Fundamentals of Islamic Money and Capital Markets rs 31 January 2013; 13:18:52 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With o ces in North America, Europe, Australia, and Asia, Wiley is globally comitted to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding The Wiley Finance series contains books written speci cally for nance and investment professionals as well as sophisticated individual investors and their nancial advisors Book topics range from portfolio management to e-commerce, risk management, nancial engineering, valuation, and nancial instrument analysis, as well as much more For a list of available titles, please visit our website at www.WileyFinance.com rs 31 January 2013; 13:18:52 Fundamentals of Islamic Money and Capital Markets Mohd Azmi Omar Muhamad Abduh Raditya Sukmana rs 31 January 2013; 13:18:52 Published by John Wiley & Sons Singapore Pte Ltd Fusionopolis Walk, #07 01, Solaris South Tower, Singapore 138628 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte Ltd., Fusionopolis Walk, #07 01, Solaris South Tower, Singapore 138628, tel: 65 6643 8000, fax: 65 6643 8008, e-mail: enquiry@wiley.com Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best e orts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and speci cally disclaim any implied warranties of merchantability or tness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor the author shall be liable for any damages arising herefrom Other Wiley Editorial O ces John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany ISBN ISBN ISBN ISBN 978 978 978 978 1 1 118 118 118 118 50399 50400 50401 50402 7 (Paperback) (ePDF) (Mobi) (ePub) Typeset in 11/14 pt ArnoPro by MPS Limited, Chennai, India Printed in Singapore by Markono Print Media, Singapore 10 rs 31 January 2013; 13:18:52 To my mother, my wife, and my children Azmi To my mother, my wife, and my children Abduh To my parents, my wife, and my kids (Hanifah, Fakhruddin, and Azmi) Raditya rs 31 January 2013; 13:18:52 Contents Preface xiii Acknowledgments xv An Introduction to Conventional and Islamic Financial Systems Learning Outcomes Introduction The Roles and Functions of Financial Markets Structures of Financial Markets Based on the Instrument Based on the Issuance of Securities Methods Used in Secondary Markets Based on the Maturity Classification of Financial Markets The Money Market The Capital Market Types of Financial Intermediaries Depository Institutions Contractual Institutions Investments and Finance Institutions A Brief Overview of the Islamic Financial System Evolution of Islamic Finance Chapter Summary Chapter Questions ftoc 31 January 2013; 13:33:12 1 6 8 9 10 12 13 14 15 17 17 18 20 21 viii / Contents Notes References 22 22 Development of Islamic Capital and Money Markets in Malaysia 23 Learning Outcomes Introduction Development of Islamic Financial Institutions in Malaysia 1960 to 1990: Establishment of Islamic Financial Institutions 1990 to 2000: Conventional Banks Allowed to Offer Islamic Financial Products and Services 2000 to 2010: Islamic Subsidiaries and the International Integration of the Islamic Banking System Islamic Capital Markets in Malaysia Sukuk Islamic Collective Investments Islamic Stock Broking Malaysia International Islamic Financial Centre (MIFC) Chapter Summary Chapter Questions Notes References 23 24 24 24 27 29 30 31 32 33 34 36 36 36 Regulators and Transactions Platform for Capital and Money Markets 37 Learning Outcomes Introduction Bank Negara Malaysia (BNM) Role and Functions BNM Administered Legislation Role of BNM on ICM Development The Securities Commission (SC) Role of SC on ICM Development Bursa Malaysia (BM) Role of BM on ICM Development Shariah-Compliant Stocks and ETF Islamic Equity Indices Islamic REITs and Sukuk Market Chapter Summary Chapter Questions Notes References Websites 37 38 38 39 40 42 42 42 45 45 46 46 47 47 48 48 48 48 Islamic Money Market 49 Learning Outcomes Introduction Money Market Participants 49 50 50 ftoc 31 January 2013; 13:33:12 26 Contents / ix Functions of the Islamic Money Market Differences between Islamic and Conventional Money Markets Components of the Malaysian Islamic Money Market Islamic Interbank Market Mudarabah Interbank Investment Profit Calculation for Mudarabah Interbank Investment Example: Mudarabah Interbank Investment (MII) Commodity Murabahah Example: Commodity Murabahah Interbank Investment Wakalah Investment Trading of Islamic Money Market Instruments Government Investment Issue (GII) Example: Calculation of GII price Malaysian Islamic Treasury Bills (MITB) Example: Calculation of Proceeds on MITB Bank Negara Monetary Notes (BNMN) Sukuk Bank Negara Malaysia Ijarah (SBNMI) Islamic Negotiable Instruments (INI) Negotiable Islamic Debt Certificate (NIDC) Example: Calculation of Price of NIDC of Less Than One Year Example: Calculation of Price NIDC with Maturity of More Than One Year Islamic Negotiable Instruments of Deposit (INID) Example: Calculation of Proceeds for an INID Islamic Accepted Bill (IAB) Import and Local Purchases Export/ Local Trade Example: Price Calculation of IAB under Bai al-Dayn Sell and Buy Back Agreement (SBBA) Example: Sell and Buy Back Agreement Cagamas Sukuk Sanadat Mudarabah Cagamas (SMC) Example: Sanadat Mudarabah Cagamas (SMC) Calculation Sanadat Cagamas Islamic Corporate Sukuk Chapter Summary Chapter Questions Notes References 51 52 53 53 54 55 56 56 58 58 59 60 61 61 62 62 63 63 63 64 An Overview of Sukuk 77 Learning Outcomes Introduction Comparing Sukuk, Bonds, and Shares Sukuk Types Sukuk Structures Sukuk al-Ijarah Sukuk al-Musharakah 77 78 79 81 81 82 88 ftoc 31 January 