ISLAMIC INVESTMENT

Mahyuddin Khalidemkay@

salam.uitm

.edu.my

Investment Market and Transaction

Topic Outline

Marketable Financial Instruments Financial Markets Types of Secondary Market How Firms Issue Securities Islamic Financial Market in Malaysia Islamic Capital Market

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Marketable Financial Instruments

Characteristics of Marketable securities• A marketable security is a near-cash (liquid) asset and is recorded at acquisition cost (purchase price plus incidentals, commissions, and taxes) or market value (whichever is lower) in the account books under current assets.

• Can be traded between or among investors after their original issue in public markets and before they mature or expire.  

• Equity or debt instrument (share/stock, bond, note) that is listed on an exchange and can be readily bought or sold.

Non-marketable securities include savings bonds and restricted shares/stock.

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Marketable Financial Instruments

Markets can be categorized by the time to maturity

Money Market Securities(for short-term debt securities that are pure discount notes)• Bankers’ acceptances• Commercial Paper• Treasury Bills

Capital Market Securities (for long-term debt or equity securities with maturities greater than 1 year)• Sukuk/ Bonds• Debentures• Common Stock• Preferred Stock

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Investment Instruments

Financial securities can be categorized into 2 types:

Equity Instruments/ Share Capital• Common stock• Preferred stock

Debt Instruments• Commercial paper• Bankers’ Acceptances• Treasury bills• Mortgage loans• Sukuk/ Bonds• Debentures

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How Firms Issue Securities

When firms need to raise capital, they can choose to sell or float securities by offering their share to public

These new securities (stock, bonds etc.) offered to public is called the Primary Market

Two type of primary market issues :1. Initial Public Offering – issuing shares for the first time2. Seasoned New Issue – offered by listed company

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Initial Public Offering (IPO)

Initial Public Offering (IPO) Process is when one companies intend to sell stocks to the investing public.

Must get approval from Securities Commission to become a public listed company and have its shares listed in the Stock Exchange

To get the approval the firm must have Good track record of earnings Good management Fulfil basic statutory requirements

2 types of IPO1. Public offering

Firm offers its securities for sale to the general public2. Private placement

Firm sells new securities directly to selected groups of investors such as insurance companies and pension fund

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The Process for Initial Public Offering (IPO)

After getting approval the firm will appoint a merchant bank to prepare for the IPO

Price of stock/shares: The initial issue price is determined by merchant bank

based on the company’s financial health and track record, market conditions; investor sentiments etc.

Post-listing prices are determined by market conditions IPO market is considered as Primary market but once

listed it is traded in the Secondary market. This is because the IPO is normally offered to shareholders,

corporations, etc. before it goes public through the stock market

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Seasoned New Issued

Season New Issued is offered by companies that already listed companies. E.g. TNB new shares of stock would constitute a seasoned new issue.

There are four types of primary market for seasoned new issued: Public Offering Private Placement Right Offering: firm offers new share to the existing

stockholders who may purchase new shares in proportion to their current ownership position

Stock Splits: companies increase the number of shares outstanding by executing stock split. By declaring a split, a form announces that it will increase the number of shares outstanding by exchanging a specified number of new shares for each outstanding shares of stock.

Price Determination

Firm specific factors

Industry specific factors

Macro-economic

factors

Investor psychologySentiments

Performance of other

regional stock

markets

International events

etc.

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Financial Markets

Finan

cial

Mar

kets

Primary Market

Markets that involve the issue of new securities by the borrower in return for

cash from investors

Capital formation occurs

Secondary Market

Markets that involve buyers and sellers of existing

securities.

Funds flow from buyer to seller.

Seller becomes the new owner of the security.

No capital formation occurs

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Where Securities are Traded?

Secondary Market will provide liquidity to the sellers. Secondary Market does not involve corporation that

issued the securities. Types of Secondary Market:

1. Exchanges or Auction Markets Involve a bidding process that takes place in specific location E.g. Bursa Malaysia

2. Dealer or Over-the-counter (OTC) Markets Do not have a physical location and consist of a network of dealers

who trade directly with one another. E.g. sukuk market

There are several organized exchange market in Malaysia: Bursa Malaysia Securities Exchange Bursa Malaysia Derivatives Exchange

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Exchange Traded • Crude Palm Oil Futures• Crude Palm Kernel Oil

Futures • Single (Shariah-compliant)

Stock FuturesOTC• Islamic Profit Rate Swap • Foreign Exchange Swap• Cross Currency Swap

Islamic Financial Market In Malaysia

Shariah-compliantDerivatives

Islamic Financial Market

Islamic Banking & Takaful

Islamic Banking Financial Products

Takaful Investment Products

Islamic Capital Market

• Shariah Compliant Securities

• Islamic Indices • Islamic Unit Trust/Mutual

Fund• Islamic REITs• Islamic ETF• Islamic Venture Capital /

PE

• Deposits• Wealth products (structured investments)• Money market products • Financing products • Trade financing

