This presentation provides a stocktake of where the Islamic Finance industry is currently positioned and what are the long term prospects for the industry. It also provides a short-medium term broad overview of what can be expected from Islamic Finance.

1. Is Islamic Finance really the value proposition it claims to be? Assessment and Opportunities Sayd Farook Senior Consultant, Dar Al Istithmar Research Advisor, Oxford Islamic Finance Disclaimer: The views presented herein are the author’s own and do not necessary represent the views of Dar Al-Istithmar or Oxford Islamic Finance 1

2. About Dar Al-Istithmar Our Services Established in 2004, Dar Al Istithmar is a venture between Russell Wood and Oxford Islamic Finance. Independent from its shareholders Dar Al Istithmar offers: Shari’a Structures Shari'a Consultancy Services Shari'a Monitoring / Purification Services Shari’a Compliance Reviews Global Investment Products / Investment Banking Asset and Fund Management Islamic Finance Arranging and Advising * Academic and Educational Work Shari’a Supervisory Board DI’s Shari’a Supervisory Board comprises world renowned scholars Dr. Hussein Hamed Hassan (Chairman) Dr. Mohammed DaudBakar Dr. Abu Sattar Abu Ghuddah Dr. Ali Al Qaradaghi Management Team Asim Khan ACA Executive Director Sayd Farook Phd FCIPA Senior Consultant Saud SiddiquiFCCA CIA CISA Senior Consultant 2 Euromoney “Best Islamic Assurance and Advisory Services” 2006 Euromoney “Best Islamic Advisory Services” 2007

3. Track Record Shari'a Structures Our work has involved the use of Murabaha, Mudarabaha, Wakala, Musharaka, Istisna’a, Ijara, Intifah, Salam, Wa’ad structures (to name a few) and these structures have been used in products such as equity funds, hedge funds, private equity funds, real estate development projects, home finance, personal finance, deposit accounts, credit cards, capital markets sukuk. Real Estate We acted as the Global Shari'a Advisor for a mega tower project, part of the Al-Haram scheme being developed in the heart of the holy city of Makkah. We have developed real estate investment funds (using vehicles in a number of different jurisdictions) Academic and Educational Work We write professional reports and articles on Islamic Finance and Islamic Capital Markets Through our affiliation with Oxford Islamic Finance, we produce contemporary research on innovations in Islamic Finance. We give presentations at numerous International Conferences, Seminars and Forums on Islamic Finance We have conducted a global educational road show on Shari'a and innovation in Islamic finance Asset and Fund Management Designed an innovative Shari'a-compliant technique for short selling for an Islamic long-short hedge fund Shari'a advisor to one of the largest banks in the world for an umbrella structure to set up a number of Islamic funds covering a wide range of asset classes Shari'a advisor to a number of Middle East asset managers on regional equity and Sukuk funds Shari'a advisor for an Islamic private equity fund to invest in science, health and technology products Investment Products / Investment Banking Shari'a advisor to one of the largest banks in the world on a new range of Shari'a-compliant derivative products. This is arguably the most sophisticated range of Islamic investment products. We have structured a Shari'a-compliant overdraft facility, housing finance, and deposit accounts for one of the largest retail banks in the United Arab Emirates Shari'a advisor to a major index provider on a new range of Islamic indices Equity Structured Products 3

4. "Law is in Islam a process of discovery. Just as the physical scientist believes that the laws of physics exist as an absolute, waiting to be discovered rather than invented, so the Muslim legal scholar believes that the shariah has been created by God and his role is to discover and articulate it rather than invent it” -Imad-ad-Dean Ahmad 4

5. Where are we coming from? 2001-2010 Structured Sukuk Mega Project Finance Large Commercial Banks Islamic Derivatives 1991-2000 Hard Asset Private Equity Fund Management 1975-1990 Commercial Banking Trade Finance Syndications Islamic Conglomorates Market Exposure: 250m Conversions, Islamic Windows & Subsidiaries of Mega Banks, Establishment of Islamic Finance in Non-Muslim states Muslim populated states getting interested Syria, Libya, CIS Market exposure: 100m Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh Market exposure: 20m One or Two Islamic Bank in each Muslim state Inefficient Command SOEs in Iran and Sudan Timeline 1975-2010 5 5

6. Historical Growth Factors 1975-1990 Resource Boom Academic and scholarly encouragement and experiments Arab Entrepreneurs 1991-2000 Regulatory Recognition and Encouragement Growth of tiger economies Efficient interbank markets Development of infrastructure 2001-2010 Resource wealth and surplus liquidity Sukuk Islamicisation and Religiosity Real Estate Asset classes Further infrastructural developments 6

