Professional Documents
Culture Documents
Chapter Five
ISLAMIC CAPITAL MARKET :
EQUITY MARKET
Topic Outlines:
5.1 Overview of Islamic Capital
Markets
5.2 Islamic equity Market.
5.3 Shariah compliant stocks
5.4 Equity Market instruments, i.e.
Preferred stocks from Islamic
perspectives
5,5 Equity related instruments
Islamic funds/unit trust, Islamic
REITS, ETC.
Components of Islamic
ICM is made
of three main
components
Capital
Market
- Equity market is divided into two, i.e. primary market & secondary
market.
- Primary market is where firms raise fund by issuing new shares and
secondary market facilitate trading of existing stocks.
- For the companies which are going public for the first time, they need
to start with the Initial Public Offering or theIPO which can be
organised by the help of Islamic investment banks.
- Certificates of ownership ( or stock) are issued by the company in
return for each financial contribution and shareholders can either hold
the shares indefinitely and earns dividend or they can resell the shares
they own in secondary markets for higher prices and earn capital gain.
- Example of certificate of ownership of shares issued by company is
shown in the next slide.
As of November 2012
14
Companys
Line of business /
Business
Activities
Benchmaks
Haram
Mixed
Halal
Parameters
based on
broad
categories
Interest
income
Companys
Finances /
Financial Ratio
Benchmarks
Interest
paid
15
INSURANCE
BANKING
PORK
ALCOHOL
GAMBLING
ENTERTAINMENT
TOBACCO
DEFENSE
Illustration
ABC Berhad has a small division which is a conventional finance
company. The revenue and profit before tax contribution of this
division does not exceed 5% of the entire companys total revenue
and profit before tax ABC Berhad can be described as Shariah
tolerated.
DEF Berhad is a conglomerate that has a wholly-owned subsidiary
involved in the hotel business that may involve illegitimate
business practice such as dealing with alcohol or client indulged
prostitution. Revenue and profit before tax from that subsidiary
comprises approximately 20% of the groups revenue and profit
before tax - The proceeds may be described as Shariah compliant.
GHI Berhad has investment in an associated company that
operates a brewery, which contributes about 8% of the companys
total profit before tax The company is Shariah non-compliant
JKL Berhad has a subsidiary that is a licensed distributor of tobacco
products. While this subsidiary make up about 7 % of JKLs profit
before tax Shariah non-compliant.
Subsidiary
KRH Cons.
Sdn. Bhd
Lai Kuay
Sdn. Bhd
Strong Heart
Sdn. Bhd
Group
Groupinfo
info: :
Group
GroupRevenue
Revenue: :RM10
RM10million
million
Group
Profit
:
RM
5
million
Group Profit
: RM 5 million
Non-permissible
Non-permissibleactivities
activities
info
info: :
Revenue
Revenuetobacco
tobacco: :RM
RM900,000
900,000
Profit
tobacco
:
RM
400,000
Profit tobacco
: RM 400,000
Tobacco business
20
Related
Relatedinformation
information
Financial Ratio
Liquid ratio = Cash over Total asset
Conventional analysts regard a company that hold
large part of its assets in form of cash or cash
equivalent & earned interest as financially sound
company. Why?
It means the company can be able to meet meet its
short-term debts.
However, in Shariah perspective, a company cash to
asset ratio should be low, reflecting that most of the
assets are invested in real production of goods &
services.
Therefore, Islam discourage firms from holding large
part of its assets in the form of cash & cash
equivalent.
2. Qualitative Screening
Benchmark
Securities Commission of Malaysia
used also
Qualitative benchmark to screen companies which
are involved in multiple industries, i.e., companies
whose business activities comprise both Shari'ah
permissible and non-permissible elements.
The analysis is done at the holding company,
subsidiary company and associate company levels.
The criteria include:
1. Core activities of the company are halal but Haram
element is small compared to core activities.
2. Public image/perception of company is good.
3. Core activities of the company are important, have
element of urf (custom) and of public interest
(maslahah) to the Muslim ummah and the country.
. Note: If a subsidiary or holding company meets all
Islamic Equity
Market
Instruments
1. Shares or Stocks
Basically there are four types of shares or
stocks, i.e. common stocks, preferred stocks,
bonus shares & rights issues.
1. Ordinary shares
.An ordinary share represents undivided
ownership by a shareholder in the business of
the company.
.Ordinary shares (Common stock) give the
holder the right to vote on matters of corporate
policy, & appointment of board of directors.
.The holder of ordinary shares are the owners of
the company
27
ContShares or Stocks
2. Preferred shares or stocks.
Preference share is a hybrid instrument that gives
the holder a fixed dividend, priority in the event of
liquidation but no voting rights in the company
annual general meeting.
Rationale for issuing preference shares include:
Issuer firm want to reduce risk of debt financing &
thus by issuing preference share the debt equityratio will be low.
Firms also want to restrict foreign shareholders
from holding voting rights.
Investor want more secure income as investing in
preference shares
gives them fixed & secured
29income.
Islamic REIT
Islamic REIT must
appoint shariah advisor to
endorse their activities
only halal activities are
allowed e.g. no club
Insurance of Property
Financing
no limitations
Financing should be
shariah compliants.