MULTIMEDIA UNIVERSITY

BFN2224
FINANCIAL MARKETS & INSTITUTION
ASSIGNMENT

Trimester 1, Session 2017 / 2018

Assignment 1: Islamic Capital Market

No. Student ID Student Name Section

1. 1142700665 MUHAMMAD NAIF NAQIUDDEEN BIN MOHD B01

NADZARI

2. 1151103063 AIZZAT NAZRAN BIN NAZEER KHAN B01

3. 1151101874 MUHAMMAD HASIF BIN MOHAMAD EZAM B01

4. 1151101470 MOHAMMAD MUNIR BIN MOHAMMAD HUSNI B01

5. 1141125303 QAMARUL ARIFIN BIN ARIFF HAZNAL B01

PREPARED FOR:
DR. RIDZWAN BIN BAKAR
REPORT SUBMISSION DATE:
Table of Contents

1.0 Executive Summary .............................................................................................................................. 3

2.0 Introduction ........................................................................................................................................... 5
2.1 History ................................................................................................................................................ 7
3.0 Objective of the Study .......................................................................................................................... 9
4.0 Methodology ........................................................................................................................................ 10
4.1 The Shariah compliance process ....................................................................................................... 10
5.0 Content ................................................................................................................................................. 11
5.1 Islamic Capital Market Products ....................................................................................................... 11
5.1.1 Shariah-complaint Securities ..................................................................................................... 12
5.1.2 Sukuk (Islamic Bond) ................................................................................................................ 12
5.1.3 Shariah-based Unit Trust Funds ................................................................................................. 12
5.1.4 Islamic Exchanged Traded Funds (ETF) ................................................................................... 13
5.1.5 Islamic Real Estate Investment Trusts (REITs) ......................................................................... 13
5.2 Differences between Islamic and Conventional Capital Market ....................................................... 14
6.0 Conclusion ........................................................................................................................................... 16
7.0 References ............................................................................................................................................ 17
8.0 Appendices ........................................................................................................................................... 18
1.0 Executive Summary

This document explains what are Islamic Capital Market and how it works. Islamic Capital Market
is the result of worldwide Islamic Finance growth. ICM can be called as a capital market according
to Islamic Shariah. However, as a new industry, it has some limitations and problems that need to
be overcome.

In the first part of report, we explain on the history of Islamic Capital Market. The rise of the
Islamic capital market, where investments and financing activities and products are organized
based on the Shariah standards, is accordingly the result of a natural movement in the development
of the Islamic financial services industry. The pressing need to address liquidity administration for
Islamic banks and takaful administrators provoked a few nations, for example, Malaysia, Bahrain,
Kuwait, Sudan and Iran to introduce Islamic bonds by encouraging the administration of assets by
Islamic financial institutions.

In the second part, the method on how Shariah Compliance process is explained. Extraction of
relevant financial information from audited financial report and other material information and
undertaking Shariah compliance review process to identify contribution from non-permissible
activities .Then ,it is compared with Shariah financial benchmark.Tabulate the result to SAC for
final consideration/decision based on quantitative method or qualitative consideration.Finally ,
the result and issue list of Shariah-compliant securities was compiled.
In the third part, the products of Islamic Capital Market is discussed. The modern Islamic financial
products and services are developed using two different approaches. The first is identifying and
modifying existing conventional products and services to comply with Shariah principles. The
second approach is the innovation of new products and services that involves the application of
various Shariah principles. The Malaysian Islamic capital market products are mainly divided into
five categories of Shariah compliant securities, Sukuk (Islamic Bond), Shariah-based Unit Trust
Fund, Islamic Exchanged Traded Funds (ETF) and Islamic Real Estate Investment Trusts.

Last part of the report, explains on how ICM and CCM are differentiated. Broadly, according to
the Shariah dictum, conventional transactions are permissible if the prohibited elements are
removed from them. Unlike conventional capital markets, Islamic capital markets are ideally
characterized by the absence of interest-based transactions (riba), doubtful transactions and stocks
of companies dealing in unlawful activities (haram) or items.
2.0 Introduction

The Islamic Financial Market keeps on exceeding and outpace its counterparts regardless of the
economic slowdown globally. According to the TheCityUK 2015 Islamic Finance Report, the
global interest for Islamic financial services, as measured by Sharia's agreeable resources,
expanded by 12% in 2014 to a record $2trillion and tripled despite the post economic crisis since
the 2007/2008 periods.

