overview of the islamic capital market & · pdf filesecurities commission introduction to...

© Securities Commission

INTRODUCTION TO ISLAMIC FINANCE:

OVERVIEW OF THE ISLAMIC CAPITAL MARKET & SHARIAH PRINCIPLES GOVERNING ISLAMIC FINANCE

Islamic Markets Programme 2014

Mohd Radzuan Ahmad Tajuddin Islamic Capital Market Business Group

11 August 2014


PRESENTATION OUTLINE

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PART B OVERVIEW OF ISLAMIC CAPITAL MARKET

PART A STATISTICAL INFORMATION – DOMESTIC & GLOBAL COMPARISON

PART C ICM VALUE PROPOSITION

© Securities Commission 3

PART A

STATISTICAL INFORMATION - DOMESTIC & GLOBAL

COMPARISON


Global Islamic Finance Assets 2013

4

Islamic financial assets estimated at USD1.8 trillion

*Takaful contributions figure is an estimate. Source: KFHR


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Sukuk Issuance by Domicile 2013

Source: KFHR


Islamic AuM by Domicile 2013

Source: KFHR


Malaysia’s Islamic Capital Market as at Dec 2013 (in billion)

TOTAL: RM1,702.1 (USD567.4)

TOTAL: RM1,031 (USD343.7)

TOTAL: RM588.4 (USD196.1)

Equities Sukuk/bonds Fund management

A global centre for Islamic finance Most liquid sukuk market: 62% of global market Second largest by Islamic AUM Comprehensive regulatory framework

First global sukuk First sovereign global sukuk First rated Islamic RMBS First listed Islamic REIT First World Bank ringgit sukuk First Islamic structured product

First Asian Islamic ETF First Islamic financing trading

platform First covered sukuk First Basel-III compliant sukuk

(Murabahah)

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Shariah Equities,

60% (RM1,029.6)

Non-Shariah Equities,

40% (RM672.5)

Sukuk Market,

50% (RM512.1)

Bond Market,

50% (RM518.9)

Islamic AUM, 17%

(RM97.5)

Conven-tional AUM, 83%

(RM490.9)


Malaysia’s Islamic Equity Market

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Number of Shariah-compliant stocks

650 stocks

% to total listed stocks 71%

Market capitalisation as at December 2013

Shariah-compliant USD343bn

Total market USD567.4bn

% of Shariah-compliant stocks to total market

61%

Equity market indices : 31 Dec 13 31 Dec 12 % change

FBM KLCI 1,866.96 1,688.95 11%

FBM EMAS Shariah 13,051.60 11,520.73 13%

FBM Hijrah Shariah 14,323.63 12,674.93 13%

DJIM Malaysia Titans 25 1,057.59 994.11 6%

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Sukuk Market

9 Source : IFIS accessed on 5 August 2014

Sukuk Issued (USD billion) 2013 2012 2011

Malaysia 86.7 113.2 68.4

Global 125.3 149.3 93.7

% to global 69% 76% 73%

Number of global issuers 142 144 125

Number of global sukuk 894 861 811

Sukuk Outstanding (USD million) 2013 2012 2011

Malaysia 161.5 129.5 81.7

Global 260.3 193.7 113.0

% to Global 62% 67% 72%

Number of global issuers 356 290 222

Number of global sukuk 1,928 1,435 1,031


Malaysia’s Islamic Fund Management Industry

10 10

(USD billion) Dec 2010 Dec 2011 Dec 2012 Dec 2013

AUM of IFMCs 3.4 6.0 9.3 12.6

Islamic AUM 16.0 21.4 26.5 32.5

Total Fund Management Industry

125.7 141.1 168.4 196.1

% Islamic AUM to Total Fund Management Industry

12.7% 15.2% 15.8% 16.6%

Note: 1. IFMCs are Islamic Fund Management Companies 2. Islamic AUM comprises AUM of IFMCs and Islamic windows 3. Data includes assets that are sourced from collective investment schemes as well as

private mandates


Islamic Unit Trust Funds in Malaysia

Number of launched Unit Trust Funds

December 2013 December 2012

Islamic UT funds 178 169

Total industry 595 589

Net Asset Value (NAV) of launched Unit Trust Funds - USD billion


Islamic UT funds 14.3 11.8

Total industry 111.8 98.3

% to total industry 13% 12%

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Islamic REITs and ETF in Malaysia

