IBCRReport2011 (LR) Final

18th Annual
A critical reference source for decision makers in the global Islamic nance industry, providing strategic insights from Ernst & Young Dear Banking & Finance Leader, It is with great pleasure that we present to you the 8th annual edition of the World Islamic Banking Competitiveness Report 2011-12. This years original research project is developed in collaboration with leading global professional services and advisory firm, Ernst & Young. With a principal focus on A Brave New World of Sustainable Growth, the WIBC Competitiveness Report 2011-12 explores the key industry trends and the critical success factors guiding the global Islamic banking and finance industry to the next level of performance and growth. The global Islamic finance industry has undergone major transformations in the last few years in its quest to boost international competitiveness and to build a sustainably profitable business model. There has been a focus on product innovation efforts that aim to provide a more comprehensive array of Shariah-based products for the market. The global Islamic finance industry has also seen significant developments in regulatory frameworks and Shariah standardization initiatives - making trans-jurisdictional market connectivity that much more achievable. However, both the challenge and the opportunity currently facing leading industry players is how will Islamic banks succeed in making the historical growth curve sustainable and profitable. We would like to express our sincere gratitude to Ernst & Young and their world renowned Islamic Financial Services Team for investing their considerable talent and resources in developing the World Islamic Banking Competitiveness Report 2011-12. The Report is exclusively launched on-site at a special plenary session of the 18th Annual World Islamic Banking Conference (WIBC) where more than 1,200 industry leaders from over 50 countries gather to chart the future of Islamic finance. Established as a critical reference resource for key industry players, thought leaders and policy makers in the global Islamic banking and finance industry, we hope that the analysis in this years Report will provide practical, constructive and valuable insights which will be useful in your own strategic planning activities and will assist your organization in its quest for success as the Islamic banking and finance industry enters the next phase of Competing for Global Growth. To find out more on how your organization can play a part in this important research initiative in the future, please e-mail sophie@megaevents.net Yours sincerely,
David McLean Managing Director The 18th Annual World Islamic Banking Conference A MEGA Brand
A MEGA Brand: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net
World Islamic Banking Competitiveness Report 2011-12

A Brave New World of Sustainable Growth
Report Structure
Competitive Landscape
Performance Analysis
Executive Brief
Country Spotlight
5
Competing to Win: The CEO Agenda

4
COMPETITIVENESS REPORT 2011-2012
A Brave New World of Sustainable Growth
Dear Executive, The global economy, and the financial markets, are at a turning point. Fast growth economies in Asia, Middle East, Africa, Latin America and Eastern Europe now form almost half of global GDP and, in 2010, they contributed 70% to overall global growth. These trends are accelerating. The dramatic developments over the past twelve months including Arab Spring, Eurozone crises and Occupy Wall Street movement provide further impetus for the growth of Islamic banking. Industry forecast suggest Islamic banking assets with commercial banks globally, will reach $1.1 trillion in 2012 (2010: $826bn). Now would be the opportune time to consider establishing Islamic sovereign wealth funds to champion the growing internationalization of the industry. The iSWF will further facilitate businesses across OIC markets seeking to transform to Sharia compliant system and also help deepen the Islamic capital market, in our view. As for MENA, Islamic banking assets increased to $416bn in 2010, representing a five year CAGR of 20% compared to less than 9% for leading conventional banks. As new geographies open up to Islamic banking, the MENA Islamic banking industry is expected to more than double to $990bn by 2015. However, there are significant performance variations across markets. In 2010, average ROE of leading Islamic banks declined to 10%. Also, market valuations appear to be converging to that of regional conventional peers. Our clients agree that business models needed to shape and sustain success in this new landscape are evolving in a fundamental way. Ensuring sustainable growth will require brave, meaningful and decisive Performance Improvement initiatives. Two key themes are starting to emerge: Excellence in banking operations by transforming to a customer centric, efficient and scalable operating model, driven by an enhanced risk and technology orientation; and Product innovation to strengthen the Sharia differentiation and provide greater integration with the real economy A worrying concern though is the absence of an enabling legislative, regulatory, tax and legal environment in most OIC markets, which adds to the cost and complexity of Islamic banking operation. Where there are guidelines and standards issued by industry infrastructure institutions, their reach and enforceability remains a concern. These must be addressed as priority. Our award-winning global Islamic Finance Center of Excellence continues to work with a diverse range of financial institutions helping them realize the true potential of their business. We trust you will find this report useful.
Ashar M. Nazim Islamic Financial Services Leader Ernst and Young
Imtiaz Ibrahim Senior Director, Islamic Financial Services Ernst and Young
Islamic Banking Competitiveness Report 2011-12

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Executive Brief
Key Messages 1 2
MENA Islamic banking assets reach $416bn in 2010, globally Islamic banking assets to cross $1.1t by 2012* Expect a permanent change of play in the GCC customer centric operating model to drive future (sustainable) growth Topping CEOs agenda Operational Transformation, Risk, Growth and Innovation
* Note: Islamic banking assets with commercial banks

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One potential scenario shows global Islamic banking assets with commercial banks to reach $1.1 trillion in 2012
Islamic Banking Asset Growth (US$bn)
114 38 127 826 25
1,130
Global Islamic Banking Assets 2010
GCC
MENA (ex GCC)
Malaysia
Rest of the World
Global Islamic Banking Assets 2012e
Source: IMF, The Banker, Central Bank Websites, EY perspective

Page 5
Analysis of leading Islamic commercial banks in the MENA region shows a large variation in the average ROE between 2006-10
Total Assets 2010
49,304 44,498 22,952 20,489 15,880 14,238 9,526 8,915 8,807 8,703 7,114 6,744 5,633 5,453 5,309 4,668 4,538 4,156 2,482 2,272 KSA Kuwait UAE UAE Bahrain Qatar Qatar UAE KSA Kuwait KSA Bahrain KSA Egypt Qatar Kuwait UAE Kuwait Bahrain Bahrain 0.20% 10.0% -1.9% 7.4% 6.7% 0.1% -2.2% 1.4% 12.6% 17.4% 11.6% 10.0% 12.2% 15.5% 8.5% 19.2% 14.2% 15.2% 13.1%
Average ROE (2006-2010)

26.0%
Steep Slide
Long Tail
(3 Yr CAGR)
15 % 16% > 20 % < 9%
Growth
US$13bn US$38bn
MENA Islamic Average MENA Conventional Average
Source: Annual Reports, Zawya, EY analysis (includes sample of leading banks across Middle East and North Africa (MENA) where published information was available)
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Globally as mature markets press forward with banking reforms, many others are keen to explore an alternative Islamic finance option
Oman
First two Islamic license awardedpotentially a 10% market share play by
Libya
Banking industry to be made Sharia compliant
Egypt
Considering sovereign sukuk
Tunisia
Central bank mulls Islamic banking regulations
Switzerland
Islamic Bank of Switzerland to open
Hong Kong
HK legislating for Islamic banking
Banks need US$ 106bn new tier 1 capital by 2012
Kenya
Kenya to emerge as the Islamic finance gateway to East Africa
CIS
First Islamic bank conversion
Source: Published information. Image: Campaigner outside London Stock Exchange in Oct 2011 (Arab News)

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By 2015, the MENA Islamic banking industry is projected to be worth $990bn a significant growth story (2010: $416bn assets)
MENA Islamic Banking Assets - 2015 Forecast (US$bn)
The Levant
Turkey
5 10
87
Tunisia
140
7 Syria Lebanon 13
Morocco Algeria
13
Jordan
12
Iraq
Kuwait
20
104
GCC
79 UAE 156 Oman
8
Libya
5
Egypt
34
Bahrain Qatar Saudi Arabia
North Africa
Key
Projected Islamic banking assets 2015 (US$bn) - the size of the circle denotes relative size Source: 2010 Company Reports, Global Insight, EY perspective
8
291 Yemen
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Rediscovering profits - Operational efficiency can increase Islamic banks profitability by approximately 25%
MENA Islamic Banking - 2015 Combined Net Profit Forecast (US$bn) Current Performance (2010)1 Growth Momentum2 Operational Improvements $5bn $6bn
Innovation Growth Play
$7bn- $9bn
$3bn $4bn
Potential Combined Islamic Banking Profit Pool (2015)
Operational Transformation Risk Infrastructure
$15bn - $19bn
Emerging Islamic geographies Affluent retail proposition
1- Based on ROA of 1.5%, 2 Based on asset growth projections
Further Potential Growth Opportunities
Integration with real economy SME banking

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The CEO Agenda There are four emerging trends that will permanently alter the Islamic banking play, especially in the GCC market
Scalable, customer centric operating model, achieved through improved risk and technology orientation (winning back the profitability and valuation advantage)
Operational Transformation
Embracing technology to deepen existing relationships and improve new customer acquisition rates Product research and structuring, while learning from past experiences (e.g. the sukuk market debacle)
Innovation
The CEO Agenda
Risk & Compliance
Economic capital, risk adjusted returns, funds transfer, pricing, regulations, and compliant products and systems to drive the change in business focus
Growth Play
Sharia compliant banking to stimulate financial access to previously unbanked expect 100 plus new Sharia compliant banks in MENA by 2020
10
Having achieved 26% market share in GCC, future growth will come from mainstream customer segment; service model to be the primary proposition

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Report Structure
Executive Brief
Country Spotlight
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11
Key Messages 1 2
Growing asset market share Sharia compliant assets represent 14% share of MENA banking market, 26% in GCC* Leading to repositioning mergers, conversions, regional expansion, and changing business focus But yet to achieve scale $13bn average asset base for leading Islamic banks, a third of conventional banks
* Note: Islamic banking assets with commercial banks

12
Growth within the Muslim population throughout the emerging markets of MENA and Asia are key drivers behind increasing demand for Islamic financial services
Global Estimated Muslim Populations Selective Markets (2010)
Turkey 74m Algeria 34m Egypt 80m Iran 74m Pakistan 178m
China 23m Bangladesh 148m India 177m Malaysia 17m
Muslim Population Density Indicator

100m + 50 - 100m 10 50m 5 10m 1 5m Under 1m
Morocco 32m Nigeria 75m
Indonesia 204m
Source: Pew Research Center, Guardian, EY analysis

