Islamic Funds & Investment Report (IFIR 2010), Ernst & Young

Islamic Funds & Investments Report 2010
Post Crisis: Waking up to an investor-driven world

Dear Investments Industry Leader,
On behalf of MEGA, it is with great pleasure that we introduce the 4th annual edition of the Ernst & Young Islamic Funds & Investments Report (IFIR 2010), which has rapidly established itself as an
indispensable reference source for decision-makers in the industry seeking to successfully navigate the changing investment landscape.
The Report is exclusively launched at the 6th Annual World Islamic Funds & Capital Markets Conference (WIFCMC 2010), the world’s largest and most influential gathering of Islamic investment
industry leaders, held in Bahrain on the 24th and 25th of May 2010. The findings of the Report are debated by the more than 400 industry leaders gathered at the conference as they seek new insights to
strengthen their market position and adapt their strategies for success in the global Shari’ah-compliant investments market.
Last year’s Report provided an in-depth analysis of the impact of the global economic crisis on the Islamic funds landscape, with key recommendations for industry leaders on surviving and adapting in a
downturn. The Report concluded with insights into key investor segments, asset classes, and products as well as competition and business model shifts. IFIR 2010 will revisit these findings as well as offer new
insights that will kick-start new business strategies in the Shari’ah compliant investments industry as crisis begins to give way to recovery.
Our gratitude goes to leading audit and business advisory firm, Ernst & Young and their Islamic Financial Services Group who have invested their considerable international talent and resources in leading
the research project and in developing the insights contained in this Report.
We hope that the content of this 4th annual edition of the Ernst & Young Islamic Funds & Investments Report will be useful in your own strategic planning activities and will assist your organisation in its
quest for success in this dynamic industry. To find out how your organisation can play a part in this initiative in the future, please email sophie@megaevents.net
Yours sincerely,
David McLean
Managing Director
The World Islamic Funds & Capital Markets Conference
A MEGA Brand
A MEGA Brand: Shaping the Future of the Global Islamic Finance Industry Since 1993
P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003
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Islamic Funds and Investments
Report 2010
Post crisis: Waking up to an investor-driven world
Disclaimer
The contents of the Islamic Funds and Investments Report 2010 are based on a combination of quantitative data and qualitative
comments and hence provide a subjective assessment of the current market. All quantitative comments are based on published
information wherever possible. Where published reliable data was not available, qualitative comments were made which may or may
not reflect the true state of affairs. Information has been assimilated from secondary sources, including published country, industry and
institutional information, and primary sources, in the form of interviews with industry executives.
We are not expressing any assurance on the accuracy or completeness of the information obtained. Although this report has been
documented based on our understanding of Islamic financing activities to include only such activities that are deemed Shari’a
compliant, no Shari’a opinion whatsoever has been taken on this report. Hence, the contents of this report, in terms of the activities to
be carried out, might not necessarily be consistent with Shari’a in all cases, and the opinion of a Shari’a scholar(s) should be taken
before any further steps are made to implement suggestions made in the report.
Whilst every care has been taken in the preparation of this report, no responsibility is taken by Ernst & Young as to the accuracy or
completeness of the data used or consequent conclusions based on that data, due to the respective uncertainties associated with any
assumptions that have been made.
This report is documented for the World Islamic Funds and Capital Markets Conference. No part of this document may be republished,
distributed, retransmitted, cited or quoted to anyone without prior written permission from MEGA Events and Ernst & Young.
2 ISLAMIC FUNDS & INVESTMENTS REPORT 2010: Post Crisis: Waking up to an investor-driven world
Page 2 The World Islamic Funds and Investments Report 2010

Contents
1. Setting the scene 5

2. Supply analysis – products and asset classes 11
3. Current state of the Islamic fund industry 19
4. Demand analysis – investor segments and asset allocation 27
5. Changes affecting the industry 37
6. The future risk environment 43
7. Jurisdiction overview 51
8. Appendix 1: Islamic fund characteristics 59
9. Team and references 61
3
Introduction to the Islamic Funds and Investment Report 2010
Dear Investment Executive
On behalf of Ernst & Young, I would like to take this opportunity to introduce you to the fourth edition of the Ernst & Young Islamic
Funds and Investments Report 2010.
While the overall economic environment continues to remain tough, 2009 saw signs of recovery in global financial markets. Islamic
equity, sukuk and commodity funds also posted gains during this period and in the first quarter of 2010. However, fund assets under
management remained stagnant at US$52 billion from 2008 as the number of funds liquidated during 2009 almost equaled those
incepted. It is a cause for concern for the Islamic funds industry as the participation of retail investor remains negligible.
In 2010 and beyond, Islamic asset managers must respond to an investor-driven world in order to sustain themselves in the long run.
Our analysis identifies the following key points which we believe should top their priority list:
► Achieve scale to ensure long term sustainability – over 55% of Islamic fund managers currently manage less than US$ 50 million
each, which is commercially unsustainable in the medium term and demands serious re-evaluation of business strategy.
► Diversify into new asset classes to improve performance and better match investors’ needs – equities remain the predominant
asset class for Islamic investment funds with little focus on new product development.
► Adopt flexible business models – given the continuing difficult market conditions, strategic alliances, fee structures, distribution
arrangements and costs should be re-assessed.
► Regain investor confidence through increased transparency, frequent investor communication and proactive risk management.
There is a real risk that executives may be tempted to shy away from making radical changes or tough decisions about business
models, people, processes or systems. Those who can do so are most likely to emerge as long-term winners.
Sameer Abdi
Partner
Ernst & Young

► Global asset management industry is on the road to
recovery from lows in 2008
► Islamic fund management industry plateaued during
2009
► Funds launched have focused on institutional investors
leaving the retail segment underserved
► Preference for the placement of wealth with banks
rather than Islamic fund managers
Setting the scene

Global mutual funds AuM reached US$ 22 trillion in 2009 and exhibited signs of recovery from
the lows of 2008
Global Mutual Fund Industry
Estimated AuM Number of Funds

(US$t) (‘000)
30 Financial Crisis 80
26.1
70
25 Dot-com Crisis
21.8 22.0
60
20 19.0
17.8 50
16.2
15 14.1 40
11.7 11.3
30
10
20
5
10
0 0
2001 2002 2003 2004 2005 2006 2007 2008 Q3 2009
Worldwide Total Net Assets of Mutual Funds (LHS) Worldwide Number of Mutual Funds (RHS)
Source: National Mutual Funds Association, Ernst & Young analysis Note: The data is for 44 countries

In contrast, the global Islamic fund management industry growth remained flat, with AuM of
US$ 52 billion
Global Islamic Fund Management Industry
Estimated AuM Number of Funds

(US$b)
60 800
51.4 52.2 52.3

48.7 700
50
600
39.5
40
34.1 500
29.2
30 400
300
20
200
10
100
0 0
2004 2005 2006 2007 2008 2009 Q1 2010
Assets Under Management (LHS) Number of Funds (RHS)
Source: Eurekahedge, Zawya, Ernst & Young analysis

The number of new funds launched has been offset by the number of funds liquidated
Global Islamic Funds - Annual Launches and Liquidations
Number of Funds
200
173
180
160
140
120
100
78
80
60
40 29 27
19
20 11
0
2007 2008 2009
Number of Islamic funds launched Number of Islamic funds liquidated
Source: Zawya, Eurekahedge, Ernst & Young analysis
The majority of funds being launched have targeted institutional investors
Breakup of Retail and Institutional Islamic Funds Launched
%
100
90
80
45%
70 57%
68% 67%
60
50 Institutional Funds
Retail Funds
40
30
55%
20 43%
32% 33%
10
0
2006 2007 2008 2009
Source: Eureka Hedge, Zawya, Ernst & Young analysis

Note: Retail funds are defined as funds that have a minimum initial subscription of US$2,000 or less
9
Potential investors tend to place money with banks rather than investing in Islamic funds –
these accounts constitute part of the Islamic asset management industry and form over 30%
of the Islamic finance sector
Asset Under Management to Total Banking Size of Fund Management Industry to Total
Deposits Industry Size (2008)
AuM to Banking Deposits
Islamic Financial Services Industry
%
200
180%
180 171%
159% Total Industry
Estimated Islamic Finance
160
US$US$
Assets 939939
b billion
133%
140
120
Islamic Assets
100
Managed
83% 84%
80 US$ 292 billion
67% 31.1%
Text
60
43% Islamic
40 Funds
25% 5.5%
20%
20 28% ► Other AuM includes off balance sheet direct investments managed
14% 15% 9% by banks and investment companies and restricted profit sharing
0 accounts
2005 2006 2007 2008 ► Islamic funds represent only 5.5% of the total Islamic financial
Saudi Arabia Malaysia UK USA services industry
Source: Central Banks Reports, Securities Commission Malaysia, DataMonitor, Eureka Hedge, Zawya, IFSL, Ernst & Young analysis