To be sure, the development of Sharia's consistent resources amid this period was no unseen event,
as the interest for items, for example, Sukuk and Sukuk funds was predicated on the accessibility
of a stronger option to conventional finance after the problems experienced in the conventional
space which prompted the 2007/2008 economic crisis.

In this situation, Sukuk keep on playing an active part in the Islamic financing space with
expanding demand and interest from sovereigns, multilateral offices and corporates for their
financing needs. The importance of Sukuk can't be under emphasised as investors and issuers see
it as a stage to oversee liquidity, provide assets and framework financing in the economy and,
ultimately, as diversification to accomplish insulation from the unpredictability of other asset
classes.

Sukuk have in recent times turned out to be dominant in the improvement of the Islamic capital
market. The demand has been driven to a great extent by expanding awareness that Sukuk are a
valuable source of liquidity for sovereigns, semi sovereign and corporate issuers. The last three
years has seen this strength in genuine terms with Sukuk issuances surpassing the USD100billion
stamp and the expansion of sovereign issuers from both Muslim and non Muslim jurisdictions.
The issuance of the first Ijara Sukuk by the United Kingdom government in 2014 in the measure
of GBP200 Million followed by the government of Luxembourg EUR200 Million, Senegal
XOF100 Billion, Hong Kong USD1 Billion and South Africa USD500 Million puts the above
issuance statistics into setting. Despite the fact that by far most of Sukuk issuances are still in the
domain of sovereign and semi sovereign, there are solid signs that, with expanding awareness, the
market expects request originating from the corporate area too, including Europe, where recent
experience of fixing of liquidity in the conventional markets caused a re-evaluation of different
types of financing.

Obviously, the traditional Sukuk markets of Malaysia, Saudi Arabia, Bahrain, and Dubai still
represent the most elevated amounts of Sukuk issuance on the planet. Dubai recently outperformed
Malaysia in Sukuk issuance due to some degree to the Malaysian National's (Bank Negara
Malaysia (BNM)) choice to quit issuing short dated Sukuk (up to three month maturities), as the
BNM accepted there was adequate liquidity in the nation's Islamic capital markets, and that their
issuances were essentially utilized by foreign banks to deal with their liquidity needs, therefore
doing little to enhance the liquidity needs of the domestic market. Given the developing nature and
use over numerous jurisdictions, Sukuk are probably going to end up plainly a key segment of the
money related scene in both created and developing markets. Elements adding to this improvement
incorporate the on-going requirements for infrastructure financing globally and sovereign liquidity
needs. Sukuk instruments are all placed to close this financing gap.
2.1 History

The rise of the Islamic capital market, where investments and financing activities and products are
organized based on the Shariah standards, is accordingly the result of a natural movement in the
development of the Islamic financial services industry. The pressing need to address liquidity
administration for Islamic banks and takaful administrators provoked a few nations, for example,
Malaysia, Bahrain, Kuwait, Sudan and Iran to introduce Islamic bonds by encouraging the
administration of assets by Islamic financial institutions.

While there had been earlier initiative taken by the Governments of Jordan and Pakistan to present
a lawful structure for Islamic bond issuance, the first effective issuance of Islamic bonds was
started by the Malaysian Government in 1983 with the issuance of the Government Investment
Issue or GII (once in the past known as the Government Investment Certificate or GIC). The
primary target of this issuance was to encourage the management of assets in the Islamic banking
system, which, at this point, was genuinely developed. The issuance of GII was referred to the
Islamic concept of qardh hasan (benevolent loan) non-interest bearing loans. In any case, GII was
not a tradable instrument under the concept of qardh hasan, which did not allow secondary trading.