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13
The MENA region boasts macroeconomic synergies that bode well for future GDP growth
The Levant
Tunisia Morocco Algeria Libya
Turkey Syria Lebanon
Iraq Kuwait Bahrain Qatar UAE Oman
Jordan
GCC
Egypt
Saudi Arabia
North Africa
Key Features Total Population 374m (2010) CAGR Population Growth 2.1% (2007-2010) (EU = 0.4%) 61% and 45% of world oil and gas reserves respectively Nominal GDP US$2.6tn GDP CAGR 6.3% (2007-2010) (EU = 4.3%)
Yemen
Hydrocarbon Reserves
The GCC, Iraq, Algeria, Libya all have large hydrocarbon reserves and accumulated wealth
Population Centers
Turkey, Egypt, Saudi Arabia, Algeria and Morocco have large population centers and human capital reserves
Source: Global Insight, EY analysis (includes Turkey; excludes Palestine due to lack of data)
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Governments are utilising their hydrocarbon revenues to stimulate, develop and sustain economic activity within the region
MENA Nominal Hydrocarbon GDP (US$bn)
738 592 494 374 21
Cost of Arab Spring (US$bn)

35 56
682
2008
2009
2010
2011f
2012f
Cost to GDP
Cost to Public Finance
Total Cost
Overall growth expected to moderate in 2012, still significantly higher than levels seen in 2009-10
Many governments have responded by (i) committing to new spending and (ii) accelerating planned large infrastructure spending
Source: Geopolicity, IIF

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15
but from a generally underpenetrated market position, the banking but from a considerable generally underpenetrated market position, the banking industry has growth opportunities when compared to the industry has considerable growth opportunities when compared to the more developed economies more developed economies
1300% 1300% 600% 600% 500% 500% 400% 400% 300% 300% 200% 200% 100% 100% 0% 0%
Average Penetration for Sample Countries1 Average Penetration for Sample Countries1
Banking Asset / Nominal GDP (2010) Banking Asset / Nominal GDP (2010)
16
Source: Central Bank Reports, Economist Intelligence Unit, Global Insight, EY analysis (average for EU) 1 Average Penetration for Sample Countries excludes US Global statistic to reduce Source: Central Bank Reports, Economist Intelligence Unit, Insight, EY skew. analysis (average for EU) 1 Average Penetration for Sample Countries excludes US statistic to reduce skew. Page 16
MENA MENA
Rest of the world Rest of the world
Islamic Banking Competitiveness Report 2011-12 Islamic Banking Competitiveness Report 2011-12
Within MENA, the GCC markets are generally more developed with greater lending/financing assets to GDP penetration
Total Bank Lending/Financing and Penetration (2010)
2008 273 250 140% 200 120% 100% 150 80% 100 92 85 59 50 28 37 15 43 26 6 Turkey Lebanon Jordan Syria Iraq Egypt Algeria Tunisia Libya 31 11 60% 40% 20% 0% KSA UAE Kuwait Qatar Oman Bahrain 268 2009 2010 Penetration
300 262
180% 160%
US$ bn
78
Source: Central Bank Reports, Global Insight, EY analysis

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17
Sharia compliant assets represent a significant portion of the total banking system assets of the region
Banking Assets (US$bn) and Islamic Share (%) in 2010 The Levant
42
546
5%
2% 1%
Turkey Syria Lebanon Jordan

49
269
25% 155
117
0%
Tunisia
135
4%
46
Morocco Algeria
109
56
Iraq
Kuwait
46
31%
27%
156
GCC
22%
0% Libya
1%
Egypt 215
12%
Bahrain Qatar Saudi Arabia UAE Oman

41
438
17%
North Africa Key

XX
Total banking assets 2010 (US$bn) - the size of the circle denotes relative size Total Islamic banking assets as a % of total assets
4%
377 Yemen
35%
8
0%
30%
X%
Source: Central Bank Reports, Press Releases, The Banker - Top 500 Islamic Financial Institutions, EY perspective (Note: Sharia assets with commercial banks)
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MENA Islamic banking market share has reached 14%; in the GCC the Islamic banking market share has crossed the all important 25% threshold which means banks are competing in the conventional market as well
Banking Asset Penetration (% of Nominal GDP) and Islamic Banking Market Share of Total Assets (%) in 2010
360% Banking Penetration (% of Nominal GDP) 320% 280% 240% 200% 160% 120% Morocco Tunisia Egypt Turkey Yemen Syria 8% 12% 28% 32% 36% Qatar KSA Jordan UAE Bahrain Kuwait Lebanon
MENA Average Islamic Banking Market Share GCC Average Islamic Banking Market Share
Iraq
Size of circles denote the relative size of Islamic banking asset in 2010
80% Libya 40% 0% Algeria Oman 4%
16%
20%
24%
40%
Islamic Banking Market Share of Total Assets (2010)

Source: Central Bank Reports, The Banker, Global Insight, EY perspective
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Strong historical growth, driven by core Islamic segment; going forward expect change of play as Islamic banks begin to compete for mainstream customers who are open to Islamic or conventional banking
Asset CAGR (2006-2010)
Qatar 7% 28%
Growth Relative to Conventional Banks

39% 41%
Islamic Banking Market Share
Bahrain
22% 26%
235%
22%
UAE 13%
16%
-38%
2008
Kuwait
20%
52%
26%
Saudi Arabia 0% 5% 10%
14%
19% 20% 25% 30% 35% 40%
40% 45%
2010
15%
Islamic Banks
Conventional Banks
Source: Company Reports, EY analysis (sample includes selective Islamic and conventional banks based on asset size and published information)
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Industry is still fragmented with most Islamic banks holding less than $13bn assets yet to achieve scale, facing pressure on profitability
Average Assets and ROE (2006-2010 Average)
80 75 70 65 2006-2010 Avg Assets (US$ bn) 60 55 50 45 40 Average ROE
Islamic Banks
Conventional Banks
35
30 25 20 15 10 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Avg ROE 2006-2010 (%) 16 17 18 19 20 21 22 23 24 25 Average Assets
Source: Annual Reports, Analyst Briefings, EY analysis
21
The largest Islamic banks within the region are all leaders in their respective home markets and have expanded internationally to some degree
Sharia Compliant Assets and ROA (2008-2010 Average)
Assets US$m 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Kuwait Market Leader
Regional Full Fledged Islamic Bank

Regional with Islamic Operation Global with Islamic Window
UAE Market Leader
Saudi Retail Banking Leader
UAE Islamic Banks
Saudi Islamic Windows Qatari Islamic Banks
0%
0.5%
1%
1.5%
2%
2.5%
3%
3.5%
4%
4.5%
5%
Source: Annual Reports, The Banker, EY analysis (where data was not available, calculation based on a 2 year average)
22

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Bank financing activity appears to be picking up, regulatory requirements may induce banks to raise higher-cost investment/ time deposits
GCC Banks Growth in Advances

40% 35% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 1% 2010 22% 90% 35% 110%
GCC Banks - Net Financing / Deposits

108% 105% 100% 95% 94% 92% 87%
15%
85% 80% 75% 70% 2006 2007 2008 2009 2010
Islamic Banks
Conventional Banks
Source: Company Reports, EY analysis (sample based on selective Islamic and conventional banks)

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23
However, real estate concentration remains a concern for Islamic banks, may affect future growth
Islamic Banks
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 35% 32% 36% 33% 25% 25% 100% 18% 15% 90% 80% 25% 24% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 39% 41% 40% 33% 32% Banks and FIs 33% Real Estate Commercial Others 16% 12% 11% 16% 11% 16%
Conventional Banks
11%
20%
Source: Company Reports, Zawya, EY analysis (sample based on selective Islamic and conventional banks) (rounded numbers)
24

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Business repositioning - (M&A, conversions, changing business focus) appear to dominate MENA Islamic banking going into 2012
Merger - Al Baraka and Emirates Global announce merger - $582m asset base, 89 branches, 40 cities (Pakistan)
Qatar Central Bank announces Islamic banking windows to be prohibited by year end
Goldman Sachs registers a $2bn Islamic bond programme with the Irish Stock Exchange Global sukuk issuance surge to $63bn YTD, GCC a primary contributor after Malaysia
2010
JULY
NOV
2011
FEB
MAY
AUG
OCT
DEC
Several countries across Africa announce plans to introduce Islamic banking; amend regulatory and legislative regimes Conversion of Amrah Bank to Islamic $500m sukuk issue by HSBC Middle East Royal Decree passed to allow Islamic finance industry to commence in Oman. First banking license granted in Q2 International Bank of Qatar announces the sale of its Islamic banking business to Barwa Bank
Formation of Warba Bank in Kuwait
Bahrain Islamic and Al Salam Bank announce they are exploring merger
ENBD acquires Dubai Bank
Source: The Banker, IFN, Maris Strategies, Analyst Briefing

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Report Structure
Executive Brief
Country Spotlight
5

4
26

Page 26
Key Messages 1 2
Painful decline in profitability industry ROE now appears to be stabilizing around the 10% range (2006: 23%) Structural advantage better financing margins, higher deposit growth and higher proportion of free deposits Operating model questioned misaligned people-processes-systems, leading to high cost to income ratio
27
ROE decomposition assists in understanding the key performance indicators of banks
Leverage
Deposits Cost of Funding
ROE
X
Return on Assets
Operating Expenses
Provisions
28

Page 28
Islamic banks have experienced a more painful decline in profitability over recent years but this now appears to be stabilizing
Net Income / Equity
40%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Operating Expense Provisions
Bahrain
40% 27% 20% 13% 11% 2007 2008 2009 9% -1% 2010 0% 2006 -20% 40% 22% 20% 16% 0% 2006 -20% 2007 2008 2009 2010 20% 15% 0% 2006 -20% 20% 19%
Kuwait
40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 13% 10% 23%
12% 5% 2007 2008 2009 2010
0%
2006 -20% 40%
Qatar
Saudi Arabia
35% 29% 14% 13% 2007 2008 2009 2010
20%
United Arab Emirates

40%
20% Islamic Banks
17%
10% 8%
Conventional Banks
0% 2006 2007 2008 2009 2010
-20%

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29
Islamic banks are able to generate higher financing margins also because of their relatively stronger retail focus
Net Financing Income / Financing Assets
Bahrain
8% 6% 8% 6% 2.8% 1.8% 2007 2008 2009 2.2% 0.6% 2010 4% 2% 0% 2006 2007 3.5%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Kuwait
5%
4.3% 4% 3.7%
4% 2% 0%
3.3% 3.1%
2006 8%
2008
2009
2010
Qatar
3.8% 2.3% 2.7% 2.2% 2008 2009 2010
8% 6% 4% 2% 0%
Saudi Arabia
7.1%
3%
3.0%
3.2% 2.8%
6% 4% 2% 0%
4.9% 3.7% 3.0%
2% 2006
2006
2007
2006
2007
2008
2009
2010
2007
2008
2009
2010
8% 6% 4%
Islamic Banks
Conventional Banks
IBs excluding KSA
2% 0%
2.3% 2.2% 2007 2008 2009
3.3% 2.7% 2010
30
2006

