1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
LEGAL FRAMEWORK OF ISLAMIC CAPITAL
MARKET

2. CONTENT
2
 INTRODUCTION
 ISLAMIC CAPITAL MARKET
 FRAMEWORK OF ICM
 DEVELOPMENT OF ICM
 REGULATORY BODIES
 REGULATORY FRAMEWORK
 ICM PRODUCTS
 SECURITIZATION
 CONCLUSION

3. INTRODUCTION
3
 The ICM is a component of the overall capital market in Malaysia.
IT functions as a parallel market to the conventional capital
market, and plays a complementary role to the Islamic banking
system in broadening and deepening the Islamic financial markets
in Malaysia.
 As the market became more complex and sophisticated, it needed
supportive infrastructure so that the system could operate and
function more efficiently and effectively.
 There is a wide array of ICM products and services to meet the
needs of those who seek to invest in compliance with Shariah
principles.
 These include Shariah-compliant stocks, Islamic bonds, Islamic
funds and Islamic risk management products.
 The ICM has grown in sophistication and Islamic forms of product
structuring, project financing, stockbroking, asset management
and venture capital services are becoming increasingly widely
available.

4. ISLAMIC CAPITAL MARKET
4
 An effective legal, regulatory and supervisory
framework provides the essential foundation for the
functioning of a modern capital market.
 Malaysia recognises that certain areas of
regulation, particularly inspection and
supervision, need to be further enhanced to ensure
that its ICM is appropriately regulated.
 For a rapidly growing market like the ICM, it is
important to ensure that an enabling and conducive
regulatory environment exists to adequately regulate
the ICM.
 Individual members may also wish to address any
factors that may impede effective product
development and innovation or discourage
participation in ICM transactions.

5. FRAMEWORK OF ICM
5
 The ICM activities can be adequately
regulated within the framework of the
conventional market.
 Due to the unique aspects of ICM products
and services, there is a view, which
advocates that specialised regulation for the
ICM may be more appropriate.
 Additional regulatory requirements are
imposed on Islamic financial intermediaries
such as requiring professionals to have
adequate knowledge in Shariah law as well
as requirements related to the internal
controls of the intermediary.

6. DEVELOPMENT OF ICM
6
 The ICM played a relatively minor role in the early stages of the
development of the Islamic Financial system in Malaysia.
 Apparently, there is a significant development of the ICM in 1990s
when more companies and other entities began to source for
funds from the capital market to finance their operations.
 In 1996, there is a promulgation of Shariah approved criteria and
the introduction of Shariah approved securities by the Securities
Commission.
 Thus, ICM has been increasingly accepted as an alternative
market for capital market seekers and providers.
 The market witnessed the development and issuance of variety of
ICM products either in term of debt or equities in year 2000
onwards:
 Notable issuance of first global corporate Islamic bond by Kumpulan
Guthrie Bhd in 2002 is a starting point liberalise market access.
 In 2004, there was another landmark issuance first ringgit
denominated Islamic bonds by the International Finance Corporation
(IFC), the private arm of World Bank.

7. REGULATORY BODIES
7
 The main regulatory bodies that govern the
Malaysian capital market are:
 Bursa Malaysia Berhad
 Securities Commission
 Labuan Offshore Financial Services Authority (LOFSA).
 The scope of jurisdiction for these regulating bodies
encompasses both Islamic and conventional finance
matters.
 Malaysia’s banking and insurance sectors come
under the jurisdiction of the Central Bank, Bank
Negara Malaysia (BNM) while the capital market is
regulated by the Securities Commission Malaysia
(SC).
 Matters related to offshore finance industry are
regulated by the Labuan Offshore Financial Services
Authority (LOFSA).

8. REGULATORY FRAMEWORK
8
 Currently, the Malaysian capital market is
governed by:
 Capital Markets and Services Act 2007
 Securities Industry (Central Depositories Act)
1991
 Securities Commission Act 1993
 Companies Act 1965
 Offshore Companies Act 1990
 Labuan Offshore Securities Industry Act 1995.

