It has been an extraordinary year for Islamic banking. A transaction volume has been reached that would have been inconceivable only a couple of years ago and technical sophistication has extended Islamic finance into areas previously thought to be beyond the limits of Shariah compliance.
The $2.35 billion raised on behalf of Etihad Etisalat to finance its licence fee as the second mobile phone provider in Saudi Arabia was the largest debt transaction in the Middle East as well as the world's biggest Islamic financing.
The number of countries following the lead of Malaysia to issue sovereign sukuks has grown more rapidly than predicted. Islamic sovereigns have been followed by corporates and, in a significant diversification, by the first European borrower, the German state of Saxony Anhalt.
Islamic finance is also growing in areas where it has previously been undeveloped. There is enormous potential for insurance in the Middle East, and many consumers are either switching completely to Islamic insurance (takaful) or taking that option when they have a choice.
There has never been any doubt about the potential market for Islamic finance. At conference after conference in recent years, bankers have come up with ever larger figures for the potential size of the retail and commercial market.
What has been in doubt is whether the financial institutions would have the size and expertise to create the services to meet those demands and whether central banks would create the regulatory systems that balanced discipline and market freedom effectively.
Many of those questions were answered this past year as organizations such as the Islamic Financial Services Board (IFSB) brought greater cohesion to the industry while ensuring that the rules did not constrain innovation. Central banks too are looking to introduce common standards. Multilateral organizations such as the IMF and World Bank are also supporting the sector.
The geographical spread is getting even wider. Countries such as Saudi Arabia, which had until recently been ambivalent about Islamic finance, and Kuwait, which had only one Islamic financial institution, are now much more welcoming – these two countries have enormous growth potential. And the UK, where the law has been changed to make Islamic mortgages viable, now has its own Shariah-compliant bank.
But the real difference is coming now with the greater involvement of western banks, whose size and expertise helps Islamic finance to develop but also poses a threat to local banks. Regional institutions, both in the Gulf and Asia, are now much more professional. The challenge for them is to find a role that complements that of the global financial institutions.
Best legal adviser in Islamic finance:
The award was won this year by international law firm Norton Rose, which was closely challenged by Denton Wilde Sapte.
Norton Rose, which has an Islamic finance group of 30 lawyers, has played a significant role in the most important developments in the Islamic financial sector in the past year.
The firm helped establish the Islamic Bank of Britain, the UK's first Islamic bank, and then produced a range of Shariah-compliant products while also pioneering the diminishing co-ownership residential mortgage, the most consumer friendly product for house purchases by Muslims.
Norton Rose is also active in project and asset finance, investment funds, real estate investments, capital market instruments (including creating more sophisticated funds that can be used for hedging), treasury management and corporate finance.
In the sukuk market, it has advised on one transaction by the Government of Bahrain and one for the financing of the Financial Harbour being built in Bahrain.
The firm's project financing activities include acting as an adviser in Qatar on liquefied natural gas projects, and in Bahrain where it is advising the lead arrangers for the $330 million Islamic element of a $1 billion financing for Bapco's new refinery.
One of Norton Rose's strengths is its cross-border expertise. It is playing a key role in the setting up of the first private pan-European Islamic equity real estate portfolio and is also advising Bank Islam in connection with a $600 million Islamic private debt securities issue to finance a public housing project in Turkey – the first cross-border sukuk done in the region.
Best Islamic assurance and advisory services:
Ernst & Young
Competition between leading management consultants, including PricewaterhouseCoopers and McKinsey, for this award was close. However it has gone to Ernst & Young, which has had an extensive range of assignments for both the public and private sector in the last 12 months.
Ernst & Young was appointed in Bahrain to carry out a pre-feasibility study for a billion-dollar wholesale Islamic investment bank – the company is carrying out an assessment of the liquidity management challenges facing the Islamic sector.
It also advised a conventional bank on the best way to convert itself into an Islamic bank – a strategy being considered by a number of financial institutions in the Gulf – and assisted in the creation of a newly established bank in Saudi Arabia. It has also done feasibility studies for banks in Kuwait and the Yemen.
