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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 Asia)

Total Number of Islamic Equity Funds: 306

Source: Failaka


Nearly full range of products
Nearly Full Range of Products Asia)

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 Asia)

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 Asia)

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 Asia)

  • 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 Asia)

95%

D/MC

C+IB/MC

AR/MC



Djim regional breakdown 2007
DJIM Regional Breakdown (2007) Asia)

Cana

Indonesia

UK


Djim sector breakdown 2007
DJIM Sector Breakdown (2007) Asia)

Credit & Impact on Financial

Financial

Tech

Indust



Compliant sector based investing

Health Care Asia)

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 Asia)

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 Asia)

  • Screening

  • Pricing

  • Data

  • Education & Awareness

    • Commodities

    • REITs

    • Hedge Funds

    • Portfolio Indexes


Islamic investing in oic countries
Islamic Investing in OIC Countries Asia)

  • 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?


Sector weighting breakdown q2 2008 what does this mean
Sector Weighting Breakdown (Q2 2008) Asia) What does this mean?


What does sector breakdown mean for an islamic oic index
What does Sector breakdown mean for an Islamic OIC Index? Asia)

  • 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?


Muslim country islamic conventional index top 5 components weightings q1 2008
Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)

37%

50%

32%

64%


Muslim country islamic conventional index top 5 components weightings q1 20081
Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)

29%

70%

50%

60%


Muslim country islamic conventional index top 5 components weightings q1 20082
Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)

40%

39%

55%

45%

36%


What does this sampling of top 5 weighting mean
What does this sampling of top 5 weighting mean? & Weightings (Q1 2008)

  • 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 & Weightings (Q1 2008)

  • 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 ( & Weightings (Q1 2008)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 & Weightings (Q1 2008)

Eurobond Market*

Sukuk profile

Malaysia

* Source: Frank J. Fabozzi,

Handbook of Fixed Income Securities, 1991


Suggestion number 2
Suggestion Number 2: & Weightings (Q1 2008)

  • 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 Cooperation

  • 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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