Strictly Private & Confidential Page 1

INVESTMENT ACCOUNT-i : A NEW FRONTIER

By Hizamuddin Jamalluddin Group Chief Strategy Officer

TABLE OF CONTENTS

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HIJRAH TO EXCELLENCE PLAN – H2E PLAN

IFSA 2013

INVESTMENT ACCOUNT – A NEW FRONTIER

INVESTMENT ACCOUNT PLATFORM – A NEW MARKETPLACE

MOVING FORWARD

Section 1

Section 2

Section 3

Section 4

Section 5

Strategic Management & Managing Director’s Office

TOWARDS THE END OF H2E PLAN (2013 – 2015)

2013

2014

2015

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RECAP H2E PLAN

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Robust Organic Growth

Service Excellence

Shariah-led Innovation

Resource Optimisation

Employer of Choice

Regional-isation

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ISLAMIC FINANCIAL SERVICES ACT 2013 (IFSA)

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Islamic Banking Act 1983

Takaful Act 1984

Payment Systems Act 2003

Exchange Control Act 1953

Repealed Laws New Law

Islamic Financial Services

Act (IFSA) 2013

Promotes financial stability and compliance with Shariah requirements

Strengthens regulation of

financial institutions Implements

recommendations under Financial Sector Assessment program (FSAP)

Objectives

How does IFSA 2013 affect us?

“For all Islamic banks in Malaysia, including Bank Islam, this involves a reclassification of our existing deposit products”

BNM on 14 March 2014 issued an Investment Account Policy that outlines the new investment account

product requirements as defined by Islamic Financial Services Act 2013 (IFSA).

ISLAMIC FINANCIAL SERVICES ACT 2013 – IN A NUTSHELL

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Forceful Governance / Oversight Framework

(Board/SSC Composition & Responsibilities)

Refined Ownership, Control & Financial Group/ Holding

Company Demands Strong Capital

Adequacy Ratio

Differentiates Deposit & Investment Account

Takaful Framework – Separation of Life &

General Takaful Promotes Responsible Risk

Sharing Business Model

Greater Transparency in Product Offerings &

Customers’ Protection Robust Risk Management

Capability & Capacity More Extensive & Intrusive

Regulation

FUNDING STRUCTURE – IFSA 2013

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Deposits Investment Accounts Shareholders’ Funds

Current Account Savings Account Term Deposit

Unrestricted Investment Account

Restricted Investment Account

Paid Up Capital Retain Earnings Tier II Capital Others

WHAT IS AN INVESTMENT ACCOUNT?

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Money paid and accepted for the purposes of

investment in accordance with Shariah

Shariah contracts: Mudarabah, Musharakah, Wakalah, etc.

The return in an investment account commensurate

with the risk taken

BEGIN WITH THE END IN MIND – “A NEW FRONTIER”

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Effective Capital Management – Cost of

Capital is expensive Enhance Liquidity

Management – LCR Ratio

Return to commensurate with the risk taken or Differing Risk-Return

Profiles

No longer restricted by the

size of Balance Sheet

Exempted from SRR calculation – Reduce

regulatory cost

Diversified Risk Profile – Effective Syndication

Medium & SCEL

Flexibility to Undertake Risk Sharing Contract

(Mudarabah, Musharakah, Istisna’ and etc)

Beyond Ordinary Risk Appetite or Underwriting

Criteria – Off Balance Sheet

New Asset Class & Revenue Generator

TRANSITION PERIOD

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Islamic Deposit Investment Account

Sum of money accepted or paid in accordance with Shariah.

Money is paid and accepted for the purpose of investment in accordance with Shariah.

Will be repaid in full on maturity. No expressed or implied obligation to repay the Money in full (Principal and/or Profit).

With or without any gains or return. With or without any returns (profit or loss).

Repayment either on demand or at a certain time.

Repayment at a certain time which includes unlimited withdrawal.

Shariah contracts: Wadiah, Tawarruq, Bai’ ‘Inah

Shariah contracts: Mudarabah, Musharakah, Wakalah

Capital guaranteed. Capital is not guaranteed.

PIDM protection – YES PIDM protection – NO

BEFORE TRANSITION

DEPOSIT Wadiah Bai’ ‘Inah Mudarabah Wakalah Tawarruq

AFTER TRANSITION

DEPOSIT Wadiah/Qard Tawarruq Bai’ ‘Inah

INVESTMENT Mudarabah Musharakah Wakalah

As per BNM’s Investment Account Policy, the new classification of the existing deposit products shall take effect commencing on 1 July 2015.

