10.9.20 sukuk and fixed income investments in islamic finance · global islamic finance performance...
TRANSCRIPT
Content Introduction & market size
Risk assets with fixed returns
Sukuk/Note with fixed returns
Equities structured within a portfolio
WHAT IS ISLAMIC FINANCE?
Interest is money earned or money received on money itself
Global Islamic Finance PerformanceBanking
Capital Market/Islamic FundsTakaful
2016$1.89 trillion
2017$2.05 trillion
8.3% growth
Sukuk
2016$318 billion
2017$399.9 billion
25.6% growth
% of Islamic to conventional banking asset
As at
Middle East & North Africa 14% June 2013
GCC 25% ($490 billion) June 2013
Bahrain – retail banking 27%
Bahrain – retail & wholesale banking
13%
N30.86Tn
Value of the Niger ian Debt Market (Sukuk Inc lus ive) as at Jan .
2020
N211.4Bn
Sukuk share of the Debt market as at Jan.
2020
0.69%
N925.8Bn
Incremental I ssuance of N711.4Bn worth of
Sukuk (Sovereign, Sub-nat ional and Corporate)
3%
338% Increase
2025 TargetTo achieve 3% of the Debt market
share
N37.207Tn
Tota l Asset va lue of Banks as at
December 2018
N159.1Bn
Contr ibut ion of NIBs to the Total Asset S i ze as
at December 2018
0.43%
N1.1Tn
Incremental c reat ion of N957.1Bn worth of
Assets needs to be created
3%
602% Increase
2025 TargetTo achieve 3% of the
Banking industry Total Assets
5 Year Projection (Provided 2018 Figures are Constant)
*Data Source – CBN,FMDQ, JAIZ Bank and Sterling Bank
PARTNERSHIPMudarabah (investment
partnership)
LEASEIjarah (lease)
Ijarah (forward lease)
JOINT OWNERSHIPMusharaka (joint venture)
SALEMurabaha (mark-up sale)Istisna (construction sale)
Salam (forward sale)
EQUITY DEBT
Basic Islamic finance contracts with emphasis on expected (fixed) returns
SERVICESKafala (guarantee)
Qard (interest-free loan)
SERVICESAgency
Wakala (agency)
SERVICES Are fixed returns allowed under Islamic finance?
What transactions can give such returns?
Can partnership modes guarantee fixed return?
Demand
Guarantee Firm
SPV
Supplier
Investors
ABC CapitalArranger
Other Agents AdviserWarehouse agents
Create
Guarantee
• Logistics• Supplier• Demand• Guarantee
Attract Investors at a low price
Partnership (mudarabah) Arrangement
Co-ownership (musharakah) Arrangement
Fertilizer Trading Sukuk/Syndication/Note
Underwriter
Can there be fixed-income in a partnership contract?
What happens when there is a loss of capital or no profit made?
What happens if takaful/insurance company fails to cover loss/fire accident in the warehouse?
Major Risk: Equity investment risk, business risk, moral hazard
Real Estate Developers
ABC Capital, DubaiCash Collateral
TB Financial Group
TB Real Estate Sukuk Co/SPV
Guarantor
1 2
4
5a
3
8
7
Gives purchase order to
supply houses worth
N25bSeek for Bank Guarantee
Provides USD as a
Mudarabah investment
Ensures DD is completed and
grants BG of 50% @ zero cost
under a kafala arrangement 5b
Gives 50% of
the BG @ 2% flat
Appoints TB Group as
Fund Manager & to get
additional guaranteeProvides funding for
construction of houses
Provide N20b through
forward lease @ 25%
rentals for 2 years
Investors
Gives fixed (expected) return of 12.5% PA to investorsMobilize N20b on
forward lease basis
6
9
Income Generating Forward Lease Sukuk Model(Sukuk Al-Ijarah)
N5b profit is shared in 2 years
Major risk: Performance and repayment risk
ABC Bahrain
Coy 1
XYZ Capital
Metal Trading Note or Private SukukDouble murabaha (mark-up sale) $10m funding structureNo secondary market since receivables cannot be traded. Cannot be refinanced.
1 Gives $10m to buy and sell goods/liquid instruments on its behalf at a mark-up of LIBOR+4 in a revolving pattern for one year
2 Gives a total of $10m to trade at a mark-up of LIBOR+8 in a revolving pattern for one year
Coy 2
Coy 33 Returns a total of $10m plus LIBOR+8 by day 365
4a Returns a total of $10m plus LIBOR+4 by day 365.
4b XYZ Capital makes a spread of 4%
Major risk: Commodity and inventory risk, repayment risk due to COVID
Equities 1 First Level ScreeningQualitative ScreeningExclusion of securities of Companies with primary source of income from alcohol, tobacco, ammunitions, pork, gambling, and interest (all conventional financial
institutions).
2 Second Level ScreeningQuantitative Screening
i Investee Company Debt Capital should not exceed 30% of Market Capitalizationii Interest income plus other non-permissible income divided by total revenue must not
exceed 5% iii Cash + Interest Bearing Securities divided by market capitalization must not exceed 30%
iv Receivables divided by Total Assets must not exceed 30%v Net liquid assets to Market cap - The company’s net liquid assets [cash + trade debtors]
– trade creditors) should not equal nor exceed the market cap of the company.
NB. If this ever happens the Shariah advisor needs to be consulted immediately.3 Third Level Screening
Fundamental Analysis as conducted by Fund ManagersMajor risk: Market volatility. RIETs may be better if well structured. Mix with other asset classes within a portfolio is essential.
Many thanks
Basheer Oshodi [email protected]