► A shift was witnessed in 2009 with the number of new
funds launched in alternative asset classes
outnumbering traditional types
► Concentration remains with 35% of total AuM invested
in equity funds
► Islamic funds across the majority of asset classes
witnessed improved performance during 2009
Supply analysis – products and asset classes
11
During 2009 there was a shift away from traditional asset classes such as equities and real
estate funds with a number of new asset classes being introduced including Shari’a compliant
ETFs and hedge funds
Number of Islamic Funds Launched by Asset Class

173 78 29
18 10 3
13 3 2
3
11
5 4
18 Real Estate
15
20 Commodities
Balanced
14 5
14 Money Market
Other*
Fixed Income
79 37 Equity
2007 2008 2009

*Note: Other includes alternative investments and feeder funds

However, overall AuM remained concentrated in traditional asset classes such as equities and
fixed income
Assets Under Management of Islamic Funds by Categories (Q1 2010)
Figures in US$b 52.3
1.3 2%
3.5 7%
6.1 12%
7.2 14%
7.4 14%
8.3 16%
18.5 35%
Equity Other* Fixed Income Money Market Commodities Real Estate Balanced Total

*Note: Other includes alternative investments and feeder funds
13
The concentration in equities proved successful during 2009 as equity markets rebounded
from the lows of 2008, but 2010 may prove to be more volatile
Islamic and Conventional Indices Islamic Equity Funds - Average Returns
Index return
% Top Quartile Return Average Return

20
%
10
60
48.6%
50 41.7%
0
40
31 May 08
30 Sep 08
30 Sep 09
30 Nov 08
30 Nov 09
31 Mar 08
31 May 09
31 Jan 08
31 Jul 08
31 Jul 09
31 Jan 09
31 Mar 09
30 Sep 07
30 Nov 07
31 Jul 07
(10)
30
20.9%
(20)
20 17.4%
(30) 10 4.2%
(40) 0
(3.8%)
(50)
(10) 2007 2008 2009 Q1 2010
(20) (10.4%)
(60)
(30)
(70)
(40)
MSCI World Islamic Index MSCI World Index Standard Core
(50) (41.8%)
Source: Bloomberg, Zawya, Eurekahedge, Ernst & Young analysis Note: Data includes returns of 290 funds

Sukuk issuance gained ground in 2009 and is forecast to remain at similar levels in 2010, with
returns likely to remain at or below 2009 levels
Global Sukuk Issuance Islamic Fixed Income Funds - Average Returns
US$b
MENA Rest of World Number of Sukuk Issues (RHS)
Number Top Quartile Return Average Return
40 250 %
14
35
11.6%
200 12
30
10
25
150
8.2%
8
20
5.5%
100 6
15
4.4%
10
4
50 2.4%
5 2 1.1%
(0.1%) 0.2%
0
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 Q1 2010 2010*
2007 2008 2009 Q1 2010
(2)
*Deals rumored/announced. Malaysia constitutes a significant part of deals

announced for the rest of world.
Source: IFIS, Zawya Sukuk Monitor, Eurekahedge, Ernst & Young analysis Note: Data includes returns of 45 funds
15
Global commodity prices recovered during 2009 resulting in strong returns for commodity
funds and with an expectation of further recovery in 2010
Merrill Lynch Commodity Excess Return Index Islamic Commodity Funds - Average Returns
Index level
900 % Top Quartile Return Average Return

70
800
700 60 56.5%
600
50
500
40
400
29.0%
300 30
21.3%
200
20
100
10 8.0%
0 2.5% 3.1%
3 Apr 05
3 Apr 06
3 Apr 07
3 Apr 08
3 Apr 09
3 Oct 05
3 Oct 06
3 Oct 07
3 Oct 08
3 Oct 09
3 Apr 10
3 Jan 05
3 Jul 05
3 Jan 06
3 Jan 07
3 Jan 08
3 Jan 09
3 Jul 06
3 Jul 07
3 Jul 08
3 Jul 09
3 Jan 10
0
(0.9%)
(10) 2007 2008 2009 Q1 2010
(20) (15.1%)
Source: Merrill Lynch, Bloomberg, Eurekahedge, Zawya, Ernst & Young analysis Note: Data includes returns of 14 funds

Money market funds remained popular with investors seeking safety and liquidity, but a
prolonged low interest rate environment may prevail in 2010
USD 3 Month LIBOR Islamic Money Market Funds - Average Returns
%
7 Top Quartile Return Average Return
%
6
7 6.5%
5 6 5.6%
5
4 4.1%
4 3.4%
3
3 2.5%
2 2
1.1%
1
1
0.2%
0
0
(1) 2007 2008 2009 Q1 2010
Nov 02
Apr 03
Sep 03
Nov 07
Dec 04
Feb 04
Jan 02
Jul 04
May 05
Jun 02
Jan 07
Mar 06
Oct 05
Apr 08
Aug 06
Sep 08
Jun 07
Dec 09
Feb 09
Jul 09
(2)
(1.9%)
(3)
Source: Bloomberg, Eurekahedge, Zawya, Ernst & Young analysis Note: Data includes returns of 63 funds
17
Property valuations suffered a correction during 2008, however there appears to be signs of a
recovery in 2009
Global REIT Index Islamic Real Estate Funds - Average Returns
Index level
Top Quartile Return Average Return

%
250
20
16.4%
200
15 13.8%
11.3%
150
10
100 5 3.5%
1.1%
50 0
(0.64%)
2007 2008 2009 Q1 2010
(5)
0 (2.9%)
2 Nov 07
2 Sep 08
2 Nov 09
2 Nov 06
2 Sep 09
2 Sep 07
2 Mar 10
2 Sep 06
2 Jan 08
2 Jul 06
2 Jul 07
2 Mar 07
2 May 07
2 May 08
2 May 09
2 Jan 10
2 Nov 08
2 Mar 06
2 May 06
2 Jan 06
2 Jan 09
2 Mar 08
2 Mar 09
2 Jan 07
2 Jul 09
2 Jul 08
(10)
(15) (12.4%)
Source: Bloomberg, Eurekahedge, Zawya, Ernst & Young analysis Note: Data includes returns of 16 funds

► Over 70% of Islamic fund managers have under US$
100 million in AuM
► Average management fee has fallen to 1.15% in Q1
2010
► US$ 80-100 million required in AuM to break even
based on average management fee
► There remains potential for consolidation or shake-out
as many Islamic fund managers have below the break
even level AuM required
Current state of the Islamic fund industry
19
The Islamic fund industry remains fragmented with over 70% of investment managers having
under US$ 100 million in AuM, with less than 10% with AuM in excess of US$ 1 billion
Number of Islamic Fund Managers by Assets Under Management (Q1 2010)
55% of Fund Managers have

less than US$ 50m AuM
79
32
22
20
18
10 11
9
< 25 25 - 50 50 - 75 75 - 100 100 - 200 200 - 300 300 - 500 > 500
Total AuM (US$m)

Meanwhile their conventional counterparts have developed significant asset gathering
capabilities
Top 25 Global Asset Managers (2008)
Barclays Global Investors

Allianz Group
State Street Global
Fidelity investments
AXA Group
BlackRock
Deutsche Bank
Vanguard Group
JPMorgan Chase
Capital Group
Bank of New York Mellon
UBS
BNP Paribas
Goldman Sachs Group
ING Group
Credit Agricole
HSBC Holdings
Legg Mason
Natixis
Wells Fargo
Northern Trust Global
Prudential Financial
Generali Group
Nippon Life Insurance
Bank of America
0 200 400 600 800 1,000 1,200 1,400 1,600

AuM US$b
Source: Watson Wyatt
21
An investor driven market has forced fund managers to reduce fees by a quarter (40 basis
points) on average since 2006, and the highest fees charged are more in line with global
standards
Average Management Fee of Islamic Funds
10.00%
High 6.00% 5.50%
2.00% 2.00%
Average 1.53% 1.44%
1.39%
1.20%
1.15%
Low 0.10% 0.03% 0.30% 0.35% 0.05%
2006 2007 2008 2009 Q1 2010
Source: Zawya, Eurekahedge, Ernst & Young analysis Note: Data includes stated management fees of 369 Islamic funds