2013; 13:33:12 65 66 66 67 67 67 68 68 69 70 70 71 71 72 72 73 73 74 x / Contents Sukuk al-Mudarabah Sukuk al-Salam Sukuk al-Istisna Sukuk al-Murabahah Sukuk al-Istithmar Sukuk al-Wakala Chapter Summary Chapter Questions Notes References 94 99 102 106 110 114 117 118 118 119 Shariah-Compliant Equity 121 Learning Outcomes Introduction The Structure of Equity Markets Shariah-Compliant Equity Securities Differences between Shariah and Non Shariah-Compliant Equity Markets Shariah-Compliant Stocks Screening Malaysia Securities Commission S&P Shariah Indices Pakistan Meezan Islamic Fund Global GCC Islamic Fund Screening Jakarta Islamic Index Chapter Summary Chapter Questions Note References 121 122 124 125 128 130 130 131 133 134 135 136 136 136 136 Islamic Mutual Funds 139 Learning Outcomes Introduction Closed and Open-Ended Funds Conventional Mutual Funds Active and Passive Management Advantages of Mutual Funds Disadvantages of Mutual Funds Fees and Expenses Islamic Mutual Funds Basic Concept of Islamic Mutual Funds Shariah Stock Screening Purification of Income Types of Islamic Mutual Funds The Role of the Shariah Advisory Board in Islamic Mutual Funds Calculating NAV in the Islamic Mutual Funds Organisation of Islamic Mutual Funds 139 140 140 141 143 143 144 145 146 147 147 148 149 ftoc 31 January 2013; 13:33:12 151 151 153 Contents / xi 10 The Process of Investing in Islamic Mutual Funds Islamic Ethical Investment and Ethical Investment Chapter Questions Notes References 154 156 158 158 158 Islamic Real Estate Investment Trusts (I-REITs) 161 Learning Outcomes Introduction Islamic Real Estate Investment Trusts (I-REITs) Shariah-Permissible Investments for I-REITs I-REITs Structure Case Study: Al- Aqar KPJ REIT Case Study: Al-Hadharah Bousted REIT Difference between Conventional and Islamic REITs Chapter Summary Chapter Questions Notes References 161 162 165 166 169 171 174 176 177 178 178 178 Islamic Exchange-Traded Funds 179 Learning Outcomes Introduction Open- and Closed-End Funds, and Unit Trust Funds Open-End Funds Closed-End Funds Unit Trust Exchange-Traded Funds (ETFs) Islamic Exchange Trade Funds (I-ETFs) Security Borrowing and Lending in Malaysia Islamic ETFs in Other Countries Challenges in Promoting I-ETFs Chapter Summary Chapter Questions Notes References 179 180 180 180 181 181 181 185 190 195 195 196 197 197 197 Islamic Derivatives Market 199 Learning Outcomes Introduction Derivative Securities in the Conventional Market Risk Profile Main Players in the Derivative Markets Hedging with a Forward Contract Hedging with Future Contracts Hedging with Swap Contracts 199 200 200 202 203 204 205 206 ftoc 31 January 2013; 13:33:12 CHAPTER 10: Islamic Derivatives Market / 225 fails to perform, then investors will lose their money but not their capital, as it is protected with the arrangement of the commodity murabaha There is a Shariah issue in the above-mentioned Islamic structured product It seems that the structuring is done via more than one contract in one transaction First, the portion of A, which is a bigger portion used to protect the capital with the adoption of the commodity murabaha, and second, the portion B, which is the investment via an Islamic option to optimise the portfolio This raises the issue of the mixed contract in one deal This issue has long been debated However, it has also been practised by Islamic banks for many years One instance is the murabaha contract Theoretically, murabaha would require a bank to buy in cash a specific asset that is requested by the customer Once the ownership has been transferred to the Islamic bank, then the asset will be sold to the customer on a deferment basis However, this ideal process in many cases creates difficulties in the real application, such as the issue of taxation and the administration process, as well as the time needed to complete the process As a result, Islamic banks have to find other ways to make a murabaha arrangement simpler and more efficient This is done via additional contracts, such as al-inah and wa d, as well as wakalah These additional contracts are intended to simplify the process However, this raises an issue regarding the permissibility of two or more contracts in one transaction The opponents view is that this practice is a backdoor to riba In other words, they have said that this structure is a means for practising interest-based financing under an Islamic nomenclature Hence Islamic finance is no different from its conventional counterpart (Hasan, 2007) Nevertheless, the proponents have argued that if the arrangement is designed in such a way that it keeps within Shariah boundaries, several contracts that are taking place concurrently or in a close sequence alone will not dictate the invalidity of the whole process As the contract is structured to be independent, the amalgamation is permissible As a result, the opinion of the jurist is that amalgamation of contracts is allowed provided that a guideline is carefully followed Chapter Summary Sukuk is certificates of equal value representing undivided shares in ownership of tangible assets, usufruct, and services, or (in the ownership of) the assets of particular projects or special investment activity; however, this is true after the receipt of the value of the sukuk, the closing of the subscription, and the employment of funds received for the purpose for which the sukuk were issued Ibn Taimiyyah divided risk into two categories: commercial risk and gambling risk The former is commonly faced by a trader, for instance: the risk of goods being unsold The latter implies eating for nothing It can also refer