuk Combination

Malaysia has also become a hub for cross-border issuance

While the bulk of Malaysia’s issuances remain domestic, there was increasing interest inthe cross-border Islamic market in 2007. The SC approved more than US$8.3 billion USdollar-denominated Sukuk issued by foreign corporations in 2007, which was muchhigher than the total approved foreign currency-denominated Sukuk issuances in the previous two years (see Chart 7).

Maybank certificates represent first cross-border subordinated Sukuk

There were a number of notable features in the Asian Sukuk issued in 2007. Amongthese, Malayan Banking Berhad (Maybank; A3, stable) issued Sukuk in April 2007(Malayan Banking Berhad Sukuk), raising US$300 million to fund the bank's Islamic banking operations and representing the first cross-border subordinated Sukuk issuance. Moody’s assigned a Baa1 foreign currency rating to the subordinated Sukuk certificates in April and upgraded the rating to A3 in May.13 The A3 rating is constrained by the country ceiling. Specifically, the bank intends to use the proceeds to refinanceexisting conventional US dollar subordinated notes. The transaction will allow Maybankto raise funds on terms compliant with Shari’ah principles. It will also count as Tier 2capital under existing capital adequacy regulations. The rating is directly linked to that ofMaybank, the obligor, because it has agreed to provide advances to cover any shortfallbetween the profits generated from the portfolio assets and the required periodicdistribution amount to certificate holders. Maybank has also irrevocably undertaken topurchase the issuer's interest in the portfolio assets at the relevant exercise pricesufficient to pay the certificate holders, either at maturity or on dissolution. Moody’snoted that Maybank, as the asset manager, will collect profit from the portfolio assetsand pay the issuer an amount sufficient to fund the required periodic distribution tocertificate holders on each distribution date. Any excess profit, after meeting therequired periodic distribution amount from the portfolio assets, will be paid to Maybankas a fee, while any shortfalls will be covered by Maybank to ensure the required periodic distribution amount is paid.

Four Rupiah-denominated Sukuk transactions in 2007 constituting 0.4% of global outstanding Sukuk

Rupiah-denominated Sukuk represented only 0.4% of global outstanding Sukuk at year-end 2007. A total of 20 Sukuk – or 3.88% of all bond issuance in Indonesia – were issued between September 2002 – when Indonesia made the market’s first issuance –and the end of July 2007. The regulatory authorities issued their first Islamic bond regulation in 2002, and the Indonesia Capital Market Supervisory Board followed up in November 2006 with asecond set of regulations that represent an attempt to encourage insurers, pension funds, banks and mutual fund managers to invest in Sukuk.

12 Source: Malaysian Securities Commission, “Sukuk approved-not issued” 13 The upgrade in May 2007 was related to Moody’s application of its refined Joint-Default Analysis and updated Bank Financial Strength Rating

methodologies.



Another challenge for the development of Sukuk in Indonesia lies in the need to boost understanding of securitisation (be it conventional or Islamic) as well as to improve accounting and tax treatments as they relate to securitisation. In the latest example of efforts to clarify the situation, the Indonesian Accounting Association in H1 2007 issued regulations for the treatment of securitisation, to apply from 2009. In November 2006, the authorities also introduced Sukuk CIC, a collectiveinvestment contract used for structured finance transactions. But no structured finance deal – conventional or Sukuk – has debuted using this structure.

Asia-Pacific Issuance Outlook Malaysia Malaysian Islamic banks as potential issuers

Malaysia remains the biggest global Sukuk market by far. In particular, banks may use Sukuk to develop their Islamic banking operations, as Maybank did in 2007. Malaysia intends for Islamic finance to account for 20% of its banking assets by 2010.Moody’s considers this target achievable, given the efforts of domestic banks and theissuance of Islamic banking licences to foreign players. This creates significant growthpotential for Sukuk, which can be used by Islamic banks for long-term funding and asset-liability management purposes.

