Introduction to Islamic Capital Markets

In 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. There is assertion of
religious law that the market is free from activities prohibited by Islam such as usury (riba),
gambling (maisir) and ambiguity (gharar).
Malaysias ICM has contributed significantly to the development of the overall capital market
through further broadening the capital market by providing an attractive alternative source of
fund raising and investment. It has expanded in breadth and depth in many aspects including
its range of products and services, the number and diversity of its stakeholders, its
infrastructure and capabilities, its geographical reach as well as its human capital
development.
The size of the ICM in Malaysia has more than tripled during 2000 2010, the period of the
first Capital Market Masterplan (CMP), or at a rate of 13.6% per annum. Since then, the
phenomenal growth momentum has been sustained, with the size of the Malaysian ICM
increased by 16.3% annually to reach RM1.42 trillion as at end December 2012. Over the last
decade, the market capitalisation of Shariah-compliant companies and the value of sukuk
outstanding in Malaysia increased at average rates of 11.5% and 22.2% per annum
respectively.
Malaysia continues to enjoy a leadership role as an international centre for ICM. Malaysia
has successfully developed various capabilities and capacities in virtually all segments and
aspects of the ICM. The key value proposition of Malaysias ICM is its comprehensiveness.
The institutionalisation of a comprehensive legislative, regulatory, legal, tax and Shariah
framework for the industry in Malaysia facilitates the development and growth of ICM.
As a result of the comprehensive framework established, Malaysia offers a wide range of
ICM products Shariah-compliant securities, sukuk, Islamic unit trusts, exchange traded
fund and real estate investment trusts, to name a few. At the same time, Malaysia is home to
leading Islamic fund management companies and Islamic stock-broking companies that offer
Islamic fund management and stock-broking services respectively alongside their
conventional businesses.
Malaysia also offers a selection of investment banks, legal firms and Shariah advisers that
possess structuring and advisory capabilities for ICM products such as sukuk. Other than the
above, the comprehensiveness of Malaysias ICM is reflected by the presence of other
capabilities and services such as Shariah research, academic institutions offering Islamic
finance programmes, and Shariah advisory and consultancy, to name a few.
In terms of growth, Malaysias ICM generally outpaces the conventional sector, with a
double-digit growth in the market capitalisation of Shariah-compliant equities, value of sukuk
outstanding and NAV of Shariah-compliant unit trust funds. The Malaysian sukuk market,
which has accounted for the majority of the worlds issuance of sukuk in recent years,
continues to attract both issuers and investors including foreign participants, while the IPO
Shariah screening process provides certainty and confidence in the Shariah-compliant nature
of companies listed on the stock exchange. This includes the screening of foreign IPOs which
facilitate the promotion of cross-border Shariah-compliant financing.

The second Capital Market Masterplan (CMP2), launched in 2011, outlined the growth
strategies for Malaysia's capital market in the next ten years. The widening of the
international base of the ICM has been identified as a key growth driver. To sustain the ICM
achieved growth, the CMP2 identified the need to strengthen the service and operational
infrastructure, promote Shariah-based approach, and increase international collaboration on
Shariah research and product development.
As reflected in the growth projection for Malaysia's ICM under the CMP2, the SC believes
that the long-term potential for the ICM remains promising, not only in Malaysia but also
internationally. In fact, the projections under the CMP2 are premised largely on the ICM
achieving greater internationalisation, which more product as well as service providers
expanding beyond their home market. It is expected that Malaysias ICM will grow at an
average rate of 10.6% annually, over the 10-year period to 2020.
Fund raising and investment activities in the Islamic capital market adhere to Islamic
principles. Islamic equity market products in Malaysia include Shariah-compliant equities,
equity indices, unit trust funds and asset management, structured products, I-REITs, I-ETFs,
Islamic venture capital and private equity.
I-REITs are collective investment vehicles that buy, manage and sell real estate. I-ETFs are
listed open- ended funds that track an Islamic benchmark index whereby the constituents are
Shariah-compliant companies. I-REITs, I-ETFs, Islamic unit trust and asset management, and
Islamic venture capital have an appointed Shariah committee or advisor to ensure investments
and operations are compliant with Islamic principles.
The Malaysian Islamic capital market has experienced phenomenal growth and raised the bar
globally for product innovation and financial intermediation. This market comprises the
Islamic equity sector and fixed income.
Introduction to Islamic Finance
Islamic finance refers to a system of finance that complies with Islamic law. The underlying
principles that govern Islamic banking are mutual risk and profit sharing between parties, the
assurance of fairness for all and that transactions are based on an underlying business activity
or asset.
These principles are supported by Islamic finances core values in which activities that
cultivate entrepreneurship, trade and commerce, and bring societal development or benefit is
encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading
(gharar) are prohibited.
Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah
(profit sharing), musyarakah (partnership), financial institutions have a great deal of
flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by
emphasising that transactions be supported by genuine trade or business related activities,
Islamic finance sets a higher standard for investments and promotes greater accountability
and risk mitigation.
Islamic finance has grown tremendously since its inception over 30 years. According to
global financial intelligence group, The Banker, there are 614 Islamic financial institutions

