Gaining a Practical Understanding of
Islamic Capital Markets
in Private Finance Initiatives
Prof. Dr. Mohd. Ma’sum Billah
www.drmasumbillah.blogspot.com
© ABF- JW Marriot, KL
Preview
Islam is a complete religion and the practical way of life
Financial system is a root of strength for one country over the other
An existing financial system should be revised in order to regain
competitiveness and strength in the market
The emergence of Islamic Financial System can be the best
medium for Muslim countries to fulfill the above mentioned objective
In Malaysia, the Islamic Capital Market has developed particularly
to promote more transparent and just capital market system as
according to the Shari'ah rulings
Framework Of The Islamic
Capital Market In Malaysia
Globally, Islamic Capital Market is developing rapidly with 52 global funds
and 21 equity funds
In Malaysia, Islamic Capital Market started in 1960s when the first equity
financing was done by Tabung Haji
The financial system of a country is a medium where two parties which need
each other can be met and fulfills their economic needs
The Deficit units, as a name implies, is an individual, corporation or
government agencies plan to execute a particular activity, economic
projects and needs a working capital from the other party
The Surplus unit is an individual, corporation or government agencies in
excess of money and capable to lend and invest some of them to the others
Framework Of The Islamic
Capital Market In Malaysia
In Malaysia, the Islamic Capital Market comprise of primary and
secondary market
In primary market, new issue of Government Islamic Securities and
Islamic Corporate Securities are offered to the public and
institutions
In the Secondary Market, Islamic Government Papers and Islamic
Corporate Securities are being traded.
Framework Of The Islamic
Capital Market In Malaysia
The financing method can be done in two ways; leverage/debt or
equity/shares
According the Shariah rulings, financing by leverage must be done
by mutual ‘akad’ or an agreement
Example of the allowable in the Islamic Principles framework is Al
Bai Bithaman Ajil (deferred sales price), Bai Al Murabahab (sales
with agreeable additional profit), Bai Al Istisna (sales by broking),
Bai Al Inah (refinance of assets) and Al Narah (hire purchase)
On the other hand, the Islamic Capital Market financing by equity
can be done as according to the agreement which are based on the
Al Mudharabah (profit sharing) and Al Musyakarah (profit and loss
sharing).
All in all, the term Islamic Capital Market is a combination of the
size of market for Debt Security and Equity Security which are
based on the above principles.
ROLE OF SECURITIES
COMISSION
set up under the Security Commission Act 1993 which is responsible to
regulate, supervise and monitor all the activities within the market
institutions, which includes stock exchanges, clearing houses and licensees
under the SIA 1983 and FIA 1993
One of the important agenda by the commission is the development of the
Islamic Capital Market
This plan aimed to establish Malaysia as an international Islamic Capital
Centre.
In order to meet their obligation, Security Commission has taken two steps
namely to provide necessary infrastructure for research, discussions and
dialogue and develop thus further strengthened the market by implementing
specific efforts
These steps are namely to establish an Islamic Capital Market Unit, Islamic
Instrument Study Group and Syariah Advisory Council
ISSUES OF THE ISLAMIC CAPITAL
MARKET
Many issues have been arisen by the public, institution as well as the
practitioners as regard to the practical side of the Islamic Capital Market in
Malaysia due to different background, education and surroundings
Some of the issues that has been arises are regarding the financial products
are call warrants, crude palm oil contract and such
Call warrants can be defined as right rather than obligation to buy or to sell
a fixed quantity of assets, in a specific time frame
It can be further divided into two, to buy a call and to sell a call
Buying a call means the investor is bullish about the stock price and trying
to hedge the risk of increase in the stock price
ISSUES OF THE ISLAMIC CAPITAL
MARKET
The Islamic Capital Study Group (IISG) has agreed on the practice of call
warrants. They have passed a resolution to permit the use of call warrant referred to the Islamic jurisprudence outlined in the haq mainly and haq
tamalluk principles.
In the time of Prophet Rasulullah SAW, the similar practice of selling and
buying rights has been traced – refer to the story of Safwan b. Umayyah
and Caliph Umar r.a
As for the Shafie mazhab, the guidelines on what can be considered as a
property have been provided. According to Imam Al Suyuti, ‘Mal can be
categorised if it has value
ISSUES OF THE ISLAMIC CAPITAL
MARKET
Some opinion argued that the futures contract is in contrast with the syariah
rulings and shall be prohibited
These issues are namely is in line with the gambling practice, gharar or
uncertainty element exist, to buy something that not exist, speculation in
nature and no exchange of goods in the transactions
However, these differences have been discussed by the Syariah Advisory
Council and on November 11, 1997, they have resolved that the crude palm
oil contract is permissible under the syariah principles
In Malaysia, only commodity contract are being traded that is the crude
palm oil contract
Any futures contract mean setting an agreement to buy and sell a
commodity in the cash market in a specified quantity in the future. This
financial product aimed to manage risks especially to help the crop
entrepreneurs from a risk of changing prices in palm oil
ISSUES OF THE ISLAMIC CAPITAL
MARKET
Firstly, a gambling elements does not occur in the trading activity because
the forces of demand and supply will most likely to determine the price
fluctuation within the market. On the other hand, gambling depends solely
on luck and not depending on the other factors.
The element of gharar means uncertainty in possessing goods which will
give profits
Future contract is one of the alternatives to minimise the losses.
This in referred to the Quranic Ayat which describes an aspiration not to
incur losses in the business. In Surah Al Fatir, verse 29, Allah SWT has
stated;
“For them, they secretly and openly hope for a commerce that will never fail
“.
ISSUES OF THE ISLAMIC CAPITAL
MARKET
Speculation which is detrimental and not fair to the public has become one
of the doubts in the crude palm oil business. It refers to the making profit
activities out of the price movements in the market. In fact, it can be divided
into two that are speculation with knowledge and without knowledge
To illustrate, consider a company anticipate that there is a likelihood that the
price of rice will increase due to a particular events / season. So, they are
bullish about the increase in the price for rice in the future. So, they buy the
future contract as per current in order to avoid any price increment in the
future.
Furthermore, the issue of no exchange of goods or ‘iwadh. In future
contract, no purchase of goods in physical form takes place
The Syariah Advisory Council found that the crude palm oil increase
economic value to the traders in the sense that it hedges the price. As the
risk can be reduced, it helps the farmers to improve their living standard
indirectly
ISSUES OF THE ISLAMIC CAPITAL
MARKET
To conclude, a future contract can be allowed. However, some elements
such as riba/usury should be prohibited. As an implication to this, a trader
particularly can manage the risk better
CONCLUSION
By engaging in the capital market, the government as well as the private
sector can work together to improvise the economy through wealth creation,
development strategy and creating more job opportunities to the people
Next, identification of races by economic sector can be gradually abolished
Next, identification of races by economic sector can be gradually abolished
All in all, an establishment of a successful of Islamic Capital Market will be
succeed if all party take a significant role, through discussions, new ideas
and continuous effort to improve the market
THANK YOU
Wassalam