Along these lines, the concept of GII was changed to bai` al-`Inah to enable it to be exchanged the
optional market. Also, the National Bank of Kuwait issued interest-free bonds to finance the
purchase of properties held by nationals other than Gulf Co-operation Council states. Iran has
likewise presented the concept of interest bonds on a mudharabah premise. The achievement of
various Islamic security issuances worldwide opened up an alternative source of subsidizing,
which is currently tapped by numerous nations and organizations. Another part of the improvement
of the Islamic capital market was the need to set up clear direction on the sorts of values that
conform to Shariah requirements. The audit and recognizable proof of Shariah-compliant stocks
are guided by particular criteria set out by Shariah researchers.
In Malaysia, the underlying efforts to give a rundown of Shariah-compliant stocks were undertaken
by Bank Islam Malaysia Bhd in 1983. This was later trailed by the introduction of a list of Shariah-
compliant stocks in June 1997 by the Securities Commission of Malaysia. The first Islamic equity
index was presented in Malaysia by RHB Unit Trust Management Bhd in May 1996. This was
trailed by the launching of the Dow Jones Islamic Market Index (DJIM) by Dow Jones & Company
in February 1999, the Kuala Lumpur Shariah Index (KLSI) by Bursa Malaysia in April 1999 and
the FTSE Global Islamic Index Series by the FTSE Group in October 1999. The Amana Income
Fund, the first Islamic equity fund to be set up in the United States, was formed in June 1986 by
members of the North American Islamic Trust (NAIT), an association in Indiana, which manages
the subsidizing of mosques in the United States. In 1987, Dallah AlBaraka Group established two
organizations, named Al-Tawfeek and Al-Amin, which was specifically committed to the
improvement of Islamic equity funds. These organizations have effectively propelled various
Islamic funds concentrating on such assorted areas, for example, land and worldwide equities.

Today, there is a wide cluster of Islamic capital market products and services to address the needs
of the individuals who look to invest in consistency with the Shariah standards. These include
Shariah-compliant stocks, Islamic securities, Islamic assets, and Islamic risk management
products. The Islamic capital market has developed in refinement and Islamic forms of products
organizing, project financing, stockbroking, asset management and funding administrations are
progressively available.
3.0 Objective of the Study
4.0 Methodology

4.1 The Shariah compliance process

Tabulate the
result to SAC
Extraction of Undertaking
for final
relevant Shariah
consideration/de Compile the
financial compliance
Compare cision based on result and
information review process
with Shariah quantitative issue list of
from audited to identify
financial method Shariah-
financial contribution
benchmark (financial compliant
report and from non-
benchmark) securities
other material permissible
and/or
information activities
qualitative
consideration

Figure 1: The Shariah compliance process (Securities Commision Malaysia Website)

5.0 Content

5.1 Islamic Capital Market Products

The modern Islamic financial products and services are developed using two different approaches.
The first is identifying and modifying existing conventional products and services to comply with
Shariah principles. The second approach is the innovation of new products and services that
involves the application of various Shariah principles. Figure 1 illustrates variety of financial
products that being offered in the Malaysian Islamic Capital Market:

Islamic Capital
Market Products

Islamic Real Estate

Shariah-compliant Sukuk (Islamic Shariah-based Unit Islamic Exchanged
Investment Trusts
Securities Bond) Trust Funds Traded Funds (ETF)
(REITs)

Figure 1: Islamic Capital Market Products

As can be seen from Figure 1, the Malaysian Islamic capital market products are mainly divided
into five categories of Shariah compliant securities, Sukuk (Islamic Bond), Shariah-based Unit
Trust Fund, Islamic Exchanged Traded Funds (ETF) and Islamic Real Estate Investment Trusts.
5.1.1 Shariah-complaint Securities

The most popular product is the securities issued by listed companies on Bursa Malaysia, which
comply with the Islamic criteria promulgated by the Securities Commission. Shariah compliant
securities include those ordinary shares, warrants and transferable subscription rights issued by
companies that comply with the Islamic criteria promulgated by the 19 Securities Commission.
Those companies are known as Shariah approved companies or Shariah compliant companies.
There are a lot of choices available at Bursa Malaysia on the selection of Shariah-compliant stocks
across diversified industries for broader and deeper investment portfolios.

5.1.2 Sukuk (Islamic Bond)

Sukuk is a form of financial note, which represent value of asset. The issuance of Islamic bonds
require an exchange of a Shariah-compliant underlying asset for a financial consideration through
the application of various Shariah principles such as ijarah, mudharabah, murabahah, mushakarah,
bai bithaman ajil and istisna17. Sukuk are being issued in Malaysia in both Malaysian Ringgit
and foreign currencies. Therefore, this offers variety investment opportunities to all investors,
either local or foreign investors and also for local and international entities that seek for listing on
Bursa Malaysia. Among the five major Islamic Capital Market products, Sukuk is the most
preferable choice for corporations to raise fund.

