THE PRINCIPLES OF ISLAMIC INVESTMENT AND BUSINESS

AND

ISLAMIC CAPITAL MARKET

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OBJECTIVES OF THIS CHAPTER

To know the definitions of Islamic investment To describe the principles of Islamic investment To identify the determination of acceptable and permissible activities The implementation of Islamic investment in Malaysia Qawaid fiqhiyyah in islamic investment
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DEFINITIONS OF ISLAMIC INVESTMENT

Islamic Investment is an investment in financial services and investment products that adhere to Islamic principles Islamic Investment means a joint pool in which the investors contribute their money for the purpose of its investment to earn permissible (halal) profits in strictly comply with the Islamic law
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Cont

The Islamic financial system broadly refers to financial market transactions, operations and services that comply with Islamic rules, principles and codes of practices The Islamic financial services industry comprise Islamic banking, Islamic insurance and Islamic capital market,

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THE PRINCIPLES OF ISLAMIC INVESTMENT

The principles of Islamic investment consists: Investment must be in ethical sectors (profits are not from prohibited activities, and non-Islamic financial institutions Investment of property and wealth must be result from a partnership between the investor and the user of capital in which rewards and risks are share Investment must be considered the philosophy of Islamic business (e.g: social justice, equitability, and fairness as well as practicality of transaction

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Cont

The major prohibited elements are riba (interest), gharar (uncertainty), maisir (gambling), non-halal (prohibited) food and drinks and immoral activities When a transaction have a prohibited elements, its must first be removed for it to be Shariah-compliant

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Cont

According to Al-Qardhawi (2000), the Shariah legal maxim in relation to transactions and contracts are state, they are permissible unless there is a clear prohibition.

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THE DETERMINATION OF ACCEPTABLE AND PERMISSIBLE ACTIVITIES

In Islamic perspectives, all activities must be acceptable and not related to prohibited by Islamic law. An examples of the prohibited activities are follow: Alcohol Gambling Pork or a related products Pornography Conventional financial, banking & insurance services
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Cont

Also, an activities such as tobacco, hotels or entertainment are prohibited The decision are depends on the methodology or interpretation used by Islamic scholars in different jurisdictions

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THE IMPLEMENTATION OF ISLAMIC INVESTMENT IN MALAYSIA

Islamic countries are recognized Malaysia as the pioneer and at the forefront in Islamic finance and investment Malaysia was developed and established an Islamic institutions by providing a clear guidance on the types of investment to fulfill the Muslim needs

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Cont

All investors whether domestic or international can invest their wealth at the Islamic financial institutions The institutions of Islamic financial in Malaysia comprise 3 categories: Islamic banking, Islamic insurance and Islamic capital market

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Cont

Modern Islamic financial products and services are developed using two different approaches. by identifying the existing conventional products and services that are generally acceptable to Islam, and modifying, removing any prohibited elements that are able to comply with Shariah principles By involving the application of various Shariah principles to facilitate the origination and innovation of new products and services Types and companies for each categories are follows:
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Islamic Banking.. Cont

Islamic banking were developed and applied by 3 types/approaches and companies are: Fully Islamic (e.g: Bank Islam Malaysia berhad (BIMB), Bank Muamalat Malaysia Berhad (BMMB), Bank Rakyat) Window banking (Dual-banking) (e.g: Public Bank, Maybank, etc) International Islamic banking. Malaysia also, give an authorization for the foreign countries to set up and developed a branches (e.g: Kuwait Financial House (KFH) and Ar-Rajhi Bank (Bahrain)
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Islamic Insurance ... Cont

Islamic insurance also well known as a takaful Example of Islamic insurance companies are Syarikat Takaful Malaysia, Etiqa Takaful and Takaful Ikhlas Each companies have a difference of business strategy to manage and achieve their goals

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Islamic Capital Marketcont

The Islamic Capital Market (ICM) refers to the market where capital market activities are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam Islamic capital market is the stocks listed of companies on Bursa Malaysia classified as Syariahapproved securities by the SAC, these securities continue to provide the momentum for further growth in the ICM

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Islamic Financial Market In Malaysia

Islamic Financial Market Islamic Banking & Takaful
Islamic Banking Financial Products
Deposits Wealth products (structured investments) Money market products Financing products Trade financing

Islamic Capital Market

Equity
Shariah Compliant Securities Islamic Indices Islamic Unit Trust/Mutual Fund Islamic REITs Islamic ETF Islamic Venture Capital / PE

Sukuk
Asset-based sukuk Asset-backed sukuk Investment Sukuk

Shariah-compliant Derivatives
Exchange traded Crude Palm Oil Futures Crude Palm Kernel Oil Futures Single (Shariah-compliant) Stock Futures OTC Islamic profit rate swap Foreign Exchange swap Cross Currency Swap

PRODUCTS

Takaful Investment Products

Takaful products (family and general) Takaful linked investment products

Shariah Compliant Structured Products

PLATFORMS

Islamic Interbank Money Market

Islamic Banks and Takaful companies Investment Banks

Bursa Malaysia
Islamic Stockbroking services Islamic Fund Management / Unit Trust Management Companies

INTERMEDIARIES

REGULATORS

Bank Negara Malaysia

Securities Commission Malaysia

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What is the Islamic Capital Market?