REITs Number of Listed REITs


Islamic REIT 4 3

Total industry 17 16

Market capitalisation (USD billion)


Islamic REIT 4.7 1.2



ETF Number of Exchange Traded Fund


Islamic ETF 1 1

Total industry 5 5

NAV (USD billion)

NAV (USD billion December 2013 December 2012

Islamic ETF 0.1 0.1




Islamic Fund Management Companies

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List of IFMCs Year Status 1 Asian Islamic Investment Management S/B 2008

JV IFMCs 2 CIMB-Principal Islamic Asset Management S/B 2008 3 AmIslamic Fund Management S/B 2009

Wholly-owned Local IFMCs

4 BIMB Investment Management Berhad 2012 5 i-VCAP Management S/B 2009 6 Kenanga Islamic Investors Berhad 2012 7 Maybank Islamic Asset Management S/B 2013 8 Muamalat Invest S/B 2010

9 *RHB Islamic International Asset Management Bhd 2010 10 Aberdeen Islamic Fund Management S/B 2009

Foreign IFMCs

11 Amundi Islamic Malaysia S/B 2009 12 BNP Paribas Islamic Asset Management Malaysia S/B 2009 13 Eastspring Al-Wara' Investments Berhad 2009 14 Franklin Templeton GSC Asset Management S/B 2010 15 Guidance Investments S/B 2013

16 KFH Asset Management S/B 2008 17 Nomura Islamic Asset Management S/B 2009 18 Saturna S/B 2010 19 Threadneedle Asset Management Malaysia S/B 2014

* Merged entity of RHB Islamic Asset Management S/B and OSK UOB Islamic Fund Management Berhad


PART B

OVERVIEW OF ISLAMIC CAPITAL MARKET


Components of Islamic Finance in Malaysia

Islamic financial system

Islamic banking

Takaful Islamic capital

markets

Dedicated Shariah, Legal & Regulatory Framework

(Dedicated Acts & mandate to regulate)

Supportive government (fiscal incentives & tax

neutrality policy)

Dispute resolution platform (Dedicated High Court Bench & dedicated KLRCA Islamic Finance Arbitration Rules)

Conventional system

Islamic financial system

Dual financial system running in

parallel

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Shariah Principles Governing ICM

ICM refers to a market where the capital market transactions, operations and activities are carried out in ways that conform with Shariah principles and requirements.

3 main elements

Prohibition of riba

Prohibition of gharar/ambiguity

Prohibition of maysir


ICM refers to a market where the capital market transactions, operations and activities are carried out in ways that conform with Shariah principles and requirements.

Other elements

Wide circulation of

wealth

Transparency in dealing/

transactions

Ownership certainty and sanctity of

contract

Justice and fair dealings

Wealth acquisition and

investment

Risk mitigation

Shariah Principles Governing ICM (cont.)

© Securities Commission 18 18

Fundamental Aspects of ICM

Islamic contracts are the underlying principles for all ICM products and services

Contract of exchange Contract of participation

Bai bithaman ajil Murabahah Istisna’ Ijarah Salam

Musharakah Mudharabah

Contract of agency

Wakalah


Capital Market Institutional Framework

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Basic Structure of Islamic Capital Market

Capital Market

Equity Market Debt Market

Primary Market

Secondary Market

Primary Market

Secondary Market

• Public issue • Private placement • Offer for sale

• Exchanges • Public issue • Private placement • Book building

• Exchanges • OTC

• Shariah-compliant stocks

• Sukuk

Islamic Fund & Asset Management Market


Building Blocks for An Effective ICM

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The Building Blocks

Legal and Regulatory Framework

Shariah Governance Framework

Tax Framework

Government Support

Diverse Pool of players

Strong Intermediation

Institutions

Talent Pool


Overall, SC adopts a three-pronged approach to ensure a well-regulated capital market

Self-discipline

• Disclosure, transparency, risk management, ethical conduct and compliance culture for intermediaries and companies