Based on the average asset management fee of 1.15%, AuM of between US$80-US$100 million is
required to break-even for an average fund manager according to industry players
Break Even Management Fee for Selected AUM Levels
Assets Under Management (US$m)
200 Industry Average Management Fee
175
150
125
100
75
50
25
0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Management fee (%)
Source: Industry interviews, Annual Reports, Ernst & Young analysis

Note: The methodology for the breakeven calculation is based on the average annual operational costs for listed equity mutual funds. It is important to note that costs/AuM will vary for more sophisticated
asset classes
23
Muslim populations are growing globally indicating future demand
Global Estimated Muslim Populations in 2009
Turkey Iran
~74m ~74m
Egypt
~79m
Estimated Algeria Morocco

Muslim ~34m ~32m
Malaysia
Populations
~17m
in 2009
Indonesia
100m + GCC ~202m
50 - 100m ~36m
Nigeria
10 – 50m ~78m
Pakistan India
5 – 10m ~174m ~161m
1 – 5m Bangladesh
~145m
Under 1m
Source: Pew Research Center, Ernst & Young analysis

In addition, income levels in key Muslim countries are growing and provide opportunities for
Islamic fund managers
Nominal GDP per Capita (US$)
US$
80,000
Qatar
United Arab Emirates
70,000
Kuwait
Bahrain
60,000
Oman
Saudi Arabia
50,000
Turkey
40,000 Malaysia
Iran
30,000 Algeria
Morocco
20,000 Indonesia
Egypt
10,000
India
Pakistan
0
2006 2007 2008 2009 2010 2011 2012
Source: Global Insight
25
The Islamic fund industry has significant room to grow if assets are reallocated from
investment accounts to funds
Savings are
invested with
Banks rather
than funds
Income
levels are
rising in
these key
markets
The fund
management
industry has
significant scope for
expansion

► Investors are expected to seek higher returns and move
up the risk return profile
► Asset allocation strategies for investor segments are
changing to reflect renewed optimism
► Investment pool for Islamic fund managers is estimated
to be between US$ 360–480 billion
Demand analysis – investor segments and asset allocation
27
Investors are expected to move up the risk-return profile as they seek higher returns in the
next 12 to 18 months
Risk Profile - Key Islamic Investor Segments

1 Capital Appreciation
► Significant risk 1
► Returns achieved through capital gains Return
Capital
► Requires a long-term investment
horizon
2 Appreciation
Total Returns
Total Returns
2 ► Moderate level of risk
3
► Returns obtained through capital gains
and reinvested dividends Current Individual
Income Investors
► Requires a long-term investment Takaful
Companies
horizon
Takaful Quasi Other

Current Income Individual
3 ► Moderate risk 4 Investors
Operators Institutional Institutional
Investors Investors
► Returns achieved through income Capital
generation Quasi Other
Preservation Institutional Institutional
Investors Investors
Capital Preservation
4 ► Little or no risk
► Nominal returns that are at least equal
Risk
to inflation Key:
► Short investment horizon Medium-term Investor
Gradual Shift
in investor
preference Investor
Post-crisis
Source: Industry interviews, Ernst & Young analysis

Mass affluent investors are expected to lower allocations in cash/money market funds in favor
of riskier investments
Mass Affluent
5%
2009 Market Size: US$ 358 Billion*
35%
55%
2010 Asset Allocation Expectation:
2009 saw a panicked shift by the mass affluent towards liquid, short-term 15%
and safe assets. In the wake of improved market performance and
economic recovery, this segment is expected to seek higher exposure to 5%
equities and fixed income products in 2010. Nonetheless, the mass
affluent being the most cautious segment, is expected to take a 12-24
40% 45%
month period to return to the pre-crisis risk-return profile.
Shari'a Sensitivity: 2009 2010E

Equity Fixed Income Cash / Money Market Real Estate Alternatives
35% 40%
*Sizing includes mass affluent individuals with liquid wealth between US$ 50K and US$ 500K. Regions
include GCC countries, Pakistan, Malaysia and Indonesia.
“The key feature of any investment I make is knowing that my money is safe.”
Individual investor
Source: World Wealth Report 2009, Datamonitor Global Wealth Model, Industry interviews, Ernst & Young analysis
29
Similarly, HNWI/UHNWIs are expected to shift towards riskier assets in search of returns
HNWIs / UHNWIs
7%
2009 Market Size: US$ 184 Billion* 20%
15%
5%
2010 Asset Allocation Expectation: 20%
2009 saw a tactical allocation shift by UHNWIs / HNWIs towards more

liquid investments in the face of market uncertainties. As the market 50%
stabilizes in 2010, the UHNWIs / HNWIs are expected to return to strategic 30%
asset allocations composed of higher allocations to equities and fixed
income products in search of higher returns.
5%
28%
20%
2009 2010E
Shari'a Sensitivity:
20% 25%
*Sizing includes UHNW/HNW individuals with liquid wealth over US$ 1 m. Regions include GCC
countries, Pakistan, Malaysia and Indonesia
“I would like to place my funds with an Islamic institution but none of them give me the same level of
comfort and safety that the larger western banks offer.”
HNW investor
Source: World Wealth Report 2009, Datamonitor Global Wealth Model, Industry interviews, Ernst & Young analysis

As markets recover, SWFs are expected to shift to long-term strategic asset allocations with
reduced exposure to low yielding, liquid assets
SWFs
10%
2009 Market Size: US$ 1.4 Trillion* 20%
20% 5%

25%
In the quest for higher returns in 2010 SWFs are expected to increase 25%
exposure to alternatives. For 2010, SWFs are exhibiting a particular interest
for large market capitalization equities, commodities including gold and
multi-strategy hedge-funds.
45% 50%
2009 2010E
5% 10%
*Sizing includes SWFs from the GCC, Malaysia and Indonesia
“Our mandate does not allow too much of a variation in our strategic asset allocation, we are currently
focusing on infrastructure investment in our home market.”
Sovereign wealth sub-fund manager
Source: Sovereign Wealth Fund Institute, Industry interviews, Ernst & Young analysis
31
Pension Funds are expected to follow suit and focus on higher risk assets such as equities and
alternatives
Pension Funds
2009 Market Size: US$ 177 Billion* 15% 17%

5% 1%
2010 Asset Allocation Expectation: 30%

28%
With market recovery and an improvement in risk appetite during 2009,

regional and global pension funds increased exposure to equities as well
as alternatives. In 2010, allocation to higher return asset classes including 15%
equities and private equity, among other alternatives, is expected to
increase. 54%
35%
2009 2010E
10% 20%
*Average historical growth of 12% has been applied to the 2007 Aggregate Public Pension Reserve.
Fund assets for GCC, Pakistan, Malaysia and Indonesia.
“We naturally look for longer-term investments that will allow us to meet our future obligations.”
Pension fund investment manager
Source: 2010 Global Pension Asset Study (Towers Watson), Industry interviews, Ernst & Young analysis

Given the weak performance of 2009, Takaful companies are cautiously increasing exposure to
fixed income and equities
Takaful Companies
10% 6%
2009 Market Size: US$ 8 Billion
26%
40%
Due to a sharp decline in profitability in 2009, Takaful companies assumed
a conservative stance with a distinct shift towards cash and money 34%
market instruments. In 2010, as the Takaful industry recovers, companies 20%
are expected to cautiously increase exposure to equity and fixed income
while reducing exposure to cash & money markets.
30% 33%
Shari'a Sensitivity: 2009 2010E

100%
“There is nothing available in the market that perfectly meets our investment needs.”
Takaful executive
Source: World Takaful Report 2010, Industry interviews, Ernst & Young analysis
33
Awqaf institutions continue to remain concentrated in real estate
Awqaf Institutions
5% 5%
2009 Market Size: US$ 105 Billion

Awqaf institutions have been sluggish in adjusting asset allocations due 80% 80%
to illiquid real estate holdings (which cannot be sold off under the
concept of Awqaf). The remaining allocation is expected to remain
unchanged evenly split among equity, fixed income, cash and
alternatives.
5% 5%
5% 5%
5% 5%
2009 2010E
100%
“Market movements are not a big factor for us, as most of our investments have been gifted to us in the
form of property or cash that we hold for charitable purposes – we are not active investors.”
Awqaf administrator

