Malaysia as a Hub for Islamic Wealth Management

1. Malaysia as a Hub for Islamic Wealth Management • THE INTERNATIONAL FINANCIAL PLANNING ADVISORS CONFERENCE 2008 Mohd Willieuddin Lim Director, Global Markets Sunway Pyramid Convention Center 22-24 February 2008

2. Contents Section 1 History of Islamic Finance Industry 3 Section 2 The Shape of the Modern Industry 5 Section 3 Islamic Wealth Management 8 Section 4 Why Islamic Wealth Management 12 Section 5 Malaysia as a Hub 24 Section 6 Opportunities & Issues 33 Section 7 Conclusion Important Notice

3. History of Islamic Finance Industry

4. Islamic Capital Market – A Tradition The Islamic Financial Industry is…… • A comprehensive financial system that adheres to Islamic principles; • It was the financial system of the known world developed under the reign of the Muawiyad and the Abbasid Empires from the year 661 until the year 850; • It continued to be a vibrant and significant financial system of the known world spearheaded by great Islamic empires in Andalusia (Spain) until the year 1031, in Granada until the year 1492, in the Malaccan Sultanate (1511) and in the Ottoman (Turkey) until the year 1918; • It is a system which has existed for the last 1,426 years. We are only relearning what is available under the system in the last 40 years. • Broadly refers to financial market transactions, operations and services that comply with Islamic rules, principles and codes of practices. The laws and rules of the religion require certain types of activities, risks or rewards to be either prohibited or promoted.

5. Islamic Financial Market – The Evolution… The evolution of Islamic Financial market is contributed by introduction of a competitive and comprehensive product and service offerings.

6. The world Muslim population today is estimated at about 1.8 billion, representing a sizeable 28% of total world population of 6.6. billion. Islamic banking and finance has become a force to be reckoned with in the global economic scenario. It often forms part of the equation in international finance, whether on a government to government basis or at the private sector levels. The global Islamic banking sector is growing at an average of 15%-20% per annum. Currently, there are 300 Islamic financial institutions operating in about 100 countries worldwide; with more than 300 Islamic equity funds managing assets in excess of USD5 billion. Source: Bursa Malaysia/LFX Islamic Capital / Market Report Modern Day Industry Facts & Figures

7. Total assets of the Islamic banking sector now stands at USD750 billion and will reach USD1 trillion by 2010. (McKinsey) Size of Islamic mutual funds assets are estimated at USD800 billion. Where USD50-70 billion are in actively managed products. (Eurekahedge, Key Trends in Islamic Funds, 2006) Global sukuk market (USD plus RM issuance) is now over USD92 billion. USD issuance of sukuk amounts to USD 22.85 billion as at end 2007. Global market capitalization of Dow Jones Islamic Index > USD10 trillion. Private capital investments, especially among Middle East’s high net worth individuals whom are predominantly Muslim, is estimated to reach USD1.5 trillion and reaching USD2 trillion by 2010. Islamic finance is recognized as having growth potential in established conventional financial centers. The market is expected to grow to USD 3-4 trillion in the next 4-5 years. Source: Malaysia International Islamic Financial Centre, October 2006 Report Modern Day Industry Facts & Figures (continued)

8. The Shape of the Modern Industry

9. Banking Non-Financial Institutions Services Money Market Islamic Financial Market Wealth Management Capital Market Debt and Equity Asset Management Takaful Structured Products and Derivatives The Modern Islamic Financial Market Industry must be comprehensive with all critical components established

