INVESTMENT PERSPECTIVE
WITH ISLAMIC ALTERNATIVES
An Investment Solution for Everyone!
Tara Uzra Dawood
CEO, Dawood Capital Management Ltd.
Pakistan
APRIL 2012
OUTLINE
ISLAMIC FINANCE – GLOBAL MARKET PERSPECTIVE
ISLAMIC FINANCE IN PAKISTAN
ISLAMIC FINANCE – FACT SHEETS
AVAILABLE AVENUES FOR ISLAMIC INVESTMENTS
ISLAMIC MUTUAL FUNDS – IN PAKISTAN
TAX SAVINGS – BETTER RETURNS
CHALLENGES TO ISLAMIC INDUSTRY
RECOMMENDATIONS
CONCLUSION
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ISLAMIC FINANCE
Global Market Perspective
Source: The Banker Top 500 Islamic Financial Institutions – The 2011 Survey
Assets of the top 100 Islamic fund
managers grew to US$58 billion in
2010, achieving a 7.6% growth
“
Islamic finance has become a
recognized and a specific
segment of finance on its own
with still-bright growth
prospects, Also it is set to
make further inroads in
developed Western markets
while Southeast Asian
countries will likely fuel the
Islamic finance advance in
Asia in 2010
Standard & Poor's credit
analyst Mohamed Damak
“
Assets of the top 500 Islamic banks
expanded 21.45% to total $1,087
billion in 2011, compared with $895
billion in 2010
Source: Ernst & Young’s Islamic Funds and Investments Report 2011
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BASIC ISLAMIC FINANCE BUSINESS
Focus Pakistan
ISLAMIC FINANCE INDUSTRY
Islamic Banks
“
Islamic Window
AMC’s
Islamic AMC
“
BANKS
With Shariah
Division
INSURANCE
Takaful
With Shariah based
products
The very objective of the Shariah is to promote the welfare of the people, which lies in safeguarding their
faith, their life, their intellect, their posterity and their wealth. Whatever ensures the safeguarding of these
five serves public interest and is desirable.
Al-Ghazali
4
MARKET SHARE ISLAMIC FINANCE
Focus Pakistan
THE CURRENT MARKET SHARE ISLAMIC BANKS IS APPROX
8% IN 6 YEARS WITH A TARGET TO INCREASE 12X12
Source: The State Bank of Pakistan
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ISLAMIC FINANCE INDUSTRY FACT SHEET
Focus Pakistan
5 full fledged Islamic commercial banks
12 conventional banks with Islamic banking windows
840 Plus Islamic banking branches
Around $7 billion in deposits under management, representing approximately 8%
market share. Islamic banking industry grew by 30% over the past six years.
15 Asset management companies offering Islamic Funds out of 24.
4 Takaful players in the market
52 Modaraba Companies
6
AVAILABLE ISLAMIC AVENUES
FOCUS PAKISTAN
When it comes to Islamic Investing, we have been exposed to various limitations, unlike
conventional investing. Every investment must go through the screening process and
validated by some expert to qualify for being Islamic. The popular avenues available in
Pakistan are:
A. STOCKS
Stocks have remained better alternative for investors who have a long term perspective and can
bear the short-medium term volatility in the stock returns. KMI-30 Index which is the Islamic
stocks performance tracker has shown a stellar returns of 44% during the last 3 years as compared
to the conventional KSE-100 Index of -19% (from CY09 to CY11).
B. COMMODITIES
Gold is considered to be the safest commodity to invest and its ISLAMIC. Gold prices were up by
more 30% and 11% in 2010 and 2011. Prices initially rallied as Central Banks purchased gold to
diversify their reserved amid rising concerns on the sustainability of the US Dollar as world’s
reserve currency. However, still today gold is the better chioce of investment when it comes to
commodity investments.
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AVAILABLE ISLAMIC AVENUES
FOCUS PAKISTAN
C. FIXED INCOME
It includes Islamic Banks and Financial Institutions deposits and various investment certificates.
GoP has also issued its Islamic Fixed Income security “GoP Ijarah Sukuk” having varying levels of
returns depending on the maturity profile. They are considered to be risk free income security.
D. REAL ESTATE
It is considered to be one of the most popular, long term and illiquid investment avenue. There is a
chance of erosion in principal amount in time of need. An investor should plan carefully according
to the time and need basis and be patience for a suitable time for investment and disinvestment.
E. MUTUAL FUNDS
Mutual Funds are the pool of investments of all options discussed. In all other options, an investor
has to spent time to monitor investments personally. But in Mutual Funds, professional managers
are there on their behalf. Beautiful thing of mutual funds is diversification in various investment
avenues to mitigate risk for different investment profiles. Due to this feature, mutual funds are
becoming popular to individual investing in various avenues. All flavors of Islamic mutual funds are
available including money market, income, stock, hybrid and pensions. Real estate funds are yet to
formularize and soon it will also be included in the basket.
8
MUTUAL FUNDS
Focus Pakistan
1962 - Government of Pakistan established NITL which launched first Open End
Equity Fund in Pakistan – NIT
1966 - Government of Pakistan established ICP which launched series of Closed End
Funds.
Only in the Mid 90s, the sprouts of mutual funds is witnessed
1994-95 – More funds launched in private sector
2006 – Total number of AMCs are 30 managing 56 mutual funds
2007 – Launch of Dawood Islamic Fund (DIF). The First Islamic Asset Allocation fund
in Pakistan.
2011 – Total number of mutual funds 141
2011 – Total Industry Size of above PKR 288 billion as of December 31, 2011
2011 – 24 operational asset management companies
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MUTUAL FUNDS
Focus Pakistan
The asset under management were increased in mutual funds as compared to percentage
of bank deposits every year. Shows a great potential in the Mutual Fund Industry of
Pakistan.
