Islamic Financial Market of Malaysia


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  • Both concepts involve excessive risk and are supposed to foster uncertainty and fraudlentbehaviour.Therefore the use of all conventional derivate instruments is impossible in Islamic banking.
  • Bursa Malaysia is the exchange holding company in Malaysia. It operates a fully integrated exchange, offering the complete range of exchange-related services including trading, clearing, settlement and depository services.The Shari'ah Advisory Council (SAC) approves and updates shares classified as Shari'ah compliant Securities, listed on Bursa Malaysia. The list is updated twice a year.Financial services based on riba (interestGambling and gaming;Conventional insurance;Alcohol;Tobacco;Life insurance
  • Insurance as a concept does not contradict the practices and requirements of Shariah. However, Muslim jurists are of the opinion that the operation of conventional insurance does not conform to the rules and requirements of Shariah.Takaful is an insurance concept in Shariah whereby a group of participants mutually agree among themselves to guarantee each other against a defined loss or damage that may inflict upon any of them.Tabarru’ Literally means “donation or contribution”. It involves benefits paid by one person to another person without receiving anything in exchange. Tabarru serves to enable Takaful to operate without exposure to Gharar or Maisir.The sharing of profit or surplus that may emerge from the operations of takaful is made only after the obligation of assisting the fellow participants has been fulfilled.
  • Al-Mudharabah- Al-mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business.
  • Takaful sector has been growing at an average of 17% p.a. since 2001 and by end 2007 total contributions were estimated at USD931 million. (BNM, Islamic Finance News)Growth of takaful is driven by demand for mortgage, motor, medical and education plans.In the same period total assets of Takaful are estimated to amount to USD1.7 billion.
  • Guaranteed Investment CertificateIslamic accepted bills and Islamic debt
  • Islamic Financial Market of Malaysia

    1. 1. Islamic Financial System (Shariah Rule)• A financial system which is based on Islamic principles and values (shariah).• Characterised by –o Elimination of interest (Riba).o Ensures a profit sharing mechanism in the system.o Prohibition of speculative transactions (Gharar).o Prohibits investing in businesses that are considered unlawful (haraam) (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values).o Shariah prohibits what is called "Maysir”, i.e. being involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future
    2. 2. Islamic laws on trading• The Quran prohibits gambling (games of chance involving money).• The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).• There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mothers womb etc.)• Jurists have sought many complete definitions of the term.• They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible)• While trading in bayu al-ghasar (non-minor risk) is deemed to be haram
    3. 3. Types Of funds
    4. 4. Murabaha• They are similar to development funds, also referred to as ‘cost-plus’ financing, where a fund will buy goods and resell them to a third party at a given price.• The price is made of the cost of goods plus a profit margin.• Cost and margin are agreed in advance.
    5. 5. Ijara• Funds that acquire and keep ownership of an asset (real estate, machinery, vehicles or equipment) and then makes profits by leasing it out in return of a rental payment.• The fund is responsible for the management of the asset and will normally receive a management fee.• The leased item must be used in a Halal manner.
    6. 6. Islamic equity funds• Islamic equity funds invest in common shares in companies engaged in halal business.• Companies are also screened in order to check for Shariah compliant accounting principles.• Because of the limited pool of companies the funds can invest into, equity funds can have higher volatility compared to similar funds in the same space.• Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system.• Currently, there are approximately 100 Islamic equity funds worldwide.• The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum
    7. 7. Islamic equity funds• Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system.• Currently, there are approximately 100 Islamic equity funds worldwide.• The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum.• With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched.• Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.
    8. 8. Islamic equity funds• Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors.• Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series.• The Web site monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide
    9. 9. Commodities• Commodities funds generate profits by buying and reselling Halal commodities.• Because of the restrictions on the use of derivatives, commodities fund make use of two types of Shariah approved contracts:• Istina’a- It’s a contract where the buyer of an item funds upfront the production of the item. A detailed specification of the item has to be agreed before production starts and the cost of production has to be paid in full when the contract is agreed.• Bay al-salam- It’s similar to a forward contract where the buyer pays in advance for the delivery of raw materials or fungible goods at a given date. The delivery price of the contract is calculated at spot price minus a discount to compensate the buyer of the credit risk for the upfront payment.