• Takaful products (family and general)• Takaful linked investment products

• Asset-based sukuk

• Asset-backed sukuk

• Investment Sukuk

Shariah Compliant Structured Products

Bursa MalaysiaIslamic Banks and Takaful

companiesInvestment Banks Islamic Stockbroking

servicesIslamic Fund Management / Unit Trust Management Companies

Islamic Interbank Money Market

Bank Negara Malaysia Securities Commission Malaysia

PLATFORMS

INTERMEDIARIES

REGULATORS

PRO

DUCT

S

SukukEquity

Regulation of Malaysia Capital Market

Securities Commission (Amendment) Act 2015 And Capital Markets And Services (Amendment) Act 2015

Capital Markets and Services Act 2007 Securities Commission Malaysia Act 1993 Securities Industry (Central Depositories) Act 1991 Demutualisation (Kuala Lumpur Stock Exchange) Act 2003 Securities Industry Act 1983 Futures Industry Act 1993

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What is the Islamic Capital Market?

Islamic Capital Market is: Any market in which Shariah compliant securities are traded.

Islamic Capital markets include the Shariah compliant stock and Islamic bonds or Sukuk markets.

Companies and governments use the Islamic Capital markets to raise funds for their operations; E.g. a company may issue an IPO while a government may issue an Shariah

compliant securities or bonds in order to conduct new or expand ongoing activities.

Investors purchase Shariah 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, Secondary markets, where all subsequent trading takes place, such as Bursa

Malaysia. Government agencies in different countries regulate local capital markets,

though some, especially exchanges, play some role in regulating themselves.

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The Securities Commission

The SC is a self-funding statutory body with investigative and enforcement powers

The SC established on 1 March 1993 under the Securities Commission Act 1993

The SC reports to the Minister of Finance and its accounts are nominated in Parliament annually

The main functions of SC are: to promote the development of the capital market to stream line the regulations of the securities market

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Function of Securities Commission

Supervising exchanges, clearing houses and central depositories

Registering authority for prospectuses of corporations Approving authority for corporate bond issues Regulating all matters relating to securities and futures

contracts Regulating the take-over and mergers of companies Regulating all matters relating to unit trust schemes Licensing and supervising all licensed persons Ensuring proper conduct of market institutions and licensed

persons

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Bursa Malaysia

Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital Markets and Services Act 2007.

It operates a fully integrated exchange, offering the complete range of exchange-related services including trading, clearing, settlement and depository services.Securities Market Derivatives Market Islamic Offerings Others

Two Markets:1.Main Market: 823 companies2.Ace Market: 117 Companies

Products:• Shares• Real estate investment

trusts (REITs)• ETFs• TSR/Warrants• Loans• Bonds

• Commodity futures• Equity futures• Equity options• Financial futures

• Sukuk• Shariah compliant

equities• i-Reits• i-ETFs• Bursa Suq Al-Sila‘ (BSAS)• Bursa Malaysia-I

• Bond Market – Electronic trading platform for:• Government Bonds• Corporate Bonds

• Offshore Market• Non-Ringgit Securities• Sukuk Listing

• Closed-end funds• icapital.biz Berhad

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Bursa Malaysia-i

Bursa Malaysia-i: The world’s first integrated end-to end Islamic securities exchange

platform and the Marketplace for trading of Shariah-compliant capital market instruments.

Bursa Malaysia-i offers a comprehensive range of exchange-related facilities including: Listing, trading, clearing, settlement and depository services,

leveraging on the existing infrastructure with enhancements to incorporate Shariah-compliant features.

Bursa Malaysia-i provides investors seeking Shariah compliant securities a new landscape that they may access the Exchange’s services, either directly or online via Islamic brokers, where investors would be able to experience comprehensive end-to-end Shariah investing

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Bursa Suq Al-Sila' (BSAS)

BSAS is a commodity trading platform specifically dedicated to facilitate Islamic liquidity management and financing by Islamic financial institutions.

BSAS is a collaboration of Bank Negara Malaysia, Securities Commission, Bursa Malaysia and the industry players

The fully electronic web based platform provides industry players with an avenue to undertake multi commodity and multi currency trades from all around the world.

This pioneering effort cements Malaysia's strength in both Islamic finance and Crude Palm Oil industry.

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Shariah Advisory Council (SAC)

The SAC of SC was established in 1996 and as a main thrust of ICM products to comply on Islamic principles

The SAC is an important source of authority for Syariah compliance and plays a critical role in ensuring and maintaining market confidence in the ICM

SAC of SC has applied a standard criterion in focusing on the activities of the companies listed on Bursa Malaysia

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Shariah Advisory Council (SAC)

The SAC has approved an updated list of securities, which have been classified as Shariah-approved securities

If subject to certain conditions, companies whose activities are not contrary to the Shariah principles will be classified as Shariah-approved securities

For further information, please refer to website: http:www.sc.com.my

The functions of SAC are: To advise the Securities Commission on Shariah-related

matters To provide Shariah guidance on ICM transaction and

activities, To aimed at standardizing and harmonizing application

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Summary

In this chapter

you have learned about:

Marketable Financial Instruments

Financial Markets

Types of Secondary Market

How Firms Issue Securities

Islamic Financial Market in Malaysia

Islamic Capital Market

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