Approximately US$360-480 billion of individual and institutional savings are potentially
available to the Islamic asset management industry
Estimated Estimated Shari'a Estimated Shari'a Sensitive

Assets 2009 Sensitivity Range (%) Assets 2009
US$
1 Mass Affluent US$ 358 Billion 35-40%
125-143 Billion
US$
2 UHNWIs /HNWIs US$ 184 Billion 20-25%
37-46 Billion
Estimated Shari’a Sensitive

Assets (2009)
US$
3 SWFs US$ 1.4 Trillion 5-10%
70-140 Billion
US$ 360-480 billion
US$
4 Pension Funds US$ 177 Billion 10-20%
18-35 Billion
(2008: US$ 350-400 billion)

Revised 2008 market sizing was done based on 2009
US$ sensitivities.
5 Takaful Companies US$ 8 Billion 100%
8 Billion
Awqaf Institutions & US$

6 US$ 105 Billion 100%
Endowments 105 Billion
*Note: Market size has been revised due to a change in Shari’a sensitive allocations as a result of industry interviews and research. The market now includes those investors which are likely to invest in Shari’a compliant funds and not
those that are ambivalent.
Page 35 The World Islamic Funds and Investments Report 2010 35

Islamic asset managers need to focus on the evolving needs of their target customer segment
rather than create ‘one size fits all’ products
Conduct
market
analysis and
customer
segmentation
Launch new
funds based
on customer
needs
analysis
Develop ‘Go-To’
market strategy and
entry approach to
win market share
from incumbents

► Investment managers have had to optimize their
market reach through geographical expansion and by
adopting flexible distribution channels
► Customers are no longer satisfied with the fixed fee
model and managers are having to tailor fees
according to customer requirements
► Investment managers have accelerated their cost
reduction programmes through a number of short,
medium and long term initiatives
Changes affecting the industry
37
Last year we highlighted that Islamic fund managers would have to adapt their business
models to survive during the downturn…
► Increase product base to retain ► Focus on value added services

market share? and generate alpha?
► Keep distribution in-house? ► Revise fee structure to
► Or move towards a wider encourage investor
distribution strategy? participation?
Islamic
Investment
Takaful
Takaful
Fund
Industry
Industry
Industry
Support Functions
► Consider cost reduction by moving back
and middle office functions to shared
service centers or off-shore?
… in 2009 the adoption of these changes were assessed as part of an extensive research
exercise which resulted in over 400 unique insights as to what investment management
companies are doing to respond and drive performance improvement
Embedding innovation and continually

challenging existing business models to ensure
they are aligned and focused on the new market.
Optimizing market reach and

product/service mix to exploit new Re-evaluate Improving the responsiveness of the
customer opportunities, achieve the organization and sharing risk-taking to
better returns and mitigate risk. business drive down cost and adapt more
model quickly to changes in the market.
Optimize Optimize
market operational
reach flexibility
The Optimize
A more complex market and Recognizing the continued
Strengthen capital
operational environment requires management Performance availability
importance of cash and constricted
focus on gaining, retaining and talent Wheel and funding, it's critical to optimize
enhancing management deployment capital availability and deployment
capabilities. to achieve greater balance sheet
flexibility.
Strengthen
Revitalize risk stakeholder
management confidence
Accelerate
A broader risk perspective at the time of decision Regaining and retaining stakeholder
making
decision making and a stronger control and
confidence means increasing
framework during execution is needed execution communication and transparency
to reflect the complexity of the market around both financial and non-financial
and the new, more risk-aware performance.
environment.
Increasing the speed of decision-making and the
effectiveness of project execution to capitalize on
shorter windows of opportunity and increased
volatility.
Source: Ernst & Young “Lessons from Change – Asset Management”
39
Optimize market reach – asset managers have sought to diversify their revenue
base through a number of strategic initiatives such as geographical expansion Islamic
Investment
Fund
Industry
Support Funct ions
Adopted Considering Not Considering
Reassessing corporate and enterprise locations for market growth,

tax and regulatory reasons
Finding new market opportunities for existing assets

(e.g., intellectual property, patents, products)
Pioneering innovative market entry strategies (e.g., exploring

opportunities outside of mega-cities into tier 2/3 locations)
Consider new horizontal integration strategies to buy up weaker

competitors and expand market share in new geographies
Leveraging local producer/agent/distributor alliances and their

knowledge to accelerate market entry
Diversifying geographically into markets with higher growth/profit

potential
Seeking alternative distribution channels and exploiting new

technologies to accelerate growth
0% 20% 40% 60% 80% 100%

Reevaluate the business model – asset managers have had to proactively review
their strategy and core competencies to reshape their business model in line with Islamic
new business realities

Investment
Fund
Industry
Support Funct ions
Embracing environmental sustainability as an engine of future

business growth
Consider new vertical integration strategies to enhance value
creation and mitigate risk
Adopting flexible pricing strategy to maximize value creation
(e.g., value based pricing) and rewarding loyalty
Capitalizing on tax credits/subsidies that support investments in new
innovations
Exploring partnering and collaboration to drive innovation and
knowledge acquisition (e.g., with customers, suppliers, distributors and
select competitors)
Refocusing on core competencies
Organizing around customers, breaking down functional silos to get
closer to the customer
Proactively challenging fit of strategy and traditional organizational
structure to new business realities
Explicitly understanding and regularly reassessing customer and
segment profitability
0% 20% 40% 60% 80% 100%
41
Optimize operational flexibility – most asset managers have undertaken cost
reduction initiatives spurred on by the financial crisis and fee pressures Islamic
Investment
Fund
Industry
Support Funct ions
Exploring new ways to improve staff productivity and workforce

mobility as an alternatives to headcount reduction
Developing new collaborative processes to drive improved performance
(e.g., assessing and rewarding suppliers for innovation and cost reduction
delivery)
Adopting holistic net present value or similar measure to assess cost
reduction programs
Aggressively reducing proportion of fixed cost (e.g., sell and lease back,
outsourcing, hired staff)
Building flexibility into long-term contracts and obligations internally
and externally
Optimizing business support functions to drive greater efficiency
(e.g., consolidation, outsourcing, shared service centres)
Adopting enhanced forecasting processes and business analytics to
identify and respond to market volatility
Accelerating cost reduction programs
0% 20% 40% 60% 80% 100%

► There has been a significant change in the key business
risks that the Islamic fund industry is expected to face
in 2010
► The key risks identified by respondents are rebuilding
trust with investors and ensuring the enforcement of a
comprehensive risk management framework
The future risk environment
43
As the asset management industry recovers from the economic crisis, rebuilding trust with
investors is the most pressing concern for 2010
Key Business Risks 2010 Key Business Risks 2009

Business Risks - Islamic Funds and Investments Industry
Global economic
1 Decline in investors’ trust 1
downturn
2
Risk management Financial Compliance 2
Prolonged reduction in
enforcement investors' risk appetite
3 Operational flexibility Global economic Increased regulatory

3 Valuations
downturn focus
Increased regulatory Risk management
4 4
focus enforcement
Cost management
5 Cost management 5 Decline in investors’ trust
Global economic Business model

6 6
downturn redundancy
Decline in
Key to Symbols
Investors’ trust
Up from Operational
2009 flexibility
Down from
2009 Risk management
New entry
Strategic Operational
Source: Industry interviews, Ernst & Young analysis * Note: To ease comparability, the names of the 2009 risks have been amended to reflect responses from this year.