to a zero sum game whereby no additional wealth is created Conditions of risk that are allowed in Islam: the inevitability that deeds will be accompanied by risks, the insignificance of risk when the risk is small, and the unintentional occurrence of risk c10 31 January 2013; 19:14:53 226 / FUNDAMENTALS OF ISLAMIC MONEY AND CAPITAL MARKETS Two reasons given by investors in dealing with derivatives: speculative and hedging goals An example of the former is short selling, whereby the investor sells stock (although he does not have that stock) at the morning session of the stock trading when the price is attractive and then buys the same stock at the afternoon session when the price is going down Hence, he or she gains the price difference This is certainly not Shariah-compliant However, some Shariah scholars accept hedging as permissible when it protects investors against the volatility of the market price The feature of the forward as well as the future contract that is against Shariah principles is that the contract is based on the payment of the money and the delivery of the goods that both will occur in the future The Islamic instrument that is close to the forward and future contract is the salam contract The Islamic instrument that may be used that is similar to the call option is urbun It is basically a down payment Meanwhile, for the put option, the Islamic instrument can use the concept of the third-party guarantee as well as khiyar al shart For the conventional swap, both cross-currency swaps as well as interest-rate swaps can be replaced with the arrangement of murabaha and secondary revolving murabaha In a conventional swap, there exists only an exchange of currency and interest while in Islam, it involves an asset This leads to the approval of the Islamic swap Structured products are the investment types for which no similarity exists with any other particular asset class or any other financial instrument that is standardised Another definition is that it is a sophisticated product created and designed so as to meet the specific needs of a client This product is specific, whereby its features cannot be served by a common financial instrument and most of the time, if not at all times, it is a combination of at least two financial instruments Chapter Questions Briefly explain the mechanism of the Islamic Profit Rate Swap Briefly explain the mechanism of the Islamic Cross-Currency Swap What are the Islamic perspectives on conventional forwards? What are the Islamic perspectives on conventional options? What are the Islamic perspectives on conventional futures? Notes See Suwailem, 2006 Ibid Ibid., 36 Ibid., 36 c10 31 January 2013; 19:14:53 CHAPTER 10: Islamic Derivatives Market / 227 Same with Figure 10.2 One basis point is equal to 0.01 percent See Suwailem 2006, 58 Guidelines on the offering of the structured product by Securities Commission, Revised Edition: April 27, 2007 References Archer, A., and R A A Karim 2002 Islamic Finance: Innovation and Growth London: Euromoney Books Global Islamic Finance Report 2010 Global Islamic Finance Annual Report Global Islamic Finance Report 2010 Islamic Derivatives, Theory and Practice Global Islamic Finance Hasan, A 2007 Islamic Structured Products: Issues and Challenges Paper presented at Muzakarah Pakar-Pakar Shariah, Kuala Lumpur Islamic Finance Forum, Nikko Hotel, November 9, 2007 IFSB 2005 Guiding Principles of Risk Management for Institutions (Other than Insurance Institutions) Offering Only Islamic Financial Services Exposure, Draft no www.ifsb.org Obiyathullah, B 1999 Derivative Instruments and Islamic Finance, International Journal of Islamic Financial Services, 1, no.1 Ross, S A., R W Wester eld, and B D Jordan 1995 Fundamentals of Corporate Finance, 3rd ed New York: Irwin Ryandono, M N H 2009 Bursa Efek & Investasi Syariah Serambi, Yogyakarta, Indonesia Securities Commission 2007 Guidelines on the Offering of Structured Products Kuala Lumpur, Malaysia Shihab, M.Q 2002 Tafsir Al Misbah Lentera Hati, Jakarta, Indonesia Suwailem, S 2006 Hedging in Islamic Finance Islamic Development Bank, Occasional Paper No 10 Vogel, F E., and S L Hayes, III 1998 Islamic Law and Finance: Religion, Risk, and Return Kluwer Law International c10 31 January 2013; 19:14:53 Bibliography Abdul Majid, A R Development of Liquidity Management Instruments: Challenges and Opportunities, 2003, www.sbp.org.pk/departments/ibd/Lecture_6_LIQUIDITY_MANAGEMENT pdf Adam, N J., and Thomas, A K Islamic Bonds: Your Guide to Issuing, Structuring, and Investing in Sukuk London: Euromoney Books, 2004 Alvi, I A Interbank Money Market Operations, 2009, www.iifm.net/media/PDF/presen tation-paper/Interbank-Money.pdf Alvi, I A Liquidity Management in Islamic Finance Products and Documentation, 2009, www.iifm.net/media /PDF/presentation-paper/Liquidity-Managemen.pdf Archer, A., and R.A.A Karim Islamic Finance: Innovation and Growth London: Euromoney Books, 2002 Bank Negara Malaysia Guidance Notes on Sell and Buyback Agreement Transactions, 2002, http://iimm.bnm.gov.my/view.php?id=2&dbIndex=0&website_id=14&ex=1287597448&md= D%F7%5Dr.