ROSLAN BIN JA’AFAR

UKM-GRADUATE SCHOOL OF FUNDAMENTAL OF ISLAMIC CAPITAL

SEMESTER 2
SESSION 2023/2024
MARKET
 The outline
Key Principles for
Shariah compliant
What are the Instruments
Capital Markets?
Requisites of the
Islamic Capital
Market?

What are the Malaysian Islamic

Islamic Capital Capital Market
Markets? Development
Discussion.
Dr Ali , a researcher in Halal technology, has invented a machine to detect whether
the chicken has been properly slaughtered or beaten to death. unfortunately, he
does not have sufficient fund to produce the machine. Mr Razlan, on the other hand,
has plenty of money . If they could meet, do you think something could happen?
 Financial market and financial intermediary institutions have the basic function of
bringing together surplus and deficit unit.

Surplus units Deficit Units

Households Households
Surplus Deficit
Business units Business
units
firms firms
Governments Governments
Foreign Foreign
Investors Investors
 Financial Markets: It serves multiple functions

Saving Functions:
Financial markets provide an avenue for the public’s savings.

Wealth Functions:
The financial instrument sold in the money market and capital markets
provide an excellent way to store wealth.

Liquidity Functions:
Financial markets provide liquidity for savers who hold financial
instruments but are in need of money.

FINANCIAL Credit Functions:

Financial markets furnish to credit to finance consumption and
MARKET investment spending.

Payment Functions:
Financial markets provide mechanism for making payments for goods
and services.

Risk Protection Functions:

Financial markets offers protection against life, health property, and
income risks, by permitting individuals and institutions to engage in
both risk –sharing and risk reduction.

Policy Functions:
Tools for government to stabilize the economy and avoid inflation.
 What is Capital Market?

Financial system is Money Financial Capital

the collection of Market System Market
markets,
institutions, laws, • Short term financial • Long- and medium-term
regulations and instruments financial instruments
• Deals with promissory • Deals in equity, bonds etc.
techniques that notes, bills of exchange, • Involves stockbrokers,
operate to enable commercial papers etc. stock exchanges etc.
the transfer money • Contains financial banks, • Comparatively less liquid.
financial companies etc.
from the surplus • Liquid
unit to the deficit
side.
 Financial markets are divided into four types based on instrument, the
issues of securities, trading methods and the maturity.

Structure of financial
market

Based on the issues of Based on trading methods Based on the maturity

Based on instrument securities in secondary markets

Debt markets Primary markets Exchange markets Money market

Equity markets Secondary markets OTC markets Capital market

 Classification of Financial Markets and Its Instruments

Money market
instruments

Financial market Negotiable Bank

Government Commercial Banker Central Bank Repurchase
Certificates of
instruments Treasury Bills
Deposit
Papers Acceptance Funds Agreements

Capital market
instruments

Corporate Government State and Local Consumer and

Government
Stocks Mortgages Agency Government Bank
Bonds/Sukuks Securities
Securities Bonds Commercial Law
 ISLAMIC CAPITAL MARKET

Similar to conventional capital market, an ICM represents an exchange network

where medium- to long-term securities are issued to raise funds for the financing
of productive activities but the activities and instruments issued must comply with
the principles and requirement of Shariah.
 Islamic Finance Framework- How do we relate finance/business and
Islam?

Islam

Aqidah (Faith and Belief) Shariah (Practices and Akhlaq (Moralities and
Activities) ethichs)

Ibadah Muamalat
(Man-to-God relationship) (Man-to-Man relationship)

Politics Social Economics

 Sources of Shariah

Sources of Shraiah Law

(Practices and Activities)

Qiyas (Analogy
Ijma’ (Consensus) Reasoning)
Al-Quran Sunnah (Analogical deduction
(The consensus of
(The Holy Book) (The Practice of Prophet opinion of Islamic provided detailed
Muhammad p.b.u.h)) Scholars) understanding derived
from Al-Quran and
Sunnah)
 The key elements in ICM is that the practices, operations and management of the investment companies
and firms must conform to the principles of shariah- riba, gharar, maysir, speculation, prohibited activities
and unethical practices

Key concepts of shariah compliant in ICM:

• Excess compensation without any corresponding counter-value

recognised by shariah.
Interest (Riba) • 2:275- 279: Allah has permitted trading and forbidden ‘Riba’ interest (usury)
Sharia encourage risk taking
such as venture capital and
• Something thts has a hidden result; represent something for which there
is almost equal probability of getting or not getting. private equity.
Uncertainty (Gaharar)

Sharia does not prohibit

• Any activities which involve betting such as gambling, speculative activities transacting with non-muslim
or game of chance.
Gambling (Maysir) or prohibit a non-muslim
from investing in accordance
with its precepts.
Unethical practices such as tala’ub • From Islamic viewpoint, where honesty in dealings is highly emphasized,
(manipulation),ihtikar (hoarding), najsh such practices involving different kinds of deception are prohibited.
(artificial price hiking) and tadlis
(concealment of the defect)

