Union de Banques Arabes et Françaises

1. Union de Banques Arabes et Françaises Islamic Products The French finance industry and the Paris money market in the era of Islamic finance December 6th 2007

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

3. A- INTRODUCTION (continued) • A potential market estimated worth USD 500 billion of assets. • Growing at a rate of between 10% to 15% p.a. • These estimates cover through a more than 330 financial institutions and banks all the Muslim world from China to Morocco englobing South East Asia, the Gulf Countries, the Middle East and Africa.

4. B- MAIN ISLAMIC PRODUCTS & INSTRUMENTS • Challenge for Islamic banking: Find sources of revenue based on non-interest banking products. Three main products satisfy such criteria: I- Trade Products (Profit). II- Corporate Investments (Dividends). III- Leasing (Rentals). In addition to these basic products a certain number of financial instruments are available.

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

6. Murabaha(Commodities) ANNEX I Islamic Bank Amount invested Deferred Payment through Transfer or irrevocable L/C Cash to “A” Invoice & Warrants to IB Invoice & Warrants to U.B.A.F. U.B.A.F. Trader “A” Economic equivalent to a term deposit in conventional banking without an investment mandate

7. Commodities could also be capital or consumer goods Traders: “A” being Exporter & “B” Importer ANNEX I bis Murabaha(Commodities) Islamic Investor Repayment of the investment plus profit less a commission Amount invested U.B.A.F. [Agent) Deferred payment through an irrevocable L/C Cash to “A” Invoice to U.B.A.F. Invoice to “B” Trader “A” Trader “B” Economic equivalent to a term deposit in conventional banking with an investment mandate

8. 2- Mudarabah I- Trade Products(continued) • A form of contract, where one (or several) investor(s), called Rab El Mal, provides funds to an entrepreneur (Mudareb) who invests such funds in a way acceptable to the Sharia. • A bank could act as Mudareb investing funds on behalf of the investors, or as Rab El Mal if acting as a participant. • The Mudareb acts without recourse vis-a-vis the investors except in case of negligence.

9. I- Trade Products(continued) • Investment risk is therefore borne by the investors to the extent of their participations. • Profit is shared, according to a mutual pre-agreement between investors and Mudareb. • Two forms of contracts: - limited: refering to a precise transaction; -unlimited: the Mudareb is not committed to inform the investors of projects undertaken (equivalent to funds under mandate in conventional banking).

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

11. Musharakah (active partnership) II- Corporate Investments • Contract between two or more parties to finance a project, or equity. • Investment banking arm of banks could participate in such contracts. • Profit is distributed among the partners along predetermined ratios. • Loss is borne by each partner in proportion to its contribution.

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

13. III- Leasing (Ijarah, Ijarah Wa Iktinaa)(continued) • Ijarah wa Iktinaa(Financial Lease) is similar to Ijarah except that the lessee is commited to take possession of the Asset at the end of the lease. • For some scholars Ijarah & Ijarahwa Iktinaa do not apply on intangible Assets (Software) or rights on natural ressources exploration. • A long-term lease contract can include an option with the agreement of both parties, to negotiate the price for a specified time period. The new price would be fixed (at the beginning of each period) at the prevailing market conditions or similar value in the market. This will virtually translate into Libor plus a fixed margin.

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

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

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

17. Differences between Conventional Lease & Ijarah(continued) • 7- Late payment penalties: Conventional lease agreements entail penalties for late payment of rent. Since this is considered interest it is prohibited under Islamic law but some kind of compensation can be considered. • 8- Method of Rescheduling: A finance lease may be rescheduled with the agreement of lessor and lessee under Sharia. The original agreement cannot be altered to reflect the rescheduling. The procedure is to cancel it and enter into a new agreement with the same parties. This enables penalties from delays on the previous contract to be recovered.

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

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

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

21. C- OTHER ISLAMIC INSTRUMENTS • Bai Al Salam: Contract in which a negotiated pre-payment is made for goods to be delivered later on. It could be used for pre-export finance. • Sukuk: Similar characteristics to those of conventional bonds with the key difference being that such Asset-Backed Securities (ABS) shall always be linked to a Sharia compliant asset as such Sukuk can be used for project finance.

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

23. ANNEX V Mudarabah &Murabaha Sight L/C U.B.A.F. (Opening Bank) Purchase of Goods S.P.C. (Islamic Banks) Exporter Contract Negotiation Sale of Goods Guaranteed deferred payment L/C Importer’s Bank Importer Instructions

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

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

26. ANNEX VIII Ijarah Begharad Al Iktinaa(Financial Lease Ending by Purchasing) Islamic Investors Aircraft Producer Charitable Trust Mudarabah Agreement Modareb Purchasing Aircraft Own 100% Lessor Funding XYZ (C.I.) Bank . “Head-Lessor” (Jersey) Managing Head Lease Lease Rentals Charitable Trust Own 100% XYZ (Cyprus) Bank Managing “Lessor” (Cyprus) Lease Rentals Operating Lease Airline Company Rentals could be guaranteed By ICIEC

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

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

29. Mahmoud ABDEL WAHAB • Né en Egypte en 1951, Mahmoud Abdel Wahab termine ses études secondaires au Caire au Collège de la Sainte Famille (Jésuites). • En 1973, il obtient sa maîtrise d’économie de la faculté d’Economie et Sciences Politiques de l’Université du Caire, qui lui confie une fonction de Maître Assistant et le détache en 1974 à sa branche de Khartoum. • En 1980, Il obtient un Doctorat d’économie de l’Université Paris I Sorbonne. • Après un court passage dans une société d’informatique, il entre à l’U.B.A.F. en 1984, et occupe en 1989 les fonctions de Secrétaire Général du Groupe UBAF. • Il contribue en 1994 à la mise en place d’une activité Islamic Banking dont il est actuellement et depuis 4 ans le responsable.

30. Union de Banques Arabes et Françaises Participants are welcomed to address any questions related to this presentation to: Mahmoud Abdel Wahab Tel. 01 46 40 64 42 Fax.01 46 40 65 17 E-mail: mahmoud.abdel-wahab@ubaf.fr