Islamic securitisation activity anticipated in 2008

The market could also see an increase in subordinated Sukuk issuance. Compared tosenior debt, subordinated Sukuk could be more favourable to Islamic banks in terms ofcapital requirements. Furthermore, investors in Islamic finance may be attracted by the potentially higher yield of subordinated paper. Finally, conventional banks, through theirIslamic windows, may also consider issuing subordinated Sukuk to access a broaderbase of investors and attractive funding. For Asia-Pacific, we expect new Islamic securitisation transactions in 2008, at least in Malaysia. Menara ABS Berhad has already issued MYR1.0 billion (US$306.1 million) ofSukuk Ijarah backed by four properties, in January 2008. (The properties are removedfrom the balance sheet of the originator, Telecom Malaysia Berhad.) In November 2007, Bank Negara Malaysia announced its plans to encourage foreign banks to conduct Islamic banking in multiple currencies. To this end, the Malaysianregulator may issue more licences to those banks and give them special tax incentives. This has been viewed as a way to promote Malaysia as an international hub for Islamicfinance.

Pakistan and Indonesia Potential for further growth in Indonesia and Pakistan

Pakistan’s14 and Indonesia’s small but growing Sukuk markets are expected to grow significantly over the coming years. Total assets of Islamic banks in Indonesia may still only represent a minor portion of the country's total banking assets, but they areexpected to grow significantly. This could also encourage Sukuk issuance.

New Markets: A Promising Prospect in 2008 Africa Huge market potential, with Africa home to around 400 million Muslims

Africa is home to an estimated 400 million Muslims. In Sudan, the state has mandated Islamic finance, and has a number of Islamic banks operating throughout the country through foreign partnerships, such as Emirates and Sudan Bank, which is backed byDIB, Shari’ah Islamic Bank and Abu Dhabi Islamic Bank PJSC (ADIB; A2, stable). In addition, Al Khartoum Bank is now 60%-owned by DIB and Qatar Islamic Bank is planning to set up a commercial and investment bank. In 2007, Sudan was the firstAfrican country to issue a Sukuk, for US$130 million, to finance a cement project on theRiver Nile. Egypt, which is the biggest Muslim country in the MENA region, has nearly 66 million Muslims. Many new Islamic banks, mainly from the GCC, have startedbranching out into Egypt. Amlak Finance, which is offering medium- to long-term Shari’ah-compliant refinancing solutions for residential and commercial properties, hasopened a new office in Cairo. ADIB and Bahrain Islamic Bank have also started similarventures.

14 The only South Asian country to witness Islamic finance activity in 2007.



South Africa is leading Islamic product hub in Africa

Given that only 20% of the population has a bank account, this offers major opportunities for growth in both conventional and Islamic products. The drive by thegovernment to reform the financial services sector and privatise several state-owned banks is expected to help drive competition and spur development. It will also increase the number of foreign institutions offering Islamic products. In the Maghreb region, we are beginning to see some Islamic investors from the Gulf planning real estate projectsin Morocco. Islamic financial institutions are not on the agenda at the moment, but this might be about to change as the central bank of Morocco (Bank Al-Maghrib) has for the first time allowed the use of Islamic finance structures such as Murabaha and Ijarah forbanks. It is very likely that North Africa will form a stronger bloc in the Islamic finance industry in future. Furthermore, South Africa is considered one of the leading countries in developing Islamic products, meeting the needs of nearly two million Muslims. ABSA Bank Ltd (Baa1, stable), a subsidiary of Barclays, and Al-Barka Group are among the biggest banks providing products approved by their Shari’ah supervisory board, whichhas overseen the development of a range of products for the local market. Theseinclude chequering accounts, contractual and discretionary savings with transactional capability and Shari’ah wills for the personal market. Vehicle and asset finance areoffered to both business and personal clients.

Asia-Pacific Japan is the most recent major developed economy to tap into the Sukuk market, the

government will issue its first sovereign Islamic Sukuk, valued at between US$300million and US$500 million, through Japan International Bank for Corporation, thisissuance is expected to come to the market by the end of Q1 2008. Moreover, Thailandand Singapore are contemplating issuing their first Sukuk in 2008.

Singapore and Hong Kong stepping up their Islamic finance efforts

Singapore’s authorities have made evident their interest and enthusiasm for Islamicproducts.15 The Monetary Authority of Singapore (MAS) constantly works with the industry to ensure both Islamic and conventional financing have comparable supervision under the country’s tax and regulatory framework. Concessionary tax treatment for Sukuk is similar to that for conventional bonds, while Singapore has also waived the double imposition of stamp duties on real estate financing structured under Shari’ah law.Several banks in Singapore are also looking at specialist subsidiaries. DBS Bank Ltd(Aa1, stable) has taken the lead with its launch of the Islamic Bank of Asia (IB Asia) after approval from MAS for a full bank licence in May 2007. IB Asia will focus oncorporate, capital market and private banking services. The Singapore financialcommunity is also actively looking at Islamic funds management.