%EAS%CD%9BsZy%87%E21%E9 Bank Negara Malaysia Guidelines on Accepted Bills, 2003, http://iimm.bnm.gov.my/view php?id=1&dbIndex=0&website_id=14&ex=1287597448&md=%02%24%D5%E4Y%60%96L %E6%0E8%0FE_R%21 Bank Negara Malaysia The Framework of the Rate of Return, 2004, http://iimm.bnm.gov my/view.php?id=7&dbIndex=0 &website_id=14&ex=1287597448&md=ul%2A%EFGB%9AJ %9B%5D%95%F1%0E%E0%2A%B5 Fundamentals of Islamic Money and Capital Markets By Mohd Azmi Omar, Muhamad Abduh and Raditya Sukmana Copyright © John Wiley & Sons Singapore Pte Ltd bbiblio 31 January 2013; 19:34:11 230 / Bibliography Bank Negara Malaysia Guidelines on Islamic Negotiable Instruments, http://iimm.bnm.gov my/view.php?id=3&dbIndex=0& website_id=14&ex=1287597448&md=%0DX%D3%88% E8W%88D%D2%16%A8%06%3F%99%25p (accessed September 1, 2010) Burton, M., R Nesiba, and R, Lombra An Introduction to Financial Markets and Institutions Mason, OH: South-Western, 2003 Coyle, Brian Money Markets Kent, UK: Financial World Publishing, 2001 Dubai International Financial Centre and Clifford Chance Sukuk Guidebook Dubai: Author, 2009 Elgari, M A Islamic ETFs International Islamic Capital Market Forum, Securities Commission, Kuala Lumpur, March 27, 2008 Fabozzi, F J., F Modigliani, and F J Jones Foundations of Financial Markets and Institutions, 4th ed Upper Saddle River, NJ: Prentice-Hall Fabozzi F J., and F Modigliani Capital Market: Institutions and Instruments Upper Saddle River, NJ: Prentice-Hall, 2009 Global Islamic Finance Report, 2010 Global Islamic Finance Global Islamic Finance Report, 2010 Islamic Derivative, Theory, and Practice Global Islamic Finance Goeltom, M S Essays in Macroeconomic Policy: The Indonesian Experience Jakarta: Gramedia Pustaka Utama, 2007 Hasan, A Islamic Structured Products: Issues and Challenges Paper presented at Muzakarah Pakar-Pakar Shariah, Kuala Lumpur Islamic Finance Forum, Nikko Hotel, November 9, 2007 Hasan, A Shariah Issues in Islamic ETFs International Islamic Capital Market Forum, Product Innovation: Islamic ETF and Commodity Murabahah, March 27, 2008 Institute Bank/Bank Malaysia Study Manual: Treasury Kuala Lumpur: Institute Bank/Bank Malaysia, 2003 Iqbal, Z., and Mirakhor, A An Introduction to Islamic Finance: Theory and Practice Hoboken, NJ: John Wiley & Sons, 2007 Islamic Financial Service Board Technical Note on Issues in Strengthening Liquidity Management of Institutions Offering Islamic Financial Services: The Development of Islamic Money Markets, March 2008, www.ifsb.org/docs/mar2008_liquidity.pdf Kassim, S Bank Lending and the Transmission Monetary Policy in Malaysia Unpublished doctoral dissertation, International Islamic University Malaysia, Kuala Lumpur, 2006 Madura, J Financial Institutions and Markets, 9th ed Mason, OH: South-Western, 2010 Mokhtar, S Behind the Screen of ETF, ISRA Bulletin (2009) Moss, Alex Asian REIT Market: Overview London: AME Capital Ltd., 2007 bbiblio 31 January 2013; 19:34:12 Bibliography / 231 Nisar, Shariq How Sukuk Works: Introduction, Structuring and Application of Sukuk Bonds, 2010, http://ifresource.com/2010/04/27/how-sukuk-works-introduction-structuring-andapplication-of-sukuk-bonds/ Obiyathullah, B Derivative Instruments and Islamic Finance, International Journal of Islamic Financial Services 1, no (1999) Pratomo, Eko Development and Challenges of Indonesia Syariah Funds Fortis Investments, 2007 PricewaterhouseCoopers Understanding the Tax, Regulatory, and Legal Aspects for Real Estate Cross-Border Investments and Joint Ventures Real Estate Investment World Conference, November 2008 Rose, P S Money and Capital Market, 7th ed New York: Irwin McGraw-Hill, 2000 Ross, S A., R W Wester eld, and B D Jordan Fundamentals of Corporate Finance, 3rd ed New York: Irwin Ryandono, M.N.H Bursa Efek & Investasi Syariah Serambi, Yogyakarta, Indonesia, 2009 Securities Commission Resolution of the Securities Commision Syariah Advisory Council Suruhanjaya Sekuriti Securities Commission, 2002 Securities Commission Asia s First Islamic ETF, Quarterly Bulletin of Malaysian Islamic Capital Market 3, no (January 2008) Securities Commission Part I: Islamic Alternative to Stock Borrowing and Lending, Quarterly Bulletin of Malaysian Islamic Capital Market 3, no (July 2008) Securities Commission Part II: Islamic Alternative to Stock Borrowing and Lending, Quarterly Bulletin of Malaysian Islamic Capital Market 3, no (November 2008) Securities Commission Guidelines on the Offering of Structured Products Kuala Lumpur, Malaysia, 2007 Securities Commission Introduction to Islamic Capital Market LexisNexis Securities Commission Sukuk Singapore: Sweet & Maxwell Asia, 2009 Shihab, M Q Tafsir Al-Misbah Lentera Hati, Jakarta, 2002 Standard & Poor s S&P Shariah Indices: Index Methodology Standard & Poor s, 2007 Suwailem, S Hedging in Islamic Finance Islamic Development Bank, Occasional Paper No 10 Usmani, M T Sukuk and their Contemporary Applications, www.failaka.com/downloads/ Usmani_SukukApplications.pdf Vogel, F E., and S L Hayes, III Islamic Law and Finance: Religion, Risk and Return The Hague: Kluwer Law International Yousaf, K Getting to Grips with Islamic Exchange-Traded Funds Islamic Financial Markets, Grand Hyatt, Jakarta, August 25, 2008 bbiblio 31 January 2013; 19:34:12 232 / Bibliography Websites www.al-hadharahboustead.com.mywww.bnm.gov.my www.klse.com.my www.sc.com.my bbiblio 31 January 2013; 19:34:12 About the Authors Professor Azmi is currently the Director General, Islamic Research and Training Institute (IRTI), Islamic Development Bank He was formerly the Deputy Rector (Deputy ViceChancellor) in charge of Academics and Research at the International Islamic University Malaysia Professor Azmi has also served as the Dean of the Faculty of Economics & Management Sciences, Dean of Corporate Strategy and Quality Assurance and Dean of the Institute of Islamic Banking and Finance He obtained his Bachelor s and Master s degrees in Finance from Northern Illinois University, United States, and his PhD from Bangor University, United Kingdom Prior to joining IIUM, Professor Azmi worked at Bank Bumiputra Malaysia Berhad, now known as CIMB Bank His