7. Where are we going to? Short to medium term growth 2002-2005 Growth: 44 % YOY (Islamic) compared to 18.2% YOY (conventional) See no signs of interest in Islamic Finance abating Increased interest of the western world Growth rates of 20-30 percent for the next five to ten years Islamic Finance will truly be part of the global banking system 7

8. Short to medium term growth 8

9. Where are we going to?Long Term Growth 2011-2040 Sophisticated Private Equity, Mega Islamic Commercial, Full Service Investment Banks Market exposure: 6000m Competition with Mega Banks, Concentrations in Muslim states, Conversions in Muslim states, Growth in Non-Muslim states ? Market exposure: 1500-2000m No further growth beyond core Muslim constituency? Market exposure: 500m-1500m Reputation Risk ? Timeline 2011-2040 9

10. Long term growth? Stellar? Steady? Negative? 10

11. Long Term Growth? Stellar? Value proposition for both Islamic and conventional populace Limited competition presented by conventional financial institutions 11

12. Long Term Growth? Steady? No value proposition beyond Muslim states and populations High competition between Islamic and conventional megaliths Efficiencies and economies achieved in Islamic transactions 12

13. Long Term Growth? Negative? Reputation risk associated with terrorism Failure to achieve economies and efficiencies Loss of confidence of core customers: Shari’a sensitivity 13

14. 14 Long Term Growth? Stellar? Value proposition for both Islamic and conventional populace Limited competition presented by conventional financial institutions Steady? No value proposition beyond Muslim states and populations High competition between Islamic and conventional megaliths Efficiencies and economies achieved in Islamic Negative? Reputation risk associated with terrorism Failure to achieve economies and efficiencies Loss of confidence of core customers: Shari’a sensitivity 14

16. 16 16 Continuing stellar growth? Three factors will determine competitive edge for Islamic Finance: Pricing Shari’ah Compliance Features Pricing Islamic Banks are still less efficient than conventional banks but will eventually achieve economies Shari’ah Compliance Remains a major challenge since many floaters are of the opinion that Shari’a compliance is a wider definition than Shari’a arbitrage Features Product features must differentiate the value proposition to capture the conventional and floaters markets Stellar growth beyond Shari’ah Loyalists can only be achieved if a differentiated strategy is adopted for the industry

17. Are we facing an existential threat? On a repeated basis, we are facing attacks from our own ranks: Mahmoud El-Gamal (PhD), Professor, Rice University Omar Farooq (PhD), Professor, Royal University for Women FehmySaddy (PhD), FS Partners MudassirSiddiqui Islamic Finance Global Head, Partner, Denton Wilde Sapte(Shari’a Scholar, IDB) NEXT??: Sayd Farook, Oxford Islamic Finance 17

18. Are we facing an existential threat? Islamic Finance CANNOT be: only about “Shari’a arbitrage” only about meeting the needs of conventional financing or capital markets constrained by the traditional nominate contracts all just commodity murabaha YET, ALL OF THIS EXISTS AND CANNOT BE AVOIDED AT THIS STAGE. In reality, the first is a blessing in disguise! 18

19. So what will keep Islamic Finance going? GCC Petro liquidity slack isn’t certainly going to last forever. There are essentially three value propositions in Islamic Finance, which we need to capitalise on: Evolution of Islamic Finance as an industry 19

20. Shari’a Contract Governance The process of ensuring that a contract is Shari’a compliant Avoid Main Prohibitions Riba Gharar Maysir Avoid Subsidiary Prohibitions Permissibility of subject matter (evaluability) consideration and process Ownership and possession of assets Cannot combine two contracts (with exceptions) Cannot defer both counter-value or have bilateral promises Cannot have twin sales Cannot have tying contracts This ensures that: All transactions are asset linked: first degree of separation only allowed i.e. trading of debts and money not allowed Mal is generally conservatively defined i.e. financial rights do not give rise to assets. 20

21. AVOIDANCE OF HARAMTRANSACTIONS Avoiding all forms of unethical activities such as financing casinos, drugs, illicit, immoral or dubious transactions AVOIDANCE OF QIMAR Gambling and Chance based (zero-sum) games AVOIDANCE OF JAHALA Clarity of intentions and transparency is imperative in all dealings AVOIDANCE OF RIBA Risk-free or guaranteed rate of return on loaned money or investment AVOIDANCE OF GHARAR Excessive uncertainty in contracts – e.g. entering into a transaction whose consequence is out of usual trade norms – E.G.: a) Financial derivatives b) Insurance contracts c) Sale of debts ISLAMIC CONTRACTUAL GOVERNANCE AVOIDANCE OF EXPLOITATION relationship to reflect justice and fairness.