Prohibited (haram) elements • Disallow investment in companies involved in the production and/or
according to shari’ah such as distribution of forbidden commodities such as alcohol, pork or
pornography.
alcohol, pork or pornography.
 Components of Islamic Capital Market (ICM)

ICM has developed into both equity and

debt markets.
Key components of ICM are:
Sukuk
Islamic Equities and Indexes
Islamic Funds
Islamic Real Estate Investment Trusts
Islamic Exchange Traded Funds (Islamic
ETFs)
Islamic Private Equity and Venture Capital
Islamic Derivative and Structured
Products
Islamic Hedge Funds
Main differences between conventional and Islamic Capital Market
 The Key Roles of the Islamic Capital Market (ICM)

Intermediates between demanders and suppliers of

the funds
Plays a complementary role to Islamic banking and
takaful sector
Provides opportunities for diversification of risks
Facilitates the availability of liquidity by enabling
secondary trading of securities
Contribute to economic growth
 Requisites of the Islamic Capital Market

A well functioning ICM is that it should meet the needs of its participants, including key players
such as investors and issuers. Thus, for a Well functioning and efficient ICM that could
contribute positively to economic development needs to be equipped with appropriate
regulations, practices and support institutions.
 The Important factors of the ICM development

Key aspect to help in sustaining the

Emphasis strong Risks are the result of uncertainty growth of the ICM sector.
corporate governance and/or being exposed to unfavorable There is constant need to for
value and structure, outcomes. innovation to adapt to the changing
transparency and Risk management and hedging tools taste of the clientele and economic
disclosure of information. are essential for ICM’s participants. environment.

Shariah Corporate Legal and Risk

Product Product
governance Governance regulatory Management
Standardization innovation
framework Strategies framework Practices

Ensuring all stakeholders Ensuring there is certainty regarding Product standardization and
in the industry are the legal enforceability of Shariah documentation is essential for setting
observing appropriate relative to the national laws when up an efficient market infrastructure,
Shariah procedures, it also dealing with ICM transactions. promoting cross-border transactions
helps in instilling public From regulatory frameworks and establishing potential
confidence in the offering viewpoint, it must universally collaboration among industry
and operations of the ICM. accepted and providing the same players.
level of protection to all investors
 Regulatory Bodies in Malaysian Capital Market- These regulating bodies
encompasses both Islamic and conventional finance matters
• Malaysia’s banking and insurance sectors come under jurisdiction of the Central
Bank or Bank Negara Malaysia.
• The principal objectives of the Bank shall be to promote monetary stability and
financial stability conducive to the sustainable growth of the Malaysian economy.
• Another important role that can be played by the BNM is to create a sound and

• The Securities Commission Bank progressive financial sector, particularly for Islamic finance, so that it can meet the
increasingly sophisticated needs of customers and businesses, as it is now a growth
Malaysia (SC) is a statutory body
entrusted with regulating and
Negara driver of the economy.

systematically developing
Malaysia s capital markets.
Malaysia
• It has direct responsibility for
supervising and monitoring the
activities of market institutions and • the first formal securities business organization in
regulating all persons licensed Malaysia was the Singapore Stockbrokers Association,
under the Capital Markets and Securities established in 1930.
Services Act of 2007. • The Malayan Stock Exchange was established in 1960
Commission and the public trading of shares commenced.
• The Stock Exchange of Malaysia was established in
Promote
1964.
Malaysian
Capital
Market
Bursa • On April 14, 2004, it changed its name to Bursa
Malaysia Berhad (BM)
Execute
regulatory Streamline
Malaysia • BM today is designed to meet the tremendously
increasing demands of Shariah-compliant investment
and
investigate Role of the regulation

Berhad from both local and foreign investors.

SC • BM now offers a complete range of innovative Islamic
market products from derivatives, equities, and
Protecting
Speedy commodities across all sectors and industries.
process and
the
approval of
investors
transaction
 Development of Islamic Capital Market in Malaysia

Since the 1980s, Malaysia have evolved to become major center for Islamic finance backed by a
strong appetite for innovation and intermediation of Shariah compliant products. The total
value of the capital market has grown more than 10-fold since 1990 from RM 200 billion to RM
2,733.1 billion in December 2013.
 Development of Islamic Financial Institution in Malaysia