The firm has also played an important role in developing the regional insurance industry by helping the Bahrain Monetary Agency establish a re-takaful company as well as conducting a pre-feasibility study on the concept of the E-dinar.
In addition the company carried out a comprehensive review of risk management policies, systems and procedures for leading corporate and Islamic investment banking institutions.
Best commodities house:
Dawnay Day has 20 years' experience of the Islamic financial sector, and provides commodity and trade assets for short-term Islamic investment products offered by more than 40 financial institutions.
It has helped six Saudi Arabian banks to introduce and implement commodity-based retail products – a development
that has enabled consumer financing to grow by more than 70% in the last year.
It has also helped a bank based in a Gulf Cooperation Council country convert from a conventional to an Islamic institution. Dawnay Day's main role was to introduce commodity-based structures to help reconfigure debt-based contracts.
It is currently advising a Swiss bank that is setting up a commodity-based Murabaha fund and is the commodity facilitator for a forfaiting fund launched for the Islamic financial sector.
Deutsche Bank's performance in offering commodity-related services has also been impressive. It launched the first and so far only Shariah-compliant investment product to offer investors a principal-protected exposure to a diverse pool of commodities.
Investors have been very interested in commodities in the past year but traditional products expose them to high volatility and warehousing costs – Deutsche's offers a return linked to the performance of a pool of commodities.
Best takaful provider:
Shariah-compliant insurance (takaful) remains one of the most underdeveloped areas of Islamic finance in both the Middle East and Asia. However, there are signs that the market is starting to expand rapidly with the passing of a new insurance law in Saudi Arabia and the determination of Bahrain to become a regional insurance centre.
The most dynamic and successful company in this field is still Takaful Malaysia, which has responded effectively to growing competition in Malaysia and is looking to expand its activities to the Middle East including a joint venture in Saudi Arabia.
It already has more than half of the takaful business in Malaysia and, with more and more customers looking to use this service – mainly on cost grounds – it expects to have 20% of total insurance business within five years.
It is unusual in offering both family business, which accounts for 60% of its activities, and general insurance, the remaining 40%. A key advantage is that it offers a profit sharing rather than agency model, which gives claimants a better return.
Best Islamic private banking services:
HSBC Amanah Private Banking
HSBC Amanah Private Banking was formally established in July 2004 but its services have been available through HSBC for several years.
One of its key advantages is that because it is a joint venture between HSBC Amanah and HSBC Private Bank, products are available to customers in more than 70 countries, giving it an enormous client base. The three core markets of the Middle East, Asia and south Asia are served by more than 400 bankers, enabling customers to have access to the widest range of products.
As well as offering Shariah-compliant structured financial solutions, HSBC markets a wide range of investment opportunities, ranging from commodity murabahas to sukuks, and is developing new concepts that will minimize risk.
Best Islamic private-equity house:
First Islamic Investment Bank
First Islamic Investment Bank (FIIB) wins the award for its consistent success in acquiring international companies, assets and properties in the US and Europe that have yielded significant gains to its customers. In what could be a significant development, the bank has also started to invest more actively in the Middle East.
Among its corporate investments in the last year, FIIB won the auction for TLC Healthcare in the US with a total transaction cost of $178 million.
Other ground-breaking transactions included the acquisition of Loehmann's Holding, a leading US retailer formally quoted on Nasdaq, for $110 million. This was financed by high-yield Shariah-compliant notes, the first time this structure had been used in the US. It was also the bank's first public to private transaction.
FIIB also acquired French kitchens and bathroom company Vogica, for e85 million – this was the bank's first corporate investment in Europe and the first Islamically structured leveraged corporate acquisition on the continent.
On the real estate and asset-based investment side, the bank formed a e231.5 million joint venture with a European partner to develop self-storage facilities and another e300 venture to invest in European logistics companies.
