Presentation during GNEXID workshop Geneva – Switzerland March 28/2014 Presentation during GNEXID workshop Geneva – Switzerland March 28/2014 Saudi Export.

Presentation during Presentation during GNEXID workshop GNEXID workshop

Geneva – Geneva – SwitzerlandSwitzerland

March 28/2014March 28/2014  

Saudi Export Program 2014

Outline of the Presentation 2

SEP’sSEP’s Objectives. Objectives.

Basic Requirements of Basic Requirements of SEP SEP Operations. Operations.

Beneficiaries. Beneficiaries.

SEP SEP Financial Instruments. Financial Instruments.

SEPSEP Export Credit Insurance Facilities. Export Credit Insurance Facilities.

SEPSEP Achievements. Achievements.

SEP SEP Tools in supporting Saudi Exports. Tools in supporting Saudi Exports.

I.I. SEPSEP Program Program

II.II. Islamic Finance and Trade . Islamic Finance and Trade .

II. SEP SEP Program Program

3

4

Established in 1999 to develop and diversify Saudi non-oil Established in 1999 to develop and diversify Saudi non-oil exports, exports,

SEP’sSEP’s Objectives Objectives

Maximize technical cooperation, joint financing and Maximize technical cooperation, joint financing and reinsurance arrangements with most international and reinsurance arrangements with most international and regional banks/Institution involved in Trade Financing. regional banks/Institution involved in Trade Financing.

Motivate Saudi exporters to explore and enter Motivate Saudi exporters to explore and enter new markets by mitigating risks associated with new markets by mitigating risks associated with International trade transactionsInternational trade transactions. .

Provide competitive insurance and credit facilities to Provide competitive insurance and credit facilities to Saudi Exporters and foreign buyers.Saudi Exporters and foreign buyers.

5

SEP’sSEP’s financing my reach up to 100% of the transaction value.financing my reach up to 100% of the transaction value.

Basic Requirements of Basic Requirements of SEPSEP Operations Operations

Local value added should be more than 25%. Local value added should be more than 25%.

Exports should be of Saudi origin.Exports should be of Saudi origin.

SEPSEP complements commercial banks and not competing them. complements commercial banks and not competing them.

SEPSEP offers financing in Saudi Riyals or United States offers financing in Saudi Riyals or United States Dollars.Dollars.

Transaction amount minimum SR 100,000 Transaction amount minimum SR 100,000 (Equivalent to about 27.000 US Dollars ).(Equivalent to about 27.000 US Dollars ).

SEPSEP does not Finance exports of crude oil.does not Finance exports of crude oil.

6BeneficiariesBeneficiaries

Saudi exporters (Saudi companies and establishments),Saudi exporters (Saudi companies and establishments),

Local and Foreign Banks that provide financing Local and Foreign Banks that provide financing facilities for eligible Saudi exports.facilities for eligible Saudi exports.

Foreign Buyers (private or public) of Saudi goods and Foreign Buyers (private or public) of Saudi goods and services,services,

Foreign exporters (Companies Exporting from Saudi Foreign exporters (Companies Exporting from Saudi Arabia), Arabia),

Local buyers (Saudi companies and establishments) Local buyers (Saudi companies and establishments) exporting Saudi products,exporting Saudi products,

7Security / CollateralSecurity / Collateral

Depending on the nature of transaction Depending on the nature of transaction

and types of risks involved,and types of risks involved, SEPSEP would would seek payment security that may deem seek payment security that may deem necessary. necessary.

SEPSEP Tools in Supporting Tools in Supporting Saudi Exports Saudi Exports

Financial Instruments.Financial Instruments.

Insurance Instruments.Insurance Instruments.

8

9Financial Instruments of Financial Instruments of SEPSEP

1- Supplier Credits.1- Supplier Credits.Supplier Credit assists Saudi exporters to provide the required credit to Supplier Credit assists Saudi exporters to provide the required credit to the foreign importers.the foreign importers.

2- Local Buyer Credits.2- Local Buyer Credits.SEPSEP offers such credit facilities to Saudi businessmen (local buyers) offers such credit facilities to Saudi businessmen (local buyers) and investors who execute projects outside the KSA and need financing and investors who execute projects outside the KSA and need financing fromfrom SEPSEP to export Saudi goods and services to use them in the project to export Saudi goods and services to use them in the project implementation.implementation.

3- Foreign Buyer Credits. 3- Foreign Buyer Credits. These credit facilities assist importers (buyers) from outside the KSA to These credit facilities assist importers (buyers) from outside the KSA to obtain the required financing directly fromobtain the required financing directly from SEPSEP.

A ) Direct Financing:A ) Direct Financing:

10

B ) Indirect Financing:B ) Indirect Financing:

1 -Lines of Credit for Banks, financial 1 -Lines of Credit for Banks, financial institutions, large Firms.institutions, large Firms.

