2 SEPTEMBER 2014

2

Global Liquidity Levels (2012-1H2014 and YTD)
US liquidity level,
USD tln
2.0
2.4
2.5
2012 2013 1H2014
YTD, +4.2%
Euro liquidity level,
USD bln
479
398 437
2012 2013 1H2014
YTD, +9.8%
Turkey liquidity level,
USD bln
85 89
74
2012 2013 1H2014
YTD, -16.9%
GCC liquidity level,
USD bln
165
184
144
2012 2013 1H2014
YTD, -21.7%
Asia liquidity level,
USD bln
312
296
280
2012 2013 1H2014
YTD, -5.4%
•
Global banking liquidity appears to be easing against tighter conditions in the past. Banking liquidity will also be more positively reinforced with new liquidity requirements from regulators.
•
The flows of global liquidity will still be supported by EM countries. Despite some slight moderation in growth, positive signs from the US should sustain growth drivers in EM, whilst the forecast for the EU into 2015 may see liquidity levels fluctuate.
Source: Central banks, Regulatory bodies, Basel Committee, KFHR
3

Bank Lending to Nonfinancial Companies: Growth and
Conditions
Conditions loosening,
Lending contracting
Conditions loosening,
Lending expanding
Conditions tightening,
Lending contracting
Conditions tightening,
Lending expanding
Lending growth (%)
250
200
150
100
50
0
Middle East - Total Banking Sector Assets,
(2014 and 2014 -2018)
20
15
10
5
0
Source: IMF, BMI, KFHR
Total assets, % of GDP
Total assets, 5-year CAGR (%) (RHS)
Global Financial System Size by Segments, % of GDP
200
150
100
50
0
EM2001 EM2007 EM Latest AE Latest
Middle East - Banking Sector Credit Growth, % y-o-y
(2014F – 2018F)
30
20
Egypt
Qatar
United Arab Emirates
Jordan
Saudi Arabia
10
0
2012 2013 2014F 2015F 2016F 2017F 2018F
4

USD tln
3.5
3
2.5
2
1.5
1
0.5
0
10
5
-10
-15
0
-5
Global credit is among the key indicators of global liquidity, where cross-border element regularly provides the marginal source of financing in the run-up to crises.
%
25
20
15
Global Cross Border and Domestic Credit Growth
Quarterly average of :
• Cross Border Credit Growth
(2001-2013): 5.9%
• Domestic Credit Growth (2001-
2013): 7.3%
Two major diverging trends in international banking markets.
• cross-border claims on advanced economies declined, while those on borrowers in emerging market economies increased sharply contributed to double digit cross border credit in Asia Pacific
Credit to emerging market economies as a percentage of total international interbank claims reached its highest level on record
• On a consolidated basis, in 1Q2013, claims on borrowers resident in these economies reached 14% of total international interbank lending - twice the level recorded five years ago.
Global Cross-border credit (yoy) Global Domestic credit (yoy)
US Cross Border Credit
Asia Pacific Cross Border Credit
Average of Cross
Border Credit
Growth (2001-
2013): 6.2%
2
1.5
1
0.5
0
USD tln
4
3.5
3
2.5
Euro Area Cross Border Credit
Average of Cross
Border Credit
Growth (2001-
2013): 5.8%
USD tln
0.6
0.5
0.4
0.3
0.2
0.1
0
Average of Cross
Border Credit Growth
(2002-2013): 12.8%
Source: BIS, KFHR
5

Global effect of combined liquidity and capital changes under Basel III on business models
0 20 40 60 80 100
Evaluating portfolios
Shifting out of complex less liquid instruments
Exiting lines of business
Exiting geographies
None of the above
2012 2013
8
4
0
Estimated capital impact on GCC Islamic banks
20
2.7
16
3.0
1.2
12
15.9
14.3
Capital (Basel 2)
Tier-1 Tier-2
Capital (Basel 3)
Basel 3 impact on capital ratios
 More and more financial institutions will review their business models and banks will continue to exit business lines and geographies as they streamline operations and strengthen balance sheet
 Expect to see more regional banks taking the forefront as global banks reassess their position and direction.
 Going forward, expect more partnerships to emerge across markets as thoughts turn to future growth opportunities.
Estimated capital adequacy ratio under Basel III of
GCC Islamic banks
Source: EY, KFHR
6

