Introducing social responsible investment sri sukuk in malaysian market (1)


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Introducing social responsible investment sri sukuk in malaysian market (1)

  1. 1. Introducing Social Responsible Investment (SRI) Sukuk Funds in Malaysian Market Muhammad Quastan Alhadi Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Shah Alam, 40450, Malaysia Abstract: The growing importance of SRI in the investment arena has resulted in considerable academic interest in the performance of socially responsible equity mutual fund. Recently the introduction of Social Responsible Investment (SRI) Sukuk had been announced by Malaysian Prime Minister, Dato Seri Mohd Najib Bin Tun Abdul Razak in the parliament during the presentation of Budget 2014. The SRI Funds is expected to be available in Malaysian market in the near future. However, the implementation of the SRI fund in Malaysia is an ambiguous action since the SRI fund is still new and launching SRI Sukuk would be the first fund of it kind ever launch in Malaysia. The aimed of this paper are; i) to examine the need of introducing (SRI) Sukuk in the Malaysian market, ii) to identify the benefit of SRI Sukuk and, iii) to suggest the important thing to be included in the SRI Sukuk framework. The research methodology of this paper will be using literatures from several authors as the references of the study to understand and to conclude the case. Findings of this paper will give us a clear understanding on SRI Sukuk and tell us the significance of introducing SRI Sukuk funds in the market, the benefit and important thing to be included in the SRI Sukuk framework. The motivation of the study is to provide a clear understanding of SRI Sukuk and to suggest the best way in implementing it. The paper is originally based on the author’s reading and understanding from literatures. Keywords: Social Responsible Investment (SRI), Sukuk (Islamic Bond), Financial Funds _________________________________ Author Tel: +6-013-7554107 / +6-012-7909396 Email address:
  2. 2. 1. INTRODUCTION In 25th October 2013, Bernama verbalized that Securities Commission (SC) will introduce the Framework of Convivially Responsible Sukuk Instrument or Gregarious Responsible Investment (SRI) Sukuk to finance sundry sustainable and responsible investment initiatives, Prime Minister Datuk Seri Mohd Najib Tun Abd Razak verbalized today. He verbally expressed that Malaysia's position as a bellwether in the Islamic capital market is an advantage to magnetize funds and issuance of securities. To enhance global competitiveness, efforts will be intensified to promote the country as a market for SRI, he verbalized when tabling Budget 2014 in the Parliament. In addition, the expected SRI Fund establishment is to be invested in listed companies which will demonstrate high accountability, transparency and sustainability, including inclusiveness in diversity encompassing gender, age and ethnicity. "For a commencement, Valuecap will allocate RM1 billion to invest in companies that score high on the Environmental, Gregarious and Governance Index (ESG). I trust this wills encourage more companies to show high commitment towards gregarious responsibility," verbally expressed Najib, who is additionally the Finance Minister. 1.1 Development History of SRI The unclear of responsible investment were found in various religious constitutions. The earliest concrete reference to investment allocation predicated on extra-financial criteria is found in the Quaker kineticism, and their avoidance of investments in slavery in the 17th century. The first responsible investment fund, the US Pioneer Fund started in 1928, was stimulated by the avoidance era and misplaced investments in alcohol and tobacco. From the 1960s forwards, many of Europe‟s churches and religious groups accepted ethical screens and begin ethical funds adapted from their moral values.
