adib sukuk

8/12/2019 ADIB sukuk

1/27

Mudaraba Sukuk

Abu Dhabi Islamic Bank(ADIB)

Saudi Hollandi Bank(SHB)

December 25,2012

Ver.1.0


2/27

2

By its very nature, sukuk are more cumbersome to issue than conventional bonds. Securing assets to

back the sukuk issue value, while becoming easier, is still a significant challenge. If you lighten the

asset-backing requirement by employing asset-based structures such as a murabaha or a usufruct-

based ijara, you might be compromising sharia authenticity and therefore be exposed to the potential of

sharia non-compliance risk. Structuring innovation has nevertheless advanced quite substantially to the

extent that issuances are achieving a good compromise between sharia authenticity and issuersneeds.

Additionally, issuance costs are still high, thereby pricing out smaller issues. Legal costs associated with

structuring/ documentation combined with additional registration or valuation costs add anything

between $50,000 to $199,000 on top of the costs of issuing a conventional bond, according to our

survey of lead arrangers. Hence issuers would have to raise at least $100 million for the issue to make

financial sense. In this regard, Malaysia has done a fantastic job incentivizing issuance out of the

country. Besides the captive investor community benefiting from exemption on withholding taxes, the

Malaysian government has made it simple and straightforward to issue from Malaysia, including a 14

working day turnaround for approval by the Securities Commission of ringgit-denominated sukuk by

multinational companies.

THE PROBLEMS WITH ISSUES


3/27

3

ADIB is the UAEs second largest Islamic bank by assets.

73 domestic branches and pursuing growth overseas. It already owns stakes in banks in Egypt and Bosnia andhas also established operations in Iraq, Saudi Arabia, UK and Qatar.

Primarily a retail bank, with almost 60% of the financing portfolio made up of retail.

Has a wholly-owned real estate investment and development company called Burooj Properties, which hasbeen an overhang on ADIBs profits, owing to challenges in UAEs real estate sector.

Carries adequate liquidity and is well placed to comply with the new liquidity regulations, in our view. The bankaddressed its low capitalization by issuing a USD1 billion Tier-1 sukuk.


4/27

4

The Certificates are perpetual securities and have no fixed or final redemption date. Unless the Certificates have previously

beenredeemed or purchased and cancelled as provided in the Conditions, the Trustee (but only upon the instructions of ADIB(acting in its sole discretion)) shall redeem the Certificates on the First Call Date or on any Periodic Distribution Date fallingafter the First Call Date in accordance with Condition 10.1(b) (Trustees Call Option). In addition, upon the occurrence of aTax Event or a Capital Event (each as defined in the Conditions), the Certificates may be redeemed in whole or in part, or theterms thereof may be varied (at the option of the Trustee (but only upon the instructions of ADIB (acting in its solediscretion)), in each case at any time on or after the Issue Date in accordance with Conditions 10.1(c) (Redemption orVariationdue to Taxation) and 10.1(d) (Redemption or Variation for Capital Event). Any redemption or variation is subject to theconditions described in Condition 10.1 (Redemption and variation).The Certificates may only be redeemed in accordance with Condition 10 (Redemption and Variation) and Condition 11(Dissolution Events and Winding-up). Upon the occurrence of a Dissolution Event (as defined in the Conditions), the Delegateshall (subject to Condition 11.1 (Dissolution Events)) give notice of the occurrence of such event to the Certificateholders inaccordance with Condition 15 (Notices) with a request to the Certificateholders to issue a Dissolution Request (as defined intheConditions) to the Delegate. Upon the receipt of a Dissolution Request in writing in accordance with Condition 11.1(Dissolution Events) or if so directed by an Extraordinary Resolution of Certificateholders, the Delegate shall (but in each case

subject to Condition 11.3(c) (Entitlement of Trustee or Delegate)) give notice to the Trustee of the Dissolution Requestwhereupon the aggregate face amount of the outstanding Certificates together with any Outstanding Payments (as defined intheConditions) shall become immediately due and payable and, upon receipt of such notice, the Trustee and/or the Delegateshallsubject to Condition 11.3 (Winding-up, dissolution or liquidation) take the actions referred to therein.


