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Click to edit Master title style SEPTEMBER 2006

Click Fund Master subtitle Conventional Fund Management Islamic to editManagement vs. style
Brunei Islamic Financial Services Forum 15-16 September 2006

Islamic FundMaster title style Conventional Fund Management Click to edit Management vs.

CONTENTS Master subtitle style Click to edit

CONTENTS
Section 1 Section 2 Shariah Principles in Asset Management Shariah Compatible Investing (SCI) & Socially Responsible Investing (SRI) Innovation Timeline Shariah Asset Classes Shariah Investment Vehicles Shariah Fund Services Estimated Industry Size Performance of Shariah Equities and Sukuks Performance of Shariah Funds 5 12

Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Section 9

15 17 19 21 23 26 29
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CONTENTS
Section 10 Section 11 Section 12 Challenges in Islamic Asset Management Product Segmentation by Investors Building A World Class Capital Market in Brunei Darussalam Brunei Darussalam Proposition As Financial Center Some Quickwins for Brunei Darussalam Our Initiatives in Brunei Darussalam About CIMB 31 34 36

Section 13 Section 14 Section 15 Section 16

42 45 47 49

Important Notice Contact Details


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Islamic FundMaster title style Conventional Fund Management Click to edit Management vs.

SHARIAH edit Master subtitle style Click to PRINCIPLES IN ASSET MANAGEMENT

SHARIAH PRINCIPLES IN ASSET MANAGEMENT


Financial market transactions, operations and services that comply with Islamic rules, principles and codes of practices Derived from three important sources: The Holy Quran Sunnah Ijtihad Issues of social justice, equitability and fairness as well as practicality of financial transactions. Prohibited elements under Shariah are:Riba (interest); Activities with elements of gharar (uncertainty); Maisir (gambling) activities; and Sale of goods and services that are prohibited in Islam.
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ISLAMIC FUND
A joint pool The investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shariah.
The Basic Structure of A Typical Fund

INVESTORS SHARIAH ADVISORY FUND INVESTMENT ADVISER PERMITTED INVESTMENT CUSTODIAN / TRUSTEE FUND MANAGER

ROLE OF SERVICE PROVIDERS


Fund Manager Investment manager and distributor of the Fund Shares. Apply the principle of Al-bai as basis for trading in Islamic securities and money market and other Islamic financial instruments Hold the Companys assets in custody for the Shareholders in separate accounts or safekeeping accounts Advise the Company in ensuring that the business activity related to the Fund Shares are Shariah compliant at all times

Investment Adviser

Custodian Bank / Trustee

Shariah Advisor

ISLAMIC FUND IN TERMS OF SHARIAH


Pro-rated profit earned by the Fund instead of a fixed return tied up with their face value. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The amounts pooled together must be invested in a business acceptable to Shariah. Be involve in the economic activities (muamalah) with a good and right manner. Prohibit idle or unproductive asset to spur economic growth of the umah. The ethics and Shariah rules should not be neglected. The activities must be done with mutual consent (al-taradhi), fair (al-adalah), and no losses at a side (la dharara wa la dhirara). One of the muamalah concept practise today is through the Mutual Fund.

COMMON SHARIAH PRINCIPLES

Musharakah Mudharabah Wakalah

Profit & Loss Sharing Profit Sharing A contract, which gives the power to a person to nominate another person

Underlyings principles Ijarah Murabahah Lease Financing Trade with Mark Up or Cost Plus

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Shariahto edit Master subtitle style vs. Socially Responsible Click Compatible Investing (SCI) Investing (SRI)

SHARIAH COMPATIBLE INVESTING (SCI) VS. SOCIALLY RESPONSIBLE INVESTING (SRI)


Shariah Compatible Investing (SCI) Socially Responsible Investing (SRI)
Shuns the stocks of any company engaged in gambling, alcohol, tobacco, firearms or armaments. Also companys environmental awareness, its workers rights, the companys shareholder irresponsibleness (or lack of it), and the companys contribution to its community. More Companies More diversified. Lower risk from regular market volatility

Excludes non-shariah compliant stocks and also neglects unethical and highly indebted firms

Excludes more companies than investing using the SRI method Less diversified Higher risk from regular market volatility

