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SEPTEMBER 2006

Islamic Fund Management vs. Conventional Fund Management

Brunei Islamic Financial Services Forum

15-16 September 2006


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CONTENTS


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Section 1 Shariah Principles in Asset Management 5

Section 2 Shariah Compatible Investing (SCI) 12& Socially Responsible Investing (SRI)

Section 3 Innovation Timeline 15

Section 4 Shariah Asset Classes 17

Section 5 Shariah Investment Vehicles 19

Section 6 Shariah Fund Services 21

Section 7 Estimated Industry Size 23

Section 8 Performance of Shariah Equities and Sukuks 26

Section 9 Performance of Shariah Funds 29

CONTENTS


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Section 10 Challenges in Islamic Asset Management 31

Section 11 Product Segmentation by Investors 34

Section 12 Building A World Class Capital Market in 36Brunei Darussalam

Section 13 Brunei Darussalam Proposition As Financial Center 42

Section 14 Some Quickwins for Brunei Darussalam 45

Section 15 Our Initiatives in Brunei Darussalam 47

Section 16 About CIMB 49

Important Notice

Contact Details

CONTENTS


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SHARIAH PRINCIPLES IN ASSET MANAGEMENT


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Financial market transactions, operations and services that comply with Islamic

rules, principles and codes of practices

Derived from three important sources:

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.

SHARIAH PRINCIPLES IN ASSET MANAGEMENT

The Holy Quran

Sunnah

Ijtihad


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A joint pool

The Basic Structure of A Typical Fund

FUND

SHARIAHADVISORY

INVESTMENT

ADVISER

FUNDMANAGER

CUSTODIAN /

TRUSTEEPERMITTED

INVESTMENT

INVESTORS

ISLAMIC FUND

The investors contribute their surplus money for the purpose of

its investment to earn halal profits in strict conformity with theprecepts of Islamic Shariah.


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ROLE OF SERVICE PROVIDERS

Fund Manager Investment manager and distr ibutor of the Fund Shares.

Investment Adviser Apply the principle of Al-bai as basis for trading inIslamic securities and money market and other Islamic

financial instruments

Custodian Bank / Trustee Hold the Companys assets in custody for theShareholders in separate accounts or safekeeping

accounts

Shariah Advisor Advise the Company in ensuring that the businessactivity related to the Fund Shares are Shariah

compliant at all times


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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 rightmanner. 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.


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COMMON SHARIAH PRINCIPLES

Musharakah Profit & Loss Sharing

Murabahah Trade with Mark Up or Cost Plus

Mudharabah Profit Sharing

WakalahA contract, which gives the power to a person to nominate

another person

Underlyings principles

Ijarah Lease Financing


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Shariah Compatible Investing (SCI) vs. Socially ResponsibleInvesting (SRI)


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

Shariah Compatible Investing (SCI) Socially Responsible Investing (SRI)

Excludes non-shariah compliant stocks andalso neglects unethical and highly

indebted firms

Shuns the stocks of any company engaged in

gambling, alcohol, tobacco, firearms or armaments.

Also companys environmental awareness, its

workers rights, the companys shareholderirresponsibleness (or lack of it), and the companys

contribution to its community.

Hakim and Rashidian (2004) used the capital asset pricing model (CAPM) to compare the Dow JonesIslamic Market Indexs (DJIMI) performance with those of the Dow Jones World Index (DJW), and theDow 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 moralrestrictions 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 excludingmore companies making SCI indexes less diversified; hence more exposed to risk and market volatility.

Excludes more companiesthan investing using the SRI method

More Companies

Less diversifiedHigher risk from regular market volatility

More diversified.Lower risk from regular market volatility


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Innovation Timeline


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

In the past 30 years, the Islamic Financial Services Industry has gone through rapid growth and evolution.

1980s

Gulf / Middle EastAsia Pacific

Commercial Islamicbanks

TakafulIslamic investmentcompanies

Commercial bankingproducts

Takaful products

1990s

Gulf / Middle EastAsia Pacific

Commercial Islamicbanks

TakafulIslamic investmentcompanies

Asset managementcompanies

Brokers/Dealers

Commercial bankingproducts

Takaful products

Mutual funds/ unittrustDomestic Islamicbonds

Shariah compliantstocks

Islamic stockbrokingIslamic derivatives

2000s

Gulf / Middle EastAsia PacificEurope / AmericasGlobal Offshore Market

Commercial Islamic banksTakafulIslamic investment companiesAsset management companiesBrokers/dealersIslamic investment banksE-Commerce

