MULTIMEDIA UNIVERSITY

BFN2224
FINANCIAL MARKETS & INSTITUTION
ASSIGNMENT

Trimester 1, Session 2017 / 2018

Assignment 1: Islamic Capital Market

No. Student ID Student Name Section

1. 1142700665 MUHAMMAD NAIF NAQIUDDEEN BIN MOHD B01

NADZARI

2. 1151103063 AIZZAT NAZRAN BIN NAZEER KHAN B01

3. 1151101874 MUHAMMAD HASIF BIN MOHAMAD EZAM B01

4. 1151101470 MOHAMMAD MUNIR BIN MOHAMMAD HUSNI B01

5. B01

PREPARED FOR:
DR. RIDZWAN BIN BAKAR
REPORT SUBMISSION DATE:
Table of Contents

1.0 Introduction ............................................................................................................................................. 3

2.0 Definition ................................................................................................................................................ 4
3.0 History .................................................................................................................................................... 5
4.0 Market Analysis ...................................................................................................................................... 6
4.1 Islamic Capital Market Products ......................................................................................................... 6
4.1.1 Shariah-complaint Securities ....................................................................................................... 7
4.1.2 Sukuk (Islamic Bond) .................................................................................................................. 7
4.1.3 Shariah-based Unit Trust Funds ................................................................................................... 7
4.1.4 Islamic Exchanged Traded Funds (ETF) ..................................................................................... 7
4.1.5 Islamic Real Estate Investment Trusts (REITs) ........................................................................... 7
4.2 Differences between Islamic and Conventional Capital Market ......................................................... 8
4.3 ........................................................................................................................................................... 10
5.0 Growth of The Market .......................................................................................................................... 11
6.0 Prospect and Challenges ....................................................................................................................... 12
7.0 Conclusion ............................................................................................................................................ 13
1.0 Introduction
2.0 Definition

What are Capital Market

Capital markets are markets for buying and selling equity and debt instruments. Capital markets
channel savings and investment between suppliers of capital such as retail investors and
institutional investors, and users of capital like businesses, government and individuals. Capital
markets are vital to the functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets, where new stock and
bond issues are sold to investors, and secondary markets, which trade existing securities.

What are Islamic Capital Market

Islamic Capital markets are any market in which Shariaa compliant securities are traded. Islamic
Capital markets includes Shariaa compliant stock and/or sukuk markets. Companies and
governments use the Islamic Capital markets to raise funds for their operations or expand
ongoing activities. Investors role are to purchase Shariaa compliant securities in order to extract
a return and earn profit on the securities. Markets in Muslim States such as Bursa Malaysia
(leading market by volume) and Saudi Arabia (Tawadul) and UAE (Dubai, Abu Dhabi and
Nasdaq Dubai) becoming increasingly important and will increase as they develop. Major
international primary markets such as IPOs and Sukuk may be placed with investors through
underwriters, and secondary markets, where all subsequent trading takes place, such as the
London Stock Exchange, Irish & Luxembourg stock exchanges not just a Muslim world
phenomena.
3.0 History
4.0 Market Analysis

4.1 Islamic Capital Market Products

The modern Islamic financial products and services are developed using two different
approaches. The first is identifying and modifying existing conventional products and services to
comply with Shariah principles. The second approach is the innovation of new products and
services that involves the application of various Shariah principles. Figure 1 illustrates variety of
financial products that being offered in the Malaysian Islamic Capital Market:

Islamic Capital
Market Products

Islamic Real Estate

Shariah-compliant Sukuk (Islamic Shariah-based Unit Islamic Exchanged
Investment Trusts
Securities Bond) Trust Funds Traded Funds (ETF)
(REITs)

Figure 1: Islamic Capital Market Products

As can be seen from Figure 1, the Malaysian Islamic capital market products are mainly divided
into five categories of Shariah compliant securities, Sukuk (Islamic Bond), Shariah-based Unit
Trust Fund, Islamic Exchanged Traded Funds (ETF) and Islamic Real Estate Investment Trusts.
4.1.1 Shariah-complaint Securities
The most popular product is the securities issued by listed companies on Bursa Malaysia, which
comply with the Islamic criteria promulgated by the Securities Commission. Shariah compliant
securities include those ordinary shares, warrants and transferable subscription rights issued by
companies that comply with the Islamic criteria promulgated by the 19 Securities Commission.
Those companies are known as Shariah approved companies or Shariah compliant companies.
There are a lot of choices available at Bursa Malaysia on the selection of Shariah-compliant
stocks across diversified industries for broader and deeper investment portfolios.

