Islamic Capital Market

Islamic Investment funds

Islamic Capital Market
Bursa Malaysia
INTRODUCTION
 In an Islamic capital market (ICM) market
transactions are carried out in ways that do
not conflict with the conscience of Muslims
and the religion of Islam.
 Here, there is assertion of religious law so
that the market is free from activities
prohibited by Islam such as usury (riba),
gambling (maisir) and ambiguity (gharar).
INTRODUCTION
 The ICM is a component of the overall capital
market in Malaysia.
 It plays an important role in generating
economic growth for the country.
 The ICM functions as a parallel market to the
conventional capital market, and plays a
complementary role to the Islamic banking
system in broadening and deepening the
Islamic financial markets in Malaysia.
INTRODUCTION
 As the market became more complex and sophisticated,
it needed supportive infrastructure so that the system
could operate and function more efficiently and
effectively.
 The SC's early initiative in setting up a dedicated Islamic
Capital Market Department (ICMD) within its Strategy
and Development Business Group was to provide the
much needed infrastructure support.
 The mandate of the ICMD is to carry out research and
development activities including formulating and
facilitating a long-term plan to further strengthen the ICM
in Malaysia.
INTRODUCTION
 The Shariah Advisory Council (SAC) was
established in May 1996 to advise the
Commission on Shariah matters pertaining to
the ICM.
 Members of the SAC are qualified individuals
who can present Shariah opinions and have
vast experience in the application of Shariah,
particularly in the areas of Islamic economics
and finance.
Islamic Capital Market
 Today, various capital market products are
available for Muslims who only seek to invest
and transact in the ICM.
 Such products include the SC list of Shariah-
compliant securities, sukuk, Islamic unit
trusts, Shariah indices, warrants (TSR), call
warrants and crude palm oil futures contract.
Islamic Investment Fund
 Islamic Investment Fund- the investors
contribute their surplus money for the purpose
of its investment to earn halal profits in strict
conformity with the precepts of Islamic
Shariah.
 The investment documents are called
"certificates" ,"units“, "shares" etc.
 Overview
 Islamic investment equity funds market is one of the fastest-
growing sectors within the Islamic financial system.
 Currently, approximately 100 Islamic equity funds worldwide.
 The total assets managed through these funds currently
exceed US$5 billion and is growing by 12–15% per annum.
 Over the last few years, quite a number of funds have closed
down. Most of the funds tend to target high net worth
individuals and corporate institutions, with minimum
investments ranging from US$50,000 to as high as US$1
million.
 Target markets for Islamic funds vary, some cater for their
local markets, e.g., Malaysia and Gulf-based investment
funds .
Conditions for Islamic funds
1. Instead of a fixed return tied up with their face value,
they must carry a pro-rated profit earned or loss
actually earned by the Fund. Therefore, neither the
principal nor a rate of profit (tied up with the principal)
can be guaranteed.
Unless the loss by the negligence or
mismanagement, the management will be liable to
compensate it.
2. The pooled funds must be invested in a business
acceptable to Shariah. It means that not only the
channels of investment, but also the terms agreed
with them must conform to the Islamic principles.
Equity Fund

