Emerging Islamic Housing Finance Markets

“The Irreversible(?) Growth of Private Housing Finance”March 15, 2006

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UIB Overview

The only full service Islamic investment bank in Gulf Cooperation Council (“GCC) – Bahrain, KSA, Kuwait, Oman, UAE & Qatar

Regulated by the central bank in Bahrain - Bahrain Monetary Agency (BMA)

Paid Up Capital: USD120 million

UIB recognizes the needs of under-served markets with pent-up demand for Islamic products

Increasing global awareness of Islamic financing

A solid business model with competitive products and services which attract investors even from conventional markets

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Five Business Lines

Unicorn offers diversified products across an integrated range of financial products and services

CorporateFinance and Capital Markets

PrivateEquity

Mergers and Acquisitions

Takaful

(Insurance)

AssetManagement

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Offices

Unicorn’s Global Reach

USA (Chicago)

GCC- Bahrain (Corporate), Dubai and Kuwait (Planned: KSA)

Asia-Pacific – Malaysia (Kuala Lumpur)

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Why Islamic Finance?

Approximately 20% of the world’s population is Muslim

Unicorn aims to focus its operations across a majority of these

countries

78 million US, UK, Germany, France & Turkey

96 million GCC, Egypt & Jordan

215 million Malaysia, Singapore & Indonesia

414 million Bangladesh, Pakistan & India

62 million Algeria & Morocco

Muslim Population

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Global Demand for Islamic Financial Products growing @ 17% annually

Oil revenues to produce current account surplus of $400 Billion in 2006 in ME & GCC

Demand likely to be fueled to levels not seen before due to increasing oil revenues

ME & GCC economies to grow at 5.5% in 2006

More than 300 Islamic Financial Institutions operating globally

Islamic Financial Markets

General Observations

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Key Objective

Become a major player in developing the Islamic capital markets through the growth of primary housing finance markets and filling the gap for fixed-income investment

instruments via Sukuk (bond) issuances

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Model

Own and operate housing finance companies with strategic partners in Islamic markets offering world class mortgage origination, underwriting and servicing technology

Islamic housing finance products and operations

Utilize warehouse lines and bond issuances (Sukuks) as main source of funding

Securitize and issue Sukuks (MBS) on a flow basis

Develop GCC and other emerging Islamic capital markets

Correspondent program to enforce origination, underwriting and servicing standards

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Islamic Housing Finance - GCC and Beyond(Turkey, Jordan, Lebanon)

Attractive demographics and population size

Key reforms at the sovereign level relating to housing finance and capital markets

Stable political and legal/regulatory environments

Growing middle class and consumer markets

Decent sovereign ratings

Mortgage to GDP Ratios – much below the more developed mortgage markets

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Uniquely Positioned to Build and Capture Islamic Primary/Secondary Housing Finance Markets

A strategic alliance with UIB provides the following advantages:

Renowned capabilities in developing Islamic structures/products

Strong expertise in housing finance relating to the primary, as well as the secondary market

Qualified staff with extensive Western experience

Clear vision & strategy to become the “major player” in the Islamic housing finance markets

Willingness to form strategic alliances to gain from international and local expertise of respective partners

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Demystifying Islamic Primary Mortgage Market Principles

Making money from money is not Islamically acceptable – Thus, Islam prohibits interest and usury (“Riba”)

Key Islamic mortgage principle – the financier must share in the ‘risks and rewards’ relating to an underlying asset rather than receiving a fixed and guaranteed ‘interest’ income

2 common Islamic mortgage structures:

Ijara (akin to a finance lease) a financer purchases an asset and leases it to a client through a leasing contract for a specified rent and term. The owner of the asset (the financier) bears all ‘risks and rewards’ associated with ownership and sells it to the client upon payment of the last installment

Musharaka (akin to a declining-balance mortgage) an equity participation contract under which a financier and its client contribute jointly to purchase a home (e.g. financier (80%) and client (20%). Ownership is distributed according to each party's share in the financing (co-ownership). The title deed is held in the name of the financier and transferred to the client’s name upon payment of the last installment

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Demystifying Islamic Secondary Mortgage Market Principles

Islamic bond (certificate) is known as a ‘Sukuk’

Key mortgage-backed Sukuk principle: the certificate must be asset and not just debt based

Must sell the underlying asset (i.e. real estate property) into the secondary market and not just the receivables(i.e. transfer of ‘risks and rewards’ in the real estate asset)

Tradable mortgage-backed Sukuks are backed by ijara and musharaka structures

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Housing Finance and Bond Markets

Housing Finance and bonds (MBS) are the backbone of any economy and capital markets, respectively

USD7 trillion of mortgages (residential/commercial) originated in the U.S. annually; whereas the U.S. corporate market stands at USD4 trillion annually

Approximately 40 industries linked to housing finance (e.g. insurance, appraisal and construction)

Housing finance key to development of SME market

MBS a key tool for the development of the bond markets (e.g. In 1970, first U.S. MBS issuance; by 1995 USD20 trillion of MBS)

MBS allows for lower interest rates due to increased competition and long-term tenors

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Source of Funding - Debt Capital Markets

Trends in conventional Capital (Bond) Markets will be repeated in the Islamic (underdeveloped) financial markets.

Conventional

1980’s and 1990’s 2000 2006

Islamic

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Total MBS issuance

$548.2 $597.1

$860.4 $777.9

$549.3

$1,362.1

$1,837.9

$488.3 $513.2

1994 1995 1996 1997 1998 1999 2000 2001 2002

2002 MBS market share US$ billions

Total MBS issuance $1,838

Total originations $2,526

Total MBS outstanding $3,157

Annual MBS issuance

Source:Inside MBS and ABS, January 10, 2003

Evolution of U.S. Mortgage Securitization - Market Sizing

73%of mortgage originations

funded through MBS

U.S. Securitized Assets

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Case Study: Kingdom of Saudi Arabia (“KSA”)

Largest GCC market

Total GDP: USD400 billion

Mortgage to GDP Ratio: 1.9%

Demand for 300,000 housing units annually

Housing finance potential: USD45 billion annually(Est: 1/4 of the housing units are built and financed)

Total Population: 22 million

Growing middle class (Annual Income Level: USD1600 – USD3200)

Baby Boomers - 65% of the Population under age 35

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GCC Demographics

Percentage of Population < 20

0%

5%

10%

15%

20%

25%

30%

35%

40%

Malaysia Thailand China India Indonesia GCC

Countries

Perc

enta

ge

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KSA Gap Analysis

Gap Analysis-Type of Financing

50%

30%

20%

8%

18%13%

0%

10%

20%

30%

40%

50%

60%

Islamic Finance Commercial Finance Government Finance

Type of Financing

Perc

enta

ge Demand (%)

Supply (%)

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UIB’s KSA Experience

o Engaged to set up a licensed housing finance institution for Kingdom Instalment Company out of KSA

o Develop the strategy and business plan

o Technical/equity partnershipso CEO and COO searcho Interact with legal/regulatory

authorities relating to housing finance reforms

o Assist with the development of systems and policies and procedures

RMBS Issuance

o Unicorn arranging, structuring and placing the very first RMBS out of the GCC region (landmark transaction)

o Rated by a recognized rating agency

o Solid credit enhancement from the International Finance Corporation (IFC)

Housing Finance