7

Global Islamic Finance Assets
Others
(North America and Europe)
• Banking assets (71.1)
• Sukuk Outstanding (6.4)
• Islamic funds (12.9)
• Takaful assets (0.01)
•
Total assets (90.3)
MENA (ex-GCC)
• Banking assets (593.9)
• Sukuk Outstanding (0.3)
• Islamic funds (0.4)
• Takaful assets (7.7)
• Total assets (602.4
)
Sub-Saharan
Africa
• Banking assets (22.9)
• Sukuk Outstanding (0.3)
• Islamic funds (1.7)
• Takaful assets (0.2)
•
Total assets (25.1)
GCC
• Banking assets (530.8)
• Sukuk Outstanding (85.3)
• Islamic funds (32.7)
• Takaful assets (8.23
)
• Total assets (657.1)
Asia
• Banking assets (213.5)
• Sukuk Outstanding (177.2)
• Islamic funds (25.9)
• Takaful assets (3.78)
•
Total assets (420.3)
*Values in USD bln as of 1H14
 The global Islamic finance assets reached approximately USD1.79tln
in assets as at end-2013, representing a sustained compounded annual growth rate (CAGR) of 16.95% during 2009-2013.
 Over the last decade, Islamic finance has gained much acceptance in the global arena as rising awareness of Shari’a compliant propositions has prompted more countries and entities to join the global cohort of Islamic finance stakeholders.
o The industry’s assets are expected to surpass the USD2tln mark during the 3Q2014.
o Today there are at least 700 Islamic financial institutions operating across more than 70 countries .
o MENA, GCC and Malaysia remain as the key driving jurisdictions.
Source: Bloomberg, IFIS, Zawya, World Islamic Insurance Directory, KFH Research
8

1 Islamic Banking
The value of global Islamic banking assets reached an estimated
USD1.53tln as at 1H2014, at a CAGR of 17.4% between 2008-2013
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Islamic Banking Assets Growth Trend by Region (2008-2014F)
2008
GCC
2009
MENA (ex. GCC)
2010
Asia
2011 2012
Africa (ex. North Africa)
2013
Others
2014F
3
Islamic Funds
The global Shari’a compliant asset management industry has reached a new high of USD75.1bln in AuM
80
70
60
50
40
30
20
10
0
47.0
Global Islamic Funds AuM (2008-17 June 2014)
71.6
75.1
66.9
73.8
60.6
61.7
56.1
1200
1000
800
600
400
200
0
AuM No. of funds
Source: KFH Research Database
2 Sukuk
Global sukuk outstanding reached USD286.41bln in 1H2014, a
6.3% expansion YTD since end-2013 and a 16.8% growth y-o-y.
350
300
250
200
150
100
50
Global Sukuk Outstanding Trend (2003-1H2014)
USD286.4bln
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H14
4
Takaful
Gross takaful contributions are estimated to have amounted to
USD21.5bln as at 1H2014. Annual growth in contributions y-o-y is forecasted to be more than 15% as at end-2014.
Global Takaful Contributions Forecast
2013E 2014F
8542
7229
Saudi
Arabia
2720
Malaysia
2311
1296
658
GCC
251
Asia Pacific Africa South Asia Middle East
9

Regulatory transformation will demand the industry increase depth and breath of liquidity investment tools and to adapt to radically different growth strategies
 Islamic banks are operating within an integral global financial system and are also exposed to various risks. Based on past crises, Islamic banks were also adversely affected from the economic crisis resulting in credit constraints.
 Generally, Islamic banks tend to hold an excess of cash reserves to buffer their liabilities due to the limited availability of short-term instruments.
 Global regulatory reforms are also being undertaken to enhance resilience of the industry and these reforms must be supported by robust product and market developments.
 Islamic banks are operating within a set of challenges in managing their liquidity, despite the heightened expectations through various regulatory reforms.
KEY REFORMS
Basel III & IFSB -
Capital
Basel III & IFSB -
Liquidity
Unique Islamic banking framework
Shari’a rulings & enhanced
Governance expectations
Impact on Business
Model
Risk weighted assets & revenue levels
Capital and funding pressure
Cost of funds and operational cost
Sukuk as growth and
Capital/liquidity instrument
10
Source: IFSB Islamic Financial Services Industry Stability Report 2013`, KFHR

