Introducing social responsible investment sri sukuk in malaysian market (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
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: firstname.lastname@example.org
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
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
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.
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
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,
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
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-
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,
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
(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.
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
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.
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
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).
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
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
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.
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
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
Based on Islamic Finance and Banking Legal Framework Securities Commission
Malaysia there are several legal infrastructures that need to be look at in
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
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.
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.
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