Due to the losses suffered, investors have lost trust in their investment managers who
promised returns they could not deliver
Decline in Investor Trust

One of the most important challenges is to rebuild trust and confidence by strong customer relationship
management and greater transparency
“Banks are bursting at the
► Interviewees agree that the most successful asset management companies have been those which focus clearly
seams with cash, but people
on their customers and that this is going to be even more important in the future. There has been a notable
are preferring to keep the
increase in investor requirements for transparency which has led to greater recognition of the importance of cash in the bank than invest in
data management and reporting. a fund.”
Saudi executive
Asset managers without a track record will find it difficult to attract investors
► During the credit crunch, there was a real flight to quality. In such an environment, consistently performing funds
with a track record had a competitive edge. In the current market, interviewees have noted a ‘flight to reliability’, “Investors that have been
with many investors looking for a reliable, well established global organization to invest with. burnt in the past are looking
for liquidity in the funds they
choose to invest in to ensure it
The reputation of the investment management industry has been hit hard by the crisis doesn’t happen again.”
► For good reasons and bad, interviewees agree that the industry’s reputation has been adversely affected during Bahraini executive
2009. Asset managers agree that they will need to work hard to avoid even the appearance of failure to deliver on
promises. In the current market environment, the asset management industry cannot afford a “credibility crisis”.
Key Considerations
The fundamentals of asset management must be handled with unflagging professionalism

► Rebuilding trust is going to take some time and will not be accomplished without a sustained and serious effort by all stakeholders including managers,
regulators and governments.
45
The financial crisis has highlighted that asset management firms have to manage a far wider
set of risks than simply investment portfolio risk
Risk Management
Asset management is, first and last, an exercise in risk management
“Risk is now the buzzword of
► Interviewees stated that the asset management industry was built around risk management and the fact that the
the industry and we cannot
industry failed at managing its own risks and those of its customers is particularly ironic, and particularly bitter. afford to not keep a grip of
our risks.”
Interrelationships not recognized and hence not managed UAE executive
► Interviewees expressed surprise at how far the economic and business reality diverged from the long held
business models of investment managers. The complexity of interrelationships between asset classes, and the
growing correlation of assets as the panic increased — particularly as large investors found themselves forced to “We have moved away from a
passive investment
liquidate even profitable positions to cover losses elsewhere — led to a general sense that the old diversification
management approach and
model needs to be re-examined. This posed a significant challenge to asset managers in terms of how to respond
are actively monitoring our
and retool in an evolving risk environment. portfolio on a daily basis.”
Malaysian executive
Embedding risk management
► Today, asset management companies are increasingly moving towards integrating risk management across the
business. Many interviewees have stated that risk cannot simply take a back seat in the business anymore and risk “Risk management now plays a
management is regularly raised at front, middle and back office levels with a fully integrated risk management much more integral role in our
approach being implemented across the industry. business.”
Saudi executive
Key Considerations
Understand and plan for risk management
► Asset management firms must clearly understand the various types of risks they are likely to face under different scenarios. Mitigants and controls should be
planned and implemented for each of these risks.

Investment managers must increase the responsiveness of their organization by emphasizing
flexibility
Operational Flexibility
Last year’s events have caused a profound change in attitudes toward the industry
► Interviewees confirmed that clients at every level of the market, from the largest institutional investor to the
“Clients are now asking for
smallest retail client, are now demanding a lot more value for their money. proof of returns, looking at
► In addition to negotiating on fees, clients are asking for the provision of a lot more detailed information on the
business plans, annual
investments within the fund and justification for purchase as well as supporting evidence for any expected accounts and management
returns. reports prior to investing.”
Bahraini executive
Changing fee structures “We have had to be flexible

► Interviewees have suggested that the fixed management fee and incentive fee (fee charged over a defined and be prepared to negotiate
hurdle rate) structure that funds have typically levied will no longer be applicable in the current economic on our fees with potential
environment. investors – this is something
► In addition, the growth of lower-cost alternatives such as ETFs and the pressure by institutional investors to cut we would never have done in
costs is forcing changes in the fee structure. the past.”
Saudi executive
Moving away from the proprietary model towards an open architecture approach
► Interviewees acknowledge that institutions with the broadest product set tended to outperform during the crisis, “Products which have failed to
as they could offer clients more alternatives. Many asset managers are now seeking to add a broader array of generate enough interest
products through joint ventures or white labeling to be able to meet their clients’ investment needs. have been immediately axed
from our portfolio.”
UAE executive
Key Considerations
More products at the right price
► Clients are demanding greater choice of financial products that best meet their wealth management needs. Additionally, they are not prepared to pay high
fees. Managers therefore have to be creative about their offering as well as cost/price structures.
47
Following the crisis regulatory authorities are adopting a more stringent stance in monitoring
the asset management industry
Increased Regulatory Focus

Initiatives by regulators “A fear exists in all regional
► In line with regulations impacting the conventional asset management space, interviewees expressed concern about asset managers that the
the impact of potential new regulations, especially in the areas of leverage, disclosure to clients and external regulatory authorities will
assurance. increase regulation”
Bahraini executive
► Interviewees cited examples of global regulations impacting the asset management industry including:
“Regulatory developments
► The proposed Alternative Investment Fund Managers (AIFM) Directive which will restructure the supervisory
taking place in Europe and
and regulatory framework for AIFM in European Union. USA in the asset management
► International Organization of Securities Commissions (IOSCO) Standing Committee on Investment space are a good predictor of
Management is focusing on the introduction of best practice standards for fund governance and for dealing changes set to take place in
with the challenge of market timing activities. the Middle East”
► The Undertakings For The Collective Investment Of Transferable Securities (UCITS) IV Directive will come into UAE executive
force in July 2010, which will expedite the fund launch process and make cross-border targeting easier in the
European Union.
“Going forward UCITS IV will
Fear of clamp down by regional regulators play an important role for
Islamic funds looking to
► Interviewees expressed concern that a clamp down by regulators may increase costs for investment managers and
increase capital and widen
in many cases hamper growth. The interviewees expressed comparisons to the hedge fund industry which their investor base”
developed exponentially with a light touch regulatory approach. Malaysian executive
Key Considerations
Keep a close eye on regulatory initiatives and lobby from the platform of industry association
► Asset managers need to be diligent and preemptive in identifying global and regional regulatory initiatives to ensure that any structural change introduced
by the authorities does not come as a surprise.

Controlling costs is a significant concern for Islamic asset managers in the foreseeable future
Cost Management
Increased focus on cost efficiency
► Interviewees commented, and research reveals, that there is a clear declining trend in fee structures which are
being closely scrutinized and aggressively negotiated by investors. The impact on the bottom line is causing “Several asset managers
managers to closely monitor and control operational costs and relook at staffing requirements. managing less than US$ 50
► Interviewees have noted a shift in focus of asset managers from revenue growth towards making operations million in AuM will have to
leaner and cost-effective. consider closure due to cost
inefficiency”
Saudi executive
Steps are being taken to reduce variable costs
► Interviewees have highlighted that several asset managers are taking actions to diminish the company’s variable
costs such as eliminating failing products, reviewing brokerage fees, third-party agreements and variable “Reduced investment
compensation (bonus). management fee is forcing us
to keep a close eye on costs to
Scale as a means to control costs protect the bottom line”
UAE executive
► Industry analysts have identified the success of ‘asset gathering machines’ that drive down costs and believe that
in part, cost savings can be achieved through scale and a well designed product mix.
Key Considerations
Implement cost reduction strategies
► Operational cost reduction strategies include exploring outsourcing and shared services options for peripheral functions, developing scale to achieve
competitive advantage, forming technical alliances to drive down costs, rationalizing product offerings and reviewing the compensation structure and
staffing requirement.
49
As markets recover, asset managers need to deliver returns to investors to regain their
confidence
Global Economic Downturn

The economic downturn bottomed out early to mid 2009
► Interviewees generally expressed the opinion that the regional asset management industry has seen the worst
“The crisis and the ensuing
and is showing signs of recovery in terms of performance and growth. losses have made a number of
small fund managers consider
Investors who were conserving cash during the crisis are returning back to the market for returns the possibility of
consolidating or closing as
► Investors were keeping historic high levels of cash during the crisis as uncertainty prevailed in the market. These
their AuMs fall to inefficient
cash balances have diminished as investors are making a come back to the market in search of returns. Similarly, levels”
newly established asset management companies decided to maintain highly liquid positions through the Saudi executive
downturn. Subsequently, with signs of recovery these investment managers are looking at different asset classes
and markets for higher return.
“The pre-crisis period was one
Redemption requests in early 2009 were at a record level of fund-raising and
investment whereas in the
► Managers have commented that in early 2009 they witnessed a surge of redemption requests as a result of
post-crisis period we see the
revisions to the returns promised to investors. However, in the latter half of 2009, the redemptions gradually start of the investment
slowed down following the recovery in the market. monitoring phase of the
cycle”
Bahraini executive
Key Considerations
Focus on delivering performance
► During the gradual recovery phase, investment managers should seek to improve their performance and deliver returns to investors. This may require a
review of their operating model, restructuring of costs and an increased focus on core competencies.

