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Benefits of Islamic Capital Market Products


Introduction

Capital market activity results from a financial disintermediation process which involves the origination and eventual issuance of equity, debt and quasi-debt financial instruments that enable investors who possess surplus funding to deploy their investment capital into the issuers of such instruments.

Islamic Capital Markets (“ICM”), whilst involving the above, crucially prohibits activities which are forbidden by the religion of Islam. Ideally, the activities should be free from elements such as usury (riba), gambling (maisir) and ambiguity (gharar).

Malaysia; at the forefront of Islamic finance, has put in place a conducive infrastructure that is attractive to both investors and issuers alike. In a uniquely successful economic model, ICM has in conjunction with the Islamic banking and finance system in Malaysia, functioned and thrived on a parallel basis with the conventional banking, finance and capital markets.


The Approach

The government, in its pursuit to promote Malaysia as not only a regional center for Islamic financial services but globally, has encouraged the growth by strengthening, promoting and developing among others the following areas:

Regulatory:

A standardized and consistent regulatory approach with regards to the approval process on the issuance of Islamic securities was adopted. The enactment of the Securities Commission Act 1993 stipulated that in a nutshell, matters concerning Islamic securities come under the purview of the Securities Commission (“SC”).   


Incentives:

For both issuers and investors alike, incentives are constantly offered to promote ICM. A case in point includes the exemption of Real Property Gains Tax (“RPGT”) in transactions under the Shariah financing principle of Bai’ Bithaman Ajil (“BBA”). A commonly adopted financing principle in Malaysia for both lending and capital market transactions, a BBA contract refers to a sale and purchase transaction for the financing of an asset on a deferred and an installment basis with a pre-agreed payment period.

Liberalisation:

Ahead of the financial sector liberalization in 2007, the government has been very proactive in encouraging more players in ICM and Islamic banking and finance. In this regard, Bank Negara Malaysia (“BNM”) has granted 3 Islamic Banking licenses to foreign entities in Malaysia. BNM has also issued 4 new licenses for several new Takaful or Islamic insurance provider.


The Benefits

In essence the confluence of a very supportive government, a strong legislature and regulatory framework and the active participation of players: both local and foreign, ensure that the benefits are enjoyed by many.

Wider range of products: Malaysia has been at the forefront of ICM for years. In this regard, there has been a wide range of products and structures developed. From the wealth of collective market experience, issuers and investors alike can now enjoy the best possible investment or fund raising alternatives available from the ICM. Some approved Shariah Concepts and Principles approved by the SC’s Shariah Board for the purposes of structuring, documenting and trading of Islamic securities include:

 Ijarah (Leasing)
Bai’ Istijrar (Supply Side)
Bai’ Wafa (Sale and Repurchase)
Ijarah Thumma Bai (Lease to Purchase)
Mudharabah (Profit Sharing)
Musharakah (Profit and Loss Sharing)
Bai’Inah (Sale with Immediate  Repurchase)
Bai’ Salam (Advance Purchase)
BBA (Deferred Payment Sale)
Istisna (Purchase Order)
Murabahah (Cost-Plus Sale)
Qardh Hasan (Benevolent Loan)

(From an Islamic Debt Capital Market perspective in Malaysia, the BBA principle constitutes the major Islamic financing principle practiced in 2004 for Islamic Private Debt Security (“IPDS”) issuance. The BBA principle made up approximately 57% of issuance followed by the Murabahah principle (Source: SC). Current trends indicate that the other principles ie. the Istisna or Ijarah or Musharakah modes are however fast gaining popularity as interest from the Middle East funds increases and as financial and transaction structures become more challenging.)


Potentially attractive terms of financing via a larger investor base: The charter of Shariah compliant funds are such that these funds can only naturally invest in Shariah compliant ICM products. Conventional funds can; however invest in both ICM and conventional products. By logical deduction, there is a relatively limited amount of ICM products available to a collective pool of larger funds (ie. the aggregate of Shariah and conventional ones). In essence, the liberalisation of the Islamic financial sector in Malaysia coupled with the requirements of institutional Shariah compliant funds such as Tabung Haji, the Islamic Banks, the Takaful companies etc in addition to conventional funds requirements may potentially reduce the funding costs of Shariah compliant securities issuers.


Recognizability:

Perhaps to some extent considered a fad previously, ICM issues are now fast gaining momentum as a serious and major financing and investment tool. Issuers who are able to tap for funds via the ICM whether on a standalone or structured basis are recognized as having Shariah compliant activities which may then possibly attract the abovementioned associated benefits as well.

Conclusion

ICM products fulfil the requirements of both issuers and investors alike regardless of religion, nationality, race or creed. For Muslims, it fulfils not just their religious obligations but the funding or investing needs as well. ICM also provides an alternative platform to those attuned to conventional capital markets, as long as the ultimate benefits of costs or returns are addressed.

The challenge at times however, may be achieving an optimal level of universal  acceptability in terms of the requirements of an economic standpoint and that from a religious viewpoint.
 

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