FINANCIAL MARKET (MAF 653)

COURSE CODE : MAF653

COURSE NAME : FINANCIAL MARKETS

FACULTY & PROGRAM : FACULTY OF ACCOUNTING / AC220

GROUP : 6 / NACAB7C

ASSIGNMENT 2

PREPARED TO : SIR MOHAMAD ROSDI BIN IDRIS

DATE OF SUBMIT : 24 JUNE 2022

STUDENT NAME MATRIC NO

NURUL SYAKIRIN BINTI NORIZAN 2017842216

SITI NURAKIDAH BINTI MOHD HANAFI 2017828878

AHMADEE BIN ABDULLAH 2017753719

NUR UKHASHA FARHANA BT ISMAIL 2017148389

TABLE OF CONTENT

NO CONTENTS PAGES

1. INTRODUCTION 1

2. BACKGROUND OF ISLAMIC FINANCE 2

3. DIFFERENCES AND SIMILARITIES BETWEEN CONVENTIONAL 3-5

AND ISLAMIC FINANCIAL MARKET IN TERMS OF CONCEPT
AND TECHNICAL PRACTICES

4. THE IMPLICATIONS OF ISLAMIC FINANCE IN MALAYSIA 6-8

ECONOMY
- FINANCING INSTRUMENTS (MURABAHAH, TAWARRUQ,
MUSHARAKAH, MUTANAQISAH, ETC.)
- MONEY MARKETS (MUDHARABAH, MURABAHAH,
WAKALAH, ETC)
- DERITATIVES

5. HOW ISLAMIC FINANCE CAN BENEFITS THE SOCIETY IN 9

MALAYSIA.

6 ANALYSIS 10

7 RECOMMENDATIONS AND CONCLUSIONS 10

8 CITATIONS & REFERENCES 10

Introduction

In Islamic Finance, it is important for a person or an entity to manage wealth in

providing social justice. There must be a distribution of wealth to the people who are less
fortunate. The increase demand for Shariah compliance products and practice as most of
the gulf countries is Islamic country. Therefore, they have perceived the importance of
avoidance of riba' and gharar. Developments in Islamic finance have taken place to allow
Muslims to invest savings and raise finance in a way which does not compromise their
religious and ethical beliefs. Islamic

Finance is the subject of growing interest as it provides an alternative banking

system to the world economy. Islam considers trade a very important component of
economic development and, therefore, the notion of investing finance in an ethical way is
essential. On the one hand, interest is forbidden in Islam; on the other hand, the
management of investment is a must, so Islam has developed an alternative financial
system which encourages the promotion of trade without interest. In this system, therefore,
risk is shared rather than being transferred while taking the business transactions into
consideration.

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a.Introduce and describe Islamic Finance.
Islamic finance is an emergent series of financial products that have been developed to meet
the requirements and constraints of people that would like to follow the Shariah law. Islamic
finance is a term that reflects financial business that is not contradictory to the principles of
Shariah.

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b.Discuss the differences and similarities (if any) between conventional financial
market and Islamic financial market in terms of concept and technical practices.

Islamic Conventional
Financial Market Financial market

● Customers The Islamic ● The Conventional Capital

D Financial market main market main customers are
Customers customers are Muslims profit seekers who are either
profit seekers who are providers of funds or
interested to either invest demanders of funds.
I in halal businesses or are
interested to establish a
halal firm using funds that
will be given on the basis
F of the shariah laws.

F ● The Islamic Financial ● The conventional Financial

Basis of Market are only allowed to market offer financial
activity offer financial instruments instruments for any profitable
financed for projects that are useful project whether it is
E and add value to the beneficent to the society or
society. But are not not, the only important factor
allowed by any means to is how profitable and how
offer investment risky is it. So a gambling
R instruments in casino can offer its bonds to
casinos,alcohol,manufact develop its gambling
uring,pornography and business.
interest bearing
E businesses that are
harmful to the moral
health of the society

N Products ● Islamic Financial market ● Conventional Financial

products are a wide range market products are equities,
which include :Sukuk, derivatives (swaps ,options,
sharia-compliant equities, futures , forward) and bonds.
T Islamic funds, equity
funds Islamic
exchange-traded funds
(IETFs), Islamic real estate
I investment trusts (IREITs)

