Islamic Capital Market • Introduction • Definition of Islamic capital market • Developments of Islamic capital market • Capital market from the Syariah point of view • Element of riba • Speculation activities • Short selling activities • Insider trading activities • Margin trading activities • Islamic equity market • The principles in the issuance of Islamic bon • Conclusion
INTRODUCTION & DEFINITION • Capital Market instrument are defined as long-term financial instruments with an original maturity exceeding one year. • The purpose of these markets is to channel savings into long-term productive investments. • The conventional capital markets encompass: • public and private long-term debt instruments – eg. government and corporate bonds • equity obligations – eg. corporate stocks
INTRODUCTION & DEFINITION • The Islamic Capital Market (ICM) refers to the market where the activities are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. • In other words, the ICM represents an assertion of religious law in the capital market transactions where the market should be free from the involvement of prohibited activities by Islam as well as free from the elements such as usury (riba), gambling (maisir) and ambiguity (gharar).
THE DEVELOPMENT OF THE ISLAMIC CAPITAL MARKET • The development of the Islamic Capital Market can be looked at from two distinct aspects: • The Islamic Equity Capital Market • The Islamic Debt Capital Market.
The Islamic Equity Capital Market • Bank Islam Malaysia Berhad, being the first Islamic bank in Malaysia, had taken the initiative to review and identify companies listed on the Kuala Lumpur Stock Exchange considered permissible for Muslims to invest in • June 1997 the Securities Commissions Syariah Advisory Councilintroducedthe Syariah Approved Securities list • The Syariah Approved Securities list contains a list of stocks that are listed on the Kuala Lumpur Stock Exchange of which Muslims can invest in.
The Islamic Equity Capital Market • In order to accommodate the possibility to participate in the stock market, various Islamic stock-broking services began to emerge with the first being BIMB Securities Sdn Bhd, which was established in 1994. • In addition, there are also other conventional stockbrokers that had seized the opportunity to operate Islamic windows side-by-side with their conventional stock-broking services.
The Islamic Equity Capital Market • Presently, the Islamic Equity Capital Market has grown to a point where Muslim investors could allow professionals to manage their funds via the various Islamic Unit Trust Funds and Asset Management Companies. • As for benchmarking the performance of the Islamic Equity Capital Market, various indices were created. • There are currently two main Islamic indices • the RHB Islamic Index introduced in 1996 • the KLSE Syariah Index introduced in 1999.
The Islamic Debt Market • The growing interest to source funding from the Islamic Debt Capital Market can be traced back to the early 1990s when major corporations such as Shell MDS Sdn Bhd, Sarawak Shell Berhad and Petronas Dagangan Berhad raised significant amount of funds from the Islamic Debt Capital Market. • The issuance of Islamic debt securities usually structured under the Syariah principles of Qardhul Hasan, Musyarakah and Al-Bai Bithaman Ajil.
The Islamic Debt Market • the Malaysian Government also issued Islamic debt instruments in the form of Government Investment Issue (formally known as Government Investment Certificates) to provide liquidity as well as to facilitate the management of assets in the Islamic Banking and Finance system • The first issuance of the Government Investment Issue was carried out in 1983 upon the inception of Bank Islam Malaysia Berhad while the demand for these Islamic debt instruments increased significantly since March 1993 following the establishment of the Islamic windows and Interest Free Banking Scheme in Malaysia
The Islamic Debt Market • Subsequently, the Islamic Debt Capital Market was accorded further depth by the issuance of the first Mudharabah Bonds by Cagamas Berhad in 1994. • In a more recent development i.e. 1997, the Malaysian Government, through Khazanah Nasional Berhad, had also issued Islamic debt instruments in the form of the Khazanah Benchmark Bonds.
The Islamic Debt Market • As at today, there are approximately RM28.9 billion worth of Islamic private debt securities raised by the corporate sector from the Islamic Debt Capital Market, out of which RM5.5 billion alone was raised in the last 5 months. .