9. REGULATORY FRAMEWORK
9
 In line with its vigorous effort to provide facilitative
regulatory environment for the development of the
Islamic Capital Market, the Securities Commission
introduced the following regulatory framework:
 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.
 Guidelines for Islamic Real Estate Investment Trusts in
November 2005
 These guidelines were introduced to facilitate the creation of
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.

10. REGULATORY FRAMEWORK
10
 Guidelines and Best Practices on Islamic Venture
Capital in May 2008:
 The new guidelines stipulate the minimum requirements
for the establishment on an 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.
 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 top priority when designing regulatory framework for
the market.

11. CAPITAL MARKET MASTER PLAN
11
 The Capital Market Master Plan was launched in 2001, for
the developments of internationally competitive Islamic
capital market of Malaysia.
 Those strategic initiatives that necessary to be undertaken
to achieve this objective are
 to facilitate the development of various competitive products
and services related to the Islamic capital market
 to create an independent market to mobilize Islamic funds
effectively
 to ensure an appropriate and comprehensive accounting, tax
and regulatory framework
 to enhance the international recognition of the Malaysian
Islamic capital
 To ensure the objectives will be a reality, the Malaysian
government has considered this in their five years economic
plan of the country.

12. ISLAMIC INDEX
12
 The Malaysian capital market witnessed the
introduction of an Islamic index that tracks the
performance of the Shariah compliant securities on
Bursa Malaysia. Among others:
 The first Islamic equity index was introduced in Malaysia
by RHB Unit Trust Management Berhad in May 1996.
 The Dow Jones Islamic Market Index (DJIM) by Dow
Jones and Company was launched in February 1999
 The Kuala Lumpur Shariah Index (KLSI) by Bursa
Malaysia in April 1999
 The FSTE Global Islamic Index Series by the FSTE
Group in October 1999.
 All these indexes were launched in order to expand
participation of investors who are passionate
investing in securities approved in accordance to the
Islamic law.

13. ISLAMIC INDEX
13
 In addition, this provides the investors a tracking and
benchmarking of the performance of Shariah
compliant securities towards making better
investments decisions.
 Besides the Shariah indexes to measure the
performance of Islamic equity, in April 2006, the Dow
Jones Citigroup Sukuk Index was launched by Dow
Jones Indexes and Citigroup Inc.
 The objectives for the launching of the Sukuk Index
are:
 to educating investors about Sukuk
 building awareness of the vehicles
 improving market transparency
 providing a benchmark
 as a basis for investable and tradable products

14. BURSA SUQ AL-SILA’
14
 Another milestone project to further
strengthening Malaysia’s position as an
international Islamic financial hub is the launched
of the Bursa Suq Al-Sila‘
 It is world first commodity trading platform
specifically dedicated to facilitate Islamic liquidity
management and financing by Islamic banks.
 One notable features of this market is that, it is a
fully electronic web based platform that provides
industry players with an avenue to undertake
multi commodity and multi currency trades from
all around the world.
 Actually it integrates the global Islamic financial
and capital markets together with the commodity

15. ICM PRODUCTS
15
 The modern Islamic financial products and services are developed
using two different approaches:
 Identifying and modifying existing conventional products and services
to comply with Shariah principles.
 Innovation of new products and services that involves the application
of various Shariah principles.
 The Malaysian Islamic capital market products are mainly divided
into five categories of:
 Shariah compliant securities
 Shariah-based Unit Trust Fund,
 Islamic Exchanged Traded Funds (ETF),
 Islamic Real Estate Investment Trusts
 Sukuk (Islamic Bond).
 There is a significant product innovation and sophistication all over
the world and Shariah compliant products have proven to be
attractive also to non-Muslim investors and offer many
opportunities, even to non-Islamic institutions,

