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© Copyright 2007 Dow Jones and Company, Inc.

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  • Plain vanilla to more sophisticated: structured, ETF, Sukuk, project finance
  • Transcript

    • 1. Issues & Suggestions for OIC Shari’ah Compliant Indexes Rushdi Siddiqui [email_address] Global Director Dow Jones Islamic Market Index Group
    • 2. Presentation Overview
      • Are the various Islamic Funds assisting and promoting OIC Countries economic and capital market development at:
      • Member Country Level
        • Intra-OIC Portfolio Investments
          • Liquidity on Stock Exchanges
        • Transparency & Governance Listed Firms
          • Deyaar, Tamweel, Nakheel, etc.
      • Regional/OIC Level
        • Viewed as a common market
      • OIC Global Level
        • Foundational, not Transactional, Infrastructure Paradigm
    • 3. Dow Jones Indexes Timeline: Key Dates
      • 10/6/97-Cash options on DJIA begin trading on CBOE
      • 2/26/98-Dow Jones STOXX Indexes launch
      • 2/5/99-Dow Jones-AIG Commodity Index launch
      • 2/9/99-Dow Jones Islamic Market Indexes launch
      • 7/14/99-Dow Jones Global Titans Index launch
      • 9/7/99-Dow Jones Sustainability Group Indexes launch
      • 2/14/00-Dow Jones U.S. Total Market Index launch
      • 2/18/03-Dow Jones Indexes Islamic Blue-Chip Indexes launch
      • 11/3/03-Dow Jones Select Dividend Index launch
      • 11/30/05-Dow Jones Wilshire U.S. Industry Indexes launch
      • 1/23/06-Dow Jones Islamic Market Sustainability Index launch
      • 3/6/06-Announced launch of Dow Jones Citigroup Sukuk Index
      • 5/31/06-Dow Jones Islamic market China Offshore Index launch
      • 6/7/06-Dow Jones BRIC 50 Index launch
    • 4. Dow Jones Islamic Market Index Awards
      • Best Shariah Compliant Index Provider (Global Finance Magazine, US, 2008)
      • Global Recognition in Islamic Finance for a Finance Institution (Dubai, IIFF 2008)
      • Best Islamic Index Provider (Euromoney, London, 2008)
      • Best Islamic Index Provider (Islamic Finance News, Malaysia, 2007)
      • Best Islamic Index Provider (Terrapin, Singapore)- 2007
      • Best Individual Contribution to Islamic Finance (Kuala Lumpur Islamic Finance Forum (KLIFF), Malaysia, 2007)
      • American Muslim Achievement Award, Islamic Center of Southern California, USA (2006)
      • Sh. Mohmmad Rashid Bin Makhtoum Award for Contribution by Western Institution to Islamic Finance (2006)
      • Contribution to Islamic Capital Market Development, International Islamic Finance Forum, Singapore, 2006.
      • Failka Award for Contribution & Development to Islamic Funds (2006)
      • Deloitte/KLIFF Award for Special Contribution to Islamic Finance (2005)
      • CERT (Malaysia) Award for Excellence in Islamic Finance (2004)
      • Sh. Mohmmad Rashid Bin Makhtoum Award for Innovation in Islamic Finance (2003)
    • 5. Where are we coming from? 1975-1990 Commercial Banking Syndications Islamic Conglomerates 1991-2000 Hard Asset Private Equity Fund Management Islamic Indexes 2001-2010 Structured Sukuk Mega Project Finance Mega Commercial Banks Market exposure: 20m Onset of Islamic Banks (Malaysia, UAE, etc.) Inefficient Command SOEs in Iran and Sudan, and Pakistan Market exposure: 100m Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh Market Exposure: 250m Conversions, Islamic Windows & Subsidiaries of Mega Banks, Establishment of significant Islamic Banks in Non-Muslim states Muslim populated states getting interested Syria, Libya, Soviet bloc Timeline 1975-2010 Source: S. Farooq, BIBF
    • 6. We are moving forward in IF M L R E PE VC Timeline/Products/Returns Activities Risk Reward IF IFI CF CFIs 300 plus years -Petro-liquidity & HNWs -Diversification -Shariah Scholars/research -Stress Tested/Time -Cross Sell CFPs IFPs S
    • 7. Hypothetical “Islamic Investor & Asset Manager” Dilemma?