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 Real ● Since financing in an ● In conventional market
versus Islamic system is backed interest-based financing does
A Artificial by assets, it is always not necessarily create real
products matched with assets, therefore, the supply
corresponding goods and of money through the loans
services advanced by the financial
T institutions does not
normally match with the real
goods and services produced
in the society, because the
loans create artificial money
I through which the amount of
money supply is increased,
and sometimes multiplied
without creating real assets
in the same quantity
O
Risk and ● In Islamic financial ● In conventional capital
Return market risk sharing is market, risk is better be
essential. So there is no avoided.Most derivatives are
instrument that is developed to hedge against
N considered shariah risk and speculation activities
complaint except when are allowed for risk takers to
the return is associated gain money like in gambling .
with the risk.

Islamic Conventional
S Financial Market Financial market

Financing &
investment ● Both types of institutions (Islamic and Conventional) are
I
providing financing to productive channels for reward.
The difference lies in the financing agreement.
M
Investor ● The financial market will function where the company can
raise funds from investors and the investor can invest
I their money through the help of the financial market.

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 ● It saves the time, money and efforts of the parties, as they
R Securities don’t have to waste resources to find probable buyers or
Trading sellers of securities. Further, it reduces cost by providing
valuable information, regarding the securities traded in
I the financial market.

I Organizational ● Both type of financial market has a centralised

Structure organisation with the standardised procedure.

Liquidity to ● By facilitating the exchange, as the investors can readily

S
tradable assets sell their securities and convert assets into cash.

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1)Implications of Islamic Finance in Malaysia economy particularly on financing
instruments

Murabahah(Mark up financing)

A widely used sale transaction between customers and banks. The buyer approaches the
bank to acquire goods. In turn, the bank purchases them from a third party with is a supplier
and then resells them to the borrower at an agreed mark-up for immediate or deferred
payment. The seller informs the buyer of the cost of acquiring the specified product and the
profit margin is negotiated between them. The total cost is usually paid in instalments.

Tawarruq

A multi-step transaction heavily used for interbank financing and liquidity management, often
based on commodities traded. Tawarruq as the process of purchasing a commodity for a
deferred price determined through Musawamah with is bargaining or Murabahah with is
mark up sale, and selling it to a third party for a spot price so as to obtain cash. Tawarruq is
most disliked by Shariah scholars when the borrower sells the commodity back to the
original seller.

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Musharakah Mutanaqisah

Musharakah Mutanaqisah is an Islamic equity financing instrument. It is a form of

partnership in which one of the partners promises to buy the equity share of the other
partner gradually until the ownership of the subject of the Musharakah is completely
transferred. However, the buying and selling agreement must be independent of the
partnership. Shariah forbids the contract of partnership is entered as a condition for the
contract of buying and selling.

2)Implications of Islamic Finance in Malaysia economy particularly on money markets

The money market is a type of financial market that provides a platform for transactions of
medium and short term instruments. Borrowers go to the money market to meet their
medium and short term borrowing needs.

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3)Implications of Islamic Finance in Malaysia economy particularly on derivatives

Derivatives are financial contracts, the inherent values of which are derived from, and exist
by reference to, independently existing underlying. The underlying for a derivative contract
can be an asset or a pool of assets, an index or any other item to which the parties may
choose to link their derivative contract. For example, credit derivatives, equity derivatives,
index linked derivatives and property derivatives are some of the popular types of derivative
instruments. Creditor in possession based lending arrangements of Islamic finance replicate
interest income of conventional lending transactions in a religiously acceptable manner. The
concept of put call parity illustrates that the three main types of Islamic finance represent
different ways to recharacterize conventional interest, through the attribution of economic
benefits from the ownership of an existing or future with is contractible asset by means of an
implicit derivatives arrangement.

Evaluation of derivatives markets

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d.Discuss on how Islamic Finance can benefit the society in Malaysia. Include your
point of view and understanding based on the information that you have presented in
the report.