Page 30
Equity multiplier suggest that Islamic banks have room for further expanding risk weighted assets
Assets / Equity
12 11
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Bahrain
12 9 8 8 4 0 2007 2008 2009 2010 2006 9 8
Kuwait
14 12 10 Multiple 8 6 4 2 0 2006 5.6 8.2
Deposit CAGR = 13%
8 4 0
8 7
2006
2007
2008
2009
2010
7.9 6.8
12 8 4 7
Qatar
12 8 5 3 2007 2008 2009 2010 8 4 0 2006 8 5
Saudi Arabia
8 5
Deposit CAGR = 16%
2006
2007
2008
2009
2010
2007
2008
2009
2010

12 8 4 0 8 6 8 8
Islamic Banks
Conventional Banks
2006
2007
2008
2009
2010

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31
Islamic banks benefit from a higher proportion of free customer deposits but there is a tendency that these are of a short term tenure
Islamic Banks
6.8%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Conventional Banks
4.9% 3.0%
17% 5% 62%
10.2%
21.7% 69.7%
47.7% 65.6%
2008-2010 Average
0.1% 78% 15% 45.5% 2.6% 23% 21% 47% 29% 2.6%
Other
Investment/ Time Deposit
Saving
Current
UAE
KSA
Qatar
UAE
KSA
Qatar
32

Page 32
After a painful decline in profitability through the financial crisis the ROA appears to be stabilizing, but now lower than conventional banks
Net income / Assets
8%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Bahrain
8% 6% 2.6% 1.1% 2007 2008 2009 0.9% -0.2% 2010 4% 2% 0% 2.6% 2.1% 6% 4% 2% 0% 2006 -2%
Kuwait
8% 7% 6% 5% 4% 3% 2% 1% 0% 2006 2007 2008 2009 4.0% 3.0% 1.6% 1.5% 2010
1.2% 1.0% 2007 2008 2009 2010
2006
8% 6% 4% 2% 0% 2006 5.5% 3.0%
Qatar
8% 6% 3.0% 2.6% 4% 2% 0%
Saudi Arabia
7.2% 3.8%
2.6% 1.8% 2007 2008 2009 2010
2007
2008
2009
2010
2006
8% 6% 4%
3.1% 2.5% 2007 2008 2009 1.7% 0.7% 2010
Islamic Banks
Conventional Banks
2% 0%
2006

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33
Higher provisions and operating costs have contributed to the steep decline in profitability of Islamic banks
Islamic Banks
ROA 3.2% 1.6% 1.5% 4% 6% 3% 4% 2.5% 1.5% 1.3% 1.1% 2% 1.1% 1.1% 1.8%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Conventional Banks
1.6% 1.6%
Other Income
Net Financing Income
2%
3.2%
3.4%
2.9%
1%
1.9%
2.1%
2.0%
Operating Expenses
0% -2.0% -2% -0.4% -2.0% -1.4% -1.8% -1.0%
0% -1.0% -1% -0.2% -1.0% -0.6% -0.9% -0.5%

Provisions
-4% 2006-2008 average 2009 2010
-2% 2006-2008 average 2009 2010
Source: Company Reports, EY analysis (numbers rounded off)

34
Provisions and operating expenses higher than conventional

Page 34
Higher cost to income ratio is a combined result of modest core banking revenues and a higher cost base due to misaligned processes and systems
Operating Cost / Operating Income
60%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
40% 29% 26% 20%
40% 35%
0% 2006
2007
2008
2009
2010
Islamic Banks
Conventional Banks

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Performance culture higher staff cost should translate into better performance but Islamic banks lag behind their conventional peers
Staff Cost / Operating Expenses
60% 59% 58% 57% 56% 55% 54% 53% 52% 51% 2009 2010 54% 58% 57% 60% 4% 3% 3% 2% 2% 1% 1% 0% 2009 0.9% 3%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Staff Cost / Deposits
3%
0.8%
2010
Islamic Banks
Conventional Banks
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Operating costs are impacting Islamic banks across the region operating models need to be made scalable
Operating Cost / Asset
6% 4% 3.8% 2.1% 1.3% 2007 2008 2009
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
Bahrain
6% 4% 2% 0% 2.0% 1.3%
Kuwait
6% 5% 4% 3% 2% 1% 2.2% 1.3% 2007 2008 2009
2% 0%
1.4% 2010
2.2% 1.5%
2006
2006 6% 4%
2007
2008
2009
2010
6%
Qatar
Saudi Arabia
3.1% 2.4%
2.1% 1.5% 2010
4% 2% 0% 2.2% 1.3% 2007 2008 2009 2010 2.1% 1.5%
2% 1.6% 0% 2006 2007 2008 2009 2010 1.4%
0% 2006
2006

6% 4% 2% Islamic Banks Conventional Banks 0% 1.6% 0.9% 2007 2008 2009 1.6% 1.0% 2010
2006

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Both Islamic and conventional banks have seen a deterioration in the provision to income ratio
Provisioning / Operating Income
50% 40% 30% 20% 10% 0% 2006 21% 20% 6% 3% 2007 2008 2009 2010
50% 30% Islamic Banks 10% 13% 3% 2007 2008 2009 2010 33% 23%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
50%
Bahrain
32% 16%
50%
Kuwait
30%
30% 8% 4% 2007 2008 2009
25% 16%
10%
5% 2% 2007 2008 2009
10%
-10% 2006 50% 30% 10%
2010
-10% 2006
2010
Qatar
50% 30% 10% 0.3% 10% 5% 2%
Saudi Arabia
18% 16% 2007 2008 2009 2010
3.7% -2% -10% 2006
2007
2008
2009
2010
-10% 2006
Conventional Banks
38
-10% 2006

Page 38
Leading GCC Islamic banks continue to grow deposit base at a faster pace
40% 35% 30% Annual Growth Rate 25% 20% 15% 10% 5% 0% 2007 2008
Money Supply and Deposit Growth Rates
While the bigger Islamic banks have seen comfortable deposit growth, the smaller institutions have had to raise expensive investment deposits to meet liquidity and regulatory requirements
2009
2010
2011
2012
2013
2014
2015
Money Supply Money Supply Forecast Islamic Deposit
Source: Central Bank, Company Reports, EY analysis (sample based on selective Islamic and conventional banks)
Conventional Deposit

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39
Average cost of customer funds is lower for Islamic banks, primarily due to high share of free deposits in the deposit mix
Average Return on Investment Account Holders Funds/ Deposits
5.0% 3.8%
Deposits
Leverage
Cost of Funding
ROE
X
Return on Assets
6% 5% 4% 3% 2% 1% 0% 2006
3.0% 1.8% 1.3% 0.4% 2007

Islamic Banks
However, cost of return-bearing customer deposits has been increasing relatively faster for a number of Islamic banks, compared to their conventional peers
2008
Conventional Banks
2009
2010
6 months US$ LIBOR (average)
Source: Company Reports, EY analysis (sample based on selective Islamic and conventional banks), US$ LIBOR: global-rates.com
40

Page 40
Sharp correction in investment asset values, and emerging focus on core banking business has led to significant change in asset mix
26% 24% 22% 20% 18% 16% 14% 12% 10% 2006 24% 22%
Investment / Total Liabilities
22%
13%
2007
2008
2009
2010
Islamic Banks
Conventional Banks

Page 41
41
Islamic banks continue to hold more liquid assets than conventional banks in most markets across the region...
Cash & Cash Equivalents / Total Liabilities
25%
20% 15% 10% 5% 0% 2006
Bahrain
18% 12% 15% 12%
20% 15% 10% 5% 0%
16% 14%
Kuwait
16% 13%
20% 18% 15% 15%
2007
2008
2009
2010
2006
2007
2008
2009
2010
19%
Qatar
14% 40% 30% 33% 29% 22% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2006
Saudi Arabia
16% 10% 7% 14%
10%
20% 10% 18%
5%
0%
2007
2008
2009
2010
0% 2006 2007 2008 2009 2010 30% 20% 10% Islamic Banks Conventional Banks 0%

21%
17%
8% 2006 2007 2008 2009 2010
42

Page 42
... but as noted earlier, Islamic banks have limited long term liabilities
Islamic Banks
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 59% 63% 66% 68% 69% 27% 1% 13% 1% 14% 2% 14% 18% 1% 14% 17% 2% 14% 15% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 66% 13% 5%
Conventional Banks
6% 2% 5% 5%
16%
20% 12%
23%
19% 13%
17% 14%
Long Term Liabilities
22%
12%
Short term Liabilities
Equity
62%
63%
63%
64%
Deposits
2007
2008
2009
2010
As % of Total Liabilities & Equity


Page 43
43
Both Islamic and conventional banks have a negative liquidity gap for short term maturity band
Net Liquidity Gap / Total Asset (selected maturity band)
80% 72% 55%
60%
40%
20%
0% Less than one year -20% Over 1 year
-40% -44% -60%
-36%
Islamic Banks
Conventional Banks
44

Page 44
Report Structure
Executive Brief
Country Spotlight
5

4

Page 45
45
Competing to Win The CEO Agenda
Key Messages 1 2
Rebuild to last operating model to be transformed for quality growth and to create sustainable shareholder value Service driven culture investing more in customer centric activities, with better use of technology and risk tools Sharia differentiation acquire and build specialist product skills, ensure better integration with real economy
46
Several Islamic banks have initiated a comprehensive transformation agenda for sustainable growth
Operational efficiency and effectiveness

Customer centric operating model Improved data management Updated Sharia compliant systems and processes
Growth
Emphasis on core businesses Consolidation, conversions and new start-ups Next 100 in the making Relationship growth with key clients, vendors and partners
The Search for A New Business Model

Risk and compliance
Risk, compliance and regulation to drive change in business models Capital management - substantive reallocation involving tools such as risk adjusted returns, fund transfer pricing, economic capital etc.
Innovation
Embracing new technology Product research & structuring while minimizing reputation, regulatory and commercial risk

Page 47
47
Competing for customers who are not driven by Sharia considerations only service quality is likely to replace pricing as the primary proposition
Customer Rapid Assessment
Customer Transformation
Customer & market strategy
Sales & channel management
Customer intelligence & economics
Customer service management
48