It also completed the acquisition of South Staffordshire Water, which was quoted on the London Stock Exchange, for £245 million ($459 million) – the bank's first European public to private equity placement and the largest it has made. It has also formed a joint venture with Bainbridge Communities to develop properties in Florida, a transaction totalling $190 million. In the Middle East FIIB has become involved in property and golf course projects in Dubai (worth $548 million in total) and Bahrain ($300 million).
Best Islamic project finance house:
BNP Paribas has for a number of years been the leading project finance house in the Middle East and has also been one of the pioneers in developing Islamic finance in this and other areas.
It wins the award as best project finance house for 2004 for its role in the $2.35 billion financing for the Etihad Etisalat project to create the second mobile telephone company in Saudi Arabia (for details see Islamic finance deal of the year).
BNP Paribas was appointed at the start of 2004 as financial adviser to the UAE telecommunications company Etisalat, which was preparing a bid for the licence. The bank's first task was to create a consortium including at least five Saudi Arabian investors. Then the bank, which is preparing to open a branch in the kingdom in 2005, created a financial model that could be used for a valuation for the bid.
When the Etisalat consortium was awarded the contract in July, it appointed BNP Paribas as the financial adviser for raising the debt portion required to finance the project – it achieved this in three weeks.
BNP Paribas was then mandated by the consortium to act as the financial adviser for the IPO of the project company – the winning company was required to float 20% of its stock on the Saudi Stock Exchange. The success in marketing this deal was shown by the fact that the company attracted SR51 billion ($13.6 billion), the largest IPO in Saudi history.
Best Islamic white labelling services:
FWU Group, a Munich-based financial services company, wins the award for best white labelling services for its family of takaful investment plans, finishing narrowly ahead of Bank Al-Jazira.
FWU's product is designed specifically for international markets, including major bank distribution partners in Europe, the Middle East, Pakistan, South Africa and the Far East. Its savings, education, marriage and retirement investment plans are all white labelled and customized for each bank distribution partner.
Features include a range of currencies, flexible contributions, partial redemption and a minimum takaful benefit. Banks are also provided with an internet point of sale, while there is a re-takaful arrangement and there is a regularly rebalanced equity investment portfolio that can adjust rapidly to changing market conditions.
FWU Group has established a strategic alliance with National Commercial Bank to distribute its family of takaful products in Saudi Arabia and reached cooperation agreements with Aman Insurance in the UAE and Eastern Federal Union in Pakistan. It is also extending its operations to South Africa, Malaysia, Indonesia and the UK.
Best Islamic real-estate finance house:
Gulf Finance House
Gulf Finance House is a Bahrain-based offshore investment bank that has focused on raising money in the Gulf and placing this as private investments in projects internationally and in the Middle East.
Its strategy proved highly successful in 2004: projects and investments worth a total of more than $6 billion were launched, mainly in real estate.
GFH identified real estate as an investment class with stronger returns and lower risk than bonds or equities and chose projects in Bahrain, Kuwait, the UK, the UAE, France, Spain and other continental European countries.
Building on the success of its financing for the Bahrain Financial Harbour – a $1.3 billion development on reclaimed land – GFH has executed a $302 million private placement for Legends Investment Company, a major real-estate development in Dubai, whose total investment is expected to require $3 billion.
The finance house also established Al Areen investment company this year to acquire a majority equity interest in a company that will develop the Al Areen Desert Spa and Resort in Bahrain. The project, which aims to develop the kingdom as a family tourist resort, will cost $600 million – the first $137 million was raised from investors through private placement in the investment company.
GFH has also created Shariah-complaint structures designed to enable investment in France and Spain. In 2004, the bank set up Al Andalus House – with a capital of $50 million – to invest in Spain's Costa del Sol.
Most innovative Islamic finance house:
In an extraordinary year in which several banks have pushed back the frontiers of what is Shariah-compliant and there have been many claims of "firsts", Noriba, the investment bank set up by UBS in Bahrain, wins this award, having created new products for commodities, equities and sukuks.
The bank has just closed the first Islamic hedge fund to encompass trading in 5,000 US stocks and it has also introduced the innovative Range Murabaha (RaMI) product, which offers both capital preservation and income return (see Islamic finance product of the year).
