Islamic Finance 2008 Outlook

8/11/2019 Islamic Finance 2008 Outlook

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International Structured FinanceEurope, Middle East, Africa & Asia-Pacific

Special Report

2007 Review and 2008 Outlook:

Islamic Finance: Sukuk Take Centre Stage, Other Shariah-Compliant Products GainPopularity as Demand Increases

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

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 OfficerFinancial 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 [email protected]

Client Service DeskLondon: +44 20 7772 5454

Paris: +33 1 5330 1074

Madrid: +34 91 702 6616

Website

www.moodys.com

25 February 2008


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SUMMARY: 2007 REVIEW / 2008 ISSUANCE OUTLOOK

Islamic finance makes up a small part of the world finance industry, estimated to be

worth around US$700 billion1globally. 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 driven

by high oil prices. This rapid growth shows no signs of slowing. Within a large segment of

Muslim societies and communities, the compliance of financial services with Shariah

rules and principles is a primary concern for the users of these services. As such, efforts

to 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, Shariah-compliant

financial services could appeal to other segments of the population so long as the quality

of 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, or

Shariah. In practice, Islamic finance involves using traditional investment techniques

and structures that comply with Shariah 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 Shariah-complaint product is Shariah scholar

approval, or fatwa. Hence, Islamic banks and conventional banks that invest some o f

their capital in Islamic finance through an Islamic finance "window" have a religious

board or committee composed of Shariah scholars. The Shariah committee examines

proposed transactions and, in the case of Islamic banks, reviews the overall activities of

the bank, for compliance with Shariah 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 Amlak

Finance; both are planning to issue their sukuk when the market stabilise.Record number of deals in 2007 Moodys has observed the following developments in Islamic Finance in EMEA and

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 in

2006, while the average deal size increased to US$269.8 million from US$175

million.

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 current

account surpluses widened. Moreover, since the 2006 equity market crisis,

corporates have shifted their funding focus more into debt markets. This trend

continued into 2007, albeit the equity markets recovered significantly during the

year.

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$10.13

billion issued. However, Ijarah structures were more frequently issued, with 54 deals

compared 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.

2 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance


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Tamweel Residential ABS CI (1)

Ltd is the first GCC globally rated

residential Islamic securitisation

Moody's assigned definitive credit ratings, ranging from Aa2to 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 in Dubai, United

Arab Emirates (UAE). This is also the first securitisation originated by Tamweel PJSC

(A3/P-2, stable), one of the major and fastest-growing Shariah-compliant home

financing lenders in the UAE.

Sudan was the first African country to issue a Sukuk in 2007, a US$130 million

transaction to finance a cement project on the River Nile.

Takaful industry premiums reached nearly US$2.5 billion in 2007,5and are expected

to reach US$7.4 billion by 2015, representing a growing segment for Islamic

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 Takaful companies.

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 and

utilities 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 issues

demonstrates that investors appetite for Sukuk with an equity potential upside

remains strong, given the recent gains in the equity market. The future of convertible

Sukuk looks promising. A number of issues have come to the market recently,

including Tamweel PJSC for US$300 million.

In September 2007, Al-Aqar KPJ Healthcare Islamic real estate investment trust

(IREIT) obtained approval from the Malaysian Securities Commission (SC) for the

issuance 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) issuedShariah-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.

Growing Islamic real estate

investment trusts issuance in

Malaysia and the GCC

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 Modarabah Murabaha Manfa'a Istisnaa Al Salam

U

M

i

o

0

10

20

30

40

50

60

I

s

N

Size ( US$ Million) Issue No.

5 Moodys estimate.

2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 3


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More corporate than sovereign

Sukuk issued in 2007

Chart 2:

EMEA and Asia Pacific 2007 Sukuk Type

Sovereign

26%

Corporate

74%

In 2008, Moodys 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 of

Japan, Thailand and the UK. Moreover, given that most GCC currencies will continueto be pegged to the US dollar in 2008, and due to inflationary pressures and 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 and

Asia-Pacific.7 More than 65% of funds are expected to emanate from the Middle East

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.