Page 48
Banks need to review their customer and market strategies to help understand customer requirements and engagement tactics in the new competitive landscape
Customer and market strategy (the double compliant customer) New market strategy Understand the competitive landscape and assess customer trends Analysis of regulation, Sharia, tax and legal requirements Customer segmentation Specially designed tools to develop deep understanding of segment requirements Data analysis and modelling to develop logical segmentation models Customer operating model review Development of organizational design and spans of control Shared service analysis Provide the linkage between employee, Sharia & customer engagement
Customer service improvement As-is and to-be analysis of customer experience to enhance customer engagement Develop the most important Customer moments of truth and develop service
Customer service improvement

Page 49
49
Customer analytics banks can identify trends in customer behavior and spending to provide suitable products in line with the customers needs successful rollout has delivered increases in retention and profitability
Customer analytics and economics Single customer view Developing an analytical single customer view to drive marketing activity Developing an operational single customer view to drive service experience Customer retention Customer profitability and lifetime value analysis Cross sales and incentive schemes to assist in both retention and customer value management Customer data architecture Assist in the selection and implementation of CRM technology Assist in designing a customer data database
Customer economics Development of actionable plans for improving margin or optimizing cost Diagnosis of key improvement initiatives to help sustain revenues, & reduce costs whilst improving customer service
Single customer view
Note: CRM (Customer Relationship Management)

50

Page 50
Effective and compelling marketing tactics can increase the customers consideration to buy. The region is already saturated with loyalty schemes so another new one needs to be carefully thought through
Sales and channel management Customer loyalty management Assess customer data to determine position in the customer lifecycle Analysis of customer needs and internal practices to help match customer expectations with service Channel strategy Use of data models for channel optimisation and defining incentive compensation for channel advocacy Smooth transition of customers between channels, efficient complaints handling process and effective use of channels Sales force effectiveness Planning sales activities/ deploying resources to develop an effective sales strategy Overhauling the sales process including pipeline management, tender management, risk & regulation Product development Developing a product strategy based on Sharia contracts to assist in revenue growth Product mix optimisation, margin improvement, consumer promotional effectiveness and competitor positioning
Customer loyalty management

Page 51
51
Banks in the region often use costly incentives to attract customers but then spend little on service to retain them this is unsustainable
Customer service management Contact centre transformation Contact centre diagnostic and performance benchmarking Developing a detailed understanding of how contact centre fits into the overall service proposition Customer service effectiveness Assess service capabilities vs. competitors to identify gaps in the service proposition Map the high level processes and identify the key issues from a customers perspective Service quality management Assess the impact of the move to self-service on the overall customer profitability Identify hot-spots and instigate process changes Service channel transformation Developing an integrated approach to servicing via multiple channels Determining the impact of service failures on customer experience
Contact centre transformation
52

Page 52
In our experience, a customer-centric operating model which has processes built around the customer are the biggest drivers of benefits, as illustrated below
5% 7% Typically three levers deliver the majority of the benefits 11% 11% 19%
60%
Benefits
8% 8%
100%
30%
Structural Rationalisation
Process & Productivity Improvement
Off shoring / Outsourcing
Business Portfolio Rationalisation
Purchasing Compliance / Governance
Supplier Rationalisation
Demand Challenge
Infrastructure Rationalisation & Efficiency
Total

Page 53
53

Growth

Risk and compliance
Innovation
54

Page 54
Reduced profits and valuations are amongst the biggest business risks facing Islamic banks
Financial
Liquidity and cost
Compliance
Top Risks for Islamic Banks
7
Reduced profits and valuations
Managing the transformation, to customer centric business model
2 1 4
Product risk, balancing innovation, law of the land and Sharia compliance
Reduced profits and valuations Geopolitical, macroeconomic shocks Human capital, including misaligned compensation structures Product risk, balancing innovation, law of the land and Sharia compliance Technology risk, including absence of fully compliant/ certified systems Liquidity and associated cost
Geopolitical, macroeconomi c shocks
Technology risk, incl. absence of fully compliant/ certified systems
Managing the transformation, to customer centric business model
Human capital, including misaligned compensation structures
Strategic
Operational

Page 55
55
Three way constraint on strategy banking industry in general feeling the pressure, Islamic banks are no exception
Business focus will have to change Spreads will need to rise Higher capital requirement for trading book Large, long-term corporate financing will need to be repriced
Cost of more capital
Leverage constraint
Cost of liquid assets buffer
56

Page 56
Liquidity challenges and needed improvements
Product innovation (e.g.

credible, compliant alternatives to Commodity Murabaha)
New data hubs needed
Contingent commitments
Systems
Better consolidated/ group wide data
Process Governance
Funds transfer pricing
Collateral tracking systems
Enhanced analytic capability

Page 57
57
As with conventional institutions, Islamic banks will find it challenging to return to pre 2007 profitability levels question is how big will the cuts be?
ILLUSTRATION ONLY
Pre-crisis, 15 - 25%
Rate of return on equity
Estimates of cut pre-mitigating actions reduction around 5-9 percentage points Components of the reduction Capital quality Capital increase Leverage ratio Liquid assets 0.8 1.3 0.1 0.6
Strategic issue for the banks how much disclosure is needed to convince equity investors they are safer
58

Page 58
It is now even more important to link remuneration code with institutions performance, and to retain scarce talent
Remuneration Committee Bank wide remuneration policy (NEDs + External Advisors)

Oversight of reward protocols + Reward framework Bonus decision (form and amount) Golden handshakes parachute payments Payout decision (timing and amount) Board level executives High end employees Assessment Line Mgmnt/ HR Risk All other employees

CRO
Key challenges

Human capital Risk Tax
Talent retention Corporate culture Shares vs. cash/ deferrals Data availability and quality
Current practices

Individuals with significant influence on direction and risk profile
Balanced Score Card Salary Short term incentive plans Long term incentive plans People Quality Customer Risk
Performance measurement framework Salary / Bonus Short term incentive plans Long term incentive plans
Reviewing new rules and guidance on remuneration Revising compensation policies, processes and systems Update balanced scorecards and new incentive plans

Page 59
59
MI framework with risk adjusted performance tools will be central to directing quality growth
Business Strategy Value Drivers Performance Measures
Income per Account
Operating Measures
Net Profit Income per Account Cost of Funding
Action Plans
Finance Income
Volume Long Term Embedded Value Investment Return Cost of Funding
Sales (# of New Accounts) Number of Existing Account Number of Closed Account
Investment Income Operating Expenses Improve Economic Profit Bad & Doubtful Debts
Write - Offs
Cure Rate # Fraudulent Accounts Value of Delinquency # of Delinquent Account # of Deceased Account Provision Estimate Value Deterioration Probability of Default Loss Given Default
Recovery Revenue
Bad Debt Provision
Investment Impairment
FX Volatility
ILLUSTRATION ONLY
Exposure at Default Portfolio Diversification
Credit Risk Capital
Risk Capital
Operational Risk Capital Other Risks Risk free rate
Cost of Risk Capital

Hurdle Rate
Beta Market premium
60

Page 60
One potential scenario shows that risk practices at Islamic banks need to evolve significantly to achieve sustainable growth
ERM FRAMEWORK
Business Strategy
Risk Appetite
Risk Based Pricing Active Portfolio Management Risk Adjusted Performance Measurement Capital Planning and Management
Policies, Standards, People & Culture Risk Organisation & Governance
Data & IT Infrastructure
Risk Monitoring & MI Risk Control & Limit Setting Scenario Analysis & Stress Testing Risk Aggregation & Economic Capital Risk Measurement Risk Identification
Credit Risk Market Risk Ops Risk Liquidity Risk Profit Rate Risk Strategic Risk Catastrophe Risks
Comparable to conventional Need Enhancement Weak

61
Risk Universe

Growth

Risk and compliance
Innovation
62

Page 62
At current pace, MENA Islamic banking assets with commercial banks are set to grow by an additional $575 billion by 2015
2015 Forecast (US$b)
The Levant
Turkey
5 10
87
Tunisia
140
Syria Lebanon
7 13
Morocco Algeria
13
Jordan
12
Iraq
Kuwait
20
104
GCC
79 UAE 156 Oman
8
Libya
5
Egypt
34
Bahrain Qatar Saudi Arabia
North Africa
~ 291 Yemen
7
Key
Total ISLAMIC banking assets 2015 (US$b) - the size of the circle denotes relative size
Source: Central Bank Reports, The Banker, Analyst Briefings, EY analysis

Page 63
63
While most Islamic banks remain localized to their GCC base, there is potential demand for an estimated 100 new Islamic financial institutions across MENA by 2020
America 1%
America 2%
Europe 5%
Europe 8%
MENA 85%
MENA 87%
Asia 3%
Asia 1%
GCC Islamic Banks
GCC Conventional Banks
64

Page 64
However, a major impediment to growth is the weak Islamic finance enabling infrastructure in several OIC markets
Enabling infrastructure would include legislative, regulatory, legal, accounting, tax, human capital, and Sharia business framework
Bahrain, Malaysia and UAE are amongst the major Islamic finance centers
Relatively Developed Infrastructure Some Infrastructure Weak or No Infrastructure
Further, Islamic finance standard setting institutions have limited geographic reach / enforceability remains a challenge
OIC (Organization of Islamic Countries)

Page 65
65
Repositioning through conversions and mergers will be an important theme, in some instances driven by market pressures
Transaction announced date
Oct-09
Jan-10
Oct-10
Jul-10*
Target company Target country
Bahraini Saudi Bank
Ahli United Bank Egypt Egypt
Royal Bank of Scotland (UAE) (Retail Banking business) UAE
Islamic Bank of Britain Plc UK
Bahrain
Bidder company Bidder country Deal value ($ m)
Al-Salam Bank
Ahli United Bank
Abu Dhabi Commercial Bank UAE 100 Abu Dhabi Commercial Bank (ADCB), agreed to acquire the retail banking business of Royal Bank of Scotland (UAE).*
Qatar International Islamic Bank Qatar 40 Qatar International Islamic Bank (QIIB) agreed to acquire 78.5% stake in Islamic Bank of Britain Plc.
Bahrain N/A Al-Salam Bank acquired a 90.31% stake in Bahraini Saudi Bank BSC. Salam issued 227.8m new shares for BHD 0.112 each
Bahrain 53 Ahli United Bank Egypt's 54.7% stake to be acquired by Ahli United Bank in a share swap transaction.*
Key details
Source: Mergermarket, Company annual reports, * Conventional banks

66

Page 66
In GCC, the pricing multiples of Islamic banks have converged over recent months now broadly in line with conventional banks
Average P/E of Banks in GCC Sep 2011