worldwide across 47 countries, The Top 500 Islamic Financial Institutions (TIFI) reported the
global total of Shariah-compliant assets grew by 27.6% to reach USD639.1billion.
The enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be
established and thereafter, with the liberalisation of the Islamic financial system, more
Islamic financial institutions have been set up.
As at end 2008, Malaysia's Islamic banking assets reached USD72.5 billion with an average
growth rate of 20% annually.
Today, Malaysia's Islamic finance sector continues to grow rapidly, supported by an
environment that is renowned for continuous product innovation, a diversity of financial
institutions from across the world, a broad range of innovative Islamic investment
instruments, a comprehensive financial infrastructure and the implementation of global
regulatory and legal best practices.
Malaysia has also placed a strong emphasis on human capital development alongside the
growth of the Islamic financial industry to ensure the availability of Islamic finance talent.
All of these value propositions have transformed Malaysia into one of the most viable Islamic
banking markets in the world.
Rapid liberalisation in the Islamic finance industry, coupled with facilitative business
environment has encouraged foreign financial institutions to make Malaysia their destination
of choice to conduct Islamic banking business. This has created a diverse and growing
community of local and international financial institutions.
Currently, Malaysia has a significant number of full-fledged Islamic banks including several
foreign owned entities; conventional institutions who have established Islamic subsidiaries
and also entities who are conducting foreign currency business. All financial institutions are
given permission to conduct both ringgit and non-ringgit businesses.
Malaysia continues to progress and to build on the industry by inviting foreign financial
institutions to establish international Islamic banking operations and conduct business in
foregin currency.
Introduction to Islamic Fund Management
Islamic fund and wealth management is the professional management of Shariah-compliant
securities and assets based on Islamic principles to achieve set financial goals.
The scope of activity involves financial analysis, asset and securities selection, investment
planning and on-going monitoring of investment funds. Both individuals and institutions may
become Islamic wealth and fund managers through the provision of related services.
Islamic fund and wealth management first emerged in the 1960s when Muslim investors
sought an alternative to the conventional western form of investment, particularly due to
interest-dealings in conventional banks (which is prohibited in Islam).
Today, the global Islamic fund and wealth management sector is on the rise, underpinned by
strong demand from Muslim and non-Muslim investors. The rising affluence of Muslim

