Emerging Islamic Housing Finance Markets

The Irreversible(?) Growth of Private Housing Finance

March 15, 2006

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

Takaful (Insurance)

Corporate Finance and Capital Markets

Asset Management Private Equity

Mergers and Acquisitions

Offices
Unicorns Global Reach

USA (Chicago) GCC- Bahrain (Corporate), Dubai and Kuwait (Planned: KSA) Asia-Pacific Malaysia (Kuala Lumpur)

Why Islamic Finance?

j Approximately 20% of the worlds population is Muslim

Muslim Population 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

Unicorn aims to focus its operations across a majority of these countries

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Islamic Financial Markets

General Observations

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

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

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

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

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

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 clients 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

Islamic

1980s and 1990s

2000

2006
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U.S. Securitized Assets

Evolution of U.S. Mortgage Securitization - Market Sizing
2002 MBS market share US$ billions Total MBS issuance Total MBS issuance Total originations Total MBS outstanding Annual MBS issuance $1,838 $2,526 $3,157

$1 837. $1 362.1 $ 60.4 $5 7.1 $488.3 $513.2 $54 .2

73% of mortgage originations funded through MBS

$777. $54 .

1994

1995

1996

1997

1998

1999

2000

2001

2002
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Source: Inside MBS and ABS, January 10, 2003

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

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KSA Gap Analysis

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UIBs KSA Experience

Housing Finance
o Engaged to set up a licensed housing finance institution for Kingdom Instalment Company out of KSA Develop the strategy and business plan Technical/equity partnerships CEO and COO search Interact with legal/regulatory authorities relating to housing finance reforms Assist with the development of systems and policies and procedures o

RMBS Issuance
Unicorn arranging, structuring and placing the very first RMBS out of the GCC region (landmark transaction) Rated by a recognized rating agency Solid credit enhancement from the International Finance Corporation (IFC)

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