MUTUAL FUNDS V/S BANK DEPOSITS
7,000
AUM as % of Bank Deposits
8.63%
4.91%
8%
6,000
4.24%
5,000
4.36%
6%
4.51%
4,000
1.93%
3,000
4%
2,000
2%
1,000
0%
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
10
Bank Deposits PKR. Billion
10%
ISLAMIC MUTUAL FUNDS
Focus Pakistan
MARKET SHARE OF SHARIAH COMPLAINT
MUTUAL FUNDS IS 17% WHICH IS PKR 44 BILLION
Source: MUFAP December 31, 2011
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ISLAMIC MUTUAL FUNDS IN PAKISTAN
GROWH TREND OF ISLAMIC AUMs
ISLAMIC AUM’s IN MUTUAL FUNDS
100%
89.31%
89.64%
Overall Growth
687%
84.27%
80%
50,000
45,000
44.43%
35,000
33.42%
40%
30,000
26.61%
20%
25,000
-25.04%
-2.81%
5.64%
20,000
0%
15,000
-36.61%
-20%
44,110
23,260
31,031
23,259
18,370
18,901
13,087
20,644
19,542
-40%
10,605
10,000
5,602
AUMs Growth (%)
60%
-60%
5,000
-
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
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AUMs in Million PKR
40,000
ISLAMIC MUTUAL FUNDS IN PAKISTAN
CATEGORIZED VIEW OF ISLAMIC AUMs
70%
61.14%
60%
50%
40%
30%
Source: MUFAP December 31, 2011
4.24%
2.38%
1.41%
0.85%
Aggressive Income
Capital Protected
Equity
Money Market
0%
Income
10%
Asset Allocation
14.67%
Balanced
15.31%
20%
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TAX SAVINGS – BETTER RETURNS
Pakistan is an emerging economy where mutual funds are now considered as a
lucrative investment options.
Besides other benefits being mentioned, one most important benefit an investor can
obtain, is the tax rebate an investor can claim on his investment in mutual funds U/S
62 of the IT Ordinance 2001. It means “Riba free returns + Tax advantages”.
According to Finance Bill 2011, an individual investor can claim up to PKR 100,000/(salaried) and PKR 125,000/- (self-employed) in a tax year on investment of PKR
500,000/- or 15% of the taxable income, whichever is lower, subject to that an
investment must be held for 3 years.
FINANCE BILL 2011
Minimum Holding Period
3 Years / 36 Months
Maximum Ceiling for Tax Credit
PKR 500,000/- or 15% of the taxable income
whichever is lower
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TAX SAVINGS – BETTER RETURNS
Working Example
Lets assume that Investors A and B both are under 20% of tax bracket and invests PKR
500,000/- in Islamic income fund providing an annual return of 11% per annum. Assume
the time horizon of 3 years. Investor A availed the tax credit while Investor B did not.
INVESTOR A
Tax Slab
INVESTOR B
20%
Tax Slab
20%
Investment (PKR)
500,000
Investment (PKR)
500,000
Timer Horizon (Yr)
3
Timer Horizon (Yr)
3
0
Tax Credit Availed (PKR)
100,000
Tax Credit Availed (PKR)
Investment net of tax (PKR)
400,000
Annual Rate of Return
Annual Rate of Return
11.00%
After Yr 1
After Yr 2
After Yr 3
Investment Value (PKR)
555,000
616,050
683,816
Annualized Return
38.75%
29.02%
27.23%
Cumulative Return at Yr 3
11.00%
After Yr 1
After Yr 2
After Yr 3
Investment Value (PKR)
555,000
616,050
683,816
Annualized Return
11.00%
11.00%
11.00%
Cumulative Return at Yr 3
36.76%
70.95%
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THE CHALLENGES
ISLAMIC FINANCE INDUSTRY
Lack of diversified products range
Understanding of investors’ need
Public awareness at mass level about the industry
Misconception that it is only for Muslims
Un-stability of Stock Markets shake the confidence level of Investors
Dearth of liquid debt instruments
Protecting and maintaining the integrity and quality
Ensuring performance
Maintaining momentum to ensure viability
Providing competitive returns
Strong Shariah Compliance
Sound Regulatory Framework
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THE CHALLENGES
MUTUAL FUND INDUSTRY
Mitigating the Risk involved
Inadequate Intellectual Capital
Comforting & convincing with bad past investment experiences
Budgetary constraints for Marketing activities.
Low saving and Investment oriented society
Information disclosure and transparency
Choosing appropriate distribution network
Right timing to launch funds
In time after sale activities
Role and Support of Regulators
Misconception that it is only for Muslims
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RECOMMENDATIONS
Cross-border Market integration
Establishing affiliations with mutual funds associations in other countries and
promote one-to-one contacts
Team work for the growth of mutual fund industry
Support in creating the Mass awareness and education about the industry
Promoting healthy business practices and ethical code of conduct
Establishing and Strengthening distribution network for Mutual Fund on the
Association level
Run mass awareness program especially about the misconceptions
Media should play a more supportive and constructive role for awareness and
disseminating information
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ANALYSIS & CONCLUSION
Islamic capital Market is on the verge to take off. The need is to have a sound and
conducive framework for both Market and regulations
Market participants including investors, Regulators, advisors and institutions have a
pivotal role to play in this connection
New Innovative products are increasing in the markets like Islamic Hedge Funds,
Derivatives and SWAPS, which calls for the qualified and well trained workforce
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Thank You
Tara Uzra Dawood
CEO, Dawood Capital Management Ltd.
Pakistan
20