Rushdi Siddiqui

Presentation Overview: 

Presentation Overview Importance of Indexes Index providers & Stock Exchanges Islamic Finance Dow Jones Islamic Market Index BMD’s Islamic Turkey ETF BNP’s DJIM Titans 100 ETF Implications & screening in issues Islamic ETFs Screening Situation in OIC countries DJ DIFC Arabia Titans 50 Conclusion

Indexes and Their Importance: 

Indexes and Their Importance Major Index Providers DJI, S&P, FTSE, MSCI, Russell To measure the pulse of capital markets and/or economies To support accountability and transparency Reward & punishment (fund flows) To help develop capital markets in emerging nations by providing a focus for investors For use as the basis for investable products Funds, ETFs, structured products, etc. Why Are Indexes Important?

Index Providers & Stock Exchanges (PPP): 

Index Providers & Stock Exchanges (PPP) Role of Stock Exchanges Platform for listing companies Platform for listing products Platform for trading securities Role of Index Providers Index Construction/Methodology *Tradable & Investable Transparency  Predictability *Rules v. Committee Independence *Market acceptance of bank indexes? Trust & Credibility Neutral Market Acceptance of Indexes Profile, Products & AUMs

Internet & Islamic Finance: 

Internet & Islamic Finance Internet (40 years old) Stage 1 Experiment (wanted something different) Stage 2 Gradual Commercialization Stage 3 Was a hot new thing Stage 4 Shakeout & Accepted Tool Islamic Finance (40) Stage 1 Ideals (wanted something different) Stage 2 Gradual Commercialization Stage 3 Becoming a hot new thing Stage 4 Consolidation & Repositioning

Table/Legs of Islamic Finance: 

Table/Legs of Islamic Finance -Prohibitions oriented -Asset backed/based -Money cannot be made from money By mere passage of time Retail Corp/IB Treasury Asset Mgmt Transaction Oriented Foundation Oriented

Western Institution Bridge to Islamic Finance: 

Western Institution Bridge to Islamic Finance New Niche markets Size & Growth Players & Products Risk Taking & Balance Sheet How the West Came To Run Islamic Banks Newsweek, Oct 31, ‘05

DJI’s Dow Jones Islamic Market Index: 

DJI’s Dow Jones Islamic Market Index No Index Provider in Islamic Finance Space Not Invented Syndrome Commitment Family Strategy Expansion to other class Islamic indexes Expansion of Shari’ah screening Muslim Country Islamic Indexes

DJIM Shari’ah Supervisory Board: 

DJIM Shari’ah Supervisory Board

DJIM Screens: 

DJIM Screens Negative Screens ~ Socially Responsible Investing Positive Screens: DJIM Sustainability Index Revenue Accountability Financial Screens Debt/asset <33%  Debt/MC <33% NOII/Revenue 5-15%  Cash + IBS/MC <33% Acc Rec/Assets <45%  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 Low Deb, Non-Financial Social-Ethical Index

DJIM Screening : 

DJIM Screening 1900/6000 Companies 44 Countries $11/$25 Trillion

DJIM Regions: 

DJIM Regions (310) (11) (701) (102) (19) (27) (30) (169) -1900/6000 Companies -44 Countries -$11T/$25 Trillion

DJIM Sectors: 

DJIM Sectors (444) (192) (252) (307) (255) (250)

DJIM Turkey (Feb 2007): 

DJIM Turkey (Feb 2007)

DJ Turkey Equal 15 Components (Feb 2007): 

DJ Turkey Equal 15 Components (Feb 2007)

DJIM Turkey v. DJ Turkey Equal 15: 

DJIM Turkey v. DJ Turkey Equal 15 Since Inception (12/31/02) Annualized: 32% ($) Since Inception (12/31/02) Annualized: 45% ($)

World’s First Islamic ETF: DJIM Turkey: 

World’s First Islamic ETF: DJIM Turkey DJIM Turkey ETF (source: avsar.sungurlu@bmd.com.tr) Launched Feb 2006 @ 112 BPs Education/Awareness -’Agency, Turkiye Finans, the largest no-interest bank in Turkey. TV programs, brochures, credit card bill inserts, sms messages, e-mails, ads on financial magazines are the most used methods.’ -’On the international side, we only listed the fund in directories and informed contacts by e-mail.’ ‘This fund is the only (still, including standard mutual funds) investment fund in Turkey that delivers the dividends and also the only Islamic capital market instrument, which is not defined in the regulations. So there was both regulatory and technical obstacles’ Ave AUMs is $2.3M & Ave Daily Trading Volume: $1.3M -‘High when launched, now stagnant due to market conditions’ 100% Local investors -Individual 6% & Institutional 94% of AUMs Long Term Investing Dividends & Purification; Up to investor

