Kamal Ali Joint Director Securities & Exchange Commission of Pakistan

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

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

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

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

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

Industry Overview Industry AUM (Rs. In billion)400 Total number of mutual funds 147 Number of AMCs/IAs28 Types of FundsOpen End 132 Close End 15 Islamic Mutual FundsAUM Rs. 52 bn. No. of funds 31 Islamic Funds Share13%

Islamic vs. Conventional Funds

Islamic Fund Types Types of Funds AUM

Islamic Funds

Asset Allocation – Islamic Funds vs. All Mutual Funds

International Islamic Funds

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

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

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