Shariah Screening Process in Islamic Capital Market DR MD Nurdin Ngadimon
Shariah Screening Process in Islamic Capital Market DR MD Nurdin Ngadimon
Shariah Screening Process in Islamic Capital Market DR MD Nurdin Ngadimon
Agenda
Shariah-Compliant Securities Approach and Methodology Case Study and Shariah Guidelines Development & Initiative for Screening
Trading
Investment Management
Products
Activities
Investor
Institution
Securities Laws
Infrastructure
Rules
Depository
Shariah-compliant Securities
Shariah-compliant Securities
Implementation of understanding of shares and mixed companies conduct by Muslims and non-Muslims
Availability of Shariah-compliant securities sets the foundation for Islamic equity investment
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 must conform with Shariah principles In Malaysia, the body that gives Shariah approval is the Shariah Advisory Council (SAC) of the Securities Commission (SC)
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The Shariah Advisory Council (SAC) reviews and endorses Shariah-compliant securities
S A C
Year Mid-1960s
Milestones Lembaga Tabung Haji (Pilgrims Fund) explored the possibility to invest its funds in Shariah-approved investment Bank Islam Malaysia initiated the review to determine Shariah status of listed stocks [but for internal use only]
Prior to 1997
1996-1997
the Shariah Advisory Council (SAC) of SC developed Shariah screening criteria to facilitate compliance review process
SC introduced the official list of Shariah-compliant stocks/securities listed on Bursa Malaysia
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June 1997
SC has a regulatory power to obtain relevant information and other business information from listed companies which are not publicly available
Enables SC to issue appropriate guidelines on Shariah compliance e.g guidelines on disposal of non-compliant stocks
Facilitates efforts to promote centralisation and harmonisation of Shariah decisions on the status of listed stocks Enhances market confidence as the stocks are endorsed by the Shariah body at national level
Agenda
Shariah-Compliant Securities
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Modern business and corporation Modern Business and Corporation not far from Musharakah
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. Any profit derived from the venture is distributed based on a pre-agreed profit sharing ratio and a loss is shared on the basis of capital distribution
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Musharakah
Riba- excess or surplus over and above the loan capital Gharar- ambiguity/element of deception Maisir- Gambling Liquor Other activities that are not allowed under Islamic principles.
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Based on Shariah criteria sourced from the Quran, the Sunnah, Qiyas, Ijma and other Shariah principles
Determine income contribution from Shariah prohibited activities of listed companies using Shariah methodology and criteria set out by the SAC
Classify a stock as Shariah-compliant if income contribution from the prohibited activities is within Shariah tolerable level
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Extraction of relevant financial information from audited financial report and other material information
Undertaking Shariah compliance review process to identify contribution from nonpermissible activities
Compile the result and issue list of Shariah-compliant securities Announcement in November every year May and
Tabulate the result to SAC for final consideration / decision based on quantitative method (financial benchmark) and/or qualitative consideration
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5. 6.
Conventional insurance
Entertainment Manufacture or sale of tobacco-based products or related products
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8. 1.
2.
In a nutshell: profits are shared according to the parties condition, nevertheless losses are shared according to shares in the capital Equal religion of the partner is not a condition
This type of partnership is the most common form Tolerant with the modern type of partnership/ company/corporation
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Muslims and non-Muslims are allowed to form a company together and Islam recognises ownership of non-Muslims and their property
Classical scholars discussed on to what extent non-Shariah compliant activities are allowed
Benchmark
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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 tobacco related activities
5%
10% Benchmarks
25%
20%
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 elements that may affect the Shariah status of these activities e.g hotel and resort operations, share trading and stockbroking
To asses the level of contribution of mixed rentals from Shariah non-compliant activities, such as rental income from premises used for supermarket which sales liquor, etc.