Hong Kong to serves as an Islamic funding platform for mainland China

In Hong Kong, the authorities are fully supportive of the development of Islamic finance.In November 2007, the Securities and Futures Commission approved the first Islamicfund (Hang Seng Islamic China Index Fund), available to retail investors. Furthermore, the Hong Kong Monetary Authority announced in January 200816 that it will apply for associate membership of the Islamic Financial Services Board. As such,Hong Kong could position itself as an international platform for Islamic funding formainland China needs, particularly in the domain of infrastructure projects. In the medium term, there could be a significant potential for cross-border and Residential Mortgage-Backed Sukuk issuance. The authorities are currently looking at improving the fiscal environment. By focusing on Sukuk, Hong Kong could also becomea platform for the development of Islamic securitisation.

Europe Europe might see its first sovereign Sukuk issued

The UK has made concrete steps forwards, given London’s appeal as a centre forIslamic finance. Over the past three years, the UK has made significant changes to itstax legislation to facilitate Islamic finance transactions. Moreover, the City of London is home to a sizeable number of professionals and expertise that enable London to claimthe title of “Islamic finance centre of Europe”. For 2008, the UK treasury iscontemplating issuing its first sterling Sukuk.

15 Speech by Ng Nam Sin, executive director of Monetary Authority of Singapore, 13 February 2007 at Islamic Finance Asia 2007. 16 Seminar on Islamic Finance, 15-16 January 2008, jointly organised by the Hong Kong Money Authority and the Islamic Financial Services

Board.



ISLAMIC FINANCE ASSET CLASS REVIEW / 2008 ISSUANCE OUTLOOK

Islamic Securitisation To date, the majority of Sukuk has been of an asset-based nature. In these transactions

the assets in place do not legally belong to the Sukuk investors, and the financing raisedis not backed by assets. In the event that the “borrower” defaults or becomes insolvent,the Sukuk investors rely on purchase undertakings for the repayment of funds. This typeof structure has drawn much attention in recent months due to the lack of asset-risk sharing of such structures and the perception that such undertakings are “guaranteeing”the asset price.17

UAE and Malaysia to lead… followed by Saudi Arabia and Qatar

Securitisation or asset-backed finance is inherently more complex for issuers as itrequires legal isolation and sale of the assets from the borrower to create a structurewhose cash flows and risk profile are driven primarily by the assets. These risk-sharing characteristics make securitisation closer to the Shari’ah ideals of participating in thecollective legal or beneficial ownership of an asset and its “value”. In the GCC, Moody’s believes that real estate (residential and commercial) will drive themajority of corporate Islamic securitisations in the short term. This is mostly due to thesizeable financing needs of the sector, and the market’s familiarity with and interest inthe underlying assets. All GCC economies are largely dependent on the oil andpetrochemical industry; these industry assets too hold significant potential for projectfinance asset-backed Sukuk. The ongoing preparation for Basel II is also driving a focuson balance sheets as regional banks reach their risk limits on real estate and projectlending and are hence looking to free up capital through securitisation. In July 2007, Tamweel issued the first GCC globally rated Islamic securitisation, astructured Sukuk that passed legal ownership of residential property located in Dubaiand the associated finance contracts to investors (Tamweel Sukuk Ltd). Comparable to conventional RMBS, the ongoing boom in the region (from a very low base) means thatdeals are performing well, with zero defaults in the underlying pool. A number of GCC countries’ foreign currency ceilings are currently Aa2, including UAE. As such, transactions that are “legally” asset backed can achieve these high ratings. Tamweel’s timing was fortuitous and it raised a significant proportion of its funding atAa2 levels while Tamweel itself has an issuer rating of A3 (Ba3 when excluding the external support element captured by Moody’s GRI methodology).18 In 2008, we expect more Islamic securitisation transactions from issuers across the GCCas the structuring and legal complexities and expertise required become morecommonplace. In addition, the genuine asset-backed, risk-sharing nature may drive further Islamic investment demand and thereby help pricing. Moreover, in Malaysia,Menara ABS Berhad issued MYR1.0 billion (US$306.1 million) of Sukuk Ijarah backedby four properties in January 2008. The properties are removed from the balance sheet of the originator, Telecom Malaysia Berhad.