► The key players in the Islamic fund management
industry are concentrated within the GCC and Malaysia
► A number of global investment fund centres are
competing to become the domicile of choice for Islamic
funds
Jurisdiction overview
51
Islamic funds industry is concentrated in the GCC and Malaysia but choices of fund domicile
vary...
Global Islamic Funds by Home Country of Asset Manager (Q1 2010)
5
8 34 2
14
8 1
4 5
1
8 USA 1 1
~2.7 2
3 100
7 24 21
Islamic AuM
2
1
181 82
6
by Country 4
(US$b) Malaysia
1 ~5.1
177
10+
13 3
1 – 10 KSA Kuwait 26
~22.8 ~4.0
0.5 – 1
Bahrain UAE
0.1 - 0.5 ~1.2 ~6.1 1
9
0.01 – 0.1
Note: Funds per country include those managed by players headquartered in that respective jurisdiction. Boxes show total AuM of Islamic
Source: Eurekahedge, Zawya Funds Monitor, Ernst & Young analysis funds in US$ billion and circles show the number of funds.

Financial centers across the globe are vying to become ‘domiciles of choice’ for Islamic
funds…
Malta* Bahrain
Ireland
- US$ 2.15b Dubai (UAE)
US$ 0.23b
- 47 US$ 0.58b
24
12
Luxembourg
US$ 0.58b
35
Malaysia
US$ 5.1b
184
Cayman Islands
US$ 4.63b
63
Saudi Arabia
US$ 22.7b
Estimated Islamic AUM (US$b) 174
Singapore
Mauritius
Estimated Number of Islamic Funds
US$ 0.76b
US$ 0.12b
13
*Currently applications for Islamic funds are under review 3
53
Jurisdiction Overview
Bahrain Cayman Islands

The government is keen to promote Bahrain as the centre of excellence for The Cayman Islands, the most recognized offshore financial center for fund
Islamic funds and has been very flexible and open to increasing the range and establishment, has also become popular for Islamic funds. It offers a reliable
number of Collective Investment Schemes domiciled and operating in Bahrain. legal system, availability of world-class professional services, an anti-money
The country also has a strong Islamic finance infrastructure in place; it is home to laundering and well-regulated culture, mechanisms to ensure speed of
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) establishment and flexibility in fund structures and products. In addition, funds
and International Islamic Financial Market (IIFM). Currently, Bahrain has a total are allowed to submit financial statements and notifications in Arabic. Cayman
of US$ 2.15 billion in Islamic assets under management. Islands has a total of US$ 4.6 billion Islamic assets under management.
Regulations & Licensing Process Regulations & Licensing Process

The Central Bank of Bahrain (CBB) is the primary regulator of Bahrain’s asset The Cayman Islands Monetary Authority (CIMA) is the regulatory body for the
management industry. The Collective Investment Undertakings (CIU) Module financial services sector. All registered funds in the Cayman Islands are
in the CBB Rulebook (Volume 6) lays out the regulatory framework for both governed by the Mutual Funds Law. The Mutual Funds Law covers companies,
Islamic and conventional funds. CIUs are classified as retail CIUs and expert unit trusts and partnerships that issue equity interests.
CIUs. Expert CIUs are designed to cater to individuals, companies,
partnerships and trusts with financial assets more than US$ 100,000. The licensing process and regulatory guidelines are the same for Islamic funds
as they are for conventional funds.
CBB licensees eligible to market funds in Bahrain are conventional banks,
Islamic banks and investment business firms. Wholesale banking institutions
are not allowed to deal with retail investors.
Tax and Cost Incentives Tax and Cost Incentives
Income from all forms of CIUs registered in Bahrain is tax-exempt. A Cayman Islands domiciled fund can obtain an undertaking from the
Government that for a period of twenty years (in case of a company) or fifty years
Each Bahrain domiciled retail CIU authorized by CBB is subject to an annual fee (in case of a trust or a partnership) from the date of the undertaking, no law which
of BD 2,000. In case of umbrella funds, each sub-fund is also charged BD 2,000 is enacted in the Cayman Islands imposing any tax on such profit, income, capital
per annum. gains or appreciations will apply to such a fund.
The annual licensing fee for a fund is US$ 3,000.
Approximate Timeline to Launch Approximate Timeline to Launch

The license application processing may take 60 calendar days depending on the The process of incorporating and registering a fund (including the time that it will
completion of information. On average, the whole process is estimated to take take to settle the fund's offering document and draft the fund's constitutional
between 3 to 6 months. documents), generally takes 3-5 weeks from start to finish.

Dubai (UAE) Ireland

Dubai International Financial Centre (DIFC) has been established with the The Irish government in its endeavor to project Dublin as a global centre for
objective to position Dubai as a recognized hub for institutional finance. The Islamic funds has been organizing seminars to educate prospective managers on
positive regulatory features for fund registration offered by DIFC include the benefits of domiciling their fund in Ireland. Ireland’s reputation as a domicile
permission of 100 per cent foreign ownership, no restrictions on capital/profit of choice has been driven by the enormous wealth of expertise across the entire
repatriation, high regulatory standards, strict supervision and enforcement of service provider community including firms providing back and middle office
money laundering laws. Further cutting down of costs for fund management is support, investment managers, lawyers, auditors, the Irish Stock Exchange and
under consideration to increase its attractiveness. Currently, DIFC has a total of other industry specialists. Currently, 24 Islamic funds are domiciled in Ireland with
US$ 0.58 billion in Islamic assets under management. an estimated AUM of US$ 0.23 billion.

Dubai Financial Services Authority (DFSA) is the primary regulator for The Irish Financial Services Regulatory Authority (IFSRA) is the single regulator
conventional and Islamic funds. The Collective Investments Law as part of the for all financial institutions. The IFSRA is seen as a constituent part of the Central
DIFC regulations provides the operational framework for the asset Bank and Financial Services Authority of Ireland.
management industry.
Funds are classified into UCITS and non-UCITS. UCITS funds are governed
Within the Collective Investments Law special provisions have been added for under the EU legislation for such funds structured to provide passport to EU to
Islamic funds. These are broadly similar to those for Islamic financial target retail investors. Non-UCITS funds are governed under local Irish fund
institutions which include the appointment of a Shari’a Supervisory Board as regulations and allow targeting retail as well as institutional investors.
well as additional disclosures in the fund prospectus.

Funds registered in the DIFC are tax-exempt. Moreover, a wide network of A fund that is authorized/domiciled in Ireland is not subject to Irish tax. Non Irish
double taxation treaties is available to UAE incorporated entities. resident investors that have completed a non Irish residency declaration on
acquiring units in the fund will receive dividend payments or redemptions/sales
Annual license renewal fee applicable to funds registered in DIFC is US$ without deduction of any withholding tax.
12,000.
Annual license fee is around US$ 1,900 per fund for up to 5 sub-funds.

The authorization process is estimated to take around 2 months from the Timeline for a qualified investment fund is highly expedited at 24 hours. Other
application date. Timeline is sensitive to timely submission of information by funds take an average of 4-6 weeks.
applicants and any responses to requests for further clarification.
55
Luxembourg Malaysia
Malaysia established the Malaysia International Islamic Financial Centre
Luxembourg is being promoted aggressively by the government as a
(MIFC) in 2006, which was an initiative undertaken by the government,
European hub for Islamic funds. The regulator is recognized for having a
regulatory authorities and the private sector to jointly project Malaysia as a
highly proactive and flexible attitude towards the launching of funds.
global hub for sukuk origination, Islamic fund management, Islamic banking,
Currently, Luxembourg has a total of US$ 0.58 billion Islamic assets under
Takaful and human capital development. Currently, Islamic funds registered in
management.
Malaysia have total assets under management of US$ 5.1 billion.

The CSSF, Commission de Surveillance du Sector Financier, is the regulator Investors have the option of either setting up an Islamic fund under the
for the asset management industry. Funds may be set up under Part I or II of Malaysian Securities Commission ('SC'), or an offshore Islamic fund under
the 2002 Investment Funds Law, as well as under the 2007 Law related to the the Labuan Financial Services Authority ('LFSA'). Both SC and LFSA fall
Specialized Investment Funds (SIF) or as unregulated structures. under the auspices of the MIFC. Islamic funds also have to comply with
additional guidelines and rulings imposed by the SC or LFSA.
No specific laws or amendments are needed for Shari'a compliant funds in
Luxembourg. Similar to conventional funds, Shari'a-compliant funds are The license application is a two-stage process, which consists of an
required to satisfy the basic requirements of the Investment Funds Law of establishment stage and a licensing stage. Upon obtaining an approval in
2002 and the CSSF regulations to secure authorization and approval to principle for the establishment of an Islamic Fund Management Company
launch a Shari’a-compliant fund. (IFMC), applicant must then submit an application for a fund manager license.