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Agenda
Shariah-Compliant Securities
Approach and Methodology Case Study and Shariah Guidelines Development & Initiative for Screening
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Related information
Interest income
Group info: Group TO: RM 10 mln Group PBT: RM 5 mln Group Int. Income: RM 0.8 mln Non-permissible activities info: TO liquor: RM 0.35 mln PBT liquor: RM 0.12 mln
Associated
*Not listed anywhere Bhd is Public Limited Company Sdn Bhd is Private Limited Company
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Pre-compliance result
Non-permissible Interest income to Group TO Percentage of liquor to Group TO Percentage of liquor to Group PBT Percentage of gaming to Group TO Percentage of gaming to Group PBT Calculation RM0.8 mln/ RM10 mln RM0.35 mln/ RM10 mln RM0.12 mln / RM5 mln RM0.19 mln / RM10 mln RM0.1 mln / RM5.0 mln Quantitative result 8% 3.50% 2.40% 1.90% 2%
Benchmark for interest income: 10% of Group TO Benchmark for liquor and gaming: 5% of Group TO or Group PBT
Contribution from interest income and non-compliant activities: Interest income: 8% Group TO: 5.4% (TO liquor + TO gaming) Group PBT: 4.4% (PBT liquor + PBT gaming) Pre-compliance result: Non-compliant stock
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Price < Original Investment Cost Hold until the price of stocks equal to original investment cost
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Example
Investment Cost (2 January) Announcement date (30 May) Disposal price (3 June)
RM5.50
RM6.00
RM7.50
Investment cost = RM5.50/share Closing price on the announcement date = RM6.00/share Disposal Price = RM7.50/share If investor disposes securities on 3 June, the capital gain is RM2 per share. He is only eligible to keep the profit of RM0.50 per share While RM1.50 should be channeled to charitable bodies)
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Example
Investment Cost (2 January) Announcement date (30 May)
RM5.00
RM4.00
Hold until the price of the stocks equal to the investment cost
Investors to dispose their non-compliant stocks within a month of knowing the status of the stocks. Any gain made in the form of capital gain or dividend received during or after the disposal of the stocks to be channelled to charitable bodies. Investors are entitled to keep their original investment cost
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Agenda
Shariah-Compliant Securities
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SC and Bursa Malaysia facilitate the development of new Shariah Indices Bursa Malaysia in collaboration with FTSE Group:
Jan 2007
Two new Shariah indices introduced
FBM Emas Shariah Index May 2007 FBM Hijrah Shariah Index (tradeable)
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Constituents was subjected to the international indexing features, such as free float and liquidity, Shariah screening by FTSE and SAC Reduced number of constituents compared to the existing Shariah Index. Index constituent review dates are the same as FBM Index Series i.e. in June and December
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Investable Index
FBM Hijrah Shariah Index
Yasaar
FBM Hijrah Shariah Index is a tradable index with the total number of constituents fixed at 30 Constituents are subject to FTSEs screening for free float and liquidity Constituents must pass Yasaar and SAC screening for Shariah compliance Index constituent review dates are the same as FBM Index Series i.e. in June and December
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The list of Shariah-complaint stocks received positive response from the private sector
Year Pre-1997 Milestones Bank Islam Msia Bhd issued list of Shariah- compliant securities for internal reference
Pre-1996-1997
Jun 1997 1999 2004 2007
As a result Islamic capital market has seen tremendous growth over the last decade
First List issued by SAC in June 1997
Shariah-non compliant 43% Shariahcompliant 57%
As at Nov 2008
Shariahcompliant 87%
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Market Capitalization
As at November 2008
350 300
No of securities
Industrial Products
Technology
Construction
Consumer Products
* As at 31 Dec 2008
Properties
Plantation
Trading / Services
Finance
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List of Shariah-compliant stocks as a catalyst of other ICM product & services developments
The list is a main source of reference to Islamic-based corporations & investors who only invest in Shariahcompliant instruments The list forms a basis for Shariah index constructed by Bursa Msia and FTSE which lead to the introduction of Islamic ETF, Islamic structured products, etc. Promotes growth of Islamic unit trust funds Spill over effect listed companies re-invest their surplus funds into Islamic banking accounts to earn profit instead of interest (riba) [10% benchmark of interest income] Non-Muslim investors who are concerned with ethical investment
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Tabung Haji Islamic religious bodies Bursa Msia Islamic UTs Stockbrokers Other institutional investors Islamic banks Retails investors
The list has given a significant impact to the tremendous growth of Shariah-based unit trust funds
Number of Shariah based Unit Trust Funds
No of Shariah Based Unit Trust Funds Total Funds Percentage of Shariah- based Unit Trust Funds
700 600
26.0 25.5 25.0 24.5 24.0
20 15
NAV (RM bln)
No of funds
2002
2003
2004
2005
2006
2007
2008
Number of Shariah-based unit trust funds1993 : 2 funds Dec 2008 : 149 funds
Net Asset Value of Shariah-based unit trust funds1993 : RM 0.97 billion Dec 2008 : RM 17.19 billion
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QUESTION?
Thank you
Dr Md Nurdin Ngadimon Islamic Capital Market Department Securities Commission Malaysia 3 Persiaran Bukit Kiara 50490 Kuala Lumpur www.sc.com.my