Hakim and Rashidian (2004) used the capital asset pricing model (CAPM) to compare the Dow Jones Islamic Market Indexs (DJIMI) performance with those of the Dow Jones World Index (DJW), and the Dow Jones Sustainability World Index (DJS), the most popular socially responsible index available. Both DJIMI and DJS mirrored DJWs risk return behaviour. This implication suggests that the moral restrictions towards investing imposed by SCI and SRI, did not expose them to more risk. DJIMI underperformed the DJS by nearly half. This is due to Shariah compliance measures excluding more companies making SCI indexes less diversified; hence more exposed to risk and market volatility.
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Innovationedit Master subtitle style Click to Timeline

PRODUCTS EVOLUTION 70S, 80S, 90S AND 00S


In the past 30 years, the Islamic Financial Services Industry has gone through rapid growth and evolution.
Evolution 1970s 1980s 1990s 2000s

Area

Gulf / Middle East

Gulf / Middle East Asia Pacific

Gulf / Middle East Asia Pacific

Gulf / Middle East Asia Pacific Europe / Americas Global Offshore Market Commercial Islamic banks Takaful Islamic investment companies Asset management companies Brokers/dealers Islamic investment banks E-Commerce

Institutions

Commercial Islamic banks

Commercial Islamic banks Takaful Islamic investment companies

Commercial Islamic banks Takaful Islamic investment companies Asset management companies Brokers/Dealers Commercial banking products Takaful products Mutual funds/ unit trust Domestic Islamic bonds Shariah compliant stocks Islamic stockbroking Islamic derivatives

Products

Commercial banking products

Commercial banking products Takaful products

Commercial banking products Takaful products Mutual funds/ unit trust Domestic Islamic bonds Global Islamic bonds Islamic asset backed securities Shariah compliant stocks Islamic stockbroking Islamic derivatives Hedge funds Private Equity & Islamic REITs

(Source: Report of the Islamic Capital Market Task Force of the International Organisation of Securities Commission (IOSCO) and CIMB Islamic Analysis) 14

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Shariahto edit Master subtitle style Click Asset Classes

2 SHARIAH ASSET CLASSES


Traditional Investments Funds Money Market Sukuk Equity Alternative Investments Funds Infrastructure Private Equity Real Estate Commodity Leasing Hedge

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Shariahto edit Master subtitle style Click Investment Vehicles

SHARIAH INVESTMENT VEHICLES


Based on the investment capabilities, the following investment vehicles can be utilised:
Investment Capabilities
Money Market Private Equity Infrastructure Real Estate Commodity Leasing Hedge Sukuk Equity

Investment Vehicles
Unit Trust / Mutual Funds Structured Products Commingled Funds Master Feeder Port Managed Accounts Institutional Funds Discretionary Port Sub-Advised Port Offshore Funds Fund of Funds

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SHARIAH FUND SERVICES: ADVANTAGES


Islamic Funds

Conventional Funds

Fund Accounting

Calculation and booking of nisbah / margin based on cash basis and/or accrual basis depending on the product types. (i.e. ijara) Investment portfolio of Shariah instruments only. Cleansing process of NonShariah income of stock dividends done. Options for ZIS (Zakat Infaq Shahadah) payment to be approved by Independent Shariah Supervisory Board

Calculation and booking of interest income based on accrual basis.

Investment portfolio of both Shariah and Non-Shariah instruments. No cleansing process of NonShariah income of stock dividends. No options for ZIS (Zakat Infaq Shahadah)

Fund Administration

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Estimated edit Master subtitle style Click to Industry Size

ESTIMATED INDUSTRY SIZE - MALAYSIA


In 2005, the Malaysian Securities Commission approved 12 Shariah-compliant mutual funds, total number of funds to 83. or 24.4% (2004: 71 funds or 24.4% of the total industry) Of the 83 Shariah-compliant mutual funds, 18 are balanced funds, 16 are bond funds, 43 are equity funds, 3 are fixed income funds, and 3 are money market funds.

Bond Fund 19%

Equity Fund 51%

Balanced Fund 22% Money Market Fund 4%

Fixed Income Fund 4%

(Source: Malaysian Securities Commission Annual Report 2005)

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ESTIMATED INDUSTRY SIZE MIDDLE EAST


Trade funds - largest portion of total Islamic Fund universe, which comprise primarily of Murabaha funds. Sophisticated structured products are very recent and comprise under 10% of the total universe of Islamic mutual funds in the Middle East. There is also a gap in terms of types of funds like hedge funds and fund of funds. Money market funds are few and represent a significant opportunity to be explored as Islamic financial institutions have excess liquidity which could be channelled into the industry.