17 For more details on the credit risk consideration of purchase undertakings, refer to our See Special Comment: Shariah and Sukuk: A Moody’s

Primer, published in May 2006. 18 See Credit Analysis: Tamweel PJSC.



Islamic Funds and Private Equity MENA and Asia-Pacific account for 65% of global funds

Islamic funds have expanded significantly in the past five years, growing at acompound annual growth rate of 22%.19 By the end of 2007, the number of global funds exceeded 700. Given the nascent nature of this industry, nearly 50% of the total numberof funds has less than US$50 million in assets under management. MENA and Asia-Pacific account for 65% of global Islamic funds, largely due to the nature and development of equity markets in the past three years. However, penetration of thesefunds in the GCC is still minimal, only accounting for over 1% of GCC GDP. SaudiArabia is considered one of the biggest markets for Shari’ah-compliant funds. NCB Capital issued one of the biggest GCC funds, targeting US$1 billion, through investing inGCC equity markets and Murabaha funds as approved by the NCB’s Shari’ah board.Real estate funds have also grown significantly in the rest of the GCC, benefiting from booming economies and real estate project expansion. The average fund size of IREITsrose by nearly 36% between 2002 and 2006 to reach nearly US$200 million. In the UK,Barclays Capital has launched its first Shari’ah-complaint exchange-traded fund. Moreover, Arab Banking Corporation B.S.C. (A3, stable), Islamic Asset Management UK and Kuwait-based Global Securities House issued a UK Islamic commercial real estatefund, Al Bait UK Real Estate Fund, for a total of £58 million (US$115 million), which includes a balance of office, mixed-use and industrial assets in diversified locations in the UK. Also given the increasing global Sukuk issuance, a number of Sukuk funds,similar to Jadwa’s Sukuk Fund, are to be introduced in the GCC region in 2008. Moody’s is aware of a number of issuers planning to launch Sukuk structured funds in H1 2008.

Private equity is an ideal Islamic-compliant investment structure… but with conservative borrowing

Private equity is also gaining momentum. Venture capital and private equity funds that do not utilise conventional leverage instruments are ideal tools for making investments inan Islamic-compliant manner. Another appropriate tool is early-stage investments in start-up companies because investors have considerable scope to negotiate the structure and conditions of their investment to ensure Shari’ah compliancy. An indicationof the acceptance of these vehicles for making Islamic-compliant investments is the number of conventional private equity and venture capital funds that have passed Shari’ah compliance tests with only minor adjustments made to the investment policiesof the funds themselves. A Shari’ah supervisory board is appointed and detailedShari’ah compliance criteria are incorporated into the offering and operational documents. Despite this, Shari’ah-compliant institutional private equity remains limited to the likes of Corecap, which launched its Islamic Private Equity Fund I (CIPEF I) in 2007. However, this limited issuance activity does not accurately reflect the fact growth in MENA private equity issuance is considered the fastest globally. The main factorconstraining Islamic finance private equity issuance has been the reliance of many transactions on leverage. The general consensus among most Shari’ah scholars is that a transaction's debt-to-equity ratio must be less than 33%. Many of the transactionsmade recently, especially in the merger and acquisition fields, have a much higherdependency on borrowing.

Takaful Malaysia and Saudi Arabia to play a significant role in the Takaful market in the coming years

Takaful industry premiums reached nearly US$2.5 billion in 2007,20 and are expected to reach US$7.4 billion by 2015, representing a growing segment for Islamic investment opportunities. Malaysia accounts for 90% of all Takaful customers worldwide. In theGCC, Saudi Arabia is recognised as the most active Takaful market. The CMA isopening up its insurance market with the issuance of 13 new licences, including five forTakaful companies. The economic boom in the GCC has created a substantial investment in infrastructure projects, as has the growth in retail Islamic banking solutionsincluding Islamic mortgages, which creates opportunities for Takaful operators due to the increased demand for mortgage protection products and home owners’ comprehensiveTakaful plans. Moody’s approach to analysing a Takaful company is very similar to thatfor a conventional mutual insurance company, given that the distribution between a“premium” and a “donation” is, in Moody’s view, more cultural than economic. However,there are several additional considerations relating to corporate governance, asset allocation, structural features, capitalisation strategies and the regulatory environment

19 Source: Ernst &Young numbers and analysis. 20 Source: Moody’s estimates.



that must be taken into account when rating a Takaful company.



