1. Overall Structure and Regulatory Framework of Islamic Capital Market

2. Islamic Financial Market In Malaysia
Islamic Banking &
Takaful
Islamic Capital
Market
Equity
Islamic banking Financial
Products
Shariah compliant securities
Islamic indexes
Islamic Unit Trust
Islamic ETF
Islamic venture capital / PE
Islamic Fund Management
Islamic REITs
Islamic Structured Products
Islamic stockbroking
Shariah deposit investment products
Money market products
Financing products
Other Investment products
Sukuk
Takaful Investment
Products
Asset-based sukuk
Asset-backed sukuk
Investment Sukuk
Takaful products
Takaful linked investment products
Shariah-compliant derivatives
Exchange traded
Crude Palm Oil Futures
Crude Palm Kernel Oil Futures
Single Stock Futures
(provided the underlying shares are Shariah-compliant)
OTC
Islamic profit rate swap
Foreign Exchange swap
Cross Currency Swap
Islamic Interbank
Money Market

3. Regulatory framework for Islamic capital market products and services – equity
Capital Markets And Services Act 2007 (CMSA) [Investor protection and disclosure requirement
Shariah compliant securities
Guidance issued with List of Shariah-compliant Securities booklet
Islamic Unit Trust
Guidelines on Unit Trust Funds (Provision)
Islamic REITS
Guidelines on Islamic Real Estate Investment Trusts
Islamic Fund Management
Guidelines on Islamic Fund Management
Islamic Structured Products
Guidelines on the Offering of Structured Products (Provision)

4. Regulatory framework for Islamic capital market products and services – equity
Islamic ETF
Guidelines on Exchange-Traded Funds (Provision)
Islamic venture capital / PE
Guidelines and Best Practices on Islamic Venture Capital
Islamic stockbroking
Best Practices In Islamic Stockbroking Services Undertaken by Participating Organisations

5. Regulatory Framework for Islamic Capital Market Products and Services – sukuk
Islamic Asset-Based Sukuk
Guidelines on the Offering of Islamic Securities
Islamic Asset-Backed Sukuk
Guidelines on the Offering of Asset-Backed Securities (Provision)

6. The SAC Provides the Impetus for Islamic Capital Market Development
Issues list of Shariah-compliant securities based on clear guidelines and criteria
The list serves as a catalyst for the development of Shariah compliant products and services
Publish book on “Resolution of the Securities Commission Shariah Advisory Council”
Provide clarity on the resolutions and views of the SAC

7. Structured Investment Products

8. They are fixed term investments
A structured investment has a maturity period depending on the features of the products. If redeemed before maturity, your investments may lose part of the returns and/or principal.
Structured investment is a form of investment that can potentially bring about higher returns, compared to other investment products, like fixed deposits. Although it promises higher returns, it also comes with higher risks. Structured investments are often linked to the performance of various underlying assets such as interest rates, foreign exchange, equities, fixed income instruments or market indices.
They can either be principal protected or non-principal protected.
The level of risks involved in non-principal protected structured investments are higher compared to principal protected structured investments. There is no guarantee on the amount of money you will receive on non-principal protected structured investments even if you hold them to maturity.

9. The returns on structured investments vary, are usually not guaranteed and are dependent on the performance of the underlying assets during the investment period. You may face losses if the performance of the underlying assets differs from what you have anticipated. The returns on certain structured investments may also be affected in movements in foreign exchange. Non-principal protected structured investments usually give higher returns compared to principal protected investments. This is mainly because of the higher risks involved in the investment. Structured investments can be used for income growth purposes. However, as in any investment, there are potential risks involved. As a savvy investor, if you are considering to invest in high-risk investments such as structured investments, you should have an asset portfolio that includes low risks assets such as fixed deposits.

10. As the name suggests, dual currency investment (DCIs) is a form of structured investment dealing with foreign exchange risks where your investments will be made in one currency (called 'base currency'). At maturity, you will either be paid in the base currency or in another currency (called 'alternative currency'). As an investor, you can choose both the base currency and alternative currency. However, remember that if the banking institution pays you in the alternative currency, you could experience a loss on your principal when you convert it back to the base currency if the foreign exchange rates did not move in the direction you anticipated.