For Bank Islam :- Islamic deposit is already in place in April 2014. Investment Account products will be launched on 1 June 2015.

NOTICE OF CONVERSION

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DEPOSIT ACCOUNTS

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Deposit Account Wadiah/Qard Tawarruq Bai Inah

Wadiah/Qard No returns Marketing on services/features

i.e.: debit-card facility, access to TH account, TAP mobile banking, MEPS IBFT, etc

Tawarruq Similar to fixed/term deposit Returns are fixed upfront as part

of Murabaha structure Brokerage fees to be borne by

the Bank

Principal guaranteed Shariah contracts ISLAMIC DEPOSIT

(Priority of payment accorded upon winding

up)

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INVESTMENT ACCOUNT – “A NEW FRONTIER”

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INVESTMENT ACCOUNTS

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Investors

Contract under IA : Wakalah Mudarabah Musharakah

Unrestricted Investment

A/C

Restricted Investment

A/C

Specific Investment Mandate/Asset Class

Fixed tenure Redemption upon

maturity of assets; or redemption only upon realisation of underlying assets to a third party; or redemption only upon finding replacement of funds from other IAH (other than the Bank)

Off-balance Sheet

General mandate or allow the Bank to make ultimate investment decision without restrictions or any conditions

Unlimited withdrawal Mismatch maturity On-balance Sheet

(subject to compliance with principles of FRS10)

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2nd Leg 1st Leg

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Wakalah

Mudarabah

Musharakah

Investors (as Muwakkil) entrust the IB (as Wakeel) to manage the Investors money in investment account

IB receives Wakalah fee regardless of the performance of the investment account

Investors (as Rabbul Mal) entrust the IB (as Mudarib) to manage their money in the investment account at the agreed PSR

IB receives its profit portion when the investment is profitable but loses its effort if the investment suffers a loss

Investors and IB (both as Shareek) put in their money together into investment account

IB receives its profit / loss sharing portion at the agreed PSR

Funding

Equity Financing

Lease based Financing

Sale based Financing

Fee based

Musharakah Mudarabah

◄ . ◄ .

Ijarah ◄ .

Murabaha Tawarruq

Istisna’

◄ . ◄ . ◄ .

Wakalah ◄ .

Investment Account Holder

APPLICATION OF SHARIAH PRINCIPLES

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INVESTMENT ACCOUNTS – KEY FEATURES

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KEY FEATURES RESTRICTED INVESTMENT ACCOUNT

TERM INVESTMENT ACCOUNT

TRANSACTIONAL INVESTMENT ACCOUNT

Product name Al Ansar Waheed Specific Investment

Account (SIA)

Al Awfar

Date of Launch 2 April 2015 1 June 2015 3 June 2015

Investor (s) / Customer’s Profile (Investor Account Holder)

Lembaga Tabung Haji

Corporate Entity Institutions Non-Individuals

Individual Retail Institutions

Fund Size RM200 mil Unlimited Unlimited (subject to availability of house financing assets)

Underlying Assets / Investment Portfolio

SME financing Existing Bank’s Assets (to be disclosed before offering)

House Financing Assets

Investment Risk High Medium (subject to underlying assets)

Low (given the underlying collateral and diversified profile)

INVESTMENT ACCOUNTS – KEY FEATURES…cont

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KEY FEATURES RESTRICTED INVESTMENT ACCOUNT

TERM INVESTMENT ACCOUNT

TRANSACTIONAL INVESTMENT ACCOUNT

Shariah Contracts Wakalah Wakalah Mudarabah

Mudarabah

Nature of Shariah Contract

Performance Incentive

Agency Fee Profit Sharing

Profit Sharing

Investment Objective / Motivation

To develop Muslim Bumiputera Economy + Expected Return

Commendable Return

To win the prizes i.e. – RM1 mil

Investment Tenure Up to 2020 (or upon fully drawdown of the fund, whichever earlier)

1 day to 1 year (Negotiable)

Unlimited

Withdrawal Upon maturity (as per the agreed term and conditions)

Upon Maturity On demand / unlimited

INVESTMENT ACCOUNTS – KEY FEATURES…cont

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KEY FEATURES RESTRICTED INVESTMENT ACCOUNT

TERM INVESTMENT ACCOUNT

TRANSACTIONAL INVESTMENT ACCOUNT

Capital/Principal Protection (Insured by PIDM)

No guarantee No guarantee (entitled to the asset tagged)

No guarantee (backed by house financing portfolio)

Minimum Placement/ Investment

RM10 mil per drawdown

RM500,000 RM100

Expected Return/ Profit Rate

3% ( or actual return if profit < 3%)

Based on agreed PSR

Based on agreed PSR

Profit Payment Frequency

Monthly distribution Upon maturity Monthly distribution

Fund Performance Reporting

Quarterly Quarterly Quarterly

Documentation Wakalah Agreement & Service Level Agreement

Specific Board Resolution & Transaction Doc.