Market-discipline

• Shareholder activism and market discipline

• Investor associations, watchdog groups, investment analysts and media

Regulatory discipline

• Strong regulatory framework

• Strong oversight – supervision and surveillance

• Effective enforcement

• Education and awareness

Investor protection


IOSCO’s Objectives and Principles of Securities Regulation

The protection of investors

- Protection of misleading, manipulative and fraudulent

practices

- Full and timely disclosure

Ensuring markets are fair, efficient and

transparent

- Regulation should detect, deter and penalise market

manipulation and other unfair trading

- Regulation should aim to ensure investors are given fair

access to the market

Reduction of systemic risks

- Reduce risk of financial failure of market intermediaries

- Promote and allow effective risk management

ICM Legal & Regulatory Framework: Compatibility & Benchmarking

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Report of the ICM Task Force of the IOSCO (July 2004) – to assess the extent of the development from a regulatory perspective and potential regulatory issues relating to ICM “the conventional securities regulation framework and principles equally apply to the ICM, with the addition of some form of a Shariah approval or certification process - no need to formulate separate regulatory principles for the Islamic capital market. By extension, IOSCO’s objectives and principles of securities regulation can be applied to the Islamic capital market”

ICM Legal & Regulatory Framework: No requirement for separate regulation in developing ICM

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How to promote the development of ICM while ensuring that the objectives and principles of securities regulation are achieved?


Analysis of the Application of IOSCO’s Objectives and Principles of Securities Regulation for Islamic Securities Products (September 2008) – to assess the compatibility of IOSCO’s core principles with the products and practices of Islamic finance “The analysis of this report has not identified any concerns with respect to the compatibility of the IOSCO Core Principles with the Islamic securities market” The overall findings are broadly consistent with the findings of the

Report of the ICM Task Force of the IOSCO (July 2004) which notes that: “[there is] … no need to formulate separate regulatory principles [as] IOSCO’s objectives and principles of securities regulation can be applied to Islamic capital markets.”

ICM Legal & Regulatory Framework: Compatibility of IOSCO’s Core Principles

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Islamic Financial Services Board Guiding Principles

Prudential

Shariah Governance

Investor Protection

ICM Legal & Regulatory Framework: Compatibility & Benchmarking

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Regulation of ICM is part of overall capital market regulations

ICM business and transactions accord same level of investor protection as in conventional market, e.g. process of regulation, supervision and enforcement;

Common regulatory approach to regulating ICM products – same liability on the part of the intermediaries, e.g. due diligence and representation; and

Disclosure, transparency and governance apply equally to both conventional and Islamic products, hence same legal and regulatory protection.


ICM regulatory practice: Two-tier approach

TIER 1 Universal /General Regulatory

Requirements

Examples Unit Trusts - Investment committee,

trustee, management company, etc. REITs - At least 75% investment in

real property

Licensing Governance Disclosure

TIER 2 Specific Shariah Requirements

Examples Islamic Unit Trusts - Shariah adviser

to certify that funds comply with Shariah requirements

Islamic REITs - Tenants’ activities and rental income must comply with Shariah requirements

Shariah principles, guidelines and practices

Shariah Governance


Regulations on ICM Products and Services in Malaysia

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• Guidelines on Sukuk

• Guidelines on Islamic Fund Management

• Guidelines for Islamic Real Estate Investment Trusts

• Guidelines and Best Practices on Islamic Venture Capital

• Registration of Shariah Advisers Guidelines

• Best Practices on Islamic Stockbroking

Specific Guidelines

on ICM

• Guidelines on Unit Trust Funds

• Guidelines on Wholesale Funds

• Guidelines on the Offering of Structured Products

• Guidelines on Exchange Traded Funds

• Guidelines on Private Retirement Scheme

• Guidelines on Business Trusts

Guidelines that Incorporate

ICM Perspective


Shariah Compliance is the Fundamental Thrust of ICM

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Shariah

Advisers

Regulator Industry

Shariah Advisory Council (SAC)

Shariah Advisers for industry

• Established under Capital Markets & Services Act 2007 (CMSA 2007) • Issues Shariah rulings on ICM products and services • Point of reference for industry