11. Interest rate-linked structured investment
HOW STRUCTURED INVESTMENT PRODUCTS WORK
Structured investment is a form of investment that can potentially bring about higher returns, compared to other investment products, like fixed deposits. Although it promises higher returns, it also comes with higher risks. Structured investments are often linked to the performance of various underlying assets such as interest rates, foreign exchange, equities, fixed income instruments or market indices.
Interest rate-linked structured investment
For an interest rate-linked structured investment, the returns are usually linked to some interest rates. There is usually a formula that refers to a specific floating interest rate (e.g. the Kuala Lumpur Interbank Offer Rate (KLIBOR).The actual returns depend on the interest rate movements. For example, if KLIBOR moves WITHIN the agreed band during the investment period, you will receive a positive return on your investment. On the other hand, if KLIBOR moves OUTSIDE the agreed band during the investment period, there will be no investment return for you. You will only receive the amount of your initial investment.

12. Difference between Fixed Deposits and Structured Investments
Minimum amount required
Return: Fixed interest rate
Potential enhanced return/interest (performance pay-off)
Full principal sum payable on
i. Maturity
ii. Early withdrawal
iii. Early redemption by bank
Risks involved
Protection by Malaysia Deposit Insurance Corporation
RM500
Yes No
Not Applicable
Relatively risk-free
Floating rate negotiable instruments of deposits: RM100,000 Investments linked to derivatives:RM250,000
(Only applicable for investments with a minimum interest feature)
Yes
(Applicable for principal protected investments only)
Investors may lose part of their return and/or principal. The amount to be paid to investors depends on the market value of the underlying assets.
Return can be affected by various types of risk such as interest rate risk, market risk foreign currency risk, and early termination risk. No

13. Deposit Taking Tools
Structured Deposit Investment Products are popular alternative to straight deposit-taking mobilisation products based on wadiah or Mudharabah. Why?
Limit imposed on deposit insurance cover (?)
Wadiah deposits though under the Shariah structure is a guaranteed contract, banking laws limit the bank’s liability only up to the Deposit Insurance (Takaful) limit i.e. RM60,000 in Malaysia.
Customers have no recourse to this claim in Shari’ah courts as such deposits are bound by Laws of Contracts, under the jurisdiction of the Civil Courts
Better yield to customers
Capital protected
Better financial planning tools
Popularity of Structured Investment Products now increasing
Made possible through creative use of Shariah approved transaction contracts and modern portfolio management
“Deposit” mobilisation now popular via investment products

14. Structured Deposit Products
The term “structured product” means any investment product that falls within the definition of “securities” …… which provides the holder with an economic, legal or other interest in another asset (“underlying asset”) and derives its value by reference to the price or value of the underlying asset;
The term “underlying asset” means any security, index, currency, commodity or other assets or combination of such assets.
* Securities Commission Malaysia, Guidelines on Structured Products
The definition of Structured Deposit Investment products can also be applied as per the above definition

15. Product Structure
The foundation of the structured deposit investment products is:
Asset allocation based on the principles of modern portfolio theory.
Efficient asset allocation takes advantage of the fact that truly different asset class returns are uncorrelated.
They react differently to changing market conditions.
In other words, stocks, bonds, real estate, and other assets often do well or poorly at different times
This feature can be used to obtain a combination of expected return and risk control that meets an investor’s profile.
In effect, portfolio diversification offers the classic advantages whereby:
a well-diversified portfolio may offer a better combination of return and risk than any individual asset class or security.
Of course, no method of investing may guarantee a profit or protect against loss.
HOW is then mitigated?
Capital Protection instead of Capital Guarantee since the basis of the deposit is either Musharakah or Mudharabah
Capital portion is invested in Sovereign Securities or AAA-rated Securities

16. Product Types
The vast majority of Islamic deposit investment structured products launched to date are:
Capital-protected
Equity-linked structures
Commodity-linked structures
Generally referenced to equities selected from the Islamic Indices (DJIF, FTSE Islamic Index, etc.)
Since these products incorporate to an extent some derivatives element, they derive its value by reference to the price or value of the underlying asset
The products represent unique opportunities that allow for better risk management and provide the investors with valuable portfolio diversification tools

17. Examples of Contract Applications
These structures typically use concepts already accepted in Islamic finance as building blocks such as Mudharabah, Murabahah, and Salam
For instance, in some sample of products:
CIMB uses Restricted Mudharabah
BNP Paribas uses a Murabahah deposit to provide the protection
Use of reverse Murabahah or Tawarruq
BNP also uses Salam to structure a number of capital-protected products that offer investors participation in the upside of a basket of stocks from the Dow Jones Islamic Index.
These products have many of the same characteristics of conventional structured investments, such as profit lockins, look-back and call features.
While an Urbun contract is used for the equity or fund-linked payout