The Takaful industry will grow by around 13% per annum to 2015, with Takaful

premiums reaching US$7 billion, thereby representing a segment that is witnessing

growing demand for Islamic investment opportunities.

Takaful industry to grow by 13%

per annum

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.

REITs, both in Asia-Pacific and the GCC, are expected to reach new record issuance.

Given the phenomenal property boom in these markets, this makes IREITs a much

needed product and a useful investment tool. Moreover, the potential 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.

Convertible or subordinated Sukuk

and IREITs will be in demand by

investors

6 Reaching US$200 billion by 2010.7 Ernst & Young estimate.8 Source: Qatar Ministry of Finance.



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Chart 3:

Global Islamic Sukuk Issued in USD Million

0

5000

10000

15000

20000

25000

30000

35000

2001 2002 2003 2004 2005 2006 2007

V

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m

e

n

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

Asia-Pacific, mainly Shariah-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.

Moodys 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 areaccessible to Moodys.

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, Moodys is aware of new

developments in other regions such as Africa and Europe, and has highlighted

them in this report.

Moodys 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, Moodys 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 Shariah

law.



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COUNTRY ANALYSIS

Gulf Co-operation Council (GCC): More Than US$19 Billion inSukuk Issuance in 2007, with UAE and Saudi Arabia Accountingfor 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

U

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0

5

10

15

20

25

30

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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,

Tamweels 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 sovereignlinkage that may constrain the rating to that of the relevant government.



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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 by the

increasing funding needs of local companies, strong appetite from originators and

investors for Shariah-compliant products and the soundness of the Saudi economy,

supported by record oil prices. In 2007, five deals came to the market compared to only

two deals in 2006, resulting in US$5.7 billion being issued, an increase of more than

500%. 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. The

Takaful and real estate industries saw important developments in 2007, with the CMA

developing 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 Arabias 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 2008

Mortgage Law, and due to the governments limited role in financing housing, the private

sector is anticipated to assume a greater role in this respect. Institutions such as National

Commercial 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 mortgage

structures.

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 Shariah-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-sizedinvestors the opportunity to benefit from the strong performance of Mecca 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 both

the company's fundamental creditworthiness and the credit enhancement that can be

achieved from government support. Qatars 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.



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Asia-Pacific: Malaysia Continues to Lead in Global RinggitIssuance

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 for

Islamic finance.11 The government has been very proactive in encouraging Islamic

finance, implementing measures such as numerous tax benefits that favour Sukuk

funding 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 global

outstanding as of 31 December 2007.

Chart 6:

Asian Sukuk Issuance

Malaysia

95.2%

Indonesia

0.3%Pakistan 3.0%

Brunei 1.5%

Cagamas Berhads 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 Sukuk

market 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 to its 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 MTN

programme was also proposed by Cagamas. The programme consisted of MYR20 billion

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.10Source: Bloomberg.11For more details, refer to our Special Comment. Asian Sukuk: Review and Introduction to Moodys Rating Approach.



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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

R

M

B

o

Conventional Sukuk Combination

Malaysia has also become a hub

for cross-border issuance

While the bulk of Malaysias issuances remain domestic, there was increasing interest in

the cross-border Islamic market in 2007. The SC approved more than US$8.3 billion US

dollar-denominated Sukuk issued by foreign corporations in 2007, which was much

higher 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. Among

these, 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.