24 20 3 16 (times) (times) 12 8 4 N/A 0 12.8 12.2 16.3 15.2 2 4
Average P/BV of Banks in GCC Sep 2011
2.0 3.4 1.6 1.8 1.9 1.4 1.4 N/A N/A 1.6
20.7
13.0
11.5
11.1
8.5
6.8
10.1
1 N/A
2.1
N/A
N/A
Islamic Avg. Islamic
Conventional Avg. conventional
Islamic Avg. Islamic
0.8
0.9
Conventional Avg. conventional
Banks include all listed retail banks excluding those having P/E of less than 0 or greater than 30; UAE banks include Dubai & Abu Dhabi based banks only; N/A No bank with P/E within specified range in the respective country; Source: Bloomberg, OneSource & EY perspective

Page 67
67
with Kuwait and UAE having the highest and lowest pricing multiples respectively
Kuwait
Average Conventional 2.1 20.7
KSA
Average Conventional Average Islamic Conventional Conventional Conventional Conventional Conventional Conventional 1.4 3.4 1.2 1.5 1.1 1.5 1.8 1.2 1.5 3.4 10 5 0 5 10 15 9.3 15.2 20 7.5 9.9 13.9 12.3 12.6 12.0 11.1 15.2
UAE
Average Conventional Average Islamic Conventional Islamic Conventional Conventional Conventional Conventional 10 5 0.9 0.8 0.7 0.8 0.9 1.2 0.9 0.6 0 5 6.0 7.4 10 5.1 8.5 7.0 8.4 6.8 8.5
Conventional
1.9
14.0
Conventional
2.4
27.4
Conventional Islamic
10
10
20
30
Qatar
Average Conventional Average Islamic Conventional Islamic Islamic Islamic Conventional Conventional Conventional Conventional 10 1.9 1.8 2.4 1.8 1.8 2.4 1.2 1.9 1.5 2.0 5 0 5 10 11.5 13.0 14.0 13.4 13.2 14.4 10.9 11.1 11.1 10.0 15 20
Oman
Average Conventional Conventional Conventional Conventional Conventional 10 1.4 1.4 1.8 1.6 1.3 5 0 5 10 16.3 14.4 12.2 Conventional 15.0 11.3 15 20 Conventional Average Conventional
Bahrain
1.6 10.1
Conventional
1.9
8.6
1.5
9.8
1.4
12.0
10
10
15
Banks include all listed retail banks excluding those having P/E of less than 0 or greater than 30; UAE banks include Dubai & Abu Dhabi based banks only; Source: Bloomberg, OneSource & EY perspective
68
P/BV (Sep 2011) P/E (Sep 2011)

Page 68
Islamic banks constitute approximately 9% of market capitalization in GCC
Break-up of Total Market Capitalization of GCC indices (Sep 2011)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Kuwait Non-financial sector 21% 4% 6% 31% 5% 14% 11% KSA 4% UAE Other financial sector 12% Qatar 48% 29% 1% 22% 3% Oman Bahrain Islamic retail banks 9% Average 30% 43% 69% 30% 53% 18% 77% 35% 11% 27% 50%
34%
Conventional retail banks
*Share of other financial sector estimated at December 2010 level; Source: Bloomberg, OneSource & EY analysis (rounded numbers)

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69
M&A decision for Islamic banks come with certain motivations, and challenges
Key motivators
Buyers/ sellers considerations
Market pressure threat of being left out in the new wave of M&A in some economies Internal &external efficiencies Business model transformation/ realignment Bigger scale expansion to exploit upcoming infrastructure projects Inorganic growth strategic mergers & acquisitions
Aggressive due diligence Reverse due diligence Retention of key employees Potential synergistic Negotiation Regulatory approvals Willingness to accept transactions structured with significant contingent payment provisions
Challenges
Pricing Difficulty in finding pricing benchmarks Post integration issues
70

Page 70

Growth

Risk and compliance
Innovation

Page 71
71
Customer adoption of digital technology is growing exponentially
1bn
2bn internet users globally 700m Facebook users 30bn iTunes downloads 8bn SMS send every day
Worldwide Audience of
50m
7 hours per day spend using digital technology $60bn peer-to-peer mobile payments by 2013
10m
2 Years
10 Years
50 Years
Sources: www.internetworldstats.com; The World Factbook, CIA, EY perspectives

72

Page 72
Digital touchpoints are now critically important for engagement, sales & service delivery and retention strategies
Personalised Experience
Each customer will expect a bespoke service from their bank at whichever touchpoint they use With technology on handheld devices, customers will expect to undertake banking whenever and wherever they need
Anytime, Anw here
Deeper Relationships
Customer Expectations
Security and trust will be important factors customers will review when choosing which digital channels they will use Banks product and marketing teams need to maximise intelligence gathered from all types of customer transaction data to forecast customer needs
Security & Trust

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73
MENA wide, there has been a considerable increase in the number of users of smartphones and social media over the last 12 months. This bodes well for banks embracing digital technology. Government stimulus packages & Nationalisation programmes Wealth distribution & Wealth acquisition
A young population already inclined to use digital technology
Middle East Internet Usage and Population Statistics
Population Median Age Users, in Internet Usage, % Population Facebook ( 2011 Est. ) of Population 2001 Latest Data (Penetration) Subscribers
1,214,705 77,891,220 30,399,572 6,508,271 2,595,628 4,143,101 3,027,959 2,568,555 848,016 26,131,703 22,517,750 5,148,664 24,133,492 1,657,155 208,785,791 30.4 27.6 20.6 21.8 26.4 29.4 23.9 20.9 30.8 21.6 21.5 30.2 16.4 17.5 23.6 40,000 250,000 12,500 127,300 150,000 300,000 90,000 35,000 30,000 200,000 30,000 735,000 15,000 n/a 2,014,800 649,300 36,500,000 860,400 1,741,900 1,100,000 1,201,820 1,465,000 1,379,000 563,800 11,400,000 4,469,000 3,555,100 2,349,000 n/a 67,234,320 53.50% 46.90% 2.80% 26.80% 42.40% 29.00% 48.40% 53.70% 66.50% 43.60% 19.80% 69.00% 9.70% n/a 32.20% 287,020 n/a 860,400 1,675,780 822,640 1,201,820 285,080 599,520 245,580 4,034,740 n/a 2,340,880 329,040 n/a 12,682,500
Bahrain Iran Iraq Jordan Kuwait Lebanon Oman Palestine (West Bk.) Qatar Saudi Arabia Syria United Arab Emirates Yemen Gaza Strip Middle East
Banks have a customer base that is ready to embrace the products and service offerings that will meet their expectations of personalised experience, anytime anywhere, security and trust and deeper relationships.
Sources: www.internetworldstats.com; The World Factbook, CIA, EY perspectives
74

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Product innovation - Sharia structures are only now being tested (for example sukuk market)
Discussion on Sukuk Structures Assets Backed Structures
Typically structured as an Ijarah (sale and lease back) or a Sharikat al Melk (co-ownership) Involves a sales contract where a beneficial interest is acquired in certain assets Funds are immediately invested in Sharia compliant assets Minimum requirement is to have at least 33% (increasingly 51%) tangible assets at the outset Provides the greatest discretion in use of proceeds as initial investment has already occurred
Source: Norton Rose
Asset Based Structures

Structured as a Musharaka (Partnership), a Wakala (Agency) or a Mudaraba (Fund Management) Allows for future asset creation from funds raised. Consequently, 33% tangible asset requirement does not apply Requires investment of funds according to an approved, Sharia compliant investment plan Suitable structure for development projects where assets are to be developed in the future and are not immediately cash generative

Page 75
75
Real life case study of a restructured sukuk issue
Sukuk Holders
Issuer as Investor Partner/ Lessor/ Trustee

Lease of Issuer Assets
Musharaka Purchase Undertaking
Mushraaka Sale Undertaking
Obligor as Commercial Partner
1% Profit
99%Profit
Units Cash contributions
Musharaka with Business Plan
Units Contribution in kind (land)
Rental Payment during Rental Period and Final Rental Payment
Management Agreement
Project Co as Lessee
Source: Norton Rose
76
Obligor as Manager
ILLUSTRATION
Page 76
General stages of the sukuk restructuring exercise (see Appendix for detailed description)
1 Existing arrangement 2 Sukuk holder accord
A thorough understanding of the underlying Sukuk structure together with the corresponding agreements is required Care shall be taken that the restructuring would not cause a cross default Sukuk holders have to be on board with respect to the key features of the restructuring, this shall also include a comparison of existing core provisions of the Sukuk structure with the restructured one Sukuk holder agreement shall be required for the revised structure Dissenting sukuk holders shall be provided with an exit route without any breach to the effective provisions of the existing sukuk structure Sukuk holders who opt to buy the portion of dissenting sukuk holders may be given some additional benefits
3 Exit option
4 Benefits & Compliance
The revised structure shall benefit both parties for it to be economically efficient The revised documentation shall comply with existing laws and regulations The trail of restructuring shall be documented
Source: Norton Rose

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77
Report Structure
Executive Brief
Country Spotlight
5

4
78

Page 78
Country Spotlight Introducing selective Islamic banking markets
Key Messages 1 2
Malaysia significant budget incentives to develop capital market products, SME business and venture financing Turkey Unique participation banking model, $25bn value, growing at CAGR of 30% plus for 2006-2010 Oman potentially a $6-10bn Islamic banking market over next five years, first two licenses awarded
79
Country focus - Salient features
Malaysia
Turkey
Oman
Banking Parameters Total banking assets 2010: US$505bn CAGR (06-10): 9.1% Islamic banking market share 2010: 17.3% Total banking deposits 2010: US$ 360bn and CAGR [06-10] 9.5% Banking asset penetration 2010: 220% Deposit penetration 2010 : 156% Islamic finance commentary Regulators recognise the profit and loss sharing concept of Islamic banks There are currently 17 Islamic banks and four international Islamic banks Conventional banks are encouraged by the Central Bank to establish Islamic windows Various incentives (legal & tax) are provided by the government (e.g. up to 100% foreign equity ownership for Islamic banks
Banking Parameters Total banking assets 2010: US$ 652bn CAGR (06-10): 25% Islamic banking market share 2010: 4.3% Total banking deposits for 2010: US$ 399bn and CAGR [06-10] 25% Banking asset penetration 2010: 85% Deposit penetration 2010: 52% Islamic finance commentary Turkey has a total of 49 banks, and 4 of them are Participation Banks Currently a law is in place which recognises the participation features of Islamic banks Total number of branches of Participation Banks has increased by 8% in 2010 to reach 607
Banking Parameters Total banking assets 2010: US$41bn CAGR (08-10): 6.6% Islamic banking market share 2010: 0% Total banking deposits 2010: US$27bn CAGR (06-10): 22% Banking asset penetration 2010: 70% Deposit penetration 2010: 47% Islamic finance commentary Royal Decree to introduce Islamic banking Central Bank of Oman expected to allow full Islamic banks and Islamic windows, new regulatory regime for Islamic banking business expected Two licenses awarded for full Islamic banks; most conventional banks expected to compete for Sharia banking business through window operation
80

