Chapter 2 - Islamic Investment Environment

8/12/2019 Chapter 2 - Islamic Investment Environment

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CHAPTER 2

ISLAMIC INVESMENT ENVIRONMENT


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Islamic Capital Market in Malaysia

Shariah Advisory Council

Fundamental Islamic Investment Principle


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To describe the environment on Islamic CapitalMarket in Malaysia

To explain the roles and responsibilities of SAC of the

Securities Commission To explain the Shariah principle of Investment


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Purpose: a method to raise funds

How: issuing debt securities (bonds)

It represents a contractual agreement

pay

certain fixed amount of money

Upon maturity = principal amount will be paid to investors

BorrowerHolder/Investor

Interestincome /coupon

payment


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FinancialMarkets

EquityIslamicEquity

Purpose: raise funds How: issuing equity

security (stocks) Different with debt:

have ownership in theissuing entity/firm

Risk & Return: riskierthan Long-term Debtinstrument, higherreturn

Depends on thesuccessful of firm

Structured based onpermissible rules andprinciples (Shariah)

Do not involveShariah prohibited &unethical activities

E.g: gambling, sellingalcohol,pornography, riba-based business


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Characteristics: S-term debt

securities (< a year) Most widely traded The price has smaller

fluctuation More liquid Less risk

Characteristics: L-term debt & equity

securities The price has bigger

fluctuation


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FinancialMarkets

IslamicMoneyMarket

IslamicCapitalMarket

Function: Liquidity Management

Maintain optimalliquidity

Allowing to meet thedemand of customer atany time

Can cope with s-term

pressure Secondary trading

E.g: GII, ITB, INI,NIDC

Channel for centralbank to conduct itsmonetory policies

Comprise of: Islamic debt market Islamic equity market

Free fromelements/activitiesprohibited in Islam

E.g: sukuk, Islamicstocks, Islamic funds,Islamic REITs, Islamicrisk managementproducts


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In an Islamic capital market (ICM), market transactions are

carried out in ways that do not conflict with the conscienceof Muslims and the religion of Islam.

the market is free from activities prohibited by Islam suchas usury (riba), gambling (maisir) and ambiguity (gharar).

The ICM is a component of the overall capital market inMalaysia.

It plays an important role in generating economic growth forthe country. The ICM functions as a parallel market to the conventional

capital market, and plays a complementary role to the Islamicbanking system in broadening and deepening the Islamicfinancial markets in Malaysia.


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As the market became more complex andsophisticated, it needed supportive infrastructure sothat the system could operate and function moreefficiently and effectively.

Today, various capital market products are available forMuslims who only seek to invest and transact in theICM. Such products include the SC list of Shariah-

compliant securities, sukuk, Islamic unit trusts,transferable subscription rights (TSR), call warrants,crude palm oil futures contract, etc.


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Islamic capital market is a trillion ringgit industry in Malaysia. Havinggrown at an average rate of 13.6% per annum over the ten-year periodbetween 2000 and 2010, the size of Malaysias Islamic capital market, orICM, stood at RM1.05 trillion as at the end of 2010, compared to justRM294 billion as at end-2000.

During this period, the market capitalisation of Shariah-compliantcompanies and the value of sukuk outstanding in Malaysia increased ataverage rates of 11.5% and 22.2% per annum respectively. A similartrend was also observed at the global level, with Islamic finance as a

whole registering an average growth rate of almost 15% per annum.

Malaysias ICM is projected to increase to RM2.9 trillion in 2020. Incomparison, the whole capital market is projected to more than doublefrom RM2.0 trillion in 2010 to RM4.5 trillion by 2020.


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One of the growth drivers of the Islamic capital market is the greaterawareness of and demand for Shariah-compliant investment andsavings products and services, which has been catalysed largely byrising income and wealth among the Muslim communities, as well asby demand or preferences of Islamic-based or similar institutions.

the ability of ICM stakeholders to develop and offer an expanding rangeof Shariah-compliant products and services on a sustained basis to theextent they are able to cater to a wider investor base.