    11. 11. Malaysia at a glance • Population – 28.3 m Muslim – 16.4 m (58%) • Strong GDP growth 3rd quarter 2011 5.4% • Low inflation
    12. 12. Malaysian Islamic financial systems• Comprehensive Islamic financial system covering all financial sectors – operating in parallel with conventional financial system• Diversities of players – 12 full-fledged Islamic banking institutions – 2 domestic Islamic banks – 3 full-fledged foreign owned Islamic banks – 7 Islamic banking subsidiaries – 9 takaful operators
    13. 13. Classification of Financial Market of Malaysia Debt Market • Sukuk Money Market • Islamic Interbank Money Market Equity Market • i-ETF • i-REIT • Bursa Suq al Sila
    14. 14. Malaysian Equity market• Bursa Malaysia (previously known as Kuala Lumpur stock exchange) is the stock exchange of Malaysia.• Islmaic Products offered by Bursa Malaysia – REITS – i-ETFs – Bursa suq al sila.
    15. 15. Real Estate Investment Trusts (REITs)• REITs are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities.• Tax benefits in taxable jurisdictions, attracting foreign investors.• High cash dividends relative to the market
    16. 16. Investing in Islamic REITs - Issues• High distributions of annual profit and lower reinvestment leads to a slower growth rate.• Although the business tends to be a fairly stable one, REITs are not without risk.• Sharia restrictions might restrict investment universe.
    17. 17. Malaysian Shari’a-Permissible Investments for I-REITs• Real Estate• Real estate related assets• Single Purpose companies• Liquid Assets• Non real estate-related assets• Asset-backed securities
    18. 18. Islamic ETFs• Similar to conventional ETFs• Main point of difference: Benchmark Index• Islamic Benchmark Index comprises of Co.’s which are Shariah compliant.• Appointment of Shariah Adviser/ Committee
    19. 19. Structure of Islamic ETF
    20. 20. Advantages for Investing in i-ETFs• Diversification• Lower expense ratio• Lower transaction cost• Transparency• Shariah-compliant investment
    21. 21. Bursa suq al sila• Bursa Suq Al-Sila is a commodity trading platform specifically dedicated to facilitate Islamic liquidity management and financing by Islamic banks.• Initiated by: – Malaysia International Islamic Financial Centre (MIFC) – Bank Negara Malaysia (BNM), – the Securities Commission Malaysia (SC), – Bursa Malaysia Berhad (Bursa Malaysia).
    22. 22. • Fully electronic web based platform providing industry players with an avenue to undertake multi commodity and multi currency trades from all around the world.• In the initial stage, crude palm oil was used as the launch commodity. Eventually, this will expand to other Shari’ah approved commodities covering both soft and hard commodities.• The first day of trade saw transactions worth RM200 million being exchanged on 20 july 2009.
    23. 23. Debt Markets
    24. 24. Sukuks• Sukuks are Islamic bonds which have similar characteristics with conventional bonds.• Asset backed and free from usury (interest).• Linked to the returns and cash flows of the financing to the assets purchased or returns from the assets purchased.• Sukuk based concepts in malaysia – Mushrakah (normal partnership agreement) – Murabaha (contract of cost plus margin) – Ijarah (leasing) – Istisnaa (pre delivery and leasing)
    25. 25. Sukuk structureSize of sukuks approved in 2010 21% mushrakah istisnaa 11% ijarah 58% murabahah 10%
    26. 26. Sukuk programmes and issuance in 2010Issuer Sharia principle Amount Amount (US$ million) (RM million)Cagamas Bhd Multiple 17,466 60,000+Binaring GSM Sdn Bhd Musharakah 4,473 15,366Telekom Malaysia Bhd & Ijarah 872 2,997Hijrah Pertama BhdKhazamah nasional Bhd Musharakah 841 2,890MISC bhd Murabahah 728 2,500
    27. 27. Equity Markets
    28. 28. Bursa Malaysia• Shariah Compliant Listed Equities• Guidelines for Sharia compliant Companies• 825 Shariah complaint securities• 89% of Bursa Malaysia• Market capitalisation as at 31 March 2011: USD 429 billion• Islamic Equity Indices –• FTSE Bursa Malaysia EMAS Shari’ah Index (FBM EMAS Shari’ah)• FTSE Bursa Malaysia Hijrah Shari’ah Index (FBM Hijrah Shari’ah)
    29. 29. Non Depository Market
    30. 30. Takaful• Meaning• Concept of Tabarru• Profit Sharing
    31. 31. Types of Takaful BusinessFamily Takaful Business General Takaful Business
    32. 32. Family Takaful Business• Islamic Life Insurance• Combination of long-term investment and mutual financial assistance scheme• Objectives: » to save regularly over a fixed period of time; » to earn investment returns in accordance with Islamic principles; and » to obtain coverage in the event of death prior to maturity from a mutual aid scheme.• Examples: Individual family takaful plans;Takaful mortgage plans; Takaful plans for education; Group takaful plans; and Health/Medical takaful.