• Appointment mandated by regulation • To advise, review and endorse compliance of products with Shariah principles • Registered with the SC


Mandated by regulation To advise, review and endorse compliance of products/services with Shariah principles

National level SAC Acts as a reference point for industry Publication of Resolutions of the SAC

31 31

Regulatory Level : National SAC

ICM regulatory mandate is supported by an effective Shariah governance framework

Industry level : Shariah Committees or Shariah Advisers

Shariah Governance Framework from regulator to industry

Registered with regulators Guidelines : general roles and responsibilities, fit and properness, academic qualification, experience and requirements for continuous professional development

Regulatory level : Supervision of Shariah Advisers at industry level


PART C

ICM VALUE PROPOSITION


Islamic Capital Market: Value Proposition

Value Proposition

Promote ethical

financing and

investing

Create employment

Risk management

tools

Expansion of asset class -

diversification

Larger investor base


Islamic Capital Market: Value Proposition (cont.)

Value Proposition

Broadening & deepening of existing

capital market

Expanding the capital

market value chain

Attract new foreign

investments Enhance liquidity

Better profiling of domestic corporations


Thank You

Securities Commission Malaysia Tel: 60.3.20910644 | Fax: 60.3.20910660 | www.sc.com.my

http://www.sc.com.my/


Linked Slides

Securities Commission Malaysia Tel: 60.3.20910644 | Fax: 60.3.20910660 | www.sc.com.my

http://www.sc.com.my/


Fund Management - Common Shariah Structure

Wakalah structures - agency arrangements in terms of which investors provide capital

to a fund manager, who manages the fund in exchange for an agreed fee. Collective investment scheme structures and segregated portfolios are often structured on a wakalah basis.

Muwakeel

(Investors)

Investment

Wakeel

(Fund Manager)

2 Invest in Shariah-compliant

instruments

3 Capital gain and periodic

dividend payment

1 Capital 4 Capital gain and periodic

dividend payment

5 Management +

performance fees


Fund Management - Common Shariah Structure

Mudarabah structure - the investor provides capital to a fund manager. The investor

and the fund manager are each entitled to a percentage of the profits, after return of capital to the investor. Mudarabah structures are suitable for private equity funds and certain collective investment scheme structures.

Rabb al-mal

(Investors)

Mudharib

(Fund Manager)

Investment

Fund/

Mudharabah

venture

1

Capital

2

Management/expertise

3 Shariah-compliant 4

5 6

Capital gain and periodic

dividend payment

Capital gain and periodic

dividend payment less

Mudharib management

and performance fees

Management and

performance fees


Intermediaries & Support Services

Fund & wealth management companies and investment products:

Islamic ETFs Islamic REITs Islamic Unit Trusts Private Mandates Islamic Structured Products Islamic Private Retirement Schemes Islamic Wholesale Fund Structures Islamic PEs & VCs


Intermediaries & Support Services (cont.)

Islamic Banks Investment Banks Stock Broking Companies Shariah Advisers Legal Firms Trust Companies Rating Agencies Research Houses Takaful Companies Re-Takaful Companies Accounting Firms Human Capital Development Institutions


In Malaysia, the concepts and Shariah principles in structuring sukuk must be approved by the Shariah Advisory Council of the SC.

What is Sukuk ?

Sukuk Origin: Arabic word SAKK which means certificate.

Application: Sukuk are instruments issued with the purpose of raising capital. Sukuk has been defined as certificates of equal value which evidence undivided ownership or investment in the assets using Shariah principles and concepts.

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Types of sukuk

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Types of sukuk

Asset-backed Hybrid Normal

(Asset-based)

Sale-based BBA

Murabahah

Salam

Istisna’

Lease-based Ijarah

Ijarah Muntahiyah Bi Tamlik

Ijarah Mawsufah Fi Dhimmah

Partnership-based Musharakah

Mudharabah

Agency-based Wakalah Bi Istithmar

Convertible Exchangeable


SUKUK BOND

Definition

• Sukuk Origin: Arabic word SAKK which means certificate.