Infrastructure and Project Finance Shari’ah-compliant project finance MTN, likely to be followed by Sukuk in 2008

Islamic financing structures are increasingly used in the project finance domain, particularly in projects in the MENA region. In a recent survey,21 prospective MENA dollar volume projects were to be estimated to be over US$167 billion, of which nearly half of the potential market is in Saudi Arabia (US$87.5 billion). The Kingdom has the full mix of projects – petrochemicals, independent water and power projects (IWPPs),telecoms and infrastructure finance. The UAE and Egypt rank second and third in termsof project diversity, expecting a mix of industrial, IWPP and infrastructure deals. Qatar22

has stated that US$70 billion will be needed in the coming years to finance projects inthe energy and telecoms sectors, of which, US$15 billion is lined up to be financed bylong-term fixed-income securities, both conventional and Islamic bonds. In the past several years, commercial banks have led the syndication project finance market. Drivenby an improved perception of the region’s risk, spreads below 100 basis points arecommon, reducing the need for agency lending. Most recently, CALYON acted as lead arranger and bookrunner for a US$2.9 billion medium-term Islamic financing by Etisalat, the UAE telecoms operator, and Mobily, its Saudi Arabian subsidiary. A few years ago,conventional views regarding the GCC region’s risk level would not have supported the current pricing and volumes from commercial lenders. Changes in risk perception orpressure from further growth in volume may lead to a swing back to greater reliance onagency sources of financing and potentially on Shari’ah-compliant Sukuk. Moody’s will continue to review its approach to analysing infrastructure and projectfinance Sukuk, which is currently based on a transaction’s specific contracts andindividual creditworthiness and does not opine on market value or compliance with Shari’ah law.

Islamic Banking The outlook for the Islamic banking industry remains positive. In the GCC, Islamic banks

have hardly suffered from the regional stock market crash that started in the secondquarter of 2006, the effects of which were still being felt in early 2007. With limited direct exposures to the region’s equity markets, no appetite for margin lending and a structuralban on riba-based structured investment products, Islamic banks’ resilience amid currentglobal credit woes is expected to remain strong. With a few exceptions, most GCC-based Islamic banks will continue to focus on their domestic markets, where Shari’ah-compliant lending opportunities are widening, both in the retail segment (with a nascentmortgage market emerging) and on the corporate side (where Islamic tranches have become increasingly common). Islamic banks’ market share in the GCC is currentlyclose to 15%23, and increasing, reflecting their solid entrenchment in servicinghouseholds. In Asia-Pacific, Malaysia remains the core market for Islamic bankers, holding a market share currently close to 14% and expected to reach the 20% line by 2010, as per the regulator’s roadmap. In 2008 and beyond, diversification is expected to be high on Islamic banks’ agendas. First, geographic diversification is expected to intensify for the largest players: a handful of leading GCC-based Islamic banks have started exploring new horizons in Asia, but also beyond the natural borders of theIslamic universe. Second, operating diversification will probably continue to pick up: although Shari’ah-compliant commercial banking will still dominate, alternative businesslines are emerging as powerful forces to enhance disintermediation, and Islamicinvestment banking – including private equity as well as asset and fund management –is playing a critical role in this field.

21 Source: Project Finance International. 22 Source: Ministry of Finance. 23 Source: Moody’s



Third, diversification of funding continuums is expected to address the naturalconstraints faced by Islamic financiers in terms of balance-sheet management: provided that market conditions become more attractive, Islamic banks are expected to be bothheavy buyers and active issuers of Sukuk, especially to cope with widening maturitymismatches between Shari’ah-compliant assets with longer tenors and funding sources still heavily reliant on short-term customer deposits. Fourth, diversification of asset allocation and further portfolio granularity have become critical, especially in view ofIslamic banks’ natural appetite for property-related exposures, at a time when, in several countries where Islamic banks are operating, real estate markets are showing signs ofgrowing tension. In this context, Moody’s expects to assign ratings to a few moreShari’ah-compliant banks, in addition to the eight fully fledged Islamic financialinstitutions that have already been rated so far.

