Islamic Finance Investment & Capital Considerations – An overview Presented By: Amr El-Husseini

Investment Considerations (1) Debt to Equity Ratio  Ratio should be below 33% in case of non sharia compliant debt structure.  Exceptions: when debt is expected to be restructured into sharia compliant. Interest income as a percentage of total income  Interest bearing income not to exceed 5% of total revenues. Industry and Nature of operations  Exceptions only in case of turnaround within three years, during which profits are retained in equity.

Investment Considerations (2) Practical conditions in case of conversion of a conventional bank into a sharia compliant one:  Turnaround within three fiscal years.  Renegotiation and modification of existing contracts.  Disposal of non sharia compliant assets & liabilities  Amendment of equity structure by eliminating non sharia compliant items such as bonds & preferred shares.  Non sharia compliant income to be distributed to charity  Change of governance structure (sharia committees)  Impact on valuation of potential acquisition targets

Capital Considerations Ordinary shares / preferred shares Uses of Capital in Islamic Banks – Theory vs. Practice  Concept of Profit / Loss sharing Profit Equalization reserve Differences in treatment of restricted and unrestricted investments by central banks. Priority deposits take over equity

Major Limitations to Expansion of Islamic Finance into new geographies Taxation issues:  Double taxation  Property transfer tax Central Bank Regulations:  Legal reserve requirement and its remuneration Consumer laws:  Protection of deposits (deposit insurance).  Ability to define sharia compliant structures under existing financial vehicles i.e. impact on commercial laws.