5/27

5

Principal shareholders (Page 5)

If circumstances were to arise where the interests of the major shareholdersconflict with the interests of the Certificateholders, Certificateholders could bedisadvantaged by any such conflict.

No GuaranteesInvestors should be aware that no guarantee is given in relation to theCertificates or any of theTransaction Documents by ADIB, the shareholders of ADIB or by any otherperson.


6/27

6

The Certificates are subordinated and unsecured obligations.

Payments of Periodic Distribution Amounts will be made by the Trustee provided thatADIB (as Mudareb) shall have paid profit amounts equal to such Periodic DistributionAmount pursuant to the terms of the Mudaraba Agreement.

Payment obligations of ADIB under the Mudaraba Agreement are subordinated to theclaims of the Senior Creditors (as defined in the Conditions) and rank pari passu toADIBs obligations under the Existing Tier 1 Securities. By virtue of suchsubordination, the payment obligations of ADIB under the Mudaraba Agreement will,in the event of the liquidation, dissolution or winding-up of ADIB, rank junior to allclaims of holders of any unsubordinated obligations of ADIB.

Risks Relating to the Certificates


7/277

If ADIB were wound up, liquidated or dissolved, ADIBs liquidator would first apply the assets of ADIB tosatisfy all claims of the Senior Creditors.

If ADIB does not have sufficient assets to settle claims of the Senior Creditors in full, the claims of theTrustee in relation to the payment obligations of ADIB will not be settled. Further, the Trustee will shareequally in payment with the claims of the holders of Pari Passu Obligations and holders of ADIBsExistingTier 1 Securities if ADIB does not have sufficient funds to make full payments on all of them. In such asituation, Certificate holders could lose all or part of their investment.

Further, the issue of any securities may reduce the amount recoverable by the Certificate holders in theevent of a winding-up, liquidation or dissolution of ADIB and ADIB may not have sufficient funds to satisfythe Certificate holdersclaims. In such a situation, the Certificate holders could lose allor part of their investment.


8/278

The Certificates are perpetual securities which have no scheduled repayment date. Certificate holders have no ability to

require the Trustee to redeem their Certificates unless a Dissolution Event occurs.

The Dissolution Events and Certificate holders rights following a Dissolution Events are set out in Condition 11 (DissolutionEvents and Winding-up). The Trustee has the option to redeem the Certificates in certain circumstances as more particularlydescribed in Condition 10 (Redemption and Variation).

This means that the Certificate holders have no ability to cash in their investment, except:

(i) if the Trustee exercises its rights to redeem the Certificates in accordance with Condition 10 (Redemption and Variation);(ii) if so directed by an Extraordinary Resolution of the Certificate holders following a Dissolution Event; or(iii) by selling their Certificates.

There can be no assurance that Certificate holders will be able to reinvest the amount received upon redemption at a ratethat will provide the same rate of return as their investment in the Certificates.

If the Central Bank informs ADIB that the Certificates no longer count as Additional Tier 1 capital, pursuant to Section10.1(d) of the Conditions, a redemption may occur without the consent of the Certificate holders at any time after the

applicable notice period to the Certificate holders

.

Perpetual Securities


9/279

Pursuant to the Mudaraba Agreement between ADIB (as Mudarib) and the Trustee (as Rab-al- Maal), which constitutes aMudaraba, the proceeds of the issuance of the Certificates will be applied as capital of the Mudaraba (the MudarabaCapital). The Mudaraba Capital will be invested by ADIB in its general business and the assets in which the MudarabaCapital is invested will constitute the assets of the Mudaraba (the Mudaraba Assets) with a view to earning profittherefrom, which will in turn be applied towards payments due to Certificate holders in respect of the Certificates.

No investigation or enquiry will be made and no due diligence will be conducted in respect of any Mudaraba Assets.

The Mudaraba Assets shall be selected by ADIB and the Certificate holders shall have no ability to influence such

selection. ADIB shall be granted the express entitlement to commingle its own assets with the Mudaraba Assets and as aresult, it may not be possible to identify the Mudaraba Assets separately from the assets of ADIB.