Another successful venture was Noriba's latest real estate offering, Noriba Euro Commercial 1, which consists of six properties leased in Germany to a subsidiary of Deutsche Telekom. The unique element of this deal is the use of ijara (leasing) for ownership of the asset, musharaka for the offshore shareholding structure and murabaha for the element of the transaction involving the shareholders' loan. This produced a highly tax efficient outcome.
Noriba has also launched the first rated international corporate sukuk for the Sarawak Economic Development Corporation, a deal distinguished from the traditional approach by the fact that the lessee and lessor are separate legal entities and the repayment of the principal at maturity does not depend on the sale of the asset.
Best domestic market sukuk house:
Liquidity Management Centre
Bahrain-based Liquidity Management Centre, whose role is to enable Shariah-compliant financial institutions to manage their liquidity through short-term and medium-term investments, wins this award for developing these sectors.
LMC offers the full range of Islamic products and in the past year it has played a notable role in launching four new issues that have been successfully targeted at regional investors, while providing very competitive terms for borrowers.
It was involved as arranger and adviser for the $250 million ijara sukuk for the Bahrain government (to be used to fund airport expansion).
And the importance of its role in creating a liquid secondary market was shown by the decision to list the $65 million ijara sukuk, raised by LMC for the Dubai property development company EMAAR, on the Bahrain Stock Exchange. This helped to create a liquid market in which Islamic institutions participate in different asset pools with varying risk and return profiles.
An indication of the growing respect for LMC was its appointment by First Islamic Investment Bank to raise a e76 million Islamic sukuk – a deal that was initially set for e50 million but was more than 50% oversubscribed. This was a considerable achievement as this deal was the first in euros for a corporate Middle East borrower.
Equally significant for LMC has been the $152.5 million variable rate sukuk to finance the Durrat al Bahrain residential leisure and resort project.
Best international market sukuk house:
The international sukuk market has grown in the past year from a relatively novel form of financing limited to Asian and Middle Eastern sovereign borrowers to a market in which issuers are regular and those raising money now include corporates and organizations outside the Middle East.
Arab institutions, including Dubai Islamic Bank, are taking a larger role not just as providers of capital but as mandated arrangers. But the leader in this sector is Citigroup, which was sole or joint bookrunner/lead manager in all four international sukuk issues executed or mandated during the year. The four bonds, adding up to $1.88 billion, set new benchmarks with the largest ever sukuk, totalling $1 billion, for the Government of Dubai, while the e100 million issue for the State of Saxony Anhalt was the first for an OECD borrower and the first denominated in euros.
Citigroup introduced important innovations – the Saxony Anhalt issue and the $250 million for the Bahrain Monetary Agency both involved head lease/sub lease structures that made it possible to avoid domestic transfer taxes while achieving an ijara structure acceptable to international and local investors, as well as to the rating agencies.
The bank also ensured that these various issues, which also included a $500 million issue for Pakistan, achieved an unprecedented level of cross-border distribution by using typical Eurobond-style book-building and price-discovery.
Best Islamic leasing house:
Kuwait Finance House
In the past year Kuwait Finance House (KFH), until recently the only Islamic financial institution in Kuwait, has faced up to the prospect of tougher competition. It has maintained its lead over all other Islamic banks in the provision of leasing (ijara) finance where it dominates both in volume of business, the quality of its products and its readiness to innovate.
In the local market, KFH has introduced new auto leasing products, and has established a strong brand franchise in the international ijara financing market.
The bank, which has been involved in big-ticket leasing for a number of years in asset types ranging from manufacturing plants to aircraft and ships, has had another highly successful year.
The most significant achievement was the agreement to purchase Boeing-777 aircraft for its subsidiary Aviation Lease and Finance Company in a $98 million deal to which KFH contributed $35 million. This transaction took KFH's investment in aviation to an estimated $500 million. KFH already has an established MALC aviation fund for leasing aircraft, with $200 million capital expected to reach $600 million.
