NAME: SHARMILA DEVI A/P SUPPIAH

MATRIC NO: 824090

TOPIC 8: ISLAMIC CAPITAL MARKET
DATE OF SUBMISSION: 29 JUNE 2019
 8.1 THE DEVELOPMENT OF THE
ISLAMIC CAPITAL MARKET
• In an Islamic capital market (ICM) market transactions are carried
out in ways that do not conflict with the conscience of Muslims and
the religion of Islam. Here, there is assertion of religious law so that
the market is free from activities prohibited by Islam such as usury
(riba), gambling (maisir) and ambiguity (gharar).

• The ICM is a component of the overall capital market in Malaysia. It

plays an important role in generating economic growth for the
country. The ICM functions as a parallel market to the conventional
capital market, and plays a complementary role to the Islamic
banking system in broadening and deepening the Islamic financial
markets in Malaysia.
• The Shariah Advisory Council (SAC) was established in May
1996 to advise the Commission on Shariah matters pertaining
to the ICM. Members of the SAC are qualified individuals who
can present Shariah opinions and have vast experience in the
application of Shariah, particularly in the areas of Islamic
economics and finance.
• Various capital market products are available for Muslims who
only seek to invest and transact in the ICM. Such products
include the SC list of Shariah-compliant securities, sukuk,
Islamic unit trusts, Shariah indices, warrants (TSR), call
warrants and crude palm oil futures contract
 8.2 THE ROLE OF STOCK MARKETS
• In a Shariā’h compatible stock company, a stock
represents a shareholder’s share in the company. It is the
document that gives the shareholder proof of his right to a
stake in the company’s wealth comprising its paid-up
capital, assets and retained profits
• Islamic stock market must also have a market place for
transaction, pricing mechanism, and the commodities.
• The Islamic stock market will be free from interest-based
securities
• A stock exchange may also complement the banking
system.
• Adopts a dynamic approach towards the development of
just, sound and ethically balanced securities
• The OIC (Organization of Islamic Conference) Fiqh Academy that includes Fiqh Scholars representing the 53 Muslim
countries in addition to others experts selected on their scholarly reputation, in several resolutions and
recommendations dealt with purchasing stocks. This can be summarized as follows:

• (a) Stocks of companies whose products are not permitted in Shari’ah are prohibited to own, purchase, sell etc.
Examples: interest-based banks and insurance companies, entertainment business, etc.

• (b) Stocks of companies that abide by the rules of Shari’ah, such as Islamic banks and Islamic Insurance companies are
permissible.

• (c) Stocks of companies whose products are permissible but the company indulges in non-allowed transactions such as
getting interest based financing, depositing in banks for interest, making contracts that include prohibited conditions,
e.g., selling gold and/or silver and/or currencies in other than spot , or giving donations or selling arms to aggressors
such as Israel. Also companies that produce permissible products but also produce non permissible products as a minor
line of production, and this category 3 includes most companies in the world such as Microsoft and IBM. All these stocks
are not permissible, in principle according to the Fiqh Academy. And this is a decision that actually represents a majority.
 8.3 FINANCIAL INSTRUMENTS
• The Difference btw Banking and Capital Markets

• Banking is for short term partnerships

• Capital Markets is for long term partnerships
 Capital Markets: Sukuk
• Sakk (Arabic):certificate
• Instead of only debt based instruments
• Asset-based Long-term partnership
• The investor shares the asset.
• Even there numerous sukuk types two areof common
Mudarabah
ijarah
• Sukuk can be issued basedhe future income flow.
• Sukuk represent certificates of equal value that evidence undivided ownership or investment in
the assets using Shariah principles and concepts endorsed by the Shariah Advisory
Council.Essentially, when you invest in Sukuk, your money is put into the assets of a project or
investment in order to generate profit. The investor receives a margin of that profit based on a
pre-agreed ratio.

• When investors buy Sukuk and become Sukuk holders, they receive a certificate from the issuer
to evidence ownership, and are entitled to receive periodic profit payments on the principal
amount invested. Upon maturity, the Sukuk holder will get back the principal amount of
investment.As with most Islamic financial instruments, there are different methods of achieving
the same objective, and the above is just one method of doing it. For instance, the periodic profit
payments may come in the form of profit-sharing or rental from the asset.
TYPES OF SUKUK
• A profit-sharing contract between two parties – an investor
and the Issuer.