10. Global Development of the Islamic Capital Market in the Last 30 Years Evolution 1970s 1980s 1990s 2000s Area • Gulf / Middle East • Gulf / Middle East • Asia Pacific • Gulf / Middle East • Asia Pacific • Gulf / Middle East • Asia Pacific • Europe / Americas • Global Offshore Market Institutions • Commercial Islamic • banks • Commercial Islamic • banks • Takaful • Islamic investment • companies • Commercial Islamic • banks • Takaful • Islamic investment • companies • Asset management • companies • Brokers/Dealers • Commercial Islamic banks • Takaful • Islamic investment companies • Asset management companies • Brokers/dealers • Islamic investment banks • E-Commerce Products • Commercial banking • products • Commercial banking • products • Takaful products • Commercial banking • products • Takaful products • Mutual funds/ unit • trust • Domestic Islamic • bonds • Shariah compliant • stocks • Islamic stock broking • Islamic derivatives • Commercial banking products • Takaful products • Mutual funds/ unit trust • Domestic Islamic bonds • Global Islamic bonds • Islamic asset backed securities • Shariah compliant stocks • Islamic stock broking • Islamic derivatives • Hedge funds • Private Equity & Islamic REITs (Source: Report of the Islamic Capital Market Task Force of the International Organization of Securities Commission (“IOSCO”) and CIMB Islamic Analysis)

11. COMPREHEMSIVE ISLAMIC FINANCIAL MARKET - MONEY MARKET, DEBT & EQUITY CAPITAL MARKET, FUNDS, ETC EUROPE EUROPE ASIA ASIA ISLAMIC BANK & TAKAFUL ISLAMIC BANK & TAKAFUL ISLAMIC BANK ONLY ISLAMIC BANK ONLY TAKAFUL ONLY TAKAFUL ONLY LUXEMBOURG LUXEMBOURG KUWAIT KUWAIT UK UK PHILIPPINES PHILIPPINES SWITZERLAND SWITZERLAND BRUNEI BRUNEI DENMARK DENMARK SINGAPORE SINGAPORE ALBANIA ALBANIA MALAYSIA MALAYSIA GERMANY GERMANY INDONESIA INDONESIA TURKEY TURKEY IRAN IRAN RUSSIA RUSSIA JORDAN JORDAN AFRICA AFRICA QATAR QATAR TUNISIA TUNISIA PAKISTAN PAKISTAN SENEGAL SENEGAL BANGLADESH BANGLADESH SUDAN SUDAN SAUDI ARABIA SAUDI ARABIA EGYPT EGYPT GHANA GHANA UAE UAE BAHRAIN BAHRAIN NIGERIA NIGERIA SOUTH AFRICA SOUTH AFRICA AMERICAS AMERICAS ALGERIA ALGERIA GAMBIA GAMBIA SRILANKA SRILANKA INDIA INDIA OCEANIA OCEANIA US US LEBANON LEBANON THAILAND THAILAND AUSTRALIA AUSTRALIA TRINIDAD & TOBAGO TRINIDAD & TOBAGO OMAN OMAN IRAQ IRAQ Strategic Landscape For International Growth • Geographical spread ofcountries that offer Islamic Banking and Takaful products and services

12. Islamic Wealth Management

13. Wealth Creation From business, savings in bank, investment in first property, etc. Wealth Distribution Wealth Enhancement Passing on assets through wills and trusts Enhancing total returns from capital gains and income, including via use of leverage Wealth Protection Capital preservations, risk management, insurance, trusts What is Islamic Wealth Management ? – The WM Cycle • Islamic Wealth Management is concerned with providing end-to-end solutions using products and services throughout the wealth management cycle in compliance with Shariah. It’s a Shariah-based service. Source: CIMB PB

14. What does it take to have a good Islamic Wealth Management Hub • To become the focal point for Islamic Wealth Management an Islamic Finance centre would • Have developed to a level where demand for management of assets in accordance to the rules of Shariah has grown beyond fulfilling basic safekeeping to generating productive returns • Have a track record of market leadership and product innovation • Have a supportive regulatory and legal framework • How does Malaysia measure up against these criteria?