  3. 3. All of this time, the concept of investment for assets gained was envisaged, investors have basis their investment culls on a variety of measures, involving either investments risk or collective advantages. Investment culls change in line with societal customs and values, where the custom enslave and children worker may have been ordinary in some period of human past, international customs now enjoin such practices. Likewise, as public stressed the causes and effects of climate evolution, the investment basis involved investors increasingly integrate many considerations into their investment. In the 2000s, investors cumulated the gregariously accountable aspect of investments with the notion of better improvement, mounting the notion of SRI from Gregariously Responsible Investment to Sustainable and Responsible Investment. Simultaneously, with evidence mounting that extra-financial information has financial impact, the Cumulated Nations backed Principles for Responsible Investments (PRI) were started at 2006. Some investors will seek to eschew certain products, whereas some will evaluate companies against a minimum standard. Some are motivated to incorporate ESG criteria by risk aversion, whereas some seek investments aimed at outperforming the market by capitalising on the ordinant dictation for sustainable products and solutions. Some investors seek environmental and/or convivial impact; some look for long-term (even intergenerational) stability of financial returns. Prevalent to all is the consideration of Environmental, Convivial and Governance concerns in the investment process. While the proliferation of SRI is first and foremost institution, as expert investors gradually increase the demand of extra-financial information from industries and their investment managers, this phase supple spiritually visually notices a range of SRI products accessible for trade investors. Today, SRI is an recognized industry, offering a diversity of focused and standardised products to both retail and institutional investors, Eurosif, (2012).
  4. 4. 2. LITERATURE REVIEW 2.1 Understanding Sukuk (Islamic Bond) There are differences between conventional and Islamic bonds (Sukuk) available in the market. These funds might look identically tantamount, but technically they had an abundance of differences and many more. Afore that, readers have to understand what Sukuk (Islamic Bond) is. Sukuk, plural of „Sakk‟ betokens “legal mechanism, deed or check”. Sukuk is the Arabic name for a financial documentation but may withal be assumed as Shariah-compliant „Bonds‟. Albeit Sukuk is normally described as Islamic bonds, it is more preponderant determined as an asset-predicated investment, as the investor owns a complete interest in a fundamental physical asset that balanced to his investment. Modernisation in Islamic finance has transmuted the dynamics of the Islamic financial industry. The need of Islamic finance funds have propagated in the previous years and have obtained universal recognition as a practical substitute to conventional financial products. Sukuk has developed as one of the most paramount mechanisms to raise finance in the market through Islamic structures. Aside from the conspicuous attractiveness to Muslim investors, Sukuk may withal appeal to conventional investors probing for attractively-priced instruments for expected income and profits from their capital. The claim personified in Sukuk is not just a claim to cash flow but an possession claim. Monies lifts by the issuance of the Sukuk notes are acclimated to invest in an underlying asset, a trust is affirmed over that meticulous asset and thereby the documentation holder will own a favourable interest in that asset in percentage to his investment. Therefore, the investor is permitted to the benefits that required, counting a percentage of the gain obtained by that asset. An added area that distinguishes Sukuk from conventional bonds from an investor‟s perspective is their (Sukuk) asset-backed nature. Opposing to the failure to pay in the payment of conventional bonds and the investors losing all their possessions, the built-
  5. 5. in protection feature of Sukuk being asset-backed plausibly secure the investors of their aptitude to regain a most part of their investment even if things go dreadfully off beam, as they will be facing an complete share in the possession of the Sukuk properties. There are some kindred characteristics amid Sukuk and conventional bonds. It always has fine-tuned term mellowness, bears a coupon (profit) and is tradable on the normal yield price. However, Sukuk is prearranged in such a way that the issuance is not an swap of documents for fund deliberation with interest as per conventional bonds. Instead, it is predicated on a switch of an accepted asset for some financial deliberation that sanctions the investors to make profits from the verbally expressed transaction, Zureena, (2008). 