Moodys 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 refinance existingconventional US dollar subordinated notes. The transaction will allow Maybank to raise

funds on terms compliant with Shariah principles. It will also count as Tier 2 capital

under existing capital adequacy regulations. The rating is directly linked to that of

Maybank, the obligor, because it has agreed to provide advances to cover any shortfall

between the profits generated from the portfolio assets and the required periodic

distribution amount to certificate holders. Maybank has also irrevocably undertaken to

purchase the issuer's interest in the portfolio assets at the relevant exercise price

sufficient to pay the certificate holders, either at maturity or on dissolution. Moodys

noted that Maybank, as the asset manager, will collect profit from the portfolio assets

and pay the issuer an amount sufficient to fund the required periodic distribution to

certificate holders on each distribution date. Any excess profit, after meeting the required

periodic distribution amount from the portfolio assets, will be paid to Maybank as 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 markets 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 a

second set of regulations that represent an attempt to encourage insurers, pension

funds, banks and mutual fund managers to invest in Sukuk.

12Source: Malaysian Securities Commission, Sukuk approved-not issued13The upgrade in May 2007 was related to Moodys application of its refined Joint-Default Analysis and updated Bank Financial Strength Rating

methodologies.



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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 collective

investment 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.

Moodys considers this target achievable, given the efforts of domestic banks and the

issuance of Islamic banking licences to foreign players. This creates significant growth

potential 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 to

senior 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 their

Islamic windows, may also consider issuing subordinated Sukuk to access a broader

base 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) of

Sukuk Ijarah backed by four properties, in January 2008. (The properties are removed

from 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 Malaysian

regulator 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

Pakistans14 and Indonesias 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 are

expected 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 millionMuslims

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 countrythrough foreign partnerships, such as Emirates and Sudan Bank, which is backed by DIB,

Shariah 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 first African country to issue

a Sukuk, for US$130 million, to finance a cement project on the River 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 started branching out into Egypt. Amlak

Finance, which is offering medium- to long-term Shariah-compliant refinancing solutions

for residential and commercial properties, has opened a new office in Cairo. ADIB and

Bahrain Islamic Bank have also started similar ventures.

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



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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 the

government 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 projects

in 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 Shariah supervisory board, which

has overseen the development of a range of products for the local market. These include

chequering accounts, contractual and discretionary savings with transactional capability

and Shariah wills for the personal market. Vehicle and asset finance are offered 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$300

million and US$500 million, through Japan International Bank for Corporation, this

issuance is expected to come to the market by the end of Q1 2008. Moreover, Thailand

and Singapore are contemplating issuing their first Sukuk in 2008.

Singapore and Hong Kong stepping

up their Islamic finance efforts

Singapores authorities have made evident their interest and enthusiasm for Islamic

products.15The Monetary Authority of Singapore (MAS) constantly works with the industry

to ensure both Islamic and conventional financing have comparable supervision under

the countrys 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 Shariah 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) afterapproval from MAS for a full bank licence in May 2007. IB Asia will focus on corporate,

capital market and private banking services. The Singapore financial community 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 Islamic

fund (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 for mainland

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 become a

platform for the development of Islamic securitisation.

Europe

Europe might see its first

sovereign Sukuk issued

The UK has made concrete steps forwards, given Londons appeal as a centre for

Islamic finance. Over the past three years, the UK has made significant changes to its

tax 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 claim

the title of Islamic finance centre of Europe. For 2008, the UK treasury is

contemplating issuing its first sterling Sukuk.

15Speech 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.



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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 raised

is 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 it

requires legal isolation and sale of the assets from the borrower to create a structure

whose cash flows and risk profile are driven primarily by the assets. These risk-sharing

characteristics make securitisation closer to the Shariah ideals of participating in the

collective legal or beneficial ownership of an asset and its value.

In the GCC, Moodys believes that real estate (residential and commercial) will drive the

majority of corporate Islamic securitisations in the short term. This is mostly due to the

sizeable financing needs of the sector, and the markets familiarity with and interest in

the underlying assets. All GCC economies are largely dependent on the oil and

petrochemical industry; these industry assets too hold significant potential for project

finance asset-backed Sukuk. The ongoing preparation for Basel II is also driving a focus

on balance sheets as regional banks reach their risk limits on real estate and project

lending and are hence looking to free up capital through securitisation.