OBJECTIVES OF ISLAMIC CAPITAL MARKET • to transfer funds from surplus to deficit units. This is to ensure the equitable allocation of capital to sectors which would yield the best of returns to the owners of capital and hence contribute towards the overall growth and expansion of the economy. • to ensure that there exists a means of attracting surplus funds for worthwhile investments in accordance with the owners' preferences in terms of the extent of risk involvement, rate of return as well as the period of investment preferred. • It is also unIslamic to hoard wealth. It is therefore necessary for wealth owners to invest their funds in order not to allow their funds to be unnecessarily eroded by the obligatory zakat(Islamic tax).
CAPITAL MARKET FROM THE SYARIAH POINT OF VIEW • Element of riba • Speculation activities • Short selling activities • Insider trading activities • Margin trading activities
THE PRINCIPLES IN THE ISSUANCE OF ISLAMIC BON • Bonds are long-term debt obligations that are secured by a specified asset or a promise to pay. In effect, a bond investor has lent money to the bond issuer. In return, the issuer of that bond promises to pay interest and to repay the principal on maturity. • The certificate itself is evidence of a lender-creditor relationship. It is a “security” because the debt can be bought and sold on the open market. In fact, a bond is a loan which is intended to be bought and sold. • The conventional system of bond issuance and trading the issue of interest is at the centre of any transaction. • In contrast, in the Islamic financial system usury and interest are the first elements to be avoided.
THE PRINCIPLES IN THE ISSUANCE OF ISLAMIC BON Approved Syariah Concepts & Principles Primary funding principles • Bai` Bithaman Ajil (BBA) [Deferred-Payment Sale] • Bai` Inah [Sale with Immediate Repurchase] • Bai' Istijrar [Supply Sale] • Bai` Salam [Advance Purchase] • Bai' Wafa' [Sale and Repurchase] • Ijarah [Leasing] • Ijarah Thumma Bai [Lease to Purchase] • Istisna` [Purchase Order] • Mudharabah [Profit-Sharing] • Murabahah [Cost-Plus Sale] • Musyarakah [Profit and Loss-Sharing] • Qardh Hasan [Benevolent Loan]
THE PRINCIPLES IN THE ISSUANCE OF ISLAMIC BON Supplementary concepts and principles • Bai` Dayn [Debt Trading] • Bai` Muzayadah [Open-Bidding Trading] • Kafalah [Guarantee] • Hak Tamalluk [Ownership Right] • Hibah [Gift] • Hiwalah [Remittance] • Ibra’ [Rebate] • Ittifaq Dhimni [Pre-Agreed Contract] • Rahnu [Collateral] • Sukuk [Securities] • Ujrah [Fee] • Wakalah [Agency]
Salam Bonds • Salam is the sale of a specific commodity, well defined in its quality and quantity which will be delivered to the purchaser on a fixed date in the future at the price paid at the spot.
Salam Bonds - example • If a corporation requires for instance, 500 million ringgit, it can use salam certificates equalling that amount in small denominations, say 10,000 ringgit each. • Each certificate represents a salamcontract. The seller is the corporation while the buyer is the holder of that certificate who paid its nominal value. • Each certificate promises that on maturity (one year for example) the corporation will deliver to the holder a specified quantity of the underlying commodity, which is described fully on the back of the certificate or in the prospectus.
Salam Bonds - example • Once the corporation receives the cash, it can use it for any purpose. • On maturity the seller will be delivering the sold goods in kind. For this purpose the corporation will certainly buy on the open market and deliver to the certificate holder. However, it should be noted that salam is possible only for fungible goods or mithli. • These are standardised into identical units. For instance, wheat, rice, barley and other grains are of this type. Oil, iron and copper are also mithli.Similarly, electricity measured in kilowatt could be considered a mithli.
Ijarah Bonds • Ijarah is a contract according to which a party purchases and leases out equipment required by the client for a rental fee. • The duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor. • Ijarah bondsare securities of equal denomination of each issue, representing physical durable assets that are tied to an ijarah contract as defined by shari‘ah.
Ijarah Bonds - example • A group of investors bought an office building and divided up the ownership rights into many certificates of equal face value. • The group may rent out the whole building for the next ten years, then sell these certificates to the public. A buyer of a such certificate is acquiring a share in the ownership of the office building, and an equal share in the net income from it for the term of the lease. • Such certificates could be easily traded in the market.