Commercial banking productsTakaful productsMutual funds/ unit trust

Domestic Islamic bondsGlobal Islamic bondsIslamic asset backed securitiesShariah compliant stocksIslamic stockbrokingIslamic derivativesHedge fundsPrivate Equity & Islamic REITs

Area

1970sEvolution

Institutions

Products

Gulf / Middle East

Commercial Islamic

banks

Commercial banking

products

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


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Shariah Asset Classes


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2 SHARIAH ASSET CLASSES

Money Market

Sukuk

Equity

Traditional Investments Funds

Infrastructure

Private Equity

Real Estate

Commodity

Leasing

Hedge

Alternative Investments Funds


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Shariah Investment Vehicles


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SHARIAH INVESTMENT VEHICLES

Money Market

Private Equity

Infrastructure

Real Estate

Commodity

Leasing

Hedge

Sukuk

Equity

Investment Capabilities

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

Investment Vehicles

Based on the investment capabilities, the following investment vehicles can be

utilised:


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Shariah Fund Services


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SHARIAH FUND SERVICES: ADVANTAGES

Calculation and booking ofinterest income based on accrualbasis.

Calculation and booking of

nisbah / margin based on cashbasis and/or accrual basisdepending on the product types.(i.e. ijara)

Fund Accounting

Conventional FundsIslamic Funds

Investment portfolio of both

Shariah and Non-Shariahinstruments.

No cleansing process of Non-Shariah income of stockdividends.

No options for ZIS (Zakat InfaqShahadah)

Investment portfolio of Shariahinstruments only.

Cleansing process of Non-Shariah income of stockdividends done.

Options for ZIS (Zakat Infaq

Shahadah) payment to beapproved by IndependentShariah Supervisory Board

FundAdministration


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Estimated Industry Size


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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.

(Source: Malaysian Securities Commission Annual Report 2005)(Source: Malaysian Securities Commission Annual Report 2005)

Bond Fund 19% Equity Fund 51%

Fixed Income Fund 4%Money Market Fund 4%Balanced Fund 22%


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ESTIMATED INDUSTRY SIZE MIDDLE EAST

(Source: Bloomberg, Google)(Source: Bloomberg, Google)

Trade funds - largest portion of total Islamic Fund universe, which comprise primarily ofMurabaha funds.

Sophisticated structured products are very recent and comprise under 10% of the totaluniverse of Islamic mutual funds in the Middle East. There is also a gap in terms of typesof funds like hedge funds and fund of funds.

Money market funds are few and represent a significant opportunity to be explored asIslamic financial institutions have excess liquidity which could be channelled into theindustry.


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Performance of Shariah Equities & Sukuks


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PERFORMANCE OF SHARIAH EQUITIES & SUKUKS

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

(Source: Bloomberg, CIMB Fixed Income Research)

Conventional Bond Index 1Yr & Above Islamic Bond Index 1Yr & Above


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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


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PERFORMANCE OF SHARIAH FUNDS

The performance of Islamic funds over the following asset classes are varied when compared to

its corresponding Conventional Funds :

Mixed Asset: Growth43.25%

(Average of 9 funds)

Mixed Asset: Islamic / Shariah Balanced16.04%


Balanced Fund

Equity: Growth

40.76%


Equity: Islamic / Shariah

25.08%


Equity Fund

Bond: General

26.56%


Bond: Islamic / Shariah

34.57%


Bond Fund

Conventional Funds(5 Year Total Return)

Islamic Funds(5 Year Total Return)

(Source: Lipper as at September 4, 2006)


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Challenges in Islamic Asset Management


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CHALLENGES IN ISLAMIC ASSET MANAGEMENT

Common

Parameters

and Filtering

Fund Accounting

Illiquid

Shariah Securities

Risk Management

Framework

Managing

Non-Compliance

Activity

Challenges


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Products Segmentation by Investors


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PRODUCTS SEGMENTATION BY INVESTORS

The Islamic fund products are segmented according to type of investor as can be seen

below :

High Net Worth Investor Institutional Investors

(Source: CIMB Islamic)

ManagedAccount

AlternativeInvestment*

InstitutionalFund

Mutual Fund

Affluent Investors

* Private Equity, Real Estate, Infrastructure, Hedge, & Commoditu Fund


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Building A World Class Capital Market In Brunei Darussalam


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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 differencein building a world class capital market.