15. Diversified products and players • Industry players of reasonable size and economies of scale undertaking multitude of Islamic financial activities. • Availability of products for multiple customer segments. • Widest Product Range • In terms of products and services, there are more than 100 Islamic financial products and services ranging from deposit, financing, treasury/money market investment, trade financing, card services and banking services offered by the financial institutions • Diversified Players • Islamic Banks • Investment Banks • Takaful companies • Development Financial Institutions • Fund Management companies • Stockbroking companies

16. Proper and effective regulatory framework • Introduction and amendment of key legislation has been a key contributor to development of Islamic banking and the sukuk. • Malaysia has the most comprehensive regulatory framework for Islamic Finance and includes…. • Shariah is regulated by the central bank. Industry as a whole is 100% Shariah compliant not just on product basis. Key Governing Laws “Accidental” Governing Laws • Banking Laws (eg. Islamic Banking Act 1983 (“IBA”)) • Securities Laws (eg. Guidelines on the Offering of Islamic Securities 2004 (“IS”)) • Shariah requirements (incorporated in IBA and IS) + Guidelines on Shariah Committee Management • Land laws • Securities laws i.e. merger/takeover, beneficial ownership • Lease laws (Ijara transaction) • Tax/Stamp duty legislation • Company law • Others

17. Malaysia Has The Most Comprehensive Regulatory Framework for Islamic Finance and includes the following… • Enactment of Islamic Banking Act 1983 • Enactment of Government Investment Act 1983 • Enactment of Takaful Act 1984 • Amendments to Banking and Financial Institutions Act 1989 • Enactment of Labuan Offshore Laws 1990 • Guidelines on the Offering of Islamic Securities 2004 • Guidelines on the Management of Shariah Committees • Guidelines for Islamic Real Estate Investment Trusts 2005 • Guidelines on Islamic Fund Management 2007 Amendments and revisions on the relevant regulatory framework continuously being made to cater the ongoing developments of Islamic financial market

18. Why Islamic Wealth Management?

19. The Obligation • The Quran : on the Prohibition of Riba’ or usury • Al-Baqarah Verse 275 • “...Allah has permitted trades and prohibited riba’/usury...” • Al-Baqarah Verses 278 - 279 • “O you who believe! Fear Allah and give up what remains of your • demand of usury, if you are indeed the believers. If you do not do it, • take notice of War from Allah and His Messenger: but if you turn back, • you shall have the capital sums; deal not unjustly, and you shall not • be dealt with unjustly.” • O ye who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah that you may be successful. (Qur’an, 3:130)

20. The Obligation • “Shariah defines five necessities as necessary and basic for human existence. It is the duty of every society to preserve and protect the five necessities; other wise human life would be harsh, brutal, poor and miserable here and in the hereafter”. (Islamic Divine Law (Shariah), The Objectives of The Islamic Divine Law – Mashhad Al Allaf) • The five necessities are • Religion (Deen), • Life (Nafs) • Intellect (Aqal) • Progeny (Nasal) • Property (Maal) • Hence the need to manage wealth in accordance to Shariah.

21. The Market Trend - Latent Demand in Malaysia • There are increasing numbers of discerning Muslims more concerned with how their monies are spent & kept. An indicator is the trend of zakat (tithe payment. • Zakat collections between 1996 and 2005 have been growing at a CAGR of 15% p.a. • By end 2006 it is estimated that zakat collections reached some RM600 million • Zakat on personal income and zakat on savings represents some 71% of zakat collected; approximately 50% of zakat collected is by way salary deduction. Source PPZ and CIMB Islamic

22. The Market Trend – Growing Islamic Banking An Indicator of Growing Wealth • Islamic banking has been a key contributor to growth in the financial markets • It is estimated that at end 2007, USD34 billion assets are held in Islamic banking representing 13% of total financial assets. (BNM) • The bulk of deposits is predominantly in investment and savings type whereas financing is mainly disbursed for purposes of home and auto purchases a clear indicator that affluence of Islamic banking population is growing. • Islamic banking Approximately 70% of Islamic banking customers are non-Muslims.