In the event that any of the risks relating to the business of ADIB mentioned above (see RiskFactorsRisks relating toADIB) materialize or otherwise impact ADIBs business, the value of and profit earned from the investment in suchMudaraba Assets may drop which may, in turn, have a material adverse effect on the ADIBsability to fulfil its paymentobligations under the Mudaraba Agreement and consequently, the Trusteesability to make payments in respect of theCertificates.

Investment in the Mudaraba Assets


10/2710

The Executive Committee of the Fatwa & Sharia Supervisory Board of ADIB, the HSBC Amanah Central Shariah Committee,the Morgan Stanley Sharia Supervisory Board and the Sharia Supervisory Committee of Standard Chartered Bank haveconfirmed that the Transaction Documents are, in their view, Sharia compliant.

However, there can be no assurance that the TransactionDocuments or the issue and trading of the Certificates will bedeemed to be Shariacompliant by any other Shariaboard or Shariascholars. None of the Trustee, ADIB, the Delegate orthe Managers makes any representation as to the Sharia compliance of the Certificates and/or any trading thereof andpotential investors are reminded that, as with any Shariaviews, differences in opinion arepossible.

In addition, prospective investors are reminded that the enforcement of any obligations of any of the parties would be, if indispute, the subject of arbitration in London under the LCIA Rules. ADIB has also agreed under certain of the TransactionDocuments to submit to the jurisdiction of the courts of England, at the option of the Trustee. In such circumstances, thearbitrator or judge, as the case may be, will first apply the relevant law of the relevant Transaction Document rather thanSharia principles in determining the obligation of the parties.

ssurance on Sharia rules


11/2711

Mike KennedyThe profound impact of the global financial crisis prompted G20 leaders to seek agreement on a set of internationallyeffective rules to improve both the quantity and quality of bank capital as well as to discourage excessive leverage Basel III.

Given that Islamic banks are liquid and inherently risk averse, the sector avoided many of the speculative products thatcontributed to the recent economic turmoil. Nevertheless, Islamic banks were not totally immune to the situation: manywere left exposed due to over-expansion and excessive risk concentrations, notably in the real estate sector.

Financial institutions must have more and higher quality tier 1 capital (which includes common equity and certainminority interests, as well as deferred tax assets). Tier 1 capital must be fully effective at absorbing losses and tier 2capital (which includes undisclosed reserves, revaluation reserves, general provisions, hybrid instruments andsubordinated term debt) must absorb more losses in order to protect capital. Capital, which is additional to minimumcapital requirements, is needed to address systemic and procyclicality risks.

The first point to note is that the capital structures of the significant majority of Shariaa-compliant banks are dominatedby tier 1 capital in common equity form, often in excess of 80 per cent of capital resources. In addition, most havecapital adequacy ratios noticeably higher than those seen in the conventional banking sector. The reasons for this can

be explained by a combination of complexities and Shariaa prohibitions in raising alternative and lower quality forms ofcapital, which result in:- The lack of Islamic subordinated debt. The lack of hybrid and callable capital structures due to the prohibition of Gharar (conditionality and uncertainty). The lack of meaningful levels of preference shares, even in Shariaa jurisdictions that permit this form of capital.

Basel III and Islamic finance
http://financialriskstoday.com/islamic_basel.phphttp://financialriskstoday.com/islamic_basel.php


12/2712

As a consequence of these factors, the capital structures and above average capital ratios ofShariaa financial institutions put them in a favourable position relative to many of their

conventional counterparts. The capital adequacy positions of Shariaa-compliant banks will alsobenefit from:- The modest role of Trading Book businesses as Shariaa principles prohibit short selling and

impose strict limitations on the use of derivatives. Shariaa financial institutions will be negligibly

impacted by the higher capital charges for such operations. The modest and very limited use of derivatives and securitised structures by Shariaa-compliant banks will result in not being adversely impacted by the additional capital charges thatare being applied to address the inherent risks in such products (e.g. wrong way risk). The lack of leverage and contingent risks, auger well for Islamic banks in so far as the new

leverage ratio is unlikelyto have anything more than a verymodest impact.