Provided to Banks and Financial institutions (acting as Provided to Banks and Financial institutions (acting as agents foragents for SEPSEP ) in the) in the importer’s country. importer’s country.

Focus on SME’s.Focus on SME’s.

11Repayment periodsRepayment periods

Long Long TermTerm

Up to 15 Up to 15 yearsyears

Capital and durable goods, and turnkey contracts, projects.

Short Short TermTerm

Up to 2 Up to 2 yearsyears

Consumable goods, raw materials.

Medium Medium TermTerm

Up to 7 Up to 7 yearsyears

Consumable durables goods, semi capital goods.

12

Total SEP TransactionsTotal SEP TransactionsUntil Dec. 2013Until Dec. 2013

ValueValue (USD Million)(USD Million)

Direct Financing TransactionsDirect Financing Transactions 3.1773.177

Lines of Credit Lines of Credit 866866

Guarantees & InsuranceGuarantees & Insurance 4.6114.611

Total Credit Amount Total Credit Amount 8.6548.654

Beneficiary CountriesBeneficiary Countries 4646

SEP'sSEP's AchievementsAchievements

IIII. Islamic Finance and Trade

13

Islamic Finance:

• Refers to a system of banking or banking activity that is compliant with the principles of Islamic–Shariah-low.

• Islamic treats money as a unit of account and a means of exchange not a commodity.

• There is a lack of complete uniformity in Fiqh view points, The different view points can be a source of counterparty risks as a result of the atmosphere of an ineffective litigation.

14

Continue…

• With the establishment of the Auditing and Accounting organization for Islamic Financial Institution (AAOIFI) in early 1990 in Manama, Bahrain, the process for bringing scholarly attentions to focus on particular issues was streamlined, with the result that consensus could be brought about through one institution, and then regular standards for a wide spectrum of Shari’ah-related issues could be approved and implemented.

15

Continue…

• The Islamic Financial Services Board (IFSB) was lunched in 2002 in Kuala Lumpur, Malaysia, by a consortium of central banks and with support of the IMF with the mandate including the provision of prudential standards and guidelines for international application by banking supervisors in the supervision of Islamic bank.

16

Fundamental Principles that guide Islamic Finance

These are that transactions Must :•Be interest free.

Usury “Riba” any increase, however great or small, above the original lent or exchanged amount.

•Have risk sharing . “Alghurm bil ghurm”. “There is no return without risk”. Ensures that real assets and inventories are created “real

economy”.

17

Continue…

• Have contractual certainty. Absent of basic prerequisite, such as. The existence of the subject matter . The fixing of a delivery date . The agreement on a price. So, Conventional insurance, interest, Futures, and options all contain an

element of contractual un certainty (Gharar) and are thus prohibited.

• And that all the element of transaction Must in and of them selves be ethical . Means that there is no buying, selling, or trading in conventional banking

and insurance, alcohol, and tobacco.

18

Continue…

• Speculation.Contracts which involve speculation (Maysir) are

not permissible (not lawful) and are considered void, however, Islamic law doesn't prohibit general commercial speculation, but it does prohibit speculation which is similar to gambling, i.e. gaining something by chance rather than productive effort.

19

Comparison of Islamic and Conventional Finance

Islamic Finance Conventional Finance

Interest-free Interest-based

Equity partnership (profit and loss sharing)

Profit is the chief motivation

Inherently micro-financing-friendly

Not inherently micro-financing-friendly

Checks and balances to maintain ethics and justice

Not enough checks and balances which can lead to excess, causing economic meltdowns.

Board of shari’ah Doesn't have

20

Islamic Financing Products

• Equity based: Mudarabah is profit sharing and loss-bearing contract. Under a

Mudarabah contract, the capital provider agrees to share the profits with the entrepreneur (Mudarib) at an a greed percentage.

Musharakah is profit-and loss-sharing partnership contract, the Islamic bank may enter into a Musharakah with a customer for the purpose of providing a Shari’ah-compliant financing facility to the a customer on a profit and loss-sharing basis.

Sukuk is an Islamic bond, structured in such away to generate returns to investors without infringing Islamic law.

Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. A Sukuk investor has a common share in the ownership of the assets. Linked to the investment although this doesn't represent a debt owed to the issuer of the bond.

21

Continue…

• Trade based Murabaha is a cost plus mark-up arrangement. Salam is an advance payment commodity sale contract where

the delivery of the commodity is deferred. Istisna’a is a “manufacture to order” contract for yet to be

manufacture of good on payment of on advance price either in full or in installments.

22

Continue…

• Lease basedIjarah contract is an operating lease contract refers to hiring or

renting any asset commodity to benefit from its usufruct.Ijarah Muntahia Biatamleek is a lease-to-purchase .