        • Increased Volatility:
          • Exclusion of prohibited industries that may be the current high-fliers
          • Exclusion of financial sector
          • Exclusion of highly leveraged firms
          • Exclusion of companies with high non-operating interest income
        • Bias: Technology, Healthcare & Energy
        • Quarterly Reviews (turnover)
    • 8. First Islamic Funds Source: Failaka Jan-93 Saudi Arabia National Commercial Bank AlAhli US Trading Equity Jul-92 Saudi Arabia Al Rajhi Banking & Invest. Al Rajhi Local Share Jun-92 South Africa Futuregrowth AlBaraka Futuregrowth AlBaraka May-91 Singapore Mendaki Holdings Pte. Ltd. Mendaki Growth Fund Jun-86 USA Saturna Capital Amana Income Fund May-71 Malaysia Tabung Amanah Bakti Tabung Amanah Bakti May-68 Malaysia Mara Unit Trust Dana Al-Aiman Inception Location Fund Manager Fund Name
    • 9. Growth in Assets in Equity Funds Source:Failaka
    • 10. Growth in the Number of Islamic Equity Funds (excluding Asia) Source:Failaka
    • 11. As regards Equity Funds Total Number of Islamic Equity Funds: 306 Source: Failaka
    • 12. Nearly Full Range of Products Source:Failaka Hedge Fund 6-7 nearly there; 2 operational Balanced Easy to duplicate and 17 available Sector Funds 9 available Regional Funds (45 funds dealing in GCC Equities) ‏ Small Company (Al-Rajhi Global Small Cap Equity) Single Country (SABB Amanah Saudi Equity) Emerging Market 19 available (BRIC, South Africa, Turkey) ‏ European Equity 7 available US Equity 12 available Asian Equity 7 by non-Asian based managers Global Equity 27 available Fund categories
    • 13. Its all Relative Total Mutual Funds in the World: 56,863 Total Islamic: 550 Total Islamic Equity: 320 (including balanced) ‏ Total Socially Responsible (SRI): 201 Source:Failaka
    • 14. Assets Under Management: In Perspective Total Assets invested in Mutual Funds: US$ 17.8 Trillion Total Assets in SRI Mutual Funds: US$ 179 Billion Total Assets in Islamic Equity Funds: US $ 17.3 Billion (est.) ‏ Source:Failaka
    • 15. DJIM Screens
      • DJIM Shariah Supervisory Board v Outsourcing Shariah
      • Primary Business
        • Negative Screens ~ Socially Responsible Investing
        • Positive Screens: DJIM Sustainability Index
      • Revenue Accountability
      • Financial Screens
        • Debt/MC <33%
        • Cash + IBS/MC <33%
        • Acc Rec/MC <33%
      • Debt Screen Impact:
        • Enron (Deleted: 3Q’01), Worldcom (2Q’01), Tyco (1Q’02) & Global Crossings (2Q’01)
      • AAOIFI Standard (21): Product  Standard
        • DJ CitiGroup Sukuk Index: Standard  Product
      • Price Only, Market Cap & Free Float Weighted Indexes
        • Price, Equal, MC and Fundamental Indexes
      • Low Debt/Non-Financial Social-Ethical Index  Alpha Strategy
    • 16. Screening Process D/MC C+IB/MC AR/MC 95% Dow Jones World Business Descrip!ion Revenue Three Financial Ratios DJIM
    • 17. DJIM Screening Primary Business Impermissible Income Financial ratios DJIM Universe
    • 18. DJIM Regional Breakdown (2007) UK Cana Indonesia
    • 19. DJIM Sector Breakdown (2007) Tech Indust Financial Credit & Impact on Financial
    • 20. DJIM Performance (2007)
    • 21. Compliant Sector Based Investing Islamic Equity Indexes Benchmark Indexes: Dow Jones Islamic Market Index ($17T) Sector Indexes: Industries (Broadest-Based) Oil & Gas Basic Matls Health Care Industrials Financials Technology Telecom Utilities Cons Goods Cons Svcs
    • 22. Theme Based Investing Strategy and Theme Based Indexes
        • Dow Jones Islamic Market Sustainability Index
        • First indexes from major provider; widely accepted as the standard.