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Malaysian Islamic banking sector registered a four year CAGR of 19.3% to reach US$ 87bn in 2010
600
US$bn
0.25
500 400 300 200 100 0 2006 2007 2008 Total Islamic Banking Assets 2009 2010 Islamic Banking Growth 51 63 76 87
0.2
0.15
0.1
0.05
43
Total Banking Assets 17% 83%
Source: BNM Annual Report 2010

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81
Islamic banking assets and deposits registered healthy growth rate

Malaysia's Islamic Banking Sector Total Financing (US$ bn)
60 50 40 30 20 10 0 2006 2007 2008 2009 2010 26 29
CAGR of 19.9% 80
Malaysia's Islamic Banking Sector Total Deposits (US$ bn)
53 44
70 60 50 40 30 20 10 0 2006 2007 40 32
CAGR of 21.6% 50
71 62
35
2008
2009
2010

82

Page 82
The five largest banks in the country account for approximately 58% of the market share
Market Share 2010 Malaysia's long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid foundation - financial bedrock of stability that adds to the richness, diversity and maturity of the financial system Islamic banks in Malaysia are regulated by the Islamic Banking Act of 1983 and are governed by the Central Bank of Malaysia, Bank Negara Malaysia (BNM) There are currently 17 Islamic banks and four international Islamic banks
Maybank Islamic 18% Other 41%
CIMB Islamic 13%
Public Islamic 9% AmIslamic 7%
Bank Islam 12%

Page 83
83
Household sector benefits the most from Islamic financing whereas deposits are mainly generated from business enterprises and financial institutions
Financing by sector Deposit by customer
Communicati ons 4% Real estate 3% Construction 4% Trade 4% Commercial 5% Healthcare 5%
Other 13%
Individuals 21%
Government 18%
Household sector 62%
Business enterprises 31%
Financial Institutions 30%

84

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Key messages
Liberal measures such as issuance of licenses and increased limits of foreign equity ownership for Islamic financial institutions will help to attract and create a diverse community of local and foreign Islamic financial institutions The growth of halal food industry in Malaysia has positive implications for the Islamic banking and finance industry, as the source of financing for the halal food industry should be from a Sharia-based source
The countrys large and young Muslim population (60.4% of the countrys total population) provides impetus for continued strong growth of Islamic banking

Page 85
85
Participation banking in Turkey has grown at a four year CAGR of 33% and now accounts for approximately US$ 25bn in asset
700 600
US$bn
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006

4%
500 400 300 200 100 0 2007 Total Assets 2008 Islamic Assets 2009 2010 Islamic Banking Growth
96%
Source: Company Reports, Analyst Briefings, Central Bank

86

Page 86
Healthy growth in participation banking assets and deposits
Turkey Islamic Banking Sector Total Financing (US$ bn)

20 18 16 14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 0 6 9 10
CAGR of 32.3%
Turkey Islamic Banking Sector Total Deposits (US$ bn)

18 25 20 15 9 6 5
CAGR of 31.7%
14
19 15
11
11
2006
2007
2008
2009
2010

Page 87
87
Participation branches increased by approximately 8% in 2007 alone
Employees and Branches

Employees Branches
Market Share
7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2005 2006 2007 2008 2009 2010
Employees Branches
700 600 500 400 300 200 100 0
Total Assets
Funds Collected
Funds Invested

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Key Messages
Participation banking is expected to more than double its market share to 10% in the next decade. A number of new applications have already been made with the Turkish banking authorities The core Sharia sensitive segment constitutes approximately 20% of the bankable market
Turkish National Assembly in February passed tax and other measures to facilitate the introduction of sukuk in Turkey

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89
With the exception of 2009, Omans banking sector has seen steady growth in total assets, deposits, credit and net profits between 2005 and 2010
Omani Banks Key Indicators (2004-2010)
Total assets Total deposits Total credit Net Profit
18,000 16,000
300
250 14,000 12,000 10,000 150 8,000 6,000 4,000 50 2,000 0 2004 2005 2006 2007 2008 2009 2010 0 100 200

90

Page 90
Retail lending constitute 40% of total credit in 2010, personal loans grew at a CAGR of 24% between 2005 & 2010
Credit distribution by sector (RO million) Loan Segmentation (% of total loans) in 2010
12,000 Other 10,000 Mining and Quarrying 8,000 Wholesale & Retail Trade Import Trade 6,000 Manufacturing Services Construction 2,000 Personal Loans
9%
50% 41%
4,000
Business Personal Government
0 2008 2009 2010

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91
Bank deposits have grown at CAGR of 23% from 2005 to 2010
Bank Deposits (RO million)

12,000 Total deposits y-o-y growth % 10,517 10,000 8,579 8,000 6,491 6,000 4,685 4,000 3,762 20% 15% 10% 2,000 5% 0 2005 2006 2007 2008 2009 2010 0% 9,091 45% 40% 35% 30% 25%
Deposit Split
Demand 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Saving Time

92

Page 92
Key Messages
1 2 3
Islamic banking was introduced in Oman in 2010 through a Royal Decree
Central Bank has awarded two Islamic banking licenses, to Bank Nizwa and Bank Izz. Most of the conventional banks are expected to launch Islamic windows Islamic banking could potentially gain up to 10% market share over next five years, also facilitating Sharia compliant foreign investment

Page 93
93
Appendices
94

Page 94
The case study draws upon a real life restructuring involving an amendment of the terms and conditions of the sukuk certificates (the Certificates) and the underlying capital markets and Islamic documentation (the Restructuring). Below is a simplified diagram of the sukuk structure
Sukuk Holders
Issuer as Investor Partner/Lessor/ Trustee

Lease of Issuer Assets
Mushraka Purchase Undertaking
Mushraka Sale Undertaking
Obligor as Commercial Partner
1% Profit
99%Profit
Units Cash contributions
Musharaka with Business Plan
Units Contribution in kind (land)
Rental Payment during Rental Period and Final Rental Payment
Management Agreement
Project Co as Lessee
Obligor as Manager
Source: Norton Rose

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95
Sukuk restructuring case study (contd)
The principal features of the structure are as follows: 1. On the issue date of the Certificates (the Issue Date), the Sukuk holders paid the issuance proceeds to the Issuer SPV, which in turn contributed such proceeds into a Musharaka in its capacity as Investor Partner (the Issuers Contribution). On the Issue Date, the Obligor contributed certain land in the Musharaka in its capacity as Commercial Partner (the Obligors Contribution), which together with the Issuers Contribution constituted the initial Musharaka assets, which were co-owned by the Issuer and the Obligor (as Musharaka partners) in the proportions in which each contributed capital to the Musharaka. On the Issue Date, the Issuer as lessor and the Obligor as lessee entered into an agreement for the lease of the Issuer Assets to the lessee (the Lease Agreement). Issuer Assets were essentially the Issuers undivided share, rights, title, interests and entitlements in the Musharaka assets. Pursuant to a Management Agreement, the Musharaka partners appointed the Obligor as manager to develop a certain project and conduct the Musharaka business on their behalf in accordance with the terms and conditions of the Musharaka Agreement and the Management Agreement. The objectives of the Musharaka included the development of the said project and the sale of the developed land in accordance with the musharaka business plan appended to the Musharaka Agreement. Not withstanding the proportion in which each Musharaka partner made its respective contributions, the Musharaka Business Plan contemplated that the profit derived from the Musharaka assets would be distributed between the Musharaka partners in the proportions 99 per cent. to the Obligor and 1 per cent. to the Issuer. The profit derived from the Musharaka assets and the rental payments made under the Lease Agreement were used to fund payments of Periodic Distribution (profit) Amounts to Sukuk holders. Pursuant to a Musharaka Purchase Undertaking, the Obligor irrevocably undertook to the Issuer that upon the Issuer exercising, at any time between the date of the undertaking and the expiry date of the Musharaka, its option to oblige the Obligor to buy all of the Issuers Musharaka units as a result of: (i) the occurrence of an event of default or (ii) on the expiry date of the Musharaka (being the scheduled dissolution date in respect of the Certificates), the Obligor would buy the Issuers units on an as is, where is basis for the Termination Sum (essentially, an amount representing the principal amount of the Certificates plus accrued but unpaid profit), on the terms and subject to the conditions of the Musharaka Purchase Undertaking. The Musharaka Purchase Undertaking operated in tandem with a Lease Purchase Undertaking such that exercise by the lessor of the Lease Purchase Undertaking automatically resulted in a deemed exercise by the Issuer of its rights under the Musharaka Purchase Undertaking. Payment by the lessee of the Termination Sum under the Lease Purchase Undertaking would be deemed to discharge the obligation of the Obligor to pay the Termination Sum under the Musharaka Purchase Undertaking. A mortgage over the land (or certain parts thereof) in favour of a security agent was taken as security in respect of the Certificates. The ratio expressed (as a percentage) of the aggregate value as reasonably determined by the lessee of the assets subject to the trust constituted pursuant to the Trust and Agency Deed in respect of the Certificates, less any further permitted financial indebtedness (as defined in the Transaction Documents) incurred by the Obligor, to the aggregate of all amounts outstanding to the Sukuk holders at the corresponding point in time (the Security Cover Ratio) was set at a ratio equal to or greater than 150 per cent.
2. 3.
4.
5.
6.
Source: Norton Rose

