Saudi Export Program 2014
Presentation during
GNEXID workshop
Geneva – Switzerland
March 28/2014
Outline of the Presentation
I. SEP Program
SEP’s Objectives.
Basic Requirements of SEP Operations.
Beneficiaries.
SEP Tools in supporting Saudi Exports.
SEP Financial Instruments.
SEP Export Credit Insurance Facilities.
SEP Achievements.
II. Islamic Finance and Trade .
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I. SEP Program
SEP’s Objectives
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Established in 1999 to develop and diversify Saudi
non-oil exports,
Provide competitive insurance and credit facilities to
Saudi Exporters and foreign buyers.
Motivate Saudi exporters to explore and enter
new markets by mitigating risks associated with
International trade transactions.
Maximize technical cooperation, joint financing and
reinsurance arrangements with most international
and regional banks/Institution involved in Trade
Financing.
Basic Requirements of SEP Operations
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SEP’s
financing my reach up to 100% of the transaction
value.
Transaction amount minimum SR 100,000
(Equivalent to about 27.000 US Dollars ).
Exports should be of Saudi origin.
Local value added should be more than 25%.
SEP does not Finance exports of crude oil.
SEP offers financing in Saudi Riyals or United States
Dollars.
SEP complements commercial banks and not competing
them.
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Beneficiaries
Saudi exporters (Saudi companies and establishments),
Local buyers (Saudi companies and establishments)
exporting Saudi products,
Foreign exporters (Companies Exporting from Saudi
Arabia),
Foreign Buyers (private or public) of Saudi goods and
services,
Local and Foreign Banks that
facilities for eligible Saudi exports.
provide
financing
Security / Collateral
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Depending on the nature of transaction
and types of risks involved, SEP would
seek payment security that may deem
necessary.
SEP Tools in Supporting
Saudi Exports
Financial Instruments.
Insurance Instruments.
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Financial Instruments of SEP
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A ) Direct Financing:
1- Supplier Credits.
Supplier Credit assists Saudi exporters to provide the required credit to
the foreign importers.
2- Local Buyer Credits.
SEP offers such credit facilities to Saudi businessmen (local buyers)
and investors who execute projects outside the KSA and need financing
from SEP to export Saudi goods and services to use them in the project
implementation.
3- Foreign Buyer Credits.
These credit facilities assist importers (buyers) from outside the KSA to
obtain the required financing directly from SEP.
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B ) Indirect Financing:
1 -Lines of Credit for Banks, financial
institutions, large Firms.
Provided to Banks and Financial institutions (acting as
agents for SEP ) in the importer’s country.
Focus on SME’s.
Repayment periods
Short
Term
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Up to 2 Consumable goods, raw
years materials.
Medium Up to 7 Consumable durables goods,
Term
years semi capital goods.
Long
Term
Up to 15 Capital and durable goods, and
years turnkey contracts, projects.
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SEP's Achievements
Total SEP Transactions
Until Dec. 2013
Direct Financing Transactions
Lines of Credit
Value
(USD Million)
3.177
866
Guarantees & Insurance
4.611
Total Credit Amount
8.654
Beneficiary Countries
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II. Islamic Finance and Trade
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Islamic Finance:
• Refers to a system of banking or banking
activity that is compliant with the principles of
Islamic–Shariah-low.
• Islamic treats money as a unit of account and
a means of exchange not a commodity.
• There is a lack of complete uniformity in Fiqh
view points, The different view points can be
a source of counterparty risks as a result of
the atmosphere of an ineffective litigation.
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• With the establishment of the Auditing and
Accounting organization for Islamic Financial
Institution (AAOIFI) in early 1990 in Manama,
Bahrain, the process for bringing scholarly
attentions to focus on particular issues was
streamlined, with the result that consensus could
be brought about through one institution, and then
regular standards for a wide spectrum of Shari’ahrelated issues could be approved and
implemented.
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• The Islamic Financial Services Board (IFSB) was
lunched in 2002 in Kuala Lumpur, Malaysia, by a
consortium of central banks and with support of
the IMF with the mandate including the provision
of prudential standards and guidelines for
international application by banking supervisors in
the supervision of Islamic bank.
