The Malaysian Islamic Capital Market

Learning objectives Describe the salient features of an Islamic financial market. Describe various methods of Islamic financing. Differential between short-term and long-term Islamic finance products. Describe the main instruments of Islamic capital markets.

Learning objectives Explain and illustrate various Sukuk structures. Explain major issues in determining tradability of Sukuk instruments. Describe important legal, regulatory and licensing issues in Sukuk instruments. Describe evolution of Islamic financial products in Europe and other countries. Explain major challenges to the development of Islamic Financial Markets.

Learning objective 1 Salient features of an Islamic financial market are: It is a financial market which operate on Shari'ah principles. Its basic code of belief suggests: Prohibition of riba (interest/usury) Prohibition of Short sales Prohibition of gambling and speculative trading Prohibition of hoarding Prohibition of Gharar (excessive uncertainty) Prohibition of dealing in unlawful goods and services

Learning objective 2 Islamic financing methods provide different Islamic finance products including: Islamic Trade & Corporate Finance Products -financing of working capital, large projects, exports & imports Islamic Personal Finance Products -financing of housing, consumer durables, automobiles Islamic Commodities/Agriculture Finance Products -financing for agriculture related businesses/services

Learning objective 3 Short-term Islamic finance products Working capital financing Leasing ­(Ijarah) financing long-term Islamic finance products Project finance Islamic syndicate finance

Instruments of Islamic capital markets Learning objective 4 Instruments of Islamic capital markets Islamic funds Equity funds Commodity funds Mixed funds

Learning objectives 5 Sukuk structures Sukuk is a Shari’ah-compliant security or certificate of investment. It must represent the ownership in the underlying assets or its usufruct. The Sukuk instruments are issued under following common structures by companies, banks and governments. Mudarabah Sukuk (Profit Sharing) Murabaha (cost plus sale) Sukuk (Deferred payment) Musharakah Sukuk (Partnership) Ijarah Sukuk (Leasing) Salam Sukuk (Forward)

Mudarabah Sukuk

Murabaha (cost plus sale) Sukuk

Musharakah Sukuk

Ijarah Sukuk

Salam Sukuk

Learning objectives 6 According to Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI), trading in Sukuk is permissible under following conditions: -for Mudarabah/Musharakah Sukuk Tradable at market price after the start of activity -for Murabaha Sukuk Tradable before sale of the goods to the end-buyer -for Salam Sukuk Not tradable except on the face value -for Istisna’a Sukuk Tradable if funds are converted into assets and before sale to the orderer.

Learning objective 7 Legal, regulatory and licensing issues in Sukuk Tax treatment - Taxes borne by investors and issuers in domestic/ cross borders transactions Trust laws -protection of assets , ring-fencing, investors’ protection Asset transfer -stamp duties, transaction legal and regulatory approval costs Licensing -ability to issue instruments in different Islamic jurisdictions freely Marketing of Equity funds &Investment certificates -disclosure of risk and return profile of investments to targeted net-worth clients

Learning objective 8 Islamic financial products in Europe Islamic Bank of Britain European Islamic Investment Bank HSBC and Lloyds TSB (UK )-Islamic deposits

Islamic Bank of Britain www.islamic-bank.com IBB was established in September 2004. IBB is the first Islamic retail bank in the Western Europe. Listed on the AIMS London market on 12/10/2004. IBB is regulated by Financial Services Authority (FSA) UK. Current account that pays no interest and receives no interest. Halal mortgage for housing Unsecured personal finance facility based on the concept of Murabaha.

European Islamic Investment Bank www.eiib.co.uk EIIB was incorporated in January 2005. Listed on AIMS market London in May 2006. EIIB is regulated by Financial Services Authority (FSA) UK. Product focus on Islamic Treasury and Capital Markets - Structured Trade Finance - Private Equity and Corporate Advisory - Shari'ah Advisory. - Asset Management.

Learning objective 9 Major Challenges to the Development of Islamic Financial Markets Education and awareness Product innovation and development Performance benchmark Risk management capabilities Information technology Skilled human resources

1.Education and awareness Creating awareness among Muslims and Non-Muslims about the Islamic financial system. Potential clients should be provided transparent and accurate description of Islamic financial products being offered. Accountability and governance of Islamic banks should be stressed across board.

2.Product innovation and development Competition with non-Islamic banks would require continuous product development. Islamic products must have salient and distinctive features for investors. Researchers, and Islamic finance product developers must strive for innovation within confines of Shari’ah principles through active coordination with religious scholars.

3.Performance benchmark Islamic financial institutions use the same benchmarks as that used by conventional non-Islamic banks. Islamic funds do not have any benchmark to compare their performance based on Shari’ah principles. Islamic financial system community should set up benchmarks for evaluating performance of Islamic capital market products that have investors and society’s welfare at its centre.

4.Risk management capabilities Islamic financial contracts have their own peculiar risks and reward features. Islamic financial institutions have to identify, unbundle, measure, monitor and control all the specific risks. Islamic financial institutions need to have well-developed internal control system to identify any potential deterioration in the asset quality of the Islamic banking portfolio. Sound risk management practices for Islamic financial contracts would provide comfort and security to the potential investors and boost further growth.

5.Information technology Information technology can play a major role in development of new Islamic products or boost attractiveness of current products and strengthen enterprise risk management. Islamic financial institutions should use information technology and decision support systems to capture and store long-term historical data to predict future risk and return underlying Islamic finance product portfolios.

6.Skilled human resources Educated, committed and competent personnel, with Islamic ethical values are needed to educate customers and general public. Joint efforts by the Islamic financial institutions, scholars, regulators, universities, and business schools . INCEIF –Islamic finance university in Malaysia. Degrees/courses in Islamic finance.