18. Definitions
Wakalah: An agent, which can be appointed for any act allowed by the Shariah Murabahah: Effectively the forward sale of a physically owned commodity. In the case of structured products, the investor pays the value of the commodity, which is sold by the bank at a deferred date. At maturity, the investor receives the assets, which are worth the same as the amount initially invested. Urbun: Entitles the investor to purchase an asset at an agreed price at any time up to the maturity of the contract – effectively an option. Salam: A sale with deferred delivery of exchanged goods but with advanced price payment – to create the capital-protection element.

19. Investment Linked Takaful Products

20. Definition Investment-linked Takaful Product (ILTP) are products that:
Offer a safe and efficient investment structure to provide minimal internal costs
Investment-principal protection, and
Takaful cover in the event of death of the investor or disability benefits
The investment fund is divided into units of equal value to derive at the investment-linked unit price.
This unit price is published daily in the newspapers for holders to track the value of your investments.

21. Takaful Concept In an investment-linked takaful:
Part of your contribution will be allocated to a takaful fund in the form of participative contribution (Tabarru’), and
the balance of the contributions will be used to purchase the investment-linked units.
Holders undertake a contract (Aqad) to become one of the participants by:
agreeing to mutually help each other, should any of the participants suffer a misfortune arising from death or disability.
If the holder do not make any claim during the period of takaful, he will be entitled to a share of the surplus in the takaful fund.
The surplus will be shared between you and the takaful operator based on the concept of surplus sharing according to a pre-agreed ratio.
The Holder’s share of the surplus will be used to purchase additional investment-linked units.
The takaful operator acts as a manager to oversee the management of the investment fund. In return, the takaful operator receives a fee (ujrah) for its service.
The contract of participation by the Holder is either Wakalah or Mudharabah

22. Difference with Investment Linked Insurance Products
Insurance companies also offer investment-linked product for Shariah-approved Securities Funds, whereby:
The investments are invested in Shariah-approved investment instruments
Whilst the insurance cover does not conform to the Shariah requirement.

23. Capital Guarantee and Protection

24. Capital Guarantee & Capital Protection
Capital Guarantee is derived from a separate third party Guarantees in the form of a financial instrument (such as bank guarantee), corporate guarantees or other collaterals to ensure that the investor will not suffer any loss at all on the amount of the invested capital even if the underlying investment did not perform well.
Capital Protection is the feature of a specific structured product wherein is embedded a derivative securities, that have the capability to ensure that the investor will get back at maturity a part or the totality of the money he has invested in the purchase of the product on day one.

25. Why Capital Guarantee is disallowed in Contracts of Musharakah or Mudharabah
Contracts of participations such as Musharakah or Mudharabah demands risk participations by way of:
Profit & loss sharing (Musharakah), or
Profit sharing (Mudharabah)
In both cases guarantees are only allowed on the capital for recovering losses from misconducts by the managing musharik or the mudharib
Guarantee on performances are disallowed
As an investment strategy, structured products invest in low-risk securities such as Shariah compliant Government Securities or ‘zero-coupon’ Sukuk

26. Shariah Rulings AAOIFI ( Shari’ah Standard No.13)
The capital provider is permitted to obtain guarantees from the mudharib that are adequate and enforceable. This is circumscribed with a condition that the capital provider will not enforce these guarantees except in cases of misconduct, negligence or breach of contract on the part of mudharib. [6/0]
Dallah Al Baraka
It is not permissible for an investor to demand from the entrepreneur (mudharib) to pay him a fixed percentage of the value of the contract, besides the capital sum, irrespective of the amount of investment involved or whether the project is profitable or in loss. Such a contract is unlawful because it involves a guarantee from the entrepreneur respecting the capital sum, whereas a mudharib is a trustee and cannot be held responsible for the capital sum except in cases of transgression or negligence. [ al-Baraka first symposium, Fatwa No.2]
Majelis Ulama Indonesia
In principle, the capital should not be guarantees unless the loss of capital is caused by the negligence of the entrepreneur. [Fatwa No : 07/DSN-MUI/IV/2000]

27. Capital Guarantee on Various Sukuk Structures
Capital Guarantee on sukuk can be seen in light of the purchase undertaking of sukuk by the issuer.
This kind of purchase undertaking is considered as capital guarantee to the investors.
Therefore, the purchase undertaking at face value is not permitted in the investments sukuk such as sukuk Musharakah and sukuk Mudharabah as this impermissibility is in line with Hadith Rasullullah:
أن الخراج بالضمان
“We have to face the risks in order to get the profit from investments”
Sukuk Al-Ijarah:
AAOIFI resolution in 2008, purchase undertaking at face value is permitted under sukuk Ijarah.