16. SECURITIZATION
16
 Securitization can be defined as:
 A process where corporation converts its physical assets
in to financial assets.
 Those assets to be securitized have to be illiquid –
cannot be traded in share market or secondary
market- and should also have produce cash flows
over its lifetime.
 Besides that, the assets should have financial value
so that they can be used as a claimed against the
securities.
 Islamic securitization can be defined as:
 A legal structure which satisfies the requirements of
Islamic Finance and replicates the economic purpose of a
traditional asset-backed securitization structure whereby
the rights over receivables are transferred from the
owner-originator to a special purpose vehicle
(SPV/Issuer), which in turn issues notes that are sold to
investors.

17. IMPORTANCE OF SECURITIZATION
17
 Securitization enables financial institutions to
efficiently remove assets from their balance
sheet, to monetize previously illiquid
assets, recycle cash to be reinvested
and, hence, expand the volume of their business
without a corresponding increase in their equity
capital. In simple terms, securitization allows
financial institutions to serve more customers
without having to raise new funds in the form of
either equity or deposits.
 Securitization helps financial institutions to raise
cheaper capital for their businesses at the asset
level instead of the enterprise level.
 In some jurisdictions, this allows originators to
benefit from tax savings such as tax on capital.

18. ASSET SECURITIZATION
18
 For both Murabahah and Al-Bai-Bithaman-Ajil (ABBA) asset
securitization, the processes of securitizing the assets are
the same.
 The difference between the two is in the maturity of the
securitization.
 Normally, Murabahah securitizations are on short-term
basis, while ABBA securitizations are for long-term
contracts.
 The securitization process is when a company (issuer) will
first sell its underlying assets to financiers or investors.
 For this, the investors will pay cash. Then, the investors will
sell back the underlying assets at a price higher than when
they bought the assets.
 Upon selling back of the assets to the company, the firm will
then issue certificates to the financiers; and upon maturity of
the certificates (bonds), the company will redeem their
securities at par value.

19. DEBT SECURITIZATION
19
 Ijarah-based securitization was seen as an ideal alternative for structuring
debt securities.
 Such securitization took off in a big way with the issue of ijarah
certificates by the Bahrain Monetary Agency (BMA). The BMA issued, in
2001, Islamic Leasing Certificates with a five-year maturity to the value of
$100 million. This issue, with bond-like characteristics, is the first of its
kind by a Central Bank in the world. The securities matured in 2006 with a
rental return of 5.25 per cent per annum.
 The ijarah securities were issued in the capital markets to mobilize short-
term deposits for the development of long-term infrastructure projects.
 This mobilization was effected through the securitization of government
tangible assets, such as airports, roads, buildings, factories, schools,
hospitals, power stations, refineries or a pool of such assets.
 Once these tangible assets were identified and specified, securities were
issued and sold to the public.
 The unique feature of these securities or sukuk is that rental payments
are guaranteed by the government, providing security and returns.
 Because the yield is predetermined (rental income) and the underlying
assets are tangible and secured, the ijarah certificates are also tradeable
in the secondary market like any other conventional debt security.

20. CONCLUSION
20
 The Malaysian Islamic Capital Market is growing rapidly and
vibrantly.
 At present, Malaysia faraway exceed other Muslim countries in
term of capital market infrastructure with persistent support by the
government providing impulsion for the growth of Malaysian
Islamic Capital Market.
 Initiatives taken by the Malaysian government towards a global
hub are substantial.
 Every perspective, such as product innovation, infrastructure
facilities, policy incentives, human capital
development, liberalisation and regulatory framework are being
well focused.
 All parties either the regulatory bodies or the market players are
involved to ensure the achievement of an international hub for an
Islamic Capital Market.
 In addition, it is a continuous effort whereby all aspect is being
reviewed by the respective bodies.
 It is responsibility of all to support and ensure the success of
Malaysia as a global hub for Islamic Capital Market.

21. 21 END OF CHAPTER