In July 2007, Tamweel issued the first GCC globally rated Islamic securitisation, a

structured Sukuk that passed legal ownership of residential property located in Dubai and

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 that

deals 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.Tamweels timing was fortuitous and it raised a significant proportion of its funding at

Aa2 levels while Tamweel itself has an issuer rating of A3 (Ba3 when excluding the

external support element captured by Moodys GRI methodology).18

In 2008, we expect more Islamic securitisation transactions from issuers across the GCC

as the structuring and legal complexities and expertise required become more

commonplace. 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 backed by

four properties in January 2008. The properties are removed from the balance sheet of

the originator, Telecom Malaysia Berhad.

17For more details on the credit risk consideration of purchase undertakings, refer to our See Special Comment: Shariah and Sukuk: A MoodysPrimer, published in May 2006.

18See Credit Analysis: Tamweel PJSC.



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Islamic Funds and Private EquityIslamic funds have expanded significantly in the past five years, growing at a compound

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 number of 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 these funds in the GCC is

still minimal, only accounting for over 1% of GCC GDP. Saudi Arabia is considered one of

the biggest markets for Shariah-compliant funds. NCB Capital issued one of the biggestGCC funds, targeting US$1 billion, through investing in GCC equity markets and

Murabaha funds as approved by the NCBs Shariah 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 IREITs rose by nearly 36% between

2002 and 2006 to reach nearly US$200 million. In the UK, Barclays Capital has

launched its first Shariah-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 estate fund, 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 Jadwas Sukuk

Fund, are to be introduced in the GCC region in 2008. Moodys is aware of a number of

issuers planning to launch Sukuk structured funds in H1 2008.

MENA and Asia-Pacific account for

65% of global funds

Private equityis also gaining momentum. Venture capital and private equity funds that

do not utilise conventional leverage instruments are ideal tools for making investments in

an 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 Shariah compliancy. An indication of the

acceptance of these vehicles for making Islamic-compliant investments is the number of

conventional private equity and venture capital funds that have passed Shariah

compliance tests with only minor adjustments made to the investment policies of the

funds themselves. A Shariah supervisory board is appointed and detailed Shariah

compliance criteria are incorporated into the offering and operational documents. Despite

this, Shariah-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 factor constraining Islamic

finance private equity issuance has been the reliance of many transactions on leverage.

The general consensus among most Shariah scholars is that a transaction's debt-to-

equity ratio must be less than 33%. Many of the transactions made recently, especially in

the merger and acquisition fields, have a much higher dependency on borrowing.

Private equity is an ideal Islamic-

compliant investment structure

but with conservative borrowing

TakafulTakaful industry premiums reached nearly US$2.5 billion in 2007,20and 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 the GCC,Saudi Arabia is recognised as the most active Takaful market. The CMA is opening up its

insurance market with the issuance of 13 new licences, including five for Takaful

companies. The economic boom in the GCC has created a substantial investment in

infrastructure projects, as has the growth in retail Islamic banking solutions including

Islamic mortgages, which creates opportunities for Takaful operators due to the

increased demand for mortgage protection products and home owners comprehensive

Takaful plans. Moodys approach to analysing a Takaful company is very similar to that

for a conventional mutual insurance company, given that the distribution between a

premium and a donation is, in Moodys 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

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

Malaysia and Saudi Arabia to play

a significant role in the Takaful

market in the coming years

19Source: Ernst &Young numbers and analysis.20Source: Moodys estimates.



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Infrastructure and Project Finance

Shariah-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, 21prospective 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 terms of 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 in the energy

and telecoms sectors, of which, US$15 billion is lined up to be financed by long-term

fixed-income securities, both conventional and Islamic bonds. In the past several years,

commercial banks have led the syndication project finance market. Driven by an improved

perception of the regions risk, spreads below 100 basis points are common, 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 regions risk level would not have supported the

current pricing and volumes from commercial lenders. Changes in risk perception or

pressure from further growth in volume may lead to a swing back to greater reliance on

agency sources of financing and potentially on Shariah-compliant Sukuk.

