BRUNEI ISLAMIC FINANCIAL SERVICES FORUM Royal Berkshire, Jerudong Park Polo Club - Brunei Darussalam 15 September 2006

ISLAMIC FUND MANAGEMENT

PRESENTATION BY

MR.K.SALMAN YOUNIS MANAGING DIRECTOR KUWAIT FINANCE HOUSE (MALAYSIA) BERHAD

TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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KFH AT A GLANCE
Incorporated and headquartered in the State of Kuwait 1977 Ownership : - Kuwait Investment Authority - Public Authority for Minors Affair - Kuwait Awkaf Public Foundation - General Public 25.01% 10.78% 8.47% 55.74% 100.00%

KFH is one of the largest Islamic banks in the world, and is involved in corporate, investment, commercial and retail banking. The Government of Kuwait owns 44.26% of the equity, and the general public holds the remaining shares
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SNAPSHOT OF KFH GROUP

As at 31 December 2005 On Consolidation Market Capitalisation : US$ 8,917 million
BANGLADESH

TURKEY

KUWAIT BAHRAIN

Net Profit : US$ 406 million Asset : US$ 16,031 million

UAE OMAN MALAYSIA & SOUTH EAST ASIA

Equity: US$ 1,849 million

Single A rated by S&P,

Moodys Fitch JBCA

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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KUWAIT FINANCE HOUSE (MALAYSIA) BERHAD

Granted Islamic Banking Licence by MOF Malaysia to commence operations with effect from 8 May 2005 Main Office : Level 17 & 18 Tower 2, MNI Twins, Jalan Pinang, Kuala Lumpur First KFH Malaysia branch : Ground floor, Tower 2, MNI Twins, Jalan Pinang, Kuala Lumpur Initial capital investment : RM380 million (US$ 100 million) Current staff strength : 140 Commencement of operations : 8 August 2005
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KUWAIT FINANCE HOUSE (MALAYSIA BERHAD) : MILESTONES

Bank Negara Malaysia approved the application of KFH to establish the first foreign Islamic bank in Malaysia. Sept 2003 First branch opened in Kuala Lumpur and started its operation.

Granted Islamic Dealers License by Securities Commission. 17 February 2006

5 May 2005 May 2004 Aug 2005

Dec 2005 February 2006

Bank Negara announced the issuance of three new Islamic banking licenses to foreign Islamic banks.

Granted Islamic Banking License by Minister of Finance Malaysia to commence operations.

KFH (Labuan) Berhad, a wholly owned subsidiary of KFHMB, was granted offshore banking license.

Official Opening by the Honorable Prime Minister of Malaysia.

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www.kfh.com.my

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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KFH EXPERIENCE IN FUND MANAGEMENT

Funds under management exceed US$ 2 billion (KFH and client funds). Examples of funds managed by KFH : Healthcare Fund (Nursing Home Operators in UK) Swedish Post Office Fund Prime Industrial Property Fund Ethmaar Fund for UK Properties Alliance Property Fund Al Soor Fund Baitak Residential Real Estate Fund Millenium Aircraft Leasing Fund BAITAK Asian Real Estate Fund These funds on average provide a cash yield of 8% and IRR of 12%
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REPORT ON KFH FUNDS AT www.kfh.com

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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DEFINITION OF ISLAMIC FUND

Islamic funds are a group of specialised collective investment Islamic funds are a group of specialised collective investment funds which offer investors the opportunity to invest their funds which offer investors the opportunity to invest their surplus cash in a diversified investment portfolio that are surplus cash in a diversified investment portfolio that are managed and selected by professional portfolio managers in managed and selected by professional portfolio managers in accordance to Shariah principles. accordance to Shariah principles. AAOIFI defined Investment Funds as Funds are investment Funds are investment AAOIFI defined Investment Funds as vehicles, which are financially independent of the institutions vehicles, which are financially independent of the institutions that establish them. Funds take the form of equal participating that establish them. Funds take the form of equal participating shares units, which represent the shareholders/ unitholders shares //units, which represent the shareholders/ unitholders share of the assets, and entitlement to profits or losses. The share of the assets, and entitlement to profits or losses. The funds are managed on the basis of either Mudharabah or agency funds are managed on the basis of either Mudharabah or agency contract (AAOIFI Financial Accounting Standard No 14, p. 422) contract (AAOIFI Financial Accounting Standard No 14, p. 422)
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SHARIAH RULING IN RELATION TO INVESTMENT SHARIAH RULING IN RELATION TO INVESTMENT FUNDS FUNDS
Investment funds are permissible by Shariah. Because funds are a form of collective investment that continue throughout their term, the rights and duties of participants are defined and restricted by the common interest, since they relate to third parties rights. Hence, in case the Fund is managed on the basis of agency the shareholders / unitholders waive their right to management, redemption or liquidation except in accordance with the limitations and conditions set out in the statutes and by-law. (AAOIFI Financial Accounting No 14, p. 422)
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STRUCTURE OF TYPICAL ISLAMIC FUND

