Diapositive 1

Union de Banques Arabes et Franaises
Islamic Products
The French finance industry and the Paris money marketin the era of Islamic financeDecember 6th 2007

Islamic Banking has a different way of financing trades and projects or investing in companies, from the one which is known in the Western world, in as much as the concept of interest or Riba is strictly forbidden by the Sharia.

A - INTRODUCTION

A potential market estimated worth USD 500 billion of assets.

Growing at a rate of between 10% to 15% p.a. These estimates cover through a more than 330 financial institutions and banks all the Muslim world from China to Morocco englobing South East Asia, the Gulf Countries, the Middle East and Africa.
A- INTRODUCTION (continued)

B- MAIN ISLAMIC PRODUCTS & INSTRUMENTS
Challenge for Islamic banking: Find sources of revenue based on non-interest banking products.

Three main products satisfy such criteria: I-Trade Products (Profit).II-Corporate Investments (Dividends).III-Leasing (Rentals). In addition to these basic products a certain number of financial instruments are available.

I- Trade Products
1- MurabahaAt the origin, before Islamic banking started, Murabaha contracts were contracts sale between seller and buyer. Islamic banking has adopted such agreement to be directly between banks and clients. A Murabaha involves the purchase of goods by a bank from a supplier (A), and the sale back of same goods simultaneously to the banks client (B) at an agreed mark up.Sale of the goods by the bank to its customer (B) could be on a deferred-payment basis i.e. credit sale (Bai Bithaman Ajil/Bai Muajal).

Murabaha (Commodities)

Islamic Bank
U.B.A.F.
Cash to A
DeferredPayment through Transferor irrevocable L/C
Amountinvested
Invoice & Warrants to IB
Invoice & Warrants to U.B.A.F.
Trader A
Economic equivalent to a term deposit in conventional banking without an investment mandate
ANNEX I

Murabaha (Commodities)

Islamic Investor
U.B.A.F.[Agent)
Cash to A
Deferred payment throughan irrevocable L/C
Trader A
Trader B
Amountinvested
Repayment of theinvestment plus profitless a commission
Invoice to U.B.A.F.
Invoice to B
Economic equivalent to a term deposit in conventional banking with an investment mandate

Commodities could also be capital or consumer goodsTraders: A being Exporter & B Importer
ANNEX I bis

2- Mudarabah
A form of contract, where one (or several) investor(s), called Rab El Mal, provides funds to an entrepreneur (Mudareb) who invests such funds in a way acceptable to the Sharia.

A bank could act as Mudareb investing funds on behalf of the investors, or as Rab El Mal if acting as a participant.

The Mudareb acts without recourse vis-a-vis the investors except in case of negligence.

I- Trade Products (continued)

Investment risk is therefore borne by the investors to the extent of their participations.

Profit is shared, according to a mutual pre-agreement between investors and Mudareb.

Two forms of contracts:- limited: refering to a precise transaction;- unlimited: the Mudareb is not committed to inform the investors of projects undertaken (equivalent to funds under mandate in conventional banking).
I- Trade Products (continued)

ANNEX II

Mudarabah / Murabaha Agreements(to Finance Exports or Projects)

Deferred RepaymentGuaranteed or not by a bank LC/LG eventually insured by ICIEC
Participants (Rab El Mal)
Murabaha &Wakala Agreements
Mudarabah Agreement
U.B.A.F.(Mudareb)
Seller
Contract
Goods
Spot
Payement
End Buyer
Agent*(Wakil)
* Designated by the end buyer

Musharakah (active partnership)
Contract between two or more parties to finance a project, or equity.

Investment banking arm of banks could participate in such contracts.

Profit is distributed among the partners along predetermined ratios.

Loss is borne by each partner in proportion to its contribution.
II- Corporate Investments

III- Leasing (Ijarah, Ijarah Wa Iktinaa)

An Ijara (Operating Lease) is a lease contract by which a lessor (a bank through an SPC) purchases and leases out an Asset to a lessee for a set period of time against payment of an pre-agreed rental charge. The underlying object of the lease contract shall be an Asset owned by the lessor, provided that the use of the Asset is lawful under Sharia.

Ijarah contract could be structured as a lease back.

Ijarah wa Iktinaa (Financial Lease) is similar to Ijarah except that the lessee is commited to take possession of the Asset at the end of the lease.

For some scholars Ijarah & Ijarah wa Iktinaa do not apply on intangible Assets (Software) or rights on natural ressources exploration.

