adib, islamic banking and the financial crisis algiers, may 12, 2009

ADIB, Islamic Banking and the Financial Crisis

Algiers, May 12, 2009

2Acquisition analysisv3_FINAL.ppt

Content

Simplified Crisis Pandemic Mechanism

Main reasons behind the crisis

Islamic Finance Mitigating Factors

Our History

Our Strategy

Our Products

Our Achievements

Our Value-Added


I- Simplified crisis pandemic mechanism

American Real

Estate Market Lending

Debt Structured

Securitization

Other debts

CDO Swaps, Options, Futures And other derivative leverage effects

Wave 1 Of

Banks&

Clients

Wave XOf

Banks&

Clients


II- Main reasons behind the Crisis:

Excessive and imprudent lending

Securitization and mixing of various degrees of debts with the ‘originate to distribute’ model - making it possible for the mortgage originators through creation of Collateralised debt obligations (CDO’s) to mix prime and subprime debt and passing the entire risk of subprime debt to ultimate purchasers who had no idea of the risk factor, relying purely on rating companies (who got their job wrong - relying on big names) and who would have normally been reluctant to bear such a risk.

Mortgage originators due to the easy securitization and liquidity of debts had less incentive to undertake careful underwriting

The whole process was amplified by speculation on derivatives such as swaps that betted on the default of the debtor, accentuating the risks and making it difficult for Hedge funds and banks to honor their commitments.


III- Islamic Finance Mitigating Factors (1):

Asset backed financing: the fact to always have an underlying asset for the financing keeps away from the financial sphere whose bubble inflates more and explodes faster than the real sphere one. The asset being sold or leased must be real, and not imaginary or notional. This eliminates derivative transactions which are often pure speculation based on zero sum games, i.e. benefitting from the loss of the principal party.



No Speculation: speculation being strictly forbidden in Islam, there is neither a contribution from Islamic banks to feed a bubble and taking advantage from its growth, nor to be seriously hit by the turmoil when price becomes a downhill racer.

Mandatory Delivery :The transaction must be a genuine trade transaction with full intention of giving and taking delivery. This motivates the trader to be more cautious in the evaluating trade risk, preventing an unnecessary speculative explosion in volume and trade of transactions.



Stability of pricing over time: the fact that rescheduling and price revising is very limited in Islamic finance led to limited adjustments (as opposed to variable rates for example) this has a negative and positive effects:

- the bank has narrow possibilities to follow mark-to-market pricing and might be out of the market

+ the bank doesn’t contribute to accelerate a crisis through vicious circle mechanisms (NPL on a given sector leading to higher rates to price the risk leading to more NPLs …etc).



No derivatives: keeping away from these instruments prevents the bank from playing on the leverage effect to take important exposures (gap between notional amounts and cash capacity).

Limited access and outreach: Islamic banks are not allowed to use a variety of financial instruments. They are also relatively young and not as widely spread as conventional banks. This limited scope also helped keeping them away from the crisis.



Limited transmission mechanisms: the fact that securitization and other risk transferring instruments are not used by Islamic banks played a key role in limiting the transmission possibilities of the crisis to Islamic banks. The debt cannot be sold and thus risk borne must be by the lender himself. Like the above, risk itself cannot be sold and thus securitization in Islamic Finance is always at a hands span, so the originator cannot be clouded amidst a series of trades and deceit the purchasers of the securities as to the nature of the security.



Prudent management: we tend to forget this factor, but the managers of most Islamic banks tend to adopt a conservative approach in financing distribution. This simple factor had an often undervalued impact in surviving the crisis.

Preliminary Ownership: The seller or owner must own and possess the goods being sold or leased. This ensures that risk is shared in order to get a part of return, also putting a constraint on short selling - thus removing the possibility of a steep decline in asset prices during a downturn. The Sharia exception (Salam and Istisna) is when goods need to be produced or manufactured and thus allows for rise in the real economy and thereby curbs excessive credit expansion.