Best Islamic asset management house:
National Commercial Bank of Jeddah
National Commercial Bank of Jeddah has long been the most successful conventional fund manager in Saudi Arabia and has developed an extremely professional Islamic sector that is now the dominant part of its asset management business.
The range of funds is impressive, including a range of Shariah-compliant short-term trade funds, which are operated on a murabaha basis. There are also medium-term trade funds providing competitive money market returns.
There is also a wide-range of equity funds that offer opportunities to invest in local regional and international markets in shares that are Shariah-compliant. There are also dollar-denominated funds of funds that offer the chance to invest across a range of asset classes, currencies and countries.
Best Islamic wholesale bank:
In 2004 HSBC Amanah arranged, participated in or syndicated transactions with a notional value of $4.1 billion in countries across the Middle East, the Indian sub-continent, Malaysia and Turkey. It established a new presence in three countries, Bangladesh, Indonesia and Pakistan.
Several of these transactions were highly innovative. The $1 billion sukuk for Dubai was the largest ever sukuk and HSBC Amanah was bookrunner alongside Dubai Islamic Bank and Citigroup.
The bank also structured and arranged a syndicated murabaha facility for Turkish retail and manufacturing company Boyner Holding. As well as HSBC, the participants included Islamic and conventional banks in the Middle East – the facility was structured so that the deferred sale price is fixed and repaid in monthly instalments.
To insure the monthly murabaha receivable, HSBC took security over the company's sales through electronic point-of-sale machines and export receivables – effectively making it the first Islamic securitization of future credit card flows.
In the first global Islamic finance facility carried out in Indonesia, the bank secured $292 million in Islamic trade financing to fund the purchase of crude oil from the Middle East. HSBC was the lead manager for this deal for Pertamina.
Together with Gulf International Bank, HSBC Amanah acted as Islamic finance co-ordinator for the expansion of Qatar Gas II, raising an estimated $530 million.
This project was a joint venture between Qatar Petroleum and Exxon Mobil to produce, liquefy and export liquefied natural gas to the UK – a major challenge was the numerous sources of funding, with more than 40 banks taking part in the loan, Islamic and export credit tranches.
Best Islamic retail market:
Al Rajhi Banking & Investment Corporation
Al Rajhi Banking & Investment Corporation has built on its position as the dominant Islamic institution in Saudi Arabia, an increasingly competitive market.
Its consumer finance business has grown by 150% in the past year, making it the leading player, with 26% of the market. It is also the leading bank for demand deposits (28%), local share trading (18%) and foreign money transfers (40%).
Al Rajhi has built on the strong foundations of an extensive branch network covering 120 Saudi cities. It has changed the banking habits of its customers so that 80% of transactions are now carried out electronically, freeing up the branches to offer more value added services. It has introduced a personal financing facility called Watani (tawarruq on local shares) that has achieved a 30% market share after only a year's operation.
Another innovation is the ability to buy and sell local shares on the Saudi Stock Exchange through SMS on mobile phones – customers can also receive notification by SMS or email of current account and card transactions.
Best provider of Islamic financial services in the Middle East:
National Commercial Bank of Jeddah
National Commercial Bank of Jeddah, the largest bank in Saudi Arabia, has gradually extended its range of Islamic financial services, which are all now highly competitive.
NCB was one of the first large conventional banks in the Middle East to realize that Islamic banking was becoming increasingly popular and to provide the branches, as well as products and services that are in demand. It is now well positioned to take advantage of the acceleration of this process in Saudi Arabia – the overwhelming majority of new personal loan business is now Islamic and the trend is for this to continue, though the corporate side will still offer an even mix of Islamic and conventional services.
Personal banking services include charge cards, loan accounts structured to comply with Shariah law and a mix of investment instruments that are almost all Shariah-compliant.
Best provider of Islamic financial services in Asia:
This is a hotly contested field but it is clearly headed by CIMB Islamic, part of the CIMB Group, one of the leading investment banks in Malaysia.
CIMB has been the lead manager for several significant Islamic finance deals. The most important of these was the M$500 million (US$131.5 million) Bai Bithaman Ajil Islamic debt securities – this is the first time a non-Islamic global institution has issued securities that are Shariah-compliant and in the Malaysian currency.