Moodys will continue to review its approach to analysing infrastructure and project

finance Sukuk, which is currently based on a transactions specific contracts and

individual creditworthiness and does not opine on market value or compliance with

Shariah 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 second

quarter of 2006, the effects of which were still being felt in early 2007. With limited

direct exposures to the regions equity markets, no appetite for margin lending and a

structural ban on riba-based structured investment products, Islamic banks resilience

amid current global 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

Shariah-compliant lending opportunities are widening, both in the retail segment (with a

nascent mortgage market emerging) and on the corporate side (where Islamic tranches

have become increasingly common). Islamic banks market share in the GCC is currently

close to 15%23, and increasing, reflecting their solid entrenchment in servicing

households. 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 regulators 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 the Islamic

universe. Second, operating diversification will probably continue to pick up: althoughShariah-compliant commercial banking will still dominate, alternative business lines are

emerging as powerful forces to enhance disintermediation, and Islamic investment

banking including private equity as well as asset and fund management is playing a

critical role in this field.

21Source: Project Finance International.22Source: Ministry of Finance.23Source: Moodys



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Third, diversification of funding continuums is expected to address the natural

constraints faced by Islamic financiers in terms of balance-sheet management: provided

that market conditions become more attractive, Islamic banks are expected to be both

heavy buyers and active issuers of Sukuk, especially to cope with widening maturity

mismatches between Shariah-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 of

Islamic 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, Moodys expects to assign ratings to a few more

Shariah-compliant banks, in addition to the eight fully fledged Islamic financial

institutions 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 Bursa

Malaysia 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 propertyboom

Al-Aqar KPJ Healthcare IREIT intends to use the proceeds to partly fund its proposed

acquisitions 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 August

2007, eight oil palm estates and two palm oil mills, all located within the Malaysian

Peninsula Malaysia, were to be sold to the trust for MYR472 million (US$135 million).

Moodys sees potential for new Asian IREITs to be brought to the market in the coming

years, particularly in the jurisdictions that have developed an environment favourable

both 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 assets in

other Asian jurisdictions, such as China or India, where the real estate markets are

booming and where IREITs are not yet in existence. However, this may change, as the

Securities and Exchange Board of India issued draft IREIT guidelines in December 2007.

In the GCC, DIB launched Shariah-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, including Islamic 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 a much needed product and

a useful investment tool, given the existing favourable investment and regulation

environment. Moreover, there has been a growing appetite for the real estate asset class

among regional institutional investors as the region boasts the world's highest

concentration of high-net-worth individuals and family businesses, which in the GCC alone

is estimated at over US$1.3 trillion.



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APPENDIX 1:

Islamic Finance Rated Transactions Closed in 2007

Country Deal Name Originator Name Issuance Size (US$ Million)

UAE DP World Sukuk Ltd DP World 1,500

UAE DIB Sukuk Co Ltd Dubai Islamic Bank PJSC 750UAE Dubai Investments LLC DIFC Investments LLC-DIFCA 1,250

UAE JAFZ Sukuk Ltd Jebel Ali Free Zone FZE 2,043.5*

UAE Tamweel Residential ABS C1 (1) Ltd Tamweel PJSC 220

UAE EIB Sukuk Co Ltd Emirates Islamic Bank PJSC 350

Saudi Arabia Golden Belt 1 Sukuk Co Saad Trading Contracting & Financial Services Co 650

Qatar Qatar Alaqaria Sukuk Co Qatar Real Estate Investment Co 300

Kuwait NIG Sukuk Ltd National Industries Group Holding S.A.K. 475

Malaysia Malayan Banking Berhad Sukuk Maybank 300

7,838.5

Equivalent to AED7.5 billion.