(Source: Bloomberg, Google)

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Performance of Shariah Equities & Sukuks Click to edit Master subtitle style

PERFORMANCE OF SHARIAH EQUITIES & SUKUKS


In Malaysia, Sukuk has proven to consistently out-perform conventional bonds

Conventional Bond Index 1Yr & Above

Islamic Bond Index 1Yr & Above

(Source: Bloomberg, CIMB Fixed Income Research)

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PERFORMANCE OF SHARIAH EQUITIES & SUKUKS


Globally, Islamic equities has proven to consistently out-perform conventional equities

FTSE TII Global Islamic

MSCI Capital Markets Global

S&P 500

(Source: Bloomberg, FTSE, MSCI, S&P)

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Performance of Shariah Funds Click to edit Master subtitle style

PERFORMANCE OF SHARIAH FUNDS


The performance of Islamic funds over the following asset classes are varied when compared to its corresponding Conventional Funds :
Islamic Funds (5 Year Total Return)
Bond: Islamic / Shariah Bond Fund 34.57% (Average of 2 funds)

Conventional Funds (5 Year Total Return)


Bond: General 26.56% (Average of 9 funds)

Equity: Islamic / Shariah Equity Fund 25.08% (Average of 14 funds)

Equity: Growth 40.76% (Average of 27 funds)

Mixed Asset: Islamic / Shariah Balanced Balanced Fund 16.04% (Average of 3 funds)
(Source: Lipper as at September 4, 2006)

Mixed Asset: Growth 43.25% (Average of 9 funds)

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Challenges in Islamic subtitle style Click to edit Master Asset Management

CHALLENGES IN ISLAMIC ASSET MANAGEMENT

Fund Accounting

Common Parameters and Filtering

Illiquid Shariah Securities Challenges

Risk Management Framework

Managing Non-Compliance Activity

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Products Segmentation by Investors Click to edit Master subtitle style

PRODUCTS SEGMENTATION BY INVESTORS


The Islamic fund products are segmented according to type of investor as can be seen below :
Affluent Investors
Mutual Fund

High Net Worth Investor

Institutional Investors

Institutional Fund Managed Account Alternative Investment*


* Private Equity, Real Estate, Infrastructure, Hedge, & Commoditu Fund (Source: CIMB Islamic)

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Building Aedit Master subtitle style Click to World Class Capital Market In Brunei Darussalam

HOW FINANCIAL MARKETS REFORM COULD BENEFIT BRUNEI DARUSSALAM


Indirect impact on growth Increased productivity because of better capital allocation Increase local knowledge and expertise Direct impact on efficiency Increased banks efficiency Migration of more payments to electronic platform Increased debt market intermediation Elimination of private lending Used of equity as a new fundraising vehicle Vital components needed for this effort include: Reputation building; High performance standards; A resilient infrastructure; and A robust regulatory framework. But vision, political commitment and, above all, leadership makes the real difference in building a world class capital market.
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BUILDING A WORLD CLASS CAPITAL MARKET IN BRUNEI DARUSSALAM


Dr. Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, has led the way Championed the creation of the Islamic Financial Services Board Latest country to recognize the need to develop its capital markets

Malaysia
Promotes Islamic finance around the world Instrumental in developing the country's master plan to strengthen its banking sector

Saudi Arabia

A clear leader has emerged: Jammaz Al-Suhaimi

Helped pass the new capital market law and also created the CMA

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BUILDING A WORLD CLASS CAPITAL MARKET IN BRUNEI DARUSSALAM


Prime Minister Lee Hsien Loong identified the need to develop a modern capital market Same league in 2004 as the United States (7.7%) Above both the - United Kingdom (5.7%) - European Union (5.2%) Managed the policy, legal, tax, & regulatory changes that have raised the contribution of the capital market

Singapore
The banking-related financial-services sector's share of Singapore's GDP has averaged 6.7 percent of nominal GDP

To change capital markets succeed when leaders effectively manage 3 key issues: Setting clear objectives Understanding the regulatory imperative Actively developing the market
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BUILDING A WORLD CLASS CAPITAL MARKET IN BRUNEI DARUSSALAM


Brunei should specialize and focus on growing its Islamic asset management sector up to international standards in order to compete with regional Islamic financial powerhouses such as Malaysia & Singapore
Banking Non-Financial NonInstitutions Services