96

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Key terms of the restructuring / incentives offered to investors
The key elements of the Restructuring the proposals put forward to investors were as follows:
1.
The Transaction Administrator (the de facto trustee acting on behalf of and in the interests of Sukuk holders) informed investors (via a series of notifications sent through the clearing systems and through publications in relevant local newspapers) that the ultimate obligor in the structure (the Obligor) and the Issuer SPV intended to restructure aspects of the Sukuk and amend the terms of the Certificates. A bank (the Dealer) was chosen to assist with and coordinate the implementation of the Restructuring. For the Restructuring to take place, it was necessary to amend certain key terms of the Certificates as well as the underlying documentation in respect of the Sukuk structure, more importantly the Musharaka Agreement and the Lease Agreement and the security documentation. Sukuk holders were informed that the Obligor and the Issuer wished to extend, in whole or in part, the term of the Certificates. The Sukuk holders were also informed that the Obligor and the Issuer wished to increase the rate at which existing profit amounts (the Periodic Distribution Amounts) on the Certificates would be calculated to be equal to a fixed rate of 6 per cent. and that the Issuer was willing to pay to the Sukuk holders accepting to participate in the Restructuring an extraordinary (one-off) Periodic Distribution Amount equal to roughly between 1 and 2 per cent. of the principal amount of the Certificates held by the Sukuk holders. Finally, the Sukuk holders were informed that the Obligor and the Issuer were willing to enhance the security granted to the Sukuk holders by increasing the Security Coverage Ratio to 200 per cent.. The increase in the collateral security package supporting the Certificates and consequent increase in the Security Coverage Ratio of the Certificates to 200 per cent. would be effected by authorising the Issuer to procure that the Obligor subdivided the existing mortgaged land and sold the subdivided plots to third parties while maintaining the Security Coverage Ratio to 200 per cent.. Sukuk holders were asked to approve a number of amendments relating to the Sukuk structure and the Certificates, including:
i. ii.
2.
3.
extending the original maturity by 3 years; approving the increase in Periodic Distribution Amounts as well as the offer of an extraordinary Periodic Distribution Amount (essentially, a restructuring fee) to those Sukuk holders who accepted the terms of the Restructuring of roughly between 100 and 200 basis points calculated on the principal amount of Certificates held by such investors following the Restructuring; and extending the Security Coverage Ratio in respect of the Certificates to 200 per cent..
iii. 4.
The Sukuk holders were asked to vote, by way of signing an Extraordinary Resolution, in respect of the matters mentioned in the preceding paragraph. However, participation in the Restructuring was not compulsory. Sukuk holders were notified that if they chose not to participate in the Restructuring they would have the option to be repaid in full on the Scheduled Dissolution Date (the original maturity date). Dissenting Sukuk holders would be repaid at maturity through the exercise (in part) of the purchase undertakings in the structure and otherwise in accordance with the original terms and conditions set out in the Offering Circular prior to any amendments effected pursuant to the Extraordinary Resolution. In addition, Sukuk holders were given the option, while agreeing to participate in the Restructuring, to increase their participations in the Sukuk and purchase Certificates from those Sukuk holders who wished to obtain full repayment on the scheduled dissolution date.
Source: Norton Rose
5.

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Procedural aspects of the restructuring
6.
Sukuk holders were asked to waive the requirements in respect of notice of time, place and purpose of Sukuk holders meetings set out in the terms and conditions of the Certificates and in the Trust and Agency Deed and to agree to the terms of the Restructuring by signing an extraordinary resolution of Sukuk holders holding in aggregate 90 per cent. of the principal amount of the Certificates. Sukuk holders were informed that a consultation period (the Initial Consultation Period) would be put in place (running from the effective date of the Extraordinary Resolution and expiring one week prior to the scheduled dissolution date) during which each Sukuk holder would be asked to return to the Issuer an extension subscription form substantially in the form prescribed in the Extraordinary Resolution indicating the number of the Certificates held by the Sukuk holder and the aggregate principal amount thereof, and irrevocably confirming whether:
i. ii.
7.
the Sukuk holder accepts the extension of maturity and the amendment of the Certificates with respect to all the Certificates held by it; the Sukuk holder rejects the extension of maturity and the amendment of the Certificates with respect to all the Certificates held by it and requests the payment to it of the scheduled dissolution amount (essentially, principal plus profit) on or before the original scheduled dissolution date; the Sukuk holder accepts the extension of maturity and the amendment with respect to a portion of the Certificates held by it and requests a repayment of the scheduled dissolution amount with respect to the remainder of the Certificates held by it; or the Sukuk holder accepts the extension of maturity and the amendment of the Certificates with respect to all the Certificates held by it and that the Sukuk holder wishes to increase its participation in the Sukuk by purchasing additional Certificates and the principal amount of the increased participation which the Sukuk holder wishes to purchase.
iii.
iv.
8.
The Sukukholders were informed and asked to agree that, following the expiry of the Initial Consultation Period, there would follow an optional participation increase period (lasting three days) (the Optional Participation Increase Period) during which the Dealer would match the Sukuk holders who, during the Initial Consultation Period, delivered an extension subscription form requesting repayment of their scheduled dissolution amount on or prior to the scheduled dissolution date (the Exiting Sukuk holders) and the Sukuk holders who during the Initial Consultation Period delivered an extension subscription form accepting the extension of maturity and amendment of the Certificates and requesting to purchase additional Certificates (the Increasing Participation Sukuk holders) in order to intermediate the transfer of the Certificates from the Exiting Sukuk holders to the Increasing Participation Sukuk holders. Following the expiration of the Optional Participation Increase Period, the Issuer and/or the Dealer would determine the continuing principal amount, being an amount equal to the aggregate principal amount specified by the Sukuk holders who, during the Initial Consultation Period, delivered the extension subscription form confirming their participation in the Restructuring plus the aggregate principal amount (if any) corresponding to the Certificates purchased by the Increasing Participation Sukuk holders from the Exiting Sukuk holders during the Optional Participation Increase Period. In accordance with the terms and conditions of the Certificates, the Restructuring was approved by an extraordinary written resolution of the Sukuk holders who, in aggregate, held more than 90 per cent. of the principal amount of the Certificates.
9.
Source: Norton Rose

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Amendments to documentation
10.
In order to give effect to the resolutions set out in the Extraordinary Resolution, the Sukuk holders were required to give their assent to the modification of the transaction documents, as well as to waive any potential breaches of the terms of the existing Certificates and thus waive the occurrence of an event of default. The transaction documents that were amended and restated included the following:
i.
11.
the terms and conditions of the Certificates as well as the Trust and Agency Deed were amended and restated in order to give effect to the extension of the maturity and the changes to the Periodic Distribution Amounts payable to investors; the offering circular in respect of the Certificates was amended by a supplemental offering circular to reflect the new terms of the securities; the Musharaka Agreement and the Lease Agreement, together with the underlying Undertakings, were amended and restated in order to reflect the increased profit payments derived from the Sukuk assets and to deal with the partial redemption of Certificates on the scheduled dissolution date; the Security Agency Agreement was amended and restated to reflect the increase in the collateral supporting the Certificates.
ii. iii.
iv. 12.
In addition, the Sukuk holders were asked to waive any potential breach of Condition 10 (the Condition specifying which events constitute dissolution events (events of default) in respect of the Certificates) occasioned by:
i. ii.
the proposals contained in the Extraordinary Resolution; and the extension, in whole or in part, of the scheduled dissolution date of the Certificates,
and any preliminary or incidental steps to the Restructuring.

13.
Care was also taken to ensure that the Restructuring and the proposals contained in the Extraordinary Resolution would not in any way trigger any crossdefault provisions contained in other unrelated financing agreements to which the Obligor was a party. Finally, the Sukuk holders authorised and requested the Issuer to take all steps considered in its sole discretion to be necessary, desirable or expedient to carry out and give effect to the Extraordinary Resolution, acknowledged the limitation of liability provisions set out in the Trust and Agency Deed in respect of the Issuer and absolved the Issuer from any liability in respect of any act or omission for which it may have become responsible under the Trust and Agency Deed with respect to the proposals contained in the Extraordinary Resolution, save in respect of the gross negligence or wilful default of the Issuer. * Note: the structure discussed above pre-dated the AAOIFI statement in 2008 in respect of the use of purchase undertakings in Sukuk structures. The Restructuring was conducted on the basis of the originally approved structure. Had the deal been structured afresh today, a different approach may have been taken in respect of the use of purchase undertakings.
Source: Norton Rose
14.

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Team, Sources & Contributors
Executive Brief
Country Spotlight
100

Page 100
Ernst Ernst & Young & Young Leadership Leadership
Islamic Islamic Financial Financial Services Services Center Center of Excellence of Excellence
Ashar Nazim Ashar Nazim Islamic Finance IslamicLeader Finance Leader ashar.nazim@bh.ey.com ashar.nazim@bh.ey.com
MENAMENA Executives Executives
Tariq Sadiq Tariq Sadiq Advisory Leader Advisory Leader
Noor Abid Noor Abid Assurance Assurance Leader Leader
Abid Shakeel Abid Shakeel abid.shakeel@bh.ey.com abid.shakeel@bh.ey.com
Sherif El-Kilany Sherif El-Kilany Tax Leader Tax Leader
Phil Gandier Phil Gandier TAS Leader TAS Leader
Sohaib Umar Sohaib Umar sohaib.umar@bh.ey.com sohaib.umar@bh.ey.com
Gordon Bennie Gordon Bennie FS Leader FS Leader
Andrew Barstow Andrew Barstow FS Advisory FS Leader Advisory Leader
Sameer Abdi Sameer Abdi Partner, Qatar Partner, Qatar Shahid Mughal Shahid Mughal shahid.mughal@bh.ey.com shahid.mughal@bh.ey.com Fawad Laique Fawad Laique Partner, Saudi Partner, Arabia Saudi Arabia Mustafa Adil Mustafa Adil mustafa.adil@bh.ey.com mustafa.adil@bh.ey.com
Robert Abboud Robert Abboud Partner, Qatar Partner, Qatar
Nader Rahimi Nader Rahimi Partner, Bahrain Partner, Bahrain
Maged Fanous Maged Fanous Partner, Kuwait Partner, Kuwait
Imtiaz Ibrahim Imtiaz Ibrahim Senior Director, Senior Bahrain Director, Bahrain
Islamic Banking Islamic Banking Competitiveness Competitiveness Report Report 2011-12 2011-12
Page 101 Page 101
101
Report methodology and our interviews
Survey Methodology Our survey sought to identify key trends and business risks for the Islamic banking industry through in-depth interviews with executives and industry observers. These discussions were used to gauge business sentiment and identify key areas for inquiry. The top Islamic and conventional banks in the region were selected for our sample with the break down of banks selected country wise being: Bahrain 4 Islamic and 4 conventional banks Saudi Arabia 4 Islamic and 5 conventional banks Kuwait 4 Islamic and 3 conventional banks Qatar 3 Islamic and 3 conventional banks UAE 4 Islamic and 4 conventional banks Egypt 1 Islamic bank Jordan 1 conventional bank Business Risk Ratings Ernst & Young subject matter experts from the Middle East, Asia and Europe developed a list of banking business risks and contributing factors. All interviewees were provided with a list of business risks and requested to rate each to reflect its severity to their respective business over the coming 12 months. Interviewees were also asked to add any additional risks they felt were important. The results of this rating process were tabulated and a relative ranking assigned to each. This rank formed the basis for our comparative.
Business Performance Indicator The Performance Indicator is a simple device that allows us to present how Islamic banks are faring in comparison to conventional banks Business Risk Categories The Performance Indicator is split into tree categories: Red Light denotes that Islamic banks are not on par with conventional banks Amber Light denotes that Islamic banks are on par with conventional banks Green Light denotes that Islamic banks are above par Anonymity and Quotes All interviewees were assured of anonymity and minutes documented during our discussions Quotations have been used to support arguments made in the report.
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Sample of Islamic and conventional banks
Islamic banks that contributed data to our sample: Bahrain