“ashari’ah-compliant alternative to a finance lease”

23

Islamic Risk Mitigation Tool

• Takaful is a co-operative system of reimbursement in case of loss, paid to people and companies concerned about hazards, compensated out of fund to which they agree to donate small regular contributions managed on behalf of them by a Takaful operator .

24

25

Murabaha Trade Finance in Practice

Supplier

Supplier's bank

Buyer

Buyer's bank

1. Bank and buyer sign an agreement under which the buyer commits himself to buy goods X from the bank at a given mark-up above its purchasing price.

10. Sale of goods and delivery of documents.

7. Shipment of goods.

6. Supplier's bank confirms/ advises the L/C.

8. Presentation the documents, and payment under the L/C.

5. Islamic bank opens a L/C.

3. The buyer contacts the supplier, on behalf of the bank, and arranges a contract for sale of goods X to the bank.

4. Buyer asks bank to open a letter of credit in the favour of the seller, stipulating the documents that the seller needs to provide.

2. Bank appoints the buyer as its agent to buy goods X.

9. Presentation of documents, and payment.

Operational Risk in Islamic Finance

• Operational risk as per the IFSB is defined as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events, which includes but is not limited to, legal risk and shari’ah-non-compliance risk.

• This definition excludes strategic and reputational risk.• Such risks are likely to be significant in Islamic finance,

due to specific contractual features and the general legal environment.

26

Continue…

• Specific aspects that could raise operational risks in Islamic finance include the following:The cancellation risks in non binding Murabahah and

Istisna’a contracts.Problems in internal control systems to detect and

manage potential problems in operational processes and back-office functions.

The potential difficulties in enforcing Islamic finance contracts in a broader legal environment.

27

Continue…

The risk of non-compliance with shari’ah requirements that may impact on permissible income.

The risk of misconduct and negligence which would result in Murabahah-based becoming a liability of Islamic bank, with consequent capital adequacy and solvency implications.

The need to maintain and manage commodity inventories, often in non-liquid markets.

The potential cost and risks in monitoring equity-based contracts and the associated legal risks.

28

Risk Management in Islamic Finance

• The specific risks associated with each of Islamic Finance products:-• Risks in Murabha.

Credit risk . client backs out from purchasing the goods.

Market risk exposure to the fluctuating market price of goods.

Supplier risk. supplier is unknown to the bank which may cause a delay in delivery time goods and

non-conformity specifications.

Operational / Ownership risk. Client as agent gains possession of goods from the supplier without informing the bank.

Transit period risk. The risk associated with goods after the bank purchases them from the supplier and before the

client purchases them from the bank.

Documentation Risk. The risk that the counterparty does not provide sufficient documentation.

29

Continue…

• Risks in Salam Holding Risk. The risk of holding goods until the time of delivery. Shariah non-compliance Risk.

Arises if goods are sold before receiving their physical or constructive possession.

Settlement and delivery Risk. Arises in the event goods are not delivered on time and do not conform to

specifications.

Rate of Return and Price Risk. The risk that a decrease in the commodity’s price after contract maturity will

result in a lower rate of return.

30

• Risk in Istisna. Risk of hidden defects.

Risk of defects inherent in the manufactured products. Shariah non-compliance Risk.

Arises as a result of not specifying the characteristics of goods, the time or place of delivery or lack of information about the supplier.

Settlement and Credit Risk. Arises when the customer is unable to honour deferred payments.

Price Risk Bank’s exposure to the risk of selling goods to a third party for a lesser price

as a result of contract cancellation. Delivery Risk.

The risk of not being able to make a scheduled delivery of manufactured goods a Parallel Istisna.

Legal Risk. Litigation costs for claims against Istisna requestor that terminates the

contract.

Continue…

31

• Risk in Ijarah. Risk associated with security that sells for a lower price in the

market as a result of which the bank cannot cover its loss. Asset Risk.

Asset is stolen, damaged.

Price Risk. Bank’s exposure to changes in the cost during the Ijarah’s term. The longer

the term the greater the bank’s exposure to price fluctuations.

Risk that the customer will back out form his promise to lease, the bank may have to sell the asset at a price lower than market price.

Legal Risk. Litigation costs against the client who refuse to compensate the bank for

losses resulting from unfulfilled promises.

Continue…

32

• Risk in Musharakah and Mudarabah. Shariah non-compliance Risk.

Debt cannot be used as a substitute for equity. One partner cannot guarantee the other partner’s principal or profit. Risk of the funds being from a prohibited source.

Credit Risk. Managing partner manipulates to show lower returns. Prohibition of any collateral to secure the bank’s investment poses

additional risk.

Continue…

33

Thank You For Your Attention

   +966 11 4659399- 4658117 Fax +966 11 4659699 P.O. Box 50483 Riyadh 11523+966 11 4659399- 4658117 Fax +966 11 4659699 P.O. Box 50483 Riyadh 11523