Chapter 5
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| Learning sessions for topic 5 are held on week 12 to 13 |
REGULATION AND SUPERVISION OF ISLAMIC CAPITAL MARKET
Purpose of Islamic capital market in
meeting Shariah requirements
- In Malaysia, the concept and Shariah Principles in structuring sukuk must be approved by the Shariah Advisory Council of the SC.
- Primary sources of research and references are the Quran and Sunnah.
- Secondary sources include ijmak, qiyas and maslahah.
- Product origination and innovation are based on various Islamic concepts such as Iarah, Istisna’, Mudharabah, Murabahah and Musyarakah.
Islamic Capital Market: Value
Proposition.
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Promote ethical financing and investing
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Larger investor base
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Create employment
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Expansion of asset class – diversification
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Risk management tools
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Broadening & deepening of the existing capital market
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Better profiling of domestic corporations
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Expanding the capital market value chain
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Enhance liquidity
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Attract new foreign investments
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Shariah governing principles of Islamic Capital market instruments
1.Prohibition of Riba
- Riba means excess, expansion and increase.
- The charging and the receiving of interest (Riba) are strictly forbidden.
- Money, on its own, may not generate profits.
- When Riba infects an entire economy, it jeopardizes the well-being of everyone living in that society.
- When investors are more concerned with rates of interest and guaranteed returns than they are with the uses to which money is put, the results can only be negative.
2.Prohibition of Gharar
- Gharar implies risk, uncertainty and hazard.
- The occurrence of gharar in any transaction may result in oppression or injustice and the loss of properties to one or even both of the parties.
- The outcome of the transaction is not clear to the parties due to the lack of information, thus exposing them to unnecessary risk in business transaction.
- This could lead to disputes among the parties.
3.Prohibition of Maysir
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| This is an example of gambling |
- Maysir also known as qimar, is defined as activity which involves betting whereby the winner will take the entire bet and the loser will lose his bet.
- It means games or pure chance where any party might gain at the expense of the loss of other party.
4.Mutuality of Risk-Sharing
- It is an established principle in Islamic commercial law that risk commensurate with the return.
- For example, in the contract of mudharabah, the capital provider has the right to profit as he is also bearing the risk of loss in the business venture.
- Likewise, the entrepreneur also has the right to profit as he is also bearing the potential loss of his effort.
- Effective shariah governance should have shariah advisors which require them to setting up of a clear and comprehensive framework to regulate the Islamic finance industry and guide its development.
- It ensures that the industry is at all times in accordance with the wishes and laws of the Almighty by ensuring the legitimacy of the products offered.
- On the issue of transparency, IFIs must abide and adhere to the same regulatory requirements when it comes to the issue of disclosures.
ETHICAL STANDARDS
- When Muslims invest their money in something, it is their religious duty to ensure that what they invest in is good and wholesome.
- It is for this reason that Islamic investing includes serious consideration of the business to be invested in, its policies, the products it produces, the services it provides, and the impact that these have on society and the environment.
- In other words, Muslims must take a close look at the business they are about to become involved in.
REGULATION AND SUPERVISION OF ICM
Malaysia has a
reputation for being soundly regulated whereby the authorities recognise the fine balance of regulation that is needed to protect parties and yet facilitates growth and development.
Malaysia's regulatory framework has been acknowledged by the International
Monetary Fund(IMF) and World Bank to be highly compliant with international
standards.
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Security Commision(SC)
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| This is Malaysia's securities commission logo |
The Securities Commission is a
statutory body set up under the securities commission act 1993(SCA), reporting directly to the minister of finance. It
is responsible for the regulation and supervision of the activities of market institutions, including the stock
exchanges, clearing houses and
monitoring of licensees under the securities industry act 1983(SIA) and future industry act 1993 (FIA). One of the
main objectives set up by this plan is to establish Malaysia as an international Islamic capital market centre.
Role of Securities
Commision :
1.
Supervising exchanges, clearing
houses and central depositories.
2.
Registering authority for
prospectures of corporations other than unlisted recreational clubs.
3.
Approving authority for corporate
bond issues.
4.
Regulating all matters relating to
securities and derivatives contract.
5.