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Fundamental Principles that
guide Islamic Finance
These are that transactions Must :
• Be interest free.
 Usury “Riba” any increase, however great or small, above the
original lent or exchanged amount.
• Have risk sharing .
 “Alghurm bil ghurm”.
 “There is no return without risk”.
 Ensures that real assets and inventories are created “real
economy”.
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• Have contractual certainty.






Absent of basic prerequisite, such as.
The existence of the subject matter .
The fixing of a delivery date .
The agreement on a price.
So,
Conventional insurance, interest, Futures, and options all contain an
element of contractual un certainty (Gharar) and are thus prohibited.
• And that all the element of transaction Must in and of them
selves be ethical .
 Means that there is no buying, selling, or trading in conventional
banking and insurance, alcohol, and tobacco.
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• Speculation.
 Contracts which involve speculation (Maysir) are
not permissible (not lawful) and are considered
void, however, Islamic law doesn't prohibit general
commercial speculation, but it does prohibit
speculation which is similar to gambling, i.e.
gaining something by chance rather than
productive effort.
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Comparison of Islamic and
Conventional Finance
Islamic Finance
Conventional Finance
Interest-free
Interest-based
Equity partnership
(profit and loss sharing)
Profit is the chief motivation
Inherently micro-financingfriendly
Not inherently micro-financingfriendly
Checks and balances to
maintain ethics and justice
Not enough checks and
balances which can lead to
excess, causing economic
meltdowns.
Board of shari’ah
Doesn't have
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Islamic Financing Products
• Equity based:
 Mudarabah is profit sharing and loss-bearing contract. Under a
Mudarabah contract, the capital provider agrees to share the profits with
the entrepreneur (Mudarib) at an a greed percentage.
 Musharakah is profit-and loss-sharing partnership contract, the Islamic
bank may enter into a Musharakah with a customer for the purpose of
providing a Shari’ah-compliant financing facility to the a customer on a
profit and loss-sharing basis.
 Sukuk is an Islamic bond, structured in such away to generate returns
to investors without infringing Islamic law.
Sukuk represents undivided shares in the ownership of tangible assets
relating to particular projects or special investment activity. A Sukuk
investor has a common share in the ownership of the assets. Linked to the
investment although this doesn't represent a debt owed to the issuer of
the bond.
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• Trade based
 Murabaha is a cost plus mark-up arrangement.
 Salam is an advance payment commodity sale contract where
the delivery of the commodity is deferred.
 Istisna’a is a “manufacture to order” contract for yet to be
manufacture of good on payment of on advance price either in
full or in installments.
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• Lease based
 Ijarah contract is an operating lease contract refers to hiring or
renting any asset commodity to benefit from its usufruct.
 Ijarah Muntahia Biatamleek is a lease-to-purchase .
“ashari’ah-compliant alternative to a finance lease”
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Islamic Risk Mitigation Tool
• Takaful is a co-operative system of
reimbursement in case of loss, paid to
people and companies concerned about
hazards, compensated out of fund to
which they agree to donate small regular
contributions managed on behalf of them
by a Takaful operator .
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Murabaha Trade Finance in
Practice
9. Presentation of documents, and payment.
5. Islamic bank opens a L/C.
Supplier's
bank
8.
Presentation
the
documents,
and payment
under the
L/C.
Buyer's
bank
4. Buyer asks
bank to open a
letter of credit
in the favour of
the seller,
stipulating the
documents that
the seller needs
to provide.
6. Supplier's
bank confirms/
advises the
L/C.
1. Bank and
buyer sign an
agreement
under which
the buyer
commits
himself to buy
goods X from
the bank at a
given mark-up
above its
purchasing
price.
2. Bank
appoints
the buyer
as its agent
to buy
goods X.
Supplier
Buyer
7. Shipment of goods.
3. The buyer contacts the supplier, on behalf of the bank,
and arranges a contract for sale of goods X to the bank.