Islamic Real Estate Investment Trusts Malaysia a leading IREIT issuance market

Since Malaysia issued its guidelines for IREITs in 2005, two IREITs have been issued. The first was the Al-Aqar KPJ Healthcare IREIT, which was issued and listed on BursaMalaysia in 2006. In September 2007, Al-Aqar KPJ Healthcare IREIT obtained approval from the SC for the issuance of up to MYR300 million nominal value (US$86 million)Sukuk Ijarah CP and/or MTN.

New IREIT transactions in the UAE and Kuwait driven by a property boom

Al-Aqar KPJ Healthcare IREIT intends to use the proceeds to partly fund its proposedacquisitions of new hospitals, and potentially to finance future acquisitions, refinanceexisting bank borrowings and for working capital. In February 2007, Al-Hadharah Boustead IREIT was listed on Bursa Malaysia. In August2007, eight oil palm estates and two palm oil mills, all located within the MalaysianPeninsula Malaysia, were to be sold to the trust for MYR472 million (US$135 million). Moody’s sees potential for new Asian IREITs to be brought to the market in the comingyears, particularly in the jurisdictions that have developed an environment favourableboth to IREITs and Islamic finance. Malaysia has already established its track record, while IREITs could also debut in Singapore. We also expect new IREITs to have assetsin other Asian jurisdictions, such as China or India, where the real estate markets arebooming and where IREITs are not yet in existence. However, this may change, as theSecurities and Exchange Board of India issued draft IREIT guidelines in December2007. In the GCC, DIB launched Shari’ah-compliant four-year capital-protected global IREITs in early 2007, which will invest through several global REITs in the US, European and Asian (mainly Japanese) real estate markets. Both Dubai-based DIFC and the CBB have issued new regulations related to the issuance and listing of REITs, includingIslamic trusts. Going into 2008, we anticipate growing IREIT issuance in the GCC, mainly the UAE and Kuwait. The property boom in the Middle East makes IREITs amuch needed product and a useful investment tool, given the existing favourableinvestment and regulation environment. Moreover, there has been a growing appetite for the real estate asset class among regional institutional investors as the region boasts theworld's highest concentration of high-net-worth individuals and family businesses, which in the GCC alone is estimated at over US$1.3 trillion.



APPENDIX 1:

Islamic Finance Rated Transactions Closed in 2007 Country Deal Name Originator Name Issuance Size (US$ Million) Issue Rating/Rating of Senior Notes UAE DP World Sukuk Ltd DP World 1,500 A1 UAE DIB Sukuk Co Ltd Dubai Islamic Bank PJSC 750 A1 UAE Dubai Investments LLC DIFC Investments LLC-DIFCA 1,250 A1 UAE JAFZ Sukuk Ltd Jebel Ali Free Zone FZE 2,043.5* A1 UAE Tamweel Residential ABS C1 (1) Ltd Tamweel PJSC 220 Aa2 UAE EIB Sukuk Co Ltd Emirates Islamic Bank PJSC 350 A1 Saudi Arabia Golden Belt 1 Sukuk Co Saad Trading Contracting & Financial Services Co 650 Baa1 Qatar Qatar Alaqaria Sukuk Co Qatar Real Estate Investment Co 300 A2 Kuwait NIG Sukuk Ltd National Industries Group Holding S.A.K. 475 Baa2 Malaysia Malayan Banking Berhad Sukuk Maybank 300 A3 7,838.5 Equivalent to AED7.5 billion.



APPENDIX 2:

Glossary of Islamic Finance Terms al Maqasid al Shari’ah: the objective of Shari’ah.