Current practices in advanced Islamic finance jurisdictions:
Challenges Remain in Most Markets :
Shortage of active money markets
Sub-optimal secondary trading in Islamic debt markets
Tenure mismatch in instruments
Government and central bank certificates*
Wakalah placements
Cash reserves
Islamic
Liquidity
Management
Instruments
Repurchase agreements*
Absence of a unified Shari'a framework and lack of standardised regulations
Commodity murabahah
Sukuk and other debt securities*
 Islamic banks have restricted access to short-term funding options used by conventional banks.
Since all transactions must be linked to a tangible, underlying asset
– this rules out purely financial contracts like repos and Certificates of Deposit. As a result, there is a big, unpopulated gap between cash and long-term papers.
 Shortage or unavailability of Shariah compliant securities in many jurisdictions will affect the performance and competitiveness of Islamic banks vis-à-vis conventional financial institutions in the internationalisation of
Islamic finance
Non-existence of cross-border liquidity infrastructure
Amplification of liquidity risk in a dual banking system

Despite the limited liquidity instruments for IFIs, both Basel Committees and
IFSB do not preclude the need for IFIs to be sufficiently resilient to withstand liquidity and market shocks.
*In reference to Shari’a compliant alternatives of these instruments
Source: IFSB Islamic Financial Services Industry Stability Report 2013`, KFHR
11

Global Sukuk Issuance Trend
(2006-1H2014)
Sukuk Outstanding in Selected Markets (1H2014)
140
120
131.18
119.71
Turkey:
USD7bln
100
UK:
USD624mln
Kuwait:
USD373mln
80
85.07
66.2
Pakistan:
USD4bln
60
40
46.02 45.15
20
25.52
0
20.63
28.02
2006 2007 2008 2009 2010 2011 2012 2013 1H2014
Saudi:
USD47.8bln
Bahrain:
USD4.3bln
UAE
USD25bln
Malaysia:
USD163bln
Indonesia:
USD14.5bln
Singapore:
USD87mln
1H14
2013
2012
2011
2010
2009
2008
0%
Sukuk Issuances by Maturity Trend (2008-1H14)
< 1 year 1 - 3 years 3 - 5 years 5 - 10 years > 10 years
20% 40% 60% 80% 100%
Source: Central banks, Regulatory bodies, Islamic banks, Zawya, IFIS, Bloomberg, KFHR
• The volume in 2014 has been spurred by issuances in 2Q14 worth
USD35.1bln
, which is the second most performing quarter in terms of new sukuk issuances since 3Q12 .
• Obligors’ based in a total of 14 different jurisdictions have tapped the primary sukuk market in 1H2014.
• Consistent with the past trend, Malaysia accounted for the largest share of the sukuk market with a USD41.7bln volume or 63% of the total issuances (2013: 68.8%).
Saudi Arabia was the other major domicile in 1H2014.
12

13

Internationalisation of Islamic finance to drive greater innovation and wider range of liquidity instruments including cross border solutions
Cross
Border level
Central
Bank Level
Interbank
Level e. g. Commodity Murabahah, Wakalah,
Lender of Last Resort,
Islamic alternative to Repo e.g.interbank Mudarabah,
Wakalah
Institution
Level e.g. Commodity Murabahah
14
Source: IFSB, KFHR

Importance of liquidity management at respective levels
1
Asset-Liability
Management of
Islamic financial institutions
Outcome
• Enhances the ability of the Islamic financial institution to meet operational cash flow;
•
Better efficiency in managing funding will improve profitability; and
• Provides an even ground for Islamic financial institutions to manage liquidity.
Importance of liquidity management
Source: KFHR
2
3
Macro
Environment
Global
Surveillance
• Helps to mitigate the probability of default by an Islamic financial institution which could lead to adverse systemic implication;
• Facilitate transactions among Islamic financial institutions hence improving costs; and
• Increase the level of liquidity in the financial system.
• Facilitates the growth and development of domestic regulator’s global involvement in liquidity risk management; and
•
Help integrate the initiatives of other jurisdiction regulatory efforts to produce a standard framework to address liquidity risk.
15

