Abuja Housing Show The Role of NIB in Housing Olawale Azeez 16-19 July, 2018. Olawale Azeez Regional Head, Non-Interest Banking, Sterling Bank

Structure of NIB Contracts Content Structure of NIB Contracts Practical Models

Hamish Juddiya (security deposit) The nature of non-interest finance Equity-based finance Debt-based finance Lease to own (Ijarah) Forward Lease(Ijarah) Service Ijarah Guarantee (Kafala) Agency (Wakala) Qard (Interest-free loan) Cost plus sale (murabaha) Manufacturing sale (istisna) Future sale (salam) Profit/loss sharing investment partnership contract (mudarabah) Profit/loss sharing joint venture contract (musharakah) Partnership Sale Lease Service Equity contribution Asset Liabilities Interest-free loan Partnership Agency Investment certificates Hamish Juddiya (security deposit) Sukuk/Bonds 11/29/2018

Non-interest finance model Partnership Sales Lease Sukuk Diminishing Partnership Refinancing Non-interest finance model RISK ASSETS EQUITY DEBT INVESTING FINANCING RETAIL CORPORATE

LIABILITIES – foreign and local funds Savings (Qardh/Wadia) Current (Qardh) Non-Investment/ Cheap Funds Agency (wakala) Partnership (mudarabah) Investment Funds

Loan Contract….this is basically used for transactional accounts and no profit is given Current account Savings account Lends N10,000 Borrower 11/29/2018

Partnership Contract (mudaraba) Term deposit account Profit-share investment account Business Community N100m Deposits Partnership Sale Lease N100m 50:50 N115m (15% profit) N130m 11/29/2018

Agency Contract (Wakala) Restricted profit-share investment account Investors/Institution Partnership Sale Lease N2b Agency fee as agreed N3.5b N3b less agency fee 11/29/2018

SALE (MURABAHAH) CONTRACT Ordinary murabahah 3 4 2 1 The second seller/first buyer (Bank) buys a commodity from the first seller on a deferred payment basis . 2. The second seller/first buyer (Bank) pays the price of the commodity to the first seller either on a cash basis or on a deferred payment basis. If paid on deferred basis through a murabahah contract then he must tell the second buyer that he bought it using a murabahah contract. 3. The second seller (Bank) sells the commodity to the second buyer by disclosing the cost price of the commodity, and whether he bought it from the seller through murabahah contract. 4. The second buyer pays the price either on a cash basis or a deferred basis. 11/29/2018

MURABAHA CONTRACT Murabahah contract under LPO 3 4 Bank Customer 2 1 Property company 1. The customer identifies the property to be acquired. 2. The bank purchases the identified property from the owner on cash basis. 3. The bank sells the property to the customer at a cost plus profit on credit basis. 4. The customer pays the bank within the agreed terms of financing. 11/29/2018

ISTISNA’ Contract CLASSICAL ISTISNA 1 2 3 Customer (Bank) (Mustasni’) Manufacturer (Sani’) 1.The customer (Bank) requests the manufacturer to construct for him a specified asset for a price agreed upon, payable over a pre-agreed period of time or on a cash basis to be delivered on the stipulated date. 2.The Bank (mustasni) pays the agreed price of the asset to the manufacturer either by instalment or spot basis. 3.The manufacturer (sani’) delivers the completed asset to the customer on the stipulated date. 11/29/2018

Istisna’ sale Agreement (ISA) ISTISNA’ Contract PARALLEL ISTISNA Istisna’ sale Agreement (ISA) Customer (Mustasni’) 1 Bank (Sani’) Asset delivery 2 Agreement (IPA) Istisna ‘ Purchase Contractor 4 3 1. A customer requests the bank to construct a specified asset at a pre-agreed price consisting of cost price plus profit margin determined by the bank, payable on a deferred payment basis. Both will sign an istisna’ sale agreement in which the customer acts as the buyer (mustasni’)and the bank as the manufacturer (sani’). 2. The bank delegates the customer to appoint a contractor on his behalf to construct the asset as specified in the Istisna’ Purchase Agreement at a price determined by the bank which is payable by installment. 3. Both bank and contractor sign a purchase agreement based on an istisna’ contract (stisna’ Purchase AgreementI) where the bank is the mustasni’ and the contractor is sani’. 4. Upon completion of the asset, the contractor as sani’ in the IPA will deliver the completed asset to the bank as mustasni’ and the bank, as in the ISA will deliver the asset to the customer as mustasni’ or the contractor with the authority from the bank may deliver the asset directly to the customer. 11/29/2018