Liquidity is, however, one area where both conventional and Shariaa-compliant banks are likelyto be impacted in different ways. Firstly, there remains a dearth of liquid Islamic instruments.

Despite progress in the deepening of Islamic liquidity markets, notably the increased Sukukissuance by the AAA rated Islamic Development Bank, there is a lack of eligible liquidityinstruments and central bank facilities. However, these limitations are offset by the relative lackof contingent and leveraged liquidity risk; a generally low reliance on interbank funding; and formany banks strong depositor loyalty.

Stronger and better managed Islamic banks will see Basel III as an opportunity to prosper andstrengthen their competitive positions. Many banks may not have this chance.


13/2713

EBT VS EQUITYSeveral features of the ADIB sukuk qualify it more as an equity instrument than aplain vanilla sukuk, which is usually classified as senior debt.The upcoming perpetual sukuk will be classed as deeply subordinated, with

proceeds used to strengthen ADIB's core capital rather than booked as a liabilityon its balance sheet."Common equity is generally perpetual, unlike bonds and sukuk, which typicallyhave a defined maturity. ADIB's Tier 1 also features a discretionary profit payment,which more closely resembles an equity dividend than a bond's coupon payment,"said Nick Stadtmiller, head of fixed income research at Emirates NBD.

"The economics of ADIB's Tier 1 notes have more equity-like features to allowthem to book the notes as capital on their balance sheet, rather than as a liability."ADIB shareholders approved the capital-boosting measures at a meeting lastmonth. The bank had a Tier 1 capital ratio of 13.45 percent at the end of June2012, and said in its second-quarter results that it aimed to raise this to above 15percent in the near term.

ADIB, the largest sharia-compliant lender by market value in Abu Dhabi, is toconclude investor meetings on Wednesday in Zurich, after kicking off meetingslast week in the Middle East and Asia.The bank has mandated itself, HSBC Holdings, Morgan Stanley Inc, NationalBank of Abu Dhabi and Standard Chartered Plc to arrange the deal. (Additionalreporting by Mala Pancholia; Editing by Andrew Torchia)


14/2714


15/2715

Mudareb

Issuer as

Rabbul Mal

Certificate

Holders

Mudaraba

Agreement

Mudaraba CapitalDissolution Mudaraba capital and

Mudaraba Profit

Periodic distribution amounts,

Dissolution distribution Amount

and Mudaraba Premium (if

applicable)

Proceeds of

Certificates Declaration

of Trust

ADIB Sukuk


16/2716

Main points of ADIB Sukuk

Mudaraba Structure

Asset ownership by the Rabbul Mal(Trustee) onMudaraba Assets

Limited Recourse to disposal of Assets

The Certificates are limited recourse obligations

The Certificates are not debt obligations of the Trustee.

Instead, the Certificates represent an undivided ownership

interest solely in the Trust Assets. Recourse to the Trustee

in respect the Certificates is limited to the Trust Assets and

the proceeds of such Trust Assets are the sole source of

payments on the Certificates.

Features such as the subordination of sukuk holders and

the conditionality of payments - ADIB can halt periodic

distributions to investors if it wishes - mean sukuk

behave more like equity than debt, which is favoured by

the new Basel standards,

1Perpetual SukukPerpetual means it would not have maturitydate i.e. no scheduled repayment date

Certificate holders have no ability to require

the Trustee to redeem their Certificates unless a

Dissolution Event occurs. Principal is repaid at the

discretion of the issuer

ADIB can choose to repay the bond on certain dates

from 2018 if it wishes.Sukuk is callable at year six

2

For Tier 1 capitalThe structure, in line with Basel III requirements,

will raise the banks tier 1 capital ratio to

19 % from 13.7 % at the end of September.