communities, who wish to invest surplus funds in a Shariah-compliant manner has been a
pivotal factor in the growth of the industry. Another contributing factor is the non-Muslim
investors' desire to diversify their investment through Shariah-compliant funds.
Malaysia has achieved some noteworthy milestones in the Islamic fund management industry,
beginning with the establishment of two Islamic unit trust funds in 1993. Malaysia also paved
the way for several industry "firsts" for the Islamic fund management industry. Notably in
2005, Malaysia launched the first Islamic Real Estate Trusts (REITs) in the world. Equally
significant was the introduction of Asia's first Islamic Exchange Traded Fund (ETF).
These achievements were further supported with a mutual recognition agreement between the
Securities Commission Malaysia (SC) and the Dubai Financial Services Authority (DFSA)
for the cross-border marketing and distribution of Islamic funds between the two Islamic
financial markets. Furthermore, the Securities Commission Malaysia (SC) and the Securities
and Futures Commission of Hong Kong (SFC) also achieved a major milestone in their
regulatory cooperation by signing a mutual recognition agreement (MRA) to further develop
the Islamic Capital Market (ICM) in particular, Islamic Collective Investment Schemes
(CIS).
The dynamic progress of Malaysia's Islamic fund and wealth management industry is
supported by Malaysia's more than 30 years experience in Islamic finance and the overall
comprehensiveness of the well-established Islamic finance industry in Malaysia. This consists
of continuous product innovation, a large and diverse pool of Islamic finance talent, a
diversity of local and international financial institutions from across the world, a broad range
of Islamic financial instruments, a comprehensive financial infrastructure and supportive
regulatory, legal and Shariah frameworks. Malaysia offers many attractive value propositions
for foreign fund managers to establish their Islamic fund management operation in Malaysia.
The domestic fund managers may also establish their Islamic fund management companies
and enjoy various tax incentives and privileges that lead to reduction in the cost of doing
business and expedient market entry. For more information on the establishment and
application procedure for Islamic fund management company, please contact Pn Dian
Dannira Skymmar (tel: 03-20910739; or e-mail: diand@seccom.com.my)
Foreign financial institutions have the option of setting up in Labuan International Business
and Financial Centre (Labuan IBFC), where the Labuan Islamic Financial Services and
Securities Act 2010 (LIFSSA) is the governing legislation of mutual funds business and
operations in Labuan, supplemented by the Guidelines on Mutual Funds and the Guidelines
on Fund Management Companies.
The LIFSSA, as well as the Guidelines, make up the regulating framework on the formation
of public and private funds in Labuan IBFC. The Shariah compliance requirements are as
outlined under the Directive on Islamic Financial Business. A mutual fund can be structured
as a company, partnership or unit trust. The incorporation may be done under the Labuan
legislations or the laws of any recognised country or jurisdiction. A mutual fund shall include
an umbrella fund whose shares are split into a number of different class funds and
participants, which are entitled to exchange rights in one part for rights in another.
To provide the above services in the Labuan IBFC, it must be a licensed fund management
company from a recognised jurisdiction or an offshore company set by individual fund

managers who are licensed by the relevant home supervisory authority. For more information,
please contact Labuan IBFC
Introduction to Sukuk
Sukuk (the plural of sakk) represent one of the most vibrant and significant components in
Islamic finance. Sukuk refers to certificates of equal value which evidence undivided
ownership or investment in the assets using Shariah principles and concepts endorsed by the
SAC, but shall not include any agreement for a financing/investment where the
financier/investor and customer/investee are signatories to the agreement and where the
financing/investment of money is in the ordinary course of business of the financier/investor,
and any promissory note issued under the terms of such an agreement.
Globally, the sukuk market has experienced tremendous growthThough sukuk market
issuances declined in 2008 as a result of global market turmoil, long-term prospects for the
sukuk market remain strong. Global sukuk outstanding rose to more than USD231.4 billion
at the end-2012.
A total of USD131.2billion (2012) worth of sukuk papers were recorded from the primary
market, representing a yo-y increase of 54.2%. (KFH Research)
Malaysia pioneered the development of the global sukuk market with the launch of the first
sovereign five-year global sukuk worth US$600 million in 2002. Since then our sukuk market
has experienced unprecedented growth with Malaysia firmly established as one of the largest
issuers of sukuk over the years.
The development of the sukuk market in Malaysia is supported by a comprehensive
infrastructure including the reporting, trading and settlement system which has resulted in an
active primary sukuk market.
Without a doubt, Malaysia offers one of the most viable options for participation in this fast
growing asset class. Coupled with Malaysia's more than 30 years of experience in Islamic
finance and its overall comprehensive domestic sector, Malaysia offers several attractive
value propositions for local and foreign sukuk issuers and investors.
In Malaysia, the issuance of sukuk is regulated by the Securities Commission Malaysia,
through the framework provided under the Guidelines on Sukuk. The structure of sukuk
must be confirmed and approved by a Shariah Adviser who is appointed by the issuer. A
Shariah Adviser can be an independent Shariah Adviser approved by the SC or a Shariah
Committee attached to a financial institution that operates Islamic banking activities
approved by Bank Negara Malaysia.
Sukuk are structured based on the specific contract of exchange of Shariah-compliant assets.
Such contracts can be made through the sale and purchase of an asset based on deferred
payment, leasing of specific assets or participation in joint-venture businesses. Hence, the
issuance of sukuk is not an exchange of paper for money with the imposition of an interest
but rather an exchange of Shariah-compliant asset for some financial consideration applying
various Shariah principles, such as bai' bithaman ajil (BBA), murabahah, ijarah, mudharabah
and musharakah that allow investors to earn profits from the transactions.