10. Sale of goods
and delivery of
documents.
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Operational Risk in Islamic
Finance
• Operational risk as per the IFSB is defined as “the risk of
loss resulting from inadequate or failed internal
processes, people, and systems or from external events,
which includes but is not limited to, legal risk and
shari’ah-non-compliance risk.
• This definition excludes strategic and reputational risk.
• Such risks are likely to be significant in Islamic finance,
due to specific contractual features and the general legal
environment.
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• Specific aspects that could raise operational
risks in Islamic finance include the following:
 The cancellation risks in non binding Murabahah and
Istisna’a contracts.
 Problems in internal control systems to detect and
manage potential problems in operational processes
and back-office functions.
 The potential difficulties in enforcing Islamic finance
contracts in a broader legal environment.
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 The risk
of non-compliance
with
shari’ah
requirements that may impact on permissible income.
 The risk of misconduct and negligence which would
result in Murabahah-based becoming a liability of
Islamic bank, with consequent capital adequacy and
solvency implications.
 The need to maintain and manage commodity
inventories, often in non-liquid markets.
 The potential cost and risks in monitoring equitybased contracts and the associated legal risks.
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Risk Management in Islamic
Finance
• The specific risks associated with each of Islamic Finance products:• Risks in Murabha.
 Credit risk .
 client backs out from purchasing the goods.
 Market risk
 exposure to the fluctuating market price of goods.
 Supplier risk.
 supplier is unknown to the bank which may cause a delay in delivery time goods and
non-conformity specifications.
 Operational / Ownership risk.
 Client as agent gains possession of goods from the supplier without informing the bank.
 Transit period risk.
 The risk associated with goods after the bank purchases them from the supplier and before the
client purchases them from the bank.
 Documentation Risk.
 The risk that the counterparty does not provide sufficient documentation.
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• Risks in Salam
 Holding Risk.
 The risk of holding goods until the time of delivery.
 Shariah non-compliance Risk.
 Arises if goods are sold before receiving their physical or constructive
possession.
 Settlement and delivery Risk.
 Arises in the event goods are not delivered on time and do not conform to
specifications.
 Rate of Return and Price Risk.
 The risk that a decrease in the commodity’s price after contract maturity will
result in a lower rate of return.
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• Risk in Istisna.
 Risk of hidden defects.
 Risk of defects inherent in the manufactured products.
 Shariah non-compliance Risk.
 Arises as a result of not specifying the characteristics of goods, the time or
place of delivery or lack of information about the supplier.

Settlement and Credit Risk.
 Arises when the customer is unable to honour deferred payments.
 Price Risk
 Bank’s exposure to the risk of selling goods to a third party for a lesser price
as a result of contract cancellation.
 Delivery Risk.
 The risk of not being able to make a scheduled delivery of manufactured
goods a Parallel Istisna.
 Legal Risk.
 Litigation costs for claims against Istisna requestor that terminates the
contract.
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• Risk in Ijarah.
 Risk associated with security that sells for a lower price in the
market as a result of which the bank cannot cover its loss.
 Asset Risk.
 Asset is stolen, damaged.
 Price Risk.
 Bank’s exposure to changes in the cost during the Ijarah’s term. The longer
the term the greater the bank’s exposure to price fluctuations.
 Risk that the customer will back out form his promise to lease,
the bank may have to sell the asset at a price lower than
market price.
 Legal Risk.
 Litigation costs against the client who refuse to compensate the bank for
losses resulting from unfulfilled promises.
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• Risk in Musharakah and Mudarabah.
 Shariah non-compliance Risk.
 Debt cannot be used as a substitute for equity.
 One partner cannot guarantee the other partner’s principal or profit.
 Risk of the funds being from a prohibited source.
 Credit Risk.
 Managing partner manipulates to show lower returns.
 Prohibition of any collateral to secure the bank’s investment poses
additional risk.
Thank You For Your
Attention
 +966 11 4659399- 4658117
Fax +966 11 4659699 P.O. Box 50483 Riyadh 11523