teaching, research, publication, and consultancy interests include Islamic banking and finance, Islamic capital markets, portfolio management, and Balanced Scorecard He was the Chairman of the IIUM Balanced Scorecard team, which led IIUM to be inducted in the coveted award of Hall of Fame in 2008, the second university in the world to be inducted in this prestigious group Professor Azmi has advised a number of commercial and investment banks in Malaysia and abroad on Islamic banking and finance and sukuk He has also advised universities in Malaysia, Brunei, Indonesia, and Sri Lanka on Islamic banking undergraduate and postgraduate programs He was formerly the Shariah adviser to Bank Rakyat Malaysia Berhad and Amanah Ikhtiar Malaysia (a microfinance institution) and a member of Investment Committee of Permodalan BSN Berhad (a unit trust company) and chaired the Investment Committee of IIUM s endowment fund He may be contacted at azmiomar@isdb.org Fundamentals of Islamic Money and Capital Markets By Mohd Azmi Omar, Muhamad Abduh and Raditya Sukmana Copyright © John Wiley & Sons Singapore Pte Ltd babout 31 January 2013; 13:34:1 234 / About the Authors Dr Muhamad Abduh is an Assistant Professor at the IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University Malaysia He obtained his Bachelor in Science (Statistics) from Bogor Agricultural University, Indonesia, and his Master of Arts (Islamic Studies) from Ibn Khaldun University, Indonesia He has also obtained his Master of Economics (Islamic Banking and Finance) degree from the Department of Economics of KENMS-IIUM in 2009 and his PhD in Business Administration (Islamic banking) from KENMS-IIUM in 2011 His research interest is in the area of Islamic Banking and Finance Dr Abduh has presented papers in many conferences and has several journal articles that have been published in the International Journal of Excellence in Islamic Banking and Finance; International Journal of Islamic and Middle Eastern Finance and Management; Journal of Islamic Economics, Banking, and Finance; American Journal of Applied Sciences; Business Intelligence Journal; Journal of Islamic Finance, and so forth He is currently appointed as the Head of Research of the IIiBF as well as the Editor-in-Chief of the Journal of Islamic Finance (JIF), official journal of IIiBF Dr Raditya Sukmana is an Assistant Professor at the Department of Islamic Economics, Airlangga University, Surabaya City, Indonesia He has obtained his Bachelor s degree in Finance from Airlangga University, Indonesia, a Master s of Economics degree from Georgia State University, United States, and a PhD in Islamic Finance from International Islamic University Malaysia (IIUM) in 2010 His interest areas are Islamic capital markets, Islamic banking, and the Islamic monetary system Dr Sukmana has presented many Islamic banking and finance papers at several international conferences in many countries, such as Malaysia, England, Poland, the United States, and Australia He has also published several papers in reputable journals, for example, International Journal of Islamic and Middle Eastern Finance and Management babout 31 January 2013; 13:34:1 Index A AAOIFI See Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 20, 78, 168 Financial Accounting Standard No 17 (AAOIFI FAS 17), 81, 118 AFB See Asian Finance Bank Berhad (AFB) AFFIN Islamic See A n Islamic Bank Berhad (AFFIN Islamic) A n Islamic Bank Berhad (AFFIN Islamic), 27 28 Al- Aqar KPJ REIT, 32 Al-Hadharah Boustead REIT, 32 Al Rajhi Bank, 28 ambiguity (gharar), 17 Anti-Money Laundering and Anti-Terrorism Financing Act, 41 Aras Sejagat Bank Guarantee Sukuk, term sheet, 84 arbitrageurs, 203 Asian Finance Bank Berhad (AFB), 29 Asian nancial crisis, 200 asset-backed securities, 168 B back-end load, 145 BAFIA See Banking and Financial Institutions Act (BAFIA) bank acceptances, Banking and Financial Institutions Act (BAFIA), 41 Bank Islam Malaysia Berhad, 25 26 Bank Muamalat Malaysia Berhad (BMMB), 27 28 Bank Negara Malaysia (BNM), 26, 38 39, 42, 47 BNM Administered Legislation, 40 41 BNM s role on ICM development, 42 governors of, 39 role and functions, 39 40 Bank Negara monetary notes (BNMN), 62 BM See Bursa Malaysia (BM) BMMB See Bank Muamalat Malaysia Berhad (BMMB) BNM See Bank Negara Malaysia (BNM) BNMN See Bank Negara monetary notes (BNMN) boards of directors fees and expenses, 145 bonds, 8, 10, 12 14, 17, 19 20 borrowers, 3, 11 12, 18, 20 Bu ett, Warren, 201 Bursa Malaysia (BM), 45 BM s role on ICM development, 45 46 list of subsidiaries of, 46 Bursa Suq-al-Sila, 40 business activity screening, 135 C Cagamas Sukuk (National Mortgage Corporation), 70 71 Capital Issues Committee (CIC), 42 capital market, 10, 12 13, 50, 140, 144 Capital Market Master Plan (CMP), 42 Capital Markets and Services Act, 42, 186, 191 Capital Market Service Licence (CMSL), 186 CDs See certi cates of deposit (CDs) central bank funds, 11 Central Bank of Malaysia Act, 38 41, 47 Fundamentals of Islamic Money and Capital Markets By Mohd Azmi Omar, Muhamad Abduh and Raditya Sukmana Copyright © John Wiley & Sons Singapore Pte Ltd bindex 31 January 2013; 19:42:7 236 / Index central facilitating agent (CFA), 193 certi cates of deposit (CDs), 12 CFA See central facilitating agent (CFA) charging interest (riba), 146 47 CIBAFI See Council for Islamic Banks and Financial Institutions (CIBAFI) CIC See Capital Issues Committee (CIC) closed-end funds, 181 CMP See Capital Market Master Plan (CMP); Malaysia Capital Market Masterplan (CMP) CMSL See Capital Market Service Licence (CMSL) commission, 145 commodity futures, 206 commodity market, 50 Commodity