Islamic Capital Market

Islamic Investment funds

Islamic Capital Market
Bursa Malaysia

Islamic Investment Fund

Islamic Investment Fund- the investors
contribute their surplus money for the purpose
of its investment to earn halal profits in strict
conformity with the precepts of Islamic
Shariah.
The investment documents are called
"certificates" ,"units, "shares" etc.

Overview
Islamic investment equity funds market is one of the fastestgrowing sectors within the Islamic financial system.
Currently, approximately 100 Islamic equity funds worldwide.
The total assets managed through these funds currently
exceed US$5 billion and is growing by 1215% per annum.
Over the last few years, quite a number of funds have closed
down. Most of the funds tend to target high net worth
individuals and corporate institutions, with minimum
investments ranging from US$50,000 to as high as US$1
million.
Target markets for Islamic funds vary, some cater for their
local markets, e.g., Malaysia and Gulf-based investment
funds .

Conditions for Islamic funds

1. Instead of a fixed return tied up with their face value,
they must carry a pro-rated profit earned or loss
actually earned by the Fund. Therefore, neither the
principal nor a rate of profit (tied up with the principal)
can be guaranteed.
Unless the loss by the negligence or mismanagement,
the management will be liable to compensate it.

2. The pooled funds must be invested in a business

acceptable to Shariah. It means that not only the
channels of investment, but also the terms agreed
with them must conform to the Islamic principles.

Equity Fund
The equity fund amounts are invested in the
shares of joint stock companies.
The profits are mainly achieved through the
capital gains by purchasing the shares and
selling them when their prices are increased.
Profits are also achieved by the dividends
distributed by the relevant companies.

Types of equity funds

Ijarah Fund
This fund is used to purchase assets like real estate,
motor vehicles, or other equipment for the purpose of
leasing them out to their ultimate users. The
ownership of these assets remains with the Fund and
the rentals are charged from the users. These rentals
are the source of income for the fund which is
distributed pro rated to the subscribers.
Commodity Fund
This fund is used in purchasing different commodities for
the purpose of the resale. The profits generated by
the sale are the income of the fund which is
distributed pro rated among the subscribers.

Types of equity funds

Murabahah Fund
"Murabahah" is a sale where the commodities are sold on a
cost-plus basis. The purchased the commodity were sold
on the basis of deferred payment at an agreed margin of
profit added to the cost. It should be a closed-end fund and
its units can not be negotiable in a secondary market.
Mixed Fund
A mixed fund refers to the subscription amounts employed in
different types of investments, like equities, leasing,
commodities, etc. If the tangible assets of the Fund are
more than 51% while the liquidity and debts are less than
50% the units of the fund may be negotiable. However, if
the proportion of liquidity and debts exceeds 50%, its units
cannot be traded in according to the majority of the
contemporary scholars.

Shariah compliant shares

The Religious Supervisory Council of BIMB
started the initiative to issue a list of Shariahcompliant securities since 1993.
May 1996-Shariah Advisory Council (SAC) was
established to advise the Commission on Shariah
matters in ICM.
Starting April 1999 -the task of preparing the list
of approved securities has been transferred to
the newly-formed Shariah Advisory Council
(SAC) of the Securities Commission of Malaysia.
Investing in Bursa Malaysia is permissible if the
investment are shariah compliant.

Criteria for shariah compliant:

The list of Shariah-compliant securities identifies
Bursa Malaysia-listed companies whose activities
conform to the Shariah criteria established by the
SAC. (Source: Securities Commission handbook 2007)
Companies should NOT include:
Financial services based on riba (interest);
Gambling;
Manufacture or sale of non-halal products or related
products;
Conventional insurance;

Criteria for shariah compliant:

Entertainment activities that are non-permissible
according to Shariah;
Manufacture or sale of tobacco-based products or
related products;
Stockbroking or share trading in Shariah noncompliant securities; and
Other activities deemed non-permissible
according to Shariah.

Additional criteria:
For companies with activities comprising both
permissible and non-permissible elements,
the SAC considers two additional criteria:
1)The public perception or image of the company must be
good; and
2) The core activities of the company are important and
considered maslahah (public interest) to the Muslim
ummah (nation) and the country, and the nonpermissible element is very small and involves matters
such as ` umum balwa (common plight and difficult to
avoid), `uruf (custom) and the rights of the non-Muslim
community which are accepted by Islam.

Islamic Capital Market

Islamic Capital Market

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.

Capital Market Products

Various capital market products are available for
Muslims to invest and transact in the ICM.
The products include:
Shariah-compliant Securities,
Sukuk ( Islamic bond),
Islamic unit trusts,
Shariah indices,
Warrants / Call warrants and
Crude Palm Oil futures contract.

Bursa Malaysia

Introduction
A stock market index represents a group of counters
performances that have been selected based on
certain criteria set by the stock market officials.
Stock market indices are used as indicators for the
performance of the stock market as a whole.
Bursa Malaysia computes an index for each of the
main sectors traded on the exchange but the most
widely followed, is the Kuala Lumpur Composite
Index (KLCI).

Islamic Index
The Islamic index serves to guide Muslims
investors especially to buy shares that are
Shariah-compliant and approved securities.
E.g.
KLCI Shariah Index (KLSI) -1999
Rashid Hussin BHD Islamic Index (RHB
Islamic Index)-1996
Dow Jones Islamic Market Index -1995

Shariah-approved securities
As of 27th.May, 2007, the KLSI included a
total of 875 (more than 80%) Main Board
shares that were on the list of Securities
Commissions Shariah-approved securities
and the total increased.

Future Market
Rosly (2005)- suggests that the future of an
Islamic equity market will depend on the
greater participation of Islamic bond issues
and bank equity financing so that the capital
structure has zero interest-bearing debt
content.
Companies looking for capital should be
given incentives to use equity rather than
interest-bearing bonds. This can be done by
treating dividend payouts as a tax-deductible
expense.

Future Market
An Islamic financial system requires several vital
elements to qualify as a viable system, i.e.: A large number of players
A broad variety of instruments and
An Islamic Financial legal act or jurisdictions
A sufficient Islamic money and capital market
activities
A support from the government
An Islamic financial system must also reflect the
socio-economic values in Islam, and must be
Islamic in both substance and form.