• All profits in the venture will be shared based on a pre-

agreed profit sharing ratio. However, in the case of loss –
all will be borne by the investor unless there it was due to
negligence or mismanagement of the venture where the
loss will then be borne by the Issuer.
• The investor will supply the entrepreneur with funds for his business venture. In return,
the investor will get a return on the funds he puts in based on a profit-sharing ratio.

• The main principle in a Sukuk mudharabah is that, the investors are dormant business
partners who do not participate in the management of the underlying asset, business or
project. The party who utilises the funds on the other hand (the issuer), is the working
partner.

• The profit from the investment activity is shared between both parties based on a pre-
agreed ratio depending on how well the asset or project performs. Losses suffered will
be borne by the investor.

• However, Sukuk mudharabah should not contain a guarantee from the issuer for the
capital or a fixed profit, or a profit based on any percentage of the capital.
• A partnership between two or more parties to finance a business
venture.

• All parties contribute capital to it either in the form of cash or kind for
the purpose of financing this venture.

• The profits for the venture will then be distributed based on a pre-
agreed profit sharing ratio. However, losses are shared based on the
basis of capital contribution.
• The musharakah contract supports a joint business venture. All parties contribute capital either in cash or in
kind for the purpose of financing a project or business venture (that must be Shariah-compliant)..

• The process begins with an obligor (issuer) signs a Musharakah contract. A Musharakah contract is a
contract between partners – whether the contract is between the issuer and the Sukuk holders, or a
Musharakah contract among Sukuk holders.

• The contract specifies a profit-sharing ratio and indicates that the obligor will contribute assets (such as cash
or property) to the joint venture.

• Profit from the venture is shared based on a pre agreed profit sharing ratio, but losses are shared based on
the capital contribution.

• With Sukuk Musharakah, the Sukuk holders (investors) are the owners of the joint venture, asset or business
activity.
• A contract of a sale and purchase of assets where the
cost and the profit margin (the marked up price) are made
known to all parties.
• A murabahah contract is an agreement between a buyer and seller for the
delivery of an asset.

• For example, the Sukuk holderbuys an asset in order to supply it to the

Sukuk issuer who has no capacity to purchase the asset directly.

• The holder then sells the asset to the issuer for the cost-plus profit – a mark-
up that both have agreed to upfront.

• The issuer then makes payments to the holder on an installment schedule.

• In general, it is a contract in which a party authorises
another party (usually an agent or “wakeel”) to act on
behalf of the former based on the agreed terms and
conditions as long as he or she is alive.

• Here, a wakeel could be appointed to manage the

wakalah portfolio with the aim to generate an agreed-
upon profit return.
• When the investor and wakeel enter into a wakalah agreement, the contract will
govern the appointment, scope of services and fees payable to the wakeel (if any).

• In a wakalah agreement, the investor will only receive the profit return agreed
between both parties at the outset. Any profit in excess of the agreed-upon profit
return will be kept by the wakeel as a performance or an incentive fee.

• The wakeel is not held to be a partner in the arrangement and therefore, does not
need to share the risk of loss in the agreement.
• A contract where the owner of an asset (lessor) leases it out to a lessee at an agreed lease rental for a
predetermined lease period. However, the ownership of the asset itself is not transferred and will always
remain with the lessor.

• The Sukuk Issuer with the funds raised from the Sukuk holders will purchase an asset and then lease it
back under an Ijarah contract. The rental payments will then be paid back to the Sukuk holders at set
intervals.

• Some salient features of ijarah include that the lessor must own the specified asset for the full lease
period. If the lessee defaults on payments or delays payments, the lessor cannot charge compound
interest.

• Finally, the leased asset’s use is specified in the contract.

