Islamic Mutual Funds

1. Islamic Mutual Funds Kamal Ali Joint Director Securities & Exchange Commission of Pakistan

2. Scheme of Presentation • Twofold Role of the Regulator • Principles of Fund Operations • Regulatory Framework • Industry Overview & Trends • International Perspective • Issues Limiting Industry Size • Proposed Way Forward

3. SECP - Twofold Role • Apex regulator for the capital markets • Three key objectives to ensure market integrity and investor confidence: • Fair, efficient and transparent markets • Investor protection • Minimize systemic risk • Regulatory role important for proper functioning of sector • Developmental role of facilitating industry growth • Ample room for growth (3% of GDP) • SECP has played such role in the past • Desire to perform developmental role with more vigor & focus

4. Principles of Fund Operations • Funds vital from multiple perspectives • Ability to meet diverse investment needs • Potential to enhance growth & corporate governance of capital markets • Inherent structure of a mutual fund built on: • Trust: Fund Manager entrusted with fiduciary responsibility of making investments in best interest of investors • Profit / loss sharing: value of investment may go up or down - reflective in NAV • Transparent Operations: fees and charges, and performance adequately disclosed. • No leverage: Fund cannot borrow and invest • Shariah-Compliant Investments – For fund to be classified as Islamic

5. Regulatory Framework • Unified framework for Islamic or Conventional Mutual Funds • Islamic mutual funds to comply with additional requirements: • Shariah-compliant investments; and • Appointment of Shariah Advisor • Some international best practices voluntarily adopted by industry participants: • Shariah Compliance Audit • Cleansing of “Riba contaminated” portfolio through distribution of haram income to approved charities • Inclusion of Shariah Advisor report in the Annual Report

6. Regulatory Framework • Prevailing regulatory framework adequate and comparable to international standards • Framework contains requisite ingredients for efficient and transparent operations of mutual funds: • Fitness & propriety of sponsors • Fund Manager’s fiduciary responsibility • Independence of trustee and segregation of assets • Adequate disclosure requirements • Categorization of funds • Enforcement in case of non-compliance • Ongoing strengthening upon identification of any gaps or weaknesses

7. Industry Overview

8. Islamic vs. Conventional Funds

9. Islamic Fund Types Types of Funds AUM

10. Islamic Funds

11. Asset Allocation – Islamic Funds vs. All Mutual Funds

12. International Islamic Funds

13. Issues Limiting Industry Size Demand Side Issues • Lack of investor awareness • Lack of wide distribution networks Supply Side Constraints • Dearth of Shariah-compliant listed companies • Limited investment avenues (corporate sukuks, etc.) • Limited number of funds to meet varying needs of investors Market Infrastructure • Difficulty in fair valuation of illiquid or thinly-traded securities

14. Proposed Way Forward • Wide-spread investor education and awareness • Extensive campaign to achieve broad-based investor participation • Inculcate a culture for savings among public • Increase investment avenues for shariah-compliant funds: • Provide impetus for listing more shariah-compliant companies • Higher number of corporate sukuks and other shariah-compliant debt securities • Increased participation through BATS • Independent bond pricing agency to value illiquid debt securities • Improved governance of capital markets for better price discovery and better disclosures by listed companies • Strengthening role of participants having an indirect role in mutual funds

15. THANK YOU