Self Assessment Form (for Individual & SME) & Transaction Doc.

DIFFERENCES BETWEEN UNRESTRICTED IA (URIA) AND RESTRICTED IA (RIA)

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URIA RIA

General mandate or allow the Bank to make ultimate investment decision without restrictions or any conditions

Specific Investment Mandate/Asset Class

Unlimited withdrawal Fixed tenure

Mismatch maturity Redemption upon maturity of assets; or redemption only upon realisation of underlying assets to a third party; or redemption only upon finding replacement of funds from other IAH (other than the Bank)

On-balance Sheet(subject to compliance with principles of FRS10)

Off-balance Sheet

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INVESTMENT ACCOUNT PLATFORM – “A NEW MARKETPLACE”

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INVESTMENT ACCOUNT PLATFORM

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IAP is a multi-bank platform to facilitate channelling of funds from individual and institutional investors to finance viable ventures intermediated by participating Islamic banks via Restricted Investment Account as governed under IFSA and DFIA

• Multi-bank platform to provide choices to investors and ventures Voluntary participation by banks

• Investors can channel their funds to finance targeted industries and ventures of the investors’ choice All investment requests made by investors will be subject to suitability

assessment conducted by banks IAP will provide robust disclosure regime to facilitate informed decision

making by investors as well as to support monitoring of their investment

• Operate on secured internet-based architecture • Internet-based to allow wide outreach, including cross-border investors

What is IAP?

Major features

Source : Bank Negara Malaysia

A NEW MARKETPLACE

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…an investment Intermediary instead of Trading Exchange

… sound like a regulated crowd funding

… similar to initial public offering - over or under subscription

…also similar concept to retail sukuk

… gateway for financial inclusion

… just imagine a “Covered Sukuk”

Funds from RIA is to finance venture

Provide funding through opening of RIA with

participating banks using IAP

POTENTIAL INVESTORS / IA HOLDERS

VENTURES

ISLAMIC BANK Restricted Investment

Account

1st leg 2nd leg

NATIONAL BUDGET 2015

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Measure 2: Strengthening Islamic Financial Market 41. The Government will introduce a new shariah-compliant investment product in 2015

called the Investment Account Platform (IAP). IAP will provide opportunities to investors in financing entrepreneurial activities and developing viable SMEs. At the same time, IAP will be a platform to attract institutional and individual investors including high net worth individuals to invest in the Islamic financial market. Initially, IAP will be implemented with a startup fund of RM150 million.

42. To promote investment in IAP, the Government proposes individual investors be given

income tax exemption on profits earned from qualifying investment for three consecutive years.

TAX INCENTIVE UNDER INVESTMENT ACCOUNT PLATFORM

Investment Account Platform (IAP) is a new funding medium based on the Shariah principles with the aim of financing projects and venture companies. The objective of IAP is to attract participation from individual and institutional investors to boost development of small and medium enterprises (SMEs) as well as entrepreneurs through a funding system which is efficient, simple and transparent.

Profit earned by individual investors from investments made through IAP be accorded an income tax exemption.

The incentive is subject to the following conditions:- Tax exemption shall only be accorded for 3 consecutive years starting from the

first year profit is earned; The investment is made for a period of 3 years starting from the operation date of

IAP; Tax incentive shall only be accorded for investment activities in Malaysia, in

venture companies owned by Malaysian or locally incorporated companies; Tax exemption shall only be accorded for investments made in SMEs and venture

companies in any sectors; and Definition for SMEs is as per the latest definition issued by SME Corporation

Malaysia

IAP is scheduled to be in operation from September 1, 2015

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KEY DRIVERS – I.M.A.M

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Raeed Holdings Sdn Bhd

25% 25% 25% 25%

Initial Paid Up Capital: RM2.0 mil

Incorporated on 13 May 2015

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A brainchild of Bank Negara Malaysia Spearhead & jointly developed by I.M.A.M

BROAD MECHANIC OF IAP

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Obtain Information

Raise Funding

Administer & Manage

supported by

Banks

Features of IAP facilitate effective matching between sources of funds with diverse financing needs of the economy