murabahah, 52, 56 58, 72 common stock, 122 24, 136 Companies Commission of Malaysia, 42 conditional order, 122 24 Council for Islamic Banks and Financial Institutions (CIBAFI), 20 credit, credit institutions, credit markets, cumulative preference stocks, 123 custody fees, 145 D daily liquidity, 143 44 debt instruments, 8, 12 debt markets, demand deposits, derivative market, 50 derivative securities in the conventional market, 200 201 in the Islamic perspective, 211 13 Development Financial Institutions (DFIs), 15 Development Financial Institutions Act, 41 DFIs See Development Financial Institutions (DFIs) direct nancing, 140 Diversi cation, 143, 150, 157 dividend, 122 23, 135 36 dividend payments, 123, 136 dividend puri cation, 135, 148 Dow Jones Islamic (DJIM) index, 46, 130 business activity screening, 134 nancial ratio, 135 nancial ratio screenings, 134 nancial ratio screens, 133 industry screens, 133 investee company, 134 revenue less than percent of, 132 33 selection universe for, 133 E EFTs See exchange-traded funds (ETFs) EONCAP Islamic Bank, 27 equity instruments, 9, 12, 21 bindex equity markets, structure of, 124 25 ethical investment, 156 57 Exchange Control Act, 40 41 exchanges markets, 9, 21 exchange-traded funds (ETFs) See also Islamic exchange-traded funds (I-ETFs) about, 181 85, 196 bene ts of, 196 closed-end funds, 181 ETF, process of, 189 ETFs vs stocks vs unit trusts, 184 evolution of, 182 open-end funds, 180 81 risks in investing in, 196 unit trust, 181, 184 expense ratio, 146 F FakhriCorporation (FC), 207 FBM EMAS Shariah See FTSE Bursa Malaysia EMAS Shariah index (FBM EMAS Shariah) FBM Hijrah Shariah See FTSE Bursa Malaysia Hijrah Shariah Index (FBM Hijrah Shariah) FC See FakhriCorporation (FC) nancial futures, 206 nancial intermediaries, chart, 13 contractual institutions, 15 17 depository institutions, 14 15 input-output ow of funds in nancial intermediaries, 14 investments and nance institutions, 17 takaful vs conventional insurance, 16 nancial intermediary institutions, nancial markets, 2, roles and functions of, structures of, nancial markets classi cation about, 10 capital market, 12 13 nancial markets and its instruments, 10 money market, 10 11 money market instruments, 11 12 money market participants, 11 nancial markets structures instrument, based on the, issuance of securities, based on the, maturity, based on the, secondary markets, methods used in, nancial ratio screening, 134 nancial system de ned, ows of funds through, foreign exchange market, 50 forward contract, 204 6, 208 9, 214 front-end load, 145 FTSE Bursa Malaysia EMAS Shariah index (FBM EMAS Shariah), 46 31 January 2013; 19:42:7 Index / 237 FTSE Bursa Malaysia Hijrah Shariah Index (FBM Hijrah Shariah), 46 fund managers, 141, 144, 154 funds accounting fee, 145 futures contracts, 206 G gambling (maisir), 18, 126 28, 130 31, 134 GII See government investment issue (GII) GLCs See government-linked companies (GLCs) GLICs See government-linked investment companies (GLICs) Global GCC Islamic Fund screening, 134 government investment certi cates (GIC), 60 61 government investment issue (GII), 54, 60 61 government-linked companies (GLCs), 11, 186 government-linked investment companies (GLICs), 190 government oversight, 144 Greenspan, Alan (Governor of Federal Reserve), 200 201 gross pro t rate, 54 56 H Hajj candidates, 146 Hanifah Corporation (HC), 207 haram income puri cation, 148 49 hedgers, 203 hedging See Islamic derivatives market I IAB See Islamic Accepted Bill (IAB) IBS See Islamic Banking Scheme (IBS) ICM See Islamic Capital Market (ICM) ICMD See Islamic Capital Market Department (ICMD) IDB See Islamic Development Bank (IDB) I-ETFs See Islamic exchange-traded funds (I-ETFs) IFSB See Islamic Financial Services Board (IFSB) IIFM See International Islamic Financial Market (IIFM) IIMM See Islamic interbank money market (IIMM) IIRA See International Islamic Rating Agency (IIRA) IMF See International Monetary Funds (IMF) INAV See indicative NAV (INAV) indicative NAV (INAV), 184 indirect nance, INI See Islamic Negotiable Instruments (INI) INID See Islamic Negotiable Instruments of Deposit (INIDs) initial public o ering (IPO), 140 Insurance Act, 41 International Centre for Education in Islamic Finance, 42 International Islamic Financial Market (IIFM), 20 International Islamic Rating Agency (IIRA), 20 International Monetary Funds (IMF), 38 International Shariah Research Academy for Islamic Finance (ISRA), 40, 42 Investee Company core business activities of, 134 mixed business activities of, 134 investment adviser, 145, 153 54 investment banks, 8, 13 investment sukuk, 78 Investment Sukuk Standard, 79 bindex IPDS See Islamic private debt securities (IPDS) IPO See initial public o ering (IPO) I-REITs See Islamic Real Estate Investment Trusts (I-REITs) Islamic Accepted Bill (IAB), 67 68 export/ local trade, 67 68 import and local purchases, 67 price calculation of IAB under Bai al-Dayn, 68 Islamic accepted bills, Islamic alternative of stock borrowing and lending, 193 Islamic Banking Act, 40 41, 45 Islamic Banking Scheme (IBS), 26 Islamic bonds (sukuk), 47 See also sukuk Islamic capital market (ICM) about, 20, 30, 38, 125, 192 BM s role on, 45 46 BNM s role on, 42 Islamic Capital Market Department (ICMD), 43 Islamic Capital Markets in Malaysia, 29 33 Islamic Corporate Sukuk, 72 Islamic derivatives market commodity swap, 207 currency swap, 207 derivative markets, main players of, 203 derivative securities in the conventional market, 200 201 derivative securities in the Islamic perspective, 211 13 hedging with a forward contract, 204 hedging with future contracts, 