Issues & Suggestions for OIC Shari’ah
Compliant Indexes
Rushdi Siddiqui
rushdi.siddiqui@dowjones.com
Global Director
Dow Jones Islamic Market Index Group
© Copyright 2007 Dow Jones and Company, Inc.
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
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Dow Jones Indexes Timeline: Key Dates
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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
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Dow Jones Islamic Market Index Awards
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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)
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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
1975-1990
Market Exposure: 250m
Conversions, Islamic Windows
& Subsidiaries of Mega Banks,
Commercial Banking
Syndications
Islamic Conglomerates
Market exposure: 100m
Establishment of significant
Islamic Banks in Non-Muslim
states
Market exposure: 20m
Concentrations of Islamic
Banks growing in GCC,
Malaysia, Pakistan and
Bangladesh
Muslim populated states getting
interested Syria, Libya, Soviet
bloc
Onset of Islamic Banks
(Malaysia, UAE, etc.)
Inefficient Command SOEs
in Iran and Sudan, and
Pakistan
Source: S. Farooq, BIBF
Timeline 1975-2010
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5
We are moving forward in IF
VC
PE
Activities
Risk
Reward
L
M
R
S
E
-Petro-liquidity & HNWs
-Diversification
-Shariah Scholars/research
-Stress Tested/Time
-Cross Sell
IFPs
CFPs
IFI
CFIs
IF
CF
300 plus years
Timeline/Products/Returns
© Copyright 2007 Dow Jones and Company, Inc.
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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)
© Copyright 2007 Dow Jones and Company, Inc.
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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
Saudi Arabia
Jan-93
AlAhli US Trading Equity National Commercial Bank
Source: Failaka
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Growth in Assets in Equity Funds
Total Asset in Islamic Equity Funds (Global Universe)
$20,000
$18,000
Assets in $ Millions
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$1996 1997
1998 1999
2000 2001
2002 2003
2004 2005
2006 2007
Year
Source:Failaka
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Growth in the Number of Islamic Equity
Funds (excluding Asia)
Growth in Islamic Equity Funds
$18,000
140
$16,000
120
$14,000
Total Assets in US$ Millions
100
$12,000
80
$10,000
$8,000
60
$6,000
40
$4,000
20
$2,000
$-
0
1996
Source:Failaka
© Copyright 2007 Dow Jones and Company, Inc.
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Fund Assets
Total Funds
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As regards Equity Funds
Total Number of Islamic Equity Funds: 306
Islamic Equity Fund Universe by Asset Class
European
2%
Other
8%
North America
4%
Sector Specific
5%
Emerging Markets
6%
Global
11%
Asian
Equity/Balance
49%
GCC
15%
Source: Failaka
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Nearly Full Range of Products
Fund categories
Global Equity 27 available
Asian Equity 7 by non-Asian based managers
US Equity 12 available
European Equity 7 available
Emerging Market 19 available (BRIC, South Africa, Turkey)
Single Country (SABB Amanah Saudi Equity)
Small Company (Al-Rajhi Global Small Cap Equity)
Regional Funds (45 funds dealing in GCC Equities)
Sector Funds 9 available
Balanced Easy to duplicate and 17 available
Hedge Fund 6-7 nearly there; 2 operational
Source:Failaka
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Its all Relative
Total Mutual Funds in the World: 56,863
Total Islamic: 550
Total Islamic Equity: 320 (including balanced)
Total Socially Responsible (SRI): 201
Source:Failaka
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Assets Under Management: In Perspective
Total Assets invested in Mutual Funds: US$ 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
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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
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Screening Process
Dow Jones World
Business
Descrip!ion
Revenue
Three Financial
Ratios
95%
D/MC
DJIM
C+IB/MC
AR/MC
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DJIM Screening
DJIM Universe
Financial ratios
Impermissible Income
Primary Business
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DJIM Regional Breakdown (2007)
60
50
40
DJIM
DJWI
30
20
10
0
US
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UK
Jap
Cana Ma'sia
Indonesia
18
DJIM Sector Breakdown (2007)
25
Credit & Impact on Financial
20
15
DJIM
DJWI
10
5
0
Oil/Gas Tech
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HCR
Indust
CG
Financial
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DJIM Performance (2007)
40
35
30
25
20
DJIM
DJW
15
10
5
0
World
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US
Can
EU
A/P
World
Dev
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Compliant Sector Based Investing
Islamic Equity Indexes
Benchmark Indexes: Dow Jones Islamic Market Index ($17T)
© Copyright 2007 Dow Jones and Company, Inc.
Industrials
Utilities
Health Care
Basic Matls
Financials
Telecom
Cons Svcs
Cons Goods
Technology
Oil & Gas
Sector Indexes:
Industries (Broadest-Based)
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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.