22. Contractual Ethics Even in its core rules, Islam is propagating ethics in contracts. The prohibition of riba, gharar and maysiris there to avoid the unjust exploitation/enrichment of one party over another. But beyond this, Islam ALSO has a position on all aspects of contractual fairness, including representations, disclosures, insider trading, 22

23. Contractual Ethics Fairness and just treatment of other people’s property ‘God does command you to render back your trusts to whom they are due…’ -Women (Surat An-Nisa) 58 Fair trade practices ‘And, O my people! Give full measure and weight fairly, and defraud not men their things, and do not act corruptly in the land, making mischief: What remains with Allah is better for you if you are believers, and I am not a keeper over you’ -Hud (SuratHud 85,86) “On the day of Judgment, the Honest Muslim merchant will stand side by side with the Martyrs” -Saying of the Prophet Muhammad (SAW) Full disclosure “When a person sells a defective thing, and he does not describe that fault to the buyer, the angel of Allah will always curse him.” -Saying of the Prophet Muhammad (SAW) Misrepresentation/Deceptive trade practices ‘He who cheats is not one of us’ -Saying of the Prophet Muhammad (SAW) Anti-Trust Insider Trading “…don’t outbid one another in order to raise the price…don’t enter into a transaction when others have already into that transaction and be as brothers one to another.”-Saying of the Prophet Muhammad (SAW) Speculative activities ‘Verily, the prophet prohibits the trading of gharar(uncertainty)’ -Narrated by a companion of the Prophet Muhammad (SAW) 23

24. Are we facing an existential threat? In short, NO, we are not! On balance of activities, we are still safe. 24

25. Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility? Zakat is only ordained for seven types of charitable purposes Zakat is essentially the minimum safety net for the bare essentials. 25

26. Ability based moral responsibility?Isn’t Zakat fulfilling moral responsibility? 26

27. Ability based moral responsibility?Are we talking about social business? 27

28. Ability based moral responsibility?Are we talking about social business? ISLAMIC FINANCE CANNOT BE JUST A SOCIAL BUSINESS… No restriction on wealth accumulation Does not require donation of all wealth Businesses can have profit maximisation objectives(Shari’a compliant activities) 28

30. Also incorporate such objectives into ther business activities

31. Set aside part of profits for charitable distribution Prof. Yunus sees social business and normal businesses co-existing, Islamic business integrates social values into a business model. 29

32. Ability Based Moral Responsibility? Did any form of responsibility exist prior to modern conceptions of CSR? Ex-post facto, does CSR have any legitimacy in Islam? Most importantly, does this form of social responsibility have any roots in Islamic principles? 30

33. Principles of Islam:Articulating moral responsibility 31

34. Defining moral or social responsibility? The west has its own definition of social responsibility based on society’s contemporary conception of what is right and wrong. Hence, casinos and alcohol are all acceptable, if conducted “responsibly”! Islam has a different perspective: What is beneficial for us and what is harmful for us cannot be left to human reasoning, because of its inherent limitations –Al-Shatibi Rational faculties can and should only be used to complement, support and strengthen ethics and morality defined by Shari’a 32

35. Key Islamic moral responsibility principles 33

36. Ability Based Moral Responsibility Public goods and wealth redistribution ALSO responsibility of individuals Islam recognizes Income disparity and makes it an obligation among those with wealth and power to redistribute it as a test “He has raised you in ranks, some above others: that He may try you in the gifts He has given you: for your Lord is quick in punishment: yet He is indeed Oft-forgiving, Most Merciful.” -The Livestock (Surat Al-Anaam) 165 “(Alms are) for the poor who are confined in the way of Allah-- they cannot go about in the land; the ignorant man thinks them to be rich on account of (their) abstaining (from begging); you can recognise them by their mark; they do not beg from men importunately; and whatever good thing you spend, surely Allah knows it.” -The Heifer (Surat Al-Baqarra) 273 34

37. Ability Based Moral Responsibility However: “On no soul doth Allah Place a burden greater than it can bear….” Baqara (The Heifer) 286 The principle of ability is paramount to the extent of moral obligation placed on each individual. 35

38. 36 Islamic Social Responsibility and Corporate GovernanceThe differentiated strategy The only real value propositions of Islamic Finance: Shari’ah Compliance (for Shari’ah Loyalists and Floaters) Social Responsibility (for Floaters and both loyalists) Shari’ah Compliance: complying with the Shari’ah rules associated with each instrument or transaction Social Responsibility: the broader manifestation of Islamic principles of equity and social justice evident in the micro rules of the Shari’ah How can these be implemented? Islamic Corporate Governance 36

39. Technical Challenge How do we incorporate such behaviour into our corporate culture? How do we engender a system and infrastructure that encourages social responsibility in all aspects of the workplace and all aspects of our work? 37