Any market in which Shariah compliant securities are traded. The Islamic Capital markets include the Shariah compliant stock and Islamic bonds or Sukuk markets. Companies and governments use the Islamic Capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue an Shariah compliant securities or bonds in order to conduct new or expand ongoing activities. Investors purchase Shari'ah compliant securities in the capital markets in order to extract a return and earn profit on the securities. The Islamic Capital markets include primary markets, such as IPOs that are placed with investors through underwriters, and secondary markets, where all subsequent trading takes place, such as the New York Stock Exchange or Bursa Malaysia. Government agencies in different countries regulate local capital markets, though some, especially exchanges, play some role in regulating themselves. Source: Adapted from Farlex Financial Dictionary. 2009 Farlex, Inc. All Rights Reserved

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THE SECURITIES COMMISSION

The SC is a self-funding statutory body with investigative and enforcement powers The SC established on 1 March 1993 under the Securities Commission Act 1993 The SC reports to the Minister of Finance and its accounts are nominated in Parliament annually

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Cont

The main functions of SC are: to promote the development of the capital market to stream line the regulations of the securities market

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SCS FUNCTIONS:
1.
2. 3.

4.
5. 6. 7. 8.

Supervising exchanges, clearing houses and central depositories; Registering authority for prospectuses of corporations Approving authority for corporate bond issues; Regulating all matters relating to securities and futures contracts; Regulating the take-over and mergers of companies Regulating all matters relating to unit trust schemes; Licensing and supervising all licensed persons; Ensuring proper conduct of market institutions and licensed persons.
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BURSA MALAYSIA

Bursa Malaysia is an exchange holding company, listed on the Main Board of Bursa Malaysia Securities Bursa Malaysia listed classified between syariah approved securities and non-syariah approved securities

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SHARIAH ADVISORY COUNSIL (SAC)

The SAC of SC was established in 1996 and as a main thrust of ICM products to comply on Islamic principles The SAC is an important source of authority for Syariah compliance and plays a critical role in ensuring and maintaining market confidence in the ICM SAC of SC has applied a standard criterion in focusing on the activities of the companies listed on Bursa Malaysia
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Cont

The SAC has approved an updated list of securities, which have been classified as Shariah-approved securities If subject to certain conditions, companies whose activities are not contrary to the Shariah principles will be classified as Shariah-approved securities For further information, please refer to website: http:www.sc.com.my
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Cont

The functions of SAC are: To advise the Securities Commission on Shariah-related matters To provide Shariah guidance on ICM transaction and activities, To aimed at standardizing and harmonizing application

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What are the Shariah-compliant stocks?

Shariah-compliant stocks

Stocks of a company listed on Bursa Malaysia which is classified as Shariah permissible for investment Primary business and investment activities that generate income for the company must conform with Shariah principles

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Shariah compliance review criteria

1. Financial services based on riba (interest)

2.
3.

Gambling
Manufacturing or sale of non-halal products or related products Conventional insurance

Classified as Shariah-compliant if the company is not significantly involved in the following activities

4.

5.
6. 7.

Entertainment
Manufacture or sale of tobacco-based products Stockbroking or share trading in Shariah noncompliant stocks

8.

Other activities deemed non-permissible

1. 2.

Interest income from conventional fixed deposits / interest bearing instruments Dividend received from investment in Shariah noncompliant stocks
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The Shariah compliance process

Extraction of relevant financial information from audited financial report and other material information

Undertaking Syariah compliance review process to identify contribution from non-permissible activities

Compare with Syariah financial benchmark

Compile the result and issue list of Shariahcompliant securities

Tabulate the result to SAC for final consideration / decision

Two stages of compliance review process

Compliance review process

1
Quantitative Compute the contribution of nonpermissible activities and compare with group turnover and SC group profit before tax

2
Qualitative
SAC

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Phase 1 : Quantitative
Parent Company

Subsidiaries Co.

Subsidiaries Co.

Associated Co.

Other investment
TO : Shariah noncompliant PBT : Shariah noncompliant

Group Turnover

Group Profit Before Tax (PBT)

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The financial benchmarks used by SAC

5% benchmark to assess level of mixed contributions from the activities that are clearly prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork 10% benchmark to assess level of mixed contributions from the activities that involve the element of umum balwa which is prohibited element affecting most people and difficult to avoid e.g interest income from fixed deposits in conventional banks and tobacco-related activities 20% benchmark - to assess the level of non permissible rental activities of listed companies 25% benchmark to assess the level of mixed contributions from the activities that generally permissible according to Shariah and have an element of maslahah to the public, but there are other elements that may effect the Shariah status of these activities e.g hotel and resort operations, share trading, stockbroking, as these activities may also involve other activities that are deemed non-permissible to the Shariah
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Stage 2 : Qualitative_Pre-Compliance results presented to SAC for final approval

SAC considers other factors / criteria before decision is given companies which compliant with quantitative review may turn to non-compliant status due to qualitative/image consideration

Qualitative

Image public perception or image of the company

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Shariah guidance on investment in Shariah noncompliant securities

Case 1 : Investment in Shariah-compliant securities, which subsequently reclassified as Shariah non-compliant Price of Shariah non-compliant stocks

On the announcement date

Price > Original Investment cost liquidate immediately any capital gain from disposal can be kept by investors Price < Original Investment cost Hold until the price of stocks equal to original investment cost Dividends received can be used to expedite the disposal

After the announcement date

Price > Original Investment cost Price < Original Investment cost

liquidate immediately
Profit (different between
original investment cost and closing price of announcement date) can

Hold until the price of stocks equal to original investment cost

Dividends received can be used to expedite the disposal 32

be kept Profit (different between

disposal price and closing price of announcement date)

channelled to charitable bodies

Shariah guidance on investment in non-compliant securities

Case 2 : Investment in (existing) non-compliant securities

Investors to dispose their non-compliant securities within a month of knowing the status of the securities Any gain made in the form of capital gain or dividend received during or after the disposal of the stocks to be channelled to charitable bodies. Investors are entitled to keep their original investment cost

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WASSALAM, THANK YOU

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