205 hedging with option contract, 208 11 hedging with swap contracts, 206 interest rate swap, 207 Islamic cross-currency swap, 218 20 Islamic forward and future contract, 213 16 Islamic option contract, 216 18 Islamic pro t rate swap, 220 22 Islamic structured product, 222 25 risk pro le, 202 Islamic Development Bank (IDB), 18 Islamic Equity Indices, 46 47 Islamic ethical investment and ethical investment, 156 57 Islamic exchange-traded funds (I-ETFs) See also Exchange-Traded Funds (ETFs) about, 180, 185 90, 195 96 I-ETFs, challenges in promoting, 195 96 I-ETFs commodity, examples of, 186 I-ETFs in other countries, 195 MyETF-DJIM Titan 25, fund information on, 187 MyETF-DJIM Titan 25, Shariah-compliant securities, 188 Islamic nancial institutions in Malaysia, 24 29 Bank Islam Malaysia Berhad, 25 26 conventional banks o er Islamic nancial products and services, 26 27 Islamic subsidiaries and international integration of Islamic banking system, 27 29 key highlights, 28 Syarikat Takaful Malaysia Berhad, 26 Tabung Haji, 24 25 Islamic Financial Services Board (IFSB), 20 Islamic Financial Services Board Act, 27 31 January 2013; 19:42:7 238 / Index Islamic nancial system brief overview of, 17 18 evolution of, 18 20 Islamic hybrid funds, 150, 155 Islamic interbank money market (IIMM), 26, 53 54 Islamic money market, 72 Commodity Murabahah, 56 58 conventional money markets vs., 52 53 functions of, 51 52 instruments, trading of, 59 Islamic Interbank Money Market, 53 54 money market participants, 50 51 Mudarabah Interbank Investment (MII), 54 56 Wakalah Investment, 58 59 Islamic money market funds, 149 50, 155 Islamic mutual funds Amana Growth Funds, 156 Amana Income Funds, 155 56 basic concept of, 147 closed and open-ended funds, 140 41 fees and expenses, 145 46 Islamic ethical investment and ethical investment, 156 57 management, active and passive, 143 mutual funds, advantages of, 143 44 mutual funds, conventional, 141 42 mutual funds, disadvantages of, 144 45 mutual funds, Islamic, 146 NAV calculation, 142, 151 53 organisation structure of, 153 54 process of investing in, 154 55 puri cation of income, 148 49 Shariah Advisory Board, role of, 151 Shariah Stock screening, 147 48 types of, 149 50 Islamic Negotiable Instruments (INI), 63 67 Islamic Negotiable Instruments of Deposit (INIDs), 9, 12, 66 67, 73 Islamic private debt securities (IPDS), 24 Islamic Real Estate Investment Trusts (I-REITs) about, 32, 47, 165 67 Case Study: Al- Aqar KPJ REIT, 171 74 Case Study: Al-Hadharah Bousted REIT, 174 76 demand for real properties in China and India, 163 diversi cation, 163 Global REIT Market Report, 164 hedging, 163 I-REITs Structure, 169 71 liquidity, 163 mixed activities, 167 pro t, 163 real estate investment trust (REIT), 162 63 REITs, conventional vs Islamic, 176 77 rental of nonpermissible activities, 167 69 Shariah-Permissible Investments for I-REITs, 166 69 taxes, 162 Islamic securities, outstanding amount of, 59 Islamic stock broking, 32 33 Islamic stock or equity funds, 146, 149 50, 155 Islamic Treasury bills, 155 bindex Islamic unit trust funds in Malaysia, 31 32 ISRA See International Shariah Research Academy for Islamic Finance (ISRA) J Jakarta Islamic index, 130 K Kuala Lumpur Stock Exchange (KLSE), 8, 29, 47 Kuwait Finance House (KFH), 28 L limit order, 124 liquid assets investments, 168 liquid investments, liquidity, Liquidity Management Centre (LMC), 20 liquor, 127, 131 LMC See Liquidity Management Centre (LMC) long-term debt instrument, 6, M Malaysia Capital Market Masterplan (CMP), 29 30 Malaysia International Islamic Financial Centre (MIFC), 27, 33 34, 40 Malaysian Islamic Treasury Bill (MITB), 50, 61 62 Malaysian Ringgit, 38 39 Malaysia Securities Commission, 130 31, 166 67 benchmarks of tolerance, 131 management fees, 145 46, 154 market-based nance, market e ciency, 128 29 market order, 122 24 market risk, 185, 196 Maybank Islamic Bank Berhad (MIB), 27 MIB See Maybank Islamic Bank Berhad (MIB) MIFC See Malaysia International Islamic Financial Centre (MIFC) Ministry of International Trade and Industry (MITI), 42 MITB See Malaysian Islamic Treasury Bill (MITB) Mitghamr Egypt Savings Association, 24 MITI See Ministry of International Trade and Industry (MITI) monetary nancial institutions, money markets, 7, 10 11 money-market securities, money markets participants, 51 Morgan Stanley Country Indexes (MSCI), 183 MSCI See Morgan Stanley Country Indexes (MSCI) Mudarabah Interbank Investment (MII), 54 55, 72 pro t calculation for, 55 56 municipal notes, mutual funds, types of, 143 mutual funds manager, professional, 144 45, 156 N NAV See net asset value (NAV) Negotiable Islamic Debt Certi cate (NIDC) about, 50, 63 67, 72 73 calculation of price of NIDC of less than one year, 64 65 calculation of price of NIDC of more than one year, 65 66 31 January 2013; 19:42:7 Index / 239 net asset value (NAV), 31 32 calculation, 142, 151 53 EFTs, 180 88, 196 Islamic mutual funds, 140, 145 New York Stock Exchange, NIDC See Negotiable Islamic Debt Certi cate (NIDC) noncumulative preference stocks, 123 nondeposit liabilities, 14 nonpermissible income other than interest income, 132 33 non-Shariah-compliant activities revenue share from, 132 non Shariah-compliant equity markets Shariah-compliant equity vs., 128 30 O open-end funds, 180 81 Organization of Islamic Conference (OIC), 20 over-the-counter (OTC) markets, 9, 21, 50 P Pakistan Meezan Islamic Fund, 130, 133 Panel on Takeovers and Mergers, 42 Payment System Act, 41 PER See Pro t Equalization Reserve (PER) pilgrimage (Hajj), 25, 34 Pilgrimage Board Act, 25 Pilgrimage Management and Fund Board, 25 pork, 127, 