2007 Review and 2008 Outlook: Islamic Finance


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APPENDIX 2:

Glossary of Islamic Finance Terms

al Maqasid al Shariah: the objective of Shariah.

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 is an

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 exist before

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 Shariah.

fiqh: practical Islamic jurisprudence. Can be regarded as the jurists understanding of the

Shariah. 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 of

the Prophet.

halal: permissible, allowed, lawful. In Islam, there are activities, professions, contracts

and transactions that are explicitly prohibited (haram) by the Quran or the Sunnah.

Barring these, all others are halal. An activity may be economically sound but may not be

allowed in Islamic society if it is not permitted by the Shariah.

haram: unlawful, forbidden (see halal). Describes activities, professions, contracts and

transactions that are explicitly prohibited by the Quran or the Sunnah.

hawala: bill of exchange, promissory note, cheque or draft. A debtor passes on theresponsibility 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 in

developing 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 for

an agreed lawful consideration. This is an arrangement under which an Islamic bank

leases 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 the leased

property to the lessee, either at the end of the lease or by stages during the term of the

contract.

ijtihad: literally effort, exertion, industry, diligence. As a legal term, it means the effort of

a qualified Islamic jurist to interpret or reinterpret sources of Islamic law in cases where

no clear directives exist.

istisnaa/istisna: a contract of sale of specified goods to be manufactured with an

obligation on the manufacturer to deliver them on completion. It is a condition in istisna

that 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 the

intention of making an easy or unearned profit.

manfaa: a form of contract in which one party gains the right to use or benefit from the

use of an asset.



19/22

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 is

determined 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 contract

by the mudarib. A mudaraba is typically conducted between an Islamic financial

institution 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 twotypes of murabaha sale: in the first type, the Islamic bank purchases the goods and

makes them available for sale without any prior promise from a customer to purchase

them, and this is termed a normal or spot murabaha; the second type involves a promise

from a customer to purchase the item from the bank, and this is called murabaha to the

purchase 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 a

murabaha credit facility with deferred payment terms, but this is not an essential

element.

musharaka/musharakah: an agreement under which the Islamic bank provides funds

that are mingled with the funds of the business enterprise and possibly others. All

providers of capital are entitled to participate in management, but are not necessarily

obliged 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 capital

contribution. 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 literal

meaning is an excess or increase, and its prohibition is meant to distinguish between an

unlawful exchange in which there is a clear advantage to one party in contrast to a

mutually beneficial and lawful exchange.

riba al-buyu: a sale transaction in which a commodity is exchanged for the same

commodity 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 for

immediate payment.

sharia/Shariah/Shariah: in legal terms, the law as extracted from the sources of law

(the Quran and the Sunnah). However, Shariah rules do not always function as rules of

law as they incorporate obligations, duties and moral considerations that serve to foster

obedience 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, approvals and

disapprovals as preserved in the hadith literature. It is the second source of revelation

after the Quran.

Takaful: a Shariah-compliant system of insurance based on the principle of mutual

support. The companys 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 deferred terms 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 Moodys Investors Service 19


20/22

ummah: the community or nation. Used to refer to the worldwide community of Muslims.

urf: the customs of a community.

wad: 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 an

exemption limit at a rate fixed by the Shariah. 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 out

in the Quran. It may be collected by the state, but otherwise it is down to each individual

to distribute the zakat.



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SF124315isf

Copyright 2008, Moodys Investors Service, Inc. and/or its licensors and affiliates (together, MOODYS). All rights reserved. ALL INFORMATION CONTAINED

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PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODYS PRIOR WRITTEN CONSENT. All information contained

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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,

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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.

MOODYShereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) andpreferred stock rated by MOODYShave, prior to assignment of any rating, agreed to pay to MOODYSfor appraisal and rating services rendered by it fees ranging

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