And it is also a major breakthrough for the Islamic capital market as it is the first time that a Mudarabah inter-bank investment (MII) – which is intangible in nature – has been approved by a Shariah board as the asset for this type of transaction. CIMB's role was to develop this structure of using the MII as the underlying asset. This was essential as there were no assets available at the time the sukuk was issued.
Other deals included lead managing the first ijarah/ murabaha programmes for Malaysian corporates, with issues worth M$150 million and M$200 million respectively. CIMB was lead manager in a further five transactions.
Islamic finance product of the year:
Noriba, the investment bank set up by UBS in Bahrain, wins this award for its Range Murabaha Investments (RaMI), which enable investors to preserve capital while getting the maximum risk-adjusted returns on short-term investments.
RaMI is a Shariah-compliant structured yield investment product that makes it possible for investors to get higher returns than would normally be available from the murabaha products that have been on the market until now.
Investors can select their benchmark commodity or currency and its performance within its selected price band range – this means they can receive a higher overall return in a set period.
Islamic finance deal of the year:
The competition has never been tougher for this award than this year as ever larger and more sophisticated deals were put together for borrowers ranging from the Kingdom of Bahrain to the German state of Saxony Anhalt – in almost any other year the latter deal, the first in euros and the first for a non-Islamic borrower would have been an extremely deserving winner.
However, the award goes to a transaction that was even more spectacularly successful and broke records for Islamic finance and for all types of funding in the region.
The $2.35 billion raised on behalf of Etihad Etisalat to finance the project for the second mobile telephone company in Saudi Arabia was both the largest debt transaction ever in the region, the biggest Islamic financing in the world and the first time such a large project has been funded only in a Shariah-compliant way.
The money raised will partly fund the $3.45 billion licence fee and the estimated $1 billion operational costs incurred in the company's first years in business – the balance has been met through an IPO on the Saudi Arabian stock exchange.
The murabaha financing, comes in two parts – one of $1.6 billion and one of $0.75 billion. To make this deal possible the participation of most of the leading banks involved in Islamic finance was required. BNP Paribas were the financial advisers (see project finance award), the lead managers were Samba Financial Group, which was the transaction arranger alongside National Commercial Bank, Citigroup, Abu Dhabi Islamic Bank, Dubai Islamic Bank, Al-Rajhi Banking and Investment Corporation, Bank Al Jazira and Emirates Bank.
Outstanding contribution to the development of Islamic finance:
Sheikh Ahmed bin Mohammed Al-Khalifa
Sheikh Ahmed bin Mohammed Al-Khalifa, recently appointed Bahrain's finance minister, was in his term as governor of the Bahrain Monetary Agency (the central bank) instrumental in helping Islamic banking reach its full potential in the country.
As central bank governor he was given unprecedented powers as a regulator and developer of the kingdom's financial sector. One of his main priorities was to create the right environment for Islamic banking to thrive and to develop other sectors such as Shariah-compliant insurance (takaful).
Bahrain is one of a very few states to have developed separate regulations for Islamic institutions that take account of the differences between regular and Shariah-compliant finance on such questions as risk while ensuring prudence and enforcing regular reporting obligations.
The result has been spectacularly successful. Bahrain is now unchallenged as the Middle East's Islamic financial centre. There are 28 Islamic financial institutions, including five full commercial banks, 16 investment banks and three offshore banking units, and the kingdom is the regional centre for a growing number of international and local insurance firms, lawyers, consultancies and multilateral organizations responsible for creating global standards for Islamic finance.
Equally important has been Sheikh Ahmed's championship of the development of money market instruments. These include the short-term sukuk market, which has not only provided the Bahrain government with additional investors but, with those issues of longer maturity, created a liquid secondary market. The BMA also raised a $250 million five-year FRN through an Islamic bond led by Citigroup.
Sheikh Ahmed is always looking for ways to improve the regulatory system. He has in the past two years put even greater emphasis on the need to hire quality staff whose expertise matches that of those working for conventional banks.