2.2 Objectives of SRI Sukuk There are several objectives of introducing SRI Bonds in the market, according Aviva Investors, (2010) “It offers you the opportunity to invest for more preponderant returns for yourself and the world around you. The SRI Bond Fund invests predominantly in Euro land regime fine-tuned interest bonds, but will supplementally hold overseas regime bonds when their yields offer the prospect of higher relative returns”. Next, The Cadiz Asset Management Convivially Responsible Investment (SRI) Bond Fund provides financial support to concrete infrastructure projects which target economic development in underdeveloped areas and communities. The Fund cumulates the dual objective of maximising investment performance by taking active duration and credit investment views, while contributing to the economic and gregarious development in South Africa, Cadiz Asset Management, (2013). According to Sanlam Investment Management, (2013) they verbally expressed that SIM SRI Bond Fund is a Convivially Responsible Investment (SRI) bond fund that strives to make a paramount contribution to gregarious and economic uplift through investments in listed fine-tuned income instruments. They withal mentioned that The Fund invests in fine-tuned income instruments (bonds and debentures) listed on the Bond Exchange of South Africa, together with rated listed Southern African Development Community
  6. 6. (SADC) member country bonds to provide long-term capital magnification and stable investment income, while promoting sustainable and responsible investing. From these literatures, we acknowledge that all of the SRI funds were betokened to avail gregarious environment development besides securing investors profit. These fund aimed to avail regime to develop underdeveloped region in the country utilizing the fund they received simultaneously to avail the living of the poor and needy. The fund is composed of the form of bond in order to secure the fund stability and amount. It is where bonds can secure an abundance of investment to be utilized by the regime and a promising return towards the investors.2.3 Basic features of SRI Sukuk SRI fund is an investment that is considered convivially responsible because of the nature of the business the company conducts. Prevalent themes for convivially responsible investments include eschewing investment in companies that engender or sell addictive substances (like alcohol, wagering and tobacco) and seeking out companies engaged in environmental sustainability and alternative energy/clean technology efforts. Gregariously responsible investments can be made in individual companies or through a gregariously conscious mutual fund or exchange-traded fund. SRI Sukuk is the fund that is utilizing Islamic contracts in the acquiescent that make it as one of the Shariah Compliance fund products. The fund is having immensely colossal kindred attributes on the objectives, uses and functions as the SRI Bond does. In general, religious investors wanted to eschew investments in companies involved in addictive substances and comportment: alcohol, tobacco and wagering. Some religions supple spiritually wanted to eschew weapons-making companies. Albeit there are still many convivially responsible investors that are guided by religion, many other investors aligned with SRI invest their fund in an environmentally focused manner. Recently, clean-tech investors (or green investors) have moved into the SRI arena as they probe for companies involved in clean energy or other technologies that balance the interaction between humans and the environment.
  7. 7. 3. FINDING AND ANALYSIS 3.1. The need of SRI Sukuk Authors had identified some major factors and reasons to describe the need on SRI Sukuk to be in the Malaysian market that includes; i) the need to keep up with global financial trends and, ii) the need to satisfy the increasing demands of halal funds in Malaysia 3.1.1. The need to keep up with global financial trends In order to keep Malaysian financial system updates, Malaysia need to update with foreign financial strategies. Predicated on the objectives of the exordium of SRI Bond‟s funds abroad, we acknowledge that SRI Bonds funds is able to avail to avail local economic magnification and due to that, Malaysian regime need to introduce SRI bonds funds in Malaysian market. Since there are no availabilities of current SRI funds either in conventional or Islamic contract in Malaysia the exordium of SRI Sukuk is very crucial and timely. “We can visually perceive that the involvement of many countries towards involvement on SRI bonds such as; Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherland, Norway, Poland, Spain, Sweden, Switzerland and Cumulated Kingdom”, Eurosif, (2012). But, the implementation of SRI in Malaysia would be different since it involves Islamic contracts in the acquiescent. Thus, it will be an incipient type of Islamic funds promulgated since the concept of Sukuk raised in Dubai few years ago by the Gulf Bond and Sukuk Association is Green Sukuk which is not cognate with SRI concept. 3.1.2. The need to satisfy the increasing demands of halal funds in Malaysia Majority of Malaysian citizens are Muslim where availability of Halal products and services is very essential. The introduction of SRI Sukuk was in line with the increasing demands and usage of Sukuk funds in the market.
