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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
4
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
7
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.
8
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.
9
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
10
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
11
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
12
GROWH TREND OF ISLAMIC AUMs
Overall Growth 687%
ISLAMIC MUTUAL FUNDS IN PAKISTAN
13
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
14
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
15
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
18
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
19
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
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