Download Housing Finance and Bond Markets

Emerging Islamic Housing Finance
Markets
“The Irreversible(?) Growth of Private Housing Finance”
March 15, 2006
UIB Overview
The only full service Islamic investment bank in Gulf Cooperation
Council (“GCC) – Bahrain, KSA, Kuwait, Oman, UAE & Qatar
Regulated by the central bank in Bahrain - Bahrain Monetary Agency
(BMA)
Paid Up Capital: USD120 million
UIB recognizes the needs of under-served markets with pent-up
demand for Islamic products
Increasing global awareness of Islamic financing
A solid business model with competitive products and services which
attract investors even from conventional markets
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Five Business Lines
Unicorn offers diversified products across an integrated range of
financial products and services
Corporate
Finance and
Capital
Markets
Takaful
(Insurance)
Mergers and
Acquisitions
Asset
Management
Private
Equity
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Offices
Unicorn’s Global Reach
USA (Chicago)
GCC- Bahrain (Corporate), Dubai and Kuwait (Planned: KSA)
Asia-Pacific – Malaysia (Kuala Lumpur)
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Why Islamic Finance?
 Approximately 20% of the world’s population is Muslim
Muslim
Population
78 million
US, UK, Germany, France & Turkey
96 million GCC, Egypt & Jordan
215 million Malaysia, Singapore & Indonesia
414 million Bangladesh, Pakistan & India
62 million
Algeria & Morocco
Unicorn aims to focus its
operations across a majority of these countries
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Islamic Financial Markets
General Observations
Global Demand for Islamic Financial Products growing @ 17%
annually
 Oil revenues to produce current account surplus of $400 Billion in
2006 in ME & GCC
 Demand likely to be fueled to levels not seen before due to
increasing oil revenues
ME & GCC economies to grow at 5.5% in 2006
More than 300 Islamic Financial Institutions operating globally
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Key Objective
Become a major player in developing the Islamic capital
markets through the growth of primary housing finance
markets and filling the gap for fixed-income investment
instruments via Sukuk (bond) issuances
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Model
Own and operate housing finance companies with strategic partners in Islamic
markets offering world class mortgage origination, underwriting and servicing
technology
Islamic housing finance products and operations
Utilize warehouse lines and bond issuances (Sukuks) as main source of funding
Securitize and issue Sukuks (MBS) on a flow basis
Develop GCC and other emerging Islamic capital markets
Correspondent program to enforce origination, underwriting and servicing
standards
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Islamic Housing Finance - GCC and Beyond
(Turkey, Jordan, Lebanon)
Attractive demographics and population size
Key reforms at the sovereign level relating to housing finance and
capital markets
Stable political and legal/regulatory environments
Growing middle class and consumer markets
Decent sovereign ratings
Mortgage to GDP Ratios – much below the more developed mortgage markets
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Uniquely Positioned to Build and Capture Islamic Primary/Secondary Housing Finance Markets
A strategic alliance with UIB provides the following advantages:
Renowned capabilities in developing Islamic structures/products
Strong expertise in housing finance relating to the primary, as well as the secondary
market
Qualified staff with extensive Western experience
Clear vision & strategy to become the “major player” in the Islamic housing finance
markets
Willingness to form strategic alliances to gain from international and local expertise of
respective partners
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Demystifying Islamic Primary Mortgage Market Principles
 Making money from money is not Islamically acceptable – Thus, Islam prohibits interest
and usury (“Riba”)
 Key Islamic mortgage principle – the financier must share in the ‘risks and rewards’
relating to an underlying asset rather than receiving a fixed and guaranteed ‘interest’
income
 2 common Islamic mortgage structures:
 Ijara (akin to a finance lease) a financer purchases an asset and leases it to a client through a
leasing contract for a specified rent and term. The owner of the asset (the financier) bears all ‘risks
and rewards’ associated with ownership and sells it to the client upon payment of the last installment
 Musharaka (akin to a declining-balance mortgage) an equity participation contract under which a
financier and its client contribute jointly to purchase a home (e.g. financier (80%) and client (20%).
Ownership is distributed according to each party's share in the financing (co-ownership). The title
deed is held in the name of the financier and transferred to the client’s name upon payment of the last
installment
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Demystifying Islamic Secondary Mortgage Market Principles
 Islamic bond (certificate) is known as a ‘Sukuk’
 Key mortgage-backed Sukuk principle: the certificate must be asset and not just debt
based
 Must sell the underlying asset (i.e. real estate property) into the secondary market and
not just the receivables
(i.e. transfer of ‘risks and rewards’ in the real estate asset)
 Tradable mortgage-backed Sukuks are backed by ijara and musharaka structures
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Housing Finance and Bond Markets
Housing Finance and bonds (MBS) are the backbone of any economy and capital
markets, respectively
USD7 trillion of mortgages (residential/commercial) originated in the U.S.
annually; whereas the U.S. corporate market stands at USD4 trillion annually
Approximately 40 industries linked to housing finance (e.g. insurance, appraisal
and construction)
Housing finance key to development of SME market
MBS a key tool for the development of the bond markets (e.g. In 1970, first U.S.
MBS issuance; by 1995 USD20 trillion of MBS)
MBS allows for lower interest rates due to increased competition and long-term
tenors
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Source of Funding - Debt Capital Markets
Trends in conventional Capital (Bond) Markets will be
repeated in the Islamic (underdeveloped) financial
markets.
Conventional
1980’s and 1990’s
Islamic
2000
2006
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U.S. Securitized Assets
Evolution of U.S. Mortgage Securitization - Market Sizing
2002 MBS market share
US$ billions
Total MBS issuance
Total MBS issuance
$1,838
Total originations
$2,526
Total MBS outstanding
$3,157
Annual MBS issuance
$1,837.9
$1,362.1
$860.4
$488.3
1994
$513.2 $548.2
1995
1996
$777.9
$597.1
1997
73%
of mortgage
originations
funded
through MBS
$549.3
1998
1999
2000
2001
2002
Source: Inside MBS and ABS, January 10, 2003
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Case Study: Kingdom of Saudi Arabia (“KSA”)
Largest GCC market
Total GDP: USD400 billion
Mortgage to GDP Ratio: 1.9%
Demand for 300,000 housing units annually
Housing finance potential: USD45 billion annually
(Est: 1/4 of the housing units are built and financed)
Total Population: 22 million
Growing middle class (Annual Income Level: USD1600 – USD3200)
Baby Boomers - 65% of the Population under age 35
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GCC Demographics
Percentage of Population < 20
40%
35%
Percentage
30%
25%
20%
15%
10%
5%
0%
Malaysia
Thailand
India
China
Indonesia
GCC
Countries
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KSA Gap Analysis
Gap Analysis-Type of Financing
60%
50%
Percentage
50%
40%
30%
Demand (%)
30%
18%
20%
10%
Supply (%)
20%
13%
8%
0%
Islamic Finance
Commercial Finance
Government Finance
Type of Financing
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UIB’s KSA Experience
RMBS Issuance
Housing Finance
o
o
o
o
o
o
Engaged to set up a licensed
housing finance institution for
Kingdom Instalment
Company out of KSA
Develop the strategy and
business plan
Technical/equity partnerships
CEO and COO search
Interact with legal/regulatory
authorities relating to housing
finance reforms
Assist with the development
of systems and policies and
procedures
o
o
o
Unicorn arranging, structuring
and placing the very first
RMBS out of the GCC region
(landmark transaction)
Rated by a recognized rating
agency
Solid credit enhancement
from the International Finance
Corporation (IFC)
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