Luxembourg is a tax-efficient jurisdiction which offers various financing and cash Under MIFC, there is an income tax exemption on all income derived from a
repatriation instruments. Specifically, fund vehicles are exempt from taxation in business of providing fund management services to local and foreign
Luxembourg. investors up to 2016.
Annual license fee is € 2,650 for a single fund under the 2002 Investment Funds Annual license fee for a fund operating outside Labuan is RM 10,000 and
Law. It is € 1,500 for a single fund under the SIF law of 2007. operating in Labuan is RM 5,000.
Typically, it should take no more than 6-8 weeks in setting up a UCITS Fund Approval in principle for the establishment of an IFMC (Stage 1) would
and 4-6 weeks in setting up a SIF Fund. However, the timing is dependent on normally take up to 6 months while the licensing approval (Stage 2) may take
pre-launch preparation and the completion of required documentation. another 6 months.

Malta Mauritius
The Maltese government has expressed a specific interest in promoting the The Mauritian government in collaboration with the private sector has been
launch of Islamic funds. Recently through the issuance of a Guidance Note for involved in projecting Mauritius as an ideal location for the development of
Shari 'a-compliant funds the regulator, Maltese Financial Services Authority Islamic finance and Islamic fund management. In 2007, the Finance Act 2007
(MFSA), has laid out the details of the support to parties looking for a suitable amended the Banking Act 2004 to facilitate Islamic banking and finance by
domicile to launch an Islamic fund. A number of registration applications for Mauritian commercial banks. Currently, Mauritius has total assets under
Islamic funds have been received so far. management of US$ 0.12 billion.
Regulations & Licensing Regulations & Licensing

The Maltese Financial Services Authority (MFSA) is the regulatory body The Financial Services Commission is the primary regulator for the asset
overseeing the asset management space in Malta. Given the relatively small management industry.
size of the country the regulator is readily accessible, active in issue resolution
and highly responsive to investor queries. This makes the licensing process fast Separate categories of licenses are available for off-shore and on-shore funds.
and smooth. Off-shore funds have to apply for a Category 1 Global Business License (GBL
1) while an on-shore fund falls under Category 2 Global Business License (GBL
The act governing the launch of Islamic and conventional funds is the Investment 2).
Services Act. Funds are divided into retail investment schemes known as
professional investor funds. UCITS platform is available for Shari 'a-compliant In case of listing, the fund needs to additionally comply with the Securities Act
funds as a passport to European retail investors. 2005.
Taxation and Cost Taxation and Cost

Collective Investment Schemes (CIS), under which category Islamic funds fall, GBL1 funds are subject to a minimum of 3% tax and can apply for a foreign tax
are tax-exempt. credit. GBL 2 funds are subject to a tax rate of 15%.
Annual fee for professional investor funds and retail investor funds is €1,500 and
€1,630 respectively. Varying incremental rates apply for additional sub-funds. Annual license fee is US$ 10,000.

Retail fund launch is expected to take between 2-4 months. Professional The registration and launch process for a fund in Mauritius is expected to take
investor funds are expected to take 3-7 days. Variation in timing is dependant around 4-6 weeks.
on the quality of information provided to the regulator.
57
Saudi Arabia Singapore

In 2005, the regulatory authority passed a regulation calling for the separation Singapore, as an established financial services centre in the Far East region,
of asset management and investment banking operations into distinct business has a well-defined framework for fund management. Over the years, Singapore
entities. Saudi Arabia has Islamic funds with AUM of US$ 22.7 billion. has revised its regulatory framework and tax structure to facilitate various
Shari' a-compliant financial products. Islamic funds domiciled in Singapore
have total assets under management of US$ 0.76 billion.

Capital Market Authority (CMA) is the regulatory body overseeing the asset The Monetary Authority of Singapore (MAS) is the primary regulatory body for
management industry. The Investment Funds Regulations issued by the the fund management industry. There is no segregation between Islamic and
Board of CMA are applicable to both conventional and Islamic funds. conventional funds from a regulatory perspective.
Under the Investment Funds Regulations the permitted fund categories Regulations relating to Collective Investment Schemes (CIS) are addressed
include funds created to invest in foreign funds, Specialized Investment in Part XIII Offers of Investments of the Securities and Futures Act (“SFA”).
Funds, fund of funds and money market funds. Under SFA two forms of schemes are allowed: retail schemes, targeting retail
investors, and restricted schemes, targeting sophisticated / institutional
investors.

Local fund managers are subject to 2.5% Zakat. In case of foreign ownership Onshore funds are subject to taxation of 20%. Offshore funds, under a tax-
the fund is subject to tax at a rate of approximately 20%. exemption scheme, are exempt from taxation if 80% of the value of the fund
is contributed by foreign investors.
Annual license fee for the fund is S$ 4,000.
Approximate Timeline for Launch Approximate Timeline for Launch

Typical time period for registration is from 2-4 months. Delays in registration Typical time period for registration is within 14-21 days of application
are primarily due to incomplete paperwork as per the requirements of the CMA. submission.

Appendix 1: Islamic fund characteristics
59

Key Differences Between a Conventional Fund and a Shari'a Compliant Fund
► Shari'a compliant funds must appoint at least three Shari'a scholars to the Shari’a Board
according to AAOIFI standards
► Screening must be performed ► The scholars are responsible for issuing Fatwas related to the permissibility of the fund
to ensure compliance with structure and investments
Shari'a
► Non-Shari'a compliant income must be

► The first level of screening ‘purified’
removes any companies
involved in non-Shari'a Appointment
► Shari'a board input is essential in
compliant industries and of a Shari'a determining the type of income to be
businesses
Board purified
► The second level of screening
involves removing companies Shari'a The ► Purification is through donation to
with financial ratios exceeding charitable institutions
the acceptable levels
Compliant Purification of
Investment Income
Key Differences
► In case of a failed trade, interest
cannot be charged
► Conducting regular Shari'a ► An alternative approach such as

Shari'a audits for the fund
Audit Failed the imposition of a fee may be
is crucial to ensure allowed
compliance with Shari'a Trade
► The Shari'a audit can be Custody of

performed by the Shari'a
board or an external third Assets
party
►The custodian does not have to be an Islamic institution but must adhere to Shari'a principles
►The administrator must prepare fund accounts in accordance with AAOIFI standards

Team and references
61

Ernst & Young’s Islamic Financial Services Group
EMEIA* Sameer Abdi +973 1751 2801 sameer.abdi@bh.ey.com
Bahrain Ashar Nazim +973 1751 2808 ashar.nazim@bh.ey.com
Saudi Arabia AbdulAziz Al Sowailim +966 1215 9411 abdulaziz.al-sowailim@sa.ey.com
Qatar Robert Abboud +974 4573 444 robert.abboud@qa.ey.com
Kuwait Salmaan Jaffery +973 1751 2802 salmaan.jaffery@bh.ey.com
UAE Najeeb Rana +971 4312 9343 najeeb.rana@ae.ey.com
United Kingdom Ken Eglinton +44 207 951 2061 keglinton@uk.ey.com
Luxembourg Pierre Weimerskirch +352 42 124 8312 pierre.weimerskirch@lu.ey.com
Malaysia Abdul Rauf Rashid +603 7495 8728 abdul-rauf.rashid@my.ey.com
* Note: Europe, Middle East, India and Africa

The report’s methodology and our interviews
Survey Methodology Business Risks Radar

► Our survey sought to identify key trends and business risks for the global ► The Ernst & Young risk radar is a simple device that allows us to present
Islamic asset management industry through in-depth interviews with the top 6 business risks in the Islamic asset management industry.
executives and industry observers. ► The risks at the center of the radar are those that the individuals we
► These discussions were used to gauge business sentiment and identify interviewed thought would pose the greatest challenge to the industry
key areas for inquiry. in 2010.
► Interviews were conducted in March and April of 2010. A total of 18
interviews were conducted in six different countries by Ernst & Young Business Risk Categories
staff. ► The radar is divided into four sections that correspond to the Ernst &
► Interviews centered on four main topics of discussion, namely: Young Risk Universe™ model.
► State of the industry ► Compliance threats originate in politics, law, regulation or corporate
► Demand side factors governance;
► Supply side dynamics ► Financial threats stem from volatility in markets and the real economy;
► Business risks
► Strategic threats are related to customers, competitors and investors;
and
Business Risk Ratings ► Operational threats impact the processes, systems, people and overall
► Ernst & Young subject matter experts developed a list of Islamic asset value chain of a business.
management business risks and contributing factors.
► All interviewees were provided with this list of business risks and Acknowledgement, Anonymity and Quotes
requested to rate each to reflect its severity to their respective business
► We would like to thank all those interviewees that agreed to contribute
over the coming 12 months. Interviewees were also asked to add any
to our report.
additional risks they felt were important.
► All interviewees were assured of anonymity and minutes documented
► The results of this rating process were tallied and a relative ranking
during our discussions were approved by respective interviewees.
assigned to each. This rank formed the basis for our comparative study
► Quotations have been used to support argument made in the report.
with 2009 results.
63
References and the Project Team
Sources Ernst & Young’s Project Team