  8. 8. Diagram 1: Number of Global Sukuk Issuance and its Volume The cross-border deal flows with Malaysia have grown steadily as issuers look to raise funds at affordable rates, in a stable currency, and under a regulatory environment that gives confidence to investors regarding investor bulwark and contract enforceability. The deal flow in Malaysia‟s Sukuk market is set to perpetuate as demand for Islamic instruments remains unshaken by global bond market volatility, with relatively stable yields within the Sukuk market being an emboldening factor for issuers looking to raise funds and engender market magnification. The country‟s sovereign benchmark Islamic issuances have adscititiously been able to remain lower than conventional regime securities in terms of yield, highlighting the vigorous demand for Islamic instruments and the ample market liquidity. Overall, the Sukuk market benefits from efficient price revelation mechanisms, such as when-issued trading, book building process and other innovative reference pricing accommodations, coalesced with a liquid secondary market and paramount market activity to afford investors transparent and precise market information that embolden investment, MIFC, (2013).
  9. 9. 3.2. The Benefit of SRI Sukuk Based on several literatures, the author had identified the benefit of having SRI Sukuk in Malaysian market; i) the convincing characteristic of SRI Sukuk and, ii) become a platform to encourage and assisting national development. 3.2.1 The convincing characteristic of SRI Sukuk to be used by the users Conventional bonds that yield interest, or riba, are of course prohibited under Shari‟a law. Besides, those who trade of conventional bonds are uncommonly scheme with what is genuinely being financed through the bond issue, which could take in actions and industries that are considered haram and prohibited such as the consumption or sale of alcohol. Companies that are highly influenced with bank liability may seek refinancing through issuing bonds, but such companies are not considered as blessed for Muslim investors. The purpose having bond traders normally is to create capital profits as finetuned-interest bond prices raise when patchy market interest rates fall. Bond trading is as a result largely about manipulating interest rate development and trading in paper that is conventionally unconnected to the value of any underlying asset. The major risk for holders of conventional bonds is of payments failure to pay, but this danger is regularly assessed exclusively on the substratum of credit rating, with the ratings agency relatively than the bond buyer estimating the risk. Therefore the bonds are look upon as mere pieces of paper with third parties estimating the threat and the purchaser, at best, only make a risk and return estimation without any indication to the business being financed. A number of Shari‟a philosophers, most extremely Muhammad Taqi Usmani, have hassled that one of the distinctive characteristics legitimizing Islamic finance is that it must engage the funding of trade in, or the engenderment of, authentic assets. Merely funding the purchase of financial securities would occupy second order financing like to lending for derivatives, the following the gearing being theoretically and incrementing hesitancy, or gharar. Hence, with murabaha, commodities are purchased on behalf of a client and resold to the
  10. 10. client, the transient possession of the product mitigating the financier‟s mark-up. Istisna‟a includes the financing of developing capacity through pre-engenderment payments, but these relate to development or equipment purchases where genuine capacity can be recognized, Rodney Wilson, (2010). The most supreme thing in this constituent is there are no other funds that possessed the characteristics of SRI Sukuk. 3.2.2. SRI Sukuk could become a platform to encourage and assisting national development Every country has their own approaches and methods in engendering funds to spend for the country‟s development. Mundane approaches used to engender country‟s income from their citizens were; income tax, properties tax, conveyances taxes and many more. The implementation on SRI Sukuk will authentically involve both regime and citizens towards country‟s development. From precedent literatures, predicated on the objectives of SRI bonds we acknowledge that SRI bonds avails nation to raise funds through gregarious responsible projects where the return is promising. The exordium of SRI Sukuk will be a good platform for Malaysia to accumulate immensely colossal funds to work on the country‟s development fixating on rural area which simultaneously bring good opportunities to investors to accommodate their country and contributed integrated value to the ESG index for the companies. Besides, it involved Islamic contracts which are the most preferable funds in Malaysia. This is inordinately fascinating, because indirectly SRI Sukuk engender the sense of belonging of the citizens to the country as they invest in SRI Sukuk funds besides relishing payments and profit received from their investment. The SRI Sukuk withal contributed to a sum of adscititious value of Environmental Convivial Governance (ESG) index for company‟s evaluation.