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Islamic Asset Class Expansion
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Screening
Pricing
Data
Education & Awareness
 Commodities
 REITs
 Hedge Funds
 Portfolio Indexes
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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.)
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 Absorption of Liquidity without Asset Inflation
 Capital flight: How does it benefit Muslim Country?
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Sector Weighting Breakdown (Q2 2008)  What does this mean?
Sctrs
DJIM
Malsi
a T-25
DJ
Malsi
a
DJIM
Turk
DJW
Turk
DJIM
PK
DJW
PK
DJIM
Ind
DJ
Ind
Arbia
50
DJ
Bah
DJ
Kw T50
DJIM
Kw
Oil/
Gas
.6%
1%
19
%
9%
31
%
19
%
4%
2%
0%
0%
0%
2%
BM
2
3
30
11
38
11
47
37
10
0
2
8
Ind
40
24
9
10
8
8
11
8
15
2
17
31
CG
35
20
4
10
4
5
8
14
1
--
1
.28
HCR
--
.51
2
1
4
.91
1
1
--
--
--
1
CS
1
11
8
8
3
.72
.49
1
--
2
1
2
Tele
16
6
20
6
6
3
21
13
20
10
2
5
UTI
3
6
4
1
7
3
7
4
--
--
0
--
FIN
2
27
6
44
--
49
--
20
45
85
69
51
TECH
.4
.37
--
.13
--
.21
--
--
9
--
10
.69
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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?
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Muslim Country Islamic & Conventional Index Top 5
Components & Weightings (Q1 2008)
DJIM
Turkey
DJW Turkey DJIM
Pakistan
DJW
Pakistan
Egreg DeMir Ve
Celik (24%)
Turkcell 9%
Dawood Hercules
Chem (10%)
MCB (15%)
Turkeye Petrol
(22)
Turkiye Garanti
(9)
Pakistan
oilfields (10)
Pak State Oil (5)
BIM Birlesik (8)
Akbank (8)
Pakistan
Petroleum (10)
Oil/Gas Dev (4)
Asya Katlim (6)
Turkiye Is
Bankasi (6)
Oil/Gas Dev (10) J&S Co (4)
Turcas Petrol
(4)
Egreg DeMir Ve
Celik (5)
Engro Chem Pk
(10)
64%
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37%
50%
Natl bank of Pk
(4)
32%
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Muslim Country Islamic & Conventional Index Top 5
Components & Weightings (Q1 2008)
DJIM
Malaysia
Titans 25
DJ Malaysia DJIM
Indonesia
DJ
Indonesia
IOI Corp (19%)
SimeDarby (7%) Bumi
Resources
(25%)
IOI Corp (6)
Telekomunikasi
(23)
Bumi
Resources
(16%)
Telekomunikasi
(14)
DiGi.com (9)
Bumiputra
Comm Ltd (6)
Astra Intl (12)
Astra Intl (7)
KL Kepong (8)
Public Bank (5)
Perusahaan
Gas (6)
Bakrie Bros (7)
MISC (7)
Malayan
Banking (5)
Indosat (4)
Bank central
Asia (6)
SimeDarby (19)
60%
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29%
70%
50%
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Muslim Country Islamic & Conventional Index Top 5
Components & Weightings (Q1 2008)
DJIM
Kuwait
DJ Kuwait
Titans 50
DJ Arabia
Titans 50
DJ Bahrain DJ MSM
Stock
Exchange
Investment
Dar (10%)
NBK (10%)
Ahli United
Bank (22%)
NBO (10%)
MTC (9)
KFH (9)
Maroc
Telecom
(10%)
Orascom
Const (7)
Batelco (12)
Raysut
Cement (10)
Agility (9)
MTC (9)
Orascom
Telecom (7)
GFH (11)
BM (9)
Gulf
Cble/Elec
(6)
Boubyan
Petro (5)
NIG (6)
MTC (6)
NBB (6)
Oman
Telecom (9)
Ithmaar
Bank (6)
Ren
Services (7)
39%
Comm Bank Arab Bank
of Kuwait
(6)
(6)
40%
36%
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55%
45%
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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.
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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
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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
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Billion Dollar Watermark Cross-Over
Eurobond Market*
Sukuk profile
70
3.5
60
3
0.8
0.8
5.7
6.9
11.8
24.1
70
50
2.5
0.1
0.6
0.7
1.1
1.8
3.1
2
1.5
1
0.5
40
30
20
10
0
0
1964
1965
1966
1967
1968
* Source: Frank J. Fabozzi,
Handbook of Fixed Income Securities, 1991
© Copyright 2007 Dow Jones and Company, Inc.
1969
2001 2002 2003 2004 2005 2006 2007
Malaysia
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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)
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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
© Copyright 2007 Dow Jones and Company, Inc.
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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 IntraOIC Investment Opportunities for ALL investors
 Win  Country OIC Level
 Win  Regional OIC level
 Win  Global OIC Level
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