A long-term lease contract can include an option with the agreement of both parties, to negotiate the price for a specified time period. The new price would be fixed (at the beginning of each period) at the prevailing market conditions or similar value in the market. This will virtually translate into Libor plus a fixed margin.
III- Leasing (Ijarah, Ijarah Wa Iktinaa) (continued)

Differences between Conventional Lease & Ijarah
1- Commencement of lease payments: Rentals can be paid in advance i.e. prior to free disposal of the leased asset by the lessee in conventional lease, it is not the case in Ijarah, however the first rental can be contractually higher than the others if the lessor wants to be protected against an immediate market depreciation of the leased asset becoming a second hand item.2- Lease assignments: Assignment of the sole rentals (excluded of the Asset) to a third party is not permitted unless that the existing Ijarah is terminated between the two parties. Then the lessor sells the asset to the third party that enters with the lessee in a new Ijarah . The lessee can sub-lease the asset to a third party if:*provision is made in the agreement or,*express permission of the lessor is taken.

3- Risk of destruction or total loss:Both schemes agree that the lessee is responsible for any loss to the leased asset caused by his negligence and that he can also be made liable for the normal wear and tear and operational maintenance costs. In case of a total loss caused by factors beyond the control of the lessee, Ijarah (to the contrary of conventional lease) does not permit in principle to make the lessee liable for the damage.4- Insurance:Not usually permissible in Islam if it is in return for a fee. However, permission has been given to obtain insurance in an Islamic lease if no other viable Islamic alternative exists. The insurance cost is borne by the lessor but can be incorporated in the rental payments.
Differences between Conventional Lease & Ijarah (continued)

5- Maintenance:Basic and essential care of the equipment necessary for the good maintenance of the leased asset is the obligation of the lessor (and eventually incorporated in rentals in case of financial lease). 6- Hell or High Water Clause:Conventional lease include usually such a clause with the lessee obligation of paying the full rental payments regardless of any event effecting the equipment or any change in the circumstances of the lessee. Such a condition is not permissible under Sharia, but appropriate solutions are available.

Differences between Conventional Lease & Ijarah (continued)

7- Late payment penalties:Conventional lease agreements entail penalties for late payment of rent. Since this is considered interest it is prohibited under Islamic law but some kind of compensation can be considered.

8- Method of Rescheduling:A finance lease may be rescheduled with the agreement of lessor and lessee under Sharia. The original agreement cannot be altered to reflect the rescheduling. The procedure is to cancel it and enter into a new agreement with the same parties. This enables penalties from delays on the previous contract to be recovered.

Differences between Conventional Lease & Ijarah (continued)

9- Financial lease (Ijara Wa Iktinaa): In a lease with purchase option, the purchase option and sale price should be clearly set out at the signing of the lease contract. However, at the actual time of sale, a new sale contract will have to be signed on the same terms agreed upon at the outset.
Differences between Conventional Lease & Ijarah (continued)

Structure of Ijarah (Operating Lease)
ANNEX III
Lessee (Fund User)
Lessor (Intermediary)
Security Sharing /Right of Recourse
Asset
Investors(Fund Provider)
CashInvestment
Sukuk Al-Ijarah
E N F O R C E M E N T
L E A S E
Lease Rental

Structure of Ijarah-Wa-Iktinaa (Lease with a Purchase Option on Asset)
ANNEX IV
Lessee (Fund User)
Lessor (Intermediary)
Security Sharing /Right of Recourse
Asset
Investors(Fund Provider)
CashInvestment
Sukuk Al-Ijarah
E N F O R C E M E N T
L E A S E
Lease Rental
PurchaseOption

C- OTHER ISLAMIC INSTRUMENTS
Bai Al Salam: Contract in which a negotiated pre-payment is made for goods to be delivered later on. It could be used for pre-export finance.

Sukuk: Similar characteristics to those of conventional bonds with the key difference being that such Asset-Backed Securities (ABS) shall always be linked to a Sharia compliant asset as such Sukuk can be used for project finance.

Tawaruq: A sale to a customer of Commodity or Assets by a bank on deferred payment at cost plus profit. The customer then sells the commodities to a third party on spot basis.Wakala: Agency Agreement.Takaful: A form of Islamic Insurance based on Quranic principle of mutual assistance.