Choose Investment

Track Performance

Distribute Profit

Report Progress

Promote & Advertise

Transparent | Easy-access | Secured | Wide-reach | Strong Governance

(Sources of fund) (Users of fund) Ventures Investors

• Strong roles played by banks, in line with their fiduciary duty

– Due-diligence

– Performance monitoring

– Suitability assessment

– Underwriting • Individual and institutional investors

• Islamic banks • Government (to

support target industries)

• Similar to current banking business

• Potential initial target: – Emerging Corporate – SMEs – Etc

Channel funds to ventures of their choice

Provide financing

– Ventures in innovative & new growth areas

Source : Bank Negara Malaysia

POTENTIAL MARKET PLAYERS/INVESTORS/FUNDER

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Business Angel Investors

“Teraju Peer-to-Peer Investors”

Takaful/Insurance Companies

High Net worth Individuals

Pension Funds Institutional Investors

Asset Management Co.

Venture Capitalist

Banking Institutions

Special Funds by the Government

Government-linked Companies

Cross Border Investors

ACT AS INVESTMENT INTERMEDIARY

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Short to Medium Term Investor or Fund Provider in

a Specific Financing Exposure

No Voting Rights & No Board Seat & Do not

involved in day-to-day management (VC)

- No Anti Dilution Rights

Return to commensurate with the risk taken or Differing Risk-Return

Profiles

Greater Transparency &

Disclosure

Optional Rating by Rating Agency Malaysia –

Strengthen Credit Profile

Business As Usual – Financing Documentation

Committed Financing Terms

Flexibility to Undertake Risk Sharing Contract

(Mudarabah, Musharakah, Istisna’ and etc)

Competitive Edge – Bigger Pool of Financier/Investors

Dealing only with the “Sponsor Bank” – Not a

Multiple Investors/ Shareholders

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KEY DIFFERENTIATION

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Comparison against different

asset classes Key similarities Key differences

Banking (deposit-financing) products

• A form of banking intermediation with banks playing significant roles to match between sources and users of fund

• Banks need to monitor progress of underlying ventures to facilitate disbursement of funds

• Investors are able to choose specific ventures to invest/ finance (supported by suitability assessment by banks), rather than financing decision made by banks from pooled deposits

• Principal not guaranteed • Risk and return to investors are directly tied to underlying

ventures/projects • IAP allows funding to viable ventures which do not fit bank’s

normal financing profile (e.g. those with lack of track record or collateral) but with viable projects

Crowd-funding/ Crowd-sourcing/ Peer-to-peer funding

Investors are able to choose specific ventures to invest/ finance from an internet-based platform

IAP involves intermediation by banks which provide pivotal roles in the transactions including sponsoring viable ventures to be floated on IAP and monitoring progress of ventures

Private equity/ Venture capital

Investors are able to choose specific ventures to invest/ finance

• Investment under PE/VC is in shares of a company whereas IA is to provide financing of viable ventures/projects

• Target investors for PE/VC are institutional and HNW investors, whereas IAP is also opened to retail investors

Shares (including listed shares)

• Investors are able to choose specific companies to invest

• Listing of wide range of investment options on an exchange

• Investment under IAP is to provide financing of viable ventures/projects

• Companies listed on a stock exchange are established companies, whereas target ventures in IAP initially are financing to SMEs

Bond/Sukuk • Investors are able to choose specific securities to invest

• Listing of wide range of investment options on an exchange

• Bonds/sukuk are usually issued by established companies, whereas target ventures in IAP initially are financing to SMEs

Unit trust Return to investors are tied to performance of underlying assets

Underlying assets for UT are usually securities and on portfolio basis, whereas IAP investments are SME financing and are done individually

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WAY FORWARD – “BEGINNING OF A NEW JOURNEY”

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INVESTMENT ACCOUNT AS "A NEW FRONTIER"

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Act as Investment Intermediary in addition to

Credit Provider Moving toward

“Responsible Risk Sharing”

Return to commensurate with the risk taken or Differing Risk-Return

Profiles

Promote Greater

Transparency & Disclosure

Facilitate Mobilisation of Capital – Gateway to

Financial Inclusion Innovation Catalyst

Flexibility to Right-size the Balance Sheet

Competitive Edge to Islamic Finance – Capital Management, Liquidity Management, SCEL &

