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Issues & Suggestions for OIC Shari’ah Compliant Indexes

Issues & Suggestions for OIC Shari’ah Compliant Indexes. Rushdi Siddiqui rushdi.siddiqui@dowjones.com Global Director Dow Jones Islamic Market Index Group. Presentation Overview.

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Issues & Suggestions for OIC Shari’ah Compliant Indexes

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  1. Issues & Suggestions for OIC Shari’ah Compliant Indexes Rushdi Siddiqui rushdi.siddiqui@dowjones.com 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? 2001-2010 Structured Sukuk Mega Project Finance Mega Commercial Banks 1991-2000 Hard Asset Private Equity Fund Management Islamic Indexes 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 1975-1990 Commercial Banking Syndications Islamic Conglomerates Market exposure: 100m Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh Market exposure: 20m Onset of Islamic Banks (Malaysia, UAE, etc.) Inefficient Command SOEs in Iran and Sudan, and Pakistan Source: S. Farooq, BIBF Timeline 1975-2010 5 5

  6. We are moving forward in IF VC PE E Activities Risk Reward S -Petro-liquidity & HNWs -Diversification -Shariah Scholars/research -Stress Tested/Time -Cross Sell R L M IFPs CFPs IFI CFIs IF CF 300 plus years Timeline/Products/Returns

  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 Fund Name Fund Manager Location Inception Dana Al-Aiman Mara Unit Trust Malaysia May-68 Tabung Amanah Bakti Tabung Amanah Bakti Malaysia May-71 Amana Income Fund Saturna Capital USA Jun-86 Mendaki Growth Fund Mendaki Holdings Pte. Ltd. Singapore May-91 Futuregrowth AlBaraka Futuregrowth AlBaraka South Africa Jun-92 Al Rajhi Local Share Al Rajhi Banking & Invest. Saudi Arabia Jul-92 AlAhli US Trading Equity National Commercial Bank Saudi Arabia Jan-93 Source: Failaka

  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 Fund categories Global Equity 27 available Asian Equity 7 by non-Asian based managers US Equity 12 available European Equity 7 available Emerging Market 19 available (BRIC, South Africa, Turkey)‏ Single Country (SABB Amanah Saudi Equity) Small Company (Al-Rajhi Global Small Cap Equity) Regional Funds (45 funds dealing in GCC Equities)‏ Sector Funds 9 available Balanced Easy to duplicate and 17 available Hedge Fund 6-7 nearly there; 2 operational Source:Failaka

  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 95% D/MC C+IB/MC AR/MC

  17. DJIM Screening

  18. DJIM Regional Breakdown (2007) Cana Indonesia UK

  19. DJIM Sector Breakdown (2007) Credit & Impact on Financial Financial Tech Indust

  20. DJIM Performance (2007)

  21. Health Care Industrials Financials Cons Svcs Oil & Gas Utilities Cons Goods Technology Basic Matls Telecom Compliant Sector Based Investing Islamic Equity Indexes Benchmark Indexes: Dow Jones Islamic Market Index ($17T) Sector Indexes: Industries (Broadest-Based)

  22. Theme Based Investing Strategy and Theme Based Indexes • 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. • 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.

  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?

  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) 37% 50% 32% 64%

  28. Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) 29% 70% 50% 60%

  29. Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) 40% 39% 55% 45% 36%

  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 Eurobond Market* Sukuk profile Malaysia * Source: Frank J. Fabozzi, Handbook of Fixed Income Securities, 1991

  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

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