2. Equity Investment Risk
Content
Features of Equity
Investments
Equity Type of Shariah
Contract
Ways To Mitigate
Equity Risk
Learning Outcome
• To explain definition and feature
of Islamic Equity Investment
• To state risk in Islamic Equity
Investment Risk and their contract.
• To explain ways to reduce Islamic
Equity Risk in contract
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3. Definition
Islamic Financial Service Board (IFSB) identifies Equity
Investment Risk as:
the risk arising from entering into a partnership of undertaking
or participating in general business activity as described, in the
contract and in which the provider of finance shares the business
risk
E.g. Partnership-based investment are mudarabah and
musharakah contract.
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4. Features of Equity Investments
The nature of equity investments requires enhanced
monitoring measures to reduce informational asymmetric.
Both mudarabah and musharakah are profit/loss sharing
contract and are subject to loss of capital despite proper
monitoring
Equity investment may not generate a steady income
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5. Quality of Partner
Considerations as to the quality of the partner, underlying business
activities and ongoing operational matters.
By nature, this type of equity investment is exposed to a confluence of
risks associated with Mudharib or Mushārakah partner, business activity
and operations.
Factor of Environment
Factors relating to the legal and regulatory environment affect equity
investment performance, and need to be considered in the risk
evaluation.
These factors include policies pertaining to tariffs, quotas, taxation or
subsidies and any sudden policy changes affecting the quality and
viability of an investment.
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6. BNM classifies the following as equity positions:
Ordinary shares; voting or nonvoting (common or preferred)
Convertible Securities
Commitments to buy or sell equity securities
Equity Derivatives
Off-balance sheet items i.e. swaps and options
Underwriting of equities
Lack of Reliable Information
Equity Market are exposed to the risks attaching to a lack of truthful
information on which to base their investment evaluation, such as an
inadequate financial control system.
These risk can do by Mudharib and Musyarakah Partners.
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7. Credit Risk
One example of credit risk exposure arises from the Mudhārib’s
obligation to pay the agreed share of profit to the IIFS as Rabb al-
māl when such payment falls due.
Failure to meet this obligation constitutes a case of misconduct
and negligence in the part of the Mudhārib.
Industry Risk
All industries have some kind of cyclical growth.
Shareholders get rewarded most during the expansion stage.
However, once the industry reaches maturity stage, the rewards
of investment are limited and can go decline.
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8. Equity Type of Shariah Contract
Mudharabah
Mudharib
Performance
of Sales
Misreporting
of profit
Rabul Mal
Financial problem
to continue
investing
Responsibilities to
destruct of the
company property
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9. Musyarakah
Musyarakah
Performance of partners in Sales
Credit Risk
Financial problem in Musyarakah partner
Musyarakah Partners misreporting of profits
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10. Ways To Mitigate Equity Risk
Diversification
Invest over a long time
Take advice from an expert
Choosing a right company
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