23. Market trend - The Need for Planning. • Estate planning is becoming increasingly important to address generational wealth transfer. • In Malaysia as at July 2006 there is an estimated RM38 billion worth of inheritance assets that have failed to be distributed due to improper estate planning. A vast proportion of this has been classed as assets belonging to Muslims. • Thus, there is a need for proper planning to administer one’s assets. • In Islam, the virtues of planning are revealed in Verse 47 of Surah Yusuf • “For seven consecutive years, you shall sow as usual and that (the harvest) which you reap you shall leave in ears, (all)-except a little of which you may eat.”

24. Malaysia as an Islamic Wealth Management Hub

25. Top 10 Companies % of Total Market Capitalization Malaysia: A Global Islamic Capital Market By Nov 2007, 86% of Bursa Malaysia comprises of shariah compliant stocks Market capitalisation of shariah compliant stocks accounted for RM705.05 billion or 63.74% of total domestic market capitalisation as at December 2007 Compared to the developing GCC & MENA stock markets, Bursa Malaysia provides more choice in terms of sectoral opportunities thereby providing better risk diversification Size of Malaysia’s Equity Market (Source: Bursa Malaysia, E&Y Islamic Funds and Investment Report 2007) (Source: Bursa Malaysia, Securities Commission) * 2007 figures Number of Companies as at Nov 07, Market Cap as at end Dec 07

26. Malaysia: A Global Islamic Capital Market As at December 2007 As at December 2003 (Source: The Islamic Capital Market Task Force (IOSCO) Report, ISI Emerging Markets, Bloomberg) • As of December 2007, approximately 66% of new Islamic fixed income securities globally were issued in Malaysia. The remaining global issues are from the Middle East / GCC and offshore jurisdictions. • Recent experience has shown that products with more global features attract more investment from abroad vis USD denominated sukuks

27. Ringgit Bonds with maturities of 1-year and above Ringgit Bonds with maturities of 5-years and above Islamic Papers have always Outperformed Conventional Papers in Malaysia (Source: CIMB Fixed Income Research)

28. Leading in Islamic Asset Management Malaysia has some 134 funds at the end of 2007 and is estimated to account for 22% of Islamic funds worldwide (Securities Commission, Eurekahedge) Fund assets have been growing at a CAGR of 38% per annum between 1997 and 2007. The total NAV of Islamic unit trusts in Malaysia by end 2007 stood at some USD5.12 billion or 9.97% of total outstanding unit trusts net asset value (Securities Commission)

29. Breakdown of Family Takaful Contributions 2001-2006 Total Takaful Contributions 2003-2006 Growing Potential of Takaful Takaful sector has been growing at an average of 17% p.a. since 2001 and by end 2007 total contributions were estimated at USD931 million. (BNM, Islamic Finance News) Growth of takaful is driven by demand for mortgage, motor, medical and education plans. In the same period total assets of Takaful are estimated to amount to USD1.7 billion.

30. Future prospects for Takaful • As at end 2006 Takaful penetration in Malaysia is estimated to be 6.3%. • Family takaful penetration relative to general takaful penetration is higher, indicating that future takaful growth will be driven by demand for more products from family takaful segment. • Malaysia’s has a relatively broader distribution infrastructure for Takaful compared to other regions (direct agents, direct mail, bancassurance). This is expected to be one of the key contributors to deepen the Takaful market. Source Malaysian S&P, Islamic Finance News, Swiss RE Sigma Report, BNM

31. Other recent product innovations • There is increased depth in products and services • Shariah compliant REITS have been listed on Bursa since 2005. REITS offer more diversification opportunities in addition to regular income streams. Despite higher relative withholding tax, there is growing interest from GCC investors in infrastructure projects slated (eg IDR) and their potential for providing long term stable income as REITS • Regulated Short Selling reintroduced in Jan 2007 brings Bursa closer to developed market standards by giving investors opportunities to make profit despite bearish market conditions • FTSE Bursa Indices enhance the attractiveness of Malaysia as key destination for global Islamic fund flows by providing investors internationally accepted performance benchmarks • Exchange Traded Funds – Asia’s First Shariah compliant ETF was launched Jan 2008 with a public spread oversubscribed by 22.5 times. This development adds to the growing list of liquid investment options available to investors • Islamic derivatives – Futures Crude Palm Oil (FCPO) and Single Stock Futures

