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Issues & Suggestions for OIC Shari’ah Compliant Indexes. Rushdi Siddiqui [email protected] Global Director Dow Jones Islamic Market Index Group. Presentation Overview.

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issues suggestions for oic shari ah compliant indexes

Issues & Suggestions for OIC Shari’ah Compliant Indexes

Rushdi Siddiqui

[email protected]

Global Director

Dow Jones Islamic Market Index Group

presentation overview
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
dow jones indexes timeline key dates
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
dow jones islamic market index awards
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)
where are we coming from
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

we are moving forward in if
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

hypothetical islamic investor asset manager dilemma
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)

first islamic funds
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

as regards equity funds

As regards Equity Funds

Total Number of Islamic Equity Funds: 306

Source: Failaka

nearly full range of products
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

its all relative
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

assets under management in perspective
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

djim screens
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
screening process
Screening Process

95%

D/MC

C+IB/MC

AR/MC

djim sector breakdown 2007
DJIM Sector Breakdown (2007)

Credit & Impact on Financial

Financial

Tech

Indust

compliant sector based investing

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)

theme based investing
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.
islamic asset class expansion
Islamic Asset Class Expansion
  • Screening
  • Pricing
  • Data
  • Education & Awareness
    • Commodities
    • REITs
    • Hedge Funds
    • Portfolio Indexes
islamic investing in oic countries
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?
what does sector breakdown mean for an islamic oic index
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?
what does this sampling of top 5 weighting mean
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.
suggestions
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
suggestion number 1 sukuk
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
billion dollar watermark cross over
Billion Dollar Watermark Cross-Over

Eurobond Market*

Sukuk profile

Malaysia

* Source: Frank J. Fabozzi,

Handbook of Fixed Income Securities, 1991

suggestion number 2
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)
suggestion number 3 complimenting comcec oic exchange cooperation oic vtp
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
conclusion
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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