 The equity fund amounts are invested in the

shares of joint stock companies.
 The profits are mainly achieved through the
capital gains by purchasing the shares and
selling them when their prices are increased.
 Profits are also achieved by the dividends
distributed by the relevant companies.
Types of equity funds
 Ijarah Fund
This fund is used to purchase assets like real estate,
motor vehicles, or other equipment for the purpose of
leasing them out to their ultimate users. The
ownership of these assets remains with the Fund and
the rentals are charged from the users. These rentals
are the source of income for the fund which is
distributed pro rated to the subscribers.
 Commodity Fund
This fund is used in purchasing different commodities
for the purpose of the resale. The profits generated by
the sale are the income of the fund which is
distributed pro rated among the subscribers.
Types of equity funds
 Murabahah Fund
 "Murabahah" is a sale where the commodities are sold on a
cost-plus basis. The purchased the commodity were sold
on the basis of deferred payment at an agreed margin of
profit added to the cost. It should be a closed-end fund and
its units can not be negotiable in a secondary market.
 Mixed Fund
 A mixed fund refers to the subscription amounts employed
in different types of investments, like equities, leasing,
commodities, etc. If the tangible assets of the Fund are
more than 51% while the liquidity and debts are less than
50% the units of the fund may be negotiable. However, if
the proportion of liquidity and debts exceeds 50%, its units
cannot be traded in according to the majority of the
contemporary scholars.
 Shariah compliant shares
 The Religious Supervisory Council of BIMB
started the initiative to issue a list of Shariah-
compliant securities since 1993.
 May 1996-Shariah Advisory Council (SAC) was
established to advise the Commission on Shariah
matters in ICM.
 Starting April 1999 -the task of preparing the list
of approved securities has been transferred to
the newly-formed Shariah Advisory Council
(SAC) of the Securities Commission of Malaysia.
 Investing in Bursa Malaysia is permissible if the
investment are shariah –compliant.
Criteria for shariah compliant:
 The list of Shariah-compliant securities identifies
Bursa Malaysia-listed companies whose activities
conform to the Shariah criteria established by the
SAC. (Source: Securities Commission handbook 2007)
 Companies should NOT include:
 Financial services based on riba (interest);
 Gambling;
 Manufacture or sale of non-halal products or related
products;
 Conventional insurance;
Criteria for shariah compliant:
 Entertainment activities that are non-permissible
according to Shariah;
 Manufacture or sale of tobacco-based products or
related products;
 Stockbroking or share trading in Shariah non-
compliant securities; and
 Other activities deemed non-permissible
according to Shariah.
Additional criteria:
 For companies with activities comprising both
permissible and non-permissible elements,
the SAC considers two additional criteria:
 1)The public perception or image of the company
must be good; and
 2)The core activities of the company are
important and considered maslahah (public
interest) to the Muslim ummah (nation) and the
country, and the non-permissible element is very
small and involves matters such as ` umum balwa
(common plight and difficult to avoid), `uruf
(custom) and the rights of the non-Muslim
community which are accepted by Islam.
Islamic Capital Market
Islamic Capital Market
 The ICM is a component of the overall capital
market in Malaysia.
 It plays an important role in generating
economic growth for the country.
 The ICM functions as a parallel market to the
conventional capital market, and plays a
complementary role to the Islamic banking
system in broadening and deepening the
Islamic financial markets in Malaysia.
Capital Market Products
 Various capital market products are available for
Muslims to invest and transact in the ICM.
 The products include:
 -Shariah-compliant Securities,
 -Sukuk ( Islamic bond),
 -Islamic unit trusts,
 -Shariah indices,
 -Warrants / Call warrants and
 -Crude Palm Oil futures contract.
Bursa Malaysia
Bursa Malaysia Stock
Exchange (KLSE)
 The main index for Bursa Malaysia is the
Kuala Lumpur Composite Index (KLCI). In
June 2006, Bursa Malaysia and FTSE Group
jointly introduced a new index series.
History and Origin
 In 1930, the Singapore Stockbrokers'
Association was formed as the first formal
securities business in Malaysia. In 1937, it was
re-registered as the Malayan Stockbrokers'
Association.
 In 1960, the Malayan Stock Exchange was
formed and began trading, while the Stock
Exchange of Malaysia was founded in 1964. In
2004, the Demutualization Act was passed and
the Kuala Lumpur Stock Exchange became a
public company, known as Kuala Lumpur Stock
Exchange Berhad.
Market Indices
 Composite Index.
 Industrial Index.
 Consumer Products Index.
 Industrial Products Index.
 Construction Index.
 Trading/Services Index.
 Finance Index. Properties Index.
 Mining Index.
 Plantations Index.
 Syariah Index.
 Technology Index.
 Second Board Index.
 MESDAQ Market Index.
Introduction
 A stock market index represents a group of counters
performances that have been selected based on
certain criteria set by the stock market officials.
 Stock market indices are used as indicators for the
performance of the stock market as a whole.
 Bursa Malaysia computes an index for each of the
main sectors traded on the exchange but the most
widely followed, is the Kuala Lumpur Composite
Index (KLCI).
Islamic Index
 The Islamic index serves to guide Muslims
investors especially to buy shares that are
Shariah-compliant and approved securities.
E.g.
 KLCI Shariah Index (KLSI) -1999
 Rashid Hussin BHD Islamic Index (RHB
Islamic Index)-1996
 Dow Jones Islamic Market Index -1995
Shariah-approved securities
 As of 27th.May, 2007, the KLSI included a
total of 875 (more than 80%) Main Board
shares that were on the list of Securities
Commission’s Shariah-approved securities
and the total increased.
Future Market
 Rosly (2005)- suggests that the future of an
Islamic equity market will depend on the
greater participation of Islamic bond issues
and bank equity financing so that the capital
structure has zero interest-bearing debt
content.
 Companies looking for capital should be given
incentives to use equity rather than interest-
bearing bonds. This can be done by treating
dividend payouts as a tax-deductible
expense.
Future Market
 An Islamic financial system requires several vital
elements to qualify as a viable system, i.e.:-
 -A large number of players
 -A broad variety of instruments and
 -An Islamic Financial legal act or jurisdictions
 -A sufficient Islamic money and capital market
activities
 -A support from the government
 An Islamic financial system must also reflect the socio-
economic values in Islam, and must be Islamic in both
substance and form.