5.1.3 Shariah-based Unit Trust Funds

The Shariah based unit trust funds are collective investment funds that offer investors the
opportunity to invest in a diversified portfolio of Shariah compliant securities and managed by
professional managers in accordance with the Shariah principles.
5.1.4 Islamic Exchanged Traded Funds (ETF)

Islamic Exchanged Traded Fund are funds traded on Bursa Malaysia which track indices based on
stocks that have been classified as Shariah compliant listed equities 16. Among the benefits of
investing in ETF are; diversification as ETF invests in a portfolio of securities, low minimum
investment as ETF is traded in board lot and liquidity as ETF is continuously traded on Bursa
Malaysia.

5.1.5 Islamic Real Estate Investment Trusts (REITs)

Islamic Real Estate Investment Trust is defined as a collective investment vehicles that pool money
from investors and use this fund to buy, manage and sell real estate. At present, there are 18 REIT
being offered in Malaysia.
5.2 Differences between Islamic and Conventional Capital Market

The underlying principle of Sharia forms the basis of difference between Islamic capital
markets and conventional capital markets. Broadly, according to the Sharia dictum, conventional
transactions are permissible if the prohibited elements are removed from them. Unlike
conventional capital markets, Islamic capital markets are ideally characterized by the absence of
interest-based transactions (riba), doubtful transactions and stocks of companies dealing in
unlawful activities (haram) or items. It should also be free from any form of unethical or immoral
transactions, such as market manipulations, insider trading, short selling, and even excessive
exposure of ones financial position by contra deals that cannot be backed by sufficient funds. The
core differences in the Islamic capital market vis--vis conventional capital markets can be
summarized as follows:

Characteristics Islamic Capital Market Conventional Capital Market

Sharia framework
Prohibited transactions
Financing
Islamic capital market Conventional capital market
products are designed based not based on religious laws or
on Sharia law-Sharia guidelines
scholars ensure adherence to
Islamic laws and provide
guidance.
Islamic capital market Except for money laundering
restricts stocks of companies and the financing of criminal
dealing in unlawful activities activities, these activities are
such as gambling, pork, permitted
alcohol, tobacco, pornography
and arms & ammunition
Islamic banks provide equity Venture capital companies
capital to a project or venture. and investment banks which
Losses are shared on the basis typically take equity stakes
of equity participation while and management control of an
 profits are shared on a pre- enterprise for providing start
agreed ratio up finance
Prohibition of interest Islamic capital market Charge of interest is not
restricts charge of interest restricted
Sukuk-Bond market Sukuks issued are backed by Bonds issued are in the form
underlying Sharia-compliant of debt paper that represents
asset underlying debt payable at
maturity. It follows the
principle of interest-based
lending
6.0 Conclusion

This report has presented the landscape of the Islamic financial services industry and
discussed the role of the Islamic capital market within the broader Islamic financial services
industry.. The objective of the report is to provide an informative discussion of the state of the
Islamic financial services industry in general, and to assess the extent to which Islamic capital
market products and services are offered in various jurisdictions, as well as to identify any potential
regulatory issues arising specific to Islamic capital markets. The Islamic Capital Market in
Malaysia has grown rapidly and successfully. As compared to other Muslim countries, Malaysia
offers a superior infrastructure for and provides on-going government support that provides
impetus for the continued growth of the Malaysian Islamic Capital Market. The leadership and
support provided by the government through the facilitation of policies and incentives has ensured
the successful development of the Islamic Capital Market. A range of incentives have been
provided through the annual Budgets from2007 to 2010 that are intended to encourage and
facilitate local and foreign participation in the Malaysian Islamic capital market. These
Government initiatives have been substantial Malaysia International Islamic Finance Centre value
prepositions provide a unique environment for development and expansion an internationally
recognized Islamic financial market. Perspectives such as product innovation, infrastructural
facilities, policy incentives human capital development, liberalisation and regulatory frameworks,
have all been focussed on encouraging the development of the Islamic Capital Market. Regulatory
bodies and market players have all been involved to ensure the successful attainment of an
international hub for an Islamic Capital Market in Malaysia .To further ensure the success of the
development, especially towards the government desire as an international Islamic Capital Market
hub, several issues should be considered. Since its products and services have been accepted and
demanded worldwide, the international harmonization of the regulatory framework, standards and
practices are needed to enhance cross-border linkages. A comprehensive, competitive and wider
range of products innovation is also essential to cater the different risk-return requirements of
investors. In addition, tax legislation and incentives should be able to cater all types of Islamic
products and services.
7.0 References
8.0 Appendices