FinancialsUSD 1 BillionCoupon: 6.375% payable twice per annum

Issue Managers: ADIB,HSBC,Morgan Stanley,

National Bank of Abu Dhabi, Standard Chartered

3

$15 billion subscribed from 330 ordersThe issue was driven by broad demand across threeregions, with allocations of 38 per cent to Asia, 32 per centto Middle East, 26 per cent to Europe, and 4 per cent toUS Offshore investors. By investor type, the TrustCertificates were sold to private banks which took 60 per

cent, Asset and Fund managers bought 26 per cent,commercial banks 11 per cent and other 3 per cent.


17/2717

Periodic payments by the TrusteeUnless a Non-Payment Event or a Non-Payment Election has occurred, prior to each PeriodicDistribution Date, the Mudareb shall distribute the profit generated by the Mudaraba to both the17Issuer and the Mudareb in accordance with an agreed percentage split (90 percent to the Issuer (asRab-al-Maal) and 10 percent to the Mudareb). The Issuer shall apply its share of the profit (if any)generated by the Mudaraba on each Periodic Distribution Date to pay the Periodic Distribution

Amount due to the Certificateholders on such date.Payments of Mudaraba Profit (as defined in the Mudaraba Agreement) by ADIB (as Mudareb) are atthe sole discretion of ADIB (as Mudareb) and may only be made in circumstances where ADIB willnot be in breach of certain conditions as a result of making such payment. The Mudareb shall nothave any obligation to make any subsequent payment in respect of such unpaid profit (whether fromits own cash resources, from the Mudaraba Reserve or otherwise).


18/2718

Tier 1 capitalis the core measure of a bank's financial strength from a regulator's point of view. It iscomposed of core capital,[1]which consists primarily of common stock and disclosed reserves (or retainedearnings

One of the highest priority issues for the Basel committee in designing Basel III was the need to

strengthen the quality, consistency, and transparency of the regulatory capital base .This shows that

capital ratios have been increased in order to discourage banks from taking excessive risks.

The formulae of the capital ratios are as follows:Capital adequacy ratio = Tier1 + Tier2 :This has to be minimum 8%

Risk weighted Assets

The common equity tier 1 ratio is calculated as:Common equity tier 1 ratio = Tier1 :4.5% minimum

Risk weighted Assets.In addition to this, there has to be an extra capital conservation buffer of 2.5%. This essentially brings upthe common equity requirement up to 7%. This buffer is used to ensure that financial institutions have acushion during periods of financial and economic stress


19/2719

On the funding side of an Islamic bank's balance sheet, we are expected to find three types of equities - equityof Musharakah, equity of Mudarabah and equity of sukuk. Our approach to these equity types needs to bechanged to respond effectively to Basel III reforms and benefit from and contribute to genuine Islamic finance.With this spirit we suggest the perpetual participation sukuk within the framework of Basel III as additional tier-1 capital.

Mudarabah is an important Islamic partnership and asset price risk driven contract. In a nutshell, the principal

amount of funds and profit rates cannot be guaranteed and the contract is fundamentally a profit sharingarrangement between the two parties.

A perpetual participation sukuk (PPS) is a Mudarabah equity share in an Islamic bank to be traded on thestock markets.

The PPS will fully conform to the fundamental Shariah requirements of the Mudarabah partnership contract. In

addition, the PPS will be perpetual, non-redeemable, and junior to all forms of deposits of the Islamic bank butwill be treated as senior to Musharakah equity shares whether held privately or publically. Furthermore, thePPS will meet all the conditions of Basel III for fulfilling the additional tier-1 capital criteria.

Basel III has introduced important capital reforms for strengthening tier-1 capital, especially by introducing anew category of capital with the name of 'additional tier 1 capital'. Additional tier 1 capital is a perpetualfinancial instrument. It is not guaranteed, it has no redemption features, and it is junior to depositors and othercreditors of the bank.

Perpetual Participation Sukuk - A proposedadditional tier-1 capital under Basel III


20/2720

The equity of Mudarabah and the equity of sukuk do not qualify to be a form of capital under Basel III.