32. Increasing Professional Capabilities in Malaysia • Financial Planning/ investment advisory services continue to experience healthy growth driven by increasingly complex products and growing client sophistication • As at end 2006 there are some 11,500 memberships registered with major financial planning bodies representing a growth of some 14% in the last 2 years* • Financial institutions are increasingly placing strong emphasis on WM divisions as a client retention strategy as well as a means to grow revenues • In line with general move to increase professionalism of advisory services training programs that are Islamic finance focused have emerged • 2006 - INCEIF established to support the need to develop Islamic finance talent • 2007- Islamic Financial Planner developed jointly by FPAM & IBFIM *Source FPAM, MFPC, MChFC

33. Opportunities and Issues of Islamic Wealth Management

34. Drivers for Islamic Wealth Management Growth • The sustained rise in price of petrol is expected to continue to drive growth for development of Islamic finance products as investors, for example from the the Middle East, seek appropriate avenues for diversifying economic, business and financial holdings • Whilst major investments are likely to be driven by sovereign wealth funds and government investment corporations another key segment looking for investment opportunities are high net worth individuals • With its diversity of Islamic finance products and experienced players Islamic capital markets such as Malaysia, are expected to be at the forefront of capturing the anticipated net capital outflows of oil producing nations • Supported by a facilitative and comprehensive regulatory framework Islamic finance has come to the stage where development in wealth management services will drive future growth

35. Opportunities: Wealth Worldwide • The numbers of HNWI expected to increase supported by economic expansion of Asia Pacific and MENA (Middle-East-North-Africa) regions • Some USD1.5 trillion of Gulf Corporative Countries (GCC) funds are held in assets worldwide vested in treasuries, corporate bonds, equities and funds. The GCC region accounts for 3.2% of the global high net worth population. (S&P, Islamic Finance News, Cap Gemini) Source: World Wealth Report 2007, Cap Gemini

36. Opportunities: Global Product Acceptance • Malaysia is known for coming out with innovative products. • Shariah harmonisation has helped to improve marketability of products in markets beyond Malaysia • Alternative Sukuk structures using globally accepted Islamic principles have consistently been oversubscribed • Shariah compliant structured products structured in Malaysia have been successfullyoffered regionally viz Brunei, Singapore & Indonesia • Domestic Shariah compliant unit trusts that choose to list cross border on DIFC need only provide Shariah disclosure • Harmonisation is not Standardisation. Differences of opinions are well celebrated in Islam and could contribute towards developing creative and innovative products.

37. Issues: Experienced Islamic Finance Professionals Must Grow Faster • The provision of sound advice requires experience. Analysis must take into account both personal and business needs looking at financial and non financial products. To be a trusted advisor, he or she should be well rounded. • Recognizing that a wide skill-set is required for a robust industry. Other jurisdiction has established key learning framework that is backed by global industry players for fast tracking the development of wealth management services. • Similar or better approach must be undertaken in Malaysia specifically for developing Wealth Management skills.

38. Issues: Limited Product Developments in Islamic Estate Planning • Islamic products for wealth distribution are largely undeveloped. The limited offerings available are based on basic fiqh concepts that are accepted under existing civil laws • Conventional products are comparatively more developed and have greater variety. For instance the concept of trust can be applied to various purposes such as living trusts, family trusts, education trusts, unit trusts etc. • A conventional trust deed does not confine the assets settled to be shariah compliant. There is a need for a specific document that functions as a trust but is Shariah compliant • Islamic Trust Deed or Amanah Deed may provide a solution.Such an Amanah deed would ensure that the assets are settled and managed in accordance Shariah • Current practice requires an individual to hibah their assets prior to establishing a trust. Without doing so trusts created may fail as any assets not willed or given in hibah would form part of the estate to be distributed according to fara’id.