 THE PRINCIPLES OF ISLAMIC FINANCIAL
INSTRUMENTS IN MALAYSIA
• The Islamic Financial System broadly refers to financial market transactions, operations and services that
comply with Islamic rules, principles and codes of practices. These laws and rules require certain types of
activities, risks or rewards to be either prohibited or promoted.
• Islamic laws and rules are known as Shariah or Islamic jurisprudence.
• Shariah governs all aspects of Islamic matters including worship, economic, social, political and cultural
aspects of Islamic societies.
• The Shariah is derived from three important sources, namely the Holy Quran (the holy book of the religion of
Islam), Sunnah (the practices of the Prophet Muhammad) and Ijtihad (the reasoning of a group of qualified
scholars).
• There are two different approaches to developing modern Islamic financial products and services. The first
approach identifies existing conventional products and services that are generally acceptable to Islam, and
modifies as well, as removes any prohibited elements so that they comply with Shariah principles. The
second approach involves the application of various Shariah principles to facilitate the origination and
innovation of new products and services.
• Prohibited elements of a commercial transaction must first be
removed for it to be Shariah compliant. Among the major elements
prohibited under Shariah, in summary, are:
• riba (interest);
• gharar (uncertainty);
• maisir (gambling) ; and
• non-halal (prohibited food and drinks and immoral activities).
• With the fundamental prohibitions identified, products were then
developed in Malaysia using a combination of approaches and have
evolved over time to meet the needs of the local population.
• Mudharabah (profit-sharing) - loss borne by capital provider
• Musharakah (profit and loss sharing)
• Murabahah (trade with mark-up or cost-plus sale)
• Bai Bithamam Ajil (BBA) (deferred-payment sale)
• Bai al-Salam (advance purchase)
• Istisna (purchase order)
• Ijarah (lease financing)
These principles are used as a basis for financial instruments used in both Islamic
banking and Capital Market.
 8.4 ISSUES REGARDING SECONDARY
MARKET
• The secondary market is where investors buy and sell
securities they already own. It is what most people
typically think of as the "stock market," though stocks are
also sold on the primary market when they are first
issued. The national exchanges, such as the New York
Stock Exchange (NYSE) and the NASDAQ, are
secondary markets.
• Though stocks are one of the most commonly traded securities,
there are also other types of secondary markets. For
example, investment banks and corporate and individual investors
buy and sell mutual funds and bonds on secondary markets. Entities
such as Fannie Mae and Freddie Mac also purchase mortgages on
a secondary market.
• Transactions that occur on the secondary market are termed
secondary simply because they are one step removed from the
transaction that originally created the securities in question. For
example, a financial institution writes a mortgage for a consumer,
creating the mortgage security. The bank can then sell it to Fannie
Mae on the secondary market in a secondary transaction.
 8.5 ISLAMIC FUNDS/UNIT TRUST
• The unit trust was first launched in United Kingdom in the year 1931 which was one of the investment
instruments of the company or individual who gather their money into the bigger investment fund in the
selected security portfolio
• The trust was re-launched as the M&G General Trust and later renamed as the Blue Chip Fund.2 The
unit trusts that are in existence today tend to be actively managed and fall into one of the following
categories:
• Securities funds
• Property funds Futures and Options Funds
• Geared Futures and 2
• Options funds
• Warrant funds Money
• Market funds
• Umbrella funds
 CURRENT DEVELOPMENT OF ISLAMIC
UNIT TRUST INDUSTRY IN MALAYSIA
• Islamic unit trust funds have become increasingly
prominent of late as they are being sought by all
investors, not only Muslims. The main objective of such
funds is to invest in a portfolio of halal stocks that comply
with the principles of the Shariah.
• The rapid growth of the unit trust industry in Malaysia
could also be observed from the number of management
companies from 13 in 1992 to almost triple the size to 39
in 2009. Similarly, the number of funds approved has also
increased to 595 from 39 for the same period.
 CONCLUSION
• Indeed, while there remains many challenges that need to be
overcome, the overall direction andpotential of the global Islamic
financial markets are certainly well recognised. Greater engagement
andinterface between the industry, the scholars, and the authorities will
create greater awareness,understanding and appreciation of the issues
and the direction for its resolution. This will provide anenvironment in
which the full potential of Islamic finance can be realised. This is
indeed a globalchallenge and it will be the cumulative efforts of the
scholars, industry and authorities that will producethe best outcome.