Concentration Risk

New Mindset & Skill Sets

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WAY FORWARD - NEW PROPSPECT

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Awqaf Development

Green Infrastructure

Financing

Technology Based Project

Financing

Renewable Energy Project

Financing

Recycling Technology

Biotechnology

Creative Media & Content

Development Life Sciences

e-commerce, mobile

applications

CONCLUSION

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New Revenue Stream

Diversified Financing Asset Class

Healthy Asset Quality

Robust Underwriting Standards & Disclosure

Strong Capital Adequacy Ratio

- BASEL III

Moving towards equity-based

financing

Enhanced Liquidity Profile

- LCR

Optimize Balance Sheet

Structure & Leverage Ratio

MALAYSIA TAKES LEAD PROTECTING SHARIAH DEPOSITS

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By Elffie Chew Aug. 26 (Bloomberg) -- Malaysia is taking the lead in the Islamic banking world by tightening the classification of deposits and offering government guarantees to protect savers. Shariah-compliant lenders have until June to comply with the Islamic Financial Services Act 2013 giving investors the option to choose how their cash is used. The measure is aimed at increasing transparency for customers who may want to put money either in safer deposits or free it up for investment under laws that prohibit interest payments and encourage risk sharing. “The introduction of the Islamic Financial Services Act is aimed at providing greater regulatory clarity and promoting Islamic financial stability,” Hizamuddin Jamalluddin, head of strategic planning at Kuala Lumpur-based Bank Islam Malaysia Bhd., said in e-mail interview yesterday. “The move is timely as customers are mature enough to differentiate between deposits and risk-based investments.” The act may impact the level of deposits in the short term as it will take time for customers to familiarize themselves with the ruling, according to CIMB Islamic Bank Bhd., which has complied with the new regulation and saw growth ease to 7 percent in 2013 from 15 percent a year earlier. Islamic deposits in the nation’s $110 billion Shariah-compliant banking industry rose 5 percent in the first six months of 2014, slowing from the average 18 percent annually in the past five years.

MALAYSIA TAKES LEAD PROTECTING SHARIAH DEPOSIT…cont

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Taking Initiative Bank Negara Malaysia is the first monetary authority in the world to implement such a rule for Islamic banks as it seeks to enhance its status as a Shariah financing hub. The country tightened its oversight of stocks last year to better reflect Koranic principles, opening the door to more funds from the Middle East. The new ruling is positive as it will encourage innovation, said Hizamuddin at Bank Islam, the nation’s largest lender operating under religious tenets. The bank is looking to boost deposits by improving how it caters to customers’ various needs and risk profiles, he said. Wadiah and Qard type deposits are guaranteed under the legislation. The former is where permission for the usage of the cash has to be given by the depositor, while the latter usually applies to more wealthy individuals and is a form of loan to the bank that must be free of profit. Deposits under the Shariah concept of Musyharakah, or a partnership with profit or loss-sharing implications, will be deemed as investment accounts and won’t be protected. The same applies to the Mudarabah and Wakalah systems. Mudarabah is a joint investing arrangement, while Wakalah is an agreement between two parties for a certain business undertaking. Bloomberg/Aug 26, 2014

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DISCLAIMER

This presentation has been prepared by Bank Islam Malaysia Berhad(“Bank Islam”) for selected recipients for information purposes only. The information contained herein is believed to be correct as of the date of this presentation and is given in summary form and does not purport to be complete. Bank Islam does not make any representation or warranty, whether expressed or implied, as to the adequacy, accuracy or completeness of any such information, opinion or estimate contained and shall not be responsible or liable for any consequences of any reliance thereon by any recipient. Opinions and estimates constitute the judgment of Bank Islam as of the date of this presentation and are subject to change without notice. Bank Islam does not act as any recipient’s financial advisor or agent and the information contained herein is not intended to be relied upon as advice to any recipient and should not be construed as an offer or recommendation to buy or sell securities. This presentation does not purport to contain all the information that a prospective investor may require and the information contained herein does not take into account the investment objectives, financial situation or needs of every recipient hence it may not be appropriate for all persons. Each recipient is responsible to make his or her own independent assessment of the information provided herein and should not treat the information provided as advice relating to investment or related matters. Each recipient should consult his or her own advisers and must make his or her own independent decision regarding any investment. Certain statements contained in this presentation may be statements of future expectations and involve known and unknown risks and uncertainties. Forward-looking statements contained in this presentation regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Bank Islam does not have any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Each recipient should not place undue reliance on forward-looking statements, which is believed to be correct only as of the date of this presentation. This presentation is being furnished to each recipient solely for his or her information and may not be reproduced, redistributed, transmitted or passed on, directly or indirectly, to any other person or published electronically or via print, in whole or in part, for any purpose.

Page 37 Strategic Client Relationship