28. Example of Capital Protection
The most common capital protected fund under Shariah compliant structured products structure is whereby:
the fund invest a portion of their assets in fixed income Shariah compliant securities likened in feature to a ‘zero-coupon ‘Sukuk or Shariah Compliant (SC) Government Securities designed to pay out the total amount invested at a fixed maturity date. This date is naturally dependent on the prevailing profit rate environment and the amount of capital the fund can set aside for this purpose without hampering performance.
For example a USD 100 portfolio could purchase for example USD 60 worth of ‘zero-coupon’ Sukuk in the expectation that in 10 years the value of those sukuk would be USD 100. The remaining USD 40 would then be invested in other investments that have more attractive returns or in profit locked-in products such as in Tawarruq contracts.

29. Profit Locked in feature to ensure more returns to investor
Capital Protection Structured Products: Strategy 1
Profit Locked in feature to ensure more returns to investor
Tawarruq Contracts
with locked-in profits
100% Capital
Protection
Initial Investment USD100
USD 40
‘Zero Coupon Sukuk’ or
SC Government Securities
USD 60
INVESTMENT LIFE OF THE PRODUCT

30. Capital Protection Structured Products: Strategy 2
Profit Locked in feature to ensure additional returns to investor
Once the Capital Protected component has matured, the portion is reinvested in other profit locked-in feature investments e.g. Tawarruq.
Profit Locked in feature to ensure more returns to investor
Tawarruq Contracts
with locked-in profits
USD 60
Initial Investment USD100
USD 40
100% Capital
Protection
‘Zero Coupon Sukuk’ or
SC Government Securities
USD 60
INVESTMENT LIFE OF THE PRODUCT
In this alternative, the capital protection matures before the life of the product. To enhance
earnings the USD60 is reinvested in other profit locked in investments. Derived profits will ensure additional income to investors

31. Shariah-Compliant Investment Instruments
To Recap

32. Shariah-based Unit Trust Fund Key Features Collective investment fund
Invests in Shariah-compliant securities
May be single or multiple asset classes
Benefits and applications
Diversification – portfolio of securities
Convenience – single transaction
Liquidity – transact with management company
Low minimum capital outlay
Benchmark Index – consists of 25 domestic Shariah-compliant stocks listed on Bursa Malaysia. The index was manufactured by Dow Jones & Company, Inc.
GLICs – Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valucap Sdn. Bhd.

33. Investment Instruments (2)
Islamic Exchange Traded Fund (ETF)
Key Features
Passively managed unit trust fund, listed & traded on stock exchange
Objective is to provide returns that closely correspond to performance of benchmark index - can be single-asset or blended index
Benefits and applications
Diversification – portfolio of securities
Convenience – single transaction
Liquidity – traded on stock exchange
Transparency – component stocks disclosed and their performance can be tracked on real-time basis
Cost Efficiency – no sales charges, and lower management fees than most equity unit trusts
Low minimum capital outlay
Benchmark Index – consists of 25 domestic Shariah-compliant stocks listed on Bursa Malaysia. The index was manufactured by Dow Jones & Company, Inc.
GLICs – Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valucap Sdn. Bhd.

34. Investment Instruments (3)
Benchmark Index – consists of 25 domestic Shariah-compliant stocks listed on Bursa Malaysia. The index was manufactured by Dow Jones & Company, Inc.
GLICs – Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valucap Sdn. Bhd.

35. Islamic Real Estate Investment Trust (REIT) Key Features
Collective investment scheme, may be listed or unlisted
Invests in real estate and/or real-estate-related assets / securities
Objective is to generate returns from rental income and capital appreciation
Benefits and applications
Investment in real estate without direct ownership
Liquid and more affordable instrument for participation in real estate
Diversified portfolio of real estate assets
Typically stable income stream translates to potentially regular dividends
Benchmark Index – consists of 25 domestic Shariah-compliant stocks listed on Bursa Malaysia. The index was manufactured by Dow Jones & Company, Inc.
GLICs – Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valucap Sdn. Bhd.