        • Measure companies that have been screened for compliance with Islamic principles based on financial ratios and industry.
        • Family includes 70+ indexes for countries, regions, sectors and cap ranges.
        • Dow Jones Sustainability Indexes
        • Based on the cooperation of Dow Jones Indexes and Zurich-based SAM, Dow Jones and Dow Jones STOXX Sustainability Indexes track the performance of the leading sustainability-driven companies.
        • The family includes global and regional indexes, and subindexes excluding alcohol, gambling, tobacco and/or armaments and firearms.
    • 23. Islamic Asset Class Expansion
      • Screening
      • Pricing
      • Data
      • Education & Awareness
        • Commodities
        • REITs
        • Hedge Funds
        • Portfolio Indexes
    • 24. Islamic Investing in OIC Countries
      • Location Source of Funds
        • GCC
      • Location of Underlying Assets Invested
        • LME Murabaha
          • Palm Oil (Malaysia)
        • Equity
        • Real Estate
        • Commodities
        • PE/VC (ArCapita, etc.)
      • Absorption of Liquidity without Asset Inflation
      • Capital flight: How does it benefit Muslim Country?
    • 25. Sector Weighting Breakdown (Q2 2008)  What does this mean? .69 10 -- 9 -- -- .21 -- .13 -- .37 .4 TECH 51 69 85 45 20 -- 49 -- 44 6 27 2 FIN -- 0 -- -- 4 7 3 7 1 4 6 3 UTI 5 2 10 20 13 21 3 6 6 20 6 16 Tele 2 1 2 -- 1 .49 .72 3 8 8 11 1 CS 1 -- -- -- 1 1 .91 4 1 2 .51 -- HCR .28 1 -- 1 14 8 5 4 10 4 20 35 CG 31 17 2 15 8 11 8 8 10 9 24 40 Ind 8 2 0 10 37 47 11 38 11 30 3 2 BM 2% 0% 0% 0% 2% 4% 19% 31% 9% 19% 1% .6% Oil/ Gas DJIM Kw DJ Kw T-50 DJ Bah Arbia 50 DJ Ind DJIM Ind DJW PK DJIM PK DJW Turk DJIM Turk DJ Malsia DJIM Malsia T-25 Sctrs
    • 26. What does Sector breakdown mean for an Islamic OIC Index?
      • Largest sector Eliminated
        • Conventional Financial
      • 2-3 Sectors more than 70% of Weighting
        • One Company Sector
      • Lack of Technology sector implies:
        • VC Industry/Angel Investing?
        • Innovation?
        • Equity Culture?
        • Knowledge Based Economies?
    • 27. Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) 64% 37% 50% 32% Natl bank of Pk (4) Engro Chem Pk (10) Egreg DeMir Ve Celik (5) Turcas Petrol (4) J&S Co (4) Oil/Gas Dev (10) Turkiye Is Bankasi (6) Asya Katlim (6) Oil/Gas Dev (4) Pakistan Petroleum (10) Akbank (8) BIM Birlesik (8) Pak State Oil (5) Pakistan oilfields (10) Turkiye Garanti (9) Turkeye Petrol (22) MCB (15%) Dawood Hercules Chem (10%) Turkcell 9% Egreg DeMir Ve Celik (24%) DJW Pakistan DJIM Pakistan DJW Turkey DJIM Turkey
    • 28. Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) 60% 29% 70% 50% Bank central Asia (6) Indosat (4) Malayan Banking (5) MISC (7) Bakrie Bros (7) Perusahaan Gas (6) Public Bank (5) KL Kepong (8) Astra Intl (7) Astra Intl (12) Bumiputra Comm Ltd (6) DiGi.com (9) Telekomunikasi (14) Telekomunikasi (23) IOI Corp (6) SimeDarby (19) Bumi Resources (16%) Bumi Resources (25%) SimeDarby (7%) IOI Corp (19%) DJ Indonesia DJIM Indonesia DJ Malaysia DJIM Malaysia Titans 25
    • 29. Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) 39% 40% 36% 55% 45% Ren Services (7) Ithmaar Bank (6) Arab Bank (6) Comm Bank of Kuwait (6) Boubyan Petro (5) Oman Telecom (9) NBB (6) MTC (6) NIG (6) Gulf Cble/Elec (6) BM (9) GFH (11) Orascom Telecom (7) MTC (9) Agility (9) Raysut Cement (10) Batelco (12) Orascom Const (7) KFH (9) MTC (9) NBO (10%) Ahli United Bank (22%) Maroc Telecom (10%) NBK (10%) Investment Dar (10%) DJ MSM DJ Bahrain Stock Exchange DJ Arabia Titans 50 DJ Kuwait Titans 50 DJIM Kuwait
    • 30. What does this sampling of top 5 weighting mean?