SALAM CONTRACT AGRICULTURAL FINANCING LEASE (IJARAH) Contract SALAM CONTRACT AGRICULTURAL FINANCING Bank A 1 4 1 3 2 6 Farmers 4 3 5 2 Customer B 7 1. The client identifies and approaches the vendor or supplier of the asset that he or she needs and collects all the relevant information. 2. The client approaches a bank for ijarah of the asset and promises to take the asset on lease from the bank upon purchase. The farmers execute a salam contract to sell a specified amount of wheat in advance for RM10 million to bank A. To be delivered on 1 June 2010. 3. The bank makes payment of price to the vendor. 4. The vendor transfers ownership of the asset to the bank. 2. Bank A pays RM10 million on a spot basis to the farmers and also stipulates from where to take delivery on June 10 2010. 5. The bank leases the asset, transfers possession and specific right of use to the client. 3. Bank A enters a promise with customer B in which customer B undertakes that he will purchase wheat from bank A for RM15 million on 1 June 2010 against of RM5 million. 6. The client pays ijarah rentals over future (known) time period(s). 7. The asset reverts to the bank if it is an operating lease or is transferred to the client if it is a financing lease. 4. The farmers supply the specified wheat to bank A on 1 June 2010; bank hamish jiddiyah A informs customer B to execute the sale and take delivery. 11/29/2018

Forward Lease Sukuk SPV Guarantor Investors Originator of sukuk Offtaker agreement 5 Lease of asset 8 Sale at dissolution 1 Ownership transfer to SPV 6 Payment of rentals 9 Exercise price at dissolution SPV Risk guarantee Guarantor Sinking fund 3 Sukuk funding 2 Sukuk issuance 7 Periodic rental payment 10 Dissolution amount 4 To cover building material importation and construction period Investors Source: Oshodi, 2014

Diminishing Partnership (musharakah) Contract…preferably used for mortgages and sometimes asset financing Home Finance Customer has N10m needs N30m N30m Pays seller Customer pays N30m + N9m Repayment Bank's share Customer's share Rent (% of value) Total Rent Payable Year 1 N30m N10m 15% N4.5m Year 2 N20m N3.0m Year 3 N1.5m Year 4 N0 N40m Total N9m 11/29/2018

Structure with a Developer Delivers the building in 12 months Off-plan sale contract 3 1 Bank sells, lease or engage in diminishing partnership with customers at month 12. Bank 4 2 Builds equity payment overtime 11/29/2018

NMRC Model 11/29/2018

The desired state LSG/Mortgage bank Sales Lease GUARANTEE 11/29/2018

Another desired case: Case on refinancing between a commercial bank, a mortgage bank and NMRC 2 Have more liquidity to and create more mortgages 1 Refinances existing and new mortgages XYZ Commercial Bank ABC Mortgage Bank 4 Pays XYZ principal and interest/profit Question: 1) At what price/interest rate will XYZ refinance ABC? 2) At what price will NMRC refinance ABC? 3 Refinances the mortgage by month 12 NMRC 11/29/2018

Asset-based and asset-backed sukuk Normal/Asset-based Asset-backed Securities Revenue/income from sukuk asset does not necessarily form the source of paymenyt for sukuk holder The source of payment usually comes from issuer/obligor’s cash flow Normally structured as ON balance sheet Usually refers to securities/sukuk backed by assets that had been sold/trnasfered by assets that had been sold/transferred by an originator to a buyer/issuer (usually SPV) – ‘asset backed’ Main source of payment is the revenue from underlying sukuk assets Can either be On or OFF-balance sheet Source: The Islamic Securities (Sukuk) Market, Securities Commission Malaysia (2009)

Risk in real estate finance MARKET RISK This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset LIQUIDITY RISK This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. OPERATIONAL RISK This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event. GENERIC RISK This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event. FOREIGN EXCHANGE RISK The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss. The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss. INVESTMENT/ CREDIT RISK The risk that the client fails to meet obligation timely and the Bank losses some or all of the capital invested in a client’s business and or asset portfolio. Default risk Interest rate risk Prepayment risk Liquidity risk Legislative risk Country risk* Foreign exchange risk Construction risk 11/29/2018

Alternative finance specific risk SHARIAH NON-COMPLIANCE RISK The non-compliance with Shariah rules principles could have the implication of jeopardizing the reputation of the Bank as a Non –interest financial institution. And the loss of income RATE OF RETURN RISK This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset This is the potential impact on the Bank’s income or return due to unexpected changes in the market situation. DISPLACED COMMERCIAL RISK This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. This is the risk that the Bank may be faced with commercial pressure to pay returns that exceeded rate earned on the asset financed by investment account holder. UNIQUE NIB RISK This is the risk arising from entering into a partnership under the profit and loss sharing contracts. (PLS). Under the PLS contract, the capital invested by the Bank does not constitute a fixed return but explicitly exposed to impairment in terms of loss of capital. This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event. EQUITY INVESTMENT RISK The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss. This is the risk arising from items in inventory either for resale under a murabaha contract or with a view to leasing under an ijarah contract. COMMODITY AND INVENTORY RISK This is the risk arising from holding on to asset. INVENTORY RISK 11/29/2018

Contact Olawale.azeez@sterlingbankng.com www.saf.ng 01-2702300 07086486369