Imane Karich – Consultante BELSIF – Islamic Banking & Investing Seminar 29 October 2008

1. ISLAMIC VISION of BANKING & INVESTING Imane Karich – ConsultanteBELSIF – IslamicBanking & InvestingSeminar 29 October 2008

2. Table of Content Islamic Finance – Theory & Concepts Description of the main islamic financial instruments

3. Islamic Finance – Myths & Realities Islamic Finance IS NOT • a RELIGIOUS system; • a simple « Interest-Free » system; • a discriminatory system restricted to Muslim People Islamic Finance IS: • a SYSTEM based on religious ETHICAL principles; • an Open system and a real alternative to conventional finance.

4. BASIC PRINCIPLES • Islamic Finance is part of the Islamic Economic System, part of the Chari’a System • Islamic Economy is a Normative system supported by moral and ethical values and guidelines of the Islamic Law; • Islamic Finance tends to establish financial equity and preventing injustice in business deals • General Basis Rule of the Economic Islamic System: CORAN - Sourate Al Baqarah - Verse 275 – 1st part: « God has allowed Trading…. » • Fundamental principle of trading system: exchange of real goods • Incentive for Participation and Risk Taking: • Principle of Profit & Loss sharing • No transfer of risk with the capital

5. And the Exception… In the light of the search of Equity and Justice Verse 275 - 2nd Part: …and has forbidden interest » • Avoid Injustice and unjustified wealth creation;

6. Roles of Money and Definition of Riba Difference between Usury & Interest ? > Notion and role of Money: Unity of Measure; Mean of exchange Reserve of Value Conclusion: no difference between « reasonable » interest and usury

7. Gharar • Fuzziness – Ignorance – Uncertainty in the contractual terms – ex: • Contingency of exchange results, • Absence of the good during the exchange, … • ≠ Risk taking inherent to trading; • Less strict than the interdiction of Riba. 7

8. Islamic Banking system Same role as the conventional banking system: Financial intermediary between investors and entreprenors To improve the efficiency and the liquidity of financial resources exchange; The main difference is situated in the risk taking owner : is not transfered with the capital but remains with the property right of the financial resources. The Bank becomes a privileged partner in Business transactions. 8

9. Islamic Bank – Basic functioning Clients Entrepreneurs/Debitors Clients Investissors/depositors Funds User Funds mobilisation R A B B al M A L B A N Q U E M U DHAR IB Islamic Bank Contract Mudharaba (or Wakalah)

10. Islamic Vision on Investment Investment in the sources of Islam: • Thesaurisation • Zakat • Financial Risk • Speculation 10

11. Islamic Vision on Investment • Thesaurisation: • Authorised sparing: • Balance and Equilibrium; • With a clear objective; • = wealth accumumation without spending or investment objectives on a medium/long term • Zakat: • Progressive seizure of the non used wealth; 11

12. Islamic Vision on Investment • Notion of Financial Risk: • Pure Risk vs Financial Risk; • Commercial Risk vs Speculative Risk; • Profit & Loss Risk; • Objective Risk; • Speculation: • Bet on a future event on an aleatory and subjective way; • Without rational fundements; • Voluntary excessive risk; 12

13. Investment Universe Limited investment universe No Alcohol, entertainment, banking, gambling arms… activities + other specific rules applied to mutual funds (see later) 13

14. Description of main Financial Instruments • Based on Islamic Commercial Law and on traditional commercial contracts; • Differentcategories of contracts: • Participation contracts (PLS based); • Musharaka and Mudharab • Financingcontracts (debtbased) • Murabaha and Ijara 14

15. Project Financing BANK Entrepreneur Project MUSHARAKA

16. Project Financing BANK Entrepreneur Project MUDHARABA

17. Mortgage Financing Buyer Seller BANK Property right Property rights 2 3 1 € € € 4 MURABAHA

18. Mortgage Financing Vendeur Acheteur BANQUE Titre de propriété 5 Contrat de vente Titre de propriété 2 3 1 € € € € € € 4 IJARA

19. Mortgage Financing Acheteur Acheteur Acheteur Vendeur Vendeur 2 3 1 € € € € 4 Banque Banque 20 % Titre de propriété 80 % Titre de propriété Musharaka Mutanaqissa

20. Islamic Investment in Practice • When investing, two aspects are important: • The Nature of the instrument/transaction • The Nature of the Issuer • Nature of Instrument : islamic view on conventional financial products and derivatives • Bonds > Riba • Derivatives > Gharar • Nature of the Issuer : investment universe > screening norms • Innovation for developing own financial vehicles • Equity Mutual Funds • Sukuk • Arbun • Wahd 20

21. Islamic Investment in Practice EQUITY Investment: • Nature of the instrument : Equity investment is fully acceptable (« Mudharaba ») • Nature of the issuer : screening norms • Mutual Funds – one of the most successful investment vehicle • Apparition of « Islamic Indexes » - DJIM • Definition of Screening Norms 21

22. Islamic Investment in Practice • Screening Norms: 1. Business of the Issuer Company (core and secondary activities): 22

23. Islamic Investment in Practice • Screening Norms: 2. Financial Structure of the Issuer Company: a) Interest Earnings: 23

24. Islamic Investment in Practice • Screening Norms: 2. Financial Structure of the Issuer Company: b) Debt Ratio: 24

25. Islamic Investment in Practice • Screening Norms: 2. Financial Structure of the Issuer Company: C) Liquid Assets: 25

26. Islamic Investment in Practice Dow Jones Islamic Market Index – DJIM: • Introduced in 1999 • First benchmarks for sharia-compliant portfolio management; • Performance: • YTD : -27% • Since 5 years : +44% • More info : www.djindexes.com 26

27. Islamic Investment in Practice • Creative engineering – new products: • Success of Sukuk investments; • Alternative for derivatives products : ‘arbun contracts, wahd contracts, … 27

28. Thanks Imane Karich FINALYSE BRUSSELS imane.karich@finalyse.com 28