39. Issues: Developing concepts into Viable Products • More research must be made to develop fiqh concepts into credible products that are endorsed by the industry. • An example is the concept of Waqf i.e. properties (fixed or moveable) settled for the benefit of Waqf beneficiaries. • Currently waqf falls under the purview of state religious authorities, waqf is one of the largely untapped potential in wealth distribution • Opportunities exist to • Develop idle Waqf lands to maximise revenues to beneficiaries • Enhance the attractiveness of Waqf assets as Islamic financial instruments • Utilise Waqf as potential product concept for wide arrays of applications

40. Issues: Lost Opportunities • Local financial institutions may only offer products developed in Malaysia or approved by regulators therefore limiting the creation of an attractive portfolio that takes advantage of market timing in global markets. • HNWI’s are generally highly seasoned investors and domestic service providers should be able to offer a product suite comparable to that of an offshore bank. • Locally registered financial institutions have attained the competency level of offering global products and are better placed to advise domestic HNWI on their portfolio. • However under the MIFC agenda Islamic banks have the opportunity to conduct international currency business in Malaysia and offshore product offering is possible.

41. Moving Forward : “Malaysia As An International Islamic Financial Hub” • MIFC- nationwide initiative to promote Malaysia as an International Islamic Financial Centre. • MIFC aims at fortifying Malaysia’s position as a vibrant, innovative and competitive International Islamic financial hub. • Vision in conjunction with MIFC -to strategise to promote Malaysia as a global reference centre for Shariah views on Islamic banking and finance, banking on our unique culture and long history of Shariah tolerance. • By promoting genuine Shariah tolerance, Malaysia can aspire to become the cosmopolitan Shariah reference centre where varied Fiqh views can be discoursed and put into practice. • Global players would assemble here for latitude in creation and innovation, in search of new ideas for their financial products.

42. Moving Forward • The results of regulatory liberalization since 2005 and progressive Shariah research are beginning to take effect with more sophisticated products and services such as shariah compliant structured products, real estate investment funds have been available to retail clients. • Whilst wealth managers are able to address the issues of wealth enhancement, protection and distribution, existing services need to be further developed to allow for more customization and opportunity for returns enhancement in all economic and investment cycle • Leveraging on the strengths of its comprehensive domestic infrastructure, active market making and products innovation Malaysia’s Islamic capital market is poised to develop into a key centre for international Islamic funds to reside. However regional competition is expected. • Islamic banks such as Faisal Bank and CIMB have establishment of Islamic Private Banking services in view of the potential growth of Islamic wealth management.

43. London New York Tokyo Hong Kong Bahrain Yangon Bangkok Kuala Lumpur Singapore Brunei Darussalam Jakarta Contact Details • Emphasis on knowledge products for private clients and institutions; • Leveraging regional product expertise; • Understanding of local requirements; • Capable banking infrastructure to execute transaction; • Comprehensive banking franchise; • A top provider of tailor-made financial solutions to clients across the region; • Kuala Lumpur is the leading Islamic financial centre. Please direct all queries to: Mohd Willieuddin Lim Director, Global Markets CIMB Islamic Bank Berhad 1st Floor, Menara Promet, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia. Tel: +603 2116 1270, Fax: +603 2144 8509 Email: willieuddin.lim@cimb.com.

44. Important Notice • This document and its contents are proprietary information and products of CIMB and may not be reproduced or otherwise disseminated in whole or in part without its written consent. • The information in this presentation reflects prevailing conditions and our views as of this date. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. Although the information contained herein is believed to be reliable, CIMB makes no representation as to the accuracy or completeness of any information contained herein or otherwise provided. Nothing contained in this presentation is, or shall be, relied upon as a promise or representation as to the future.