al adl: a trusted and honourable person, selected by both parties to a transaction.Somewhat analogous to a trustee. amana/amanah: literally means reliability, trustworthiness, loyalty and honesty, and isan important value of Islamic society in mutual dealings. It also refers to deposits in trust,sometimes on a contractual basis. bai/bay: contract of sale, sale and purchase. bai al-salam: advance payment for goods. While normally the goods need to existbefore a sale can be completed, in this case the goods are defined (such as quantity,quality, workmanship) and the date of delivery fixed. Usually applied in the agricultural sector where money is advanced for inputs to receive a share in the crop. fatwa (pl. al fatawa): an authoritative legal opinion based on the Shari’ah. fiqh: practical Islamic jurisprudence. Can be regarded as the jurists’ understanding of the Shari’ah. There are four Islamic jurisprudence, including al-Shaifi, al-Hanifi, al-Maliki and al-Hanbali. gharar: uncertainty in a contract or sale in which the goods may or may not be availableor exist (e.g. the bird in the air or the fish in the water). Also, ambiguity in the consideration or terms of a contract – as such, the contract would not be valid. hadith: the narrative record of the sayings, doings and implicit approval or disapproval ofthe Prophet. halal: permissible, allowed, lawful. In Islam, there are activities, professions, contractsand transactions that are explicitly prohibited (haram) by the Qur’an or the Sunnah.Barring these, all others are halal. An activity may be economically sound but may notbe allowed in Islamic society if it is not permitted by the Shari’ah. haram: unlawful, forbidden (see halal). Describes activities, professions, contracts andtransactions that are explicitly prohibited by the Qur’an or the Sunnah. hawala: bill of exchange, promissory note, cheque or draft. A debtor passes on the responsibility of payment of his debt to a third party who owes the former a debt. Thus,the responsibility of payment is ultimately shifted to a third party. Hawala is used indeveloping countries as a mechanism for settling international transactions by book transfers. ijarah/ijara: lease, hire or the transfer of ownership of a service for a specified period foran agreed lawful consideration. This is an arrangement under which an Islamic bankleases equipment, a building or other facility to a client for an agreed rental. ijarah wa iqtina/ijarah muntahla bittamleek: a leasing contract used by Islamic financial institutions that includes a promise by the lessor to transfer the ownership of theleased property to the lessee, either at the end of the lease or by stages during the termof the contract. ijtihad: literally effort, exertion, industry, diligence. As a legal term, it means the effort ofa qualified Islamic jurist to interpret or reinterpret sources of Islamic law in cases where no clear directives exist. istisna’a/istisna: a contract of sale of specified goods to be manufactured with anobligation on the manufacturer to deliver them on completion. It is a condition in istisnathat the seller provides either the raw material or the cost of manufacturing the goods. maisir/maysir: the forbidden act of gambling or playing games of chance with theintention of making an easy or unearned profit. manfa’a: a form of contract in which one party gains the right to use or benefit from the use of an asset.



mudaraba/mudarabah: a form of contract in which one party (the rab-al-maal) brings capital and the other (the mudarib) personal effort. The proportionate share in profit isdetermined by mutual consent, but the loss, if any, is borne by the owner of the capital, unless the loss has been caused by negligence or violation of the terms of the contractby the mudarib. A mudaraba is typically conducted between an Islamic financialinstitution or fund as mudarib and investment account holders as providers of funds. mudarib: the managing partner or entrepreneur in a mudaraba contract (see above),see also rab almal. murabaha: a contract of sale with an agreed profit mark-up on the cost. There are two types of murabaha sale: in the first type, the Islamic bank purchases the goods andmakes them available for sale without any prior promise from a customer to purchasethem, and this is termed a normal or spot murabaha; the second type involves a promisefrom a customer to purchase the item from the bank, and this is called murabaha to thepurchase order. In this latter case, there is a pre-agreed selling price that includes the pre-agreed profit mark-up. Normally, it involves the bank granting the customer amurabaha credit facility with deferred payment terms, but this is not an essentialelement. musharaka/musharakah: an agreement under which the Islamic bank provides fundsthat are mingled with the funds of the business enterprise and possibly others. Allproviders of capital are entitled to participate in management, but are not necessarilyobliged to do so. The profit is distributed among the partners in a pre-determined manner, but the losses, if any, are borne by the partners in proportion to their capitalcontribution. It is not permitted to stipulate otherwise. qard al hasan/qard hassan: a virtuous loan in which there is no interest or mark-up. The borrower must return the principal sum in the future without any increase. rab-al-maal: the investor or owner of capital in a mudaraba contract (see above). rahn: a mortgage or pledge. riba: interest. Sometimes equated with usury, but its meaning is broader. The literalmeaning is an excess or increase, and its prohibition is meant to distinguish between anunlawful exchange in which there is a clear advantage to one party in contrast to amutually beneficial and lawful exchange. riba al-buyu: a sale transaction in which a commodity is exchanged for the samecommodity but unequal in amount or quality, or the excess over what is justified by the counter-value in an exchange/business transaction. sadaqa: voluntary charity. salam: a contract for the purchase of a commodity for deferred delivery in exchange forimmediate payment. shari’a/Shariah/Shari’ah: in legal terms, the law as extracted from the sources of law (the Qur’an and the Sunnah). However, Shari’ah rules do not always function as rules oflaw as they incorporate “obligations, duties and moral considerations that serve to fosterobedience to the Almighty”. shirkat al-aqad: a joint-venture partnership. shirkat al-milk: a co-ownership partnership. Saak: participation securities, coupons, investment certificates. Plural Sukuk. Sunnah: the way of the Prophet Mohammed including his sayings, deeds, approvalsand disapprovals as preserved in the hadith literature. It is the second source ofrevelation after the Qur’an. Takaful: a Shari’ah-compliant system of insurance based on the principle of mutualsupport. The company’s role is limited to managing the operations and investing the contributions. tawarruq: literally monetisation. The term is used to describe a mode of financing,where the commodity sold is not required by the borrower but is bought on deferredterms and then sold to a third party for a lower amount of cash, so becoming “monetised”. The reverse of murabaha.