Regulating the take-over and
mergers of companies.
6.
Regulating all matters relating to
unit trust schemes.
7.
Licensing and supervising all
licensed person.
8.
Encouraging self-regulation.
9.
Ensuring proper conduct of market
institutions and licensed persons.
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Shariah Advisory Council (SAC)
The SAC of the Securities Commission
Malaysia is responsible to advise on matters pertaining to the Islamic capital
market. Consisting of prominent Shariah scholars, jurists and market
practitioners, members of the SAC are qualifying individuals who can present
Shariah opinions and have vast experience in banking, finance, economics, law
and application of Shariah.
Roles of Shariah
Advisory Council (SAC)
- Development facilitates – development and regulation of new products
- The market provides greater clarity and enhances market confidence and integrity through the dissemination of Shariah rulings.
- Regular interaction with industry and other Shariah experts provide useful feedback for decision-making.
- Participation at international conferences and dialogues enhance awareness and understanding of Malaysia's Islamic capital market.
REGULATORY FRAMEWORK
In line with its vigorous effort to provide a facilitative regulatory environment for the development of the Islamic Capital Market, the Securities Commission introduced the following regulatory framework:
1. Guidelines on the Offering of Islamic Securities in July 2004:
◼These guidelines aimed to facilitate the development of more innovative and sophisticated Islamic instruments that meet the requirements of both local and global investors.
2. Guidelines for Islamic Real Estate Investment Trusts in November 2005
◼These guidelines were introduced to facilitate the creation of a new asset class and further development of new Islamic Capital Market products.
◼This effort is another notable effort, making Malaysia the first jurisdiction in the global Islamic financial sector to issue such guidelines.
3. Guidelines and Best Practices on Islamic Venture Capital in May 2008:
◼ The new guidelines stipulate the minimum requirements for the establishment of Islamic venture capital and Islamic venture capital management company.
◼ In addition, it includes a set of best practices to promote appropriate Islamic standards in the industry.
4. Guidelines on Unit Trust Funds in March 2008
◼ These guidelines set out requirements to be complied with by any person intending to establish a unit trust fund in Malaysia and were revised to set out additional requirements for the appointment of Shariah advisers and define the roles of the Shariah adviser and compliance officer.
◼ On top of a robust and effective regulatory framework, a fine balance between enhancing the growth of the industry and ensuring safeguards to protect investor interest needs to be a top priority when designing a regulatory framework for the market.
INTERNATIONAL ISLAMIC FINANCE BODIES
1) Malaysian Islamic Financial Centre
- The Malaysia International Islamic Financial Centre (MIFC) the initiative was launched in 2006 to develop Malaysia as an international marketplace for Islamic finance.
- Since its inception more than 30 years ago, Islamic finance in Malaysia has progressed and developed into a sophisticated Islamic finance marketplace that is characterised by a robust regulatory and supervisory framework, a deep primary market and active secondary sukuk market, a diverse talent base with global capabilities and connectivity, and product breadth and depth.
- The Malaysian marketplace also provides an efficient system for multicurrency clearing and settlement.
2) International Islamic Financial Market.
- IIFM is a standard-setting body of the Islamic Financial Services Industry (IFSI) focusing on standardization of Islamic financial contracts and product templates relating to the capital & money market, corporate finance and trade finance segments of the IFSI.
- IIFM plays its role in market unification by developing best practices at the global level and achieving Shari’ah harmonization through its efforts for the creation of a robust, transparent and efficient Islamic finance industry. IIFM also contributes in creating industry awareness by organizing specialized seminars and workshops as well as publishing research reports.
IIFM principal activities and the current focus
- Addressing the documentation standardization needs of the industry in the areas of Capital and Money Market, Corporate Finance and Trade Finance.
- Provide universal platform by bringing regulatory bodies, financial institutions, law firms, stock exchange, industry associations, infrastructure services providers and other market participants on a common platform through the creation of project specific global working groups and committees.
- Facilitate unification, Shariah harmonization and legal reforms in Islamic financial markets.
- Organize specialized events, market consultative meetings and standardization specific seminars and workshops.
- Research and reports on sukuk.
This is a forum about chapter 5
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