      • Conventional components from OIC
        • Comparable to non-OIC EM
          • Capping weightings
        • Financial sector available
        • Trading in top 20 companies
      • Shari’ah compliant components from OIC
        • Largest/liquid sector eliminated
          • Free Float
          • Illiquid Mid-Small caps available
          • No equity culture (debt screen)
        • Volatility
        • Established OIC v Emerging OIC
          • Malaysia, Turkey, Pakistan, Egypt, Saudi , UAE, Kuwait, etc.
          • Bangladesh, Nigeria, Jordan, etc.
    • 31. Suggestions
      • OIC Countries
        • Risk Mindset: Debt v. Equity Culture?
        • Habit Mindset: Depositors v. Investors?
          • Fraud on the Unsuspecting (Returns advertised)
        • Understanding Mindset: Real estate v. Other asset class comprehension?
      • Shariah Screening
        • Muslim owned companies
        • One methodology does not fit all geographies or asset classes
      • Consensus on Primary Business
    • 32. Suggestion Number 1 ( Sukuk ):
      • Financial Screens
        • Conventional Debt
          • Reduction over a given time frame
            • Islamic Indexes v Funds: Selling no longer compliant companies
            • Conversions FIs to IFIs (Sharjah Islamic Bank)
            • Acquisitions (ADIB acquires Natl Bank of Development (Egypt))
          • Equitization of Balance Sheet via Sukuks & Equity Recapitalization
            • PLUS (Malaysia)  WIDER SHAREHOLDERS
      • Sukuks [financial incentive within time, Ex: IDB Incentive Fund]:
        • Primary & secondary mkt development
        • Sukuk Market Development
        • Yield curves for corporate tenors
        • Sukuk Trading & Investing vehicles
        • Expansion to other issuers
        • Cross Issuers & Buyers
    • 33. Billion Dollar Watermark Cross-Over Sukuk profile Eurobond Market* * Source: Frank J. Fabozzi, Handbook of Fixed Income Securities, 1991 Malaysia
    • 34. Suggestion Number 2:
      • Index for investable and tradable OIC countries
        • DJ OIC Index
        • DJ OIC Islamic Index
      • [Profile Indexes: DJIA, S&P 500, DJIM, MSCI EAFE, FTSE 100, Russell 2000, etc.)
      • Sub-Indexes
      • Transparency & Governance
      • Investable Products off of the Index
      • Intra-OIC Investments  Liquidity
      • Liquidity Encourages Listings (BB v FPI)
    • 35. Suggestion Number 3 (Complimenting COMCEC: OIC Exchange Cooperation OIC VTP )
      • Arab Stock Exchange?
      • Islamic Stock Exchange:
        • Location?
        • Deciding Compliance?
        • Listing of companies/products?
      • OIC VTP :
        • Neutrality
        • Gatekeeper of compliance?
        • Trading of companies & products
          • Funds Supermarket
        • Supported by financial information, news, analysis, PLUS:
          • Obligatory Information
        • Liquidity to traded company  Home country exchange
        • Proprietary Trading
        • Global Secondary Sukuk Trading Platform
        • Cross sell
    • 36. Conclusion
      • Suggesting a Path for Shariah compliance for OIC publicly listed Companies & Encourage Listings
        • Add Depth & Breadth
      • Encouraging Use of Sukuks
      • Developing an Equity/risk taking culture in OIC
      • Establishing an informed Global Portal for Intra-OIC Investment Opportunities for ALL investors
      • Win  Country OIC Level
      • Win  Regional OIC level
      • Win  Global OIC Level