Promoting cross border liquidity
Placing Islamic funds to other Islamic centres
Establishing benchmark rates
Wide distribution of
Sovereigns sukuk
Open markets financial enabling entry and exit of investors
Selling of Islamic instruments among jurisdiction
• Due to the size of the Islamic banking industry and capital market, it will be challenging to create a local deep liquidity market , which explains why efficient cross-border liquidity risk management tools have been explored.
• The establishment of the IILM in 2010 is an important development in facilitating effective cross-border liquidity management.
• However, with the aim of managing liquidity risk, it is important that other risks (e.g. currency risk for cross-border liquidity management products) are not introduced.
• This lack of market liquidity is often seen as the major constraint to the development of an integrated
Islamic financial system
Source: KFHR
16

Macro Challenges and Developmental Issues Surrounding Islamic Liquidity Management
Global Shari’a
Standards
Need for more transparency, disclosure
Different legal, regulatory & tax frameworks
Global acceptance
Efficient payment & settlement system
Uniformity in other frameworks
Robust cross border infrastructure
Adequate availability of short term instruments
Robust standards
Inadequate cross border liquidity market
Need for well designed, suitable assets for trade across borders
Different standards used among jurisdictions
Source: KFHR
Macro
Challenges
Developmental
Issues
17

Market Expectations
Fundamental
Banking
Prerequisite
Global Expansion:
Managing Liquidity
Challenges

Internationalisation of Islamic finance raise the bar for more timely, sophisticated liquidity management instruments
 Cross border collaboration on liquidity, mitigates systemic risk, brings efficiency to the financial institutions funding operations
 Global and regional expansion of Islamic banks requires greater advancement of cross border liquidity instruments to manage the necessary exposures.
 Various availability of Islamic liquidity management tools such as Wakalah and unrestricted Wakalah, short-term
Ijarah sukuk, Government shari’a compliant instruments are needed to manage liquidity effectively.

Inadequate cross border liquidity infrastructure, identifying the right assets which is acceptable across most markets, different
Shari’ interpretations, absence of a LOLR among jurisdictions are among the challenges
18

“Best Islamic Research Firm 2013”
Islamic Finance News Awards Poll
2013
“Best Islamic Finance Research House
2014”
The Asset Triple A Islamic Finance
Awards 2014
“Best Islamic Consulting Service 2014”
The Asset Triple A Islamic Finance
Awards 2014
“Best Islamic Consulting Service 2013”
The Asset Triple A Islamic Finance Awards
“Best Islamic Finance Research House 2013”
The Asset Triple A Islamic Finance Awards
2013
“Best Islamic Consulting Service 2012”
The Asset Triple A Islamic Finance Awards
2012
“Outstanding Contribution to Islamic
Finance”
Failaka-Amanie Symposium, Dubai
April 2010
“Best Islamic Research Company”
Islamic Finance News Awards Poll 2008
January 2009
"Best Research in Islamic Finance”
Master of Islamic Funds Award
November 2007
“Best Islamic Research Firm”
Islamic Finance News Awards Poll 2011
2013
“Best Islamic Finance Research House
2012”
November 2011
“Contribution to Islamic Finance Research”
International Islamic Finance Forum, Dubai
The Asset Triple A Islamic Finance Awards
2012
“Best Islamic Finance Research House 2011”
The Asset Triple A Islamic Finance Awards
“Best Islamic Finance Research House”
The Asset Triple A Islamic Finance Awards
2009
“New Provider for Islamic Finance
5 th
May 2010
Research”
KLIFF Islamic Finance Awards
November 2008
2011
“Best Islamic Research Company”
Islamic Finance News Awards Poll 2009
January 2010
“Contribution to Research in
Islamic Finance 2009”
International Islamic Finance Forum April
2009
19