Today, Malaysia's Islamic finance continues to grow rapidly, supported by a conducive

environment that is renowned for continuous product innovation, a diversity of financial
institutions from across the world, a broad range of innovative Islamic investment
instruments, a comprehensive financial infrastructure and adopting global regulatory and
legal best practices. Malaysia has also placed a strong emphasis on human capital
development alongside the development of the Islamic financial industry to ensure the
availability of Islamic finance talent. All of these value propositions have transformed
Malaysia into one of the most developed Islamic banking markets in the world.

In economic point of view, the practice of Islamic Finance in Malaysian results to

Sharpen Malaysia proposition as an international gateway for Islamic finance. In regards of
practicing Islamic Finance, Malaysia is promoted greater industry leadership and facilitate
further deepening of Malaysia’s Islamic financial and capital markets. In Malaysia, the
Islamic finance that widely practiced is Zakat. Zakat is a financial institution that requiring
the wealthy to give annual alms to those in need. Also, zakat also now allowed the
deduction from the salary. Which is, it’s also will be involve the banking institution to
collaboration with zakat institution.

The corporatization of baitulmal institution in the early 1990s was a key development
that considerably improved zakat collections. Equally significant has has been the melding if
waqf interests between baitulmal and Islamic banks to benefit socially import sectors such as
health and education.
Prospects for further growth of Financial Islamic, Malaysia must develop a more
conducive regulatory environment to facilitate the application of diverse Shariah contracts.
Introducing and practicing the Insurance and takaful in Malaysia and widely use also are
develop regulatory framework. Furthermore, by emphasising the need for transactions to be
supported by genuine trade or business-related activities, Islamic banking sets a higher
standard for investments and promotes greater accountability and risk mitigation.
In my point of view, in Malaysia, we also have Tabung Jaji Institution for the Islamic
Financial. Tabung Haji has benefited millions of depositors over the past 60 years. As the
size of deposits continued to increase, Tabung Haji had become a large investment fund with
an estimated size of nearly RM70 billion. This had transformed the institution from a pure
deposit-taker into one the largest GLICs. Today, Tabung Haji has significant exposures in
many major industries in Malaysia encompassing plantation, properties, trading, travel and
many more.

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Recommendation and Conclusion

Malaysia's Islamic banking sector has emerged as one of the most forward thinking
and creative in terms of offering Islamic financial services and goods. With the growth and
innovation in Islamic Financial Services, the role of Islamic Finance in Malaysia's economy is
becoming more and more significant. The methodology used to calculate the value added by
Islamic banking, Takaful, and Islamic Capital Market is constantly being evaluated due to the
rapid expansion of Islamic banking and Islamic finance. Malaysia participates in and
supports a number of international statistical organisations' activities aimed at improving the
statistical treatment of Islamic finance in national accounts. A global standard is required
going forward to guarantee that the estimation of Islamic banking and finance in national
accounts is equivalent across nations.

More investigation is needed to evaluate the degree to which measures intended to

support the expansion of Islamic finance also contributed to increased financial inclusion and
the strengthening of Islamic finance. Islamic finance has been developed as a significant
source of financial inclusion through deliberate policy making and the establishment of
diverse institutions, particularly among populations that were hesitant to participate in
conventional banking due to religious concerns.It is impossible to establish with certainty the
exact degree of correlation between the expansion of Islamic finance and increasing
financial inclusion. From a policy standpoint, it is clear that encouraging Islamic finance as
well as financial inclusion have benefited Malaysia's development. Thus, it would seem that
achieving even higher levels of financial engagement would entail less support for
conventional finance and more efforts to make both Islamic and conventional banking more
approachable and understandable. To reach the remaining group of people who are not yet
financially included, this may involve continuing to emphasise financial literacy, FinTech, and
other strategies.

g. References
1. https://www.bnm.gov.my/documents/20124/5915429/fsb3_en_s5.pdf
2. http://www.ijbssnet.com/journals/Vol._2_No._2%3B_February_2011/20.pdf
3. https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf
4. https://islamicmarkets.com/education/five-main-contracts-in-islamic-finance
5. https://www.bankislam.com/business-banking/treasury/money-market/
6. https://www.imf.org/external/pubs/ft/sdn/2015/sdn1505.pdf

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