IV- Our History

ADIB was established in May 1997 as a public joint stock company and inaugurated by HH Sheikh Abdullah Bin Zayed Al Nahyan

The initial capital was $ 286 million and has quintupled since to reach $ 1,6 billion shareholders equity as of 12/31/08

ADIB shareholding is spread over more than 100 000 people

ADIB developed an expertise in all fields of banking thanks to a team of specialized professionals coming from the most prestigious banks and multilateral institutions.

ADIB is becoming a top tier Islamic bank with an international scope


V- Our Shareholders

The founding Shareholders of ADIB are :

members of the ruling family who deeply share Islamic and ethical banking values

Abu Dhabi Investment Authority (ADIA): The largest sovereign fund in the world started in 1976 and handling more than $ 1 trillion today. It is known across the world financial markets for its highest standards of leadership, integrity and professionalism

Prominent UAE Nationals holding the remaining capital.


VI- Our Strategy

International Development: acquired a bank in Egypt, awaiting license in Algeria and Iraq and closely considering Libya, Sudan, Syria, Jordan, Qatar and Saudi Arabia

Innovation through structuring new Islamic compliant financial solutions

ADIB Business strategy abroad will be built around steady growth of in the retail area of consumer finance followed by gradually growing commercial and corporate banking services.

Becoming an integrated group with our subsidiaries:

Abu Dhabi National Takaful (insurance) Abu Dhabi Islamic Financial Services LLC (Stock Exchange) ADIB Sukuk Company Ltd (Issuance of Sukuk) Burooj Properties LLC (Real Estate)


VII- Our Products (1)Beyond proposing the whole range of standard Islamic compliant products such as :

Murabaha :selling of an already possessed good with term installments Ijara: leasing against rental installments and buy option

Musharaka: partnership in a project or asset with diminishing stake

Istisna’a: Selling through installments of an asset to be developed

Sukuk: Securities giving the ownership and return of a specific asset

Wakalah: Contract to invest for the client his deposit for a fixed fee (and incentive)

Mudaraba: Contract to invest for the client his deposit and sharing profit


VII- Our Products (2)

ADIB has a competitive edge in new instruments such as: Covered Cards: An alternative to credit cards, but the

account never goes overdraft because the cardholder should credit the “cover amount” into the card’s investment account in advance. The cardholder may get such an amount through a financing.

Al Khair: Conversion of one or many conventional debts into one Islamic compliant one through an International commodities Murabaha, where the client sells the commodities on cash basis after purchasing them from the bank on deferred payment basis. The client utilizes the sale price for settling the conventional debts.

Technology Products : Mobile banking, e-banking…..


VIII- Our Performance

ADIB is rated A+ by Fitch and A2/Prime 1 by Moody’s

ADIB wasn’t hit by the financial crisis thanks to its financing ethics and sound management

ADIB is market leader in the retail segment (some murabaha approvals are given in a couple of minutes)

ADIB Risk management systems are in line with Basel II recommendations

ADIB has more than: $ 14,6 billion total assets, 15% ROE (during 2008 which is not perceived as a good financial year) 1,3 Deposit/Financings ratio 1500 employees 126 branches


IX- Our Value Added

ADIB is happy to transfer knowledge and experience to local staff through training sessions and sharing expertise

ADIB belongs to a group that can offer a full package of financial products (Takaful, Brokerage, Sukuk issuing, equity financing ..) but also investment or subcontracting opportunities (EIIC projects)

ADIB is eager to address the needs of the economy through a wide range of financing products for which there is a strong demand

ADIB is honored to contribute to the diversification and development of the country’s financial system through the introduction of new financial instruments

ADIB is a universal fund provider in the sense that we propose Islamic financing solutions (trade, financing, brokerage, investment banking..) for individuals and entities without borders.

adib, islamic banking and the financial crisis algiers, may 12, 2009

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