• Sukuk represent undivided beneficial ownership in the underlying assets and sukukholders are entitled to share in the revenues generated by the sukuk assets as well as being entitled to share in the proceeds of the realization of the sukuk assets.

• Bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to the bondholders, on certain specified dates, the interest and principal.

• Bond is issued based on the activity of lending. Bond is an “IOU” given by a borrower (the issuer) to a lender (the investor).

Features • Asset in exchange for monies • Profit/income derived from asset • Ownership of undivided share in asset • Utilisation of proceeds for Shariah-compliant

purposes

• Paper in exchange for monies • Interest • Creditor’s right against issuer • No restriction on utilisation of proceeds

Relationship • Relationship between issuer and investor/asset owner depends on the types of Shariah contract. An Issuer may be a partner/ agent/ manager/ lessor/ lessee and investors may be partner/ lessor, etc. depending on the Shariah contract.

• Relationship between issuer and investor is a borrower-creditor relationship.

Ownership • Represents ownership shares in assets that brings in profits or revenues, like leased assets, or commercial or industrial enterprises, or investment vehicles that may include a number of projects

• Bond does not represent ownership on the part of the bondholders in the commercial or industrial enterprises for which the bonds were issued. Rather, they document the interest-bearing debt owed to the holders of the bonds by the issuer, the owner or the enterprise.

Differences Between Sukuk and Bond


SUKUK BOND

Profit

• Sukukholders receive profit or income from the assets in the form of periodic distributions. The rate of return may be benchmarked against certain benchmarks, e.g. KLIBOR, etc. Returns may be fixed or variable depending on the mechanisms applied.

• Regular interest payments are made to the bondholders. The amount of interest is determined as a percentage of the capital and not as a percentage of actual profits. Sometimes interest is fixed, while oftentimes in bonds with longer tenors the rate of interest is allowed to float.

At maturity • At maturity, the issuer/ obligor may purchase

back, via the wa’d mechanism, the underlying assets from the investors and the sukuk is redeemed.

• Capital preservation at maturity. Issuer is obligated to pay the investors the amount borrowed at maturity.

The Malaysian context: Regulatory Requirements

• To be issued pursuant to the Guidelines on the Offering of Islamic Securities

• Utilisation of proceeds shall be for Shariah compliant purposes only.

• Requirement for the appointment of a registered Shariah Adviser.

• Sukuk to be issued based Shariah principles approved by the SC’s SAC

• To be issued pursuant to the Guidelines on the offering of Private Debt Securities.

• No restriction on utilisation of proceeds. • No such requirement. • No such requirement.

Differences Between Sukuk and Bond – cont’d


Murabahah/Bai Bithaman Ajil (BBA)

Murabahah in simple terms means cost plus profit

A contract that refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin are made known and agreed by all parties involved.

The settlement for the purchase can be settle either on a deferred lump-sum basis or on installment basis, and is specified in the agreement.

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Ijarah is a manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or an equipment to its client at an agreed rental fee and pre-determined lease period upon the ‘aqad (contract).

The ownership of the leased equipment remains in the hands of the lessor.

Ijarah

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Istisna’ is a purchase order contract whereby the issuer will place an order to purchase an asset (based on specifications) that will be delivered in the future.

Both parties of the contract will decide on the sale and purchase prices as they wish and the settlement can be delayed or arranged based on the schedule of the work completed.

Istisna’ is similar to purchase order.

Istisna’

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Musharakah

Musharakah is a partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the business venture.

Any profit derived from the venture will be distributed based on a pre-agreed profit sharing ratio, but a loss will be shared on the basis of equity participation.

In simple terms, Musharakah means profit and loss sharing.

48


Mudharabah

Mudharabah is a contract which is made between two parties to finance a business venture.

The parties are an investor who solely provides the capital (rabb al-mal) and an entrepreneur who solely manages the project (mudharib).

If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a business loss, the loss shall be borne solely by the provider of the capital.

A Mudharabah contract may involve two or more parties.

The difference between a Mudharabah and Musyarakah contract is that, in the latter all parties contribute capital and services.

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Wakalah

Wakalah refers to a contract where a party authorises another party to act on its behalf, based on the agreed terms and conditions.

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