► Bloomberg
► Central Bank Websites Sameer Abdi Ashar Nazim
► Company Annual Reports Sohaib Umar Kamran Akhtar
► Datamonitor Global Wealth Model Ali Shaikh Faisal Hasan
► EFAMA Ghayas Saeed Zahra Al Sairafi
► Ernst and Young: “Lessons from Change – Asset Management”
► Eurekahedge For questions or comments, please contact Kamran Akhtar on:
► Global Insight +973 1751 2817
► Investing in the GCC Markets: New Opportunities in a Changing kamran.akhtar@bh.ey.com
Landscape
► Investment Company Institute
► IFIS
► Islamic Finance News
► IFSL
► Merrill Lynch
► National Mutual Fund Association
► OECD-Private Pensions Outlook 2008
► Pew Research Center
► SWF Institute
► Watson Wyatt
► World Wealth Report 2009
► Zawya
► 2010 Global Pension Asset Study

Shaping the Future of the Global Islamic Finance Industry Since 1993
2 Decades of Supporting the Market Leaders

MEGA is the leading international information firm focused on achieving business results for the Islamic banking & finance industry
since 1993. Our exclusive focus on Islamic finance has enabled us to create significant value for the leading players in the Islamic
Our Portfolio of Brands: banking, finance and investment markets. The portfolio of MEGA brands represents the landmark industry conferences and our
clients are the leading players in the international financial markets.
Partnering with Governments and the Industry Thought Leaders

Our Strategic Partners are world leaders in their respective fields and include key government finance and regulatory agencies such as
the Central Bank of Bahrain, Dubai International Financial Centre, UK Trade & Investment, the Monetary Authority of Singapore and the
Economic Development Board of Bahrain. These and our other strategic alliances with international thought leaders including Ernst
& Young and global strategy advisory firm McKinsey & Company further strengthen MEGA’s brand leadership position by providing
original new research insights on the Islamic finance industry worldwide.
Investing in Our Brands: Number 1 in Each of Our Markets

MEGA continues to grow its portfolio of Islamic finance brands to further extend our leadership position across the Banking, Takaful,
Funds, Capital Markets, and Project Finance segments. Each brand is successfully developed over many years in order to further
cement its number 1 position in its respective market.
In 1994 we founded the World Islamic Banking Conference (WIBC), which at the time was one of the first conferences in the world to
focus on this nascent industry. That first year we had 120 pioneering delegates and one sponsor. Today, fast approaching 2 decades
SAUDI
SUMMIT
later and with more than 1,200 delegates from over 50 countries attending the conference each year, WIBC is an iconic brand
internationally recognised as the world’s largest gathering of Islamic finance leaders.
A World Stage: Genuinely Global Dialogues

MEGA brands have a genuinely global reach across the Islamic finance industry. An initiative to further broaden this international
representation ‘The World Comes to WIBC’ was launched at WIBC 2007 and has grown to now feature a British Pavilion led by UKTI and
comprising 18 British-based banks. 2008 saw us further extending this programme to Asia, in partnership with the Monetary Authority
of Singapore, which resulted in a high-profile Singapore delegation led by the MAS Governor. A number of leading international
Islamic banking groups also now convene their annual board meetings along the sidelines of WIBC.
Understanding Client Needs & Delivering Long-Term Value

MEGA’s leadership position has come as a result of our relentless focus on the constantly changing needs of our clients as the
Islamic finance industry has grown and matured. Whether it be the challenges of launching a new bank, a new investment fund,
an innovative new retail financial product or raising corporate profile in a key target market, we ensure that our offerings are closely
aligned to the immediate business priorities of our clients. Then we make sure that we deliver on our promises and that is why the
market leaders come back and work with us year after year. Our genuine value creation is highlighted by our long-term relationship
with Ernst & Young who have worked with us continuously since the inception of the World Islamic Banking Conference 17 years ago
- and who are also now our partners across the portfolio of MEGA brands.
MEGA Brands: Shaping the Future of the Global Islamic Finance Industry Since 1993
www.megaevents.net
65
WIFCMC is a MEGA Brand
MEGA BRANDS. MEGA CLIENTS. MARKET LEADERS.

MEGA is the market leading business information firm focused on achieving business results for the global
Islamic banking & finance industry since 1993. The portfolio of MEGA brands represents the landmark industry
conferences and our clients are the leading players in the international financial markets.
SAUDI
SUMMIT
MEGA Brands: Shaping the Future of the Global Islamic Finance Industry Since 1993
www.megaevents.net

Islamic Funds &amp; Investment Report (IFIR 2010), Ernst &amp; Young

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Islamic Funds & Investments Report 2010

Post Crisis: Waking up to an investor-driven world

Page 2 The World Islamic Funds and Investments Report 2010

1. Setting the scene 5

Dear Investment Executive

Page 4 The World Islamic Funds and Investments Report 2010

Setting the scene

Page 5 The World Islamic Funds and Investments Report 2010

Global Mutual Fund Industry

Estimated AuM Number of Funds

2001 2002 2003 2004 2005 2006 2007 2008 Q3 2009

Page 6 The World Islamic Funds and Investments Report 2010

Global Islamic Fund Management Industry

Estimated AuM Number of Funds

51.4 52.2 52.3

Assets Under Management (LHS) Number of Funds (RHS)

Source: Eurekahedge, Zawya, Ernst & Young analysis

Page 7 The World Islamic Funds and Investments Report 2010

Global Islamic Funds - Annual Launches and Liquidations

Source: Zawya, Eurekahedge, Ernst & Young analysis

Breakup of Retail and Institutional Islamic Funds Launched

Source: Eureka Hedge, Zawya, Ernst & Young analysis

Page 10 The World Islamic Funds and Investments Report 2010

Supply analysis – products and asset classes

Number of Islamic Funds Launched by Asset Class

2007 2008 2009

Source: Zawya, Eurekahedge, Ernst & Young analysis

Page 12 The World Islamic Funds and Investments Report 2010

Assets Under Management of Islamic Funds by Categories (Q1 2010)

Figures in US$b 52.3

Source: Zawya, Eurekahedge, Ernst & Young analysis

Islamic and Conventional Indices Islamic Equity Funds - Average Returns

% Top Quartile Return Average Return

Page 14 The World Islamic Funds and Investments Report 2010

Global Sukuk Issuance Islamic Fixed Income Funds - Average Returns

*Deals rumored/announced. Malaysia constitutes a significant part of deals

900 % Top Quartile Return Average Return

Page 16 The World Islamic Funds and Investments Report 2010

USD 3 Month LIBOR Islamic Money Market Funds - Average Returns

Global REIT Index Islamic Real Estate Funds - Average Returns

Top Quartile Return Average Return

Page 18 The World Islamic Funds and Investments Report 2010

Current state of the Islamic fund industry

Number of Islamic Fund Managers by Assets Under Management (Q1 2010)

55% of Fund Managers have

Total AuM (US$m)

Source: Eurekahedge, Zawya, Ernst & Young analysis

Page 20 The World Islamic Funds and Investments Report 2010

Top 25 Global Asset Managers (2008)

Barclays Global Investors

0 200 400 600 800 1,000 1,200 1,400 1,600

Average Management Fee of Islamic Funds

High 6.00% 5.50%

Low 0.10% 0.03% 0.30% 0.35% 0.05%

2006 2007 2008 2009 Q1 2010

Page 22 The World Islamic Funds and Investments Report 2010

Break Even Management Fee for Selected AUM Levels

Assets Under Management (US$m)

200 Industry Average Management Fee

Source: Industry interviews, Annual Reports, Ernst & Young analysis

Global Estimated Muslim Populations in 2009

Estimated Algeria Morocco

Source: Pew Research Center, Ernst & Young analysis

Page 24 The World Islamic Funds and Investments Report 2010

Islamic Funds & Investment Report (IFIR 2010), Ernst & Young

Islamic Funds & Investment Report (IFIR 2010), Ernst & Young