Mudarabah is the basis of profit sharing investment accounts (PSIAs) in Islamic banks. PSIAs have uniquefeatures including withdrawal risk, fiduciary risk, displaced commercial risks etc. Therefore, some regulatory

jurisdictions do not even recognize the PSIAs as a source of funding for the Islamic bank. Other jurisdictionsprefer to treat PSIAs no differently than current accounts in terms of regulatory capital allocation.

All existing sukuk are facing what can be called "structural risks" - a risk showing a condition in the design ofthe contract when asset price risk, rate of return risk and credit risk are not separated properly. The rating

agencies, sukuk arrangers and law firms have tried to remove the asset price risk from sukuk throughvarious undertakings, particularly the re-purchase undertaking at the initial price. In the existence of thisundertaking, sukuk replicates the credit risks and interest rate risks of conventional bonds.

But most Shariah scholars reject the undertaking, considering it Bai' Al I'nna. If the re-purchase undertakingat initial price is removed, the sukuk will move into the category of equity driven by asset price risk.This tussle between the asset price risk driven sukuk which is preferred by the Shariah scholars on one hand

and credit risk driven sukuk as preferred by rating agencies, arrangers and law firms on the other handcompound the sukuk structure risks. Therefore, sukuk with structure risks cannot be a stable source offunding for Islamic banks.The central focus of Basel III is on strengthening the stable sources of funding and liquidity in bankinginstitutions. The PPS is based on a pure Mudarabah contract, it is driven by asset price risk, it is perpetualand non-redeeming, it is junior to deposits and hence it will be fully compliant with the Basel III additional tier-1 capital criteria.

Why Do Islamic Banks Need PPS?


21/2721

No Fixed Redemption Date and Conditionsfor Redemption and Variation * page 46)No Fixed Redemption Date and Conditions for Redemption and VariationThe Certificates are perpetual securities in respect of which there is no fixed redemption dateand the Trustee shall (subject to the provisions of Condition 4.2.2 (Subordination) and Condition11.3 (Winding-up, dissolution or liquidation) and without prejudice to the provisions of Condition13 (Prescription)) only have the right to redeem the Certificates or vary the terms thereof inaccordance with the following provisions of this Condition 10 (Redemption and Variation).The redemption of the Certificates or variation of the Conditions, pursuant to this Condition 10(Redemption and Variation) is subject to the following conditions:(i) the prior consent of the Financial Regulator;

(ii) the requirement that both at the time when the relevant notice of redemption or variationis given and immediately following such redemption or variation (as applicable), ADIB isor will be (as the case may be) in compliance with the Applicable Regulatory CapitalRequirements;(iii) the requirements of Condition 4.2 (Subordination); and(iv) (in the case of Conditions 10.1(c) (Redemption or Variation due to Taxation) or 10.1(d)(Redemption or Variation for Capital Event) only) the requirement that the circumstancethat entitles the Trustee to exercise its right of redemption or variation is a change of lawor regulation (including in the case of Condition 10.1(d) (Redemption or Variation forCapital Event), Applicable Regulatory Capital Requirements) in the Emirate of Abu Dhabior the United Arab Emirates or a change in the interpretation of such law or regulationby any court or authority entitled to do so which change becomes, or would become,effective on or after the date of the Mudaraba Agreement,(in the case of (i) and (ii) above only, except to the extent that the Financial Regulator nolonger so requires).


22/2722

On 16 April 2009, under the Government of Abu Dhabi Bank capitalisation programme, the Bank has issued Tier 1

sukuk (the "Sukuk") to the Department of Finance of the Government of Abu Dhabi, with a principal amount ofAED 2,000,000 thousand. Issuance of this Sukuk was approved by the shareholders of the Bank in the ExtraordinaryGeneral Meeting held on 22 March 2009.

This Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitute direct,unsecured, subordinated obligations of the Bank subject to the terms and conditions of the Mudaraba. The Sukuk iscallable by the Bank subject to certain conditions. The Sukuk bear an expected mudaraba profit rate of 6% payableduring the initial period of five years semi-annually in arrears and, after the initial period, bear an expected variablemudaraba profit rate payable of 6 months EIBOR plus an expected margin of 2.3%. Profit distributions will be

reported in the consolidated statement of changes in equity.