4.1.2 Sukuk (Islamic Bond)

Sukuk is a form of financial note, which represent value of asset. The issuance of Islamic bonds
require an exchange of a Shariah-compliant underlying asset for a financial consideration
through the application of various Shariah principles such as ijarah, mudharabah, murabahah,
mushakarah, bai bithaman ajil and istisna17. Sukuk are being issued in Malaysia in both
Malaysian Ringgit and foreign currencies. Therefore, this offers variety investment opportunities
to all investors, either local or foreign investors and also for local and international entities that
seek for listing on Bursa Malaysia. Among the five major Islamic Capital Market products,
Sukuk is the most preferable choice for corporations to raise fund.

4.1.3 Shariah-based Unit Trust Funds

The Shariah based unit trust funds are collective investment funds that offer investors the
opportunity to invest in a diversified portfolio of Shariah compliant securities and managed by
professional managers in accordance with the Shariah principles.

4.1.4 Islamic Exchanged Traded Funds (ETF)

Islamic Exchanged Traded Fund are funds traded on Bursa Malaysia which track indices based
on stocks that have been classified as Shariah compliant listed equities 16. Among the benefits of
investing in ETF are; diversification as ETF invests in a portfolio of securities, low minimum
investment as ETF is traded in board lot and liquidity as ETF is continuously traded on Bursa
Malaysia.

4.1.5 Islamic Real Estate Investment Trusts (REITs)

Islamic Real Estate Investment Trust is defined as a collective investment vehicles that pool
money from investors and use this fund to buy, manage and sell real estate. At present, there are
18 REIT being offered in Malaysia.
4.2 Differences between Islamic and Conventional Capital Market

The underlying principle of Sharia forms the basis of difference between Islamic capital markets
and conventional capital markets. Broadly, according to the Sharia dictum, conventional
transactions are permissible if the prohibited elements are removed from them. Unlike
conventional capital markets, Islamic capital markets are ideally characterized by the absence of
interest-based transactions (riba), doubtful transactions and stocks of companies dealing in
unlawful activities (haram) or items. It should also be free from any form of unethical or
immoral transactions, such as market manipulations, insider trading, short selling, and even
excessive exposure of ones financial position by contra deals that cannot be backed by sufficient
funds. The core differences in the Islamic capital market vis--vis conventional capital markets
can be summarized as follows:

Characteristics Islamic Capital Market Conventional Capital Market

Sharia framework
Prohibited transactions
Financing
Islamic capital market Conventional capital market
products are designed based not based on religious laws or
on Sharia law-Sharia guidelines
scholars ensure adherence to
Islamic laws and provide
guidance.
Islamic capital market Except for money laundering
restricts stocks of companies and the financing of criminal
dealing in unlawful activities activities, these activities are
such as gambling, pork, permitted
alcohol, tobacco,
pornography and arms &
ammunition
Islamic banks provide equity Venture capital companies
capital to a project or venture. and investment banks which
Losses are shared on the basis typically take equity stakes
of equity participation while and management control of
 profits are shared on a pre-
agreed ratio
Prohibition of interest Islamic capital market
restricts charge of interest
Sukuk-Bond market Sukuks issued are backed by
underlying Sharia-compliant
asset
an enterprise for providing
start up finance
Charge of interest is not
restricted
Bonds issued are in the form
of debt paper that represents
underlying debt payable at
maturity. It follows the
principle of interest-based
lending
4.3
5.0 Growth of The Market
6.0 Prospect and Challenges
7.0 Conclusion