1. Assessing the growth of Islamic equity funds Suhail Arain Investment Director Scottish Widows Investment Partnership

2. Islamic Finance : Overview Islamic assets are about 1% of global banking assets The current size of Islamic finance market is estimated to be US$480 bn with retail being the largest segment at US$380 bn Islamic capital markets is the most dynamic segment with 40% CAGR over the 2000 – 06 period Regional breakdown : Middle East 40%, South East Asia 28%, Europe 10% and North American 6% Forecast growth of Islamic finance market 11% CAGR over period 2007 – 2010 The opportunity remains large with some surveys indication that 75% of banking customers in the Gulf prefer Islamic banks and would switch to this format if their products were at least on par with those of conventional banks

3. Islamic Finance : Current Market Size

4. Islamic Funds

5. Developments and Outlook

6. Risk/return relationship and the benefits of diversification What do investors give up in becoming Shariah investors? An Islamic investor tends to focus on quality (low gearing) Favoured sectors include : Energy, materials, industrials, healthcare and technology at the expense of FINANCIALS and utilities An investment managers’ perspective

7. SWIP Shariah Guidelines Investment Principles According to Islamic principles certain industries are unlawful and investments in these are forbidden They include: –Tobacco –The production or sale of pork products –The production or sale of intoxicating liquor –Non-Islamic structured banking, finance, investment or life insurance business, or any other interest-related activity –Cinema, and all media that contain pornographic material such as broadcasting, videos and CDs etc –Arms manufacturing Companies invested in must also follow the following guidelines –Interest revenue shall not exceed -5% of total revenue –Non-Islamic structured borrowing must not exceed -30% of the total market value of the company’s stock –Cash plus accounts receivables plus interest bearing assets shall not exceed -30% of the company’s adjusted total assets –Each company shall be comprised of -51% non-liquid assets

8. Islamic Performance ISLAMIC VS NON ISLAMIC SECTOR PERFORMANCE 12/10/07 20032004200520062007 80 100 120 140 160 180 200 220 240 260 280 300 VICE WEIGHTED INC FI N - PRICE INDEX NON VICE WEIGHTED - PRICE INDEX Source: Thomson Datastream

9. Islamic Performance FTSE GLOBAL ISLAMIC INDEX VS MSCI GLOBAL INDEX 12/10/07 20032004200520062007 80 100 120 140 160 180 200 220 240 FTSE ISLAMIC GLOBAL $ - PRICE INDEX MSCI WORLD U$ - PRICE INDEX Source: Thomson Datastream

10. Examining the need for uniform Shariah guidelines Islamic finance has come of age but is still developing Is Shariah compliance a binary event or something more complex? May need to standardise products but not principles Transparency is of the uptmost importance Who decides? –Customers/investors –Investment advisors In the end a fatwa is just an opinion given in the best of faith Unfortunately no decisive answer investors should invest in those assets that are most appealing/relevant for them