Islamic Syndication vs Conventional

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Are Islamic syndicated financings different from conventional syndicated loans? University of Maastricht Faculty of Economics and Business Administration Maastricht, 03.08.2009 Farbood, Hutan (I229830) Master of Science in International Business Concentration: Finance Supervisor: Professor Dr. S. Kleimeier Final Master Thesis Table of Contents Page 1. Introduction…………………………………………………………………… 2 2. Islamic Financing …………………………………………………………….. 2.1. The Principles of Islamic Financing …………………………………
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    Are Islamic syndicated financings differentfrom conventional syndicated loans? University of MaastrichtFaculty of Economics and Business AdministrationMaastricht, 03.08.2009Farbood, Hutan (I229830)Master of Science in International BusinessConcentration: FinanceSupervisor: Professor Dr. S. KleimeierFinal Master Thesis  1 Table of ContentsPage1. Introduction …………………………………………………………………… 22. Islamic Financing …………………………………………………………….. 5 2.1. The Principles of Islamic Financing ………………………………….……... 52.2. Islamic Financing Methods …………………………….   …………………… 72.2.1. The Profit-and Loss-sharing Modes …………………………………. …… 92.2.2. The Mark-up Modes ……………………………………… ……………….. 10 2.2.3. Sukuk……………………………………………………………………….. 112.3. Islamic Syndicated Finance ……… ... ………………………………………… 12  3. Descriptive Research Questions ………………………… .. …………………. 154. Analysis on Loan Spreads of Malaysian Syndications ………….……… ... 21 4.1. The Banking System in Malaysia ………………………………………… ...... 25 5. Data Selection ………………………………………………………………... ... 27 5.1. Data Selection for the Descriptive Research Questions………………...…... .. 275.2. Sample Characteristics for the Descriptive Research Questions... ……….. . …. 285.3. Data Selection & Sample Characteristics for the Loan Spread Analysis of Malaysian Syndications ……………………………………………......….. .... 29 6. Emp irical Results…………………………………………………………..… .. 31 6.1. The source of funds for Islamic Syndicated financings... ……………...……... 316.2. The receivers of Islamic syndicated financings ………………………..……… 346.3. Industries towards which Islamic syndicated financing are directed to …...…. 376.3.1. Changes of Islamic syndicated deals for different industries over time … .. … 446.4.   Shares of lead banks: Islamic syndications vs. conventional syndications … .... 466.5.   Maturities of Islamic syndicated financings versus conventional syndications. 476.6.   Financial debt covenants: Islamic syndications vs. conventional syndications. 496.7.   Participating banks: Islamic syndications vs. conventional syndications …… .. 496.8.   Deal Size: Islamic syndications vs. conventional syndications …………… ..... 506.9.   Differences in the Spread …………………………………………………….. . 51 7. Conclusion and Limi tations………………………………………………. ...... 56 References……………………………………………………………………....… 60 Appendix……………………………………………………………………...…. .. 65  2 1. Introduction: Islamic finance has become a widespread hot topic, and even more heard since the stormof financial and economic crisis erupted in the end of 2007. Financial Institutions in theoil rich states at the Persian Gulf, thriving emerging nations in South-East Asia andAfrican nations, with their large Muslim populations, but also financial centers in theWestern World rush to take part at the phenomenal 15-20% growth of Islamic financialproducts even in the wake of the recent financial crash. Even banks which are laying off their workforce on a large scale are still looking to increase their workforce in the Islamicfinancing business as they hope to tap into this promising niche market. The Islamicfinancial assets size is expected to be between $700bn and $1tn in spring 2009 (Reuters,2009).Indeed Islamic finance has seen fast growth since 1975, when the first Shariah-compliantbank in the world was set up. 1 Islamic financial institutions in the last three decades grewfaster than their conventional counterparts in Muslim nations. The number of Shariah-compliant financial institutions has risen to more than 300 institutions operating in 75countries till 2008 (Hasan, 2008). A determinant factor for the growth of the Islamicfinance industry is because it complies with the religious beliefs and also the culturalcharacteristics of societies in Muslim nations (Hamwi & Aylward, 1999). Furthermore,the rise in Islamic finance can also be attributed to the rise of the petrodollar income inthe Middle East (The Boston Consulting Group, 2008). But next to the growth of Islamicfinancial institutions in Islamic countries, Islamic finance has gained ground inpredominantly non-Muslim nations as well. The United Kingdom and Singapore forexample opened their doors to become centers for Islamic finance (Akhtar, 2007). Thereit has been noticed that mostly conventional banks have opened Islamic windows, incontrast to the Middle-East where there is the tendency to establish stand-alone Islamicinstitutions. The growth of Islamic finance also in non-Muslim countries is due to therising demand of the Muslim population in Western countries and the desire of Islamic 1 Islamic financing, lead to sustained economic development throughout the Islamic world already duringthe Middle Ages (Grais & Pellegrini, 2006).And in 1963, a small Islamic savings fund started operations inMalaysia. This Islamic institution managed funds for pilgrimages to Mecca (Solé, 2007). Also in 1963 asavings bank, working in line with Islamic principles, in Mit Ghamr in Egypt was founded. But this bank did not include any reference to Islam or the Shariah in its charter (Chong & Liu, 2007).  3investors, especially Investors from the Persian Gulf, to diversify their investmentportfolio geographically while complying with Islamic jurisprudence (Solé, 2007). Butalso more and more non-Muslims find the philosophy of Islamic banking desirable (TheBoston Consulting Group, 2008). Another argument accrues as well, namely the unevenperformance of the conventional financial markets, especially in the West (Grais &Pellegrini, 2006). Therefore non-Muslim European investors use Islamic financialproducts to diversify their investment portfolio (Oakley, 2009). On the one hand it is expected that Islamic finance is going to continue its growth path, asIslamic financial institutions will attract 40 to 50% of the total savings of the populationin the Muslim World already in some years (Dahlia El, Wafik, Zamir, 2004). TheEuropean Islamic Investment Bank even believes that about 60% of Muslim investorswill turn to Islamic financial products in the future, compared with 20% in 2009(Financial Times, 2009). But on the other hand, further growth may be hindered byuncertainty on scholarly views 2 on the compliance of Islamic financial products and alack of standardization, which is believed to make Islamic financial products more time-consuming to construct and therefore also more expensive (Reuters, 2009). Furthermore,agency problems at Islamic financial institutions do deserve separate and special attentionto enable further growth in the future. Reasons for this special attention arise due to thefact that the bankers in Islamic financial institutions are entrusted to maximizeshareholder value in a Shariah conform way. Islamic financial institutions have differentoperations dynamics and the relationships between the parties involved are different.Another reason why agency problems at Islamic financial institutions deserve separateand special attention is because of the incredible growth of Islamic financial institutions.Also the fact that little empirical research has been done on this subject can be seen as areason why agency problems deserve special attention at Islamic financial institutions(Safieddine, 2008).This paper takes into account these considerations, particularly of the special agencychallenges at Islamic financial institutions. Empirical research is conducted on Islamic 2 Supervisory boards of Islamic financial institutions rely on their own Shariah experts. This may lead tocontradictions of the permissibility of financial instruments in different countries. And this in turn canhamper the cross-border use of Islamic financial products and the growth potential of this industry (Solé,2007).
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