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Malaysia

Dr. Zeti Akhtar Aziz,the governor of Bank Negara

Malaysia, has led the way

Championed the creationof the Islamic Financial

Services Board

Promotes Islamic financearound the world

Instrumental indeveloping the country'smaster plan to strengthen

its banking sector

Saudi Arabia

Latest country torecognize the need

to developits capital markets

A clear leaderhas emerged:

Jammaz Al-Suhaimi

Helped pass the newcapital market law andalso created the CMA

BUILDING A WORLD CLASS CAPITAL MARKET IN BRUNEI DARUSSALAM


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Singapore

Prime Minister Lee Hsien Loongidentified the need to develop a

modern capital market

Managed the policy,legal, tax, & regulatory

changes that haveraised the contributionof the capital market

Same league in 2004 asthe United States (7.7%)Above both the- United Kingdom (5.7%)- European Union (5.2%)

The banking-relatedfinancial-services sector'sshare of Singapore's GDPhas 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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Brunei should specialize and focus on growing its Islamic asset management sector up tointernational standards in order to compete with regional Islamic financial powerhouses

such as Malaysia & Singapore

IslamicIslamic

FinancialFinancial

MarketMarket

WealthWealth

ManagementManagement

BankingBanking

NonNon--FinancialFinancial

InstitutionsInstitutions

ServicesServices

Money MarketMoney Market

CapitalCapital

Market DebtMarket Debt

and Equityand Equity

AssetAsset

ManagementManagementTakafulTakaful

StructuredStructured

Products andProducts and

DerivativesDerivatives



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BUILDING A SPACE IN ISLAMIC FINANCE BRUNEI FOR DARUSSALAM

Business

Model

Demand for

Islamic banking

Market

Profile

Impact on the performance of Islamic institutions 3 factors:

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


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Brunei Darussalam Proposit ion As Financial Center


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BRUNEI DARUSSALAM PROPOSITION AS FINANCIAL CENTER

Good quality

of life

Rational

legal-regulatory

framework

Attractive,

sustainable

local economy

Highly developedinfrastructure

Stable political

environment

Strategic

geographiclocation


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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, Anti-

money laundering legislation. Brunei has established a National Anti-MoneyLaundering 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


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SOME QUICKWINS FOR BRUNEI DARUSSALAM

Incorporate

National Investment

Holding

Financial

Exchange

Domestic

Fundraising

Increase

Sukuk Issuance

Promote

Offshore Funds

Introduce

government

sponsored National

Unit Trusts Fund


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Our Initiatives in Brunei Darussalam


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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 officespace 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


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ABOUT CIMB GROUP

Transforming CIMB into a Universal Bank

CIMB to transform into a "universal bank". The planned restructuring involves the integration ofCIMB with its sister company, Bumiputra-Commerce Bank, uniting investment banking commercialbanking and asset management services under the CIMB brand.

The second-largest financial services provider in Malaysia, combined staff strength of more than20,000 globally.

InvestmentBanking

IslamicBanking

RetailBanking

BusinessBanking

AssetManagement

Treasury


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CIMB GROUPS PRESENCE IN MAJOR FINANCIAL CENTERS

New York

London

Brunei Darussalam

Hong Kong

Jakarta

Kuala LumpurSingapore

Bangkok

Bahrain

Emphasis on knowledgeproducts for private clients

and institutions;

Leveraging regional product

expertise;

Understanding of localrequirements;

Capable banking

infrastructure to execute

transaction;

Comprehensive bankingfranchise;

A top provider of tailor-made

financial solutions to clients

across the region;

Kuala Lumpur is the leadingIslamic financial centre.

Labuan

Tokyo

Yangon


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The future depends on what we do in the present.

Mahatma Gandhi


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IMPORTANT NOTICE

This document and its contents are proprietary information and products of CIMB andmay not be reproduced or otherwise disseminated in whole or in part without its writtenconsent.

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, withoutindependent verification, the accuracy and completeness of all information availablefrom public sources or which was provided to us or which was otherwise reviewed byus. Although the information contained herein is believed to be reliable, CIMB makesno representation as to the accuracy or completeness of any information containedherein or otherwise provided. Nothing contained in this presentation is, or shall be,

relied upon as a promise or representation as to the future.

CONTACT


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CONTACT

Noripah Kamso, Director

CIMB Principal Asset Management

T: +603 2084 2300

F: +603 2084 2299

E: [email protected]

Suryono Darnor, Director

CIMB Islamic Asset Management

T: +603 2116 1336

F: +603 2144 8509E: [email protected]

Ak Nor Muhammmad Nizam Pg Hj Tengah, Country Manager

CIMB Brunei

T: +673 224 1888

F: +673 224 0999

E: [email protected]

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