Further readings:http://119.110.108.29:9117/259_220_220/Web/WebPage/Development-of-Islamic-Capital-Market-in-Malaysia/Development-of-Islamic-Capital-Market-in-Malaysia.html


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Overview of SC A statutory body set up under Securities Commission Act 1993 (SCA)

Reporting -> Minister of Finance

Sole regulatory body - regulation and development of the capital

market in Malaysia Directly responsible regulation and supervision of the activities of

market institutions, include stock exchanges, clearing houses, &monitoring of licensees under Securities Industry Act 1983 (SIA) andFutures Industry Act 1993 (FIA)


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Steps

ICMD

IISG

SAC


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The SC's early initiative in setting up a dedicated Islamic CapitalMarket Department (ICMD) under the Market Policy andDevelopment

The mandate of the ICMD is to carry out research and developmentactivities including Islamic capital market products in the equity, debt,and derivative, as well as analysing the securities of listed companies


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SC established Islamic Instrument Study Group (IISG) in1994

Membership comprise of Shariah consultants andcorporate figures.

Functions: Discuss and made decisions on issues related to ICM in

Malaysia


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Definition AAOIFI

An independent body of specialised jurists in fiqh muamalat; mayinclude a member other than those specialised in fiqh muamalat but

who should be an expert in the field of Islamic financial institutions

and with the knowledge of fiqh muamalat BIMB

A Religious Supervisory Council whose members would be made up ofMuslim religious scholars in the country to advise on the operations ofits banking business in order to ensure that they do not involve anyelement which is not approved by the Religion of Islam

A group of Shariah experts whose responsibility is to monitor andsupervise the operations of Islamic financial institutions in order toensure that it does not contravene Shariah principles.


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The Shariah Advisory Council (SAC) was established inMay 1996 to advise the Commission on Shariah matterspertaining to the ICM.

SAC was establisbed from expanding and upgrading therole of IISG

To ensure that the implementation of ICM complied withShariah principles.

Scope of jurisdiction: Advise the SC Reference centre for ICM issue


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2 approaches:1. Study the validity of conventional instruments used by

the local capital market from the Shariah perspective

2. Formulating and developing new financial

instruments based on Shariah principles


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Members of the SAC are qualified individuals who canpresent Shariah opinions and have wide experience in theapplication of Shariah, particularly in the areas of Islamiceconomics and finance.

Appointed by SC once every two years


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1.

Tun Abdul Hamid Haji Mohamad, Former Chief Justice of the Federal Court, Malaysia

2.

Tan Sri Sheikh Ghazali Haji Abdul Rahman, Shariah Legal Advisor, Attorney General's Chambers

3.

Dato' Dr. Abdul Halim Ismail, Pro-Chancellor Insaniah University College and Chairman, Shariah Committee of Shariah-Compliant Funds of Amanah Mutual Bhd

4.

Dr. Mohd. Daud Bakar, Chairman, Shariah Advisory Council of Bank Negara Malaysia and CEO of Amanie Advisors Sdn. Bhd.

5.

Dr. Muhammad Syafii Antonio, Rector of TAZKIA University College of Islamic Economics, Bogor, Indonesia

6.

Professor Mohammad Hashim Kamali, Founding Chairman and CEO of the International Institute of Advanced Islamic Studies,Malaysia

7.

Professor Dr Ashraf bin Md Hashim, Head of Consultancy Department, International Shari'ah Research Academy for IslamicFinance (ISRA)

8.Associate Professor Dr. Azman bin Mohd Noor, Department of Fiqh and Usul al Fiqh, Kulliyyah of Islamic Revealed Knowledgeand Human Sciences, International Islamic University Malaysia

9.Assistant Professor Dr. Aznan Hasan, Department of Islamic Law, Ahmad Ibrahim Kulliyyah of Laws, International IslamicUniversity Malaysia

10.

Associate Professor Dr. Engku Rabiah Adawiah Engku Ali, Institute of Islamic Banking and Finance (IIBF), International IslamicUniversity Malaysia

1

1.

Associate Professor Dr. Shamsiah Mohamad, Lecturer, Department of Fiqh and Usul, Academy of Islamic Studies, University of

Malaya

1 July 2012 - 31 July 2014


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The development of Islamic capital market globally has drive interest inthe importance of preparing the public for this change.

Islam encourages investment to accumulate wealth, however, theinvestment must be implemented based on Shariahprinciples.

Allah mentioned in the Quran that trading is permitted, however, it mustadhere to certain basic principles.

Trading or investment must not involved with the non-allowable elementswhich includes Riba (interest or usury), Maisir (gambling) and Gharar(uncertainty).

It is also prohibited to get involved in manufacturing or trading in Haramproducts such as liquor, pork and meat that is not slaughtered according toIslamic rules and any other activities against the Islamic teaching.


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Islamic Financial System: Principles & Operations

Resolutions of the Securities Commission ShariahAdvisory Council: 2ndEdition

Chapter 2 - Islamic Investment Environment

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Transcript of Chapter 2 - Islamic Investment Environment