INVESTORS (UNITHOLDERS) FUND Deed

TRUSTEE
Custodian of Assets

MANAGER Administers the operation of the fund

ASSETS (INVESTMENT PORTFOLIO)

Shariah Committee
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ROLE OF THE SHARIAH COMMITTEE / SHARIAH ADVISOR

Ensuring the fund is managed and administered in accordance with Shariah principles. Providing expertise and guidance for the fund in all matters relating to Shariah, including the funds trust deed and prospectus, its structure and investment, and other operational and administrative matters. Monitoring the funds. Offering the investors with a peace of mind and confidence that their investments are managed based on Shariah principles.

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RELATIONSHIP BETWEEN FUND MANAGER AND INVESTORS & REMUNERATION

There are commonly two types of relationship between the fund manager and the investors :a) Mudharabah management of the fund has been undertaken on a mudharabah basis and the manager is acting as the Mudharib and the remuneration is by the way of a share of the profits generated by the funds. b) Wakalah - management of the fund has been undertaken on a wakalah (agency) basis and the manager is acting as the agent and the remuneration is by way of a fixed fee arrangement, or the fee is calculated by reference to the value of the fund itself.
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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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TYPES OF ISLAMIC FUNDS

Mutual Funds / Unit Trust Aviation Funds Equity Funds / Private Equity Funds Leasing Funds

Hedge Funds

ISLAMIC FUNDS

Property Funds

Sukuk Funds

REITs Funds

Shipping Funds

Commodity Funds

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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ASSET CLASSES
Assets (investment portfolio) need to be screened to ensure its compliance with Shariah. Types of assets : a) Financial assets Shares Sukuk Etc b) Non-financial assets Real property Aviation Shipping Commodities Infrastructure projects Etc

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EQUITY SCREENING
Equity / Shares Core Activities : No Prohibited Activities Financial Ratio : Dow Jones Islamic Index, FTSE Islamic Index etc Purification Tainted Income

Shariah Compliant Equities / Shares

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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SOCIALLY RESPONSIBLE INVESTING (SRI) & SHARIAH COMPATIBLE INVESTING (SCI)

SOCIALLY RESPONSIBLE INVESTING (SRI) Ethical Social conscience & environmental Proactive by using financial muscle to encourage positive change SHARIAH COMPATIBLE INVESTING (SCI) Ethical Social conscience & environmental Religious & based on Shariah principles

Need to build bridges between SRI & SCI

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TOPICS
Introduction to Kuwait Finance House Background of Kuwait Finance House (Malaysia) Berhad KFH Experience In Fund Management Overview of Islamic Funds Types of Islamic Funds Asset Classes Socially Responsible Investing (SRI) & Shariah Compatible Investing (SCI) Challenges & Way Forward
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CHALLENGES FOR ISLAMIC FUND MANAGEMENT INDUSTRY

Shariah Harmonisation & Convergence Marketing & Distribution Channels Risk Management Product Development & Innovation Regulatory and tax issues

CHALLENGES

Competition with conventional funds

Human Capital Skills & Expertise

Building Credibility & Confidence

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CHALLENGES IN DEVELOPING BRUNEI INTO A REGIONAL HUB FOR ISLAMIC FUND MANAGEMENT
1. To close the gap between Brunei Shariah views & GCC / global Shariah views Shariah harmonization & convergence. 2. To provide a wide range of Shariah compliant assets, products & services to meet the needs of the investors. 3. To create a vibrant market with a good regulatory, legal, tax, accounting and Shariah framework.

4. To educate investors and enhance their awareness on Brunei financial products, instruments and services.
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ISLAMIC FUND MANAGEMENT DEVELOPMENT WAY FORWARD

Both industry players and regulators should strive to improve value proposition of the Islamic market. Build credibility by improving earning power, transparency, global Shariah compliance, excellent customer service and efficiency of delivery channels of Islamic financial products. Regulators should strive to create a uniform reporting and disclosure basis of Islamic financial products. Islamic financial market should increase market share and increase cross-border expansion. Increase investment in human resource capability. Knowledge sharing between different Islamic markets.
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Thank You Thank You

Kuwait Finance House (Malaysia) Berhad Level 18, Tower 2, MNI Twins 11, Jalan Pinang 50704, Kuala Lumpur Malaysia TEL : (+603) 2055 7777 FAX : (+603) 2166 7999 www.kfh.com.my
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