TBLI CONFERENCE

AMSTERDAM

The Relevance of Islamic Finance Principles

By Asad ZafarCEO

Al Rayan Investment LLC13 - 14 November 2008

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ContentsContents1. Who are we ?

- Masraf Al Rayan - Al Rayan Investment

2. What is Islamic finance ? - Origins - Principles - Industry evolution - Growing product availability - Key building blocks - Ijara - Istisna

3. The relevance of Islamic finance principles today - The ideal Islamic finance model - Unprecedented global financial crisis - Global equity market correction - Declining base metal prices - Precious metal prices - Declining commodity prices - Shariah “based vs compliant” - Conventional vs. Islamic finance - The way forward

• Masraf Al Rayan was incorporated in Jan 2006 and is licensed by the QCB• Full service bank, commenced operations in Oct 2006 • The bank currently has three branches in Doha

• Authorized and paid up capital of US$2 billion and US$ 1 billion respectively• The IPO in 2006 was 5.5 times oversubscribed• The shares are listed on the Doha Stock Market • Total assets of the bank are over QR 10 billion• Net profit for 12 months ending 2007 was over QR 1.1 billion

• Currently over 200,000 shareholders• Approximately 69% of the bank is owned by Qatari citizens• Approximately 31% of the banks’ shares are owned by GCC citizens• Approximately 27% of the bank is owned by Qatari Government related entities• The Bank has a nine member Board of Directors • The Chairman and Managing Director of the bank is Dr Hussain Ali Al Abdulla

• Al Rayan Investment LLC - Qatar 100%• Lusail Waterfront Investment - Qatar 100%• Pak Qatar General Takaful - Pakistan 20%• Pak Qatar General Family Takaful - Pakistan 20%• Kirnaff Installment Company - Saudi Arabia 20%

Masraf Al Rayan

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Overview

Financials

Shareholders

Subsidiaries

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Al Rayan Investment LLC

• 100% owned Investment banking subsidiary • PIIB 2 License. Authorized & regulated by Qatar Financial Centre• Authorized and paid up capital of US$ 100 million• Operational in June 2008• Plan to have 50 Staff over 5 years

• People

• Teamwork

• Leadership

• Trusted Advisor

• Doing the right thing

• Link GCC with Asia, Europe and America

• The Investment Platform has 5 units or divisions aside from the Institutional Sales team

- Asset Management

- Asset Backed Investments

- Real Estate

- Private Equity and Venture Capital

- Brokerage

Overview

Our Values

Vision

Business Units

Islamic IntermediationIslamic Intermediation

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Islamic finance - Origins

An ethical and equitable mode of finance derived from the Holy Book (the Quran) and the traditions of the Prophet Muhammad (PBUH) - (the Sunnah) and (the Hadith).

Shariah (Islamic law) prohibits interest. This does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest.

In an Islamic framework, profit-sharing is the method recommended for business to operate. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.

In its current and broadest form, Islamic finance encompasses a wide range of products comparable to traditional banking products – from current accounts and home financing to syndicated finance and capital markets – which has been adapted to comply with Islamic law requirements

Origins dates back over 1400 plus years

Interest is prohibited

Profit-sharing methodology

Wide range of products available

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Islamic finance - Principles

Gharar (Uncertainty, Risk or Speculation) is also prohibited

– This includes mis description or ignorance of goods, or their price; encompasses a sale of goods which the seller is not in a position to deliver; and/or the making of a contract which is conditional upon an unknown event. Any such contract which involves an element of uncertainty, speculation or a gamble is prohibited under the Shariah

Maysir (Gambling) is also prohibited

– speculation, conventional insurance and derivatives

Islamic finance is fundamentally based on assets

– Money is only a medium of exchange, a way of defining the value of an asset; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. Interest is prohibited

The investor must share in the profits or losses arising out of the enterprise or commercial activity for which the capital was provided

– Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business. As defined in the Shariah, Islamic finance is based on the belief that the provider of capital and the user of capital should share the risk of business ventures

Investments should only support practices or products that are not forbidden or discouraged by Islam

– Interest, alcohol, pornography, drugs, financing construction of a casino etc.

Speculation & gambling are

prohibited

Asset based Financing

Compliance with Islamic principles

Certain sectors are forbidden

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Islamic finance Industry evolution

1970s

commercial banking

1980s

commercial banking

project finance & syndications

1990s

commercial banking

project finance & syndications

equity Ijarah

2000s

commercial banking

project finance & syndications

Equity Ijarah sukuk al ijarah structured

alternative assets

2005+

commercial banking

project finance & syndications

equity Ijarah sukuk al ijarah structured

alternative assets liquidity

management tools

• The Islamic finance Industry is now between US$ 500 billion to 1 trillion.• Industry is growing at 15-20% annually. • Demand for Islamic products will continue to outstrip conventional products in the GCC region• Rapid developments the field especially over the last 10 years

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Growing availability of products

N. America wholesale EMEA

SE Asia

Now more than 500 Institutions in 47 countries.