1993- Malaysia Government allowed

conventional banks to participate in
the Islamic banking business.
1994- Malaysia introduced the
Islamic interbank money Market.
1999- The second Islamic Bank- Bank
• 1969- Tabung Haji was Muamalat, was established. 2000-2010: Islamic Subsidiaries
established as the first Islamic and the International Integration
Institution. of the Islamic Banking System
• 1983- The inception of Bank
Islam Malaysia Berhad 1990-2000: 2002- the Islamic Financial services Board was
Conventional Banks
• 1985- Takaful Malaysia was allowed to offer Islamic
established.
established. Financial Products and Malaysia promote Malaysia as a major hub for
Services International Islamic finance.
2003- Bank Negara Malaysia set up the Islamic
1960-1990: subsidiary concept.
Establishment of 2008- Maybank’s Islamic Banking begins its
Islamic Financial operations
Institutions 2010- the Islamic Banking and finance industry
constitute 20% of the overall market
Development of Islamic Financial Institution in Malaysia
International Infrastructure Institutions Supporting ICM Development-Standard-
setting institutions are formed to look into the standardization of practices and to
promote its ICM growth and development.
 International institution
 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)-Based in Bahrain and prepares
accounting, auditing, governance, ethics and Shariah standard for Islamic financial institution and the industry.

 Islamic Financial Services Board (IFSB)- Established in 2002 and have vested interest in ensuring the soundness and
stability of the Islamic Financial services industry.

 International Islamic Financial Market (IIFM)- Focused on the Islamic capital and money market segment looking into
primarily the standardization of Islamic financial products, documentations and related process at the global level.

 Liquidity Management Centre (LMC)- To facilitate the investment of the surplus funds of Islamic Financial institution
into short- and medium-term financial instrument structured in accordance with Shariah principles.

 International Islamic Liquidity Management Corporation (IILM)-Founded by central banks, monetary authorities, and
multilateral organizations to create and issue short-term Shariah-compliant financial instruments to facilitate cross-
border Islamic liquidity management.

 Islamic International Rating Agency (IIRA)- Aim to provide the capital markets and banking sectors with a rating
spectrum the encompasses the full array of capital market instruments and Islamic financial products.
 Islamic Finance Overview

The Islamic Finance Development Report 2018 shows that the global Islamic finance industry
grew year-on-year by of 11% to US$ 2.4 trillion in assets in 2017. Malaysia, Bahrain and the
UAE again led the 131 countries assessed in terms of the Islamic Finance Development
Indicator score.
 Global Islamic Finance Landscape- Malaysia plays a vital role in Global
Development

Islamic Finance Asset Growth 2017 Top Global Islamic Banking Markets 2017
4000 3809
600
3500 486
3000 500
2438
2500 2050 2190 2290
400
376
1965
US$ Billion

US$ Billion
2000 1746
1500 300
201 180
1000 200
500 98
0 100
2012 2013 2014 2015 2016 2017 2023*
0
Top countries : 1- Iran 2- Saudi Arabia 3- Malaysia Iran Saudi Arabia Malaysia UAE Qatar

Sukuk Assets Growth 2017 Top Global Sukuk Market

1000 250
783 204
800 200
US$ Billion

600

US$ Billion
462 150
400 299 342 345
260 284
100 81
200
46
0 50 32 21
2012 2013 2014 2015 2016 2017 2023*
0
Top countries : 1- Malaysia 2- Saudi Arabia 3- Indonesia Malaysia Saudi Arabia Indonesia UAE Qatar
Source- Islamic Finance Development Report, 2018
Shariah-Compliant Securities on Bursa as at June 2023

Source- Malaysian Islamic Capital Market bi-annual Bulletin Jan-June 2023, SAC
Shariah-Compliant Securities on Bursa as at June 2023

Source- Malaysian Islamic Capital Market bi-annual Bulletin June 2023, SAC
Shariah-Compliant Securities on Bursa as at 27 May 2022

Source- Malaysian Islamic Capital Market bi-annual Bulletin Jan-June 2022, SAC
Conclusion
The capital markets, both Islamic and conventional, represent a
significant component of the overall financial system, fulfilling
important functions such as the facilitation of long-term financing
for governments and private sector businesses.

Transactions within the ICM therefore have to eliminate key

prohibitions such as ribā (interest), gharar (uncertainty), maysir
(gambling); unethical market practices such as talāʿub
(manipulation), iḥtikār (hoarding), najsh (artificial price hiking) and
tadlīs (concealment of a defect).

The ICM can therefore be defined as a market where the capital

market transactions, operations and activities are carried out
according to Shariah principles and requirements.
 References

• International Shariah Research Academy for Islamic Finance (ISRA), 2015, Islamic
Capital Market: Principles and Practices. Kuala Lumpur. Pearson Malaysia Sdn Bhd.

• Mohd Azmi Omar, Muhamad Abduh & Raditya Sukmana. 2013. Fundamentals of
Islamic money and capital markets. Kuala Lumput. Wiley Finance Asia.

• https://www.sc.com.my/
Thank you
Dr. Roslan Ja’afar
UKM-Graduate School of Business, Universiti Kebangsaan Malaysia