Challenges & Opportunities Facing the Global Islamic Capital Market (Bond @ Sukuk)

Challenges & Opportunities Facing the Global Islamic Capital Market (Bond @ Sukuk) Prof. Dr. Mohd. Ma’sumBillah www.drmasumbillah.blogspot.com Shangri-La-Hotel, Jakarta

Preview • Islam is a complete religion and the best way of life • Financial system is a root of strength for one country over the other • An existing financial system should be revised in order to regain competitiveness and strength in the market • The emergence of Islamic Financial System can be the best medium for Muslim countries to fulfill the above mentioned objective • In Malaysia, the Islamic Capital Market has developed particularly to promote more transparent and just capital market system as according to the Shari'ah rulings

Framework Of The Islamic Capital Market In Malaysia • Globally, Islamic Capital Market is developing rapidly with 52 global funds and 21 equity funds • In Malaysia, Islamic Capital Market started in 1960s when the first equity financing was done by Tabung Haji • The financial system of a country is a medium where two parties which need each other can be met and fulfills their economic needs • The Deficit units, as a name implies, is an individual, corporation or government agencies plan to execute a particular activity, economic projects and needs a working capital from the other party • The Surplus unit is an individual, corporation or government agencies in excess of money and capable to lend and invest some of them to the others

Framework Of The Islamic Capital Market In Malaysia • In Malaysia, the Islamic Capital Market comprise of primary and secondary market • In primary market, new issue of Government Islamic Securities and Islamic Corporate Securities are offered to the public and institutions • In the Secondary Market, Islamic Government Papers and Islamic Corporate Securities are being traded.

Framework Of The Islamic Capital Market In Malaysia • The financing method can be done in two ways; leverage/debt or equity/shares • According the Shariah rulings, financing by leverage must be done by mutual ‘akad’ or an agreement • Example of the allowable in the Islamic Principles framework is Al Bai Bithaman Ajil (deferred sales price), Bai Al Murabahab (sales with agreeable additional profit), Bai Al Istisna (sales by broking), Bai Al Inah (refinance of assets) and Al Narah (hire purchase) • On the other hand, the Islamic Capital Market financing by equity can be done as according to the agreement which are based on the Al Mudharabah (profit sharing) and Al Musyakarah (profit and loss sharing). • All in all, the term Islamic Capital Market is a combination of the size of market for Debt Security and Equity Security which are based on the above principles.

ROLE OF SECURITIES COMISSION • set up under the Security Commission Act 1993 which is responsible to regulate, supervise and monitor all the activities within the market institutions, which includes stock exchanges, clearing houses and licensees under the SIA 1983 and FIA 1993 • One of the important agenda by the commission is the development of the Islamic Capital Market • This plan aimed to establish Malaysia as an international Islamic Capital Centre. • In order to meet their obligation, Security Commission has taken two steps namely to provide necessary infrastructure for research, discussions and dialogue and develop thus further strengthened the market by implementing specific efforts • These steps are namely to establish an Islamic Capital Market Unit, Islamic Instrument Study Group and Syariah Advisory Council

ISSUES OF THE ISLAMIC CAPITAL MARKET • Many issues have been arisen by the public, institution as well as the practitioners as regard to the practical side of the Islamic Capital Market in Malaysia due to different background, education and surroundings • Some of the issues that has been arises are regarding the financial products are call warrants, crude palm oil contract and such • Call warrants can be defined as right rather than obligation to buy or to sell a fixed quantity of assets, in a specific time frame • It can be further divided into two, to buy a call and to sell a call • Buying a call means the investor is bullish about the stock price and trying to hedge the risk of increase in the stock price

ISSUES OF THE ISLAMIC CAPITAL MARKET • The Islamic Capital Study Group (IISG) has agreed on the practice of call warrants. They have passed a resolution to permit the use of call warrant - referred to the Islamic jurisprudence outlined in the haq mainly and haq tamalluk principles. • In the time of Prophet Rasulullah SAW, the similar practice of selling and buying rights has been traced – refer to the story of Safwan b. Umayyah and Caliph Umar r.a • As for the Shafie mazhab, the guidelines on what can be considered as a property have been provided. According to Imam Al Suyuti, ‘Mal can be categorised if it has value

ISSUES OF THE ISLAMIC CAPITAL MARKET • Some opinion argued that the futures contract is in contrast with the syariah rulings and shall be prohibited • These issues are namely is in line with the gambling practice, gharar or uncertainty element exist, to buy something that not exist, speculation in nature and no exchange of goods in the transactions • However, these differences have been discussed by the Syariah Advisory Council and on November 11, 1997, they have resolved that the crude palm oil contract is permissible under the syariah principles • In Malaysia, only commodity contract are being traded that is the crude palm oil contract • Any futures contract mean setting an agreement to buy and sell a commodity in the cash market in a specified quantity in the future. This financial product aimed to manage risks especially to help the crop entrepreneurs from a risk of changing prices in palm oil

ISSUES OF THE ISLAMIC CAPITAL MARKET • Firstly, a gambling elements does not occur in the trading activity because the forces of demand and supply will most likely to determine the price fluctuation within the market. On the other hand, gambling depends solely on luck and not depending on the other factors. • The element of gharar means uncertainty in possessing goods which will give profits • Future contract is one of the alternatives to minimise the losses. • This in referred to the Quranic Ayat which describes an aspiration not to incur losses in the business. In Surah Al Fatir, verse 29, Allah SWT has stated; • “For them, they secretly and openly hope for a commerce that will never fail “.

ISSUES OF THE ISLAMIC CAPITAL MARKET • Speculation which is detrimental and not fair to the public has become one of the doubts in the crude palm oil business. It refers to the making profit activities out of the price movements in the market. In fact, it can be divided into two that are speculation with knowledge and without knowledge • To illustrate, consider a company anticipate that there is a likelihood that the price of rice will increase due to a particular events / season. So, they are bullish about the increase in the price for rice in the future. So, they buy the future contract as per current in order to avoid any price increment in the future. • Furthermore, the issue of no exchange of goods or ‘iwadh. In future contract, no purchase of goods in physical form takes place • The Syariah Advisory Council found that the crude palm oil increase economic value to the traders in the sense that it hedges the price. As the risk can be reduced, it helps the farmers to improve their living standard indirectly

ISSUES OF THE ISLAMIC CAPITAL MARKET • To conclude, a future contract can be allowed. However, some elements such as riba/usury should be prohibited. As an implication to this, a trader particularly can manage the risk better

CONCLUSION • By engaging in the capital market, the government as well as the private sector can work together to improvise the economy through wealth creation, development strategy and creating more job opportunities to the people • Next, identification of races by economic sector can be gradually abolished • Next, identification of races by economic sector can be gradually abolished • All in all, an establishment of a successful of Islamic Capital Market will be succeed if all party take a significant role, through discussions, new ideas and continuous effort to improve the market

THANK YOU Wassalam

Challenges & Opportunities Facing the Global Islamic Capital Market (Bond @ Sukuk)