DJ Global Titans 50 (Feb 2007): 

DJ Global Titans 50 (Feb 2007)

DJIM Titans 100 (Feb 2007): 

DJIM Titans 100 (Feb 2007)

DJIM Titans 100 v. DJ Global Titans 50: 

DJIM Titans 100 v. DJ Global Titans 50 Since inception-12/31/95 to 2/22/07- annualized: 7.8%($) Since inception, 12/31/95 to 2/22/07- annualized 7.8% ($)

World’s 2nd Islamic ETF: DJIM Titans 100: 

World’s 2nd Islamic ETF: DJIM Titans 100 DJIM Titans 100 ETF (Jan. 2007) “The new ETF reflects growing interest in the area of Islamic finance as well as a heightened overall demand for unique concepts and products in passive investing. The Dow Jones Islamic Market Indexes are a perfect tool for combining faith-based principles and finance in order to capture the performance of the largest 100 Islamic compliant companies globally. This index family is just one example of Dow Jones Indexes’ leadership in producing advanced, innovative benchmarks—market participants may be looking at this area of finance now, but we’ve been there since the beginning.” Daniele.tohmeadet@bnpparibas.com BNP Paribas Asset Management Swiss Bourse $58M AUMs (source: www.easyetf.com) 50 BPs (source: www.easyetf.com)

Implications in Demand for Islamic ETF: 

Implications in Demand for Islamic ETF Sophistication Open/Closed Funds  Certificates  ETFs Investment vehicle for the trading mindset Better for stability of the market (OIC country ETF) Dual listing (OIC exchange ready?) Interim alternative for short term Islamic liquidity Treasury Interim alternative for compliant risk mitigation Diversified asset class portfolio Reach out to non-Islamic investors: diversification Positioning as ethical investment vehicle (Europe) Performance & Non-financial sector expansion

Screening Issues in an Islamic ETF: 

Screening Issues in an Islamic ETF Educational & awareness issue Regional & Sector Biases Family Strategy Quarterly Reviews & Financial Screens Dividends & Purification Muslim country Islamic Indexes Largest sector eliminated Liquidity/Free float & foreign restrictions

Screening Situation in OIC Countries: 

Screening Situation in OIC Countries 56  30  17 Increase intra-OIC trade and investment Shari’ah compliant capital flight Conventional financial sector is largest sector (>50%) in almost all OIC countries with stock exchanges Publicly listed Islamic banks have a small free floatation (small number of shares available for investing) Interim Shari’ah Screens For OIC? DFM ~ Islamic Stock Exchange Debt culture: banking over finance Equity culture developing selectively Many companies fail the gearing Shari’ah screen Thus, 99% of the companies in the Dow Jones Islamic Market Index (DJIM) are from OECD countries: Thus, Shari’ah complaint capital flight

Indexes in the Emerging Markets: 

Indexes in the Emerging Markets Index Construction Float Weighting & Sector Bias Reviews Corporate actions Real time v. End of Day Market cap v. Price weight v. Equal weight v. Fundamental index Family Strategy? View from the West Small, Mid or large Cap companies (illiquid) Index construction issues Governance (minority shareholders)

GCC/MENA : 

GCC/MENA Success of the Dow Jones Islamic Market Indexes Dow Jones CitiGroup Sukuk Index Dow Jones & Bahrain Stock Exchange Dow Jones & Cairo & Alexandria Stock Exchange Dow Jones Kuwait Dow Jones Kuwait 50 DJIM Kuwait Dow Jones & Dubai Financial Market Several Pending Dow Jones DIFC Arabia Titans 50 Public Private Partnership

DJ DIFC Arabia Titans 50 (2006): 

DJ DIFC Arabia Titans 50 (2006)

DJ DIFC Arabia Titans 50 (2006): 

DJ DIFC Arabia Titans 50 (2006)

DJ DIFC Arabia Titans 50 (2006): 

DJ DIFC Arabia Titans 50 (2006)

Conclusion: 

Conclusion Islamic Indexes  Islamic ETFs Islamic index construction issues Demand implies sophistication & use Islamic Capital market development Islamic Asset Class Indexes DJ Citigroup Sukuk Index REITs, Commodities, etc. -Modify Screening Islamic Indexes for OIC countries Conventional Islamic -Modify Screening Islamic ETF  Beginning of Integration

Slide31: 

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