The Bank may, at its sole discretion, elect not to make any Mudaraba profit distributions as expected and the event isnot considered an event of default. If the Bank makes a non-payment election or a non-payment event occurs, thenthe Bank will not (a) declare or pay any distribution or dividend or (b) redeem, purchase, cancel, reduce or otherwiseacquire any of the share capital or any securities of the Bank ranking pari passu with or junior to the Sukuk exceptsecurities, the term of which stipulate a mandatory redemption or conversion

TIER 1 SUKUK


23/27

Sukuk udaraba

23

Project

SPV

As Mudarib

Investors

Sukuk

certificatesCash

proceeds

3

Capital + Periodic

Profit

payments

Project

Handover

on

completion

4

Project

Owner

Agreement

for

construction

of project

2a 2b

Steps involved in the structure:

1.Mudarib enters into an agreement with project owner for construction/commissioning of project.2. SPV issues Sukuk to raise funds.3. Mudarib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors.4. Upon completion, Mudarib hands over the finished project to the owner.


24/2724

Project

SPV

As Mudarib

Investors

Sukuk

certificatesCash

proceeds

3

Capital + Periodic

Profit

payments

4

Project

Owner

Agreement

for

construction

of project

2a 2b

SAUDI HOLLANDI BANK


25/27

25

Offer of Mudaraba Sukuk due 2019 callable with step up in 2014

SAUDI HOLLANDI BANK

Parties

Issuer: ..............................................................S...a.u di Hollandi Bank

Joint Bookrunners & Joint Lead Managers: ....R...i.y ad Capital and Saudi Hollandi

CapitalSukukholders Agent: ......................................S...a.u di Hollandi Capital

Payment Administrator: ...................................S...a.u di Hollandi Capital

Registrar: .........................................................T...h. e Saudi Stock Exchange

(Tadawul)

Summary of the Offering


26/27

26

Mudaraba Agreement: ....................................P...u. r suant to a mudaraba agreement (the Mudaraba

Agreement) dated on or about the Closing Date between the Issuer (as mudareb) and the SukukholdersAgenton behalf of theSukukholders (as raab al maal), the proceeds of the sale of the Mudaraba Sukuk will be applied as the capital (the Capital) of the

Mudaraba constituted by the Mudaraba Agreement (the Mudaraba).

The Mudaraba will commence on the Closing Date and will end either: (i) on the later of 31 December 2019 and the date on which the

Mudaraba Sukuk are redeemed in full; or (ii) in the event that the Mudaraba Sukuk are redeemed in full prior to 31 December 2019, on

the day immediately following such redemption

Mudaraba Assets: ..........................................

..T...h. e Capital of the Mudaraba to be invested by the Issuer (acting as mudareb) in the Islamic BusinessPortfolio. The Issuer shall be entitled to commingle its own Islamic assets with the Mudaraba Assets.None of the Issuer, the Sukukholders Agent and the Joint Bookrunners & Joint Lead Managers are providing a guarantee inconnection with the performance of the profitability of the Mudaraba Assets or for the share and amount of the distributions(if any) made to the Sukukholders.

Mudaraba Income Distribution: ......................T...h. e objective of the Mudaraba will be to earn profit from the application of the Capital in accordance withthe Mudaraba Agreement. Such profit will be distributed among the Issuer and the Sukukholders in accordance with thefollowing ratios applied over the Net Profit (as defined below) less the Mudaraba Costs (as defined in the Conditions):Sukukholders: 90 per cent. of the Net Profit (the Mudaraba Income); and Issuer: 10 per cent. of the Net Profit (the


27/27

Mudareb Profit).The Mudaraba Income, up to the periodic Distribution

Amount, shall be distributed by the Issuer to theSukukholders on each Periodic Distribution Date on thebasis of a constructive liquidation of the Mudaraba.

If the Mudaraba Income in any Periodic DistributionPeriod exceeds the Periodic Distribution Amount, theamount of any surplus shall be retained by the Issuer asa reserve (the Reserve). The Issuer shall not have theright to use and invest the monies (if any) standing tothe credit of the Reserve for its own account.