40. Conclusion GOLDEN OPPORTUNITY The world of finance is looking at us for direction. WAKE UP CALL This a is wake up call to the industry to identify and differentiate Islamic Finance based on principles of opportunity based moral responsibility. LOOSE OUR APPEAL If we don’t follow this route, we will loose our appeal tothose who don’t see any value in Shari’a governance or contractual ethics because some of these are already existent in conventional finance. 38

41. Corporate Social Responsibility and Islamic Finance: The Way Forward Sayd Farook 39

42. Vision without action is a dream. Action without vision is simply passing the time. Action with Vision is making a positive difference. 40

43. Vision without action is a dream. 41

44. The chronological life of an AAOIFI Governance standard 42

45. CSR and AAOIFI 43 Series of studies verified that there was a disjoint between the perceived ethical stance of IFIs and the reality of the IFIs Maali, Casson and Napier (2003) Farook and Lanis (2004) Beydoun and Willett (2000) Studies suggested that Islamic banks were attempting to PORTRAY themselves as Islamic or socially responsible through Islamic art inclined annual report disclosures without necessarily following the substantive content. There is a LACK OF CONCEPTUAL UNDERSTANDING OF WHAT SOCIAL RESPONSIBILITY IS!

46. Action without vision is simply passing the time. 44

48. Providing Qard al-Hasan loans for poor?

49. Donating a percentage of profits from depositors (2%) for eco-sustainability ventures?Operating on a non-profit basis or giving financing for free? Supporting an F3 Racing Team? Establishing a sukuk fund with minimum subscription of USD 100,000? "As part of our corporate social responsibility and stemming from our belief in sharing our success with all, we have decided to offer the opportunity to the largest number possible of potential investors. Therefore, we set the minimum limit of investment to US$ 100,000 and in increments of US$ 10,000 for those wishing to invest more" CEO- Anonymous Islamic Investment Company 45

50. Social responsibility for Islamic financial institutions 46

51. Do IFIs need to be socially responsible? Representing themselves as complying with Shari’a rules Representatives for individuals who: i. invest their money as shareholders or investment account holders, ii. have co-operative, partnership or borrowing relations with the IFI, iii. are employed by the IFI, iv. have other explicit contractual relations with the IFI, v. in addition to the above, have a implicit social contract with the IFI as part of the larger community (Ummah). Representative of Muslims, who are accountable to Allah (SWT) In addition, IFIs have a SPECIAL POSITION in society as FINANCIAL INTERMEDIARIES, which carry with it certain responsibilities and obligations. 47

52. Do IFIs need to be socially responsible? 48 Investors Shareholders Investment Account Holders Overarching Accountability to Allah (SWT) Taqwa centricity Contractual parties Clients (Current A/C holders, Lessees, Partners, Vendors and Buyers) Employees and contractors Other contractual parties Society (Poor, youth, elders, marginalised, discriminated against, environment)

53. Technical Challenge Remember my questions before: How do we incorporate such behaviour into our corporate culture? How do we engender a system that encourages social responsibility in all aspects of the workplace and all aspects of our work? How do we develop an infrastructure in line with such principles? 49

54. Defining social responsibility for IFIs On no soul doth Allah Place a burden greater than it can bear…. Baqara (The Heifer) 286 IFIs can and should do everything in their capacity to be socially responsible. 50

55. Conceptualizing social responsibility for IFIs 51

56. Core Activities Are central to the operations of the financial institution, i.e. the day to day running of the business Do not need additional resources Are aligned to the present business model 52 Shareholders Mobilise Funds Islamic Bank Investment Account Holders and Customers Receive Funding Clients ManagementEmployees Contractors

57. Supplementary Activities Are NOT central to the operations of the business and the day to day running of the business Require additional resources and costs to implement Require a re-alignment of business operations, systems and functions 53

58. Distinction between Mandatory and Recommended Broadly based on the principles of Maslaha articulated by al-Ghazzali 54

59. Mandatory VS Recommended 55

60. Action with Vision is making a positive difference. 56

61. What are we doing? Maqasid Al-Shari’a CSR Survey and Awards (Dar Al Istithmar-Dinar Standard-AAOIFI) Oxford Islamic Micro-Finance Project 57

62. Maqasid Al-Shari’a CSR Survey and Awards Encourage financial institutions to adopt and apply CSR standards Act as “civil society” to implicitly “pressure” IFIs to be socially responsible Award those institutions that are socially responsible 58

63. Oxford Islamic Micro-Finance Project 59 Intermediate funding from IFIs to make Islamic Micro-finance a viable reality Target IFI charities Target IFI wholesale funding

64. Conclusion When we have done what we can, God will do what we can’t. 60

65. Contact Dar Al Istithmar Head Office: 3 George Street, Oxford, OX1 2AT, United Kingdom T: +44-1865288545 F: +44-1865244762 W: www.daralistithmar.com E:di.admin@oxif.co.uk 61