    33. 33. General Takaful Business• Short term• Surplus Sharing: On the basis of principle of al-Mudharabah• Examples: Fire Takaful Scheme; Motor Takaful Scheme; Accident/Miscellaneous Takaful Scheme; Marine Takaful Scheme; and Engineering Takaful Scheme.
    34. 34. Growing Takaful Market• Takaful sector has been growing at an average of 17% p.a. since 2001• Malaysia is largest player.• Takaful contribution in Muslim countries constitute only 1% of total global insurance premiums.• Muslims account for 22% of worlds population• Driven by demand for mortgage, motor, medical and education plans.
    35. 35. Money Markets
    36. 36. Islamic inter-Bank Money Markets (IBMM))• Short term itermediary based on Sharia principles• Used to match the funding requirements• Covers 2 aspects: » Interbank trading of Islamic financial instruments; and » Mudharabah Interbank Investments ("MII")
    37. 37. Interbank Trading• Trade in Islamic financial instruments• GIC are non-tradable but the players may exchange the papers among themselves
    38. 38. Mudharabah Interbank Investments• Based on Mudharabah (profit-sharing)• Period: Overnight to 12 months
    39. 39. Malaysia – A Global Hub for Islamic Markets
    40. 40. A Global Islamic Capital Market •Market capitalisation of shariah compliant stocks accounted for RM705.05 billion or 63.74% of total domestic market capitalisation as at December 2007 •Compared to the developing GCC & MENA stock markets, Bursa Malaysia provides more choice in terms of sectoral opportunities thereby providing better risk diversificationTop 10 Companies % of Total Market Size of Malaysia’s Equity MarketCapitalization 1000 800 Billions 886 900 855 853 700 Saudi 800 778 699 600 UAE 700 677 636 Bahrain 600 585 500 544 Malaysia 500 400 US 400 300 UK 300 200 China 200 100 1000% 20% 40% 60% 80% 100% 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007*(Source: Bursa Malaysia, Total Listed Companies Market ValuationE&Y Islamic Funds and Investment Report 2007) (Source: Bursa Malaysia, Securities Commission) * 2007 figures Number of Companies as at Nov 07, Market Cap as at end Dec 07
    41. 41. A Global Islamic Capital Market•As of December 2007, approximately 66% of new Islamic fixed incomesecurities globally were issued in Malaysia. The remaining global issuesare from the Middle East / GCC and offshore jurisdictions. As at December 2003 As at December 2007 Malaysia Malaysia 90% 65.80% Bahrain 4% Indonesia UAE Saudi Arabia Jersey 0% 8.54% Saudi Arabia 8.18% Caymans Others 5.97% 2% Qatar 7.67% Others 3.84% 3% 1%(Source: The Islamic Capital Market Task Force (IOSCO) Report, ISI Emerging Markets, Bloomberg)
    42. 42. Islamic Papers have always Outperformed Conventional Papers in MalaysiaRinggit Bonds with maturities of 1-year and above Ringgit Bonds with maturities of 5-years and above155 155 Islamic Conventional Islamic Conventional145 145135 135125 125115 115105 10595 95 Mar-04 Mar-05 Mar-06 Dec-03 Dec-04 Dec-05 Jun-04 Jun-05 Jun-06 Mar-04 Mar-05 Mar-06 Dec-03 Dec-04 Dec-05 Jun-04 Jun-05 Jun-06 Sep-03 Sep-04 Sep-05 Sep-06 Sep-03 Sep-04 Sep-05 Sep-06 Index reading Av. Annualized Returns Average Duration Islamic Conventional Islamic Conventional Islamic Conventional 1-year and above 145.47 138.35 7.64% 6.27% 4.73 3.98 5-years and above 142.07 125.43 7.57% 4.39% 6.32 6.11 (Source: CIMB Fixed Income Research)
    43. 43. Leading in Islamic Asset Management Malaysia has some 134 funds at the end of 2007 and is estimated to account for 22% of Islamic funds worldwide (Securities Commission, Eurekahedge) No. of Shariah Funds vs Conventional Funds 600 Fund assets have been growing at a 500 No. of Funds CAGR of 38% per annum between 1997 400 387 and 2007. 300 200 257 316 229 171 100 83 100 134 55 71 0 Shariah-based Unit Trust Funds 2003 2004 2005 2006 2007 Year 18 16.90 12 Shariah-based Conventional 16 9.98 10NAV (RM billion) 14 8.6 12 6.8 7.7 7.5 8 The total NAV of Islamic unit trusts in 10 8 9.17 6 (%) Malaysia by end 2007 stood at some 8.49 6 4 6.76 4 USD5.12 billion or 9.97% of total outstanding 4.75 2 2 0 0 unit trusts net asset value (Securities 2003 2004 2005 2006 2007 Commission) Year NAV % to Total Industry
    44. 44. Thank You