2005 Review and 2006 Issuance Outlook: EMEA RMBS Moody’s Investors Service • 21

ummah: the community or nation. Used to refer to the worldwide community of Muslims.urf: the customs of a community. wa’d: a promise or unilateral undertaking. wadiah: a deposit. wakala: agency, an agency contract that generally includes in its terms a fee for the agent. wakeel al-Istithamr: an investment agent. waqf: a charitable endowment. zakah/zakat: a tax that is prescribed by Islam on all persons having wealth above anexemption limit at a rate fixed by the Shari’ah. Its objective is to collect a portion of the wealth of the well-to-do and distribute it to the needy. The way it is distributed is set outin the Qur’an. It may be collected by the state, but otherwise it is down to each individual to distribute the zakat.

SF104427isf

© Copyright 2007, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from USD1,500 to approximately USD2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

22 • Moody’s Investors Service 2007 Review & 2008 Outlook: Islamic Finance EMEA and Asia-Pacific

SELECTED RESEARCH

For a more detailed explanation of Moody’s approach to this type of transaction, as wellas similar transactions, please refer to the following reports:

Rating Methodologies: − Securitisation in New Markets: Moody’s Perspective, September 2006 (SF74362)

− Moody’s Approach to Rating RMBS in Emerging Securitisation Markets – EMEA, June 2007 (SF97186)

Special Comments: − Asian Sukuk: Review and Introduction to Moody's Rating Approach, August 2007

(104446) − Risk Issues at Islamic Financial Institutions, January 2008 (107175) − Understanding Moody’s Approach to Unsecured Corporate Sukuk, August 2007

(103919) − Shari’ah and Sukuk: A Moody’s Primer, May 2006 (SF74488) − A Guide to Rating Islamic Financial Institutions, April 2006 (97226) − Moody’s Involvement in Rating Islamic Financial Institutions, April 2006 (97113)

Transaction Reports: − Tamweel Residential ABS CI (1) Ltd, June 2007 (SF101479)

− Tamweel PJSC, November 2007 (105926) − UAE CMBS Vehicle No. 1 Limited, June 2007 (SF101325) − Dubai Electricity and Water Authority, November 2007 (105503) − Jebel Ali Free Zone FZE, November 2007 (105696) − Qatar Real Estate Investment Company, July 2007 (103653) − DP World, June 2007 (102891) − Saad Trading Contracting & Financial Services Company, May 2007 (102659) − DIFC Investments LLC, May 2007 (103068) − National Industries Group Holding NIG, April 2007 (102600) − Malaysia Global Sukuk Inc. US$ 600,000,000 Trust Certificates Due 2007, July 2002

(SF15069) To access any of these reports, click on the entry above. Note that these references are current as of the date of

publication of this report and that more recent reports may be available. All research may not be available to allclients.


2005 Review and 2006 Issuance Outlook: EMEA RMBS Moody’s Investors Service • 23

Date post:	11-Apr-2015
Category:	Documents
Upload:	lahem88
View:	738 times
Download:	0 times

2007 Review and 2008 Outlook Islamic Finance

Documents