131 preferred stock, 122 24 primary market, 8, 21 principal loan, professional service fees, 145 Pro t Equalization Reserve (PER), 55 pro t-sharing ratio (PSR), 55 PSR See pro t-sharing ratio (PSR) public s savings, puri cation dividend, 135, 148 haram income, 148 49 of income, 148 49 way to compute, 168 R Rating Agency Malaysia, 29 real estate investments, 168 real estate nonrelated assets investments, 168 real estate-related assets investments, 168 regulated short selling (RSS), 191 92 repurchase agreements (repos), 11 residual claimants, riba (charging interest), 146 47 risk exposure, 201 risk pro le, 202 risk protection, risk-reduction, risk-sharing, 6, 18 risks in investing in ETFs, 196 Robinson s demand-following view, RSS See regulated short selling (RSS) bindex S SAC See Shariah Advisory Council for Islamic Banking and Takaful (SAC) Sanadat Cagamas, 71 72 Sanadat Mudarabah Cagamas (SMC), 70 71 savings, SBBA See Sell and Buy Back Agreement (SBBA) SBL See Securities Borrowing and Lending (SBL) SC See Securities Commission (SC); Securities Commission Malaysia (SC) SC1 See subsidiary company (SC1) Schumpeter s supply-leading view, secondary markets, 9, 12, 20 21 Securities Borrowing and Lending (SBL), 190 Securities Commission (SC), 29, 42, 126 SC role on ICM development, 29, 42 44 Securities Commission Malaysia (SC), 27, 42, 47, 78 Securities Commission Shariah Advisory Council, 44 securities transaction fees, 146 Security Borrowing and Lending in Malaysia, 190 94 Sell and Buy Back Agreement (SBBA), 68 69 shareholders, 145, 153 54 shareholders communications expenses, 145 Shariah advisor, 129 30 Shariah Advisory Board, role of, 151 Shariah Advisory Council for Islamic Banking and Takaful (SAC), 28, 43, 126, 136, 166 Shariah-compliant equity about, 122 24 non Shariah-compliant equity markets vs., 128 30 securities, 125 27 securities equity, overview of, 122 structure of, 129 Shariah-compliant stocks and ETF, 46 Shariah-compliant stocks screening, 130, 136 accounting-based screens, 132 cash compliance, 132 leverage compliance, 132 Malaysia Securities Commission, 130 31 S&P Shariah indices, 131 32 Shariah principles, 4, 18, 52, 146 47 Shariah stock portfolio, 147 Shariah Stock screening, 147 48 shortage (Hasan), short-term debt instrument, 6, single-purpose companies investments, 168 small and medium-size enterprises (SMEs), 15 SMEs See small and medium-size enterprises (SMEs) speculators, 200, 203 S&P Shariah indices, 130 32 Standard & Poor s Index (S&P index), 141 42, 182 83 stock price, positive changes, 122 23, 136 stop order, 124 subsidiary company (SC1), 207 sukuk (Islamic bonds) about, 2, 6, 10, 12, 19 20, 30 31, 225 Aras Sejagat Bank Guarantee Sukuk, term sheet of, 84 Cagamas Sukuk Al-Amanah Li al-Istithmar (ALIm), term sheet of, 111 31 January 2013; 19:42:7 240 / Index key features of, 93 94 structure of, 89, 91 93 Sukuk al-Salam, 99 case study, 99 documents required for, 101 key features of, 102 structure of, 100 101 Sukuk al-Wakala, 114 case study, 114 key features of, 117 structure, documents required for, 117 structure of, 115 17 Sukuk funds, 149, 155 surplus (Tuan Bakri), surplus capital, swaps See Islamic derivatives market Syarikat Takaful Malaysia Berhad, 26 sukuk (Islamic bonds) (continued) case study, 83 84 CJ Capital Sukuk Murabaha, term sheet of, 108 Dar Al Arkan Sukuk Wakalah, term sheet of, 114 history of, 78 79 investment, 78 issued globally by structure (2008 2009), 90 market, 47 market, composition of, 96 MRCB and Makro Utama Sukuk, term sheet of, 103 short-term, structures, 81 82 Sukuk al-Ijarah, 82 83 sukuk vs conventional bonds vs company shares, 79 81 types of, 81, 118 WCT engineering berhad, sukuk structure of, 91 WCT engineering sukuk, term sheet of, 90 Sukuk al-Ijarah, 82 83 issuance, documents required for, 86 87 structure, 85 86 structure, key features of, 87 Sukuk al-Istisna, 102 case study, 102 structure, documents required for, 105 structure of, 102 Sukuk al-Istithmar, 110 case study, 110 key features of, 113 structure, documents required for, 113 structure of, 110 13 Sukuk al-Mudarabah, 94 95 case study, 95 key features of, 98 structure, documents requried for, 98 structure of, 95, 97 98 term sheet of IIG, 96 Sukuk al-Murabahah, 106 case study, 107 key features of, 109 10 structure, documents required of, 109 structure of, 107 Sukuk al-Musharakah, 88 89 case study, 89 issuance, documents required for, 93 T Tabung al-Ittikal, 31, 34 Tabung Amanah Bakti, 31, 34 Tabung Haji, 24 25, 28, 34 takaful (Islamic insurance), 16, 19, 22 Takaful Act, 41, 45 Takaful Malaysia, 26, 28, 34 T-bills See treasury bills (T-bills) Thailand Baht, 38 Toronto Stock Exchange Index Participation (TIPs), 182 tracking error, 185, 187, 196 trade and commerce (al-bay ), 17 trading currencies, 10 transactions (mu amalah), transfer agents, 154 transfer agent service fees, 145 treasury bills (T-bills), 12 U underwriters, principal, 154 unit trust, 181, 184 W Wakalah Investment, 58 59, 72 Z zero-sum exchange/game, 200 bindex 31 January 2013; 19:42:7 ... characteristics of the Islamic financial system and the conventional financial system List the salient features of the Islamic financial system Fundamentals of Islamic Money and Capital Markets By... to Offer Islamic Financial Products and Services 2000 to 2010: Islamic Subsidiaries and the International Integration of the Islamic Banking System Islamic Capital Markets in Malaysia Sukuk Islamic. .. to capital markets to issue its shares as equity instruments c01 31 January 2013; 18:48:1 / FUNDAMENTALS OF ISLAMIC MONEY AND CAPITAL MARKETS TABLE 1.1 Instruments in Financial Markets Type of