Money Market

Wealth Management

Islamic Financial Market

Capital Market Debt and Equity

Asset Management Structured Products and Derivatives

Takaful

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BUILDING A SPACE IN ISLAMIC FINANCE BRUNEI FOR DARUSSALAM


A growth model for Islamic banking: In some countries Islamic banks do better than their local conventional rivals, but in others they perform much worse

Impact on the performance of Islamic institutions 3 factors: Market Profile Business Model Demand for Islamic banking

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Brunei Darussalam Proposition As Financial Center Click to edit Master subtitle style

BRUNEI DARUSSALAM PROPOSITION AS FINANCIAL CENTER


Rational legal-regulatory framework Good quality of life Strategic geographic location Attractive, sustainable local economy Stable political environment

Highly developed infrastructure

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BRUNEI DARUSSALAM PROPOSITION AS FINANCIAL CENTER


Credible and reliable financial center Accommodative legal framework High liquidity in the system Globally competitive tax structure Internationally recognized and highly regarded: OECD: not blacklisted, FATF: listed as significant financial centre, Antimoney laundering legislation. Brunei has established a National Anti-Money Laundering Committee, Anti-terrorism legislation Involvement with: International Organization of Securities Commission (IOSCO), APG on Money Laundering, a sub-group of FATF. ASEAN Capital Markets Forum, International Monetary Fund (IMF), World Bank, World Trade Organization (WTO), Asian Development Bank (ADB), South East Asian Central Banks (SEACEN)

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Some Quickwins for Brunei Darussalam Click to edit Master subtitle style

SOME QUICKWINS FOR BRUNEI DARUSSALAM

Financial Exchange

Domestic Fundraising

Incorporate National Investment Holding Introduce government sponsored National Unit Trusts Fund

Promote Offshore Funds

Increase Sukuk Issuance

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Our Initiatives Master subtitle style Click to edit in Brunei Darussalam

OUR INITIATIVES IN BRUNEI DARUSSALAM


International Investment Banking License in June 2005 Investment Advisers License approved in August 2005 Headed and staffed by Bruneians Long term commitment is further evidenced by 6,000 square-foot office space in PGGMB Building in Bandar Seri Begawan Our core offerings Investment Banking and Asset Management Our current and future initiatives Onshore / Offshore Islamic Funds, Sukuk Origination and Syndication

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About CIMB Group subtitle style Click to edit Master

ABOUT CIMB GROUP


Transforming CIMB into a Universal Bank CIMB to transform into a "universal bank". The planned restructuring involves the integration of CIMB with its sister company, Bumiputra-Commerce Bank, uniting investment banking commercial banking and asset management services under the CIMB brand. The second-largest financial services provider in Malaysia, combined staff strength of more than 20,000 globally.

Investment Banking

Islamic Banking Retail Banking

Treasury

Asset Management

Business Banking

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CIMB GROUPS PRESENCE IN MAJOR FINANCIAL CENTERS


Emphasis on knowledge products for private clients and institutions; Leveraging regional product expertise; Understanding of local requirements; Capable banking infrastructure to execute transaction; Comprehensive banking franchise; A top provider of tailor-made financial solutions to clients across the region; Kuala Lumpur is the leading Islamic financial centre.

London New York Bahrain Yangon


Tokyo Hong Kong

Bangkok Brunei Darussalam Kuala Lumpur Labuan Singapore Jakarta

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Mahatma Gandhi

IMPORTANT NOTICE
This document and its contents are proprietary information and products of CIMB and may not be reproduced or otherwise disseminated in whole or in part without its written consent. The information in this presentation reflects prevailing conditions and our views as of this date. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. Although the information contained herein is believed to be reliable, CIMB makes no representation as to the accuracy or completeness of any information contained herein or otherwise provided. Nothing contained in this presentation is, or shall be, relied upon as a promise or representation as to the future.

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CONTACT
Noripah Kamso, Director CIMB Principal Asset Management T: +603 2084 2300 F: +603 2084 2299 E: noripah@cimb-principal.com.my Suryono Darnor, Director CIMB Islamic Asset Management T: +603 2116 1336 F: +603 2144 8509 E: suryono@cimb.com.my Ak Nor Muhammmad Nizam Pg Hj Tengah, Country Manager CIMB Brunei T: +673 224 1888 F: +673 224 0999 E: normd_nizam@cimb.com.my

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