Tara Uzra Dawood CEO, Dawood Capital Management Ltd. Pakistan

Tara Uzra Dawood CEO, Dawood Capital Management Ltd. Pakistan

An Investment Solution for Everyone!

WITH ISLAMIC ALTERNATIVES

APRIL 2012

INVESTMENT PERSPECTIVE

OUTLINE

2

ISLAMIC FINANCE – GLOBAL MARKET PERSPECTIVE

ISLAMIC MUTUAL FUNDS – IN PAKISTAN

AVAILABLE AVENUES FOR ISLAMIC INVESTMENTS

ISLAMIC FINANCE – FACT SHEETS

ISLAMIC FINANCE IN PAKISTAN

TAX SAVINGS – BETTER RETURNS

CONCLUSION

CHALLENGES TO ISLAMIC INDUSTRY

RECOMMENDATIONS

3

Assets of the top 500 Islamic banks expanded 21.45% to total $1,087 billion in 2011,

compared with $895 billion in 2010

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

““

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% growthSource: Ernst & Young’s Islamic Funds and Investments Report 2011

BASIC ISLAMIC FINANCE BUSINESS

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Focus Pakistan

ISLAMIC FINANCE INDUSTRY

BANKS AMC’s INSURANCE

Islamic Banks Islamic Window Islamic AMC With Shariah Division 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“ “

5

THE CURRENT MARKET SHARE ISLAMIC BANKS IS APPROX 8% IN 6 YEARS WITH A

TARGET TO INCREASE 12X12

MARKET SHARE ISLAMIC FINANCE Focus Pakistan

Source: The State Bank of Pakistan

6

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

ISLAMIC FINANCE INDUSTRY FACT SHEETFocus Pakistan

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AVAILABLE ISLAMIC AVENUESFOCUS 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. STOCKSStocks 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. COMMODITIESGold 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 AVENUESFOCUS PAKISTAN

C. FIXED INCOMEIt 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 ESTATEIt 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 FUNDSMutual 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.

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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

MUTUAL FUNDSFocus Pakistan

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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.

1.93%

8.63%

4.51%

4.36%

4.24%

4.91%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0%

2%

4%

6%

8%

10%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Ban

k D

epos

its P

KR

. Bill

ion

AUM

as

% o

f Ban

k D

epos

its

MUTUAL FUNDS V/S BANK DEPOSITS

MUTUAL FUNDSFocus Pakistan

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MARKET SHARE OF SHARIAH COMPLAINT MUTUAL FUNDS IS 17%

WHICH IS PKR 44 BILLION

Source: MUFAP December 31, 2011

ISLAMIC MUTUAL FUNDSFocus Pakistan

5,60

2

10,6

05

19,5

42

20,6

44

13,0

87

18,9

01

18,3

70

23,2

59

31,0

31

23,2

60

44,1

10

89.31%84.27%

5.64%

-36.61%

44.43%

-2.81%

26.61%33.42%

-25.04%

89.64%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

AUM

sin M

illio

n PK

R

AUM

s Gro

wth

(%)

ISLAMIC AUM’s IN MUTUAL FUNDS

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GROWH TREND OF ISLAMIC AUMs

Overall Growth 687%

ISLAMIC MUTUAL FUNDS IN PAKISTAN

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61.14%

15.31% 14.67%

4.24% 2.38% 1.41% 0.85%0%

10%

20%

30%

40%

50%

60%

70%

Inco

me

Mon

ey M

arke

t

Equi

ty

Bala

nced

Asse

t Allo

catio

n

Aggr

essiv

e In

com

e

Capi

tal P

rote

cted

ISLAMIC MUTUAL FUNDS IN PAKISTAN

Source: MUFAP December 31, 2011

CATEGORIZED VIEW OF ISLAMIC AUMs

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TAX SAVINGS – BETTER RETURNSPakistan 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 2011Minimum 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

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.

Working Example

INVESTOR ATax Slab 20%

Investment (PKR) 500,000

Timer Horizon (Yr) 3

Tax Credit Availed (PKR) 100,000

Investment net of tax (PKR) 400,000

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 70.95%

INVESTOR B

Tax Slab 20%

Investment (PKR) 500,000

Timer Horizon (Yr) 3

Tax Credit Availed (PKR) 0

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 11.00% 11.00% 11.00%

Cumulative Return at Yr 3 36.76%

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 Framework16

THE CHALLENGES ISLAMIC FINANCE 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 Muslims17

THE CHALLENGES MUTUAL FUND INDUSTRY

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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

RECOMMENDATIONS

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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

ANALYSIS & CONCLUSION

Thank You

20

Tara Uzra Dawood CEO, Dawood Capital Management Ltd.

Pakistan