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Islamic finance – Key building blocks

An unconditional sale contract where pre-approved and pre-agreed goods are sold at a cost-price plus mark-up for which the sale date is clearly defined and agreed

Deferred Sale used in Project finance transactions

A Salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar to a forward contract where delivery is in the future in exchange for spot payment

Islamic deposit or down payment. An Islamic Option

Islamic Lease Agreement (Operating and Finance)

Islamic Partnership

Islamic Trust

An entrepreneur or Islamic Investment Manager

Islamic Agency

Islamic Insurance (mutual)

Murabaha

Istisna

Salaam

Arbun

Ijara

Musharaka

Mudariba

Mudarib

Wakala

Takaful

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Islamic finance – Ijara or Leasing

Seller/ Manufacturer

Bank(or Customeras Agent of

Bank)

Customer

Lease of equipment& Returns

Uses

• Equipment financing

• Project finance

• Operating or finance lease

Tenor

Long tenors common in Ijara financing, due to floating rate

Up to 20.5 years

Pricing

Comparable to conventional finance

Floating rate achievable in Ijara financing

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Islamic Finance – Istisna (Project finance)

Uses

Equipment financing

Project finance

Tenor

Long tenors common in Ijara financing, due to floating rate

Pricing

Comparable to conventional finance

Cost Plus markup

Client Contractor

Project

BankBuyer/Seller

IstisnaParallelIstisna

The Relevance of Islamic Finance Principles todayThe Relevance of Islamic Finance Principles today

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The Islamic finance model

Real Economy

Financial Economy

Islamic Finance

=

Asset Backed

Maysir= Gambling

Gharar = Uncertainty

Riba= Interest

=

The world’s financial markets have changed. The conventional markets do not to revisit the “basics”

Mortgage Crisis

Mortgage crisis created a global liquidity and credit crisis

An Unprecedented level of liquidity approximately US$ 4 trillion has been pumped into the system globally by various government saround the world

Unprecedented bailouts of financial institutions globally

A Global Recession

The rapid deleveraging of financial institutions as a result of the financial crisis across the globe has created a global slowdown

In many instances Institutions were leveraged 40:1

US and Europe will likely see reduced GDP growth over the next two years

The Emerging markets (especially China and India) will also see a contraction in their GDP growth

Commodity prices have already decreased back to 2003 levels

Equity markets have corrected between 25% and 70% since the start of the year.

GCC .markets will fair better than others so long as oil prices remain over US$ 40 per barrel

Deflationary environment

We are likely to be in a deflationary environment for 6 -12 months

Unprecedented global market conditions

Global Equity Market Correction

Markets across the globe have corrected to near 5 year lows. US$ 27 trillion in value has been wiped off equity prices !

Declining Base Metal Prices

Now at near 2003 levels

Precious Metal Prices

Safe haven investments –

Silver at 2005 levels, Gold at 2005 level

Declining Commodity Futures

INDEX NAME VALUE CHANGE OPEN HIGH LOW TIME

  UBS BLOOMBERG CMCI 976.20 -3.25 989.24 990.76 973.94 11/07

  S&P GSCI 420.39 1.44 425.14 429.93 418.21 11/07

  RJ/CRB Commodity 256.84 -.26 257.11 258.08 256.31 11/07

  Rogers Intl 2972.55 -5.72 2996.60 3033.59 2962.69 11/07

  Brookshire Intl 328.54 -.94 333.42 333.98 327.46 11/07

Commodity futures have also decreased between 25 - 40% in 08

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Shariah based vs. Compliant

Real Economy

Financial Economy

Islamic

Intermediation

Prohibitions on: Interest gambling and speculation

and certain types of uncertainty

No investment in prohibited industries

e.g., Alcohol, Pork, Pornography, Tobacco, etc

Shariah encourages Commercial Enterprise, along certain ethical parameters.

Mutual consent and justice between parties

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Conventional vs. Islamic Finance

Conventional

value free

interest-based

primacy of debt financing

debt financing is interest-based and does not require assets

Derivatives are permitted

Islamic

value driven

interest-free

primacy of equity financing

debt financing must be asset-backed and interest-free

Derivatives are not permitted

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The way forward

Islamic finance create products and services that are asset backed and avoid

– Riba

– Gharar

– Maysir

The mandate of the Islamic industry is to develop and deliver solutions that

are compliant with Shariah and

– remove the economic penalty borne by users who avoid interest-based transactions

– deliver comparable returns to conventional alternatives

– tap underutilized funds and an under-serviced market

The basic principles underlying Islamic finance have limited disruption within to the Islamic finance industry during this crisis

In light of the financial crisis, conventional finance should re-consider these basic principles used in Islamic intermediation

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Thank You

Asad Zafar

CEO

Al Rayan Investment

Asad.zafar@alrayan.com

+974 552 6075 (mob)