Conventional banks that contributed data to our sample: Bahrain

Al Baraka Banking Group Ithmaar Bank Bahrain Islamic Bank Al Salam Bank
Arab Banking Corporation Ahli United Bank Bank of Bahrain and Kuwait National Bank of Bahrain
Saudi Arabia

Saudi Arabia

Al Rajhi Bank Bank Al Jazira Alinma Bank Bank AlBilad
National Commercial Bank Samba Financial Group Riyad Bank SABB Arab National Bank
Kuwait

Kuwait Finance House Ahli United Bank Boubyan Bank Kuwait International Bank
Kuwait

National Bank of Kuwait Burgan Bank Commercial Bank of Kuwait
Qatar

Qatar

Qatar Islamic Bank Masraf Al Rayan Qatar International Islamic Bank
Doha Bank Qatar National Bank Commercial Bank of Qatar
UAE

UAE

Dubai Islamic Bank Abu Dhabi Islamic Bank Emirates Islamic Bank Sharjah Islamic Bank
Emirates NBD Abu Dhabi Commercial Bank National Bank of Abu Dhabi First Gulf Bank
Egypt
Jordan
Faisal Islamic Bank of Egypt
Arab Bank

Page 103
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References and acknowledgments
Sources Global Insight - comparative world overview tables Zawya Central bank reports Economist intelligence unit Maris Strategies The Banker Islamic Finance News Morgan Stanley Bank annual reports Ernst & Youngs Project Team Ashar Nazim Abid Shakeel Fawaz Siddiqui Saad Qureshi Mohammed Al Felaij Mubashar Haroon Assad Butt Yasman Moghaddam Mustaqim Zain
Our industry awards
Best Takaful Advisory Firm 2010, 2011 International Takaful Summit, London
Best Islamic Advisory Firm/Best Islamic Research 2010 CPI Financial Islamic Finance Award
Nader Rahimi Imtiaz Ibrahim Maged Fanous Hammad Younas Asad Jafree Murat Hatipoglu Merisha Kassie Mohd Husin Venkat Subramanian
Best IFN Awards 2009/2010
Best Islamic Consulting Firm 2006 Sheikh Mohammed Bin Rashid Al Maktoum Award
Contributions Norton Rose Alun Williams
WIBC Leading Islamic Financial Services Provider 2008 World Islamic Banking Awards, Bahrain
Most Outstanding Business Advisory & Consulting Firm 2006/2007 Kuala Lumpur Islamic Finance Forum, Malaysia
For questions or comments, please contact : Fawaz Siddiqui: fawaz.siddiqui@bh.ey.com Saad Qureshi: saad.qureshi@bh.ey.com
104
Consistently ranked the best Islamic Advisory firm with awards every year since 2006
Page 104
Ernst & Young Assurance Tax Transactions Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. The Middle East practice of Ernst & Young has been operating in the region since 1923. For over 85 years, we have evolved to meet the legal and commercial developments of the region. Across the Middle East, we have over 4,200 people united across 20 offices and 15 Arab countries, sharing the same values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. 2011 Ernst & Young. All rights reserved. www.ey.com This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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MEGA: Shaping the Future of the Global Islamic Finance Industry Since 1993 2 Decades of Supporting the Market Leaders MEGA is the leading international information firm focused on achieving business results for the Islamic banking & finance industry since 1993. Our exclusive focus on Islamic finance has enabled us to create significant value for the leading players in the Islamic banking, finance and investment markets. The portfolio of MEGA brands represents the landmark industry conferences and our clients are the leading players in the international financial markets. Partnering with Governments and the Industry Thought Leaders Our Strategic Partners are world leaders in their respective fields and include key government finance and regulatory agencies such as the Central Bank of Bahrain, Dubai International Financial Centre, UK Trade & Investment, the Monetary Authority of Singapore and the Economic Development Board of Bahrain. These and our other strategic alliances with international thought leaders including Ernst & Young and global strategy advisory firm McKinsey & Company further strengthen MEGAs brand leadership position by providing original new research insights on the Islamic finance industry worldwide. Investing in Our Brands: Number 1 in Each of Our Markets MEGA continues to grow its portfolio of Islamic finance brands to further extend our leadership position across the Banking, Takaful, Funds, Capital Markets, and Project Finance segments. Each brand is successfully developed over many years in order to further cement its number 1 position in its respective market. In 1994 we founded the World Islamic Banking Conference (WIBC), which at the time was one of the first conferences in the world to focus on this nascent industry. That first year we had 120 pioneering delegates and one sponsor. Today, fast approaching 2 decades later and with more than 1,200 delegates from over 50 countries attending the conference each year, WIBC is an iconic brand internationally recognised as the worlds largest gathering of Islamic finance leaders. A World Stage: Genuinely Global Dialogues MEGA brands have a genuinely global reach across the Islamic finance industry. An initiative to further broaden this international representation The World Comes to WIBC was launched at WIBC 2007 and has grown to now feature a British Pavilion led by UKTI and comprising 18 British-based banks. 2008 saw us further extending this programme to Asia, in partnership with the Monetary Authority of Singapore, which resulted in a high-profile Singapore delegation led by the MAS Governor. A number of leading international Islamic banking groups also now convene their annual board meetings along the sidelines of WIBC. Understanding Client Needs & Delivering Long-Term Value MEGAs leadership position has come as a result of our relentless focus on the constantly changing needs of our clients as the Islamic finance industry has grown and matured. Whether it be the challenges of launching a new bank, a new investment fund, an innovative new retail financial product or raising corporate profile in a key target market, we ensure that our offerings are closely aligned to the immediate business priorities of our clients. Then we make sure that we deliver on our promises and that is why the market leaders come back and work with us year after year. Our genuine value creation is highlighted by our long-term relationship with Ernst & Young who have worked with us continuously since the inception of the World Islamic Banking Conference 18 years ago - and who are also now our partners across the portfolio of MEGA brands.
A MEGA Brand: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net
106
WIBC: 19 Years of Market Leadership

19 Years of shaping the future of the global Islamic finance industry 19 Years of gathering industry thought leaders in dynamic debate 19 Years of bringing together more than 1,200 international industry leaders 19 Years of successfully working with the market leaders 19 Years of delivering a one-of-a-kind spectacle to the Islamic finance industry
In collaboration with
1,200 Industry leaders. 50+ Countries. 1 Gathering: WIBC 2012

The Worlds Largest Annual Gathering of Islamic Finance Leaders
WIBC is a MEGA Brand MEGA Brands. MEGA Clients. Market Leaders. | Shaping the Future of the Global Islamic Finance Industry Since 1993
To participate in this prestigious event contact: sophie@megaevents.net | t:+971 4 343 1200 | f:+971 4 343 6003 | P.O. Box 72045, Dubai | www.megaevents.net/Islamic_banking
MEGA BRANDS. MEGA CLIENTS. MARKET LEADERS. MEGA is the market leading business information firm focused on achieving business results for the global Islamic banking & finance industry since 1993. The portfolio of MEGA brands represents the landmark industry conferences and our clients are the leading players in the international financial markets.
WIBC is a MEGA Brand Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai | t:+971 4 343 1200 | f:+971 4 343 6003 www.megaevents.net MEGA Brands. MEGA Clients. Market Leaders.
2011 The World Islamic Banking Competitiveness Report is documented for the World Islamic Banking Conference. No part of this document may be republished, distributed, retransmitted, cited or quoted without the prior written permission from MEGA or Ernst & Young.

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18th Annual

World Islamic Banking Competitiveness Report 2011-12

Competing to Win: The CEO Agenda

COMPETITIVENESS REPORT 2011-2012

A Brave New World of Sustainable Growth

Ashar M. Nazim Islamic Financial Services Leader Ernst and Young

Islamic Banking Competitiveness Report 2011-12

* Note: Islamic banking assets with commercial banks

Islamic Banking Competitiveness Report 2011-12

114 38 127 826 25

Global Islamic Banking Assets 2010

MENA (ex GCC)

Rest of the World

Global Islamic Banking Assets 2012e

Source: IMF, The Banker, Central Bank Websites, EY perspective

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

Average ROE (2006-2010)

MENA Islamic Average MENA Conventional Average

Islamic Banking Competitiveness Report 2011-12

Banks need US$ 106bn new tier 1 capital by 2012

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

Bahrain Qatar Saudi Arabia

Islamic Banking Competitiveness Report 2011-12

Operational Transformation Risk Infrastructure

Further Potential Growth Opportunities

Integration with real economy SME banking

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

The CEO Agenda

Risk & Compliance

Islamic Banking Competitiveness Report 2011-12

Competing to Win: The CEO Agenda

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

* Note: Islamic banking assets with commercial banks

Islamic Banking Competitiveness Report 2011-12

China 23m Bangladesh 148m India 177m Malaysia 17m

Muslim Population Density Indicator

Morocco 32m Nigeria 75m

Source: Pew Research Center, Guardian, EY analysis

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

Turkey Syria Lebanon

Iraq Kuwait Bahrain Qatar UAE Oman

Islamic Banking Competitiveness Report 2011-12

Cost of Arab Spring (US$bn)

Cost to Public Finance

Source: Geopolicity, IIF

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

COMPETITIVENESS REPORT 2011-2012

Rest of the world Rest of the world

Source: Central Bank Reports, Global Insight, EY analysis

Islamic Banking Competitiveness Report 2011-12

COMPETITIVENESS REPORT 2011-2012

Turkey Syria Lebanon Jordan

Bahrain Qatar Saudi Arabia UAE Oman

North Africa Key

Islamic Banking Competitiveness Report 2011-12

80% Libya 40% 0% Algeria Oman 4%

Islamic Banking Market Share of Total Assets (2010)