C- OTHER ISLAMIC INSTRUMENTS (continued)

ANNEX V
Exporter
S.P.C.(Islamic Banks)
Importer
Contract Negotiation
Purchase ofGoods
U.B.A.F. (Opening Bank)
Sight L/C
Instructions
ImportersBank
Guaranteed deferredpaymentL/C

Mudarabah & Murabaha

Sale ofGoods

Tawaruq
ANNEX VI
Contractor
Contract USD 10MM
XYZ HotelsCompany
FinancialCompany (A)
Sale of Shares
Modareb &Co Modareb
Spot Payment
Sale of Shares
Deffered Payment
Resale of Shares
Spot Payment
U.B.A.F.
XYZ
*ICIEC*Bank Guarantee*Assignment ofreceivables
Securities
FinancialCompany (B)

Sukuk Al-Ijarah Lease Back associated with certificates (Sukuk)
ANNEX VII
Industrial company
Cayman SPV
Cash
Certificate holders
Certificates
Issue of Certificates and Sale of Trust Assets
Cash
Trust Assets
Leased back Assets
Cash Redemption of Certificates
Lease Rentals Payments
Periodic Cash Distributions
Lease Payments and Periodic Distributions
Repurchase of Trust Assets and Redemption of Certificates
Repurchased of trust

.Head-Lessor(Jersey)
AircraftProducer
CharitableTrust
XYZ (C.I.)Bank
PurchasingAircraft
Lessor(Cyprus)
Own 100%
Managing
Charitable Trust
Own 100%
XYZ (Cyprus) Bank
Managing
IslamicInvestors
Modareb
Airline Company
Lessor Funding
Mudarabah Agreement
LeaseRentals
Operating Lease
Head Lease
LeaseRentals

Ijarah Begharad Al Iktinaa(Financial Lease Ending by Purchasing)

Rentals could be guaranteedBy ICIEC
ANNEX VIII

LBO
ANNEX IX
Investors
Holding 1
Holding 2
100%
100%
Target Co.
Islamic banks
Trader A
Trader B
Acquisition100%
Goods
Goods
Goods
Spot
Spot
Deferred
Repayment

Patrick LEGAIT
Patrick LEGAIT, is Chairman of the Management Board of U.B.A.F. since mid 2001, seconded from Crdit Lyonnais.Previously and after 9 years with Socit Gnrale, from 1973 to 1982, successively as Credit Manager and Buyers Credit specialist in both France and Germany, he joined First Chicago from 1982 to 1988, and became Vice President and Managing Director to lead the Frankfurt based Trade Finance Group. He was then transferred to Geneva with world wide responsibilities, and was particularly in charge of major customers in Saudi Arabia.Then Patrick Legait joined Crdit Lyonnais in 1988 where he assumed different responsibilities, mainly: Head of the Commercial Department and Managing Director of Crdit Lyonnais in Frankfurt, Director of BfG Bank AG in charge of multinational customers. Back to Crdit Lyonnais' Head Office, he became responsible for Crdit Lyonnais' Central Department for the paper industry worldwide. Afterwards he was appointed to Crdit Lyonnais' European Division to handle all customer and commercial aspects linked to European commission constraints on Crdit Lyonnais. He was then transferred to the Inspection Gnrale in 1999 and headed various missions in French, Asian and North African banking units.Born in 1948, Patrick Legait who started his career with a Master Degree of Economics, is today a man of broad international experience and speaks fluently English and German.

Mahmoud ABDEL WAHAB
N en Egypte en 1951, Mahmoud Abdel Wahab termine ses tudes secondaires au Caire au Collge de la Sainte Famille (Jsuites). En 1973, il obtient sa matrise dconomie de la facult dEconomie et Sciences Politiques de lUniversit du Caire, qui lui confie une fonction de Matre Assistant et le dtache en 1974 sa branche de Khartoum. En 1980, Il obtient un Doctorat dconomie de lUniversit Paris I Sorbonne.Aprs un court passage dans une socit dinformatique, il entre lU.B.A.F. en 1984, et occupe en 1989 les fonctions de Secrtaire Gnral du Groupe UBAF. Il contribue en 1994 la mise en place dune activit Islamic Banking dont il est actuellement et depuis 4 ans le responsable.

Participants are welcomed to address any questions related to this presentation to:

Mahmoud Abdel WahabTel. 01 46 40 64 42Fax.01 46 40 65 17E-mail: mahmoud.abdel-wahab@ubaf.fr
Union de Banques Arabes et Franaises