Fundamentals of Islamic Capital Markets Differences between Conventional and Islamic

Source: BURSA ACADEMY | Published: June 2020

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In a financial system, capital from investors is raised through capital markets using financial instruments like debt, equity and derivatives. Raising capital is equally important to both the conventional market and the Islamic Capital Market, except that there is a major difference in the nature of investments and investors' choices.

A conventional market allows and, in fact, invites investors to invest in any sector that pleases them. This might include just about any kind of business or industry, including conventional financial services based on interest speculation and/or gambling, and food and beverage companies with core business interests in pork products or alcohol.

However, the approach to investing is significantly different in Islamic Capital Markets. Shariah law and principles strictly require that investing in this market be free from usury (riba), gambling (maysir) and ambiguity (gharar). Investing in commodities like liquor and tobacco is also not allowed. The ban on interest in all economic activities is explicitly defined and remains uncompromisable in Islamic principles, as it is divinely forbidden by Allah. Businesses should avoid sinful products and services in their portfolios, earn profits fairly and moderately and must avoid resorting to misleading marketing of products or services offered to consumers.

The Islamic faith underscores the need for businesses, professions, and people in employment to be conscious of Shariah provisions (Qur’an & Sunnah) when determining what is halal or haram in their investment dealings. Over the last 37 years, Malaysia has laid a strong and comprehensive foundation for Shariah investing through the nation’s Islamic Banking Act and the Takaful Act.

Malaysia's Shariah-compliant banking and finance framework has inspired other Muslim countries to emulate the initiative with a similar flourish. The nature of the Islamic Capital Market is in accordance with the Shariah law and principles that an investor must choose to accept the halal way when investing, and that the extent of returns must be in a manner that is fair and equitable to all parties.

As a pioneer in the globalisation of Islamic Capital Markets and the world's leader in the management of Shariah-compliant productive assets, sukuk and Islamic funds, Malaysia's Islamic financial system has anchored the principle of fairness and equitable risk-sharing. In this, it has been well supported by the government, the central bank and the Shariah committees.

With similar tenets guiding sustainability and responsible investing, the Islamic Capital Market has been readily assisted by the Islamic infrastructure platform made available by various local financial institutions and market players. There has been surging demand for Islamic products as investors have realised that the Islamic Capital Market strictly abides by Islam's religious values, principles and laws.

Through constant innovation and the development of several Islamic products, such as Islamic Equities, Islamic Unit Trusts, sukuk and Islamic ETFs (Exchange Traded Funds), Islamic products are being well received globally. After a new set of guidelines was introduced in 2008 for best practices in Islamic stockbroking, Islamic funds have also become the major contributor to sustainable investment assets, and the government has continuously supported the growth of the Islamic Capital Market space.

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Tags: BURSA MALAYSIA-i, SHARIAH INVESTING, SHARIAH SCREENING

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