  11. 11. It is a policy for a company to have their own Corporate Convivial Responsibilities (CSR) program in the schedule. Investing in SRI Sukuk will facilitate the orchestrating for the company and less expenditure of mazuma, time and effort will incur since fine-tuned procedures and framework was yare by SC Malaysia. 3.3. The important thing to be considered in SRI Sukuk framework Constructing funds framework and legislation is very crucial before it can be market to the consumers. It requires several justifications and pilot tests marketing before having a complete knowledge on the product they are developing. Different product requires different elements of considerations in developing the product which depend on the area and sectors of industries. Based on the reading, authors have identified several consideration and important things to be include in the development of SRI Sukuk; i) All procedures and regulations must refer to Legal infrastructure in Malaysia, ii) Islamic compliant funds contracts 3.3.1. All procedures and regulations must refer to Legal infrastructure in Malaysia, Based on Islamic Finance and Banking Legal Framework Securities Commission Malaysia there are several legal infrastructures that need to be look at in Malaysia; a) Islamic Banking Act 1983 (IBA) b) Banking and Financial Institutions Act 1989 (BAFIA) c) Central Bank of Malaysia Act 1958 3.3.2 Islamic compliant funds contracts Shariah-Compliant Funds have expanded in popularity only recently, albeit the concept was first developed in the tardy 1960s. The concept requires considerable effort to implement, since much attention must be paid to
  12. 12. compliance with the Shariah principles, both at the fund operations level and for all underlying investments. Shariah-Compliant funds are precluded from investing in companies which derives income from the sales of alcohol, pork products, pornography, wagering, ordnance or weapons. Shariah sanctions for a modicum of an investment's income to emanate from proscribed sources, though a Shariah-Compliant fund cannot profit from this income. 4. CONCLUSION The exordium and implementation of SRI Sukuk in Malaysian market is essential and it should be done in the most proximate time since the desideratum of it is very crucial. Readers should after this acknowledge the objectives of SRI mazuma, explicated on Sukuk generally and general features of SRI Sukuk. The implementation of SRI Sukuk is very crucial since it satiated lots of need in several circumstances. Forsaking SRI Sukuk funds in Malaysian market would make the regime loss their opportunities to remain as the main hub of Islamic financial product pioneer in the market in juxtaposition of relishes the other benefits of having SRI Sukuk in the market. This paper had prosperously highlighted the desiderata, benefits and consequential things to be considered in the implementation of SRI Sukuk. The desideratum of SRI Sukuk is due to the the desideratum to keep up with global financial trends and the desideratum to gratify the incrementing injuctive authorizations of halal funds in Malaysia. In additament, we withal acknowledge some benefits of having SRI Sukuk in the market where the persuasively relevant characteristics of SRI Sukuk make it as targeted preferable funds in the market that enhearten Islamic financial magnification. Then, the most intriguing part is the benefits of SRI Sukuk where it could become a platform to embolden and availing national development that involve both regime and citizens concurrently. Not only that, there are several things that need to be considered in developing SRI Sukuk framework before it goes into the market. After the screening and detail development process, SRI Sukuk shall be implemented and yare for the Malaysian market. The implementation is timely since there are need and benefit of it.
  13. 13. 5. REFERENCES ACCA. (2013). Islamic finance . theory and practical use of sukuk bonds, 1-9. AVIVA INVESTORS . (2010). SRI BOND FUND. 1. Business Times, BERNAMA. (2013). SC to introduce SRI Sukuk framework. Kuala Lumpur: The New Straits Times Press (Malaysia) Berhad. Cadiz Asset Management. (2008). SRI BOND FUND. 1. Eurosif. (2013). European SRI Study 2012. 1-68. Latif, Q., & Dey, D. (2006). Introduction to Sukuk . 1-5. Malaysian International Islamic Finance Centre (MIFC). (2013). GLOBAL SUKUK REPORT . 1-4. Mohamed, Z. B. (2008). Sukuk. A Brief Introduction, 1-2. Sanlam Investment Management. (2010). SIM SRI BOND FUND FLASH FACT. 1-2. Securities Comission Malaysia. (2012). GUIDELINES ON SUKUK . 1-67. Wilson, R. (2008). Islamic Bonds. Your Guide to Issuing, Structuring and Investing in Sukuk, 1-15.