36. Benchmark Index – consists of 25 domestic Shariah-compliant stocks listed on Bursa Malaysia. The index was manufactured by Dow Jones & Company, Inc.
GLICs – Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valucap Sdn. Bhd.

37. Shariah Screening

38. Islamic Equity
Islamic equity investment starts with Shariah compliant securities
Shariah-compliant securities
Securities (ordinary shares / equities) of a company listed on Bursa Malaysia which is classified as Shariah permissible for investment
Primary business and investment activities that generate income for the company are consistent with Shariah principles
In Malaysia, the body that gives Shariah endorsement is the Shariah Advisory Council (SAC) of the Securities Commission (SC)

39. Based on Shariah compliance review criteria
Financial services based on riba (interest)
Gambling
Manufacturing or sale of non-halal products
Conventional insurance
Entertainment
Manufacture or sale of tobacco-based products or related products
Stockbroking or share trading in non-approved securities
Other activities deemed non-permissible
Classified as approved if company’s involvement in the following activities is minimal :
Interest income from conventional fixed deposits / interest bearing instruments
Dividend income from investment in non-approved securities

40. Specific benchmark are established
To asses the level of mixed contributions from the activities that are clearly prohibited such as riba (interest based companies like conventional banks), gambling, liquor and pork 5%
To asses the level of mixed contributions from the activities that are generally permissible according to Shariah and have an element of maslahah to the public, but there are other element that may affect the Shariah status of these activities e.g hotel and resort operations, share trading, stock brocking
To assess the level of mixed contributions from the activities that involve the element of ‘umum balwa’ which is prohibited element affecting most people and difficult to avoid e.g interest income from fixed deposits in conventional banks and tobaccao related activities
25%
10%
20%
To assess the level of contributions from mixed rental payment from Shariah non-compliant activities, such as rental payments from premises used in gambling, sale of liquor, etc.

41. Islamic Equity Market - Shariah compliant securities
85% of Bursa stocks are Shariah-compliant
Shariah-compliant market cap of RM627.8 bil (US$196 bil) or 64.6% of total market cap
FTSE-Bursa Malaysia Shariah indices based on internationally compliant criteria
FBM EMAS Shariah
FBM HIJRAH Shariah
Year
M-cap of Islamic
Equities (RM bln)
% to total market capitalisation
2000
247.49
54.74
2001
285.50
59.23
2002
290.42
57.55
2003
391.12
57.70
2004
457.32
59.93
2005
439.77
63.25
2006
548.42
64.62
2007
705.05
63.74
May-2008
627.84
64.60
Shariah Compliant Securities Listed on Bursa Malaysia
85%
15% 41 41

42. Capital Market

43. What is Capital Market? Capital Market
Any market in which securities are traded. Capital markets include the stock and bond markets. Companies and governments use capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue a bond in order to conduct new or expand ongoing activities. Investors purchase securities in the capital markets in order to extract a return and earn profit on the securities. Capital markets include primary markets, such as IPOs that are placed with investors through underwriters, and secondary markets, where all subsequent trading takes place, such as the New York Stock Exchange. Government agencies in different countries regulate local capital markets, though some, especially exchanges, play some role in regulating themselves.
Source: Farlex Financial Dictionary. © 2009 Farlex, Inc. All Rights Reserved

44. What is the Islamic Capital Market?
Any market in which Shari’ah compliant securities are traded. The Islamic Capital markets include the Shari’ah compliant stock and Islamic bonds or Sukuk markets. Companies and governments use the Islamic Capital markets to raise funds for their operations; for example, a company may issue an IPO while a government may issue an Shari’ah compliant securities or bonds in order to conduct new or expand ongoing activities. Investors purchase Shari'ah compliant securities in the capital markets in order to extract a return and earn profit on the securities. The Islamic Capital markets include primary markets, such as IPOs that are placed with investors through underwriters, and secondary markets, where all subsequent trading takes place, such as the New York Stock Exchange or Bursa Malaysia. Government agencies in different countries regulate local capital markets, though some, especially exchanges, play some role in regulating themselves.
Source: Adapted from Farlex Financial Dictionary. © 2009 Farlex, Inc. All Rights Reserved

45. Thank You Wan Abdul Rahim Kamil Islamic Capital Market Consultant,
Securities Commission Malaysia