International Structured Finance

Europe, Middle East, Africa & Asia-Pacific

Special Report
2007 Review and 2008 Outlook:
Islamic Finance: Sukuk Take Centre Stage, Other Shariah-Compliant Products Gain
Popularity 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
Faisal.Hijazi@moodys.com
Dominique Gribot-Carroz
Assistant Vice President
Business Development
+852 2916 1120
Dominique.Gribot-Carroz@moodys.com
Middle East and Islamic Finance
Additional Contacts
Khalid Howladar
Vice President Senior Credit Officer
Asset-Backed & Islamic Finance
+9714 365 0284
Khalid.Howladar@moodys.com
Philipp Lotter
Vice President Senior Credit Officer
Corporate Finance Group
+9714 365 0283
Philipp.Lotter@moodys.com
Anouar Hassoune
Vice President Senior Credit Officer
Financial Institutions Group
+33 1 5330 3340
Anouar.Hassoune@moodys.com
Christine Kuo
Vice President-Senior Analyst
Financial Institutions Group
+8862 2757 7125
Christine.Kuo@moodys.com
Investor Liaison
New York
Brett Hemmerling
Investor Liaison Specialist
+1 212 553 4796
Brett.Hemmerling@moodys.com
Client Service Desk
London: +44 20 7772 5454
Paris: +33 1 5330 1074
Madrid: +34 91 702 6616
Website
www.moodys.com

25 February 2008

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 billion
1
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 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 will
hinge 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 of
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 Africa
3
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

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 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,
5
and 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) issued
Shariah-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
S
$

M
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l
i
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n
0
10
20
30
40
50
60
I
s
s
u
e

N
o
.
Size ( US$ Million) Issue No.


5
Moodys estimate.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 3


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 continue
to 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.
4 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic 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
V
o
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u
m
e

i
n

U
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D

M
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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 are
accessible 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.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 5



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
U
S
$

M
i
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0
5
10
15
20
25
30
I
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s
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N
o
.
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 sovereign
linkage that may constrain the rating to that of the relevant government.
6 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance

As a sign of the increasing confidence in and desirability of Sukuk in the GCC, NIG Sukuk
Ltd issued its first Sukuk (NIGSL; Baa2, stable). Moreover, Saad Trading Contracting &
Financial Services Co issued the first GCC Manfaa sukuk (Golden Belt 1 Sukuk 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 shared
characteristics across the countries of the GCC, there remains a difference in the relative
ability of Gulf governments to service their debt between the very wealthy states of
Kuwait, Qatar, and the UAE and the less wealthy states of Bahrain, Oman and Saudi
Arabia. 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 constrained
by political and institutional factors. The outlook on the government bond rating of Saudi
Arabia is still positive, while the outlooks on the government bond ratings of the other
countries 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, Moodys predicts the number
and volume of new issuance of Sukuk to remain buoyant.. More Shariah-complaint
securitisation is expected to take off in H1 2008, mainly Shariah-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 of KPIZ, located in Taweelah between
the cities of Abu Dhabi and Dubai, is more than US$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 instruments including Sukuk.

Bahrain
Central Bank of Bahrain a leading
sovereign Sukuk issuer
The Central Bank of Bahrain (CBB) is among the first of the worlds Islamic financial
regulators and has played a critical role in developing new Shariah-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 CBBs money market
operations, including Al Salaam Sukuk and CBB short-term Sukuk. Gulf Finance House
(GFH), a Bahraini Shariah-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 a
similar level of issuance activity, including for CBBs 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.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 7



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-sized
investors 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 the
Euromoney 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.
8 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance


Asia-Pacific: Malaysia Continues to Lead in Global Ringgit
Issuance
Close to 50% growth in domestic
markets since December 2006
Asian currency-denominated Sukuk outstanding
9
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.
10
Source: Bloomberg.
11
For more details, refer to our Special Comment. Asian Sukuk: Review and Introduction to Moodys Rating Approach.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 9



Chart 7:
Malaysia: Approved Ringgit-Denominated Private-Debt Securities Issuances
12
Including Approved Issuances by Cagamas Berhad
0
50
100
150
200
250
300
2004 2005 2006 2007
R
M

B
i
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i
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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 existing
conventional 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.

12
Source: Malaysian Securities Commission, Sukuk approved-not issued
13
The upgrade in May 2007 was related to Moodys application of its refined Joint-Default Analysis and updated Bank Financial Strength Rating
methodologies.
10 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance

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 of
capital 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 Islamic
finance.
Pakistan and Indonesia
Potential for further growth in
Indonesia and Pakistan
Pakistans
14
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 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 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.

14
The only South Asian country to witness Islamic finance activity in 2007.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 11


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 for
banks. 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.
15
The 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) after
approval 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 2008
16
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.

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.
12 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance


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 type
of 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.

17
For more details on the credit risk consideration of purchase undertakings, refer to our See Special Comment: Shariah and Sukuk: A Moodys
Primer, published in May 2006.
18
See Credit Analysis: Tamweel PJSC.
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 13



Islamic Funds and Private Equity
Islamic 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 biggest
GCC 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 equity is 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

Takaful
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 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

19
Source: Ernst &Young numbers and analysis.
20
Source: Moodys estimates.
14 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance


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,
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 terms of project
diversity, expecting a mix of industrial, IWPP and infrastructure deals. Qatar
22
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: although
Shariah-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.

21
Source: Project Finance International.
22
Source: Ministry of Finance.
23
Source: Moodys
2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 15


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 of
growing 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 property
boom
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, refinance
existing 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.
16 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance

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
A1 UAE DIB Sukuk Co Ltd Dubai Islamic Bank PJSC 750
UAE Dubai Investments LLC DIFC Investments LLC-DIFCA 1,250 A1
A1 UAE JAFZ Sukuk Ltd Jebel Ali Free Zone FZE 2,043.5*
UAE Tamweel Residential ABS C1 (1) Ltd Tamweel PJSC 220 Aa2
A1 UAE EIB Sukuk Co Ltd Emirates Islamic Bank PJSC 350
Saudi Arabia Golden Belt 1 Sukuk Co Saad Trading Contracting & Financial Services Co 650 Baa1
A2 Qatar Qatar Alaqaria Sukuk Co Qatar Real Estate Investment Co 300
Kuwait NIG Sukuk Ltd National Industries Group Holding S.A.K. 475 Baa2
A3 Malaysia Malayan Banking Berhad Sukuk Maybank 300
7,838.5
Equivalent to AED7.5 billion.

2007 Review and 2008 Outlook: Islamic Finance Moodys Investors Service 17


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 available
or 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 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 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.
18 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance

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 two
types 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


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.

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

SELECTED RESEARCH
For a more detailed explanation of Moodys approach to this type of transaction, as well
as similar transactions, please refer to the following reports:
Rating Methodologies:
Securitisation in New Markets: Moodys Perspective, September 2006 (SF74362)
Moodys 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 Moodys Approach to Unsecured Corporate Sukuk, August 2007
(103919)
Shariah and Sukuk: A Moodys Primer, May 2006 (SF74488)
A Guide to Rating Islamic Financial Institutions, April 2006 (97226)
Moodys 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 all
clients.

2005 Review and 2006 Issuance Outlook: EMEA RMBS Moodys Investors Service 21


SF124315isf
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22 Moodys Investors Service 2007 Review and 2008 Outlook: Islamic Finance